Credit Without the Constraints

Executive Summary

Building more resilient portfolios with synthetic credit

Three years after the liability-driven investing (LDI) crisis reshaped UK pension governance, trustees face a new hurdle. The Pensions Regulator’s funding code now requires schemes to show clear paths to low dependency, pushing portfolios toward liability‑matching assets—predominantly investment‑grade credit. At the same time, many schemes are preparing for their endgame—some positioning for an eventual insurance transaction and others choosing to “run on” whilst questions around surplus extraction and policy reform evolve. However, a problem exists. Whilst regulations and endgame considerations push schemes towards credit, the sterling corporate bond market is constrained. Spreads are tight, concentration risk is high (dominated by financials and utilities) and the physical market lacks the depth to support the £1.12 trillion in pension liabilities chasing just £373 billion in sterling corporate bonds.

Trustees need a solution that efficiently accesses credit exposure without sacrificing the resilience and liquidity that 2022 proved is essential.

Global Credit Alternative

We developed Global Credit Alternative (GCA) to address these challenges. GCA is built on a simple and widely known financial principle: holding corporate bonds is economically similar to selling equity puts. In both cases, the investor earns a steady income (spread or premium) in exchange for bearing downside risk linked to company performance.

GCA applies this logic systematically. Instead of buying individual bonds, the strategy:

1. Sells a basket of equity index put options to generate premium income (similar to earning a credit spread)
2. Buys deep out-of-the-money put options to cap losses (creating a maximum downside)
3. Uses UK gilts as collateral, providing the duration exposure and collateral support central to LDI frameworks

This structure delivers coupon-like income and corporate bond–like economics but with distinct advantages over physical credit, including defined risk.

Why consider GCA?

1. Scalable liquidity
The exchange-traded equity index options market trades over US$4 trillion daily. Unlike the sterling credit market, which became heavily one-sided during the 2022 crisis, equity options remained liquid. This depth helps trustees access capital when they need it most.

2. Global diversification
GCA offers exposure to diversified global markets and sectors, avoiding the heavy concentration of financials found in sterling credit. Crucially, it does this without the foreign exchange or interest rate hedging headaches often associated with global bond portfolios.

3. Capital efficiency
Because GCA is an overlay strategy, it doesn't require full funding (i.e., it can be invested with less than 100 pence for each pound of exposure). Using GCA, schemes can target their desired spread exposure whilst keeping the majority of their capital in high-quality gilts to support liability hedging.

Building for the next decade

Physical sterling credit remains a cornerstone of pension portfolios, but it has limitations. GCA isn't a replacement but rather a powerful complement. By combining physical credit with GCA, trustees can use multiple levers for managing risk: physical bonds for cash flow matching and GCA for liquidity, diversification and operational flexibility.

As schemes navigate the path to their endgame, having a resilient, liquid and efficient credit allocation is no longer optional—it's essential.

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Hypothetical past performance is not a reliable indicator of future actual results. The results are theoretical, reflect performance of a strategy not currently offered to investors and do not represent returns that any investor actually attained. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve results similar to those shown. There are frequently sharp differences between hypothetical performance results and the actual performance results subsequently achieved by any particular trading strategy.

An equity option is a contract that gives the purchaser the right, but not the obligation, to buy or sell a stock at a specific price within a certain period. There are numerous risks associated with transactions in options on securities and/or indices. As a writer of covered call options, the portfolio forgoes the opportunity to profit from increases in the values of securities held by the portfolio. However, the portfolio has retained the risk of loss (net of premiums received), should the price of the portfolio’s securities decline. Similar risks are involved with writing call options or secured put options on individual securities and/or indices held in the portfolio. This combination of potentially limited appreciation and potentially unlimited depreciation over time may lead to a decline in the value of the portfolio.

Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

This marketing communication is for professional/institutional and qualified clients/investors only. Not for retail use. Recipients who do not wish to be treated as professional/institutional or qualified clients/investors should notify their Allspring contact immediately.

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