Reformed public DC plans typically contain a minimum benefit guarantee (DC-MB). This
paper explores risk management techniques to control the cost of these guarantees in DC
systems with minimum benefit guarantees (DC-MB). The paper finds two approaches are
particularly useful. The first approach borrows an idea from the recent catastrophic insurance
literature. The guarantee is placed over a ‘standardized’ portfolio, requiring agents to accept
any ‘basis risk’ if they chose a non-standard portfolio. However, for large conversions from
DB to DC-MB plans, in which there is little or no DB benefit remaining, the government must
still worry about any ‘implicit guarantee’ that might extend beyond the standardized portfolio
which might entice agents to accept a lot of basis risk (a ‘Samaritan's Dilemma’). The second
method, therefore, uses a more brute force approach: private portfolio returns in the good
states of the world are taxed while returns in the bad states are subsidized. Both options are
very effective at controlling guarantee costs, and they can be used separately or together.
Calculations demonstrate that all of the unfunded liabilities associated with modern pay-as-you-go
public pension programs can be eliminated under both approaches even at a modest contribution rate.