Analysis of the optimal switch option in labor pension act

• Main Authors: CHI,YING-YU, 紀穎昱
• Other Authors: 王儷玲
• Format: Others
• Language: zh-TW
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/11024125305184218583

碩士 === 國立政治大學 === 風險管理與保險研究所 === 93 === The newly Labor Pension Act will be carried out in 2005 soon. Under this new pension system, employees will be given the choices of converting their traditional defined benefit (DB) pension plan into an individual-account defined contribution (DC) pension plan with full control over assets allocation and investment decisions. Under DC pension plan in Taiwan, there are two types of pension plan- Individual Account System and Commercial Pension Plan System- for employees to choose. DC and DB pension plan are totally different in essences, so on the basis of our assumptions, switch options will exist among Individual Account System and Commercial Retirement Plan System. Thus, in order to maximum employees’ retired wealth, employees might choose the optimal time to convert Individual Account System into Commercial Pension Plan System. Although our model is deterministic in nature, we believe that it provides an intuitive insight about switch options. We find not only the optimal switch time between Individual Account System and Commercial Retirement Plan System but also the “trade-off” economic values. This paper designs a model of maximizing retired wealth and makes numerical simulation to analyze optimal switch time. We find it is the “rate of change” of these two different pension systems affects the times for employees to exercise switch options. Besides, both the payment-rate scaled present value of the DB pension annuity and the retirement horizon are significant parameters in our analysis. Third, we also calculate the threshold investment returns between Individual Account System and Commercial Pension Plan System under various investment environments. Finally, we also contrast the effects of exercising switch options between younger and older employees. In short, we want to provide some principles for employees to make the optimal retired wealth allocation under Newly Labor Pension Act, then exercise switch options at the proper time.