IBM Notice of 2008 Annual Meeting and Proxy Statement

2007 Pension benefits narrative

The 2007 Pension Benefits Table shows each named executive officer’s number of years of credited service, present value of accumulated benefit and payments during the last fiscal year under the IBM Personal Pension Plan (the Plan). As discussed below, the Plan includes a Qualified Plan and a Nonqualified Excess Plan.

IBM Personal Pension Plan—General

Plan Description

• The Plan provides funded, tax-qualified benefits up to the limits on compensation and benefits under the Internal Revenue Code (referred to as the Qualified Plan), and unfunded, nonqualified benefits in excess of the limits (referred to as the Nonqualified Excess Plan).
• Effective July 1, 1999, IBM amended the Plan to provide a new benefit formula, but allowed participants who met certain age and service conditions as of June 30, 1999 to elect to continue to earn benefits under the prior formula.
• Effective January 1, 2005, the Plan was closed to new participants.
• Accrual of future benefits under the Plan stopped on December 31, 2007. Accordingly, a participant’s pension benefit does not consider pay earned and service credited after December 31, 2007.
• Effective January 1, 2008, all eligible employees, including the named executive officers, became eligible for Company contributions under a new defined contribution plan, the IBM 401(k) Plus Plan. Under the new plan, the named executive officers are eligible for Company contributions of up to 10% of total pay, depending on their pension plan formula participation as of December 31, 2007.

IBM Personal Pension Plan—Qualified Plan

Purpose of the Qualified Plan

• The Qualified Plan was designed to provide tax-qualified pension benefits that are generally available to all U.S. regular employees.
• The cessation of additional accruals under the Qualified Plan and the replacement of Qualified Plan accruals with contributions under the new defined contribution plan reflect the Company’s desire to provide appropriate benefits for its employees, consistent with the changing needs of IBM’s workforce and the changing nature of retirement benefits provided by the Company’s current competition.

Material Terms and Conditions: Pension Credit Formula under the Qualified Plan

• The benefits under the Qualified Plan for Messrs. Palmisano, Loughridge, Mills, and Daniels are determined under the Pension Credit Formula. Each of these named executive officers satisfied the eligibility requirements for the Pension Credit Formula in 1999.
• The Pension Credit Formula is a pension equity formula that provides annual benefits based on a participant’s total point value divided by an annuity conversion factor.
• The total point value is equal to total base points times final average pay plus total excess points times final average pay in excess of Social Security Covered Compensation.
• For purposes of the Pension Credit Formula, final average pay is equal to average compensation over the final five years of employment or the highest consecutive five calendar years of compensation, whichever is greater.
• The annuity conversion factor is determined according to a table set forth in the IBM Personal Pension Plan document.
• Prior to 2008, the named executive officers earned points as follows: 0.16 base points each year until a 4.25 base point cap was reached, and 0.03 excess points each year until a 0.75 excess point cap was reached.
• The total point value is converted to an annuity at the benefit commencement date based on pre-determined annuity conversion factors.
• A named executive officer may receive his benefit immediately following termination of employment, or may defer benefit payments until any time between early retirement age and normal retirement age.
• Early retirement age is defined as:
  • – Any age with 30 years of service,
  • – Age 55 with 15 years of service, or
  • – Age 62 with five years of service.
• As of December 31, 2007, Messrs. Palmisano, Loughridge, Mills, and Daniels had attained early retirement age.
• Under the Pension Credit Formula an executive who terminates employment and whose pension benefit commences before his normal retirement age will receive smaller monthly annuity payments than if his benefit commences at normal retirement age.
• Prior to 2008, an executive who terminates employment on or after age 60 and on or after early retirement age, but before normal retirement age, will receive an immediate annuity beginning on such early commencement retirement age that equals the immediate annuity that would be payable if the executive continued to work until any later age, but earned no additional pay or points after such early commencement age. On this immediate annuity basis:
  • – The immediate annuity will be reduced if the named executive officer terminates employment before age 60 or before early retirement age.
  • – The other named executive officers are not yet eligible to receive unreduced pensions.
  • – For purposes of determining present value, the assumptions described immediately following the 2007 Pension Benefits Table are used.
• Instead of receiving his entire benefit under the Pension Credit Formula as an annuity, a named executive officer may elect to receive a portion of the benefit as an unsubsidized lump sum. The amount that may be paid as a lump sum is based on the benefit the named executive officer earned before January 1, 2000.

Material Terms and Conditions: Personal Pension Account Formula under the Qualified Plan

• Mr. Elix’s benefit under the Qualified Plan is determined under the Personal Pension Account formula because, unlike the other named executive officers, he did not satisfy the eligibility requirements for the Pension Credit Formula in 1999.
• The Personal Pension Account formula is a cash balance formula.
• Under the Personal Pension Account formula, prior to 2008, Mr. Elix received pay credits and interest credits to his hypothetical Personal Pension Account. The pay credits for a year were equal to 5% of his eligible compensation for that year. The interest credits, which continue until Mr. Elix’s benefit is distributed, are based on the annual interest rate on one-year Treasury Constant Maturities plus 1%.
• Mr. Elix may receive his benefit under the Personal Pension Account formula at any time following his termination of employment, but may not defer his benefit later than normal retirement age.
• If Mr. Elix’s benefit begins to be paid before normal retirement age, it will be reduced when compared to the benefit that would commence at normal retirement age.
• Mr. Elix may receive his benefit in the following forms: a lump sum equal to his Personal Pension Account, an annuity that is actuarially equivalent to his Personal Pension Account, or both a partial lump sum and a reduced annuity.

Compensation Elements Included in Calculation

• Prior to 2008, eligible compensation was generally equal to the total amount that is included in income including:
  • – Salary,
  • – Recurring payments under any form of variable compensation plan (excluding stock options and other equity awards), and
  • – Amounts deferred from salary and variable compensation under IBM’s 401(k) plan and Internal Revenue Code Section 125 plan (cafeteria plan) and amounts that are deferred under the IBM Executive Deferred Compensation Plan.
• Equity compensation—stock options, RSUs, RRSUs and PSUs—was excluded from eligible compensation.
• Benefits provided under the Qualified Plan are based on annual compensation up to a compensation limit under the Internal Revenue Code (which was $225,000 in 2007). In addition, benefits provided under the Qualified Plan may not exceed an annual benefit limit under the Internal Revenue Code (which was $180,000 payable as a single life annuity beginning at normal retirement age in 2007).

Qualified Plan Funding

• Benefits under the Qualified Plan are funded by an irrevocable tax-exempt trust.
• A participant’s benefits under the Qualified Plan are payable from the assets held by the tax-exempt trust.

Policy Regarding Extra Years of Credited Service

• Generally, a participant’s years of credited service are based on the years an employee participates in the Plan.
• The years of credited service for the named executive officers are based only on their service while eligible for participation in the Plan.

IBM Personal Pension Plan—Nonqualified Excess Plan

Purpose of the Nonqualified Excess Plan
The Nonqualified Excess Plan provides Qualified Plan participants with benefits that may not be provided under the Qualified Plan because of the tax limits on eligible compensation and benefits paid.

Material Terms and Conditions of the Nonqualified Excess Plan
The Nonqualified Excess Plan provides a benefit that is equal to the benefit that would be provided under the Qualified Plan if the compensation and benefit limits did not apply minus the benefit actually provided under the Qualified Plan.

Excess Plan Funding

• The Nonqualified Excess Plan is unfunded and maintained as a book reserve account.
• No funds are set aside in a trust or otherwise; participants in the Nonqualified Excess Plan are general unsecured creditors of the Company with respect to the payment of their Nonqualified Excess Plan benefits.

Policy Regarding Extra Years of Credited Service
The Company’s policy with respect to the Nonqualified Excess Plan is identical to the Company’s policy with respect to the Qualified Plan, as stated above.

Available Forms of Payment

• A portion of the benefit that is available to Messrs. Palmisano, Loughridge, Mills, and Daniels under the IBM Personal Pension Plan may be paid as a lump sum. The portion is determined on the benefit that was earned before January 1, 2000.
• Mr. Elix’s entire benefit under the IBM Personal Pension Plan may be paid as a lump sum because, as explained above, unlike the other named executive officers, his benefit is determined under the Personal Pension Account formula.
• The maximum lump sum amount that the named executive officers could have elected to receive as of January 1, 2008 if they had terminated employment on December 31, 2007 was equal to:

	Maximum Lump Sum
	Qualified Plan	Nonqualified Excess Plan	Total Available Lump Sum
S.J. Palmisano	$ 581,535	$ 0	$ 581,535
M. Loughridge	319,323	0	319,323
S.A. Mills	560,325	0	560,325
M.E. Daniels	346,474	0	346,474
D.T. Elix	91,121	511,971	603,092

• A participant may elect to receive his or her entire benefit, or the portion of the benefit that is not paid as a lump sum, in the form of a single life annuity or in certain other actuarially equivalent forms of payment.

Annual Pension Benefits
The annual pension benefit that was earned as of December 31, 2007, and that is payable as a single life annuity beginning at normal retirement age for each of the named executive officers is as follows:

Assumptions to determine present value as of December 31, 2007:

• Measurement date: December 31, 2007
• Interest rate for present value: 6.00%
• To determine Personal Pension Account benefit:
  
  • – Interest crediting rate: 6.00% for 2007, 5.20% for 2008 and beyond
  • – Interest rate to convert Personal Pension Account balance to single life annuity: 4.83%
  • – Mortality table to convert Personal Pension Account balance to single life annuity is the mortality table described in Rev. Rul. 2001-62
• Mortality (pre-commencement): None
• Mortality (post-commencement): 1994 US GAM Male table with 20 year improvement
• Termination of employment: Later of age 65 or current age
• Accumulated benefit is calculated based on credited service and compensation history as of December 31, 2007
• Benefit payable as a single life annuity in the case of the Pension Credit Formula and lump sum in the case of the Personal Pension Account Formula beginning on the first day of the month following termination of employment
• The Pension Credit Formula conversion factor is based on age at December 31, 2007 and commencement at age 65
• All results shown are estimates only; actual benefits will be based on credited service and compensation history at time of actual termination of employment

Assumptions to determine present value as of December 31, 2006:

• The column titled Change in Pension Value in the 2007 Summary Compensation Table quantifies the change in the present value of the pension benefit from December 31, 2006 to December 31, 2007
• To determine the present value of the pension benefit as of December 31, 2006, the same assumptions that are described above to determine present value as of December 31, 2007 were used, except (1) a 5.75% interest rate and the 1994 US GAM Male table with 12 year improvement for post-commencement mortality were used to determine present value, and (2) to determine the Personal Pension Account benefit, the following were used:
  
  • – Interest crediting rate: 5.0% for 2006, 6.0% for 2007 and beyond
  • – Interest rate to convert Personal Pension Account balance to single life annuity: 4.90%