A pension obligation representing the aggregate present value of both vested and non-vested benefits at present pay levels is called the: Vested benefit obligation. Retiree benefit obligation. Projected benefit obligation. Accumulated benefit obligation.
The Correct Answer and Explanation is:
The correct answer is: Accumulated Benefit Obligation (ABO).
The Accumulated Benefit Obligation (ABO) refers to the present value of pension benefits earned by employees based on their service up to a certain date, using current pay levels. It is the total amount of pension obligation that has been accrued to date, considering all employees, both vested and non-vested, at the current salary levels.
Here’s a breakdown of the terms to help clarify why the ABO is the correct answer:
- Vested Benefit Obligation (VBO): This only includes the benefits that have already vested, meaning employees are entitled to them regardless of whether they remain with the company. It does not include non-vested benefits.
- Retiree Benefit Obligation (RBO): This is the obligation related specifically to the pension benefits for employees who are already retired, so it doesn’t account for active employees or non-vested employees.
- Projected Benefit Obligation (PBO): This represents the present value of pension benefits earned by employees, but it uses projected future salary levels rather than current pay. It includes both vested and non-vested benefits, and it is based on the assumption that employees’ future pay increases will be factored into the pension calculation.
- Accumulated Benefit Obligation (ABO): As mentioned, the ABO represents the total present value of pension benefits that employees have earned to date, using current pay levels. It includes both vested and non-vested benefits, making it a broader measure than the VBO, but it does not project future salary increases, which distinguishes it from the PBO.
In summary, the ABO is a snapshot of the pension obligation using current pay levels, regardless of future salary projections, and includes both vested and non-vested benefits. It’s one of the key measures used in pension accounting.
