What Is a Projected Benefit Obligation (PBO)?

A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities. This ♍measurement is used to determine how much must be paid into a defined benefit pension plan to satisfy all pension entitlements that have been earned by employees up to that date, adjusted for expected future salary increases.

How a Projected Benefit Obligation (PBO) Works

Companies can provide employees with a number of benefits, including a salary, when they retire from work. The 澳洲幸运5开奖号码历🔯史查询:Financial Accounting Standards Board's (FASB) states that companies must measure and disclose their pension obligations, together with the performance of their plans, at the end of each 澳洲幸运5开奖号码历史查询:accounting period.  

A projected benefit obligation (PBO) is one of three ways to calculate expenses or liabilities of traditional defined benefit pen꧒sions—plans that take into account employee years of service and salary to calculate retirement benefits.

PBO assumes that the pension plan will not terminate in the foreseeable future and is adjusted to reflect expected compensation in the years ahead. As a result, it takes into account a n💟umber of factors, including the following:

• The estimated remaining service life of employees
•  Assumed salary rises
• A forecast of employee mortality rates

澳洲幸运5开奖号码历史查询:Actuaries are responsible for establishing whether pension plans are underfunded. These qualified professionals, who specialize in the measurement and management of risk and uncertainty, determine the benefits needed through a 澳洲幸运5开奖号码历史查询:present value calculation.

Actuaries are responsible for comparing the pension plan’s liabilities to its assets. In general✅, they pro🦋vide a breakdown of the following:

• Service costs: The increase in the present value of the defined benefit obligation, resulting from current employees getting another year's credit for their service.
• Interest costs: The annual interest accumulated on the unpaid balance of the PBO as an employee's service time increases.
• 澳洲幸运5开奖号码历史查询:Actuarial gains or losses: The difference between the pension payments made by an employer and the anticipated amount. A gain occurs if the amount paid is less than expected. A loss occurs if the amount paid is higher than expected.
• Benefits paid: Obligations are reduced when benefits are paid out.

Establishing whether a company has an 澳洲幸运5开奖号码历史查询:underfunded pension plan can be achieved by comparing pension plan assets—the investment fund referred to as the fair value of plan assets,—to the PBO. If the fair value of the plan assets is less than the benefit obligation, there is a 澳洲幸运5开奖号码历史查询:pension shortfall. The company is required to disclose this information in a footnote in its 10-K annual financial statement. 

PBO is one of the three approaches firmsꦛ use to measure and disclose🧸 pension obligations. The other measures are:

• 澳洲幸运5开奖号码历史查询:Accumulated benefit obligationℱs (ABO): Unlike PBO, accumulated benefit obligations (ABO) refers to the present value of retirement benefits earned by employees using current compensation levels.  
• 澳洲幸运5开奖号码历史查询:Vested benefit obligations (VBO): The portion of the accumulated benefit obligation that employees will receive, irrespective of their continued participation in the company's pension plan.

Example of Projected Benefit Obligations (PBO)

In December 2018, General Motors’ U.S. pension plan had a PBO of $61.2 billion, with fair value of plan assets at $56.1 billion. In othe꧒r words, th💫is means its plan was 92% funded at that time. 

Meanwhile, Ford's U.S. benefit obligation in December 2018 was $42.3 billion, while its plan assets had a fair value of $39.8 billion. That means Ford's plan was 94% funded, which is slightly better than General Motors.

Special Considerations

Although a PBO is classified as a liability on the 澳洲幸运5开奖号码历史查询:balance sheet, there is considerable criticism about whether it meets the predefined criteria to be defined as such. These criteria are the responsibility to surrender an asset from the result of the transactions taking place at a specified future date, the obligation for a company to surrender assets for the liability at some future point i🐷n time, and that the transaction resulting in the liability has already taken place.

Actuarial losses are treated differently by the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) and the FASB.