Collective Defined Contribution Schemes Without Intergenerational Cross-Subsidies

2025-04-23

AI Summary

Current UK collective defined contribution (CDC) schemes employ shared indexation, resulting in substantial and unpredictable intergenerational cross-subsidies that undermine financial fairness and predictability. This paper proposes a novel “Collective-Drawdown CDC” architecture, which replaces conventional discounting with explicit insurance contracts for liability valuation, thereby enabling risk pooling among members while ensuring intergenerational financial neutrality. For the first time within the CDC framework, this design fully eliminates intergenerational cross-subsidies, guaranteeing actuarially fair, generationally neutral pension payouts. Actuarial simulations under identical parameter assumptions demonstrate that, relative to shared-indexation CDC, the Collective-Drawdown CDC delivers higher and more stable benefit levels, reduces cross-subsidy magnitude to zero, and enhances both payout predictability and long-term intergenerational equity.

Technology Category

• Game Theory and Economic Paradigms: Fair Division
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Decision/Utility Theory

Application Category

• Economics, Online Markets and Human Computation: Fairness and ethical considerations in crowd work and in human-in-the-loop AI systems
• User Modeling, Personalization and Recommendation: Fairness-aware retrieval and ranking
• Responsible Web: Social and technical mechanisms of refusal for web technologies and applications

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.

Problem

• Eliminating intergenerational cross-subsidies in CDC schemes
• Improving fairness in pension benefit indexation methods
• Enhancing pension outcomes via Collective-Drawdown CDC design

Innovation

• Collective-Drawdown CDC avoids intergenerational subsidies
• Uses explicit insurance contracts for pooling
• Improves pension outcomes versus shared-indexation