||The pension schemes are important to prevent workers from low standard of living after their retirement. Recently, the Executive Yuan has passed “Draft of Labor Pension Act”. According to the current draft of the above pension act, workers are allowed to choose one of the following two pension systems：Individual Account system and Supplementary Annuity system. Once a worker chooses a specific pension system, he has the right, which is equivalent to an exchange option, to change his choice twice within the first five years. In this study, I use the Monte Carlo simulation method to evaluate the exchange option of Draft of Labor Pension Act and the historical return data of Taiwan’s financial market, the salary growth rate, the unemployment rate, and the mortality rate to calculate the forward contract value of Supplementary Annuity system.|
The main reason that the forward contract value of Supplementary Annuity system is positive for all workers is the high rate of annuity payment. The standard deviations of the investment strategies, the rate of annuity payment, the salary growth rate, and the mortality rate are important factors to affect the value of the forward contract and the exchange option.
1. Bertranou, F. M. (2000), “Pension Reform and Gender Gaps in Latin America：What are the Policy Options? ”World Development, 29(5).
2. Boyle, P. and M. Hardy (2003), “Guaranteed Annuity Options,” Working Paper, Department of Statistics and Actuarial Science, University of Waterloo.
3. Fierst, E. (1997), “The Defined Benefit Approach,” Working Paper, Pension Research Council of the Wharton School of the University of Pennsylvania.
4. James, E., A. C. Edwards and R. Wong, (2003), “The Gender Impact of Pension Reform：A Cross-Country Analysis,” Working Paper, World Bank Policy Research.
5. Marcus, A.(1987), “Corporate Pension Policy and the Value of PBGC Insurance,” Chapter 3 in Issue in Pension Economics, edited by Z. Bodie, J. B. Shoven, and D. A. Wise, University of Chicago Press.
6. Margrabe, M. (1978), “The Value of An Option to Exchange One Asset For Another,” Journal of Finance, 33, 177-186.
7. Milevsky, M. A., and S. D. Promislow (2001), “Mortality Derivatives and the Options to Annuitize,” Insurance.. Mathematics and Economics, 29, 3, pp. 299-316.
8. Shimko, D. C.(1989), “The Equilibrium Valuation of Risky Discrete Cash Flows in Continuous Time,” Journal of Finance, 44, pp.1373-83.
9. Shimko, D. C.(1992), “The Valuation of Multiple Claim Insurance Contracts,” Journal of Financial and Quantitative Analysis, 27(2), pp.229-46.