Alcoa 2003 Annual Report Download - page 62

An increase in the minimum pension liability resulted in a charge
to shareholders’ equity of $39 in 2003 and $851 in 2002.
Assumptions
We ighted average assumptions used to determine benefit obligations
at December 31:
2003 2002
Discount rate 6.25% 6.75%
Rate of compensation increase 5.00 5.00
We i g hted average assumptions used to determine the net cost for
years ended December 31:
2003 2002 2001
Discount rate 6.75% 7.25% 7.75%
Expected long-term return on
plan assets 9.00 9.50 9.50
Rate of compensation increase 5.00 5.00 5.00
Theexpected return on plan assets is based on historical
performance as well as expected future rates of return on plan assets
considering the current investment portfolio mix and the long-term
investment strategy.
Assumed health care cost trend rates at December 31:
2003 2002 2001
Health care cost trend rate assumed
for next year 9.0% 11.0% 9.5%
Rate to which the cost trend rate
graduallydeclines 5.0% 5.0% 5.0%
Year t hat the rate reaches the rate
at which it isassumedto remain 2009 2008 2006
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point
change in these assumed rates would have the following effects:
1%
increase
1%
decrease
Effect on total of service and interest cost
components $ 13 $ (12)
Effect on postretirement benefit obligations 182 (144)
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Plan Assets
Alcoa’s pension and postretirement plans’ investment policy,
weighted average asset allocations at December 31, 2003 and 2002,
and target allocations for 2004, by asset category, are as follows:
Asset category
Policy
Range
Plan assets at
December 31
2003 2002
Ta r g e t
%
2004
Equity securities 35–60% 52% 45% 50%
Debtsecurities 30–55% 36 42 38
Real estate 5–15% 676
Other 0–15% 666
To t a l 100% 100% 100%
Thebasic goal underlying the pension plan investment policy
is to ensure that theassetsofthe plan,along with expected plan
sponsor contributions, will be invested in a prudent manner
to meet the obligations of the plan as those obligations come due.
Investment practices must comply with the requirements of the
Employee Retirement Income Security Act of 1974
(ERISA) and any
other applicable laws and regulations.
Numerous assetclasses with differingexpected rates of return,
return volatility, and correlations are utilized to reduce risk by
providing diversification. Debt securities comprise a significant
portion of the portfolio due to their plan-liability-matching charac-
teristics and to address the plan’s cash flow requirements. Addition-
ally, diversification of investments within each asset class is utilized
to further reduce the impactoflossesinsingle investments. The
use of derivative instruments is permitted where appropriate and
necessary for achieving overall investment policy objectives.
Cash Flows
Alcoa expects to contribute $100 to its pension plans in 2004.
Alcoa also sponsors a number of defined contribution pension
plans. Expenseswere$107in2003, $101 in 2002 , and $103 in 2001.
W. Other Financial Instruments and Derivatives
OtherFinancial Instruments. The carryingvaluesandfair values
of Alcoa’s financial instruments at December 31 follow.
2003
Carrying
value
Fair
value
2002
Carrying
value
Fair
value
Cash and cash equivalents $ 576 $ 576 $ 344 $ 344
Short-term investments 30 30 69 69
Noncurrent receivables 23 23 74 74
Available-for-sale
investments 639 639 135 135
Short-term debt 579 579 122 122
Long-term debt 6,692 7,372 8,366 8,936
Components of Net Periodic Benefit Costs (Income)
December 31
Pensionbenefits
2003 2002 2001
Postretirement benefits
2003 2002 2001
Servicecost $ 194 $ 176 $ 162 $31 $25 $25
Interest cost 609 593 578 237 224 220
Expected return on plan assets (727) (776) (781) (11) (11) (11)
Amortization of priorservice cost (benefit) 38 38 34 (32) (32) (33)
Recognized actuarial loss (gain) 84(26) 40 5(2)
Netperiodicbenefit costs (income) $ 122 $35 $(33) $265 $211 $199