Question

Kemir Co. has a pay-related defined benefit pension plan in which retirement benefits are calculated based on the retiree’s average salary for the 5-year period prior to retirement. Which of the following would represent the greatest potential pension liability?

Multiple Choice

Projected benefit obligation (PBO)

Accumulated benefit obligation (ABO)

Vested benefit obligation (VBO)

Combined benefit obligation (CBO)

Answer 1

Projected benefit obligation (PBO) is the greatest potential pension ability .

The VBO represents the Value Of Benefits employees would be entitled to if they terminated employment as of the balance sheet date. It is the smallest potential pension liability. The ABO represents the value of benefits which the employees have earned to the date, including which are not yet vested, assuming that the employees will remain with the company until their average retirement age . The ABO is greater to the VBO since it includes both the value of benefits of vested and unvested.

The PBO represents the value of benefits which the employees have earned till the date, including both vested and unvested value of benefits under the assumption that employees will remain with the company until their average retirement age. It differs from the ABO in that it takes into account anticipated future pay increases and, in a pay-related plan, will be higher than the ABO and will represent the highest potential pension liability.