Federal Express 2009 Annual Report Download - page 31

MANAGEMENT’S DISCUSSION AND ANALYSIS
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Retirement plans cost in 2010 is expected to be approximately
$500 million, an increase of approximately $29 million from 2009.
This increase is attributable to increased pension plan expense
as a result of the negative impact of current market conditions
on our pension plan assets, which will be substantially offset by
lower expenses on our 401(k) plans due to the temporary suspen-
sion of the company-matching contribution.
Pension Cost. The components of pension cost for all pension
plans are as follows (in millions):
2009 2008 2007
Service cost $ 499 $ 518 $ 540
Interest cost 798 720 707
Expected return on plan assets (1,059) (985) (930)
Recognized actuarial (gains) losses
and other (61) 70 150
Net periodic benefi t cost $ 177 $ 323 $ 467
Pension cost for our primary domestic pension plan was favor-
ably affected in 2009 by approximately $210 million due to an
increase in the discount rate driven by higher interest rates in
the bond market year over year. Pension cost will be higher in
2010 by approximately $125 million due to signifi cant declines in
the value of our plan assets due to current market conditions,
partially offset by a higher discount rate.
Following is a discussion of the key estimates we consider in
determining our pension cost:
Discount Rate. This is the interest rate used to discount the esti-
mated future benefi t payments that have been accrued to date
(the projected benefi t obligation, or PBO) to their net present
value and to determine the succeeding year’s pension expense.
The discount rate is determined each year at the plan measure-
ment date. An increase in the discount rate decreases pension
expense. The discount rate affects the PBO and pension expense
based on the measurement dates, as described below.
Discount Amounts Determined by Measurement
Measurement Date (1) Rate Date and Discount Rate
5/31/2009 7.68% 2009 PBO and 2010 expense
6/01/2008 7.15 2009 expense
2/29/2008 6.96 2008 PBO
2/28/2007 6.01 2007 PBO and 2008 expense
2/28/2006 5.91 2006 PBO and 2007 expense
(1) SFAS 158 required us to change our measurement date to May 31, beginning in 2009.
We determine the discount rate (which is required to be the
rate at which the projected benefi t obligation could be effec-
tively settled as of the measurement date) with the assistance
of actuaries, who calculate the yield on a theoretical portfolio
of high-grade corporate bonds (rated Aa or better) with cash
fl ows that generally match our expected benefi t payments in
future years. In selecting bonds for this theoretical portfolio, we
focus on bonds that match cash fl ows to benefi t payments and
limit our concentration of bonds by industry and issuer. This bond
modeling technique allows for the use of non-callable and make-
whole bonds that meet certain screening criteria to ensure that
the selected bonds with a call feature have a low probability of
being called. To the extent scheduled bond proceeds exceed the
estimated benefi t payments in a given period, the yield calculation
assumes those excess proceeds are reinvested at the one-year
forward rates implied by the Citigroup Pension Discount Curve.
The increase in the discount rate for 2010 was driven by cur-
rent conditions in the market for high-grade corporate bonds, in
which yields have strengthened signifi cantly since May 31, 2008.
The discount rate assumption is highly sensitive, as the follow-
ing table illustrates with our largest tax-qualifi ed U.S. domestic
pension plan:
Sensitivity (in millions)
Effect on 2010 May 31, 2009
Pension Expense Effect on PBO
One-basis-point change in discount rate $1.5 $13.9
One-basis-point change in expected
return on assets 1.2 –
At the February 29, 2008 and June 1, 2008 measurement dates,
respectively, a one-basis-point change in the discount rate would
have impacted the 2008 PBO by $16 million and 2009 expense by
$1.7 million.
Plan Assets. The estimated average rate of return on plan assets
is a long-term, forward-looking assumption that also materi-
ally affects our pension cost. It is required to be the expected
future long-term rate of earnings on plan assets. Our pension
plan assets are invested primarily in listed 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.
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 geometric return we
can reasonably 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
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. As part of our strategy to
manage future pension costs and net funded status volatility,
we are transitioning to a more liability-driven investment
strategy, which will better align our plan assets and liabilities. This
strategy will ultimately result in a greater concentration of fi xed-
income investments.