What does the accumulated benefit obligation (ABO) represent?

The accumulated benefit obligation (ABO) represents the present value of benefits owed to employees, assuming the pension plan is terminated immediately. This measure includes the benefits that employees have earned up to the valuation date, reflecting their service to that point in time, but does not account for future salary increases that may occur if the plan were to continue.

In this context, the ABO is focused strictly on the existing obligations under the plan based on the current salary levels of employees, rather than projecting any future changes in compensation or benefit levels that would not be applicable if the plan were to cease operations immediately. Understanding the ABO is critical in assessing the financial status and liabilities associated with defined benefit pension plans, especially in scenarios involving plan termination or restructuring.