Collective Defined Contribution Schemes Without Intergenerational Cross-Subsidies

ArXiv ID: 2504.16892 “View on arXiv”

Authors: John Armstrong, James Dalby, Rohan Hobbs

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.

Keywords: Collective Defined Contribution (CDC), Intergenerational Cross-Subsidies, Shared-Indexation, Collective-Drawdown, Liability Valuation, Pension Funds

Complexity vs Empirical Score

• Math Complexity: 8.0/10
• Empirical Rigor: 3.0/10
• Quadrant: Lab Rats
• Why: The paper involves advanced mathematical modeling of pension scheme liabilities, fairness conditions, and optimization, including references to stochastic calculus and neural network-based optimal control, but it presents a theoretical architecture and conceptual comparison rather than empirical backtests or real-world implementation details.

  flowchart TD
    A["Research Goal<br>Design CDC scheme<br>without intergenerational<br>cross-subsidies"] --> B{"Methodology"}
    
    B --> C["Analyze Shared-Indexation CDC<br>Identify valuation flaws"]
    B --> D["Propose Collective-Drawdown CDC<br>Implement explicit insurance"]
    
    C --> E["Simulate Liability Valuation<br>Approximate discounting"]
    D --> F["Simulate Liability Valuation<br>Insurance contract pricing"]
    
    E --> G["Computational Analysis<br>Measure cross-subsidies & outcomes"]
    F --> G
    
    G --> H{"Key Findings"}
    H --> I["Collective-Drawdown eliminates<br>intergenerational cross-subsidies"]
    H --> J["Collective-Drawdown yields<br>superior pension outcomes<br>vs Shared-Indexation"]