ABSTRACT
This entry discusses some of the basic mechanics in the management of public pension plans. It first discusses the two different types of public pension benefit plan, defined benefit (DB) plan, and defined contribution (DC) plan. As DB is the predominant plan type in the public sector, this entry focuses on the management of DB plans. Once the parameters of the pension benefits are set by the government sponsors, the management of pension benefits starts out with an actuarial valuation. It is a process that determines the level of benefits a new employee will receive upon his retirement. It also determines how much should be contributed to the pension plan every year during the working years of this employee so that sufficient amount can be accumulated to pay for his benefits at that time. This process involves many economic and demographic assumptions, of which the most important is the investment return assumption. These contributions are invested and are expected to earn a certain return in order to meet the future pension funding needs. The entry then discusses the concept of funded ratio and unfunded pension liability. It discusses the main reasons why unfunded pension liability can occur and the two methods for eliminating it once it occurs. Finally it discusses three management principles that can help to reduce the odds that the unfunded pension liability will occur.
