Federal Express 2005 Annual Report Download - page 77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EMPLOYEE BENEFIT PLANS
Pension Plans
We sponsor defined benefit pension plans covering a majority of
our employees. The largest plan covers certain U.S. employees
age 21 and over, with at least one year of service. Eligible employ-
ees as of May 31, 2003 were given the opportunity to make a
one-time election to accrue future pension benefits under either
a new cash balance formula which we call the Portable Pension
Account or a traditional pension benefit formula. Benefits provided
under the traditional formula are based on average earnings and
years of service. Under the Portable Pension Account, the retire-
ment 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. In either case, employees retained all benefits previ-
ously accrued under the traditional pension benefit formula and
continue to receive the benefit of future salary increases on ben-
efits accrued as of May 31, 2003. Eligible employees hired after
May 31, 2003 receive benefits exclusively under the Portable
Pension Account.
Plan funding is actuarially determined and is subject to certain
tax law limitations. International defined benefit pension plans
provide benefits primarily based on final earnings and years of
service and are funded in accordance with local laws and
income tax regulations. Substantially all plan assets are actively
managed. The weighted-average asset allocation for our primary
pension plan at February 28, 2005 was as follows:
Actual Target
Domestic equities 53% 53%
International equities 20 17
Private equities 25
Total equities 75 75
Long duration fixed income securities 15 15
Other fixed income securities 10 10
100% 100%
The investment strategy for pension plan assets is to utilize a
diversified mix of global public and private equity portfolios,
together with public and private fixed income portfolios, to earn
a long-term investment return that meets our pension plan
obligations. Active management strategies are utilized within
the plan in an effort to realize investment returns in excess of
market indices.
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. A substantial increase in the value of plan
assets as a result of investment gains and contributions at the
measurement date for 2005 pension expense (February 27, 2004)
almost completely offset the effect of a slightly lower discount rate
and other actuarial losses.
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 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.
Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. 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 return we can reason-
ably expect those investment classes to earn over the next
10- to 15-year time period (or such other time period that may
be appropriate).
• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.
We review the expected long-term rate of return on an annual
basis and revise it as appropriate. Also, we periodically commis-
sion detailed asset/liability studies performed by third-party
professional investment advisors and actuaries. These studies
project our estimated future pension payments and evaluate the
efficiency of the allocation of our pension plan assets into various
investment categories. These studies also generate probability-
adjusted expected future returns on those assets. The study
performed for 2004 supported the reasonableness of our 9.10%
return assumption used for 2004 based on our liability duration
and market conditions at the time we set this assumption (in
2004). The results of this study were reaffirmed for 2005 by our
third-party professional investment advisors and actuaries.
Postretirement Healthcare Plans
Certain of our subsidiaries offer medical, dental and vision cov-
erage 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, con-
tinuous 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.
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