term rate of return on plan assets and an increase in the amortization of unrecognized actuarial losses, with smaller impacts from reductions in the discount rate and the assumed rate of future compensation increase. International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of SFAS No. 87, “Employers’ Accounting for Pensions.” These assumptions are used to calculate benefit obligations as of December 31 of the current year and pension expense to be recorded in the following year. discount rate to 5.75% in 2005 from 6.00% in 2004, and a decrease in the expected return on assets to 8.50% in 2005 from 8.75% in 2004. The following illustrates the effect on pension expense for 2005 of a 25 basis point decrease in these assumptions: Plan assets are invested to maximize returns within prudent levels of risk and to maintain full funding of the benefit obligations. The target allocations by asset class are summarized in the following table. Investments are diversified across classes and within each class to minimize risk. The investment policy permits the use of swaps, options, forwards and futures contracts. Periodic reviews are made of investment policy objectives and investment managers. International Paper’s pension plan asset allocation by type of fund at December 31, 2004 and 2003, and target allocations by asset category are as follows: Weighted average assumptions used to determine benefit obligations as of December 31, 2004 and 2003 were as follows: No plan assets were invested in International Paper common stock at December 31, 2004 or 2003. At December 31, 2004, total future pension benefit payments are estimated as follows: The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. Projected rates of return are developed through an asset/liability study, in which projected returns for each of the plan’s asset classes are determined after analyzing historical experience and future expectations of returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio is developed considering the effects of active portfolio management and expenses paid from plan assets. The discount rate assumption is determined based on a yield curve that incorporates approximately 570 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. To calculate pension expense for 2005, the Company will use an expected long- term rate of return on plan assets of 8.50%, a discount rate of 5.75% and an assumed rate of compensation increase of 3.25%. The Company estimates that it will record net pension expense of approximately $210 million for its U.S. defined benefit plans in 2005, principally reflecting an increase in the amortization of unrecognized actuarial losses over a shorter average remaining service period, a decrease in the assumed 72 In millions 2005 $ 516 2006 511 2007 508 2008 510 2009514 2010 - 2014 2,746 Percentage of Plan Assets Target at December 31, Asset Category Allocations 2004 2003 Equity securities 52% - 63% 62% 62% Debt securities 26% - 34% 27% 27% Real estate 5% - 10% 8% 8% Other 2% - 8% 3% 3% Total 100% 100% 2004% 2003% Discount rate 5.75% 6.00% Rate of compensation increase 3.25% 3.25% 2004% 2003% 2002% Discount rate 6.00% 6.50% 7.25% Expected long-term return  on plan assets 8.75% 8.75% 9.25% Rate of compensation increase 3.25% 3.75% 4.50% In millions 2005) Expense/(Income): Discount rate $22) Expected long-term return on plan assets 16) Rate of compensation increase (5) Weighted average assumptions used to determine net pension expense (income) for 2004, 2003 and 2002 were as follows: Investment Policy / Strategy