The portable guarantee to exchange back an old defined benefit for a new defined contribution (DC) pension plan

Chao-Liang Chen

Applied Economics, 2006, vol. 38, issue 6, 699-706

Abstract: As a defined contribution (DC) pension plan is introduced to replace a defined benefit (DB) pension plan, the portability benefit from a DC pension plan costs the employees to bear the investment risk from managing the pension fund. To protect the retirement income and maintain the portability benefit, a guarantee to exchange back the old defined benefit is supposed to be demanded for the new DC plan's participants in the guarantee market. In light of such a demand, this article applies a claim-terminating insurance pricing model to offer a contingent claims pricing model for a portable pension guarantee. Using the new labor pension plan of Taiwan as an illustration, a guaranteed DC pension will carry an extra cost of almost 50% up to over 100% of the plan's contributions over the participant's work life, given the current mandatory minimum requirement of a contribution rate of 6%.

Date: 2006
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DOI: 10.1080/00036840500397127

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