What is 'Accumulated Benefit Obligation'

Accumulated benefit obligation (ABO) is an approximate amount of a company's pension plan liability at a single point in time. ABO is estimated based on the assumption that the pension plan is to be terminated immediately; it does not consider any future salary increases. This differs from the projected benefit obligation (PBO), which assumes that the pension plan is ongoing, and thus accounts for future salary increases.

BREAKING DOWN 'Accumulated Benefit Obligation'

Accumulated benefit obligation is the present value of the amounts that a pension plan expects to pay employees during retirement based on accumulated work service and current salary levels (i.e., no future salary increases) at the time of pension liability measurement. Changes in annual ABO are mainly determined by changes in service costs, interest costs, contributions by plan participants, actuarial gains or losses, benefits paid during the year and foreign exchange gains or losses, if applicable.

ABO and PBO are similar but ABO does not provide for future salary increases. ABO and the fair value of plan assets are compared at the end of a period. If there is a shortfall in plan assets to ABO, the pension plan is "underfunded"; the if plan assets exceed ABO, the pension plan is "overfunded." Underfunded plans are booked as a long-term liability on the balance sheet. Two major drivers of underfunded/overfunded status are the assumptions of discount rate and the expected long-term rate of return on plan assets. If there is a decline in the assumed discount rate, the estimated underfunded amount will increase (or an overfunded amount will decrease), all else equal. On the other hand, if the assumed rate of return on plan assets is increased, an underfunded amount will fall (or an overfunded amount will rise), holding all other variables constant.

Example of Accumulated Benefit Obligation

A financial statement note in Raytheon Company's 10-K for fiscal year 2016 details ABO, PBO and plan assets amounts. ABO for domestic pension plans was $22.1 billion, compared to $17.8 billion in value of its domestic pension plans, an underfunded status of $4.3 billion. This amount was recorded as part of "Accrued retiree benefits and other long-term liabilities" on the company's balance sheet.

RELATED TERMS
  1. Vested Benefit Obligation - VBO

    Vested benefit obligation is a measure of a firm's pension liability, ...
  2. Projected Benefit Obligation (PBO)

    A projected benefit obligation (PBO) is an actuarial measurement ...
  3. Overfunded Pension Plan

    An overfunded pension plan is a company retirement plan that ...
  4. Funded Status

    Funded status compares the assets to the liabilities in a pension ...
  5. Fully Funded

    "Fully funded" is a term that describes when a pension plan has ...
  6. Statement Of Changes In Net Assets ...

    A Statement Of Changes In Net Assets Available For Pension Benefits ...
Related Articles
  1. Retirement

    Can You Count On Your Pension?

    We look at how to determine the health of your company's pension plan, and what to do if things are looking grim.
  2. 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.
  3. 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. ...
  4. Financial Advisor

    How Do Pension Funds Work?

    Traditional private pension funds are well regulated by the government through ERISA and the PBGC. Alternative investments are aiding portfolio returns.
  5. Managing Wealth

    How Pensions, Social Security Differ

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Here's the lowdown.
  6. Retirement

    How to Spot Pension Fraud Before It Hurts You

    Don't let pension fraud threaten your livelihood after retirement. Here's what to watch out for.
  7. Financial Advisor

    How Capital Gains Tax Works on Pension Funds

    Here's why capital gains tax does not affect the assets in pension funds.
  8. Retirement

    Here’s How to Find a Lost Pension

    To find a lost pension, you have to figure out who is now responsible for paying it and how to claim your benefits.
  9. Personal Finance

    A Retirement Savings Lesson from Teachers

    While teachers' incomes tend to be lower than many, they are often able to retire with few financial concerns.
  10. Retirement

    Are Cash Balance Pensions the Best for Small Biz?

    Are cash balance pensions the right solution for your small business clients?
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center