Pension Obligation

Definition

The term pension obligation can refer to one of three different ways to measure the future expenses or liabilities associated with a pension plan.  Generally, pension obligations can be stated in terms of accumulated, vested, and projected benefits.

Explanation

Companies will provide employees with a pension plan as part of a larger array of employment benefits.  Pension plans are structured by companies to provide a periodic and reliable source of income when the employee reaches the plan's normal retirement age.

The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period.  The calculations involved in determining a company's obligation under a defined benefits plan are complex and require the skill of an actuarial to perform.  Generally, pension obligations can be measured in the following ways:

  • Accumulated Benefit Obligation (ABO):  the present value of retirement benefits earned by employees, using current compensation levels.
  • Vested Benefit Obligation (VBO): the portion of the accumulated benefit obligation that employees will receive regardless of their continued participation in the pension plan.
  • Projected Benefit Obligation (PBO): the present value of retirement benefits earned by employees, using an estimate of future compensation levels.

Related Terms

pension plan, defined benefits plan, defined contributions plan, accumulated benefit obligation, vested benefit obligation, projected benefit obligation, pension service cost, pension interest cost, return on plan assets, amortization of prior service cost