The pension costs from a defined benefit to individual pension accounts: do they cost more in the case of Taiwan?

Abstract

This article develops a market-based liability valuation model to price individual pension costs of a Defined Benefit (DB) pension plan. The purpose is to compare them with the new labour pension plan, Individual Pension Accounts (IPAs), in the case of Taiwan. The results based on the numerical approach show that the new IPAs cost a company more than the old DB plan, except if the average wage growth relative to the risk-free interest rate is high enough.

Notes

¹ For a comprehensive discussion on these issues, see Mitchell and Smetters (2003), Mitchell and Schieber (1998) and Walliser (2003).

² Both Lachance et al. (2003) and Milevsky and Promislow (2004) analysed the case of Florida's public sector pension plan, while Chen (2006) did for the case of Taiwan labour pension plan.

³ See Pennacchi and Lewis (1994), Hsieh et al. (1994), Boyce and Ippolito (2002), Marcus (1987) and Seow (1995), etc.

⁴ One can consult Merton (1973), Breeden (1979) and Cox et al. (1985a) for the determination of the market price of risk.