NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The preceding tables also reflect Key Equity Capital Corporation’s (“KECC”), a subsidiary of KBNA, assumption of a defined benefit pension plan that had been sponsored by a company in which KECC had maintained an equity capital investment. The company entered into bankruptcy in December 2002 and was subsequently liquidated by Bankruptcy Court order. By request of KECC and under the review of the Pension Benefit Guaranty Corporation, the Bankruptcy Court authorized KECC to assume the role of Plan Sponsor and Plan Administrator of the Plan effective June 13, 2003. The acquired PBO and FVA at that date were $56 million and $46 million, respectively. KECC recognized pension income of less than $1 million for this plan during 2003. In order to determine the actuarial present value of benefit obligations at the September 30 measurement date, management assumed the following weighted-average rates: The investment objectives of the pension funds are developed to reflect the characteristics of the plans, which include but are not limited to the plans’ pension formulas and cash lump sum distribution features, and the membership/liability profiles of the plans’ participants. The pension funds’ investment allocation policies specify that fund assets are to be invested within the following ranges: Key’s asset allocations for its pension funds at the September 30 measurement date are summarized as follows: Although the investment policies permit the use of derivative contracts subject to certain limitations and restrictions, no such contracts have been entered into. There are no foreseeable plans to employ such contracts in the future. Key sponsors a contributory postretirement healthcare plan. Retirees’ contributions are adjusted annually to reflect certain cost-sharing provisions and benefit limitations. Key also sponsors life insurance plans covering certain grandfathered employees. These plans are principally noncontributory. Separate Voluntary Employee Beneficiary Association (“VEBA”) trusts are used to fund the healthcare plan and one of the life insurance plans.  Net periodic and total net postretirement benefit cost includes the following components: Management estimates that Key’s net pension cost will be $21 million for 2004, compared with $37 million for 2003 and $6 million for 2002. The estimated reduction in cost in 2004 is due primarily to asset growth attributable to strong investment returns coupled with the effect of a $121 million voluntary contribution made in 2003. The increase in cost for 2003 compared with 2002 was due primarily to a decline in the fair value of plan assets, reflecting continued weakness in the capital markets at the September 30, 2002, measurement date. The higher 2003 cost also reflects an expected return of 9.00% on plan assets, compared with an expected return of 9.75% in 2002. Management estimates that a 25 basis point decrease (increase) in the expected return on plan assets would increase (decrease) Key’s net pension cost for 2004 by approximately $3 million. Additionally, pension cost is affected by an assumed discount rate and an assumed compensation increase rate. Management estimates that a 25 basis point change in either or both of these assumed rates would change net pension cost for 2004 by less than $1 million. Management determines Key’s expected return on plan assets by considering a number of factors. Primary among these are:  • Historical returns on Key’s plan assets. Management’s assumed rate of return on plan assets for 2004 is 9%. This assumed rate is consistent with actual rates of return since 1991. • Management’s expectations for returns on plan assets over the long- term, weighted for the investment mix of the assets.  Year ended December 31, in millions 2003 2002 2001 Service cost of beneGLYPH<222>ts earned $3 $3 $3 Interest cost on accumulated postretirement beneGLYPH<222>t obligation 8 8 8 Expected return on plan assets (3) (2) (2) Amortization of unrecognized  transition obligation 4 4 4 Amortization of losses 2 GLYPH<209> GLYPH<209> Net postretirement beneGLYPH<222>t cost 14 13 13 Curtailment gain GLYPH<209> GLYPH<209> (1) Total net postretirement  beneGLYPH<222>t cost $14 $13 $12 OTHER POSTRETIREMENT BENEFIT PLANS December 31, 2003 2002 Equity securities 73% 71% Fixed income securities 15 17 Convertible securities 10 11 Cash equivalents and other assets 2 1 Total 100% 100% Asset Class Investment Range Equity securities 65% GLYPH<209> 85% Fixed income securities 15 GLYPH<209> 30 Convertible securities 0 GLYPH<209> 15 Cash equivalents and other assets 0 GLYPH<209> 5  December 31, 2003 2002 2001 Discount rate 6.00% 6.50% 7.25% Compensation increase rate 4.00 4.00 4.00  Year ended December 31, 2003 2002 2001 Discount rate 6.50% 7.25% 7.75% Compensation increase rate 4.00 4.00 4.00 Expected return on plan assets 9.00 9.75 9.75 To determine net pension cost (income) management assumed the following weighted-average rates: 74 NEXT PAGE PREVIOUS PAGE SEARCH BACK TO CONTENTS