Reports and Briefing Notes

Modelling Collective Defined Contribution Schemes

The Department for Work and Pensions (DWP) sponsored the PPI to develop a Collective Defined Contribution (CDC) model to look at a potential CDC scheme under different assumptions to determine whether CDC produces better results compared to DC and in what circumstances. 

In the short term, with no initial pre-funding (which is likely to be the case for a new scheme), the benefits of the modelled CDC scheme are similar to that of a DC scheme with an aggressive drawdown (7% per year). However, the modelled CDC scheme would be less likely to run out, and the outcomes are still higher than a DC scheme with an annuity. 

In the long term, once the scheme is mature and the scheme population is stable, CDC produces better outcomes (a replacement rate of between 27% and 30%) than DC (a replacement rate of between 12% and 21%, assuming a 10% contribution rate). The PPI modelled CDC scheme also requires a relatively low contribution rate to maintain these outcomes.