Defensive equity: a DC strategy for today and tomorrow?

Decumulation brings a different set of challenges with market volatility a key consideration for retirement income. 

For DC members near or at retirement with equity exposure, this raises an important question: how can they retain access to growth, while managing the potential impact of market falls along the way? 

Approaches that seek to reduce the probability and severity of drawdowns may therefore play an increasingly important role.

A defensive equity strategy is one approach that may be appropriate for some portfolios. Although a relatively new idea for DC savers, option-based strategies have a well-established history in defined benefit (DB) pension schemes for managing equity risk.

Combining equity market exposure with a systematic option hedging overlay, a defensive equity approach seeks to maintain participation in growth assets while aiming to reduce drawdowns and smoothing volatility. While not necessarily suitable for all portfolios, it may play a role either as a partial substitute for equity exposure or alongside diversified growth strategies.

Although such a strategy cannot eliminate market risk or guarantee outcomes, its objective is to create a more controlled experience of equity exposure, especially during periods of heightened uncertainty. This outcome may be helpful for members that still seek growth but want to avoid the potential disruption that large and sudden market falls can cause. 

When is defensive synthetic equity appropriate for DC members?

The role of defensive synthetic equity is not to make big calls, but to engineer a more robust participation in equity returns. 

It may be appropriate for today’s particular flavours of geopolitics, volatile commodity prices and artificial intelligence disruption. And, equally for future risks from different regions, new forms of technological change, shifts in policy, or entirely unforeseen shocks. What remains consistent is that equity participation can be shaped to better support stability without removing the potential for long-term returns.

Evolving DC member journeys: Smoothing paths for decumulation

As DC members approach and enter decumulation the nature of risk changes. Returns matter, but so does the pattern in which they arrive. A significant market fall early in retirement may impact outcomes, particularly when withdrawals are being taken at the same time.

In this phase, a defensive equity strategy may help members retain some growth potential while aiming to limit the impact of severe drawdowns. In decumulation, where stability matters, shaping equity participation more deliberately may offer meaningful value, contributing to and supporting more resilient withdrawals and a steadier drawdown experience through retirement.  

DC, decumulation and destabilised markets

In a world where risks evolve quickly, from geopolitical risk to AI disruption – and DC solutions for decumulation and drawdown are being sought – defensive equity is one of several tools that DC trustees and schemes may consider as a pragmatic way to help members stay invested, resilient, and on track.

For more information read our previous blog: Could a defensive equity strategy defend DC savers?

 

Key risks

Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested.

For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security

Risk management cannot fully eliminate the risk of investment loss. It should be noted that diversification is no guarantee against a loss in a declining market. The above information does not constitute advice.