IBM 2011 Annual Report Download - page 130

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies128
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 129. 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, 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, 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, 2011, 2010
and 2009 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, 2011,
2010 and 2009, 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 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 1.3 percent
for the year ended December 31, 2011, from 1.4 percent for the year
ended December 31, 2010, resulted in an increase in 2011 net periodic
income of $4 million. 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.
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 2012 will be 7.5 percent. In
addition, the company assumes that the same trend rate will decrease
to 5 percent over the next five years. A one percentage point increase
or decrease in the assumed healthcare cost trend rate would not
have had a material effect on 2011, 2010 and 2009 net periodic cost
or the benefit obligations as of December 31, 2011 and 2010.
Healthcare Legislation
The expected effects of the U.S. healthcare reform legislation enacted
in March 2010 were incorporated into the remeasurements of the
U.S. nonpension postretirement benefit plan at December 31, 2011
and 2010. The impact was insignificant as a result of the terms of
the plan which limit the company’s obligation to the participants.