Collective Defined Contribution Schemes Without Intergenerational Cross-Subsidies

John Armstrong, James Dalby and Rohan Hobbs

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Abstract: We present an architecture for managing Collective Defined Contribution (CDC) schemes. The current approach to UK CDC can be described as shared-indexation, where the nominal benefit of every member in a scheme receives the same level of indexation each year. The design of such schemes rely on the use of approximate discounting methodologies to value liabilities, and this leads to intergenerational cross-subsidies which can be large and unpredictable. We present an alternative approach which we call Collective-Drawdown CDC. This approach does not result in intergenerational cross-subsidies since all pooling is performed by explicit insurance contracts. It is therefore completely fair. Moreover, this scheme results in better pension outcomes when compared to shared-indexation CDC under the same model parameters.

Date: 2025-04, Revised 2025-05
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