A redesigned collective defined contribution (CDC) pension model could deliver retirement outcomes up to 75 per cent higher than traditional defined contribution (DC) schemes, according to new research from the Pensions Policy Institute (PPI) and King’s College London (KCL).

The two-year study, Collective Pensions with Investment Choice: Making CDC Work for the UK, funded by the Nuffield Foundation, modelled several CDC designs and found that a “collective drawdown” structure could deliver the strongest and most sustainable outcomes for savers.

The analysis found that, on a risk-adjusted basis, collective drawdown could offer an approximately 75 per cent better pension than a DC scheme followed by full annuitisation, and 22 per cent better outcomes than optimised drawdown strategies such as “flex-then-fix”.

Unlike traditional DC models, where individuals bear all investment and longevity risks, the collective drawdown design would allow members to benefit from pooled longevity insurance while retaining individual investment pots and choice over risk level or ethical preferences.

According to the researchers, this structure enhances risk management and efficiency, offering higher and more stable incomes without requiring employer guarantees.

The PPI found that collective drawdown schemes could be particularly effective because they separated longevity pooling from investment pooling, overcoming some of the limitations seen in existing “shared-indexation” CDC designs, such as intergenerational cross-subsidies and mispricing.

For example, the report revealed that traditional flat-accrual CDC designs can result in pensions worth up to nine times those of the youngest members, while dynamic-accrual approaches may misprice benefits by as much as 50 per cent if indexation is assumed to remain constant.

The report’s modelling also indicated that all CDC designs tested, including those currently possible under UK regulation, could outperform DC plus annuity approaches for members who remain in the scheme throughout their careers.

However, collective drawdown consistently achieved the best outcomes, with an optimal “certainty-equivalent replacement ratio” of 0.62 compared to 0.35 for DC plus annuity, 0.45 for dynamic-accrual CDC, and 0.52 for statistically calibrated CDC.

Beyond individual benefits, the researchers noted that improved risk management within collective drawdown schemes could support greater investment in productive assets, bringing wider economic benefits through capital markets.

They also suggested that the design could simplify regulation and improve transparency for members, making collective schemes easier to communicate and understand.

However, the report warned that the collective drawdown model was not currently permitted under UK law and would require new regulatory and potentially legislative frameworks to be established.

It also called for clear communication strategies and consumer testing to ensure savers could understand and trust collective arrangements, recommending further exploration of collective drawdown as a potential default option for DC members at retirement.

PPI head of modelling and co-investigator for the project, Timothy Pike, said he was "incredibly proud" of the analysis that PPI had contributed.

"As the sector gears up for a future with a potentially larger role for CDC schemes, it is vital we understand how we can optimise retirement saving outcomes,” he added.

Looking ahead, the study made nine policy recommendations, including that regulators should require CDC schemes to publish simulation-based risk assessments and that policymakers explicitly consider acceptable levels of cross-subsidy between age groups.

It also suggested that schemes should communicate members’ projected real-terms benefits and uncertainty, rather than nominal benefit amounts, to help savers make better-informed decisions.

While only one CDC scheme, Royal Mail’s, currently operates in the UK, the PPI and KCL findings come amid growing momentum for the model.

The Department for Work and Pensions (DWP) has recently finalised regulations to extend CDC to multi-employer schemes and launched a consultation on “decumulation-only” models.

Meanwhile, both the Church of England and TPT Retirement Solutions have also expressed interest in developing collective pension designs.

The report concluded that collective drawdown could represent the “optimal” form of collective pension provision for the UK, offering a “third way” between defined benefit (DB) and DC structures that combines longevity pooling with member choice, higher potential returns, and improved fairness.

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