Projected Benefit Obligation (PBO)

Definition

The term projected benefit obligation refers to the present value of the retirement benefits earned by employees, using an estimate of future compensation levels.  A company's projected benefit obligation (PBO) is one of three ways to calculate expenses or liabilities associated with pension plans.  The other measures include accumulated benefit obligations (ABO) and vested benefit obligations (VBO).

Calculation

Projected Benefits Obligation, Start of Period

+ Service Costs
+ Interest Costs
+ Amortization of Prior Service Costs
+ Or - Amortization of Actuarial Gains or Losses
- Benefits Paid to Retirees

= Projected Benefit Obligation, End of Period

Explanation

Companies provide employees with a pension plan as part of a larger array of employment benefits.  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.  Generally, there are three approaches to this measure, including:  accumulated, vested, and projected benefit obligations.

Also known as PBO, the projected benefit obligation is the present value of the retirement benefits earned by plan participants.  The calculations involved in determining a company's obligation under a defined benefit plan are complex and require the skill of an actuarial to perform.  When calculating the funded status of a pension, the liabilities of the plan (PBO) are compared to the plan's assets.  Generally, the factors that can influence this projection include:

  • Service Costs (increases obligation):  the present value of the projected retirement benefits earned by the plan's participants.
  • Interest Costs (increases obligation):  the annual interest accrued on the beginning balance of the projected benefit obligation.
  • Amortization of Prior Service Costs (increases obligation): the systematic recognition of a pension's liability resulting from a retroactive change to the plan's formula.
  • Amortization of Actuarial Gains or Losses (increases or decreases obligation):  the increase or decrease to a company's estimate of their projected benefit obligation as a result of the periodic reevaluation of assumptions used when calculating the benefit.
  • Benefits Paid to Retirees (lowers obligation):  while several of the above factors can increased the company's projected benefit obligation, the obligation is reduced when benefits are paid to retirees.

Related Terms

pension plan, defined benefit plan, defined contribution plan, pension obligation, accumulated benefit obligation, vested benefit obligation, service cost, pension interest cost, amortization of prior service costactuarial gains and lossespension expensepension plan assets