Retirement is evolving. Diversification must too

For decades, de-risking in workplace pension portfolios followed a familiar pattern: reduce exposure to equities and increase exposure to bonds. Equities provided growth, while bonds were expected to offer greater stability as members approached retirement.​

That framework remains important, but it may no longer be sufficient on its own. Recent experience has shown that equities and bonds can come under pressure simultaneously, particularly when inflation rises sharply and interest rates adjust quickly.​

Public and private market alternatives can complement these traditional assets by broadening return drivers and strengthening resilience. Earlier this year, we launched our Growth and Diversified Private Credit LTAFs, giving workplace pension members access to private markets.​

As retirement evolves, how we think about diversification must evolve too. ​

Adding more alternative assets can broaden the opportunity set, but the key is how they are combined to shape the portfolio's overall risk and return profile. The objective is greater confidence in retirement, improving resilience to market shocks without sacrificing long-term growth potential.​

So, we are exploring how a broader mix of liquid investments with distinct return drivers could strengthen diversification during the de-risking phase by bringing together assets that respond differently to changing market conditions. 

Why diversification needs to evolve​

The market environment has become more complex. Inflation risk has returned, geopolitical uncertainty has increased and government debt levels remain elevated. At the same time, global equity market returns have become increasingly dependent on a relatively narrow group of large companies and sectors.​

For DC portfolios, these risks become particularly important as members approach retirement. A significant market fall at this stage can have a disproportionate effect on outcomes, especially if members begin drawing income before markets recover.​

This sequencing risk makes the composition of de-risking portfolios critical. Growth remains necessary, but it needs to be balanced against the need to manage drawdowns, preserve capital and maintain purchasing power.

The changing role of bonds​

The retirement journey has also become more complex and extended. As DC schemes increasingly support members through retirement as well as the years leading up to it, portfolios face a broader set of objectives. Alongside managing downside risk, they may need to support income drawdown, provide inflation protection and maintain growth potential over retirements that could span several decades.​

This leads us to question whether traditional de-risking approaches can meet all these objectives on their own. Rather than viewing bonds as the primary solution to retirement risk, we are considering how different assets and strategies could contribute at each stage of the member journey.​

The challenge is no longer simply to reduce volatility. It is to balance capital preservation, income generation, inflation resilience and participation in long-term market growth across a range of retirement pathways.​

Building a more resilient de-risking portfolio​

The aim is to build a de-risking portfolio that is less dependent on listed equities, conventional bonds or any single economic scenario, and better equipped to support members as they approach and move through retirement.​

Our starting point is not to add alternative asset classes for their own sake, but to define the outcomes required during de-risking and identify the exposures best placed to support them.​

So, our focus is on how diversification can be made more effective, not simply broader. That means identifying investments with genuinely different return drivers, understanding the role each could play and how best to package them together. This may involve combining diverse alternative sources of return, specialist investment exposures and carefully constructed asset allocations.​

We are looking at how return-seeking, defensive and inflation-sensitive strategies could be blended to maintain long-term return potential while improving diversification, downside resilience and protection from sequencing risk. This means assessing each exposure by its role within the overall portfolio: its source of return, behaviour during market stress, sensitivity to inflation and interest rates, and contribution after costs. Liquidity, governance and implementation are equally important. ​

Broader diversification only adds value where each exposure has a clear purpose and strengthens the portfolio as a whole.​

What liquid alternatives we are looking at​

Beyond private markets, we are exploring the role of more liquid alternatives. These can broaden the investment opportunity set while retaining characteristics that matter within workplace pensions, including liquidity, transparency and efficient implementation. We are considering three complementary types of investment exposure:​

• Return-seeking
  Controlled approach to equity investing through defensive strategies, reduced cyclical exposure and selective use of derivatives. Protected equity and minimum-volatility equity strategies can preserve participation in market growth while seeking to cushion downside risks. These can be combined with differentiated equity exposure, such as listed infrastructure or real estate investment trusts (REITs), which offer distinct return drivers and can enhance diversification. ​
• Resilience​
  Assets designed to help smooth returns and provide greater protection during periods of stock market weakness. This could include a mix of alternative credit investments with built-in protections, floating-rate features and lower sensitivity to changes in interest rates.​
  
  Within credit, leveraged loans, floating-rate credit and securitised credit can provide income from sources that differ from conventional government and corporate bonds. Their sensitivities to interest rates, inflation and economic conditions also vary, creating scope to diversify fixed-income exposure.​
• Satellites​
  Investments with distinct return drivers, such as commodities, gold or non-traditional asset classes and strategies. They may provide a potential counterweight to assets whose real value can be eroded by things like unexpected inflation.​

No single exposure is expected to perform well in every environment. The case for combining them rests on the distinct role each can play within the overall portfolio.​

Bonds remain important, but they need support​

This is not an argument for abandoning bonds. Government and corporate bonds can continue to provide income, liquidity and important defensive characteristics within retirement portfolios.​

The question is whether they should be expected to deliver every aspect of defence on their own.​

Our view is that modern de-risking portfolios benefit from a wider toolkit. By combining bonds with carefully selected alternatives, it is possible to build portfolios that are better equipped to balance growth, income, downside protection and inflation resilience over long retirement horizons.​

The principle is straightforward: do not ask one asset class to solve every problem. Instead, build resilience through multiple, clearly defined sources of return and risk management.​