Defined benefit (DB) pension schemes should "double down" on liquidity management if they want to stay on course to meet their long-term objectives, AXA Investment Managers senior portfolio manager, buy and maintain credit, Rob Price, has said.

Whilst managing liquidity has always been a challenge for DB schemes, Price said that the 2022 gilt crisis brought the need to maintain appropriate liquidity for liability-driven investment (LDI) portfolios and wider scheme objectives into sharp focus, driving "seismic" changes in the way schemes invest and view liquidity in their portfolios.

In particular, Price said that credit has been playing an increasingly important role in liquidity management since then, particularly for schemes with an endgame in mind, as schemes look at how this can be enhanced within the typically 20-50 per cent investment-grade credit allocation held.

Given this, Price suggested that there are three key things DB schemes should be doing to boost liquidity within credit portfolios, encouraging schemes "first and foremost" to look at whether changes to asset allocation could enhance liquidity.

"Different types of assets bring different advantages, and having the right mix helps to balance the potential for enhanced returns with the necessity to maintain sufficient liquidity," he explained.

Whilst Price acknowledged that cash is the most liquid asset class and therefore the most flexible, he emphasised that this provides no interest rate sensitivity to help hedge liabilities, nor does it provide any growth potential.
 
“Short-duration credit tends to be more liquid and cheaper to sell than all-maturity bonds, providing more flexibility. Credit spread curves are also flat relative to the recent past so investors don’t give up much, if any, potential return from re-allocating to short-duration bonds," he stated.

"However, similar to cash, the matching benefit is limited, and insurance companies are unlikely to want to receive short-dated bonds in transactions."

Price said that asset-backed securities (ABS) also have the benefit of providing a diversified source of liquidity to investment-grade credit portfolios, both from the pool of investors in the asset class and the underlying investment risks themselves.

"They can also provide a meaningful spread pick-up over credit," he continued. “The main drawback is the perceived complexity of the asset class and – similar to the other two options – lack of matching benefit, leading to higher leverage or more collateral being required in LDI portfolios.”

In addition to allocation changes, Price encouraged DB schemes to consider how credit repurchase agreements, known as credit repos, can provide a way to access liquidity while also maintaining market exposure.

“Repos offer schemes several significant advantages, including a buffer of liquidity that is quickly available should it be needed at short notice, for example for the LDI portfolio," he explained.

"They also allow credit portfolio managers to remain invested through market volatility and benefit when markets recover. Finally, they can fund purchases without needing the capital upfront, so that schemes can more easily take advantage of short-term spread moves, potentially improving overall portfolio returns."

Some schemes are already taking this approach, as Price explained that one DB client set up a credit repo facility following the 2022 gilts crisis and opted to use it in April 2025 following Liberation Day and the tariff volatility, to increase their level of buffer within LDI hedging arrangements, in anticipation of heightened volatility in interest rates and credit spreads.

More broadly, Price also emphasised the need for DB schemes to simply be ready to take advantage of market conditions, warning that "credit spreads can widen quickly, and snap back just as fast".

"A typical DB scheme may not be able to act with the speed required to take full advantage of these moves. Very often, the opportunity has passed before authority to make a trade has been established with a scheme’s different stakeholders," he stated.
 
“The infrequency of spread-widening events, and the high opportunity cost associated with missing them, means a proactive approach could lead to better investment outcomes."

One solution, Price suggested, is to establish a credit trigger framework that puts rules in place to provoke action when certain market movements occur.

"This could range from consultation with key decision-makers to empowering portfolio managers to make trades when well-defined market conditions are met," he explained.
 
 

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