Pension, Retiree Medical and Retiree Savings Plans

U.S. Pension Plans

We sponsor qualified and supplemental (non-qualified) noncontributory defined benefit plans covering certain full-time salaried and hourly U.S. employees. The qualified plan meets the requirements of certain sections of the Internal Revenue Code and provides benefits to a broad group of employees with restrictions on discriminating in favor of highly compensated employees with regard to coverage, benefits and contributions. The supplemental plans provide additional benefits to certain employees. We fund our supplemental plans as benefits are paid.

The most significant of our U.S. plans is the YUM Retirement Plan (the “Plan”), which is a qualified plan. Our funding policy with respect to the Plan is to contribute amounts necessary to satisfy minimum pension funding requirements, including requirements of the Pension Protection Act of 2006, plus additional amounts from time to time as are determined to be necessary to improve the Plan’s funded status. Subsequent to year end we contributed $75 million to the Plan, and do not expect to make any further significant contributions in 2015. We currently expect to make $24 million in benefit payments related to our primary unfunded U.S. non-qualified plan in 2015. Our two significant U.S. plans were previously amended such that any salaried employee hired or rehired by YUM after September 30, 2001 is not eligible to participate in those plans.

We do not anticipate any plan assets being returned to the Company during 2015 for any U.S. plans.

Obligation and Funded Status at Measurement Date:

The following chart summarizes the balance sheet impact, as well as benefit obligations, assets, and funded status associated with our two significant U.S. pension plans. The actuarial valuations for all plans reflect measurement dates coinciding with our fiscal year end.



	2014			2013
Change in benefit obligation
Benefit obligation at beginning of year	$	1,025		$	1,290
Service cost	17			21
Interest cost	54			54
Plan amendments	1			—
Curtailments	(2		)	(3		)
Special termination benefits	3			5
Benefits paid	(65		)	(21		)
Settlements^(a)(b)	(17		)	(151		)
Actuarial (gain) loss	290			(164		)
Administrative expense	(5		)	(6		)
Benefit obligation at end of year	$	1,301		$	1,025

Change in plan assets
Fair value of plan assets at beginning of year	$	933		$	945
Actual return on plan assets	124			116
Employer contributions	21			22
Settlement payments^(a)	(17		)	(123		)
Benefits paid	(65		)	(21		)
Administrative expenses	(5		)	(6		)
Fair value of plan assets at end of year	$	991		$	933
Funded status at end of year	$	(310	)	$	(92	)


(a)	For discussion of the settlement payments and settlement losses, see Components of net periodic benefit cost below.


(b)	2013 includes the transfer of certain non-qualified pension benefits into a defined benefit plan not included in the table.



Amounts recognized in the Consolidated Balance Sheet:
	2014			2013
Prepaid benefit asset - non-current	$	—		$	10
Accrued benefit liability - current	(11		)	(8		)
Accrued benefit liability - non-current	(299		)	(94		)
	$	(310	)	$	(92	)

The accumulated benefit obligation was $1,254 million and $983 million at December 27, 2014 and December 28, 2013, respectively.



Information for pension plans with an accumulated benefit obligation in excess of plan assets:
	2014		2013
Projected benefit obligation	$	1,301	$	102
Accumulated benefit obligation	1,254		94
Fair value of plan assets	991		—



Information for pension plans with a projected benefit obligation in excess of plan assets:
	2014		2013
Projected benefit obligation	$	1,301	$	102
Accumulated benefit obligation	1,254		94
Fair value of plan assets	991		—

Components of net periodic benefit cost:



Net periodic benefit cost	2014			2013			2012
Service cost	$	17		$	21		$	26
Interest cost	54			54			66
Amortization of prior service cost^(a)	1			2			1
Expected return on plan assets	(56		)	(59		)	(71		)
Amortization of net loss	17			48			63
Net periodic benefit cost	$	33		$	66		$	85
Additional (gain) loss recognized due to: Settlements^(b)	$	6		$	30		$	89
Special termination benefits	$	3		$	5		$	3


(a)	Prior service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.

(b)

Settlement losses result when benefit payments exceed the sum of the service cost and interest cost within a plan during the year. During the fourth quarter of 2012 and continuing through 2013, the Company allowed certain former employees with deferred vested balances an opportunity to voluntarily elect an early payout of their pension benefits. The majority of these payouts were funded from existing pension plan assets. See Note 4.



Pension (gains) losses in Accumulated other comprehensive income (loss):
	2014			2013
Beginning of year	$	124		$	428
Net actuarial (gain) loss	220			(221		)
Curtailments	(2		)	(3		)
Amortization of net loss	(17		)	(48		)
Amortization of prior service cost	(1		)	(2		)
Prior service cost	1			—
Settlement charges	(6		)	(30		)
End of year	$	319		$	124



Accumulated pre-tax losses recognized within Accumulated Other Comprehensive Income:
	2014		2013
Actuarial net loss	$	314	$	119
Prior service cost	5		5
	$	319	$	124

The estimated net loss that will be amortized from Accumulated other comprehensive income (loss) into net periodic pension cost in 2015 is $45 million. The estimated prior service cost that will be amortized from Accumulated other comprehensive income (loss) into net periodic pension cost in 2015 is $1 million.



Weighted-average assumptions used to determine benefit obligations at the measurement dates:
	2014		2013
Discount rate	4.30	%	5.40	%
Rate of compensation increase	3.75	%	3.75	%



Weighted-average assumptions used to determine the net periodic benefit cost for fiscal years:
	2014		2013		2012
Discount rate	5.40	%	4.40	%	4.90	%
Long-term rate of return on plan assets	6.90	%	7.25	%	7.25	%
Rate of compensation increase	3.75	%	3.75	%	3.75	%

Our estimated long-term rate of return on plan assets represents the weighted-average of expected future returns on the asset categories included in our target investment allocation based primarily on the historical returns for each asset category.

Plan Assets

The fair values of our pension plan assets at December 27, 2014 and December 28, 2013 by asset category and level within the fair value hierarchy are as follows:



	2014		2013
Level 2:
Cash Equivalents^(a)	$	5	$	5
Equity Securities – U.S. Large cap^(b)	298		329
Equity Securities – U.S. Mid cap^(b)	50		55
Equity Securities – U.S. Small cap^(b)	50		53
Equity Securities – Non-U.S.^(b)	91		110
Fixed Income Securities – U.S. Corporate^(b)	305		234
Fixed Income Securities – U.S. Government and Government Agencies^(c)	178		129
Fixed Income Securities – Other^(d)	11		15
Total fair value of plan assets^(e)	$	988	$	930


(a)	Short-term investments in money market funds


(b)	Securities held in common trusts


(c)	Investments held directly by the Plan


(d)	Includes securities held in common trusts and investments held directly by the Plan


(e)	2014 and 2013 both exclude net unsettled trades receivable of $3 million

Our primary objectives regarding the investment strategy for the Plan’s assets are to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future payment requirements. To achieve these objectives, we are using a combination of active and passive investment strategies. Our equity securities, currently targeted to be 50% of our investment mix, consist primarily of low-cost index funds focused on achieving long-term capital appreciation. We diversify our equity risk by investing in several different U.S. and foreign market index funds. Investing in these index funds provides us with the adequate liquidity required to fund benefit payments and plan expenses. The fixed income asset allocation, currently targeted to be 50% of our mix, is actively managed and consists of long-duration fixed income securities that help to reduce exposure to interest rate variation and to better correlate asset maturities with obligations. The fair values of all pension plan assets are determined based on closing market prices or net asset values.

A mutual fund held as an investment by the Plan includes shares of YUM common stock valued at $0.5 million at December 27, 2014 and $0.2 million at December 28, 2013 (less than 1% of total plan assets in each instance).

Benefit Payments

The benefits expected to be paid in each of the next five years and in the aggregate for the five years thereafter are set forth below:



Year ended:
2015	$	72
2016	53
2017	51
2018	55
2019	57
2020 - 2024	299

Expected benefits are estimated based on the same assumptions used to measure our benefit obligation on the measurement date and include benefits attributable to estimated future employee service.

International Pension Plans

We also sponsor various defined benefit plans covering certain of our non-U.S. employees, the most significant of which are in the UK. During 2013, one of our UK plans was frozen such that existing participants can no longer earn future service credits. Our other UK plan was previously frozen to future service credits in 2011.

At the end of 2014 and 2013, the projected benefit obligations of these U.K. plans totaled $231 million and $226 million, respectively and plan assets totaled $288 million and $259 million, respectively. These plans were both in a net overfunded position at the end of 2014 and 2013 and related expense amounts recorded in each of 2014, 2013 and 2012 were not significant.

The funding rules for our pension plans outside of the U.S. vary from country to country and depend on many factors including discount rates, performance of plan assets, local laws and regulations. We do not plan to make significant contributions to either of our UK plans in 2015.

Retiree Medical Benefits

Our post-retirement plan provides health care benefits, principally to U.S. salaried retirees and their dependents, and includes retiree cost-sharing provisions. This plan was previously amended such that any salaried employee hired or rehired by YUM after September 30, 2001 is not eligible to participate in this plan. Employees hired prior to September 30, 2001 are eligible for benefits if they meet age and service requirements and qualify for retirement benefits. We fund our post-retirement plan as benefits are paid.

At the end of 2014 and 2013, the accumulated post-retirement benefit obligation was $69 million and $70 million, respectively. An actuarial gain of $2 million was recognized in Accumulated other comprehensive (income) loss at the end of both 2014 and 2013. The net periodic benefit cost recorded was $5 million in both 2014 and 2013 and $6 million in 2012, the majority of which is interest cost on the accumulated post-retirement benefit obligation. The weighted-average assumptions used to determine benefit obligations and net periodic benefit cost for the post-retirement medical plan are identical to those as shown for the U.S. pension plans. Our assumed heath care cost trend rates for the following year as of 2014 and 2013 are 7.1% and 7.2%, respectively, with expected ultimate trend rates of 4.5% reached in 2028.

There is a cap on our medical liability for certain retirees. The cap for Medicare-eligible retirees was reached in 2000 and the cap for non-Medicare eligible retirees was reached in 2014; with the cap, our annual cost per retiree will not increase. A one-percentage-point increase or decrease in assumed health care cost trend rates would have less than a $1 million impact on total service and interest cost and on the post-retirement benefit obligation. The benefits expected to be paid in each of the next five years are approximately $6 million and in aggregate for the five years thereafter are $24 million.

Retiree Savings Plan

We sponsor a contributory plan to provide retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for eligible U.S. salaried and hourly employees. Participants are able to elect to contribute up to 75% of eligible compensation on a pre-tax basis. Participants may allocate their contributions to one or any combination of multiple investment options or a self-managed account within the 401(k) Plan. We match 100% of the participant’s contribution to the 401(k) Plan up to 6% of eligible compensation. We recognized as compensation expense our total matching contribution of $12 million in both 2014 and 2013 and $13 million in 2012.