IBM Notice of 2009 Annual Meeting and Proxy Statement

2008 Pension benefits narrative

The 2008 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 IBM Personal Pension Plan consists of a tax-qualified plan and a non-tax qualified plan. Effective January 1, 2008, the non-tax qualified plan was renamed the IBM Excess Personal Pension Plan and is referred to herein as the Nonqualified Plan and the tax-qualified plan is referred to as the Qualified Plan. The combined plan is referred to herein as the IBM Personal Pension Plan.

IBM personal pension plan and IBM excess personal pension plan descriptions — general

Plan description

• Effective July 1, 1999, IBM amended the IBM Personal Pension 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 IBM Personal Pension Plan was closed to new participants.
• Accrual of future benefits under the IBM Personal Pension Plan stopped on December 31, 2007. Accordingly, a participant’s pension benefit does not consider pay earned and service credited after December 31, 2007.
• The Qualified Plan provides funded, tax-qualified benefits up to the limits on compensation and benefits under the Internal Revenue Code.
• The Nonqualified Plan provides unfunded, nonqualified benefits in excess of the limits on compensation.

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.
• 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, on eligible pay up to the compensation limits of the Internal Revenue Code. Under the new plan, participants are eligible for Company contributions up to 10% of eligible pay, depending on their pension plan formula participation as of December 31, 2007 and the amount they contributed to the plan. In 2008, each named executive officer received Company contributions equal to 10% of total eligible pay.
• The cessation of accruals under the IBM Personal Pension Plan and the replacement of Qualified Plan accruals with contributions under the new tax-qualified 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 all of the named executive officers are determined under the Pension Credit Formula. Each of the 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, prior to 2008.
• 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 or her 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, 2008, Mr. Palmisano, Mr. Loughridge, Mr. Daniels and Mr. Mills had attained early retirement age, and Ms. Rometty had not.
• Under the Pension Credit Formula, an executive who terminates employment and whose pension benefit commences before his or her normal retirement age will receive smaller monthly annuity payments than if his or her benefit commences at normal retirement age.
• Instead of receiving his or her 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.

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 Excess 401(k) Plus Plan (formerly the Executive Deferred Compensation Plan).
• Equity compensation — stock options, RSUs, RRSUs and PSUs — was excluded from eligible compensation.
• Compensation for a year was limited to the compensation limit under the Internal Revenue Code. For 2007, the compensation limit was $225,000. In addition, benefits provided under the Qualified Plan may not exceed an annual benefit limit under the Internal Revenue Code (which was $185,000 payable as a single life annuity beginning at normal retirement age in 2008).

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. Because accruals under the Qual­ified Plan stopped on December 31, 2007, service credited after such date is not counted.

IBM excess personal pension plan (nonqualified plan)

Purpose of the Nonqualified Plan

• The Nonqualified 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.
• The benefit provided to a named executive officer is payable only as an annuity beginning on the first day of the month following termination of employment (subject to the six-month delay for “specified employees” as required under Section 409A of the Code).

Material terms and conditions of the nonqualified plan

The Nonqualified 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.

Nonqualified plan funding

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

Policy regarding extra years of credited service

The Company’s policy with respect to the Nonqualified 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 each of the named executive officers under the Qualified Plan may be paid as a lump sum. The portion is determined on the benefit that was earned before January 1, 2000.
• The maximum lump sum amount that the named executive officers could have elected to receive as of January 1, 2009 if they had terminated employment on December 31, 2008 was equal to:
  
  

  	Maximum Lump Sum
  Name	Qualified Plan	Nonqualified Plan	Total Available Lump Sum
  S.J. Palmisano	$577,300	$0	$577,300
  M. Loughridge	315,370	0	315,370
  M.E. Daniels	341,889	0	341,889
  S.A. Mills	556,126	0	556,126
  V.M. Rometty	226,681	0	226,681

• 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:

	Annual Pension Benefit at Normal Retirement Age
Name	Qualified Plan	Nonqualified Plan	Total Benefit
S.J. Palmisano	$93,043	$3,113,737	$3,206,780
M. Loughridge	85,717	613,407	699,124
M.E. Daniels	88,036	416,355	504,391
S.A. Mills	92,479	594,573	687,052
V.M. Rometty	81,390	342,761	424,151

Present value of accumulated benefit

• The present value of accumulated benefit is the value as of December 31, 2008 of the annual pension benefit that was earned as of December 31, 2007.
• The annual pension benefit is the benefit that is payable for the named executive officer’s life beginning at his or her normal retirement age.
• The normal retirement age is defined as the later of age 65 or the completion of one year of service.
• Certain assumptions were used to determine the present value and to determine the annual pension that is payable beginning at normal retirement age. Those assumptions are described immediately following the 2008 Pension Benefits Table.

2008 Pension benefits table

As noted in the Introduction and Purpose to the 2008 Retention Plan Narrative, the 2008 Pension Benefits Table does not include amounts reflected in the 2008 Retention Plan Table.

Name (a)	Plan Name (b)	Number of Years Credited Service (#) (c)	Present Value of Accumulated Benefit ($)(1) (d)	Payments During Last Fiscal Year ($) (e)
(1) While the accruals under the Qualified Plan and the Nonqualified Plan stopped on December 31, 2007, the value of the Qualified Plan and Nonqualified Plan benefits will continue to change based on the ages of the named executive officers and the assumptions used to calculate the present value of the accumulated benefit.
S.J. Palmisano	Qualified Plan	34	$687,744	$0
	Nonqualified Plan		23,015,815	0
	Total Benefit		23,703,559	0
M. Loughridge	Qualified Plan	30	553,520	0
	Nonqualified Plan		3,961,092	0
	Total Benefit		4,514,612	0
M.E. Daniels	Qualified Plan	32	547,692	0
	Nonqualified Plan		2,590,254	0
	Total Benefit		3,137,946	0
S.A. Mills	Qualified Plan	34	680,397	0
	Nonqualified Plan		4,374,462	0
	Total Benefit		5,054,859	0
V.M. Rometty	Qualified Plan	26	459,564	0
	Nonqualified Plan		1,935,372	0
	Total Benefit		2,394,936	0

Assumptions to determine present value as of December 31, 2008:

• Measurement date: December 31, 2008
• Interest rate for present value: 5.75%
• Mortality (pre-commencement): None
• Mortality (post-commencement): 1994 US GAM Male or Female table with 25 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 beginning on the first day of the month following termination of employment. The six-month delay under the Nonqualified Plan for “specified employees” as required under Section 409A of the Code was disregarded for this purpose.
• 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 precise credited service and compensation history which will be determined at termination of employment.

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

• The column titled Change in Pension Value in the 2008 Summary Compensation Table quantifies the change in the present value of the pension benefit from December 31, 2007 to December 31, 2008.
• To determine the present value of the pension benefit as of December 31, 2007, the same assumptions that are described above to determine present value as of December 31, 2008 were used, except a 6.00% interest rate and the 1994 US GAM Male or Female table with 20 year improvement for post-commencement mortality were used to determine present value.