What is a 'Pension Benefit Obligation - PBO'

A pension's projected benefit obligation (PBO) is an actuarial liability equal to the present value of liabilities earned and the present value of liability from future compensation increases. It measures the amount of money a company must pay into a defined-benefit pension plan to satisfy all pension entitlements that have been earned by employees up to that date, adjusted for expected future salary increase. The magnitude of the obligation is determined through a present value calculation.

!--break--A projected benefit obligation is a calculation of the total amount due to employees in the pension fund for all of the past service completed up to that date, but it assumes that the plan will not terminate in the foreseeable future and is adjusted to reflect expected future compensation increases. This can be differentiated from accumulated benefit obligation, which lacks the adjustments for expected future increases in salary. PBO is more limited than total future liability, in that total future liability accounts for expected labor that has not yet been rendered.

Theory and Calculation of PBO

Pension accounting stipulates that these retirement benefits are treated as deferred income that has already been earned. As active participants earn future benefits each year, they incur a corresponding cost known as the normal cost. Additional actuarial gains or losses can be incurred as key assumptions in the PBO calculation change. Some of the assumptions an actuary will use to calculate the PBO include the estimated remaining service life of employees, salary raises and the mortality rates of employees. An unfunded plan exists when the PBO exceeds the pension plan assets.

Consider the funded status of the pension plans for large automakers Ford Motor Company and General Motors. As of December 2015, General Motors had PBO of $71.5 billion, with fair value of plan assets at $61.1 billion, meaning the plan was 85% funded. Ford's benefit obligation at that date was $74.6 billion, while plan assets had fair value of $63.4 billion. Ford's plan was 89% funded, which is slightly better than its close peer.

Complications

Although a PBO is classified as a liability on the balance sheet, there is considerable criticism about whether it meets the predefined criteria of a liability. These criteria are the responsibility to surrender an asset from the result of the transactions taking place at a specified future date, the obligation for a company to surrender assets for the liability at some future point in time, and that the transaction resulting in the liability has already taken place. Actuarial losses are treated differently by the Internal Revenue Service and the Financial Accounting Standards Board.

BREAKING DOWN 'Pension Benefit Obligation - PBO'

RELATED TERMS
  1. Accumulated Benefit Obligation

    An approximate measure of a company's pension plan liability. ...
  2. Corridor Rule

    In financial accounting, the corridor rule is a materiality rule ...
  3. Actuarial Gain Or Loss

    Gain or loss arising from the difference between estimates and ...
  4. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  5. Actuarial Basis Of Accounting

    A method used in computing the periodic payments that a company ...
  6. Actuarial Cost Method

    A method used by actuaries to calculate the amount a company ...
Related Articles
  1. Financial Advisor

    The Defined-Benefit Plan's Many Problems

    The shift in retirement plan schemes - from defined benefit plans to defined contribution plans - raises some important issues.
  2. Retirement

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
  3. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  4. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  5. Financial Advisor

    How to Advise Clients with Frozen Pensions

    Financial advisors are on the front line in advising clients impacted by a frozen pension. Here's what they need to consider.
  6. Retirement

    Chipping Away At The Pension Freeze Trend

    Learn five steps that'll put your retirement back into your own hands.
  7. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
  8. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  9. Retirement

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  10. Retirement

    Florida's Surprisingly Flexible State Retirement System

    Retired Florida employees can choose a 401(k)-style investment plan or a traditional pension.
RELATED FAQS
  1. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Answer >>
  2. Are Canadian Pension Plans inflation-protected?

    Learn about the Canada Pension Plan and how it adjusts its contributions and benefits each year for changes in inflation ... Read Answer >>
  3. What is the difference between an expense and a liability?

    Learn what liabilities and expenses are, which financial statements they are listed on, and the differences between liabilities ... Read Answer >>
  4. Can I leave my pension to my spouse when I pass away?

    In most cases, an individual with a pension plan should have the option to leave at least a portion of his or her pension ... Read Answer >>
  5. How do pay-as-you-go pension plans work?

    Learn what a pay-as-you-go pension plan is and how it is different from fully funded pension plans. Understand how public ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center