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Diversification is often not well understood and many interpretations abound. It is also rarely measured or quantified effectively so that any proposal to improve diversification is assessed with a fair amount of freedom. Below, we explore the concept and value of diversification and discuss implementation ideas that may make sense in the DB governance space.

Pension schemes seeking to be less sponsor-dependent should aim to minimise their future cash contribution requirements, and should be wary of an underperforming portfolio, particularly given the triennial valuation cycle.

An effectively diversified asset allocation will reduce volatility and limit drawdowns, while still delivering the scheme’s return objectives.