With two-thirds of 2026 behind us, Pensions Expert asks investment consultants for the key risks and opportunities that should be on trustees’ agendas going into the autumn.
The rise of artificial intelligence (AI) technologies and the investor hype around related companies have formed one of the biggest themes in both equity and bond markets this year.
At the same time, record temperatures across the UK and Europe and the resulting wildfires and droughts have refocused attention on the effects of climate change.
Meanwhile, military conflicts in the Middle East and Ukraine continue to affect supply chains, and there have been warnings about risks mounting in areas of private markets such as unlisted debt.
In short, there is plenty for pension fund investment committees to consider when they reconvene after the summer. But what should be top of the agenda?
Understanding AI upsides and downsides
SpaceX set a record for the biggest initial public offering when it listed earlier this year with a valuation of approximately $1.8trn. This is expected to be eclipsed in a matter of weeks when AI giant Anthropic comes to market, with some reports predicting a valuation of $2trn.
James Lewis, chief investment officer for Mercer’s UK business, said conversations around AI should focus on “knowing what you own to understand concentration themes in portfolios and whether they are desired or a by-product of a series of other decisions”.
Yona Chesner, head of pensions investments at Cartwright Pension Trusts, agrees that trustees need to be aware of concentration risk, and adds that this is not limited to equity allocations.
“Much of the issuance funding data centres, power, and the wider AI build-out now sits within buy-and-maintain credit portfolios. Looking at name and sector exposure across asset classes can give trustees a more holistic idea of where they are most concentrated.”
“Increasingly this concentration has also moved into credit portfolios,” Chesner explains. “Much of the global investment grade issuance funding data centres, power and the wider AI build-out now sits within buy and maintain credit portfolios. Looking at name and sector exposure across asset classes can give trustees a more holistic idea of where they are most concentrated at a total scheme level.”
Barry Jones, chief investment officer at Isio, warns that reducing exposure to the mega technology companies dominating equity indices “hasn’t necessarily paid off as these companies have continued to drive market returns, but the concentration risk is still there”.
Jones also echoes Chesner’s view on AI’s prevalence in bond portfolios, warning that this concentration in AI themes and companies “could create a blind spot in traditional risk modelling”.
“Models may assume more diversification between different asset classes than investors would actually experience if there were a significant setback for AI,” he explains. “Equity and debt exposures to the same companies could come under pressure at the same time, so schemes should consider whether traditional correlation assumptions fully capture that concentration risk.
“AI and the largest technology companies will continue to play an important role in pension portfolios. As these businesses become an even bigger part of public markets, trustees need to understand how much exposure they have across the portfolio and consider how that concentration could affect portfolio resilience during periods of market stress.”
Managing liquidity as part of endgame planning
For defined benefit (DB) pension schemes, another big theme of 2026 has been endgame planning as government reforms and industry developments present more opportunities for pension schemes to secure funding positions and potentially use surplus capital.
Managing investment portfolios with an endgame in mind presents new challenges for trustees. Cartwright’s Chesner highlights that DB schemes looking to transact with an insurer “will be holding, or looking to hold, far more liquid portfolios than have historically been the case”.
However, for schemes not transacting imminently, Chesner says illiquidity risk “looks better rewarded than it has for a while, for those who can still collect it”.
“I would suggest that all trustees take a considered approach to illiquidity; for many the right answer will be to be fully liquid, but this should be a deliberate decision, not a reflex reaction,” he says.
“Traditional asset allocations towards credit are being reviewed as there could be better-positioned assets, such as securitised options and trade finance, that would still hedge key risks and give you the desired level of return for your risk appetite.”
Mercer’s Lewis adds that different endgame options require different investment approaches.
“What is clear at the macro level is that pension schemes now have far more options when it comes to end game planning,” he says. “From running on using cashflow driven investment strategies, innovative surplus management or traditional buyout each will influence the portfolio construct and the key risks to focus on in 2026.”
Lewis continues: “Wherever you may be on that journey, understanding what you own alongside stress and scenario testing is a key discipline to ensure the investment strategy is aligned to the pension scheme’s key objectives, and to manage both loss aversion and regret aversion.”
Time to refocus on climate risk
With much of England and Wales struggling with record temperatures, drought conditions and even wildfires, Andy Knight-Stephens, investment director at Broadstone, says climate risk should be back at the top of trustee board agendas.
“Many DB schemes still treat climate as a reporting exercise rather than a genuine investment risk,” he says. “Guidance encourages trustees to consider climate risk, scenarios and their potential impacts.
“The key is systems thinking: climate change can amplify interconnected risks across inflation, growth, interest rates, credit, supply chains, geopolitics and markets. Trustees should therefore consider not just ‘what is our climate exposure?’ but how climate-related shocks could propagate through their wider risk framework.”
Geopolitics at home and abroad
Alan Greenlees, client director at Zedra, says trustee boards and investment committees need to be “ever mindful of the shifting geopolitical landscape”.
“We’re well aware of the global conflicts and foreign policies that can impact markets and lead to systematic risk,” he says. “However, there could also be emerging domestic risks as the new Labour government continues to establish its new mandate and consider financial policies for the future.
“The gilt market will be taking close watch of any policy changes, which have the opportunity to disrupt funding levels for those less well-hedged schemes, as well as long-term plans if you are not resilient.”
Data published today (18 August) by EY-Parthenon shows that geopolitics and policy change were the main factors that triggered profit warnings for UK-listed DB pension scheme sponsors in the first half of the year.
More broadly, Broadstone’s Knight-Stephens highlights the importance of considering whether their investment portfolios can be made resilient to “persistent structural change”.
He points to factors such as geopolitical fragmentation, higher government spending, increased defence spending, and inflation, among others.
“This could challenge the traditional assumptions that government bonds will reliably diversify growth assets, for example, or that certain asset classes will behave like they did in the past,” Knight-Stephens continues.
“The theme is therefore to rise above traditional asset-liability management outputs and focus on portfolio resilience in a structurally different regime – considering not just expected returns but how different assets behave when inflation, rates, and geopolitics move together unexpectedly.”
