A projected benefit obligation (PBO) is the estimated present value of an employee's pension, under the assumption that the employee continues to work for the employer. This information is needed by the employer to account for a pension liability, but is only needed when the pension is of the defined benefit variety. This concept is not needed when an employer has a defined contribution plan. The PBO is usually prepared and periodically updated by a third-party actuarial service.
The calculation of the PBO takes into account a number of factors, including assumed increases in employee pay in the future, which will increase the amount of the pension liability. The calculation also includes an estimate of employee mortality rates, as well as the amount of service already completed by employees.