Abstract

Two outstanding characteristics of the National Pension Program(NPP) proposed by the ROC Executive Yuan are: the minimum return rate guarantee and the differential premium shares in accordance to a person's income level and health conditions. This report focuses on assessing the effects of minimal return rate guarantee on NPP's optimum asset allocation decision. The research is conducted in two ways. First, the asset allocation decision process is examined through linear stochastic programming approach, under the assumptions of dynamic asset allocation capability, minimal return rate guarantee, and other investment constrains. The optimal solutions of the process can then be determined. Second, the Copula function approach is used to obtained the co-variations between income level and health conditions in order to establish the liability cash flow model for the National Pension Program. The result of our analytical exercises reveals that: (1) The correlation assumptions between income level and health conditions have on visible effect on total NPP cash flow. (2) The minimal return rate guarantee could decrease both the investment risk and expected return as well. (3) Due to the existence of transaction costs, the dynamic asset allocation strategy does not always outperform the fixed- ratio asset allocation strategy.