Key Takeaways
- • Aon argues that liquid alternative assets can enhance UK pension schemes' portfolio resilience while maintaining return objectives, particularly in environments marked by elevated market volatility and expensive equity and credit valuations.
- • Many defined benefit (DB) schemes have become overweight in illiquid assets since the 2022 gilts crisis, creating structural challenges for schemes pursuing insurance-based solutions or near-term buyouts.
- • Liquid diversifiers—alternative strategies investing across multiple asset classes and styles in accessible formats—can mitigate equity and credit market risks while generating uncorrelated absolute returns, according to Aon investment partner Guy Saintfiet.
- • Implementation of liquid alternatives presents barriers for mid-sized and smaller institutional investors due to the significant expertise and resources required, making outsourced solutions the preferred approach for most schemes.
- • Investment horizon materially affects allocation strategy; schemes with shorter timeframes seeking steady returns prioritize liquid alternatives differently than long-term investors, though diversification benefits apply across both profiles.
Summary
Aon has positioned liquid alternative assets as a critical tool for UK pension schemes seeking to strengthen portfolio resilience amid heightened market volatility and elevated valuations across traditional equity and credit markets. The asset management firm contends that these strategies offer genuine diversification benefits while enabling schemes to achieve return targets without excessive concentration in illiquid holdings.
The impetus for this strategic reorientation stems partly from the 2022 gilts crisis, which forced many defined benefit schemes into overweight positions in illiquid assets. This structural imbalance has become particularly acute for schemes pursuing insurance-based solutions, where liquidity and capital efficiency are essential prerequisites. Guy Saintfiet, Aon investment partner, emphasized that liquid diversifiers—which employ non-traditional investment styles across multiple asset classes in accessible, publicly traded formats—can mitigate concentrated equity and credit exposures while delivering uncorrelated absolute returns.
The portfolio construction rationale varies by scheme circumstances. Schemes with shorter investment horizons, particularly those planning near-term buyouts or insurance transactions, prioritize steady return profiles that liquid alternatives can provide, supporting portfolio diversification during transition periods. Conversely, longer-dated schemes benefit from the risk-offsetting characteristics of these strategies within broader asset allocation frameworks.
A principal constraint limiting broader adoption is the operational complexity and resource intensity required to identify, implement, and monitor liquid alternative positions. Aon notes that all but the largest institutional investors face meaningful hurdles in building internal expertise for this asset class, positioning outsourced implementation through specialist managers as the practical solution for most pension schemes. This approach allows schemes to access institutional-grade alternative strategies without building standalone investment infrastructure.
The impetus for this strategic reorientation stems partly from the 2022 gilts crisis, which forced many defined benefit schemes into overweight positions in illiquid assets. This structural imbalance has become particularly acute for schemes pursuing insurance-based solutions, where liquidity and capital efficiency are essential prerequisites. Guy Saintfiet, Aon investment partner, emphasized that liquid diversifiers—which employ non-traditional investment styles across multiple asset classes in accessible, publicly traded formats—can mitigate concentrated equity and credit exposures while delivering uncorrelated absolute returns.
The portfolio construction rationale varies by scheme circumstances. Schemes with shorter investment horizons, particularly those planning near-term buyouts or insurance transactions, prioritize steady return profiles that liquid alternatives can provide, supporting portfolio diversification during transition periods. Conversely, longer-dated schemes benefit from the risk-offsetting characteristics of these strategies within broader asset allocation frameworks.
A principal constraint limiting broader adoption is the operational complexity and resource intensity required to identify, implement, and monitor liquid alternative positions. Aon notes that all but the largest institutional investors face meaningful hurdles in building internal expertise for this asset class, positioning outsourced implementation through specialist managers as the practical solution for most pension schemes. This approach allows schemes to access institutional-grade alternative strategies without building standalone investment infrastructure.
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