PBO vs ABO vs Funding Target: Three Liabilities for One Pension Plan, Built for One Participant at Three Discount Rates

A final average pay formula multiplies three things: an accrual rate, years of service and a pay figure. The projected benefit obligation uses the pay the participant is expected to retire on, the accumulated benefit obligation uses the pay earned to date, and the funding target under 26 U.S.C. 430 counts "all benefits accrued or earned under the plan as of the beginning of the plan year" at a statutory rate. For a 45-year-old on $80,000 growing 3% a year, that pay choice alone makes the PBO 1.81 times the ABO at every discount rate.

Three readers receive the three measures. Investors and auditors see the PBO and ABO in the sponsor's 10-K footnote under ASC 715-30. Form 5500 Schedule SB carries the funding target to the IRS and sets the minimum contribution, and a close cousin of it, discounted on a fourth basis, sets the plan's PBGC variable-rate premium. This reference builds all three for one participant, names the single assumption separating each pair, and sets the two discount bases side by side in a month where they point in opposite directions. The site's life and retirement coverage of funded-status indexes and buyout pricing assumes the reader already holds this map.

Key Takeaways

• 1.81 is the PBO to ABO ratio for a participant 20 years from retirement on 3% pay growth, because 1.03 to the twentieth power is 1.806; the ratio holds at 4.5%, 5.5% and 6.5% discount rates, since projected pay scales the benefit and the discount rate scales both measures alike.
• 23% is what each 100 basis points of discount rate removes from this participant's ABO and PBO (from $77,800 to $59,900 on the ABO between 5.5% and 6.5%), a duration effect that outweighs the pay assumption once a plan's active population skews young.
• 6.47% was the Milliman 100 discount rate at September 30, 2026, up 111 basis points in twelve months, while the 2026 funding segment rates stood at 4.75%, 5.25% and 5.99% (IRS, September 2026), with the first two pinned by the 5% deemed floor on the 25-year average.
• $68,400 against $60,400: the same $18,000-a-year accrued benefit is worth more as a 2026 funding target at the 5.99% third segment than as an ABO at 6.47%, and only $56,500 as a PBGC premium funding target at the 6.73% August 2026 spot third segment.
• 95% to 105% is the Section 430(h)(2)(C)(iv) corridor through plan year 2030; it widens to 90% to 110% in 2031 and reaches 70% to 130% after 2034, so the funding target's lag behind market rates is scheduled to unwind over five years.

Which Benefits Each Measure Counts: The ASC 715 Glossary Beside Section 430(d)

The FASB glossary defines the projected benefit obligation as "the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date," measured with an assumption about future compensation where the formula is pay-related (ASC 715-30-20). The accumulated benefit obligation covers the same service and compensation earned before the measurement date, and the glossary states that it "differs from the projected benefit obligation in that it includes no assumption about future compensation levels." For a flat-dollar or career-average formula the two are the same number.

Both measures attribute benefits by the plan's own formula, so the ABO counts nonvested as well as vested accruals, and the vested benefit obligation is a third accounting cut the footnote rarely shows. The sponsor reports the PBO as its benefit obligation; the ABO appears beside it in the disclosure, with a separate aggregate line for plans whose ABO exceeds plan assets (ASC 715-20-50). Investors read funded status as assets minus PBO. The Milliman 100 Pension Funding Index is built on that same number: $1.263 trillion of assets against a $1.103 trillion projected benefit obligation for a 114.5% funded ratio at September 30, 2026 (Milliman, October 2026).

Section 430(d)(1) reads differently. It sets the funding target as "the present value of all benefits accrued or earned under the plan as of the beginning of the plan year" (26 U.S.C. 430, as amended). ERISA Section 303, at 29 U.S.C. 1083, carries the identical text on the labor side.

"Accrued or earned" means the accrued benefit under the plan document, which for a final average pay plan is service to date times pay to date. Future pay growth is excluded, so the funding target lines up with the ABO on the benefit side. The target normal cost in Section 430(b) picks up the year's new accruals, and the Treasury regulations fold in the increase in the accrued benefit from pay rises expected during the year.

Form 5500 Schedule SB is where the funding target becomes a public figure. Line 3 reports it "as of the valuation date" split by retired, terminated vested and active participants, with a separate column for "the portion of the funding target attributable to vested benefits," and the instructions add that "benefits considered to be vested for PBGC premium purposes must be included" (DOL, 2025 Form 5500 instructions). Line 21a records the three segment rates or an election to use the full yield curve; the funding target attainment percentage, assets over funding target, drives the benefit restrictions under Section 436.

Three readers, then, with three questions. An investor asks what the sponsor owes if pay keeps growing. An auditor's second line asks what it owes if the plan froze today. Treasury asks what has been earned at the start of the year and how much cash is due against it. The pay assumption separates the first pair, and each measure answers its own question correctly. The worked table shows how little that assumption moves the number once the discount rate is allowed to vary.

One Participant, Three Liabilities: The Worked Table

Take a 45-year-old with 15 years of service in a plan paying 1.5% of final average pay per year of service from age 65, on $80,000 of current pay growing 3% a year. Pay at 65 is $80,000 times 1.806, or $144,490. The accrued benefit on current pay is 1.5% times 15 times $80,000, or $18,000 a year; on projected pay it is $32,510 a year. Discounting both for 20 years of deferral and valuing the annuity from 65 gives the table.

Computation: accrued benefit of $18,000 (ABO, funding target, premium funding target) or $32,510 (PBO), times the 20-year discount factor at the row's rate, times a level 20-year annuity-due from age 65, with no pre-retirement decrement. The 20-year certain stream stands in for a Pri-2012 life annuity, which the SOA built from 16 million life-years and 343,000 deaths across 402 plans and which puts a 65-year-old male's life expectancy at 84.7 years (SOA, 2019); a true life annuity factor is slightly lower, by Jensen's inequality, in every row alike. The funding target rows discount entirely at the third segment because every payment falls more than 20 years after the valuation date.

Two things carry the table. The pay assumption is a multiplier that sits outside the discounting, so the PBO to ABO ratio of 1.81 never moves across the rows. Everything separating the ABO from the PBO is 1.03 raised to the number of years to retirement: for the same participant at 55, the ratio drops to 1.34, and for a retiree it is 1.00. A plan's reported PBO to ABO gap is therefore a census statement about how young its actives are, and a frozen plan's two accounting measures coincide.

The discount rate, by contrast, works on the whole deferred cash flow. Each 100 basis points cuts both measures by about 23%, consistent with a modified duration in the mid-20s for a liability that starts paying in 20 years and runs for 20 more. A retiree's liability moves about 7% for the same shift. That is why the Milliman 100's 86 basis point rise in the third quarter of 2026 took $105 billion off the PBO while a $59 billion asset loss still left the index up 5.1 points to 114.5% (Milliman, October 2026), the pattern this site worked through when the rate first crossed 6% in July.

For a sponsor, the mechanism lands as a priority. A 3% pay assumption against a 3.5% one moves this PBO by 10% over 20 years; the discount rate moved it by 23% per point in the table. Salary scale is argued in the assumptions memo once a year, and the discount basis is set by the market each month, which is why the funded-status surplus the site traced to $115 billion at mid-year rebuilds and unwinds on rates and not on census drift.

Two Discount Bases Moving at Different Speeds: The Settlement Rate Against the Corridor

ASC 715-30-35-43 states that "assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled," and lets the employer look to "rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits" (FASB, ASC 715-30-35-43; PwC, 2026). That measurement is a spot price. A sponsor matches its projected benefit payments to a yield curve of AA corporate bonds on the measurement date and discloses the single rate that reproduces the result. When the curve moves 47 basis points in a month, as it did in September 2026, the PBO moves with it.

Section 430(h)(2) builds its rate from the same corporate bond curve and then removes the spot. Each segment rate is "the average, for the 24-month period ending with the month preceding such month" of the curve's yields, split into bonds maturing in the first five years, the next fifteen, and beyond (26 U.S.C. 430(h)(2)(C) and (D)).

On top of the average sits the stabilization corridor added in 2012 and reset in 2021. Each segment rate is held between an applicable minimum and maximum percentage of its own 25-year average, with that average "deemed to be 5 percent" if the actual figure falls lower. The percentages are 95% and 105% for plan years 2020 through 2030, then 90% and 110% in 2031, 85% and 115% in 2032, 80% and 120% in 2033, 75% and 125% in 2034, and 70% and 130% after that.

September 2026's IRS table for 2026 plan years shows what the corridor does in practice. Unadjusted 24-month averages were 4.36%, 5.32% and 6.02%; the adjusted rates sponsors actually use were 4.75%, 5.25% and 5.99% (IRS, September 2026). Those first two are 95% and 105% of a deemed 5% floor, so the first segment has been lifted above its market average and the second capped below it. Segment three is capped at 105% of a 25-year average near 5.7%. That first segment has read 4.75% in every month since October 2025, while the accounting rate climbed from 5.36% to 6.47%.

Set the two bases against each other for the stylized participant and the ordering inverts what most readers expect. At the 6.47% settlement rate the ABO is $60,400. At the 5.99% stabilized third segment the funding target for the same $18,000 accrued benefit is $68,400, 13% higher. A plan holding $65,000 of assets per such participant reports a funding target attainment percentage of 95% on Schedule SB and a 108% ABO coverage ratio in its footnote in the same month, and a 60% PBO funded status beside it. None of the three is wrong, and none ranks the plan against one measured on a different line.

A fourth rate comes from the PBGC. Its variable-rate premium, $52 per $1,000 of unfunded vested benefits with a $751 per-participant cap (PBGC, 2026), is assessed on a premium funding target that, under the standard method, uses "the rates for the month preceding the month in which the plan year begins," unaveraged and outside any corridor (PBGC, 2026). At the August 2026 spot third segment of 6.73%, the participant's vested benefit is worth $56,500. A sponsor can owe a minimum contribution against a $68,400 target and no variable-rate premium against a $56,500 one, which drives the exits the site traced when flat-rate premiums reached $111.

A buyout quote prices none of the three. Milliman's competitive index put the cost of transferring retiree liabilities at 99.7% of the accounting liability in May 2026, and that ratio is the insurer's own pricing basis, with its own mortality and asset yield, divided by the sponsor's ABO. That denominator is the measure a settlement gain or loss is booked against. Meanwhile the IRS mortality basis under Section 430(h)(3) sets the funding target's annuity factor and the Section 417(e) lump sum, the layer the site traced through the 2027 mortality table update, while the insurer's table sets the quote.

Congress wrote the corridor for falling rates, and in 2026 it is doing the reverse job. A floor built to keep contributions from spiking when the 24-month average collapsed now holds the funding target up while the settlement rate drops the PBO. This participant's funding target fell 8% over the twelve months to September 2026, from $74,000 at the 5.69% third segment to $68,400, while the ABO fell 25%, from $80,700 at 5.36% to $60,400. Sponsors fund the slower number and report the faster one.

Statute resolves that gap in only one direction. A 95% floor becomes 90% in 2031 and 70% in 2035, so a plan whose minimum contribution is set today by a 4.75% first segment faces a funding target that tracks the market curve down as well as up just as the corridor's protection expires. If the 24-month averages are still below 5% then, the deemed floor stops binding and the first segment rate can fall by a fifth over four plan years with no change in the plan at all.