Public Pension Fund – Definition

Cite this article as:"Public Pension Fund – Definition," in The Business Professor, updated April 10, 2019, last accessed May 25, 2020, https://thebusinessprofessor.com/lesson/public-pension-fund-definition/.

Back To: HUMAN RESOURCES, EMPLOYMENT, & LABOR

Public Pension Fund Definition

Retirement savings funds for public servants – people employed by state and central government departments, or working in the public sector, are called ‘Public Pension Funds (PPF)’. People employed in law enforcement, maintenance of Parks, municipal workers, etc., are all eligible for being enrolled in a Public Pension Fund plan. People working in the private sector, like corporate employees of Google, are covered under the Private Pension Fund plans. Some private companies do not offer such retirement plans.

A Little More on What is a Public Pension Fund

A part of the employee’s salary is remitted into the retirement savings account, with guaranteed and set benefits, independent of the underlying assets’ performance, upon the employee’s retirement.

It is incumbent upon employers to keep up the flow of a sum of money to the employees pension funds account, determined by a formula that factors in the duration of service and salary amount. If the underlying assets of the pooled investment fund perform poorly, or lose money, the employer is legally obligated to makeup the difference.

Employer sponsored pension plans date back to the 1870s in the United States. At its height in the 1980s, the American Express Company covered almost half of the privately employed workforce under its pension scheme. The Bureau of Labor Statistics states that almost 90% of public workforce and 10% of the private workforce in the United States is enrolled in the guaranteed pension scheme.

401(k) plans are the most well known defined-contribution pension plans in the United States for public workers. It’s equivalent in the non-profit industry are the 403(b) pension plans.

Pay-as-you-go pension plans also come without employer funds match and are funded solely by deductions from the employee’s paychecks.

Pension plans also provide tax sops to both employers and employees. Employer matched sum is accorded tax-advantaged status, while the deductions from paychecks that are added to the pension fund, bring down the total taxable income for employees. The accumulating funds in the plan are also tax-deferred. Once taken out of the funds upon retirement, state and federal taxes  may be levied on the gains. Pension from funds completely sponsored by employers with zero input from employees are fully taxable.

References for Public Pension Funds

Academic Research on Public Pension Funds

Of what value are shareholder proposals sponsored by public pension funds, Prevost, A. K., & Rao, R. P. (2000). The Journal of Business, 73(2), 177-204. This paper examines the role of Public Pension Funds in sponsoring shareholder proposals.

Investing in socially responsible companies is a must for public pension funds–because there is no better alternative, Sethi, S. P. (2005). Journal of Business Ethics, 56(2), 99-129. This journal discusses responsible investing of public pension funds.

On beyond Calpers: survey evidence on the Developing role of Public pension funds in corporate governance, Choi, S. J., & Fisch, J. E. (2008). Vand. L. Rev., 61, 315. This paper presents the evidence of PPFs’ impact on corporate governance.

Portfolio allocation for public pension funds, Pennacchi, G., & Rastad, M. (2011). Journal of Pension Economics & Finance, 10(2), 221-245. This paper suggests a safe model of portfolio asset allocation to mitigate the risks involved in PPF investments.

The case against stock in public pension funds, Bader, L. N., & Gold, J. (2007). Financial Analysts Journal, 63(1), 55-62. This paper sheds light on the U.S. market governance of PPFs and their investment in stocks, casting them in an unfavorable light.

The politics of public pension funds, Romano, R. (1995). Public Interest, (119), 42. This paper looks at the political scenario behind the management of PPFs.

Public pension funds and operating budgets: A tale of three states, Peng, J. (2004). Public Budgeting & Finance, 24(2), 59-73. This articles studies the management of PPFs in three states and provides a framework to study the correlation between PPF management and government operational budgets.

Public pension funds and assumed rates of return: an empirical examination of public sector defined benefit pension plans, Stalebrink, O. J. (2014). The American Review of Public Administration, 44(1), 92-111. This research examines empirical data to study the assumed rates of returns on PPF in the defined-benefit public sector pension plans.

Political representation and governance: Evidence from the investment decisions of public pension funds, Andonov, A., Hochberg, Y. V., & Rauh, J. D. (2018). The Journal of Finance, 73(5), 2041-2086.  This chapter takes a look at political governance and representation through the lens of PPFs.

Public Pension Funds: The Need for Federal Regulation of Trustee Investment Decisions, Paisley, K. (1985). Public Pension Funds: Yale L. & Pol’y Rev., 4, 188. This chapter highlights the need for federal regulation of investment decisions and strategies in managing PPFs.

Shareholder activism of public pension funds: The political facet, Wang, Y., & Mao, C. X. (2015). Journal of Banking & Finance, 60, 138-152. This paper focuses on the politics of shareholder activism in the sphere of PPFs.

Was this article helpful?