Retirement-Related Benefits:

3 Months Ended

Mar. 31, 2014

8. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the total retirement-related benefit plans’ impact on income before income taxes:

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Retirement-related plans – cost
	Defined benefit and contribution pension plans – cost	$	474	$	674		(29.6)	%
	Nonpension postretirement plans – cost		67		80		(16.0)
	Total	$	541	$	754		(28.2)	%

The following tables provide the components of the cost/(income) for the company’s pension plans:

Cost/(Income) of Pension Plans

(Dollars in millions)		U.S. Plans				Non-U.S. Plans
For the three months ended March 31:		2014		2013		2014		2013
Service cost		$	—	$	—	$	116	$	131
Interest cost			555		496		390		382
Expected return on plan assets			(1,024)		(995)		(572)		(554)
Amortization of prior service costs/(credits)			2		2		(29)		(31)
Recognized actuarial losses			269		451		360		404
Curtailments and settlements			—		—		4		0
Multi-employer plans/other costs			—		—		79		30
Total net periodic pension (income)/cost of defined
	benefit plans		(198)		(46)		348		363
Cost of defined contribution plans			191		206		133		151
Total defined benefit and contribution plans cost recognized
	in the Consolidated Statement of Earnings	$	(7)	$	160	$	481	$	514

On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contributions plans. See page 35 for additional information. As a result of the ruling, the company recorded an additional pre-tax retirement-related obligation of $55 million in the first quarter of 2014 in selling, general and administrative expense in the Consolidated Statement of Earnings. This charge is not reflected in operating (non-GAAP) expense. This obligation is reflected in "Non-U.S. Plans - Multi-employer plans/other costs" in the table above. To date, the rulings in this case are declaratory only and there have been no quantifications of any individual remedies.

In March 2014, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2014 target asset allocation was modified, primarily by reducing equity securities from 42 percent to 32 percent, and increasing debt securities from 47 percent to 57 percent of total plan assets, respectively. The asset allocation change was substantially completed by March 31, 2014. This change is designed to reduce the potential negative impact that equity markets might have on the funded status of the U.S. defined benefit plan. The change is expected to reduce the 2015 expected long-term rate of return on assets to approximately 7.75 percent. See note S, "Retirement-Related Benefits," on page 135 in the company's 2013 Annual Report for additional information regarding the company's investment strategy.

In 2014, the company expects to contribute to its non-U.S. defined benefit and multi-employer plans approximately $600 million, which will be mainly contributed to the defined benefit pension plans in Japan, the UK, Switzerland and the Netherlands. This amount represents the legally mandated minimum contributions. Total net contributions to the non-U.S. plans in the first three months of 2014 were $126 million.

The following table provides the components of the cost/(income) for the company's nonpension postretirement plans:

Cost of Nonpension Postretirement Plans
		U.S. Plan				Non-U.S. Plans
(Dollars in millions)		2014		2013		2014		2013
For the three months ended March 31:
Service cost		$	7	$	9	$	2	$	3
Interest cost			45		42		16		16
Expected return on plan assets			0		(0)		(2)		(2)
Amortization of prior service costs/(credits)			(2)		—		(1)		(1)
Recognized actuarial losses			0		8		3		6
Total nonpension postretirement plan cost recognized in
	Consolidated Statement of Earnings	$	50	$	58	$	17	$	22

In connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the ‘Act’), the company qualified to receive a subsidy through 2013. Due to benefit plan changes effective January 1, 2014, the company no longer qualifies for the subsidy as of that date. The company is expected to receive additional subsidies after 2013 to true up the final subsidy amount due to IBM under the Act. The company received a $5.4 million subsidy in the first quarter of 2014 and a $6.1 million subsidy in the first quarter of 2013. For further information related to the Act, see page 141 in the company’s 2013 Annual Report.