IBM 2010 Annual Report Download - page 121

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies 119
For the U.S. defined benefit pension plans, the changes in the
discount rate assumptions impacted the net periodic (income)/cost
and the PBO. The changes in the discount rate assumptions
resulted in a decrease in 2010 net periodic income of $40 million,
a decrease in 2009 net periodic income of $70 million and an
increase in 2008 net periodic income of $67 million. The changes
in the discount rate assumptions resulted in an increase in the PBO
of $2,943 million and $703 million at December 31, 2010 and 2009,
respectively.
For the nonpension postretirement benefit plans, the changes
in the discount rate assumptions had no material impact on net
periodic cost for the years ended December 31, 2010, 2009 and
2008 and resulted in an increase in the APBO of $240 million and
$140 million at December 31, 2010 and 2009, respectively.
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 the investment policies
and strategies as described on page 120. 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 accumulated 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, depend-
ing 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, the Qualified PPP,
the expected long-term rate of return on plan assets of 8.00 percent
remained constant for the years ended December 31, 2010, 2009
and 2008 and, consequently, had no incremental impact on net
periodic (income)/cost.
For the nonpension postretirement benefit plans, the company
maintains a nominal, highly liquid trust fund balance to ensure timely
payments are made. As a result, for the years ended December 31,
2010, 2009 and 2008, 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 ben-
efit pension plans as benefit accruals ceased December 31, 2007
for all participants. Mortality rate assumptions 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 1.4
percent for the year ended December 31, 2010, from 2.8 percent
for the year ended December 31, 2009, resulted in an increase in
2010 net periodic income of $62 million. 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.
Healthcare Cost Trend Rate
For nonpension postretirement benefit plan accounting, the company
reviews external data and its own historical trends for healthcare
costs to determine the healthcare cost trend rates. However, the
healthcare cost trend rate has an insignificant effect on plan costs
and obligations as a result of the terms of the plan which limit the
company’s obligation to the participants. The company assumes
that the healthcare cost trend rate for 2011 will be 7.5 percent. In
addition, the company assumes that the same trend rate will
decrease to 5 percent over the next three years. A one percentage
point increase or decrease in the assumed healthcare cost trend
rate would not have a material effect on 2010, 2009 and 2008 net
periodic cost or the benefit obligations as of December 31, 2010
and 2009.