Maximising long-term returns using asset allocation

Even in economic good times, investing is a risky activity. Attempting to predict the future and bring together a combination of assets to fit that narrative is a trap to avoid. As recent geopolitical developments highlight, it’s exceptionally difficult to anticipate the evolution of world events, and after a steep fall in markets, it’s tempting to reduce risk by selling equities.

A better, more methodical approach is to estimate long-term returns by asset class and allocate the best mix of different investments to build a portfolio that maximises potential future returns for a given level of risk. As central banks abandon policies, such as quantitative easing, that have dampened market volatility in recent years, forming an educated opinion on future volatility and how the correlations between different asset classes are likely to evolve is a key part of this process.


For assets that benefit from economic growth – particularly equities – we utilise a combination of analysis of historical inflation-adjusted returns with:

  • expectations of long-term economic growth
  • inflation
  • risk premia
  • current valuation measures.

All this data helps us to draw conclusions about future returns; and the metrics substantiate our view that equities, over the next 10 years, should return 3-4% above inflation, somewhat less than we have seen since 2012.


For defensive assets – principally bonds – we think carefully about:

  • low starting yields
  • the progressive unwinding of central bank quantitative easing
  • future inflation-growth trade-off.

Our analysis of this information leads us to believe that bonds will struggle to match inflation over the next decade, and after 3 years of strong returns, we are starting to reduce the interest rate and credit sensitivity of our bond portfolio.

As a result, over the next decade, the inflation-adjusted return of a traditional balanced 60/40 equity bond portfolio is unlikely to exceed 2%, considerably lower than the returns recorded since 2012. So, while this long-term strategic approach to asset allocation removes the risk of short-term price volatility, prospective returns appear moderate at best.

Hybrid investments

A solution to increasing returns in a balanced portfolio is to include hybrid investments in the asset mix at the expense of traditional fixed income. At The People’s Pension, our default investment option invests almost 67% in equities, 20% in bonds, and the rest in real estate and infrastructure investments. These latter 2 asset classes have both equity and bond-like characteristics as they engage in the benefits of economic growth and pricing power while also producing income. Evidence also suggests that they can provide some protection against inflation.

Risk premia strategies

The equity assets we invest in also use risk premia strategies, which comprise:

  • value
  • momentum
  • quality
  • size
  • low volatility.

Here, we employ a rules-based approach to benefit from market inefficiencies caused by investors’ various cognitive biases. We incorporate these strategies in a low-cost way within our members’ overall asset allocation.

The benefits of utilising hybrid assets and a risk premia approach

We estimate that introducing hybrid assets and a risk premia approach into our investment strategy should boost the long-term real return to around 3%, which, compared to a traditional balanced portfolio, is a better return. Obviously, there is no guarantee of future returns, and a combination of geopolitical uncertainty, elevated energy prices, and ongoing supply-side constraints is likely to lead to prolonged volatility, potentially whipsawing (ie the movement of stocks in a volatile market when a stock price will suddenly switch direction) those brave investors keen to trade markets tactically.

Looking forward

Looking to the future, after a weak start to the year, our base case is that economic growth will quicken as we move through 2022. However, inflation will remain a significant margin above the key central banks’ targets, and with wage growth lagging, real incomes will be squeezed. This time round, central banks will not be able to ‘look through’ unfavourable inflationary outcomes and there will be monetary policy tightening. Higher interest rates will be driven primarily by the authorities’ desire to ensure inflation expectations do not drift and cause a repeat of the 1970’s experience. Currently, financial markets are giving central banks the benefit of the doubt in their attempt to engineer a soft landing for inflation in 2023 while maintaining reasonable economic growth, and this remains our baseline scenario. Ifthis occurs, financial markets should recover lost ground as we head through this year. However, if central banks lose control of the inflationary narrative, expect further weakness in markets.   

New Head of Risk and Performance appointed

B&CE, provider of The People’s Pension, has strengthened its investments expertise with the appointment of a new Head of Risk and Performance.

Shakeel Ahmad joins the UK’s largest independent master trust from F&C/BMO Global Asset Management, where he was Head of Investment Risk. He has previously held the same position at JP Morgan and spent four years at ABN Amro Asset Management as Head of Risk Management for fixed income and FX. He has also previously held risk and performance-related roles across multiple asset classes at various investment houses.

At B&CE, which provides The People’s Pension to one in five workers, almost 6 million people, across the UK, Shakeel joins a growing investments team which oversees assets under management of more than £17 billion, alongside asset manager State Street Global Advisors.

Commenting on his appointment, he said:

“I’m delighted to have joined B&CE at such an exciting time in its history. I’m looking forward to working with a hugely talented investment team, which has the shared aim of making the right choices for the millions of members of The People’s Pension.”

Jon Cunliffe, managing director, investments at B&CE, said:

“We’re delighted that Shakeel has brought his wealth of knowledge and experience to B&CE. He shares B&CE’s values and is committed to putting the member at the heart of every decision made and helping them to build financial foundations for life.”


Our ESG strategy prioritises a finance-first approach to investing

The consensus may be waning, but even today, some investors still agree with the Milton Friedman doctrine that a firm’s only responsibility is to legally increase its stakeholder profits, leaving individual investors, consumers, and employees – rather than corporations – as the leaders of positive societal change.

Previously, this approach was deemed to be logical. However, there are obvious problems with it. For example:

  • Firms that prioritise corporate responsibility may gain community support and, as a result, benefit their shareholders.
  • There is evidence that firms that subscribe to the Friedman doctrine place excessive focus on short-term profit delivery, which has a negative effect on longer-term thinking around investment and innovation.

A finance-first approach to ESG

However, be that as it may, we need to be mindful of not constraining investments too narrowly when integrating environmental, social and governance factors because this will begin to diminish prospective risk-adjusted returns. If social and economic considerations take precedence over a finance-first approach to investing, there is a heightened risk that future investment returns will be compromised. Therefore, it’s important for investment managers to take a sensible approach to ESG investing, one that aligns with a finance-first approach. For example, if a company is involved in polluting the environment, exploiting its workers, or incentivising its managers to focus on short-term profit delivery, then these issues are likely to reduce the sustainability of its business model and therefore its attractiveness as an investment.

Higher market valuations

ESG considerations should not be treated as an add-on to a pre-existing asset allocation approach but should be at the core of how members’ retirement savings are allocated. While it cannot be comprehensively proven, there is substantial academic evidence to support the view that companies with higher-than-average ESG ratings tend to be rewarded with higher market valuations compared to their competitors.

A fundamental reason for this seems to be that these companies are better at managing the non-financial risks of their business models, and, as a result, this makes them relatively more sustainable and less susceptible to a damaging de-rating by the market. We’ve all seen real-world examples of companies not managing non-financial risks and the negative effects on their share prices, such as the Deepwater Horizon oil spill on BP or the emissions scandal on Volkswagen.

A ‘leader’ in managing ESG risks

At The People’s Pension, we have successfully incorporated ESG into the stewardship of our members’ retirement savings and, using MSCI ESG ratings, our default investment profile has been rated AA, making it a ‘leader’ in managing ESG risks. However, this is only part of what we’re focusing on as responsible investors.

An exclusionary approach

Instead of adopting the best in class, the ‘how’ approach to ESG investing, responsible investing involves making the active choice to remove (or choose) investments based upon the ‘what’. The ‘what’ typically involves removing or excluding investments in controversial weapons, addictive substances, gambling, and enterprises damaging to the environment. Therefore, in addition to ESG integration, we have used negative screens to help us divest £226m from 147 companies involved in controversial weapons or linked to controversies involving human rights, labour, the environment, and corruption.

Due to the increasing influence of responsible investment on investor choices, this approach should not sacrifice returns and can help prevent assets from becoming stranded by climate transition. Therefore, an exclusionary approach, in theory, can add to the improved risk-adjusted returns achieved through ESG integration. We have progressed even further with this approach by implementing tilts to reduce the carbon emissions from the assets we hold for our members.

Our goal is to be engaged asset owners, and we therefore expect our external managers to participate on behalf of our members in order to help ensure responsible governance and reduce non-financial risks. This activity should have a positive impact on our members’ returns over the long term. 

How we run our members’ money

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.

A review of pensions policy in 2021

Many of the policy changes discussed in 2021, like pensions dashboards, will be difficult to accomplish but will bring real improvements for savers. We have more questions about other initiatives, but have no doubt the Department for Work and Pensions (DWP) is trying to improve the UK pension system.  

Pensions dashboards

Big projects, like the pensions dashboards have seen major progress this year. The main contracts for the systems that will make the dashboards work have been issued by the Money and Pensions Service and they are progressing towards staging schemes on dashboards from early 2023.

Most of the legal and regulatory rules that will underpin how dashboards work have yet to be published, so there is still much to do. Similarly, we haven’t seen the application programming interface (API) that will be used to link together pension scheme member databases and the dashboards information architecture. It’s imperative that schemes get confirmation on the final requirements as soon as possible so that preparation can begin in earnest.

Small pots

In late 2020, the DWP working group produced a report recommending that the industry look at the policy and administrative issues around automatic consolidation of small pots. So, this year there has been further investigation into the small pots issue. And now following a report by the Pensions and Lifetime Savings Association (PLSA) and the Association of British Insurers (ABI) working group, there is a need for further action by policymakers. It is likely we will need legal and potential primary legislation to make small pot consolidation a reality. We hope that both the government and the industry will return to the table in 2022.

Communications and engagement

We now have final regulations for the simpler annual benefit statement.

The statement is now a known quantity. For most people, it’ll be a clear and standard-comparable document. For some (potentially those with more than one job or a protected pension age) it may look different, but not significantly so.


On investments, we have seen a renewed focus on investing in illiquid assets. Much of the government views rapidly growing DC funds as an easy source of capital for national economic priorities.

Measures like changing the charge cap are being suggested, which we see as ineffective. But other measures, like a new fund structure, are more likely to enable greater diversification in how DC funds invest. Broadly, we see investment in unlisted assets as potentially desirable given the large body of work showing an illiquidity premium for the schemes capable of capturing it.

The market for workplace DC is, however, very price-sensitive. Investing in unlisted assets is typically much more expensive than investing passively in listed equities and changing scheme asset allocations to invest in unlisted assets would most likely pass through to member charges.

Value for money

Which brings us to The Pensions Regulator and the Financial Conduct Authority framework for value for money. Making the workplace pension conversation about value, rather than just charges, is a sensible aim. Initially, the regulators’ value-for-money framework is intended to help pension professionals assess value, but, in time, we expect metrics to be developed that are consumer facing.

Our view is evolving. The focus on the proposed framework consultation paper in judging the quality of scheme oversight, investment and costs and charges is mainly right. The Pensions Policy Institute’s recent piece on the global experience of value for money also highlighted the importance of governance as a theme. It’s something we hope both regulators will return to.

So, while we expect 2022 to be equally busy, the hope is that policymakers keep the bigger picture in mind. 

Tim Gosling, head of pensions policy at B&CE, provider of The People’s Pension

Leading the value debate and meeting newly-engaged member expectations

When saver engagement comes – and I guarantee it will – how can we show the value of what we offer? As saver interest grows, can we tell the story of how we’re all helping to plan for our members’ futures and, if so, will we be able to service all their enquiries and not let them down?

The price of a family car

Common sense tells us the more a member has saved, the more involved they’ll be with their pension savings. It’s noted in Australia, who’ve had auto-enrolment since the 1990’s, that people take an interest in their savings when the value of their pot reaches the price of an ordinary family car.

Auto-enrolment, pension growth and increasing member engagement

As we approach the UK’s 10-year anniversary of auto-enrolment, pension pots are growing, and people are beginning to take more interest in their savings. We’ve seen this in our own members, where those who have more saved are more active in their online account.

So, as providers, employers, and financial professionals, we need to prepare ourselves for more engaged members, the questions they’re likely to ask, and the support they may need.

What is the charge?

Once engaged, charges often come as a bit of a surprise to savers, and 2 questions they will ask are, ‘How much am I being charged?’ and ‘Can I get it cheaper elsewhere?’ The Cheapest isn’t always the best, but in the case of pensions, value for money is important.

Value for money

Value for money for the newly-engaged saver is important, and what charges are paid for in pounds and pence is essential.

Flat percentage charges increase the cost to the member as their savings grow. So, to improve value for money, many financial companies reduce charges gradually as a member’s savings grow.

Employee benefits benefit employers too

Employers also want value for money from their workplace pension schemes too. Research tells us that employees value their employer’s pension contributions – second only to holiday entitlement. A scheme that lowers a member’s charge as their pot grows, effectively rewards loyal employees.

For employers, it’s very difficult to examine value for money at an individual level. Therefore, offering a scheme that reduces employees’ charges demonstrates value and promotes ownership of the journey towards an affordable retirement.

The shift from defined benefit to defined contribution pensions places greater responsibility on the member. Individuals approaching retirement must decide what to do with their savings and consider competing future variables, such as longevity, inflation, investment returns, and risks. How can we help them see the importance of those decisions?

Creating the journey

Our long-running New Choices, Big Decisions longitudinal study highlights that as people approach retirement, financial decisions can be made with little grasp of the full facts. Instead, they often choose the path of least resistance.

As an industry, we’ve confused savers instead of creating a simple journey of saving and then spending. What’s needed are guided routes into retirement, starting long before retirement approaches, when trigger points activate engagement and forward thinking. We must make it easier for them to become engaged with their savings and show our value.

Knowing how much money they have, who they can pass it on to if the worst happens, and where they can get simple retirement planning tools may be enough for some savers. For them, accessing their pot online must be the first step.

Pension engagement has been smouldering for years, but with a few small steps we can help ignite future interest for savers who want to know more. Employers, pension providers, and trusted financial advisers all have a role to play here in driving engagement and demonstrating value. The end destination should be a comfortable retirement. How savers think and approach that, along with lessons for us all, are discussed in our New Choices, Big Decisions report.

The People’s Pension divests £226m

The People’s Pension removes £226m from businesses that fail to meet its ESG standards

Leading workplace pension scheme, The People’s Pension1 has today announced that it has removed investment in companies worth up to £226m from its funds because these businesses have failed to meet its rigorous ESG (environmental, social and governance) standards2.

The workplace pension scheme has worked closely with its fund manager, State Street Global Advisors (SSGA)3, on the policy which led to the initial removal of approximately 150 stocks from its portfolio.

The divestment targets controversial weapons companies as well as organisations linked to severe controversies involving human rights, labour, environment, and corruption. Such companies are deemed to present some of the most severe types of ESG-related investment risk4.

Jon Cunliffe, managing director of investments at B&CE, provider of The People’s Pension, said:

“We’ve taken the significant step of divesting from companies which fail to meet our ESG standards because of the risks they pose to member accounts and the reputation of the scheme.

“As engagement with companies which flagrantly breach good practice is unlikely to work, we have removed investments from these holdings, in the best interest of our members.

“Both SSGA and our Trustees have worked very hard to get to this point, and we know that this decisive action will have the support of our members as our polling tells us that responsible investment is important to them.

“These exclusions underline our commitment to being a responsible investor, which we put at the heart of our decision making2.”

Alistair Byrne, managing director, head of retirement strategy at State Street Global Advisors, said:

“ESG considerations are an increasingly crucial aspect of the investment strategy of any pension scheme. We are delighted to have been able to work with The People’s Pension to design and implement these changes, creating a more robust and sustainable default fund for their millions of members. We look forward to continuing our collaboration to evolve the ESG strategy of the scheme.”


Holding long-term investments – why has my pension pot changed in value

Pensions, like any investment, carry some degree of risk. The value of your pension can go down as well as up. When considering these swings in value it’s important to think about your pension as a long-term investment.

Over the long term these swings in value usually iron out and return a profit.

History teaches

During the 2008-2009 stock market crash the FTSE 100 (the share index of the top 100 companies listed on the London Stock Exchange) struck its lowest point in March 2009. Yet it came roaring back during the following decade and struck all-time highs in May 2018.

But you don’t need to buy during a crash to benefit from stock market growth. Going back to the mid-1980s, if you’d invested a pound in the UK stock market on any given day and kept it there for 10 years, 99% of the time you’d have made money – on average more than doubling it. If you’d invested for only 1 year and taken your money out, you’d have lost money over a quarter of those times.

So, if you plan on remaining invested for a long time, don’t worry too much about the short-term ups and downs of the market. The main point is to stay invested over the long term, so your contributions have chance to grow.

If you still have concerns about your pension it may be beneficial to speak with a financial adviser. They usually charge a fee for their service so bear this in mind before seeking advice. Another option is to visit a website like MoneyHelper that provides free advice.

What are the benefits of a workplace pension?

Your workplace pension is a great way to save for your retirement:

  • All the contributions you and your employer make into your pension are tax-free
  • Pension funds invest in lots of different assets and this helps spread risk while still targeting long-term growth. For more information about what your fund(s) invest in please see our fund factsheets
  • The full state pension is only £179.60 per week (for the 2021/2022 tax year) so if you think you’ll need more money in retirement a workplace pension is a great investment

How do you define responsible investment?

Responsible investment is a phrase that has been thrust into the limelight in the last 12 months as more pension savers rightly become interested in how their money is invested.

But what does responsible investment actually mean?

At The People’s Pension, we have the dual responsibility of keeping savers’ money safe whilst generating positive returns – which of course must be further balanced against their own attitude to risk.

Our challenge is to determine how we invest member money in the types of industries and companies that they’re comfortable with, and still provide the type of growth needed to provide a meaningful return on their investment.

To be clear on the concerns our members have, we ask them. Over the last couple of years, we’ve run a survey asking them to rate the issues that matter most to them. Overwhelmingly, climate change came out as the most important topic, followed by controversial weapons.

So, if you know your customers’ primary concerns, how do you turn that sentiment into actionable change? Well, this question requires serious and careful consideration. For us, this means taking time to assess all issues thoroughly and taking a systematic and fact-based approach so we can make high-quality decisions on behalf of our customers.

This approach has seen us implement our first steps in ensuring our investment portfolio is aligned with our members’ wishes – we’ve completely excluded controversial weapons from our investment portfolio. This was a relatively straightforward decision to make and change to implement, as it had no material impact on the make-up and performance of our investment funds – so low risk and fuss free.

However, addressing climate change and how to travel down the road to net zero, requires rather more planning as it’s a very much more considered journey. We started in 2018, by adding a fund that reduces the carbon intensity of that part of our default funds. We acknowledge there is more to come, and from the mid-2020s we intend to use new contributions to smooth our transition to a net zero portfolio. This aims to balance the future risks of stranded assets against the current concentration risks caused by a relatively small number of net zero companies, as well as avoiding the potentially large transaction costs of having to sell significant assets in short time frames.

But there’s more to come. I’ll be at the Pensions Age Autumn Conference if you’re interested to hear more about our investment strategy and the further steps The People’s Pension plan to take on the route to net zero – look forward to seeing you there.

B&CE appoints new Investment Managing Director

Provider of The People’s Pension announces appointment

B&CE, provider of The People’s Pension1, has appointed a new Investment Managing Director to bolster its Investment Business Unit and enable the continued growth in scale and breadth of B&CE’s funds under management.

Jon Cunliffe, who has over 30 years’ experience in the finance industry will join B&CE in October. He joins from his role as Chief Investment Officer at wealth managers, Charles Stanley, with previous roles at Tesco Pension Investment, Aberdeen Asset Management and Bank of England.

Commenting on his appointment, he said:

“B&CE has an unrivalled reputation for providing first class workplace pensions solutions, which have provided good risk adjusted returns at a really competitive price.  Elsewhere, the support and customer service that clients receive are a cornerstone of its impressive growth trajectory. 

“After more than 30 years working in financial services, the opportunity to work for a fast growing, not for profit organisation, where there is a clear alignment of the interests of all stakeholders, is too good an opportunity to turn down.  I can’t wait to begin working with the team to establish B&CE’s position as the leading provider of workplace pensions.”

The People’s Pension, administered by B&CE, is the largest, independent master trust in the UK.

The new Managing Director for Investments will be responsible for the overall performance of the Investment Business Unit, working alongside the Chief Investment Officer who will retain responsibility for client investment strategy.

Welcoming the new hire, B&CE CEO Patrick Heath-Lay, said:

“It’s fantastic that Jon will be joining us. The growth of our investment activities, on behalf of our members, will be significant over the coming years and with the addition of Jon’s wealth of experience, these activities will continue to go from strength to strength.”