IBM 2015 Annual Report Download - page 136

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
134
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 2015 net periodic income of $286mil-
lion, an increase in 2014 net periodic income of $275million and a
decrease in 2013 net periodic income of $162million. The changes
in the discount rate assumptions resulted in a decrease in the PBO
of $1,621million and an increase of $4,437 million at December31,
2015 and 2014, respectively.
For the U.S. 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, 2015, 2014
and 2013, and resulted in a decrease in the APBO of $109million
and an increase of $256million at December31, 2015 and 2014,
respectively.
For all of the company’s retirement-related benefit plans, the
change in the discount rate assumptions resulted in a decrease
in the benefit obligation of approximately $2billion at Decem-
ber31, 2015 and an increase of approximately $11billion at
December31, 2014.
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135. These rates of return
are developed 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 component 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 expected
long-term rate of return on plan assets for the years ended
December31, 2015, 2014 and 2013 was 7.5percent, 8percent and
8percent, respectively. The change in the rate in 2015 resulted in a
decrease in 2015 net periodic income of $264million. For 2016, the
projected long-term rate of return on plan assets is approximately
7.0percent.
For the U.S. nonpension postretirement benefit plans, the com-
pany maintains a highly liquid trust fund balance to ensure timely
payments are made. As a result, for the years ended December31,
2015, 2014 and 2013, 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 experi-
ence. In the U.S., the Society of Actuaries released new mortality
tables in 2014 and updated them in 2015. The company utilized
these tables in its plan remeasurements at December31, 2015 and
2014. For the U.S. retirement-related plans, the change in mortality
assumptions resulted in a decrease to the plan benefit obligations
of $0.7billion and an increase of $2.6billion at December31, 2015
and 2014, respectively.
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 ben-
efits 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 interest crediting rate of 1.1percent for the year
ended December31, 2015 was unchanged from 2014 and, there-
fore, had no impact on the decrease in 2015 net periodic income.
The change in the interest crediting rate to 1.1percent for the year
ended December31, 2014, from 1.2percent for the year ended
December31, 2013, resulted in an increase in 2014 net periodic
income of $8million. The change in the interest crediting rate to
1.2percent for the year ended December31, 2013, from 1.1percent
for the year ended December31, 2012, resulted in a decrease in
2013 net periodic income of $6million.