Search within this section
Select a section below and enter your search term, or to search all click peb_guide
Favorited Content
2.2 Measurement of the defined benefit obligation
Publication date: 31 Oct 2023
us Pensions guide
The projected benefit obligation and accumulated benefit obligation are measures of the obligation of a pension plan and the expected postretirement benefit obligation is a measure of the obligation of an OPEB plan.
2.2.1 Pension—Projected benefit obligation
The projected benefit obligation, or PBO, is the actuarial present value of all expected future benefit payments attributed by the pension benefit formula to employee service rendered to date. Measurement of the PBO should reflect future compensation levels to the extent that defined benefits are compensation-related, in accordance with the projected unit credit method (see PEB 2.5.1). Future compensation levels should be consistent with the formula defining the pension benefit and include an estimate of future compensation levels of individual employees covered by the plan, including changes attributed to general price levels, productivity, seniority, and promotion, depending upon the pension benefit formula. All assumptions should reflect consistent expectations of future economic conditions, such as future rates of inflation. See ASC 715-30-55-20 for information on the interplay between assumed increases in salary levels and the selection of discount rates.
Other factors, such as changes under existing law in expected social security benefits (or similar national welfare program) that, pursuant to the terms of the plan, will offset the benefits payable by the pension plan, including benefit and salary limitations, should also be estimated. As noted in ASC 715-30-55-21, if existing law provides for indexing or has a schedule of changes inherent in it, those effects should be considered; however, possible amendments of the law should not be considered.
2.2.2 Substantive pension plans
ASC 715 requires employers to account for the substantive plan, which is the substantive commitment made to employees for future benefits, which may differ from the written provisions or there may be no written provisions.
Excerpt from ASC 715-60-35-56
A past practice of regular increases in postretirement benefits defined in terms of monetary amounts may indicate that the employer has a present commitment to make future improvements to the plan and that the plan will provide monetary benefits attributable to prior service that are greater than the monetary benefits defined by the extant written plan. In those situations, the substantive commitment to increase those benefits shall be the basis for the accounting.
This is a critical aspect of defined benefit plan accounting as many arrangements are not legally protected or contractual. The objective is to account for the promise that the employer has made to provide postretirement benefits in return for current employee service.
If evidence indicates the plan sponsor has made a substantive commitment to make future plan amendments, such amendments should be included in the projected benefit obligation. A substantive commitment might be a benefit increase announced to employees, a plan amendment approved by the Board of Directors, or an unwritten policy to increase benefits. This latter situation relates primarily to non-pay-related plans when, for example, it is the entity's policy or practice to increase retirement benefits by a cost-of-living adjustment. However, a history of retroactive plan amendments does not, in and of itself, represent a "substantive commitment." See ASC 715-30-55-16 through ASC 715-30-55-19 for additional guidance in this area.
2.2.3 Pension—accumulated benefit obligation definition
The accumulated benefit obligation (ABO) is the actuarial present value of expected future benefit payments attributed by the pension benefit formula based only on the employees’ accumulated service to the measurement date. The ABO is based on the assumption that no future pension benefits, or increases in benefits based on future salary increases, will accrue in the future. The measurement technique for the ABO is the same as for the PBO, except that it focuses on past and current compensation levels, and does not incorporate assumed salary increases. It does, however, similar to the requirement to consider the substantive commitment in measuring the PBO, include automatic benefit increases specified by the plan (e.g., cost-of-living increases) that are expected to occur. In addition, contractually agreed-upon retroactive plan amendments should be included in the ABO, even if some of the provisions are not yet effective.
The ABO should be measured based on the employees' history of service and compensation. Projected years of service may be a factor if, for example, benefits earned per year increase based on achieving a specified number of years of service.
2.2.4 OPEB—expected postretirement benefit obligation definition
The expected postretirement benefit obligation (EPBO) is the actuarial present value at a particular date of the total postretirement benefits expected to be paid to employees and their dependents and beneficiaries for an OPEB plan—essentially the projected total costs of benefits to be provided in retirement. The EPBO is the basis for calculating the service cost component—the portion considered compensation—of net periodic postretirement cost and is the key estimate underlying the reported liability for an OPEB plan—the accumulated postretirement benefit obligation (APBO).
The APBO is the portion of the EPBO earned to date and not yet paid (i.e., the aggregation of the EPBO attributed to plan participants' prior service periods, together with accumulated interest thereon, less benefits paid). The portion is based on the years of service in relation to total expected years of service to the full eligibility date under the plan (see PEB 2.5.3).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
