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):

The weighted-average discount rate for all our pension and postretirement healthcare plans decreased from 4.11% at May 31, 2018 to 3.69% at May 31, 2019. The demographic experience in 2019 reflects updates to several forward-looking assumptions, including retirement rates, disability incidence rates and salary increase assumptions and a current-year actuarial loss due to unfavorable experience compared to various demographic assumptions. The actual rate of return, which is net of all fees and expenses, on our U.S. Pension Plan assets of 4.05% was lower than our expected return of 6.75%, as lower than expected equity returns negatively impacted return-seeking assets while fixed-income assets performed as expected due to declining interest rates.

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 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.

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 experience in 2017 reflects an update in mortality tables 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 (“PPA”). Under the PPA, 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 PPA 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 satisfied certain conditions and were receiving 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 was included in our 2018 year-end MTM retirement plans accounting 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
	2019			2018			2017			2019			2018			2017			2019			2018			2017
Discount rate used to determine benefit obligation		3.85	%		4.27	%		4.08	%		1.92	%		2.37	%		2.43	%		3.70	%		4.33	%		4.32	%
Discount rate used to determine net periodic benefit cost		4.27			4.08			4.13			2.34			2.43			2.46			4.33			4.32			4.43
Rate of increase in future compensation levels used to determine benefit obligation		5.10			4.43			4.47			2.27			2.26			2.42			—			—			—
Rate of increase in future compensation levels used to determine net periodic benefit cost		4.43			4.47			4.46			2.22			2.42			2.82			—			—			—
Expected long-term rate of return on assets		6.75			6.50			6.50			3.12			3.09			3.18			—			—			—
Interest crediting rate used to determine net periodic benefit cost		4.00			4.00			4.00			2.20			2.20			2.30			—			—			—
Interest crediting rate used to determine benefit obligation		4.00			4.00			4.00			2.20			2.20			2.30			—			—			—

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:

For consolidated pension expense, we assumed a 6.75% expected long-term rate of return on our U.S. Pension Plan assets in 2019, and 6.50% in 2018 and 2017. We increased our EROA assumption in 2019 to 6.75% as the decrease in the number of retirees in payment status due to the purchase of a group annuity contract in May 2018 (discussed above) is expected to reduce our short-term future cash outlays and allow the remaining assets to be placed in longer-duration investments, which will increase the rate of return on assets. Also, the reduction of Pension Benefit Guaranty Corporation fixed- and variable-rate premiums should increase the net return on assets. For the 15-year period ended May 31, 2019, our actual return was 7.5%, 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 and 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:

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

	Plan Assets at Measurement Date
	2019
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	$	570			2	%	0 - 5%	$	50		$	520
Equities							30 - 50
U.S. large cap equity⁽²⁾		2,546			11				875
International equities⁽²⁾		3,306			14				2,700
Global equities⁽²⁾		1,451			6
U.S. SMID cap equity		731			3				730			1
Fixed income securities							50 - 70
Corporate		6,794			29							6,794
Government⁽²⁾		5,384			23							3,742
Mortgage-backed and other⁽²⁾		622			3							175
Alternative investments⁽²⁾		1,963			9		0 - 15							$	302
Other		(47	)		—				(45	)		(2	)
Total U.S. plan assets	$	23,320			100	%		$	4,310		$	11,230		$	302
Asset Class (International Plans)
Cash and cash equivalents	$	57			4			$	57
Equities
International equities⁽²⁾		72			5
Global equities⁽²⁾		206			15
Fixed income securities
Corporate⁽²⁾		322			24
Government⁽²⁾		438			32				290
Mortgage-backed and other⁽²⁾		167			12
Other⁽²⁾		112			8				10			17
Total international plan assets	$	1,374			100	%		$	357		$	17

⁽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
	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⁾

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

The following tables provide 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, 2019 and a statement of the funded status as of May 31, 2019 and 2018 (in millions):

	U.S. Pension Plans						International Pension Plans						Postretirement Healthcare Plans
	2019			2018			2019			2018			2019			2018
Accumulated Benefit Obligation (“ABO”)	$	25,915		$	22,029		$	2,084		$	1,956
Changes in Projected Benefit Obligation (“PBO”) and Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year	$	22,653		$	27,870		$	2,167		$	2,043		$	955		$	927
Service cost		689			679			94			97			35			36
Interest cost		951			1,115			49			49			40			39
Actuarial loss		3,016			21			127			(34	)		266			(9	)
Benefits paid		(755	)		(854	)		(38	)		(46	)		(123	)		(80	)
Settlements		—			(6,178	)		(13	)		(5	)		—			—
Other		—			—			(85	)		63			48			42
PBO/APBO at the end of year	$	26,554		$	22,653		$	2,301		$	2,167		$	1,221		$	955
Change in Plan Assets
Fair value of plan assets at the beginning of year	$	22,057		$	24,933		$	1,509		$	1,379		$	—		$	—
Actual return on plan assets		984			1,609			94			49			—			—
Company contributions		1,034			2,547			91			84			73			42
Benefits paid		(755	)		(854	)		(38	)		(46	)		(123	)		(80	)
Settlements		—			(6,178	)		(13	)		(5	)		—			—
Other		—			—			(65	)		48			50			38
Fair value of plan assets at the end of year	$	23,320		$	22,057		$	1,578		$	1,509		$	—		$	—
Funded Status of the Plans	$	(3,234	)	$	(596	)	$	(723	)	$	(658	)	$	(1,221	)	$	(955	)
Amount Recognized in the Balance Sheet at May 31:
Noncurrent asset	$	—		$	—		$	82		$	73		$	—		$	—
Current pension, postretirement healthcare and other benefit obligations		(70	)		(22	)		(16	)		(16	)		(87	)		(62	)
Noncurrent pension, postretirement healthcare and other benefit obligations		(3,164	)		(574	)		(789	)		(715	)		(1,134	)		(893	)
Net amount recognized	$	(3,234	)	$	(596	)	$	(723	)	$	(658	)	$	(1,221	)	$	(955	)
Amounts Recognized in AOCI and not yet reflected in Net Periodic Benefit Cost:
Prior service (credit) cost and other	$	(173	)	$	(292	)	$	(6	)	$	(10	)	$	1		$	2

The table above provides the PBO, fair value of plan assets and funded status of our pension plans on an aggregated basis. The following tables present 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):

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

For 2020, no pension contributions are required for our U.S. Pension Plans as they are fully funded under the Employee Retirement Income Security Act. However, we expect to make voluntary contributions of $1.0 billion to these plans in 2020.

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
	2019			2018			2017			2019			2018			2017			2019		2018			2017
Service cost	$	689		$	679		$	638		$	94		$	97		$	83		$	35	$	36		$	36
Interest cost		951			1,115			1,128			49			49			43			40		39			39
Expected return on plan assets		(1,505	)		(1,624	)		(1,501	)		(47	)		(46	)		(38	)		—		—			—
Amortization of prior service credit		(118	)		(118	)		(118	)		(2	)		(2	)		(2	)		—		(1	)		—
Actuarial losses (gains) and other		3,537			37			(95	)		80			(38	)		87			265		(9	)		(14	)
Net periodic benefit cost	$	3,554		$	89		$	52		$	174		$	60		$	173		$	340	$	65		$	61

Amounts recognized in other comprehensive income were primarily related to amortization of prior service cost in our U.S. Pension Plans of $118 million in 2019 and 2018 ($91 million, net of tax, in 2019 and $83 million, net of tax, in 2018).

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

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 6.00% during 2020, decreasing to an annual growth rate of 4.50% in 2037 and thereafter.