Pension Benefit Obligation - PBO

See: PBGC. See: Defined-Benefit Plan.

Pensions are all about predicting the future. If you run a pension plan, you bring in money now that you might not need to spend for dozens of years. Meanwhile, you need to keep ahead of decades-long trends, like inflation.

The pension benefit obligation represents the main prediction a pension makes. It represents the present value of the workers' retirement benefits.

The pension plan managers calculate the PBO based on a number of assumptions. They use the same kind of actuaries insurance companies utilize to estimate things like mortality rates and life expectancies. Meanwhile, they also make predictions about future pay structures and on general economic factors, like growth and inflation.

Once the pension has its benefit obligations in mind, it can map out an investment plan. The managers hope they can invest the money they collect now to earn enough to pay for all the retirement promises they've made their employees.