Jon Cunliffe by Jon Cunliffe |

Like most pension schemes, the vast majority of our members invest in the default. So, this fund is particularly important and requires a highly focused investment strategy that means savers can receive the retirement outcome they deserve.

Optimising risk and return

We prioritise optimising risk and return by offering an appropriate default fund, which meets the retirement needs of our members in the most cost-effective way. We do this by investing in several different asset classes that target positive long-term returns. This combination of different assets forms what is known as a ‘balanced portfolio’. It uses the benefits of diversification with the aim of reducing the fluctuations of our members’ investment returns. 

Traditional beta with equities as the cornerstone

Most long-term investment returns derive from asset allocation in traditional beta, which is made up of various sources of return. Equities are the cornerstone, having historically been the best way for investors to benefit from economic growth through corporate earnings.

Our equity allocation incorporates risk premia strategies, which use a rules-based approach to benefit from market inefficiencies caused by investors’ various cognitive biases. These strategies consist of value, momentum, quality, size and low volatility –and we integrate them in a low-cost way within our members’ overall asset allocation.

Infrastructure and property

Along with equities, we also invest in 2 other so-called ‘growth-facing’ asset classes – infrastructure and property. They’re ‘hybrids’ in the sense that they both have equity and bond-like characteristics; they can generate economic growth as well as an income stream and have lower volatility compared to equities. Both of these asset classes boost the risk-adjusted returns received by our members.


We also hold bonds, historically a key part of a balanced portfolio. Yet, low yields and high levels of interest rate sensitivity have reduced prospective risk-adjusted returns. While it’s inevitable that future returns will be lower, we still think that sovereign bonds do offer valuable diversification benefits in a portfolio of mixed assets.

Sustained inflationary risk that prompts central banks to push up interest rates too quickly must be taken seriously. However, current high levels of borrowing suggest a limited cycle of rate hikes – with central banks eager to inflate away the debt burden by tolerating above-target inflation, while committing to maintaining interest rates at relatively low levels. 

Corporate bonds

Our fixed income allocation is heavily weighted towards corporate bonds, which has been a big positive for our members’ returns. An early end to the economic cycle would be negative for these assets; but we feel that central banks are committed to extending the current economic expansion.

Foreign exchange risk

Finally, there is foreign exchange risk. We take a rational, global approach to long-term asset allocation, so the majority of our investments are in foreign currency. We don’t want to hold unrewarded risk for our members. And as a result, we have analysed the appropriate amount of exposure to the major foreign currencies that we should hedge back to the Pound and concluded that 70% is the optimal level.

Responsible investing

There is significant academic evidence that suggests that companies with higher-than-average environmental, social, and governance (ESG) ratings are rewarded with relatively higher market valuations. Crucially, these companies are better at managing their non-financial risks, which makes them less prone to a damaging de-rating by the market.

Surveys show that ESG is important to our members. Morgan Stanley Capital International (MSCI) has rated the accumulation fund used in our default lifestyle profile as ‘AA’. This means that the companies our members hold are, on average, leaders in managing ESG risks and opportunities. 

Also, we’ve actively decided to remove (or choose) investments in companies based upon the detrimental nature of their business activities. This approach is increasingly preferred by investors. It should not necessarily involve sacrificing returns and should be able to increase the improved risk-adjusted returns delivered by ESG integration.

Continuing to evolve our approach

Like all major asset owners, we need to continue to evolve our approach. A lot of good work has already been done to ensure that our members’ investment journeys are positive, and this is something I intend to build upon in the years ahead.


This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.