DEFINITION of Accrued Monthly Benefit
An accrued monthly benefit is the earned pension benefit that an employee receives at regular retirement age. The accrued monthly benefit is based on the employee's years of service through the accrual date and is paid to pension holders each month, following retirement.
BREAKING DOWN Accrued Monthly Benefit
The accrued monthly benefit is based on the employee's years (or units) of service. Most pension plans can calculate the accrued monthly benefit that an employee will receive, based on a number of different cut-off dates (the date the employee will terminate his or her employment and retire). In addition, many employers issue annual benefits statements that specify an employee's accrued monthly pension benefit.
Employees are often not eligible for such a benefit until a vesting period is underway or completed. While vesting can also apply to inheritance law and real estate, with regard to retirement plan benefits, vesting gives an employee rights to employer-provided assets over time. The purpose of a vesting schedule is to incentivize the employee to perform well and remain with the company.
Accrued Monthly Benefit and Pension Benefit Obligation
A company’s pension benefit obligation (PBO) is the accrued benefits that it owes to its employees. This 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 employees have earned to date, adjusted for the expected future salary increase.
A PBO can be an enormous liability for a company that has not set aside enough funds or managed its investments well enough to pay employees at retirement. Many DC plans opt for the services of an asset manager like J.P. Morgan or Neuberger Berman. These managers will take employee contributions and manage them for a range of objectives, such as capital preservation or modest growth via several investment strategies that they have built out or acquired over time. Managers that advise pension funds generally adopt lower risk strategies to avoid losing employees’ wealth.
It’s important to note a pension’s funded status, as well. This describes how much of a pension plan is funded for employee benefit purposes. For example, in April 2018, the CalPERS (California Public Employees’ Retirement System) fund had a funded status of 68% at of the end of the June 30 fiscal year. This was flat from its 68.3% on June 30, 2016, according to the plan’s reports. In April 2018, the size of the CalPERS fund was $351.5 billion.