The 2014 Pension Benefits Table shows the number of years of credited service, present value of accumulated benefit and payments during the last fiscal year for each eligible named executive officer under the IBM Personal Pension Plan. Effective January 1, 2005, the IBM Personal Pension Plan was closed to new participants. Mr. Keverian was hired after the IBM Personal Pension Plan was closed and therefore, he is not eligible for an IBM Personal Pension Plan benefit.
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.
Qualified Plan and Nonqualified Plan Descriptions—General
- 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 formulas, including the Pension Credit Formula.
- 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 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 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 contribute to the plan. In 2014, Mrs. Rometty and Mr. Mills, received Company contributions equal to 10% of eligible pay. Mr. Kelly received Company contributions equal to 8% of eligible pay. Mr. Schroeter received Company contributions equal to 6% of eligible pay. Mr. Keverian is not yet eligible to receive Company contributions because as of December 15, 2014 he had not completed the one-year service requirement.
- 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 Mrs. Rometty and Mr. Mills are determined under the Pension Credit Formula. Both 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, 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, participants 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 participant 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, 2014, the named executive officers noted above had attained early retirement age.
- Under the Pension Credit Formula, a participant 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 participant 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 participant earned before January 1, 2000.
Material Terms and Conditions: Personal Pension Account Formula under the Qualified Plan
- Mr. Schroeter’s and Mr. Kelly’s benefit under the Qualified Plan is determined under the Personal Pension Account formula which is a cash balance formula.
- According to the terms of the Qualified Plan, under the Personal Pension Account formula prior to 2008, Mr. Schroeter and Mr. Kelly receive pay credits and interest credits to their respective Personal Pension Accounts. The pay credits for a year were equal to 5% of Mr. Schroeter’s and Mr. Kelly’s eligible compensation for that year. The interest credits are based on the annual interest rate on one-year Treasury Constant Maturities plus 1%. Further, Mr. Schroeter and Mr. Kelly may receive their benefit under the Personal Pension Account formula at any time following termination of employment, but may not defer the commencement of the benefit later than normal retirement age. If Mr. Schroeter’s or Mr. Kelly’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. Schroeter and Mr. Kelly may receive their benefit in the following forms: a lump sum equal to the Personal Pension Account balance, an annuity that is actuarially equivalent to the Personal Pension Account balance, or both a partial lump sum and a reduced annuity.
Compensation Elements Included in Calculations
- Prior to 2008, eligible compensation was generally equal to the total amount that is included in income including:
−Recurring payments under any form of variable compensation plan (excluding stock options and other equity awards); and
−Amounts deducted from salary and variable compensation under IBM’s Internal Revenue Code Section 125 plan (cafeteria plan), and amounts deferred under IBM’s 401(k) Plus Plan and Excess 401(k) Plus 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 last year that benefits accrued under the Qualified Plan 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 in 2014 was $210,000 payable as an annual single life annuity beginning at normal retirement age).
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 Qualified Plan.
- The years of credited service for the eligible named executive officers are based only on their service while eligible for participation in the Qualified Plan. In 2005, Mr. Schroeter left IBM U.S. and became an executive of IBM Australia, and therefore, Mr. Schroeter’s years of credited service for benefit calculations in the 2014 Pension Benefits Table are based only on his service with IBM U.S. Because accruals under the Qualified Plan stopped on December 31, 2007, service performed after such date is not counted for any named executive officer.
IBM Excess Personal Pension Plan (Nonqualified Plan)
Purpose of the Nonqualified Plan
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 disregarding the benefit limits.
Nonqualified Plan Funding
Policy Regarding Extra Years of Credited Service
Available Forms of Payment
Pension Credit Formula
Personal Pension Account
|Maximum Lump Sum|
|Name||Qualified Plan||Nonqualified Plan||Total Available Lump Sum|
|J.E. Kelly III||437,240||950,790||1,388,030|
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 eligible named executive officers is below. Because Mr. Schroeter and Mr. Kelly will receive a lump sum payment for their Nonqualified Plan benefits, no amount is represented in the Nonqualified Plan column below:
|Annual Pension Benefit at
Normal Retirement Age
|Name||Qualified Plan||Nonqualified Plan||Total Benefit|
|J.E. Kelly III||34,893||N/A||34,893|
Present Value of Accumulated Benefit
- The present value of accumulated benefit is the value as of December 31, 2014 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 eligible 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 of accumulated benefits. Those assumptions are described immediately following the 2014 Pension Benefits Table.
2014 Pension Benefits Table
As noted in the Introduction and Purpose to the 2014 Retention Plan Narrative, the 2014 Pension Benefits Table does not include amounts reflected in the 2014 Retention Plan Table.
|Number of Years Credited Service(1)
|Present Value of Accumulated Benefit(2)
|Payments During Last Fiscal Year
|V.M. Rometty||Qualified Plan||26||$965,235||$0|
|M.J. Schroeter||Qualified Plan||4||$43,127||$0|
|S.A. Mills||Qualified Plan||34||$1,283,754||$0|
|J.E. Kelly III||Qualified Plan||27||$402,245||$0|
(2) 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 for the eligible named executive officers will continue to change based on their ages and the assumptions used to calculate the present value of the accumulated benefit.
Assumptions to determine present value as of December 31, 2014 for each eligible named executive officer:
- Measurement date: December 31, 2014
- Interest rate for present value: 3.7%
- To determine Personal Pension Account benefit:
- Interest crediting rate: 1.1% for 2015 and after
- Interest rate to convert Personal Pension Account balance to single life annuity: 1.31% for years 1–5, 3.8833% for years 6–20, and 4.96% for year 21 and after
- Mortality table to convert Personal Pension Account balance to single life annuity is 2015 Personal Pension Account Optional Combined Unisex Table
- Mortality (pre-commencement): None
- Mortality (post-commencement):
- Base Table: Modified RP-2014 White Collar sex-distinct tables for annuitants based on IBM experience. The RP-2014 White Collar tables are modified by multiplying the mortality rates at each age by adjustment factors averaging approximately 1.06, based on retiree mortality experience for the period 2009–2013.
- Improvement Scale: A modified Scale MP-2014 projection table. The modified table is based on the RPEC_2014 model, with the same 20 year convergence period and underlying weighting percentages for the age/period and year-of-birth cohort periods. The long-term improvement rates are 0.75% up to age 85, linearly decreasing to 0.0% at age 115.
- Withdrawal rates: None
- Retirement rates: None prior to Assumed Retirement Age
- Normal Retirement Age: Age 60 for Retention Plan, Age 65 for Pension Plan
- Assumed Retirement Age: Later of Age 60 for Retention Plan, Age 65 for Pension Plan, 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 a separation from service from IBM. The six-month delay under the Nonqualified Plan for “specified employees” as required under Section 409A of the Internal Revenue 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 separation from service from IBM.
Assumptions to determine present value as of December 31, 2013:
- The column titled Change in Pension Value in the 2014 Summary Compensation Table quantifies the change in the present value of the pension benefit from December 31, 2013 to December 31, 2014.
- To determine the present value of the pension benefit as of December 31, 2013, the same assumptions that are described above to determine the present value as of December 31, 2014 were used, except a (1) 4.5% interest rate and the RP 2000 Combined Healthy Mortality, sex distinct with 41 year improvement using scale AA mortality table, and (2) to determine the Personal Pension Account benefit, the following were used:
- Interest rate to convert Personal Pension Account balance to single life annuity: 1.3333% for years 1–5, 4.5767% for years 6–20, and 5.5733% for year 21 and after
- Mortality table for Personal Pension Account balance conversion: 2014 Personal Pension Account Optional Combined Unisex Table.