NOTE 13: RETIREMENT PLANS

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 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. We use MTM 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 PBO of the plan.

A summary of our retirement plans costs over the past three years is as follows (in millions):

	2018			2017			2016
Defined benefit pension plans	$	150		$	234		$	214
Defined contribution plans		527			480			416
Postretirement healthcare plans		74			76			82
Retirement plans mark-to-market (gain) loss		(10	)		(24	)		1,498
	$	741		$	766		$	2,210

The components of the MTM adjustments are as follows (in millions):

	2018			2017			2016
Discount rate changes	$	(613	)	$	266		$	1,129
Demographic assumption experience		382			450			(916	)
Annuity contract purchase		210			—			—
Actual versus expected return on assets		11			(740	)		1,285
Total mark-to-market (gain) loss	$	(10	)	$	(24	)	$	1,498

2018

The weighted average discount rate for all of our pension and postretirement healthcare plans increased from 3.98% at May 31, 2017 to 4.11% at May 31, 2018. The demographic assumption experience in 2018 reflects a liability loss due to unfavorable results related to various demographic assumptions. The annuity contract purchase loss relates to the contract with Metropolitan Life Insurance Company as discussed below. The actual rate of return, which is net of all fees and expenses, on our U.S. Pension Plan assets of 6.30% was slightly lower than our expected return of 6.50% primarily due to generally flat returns in the long-duration fixed income portfolio partially offset by strong returns from global equities.

2017

The actual rate of return on our U.S. Pension Plan assets, which is net of all fees and expenses, of 9.2% was higher than our expected return of 6.50% primarily due to a rise in the value of global equity markets in addition to favorable credit market conditions. The weighted average discount rate for all of our pension and postretirement healthcare plans decreased from 4.04% at May 31, 2016 to 3.98% at May 31, 2017. The demographic assumption experience in 2017 reflects an update in mortality tables for U.S. pension and other postemployment benefit plans.

2016

The actual rate of return on our U.S. Pension Plan assets of 0.9%, net of all fees and expenses, 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.

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.

During 2017, our U.S. Pension Plans were amended to permit former employees with a vested traditional pension benefit to make a one-time, irrevocable election to receive their benefits in a lump-sum distribution. Approximately 18,300 former employees elected to receive this lump-sum distribution and a total of approximately $1.3 billion was paid by the plans in May 2017.

In May 2018, we entered into an agreement with Metropolitan Life Insurance Company to purchase a group annuity contract and transfer approximately $6 billion of our U.S. Pension Plan obligations. The transaction transferred responsibility for pension benefits to Metropolitan Life Insurance Company for approximately 41,000 of our retirees and beneficiaries who satisfy certain conditions and currently receive a monthly benefit from participating U.S. Pension Plans. There was no change to the pension benefits for any plan participants as a result of this transaction. The purchase of the group annuity contract was funded directly by assets of the U.S. Pension Plans. We recognized a $210 million one-time settlement loss in connection with this transaction, which is included in our 2018 year-end MTM retirement plans adjustment.

POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents and a small number of international employees. 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 under most plans, so these benefits are not subject to future inflation.

Effective January 1, 2018, certain of our U.S. postretirement healthcare benefits were converted to a lump-sum benefit in a notional retiree health reimbursement account (HRA) for eligible participants. The HRA is available to reimburse a participant for qualifying healthcare premium costs and limits the company liability to the HRA account balance. The amount of the credit is based on age at January 1, 2018 or upon age at retirement thereafter. In connection with this change, retiree health coverage was closed to most new employees hired on or after January 1, 2018.

PENSION PLAN ASSUMPTIONS. 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.

Weighted-average actuarial assumptions used to determine the benefit obligations and net periodic benefit cost of our plans are as follows:

	U.S. Pension Plans									International Pension Plans									Postretirement Healthcare Plans
	2018			2017			2016			2018			2017			2016			2018			2017			2016
Discount rate used to determine benefit obligation		4.27	%		4.08	%		4.13	%		2.37	%		2.43	%		2.46	%		4.33	%		4.32	%		4.43	%
Discount rate used to determine net periodic benefit cost		4.08			4.13			4.42			2.43			2.46			2.95			4.32			4.43			4.62
Rate of increase in future compensation levels used to determine benefit obligation		4.43			4.47			4.46			2.26			2.42			2.82			—			—			—
Rate of increase in future compensation levels used to determine net periodic benefit cost		4.47			4.46			4.62			2.42			2.82			3.19			—			—			—
Expected long-term rate of return on assets		6.50			6.50			6.50			3.09			3.18			3.68			—			—			—

Our U.S. 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:

•

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 time, net of all fees and expenses; 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.

For consolidated pension expense, we assumed a 6.50% expected long-term rate of return on our U.S. Pension Plan assets in 2018, 2017 and 2016. For 2019, we have increased our EROA assumption to 6.75%. The decrease in the number of retirees in payment status due to the purchase of the group annuity contract in May 2018 will reduce our short-term future cash outlays for the U.S. Pension Plans and allow the remaining assets to be placed in longer duration investments, which is expected to increase the rate of return on assets. Also, the elimination of Pension Benefit Guaranty Corporation fixed and variable-rate premiums due to the reduction in the number of participants in our U.S. Pension Plans will increase the net return on assets. For the 15-year period ended May 31, 2018, our actual return was 8.2%, net of all fees and expenses.

The investment strategy for our U.S. Pension Plan assets is to utilize a diversified mix of public equities, fixed income and alternative investments 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, Barclays Long Corporate or the Citigroup 20+ STRIPS indices), and U.S. and non-U.S. Equities (which are mainly benchmarked to the S&P 500 Index and MSCI 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.

The following is a description of the valuation methodologies used for investments measured at fair value:

•

Cash and cash equivalents. These Level 1 investments include cash, cash equivalents and foreign currency valued using exchange rates. These Level 2 investments include short-term investment funds which are collective funds priced at a constant value by the administrator of the funds.

•

Domestic, international and global equities. These Level 1 investments are valued at the closing price or last trade reported on the major market on which the individual securities are traded. These Level 2 investments include mutual funds.

•

Fixed income. We determine the fair value of these Level 2 corporate bonds, U.S. and non-U.S. government securities and other fixed income securities by using bid evaluation pricing models or quoted prices of securities with similar characteristics.

•

Alternative Investments. The valuation of these Level 3 investments requires significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. Investments in private equity, debt, real estate, hedge funds and other private investments are valued at estimated fair value based on quarterly financial information received from the investment advisor and/or general partner. These estimates incorporate factors such as contributions and distributions, market transactions, market comparables and performance multiples.

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

	Plan Assets at Measurement Date
	2018
Asset Class (U.S. Plans)	Fair Value			Actual %			Target Range %⁽¹⁾	Quoted Prices in Active Markets Level 1			Other Observable Inputs Level 2			Unobservable Inputs Level 3
Cash and cash equivalents	$	714			3	%	0 - 5%	$	19		$	695
Equities							30 - 50
U.S. large cap equity⁽²⁾		2,449			11				840
International equities⁽²⁾		3,506			16				2,681			172
Global equities⁽²⁾		1,772			8
U.S. SMID cap equity		780			4				780
Fixed income securities							50 - 70
Corporate		5,834			26							5,834
Government⁽²⁾		4,872			22							3,345
Mortgage-backed and other⁽²⁾		626			3							125
Alternative investments⁽²⁾		1,573			7		0 - 10							$	209
Other		(69	)		—				(62	)		(7	)
Total U.S. plan assets	$	22,057			100	%		$	4,258		$	10,164		$	209
Asset Class (International Plans)
Cash and cash equivalents	$	24			2	%		$	2		$	22
Equities
International equities⁽²⁾		146			11							70
Global equities⁽²⁾		228			17
Fixed income securities
Corporate⁽²⁾		306			23							68
Government⁽²⁾		452			34				108			256
Mortgage-backed and other⁽²⁾		168			13
Alternative investments		19			2							19
Other		(23	)		(2	)			(6	)		(17	)
Total international plan assets	$	1,320			100	%		$	104		$	418

⁽¹⁾

Target ranges have not been provided for international plan assets as they are managed at an individual country level.

⁽²⁾

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.

	Plan Assets at Measurement Date
	2017
Asset Class (U.S. Plans)	Fair Value			Actual %			Target Range %⁽¹⁾	Quoted Prices in Active Markets Level 1			Other Observable Inputs Level 2			Unobservable Inputs Level 3
Cash and cash equivalents	$	1,076			4	%	0 - 5%	$	26		$	1,050
Equities							30 - 50
U.S. large cap equity⁽²⁾		2,415			10				830
International equities⁽²⁾		3,521			14				2,747			157
Global equities⁽²⁾		3,276			13
U.S. SMID cap equity		987			4				987
Fixed income securities							50 - 70
Corporate		8,163			33							8,163
Government⁽²⁾		4,674			19							3,454
Mortgage-backed and other⁽²⁾		603			2							129
Alternative investments⁽²⁾		377			2		0 - 5							$	129
Other		(159	)		(1	)			(161	)		2
Total U.S. plan assets	$	24,933			100	%		$	4,429		$	12,955		$	129
Asset Class (International Plans)
Cash and cash equivalents	$	48			4	%		$	2		$	46
Equities
International equities⁽²⁾		137			11							72
Global equities⁽²⁾		202			17
Fixed income securities
Corporate⁽²⁾		270			22							49
Government⁽²⁾		405			34				95			230
Mortgage-backed and other⁽²⁾		145			12
Alternative investments		17			1							17
Other		(18	)		(1	)			(2	)		(16	)
Total international plan assets	$	1,206			100	%		$	95		$	398

⁽¹⁾

Target ranges have not been provided for international plan assets as they are managed at an individual country level.

⁽²⁾

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

	U.S. Pension Plans
	2018		2017
Balance at beginning of year	$	129	$	48
Actual return on plan assets:
Assets held during current year		8		5
Assets sold during the year		4		1
Purchases, sales and settlements		68		75
Balance at end of year	$	209	$	129

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, 2018 and a statement of the funded status as of May 31, 2018 and 2017 (in millions):

	U.S. Pension Plans						International Pension Plans						Postretirement Healthcare Plans
	2018			2017			2018			2017			2018			2017
Accumulated Benefit Obligation (“ABO”)	$	22,029		$	27,244		$	1,956		$	1,842
Changes in Projected Benefit Obligation (“PBO”) and Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year	$	27,870		$	27,804		$	2,043		$	1,798		$	927		$	905
Service cost		679			638			97			83			36			36
Interest cost		1,115			1,128			49			43			39			39
Actuarial loss		21			571			(34	)		161			(9	)		(14	)
Benefits paid		(854	)		(2,271	)		(46	)		(38	)		(80	)		(72	)
Settlements		(6,178	)		—			(5	)		(7	)		—			—
Purchase accounting adjustment		—			—			—			26			—			—
Other		—			—			63			(23	)		42			33
PBO/APBO at the end of year	$	22,653		$	27,870		$	2,167		$	2,043		$	955		$	927
Change in Plan Assets
Fair value of plan assets at the beginning of year	$	24,933		$	23,017		$	1,379		$	1,254		$	—		$	—
Actual return on plan assets		1,609			2,167			49			112			—			—
Company contributions		2,547			2,020			84			95			42			36
Benefits paid		(854	)		(2,271	)		(46	)		(38	)		(80	)		(72	)
Settlements		(6,178	)		—			(5	)		(7	)		—			—
Other		—			—			48			(37	)		38			36
Fair value of plan assets at the end of year	$	22,057		$	24,933		$	1,509		$	1,379		$	—		$	—
Funded Status of the Plans	$	(596	)	$	(2,937	)	$	(658	)	$	(664	)	$	(955	)	$	(927	)
Amount Recognized in the Balance Sheet at May 31:
Noncurrent asset	$	—		$	—		$	73		$	40		$	—		$	—
Current pension, postretirement healthcare and other benefit obligations		(22	)		(33	)		(16	)		(17	)		(62	)		(39	)
Noncurrent pension, postretirement healthcare and other benefit obligations		(574	)		(2,904	)		(715	)		(687	)		(893	)		(888	)
Net amount recognized	$	(596	)	$	(2,937	)	$	(658	)	$	(664	)	$	(955	)	$	(927	)
Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost:
Prior service (credit) cost and other	$	(292	)	$	(410	)	$	(10	)	$	(13	)	$	2		$	(4	)
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	$	(118	)	$	(118	)	$	(2	)	$	(2	)	$	—		$	—

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

	PBO		Fair Value of Plan Assets		Funded Status
2018
Qualified	$	22,413	$	22,057	$	(356	)
Nonqualified		240		—		(240	)
International Plans		2,167		1,509		(658	)
Total	$	24,820	$	23,566	$	(1,254	)
2017
Qualified	$	27,600	$	24,933	$	(2,667	)
Nonqualified		270		—		(270	)
International Plans		2,043		1,379		(664	)
Total	$	29,913	$	26,312	$	(3,601	)

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
	2018			2017
U.S. Pension Benefits
Fair value of plan assets	$	22,057		$	24,933
PBO		(22,653	)		(27,870	)
Net funded status	$	(596	)	$	(2,937	)
International Pension Benefits
Fair value of plan assets	$	1,060		$	952
PBO		(1,791	)		(1,656	)
Net funded status	$	(731	)	$	(704	)

	ABO Exceeds the Fair Value of Plan Assets
	2018			2017
U.S. Pension Benefits
ABO⁽¹⁾	$	(1,134	)	$	(27,244	)
Fair value of plan assets		859			24,933
PBO		(1,214	)		(27,870	)
Net funded status	$	(355	)	$	(2,937	)
International Pension Benefits
ABO⁽¹⁾	$	(1,581	)	$	(1,433	)
Fair value of plan assets		1,060			928
PBO		(1,791	)		(1,626	)
Net funded status	$	(731	)	$	(698	)

⁽¹⁾	ABO not used in determination of funded status.

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

	2018		2017
Required	$	22	$	459
Voluntary		2,478		1,541
	$	2,500	$	2,000

For 2019, no pension contributions will be required for our U.S. Pension Plans as they are fully funded under the Employee Retirement Income Security Act. However, we expect to make tax-deductible discretionary contributions to those plans at levels significantly less than those made in 2018, in addition to required contributions to certain international pension plans. We expect total pension plan contributions to be substantially less than those made in 2018.

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

	U.S. Pension Plans									International Pension Plans									Postretirement Healthcare Plans
	2018			2017			2016			2018			2017			2016			2018			2017			2016
Service cost	$	679		$	638		$	622		$	97		$	83		$	40		$	36		$	36		$	40
Interest cost		1,115			1,128			1,155			49			43			25			39			39			42
Expected return on plan assets		(1,624	)		(1,501	)		(1,490	)		(46	)		(38	)		(18	)		—			—			—
Amortization of prior service credit		(118	)		(118	)		(118	)		(2	)		(2	)		(3	)		(1	)		—			—
Actuarial losses (gains) and other		37			(95	)		1,563			(38	)		87			(1	)		(9	)		(14	)		(64	)
Net periodic benefit cost	$	89		$	52		$	1,732		$	60		$	173		$	43		$	65		$	61		$	18

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

	2018												2017
	U.S. Pension Plans				International Pension Plans				Postretirement Healthcare Plans				U.S. Pension Plans				International 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		Gross Amount		Net of Tax Amount		Gross Amount			Net of Tax Amount
Prior service cost (credit) arising during period	$	—	$	—	$	—	$	—	$	5	$	4	$	—	$	—	$	1	$	1	$	(3	)	$	(2	)
Amortizations:
Prior services credit		118		83		2		1		1		1		118		74		2		2		—			—
Total recognized in OCI	$	118	$	83	$	2	$	1	$	6	$	5	$	118	$	74	$	3	$	3	$	(3	)	$	(2	)

Benefit payments, which reflect expected future service, are expected to be paid as follows for the years ending May 31 (in millions):

	U.S. Pension Plans		International Pension Plans		Postretirement Healthcare Plans
2019	$	680	$	48	$	62
2020		781		48		65
2021		846		54		69
2022		951		71		73
2023		1,071		79		76
2024-2028		7,325		428		369

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 6.30% during 2019, 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, 2018 or 2018 benefit expense because the level of these benefits is capped.