Unlocking the Value of Alternative Fixed Income
With many corporate pension plans now approaching or at their end-state targets, these plans are increasingly turning to alternative fixed income strategies to refine their portfolios. These strategies can enhance diversification, improve yield, and offer better alignment with liability profiles than traditional fixed income alone. While there are a range of products across the credit risk spectrum, we focus here on asset-based finance, private IG credit, direct lending, and leveraged credit, as we believe these categories are particularly well suited to the needs of corporate pension plans. The following sections explore how each can support more efficient, resilient portfolio construction.
Asset-Based Finance
ABF offers a flexible toolkit for corporate pension plans seeking to align return objectives with prudent risk management. Strategies span a spectrum: high-grade ABF provides investment-grade exposure with strong downside protection, while higher-yielding products offer enhanced return potential through selective credit or structural complexity. This range allows plan sponsors to tailor allocations based on funding status, duration needs, and de-risking glide paths.
High-grade ABF is particularly compelling for plans aiming to reduce risk without sacrificing yield. The asset class offers stable contractual cash flows, low mark-to-market volatility, and strong structural protections—attributes well suited to matching projected liability cash flows. As funded ratios improve, sponsors are increasingly shifting from equities into fixed income, and high-grade ABF offers enhanced spread relative to traditional investment-grade credit, delivering yield pickup of 100-150 bps versus IG corporate benchmarks. We also note that ERISA-friendly evergreen fund structures offer corporate pension plans attractive access to the asset class with no limitations on ERISA capital.
Beyond return enhancement, ABF brings unique diversification. Many segments are tied to distinct economic drivers, such as housing, consumer spending, or lease payments, rather than broad corporate credit cycles. This makes ABF a valuable complement in multi-asset portfolios, especially for sponsors seeking to reduce public market reliance while maintaining yield efficiency.
ABF’s natural amortization and predictable cash flows also support benefit payment alignment. With typical durations of 3–5 years, it allows sponsors to manage both interest rate and spread duration effectively. Combined with broad sector and structural diversification, ABF offers an efficient path to de-risking, particularly for plans nearing end-state.
Private IG Credit
Private IG credit offers corporate pension plans a compelling way to enhance yield, diversify exposures, and better align portfolios with long-term liabilities while maintaining strong credit quality. Spanning corporate credit, high-grade ABF, and real assets, the asset class delivers tailored, privately negotiated transactions with high-quality borrowers, opportunities often unavailable in public markets. These transactions typically provide 100–250bps of incremental spread over public IG benchmarks, supported by structural protections, contractual cash flows, and collateral-backed security packages.
For plans approaching or at end-state, private IG’s customizable structures and duration profiles directly support liability-driven investing objectives, reduce surplus volatility, and mitigate benchmark concentration risk. As allocations to illiquid credit expand, private IG is emerging as a distinct and attractive complement to traditional exposures. While direct lending will likely remain the “core” allocation within private credit, growing portfolios increasingly require differentiated sources of yield and diversification within illiquid sleeves. Similar to ABF, private IG broadens the opportunity set beyond corporate loans into a spectrum of investment-grade corporate credit, high-grade ABF, and real assets. By pairing core direct lending with complementary allocations to ABF and private IG, corporate pension plans can improve sector balance, capture illiquidity premiums, and build more resilient, diversified income streams that sustain funded status stability over the long term.
Direct Lending
Direct lending provides corporate pension plans with access to privately originated, senior-secured loans that can deliver equity-like returns with moderate volatility. These loans are typically extended to middle-market companies and feature floating-rate coupons, structural covenants, and negotiated terms that reduce credit risk and increase resilience to rising interest rates. For underfunded plans seeking return enhancement, direct lending seeks to offer an appealing way to generate meaningful yield without the same mark-to-market sensitivity as public equities while offering a yield premium to traditional fixed income.
Direct lending also diversifies portfolio exposures away from traditional bond benchmarks. The asset class performance is typically driven by negotiated spread rather than broader market forces, offering diversification benefits relative to traditional bonds. Its underlying exposures, largely tied to idiosyncratic business fundamentals, provide a differentiated return stream that can help reduce overall portfolio volatility. For plans pursuing a blended strategy, seeking to close funding gaps while maintaining disciplined risk control, direct lending can serve as a valuable complement to fixed income and public credit allocations.
Leveraged Credit
Leveraged credit, which includes syndicated bank loans and high-yield bonds, represents a liquid, intermediate risk option for corporate pension portfolios. These assets tend to offer higher yields than investment-grade corporate bonds and have shorter durations, making them well suited for plans that require liquidity while managing funding volatility.
With a return profile that bridges traditional fixed income and equity, leveraged credit strategies can enhance income generation without meaningfully increasing risk. Many strategies offer periodic or daily liquidity, enabling tactical rebalancing within liability-driven portfolios. For CIOs looking to add return-seeking exposure without introducing substantial volatility, diversified leveraged credit funds can provide flexibility and stability in evolving rate environments.
Conclusion
U.S. corporate pension plans have entered a new era—one defined by stronger funding, shorter liabilities, and a structurally more resilient portfolio architecture. Yet this progress brings new challenges: as end-state portfolios approach maturity, CIOs must evolve their toolkits to preserve gains, enhance diversification, and future-proof portfolios for long-term success.
With higher funding levels and increased investment flexibility, corporate pension plans now have an opportunity to shift from defense to offense—redefining what it means to invest prudently in a lower-growth, higher-rate world. We believe that those who embrace a forward-looking, risk-aware approach that incorporates high-quality alternatives may be better prepared to navigate the road ahead.