Huh. So, basically, the only way to get this to work is to cheat or exploit the game rules by preparing to kill everyone ahead of time? I am a little bummed to find out that an "open-ended" game includes an instant-death option in the dialog. It was one thing to be warned not to go near Vault 87 due to radiation, but this just seems like an option that shouldn't have been offered at all...
If I recall correctly there's no instant-death option, you still have to manually kill him after telling him you are.
Don't listen to anyone who tells you it can't be done without cheating or exploiting. A high enough sneak (50 I think?) will allow you to carry holdout weapons into Caesar's camp, including C4 and the detonator. I did this the first time I went in. No cheats there, you're supposed to be able to do this.
A few things that would help you:
1. Stealth boys or extremely high sneak to allow you to plant C4 on everyone. (I had this first time I went in too.)
2. Good companions to assist you in breaking out of the camp in the inevitable firefight that ensues.
3. A silenced sniper rifle for stealth-killing praetorians without getting detected, helping you thin down the camp before engaging Caesar. Note: Nobody will suspect you until either Lucius (head of the praetorians behind Caesar) or Caesar are killed, in which case everyone in the camp will start targeting you.
Here's how I did it:
http://www.youtube.com/watch?v=TM7hQuWrOC4
After clearing out the entire camp you're free to release Benny and he'll walk out unhindered.
*Note: In the first playthrough trying to kill Caesar, you can see that I managed to sneak in a Brush gun. This is done by stealth-killing the gatekeeper of the camp, travelling out of the fort then back in. Because the gatekeeper isn't there to relieve you of your weapons, you and your companions are all allowed to bring their full payloads in.
My method of killing Caesar and his praetorian guards does not require any preparation or cheats although being a stealth character with some C4 in your inventory helps a lot. It just so happened that I was stockpiling C4 and stealthy tactics from the beginning of the game just for situations like these, without knowing exactly what I was going to have to do.