Consistent with the provisions of the Pension Protection Act, the annual contribution is limited to an amount that would cause pension fund assets to exceed 150% of the accumulated benefit obligation
. Our simulations do not involve contributions in excess of the minimum required, so the full funding limitation becomes binding only as a result of superior investment performance.
Companies were not required to disclose the vested and nonvested plan benefits (in total referred to as the accumulated benefit obligation) after 1997.
The accumulated benefit obligation for the defined-benefit pension plans reflected above was $212.0 million and $186.4 million at December 31, 2003, and 2002, respectively.
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2003, were as follows:
($ in thousands) 2003 2002 Projected benefit obligation $38,845 $32,768 Accumulated benefit obligation $28,840 $24,656 Fair value of plan assets $24,508 $20,615 Weighted-average assumptions used to determine benefit obligations at December 31 were as follows:
Pension accounting requires the recording of an additional liability when the accumulated benefit obligation exceeds the fair value of the plan assets.
Finally, OPEB accounting requires the disclosure of the amortization of the unrecognized transition obligation as a separate component of net periodic cost, the effect of a one percentage point increase in the assumed health-care trend rate on the accumulated benefit obligation, the service cost, and interest cost.
The actuarial present value of benefits earned by employees to date is the amount of the Accumulated Benefit Obligation. This amount, less the amount attributable to earned, non-vested benefits, approximates the liability if the plan was to be terminated.
David Gray in a recent article (Financial Executive, November/December 1988) strongly suggests that the pension fund manager's relative performance (pension assets outperforming the market) "will give way to an emphasis on outperforming the liability--specifically, the Accumulated Benefit Obligation (ABO)--and to maintaining and building a pension surplus." The reason for this is that under SFAS 87, pension plan assets must exceed the ABO or the liability will be recorded on the balance sheet.
Corporations that have pension plans that are not under-funded with respect to their accumulated benefit obligations
do not have MPL, and must be sure to eliminate any existing MPL remaining from prior periods.
This means that an additional liability, beyond unfunded accrued pension cost, would be recognized if necessary, so that the total liability recognized would equal the unfunded accumulated benefit obligation
. An equal intangible asset would also be recognized in most cases, thus avoiding an immediate reduction in fund equity.