Federal Express 2006 Annual Report Download - page 82

FEDEX CORPORATION
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NOTE 13: EM PLOYEE 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
employees as of May 31, 2003 were given the opportunity to
make a one-time election to accrue future pension benefits
under either a 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 retirement benefit is expressed as a dol-
lar 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 previously accrued under the traditional pension ben-
efit formula and continue to receive the benefit of future salary
increases on benefits accrued as of May 31, 2003. Eligible
employees hired after May 31, 2003 accrue 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 pro-
vide 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 allocations for our primary pension
plan at February 28 were as follows:
2006 2005
Actual Target Actual Target
Domestic equities 54% 53% 53% 53%
International equities 20 17 20 17
Private equities 3 5 2 5
Total equities 77 75 75 75
Long duration fixed
income securities 14 15 15 15
Other fixed income securities 910 10 10
100% 100% 100% 100%
The investment strategy for pension plan assets is to utilize a diver-
sified 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.
We use a measurement date of February 28 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 experi-
enced in the future. Additional information about our pension plan
can be found in the Critical Accounting Estimates section of
Management’s Discussion and Analysis.
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); and
• 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 to assist us in this
evaluation. These studies project our estimated future pension
payments and evaluate the efficiency of the allocation of our pen-
sion 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 and 2006 by our third-party professional
investment advisors and actuaries.
POSTRETIREM ENT 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. 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.