Pension benefit obligation definition
/What is a Pension Benefit Obligation?
A pension benefit obligation is the present value of retirement benefits earned by employees. The amount of this obligation is determined by an actuary, based on a number of assumptions, including the following:
Estimated future pay raises
Estimated employee mortality rates
Estimated interest costs
Estimated remaining employee service periods
Amortization of actuarial gains or losses
The amount of this liability is then reduced to its present value to derive the pension benefit obligation. This amount is then compared to the current funding of a plan to determine how much additional funding is needed. This examination is useful for determining the future payout obligations of a business.
The pension benefit obligation will change over time, since it is based on a number of assumptions. Any changes in these assumptions will necessarily alter the amount of the obligation. For example, an increase in the estimated life expectancy of pension beneficiaries will increase the amount of the obligation, while a reduction in the assumed amount of future salary increases will reduce it.
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FAQs
What Factors Cause Changes in the Pension Benefit Obligation?
The pension benefit obligation changes due to several key factors, including service cost from employees earning additional benefits and interest cost from the passage of time on the obligation. It also changes when benefits are paid out, when actuarial assumptions like mortality, turnover, or discount rates shift, or when plan amendments alter benefit formulas. Actuarial gains and losses from differences between expected and actual experience further increase or decrease the PBO.