What Is an Accumulated Benefit Obligation?

An accumulated benefit obligation (ABO) is an estimate of the current value of an employee's pension plan, on the basis of contributions made up to that date. An actuary can make this estimate on the basis of the assumption that the pension payouts start immediately, in contrast with a projected benefit obligation, which looks at long term value and takes factors like salary increases into account. Estimating pensions is part of pension accounting, the branch of accounting that focuses on employee benefits and projected future obligations under the contracts signed by employees.

Companies traded on the open market need to disclose things like their accumulated benefit obligation for the benefit of prospective investors. Pension payouts can become substantial as more members of the workforce retire and older retired workers live longer. These obligations may add significantly to the expenses of a company and are thus of concern to investors with worries about profits and the bottom line. If a company has large accumulated benefit obligations, these could become a serious problem.

In addition to allowing a company to evaluate current and future pension obligations for planning purposes, pension accounting can also identify issues like shortfalls. A determination of the accumulated benefit obligation for employees may show that the company owes these employees more than it has. While it may be able to borrow from other departments to meet the obligation, this can delay the inevitable. The company will eventually be unable to fund its pensions, and current employees expecting pensions upon retirement might not have any money available when they are ready to leave, despite their payments into a pension plan.

In calculations to find the accumulated benefit obligation, actuaries can use a variety of techniques. Some companies may be accused of using creative accounting tactics to shift obligations around with the intent of making their obligations look less serious. This can have a deceptive effect on investors, as they may falsely believe that the company is adequately prepared for its pension obligations on the basis of disclosed information.

Employees curious about their accumulated benefit obligation can request an overview and statement from the human resources or accounting department. This document should provide information about how much has been paid in and how much the employee can expect to receive after retirement. This information is useful for retirement planning, where awareness of anticipated monthly retirement income may influence investment decisions and retirement planning choices.