Vested Benefit Obligation (VBO) Definition
One indicator of a company’s pension fund burden is the vested benefit obligation (VBO), the actuarial present value of the pension plan that workers have accrued.
A Comprehensive Guide on Vested Benefit Obligation (VBO)
According to FASB Statement of Financial Accounting Standards No. 87, vested benefit obligation (VBO) is one of three ways businesses can evaluate and report on pension obligations, plan performance, and financial health after each accounting period. The other two metrics are the firm’s estimated benefit obligation and accrued benefit obligation.
The percentage of the accumulated benefit obligation that workers will get, irrespective of whether or not they continue to participate in the company’s pension plan, is known as the VBO. Unlike the cumulative benefit liability, which is the current value of all benefits, vested or not, this benefit is awarded to the workers.
Companies are required by the Employee Retirement Income Security Act (ERISA) of 1974 to vest benefits by one of the two methods listed below:
- Pension benefits must entirely vest in no more than five years; otherwise,
- Employers can deposit 20% of a worker’s pension benefits in three years or fewer, then another 20% annually until the worker has seven years of service and is fully vested in the scheme.
In most pension plans, the values of the vested benefit obligation and the cumulative benefit obligation are similar since the minimum vesting requirements are typically five years. Companies financial statements display the ABO value and indicate that the VBO and ABO values are not considerably different, even though the ABO and VBO values must be declared at fiscal year-end if the numbers are nearly identical.
