FEDERAL EXPRESS CORP | 2013 | FY | 3


NOTE 10: RETIREMENT PLANS

       

RETIREMENT PLANS SPONSORED BY FEDEX

 

We sponsor or participate in 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 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. These assumptions most significantly impact our U.S. domestic pension plan.

 

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

  2013 2012 2011
Pension plans sponsored by FedEx$ 431 $ 321 $ 322
Other U.S. domestic and international pension plans  46   43   45
U.S. domestic and international defined contribution plans  233   220   178
U.S. domestic and international postretirement healthcare plans  62   56   49
          
  $ 772 $ 640 $ 594

PENSION PLANS. A majority of our employees are covered by the FedEx Corporation Employees' Pension Plan (“FedEx Plan”), a defined benefit pension plan sponsored by our parent, FedEx. The 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 and corporate bond rates. 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. Our employees comprise approximately 73% of the participants in the FedEx Plan. For more information about this plan and the related accounting assumptions, refer to the financial statements of FedEx included in its Form 10-K for the year ended May 31, 2013.

 

PENSION PLAN ASSUMPTIONS. 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 May 31 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. Actuarial gains or losses are generated for changes in assumptions and 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.

 

The weighted-average actuarial assumptions for the FedEx Plan were as follows:

  Pension Plans
  2013 2012 2011
          
Discount rate used to determine benefit obligation 4.79%  4.44%  5.76%
Discount rate used to determine net periodic benefit cost 4.44   5.76   6.37 
Rate of increase in future compensation levels        
 used to determine benefit obligation 4.54   4.62   4.58 
Rate of increase in future compensation levels        
 used to determine net periodic benefit cost 4.62   4.58   4.63 
Expected long-term rate of return on assets 8.00   8.00   8.00 
          

We incurred a net periodic benefit cost of $420 million in 2013 and $308 million in 2012 and 2011, for our participation in the FedEx Plan. Pension costs in 2013 were higher than 2012 due to the negative impact of a significantly lower discount rate at our May 31, 2012 measurement date. Pension costs were flat from 2011 to 2012 as the benefit of significant investment returns on our pension plan assets in 2011 offset the negative impact of a lower discount rate at our May 31, 2011 measurement date.

 

Information regarding the funded status of the FedEx Plan was as follows (in millions):

 May 31,
 2013 2012
Projected benefit obligation ("PBO")$ 20,922 $ 20,626
Fair value of plan assets  18,526   16,578
Funded status$ (2,396) $ (4,048)

Certain of our employees participate in a nonqualified defined benefit pension plan sponsored by FedEx. Our participants in this nonqualified defined benefit plan make up approximately 30% of the participants in the plan. FedEx has accumulated benefit obligations (“ABOs”) aggregating approximately $274 million at May 31, 2013 and $304 million at May 31, 2012 and PBOs aggregating approximately $278 million at May 31, 2013 and $307 million at May 31, 2012 related to this plan. This plan is not funded because such funding provides no current tax deduction and would be deemed current compensation to plan participants.

 

DEFINED CONTRIBUTION PLANS. Defined contribution plans are in place covering a majority of U.S. employees and certain international employees. Most U.S. employees are covered under the FedEx 401(k) plan. Pilots are covered under a 401(a) money purchase pension plan, as well as their own 401(k) plan. Expense for our employees under these plans was $233 million in 2013, $220 million in 2012 and $178 million in 2011.

 

FEDEX EXPRESS SPONSORED RETIREMENT PLANS

 

PENSION PLANS. We also sponsor nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. The nonqualified benefit plans are not funded because such funding provides no current tax deduction and would be deemed current compensation to plan participants. The international defined benefit pension plans provide benefits primarily based on both final earnings as well as career average earnings and years of service and are funded in compliance with local laws and practices. Beginning April 6, 2012, the United Kingdom pension plan formula changed for future benefit accruals to a cash balance formula, which is expressed as an amount in a notional account that grows with annual credits based on pay and interest on the notional account balance and is converted to a pension with an insurance company at retirement. Prior benefits were accrued using a traditional pension formula (based on final earnings and years of service). In addition, employees earning benefits under the cash balance design are eligible to contribute into a defined contribution plan where the company matches 200% of the employee's contribution up to 6%. For the plans sponsored by us, our assets are primarily invested in equities and fixed income securities. Fair value disclosures have not been provided for these international defined benefit pension plans since the assets are primarily managed at an individual country level. The amount of assets in these plans having significant unobservable inputs (Level 3), if any, would be immaterial to our financial statements.

 

POSTRETIREMENT HEALTHCARE PLANS. We sponsor a plan offering medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. For Medicare eligible non-pilot retirees and their eligible dependents, we only provide a fixed subsidy toward a Health Reimbursement Account (HRA) with Extend Health, which may be used for the premium payment for a Medigap policy. U.S. employees 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 and therefore, these benefits are not subject to additional future inflation.

 

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 accumulated other comprehensive income (“AOCI”) of unrecognized gains or losses and prior service costs or credits. The funded status is measured as the difference between the fair value of the plan's assets and the PBO or APBO of the plan.

For the plans currently sponsored by us, the following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations and fair value of assets for our employees over the two-year period ended May 31, 2013 and a statement of the funded status as of May 31, 2013 and 2012 (in millions):
              
   Pension Plans Postretirement Healthcare Plans
   2013 2012 2013 2012
Accumulated Benefit Obligation ("ABO")$ 627 $ 555      
Changes in Projected Benefit Obligation ("PBO") and           
 Accumulated Postretirement Benefit Obligation ("APBO")           
PBO/APBO at the beginning of year$ 659 $ 602 $ 644 $ 533
 Service cost  32   29   33   28
 Interest cost  27   27   29   29
 Actuarial loss (gain)  71   74   (25)   80
 Benefits paid  (20)   (20)   (52)   (50)
 Settlements  (1)   (4)   -   -
 Amendments  -   (35)   -   -
 Participant contributions  3   3   26   24
 Other  (8)   (17)   4   -
PBO/APBO at the end of year$ 763 $ 659 $ 659 $ 644
              
Change in Plan Assets           
Fair value of plan assets at the beginning of year$ 322 $ 320 $ - $ -
 Actual return on plan assets  54   (2)   -   -
 Company contributions  39   41   26   26
 Benefits paid  (20)   (20)   (52)   (50)
 Settlements  (1)   (4)   -   -
 Other  (8)   (13)   26   24
Fair value of plan assets at the end of year$ 386 $ 322 $ - $ -
              
Funded Status of the Plans$ (377) $ (337) $ (659) $ (644)
              
Amount Recognized in the Balance Sheet at May 31:           
 Current pension, postretirement healthcare and other           
  benefit obligations$ (11) $ (9) $ (30) $ (28)
 Noncurrent pension, postretirement healthcare and other           
  benefit obligations  (366)   (328)   (629)   (616)
Net amount recognized$ (377) $ (337) $ (659) $ (644)
              
Amounts Recognized in AOCI and not yet reflected in            
 Net Periodic Benefit Cost:           
  Net actuarial loss (gain)$ 207 $ 185 $ (18) $ 6
  Prior service (credit) cost and other  (27)   (31)   1   2
Total$ 180 $ 154 $ (17) $ 8
              
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:           
  Net actuarial loss (gain)$ 10 $ 10 $ - $ -
  Prior service (credit) cost and other  (3)   (3)   -   -
Total$ 7 $ 7 $ - $ -

The following table presents plans sponsored by us on a disaggregated basis to show those plans (as a group) in an unfunded position. At May 31, 2013 and 2012, the fair value of plan assets for pension plans with a PBO or ABO in excess of plan assets were as follows (in millions):
         
   PBO Exceeds the Fair Value of Plan Assets 
   2013 2012 
         
Pension Benefits      
 Fair value of plan assets$ 386 $ 322 
 PBO  (763)   (659) 
 Net funded status$ (377) $ (337) 
         
   ABO Exceeds the Fair Value of Plan Assets 
   2013 2012 
         
Pension Benefits      
 ABO(1)$ 599 $ 554 
         
 Fair value of plan assets  357   320 
 PBO  (733)   (656) 
 Net funded status$ (376) $ (336) 
         
(1) ABO not used in determination of funded status. 

In the plans currently sponsored by us, net periodic benefit cost for FedEx Express employees for the three years ended May 31 were as follows (in millions):

 Pension Plans Postretirement Healthcare Plans
 2013 2012 2011 2013 2012 2011
                  
Service cost$ 32 $ 29 $ 29 $ 33 $ 28 $ 25
Interest cost  27   27   26   29   29   28
Expected return on plan assets  (21)   (20)   (17)   -   -   -
Recognized actuarial losses (gains) and other  8   7   7   -   (1)   (4)
Net periodic benefit cost$ 46 $ 43 $ 45 $ 62 $ 56 $ 49

Amounts recognized in OCI were as follows (in millions):

   2013 2012
   Pension Plans Postretirement Healthcare Plans 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
                          
Net loss (gain) and other                       
 arising during period$ 38 $ 26 $ (15) $ (20) $ 63 $ 42 $ 92 $ 57
Amortizations:                       
 Actuarial (losses) gains                       
  and other  (7)   (4)   -   -   (9)   (6)   -   11
Total recognized in OCI$ 31 $ 22 $ (15) $ (20) $ 54 $ 36 $ 92 $ 68

The weighted-average actuarial assumptions for the plans sponsored by us were as follows:

  Pension Plans Postretirement Healthcare Plans
  2013 2012 2011 2013 2012 2011
                   
Discount rate used to determine benefit obligation 3.66%  4.08%  4.79%  4.91%  4.55%  5.67%
Discount rate used to determine net periodic benefit cost 4.08   4.79   4.76   4.55   5.67   6.11 
Rate of increase in future compensation levels                 
 used to determine benefit obligation 3.30   3.00   4.02   -   -   - 
Rate of increase in future compensation levels                 
 used to determine net periodic benefit cost 3.00   4.02   4.08   -   -   - 
Expected long-term rate of return on assets 6.41   6.52   6.45   -   -   - 
                   

Benefit payments for FedEx Express employees in the plans sponsored by us, which reflect expected future service, are expected to be paid as follows for the years ending May 31 (in millions):

 Pension Plans Postretirement Healthcare Plans
2014$ 21 $ 31
2015  22   32
2016  23   34
2017  26   35
2018  27   37
2019-2023  169   222

We expect to make pension plan contributions in 2014 approximating $35 million. 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 7.7% during 2014, decreasing to an annual growth rate of 4.5% in 2029 and thereafter. Future dental benefit costs are estimated to increase at an annual rate of 6.9% during 2014, decreasing to an annual growth rate of 4.5% in 2029 and thereafter. A 1% change in these annual trend rates would not have a significant impact on the APBO at May 31, 2013 or 2013 benefit expense because the level of these benefits is capped.


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