Accumulated Benefit Obligation
You run a big factory. You make windshield wipers that whistle. You have been successful in the last decade, largely thanks to Tesla's affinity for F#. Your pension obligation of a billion dollars is mostly funded with seven hundred million invested in index funds. You still owe three hundred million bucks to fully fund that pension.
You don't need to pay all that dough today, but regardless, your accumulated benefit obligation (or ABO) is the grossed up billion dollars you owe, at least at some point, along the long, lonesome highway.
More specifically, the ABO discounts back future pension obligations expected to be paid to employees, such that it takes into account, in one form or another, the expected salary increases and other contributions, as well as market increases coming down the line. Illustratively, if your ABO had a full billion dollars today sitting in public, liquid index funds, with only 5% of your workforce retiring each year, your pension would be considered "over-funded," and you would be a rare bird in this highly aggressive investment universe of our modern era.
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Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
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