Retirement-Related Benefits

3 Months Ended

Mar. 31, 2016

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 tables provide the pre-tax cost for all retirement-related plans

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2016		2015		Change
Retirement-related plans – cost
	Defined benefit and contribution pension plans – cost	$	439	$	749		(41.4)	%
	Nonpension postretirement plans – cost		60		71		(15.9)
	Total	$	499	$	820		(39.2)	%

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:		2016		2015		2016		2015
Service cost		$	—	$	—	$	104	$	108
Interest cost			513		508		262		271
Expected return on plan assets			(922)		(989)		(470)		(483)
Amortization of prior service costs/(credits)			3		2		(25)		(25)
Recognized actuarial losses			333		415		347		401
Curtailments and settlements			—		—		5		4
Multi-employer plans/other costs			—		—		18		248
Total net periodic pension (income)/cost of defined
	benefit plans		(74)		(64)		241		524
Cost of defined contribution plans			165		173		106		115
Total defined benefit and contribution plans cost recognized
	in the Consolidated Statement of Earnings	$	91	$	109	$	348	$	640

On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contribution plans. As a result of the ruling, the company recorded pre-tax retirement-related obligations of $233 million in 2015 ($230 million in the first quarter of 2015) in selling, general and administrative expense in the Consolidated Statement of Earnings. These obligations are reflected in "Non-U.S. Plans - Multi-employer plans/other costs" in the table above.

In March 2016, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2016 target asset allocation was modified by reducing equity securities from 34 percent to 21 percent, other investments from 10 percent to 9 percent and increasing debt securities from 56 percent to 70 percent of total plan assets. This change is designed to reduce the risk associated with 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 2017 expected long-term rate of return on assets from 7.00 percent to approximately 6.25 percent. See note S, “Retirement-Related Benefits,” on page 135 in the company’s 2015 Annual Report for additional information regarding the company’s investment strategy.

In 2016, the company expects to contribute approximately $500 million to its non-U.S. defined benefit and multi-employer plans, the largest of which will be contributed to the defined benefit pension plans in the UK and Japan. This amount represents the legally mandated minimum contribution. Total net contributions to the non-U.S. plans in the first three months of 2016 were $107 million, of which $65 million was in cash and $42 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

The following tables provide the components of the cost/(income) for the company's nonpension postretirement plans.

Cost of Nonpension Postretirement Plans

(Dollars in millions)		U.S. Plan				Non-U.S. Plans
For the three months ended March 31:		2016		2015		2016		2015
Service cost		$	5	$	6	$	1	$	2
Interest cost			41		41		10		14
Expected return on plan assets			—		0		(1)		(2)
Amortization of prior service costs/(credits)			(2)		(2)		(1)		(1)
Recognized actuarial losses			5		11		2		3
Total nonpension postretirement plan cost recognized in
	Consolidated Statement of Earnings	$	49	$	56	$	11	$	15

The company contributed $100 million in U.S. Treasury securities and $126 million in cash to the U.S. nonpension postretirement benefit plan during the first quarter ended March 31, 2016 and 2015, respectively. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.