Terms & Concepts

Term Definition
Accumulated Benefit Obligation (ABO) The ABO liability concept includes the present of value of :

  • the remaining pension benefits to be paid to currently retired employees,
  • and the retirement benefits earned to date by active employees based on their current salaries and years of service.

It does NOT include the effect of future salary increases or service on the benefits to be paid to active workers.
Actuarial Accrued Liability The present value of future benefits earned for accrued service. Plans report the accrued liability using two liability concepts: the projected Benefit Obligation (PBO) and the Accumulated Benefit Obligation (ABO). Historically, public sector plans use the PBO, while the private sector uses the ABO.
Actuarial Assets The asset value used for valuation purposes (i.e. calculating the reported funded ratio and annual required contributions). Generally, it is based on the current market value of assets plus a portion of prior years’ unrealized gains and losses. On average, public pensions carry forward 5 prior years of unrealized gains and losses.
Actuarial Cost Method The method used to allocate the present value of expected lifetime benefits to each period between plan entry and retirement. Most public pension plans use either the entry age normal (EAN), Projected Unit Credit (PUC), or Aggregate Cost (AGG) method.
Aggregate Cost Method (AGG)  The AGG method allocates the difference between current actuarial assets on hand and the present value of future benefits (PVFB) evenly over future active payroll or service. It is similar to EAN in that it allocates the liability evenly over periods. However, unlike EAN and PUC, AGG plans do not have a concept of accrued liabilities. Each year the AGG method allocates the difference between the actuarial assets on hand and the total present value of benefits over future periods, and does not consider past allocations as an accrued liability.
Annual Required Contribution (ARC)  The required annual required contribution by the employer necessary to fund the pension’s annual normal cost and amortize the unfunded accrued liability.  Prior to 2013 GASB prescribed the calculation of an ARC using an amortization period of less than 30 years for the unfunded liability.
Defined Benefit Plan A pension plan that specifies the amount of pension benefits to be provided at a future date (or after a certain period of time). The benefit amount is based on one or more factors such as age, years of service, and salary.
Entry Age Normal (EAN): Plans that use this method allocate the present value of total projected lifetime retirement benefit equally (typically as a percent of payroll) over each year of the employee’s career. As each year of the employee’s career passes, the allocated portion becomes part of the accrued liability. The EAN method is the dominant method used in the public sector.
Experience Gain (Loss)  The difference between actual experience and that which was expected based upon the plan’s actuarial assumptions. The full amount of these differences is generally accounted for incrementally over future periods until all the gain (loss) has been realized.
Funded Ratio: The ratio of actuarial assets to actuarial accrued liability.
Normal Cost  The present value of projected lifetime benefits to be paid to active workers that is allocated to the current year by the actuarial cost method.
Present Value of Future Benefits (PVFB) The PVFB liability concept includes the present value of:

  • the remaining pension benefits to be paid to currently retired employees,
  • the retirement benefits earned to date by active employees based on their current salaries and years of service,
  • and the impact of future salary increases and service on the benefits to be paid to active workers.

This liability concept is the present value of the remaining pension benefits to be paid to currently retired employees plus the present value of the actual lifetime benefit that active employees are expected to have earned at the time of their retirement.
Projected Benefit Obligation (PBO) The PBO liability concept includes the present value of:

  •     the remaining pension benefits to be paid to currently retired employees,
  •     retirement benefits earned to date by active employees based on their current salaries and years of service,
  •     and the effect of future salary increases on the value of benefits already earned by active workers.

It does NOT include the impact of future service on the benefits to be paid to active workers.
 Projected Unit Credit (PUC)  The PUC method is more commonly used in the private sector. For plans that use this method, the normal cost in a given year is the present value of the additional expected lifetime retirement benefit that the employee earned for the additional year of service. The lifetime benefit is based on the final average salary the employee is expected to have at retirement. If the benefit formula and the expected final salary remain unchanged through the worker’s career, then the additional pension benefit the employee earns in each year will also remain unchanged. The annual cost of that increase in benefit, however, will rise as workers approach retirement and annual pension contributions have less time to accumulate investment earnings. So employers with an aging workforce that use this costing method will see their annual pension expense rise over time.
Unfunded Actuarial Accrued Liability (UAAL) The difference between the actuarial accrued liability and valuation assets. It is sometimes referred to as “unfunded accrued liability.”