What is a Projected Benefit Obligation?

A projected benefit obligation (PBO) is the estimated present value of an employee's pension, under the assumption that the employee continues to work for the employer. This information is needed by the employer to account for its pension liability, where the present value of this obligation satisfies all pension benefits earned by employees through the date of this calculation.

The projected benefit obligation is only needed when the pension is of the defined benefit variety. This concept is not needed when an employer has a defined contribution plan. In a defined contribution plan, the employer is only responsible for employer-matched funds that are provided to a pension when an employee pays into the plan.

The PBO is usually prepared and periodically updated by a third-party actuarial service.

Calculation of the Projected Benefit Obligation

The calculation of the PBO takes into account a number of factors, including assumed increases in employee pay in the future, which will increase the amount of the pension liability. The calculation also includes an estimate of employee mortality rates, where an increased mortality rate will reduce the amount of the pension liability. In addition, the calculation includes the amount of service already completed by employees. These estimates will vary over time, and so can result in significant changes in the PBO from year to year.