Notes to Consolidated Financial Statements 48 The funded status of pension plans included above with accumu- lated benefit obligations in excess of plan assets at December 31 is  as follows: The weighted average asset allocations of the Company’s funded pen- sion plans at December 31, 2004 and 2003, and target allocations by  asset category, are as follows: millions of dollars 2004  2003 Accumulated benefit obligation   $(449.7) $(418.1) Plan assets   (321.9) (270.0) Deficiency $(127.8) $(148.1) Pension deficiency by country: United States  $ (19.4) $ (56.7) United Kingdom ( 29.0)  (30.0) Germany  (72.5)  (55.5) Japan (6.9) (5.9) Total pension deficiency  $(127.8) $(148.1) Target percent  2004 2003 Allocation Cash, real estate and other  7% 4% 0-15% Fixed income securities 33 33  30-45 Equity securities  60 63  50-70 100% 100% The Company’s investment strategy is to maintain actual asset weight- ings within a preset range of target allocations. The Company believes  these ranges represent an appropriate risk profile for the planned  benefit payments of the plans based on the timing of the estimated  benefit payments. Within each asset category, separate portfolios  are maintained for additional diversification. Investment managers are  retained within each asset category to manage each portfolio against  its benchmark. Each investment manager has appropriate investment  guidelines. In addition, the entire portfolio is evaluated against a rel- evant peer group. The pension plans did not hold any Company securi- ties as investments as of December 31, 2004 and 2003. The Company expects to contribute a total of $20 million to $25 million into all of its pension plans during 2005. The Company’s net periodic  pension benefit cost was $16.7 million in 2004, $23.2 million in 2003 and $6.8 million in 2002. See table below for a breakout between U.S. and  non-U.S. plans.  millions of dollars  Pension benefits  Other post retirement benefits For the Year Ended December 31,  2004 2003 2002 2004 2003 2002 U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. Components of net periodic benefit cost: Service cost  $ 2.4 $ 9.3 $ 2.5 $ 7.5 $ 2.1 $ 5.5 $ 6.0 $ 5.3 $ 5.0 Interest cost  17.3 11.5 18.5 9.5 18.8 7.5 28.8 29.7 28.8 Expected return on plan assets  (26.1) (7.3) (20.7) (5.7) (25.5) (5.4) — — — Amortization of unrecognized transition obligation  — 0.3  — 0.3 —  (0.1)  — — — Amortization of unrecognized prior service cost  1.5 0.2  1.5 0.2 1.5 0.2 (0.2) (0.2) (0.1) Amortization of unrecognized loss  5.2 2.4 7.8 1.8 2.1 0.1 8.6 5.9 4.0 Net periodic benefit cost/(benefit)  $ 0.3 $16.4  $ 9.6 $13.6 $ (1.0)  $ 7.8 $43.2  $40.7  $37.7 percents  2004 2003 2002 U.S. plans  Discount rate 6.00 6.75 7.25 Rate of compensation increase  3.50 4.50 4.50 Expected return on plan assets  8.75 8.75 9.50 Non-U.S. plans  Discount rate 5.49 5.45 5.46 Rate of compensation increase  3.40 3.36 3.39 Expected return on plan assets  6.62 6.82 6.43 percents 2004 2003 U.S. plans  Discount rate 5.75 6.00 Rate of compensation increase  3.50 3.50 Non-U.S. plans  Discount rate 5.04 5.49 Rate of compensation increase  3.36 3.40 The return on assets assumption was developed through analysis  of historical market returns, current market conditions, target allo- cations among asset classes and past experience. Overall, it was  projected that the U.S. funds could achieve an 8.75% net return over  time, based upon the targeted asset allocation. This assumes no  benefit from manager selection strategies. The Company’s weighted-average assumptions used to determine  the net periodic benefit cost (income) for our defined benefit pension  and other post retirement benefit plans for the three years ended  December 31, 2004 were as follows: The Company’s weighted-average assumptions used to determine the  benefit obligations for our defined benefit pension and other post retire- ment plans as of December 31, 2004 and 2003 were as follows: BorgWarner Inc.  and Consolidated Subsidiaries 49 The estimated future benefit payments for the pension and other post  retirement benefits are as follows: NOTE 9 STOCK INCENTIVE PLANS Under the Company’s 1993 Stock Incentive Plan, the Company  granted options to purchase shares of the Company’s common stock  at the fair market value on the date of grant. The options vest over  periods up to three years and have a term of ten years from date of  grant. As of December 31, 2003, there were no options available for  future grants under the 1993 plan. The 1993 plan expired at the end  of 2003 and was replaced by the Company’s 2004 Stock Incentive  Plan. Under the 2004 Stock Incentive Plan, the numbers of shares  available for grant are 2,700,000. As of December 31, 2004, there  are 2,990,205 outstanding options under the 1993 and 2004 Stock  Incentive Plans. On July 28, 2004, the Company issued a total of 6,400  restricted shares of common stock to its non-employee directors  under the 2004 Stock Incentive Plan. The weighted-average rate of increase in the per capita cost of cov- ered health care benefits is projected to be 8.0% in 2005 decreasing  to 4.5% by the year 2009. A one-percentage point change in the  assumed health care cost trend would have the following effects: Other millions of dollars  Pension  post retirement Year  benefits benefits 2005  $ 31.5  $ 30.8 2006  31.7 29.7 2007  32.0 30.3 2008  32.4 30.8 2009  33.1 30.7 2010–2014  175.7 162.3 One percentage point millions of dollars  increase decrease Effect on post retirement benefit obligation   $70.0  $(55.7) Effect on total service and interest  cost components  $ 5.7  $ (4.5) The Company accounts for stock options in accordance with APB  Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation cost has been recognized for fixed  stock options because the exercise price of the stock options  exceeded or equaled the market value of the Company’s common  stock at the date of grant, which is the measurement date. A summary of the plan’s shares under option at December 31, 2004,  2003 and 2002 follows:  2004 2003 2002 Shares Weighted-average Shares Weighted-average Shares Weighted-average (thousands) exercise price (thousands)  exercise price (thousands) exercise price Outstanding at beginning of year  2,680 $26.44 3,650 $23.29 2,986 $22.34 Granted 1,063 44.56 682 32.74 1,232 25.34 Exercised (593) 24.22 (1,518) 21.80 (434) 22.61 Forfeited (160) 26.74 (134) 25.03 (134) 23.13 Outstanding at end of year  2,990 $33.30 2,680 $26.44 3,650  $23.29 Options exercisable at year-end 793 $23.78 554 $22.57 1,188 $22.61 Options available for future grants  1,637 Options outstanding  Options exercisable Range of  Number outstanding  Weighted-average  Weighted-average  Number exercisable  Weighted-average exercise prices  (thousands)   remaining contractual life  exercise price  (thousands)  exercise price $12.78-21.13  156 5.0 $18.31 156 $18.31 $24.14-26.56  1,106 7.1  25.14 575 24.90 $26.94-44.56  1,728 9.0  39.88 62 27.18 $12.78-44.56  2,990 8.1 $33.30 793 $23.78 The following table summarizes information about stock options outstanding at December 31, 2004: The weighted average fair value at date of grant for options granted  during 2004, 2003, and 2002 were $16.28, $11.91, and $10.13,  respectively, and were estimated using the Black-Scholes options  pricing model with the following weighted average assumptions: Executive Stock Performance Plan The Company has an Executive  Stock Performance Plan that provides payouts to members of senior  management at the end of successive three-year periods based on  the Company’s performance in terms of total stockholder return  relative to a peer group of automotive companies. Payouts earned  are payable 40% in cash and 60% in the Company’s common stock.  For the three-year measurement periods ended December 31, 2004,  2003 and 2002, the amounts expensed under the plan and the  related share issuances were as follows:  2004 2003 2002 Risk-free interest rate  4.14% 3.58% 4.34% Dividend yield  1.26% 1.27% 1.32% Volatility factor  32.89% 34.38% 33.66% Weighted average expected life  6.5 years 6.5 years  6.5 years