How ‘buy and refresh’ is revitalising credit
December 17, 2025
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6 min
Is this a once-in-a-generation opportunity for pension schemes to get more from their credit allocations?
It certainly looks like an inflexion point, as the paradigm of the last 20 years – whereby pension schemes have put most of their energies into repairing deficits – reaches the endgame.
Schemes’ matching assets – principally government and inflation-linked bonds plus REITs – have done a magnificent job. Funding levels have improved massively and, in many cases, schemes are now fully funded over a number of metrics.
The macro-economic and regulatory environments have changed substantially too. All of a sudden, more endgame options have opened up. Pramila Agarwal, Portfolio Manager and Director of Custom Income Strategies at Loomis Sayles and Justin Teman, Head of the Institutional Advisory group delve into what this means for portfolios over the long term.
How have we got to the pensions endgame?
Justin: Perhaps the biggest change in UK pensions over the past 20 years is that Defined Benefit (DB) schemes have moved out of survival mode and into strategic mode. Many are finally fully-funded or even in surplus after a patient and painstaking derisking journey. Funding levels have improved substantially across all asset-liability valuation methods and a large majority of UK DB schemes are now in surplus on a technical provision basis. More than half are fully funded on a buyout basis.
Much of the transformation of DB schemes’ balance sheets has taken place in the past three to four years, amid rising inflation and falling bond yields. This funding position may represent an unrivalled opportunity to provide financial outcomes for members and sponsors that were a distant dream just a few years ago.
What kinds of opportunities are opening up to schemes now?
Pramila: Schemes have worked hard to get themselves into this position and those in surplus now have more endgame options than they previously believed. They have been aided in their task by the Mansion House reforms which provide for greater flexibility over how surpluses are used.
Schemes have a variety of options for their surpluses. They can, for instance, release surpluses to members and employers. They could also repurpose surpluses to support Defined Contribution (DC) schemes, into which most new pension savings are now directed. They also have the opportunity to create run-on funds, with the strong funding position allowing the taking of some extra risk to increase yields.
All across the globe there is currently an ebb and flow of rates and spreads so it’s an opportune time to be flexible. We have not seen this kind of evolution in the fixed income landscape for a long time. Rates across most economies very high, not just in nominal but real rates too. It’s all very interesting.
How do you assess the ‘buy and maintain’ approach to managing credit?
Justin: Buy and maintain has been highly successful in capturing extra yield versus government bonds. In addition to the yield pick-up, the approach has provided a high degree of income and cashflow matching, and thus more linkage to a potential buyout. We expect our buy and maintain strategies – holding instruments to maturity, and avoiding costs and losses by limiting trading and avoiding downgrades and defaults – to remain a core part of client allocations.
But schemes with strong funding levels are now looking for extra yield and to diversify their credit exposure. Now is a good moment to step back and look at the evolution of portfolios. Is buy and maintain still the best way to access credit markets? Are schemes leaving returns on the table?”
We see this as an inflexion point. The time could be ripe for schemes to move on from a purely buy and maintain approach to their fixed income allocations.
What is buy and refresh and why might this be a good time to implement it?
Justin: Buy and refresh is designed to complement buy and maintain. Buy and refresh, a term which was coined by Loomis Sayles, is a more active strategy than buy and maintain. It builds on the cashflow stability and yield potential of buy and maintain, but adds tactical sector and security selection rotation, seeking to enhance yields and total returns.
Buy and refresh sits between buy and maintain and full active total return. The portfolio has a similar composition to a buy and maintain portfolio. The difference is how we manage that portfolio.
Buy and refresh provides the flexibility to use fund manager and credit research skills to enhance yields, taking advantage of volatility and dislocation in markets. The tactical allocation can act as diversifier and yield-enhancer for plans seeking self-sufficiency or, for other plans, can lock-in gains and reduce ultimate buyout costs.
Importantly, a buy-and-refresh approach preserves the benefits of buy and maintain, whereby schemes get stable income and risk controls to ensure member benefits are paid.
Does ‘buy and refresh’ entail a complete overhaul of the credit portfolio?
Pramila: Buy and refresh does not require wholesale re-allocation and retooling of the credit portfolio. It is an evolutionary process rather than revolutionary. The idea came from clients saying ‘you are an active manager, how about we take some additional risk in our buy and maintain portfolio’. In practice, this typically means 10%-20% of the portfolio is more actively managed to take advantage of tactically-dislocated sectors or mispriced individual names. Even higher-quality names can be tactically dislocated. We find downgrade selling almost always overshoots and that’s one place where there is opportunity.
But even in a tactical allocation, at Loomis Sayles we not invest in low-quality credits to achieve yield. We restrict ourselves to the lower end of the spectrum to ‘cross-over’ names – that is, companies that bounce between the investment grade and high-yield categories. Stable high-yield names get more carry, but they are still in the high-quality zone.
Does management of buy and refresh differ from traditional credit portfolios?
Justin: To manage a buy and refresh strategy requires experience in both credit analysis and bespoke solutions. You need a manager with rigour and discipline who knows the nuances of the industry. In addition, with active management, you need to take a risk-adjusted approach, so it requires managers skilled in that.
Loomis Sayles’ long-standing, independent credit rating process is complemented by deep macro, sovereign, securitized and quantitative research. We have been managing these custom mandates for over 10 years across over 40 accounts without any defaults.
Bespoke management allows clients to choose how much flexibility they are willing to build into their credit portfolios. There is a large spectrum depending on the return targeted, but we don’t typically aim to go beyond 20bps-30bps of extra return. You are trying to move the needle incrementally rather than hit home runs.
To which types of pension scheme is buy and refresh most relevant?
Pramila: Whatever the endgame, a flexible investment approach can potentially enhance it, giving a financial boost to DB members, DB scheme sponsors and, potentially, DC scheme members and sponsors too. Higher rates and stable spreads have created a unique opportunity to reach for yield, increase diversification and enhance returns. Whether buyout or run-on is the end-game objective, we believe buy and refresh credit strategies will become more relevant for many plans.
Despite geopolitical concerns, the timing for this strategy is opportune. We have a fundamentally strong corporate sector and global credit spreads have been resilient. Few specific sectors are at risk of default and, even if we expect some pick-up in defaults, these will likely occur among lower-quality names, which the firm tends to avoid within buy and hold and buy and refresh portfolios.
