For a DB plan, calculate and interpret accrued benefits, including benefits on early exit from the plan.

A 30-year-old hired today, a 55-year-old quitting after 20 years, and a 65-year-old retiring on schedule all carry an "accrued benefit" under the same DB plan. The dollar amount, the start date, and the reduction factor depend entirely on the exit pathway.

Before learning to compute an accrued benefit you should know why someone signed a plan document and committed corporate cash to it. A DB promise is expensive, long-tailed, and loaded with longevity and investment risk for the sponsor. Sponsors accept that risk because six interlocking motives make a DB plan a better deal than the equivalent cash compensation.

• Recruitment. A guaranteed lifetime pension is a hiring lever, especially for risk-averse candidates and for public-sector or unionized workforces where compensation transparency matters.

• Retention. DB accrual back-loads. A 1.5% final-salary plan pays 22.5% of final salary at 15 years of service but 30% at 20 years, and the salary base itself is usually...

• Turnover management. Subsidized early retirement, like the 5%-per-year reduction factor in Example 2, lets the employer thin senior headcount on demand.

Common mistakes

• Using projected final salary in the accrued benefit. The accrued benefit freezes salary at the valuation date. Projecting salary to NRA produces the projected benefit, used for funding methods but not for accrued liability under unit credit.
• Counting non-vested service. A member with 4 years under 5-year cliff vesting has $0 accrued for collection purposes, regardless of formula. Many candidates plug $n=4$ and report a positive answer.
• Applying ERF to the deferred vested benefit. The deferred vested benefit pays at NRA with no reduction. Applying an ERF double-counts.

Bottom line

• Accrued benefit = the past-service portion of the plan formula, valued as if the member exited today with salary and service frozen.
• Four benefit formulas: final salary, final average salary (FAS), career average revalued (CARE), and flat-dollar (collectively bargained).
• Vesting decides whether the accrued benefit survives early exit. Cliff (e.g., 5-year) or graded.
• Early retirement applies an ERF to the age-65 accrued benefit, either actuarial $v^t\cdot {}_t{p}_x\cdot {\ddot{a}}_{x+t}^{(12)}/{\ddot{a}}_x^{(12)}$ or plan-subsidized.

Exam shortcut

Write the formula skeleton $B=\alpha \cdot n\cdot S$ first, then fill in the salary measure (final, FAS, CARE) before touching numbers. Half of accrued-benefit errors trace to using the wrong $S$. DECISION: Exit at NRA → no factor. Vested early exit, defer to NRA → no factor, possibly revalue. Vested early exit, take it now → multiply by ERF. Not vested → zero.

The full lesson (about 4,577 words, 31 min read) adds 4 worked examples, all 10 common mistakes, a self-check, free in the app.

Learning objectives

• 5d

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