Projected Benefit Obligation Definition - AccountingTools

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What is a Projected Benefit Obligation?

A projected benefit obligation (PBO) is the estimated present value of an employee's pension, under the assumption that the employee continues to work for the employer. This information is needed by the employer to account for its pension liability, where the present value of this obligation satisfies all pension benefits earned by employees through the date of this calculation.

The projected benefit obligation is only needed when the pension is of the defined benefit variety. This concept is not needed when an employer has a defined contribution plan. In a defined contribution plan, the employer is only responsible for employer-matched funds that are provided to a pension when an employee pays into the plan.

The PBO is usually prepared and periodically updated by a third-party actuarial service.

Calculation of the Projected Benefit Obligation

The calculation of the PBO takes into account a number of factors, including assumed increases in employee pay in the future, which will increase the amount of the pension liability. The calculation also includes an estimate of employee mortality rates, where an increased mortality rate will reduce the amount of the pension liability. In addition, the calculation includes the amount of service already completed by employees. These estimates will vary over time, and so can result in significant changes in the PBO from year to year.

Related AccountingTools Course

Accounting for Retirement Benefits

Sample Presentation of a Projected Benefit Obligation

The following disclosure could be included in a reporting entity’s financial statements regarding its projected benefit obligation:

The Company sponsors defined benefit pension plans that provide pension benefits to eligible employees based on years of service and final average compensation. The plans are unfunded and funded, depending on the jurisdiction. The Company’s obligations under these plans are subject to actuarial valuation.

Actuarial gains and losses arise from changes in assumptions, including the discount rate and demographic assumptions, as well as differences between actual and expected experience. These are recognized through [OCI/Net Periodic Benefit Cost, depending on policy].

Changes in the assumptions used to measure the PBO could have a significant impact on the obligation. A 25-basis-point increase/(decrease) in the discount rate would result in a decrease/(increase) in the PBO of approximately [$X million].

FAQs

How Does PBO Differ From Accumulated Benefit Obligation (ABO)?

The accumulated benefit obligation (ABO) measures the present value of pension benefits earned to date, assuming current salary levels remain unchanged. The projected benefit obligation (PBO), by contrast, includes not only benefits already earned but also anticipated future salary increases, which makes it a more forward-looking measure. Because of this, the PBO is usually larger than the ABO and provides a more comprehensive picture of a company’s pension liability.

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Net Periodic Pension Cost

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