Definition of Vested Benefit Obligation (VBO)
Let me explain what vested benefit obligation, or VBO, really means. It's the actuarial present value of the pension plan benefits that employees have earned, and it serves as one key measure of a company's pension fund liability.
Understanding Vested Benefit Obligation (VBO)
You should know that VBO is one of three methods companies use to measure and report their pension obligations, along with assessing the performance and financial health of their plans at the end of each accounting period. This is all required under FASB Statement of Financial Accounting Standards No. 87. The other two are the accumulated benefit obligation and the projected benefit obligation.
Essentially, VBO covers the part of the accumulated benefit obligation that employees will get no matter if they stay with the company or not. These are the benefits that have vested in the employees, unlike the accumulated benefit obligation, which includes the present value of all benefits, vested or otherwise.
Vesting Requirements Under ERISA
The Employee Retirement Income Security Act (ERISA) of 1974 mandates how companies must vest benefits. You need to understand that companies have to use one of two approaches for this.
ERISA Vesting Approaches
- Pension benefits must fully vest in five years or less.
- A company can vest 20% of the employee's pension benefits in three years or less, then add another 20% each year until the employee is 100% vested after seven years of service.
Comparing VBO and ABO
Since the minimum vesting period is generally five years, the values for vested benefit obligation and accumulated benefit obligation are usually quite close in most pension plans. Companies are required to disclose both ABO and VBO at fiscal year-end, but if they're almost the same, the financial statements will show the ABO value and note that the VBO isn't materially different.
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