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.

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. During 2015, we adopted 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):

	2016		2015		2014
Defined benefit pension plans	$	214	$	(41)	$	99
Defined contribution plans		416		385		363
Postretirement healthcare plans		82		81		78
Retirement plans mark-to-market adjustment		1,498		2,190		15
	$	2,210	$	2,615	$	555

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

	2016		2015		2014
Actual versus expected return on assets	$	1,285	$	(35)	$	(1,013)
Discount rate changes		1,129		791		705
Demographic assumption experience		(916)		1,434		323
Total mark-to-market loss	$	1,498	$	2,190	$	15

The actual rate of return on our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) 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.

The implementation of new U.S. mortality tables in 2015 resulted in an increased participant life expectancy assumption, which increased the overall projected benefit obligation 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.

The actual rate of return on our U.S. Pension Plan assets of 13.3% exceeded our expected return of 7.75% primarily due to a favorable investment environment for global equity markets. The weighted average discount rate for all of our pension and postretirement healthcare plans decreased from 4.76% at May 31, 2013 to 4.57% at May 31, 2014.

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.

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. The TNT Express acquisition added a number of defined benefit pension plans, the most significant of which are in the Netherlands, Germany, Italy and Belgium. At May 31, 2016, the total projected benefit obligation for all of these defined benefit plans is $907 million and the total fair value of assets is $761 million. The assets of the largest acquired plan are primarily invested in fixed income managed funds. At May 31, 2016, the weighted average discount rate for all of these defined benefit plans is 2.25% and the expected return on assets used to calculate 2017 expense is 3.29%. Our international pension PBO at May 31, 2016, is approximately 6% of the total pension obligation, and therefore, disaggregated disclosures have not been provided.

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. 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. 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 immediately recognized and expensed in the fourth quarter mark-to-market adjustment.

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
		2016		2015		2014		2016		2015		2014

Discount rate used to determine benefit obligation		4.13	%	4.42	%	4.60	%	4.41	%	4.60	%	4.70	%
Discount rate used to determine net periodic benefit cost		4.42		4.60		4.79		4.60		4.70		4.91
Rate of increase in future compensation levels
	used to determine benefit obligation	4.46		4.62		4.56		-		-		-
Rate of increase in future compensation levels
	used to determine net periodic benefit cost	4.62		4.56		4.54		-		-		-
Expected long-term rate of return on assets -
	Consolidated	6.50		7.75		7.75		-		-		-
Expected long-term rate of return on assets - Segment
	Reporting	6.50		6.50		6.50		-		-		-

The expected average rate of return on plan assets is a long-term, forward-looking assumption. It is required to be the expected future long-term rate of earnings on plan assets. Our 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:

For consolidated pension expense, we assumed a 6.5% expected long-term rate of return on our U.S. Pension Plan assets in 2016 and 7.75% in 2015 and 2014. We lowered our EROA assumption in 2016 as we continued to implement our asset and liability management strategy. In lowering this assumption we considered our historical returns, our current capital markets outlook and our investment strategy for our plan assets, including the impact of the duration of our liabilities. Our actual return in 2016 was less than the expected return. Our actual returns in 2015 and 2014, however, exceeded those long-term assumptions. Our actual return on plan assets has contracted from 2015 due to lower than expected returns on public equities. For the 15-year period ended May 31, 2016, our actual returns were 6.9%.

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 largest asset classes are Corporate Fixed Income Securities and Government Fixed Income Securities (which are largely benchmarked against the Barclays Long Government/Long Corporate Index), and U.S. and International Large Cap Equities (which are mainly indexed 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:

In accordance with recently updated accounting standards, certain investments in 2016 and 2015 that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified as Level 1, 2 or 3 in the below fair value hierarchy but are included in the total. As a result, a reclassification has been made to the prior year's plan asset classification table to conform to the current year's presentation, which also resulted in the removal of the prior year Level 3 asset roll-forward. See Note 2 for additional information.

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

		Plan Assets at Measurement Date
		2016
						Target		Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Asset Class		Fair Value		Actual %		Range %		Level 1		Level 2		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)
		$	23,017	100	%			$	4,119	$	12,499	$	48
⁽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.
		2015
						Target		Quoted Prices in Active Markets		Other Observable Inputs
Asset Class		Fair Value		Actual %		Range %		Level 1		Level 2
Cash and cash equivalents		$	738	3	%	0-5	%	$	36	$	702
Equities						35-55
	U.S. large cap equity⁽¹⁾		4,291	19					302
	International equities⁽¹⁾		3,064	14					2,429		1
	Global equities⁽¹⁾		2,579	11
	U.S. SMID cap equity		979	4					979
Fixed income securities						45-65
	Corporate		6,455	28							6,455
	Government		4,645	20							4,645
	Mortgage backed and other⁽¹⁾		213	1							153
Alternative investments⁽¹⁾			226	1		0-5
Other			(184)	(1)					(181)		(3)
		$	23,006	100	%			$	3,565	$	11,953
⁽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.

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

		2016
Balance at beginning of year⁽¹⁾		$	-
Actual return on plan assets:
	Assets held during current year		2
	Assets sold during the year		-
Purchases, sales and settlements			46

Balance at end of year		$	48

⁽¹⁾	Investments classified in prior years as Level 3 that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have been removed from the fair value hierarchy in accordance with retrospective adoption of recently updated accounting standards. See Note 2 for additional information.

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, 2016 and a statement of the funded status as of May 31, 2016 and 2015 (in millions):

			Pension Plans				Postretirement Healthcare Plans
			2016		2015		2016		2015
Accumulated Benefit Obligation ("ABO")			$	28,845	$	26,793
Changes in Projected Benefit Obligation ("PBO") and
	Accumulated Postretirement Benefit Obligation ("APBO")
PBO/APBO at the beginning of year			$	27,512	$	24,578	$	929	$	883
	Service cost			662		653		40		40
	Interest cost			1,180		1,096		42		41
	Actuarial loss			277		2,231		(64)		6
	Benefits paid			(912)		(815)		(78)		(73)
	Business acquisition			907		-		-		-
	Other			(24)		(231)		36		32
PBO/APBO at the end of year			$	29,602	$	27,512	$	905	$	929

Change in Plan Assets
Fair value of plan assets at the beginning of year			$	23,505	$	21,907	$	-	$	-
	Actual return on plan assets			223		1,718		-		-
	Company contributions			726		746		42		37
	Benefits paid			(912)		(815)		(78)		(73)
	Business acquisition			761		-		-		-
	Other			(32)		(51)		36		36
Fair value of plan assets at the end of year			$	24,271	$	23,505	$	-	$	-

Funded Status of the Plans			$	(5,331)	$	(4,007)	$	(905)	$	(929)

Amount Recognized in the Balance Sheet at May 31:
	Noncurrent asset		$	53	$	26	$	-	$	-
	Current pension, postretirement healthcare and other
		benefit obligations		(31)		(34)		(40)		(42)
	Noncurrent pension, postretirement healthcare and other
		benefit obligations		(5,353)		(3,999)		(865)		(887)
Net amount recognized			$	(5,331)	$	(4,007)	$	(905)	$	(929)

Amounts Recognized in AOCI and not yet reflected in
	Net Periodic Benefit Cost:
		Prior service credit and other	$	(546)	$	(668)	$	-	$	-

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	$	(121)	$	(121)	$	-	$	-

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

		PBO		Fair Value of Plan Assets		Funded Status

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)

2015
	Qualified	$	26,365	$	23,006	$	(3,359)
	Nonqualified		271		-		(271)
	International Plans		876		499		(377)
	Total	$	27,512	$	23,505	$	(4,007)

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
		2016		2015

Pension Benefits
	Fair value of plan assets	$	23,867	$	23,099
	PBO		(29,251)		(27,132)
	Net funded status	$	(5,384)	$	(4,033)

		ABO Exceeds the Fair Value of Plan Assets
		2016		2015

Pension Benefits
	ABO⁽¹⁾	$	(28,493)	$	(26,413)

	Fair value of plan assets		23,865		23,099
	PBO		(29,249)		(27,132)
	Net funded status	$	(5,384)	$	(4,033)

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

For 2017, we anticipate making contributions to our U.S. Pension Plans totaling $1.0 billion (approximately $615 million of which are required).

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

	Pension Plans						Postretirement Healthcare Plans
	2016		2015		2014		2016		2015		2014

Service cost	$	662	$	653	$	657	$	40	$	40	$	38
Interest cost		1,180		1,096		1,055		42		41		40
Expected return on plan assets		(1,508)		(1,678)		(1,495)		-		-		-
Amortization of prior service credit		(121)		(115)		(115)		-		-		-
Actuarial losses (gains) and other		1,562		2,190		7		(64)		6		5
Net periodic benefit cost	$	1,775	$	2,146	$	109	$	18	$	87	$	83

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

		2016								2015
		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

Prior service cost
	arising during period	$	-	$	-	$	-	$	-	$	(113)	$	(72)	$	(1)	$	-

Amortizations:
	Prior services credit		121		76		-		-		115		72		-		-
Total recognized in OCI		$	121	$	76	$	-	$	-	$	2	$	-	$	(1)	$	-

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 2017, 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, 2016 or 2016 benefit expense because the level of these benefits is capped.