Federal Express 2011 Annual Report Download - page 32

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MANAGEMENT’S DISCUSSION AND ANALYSIS
We have assumed an 8.0% compound geometric long–term rate of
return on our U.S. Pension Plan assets for 2012, 2011 and 2010, as
described in Note 12 of the accompanying consolidated financial
statements. A one–basis–point change in our expected return on plan
assets impacts our pension expense by $1.5 million.
The actual historical return on our U.S. Pension Plan assets, calculated
on a compound geometric basis, was approximately 7.8%, net of
investment manager fees, for the 15–year period ended May 31, 2011
and 7.9%, net of investment manager fees, for the 15–year period
ended May 31, 2010.
Pension expense is also affected by the accounting policy used to
determine the value of plan assets at the measurement date. We
use a calculated–value method to determine the value of plan assets,
which helps mitigate short–term volatility in market performance
(both increases and decreases) by amortizing certain actuarial gains or
losses over a period no longer than four years. Another method used
in practice applies the market value of plan assets at the measure-
ment date. For purposes of valuing plan assets for determining
2012 pension expense, we used the calculated–value method, as
our actual returns on plan assets significantly exceeded our assump-
tions. However, as previously indicated, our pension costs in 2012 are
expected to remain flat. The calculated–value method resulted in the
same value as the market value in 2011. The calculated–value method
significantly mitigated the impact of asset value declines in the deter-
mination of our 2010 pension expense, reducing our 2010 expense by
approximately $135 million.
FUNDED STATUS. Following is information concerning the funded
status of our pension plans as of May 31 (in millions):
The amounts recognized in the balance sheet reflect a snapshot of the
state of our long–term pension liabilities at the plan measurement
date and the effect of year–end accounting on plan assets. At May
31, 2011, we recorded a decrease to equity through OCI of $350 million
(net of tax) to reflect unrealized actuarial losses during 2011 related to
a decline in the discount rate. Those losses are subject to amortization
over future years and may be reflected in future income statements
unless they are recovered. At May 31, 2010, we recorded a decrease
to equity through OCI of $1.0 billion (net of tax) attributable to our
pension plans.
The funding requirements for our U.S. Pension Plans are governed
by the Pension Protection Act of 2006, which has aggressive fund-
ing requirements in order to avoid benefit payment restrictions that
become effective if the funded status determined under Internal
Revenue Service rules falls below 80% at the beginning of a plan year.
All of our U.S. Pension Plans have funded status levels in excess of
80% and our plans remain adequately funded to provide benefits to our
employees as they come due. Additionally, current benefit payments
are nominal compared to our total plan assets (benefit payments for
our U.S. Pension Plans for 2011 were approximately $411 million or
3% of plan assets).
During 2011, we made $480 million in contributions to our U.S.
Pension Plans, including $121 million in voluntary contributions. Over
the past several years, we have made voluntary contributions to our
U.S. Pension Plans in excess of the minimum required contributions.
Amounts contributed in excess of the minimum required result in a
credit balance for funding purposes that can be used to meet minimum
contribution requirements in future years. For 2012, we anticipate
making required contributions to our U.S. Pension Plans totaling
approximately $500 million.
Cumulative unrecognized actuarial losses were $5.4 billion through
May 31, 2011, compared to $5.2 billion through May 31, 2010. These
unrecognized losses reflect changes in the discount rates and differ-
ences 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 corridor amount, these unrecognized actuarial losses
are required to be amortized and recognized in future periods. Our
pension expense includes amortization of these actuarial losses of
$276 million in 2011, $125 million in 2010 and $44 million in 2009.
SELF–INSURANCE ACCRUALS
We are self–insured up to certain limits for costs associated with
workers’ compensation claims, vehicle accidents and general business
liabilities, and benefits paid under employee healthcare and long–term
disability programs. Our reserves are established for estimates of
loss on reported claims, including incurred–but–not–reported claims.
At May 31, 2011 and 2010, there were $1.6 billion of self–insurance
accruals reflected in our balance sheet. Approximately 40% of these
accruals were classified as current liabilities.
2011 2010
Funded Status of Plans:
Projected benefit obligation (PBO) $ 17,372 $ 14,484
Fair value of plan assets 15,841 13,295
Funded status of the plans $ (1,531) $ (1,189)
Components of Funded Status by Plans:
U.S. qualified plans $ (927) $ (580)
U.S. nonqualified plans (339) (348)
International plans (265) (261)
Net funded status $ (1,531) $ (1,189)
Components of Amounts Included
in Balance Sheets:
Current pension and other benefit obligations (33) (30)
Noncurrent pension and other benefit obligations (1,498) (1,159)
Net amount recognized $ (1,531) $ (1,189)
Cash Amounts:
Cash contributions during the year $ 557 $ 900
Benefit payments during the year $ 468 $ 391