IBM 2012 Annual Report Download - page 128

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
127
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 128. These rates of return are devel-
oped by the company 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 compo-
nent of net loss or gain in AOCI, 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, 2012, 2011
and 2010 and, consequently, had no incremental impact on net
periodic (income)/cost.
For the nonpension postretirement benefit plans, the company
maintains a highly liquid trust fund balance to ensure timely pay-
ments are made. As a result, for the years ended December 31, 2012,
2011 and 2010, 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 expec-
tancy 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 1.1 percent
for the year ended December 31, 2012, from 1.3 percent for the year
ended December 31, 2011, resulted in an increase in 2012 net periodic
income of $10 million. 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.
Healthcare Cost Trend Rate
For nonpension postretirement benefit plan accounting, the com-
pany reviews external data and its own historical trends for
healthcare costs to determine the healthcare cost trend rates. How-
ever, 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 2013 will be 7.0 per-
cent. In addition, the company assumes that the same trend rate will
decrease to 5 percent over the next four years. A one percentage
point increase or decrease in the assumed healthcare cost trend rate
would not have had a material effect on 2012, 2011 and 2010 net
periodic cost or the benefit obligations as of December 31, 2012
and 2011.
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,
2012 and 2011. The impact was insignificant as a result of the terms
of the plan which limit the company’s obligation to the participants.
Plan Assets
Retirement-related benefit plan assets are recognized and mea-
sured at fair value as described in note A, “Significant Accounting
Policies,” on page 84. Because of the inherent uncertainty of
valuations, these fair value measurements may not necessarily
reflect the amounts the company could realize in current market
transactions.