NOTE 13: 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 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 either expense or AOCI of unrecognized gains or losses and prior service costs or credits. We use mark-to-market accounting for the recognition of our actuarial gains and losses related to our defined benefit pension and postretirement healthcare plans as described in Note 1. 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.

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

	2017			2016		2015
Defined benefit pension plans	$	234		$	214	$	(41	)
Defined contribution plans		480			416		385
Postretirement healthcare plans		76			82		81
Retirement plans mark-to-market adjustment		(24	)		1,498		2,190
	$	766		$	2,210	$	2,615

The components of the pre-tax mark-to-market adjustments are as follows (in millions):

	2017			2016			2015
Actual versus expected return on assets	$	(740	)	$	1,285		$	(35	)
Discount rate changes		266			1,129			791
Demographic assumption experience		450			(916	)		1,434
Total mark-to-market (gain) loss	$	(24	)	$	1,498		$	2,190

2017

The actual rate of return on our U.S. Pension Plan assets of 9.6% was higher than our expected return of 6.50% primarily due to a rise in the value of global equity markets in addition to favorable credit market conditions. The weighted average discount rate for all of our pension and postretirement healthcare plans decreased from 4.04% at May 31, 2016 to 3.98% at May 31, 2017. The demographic assumption experience in 2017 reflects an update in mortality tables for U.S. pension and other postemployment benefit plans.

2016

The actual rate of return on our U.S. Pension Plan assets of 1.2% was lower than our expected return of 6.50% primarily due to a challenging environment for global equities and other risk-seeking asset classes. The weighted average discount rate for all of our pension and postretirement healthcare plans declined from 4.38% at May 31, 2015 to 4.04% at May 31, 2016. The demographic assumption experience in 2016 reflects a change in disability rates and an increase in the average retirement age for U.S. pension and other postemployment benefit plans.

2015

The implementation of new U.S. mortality tables in 2015 resulted in an increased participant life expectancy assumption, which increased the overall PBO by $1.2 billion. The weighted average discount rate for all of our pension and postretirement healthcare plans declined from 4.57% at May 31, 2014 to 4.38% at May 31, 2015.

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). Benefits under this formula were capped on May 31, 2008 for most employees.

Our U.S. Pension Plans were amended to permit former employees with a vested traditional pension benefit to make a one-time, irrevocable election to receive their benefits in a lump-sum distribution. Approximately 18,300 former employees elected to receive this lump-sum distribution and a total of approximately $1.3 billion was paid by the plans in May 2017.

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 earnings and years of service and are funded in compliance with local laws and practices. The majority of our international obligations are for defined benefit pension plans in the Netherlands and the United Kingdom.

POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents and a small number of international employees. 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 under most plans so these benefits are not subject to future inflation.

PENSION PLAN ASSUMPTIONS. 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.

Weighted-average actuarial assumptions used to determine the benefit obligations and net periodic benefit cost of our plans are as follows:

	U.S. Pension Plans									International Pension Plans									Postretirement Healthcare Plans
	2017			2016			2015			2017			2016			2015			2017			2016			2015
Discount rate used to determine benefit obligation		4.08	%		4.13	%		4.42	%		2.43	%		2.46	%		2.95	%		4.32	%		4.43	%		4.60	%
Discount rate used to determine net periodic benefit cost		4.13			4.42			4.60			2.46			2.95			3.57			4.43			4.62			4.70
Rate of increase in future compensation levels used to determine benefit obligation		4.47			4.46			4.62			2.42			2.82			3.19			—			—			—
Rate of increase in future compensation levels used to determine net periodic benefit cost		4.46			4.62			4.56			2.82			3.19			3.31			—			—			—
Expected long-term rate of return on assets - Consolidated		6.50			6.50			7.75			—			—			—			—			—			—
Expected long-term rate of return on assets - Segment Reporting		6.50			6.50			6.50			3.18			3.68			5.13			—			—			—

Our U.S. Pension Plan assets are invested primarily in publicly tradable 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. As part of our strategy to manage pension costs and funded status volatility, we follow a liability-driven investment strategy to better align plan assets with liabilities.

Establishing the expected future rate of investment return on our pension assets is a judgmental matter, which we review on an annual basis and revise 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.

For consolidated pension expense, we assumed a 6.50% expected long-term rate of return on our U.S. Pension Plan assets in 2017 and 2016 and 7.75% in 2015. We lowered our EROA assumption in 2016 as we continued to implement our asset and liability management strategy. For the 15-year period ended May 31, 2017, our actual returns were 7.8%.

The investment strategy for our U.S. 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 largest asset classes are Corporate Fixed Income Securities and Government Fixed Income Securities (which are largely benchmarked against the Barclays Long Government, Barclays Long Corporate or the Citigroup 20+ STRIPS indices), and U.S. and International Large Cap Equities (which are mainly benchmarked to the S&P 500 Index and other global indices). 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. 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.

The 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. These Level 2 investments include short-term investment funds which are collective funds priced at a constant value by the administrator of the funds.

•

Domestic, international and global 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. These Level 2 investments include mutual funds.

•

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

•

Alternative Investments. 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 in private equity, debt, real estate and other private investments are valued at estimated fair value based on quarterly financial information received from the investment advisor and/or general partner. These estimates incorporate factors such as contributions and distributions, market transactions, market comparables and performance multiples.

The fair values of investments by level and asset category and the weighted-average asset allocations for our U.S. Pension Plans and most significant international pension plans at the measurement date are presented in the following table (in millions):

	Plan Assets at Measurement Date
	2017
Asset Class (U.S. Plans)	Fair Value			Actual %			Target Range %⁽²⁾			Quoted Prices in Active Markets Level 1			Other Observable Inputs Level 2			Unobservable Inputs Level 3
Cash and cash equivalents	$	1,076			4	%		0 - 5	%	$	26		$	1,050
Equities							30 - 50
U.S. large cap equity⁽¹⁾		2,415			10						830
International equities⁽¹⁾		3,521			14						2,747			157
Global equities⁽¹⁾		3,276			13
U.S. SMID cap equity		987			4						987
Fixed income securities							50 - 70
Corporate		8,163			33									8,163
Government⁽¹⁾		4,674			19									3,454
Mortgage-backed and other⁽¹⁾		603			2									129
Alternative investments⁽¹⁾		377			2		0 - 5									$	129
Other		(159	)		(1	)					(161	)		2
Total U.S. plan assets	$	24,933			100	%				$	4,429		$	12,955		$	129
Asset Class (International Plans)
Cash and cash equivalents	$	48			4	%				$	2		$	46
Equities
International equities⁽¹⁾		137			11									72
Global equities⁽¹⁾		202			17
Fixed income securities
Corporate⁽¹⁾		270			22									49
Government⁽¹⁾		405			34						95			230
Mortgage-backed and other⁽¹⁾		145			12
Alternative investments		17			1									17
Other		(18	)		(1	)					(2	)		(16	)
Total International plan assets	$	1,206			100	%				$	95		$	398

⁽¹⁾	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the total.

⁽²⁾	Target ranges have not been provided for international plan assets as they are managed at an individual country level.

	Plan Assets at Measurement Date
	2016
Asset Class (U.S. Plans)	Fair Value			Actual %			Target Range %⁽²⁾			Quoted Prices in Active Markets Level 1			Other Observable Inputs Level 2			Unobservable Inputs Level 3
Cash and cash equivalents	$	568			2	%		0 - 5	%	$	76		$	492
Equities							35 - 55
U.S. large cap equity⁽¹⁾		3,257			14						750
International equities⁽¹⁾		3,381			15						2,685			121
Global equities⁽¹⁾		2,794			12
U.S. SMID cap equity		913			4						913
Fixed income securities							45 - 65
Corporate		6,608			29									6,608
Government		5,148			22									5,148
Mortgage-backed and other⁽¹⁾		347			2									146
Alternative investments⁽¹⁾		322			1		0 - 5									$	48
Other		(321	)		(1	)					(305	)		(16	)
Total U.S. plan assets	$	23,017			100	%				$	4,119		$	12,499		$	48
Asset Class (International Plans)
Cash and cash equivalents	$	211			19	%				$	157		$	54
Equities
International equities⁽¹⁾		124			11									63
Global equities⁽¹⁾		148			14
Fixed income securities
Corporate⁽¹⁾		122			11									44
Government⁽¹⁾		324			30						60			213
Mortgage-backed and other⁽¹⁾		134			12
Alternative investments⁽¹⁾		39			4									18
Other		(10	)		(1	)					(14	)		4
Total International plan assets	$	1,092			100	%				$	203		$	396

⁽¹⁾	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the total.

⁽²⁾	Target ranges have not been provided for international plan assets as they are managed at an individual country level.

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

	U.S. Pension Plans
	2017		2016
Balance at beginning of year	$	48	$	—
Actual return on plan assets:
Assets held during current year		5		2
Assets sold during the year		1		—
Purchases, sales and settlements		75		46
Balance at end of year	$	129	$	48

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, 2017 and a statement of the funded status as of May 31, 2017 and 2016 (in millions):

	U.S. Pension Plans						International Pension Plans						Postretirement Healthcare Plans
	2017			2016			2017			2016			2017			2016
Accumulated Benefit Obligation (“ABO”)	$	27,244		$	27,236		$	1,842		$	1,609
Changes in Projected Benefit Obligation (“PBO”) and Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year	$	27,804		$	26,636		$	1,798		$	876		$	905		$	929
Service cost		638			622			83			40			36			40
Interest cost		1,128			1,155			43			25			39			42
Actuarial loss		571			284			161			(7	)		(14	)		(64	)
Benefits paid		(2,271	)		(893	)		(38	)		(19	)		(72	)		(78	)
Business acquisition		—			—			—			907			—			—
Purchase accounting adjustment		—			—			26			—			—			—
Other		—			—			(30	)		(24	)		33			36
PBO/APBO at the end of year	$	27,870		$	27,804		$	2,043		$	1,798		$	927		$	905
Change in Plan Assets
Fair value of plan assets at the beginning of year	$	23,017		$	23,006		$	1,254		$	499		$	—		$	—
Actual return on plan assets		2,167			211			112			12			—			—
Company contributions		2,020			693			95			33			36			42
Benefits paid		(2,271	)		(893	)		(38	)		(19	)		(72	)		(78	)
Business acquisition		—			—			—			761			—			—
Other		—			—			(44	)		(32	)		36			36
Fair value of plan assets at the end of year	$	24,933		$	23,017		$	1,379		$	1,254		$	—		$	—
Funded Status of the Plans	$	(2,937	)	$	(4,787	)	$	(664	)	$	(544	)	$	(927	)	$	(905	)
Amount Recognized in the Balance Sheet at May 31:
Noncurrent asset	$	—		$	—		$	40		$	53		$	—		$	—
Current pension, postretirement healthcare and other benefit obligations		(33	)		(19	)		(17	)		(12	)		(39	)		(40	)
Noncurrent pension, postretirement healthcare and other benefit obligations		(2,904	)		(4,768	)		(687	)		(585	)		(888	)		(865	)
Net amount recognized	$	(2,937	)	$	(4,787	)	$	(664	)	$	(544	)	$	(927	)	$	(905	)
Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost:
Prior service credit and other	$	(410	)	$	(528	)	$	(13	)	$	(18	)	$	(4	)	$	—
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:
Prior service credit and other	$	(118	)	$	(118	)	$	(2	)	$	(3	)	$	—		$	—

Our pension plans included the following components at May 31 (in millions):

	PBO		Fair Value of Plan Assets		Funded Status
2017
Qualified	$	27,600	$	24,933	$	(2,667	)
Nonqualified		270		—		(270	)
International Plans		2,043		1,379		(664	)
Total	$	29,913	$	26,312	$	(3,601	)
2016
Qualified	$	27,543	$	23,017	$	(4,526	)
Nonqualified		261		—		(261	)
International Plans		1,798		1,254		(544	)
Total	$	29,602	$	24,271	$	(5,331	)

The table above provides the 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. The fair value of plan assets for pension plans with a PBO or ABO in excess of plan assets at May 31 were as follows (in millions):

	PBO Exceeds the Fair Value of Plan Assets
	2017			2016
U.S. Pension Benefits
Fair value of plan assets	$	24,933		$	23,017
PBO		(27,870	)		(27,804	)
Net funded status	$	(2,937	)	$	(4,787	)
International Pension Benefits
Fair value of plan assets	$	952		$	850
PBO		(1,656	)		(1,447	)
Net funded status	$	(704	)	$	(597	)

	ABO Exceeds the Fair Value of Plan Assets
	2017			2016
U.S. Pension Benefits
ABO⁽¹⁾	$	(27,244	)	$	(27,236	)
Fair value of plan assets		24,933			23,017
PBO		(27,870	)		(27,804	)
Net funded status	$	(2,937	)	$	(4,787	)
International Pension Benefits
ABO⁽¹⁾	$	(1,433	)	$	(1,257	)
Fair value of plan assets		928			848
PBO		(1,626	)		(1,445	)
Net funded status	$	(698	)	$	(597	)

⁽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):

	2017		2016
Required	$	459	$	8
Voluntary		1,541		652
	$	2,000	$	660

For 2018, we anticipate making contributions to our U.S. Pension Plans totaling $1.0 billion (approximately $700 million of which are expected to be required).

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

	U.S. Pension Plans									International Pension Plans									Postretirement Healthcare Plans
	2017			2016			2015			2017			2016			2015			2017			2016			2015
Service cost	$	638		$	622		$	615		$	83		$	40		$	38		$	36		$	40		$	40
Interest cost		1,128			1,155			1,068			43			25			28			39			42			41
Expected return on plan assets		(1,501	)		(1,490	)		(1,655	)		(38	)		(18	)		(23	)		—			—			—
Amortization of prior service credit		(118	)		(118	)		(112	)		(2	)		(3	)		(3	)		—			—			—
Actuarial losses (gains) and other		(95	)		1,563			2,154			87			(1	)		36			(14	)		(64	)		6
Net periodic benefit cost	$	52		$	1,732		$	2,070		$	173		$	43		$	76		$	61		$	18		$	87

Amounts recognized in other comprehensive income (“OCI”) for all plans for the years ended May 31 were as follows (in millions):

	2017														2016
	U.S. Pension Plans				International Pension Plans				Postretirement Healthcare Plans						U.S. Pension Plans				International 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		Gross Amount		Net of Tax Amount		Gross Amount		Net of Tax Amount
Prior service cost (credit) arising during period	$	—	$	—	$	1	$	1	$	(3	)	$	(2	)	$	—	$	—	$	—	$	—	$	—	$	—
Amortizations:
Prior services credit		118		74		2		2		—			—			118		74		3		2		—		—
Total recognized in OCI	$	118	$	74	$	3	$	3	$	(3	)	$	(2	)	$	118	$	74	$	3	$	2	$	—	$	—

Benefit payments, which reflect expected future service, are expected to be paid as follows for the years ending May 31 (in millions):

	U.S. Pension Plans		International Pension Plans		Postretirement Healthcare Plans
2018	$	1,013	$	44	$	39
2019		1,070		43		40
2020		1,169		48		42
2021		1,233		53		42
2022		1,345		59		43
2023-2027		8,565		789		246

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 7.8% during 2018, decreasing to an annual growth rate of 4.50% in 2037 and thereafter. A 1% change in these annual trend rates would not have a significant impact on the APBO at May 31, 2017 or 2017 benefit expense because the level of these benefits is capped.