Projected Benefit Obligation (PBO)

What Is a Projected Benefit Obligation (PBO)?

A projected benefit obligation (PBO) is an actuarial measurement of what a company will require right now to cover future pension liabilities. This measurement is utilized to decide how much must be paid into a defined benefit pension plan to fulfill all pension privileges 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 furnish employees with a number of benefits, including a salary, when they retire from work. The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 87 states that companies must measure and uncover their pension obligations, along with the performance of their plans, toward the finish of each accounting period.

A projected benefit obligation (PBO) is one of three methods for computing expenses or liabilities of traditional defined benefit pensions — plans that take into account employee long stretches of service and salary to work out retirement benefits.

PBO accepts that the pension plan won't end in the foreseeable future and is adjusted to reflect expected compensation in the years ahead. Subsequently, it takes into account a number of factors, including the accompanying:

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

Actuaries are responsible for laying out whether pension plans are underfunded. These qualified experts, who specialize in the measurement and management of risk and vulnerability, decide the benefits required through a present value calculation.

Actuaries are responsible for contrasting the pension plan's liabilities with its assets. As a rule, they give a breakdown of the accompanying:

Service costs: The increase in the current value of the defined benefit obligation, coming about because of current employees getting one more 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.
Actuarial gains or losses: The difference between the pension payments made by an employer and the anticipated amount. An increase happens in the event that the amount paid is not exactly expected. A misfortune happens on the off chance that the amount paid is surprisingly high.
Benefits paid: Obligations are decreased when benefits are paid out.

Laying out whether a company has a underfunded pension plan can be accomplished by contrasting pension plan assets — the investment fund alluded to as the fair value of plan assets, — to the PBO. On the off chance that the fair value of the plan assets is not exactly the benefit obligation, there is a pension shortfall. The company is required to unveil this data in a commentary in its 10-K annual financial statement.

PBO is one of the three methodologies firms use to measure and uncover pension obligations. Different measures are:

Accumulated benefit obligations (ABO): Unlike PBO, accumulated benefit obligations (ABO) alludes to the current value of retirement benefits earned by employees utilizing current compensation levels.
Vested benefit obligations (VBO): The portion of the accumulated benefit obligation that employees will receive, regardless of their proceeded with participation in the company's pension plan.

Illustration 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. As such, this means its plan was 92% funded around then.

In the interim, 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 somewhat better than General Motors.

Special Considerations

Albeit a PBO is classified as a liability on the balance sheet, there is extensive analysis about whether it meets the predefined criteria to be defined thusly. These criteria are the responsibility to surrender an asset from the consequence of the transactions taking place at a predetermined future date, the obligation for a company to surrender assets for the liability at some future point in time, and that the transaction bringing about the liability has proactively taken place.

Actuarial losses are dealt with diversely by the Internal Revenue Service (IRS) and the FASB.

Features

Projected benefit obligation (PBO) accepts that the plan won't end in the foreseeable future and is adjusted to reflect expected compensation in the years ahead.
A projected benefit obligation (PBO) is an actuarial measurement of what a company will require right now to cover future pension liabilities.
Actuaries are responsible for utilizing the projected benefit obligation (PBO) to ascertain whether pension plans are underfunded.