Question

Fin Reporting & Analysis

Name three approaches to measuring benefit obligations from a pension plan and explain how they differ.

Thank you!

Answer 1

The three approaches for measuring benefit obligations from a pension plan are:

1. Projected Benefit Obligations

2. Vested benefit Obligations

3. Accumulated benefit Obligations

1. Projected Benefit Obligations: Projected benefit obligations are calculated by computing the present value of retirement benefits of employees based on their future estimated earnings. In projected benefit it is estimated as to how long the employee will continue to work for the organization and what will be estimated salary during that period. This estimated salary of future periods is discounted by a discount rate assumed by the company to arrive at the present pension obligation.

Formula for Projected Pension Obligation: (Note Formula taken from Google)

Projected Benefits Obligation, Start of Period

+ Service Costs
+ Interest Costs
+ Amortization of Prior Service Costs
+ Or - Amortization of Actuarial Gains or Losses
- Benefits Paid to Retirees

= Projected Benefit Obligation, End of Period

2. Vested Benefit Obligation: Vested Pension Obligation is calculated by computing the present value of the retirement benefits earned by the employee as per his completed years of service in the company.

Vested Pension Obligations assumes that the employee may not be continuing with the company and the pension obligation is the benefits earned by the employee upto the date of computation of pension obligation.

3. Accumulated Pension Obligation: The only difference between Projected benefit Obligation and Accumulated Pension Obligation is that in Accumulated Pension Obligation any future salary increase is not considered or estimated while computing the pension obligation.