IBM 2005 Annual Report Download - page 93
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
92_ NotestoConsolidatedFinancialStatements
Forpurposes ofcalculatingthebenefitobligation,thedis-
count rate used in 2005 was 5.5 percent which was 25 basis
pointslowerthanthe2004rateof5.75percent.Thisdecrease
resulted in anincreaseinthebenefitobligationofapproximately
$1,272 million in2005.Thechangeindiscountratein2004from
6.0percentto5.75percentresultedinanincreasein the benefit
obligationin2004ofapproximately$1,193million.
FortheU.S.nonpensionpostretirementplan, the discount
rate changes did not have a material effect on net periodic
cost/(income) and the benefit obligation for the years ended
December31,2005and 2004.
EXPECTEDRETURNONPLANASSETS
Expected returns on plan assets take into account long-term
expectations for future returns and investment strategy. These
ratesaredevelopedbythecompanyinconjunctionwithexter-
naladvisors, are calculatedusinganarithmeticaverageand are
testedforreasonablenessagainstthehistoricalreturnaverage
by asset category, usually over a ten-year period. The use of
expectedlong-termratesofreturnonplanassetsmayresultin
recognized pension income that is greater or less than the
actualreturnsofthoseplanassetsinanygivenyear.Overtime,
however, the expected long-term returns are designed to
approximatetheactuallong-termreturnsandthereforeresultin
apatternofincomeandexpenserecognitionthatmoreclosely
matchesthepatternoftheservicesprovidedbytheemployees.
Differencesbetweenactualandexpectedreturns,acomponent
ofunrecognizedgains/losses, arerecognized overtheservice
lives of the employees in the plan, provided such amounts
exceedthresholdswhicharebasedupontheobligationorthe
valueofplanassets,asprovidedbyaccountingstandards.
ForthePPP,theexpectedlong-termreturnonplanassets
did not change for the years ended December 31, 2005 and
2004and,asaresult,hadnoincrementalimpactonnetperiodic
cost/(income).
Forthenon-U.S.definedbenefitplans,thechangesinthe
expectedlong-term returnon plan assetsassumptions for the
yearended December 31,2005 whencomparedwith theyear
endedDecember 31, 2004resultedin an increasein netperi-
odicpensioncostof$140 million.Thechangesintheexpected
long-termreturnonplanassetsassumptionsfortheyearended
December31,2004forcertainnon-U.S.planswhencompared
withtheyearendedDecember31,2003resultedinanincrease
innetperiodicpensioncostof$54million.
For the U.S. nonpension postretirement benefit plan, the
companymaintainsanominal,highlyliquidtrustfundbalanceto
ensure payments are made timely. As a result, for the years
ended December 31, 2005 and 2004, the expected long-term
returnonplanassetsandtheactualreturnonthoseassetswere
notmaterial.
RATEOFCOMPENSATIONINCREASESANDMORTALITYRATE
Therateofcompensationincreasesandmortalityratesarealso
significant assumptions used in the actuarial model for pension
accounting.Therateofcompensationincreasesisdeterminedby
thecompany,baseduponitslong-termplansforsuchincreases.
Mortality rate assumptions are based on life expectancy and
deathratesfordifferenttypesofparticipants.Therewasnosignif-
icantimpacttotheprojectedbenefitobligationortonetperiodic
costasaresultofchangestotherateofcompensationincreases
or to mortality rate assumptions during the years ended
December31,2005and2004.
INTERESTCREDITINGRATE
BenefitsforcertainparticipantsinthePPParecalculatedusing
acashbalanceformula.Anassumptionunderlyingthisformula
isaninterestcreditingrate,whichimpactsbothnetperiodiccost
andtheprojected benefitobligation.Thisassumptionprovides
abasisforprojectingtheexpectedinterestratethatparticipants
willearnonthebenefitsthattheyare expectedtoreceiveinthe
following year and are based on the average, from August to
October of the one-year U.S. Treasury Constant Maturity yield
plusonepercent.
Forthe PPP, the changeinthe interest creditingrate from
2.3percentfortheyearendedDecember31,2004to3.1 percent
fortheyearendedDecember31,2005resultedinanincreaseto
netperiodiccostof$55million. Thechangeintheinterestcred-
iting rate from 2.7 percent for the year ended December 31,
2003 to 2.3 percent for the year ended December 31, 2004
resultedin a decreasetonetperiodiccostof$20 million.
HEALTHCARECOSTTRENDRATE
For nonpension postretirement plan accounting, the company
reviewsexternaldataanditsownhistoricaltrendsforhealthcare
coststodeterminethehealthcarecosttrendrates. However, the
healthcare cost trend rate has an insignificant effect on plan
costsandobligations asaresultofthetermsoftheplanwhich
limitthecompany’sobligationtotheparticipants.
Thecompanyassumesthatthe healthcarecost trendrate
for 2006 will be 9 percent. In addition, the company assumes
thatthesametrendratewilldecreaseto5percentoverthenext
4 years. A one-percentage point increase or decrease in the
assumedhealthcarecost trendratewouldnothavea material
effect upon net periodic cost or the benefit obligation as of
December31,2005.