Retirement Plans

12 Months Ended

May 31, 2011

Retirement Plans Abstract

Retirement Plans

NOTE 12: RETIREMENT PLANS

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. The accounting for pension and postretirement healthcare plans includes numerous assumptions, such as: discount rates; expected long-term investment returns on plan assets; future salary increases; employee turnover; mortality; and retirement ages. These assumptions most significantly impact our U.S. Pension Plans.

The accounting guidance related to postretirement benefits requires recognition in the balance sheet of the funded status of defined benefit pension and other postretirement benefit plans, and the recognition in accumulated other comprehensive income (“AOCI”) of unrecognized gains or losses and prior service costs or credits. The funded status is measured as the difference between the fair value of the plan's assets and the projected benefit obligation (“PBO”) of the plan. At May 31, 2011, we recorded a decrease to equity of $350million (net of tax) attributable to our plans. At May 31, 2010, we recorded a decrease to equity of $1 billion (net of tax) to reflect unrealized actuarial losses during 2010.

A summary of our retirement plans costs over the past three years is as follows (in millions):

	2011		2010		2009
U.S. domestic and international pension plans	$	543	$	308	$	177
U.S. domestic and international defined contribution plans		257		136		237
Postretirement healthcare plans		60		42		57
	$	860	$	486	$	471

PENSION PLANS. Our largest pension plan covers certain U.S. employees age 21 and over, with at least one year of service. Pension benefits for most employees are accrued under a cash balance formula we call the Portable Pension Account. Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a notional account that grows with annual credits based on pay, age and years of credited service, and interest on the notional account balance. The Portable Pension Account benefit is payable as a lump sum or an annuity at retirement at the election of the employee. The plan interest credit rate varies from year to year based on a U.S. Treasury index. Prior to 2009, certain employees earned benefits using a traditional pension formula (based on average earnings and years of service); however, benefits under this formula were capped on May 31, 2008. We also sponsor or participate in nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. The international defined benefit pension plans provide benefits primarily based on final earnings and years of service and are funded in compliance with local laws and practices.

POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. U.S. employees covered by the principal plan become eligible for these benefits at age 55 and older, if they have permanent, continuous service of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1, 1988. Postretirement healthcare benefits are capped at 150% of the 1993 per capita projected employer cost, which has been reached and, therefore, these benefits are not subject to additional future inflation.

PENSION PLAN ASSUMPTIONS. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations and the expected long-term rate of return on plan assets.

We use a measurement date of May 31 for our pension and postretirement healthcare plans. Management reviews the assumptions used to measure pension costs on an annual basis. Economic and market conditions at the measurement date impact these assumptions from year to year and it is reasonably possible that material changes in pension cost may be experienced in the future. Actuarial gains or losses are generated for changes in assumptions and to the extent that actual results differ from those assumed. These actuarial gains and losses are amortized over the remaining average service lives of our active employees if they exceed a corridor amount in the aggregate. Additional information about our pension plans can be found in the Critical Accounting Estimates section of Management's Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) in this Annual Report on Form 10-K (“Annual Report”).

Weighted-average actuarial assumptions for our primary U.S. retirement plans, which represent substantially all of our PBO and accumulated postretirement benefit obligation ("APBO"), are as follows:
		Pension Plans						Postretirement Healthcare Plans
		2011		2010		2009		2011		2010		2009
Discount rate used to determine benefit obligation		5.76	%	6.37	%	7.68	%	5.67	%	6.11	%	7.27	%
Discount rate used to determine net periodic benefit cost		6.37		7.68		7.15		6.11		7.27		7.13
Rate of increase in future compensation levels
	used to determine benefit obligation	4.58		4.63		4.42		-		-		-
Rate of increase in future compensation levels
	used to determine net periodic benefit cost	4.63		4.42		4.49		-		-		-
Expected long-term rate of return on assets		8.00		8.00		8.50		-		-		-

The estimated average rate of return on plan assets is a long-term, forward-looking assumption that also materially affects our pension cost. It is required to be the expected future long-term rate of earnings on plan assets. Establishing the expected future rate of investment return on our pension assets is a judgmental matter. We review the expected long-term rate of return on an annual basis and revise it as appropriate. Management considers the following factors in determining this assumption:

• the duration of our pension plan liabilities, which drives the investment strategy we can employ with our pension plan assets;

• the types of investment classes in which we invest our pension plan assets and the expected compound geometric return we can reasonably expect those investment classes to earn over time; and

• the investment returns we can reasonably expect our investment management program to achieve in excess of the returns we could expect if investments were made strictly in indexed funds.

Our estimated long-term rate of return on plan assets remains at 8% for 2012, consistent with our expected rate of return in 2011 and 2010. For the 15-year period ended May 31, 2011, our actual returns were7.8%.

Pension expense is also affected by the accounting policy used to determine the value of plan assets at the measurement date. We use a calculated-value method to determine the value of plan assets, which helps mitigate short-term volatility in market performance (both increases and decreases) by amortizing certain actuarial gains or losses over a period no longer than four years. Another method used in practice applies the market value of plan assets at the measurement date. For purposes of valuing plan assets for determining 2012 pension expense, we used the calculated-value method,as our actual returns on plan assets significantly exceeded our assumptions. However, as previously indicated, our pension costs in 2012 are expected to remain flat. The calculated-value method resulted in the same value as the market value in 2011. The calculated-value method significantly mitigated the impact of asset value declines in the determination of our 2010 pension expense, reducing our 2010 expense by approximately $135 million.

The investment strategy for pension plan assets is to utilize a diversified mix of global public and private equity portfolios, together with fixed-income portfolios, to earn a long-term investment return that meets our pension plan obligations. Our pension plan assets are invested primarily in listed securities, and our pension plans hold only a minimal investment in FedEx common stock that is entirely at the discretion of third-party pension fund investment managers. Our largest holding classes areU.S. Large Cap Equities, which is indexed to an S&P 500 fund, and Corporate and U.S. Government Fixed Income Securities. Accordingly, we do not have any significant concentrations of risk. Active management strategies are utilized within the plan in an effort to realize investment returns in excess of market indices. As part of our strategy to manage future pension costs and net funded status volatility, we have transitioned to a liability-driven investment strategy with a greater concentration of fixed-income securities to better align plan assets with liabilities. Our investment strategy also includes the limited use of derivative financial instruments on a discretionary basis to improve investment returns and manage exposure to market risk. In all cases, our investment managers are prohibited from using derivatives for speculative purposes and are not permitted to use derivatives to leverage a portfolio.

Following is a description of the valuation methodologies used for investments measured at fair value:

• Cash and cash equivalents. These Level 1 investments include cash, cash equivalents and foreign currency valued using exchange rates. TheLevel 2 investments include commingled funds valued using the net asset value.

• Domestic and international equities. These Level 1 investments are valued at the closing price or last trade reported on the major market on which the individual securities are traded. The Level 2 investments are commingled funds valued using the net asset value.

• Private equity. The valuation of these Level 3 investments requires significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. Investments are valued based upon recommendations of our investment managers incorporating factors such as contributions and distributions, market transactions, market comparables and performance multiples.

• Fixed income. We determine the fair value of these Level 2 corporate bonds, U.S. government securities and other fixed income securities by using bid evaluation pricing models or quoted prices of securities with similar characteristics.

The fair values of investments by level and asset category and the weighted-average asset allocations for our domestic pension plans at the measurement date are presented in the following table (in millions):

		Plan Assets at Measurement Date
		2011
								Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Asset Class		Fair Value		Actual %		Target %		Level 1		Level 2		Level 3
Cash and cash equivalents		$	409	3	%	1	%	$	107	$	302
Domestic equities
	U.S. large cap equity		4,280	27		24			26		4,254
	U.S. SMID cap equity		1,481	10		9			1,481
International equities			2,013	13		12			1,702		311
Private equities			403	3		5						$	403
Fixed income securities						49
	Corporate		3,794	24							3,794
	U.S. government		3,135	20							3,135
	Mortgage backed and other		66	-							66
Other			(63)	-		-			(59)		(4)
		$	15,518	100	%	100	%	$	3,257	$	11,858	$	403
		2010
								Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Asset Class		Fair Value		Actual %		Target %		Level 1		Level 2		Level 3
Cash and cash equivalents		$	427	3	%	1	%	$	145	$	282
Domestic equities
	U.S. large cap equity		3,374	26		24					3,374
	U.S. SMID cap equity		1,195	9		9			1,195
International equities			1,502	12		12			1,262		240
Private equities			399	3		5						$	399
Fixed income securities						49
	Corporate		3,546	27							3,546
	U.S. government		2,537	19							2,537
	Mortgage backed and other		122	1							122
Other			(47)	-		-			(46)		(1)
		$	13,055	100	%	100	%	$	2,556	$	10,100	$	399

The change in fair value of Level 3 assets that use significant unobservable inputs is shown in the table below (in millions):

Beginning balance May 31, 2009		$	341
Actual return on plan assets:
	Assets held at May 31, 2010		38
	Assets sold during the year		24
Purchases, sales and settlements			(4)
Balance at May 31, 2010			399
Actual return on plan assets:
	Assets held at May 31, 2011		27
	Assets sold during the year		36
Purchases, sales and settlements			(59)
Ending balance May 31, 2011		$	403

The following table provides a reconciliation of the changes in the pension and postretirement healthcare plans' benefit obligations and fair value of assets over the two-year period ended May 31, 2011 and a statement of the funded status as of May 31, 2011 and 2010 (in millions):

			Pension Plans				Postretirement Healthcare Plans
			2011		2010		2011		2010
Accumulated Benefit Obligation ("ABO")			$	16,806	$	14,041
Changes in Projected Benefit Obligation ("PBO") and
	Accumulated Postretirement Benefit Obligation ("APBO")
PBO/APBO at the beginning of year			$	14,484	$	11,050	$	565	$	433
	Service cost			521		417		31		24
	Interest cost			900		823		34		30
	Actuarial loss			1,875		2,607		44		102
	Benefits paid			(468)		(391)		(48)		(45)
	Other			60		(22)		22		21
PBO/APBO at the end of year			$	17,372	$	14,484	$	648	$	565
Change in Plan Assets
Fair value of plan assets at the beginning of year			$	13,295	$	10,812	$	-	$	-
	Actual return on plan assets			2,425		1,994		-		-
	Company contributions			557		900		26		24
	Benefits paid			(468)		(391)		(48)		(45)
	Other			32		(20)		22		21
Fair value of plan assets at the end of year			$	15,841	$	13,295	$	-	$	-
Funded Status of the Plans			$	(1,531)	$	(1,189)	$	(648)	$	(565)
Amount Recognized in the Balance Sheet at May 31:
	Current pension, postretirement healthcare and other
		benefit obligations	$	(33)	$	(30)	$	(31)	$	(28)
	Noncurrent pension, postretirement healthcare and other
		benefit obligations		(1,498)		(1,159)		(617)		(537)
Net amount recognized			$	(1,531)	$	(1,189)	$	(648)	$	(565)
Amounts Recognized in AOCI and not yet reflected in
	Net Periodic Benefit Cost:
		Net actuarial loss (gain)	$	5,386	$	5,157	$	(85)	$	(134)
		Prior service (credit) cost and other		(993)		(1,106)		2		2
Total			$	4,393	$	4,051	$	(83)	$	(132)
Amounts Recognized in AOCI and not yet reflected in
	Net Periodic Benefit Cost expected to be amortized in
	next year's Net Periodic Benefit Cost:
		Net actuarial loss (gain)	$	307	$	284	$	(1)	$	(5)
		Prior service credit and other		(112)		(113)		-		-
Total			$	195	$	171	$	(1)	$	(5)

Our pension plans included the following components at May 31, 2011 and 2010 (in millions):
		ABO		PBO		Fair Value of Plan Assets		Funded Status
2011
	Qualified	$	16,024	$	16,445	$	15,518	$	(927)
	Nonqualified		335		339		-		(339)
	International Plans		447		588		323		(265)
	Total	$	16,806	$	17,372	$	15,841	$	(1,531)
2010
	Qualified	$	13,311	$	13,635	$	13,055	$	(580)
	Nonqualified		346		348		-		(348)
	International Plans		384		501		240		(261)
	Total	$	14,041	$	14,484	$	13,295	$	(1,189)

The table above provides the ABO, PBO, fair value of plan assets and funded status of our pension plans on an aggregated basis. The following table presents our plans on a disaggregated basis to show those plans (as a group) whose assets did not exceed their liabilities. These plans are comprised of our unfunded nonqualified plans, certain international plans and our U.S. Pension Plans.At May 31, 2011 and 2010, the fair value of plan assets for pension plans with a PBO or ABO in excess of plan assets were as follows (in millions):

		PBO Exceeds the Fair Value of Plan Assets
		2011		2010
Pension Benefits
	Fair value of plan assets	$	15,815	$	13,295
	PBO		(17,346)		(14,484)
	Net funded status	$	(1,531)	$	(1,189)
		ABO Exceeds the Fair Value of Plan Assets
		2011		2010
Pension Benefits
	ABO(1)	$	(16,530)	$	(14,014)
	Fair value of plan assets		15,538		13,263
	PBO		(17,014)		(14,441)
	Net funded status	$	(1,476)	$	(1,178)

(1)ABO not used in determination of funded status.

Contributions to our U.S. Pension Plans for the years ended May 31 were as follows (in millions):

	2011		2010
Required	$	359	$	353
Voluntary		121		495
	$	480	$	848

Net periodic benefit cost for the three years ended May 31 were as follows (in millions):

	Pension Plans						Postretirement Healthcare Plans
	2011		2010		2009		2011		2010		2009
Service cost	$	521	$	417	$	499	$	31	$	24	$	31
Interest cost		900		823		798		34		30		33
Expected return on plan assets		(1,062)		(955)		(1,059)		-		-		-
Recognized actuarial losses (gains) and other		184		23		(61)		(5)		(12)		(7)
Net periodic benefit cost	$	543	$	308	$	177	$	60	$	42	$	57
The increase in pension costs from 2010 to 2011 was due to a significantly lower discount rate used to measure our benefit obligations at our May 31, 2010 measurement date.

Amounts recognized in OCI for all plans were as follows (in millions):
			2011								2010
			Pension Plans				Postretirement Healthcare Plans				Pension Plans				Postretirement Healthcare Plans
			Gross Amount		Net of Tax Amount		Gross Amount		Net of Tax Amount		Gross Amount		Net of Tax Amount		Gross Amount		Net of Tax Amount
Net loss and other
	arising during period		$	511	$	321	$	44	$	26	$	1,562	$	986	$	102	$	59
Loss from settlements
	and curtailments			(13)		(8)		-		-		-		-		-		-
Amortizations:
	Prior services credit			113		71		-		-		113		99		-		-
	Actuarial (losses) gains
		and other		(284)		(178)		5		3		(130)		(114)		12		12
Total recognized in OCI			$	327	$	206	$	49	$	29	$	1,545	$	971	$	114	$	71

Benefit payments, which reflect expected future service, are expected to be paid as follows for the years ending May 31 (millions):
	Pension Plans		Postretirement Healthcare Plans
2012	$	562	$	31
2013		633		31
2014		694		33
2015		754		35
2016		843		37
2017-2021		5,667		225

These estimates are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

Future medical benefit claims costs are estimated to increase at an annual rate of 8.3% during 2012, decreasing to an annual growth rate of 4.5% in 2029 and thereafter. Future dental benefit costs are estimated to increase at an annual rate of 7.0% during 2012, decreasing to an annual growth rate of 4.5%in 2029 and thereafter. A 1% change in these annual trend rates would not have a significant impact on the APBO at May 31, 2011 or 2011 benefit expense because the level of these benefits is capped.