Benefits expense for the years ended December 31, 2003, 2002 and 2001, included the following components:
| Pension Benefits | Postretirement Benefits | |||||
| in € m. | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 |
| Service cost | 279 | 323 | 309 | 8 | 4 | 4 |
| Interest cost | 375 | 384 | 367 | 9 | 8 | 10 |
| Expected return on plan assets | (409) | (175) | (197) | – | – | – |
| Actuarial loss (gain) recognized | 66 | 39 | 1 | – | – | (1) |
| Settlement/curtailment | (7) | 4 | 4 | – | – | – |
| Amortization of unrecognized | (9) | (10) | (10) | – | – | – |
| transition obligation (asset) | ||||||
| Total defined benefit plans | 295 | 565 | 474 | 17 | 12 | 13 |
| Defined contribution plans | 167 | 228 | 175 | – | – | – |
| Net periodic benefit expense | 462 | 793 | 649 | 17 | 12 | 13 |
The following actuarial assumptions were calculated on a weighted-average basis and reflect the local economic conditions for each country's respective defined benefit and postretirement benefit plans:
| Pension Benefits | Postretirement Benefits1 | |||||
| 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |
| Discount rate in determining expense | 5.4% | 5.7% | 6.4% | 6.0% | 6.7% | 7.2% |
| Discount rate in determining benefit obligations at year-end | 5.5% | 5.8% | 6.1% | 5.9% | 6.7% | 7.2% |
| Rate of increase in future compensation levels for determining expense | 3.5% | 3.0% | 3.4% | N/A | N/A | N/A |
| Rate of increase in future compensation levels for determining benefit obligations at year-end | 3.3% | 2.0% | 2.5% | N/A | N/A | N/A |
| Expected long-term rate of return on assets | 5.6% | 6.7% | 8.1% | N/A | N/A | 9.0% |
| N/A Not applicable | |
| 1 | The weighted-average actuarial assumptions for the postretirement plans reflect the assumptions used in the United States and the United Kingdom where the Group's postretirement plans are located. |
The expected return on the Group’s defined benefit pension plans’ assets is calculated by applying a risk premium which reflects the inherent risks associated with each relevant asset category over a risk-free return. This percentage is applied against the target assets in each category to arrive at an expected total return. Using this so-called “building block” approach globally ensures that the Group has a consistent framework in place. In addition, it allows sufficient flexibility to allow for changes that need to be built in to reflect local specific conditions.
The determination of the expected return on plan assets for 2004 was based on the actual asset allocation as of the measurement date.
The ten-year government fixed interest bond yield equal for the country in which each plan is located was used as the basis for the risk-free return. An additional risk premium of 3.0%, 1.0% and 1.5% was then added to the risk-free return for equities, debt securities and real estate, respectively.
For cash, the Group estimated the expected return to be equivalent to the yield of a short-term (two to three years) bond for the applicable country.
In determining postretirement benefits expense, an annual weighted-average rate of increase of 8.0% in the per capita cost of covered health care benefits was assumed for 2004. The rate is assumed to decrease gradually to 5.0% by 2007 and remain at that level thereafter.
Assumed health care cost trend rates have an effect on the amounts reported for the retiree health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the Group's retiree health care plans:
| One-Percentage Point Increase | One-Percentage Point Decrease | |||
| in € m. | 2003 | 2002 | 2003 | 2002 |
| Effect on total of service and interest | 3 | 2 | (2) | (2) |
| cost components | ||||
| Effect on accumulated postretirement | 18 | 18 | (16) | (15) |
| benefit obligation | ||||
In January 2004, the FASB issued Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP”). The Act, signed into law in the U.S. on December 8, 2003, introduces a prescription drug benefit as well as a subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to benefits provided under the Act. The FSP permits an entity to make a one-time election to defer recognizing the effects of the Act in accounting for its postretirement benefit plans under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”), until either authoritative accounting guidance is issued or plan assets and obligations are remeasured due to a significant event.
The Group has elected to defer recognition of the effects of the Act in accounting for its postretirement plans under SFAS 106, and the pension postretirement benefit obligations and expense reported in the accompanying financial statements and footnotes do not reflect the effects of the Act. Specific authoritative guidance on the accounting for the government subsidy is pending and that guidance, when issued, could require that the Group change previously reported information.