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Plan assets were primarily comprised of debt and equity securities. Included in the equity securities of the defined benefit plan were common
shares of Nortel Networks Corporation with an aggregate market value of $13 (0.2 % of total plan assets) as of December 31, 2003 and $3
(0.1% of total plan assets) as of December 31, 2002.
Unrecognized actuarial gains and losses are being recognized over approximately a 12 year period, which represents the weighted-average
expected remaining service life of the employee group. Unrecognized actuarial gains and losses arise from several factors including experience
and assumption changes in the obligations and from the difference between expected returns and actual returns on assets. At the end of 2003,
we had unrecognized net actuarial losses related to the defined benefit plans of $1,664 which could result in an increase to pension expenses in
future years depending on several factors, including whether such losses exceed the corridor in accordance with SFAS No. 87, “Employers’
Accounting for Pensions”. The post-retirement benefit plans had unrecognized actuarial losses of $119 at the end of 2003.
The estimated accumulated benefit obligations for the defined benefit plans exceeded the fair value of the plan assets at September 30, 2003 as
a result of reductions in discount rates and changes in foreign exchange rates which more than offset the favorable impacts of strong pension
asset returns and the voluntary contributions made by us during 2003. Accordingly, we recorded a non-cash charge of $219 ($187 after tax) to
shareholders’ equity for the minimum pension liability. A similar charge may be required in the future as the impact of changes in global
capital markets and interest rates on the value of our pension plan assets and obligations is measured.
During 2003, we made cash contributions to our defined benefit pension plans of approximately $300. In 2004, we expect to make cash
contributions of approximately $140 to our defined benefit pension plans, which excludes $78 of deferred contributions for 2004 that were
made in 2003, and approximately $30 to our post-retirement benefit plans.
For 2004, our expected rate of return on plan assets was lowered from 7.8% to 7.4% for defined benefit pension plans and was lowered from
8.0% to 6.0% for 2004 for post-retirement benefit plans. Also for 2004, we lowered our discount rate on a weighted-average basis for pension
expenses from 6.3% to 5.8% for the defined benefit pension plans and from 6.8% to 6.0% for post-retirement benefit plans given the declining
trend in current global interest rates. We will continue to evaluate our expected long-term rates of return on plan assets and discount rates at
least annually and make adjustments as necessary, which could change the pension and post-retirement obligations and expenses in the future.
If the actual operation of the plans differs from the assumptions, additional contributions by us may be required. If we are required to make
significant contributions to fund the defined benefit plans, reported results could be materially and adversely affected and our cash flow
available for other uses may be significantly reduced.
For additional information, see “Employee benefit plans” in note 9 of the accompanying consolidated financial statements.
Special charges
In 2001 we entered into an unprecedented period of business realignment in response to a significant adjustment in the industry. We
implemented a company-wide restructuring plan to streamline our operations and activities around core markets and operations, which
included significant workforce reductions, global real estate closures and dispositions, substantial write-downs of our plant and equipment,
goodwill and other intangible assets and extensive contract settlements with customers and suppliers around the world. As a result of these
actions, our workforce declined significantly from January 1, 2001 to December 31, 2003 and over the same time period, we significantly
reduced our facilities.
At each reporting date, we evaluate our accruals related to workforce reduction charges, contract settlement and lease costs
88
Effect on 2003 pre-tax
Effect on 2003 pre-tax post-retirement
Change in Assumption pension expense * benefit expense
Increase/(decrease) Increase/(decrease)
1 percentage point increase in the expected return on assets ($50) $ <1
1 percentage point decrease in the expected return on assets 50 <1
1 percentage point increase in the discount rate (73) (3)
1 percentage point decrease in the discount rate 67 2
* excludes settlement costs (lump sum and termination payments to participants which discharges our obligations)