The 2017 Pension Benefits Tables show 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 U.S. defined benefit pension plan. Mrs. Rometty, Mr. Schroeter, Dr. Kelly, and Mr. Kavanaugh have pension benefits under the U.S. defined benefit pension plan, and Mr. Clementi does not have a benefit under any IBM defined benefit pension plan.

U.S. Qualified Plan and Nonqualified Plan Descriptions – General

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. Effective January 1, 2005, the IBM Personal Pension Plan was closed to new participants.

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 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 such date.
  • 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 U.S. 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 accruals under the Qualified Plan and the continued IBM contributions under the tax-qualified defined contribution plan, the IBM 401(k) Plus Plan, reflects IBM’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 IBM’s current competition.

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

  • The benefits under the Qualified Plan for Mrs. Rometty are determined under the Pension Credit Formula. Mrs. Rometty 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 pre-determined according to 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, 2017, Mrs. Rometty 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 lump sum amount 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, Dr. Kelly’s and Mr. Kavanaugh’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, the eligible named executive officers above receive pay credits and interest credits to their respective Personal Pension Accounts. The pay credits for a year were equal to 5% of the eligible named executive officers’ eligible compensation for that year. The interest credits are based on the annual interest rate on one-year Treasury Constant Maturities plus 1%. Further, the eligible named executive officers 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 the eligible named executive officers’ 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. The eligible named executive officers 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:
    • Salary;
    • 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 2017 was $215,000 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 2017 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 U.S. 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.
  • The benefit provided to a participant is payable following a separation from service from IBM (subject to the six-month delay for “specified employees” as required under Section 409A of the Internal Revenue 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 disregarding the benefit limits.

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 IBM with respect to the payment of their Nonqualified Plan benefits.

Policy Regarding Extra Years of Credited Service

  • 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. Because accruals under the Nonqualified Plan stopped on December 31, 2007, service performed after such date is not counted.

Available Forms of Payment

Pension Credit Formula

  • A portion of the benefit that is available to Mrs. Rometty 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 benefit available to Mrs. Rometty under the Nonqualified Plan may only be paid as an annuity.

Personal Pension Account

  • Under the terms of the Qualified Plan, the entire benefit may be paid as a lump sum.
  • Under the terms of the Nonqualified Plan, Mr. Schroeter’s entire Nonqualified Plan benefit must be paid as a mandatory lump sum. Dr. Kelly and Mr. Kavanaugh have elected to receive their Nonqualified Plan benefit in a lump sum immediately following separation from service.
  • The maximum lump sum amount that the eligible named executive officers could have elected to receive under the Qualified Plan and Nonqualified Plan, as of January 1, 2018 if they had a separation from service from IBM on December 31, 2017 was equal to:
    Maximum Lump Sum  
Name Qualified Plan Nonqualified Plan Total Available Lump Sum
V.M. Rometty $493,391 N/A $493,391
M.J. Schroeter 63,185 21,530 84,715
J.E. Kelly III 454,963 989,328 1,444,291
J.J. Kavanaugh 161,218 69,759 230,977
       
  • 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 eligible named executive officers is below. Because Mr. Schroeter, Dr. Kelly and Mr. Kavanaugh will receive a lump sum payment for their Nonqualified Plan benefits, no amount is represented for them in the Nonqualified Plan column below:
    Annual Pension Benefit at
Normal Retirement Age
 
Name Qualified Plan Nonqualified Plan Total Benefit
V.M. Rometty $82,083 $342,761 $424,844
M.J. Schroeter 5,923 N/A 5,923
J.E. Kelly III 33,326 N/A 33,326
J.J. Kavanaugh 15,475 N/A 15,475
       

Present Value of Accumulated Benefit

  • The present value of accumulated benefit is the value as of December 31, 2017 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 of accumulated benefits. Those assumptions are described immediately following the 2017 Pension Benefits Table.

2017 Pension Benefits Table

As noted in the General Description and Purpose to the 2017 Retention Plan Narrative, the 2017 Pension Benefits Table does not include amounts reflected in the 2017 Retention Plan Table.

Name
(a)
Plan Name
(b)
Number of Years Credited Service(1)
(#)
(c)
Present Value of Accumulated Benefit(2)
($)
(d)
Payments During Last Fiscal Year
($)
(e)
V.M. Rometty Qualified Plan 26 $1,095,989 $0
  Nonqualified Plan   4,576,589 0
  Total Benefit   $5,672,578 $0
M.J. Schroeter Qualified Plan 4 $57,325 $0
  Nonqualified Plan   18,988 0
  Total Benefit   $76,313 $0
J.E. Kelly III Qualified Plan 27 $459,385 $0
  Nonqualified Plan   977,063 0
  Total Benefit   $1,436,448 $0
J.J. Kavanaugh Qualified Plan 12 $140,390 $0
  Nonqualified Plan   60,275 0
  Total Benefit   $200,665 $0
         

(1) Reflects years of credited service as of December 31, 2007, which was the date accruals under the Qualified Plan and the Nonqualified Plan stopped. Each of the named executive officers in this table has ten additional years of service with IBM after that date.

(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, 2017 for each eligible named executive officer:

  • Measurement date: December 31, 2017
  • Interest rate for present value: 3.4%
  • To determine Personal Pension Account benefit:
    • Interest crediting rate: 2.3% for 2018 and after
    • Interest rate to convert Personal Pension Account balance to single life annuity: 1.98% for years 1–5, 3.5867% for years 6–20, and 4.3267% for year 21 and after
    • Mortality table to convert Personal Pension Account balance to single life annuity is 2018 Personal Pension Account Optional Combined Unisex Table
  • Mortality (pre-commencement): None
  • Mortality (post-commencement):
    • Base Table: Modified RP-2014 White Collar sexdistinct annuitant tables with adjustment to 2011 by backing out MP-2014 improvement and further adjusting the mortality rates at each age (averaging approximately 1.06)
    • Improvement Scale: A modified Scale MP-2017 projection table starting in 2011 for healthy mortality. The modified table is based on the RPEC 2014 v 2017 model, with the same 20 year diagonal convergence period and 10 year horizontal 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 IBM Personal Pension Plan
  • Assumed Retirement Age: Later of Age 60 for Retention Plan, Age 65 for IBM Personal 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, 2016:

  • The column titled Change in Pension Value in the 2017 Summary Compensation Table quantifies the change in the present value of the pension benefit from December 31, 2016 to December 31, 2017
  • To determine the present value of the pension benefit as of December 31, 2016, the same assumptions that are described above to determine the present value as of December 31, 2017 were used, except a (1) 3.8% interest rate and Modified MP-2016 improvement scale, and (2) to determine the Personal Pension Account benefit, the following were used:
    • Interest crediting rate: 1.6% for 2017 and after
    • Interest rate to convert Personal Pension Account balance to single life annuity: 1.4767% for years 1–5, 3.3533% for years 6-20, and 4.29% for year 21 and after
    • Mortality table for Personal Pension Account balance conversion: 2017 Personal Pension Account Optional Combined Unisex Table