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An increase in the minimum pension liability resulted in a charge to shareholders’ equity of $21 in 2004 and $39 in 2003. 

## Assumptions 

Weighted average assumptions used to determine benefit obligations are as follows: 

<img src='content_image/35940.jpg'>

The discount rate is based on settling the pension obligation with high grade, high yield corporate bonds, and the rate of compensation increase is based upon actual experience. 

Weighted average assumptions used to determine the net periodic benefit cost are as follows: 

<img src='content_image/35941.jpg'>

The expected 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 are as follows: 

<img src='content_image/35942.jpg'>

The health care cost trend rate in the calculation of the 2003 benefit obligation was 9.0% from 2003 to 2004 and 8.0% from 2004 to 2005. Actual company health care trend experience in2003and2004was7 .5%and5.0%,respectively.The8% trend rate will be maintained for 2005. 

Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage- point change in these assumed rates would have the following effects: 

<img src='content_image/35945.jpg'>

## Plan Assets 

Alcoa’s pension and postretirement plans’ investment policy, weighted average asset allocations at December 31, 2004 and 2003, and target allocations for 2005, by asset category, areasfollows: 

<img src='content_image/35947.jpg'>

The basic goal underlying the pension plan investment policy is to ensure that the assets of the 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 asset classes with differing expected 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 characteristics and to address the plan’s cash flow requirements. Additionally, diversification of investments within each asset class is utilized to further reduce the impact of losses in single investments. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. 

## Cash Flows 

Alcoa expects to contribute $57 to its pension plans in 2005. 

Alcoa also sponsors a number of defined contribution pension plans. Expenses were $118 in 2004, $107 in 2003, and $101 in 2002. 

Benefit payments expected to be paid to plan participants and expected subsidy receipts are as follows: 

<img src='content_image/35943.jpg'>

## X. Other Financial Instruments and Derivatives 

Other Financial Instruments. The carrying values and fair values of Alcoa’s financial instruments at December 31 follow. 

<img src='content_image/35944.jpg'>

The methods used to estimate the fair values of certain financial instruments follow. 

Cash and Cash Equivalents, Short-Term Investments, Short-Term Debt, and Commercial Paper. The carrying amounts approximate fair value because of the short maturity of the instruments. 

Noncurrent Receivables. The fair value of noncurrent receivables is based on anticipated cash flows which approximates carrying value. 

