Pension benefit obligation definition

A pension benefit obligation is the present value of retirement benefits earned by employees. The amount of this obligation is determined by an actuary, based on a number of assumptions, including the following:

• Estimated future pay raises
• Estimated employee mortality rates
• Estimated interest costs
• Estimated remaining employee service periods
• Amortization of prior service costs
• Amortization of actuarial gains or losses

The amount of this liability is then reduced to its present value to derive the pension benefit obligation. This amount is then compared to the current funding of a plan to determine how much additional funding is needed. This examination is useful for determining the future payout obligations of a business.

The pension benefit obligation will change over time, since it is based on a number of assumptions. Any changes in these assumptions will necessarily alter the amount of the obligation. For example, an increase in the estimated life expectancy of pension beneficiaries will increase the amount of the obligation, while a reduction in the assumed amount of future salary increases will reduce it.