Why portfolio structure matters for DC pensions

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When building any multi-asset investment portfolio, the focus tends to fall on two things: choosing the right assets and choosing the right managers. These factors are important, but they can overshadow a third consideration – implementation. Perhaps it’s less glamorous than the other two, but it’s no less influential for long-term returns.

That’s because implementation goes beyond just putting investments in place. It covers how a portfolio is designed and operated in practice, including how it manages liquidity, maintains control and keeps costs in check over time.

Implementation is becoming especially important as UK defined contribution (DC) pension schemes gain greater access to private markets, particularly through long-term asset funds (LTAFs). While this is opening up new opportunities, it’s also introducing new complexities in how portfolios are built and managed.

Convenient doesn’t always mean efficient

A lot of the new access is delivered by structures designed for ease and speed, rather than long-term efficiency. And that can come at a cost to returns. Evergreen funds have become a popular structure for accessing private markets because they can simplify fundraising, reporting and cashflow management. They also offer the potential to scale and standardise.

For those reasons, evergreen approaches are typically concentrated in the income-focused or easier-to-access parts of private markets, like private credit or income-generating infrastructure. They tend to rely on pooled structures and pre-packaged portfolios. In practice, though, this can limit how far the portfolio manager can control where and when capital is deployed. It can also mean holding larger cash allocations to meet liquidity needs. All of this can create a certain rigidity, reducing the ability to adapt as conditions change. These trade-offs aren’t always immediately visible, but they can have a meaningful effect on long-term outcomes.

Why diversification still matters in private markets

By focusing on what’s easiest to implement, portfolios can also become narrower. This is a shame, because private markets are not one single type of investment; they include different asset classes that behave in different ways. Much like their traditional equivalents, some are designed to produce regular income – for example, private credit or infrastructure debt – while others, such as private equity, concentrate on long-term capital growth.

To be well balanced, a private market portfolio will typically need a mix of these characteristics, which can help smooth returns, balance income and growth, and build resilience over time. Weighting one area too heavily can skew outcomes (for example, by being too income-focused), restrict exposure to growth opportunities and increase reliance on a single type of return. Designing portfolios for ease and speed of access alone can lead to narrower, less balanced exposure. To put it simply, achieving diversification isn’t just about the ‘what’ you invest in. The ‘how’ of building and managing the portfolio is also important, bringing us back to implementation.

Implementation – making diversification work in practice

In practice, that comes through in how portfolios are structured. Implementation can affect:

• timing and efficiency of capital deployment
• how much control the investor retains
• how efficiently returns are delivered – including the effects of costs  and uninvested cash.

The challenge of liquidity often shapes how private market portfolios are built, influencing everything from fund structures to cash holdings.  Implementation also shines a spotlight on liquidity. Many investors view liquidity as a fixed requirement, but portfolio design can significantly influence how much is actually needed.

Designing, not buying, liquidity

Often, liquidity may be seen as a constraint, something that needs to be built in through fund structures. That can lead to portfolios holding larger cash balances or maintaining exposure to more liquid assets, which can dilute long-term returns.

Rather than building liquidity into the private market allocation itself, schemes can manage it through the wider DC portfolio.  Of course, some cash holdings are a natural feature of a portfolio, particularly in the early stages. But portfolios can also be designed to generate liquidity over time, via income, loan repayments and asset sales. In other words – through quality private assets. This way, the need for large cash buffers can be reduced, while still providing flexibility to meet member needs.

In this context, liquidity is less about access on demand, and more about careful planning and sequencing. By deploying and returning capital in a controlled way, portfolios can move from being cash-constrained in the early stages to more self-sustaining over time. In turn, that can help improve efficiency and support more consistent long-term outcomes.

Improving outcomes

Liquidity and portfolio construction are important aspects of implementation, but they’re not the only ones. As private markets become a larger part of pension portfolios, robust valuation processes and clear governance frameworks also help ensure fairness between members over time.  

This broader approach to implementation is sometimes called creating ‘structural alpha’. It’s a term used by private market specialists Future Growth Capital to mean value that can be added through better portfolio design, rather than through market timing or by manager selection.

In the simplest terms, it’s about improving outcomes by removing unnecessary costs, maintaining control over how capital is deployed and avoiding inefficiencies like idle cash. In isolation, each of these effects might seem small, but over the decades that many pension savers spend investing, they can compound to make a meaningful difference to net returns.

Access isn’t enough

As private assets become a more prominent part of DC portfolios, the way those investments are implemented will become increasingly important. Access alone isn’t enough, and how portfolios are structured, diversified and managed over time must all play key roles in shaping outcomes for members.

For advisers and trustees, that means looking beyond the assets themselves and considering how those investments work together in practice. A broader, more balanced approach to private-market investing, supported by thoughtful implementation, can help make portfolios not only easier to access, but better positioned to deliver for the long term.