People's Pension has announced several strategic changes to the £6bn invested in the pre-retirement portion of its default fund, resulting in a "significant" restructuring of its fixed income allocation.

The changes, which are designed to deliver better long-term outcomes for its older members by improving real returns while continuing to manage drawdown risk carefully, reflect the declining competitiveness of cash as a long-term strategic asset as interest rates fall.

People’s Pension also explained that, as it is now using segregated mandates, a cash buffer is no longer essential.

The pre-retirement fund has also reduced its exposure to sovereign bonds, such as gilts and treasuries, as recent fiscal concerns have led to heightened volatility in term premiums, resulting in lower risk-adjusted returns from these instruments.

This means the pre-retirement fund will now be anchored around a global portfolio of high-quality, short-dated corporate bonds, actively managed by Invesco. This portfolio spans investment-grade corporate bonds across the US, Europe, and the UK, as well as selective exposure to US and European high yield.

People's Pension said that the shorter duration of the corporate bonds that have been selected manages risk and gives the possibility of redeploying maturing assets into higher spread environments should that occur.

It also stressed the importance of the global nature of the holdings, explaining that this ensures sufficient diversification and liquidity that is not available in the sterling market alone.

The group also confirmed that the investment management agreement (IMA) for the partnership between Invesco and People's Pension embeds robust responsible investment expectations, including responsible investment (RI) policy alignment and bespoke engagement.

This means that the increase in allocation to Invesco-managed bonds will see a greater proportion of the pre-retirement fund covered by the scheme's climate targets, exclusions policy, climate reporting requirements, and other RI objectives.

The equity portion of the People's Pension pre-retirement fund will continue to be passively managed by Amundi and listed infrastructure by State Street.

Commenting on the restructure, People's Partnership chief investment officer, Dan Mikulskis, said: “These changes reflect both our asset ownership model, which constantly evolves our investment strategy in line with market realities and member needs, and the power of our partnership with Invesco.

"By focusing on high-quality corporate credit, we aim to deliver better real returns while managing risk responsibly.”

Adding to this, People's Pension chair of the investment committee, Chris Fagan, said: “Our driving focus is always to improve outcomes for our members. These changes are grounded in deep analysis and clearly defined investment beliefs, and we firmly believe they will help us to continue to deliver more stable and rewarding retirement journeys for millions of savers.”

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