Computing the Accumulated Benefit Obligation (ABO)
Wu Company has established a defined benefit pension plan for its lone employee, Ronald Dalton. Annual payments under the pension plan are equal to Ronald’s highest lifetime salary multiplied by (2% x number of years with the company). As of the beginning of 2008, Ronald had worked for Wu Company for 10 years. His salary in 2007 was $50,000. Ronald is expected to retire in 25 years and his salary increases are expected to average 3% per year during that period. Ronald is expected to live for 15 years after retiring and will receive the first annual pension payment one year after he retires. Compute Wu Company’s accumulated benefit obligation (ABO) as of January 1, 2008, assuming (1) an 8% discount rate and (2) a 12% discount rate.