Notes to consolidated financial statements (audited)
International Business Machines Corporation and Subsidiary Companies

Description of plans

IBM sponsors defined benefit pension plans and defined contribution plans that cover substantially all regular employees, a supplemental retention plan that covers certain U.S. executives and nonpension postretirement benefit plans primarily consisting of retiree medical and dental benefits for eligible retirees and dependents.

U.S. plans

Defined Benefit Pension Plans

IBM Personal Pension Plan

IBM provides U.S. regular, full-time and part-time employees hired prior to January 1, 2005 with noncontributory defined benefit pension benefits via the IBM Personal Pension Plan. Prior to 2008, the IBM Personal Pension Plan consisted of a tax qualified (qualified) plan and a non-tax qualified (nonqualified) plan. Effective January 1, 2008, the nonqualified plan was renamed the Excess Personal Pension Plan (Excess PPP) and the qualified plan is now referred to as the Qualified PPP. The combined plan is now referred to as the PPP. The Qualified PPP is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of participants and beneficiaries. The Excess PPP, which is unfunded, provides benefits in excess of IRS limitations for qualified plans.

Benefits provided to the PPP participants are calculated using benefit formulas that vary based on the participant. Pension benefits are calculated using one of two methods based upon specified criteria used to determine each participant’s eligibility. The first method uses a five-year, final pay formula that determines benefits based on salary, years of service, mortality and other participant-specific factors. The second method is a cash balance formula that calculates benefits using a percentage of employees’ annual salary, as well as an interest crediting rate.

Benefit accruals under the IBM Personal Pension Plan ceased December 31, 2007 for all participants.

U.S. Supplemental Executive Retention Plan

The company also sponsors a nonqualified U.S. Supplemental Executive Retention Plan (Retention Plan). The Retention Plan, which is unfunded, provides benefits to eligible U.S. executives based on average earnings, years of service and age at termination of employment. Effective July 1, 1999, the company replaced the then effective Retention Plan with the current Retention Plan. Some participants in the previous Retention Plan will still be eligible for benefits under that prior plan if those benefits are greater than the benefits provided under the current plan.

Benefit accruals under the Retention Plan ceased December 31, 2007 for all participants.

Defined Contribution Plans

IBM 401(k) Plus Plan

U.S. regular, full-time and part-time employees are eligible to participate in the IBM 401(k) Plus Plan, which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. Effective January 1, 2008, under the IBM 401(k) Plus Plan, eligible employees receive a dollar-for-dollar match of their contributions up to 6 percent of eligible compensation for those hired prior to January 1, 2005, and up to 5 percent of eligible compensation for those hired on or after January 1, 2005. In addition, eligible employees receive automatic contributions from the company equal to 1, 2 or 4 percent of eligible compensation based on their eligibility to participate in the PPP as of December 31, 2007. Employees receive automatic contributions and matching contributions after the completion of one year of service.

Prior to January 1, 2008, the company match equaled 50 percent of the first 6 percent of eligible compensation that participants contributed to the plan for those hired before January 1, 2005, and 100 percent of the first 6 percent contributed for those hired after December 31, 2004.

The company’s matching contributions vest immediately and participants are always fully vested in their own contributions. All contributions, including the company match, are made in cash and invested in accordance with participants’ investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of company stock to another investment choice, other than excessive trading rules applicable to such investments.

IBM Excess 401(k) Plus Plan

Effective January 1, 2008, the company replaced the IBM Executive Deferred Compensation Plan, an unfunded, nonqualified, defined contribution plan, with the IBM Excess 401(k) Plus Plan (Excess 401(k)), an unfunded, nonqualified defined contribution plan. All employees whose eligible compensation is expected to exceed the IRS compensation limit for qualified plans are eligible to participate in the Excess 401(k). The purpose of the Excess 401(k) is to provide benefits that would be provided under the qualified IBM 401(k) Plus Plan if the compensation limits did not apply.

Amounts deferred into the Excess 401(k) are recordkeeping (notional) accounts and are not held in trust for the participants. Participants in the Excess 401(k) may invest their notional accounts in the primary investment options available to all employees through the 401(k) Plus Plan. Participants in the Excess 401(k) are also eligible to receive company match, automatic contributions and transition credits, if applicable, on eligible compensation deferred into the Excess 401(k) and on compensation earned in excess of the Internal Revenue Code pay limit once they have completed one year of service. Amounts deferred into the Excess 401(k), including company contributions are recorded as liabilities.

Nonpension Postretirement Benefit Plan

U.S. Nonpension Postretirement Plan

The company sponsors a defined benefit nonpension postretirement benefit plan that provides medical and dental benefits to eligible U.S. retirees and eligible dependents, as well as life insurance for eligible U.S. retirees. Effective July 1, 1999, the company established a Future Health Account (FHA) for employees who were more than five years from retirement eligibility. Employees who were within five years of retirement eligibility are covered under the company’s prior retiree health benefits arrangements. Under either the FHA or the prior retiree health benefit arrangements, there is a maximum cost to the company for retiree health benefits.

Since January 1, 2004, new hires, as of that date or later, are not eligible for company subsidized postretirement benefits.

Non-U.S. plans

Most subsidiaries and branches outside the United States sponsor defined benefit and/or defined contribution plans that cover substantially all regular employees. The company deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employee’s compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.

In addition, certain of the company’s non-U.S. subsidiaries sponsor defined benefit nonpension postretirement benefit plans that provide medical and dental benefits to eligible non-U.S. retirees and eligible dependents, as well as life insurance for certain eligible non-U.S. retirees. However, most of the non-U.S. retirees are covered by local government sponsored and administered programs.

Plan financial information

Summary of financial information

The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the Consolidated Statement of Earnings.

($ in millions)
	U.S. Plans			Non-U.S. Plans			Total
For the year ended December 31:	2008	2007*	2006*	2008	2007*	2006*	2008	2007*	2006*
* Reclassified to conform with 2008 presentation.
Defined benefit pension plans	$(948)	$473	$549	$380	$822	$724	$(568)	$1,295	$1,273
Retention Plan	13	23	20	—	—	—	13	23	20
Total defined benefit pension plans (income)/cost	$(936)	$496	$569	$380	$822	$724	$(556)	$1,318	$1,293
IBM 401(k) Plus Plan and Non-U.S. plans	$1,034	$390	$358	$540	$478	$377	$1,574	$868	$735
Excess 401(k)	36	12	11	—	—	—	36	12	11
Total defined contribution plans cost	$1,069	$402	$370	$540	$478	$377	$1,609	$880	$747
Nonpension postretirement benefit plans cost	$310	$342	$335	$53	$57	$53	$363	$399	$388
Total retirement-related benefits Net periodic cost	$443	$1,240	$1,274	$973	$1,357	$1,154	$1,416	$2,597	$2,428

The following table presents a summary of the total projected benefit obligation (PBO) for defined benefit plans, accumulated postretirement benefit obligation (APBO) for nonpension postretirement benefit plans (benefit obligations), fair value of plan assets and the associated funded status recorded in the Consolidated Statement of Financial Position.

($ in millions)
	Benefit Obligations		Fair Value of Plan Assets		Funded Status*
At December 31:	2008	2007**	2008	2007**	2008	2007**
* Funded status is recognized in the Consolidated Statement of Financial Position as follows: Asset amounts as prepaid pension assets; (Liability) amounts as compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability). ** Reclassified to conform with 2008 presentation.
U.S. Plans:
Overfunded plans:
Qualified PPP	$ —	$46,323	$ —	$57,191	$ —	$10,868
Underfunded plans:
Qualified PPP	$47,297	$ —	$45,918	$ —	$(1,379)	$ —
Excess PPP	1,224	1,135	—	—	(1,224)	(1,135)
Retention Plan	235	215	—	—	(235)	(215)
Nonpension postretirement benefit plan	5,224	5,472	113	504	(5,111)	(4,968)
Total underfunded U.S. plans	$53,980	$6,822	$46,031	$504	$(7,949)	$(6,318)
Non-U.S. Plans:
Overfunded plans:
Qualified defined benefit pension plans	$12,586	$29,168	$14,183	$35,716	$1,598	$6,548
Nonpension postretirement benefit plans	12	—	14	—	3	—
Total overfunded non-U.S. plans	$12,598	$29,168	$14,197	$35,716	$1,601	$6,548
Underfunded plans:
Qualified defined benefit pension plans	$21,179	$7,437	$14,980	$5,980	$(6,199)	$(1,457)
Nonqualified defined benefit pension plans	5,406	5,686	—	—	(5,406)	(5,686)
Nonpension postretirement benefit plans	596	769	65	121	(532)	(648)
Total underfunded non-U.S. plans	$27,182	$13,892	$15,045	$6,101	$(12,137)	$(7,791)
Total overfunded plans	$12,598	$75,491	$14,197	$92,908	$1,601	$17,417
Total underfunded plans	$81,162	$20,714	$61,076	$6,605	$(20,086)	$(14,109)

At December 31, 2008, the company’s qualified defined benefit pension plans were 93 percent funded compared to the benefit obligations. The U.S. Qualified PPP was 97 percent funded. Overall, including nonqualifed plans, the company’s defined benefit pension plans were 85 percent funded.

Defined benefit pension and nonpension postretirement benefit plan financial information

The following tables represent financial information for the company’s retirement-related benefit plans. Defined benefit pension plans in U.S. Plans consist of the Qualified PPP, the Excess PPP and the Retention Plan. Defined benefit pension plans in the Non-U.S. Plans consist of all such plans sponsored by the company’s subsidiaries. The nonpension postretirement benefit plan in the U.S. Plan represents the U.S. Non­pension Postretirement Benefit Plan. Nonpension postretirement benefit plans in the Non-U.S. Plans consist of all such plans sponsored by the company’s subsidiaries. Prior-year amounts were reclassified to conform with 2008 presentation.

The following table presents the components of net periodic (income)/cost of the company’s retirement-related benefit plans recognized in Consoli­dated Statement of Earnings.

($ in millions)
	Defined Benefit Pension Plans
	U.S. Plan			Non-U.S. Plans
For the year ended December 31:	2008	2007	2006	2008	2007	2006
Service cost	$ —	$773	$791	$660	$688	$640
Interest cost	2,756	2,660	2,525	2,042	1,825	1,626
Expected return on plan assets	(3,978)	(3,703)	(3,613)	(2,725)	(2,528)	(2,314)
Amortization of transition assets	—	—	—	0	(3)	(6)
Amortization of prior service costs/(credits)	(7)	57	54	(129)	(125)	(105)
Recognized actuarial losses	291	703	810	612	934	883
Curtailments and settlements	2	5	—	(139)	2	—
Multiemployer plan/other costs	—	—	—	59	29	1
Total net periodic (income)/cost	$(936)	$496	$569	$380	$822	$724

($ in millions)
	Nonpension Postretirement Benefit Plans
	U.S. Plans			Non-U.S. Plans
For the year ended December 31:	2008	2007	2006	2008	2007	2006
Service cost	$55	$69	$62	$10	$12	$12
Interest cost	312	311	306	53	46	45
Expected return on plan assets	(8)	—	—	(10)	(11)	(10)
Amortization of transition assets	—	—	—	0	1	0
Amortization of prior service costs/(credits)	(62)	(62)	(62)	(7)	(8)	(8)
Recognized actuarial losses	9	24	29	14	17	15
Curtailments and settlements	3	—	—	(6)	—	—
Total net periodic cost	$310	$342	$335	$53	$57	$53

The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans.

($ in millions)
	Defined Benefit Pension Plans				Nonpension Postretirement Benefit Plans
	U.S. Plans		Non-U.S. Plans*		U.S. Plan		Non-U.S. Plans
	2008	2007	2008	2007	2008	2007	2008	2007
* Excludes a defined benefit pension plan in Brazil due to restrictions on the use of plan assets imposed by governmental regulations. ** Represents the benefit obligation assuming no future participant compensation increases. N/A — Not applicable
Change in benefit obligation:
Benefit obligation at beginning of year	$47,673	$47,839	$42,291	$40,861	$5,472	$5,773	$769	$680
Service cost	—	773	660	688	55	69	10	12
Interest cost	2,756	2,660	2,042	1,825	312	311	53	46
Plan participants’ contributions	—	—	63	67	216	199	—	—
Acquisitions/divestitures, net	—	5	(6)	85	—	—	(1)	—
Actuarial losses/(gains)	1,183	(484)	(64)	(2,388)	(191)	(203)	(12)	(44)
Benefits paid from trust	(2,999)	(3,046)	(1,814)	(1,638)	(656)	(650)	(31)	(6)
Direct benefit payments	(81)	(75)	(486)	(492)	(24)	(38)	(21)	(16)
Foreign exchange impact	—	—	(3,357)	3,279	—	—	(146)	98
Medicare subsidy	—	—	—	—	37	10	—	—
Plan amendments/curtailments/settlements	224	—	(157)	3	3	—	(13)	—
Benefit obligation at end of year	$48,756	$47,673	$39,171	$42,291	$5,224	$5,472	$608	$769
Change in plan assets:
Fair value of plan assets at beginning of year	$57,191	$52,913	$41,696	$38,207	$504	$47	$121	$99
Actual return on plan assets	(8,274)	7,324	(7,678)	1,483	4	15	10	11
Employer contributions	—	—	858	474	45	893	10	3
Acquisitions/divestitures, net	—	—	16	52	—	—	—	—
Plan participants’ contributions	—	—	63	67	216	199	—	—
Benefits paid from trust	(2,999)	(3,046)	(1,814)	(1,638)	(656)	(650)	(31)	(6)
Foreign exchange impact	—	—	(3,978)	3,054	—	—	(30)	14
Plan amendments/curtailments/settlements	—	—	2	(3)	—	—	—	—
Fair value of plan assets at end of year	$45,918	$57,191	$29,164	$41,696	$113	$504	$79	$121
Funded status at end of year	$(2,838)	$9,519	$(10,007)	$(595)	$(5,111)	$(4,968)	$(529)	$(648)
Accumulated benefit obligation**	$48,756	$47,673	$37,759	$40,598	N/A	N/A	N/A	N/A

The following table presents the net funded status recognized in the Consolidated Statement of Financial Position.

($ in millions)
	Defined Benefit Pension Plans				Nonpension Postretirement Benefit Plans
	U.S. Plans		Non-U.S. Plans		U.S. Plan		Non-U.S. Plans
At December 31:	2008	2007	2008	2007	2008	2007	2008	2007
Prepaid pension assets	$ —	$10,868	$1,598	$6,548	$ —	$ —	$3	$ —
Current liabilities — Compensation and benefits	(86)	(82)	(283)	(432)	(255)	—	(9)	(12)
Noncurrent liabilities — Retirement and nonpension postretirement benefit obligations	(2,752)	(1,268)	(11,322)	(6,711)	(4,856)	(4,968)	(523)	(636)
Funded status — net	$(2,838)	$9,519	$(10,007)	$(595)	$(5,111)	$(4,968)	$(529)	$(648)

The following table presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in gains and (losses) not affecting retained earnings and the changes in pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in accumulated gains and (losses) not affecting retained earnings for the company’s retirement-related benefit plans.

($ in millions)
	Defined Benefit Pension Plans				Nonpension Postretirement Benefit Plans
	U.S. Plans		Non-U.S. Plans		U.S. Plan		Non-U.S. Plans
	2008	2007	2008	2007	2008	2007	2008	2007
* See note N, “Stockholders’ Equity Activity,” for the total change in the accumulated gains and (losses) not affecting retained earnings and the Consolidated Statement of Stockholders’ Equity for components of net periodic (income)/cost, including the related tax effects, recognized in gains and (losses) not affecting retained earnings for the company’s retirement-related benefit plans.
Net loss at January 1	$2,479	$7,286	$9,228	$11,504	$657	$935	$186	$247
Current period loss/(gain)	13,435	(4,105)	10,339	(1,342)	(194)	(254)	(11)	(44)
Curtailments and settlements	—	—	(56)	—	—	—	(7)	—
Amortization of net loss included in net periodic (income)/cost	(291)	(703)	(612)	(934)	(9)	(24)	(14)	(17)
Net loss at December 31	$15,623	$2,479	$18,898	$9,228	$454	$657	$155	$186
Prior service costs/(credits) at January 1	$(60)	$(3)	$(1,147)	$(1,323)	$(115)	$(177)	$(28)	$(35)
Current period prior service costs/(credits)	222	—	—	51	—	—	—	—
Curtailments and settlements	—	—	38	—	—	—	—	—
Amortization of prior service (costs)/credits included in net periodic (income)/cost	7	(57)	129	125	62	62	7	8
Prior service costs/(credits) at December 31	$168	$(60)	$(980)	$(1,147)	$(53)	$(115)	$(21)	$(28)
Transition (assets)/liabilities at January 1	$ —	$ —	$(1)	$(4)	$ —	$ —	$1	$2
Amortization of transition assets/(liabilities) included in net periodic (income)/cost	—	—	0	3	—	—	0	(1)
Transition (assets)/liabilities at December 31	$ —	$ —	$(1)	$(1)	$ —	$ —	$1	$1
Total LOSS recognized in Accumulated gains and (losses) not affecting retained earnings*	$15,791	$2,418	$17,917	$8,080	$401	$542	$135	$160

The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/liabilities of the company’s retirement-related benefit plans that will be amortized from accumulated gains and (losses) not affecting retained earnings into net periodic (income)/cost and recorded in the Consolidated Statement of Earnings in 2009.

($ in millions)
	Defined Benefit Pension Plans		Nonpension Postretirement Benefit Plans
	U.S. Plans	Non-U.S. Plans	U.S. Plan	Non-U.S. Plans
Net loss	$434	$703	$ —	$10
Prior service costs/(credits)	9	(113)	(39)	(6)
Transition (assets)/liabilities	—	0	—	0

During the year ended December 31, 2008, the IBM Board of Directors approved a pension adjustment for certain U.S. retirees and beneficiaries in the PPP. This adjustment provided a pension increase to approximately 42,000 IBM retirees who retired before January 1, 1997. This adjustment resulted in an increase in the PBO of $222 million and had no impact on the 2008 net periodic (income)/cost.

During the year ended December 31, 2008, the company terminated one of its defined benefit pension plans in Japan that resulted in a settlement gain of $140 million recorded as part of the 2008 net periodic (income)/cost and resulted in a decrease to the PBO of $157 million.

No significant amendments of the retirement-related benefit plans occurred during the years ended December 31, 2007 and 2006 that had a material effect on the Consolidated Statement of Earnings.

Assumptions used to determine plan financial information

Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These valuations use participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.

The table below presents the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for the retirement-related benefit plans.

	Defined Benefit Pension Plans
	U.S. Plans			Non-U.S. Plans
For the year ended December 31:	2008	2007	2006	2008	2007	2006
* 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. N/A — Not applicable
WEIGHTED-AVERAGE ASSUMPTIONS USED TO MEASURE NET PERIODIC (income)/COST FOR THE YEAR ENDED DECEMBER 31:
Discount rate	6.00%	5.75%	5.50%	5.06%	4.40%	4.19%
Expected long-term returns on plan assets	8.00%	8.00%	8.00%	6.86%	6.95%	7.14%
Rate of compensation increase*	N/A	4.00%	4.00%	3.23%	3.05%	3.11%
WEIGHTED-AVERAGE ASSUMPTIONS USED TO MEASURE BENEFIT OBLIGATIONS AT DECEMBER 31:
Discount rate	5.75%	6.00%	5.75%	4.89%	5.06%	4.40%
Rate of compensation increase*	N/A	N/A	4.00%	3.09%	3.23%	3.05%

	Nonpension Postretirement Benefit Plans
	U.S. Plan			Non-U.S. Plans
For the year ended December 31:	2008	2007	2006	2008	2007	2006
N/A — Not applicable
WEIGHTED-AVERAGE ASSUMPTIONS USED TO MEASURE NET PERIODIC COST FOR THE YEAR ENDED DECEMBER 31:
Discount rate	6.00%	5.75%	5.50%	7.13%	6.93%	6.58%
Expected long-term returns on plan assets	3.02%	N/A	N/A	9.04%	9.95%	11.50%
WEIGHTED-AVERAGE ASSUMPTIONS USED TO MEASURE BENEFIT OBLIGATIONS AT DECEMBER 31:
Discount rate	5.75%	6.00%	5.75%	7.36%	7.13%	6.93%

Discount Rate

The discount rate assumptions used for the retirement-related benefit plans accounting reflect the yields available on high-quality, fixed income debt instruments at the measurement date. For the U.S. discount rate assumptions, a portfolio of high-quality corporate bonds is constructed with maturities that match the expected timing of the benefit obligation payments. In the non-U.S., where markets for high-quality long-term bonds are not generally as well developed, a portfolio of long-term government bonds is used as a base, to which a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan, as the benchmark for developing the respective discount rates. The value of the portfolios constructed in developing the discount rate assumptions is sufficient to effectively settle the benefit obligations and excludes any bonds that do not represent high-quality corporate bonds as a result of current market fluctuations.

For the U.S. defined benefit pension plans, the changes in discount rate assumptions impacted the net periodic (income)/cost and the PBO. The changes in discount rate assumptions resulted in an increase in the 2008 net periodic income of $67 million, a decrease in the 2007 net periodic cost of $92 million and an increase in the 2006 net periodic cost of $94 million. The changes in discount rate assumptions resulted in an increase in the PBO of $1,190 million and a decrease of $1,192 million at December 31, 2008 and 2007, respectively.

For the non-U.S. defined benefit pension plans, the changes in discount rate assumptions resulted in a decrease in the 2008 net periodic cost of $335 million and an increase in the 2007 and 2006 net periodic cost of $30 million and $274 million, respectively.

For the nonpension postretirement benefit plans, the changes in discount rate assumptions had no material impact on net periodic cost for the years ended December 31, 2008, 2007 and 2006 and on the APBO at December 31, 2008 and 2007.

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. The market-related value of plan assets recognizes changes in the fair value of plan assets systematically over a five-year period. Expected long-term returns on plan assets take into account long-term expectations for future returns and investment strategy. These rates of return are developed by the company, calculated using an arithmetic average and are tested for reasonableness against the historical return average, usually over a ten-year period. 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 over five years in the expected return on plan assets line in net periodic (income)/cost and also as a component of net loss or gain in accumulated gains and (losses) not affecting retained earnings, which is recognized over the service lives of the employees in the plan, provided such amounts exceed thresholds which are based upon the obligation or the value of plan assets, as provided by accounting standards.

For the Qualified PPP, the expected long-term return on plan assets of 8.00 percent remained constant for the years ended December 31, 2008, 2007 and 2006 and, consequently, had no incremental impact on net periodic (income)/cost.

For the non-U.S. defined benefit pension plans, the changes in the expected long-term return on plan assets resulted in an increase in the 2008, 2007 and 2006 net periodic cost of $41 million, $50 million and $18 million, respectively.

For the nonpension postretirement benefit plans, the company maintains a nominal, highly liquid trust fund balance to ensure payments are made timely. As a result, for the years ended December 31, 2008, 2007 and 2006, 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 company, 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. Changes to defined benefit pension plans mortality rate assumptions increased the 2008 and 2007 net periodic cost by $197 million and $80 million, respectively, and increased the 2008 and 2007 benefit obligation by $472 million and $790 million, respectively. Changes to the rate of compensation increases reduced the 2006 net periodic cost by $32 million.

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 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 the 2008 net periodic income of $65 million. The change in the interest crediting rate to 6.0 percent for the year ended December 31, 2007 from 5.0 percent for the year ended December 31, 2006 resulted in an increase in the 2007 net periodic cost of $125 million. The change in the interest crediting rate to 5.0 percent for the year ended December 31, 2006 from 3.1 percent for the year ended December 31, 2005 resulted in an increase in the 2006 net periodic cost of $170 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 2009 will be 7.5 percent. 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 a material effect on the 2008, 2007 and 2006 net periodic cost or the benefit obligations as of December 31, 2008 and 2007.

Plan assets

Retirement-related benefit plan assets are recognized and measured at fair value using quoted prices in active markets. In the absence of quoted prices in active markets, quoted prices for similar assets or financial instruments for which significant inputs are observable, either directly or indirectly, are used. Certain assets are measured using prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Because of the inherent uncertainty of valuations, these fair value measurements might not necessarily indicate the amounts the company could realize in current market transactions.

Defined Benefit Pension Plans

The company’s defined benefit pension plans’ asset allocations at December 31, 2008 and 2007 and target allocation for 2009, by asset category, are as follows:

U.S. Plan (actual allocations)

	Plan Assets at December 31:
	2008	2007	2009 Target Allocation
* See the following discussion regarding certain private market assets, and future funding commitments thereof, that are not as liquid as the publicly traded securities.
Asset Category:
Equity securities*	37.1%	46.9%	46%
Debt securities	54.0	44.6	44
Real estate*	5.9	5.4	5
Other	3.0	3.1	5
Total	100.0%	100.0%	100%

Non-U.S. Plans (weighted-average)

	Plan Assets at December 31:
	2008	2007	2009 Target Allocation
Asset Category:
Equity securities	46.0%	58.2%	47%
Debt securities	48.5	37.7	46
Real estate	1.6	1.9	2
Other	4.0	2.2	6
Total	100.0%	100.0%	100%

The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the Qualified PPP to meet its future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plan’s participants. The obligations are estimated using actuarial assumptions, based on the current economic environment. The Qualified PPP portfolio’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could cause the plans to become underfunded, thereby increasing their dependence on contributions from the company. Within each asset class, careful consideration is given to balancing the portfolio among industry sectors, geographies, interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. During 2007, the company modified the asset allocation of the Qualified PPP portfolio primarily by reducing public equity securities, by increasing debt securities from 33 percent to 43 percent of total plan assets, and by increasing the duration of debt securities and increasing the use of derivatives, including interest rate swaps in debt securities, to further mitigate the effects of future interest rate changes. These changes were designed to reduce the potential negative impact that equity markets or interest rates might have on the funded status of the Qualified PPP. These changes did not impact the expected long-term return on plan assets assumption, which remained at 8.00 percent for 2008. The effect on expected long-term return on plan assets of increasing the duration of debt securities substantially offset the effect of reducing public equity securities. Derivatives are also used to hedge currency, adjust portfolio duration and reduce specific market risks.

The assets are managed by professional investment firms, as well as by investment professionals who are employees of the company. They are bound by mandates and are measured against specific benchmarks. Among these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and reliance on particular active and passive investment strategies. Market liquidity risks are tightly controlled, with only a modest percentage of the Qualified PPP portfolio invested in private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded securities.

The Qualified PPP portfolio included private market assets comprising approximately 12.9 percent and 12.0 percent of total assets at December 31, 2008 and 2007, respectively. The target allocation for private market assets in 2009 is 12.9 percent. As of December 31, 2008, the Qualified PPP portfolio had $3,999 million in commitments for future private market investments to be made over a number of years. These commitments are expected to be funded from plan assets.

Other assets in the Qualified PPP portfolio include commodities and non-traditional investments designed to further diversify the returns of the portfolio.

Equity securities include IBM common stock of $83 million, representing 0.2 percent of the Qualified PPP plan assets at December 31, 2008 and $111 million, representing 0.2 percent of the plan assets at December 31, 2007.

Outside the U.S., the investment objectives are similar, subject to local regulations. In some countries, a higher percentage allocation to fixed income securities is required. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared with the strategies previously described. Generally, these non-U.S. funds do not invest in illiquid assets and their use of derivatives is usually limited to currency hedging, adjusting portfolio durations and reducing specific market risks. There was no significant change in the investment strategies of these plans during either 2008 or 2007.

Expected contributions

Defined benefit pension plans

It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.

The company contributed $917 million and $503 million in cash to non-U.S. plans, including non-U.S. multi-employer plans, during the years ended December 31, 2008 and 2007, respectively.

In 2009, the company is not legally required to make any contributions to the U.S. defined benefit pension plans. However, depending on market conditions, or other factors, the company may elect to make discretionary contributions to the Qualified PPP during the year.

The Pension Protection Act of 2006 (the Act), enacted into law in 2006, is a comprehensive reform package that, among other provisions, increases pension funding requirements for certain U.S. defined benefit plans, provides guidelines for measuring pension plan assets and pension obligations for funding purposes and raises tax deduction limits for contributions to retirement-related benefit plans. The additional funding requirements by the Act apply to plan years beginning after December 31, 2007. The Act was updated by the Worker, Retiree and Employer Recovery Act of 2008, which revised the funding requirements in the Act by clarifying that pension plans may smooth the value of pension plans over 24 months. The adoption of the Act, as modified, is not expected to have a material effect on the company’s minimum mandatory contributions to its PPP.

In 2009, the company estimates contributions to its non-U.S. plans to be approximately $1,000 million, which will be mainly contributed to defined benefit pension plans in Japan, the Netherlands, Spain, Switzerland, Belgium and the United Kingdom. These 2009 contributions represent the legally mandated minimum contributions. Financial market performance in 2009 could increase the legally mandated minimum contribution in certain countries which require monthly or daily remeasurement of the funded status. The company could also elect to contribute more than the legally mandated amount based on market conditions or other factors.

Nonpension Postretirement Benefit Plans

The company contributed $10 million and $850 million to the nonpension postretirement benefit plans during the years ended December 31, 2008 and 2007. These contribution amounts exclude the Medicare-related subsidy discussed below. The 2007 funding included a $500 million voluntary contribution to the U.S. nonpension postretirement benefit plan to fund benefit payments.

Expected benefit payments

Defined Benefit Pension Plan Expected Payments

The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the plans’ PBO at December 31, 2008 and include benefits attributable to estimated future compensation increases, where applicable.

($ in millions)
	Qualified PPP Payments	Excess PPP Payments	Qualified Non-U.S. Plans Payments	Non- qualified Non-U.S. Plans Payments	Total Expected Benefit Payments
2009	$3,492	$86	$1,791	$349	$5,718
2010	3,226	87	1,804	348	5,465
2011	3,234	90	1,830	351	5,506
2012	3,249	93	1,853	356	5,551
2013	3,266	95	1,874	362	5,598
2014 – 2018	16,630	511	9,888	1,922	28,952

The 2009 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (underfunded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position.

Nonpension Postretirement Benefit Plan Expected Payments

The following table reflects the total expected benefit payments to nonpension postretirement benefit plan participants, as well as the expected receipt of the company’s share of the Medicare subsidy described below. These payments have been estimated based on the same assumptions used to measure the plan’s APBO at December 31, 2008.

($ in millions)
	U.S. Plan Payments	Less: IBM Share of Expected Medicare Subsidy	Net Expected U.S. Plan Payments	Qualified Non-U.S. Plans Payments	Non- qualified Non-U.S. Plans Payments	Total Expected Benefit Payments
2009	$496	$32	$464	$5	$23	$492
2010	487	34	453	4	25	482
2011	473	37	436	5	26	467
2012	453	39	414	5	28	447
2013	446	—	446	5	29	481
2014 – 2018	2,190	—	2,190	33	175	2,398

The 2009 expected benefit payments to nonpension postretirement benefit plan participants not covered by the respective plan assets represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position.

Medicare prescription drug act

In connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003, the company is expected to continue to receive a federal subsidy of approximately $269 million to subsidize the prescription drug coverage provided by the U.S. nonpension postretirement benefit plan, which is expected to extend until 2012. Approximately $143 million of the subsidy will be used by the company to reduce its obligation and cost related to the U.S. nonpension postretirement benefit plan. The company will contribute the remaining subsidy of $126 million to the plan in order to reduce contributions required by the participants. The company received a total subsidy of $45 million and $46 million for prescription drug-related coverage during the years ended December 31, 2008 and 2007, which was utilized to reduce the company contributions to the U.S. nonpension postretirement benefit plan.

The company has included the impact of its portion of the subsidy in the determination of net periodic cost and APBO for the U.S. nonpension postretirement benefit plan at and for the years ended December 31, 2008, 2007 and 2006. The impact of the subsidy resulted in a reduction in APBO of $127 million and $139 million at December 31, 2008 and 2007, respectively. The impact of the subsidy resulted in a reduction in the 2008, 2007 and 2006 net periodic cost of $40 million, $36 million and $40 million, respectively.

Other plan information

The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of plan assets. For a more detailed presentation of the funded status of the company’s defined benefit pension plans, see above.

($ in millions)
	2008		2007
At December 31:	Benefit Obligation	Plan Assets	Benefit Obligation	Plan Assets
Plans with PBO in excess of plan assets	$75,341	$60,898	$14,472	$5,980
Plans with ABO in excess of plan assets	73,939	60,630	13,607	5,687
Plans with assets in excess of PBO	12,586	14,183	75,491	92,908