Intergenerational cross-subsidies in UK collective defined contribution (CDC) funds

John Armstrong, James Dalby and Catherine Donnelly

Papers from arXiv.org

Abstract: We evaluate the performance of and level of intergenerational cross subsidy in single-employer and multi-employer collective defined contribution (CDC) schemes which have been designed to be compatible with UK legislation. The single-employer scheme captures the essential features of the Royal Mail CDC scheme, which is currently the only UK CDC scheme. We find that the schemes can be successful in smoothing pension outcomes while outperforming a DC + annuity scheme, but that this outperformance is not guaranteed in a single-employer scheme. There are significant intergenerational cross-subsidies in the single-employer scheme. These qualitatively mirror the cross-subsidies seen in existing defined benefit schemes, but we find the magnitude of the cross-subsidies is much larger in single employer CDC schemes. The multi-employer scheme is intended to minimize such cross-subsidies, but we find that such subsidies still arise due to the approximate pricing methodology implicit in the scheme design. These cross-subsidies tend to cancel out over time, but in any given year they can be large, implying that it is important to use a rigorous pricing methodology when valuing collective pension investments.

Date: 2024-11, Revised 2024-11
New Economics Papers: this item is included in nep-age
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2411.13565 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2411.13565

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().