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Working Paper

Redesigning Public Sector Pensions In Developing Countries

Olivia S. Mitchell
WP2002-09

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Abstract — Pensions in the public sector cover state, municipal, and federal government employees in addition to workers in publicly-managed enterprises. Until recently, the most prominent model for public employee pension plans in both developed and developing economies was the defined benefit (DB) plan. Nevertheless, the status quo is now changing as public plans are being asked to catch up with global changes in labor and capital markets. As a consequence, defined contribution (DC) pensions are now making headway in many cases as an alternative or sometimes an additional pillar of public employees' retirement systems. This paper examines public pension plan design and management decisions in developing countries, beginning by identifying the key functions of a pension plan and the range of structures implemented as well as their economic effects. We then discuss the rationales for and means of moving to a funded public pension system, including the problems associated with underfunding and the ways in which accrued rights can be financed and managed, with attention to the range of stakeholders in a public pension system. Finally we explore governance and investment issues in the context of public pension plans. A number of public pension changes exist that could contribute materially to the strengthening of the pension promise in developing nations, while making the plans more equitable, more economically efficient, and more financially solvent. These reforms could benefit not only the employer and employee groups most directly associated with public pension systems, but they can also enhance the wellbeing of broader groups including taxpayers and consumers on whom the burden of high taxes and reduced public services ultimately fall.