IBM 2009 Annual Report Download - page 118

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
For the U.S. defined benefit pension plans, the changes in
discount rate assumptions impacted the net periodic (income)/
cost and the PBO. The changes in discount rate assumptions
resulted in a decrease in 2009 net periodic income of $70 mil-
lion, an increase in 2008 net periodic income of $67 million and
a decrease in 2007 net periodic cost of $92 million. The changes
in discount rate assumptions resulted in an increase in the PBO
of $703 million and $1,190 million at December 31, 2009 and
2008, respectively.
For the nonpension postretirement benefit plans, the changes
in discount rate assumptions had no material impact on net peri-
odic cost for the years ended December 31, 2009, 2008 and
2007 and on the APBO at December 31, 2009 and 2008.
EXPECTED LONG-TERM RETURNS ON PLAN ASSETS
Expected returns on plan assets, a component of net periodic
(income)/cost, represent the expected long-term returns on plan
assets based on the calculated market-related value of plan
assets. Expected long-term returns on plan assets take into
account long-term expectations for future returns and invest-
ment policies and strategies as described on page 117. These
rates of return are developed by the company, calculated using
an arithmetic average and are tested for reasonableness against
historical returns. The use of expected long-term returns on plan
assets may result in recognized pension income that is greater
or less than the actual returns of those plan assets in any given
year. Over time, however, the expected long-term returns are
designed to approximate the actual long-term returns, and
therefore result in a pattern of income and cost recognition that
more closely matches the pattern of the services provided by the
employees. Differences between actual and expected returns
are recognized as a component of net loss or gain in accumu-
lated other comprehensive income/(loss), which is amortized
as a component of net periodic (income)/cost over the service
lives or life expectancy of the plan participants, depending on
the plan, provided such amounts exceed certain thresholds
provided by accounting standards. The market-related value of
plan assets recognizes changes in the fair value of plan assets
systematically over a five-year period in the expected return on
plan assets line in net periodic (income)/cost.
For the U.S. defined benefit pension plan, Qualified PPP, the
expected long-term rate of return on plan assets of 8.00 percent
remained constant for the years ended December 31, 2009,
2008 and 2007 and, consequently, had no incremental impact
on net periodic (income)/cost.
For the nonpension postretirement benefit plans, the com-
pany maintains a nominal, highly liquid trust fund balance to
ensure payments are made timely. As a result, for the years
ended December 31, 2009, 2008 and 2007, the expected long-
term return on plan assets and the actual return on those assets
were not material.
RATE OF COMPENSATION INCREASES AND MORTALITY RATE
The rate of compensation increases is determined by the com-
pany, based upon its long-term plans for such increases. The
rate of compensation increase is not applicable to the U.S.
defined benefit pension plans as benefit accruals ceased
December 31, 2007 for all participants. Mortality rate assump-
tions are based on life expectancy and death rates for different
types of participants. Mortality rates are periodically updated
based on actual experience.
INTEREST CREDITING RATE
Benefits for certain participants in the PPP are calculated using
a cash balance formula. An assumption underlying this formula
is an interest crediting rate, which impacts both net periodic
(income)/cost and the PBO. This assumption provides a basis
for projecting the expected interest rate that participants will
earn on the benefits that they are expected to receive in the
following year and is based on the average from August to
October of the one-year U.S. Treasury Constant Maturity yield
plus one percent.
For the PPP, the change in the interest crediting rate to
2.8 percent for the year ended December 31, 2009 from 5.2
percent for the year ended December 31, 2008 resulted in
an increase in 2009 net periodic income of $151 million. The
change in the interest crediting rate to 5.2 percent for the year
ended December 31, 2008 from 6.0 percent for the year ended
December 31, 2007 resulted in an increase in 2008 net periodic
income of $65 million. The change in the interest crediting rate
to 6.0 percent for the year ended December 31, 2007 from 5.0
percent for the year ended December 31, 2006 resulted in an
increase in 2007 net periodic cost of $125 million.
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