Federal Express 2006 Annual Report Download - page 57

MANAGEM ENT’S DISCUSSION AND ANALYSIS
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upward to 3.46% for our 2006 measurement date, up from 3.15%
over the last three fiscal years. Our primary domestic pension
plan expense will be negatively affected for 2007 by approximately
$73 million due to changes in the average rate and timing of future
salary increases. A one-basis-point across the board change in
the rate of estimated future salary increases affects pension costs
by approximately $1.3 million. Approximately $40 million of the
increase is due to a change in rate. The remainder of the increase
is due to changes in the distribution of salary increases by age and
to changes in the assumed average ages of hire and retirement.
Following is information concerning the funded status of our pen-
sion plans as of May 31, 2006 and 2005 (in millions):
2006 2005
Funded Status of Plans:
Accumulated benefit obligation (ABO):
Qualified U.S. domestic plans $ 9,591 $ 8,534
Other plans 499 399
Total ABO $10,090 $ 8,933
Projected benefit obligation (PBO) $12,153 $10,401
Fair value of plan assets 10,130 8,826
PBO in excess of plan assets (2,023) (1,575)
Unrecognized actuarial losses,
principally due to changes in
discount rate and investments 3,026 2,500
Unamortized prior service cost and other 93 100
Amounts included in balance sheets $ 1,096 $ 1,025
Components of Amounts Included in Balance Sheets:
Prepaid pension cost $ 1,349 $ 1,272
Accrued pension liability (253) (247)
Minimum pension liability (122) (63)
Accumulated other comprehensive income 112 52
Intangible asset and other 10 11
Net amounts recognized in balance sheets $ 1,096 $ 1,025
Cash Amounts:
Cash contributions during the year $ 492 $ 489
Benefit payments during the year $ 228 $ 194
The funded status of the plans reflects a snapshot of the state
of our long-term pension liabilities at the plan measurement
date. However, our plans remain adequately funded to provide
benefits to our employees as they come due and current benefit
payments are nominal compared to our total plan assets (benefit
payments for 2006 were approximately 2% of plan assets).
Furthermore, our plan assets were sufficient to fully fund the
accumulated benefit obligation of our qualified U.S. domestic
plans at May 31, 2006 and 2005.
We made $456 million in 2006 and $460 million in 2005 in tax-
deductible voluntary contributions to our qualified U.S. domestic
pension plans. Currently, we do not expect any contributions for
2007 will be legally required. However, we currently expect to
make tax-deductible voluntary contributions to our qualified plans
in 2007 at levels approximating those in 2006.
Cumulative unrecognized actuarial losses were approximately
$3.0 billion through February 28, 2006, compared to $2.5 billion at
February 28, 2005. These unrecognized losses primarily reflect the
declining discount rate from 2002 through 2006. A portion is also
attributable to the differences between expected and actual
asset returns, which are being amortized over future periods.
These unrecognized losses may be recovered in future periods
through actuarial gains. However, unless they are below a corri-
dor amount, these unrecognized actuarial losses are required to
be amortized and recognized in future periods. For example, pro-
jected U.S. domestic plan pension expense for 2007 includes $136
million of amortization of these actuarial losses versus $107 million
in 2006, $60 million in 2005 and $62 million in 2004.
The net amounts reflected in our balance sheets related to
pension items include a substantial prepaid pension asset. This
results from excess cash contributions to the plans over amounts
that are recognized as pension expense for financial accounting
purposes. Amounts accrued as liabilities (including minimum
pension liabilities) relate primarily to unfunded nonqualified
plans and international pension plans where additional funding
may not provide a current tax deduction or where such funding
would be deemed current compensation to plan participants.
Effective in 2004, we amended the FedEx Corporation Employees’
Pension Plan to add a cash balance feature, which we call the
Portable Pension Account. We expect the Portable Pension
Account will help reduce the long-term growth of our pension
liabilities. All employees hired after May 31, 2003 accrue benefits
under the Portable Pension Account formula. Eligible employees
as of May 31, 2003 were able to choose between continuing
to accrue benefits under the traditional pension benefit formula
or accruing future benefits under the Portable Pension
Account formula. The election was entirely optional. There was
no conversion of existing accrued benefits to a cash balance.
All benefits accrued through May 31, 2003, including those
applicable to employees electing the Portable Pension Account,
will be determined under a traditional pension plan formula.
Accordingly, it will be several years before the impact of the
lower benefit provided under this formula has a significant impact
on our total pension liabilities and costs.
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 ser-
vice and interest on the notional account balance. An employee’s
pay credits are determined each year under a graded formula
that combines age with years of service for points. The plan inter-
est credit rate will vary from year to year based on the selected
U.S. Treasury index, with a 4% minimum and a maximum based
on a government rate. Employees are fully vested on completion
of five years of service.