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This chapter analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans, which are optimal either from the perspective of the plan sponsor or the beneficiaries. It evaluates the impact of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on members’ investment returns. For low/medium risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees, but for the latter, costs increase exponentially with investment risk. It is also shown that the sponsor’s portfolio choice differs from that of the participants, depending on plan design and risk aversion. One way to resolve these differences is to combine minimum return guarantees and caps on investment returns, which shares investment risks and returns more equally between sponsor and beneficiaries, and keeps pension plan costs under control.

Pension systems are a central component of the compensation package for workers in virtually every developed nation, and nowhere are they more important than for public sector employees. The growth of public pensions has spurred a hot debate of late, since some private sector employees envy their public sector counterparts the relatively generous benefits negotiated by strong unions that traditionally represent civil servants. Also some politicians had argued that pension and health-care benefits paid to police and firefighters, schoolteachers, and other civil servants have become too expensive for the public purse, especially when benefits have been cut in the private sector And the costs of maintaining public sector pension plans have come under the microscope of late, as municipalities, states, and other governmental units facing difficult financial times and volatile capital markets realize they must cut corners. This volume takes up these and other themes pertinent to the future of public employee retirement systems around the world.

This chapter examines pension reform in the UK. It argues that future reform of the UK pension system is unnecessary to make it sustainable in terms of costs. Forecast expenditures can be met without tax increases due to large cuts to the state pension system in the last 20 years. However, whether the current system is politically sustainable remains uncertain. Given that a rising percentage of the electorate will be aged over the state pension age, what they expect with regards to retirement income may impact current pension system.

This chapter assesses best-practice benchmarks for the design of defined contribution plans in the public sector, where such plans are the primary, or core, employment-based retirement benefit. These benchmarks rely on the notion that providing an adequate and secure retirement income for participants is the primary plan objective.

It is often argued that compensation patterns for public sector employees are higher than in the private sector. This chapter examines some of the reasons for the observed differences in total compensation costs between US state and local government employers and private industry employers. The author examines compensation costs by industry, occupation, union status, and employee benefit participation.

This chapter compares the administrative costs of public sector defined benefit and defined contribution systems offered by the federal government and many states. Administrative expenses are presented as percentages of both income and assets, and the author discusses how administrative expenses might enter into the decision by a public sector employer as to whether to establish a defined contribution plan.