Intergenerational equity and sustainability in a collective defined contribution plan

A collective defined contribution (CDC) plan is a group pension scheme where fixed annual contributions are made each year to a collective fund and where the benefits payable to each cohort depend on the plan’s investment experience. It differs from an individual defined contribution plan in that risks are shared among members, both within the same cohort and across different cohorts, rather than being borne separately by individual members.  The design of the mechanism used to adjust benefit levels in response to emerging experience has a direct impact on the relative benefit levels of successive generations. When the distribution of future benefit levels can be shown to be significantly different ex ante from one generation to another, the equity and sustainability of the entire scheme is called into question.