New LCP modelling shows CDC delivers more stable retirement outcomes across eight decades

New modelling of how CDC schemes would have fared over the last 80 years shows well-designed CDC schemes prove resilient to radically different market conditions.

The analysis by LCP which uses actual historic returns and market conditions to model outcomes from different types of pension arrangements over time, highlights that over three out of the four time periods, the CDC pensioner ended the 20-year period with a pension that beat inflation. Only over the extreme stagflation regime of 1963–1983 was there a material real loss.

The modelling has led to four findings:

• CDC remains resilient across very different market environments - LCP’s modelling shows CDC delivers consistently stronger and more stable outcomes than individual DC across all four historic economic regimes modelled, outperforming inflation in three out of four 20 year periods. CDC smooths volatility by avoiding “point in time” losses at retirement, from a member perspective sitting between DC and DB in terms of risk and stability.
• Growth asset exposure drives CDC’s long term outcomes - CDC’s ability to maintain exposure to growth assets throughout retirement – unlike DC annuity purchase – underpins its resilience. Strong markets feed directly into higher pensions, while downturns do not permanently lock in lower outcomes.
• Outcomes vary by age and horizon - Younger members see stronger outcomes because they can benefit from “cheap accrual” during weaker market periods and have longer to recover from volatility. Older members have some protection of short-term pension purchasing power, with outcomes shaped by how increases and accrual costs shift year to year.
• CDC adjusts pensions over time rather than locking in outcomes - CDC pensions evolve with market conditions: they rise in strong markets and fall behind inflation in challenging periods, but avoid the large nominal cuts typical in some other designs. This flexibility reduces the risk of poor retirement timing and allows pensions to recover when conditions improve.

Ivan Buzulutsky, LCP Partner commented: “Our analysis highlights how different pension designs respond to very different economic environments. CDC does not eliminate investment risk, nor does it guarantee outcomes. Instead, it changes how risk is shared and how outcomes adjust over time.

“The experience of the past 80 years does not predict the future, but it does illustrate the structural strengths and limitations of different pension designs. For policymakers, trustees, and employers considering CDC, the key question is not whether risk can be removed, but how it should be shared — and whether members are comfortable with the form that sharing takes.”

Helen Draper, LCP Partner, added: “One of the key strengths of CDC schemes is that they avoid locking in poor outcomes at a single point in time, allowing members to continue participating in long-term growth during retirement. Compared with purely individual arrangements, it spreads the impact of adverse market conditions across members and over time, reducing the severity of poor timing for any one cohort.

“These features come with trade-offs. Outcomes within CDC vary by age and market experience, and pensions in payment may fluctuate in real terms. Whether this is viewed as desirable depends on how fairness is defined: as individual ownership of outcomes, or as collective sharing of risk.”