Over the past decade, defined contribution (DC) schemes have increasingly incorporated alternative assets into their investment strategies.

The recently released 10th edition of The DC Future Book, published in collaboration with Columbia Threadneedle Investments, reflects on these investment trends.

The shift towards alternative assets in DC schemes aims to enhance returns and diversify portfolios, addressing the limitations of traditional low-cost, liquid investments such as listed bonds and passively managed equities.

Historically, DC schemes have been cautious about alternatives due to concerns over liquidity, complexity, and regulatory constraints.

Despite these challenges, increased investment in alternative assets could improve retirement outcomes for members.

Alternatives offer higher potential returns than traditional equities and bonds, potentially resulting in greater growth of DC pots. Additionally, alternatives provide improved diversification, reducing risk and better protecting members’ savings during market downturns.

However, there are trade-offs. Illiquid alternatives may involve higher fees and complex administration, which could increase the cost of managing DC schemes and reduce overall returns.

The introduction of new initiatives, such as Long-Term Asset Funds (LTAFs), are supporting this shift, but careful management remains essential.

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