Question

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

Answer 1

The three approaches to measure benefit obligations of a pension plan are

1. Vested Benefit Obligation
2. Accumulated Benefit Obligation
3. Projected Benefit Obligation

These differ from each other in the following ways-

Vested Benefit Obligation uses only current salary level of an employee and the benefits that are vested in employment contract. This means that it does not take into consideration additional services if any rendered by the employee.

Accumulated Benefit Obligation is measured using the present value of the benefit that the pension plan will provide to the employee to the services that he/she will provide before a specific date. This means that is purely based on the services provided by employees and the compensation that is to be paid prior to the last date.

Projected Benefit Obligation is measured by taking into consideration future compensation levels. This means that it is based on vested and non-vested services that an employee will provide in the future salary level.