Pension plan schemes and financial performance of Coca-Cola and PepsiCo

COCA-COLA vs. PEPSICO COMPANY

Company Financial Comparative Study

Coca-Cola Company and Pepsi Incorporation are beverage-producing companies worldwide. Over the years, people have had different opinions and ideas about the two companies, although their products are meant to serve the same purpose. Both plants have sub-plants, although Coca-Cola Company has its sub-plants worldwide. Pepsi Company has managed to set plants in specified regions, which serve as strong hold of the company. Pension plans set by both companies have also affected the level of investment and risk in the companies, and has also affected their level of production and sell of their products worldwide. Both companies have established strong public relations worldwide which aids them in linking the consumers to the company.

Analysis

Both companies have diversified products that face competition from the rival company, and have different pension schemes. Pension schemes for both companies aim at benefiting their retired employees, and each company uses different approach. IFRS (International Financial Report Standard) enables the company to realize whether the pension plan scheme is a profit (asset) to them or loss (liability). This enables the company to determine whether the pension plan is overfunded or underfunded (Stickney et al., 2009).

In the year 2009, Coca Cola Company became the third major company to adopt the cash balance report to cater for their pension plan schemes. Executive managers of the company rejected the use of constitutional approach for funding pensioned plans. This resulted to minimized risks to the company, and secured benefits to the employees as compared to the preceding year. Mobility of the workforce also increased as a result of the plan, and career benefits accruing from the plan were more compared to their previous approach on dealing with pension plan. This pension approach plan has also ensured empowerment of the employers to set up new cash flow systems without any threat of litigation. This would especially accrue when the company is sued for discriminating age. This plan also resulted to an increase of revenue to the company in the year 2009, with reported $31.9 billion operating revenue, comparatively from 2008 that reported $28.9 billion operating revenue.

At the year 2009, PepsiCo Company still adopted the method of offering new employees a final salary pension, which benefits its workers and family members upon the worker's retirement. It includes benefits for their retired employees and medical fees upon retirement, and is calculated differently. This required high quality pension scheme to secure the retirement of both the newly and present employed workers, and the method is still applicable to present day by the company. This posed a greater risk to the company and resulted to decline of the total net sales of the company as compared to the preceding year.

Capital gains ($)

Coca-Cola Company

2009 2008 2007

Cost of goods sold 11,088 11,374 10,406

Subtract

Total income before taxes 8,946 7,506 7,919

Total capital gains 2,142 3,868 2,487

PepsiCo Company

2009 2008 2007

Total operating profit 8,044 6,959 7,182

Subtract

Total income before taxes 5,946 5,142 5,658

Total capital gains 2,098 1,817 1,524

Funding levels (%)

Coca-Cola Company

2009 2008

Expected returns on planned assets 57 63

Actual return on planned assets 50 34

PepsiCo Company

2009 2008

Expected return on invested capital 7.8-7.8

Actual return on invested capital 27.2-25.5

Effects of pension plan to a company

Pension plans set by a company are aimed at benefiting their employees upon retirement. It is important for the company to make proper decisions on what steps to take for planning such retirement benefits, as it might pose it risky for the company's operations with poor pension planning. This is highly determined by the changes between assets and liabilities in a company's balance sheet. Factors influencing future payment pensions include; longevity, inflation, wage costs, and service growth (Haslett, 2010).

Pension financing represents a program to pay for retirement benefits of employees that are planned and based on the number of years an employee anticipates to still be in the workforce. Pension funds set aside can also aid in minimizing risks that might be spilt in three ways, that is, opting to invest in a more conservative strategy to reduce financial risk, adjusting the sharing of risk and allocating more to the pensioners, and finally reducing the level of ambition of second pillar pensions to bring down the weight of company's risk.

Inflation affects liabilities through its effects on wage growth, which is linked to final average pay and forms the basis of determining final pension pay. Interest rates, therefore, should be decomposed to expected inflation and real interest rates to avoid higher liabilities. Volatility of company's cash is one of the risks posed by pension plans (Sortino, 2001). A company that has higher cash volatility is likely to face financial strains. Pension plan is an example of a risk facing such company, an in return, the company is more likely to withdraw its investment on such risky projects and chooses to invest in more on reduced risks that will enable the company lay proper financial strategies (Kortleve et al. 2006).

Equity of a company is reflected in its pension plan. DB plan of a company is generally tied to inflation, and hence, its major concern is inflation. The price of neglecting to consider inflation will be felt by the pension fund beneficiaries at retirement, when it is too late to add in a major way to accumulated savings (Haslett, 2010). When a company freezes its DB plan, it slows down the increase in company's equity risk posed by its pension plan. Reduction in company's equity implies lower level of capital cost, hence minimizing the constraint that a company would get by using external sources to fund the company. Cost of capital entirely defines the position of a company to invest in a risky project, with minimal risk posing more likeliness of the company to invest in it. This adds to the level of risk that a company faces, and needed to be reported in the annual report.

As much as calculating liabilities of a planned benefit might proof to be difficult, it is important to determine the discount rates, to enable the company to determine the rate of return on the assets of the pension plan. This encourages the pension plan to invest in equities because the average rate of return on equities is higher than the average rate of returns on bonds, making the value of liabilities looks low. Liabilities of pension plans are obligations similar to bonds and require the liabilities of the pension plan of a company, which is all reflected in the company's annual report.

Conclusion

Pension plan by a company plays a major role in determining the nature of its annual report. As much as an individual benefit from pension plans by a company upon his/her retirement, he/she does not have direct control over the plan. Proper planning should be made by the company to determine the level of risk involved in company's investment in pension schemes. Risks posed by defined benefit plan can lead to converting defined benefit plans to defined contribution plans.