News that the pensions funds for Pennsylvania state employees and for retired school employees boasted investment returns for 2007 that outperformed market benchmarks is good news. But the fact that the funds did so much better than similar funds does raise questions about the risks associated with some of the investments.

State workers and public school teachers have to be pleased to learn that their pension funds have returned very strong gains. The State Employees Retirement System (SERS) reported a 17.2 percent gain for 2007, and the Pennsylvania School Employees Retirement System (PSERS) gained 13.8 percent in 2007.

By comparison, the Massachusetts Pension Reserve Investment Trust, that state's main pension fund, earned 11.9 percent for 2007 and boasted that it outperformed 95 percent of all large public funds.

Both of Pennsylvania's public employee pension funds have turned in an extraordinary record, averaging about 17.5 percent annual returns for the past five years.

But when it comes to investment returns, there is a connection between risk and reward. Higher returns generally are associated with higher risk.

As with most serious investment funds, the pension funds have investments in several different sectors to diversify the portfolio, and minimize risk, so that if one area is weak, another investment might be returning strong gains. Still, the extraordinary investment returns posted by Pennsylvania's two massive pension plans does suggest exposure to heightened risk.

Major investment sectors for PSERS include domestic equity, international equity, private debt, private equity, venture capital and real estate. It is most likely that the higher risks, and higher returns, were found in private equity, venture capital and real estate sectors.

According to the Wilshire Trust Universe Comparison Survey, the median return for large pension funds last year was 8.7 percent. Another useful comparison is the Standard & Poors 500, which recorded a gain of just 5.49 percent in 2007.

So, Pennsylvania's pension funds appear to be well-managed, and also are significantly invested in higher-risk categories.

Whatever the risk involved in Pennsylvania's public employee pension funds, it must be a risk that the investment advisers and trustees of the funds are aware of and are prepared to take.

State employees are no doubt pleased with the pension funds' strong returns. Taxpayers, too, have a reason to be pleased because strong investment returns generally mean reduced taxpayer contributions to support the defined benefit program.

In 2001, there was an exception to this scenario when strong investment returns were not allowed to remain to reduce taxpayer contributions. Instead, state lawmakers decided to take the surplus produced by strong investment returns of the 1990s and reward themselves with a 50 percent pension increase. At the same time, they also gave public school teachers a 25 percent pension boost.

Given the healthy position of the state's two giant public employee pension programs, this might be a good time to consider the conversion to a defined contribution plan, with state — or taxpayer — matching that is comparable to the match found in private industry where many traditional pension plans have been replaced by 401(k) programs. The current system is a defined benefit program, which holds taxpayers responsible for making up for poor investment returns and week stock market conditions. A defined contribution plan, such as a 401(k)-type program, would result in investment gains or losses being issues for state employees, public school teachers and retirees, but not the taxpayers.

Strong investment returns posted by Pennsylvania's public employee pensions are good news. But they also raise questions — about investment risks and reducing taxpayers' exposure by conversion to a 401(k).