From accumulation to income: parallel lending as part of a DC decumulation solution

November 5, 2026

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The UK defined contribution (DC) pension market is entering a period of significant change. As part of a broader programme of reform, greater attention is being paid to decumulation and how schemes can support members as their needs shift from accumulating savings to generating an income in retirement. Guided Retirement will require schemes to provide default retirement income solutions for members who do not make an active choice.

At the same time, there is a growing focus on broadening DC schemes’ access to private markets, with the Pension Schemes Act 2026 creating a framework that will likely require a proportion of assets in main default funds to be allocated to private assets.

Together, these developments raise an interesting investment question: as private markets become a more established part of DC portfolios and glidepaths, could some of these assets also help meet the changing needs of members as they move from accumulation to decumulation?

The investment challenge changes in decumulation

Moving from accumulation to decumulation changes what is required from the portfolio. Once members begin drawing an income, the portfolio must support regular withdrawals while seeking to preserve capital over an uncertain time horizon.

The sequence of investment returns also becomes more important. If assets need to be sold following a market decline to fund withdrawals, losses may be crystallised, leaving less capital to participate in a subsequent recovery.

This places greater emphasis on the source and consistency of investment income. Assets that generate recurring cash flows may help meet withdrawals without relying solely on selling investments.

Not all private credit is created equal

Against this backdrop, private credit could have a role to play. However, it encompasses a broad range of approaches, from senior-secured corporate lending to more leveraged strategies where a meaningful proportion of interest may be payment-in-kind (PIK), meaning reported income may accrue to the loan balance rather than being received as cash, while increasing the borrower’s outstanding debt. PIK interest may contribute to total return, but it is added to the outstanding loan rather than paid in cash and therefore cannot directly support regular withdrawals — an important distinction in decumulation, where portfolios need to generate income to help meet those withdrawals. More concentrated or highly leveraged strategies may also expose investors to greater potential capital losses at a point when preserving capital while funding withdrawals becomes increasingly important.

For an allocation intended to support retirement income, this places greater emphasis on recurring cash generation, capital preservation and diversification. These are characteristics we believe can be found in parallel lending.

Parallel lending as part of a decumulation solution

In parallel lending, an asset manager lends alongside a bank, with both retaining exposure to the borrower on pari passu terms — meaning they rank equally, with the same documentation and security.

This provides access to a different origination channel from conventional sponsor-led direct lending, with exposure to established middle-market businesses sourced through banks’ longstanding corporate relationships.

The key characteristics of a parallel lending strategy could be particularly relevant for decumulation.

1. Cash-pay income

First, the income is cash-pay. Borrowers make contractual interest payments, creating recurring portfolio cash flows. For a retirement portfolio, this potentially provides a source of income that can contribute towards withdrawals rather than requiring every payment to be financed through asset sales.

2. Senior secured

Second, the loans are generally senior secured. A focus on first-lien loans, conservative leverage and strong interest coverage can help mitigate downside risk. This does not remove credit risk, but seniority and security can help mitigate the risk of permanent capital loss.

3. Diversification

Third, diversification can be significant. A portfolio of more than 100 loans means exposure is spread across many borrowers, sectors and European markets. This reduces dependence on the performance of individual companies.

4. Floating rate

Fourth, the loans are typically floating rate. Coupons reset as the underlying reference rate changes, resulting in a low duration profile. This can provide a source of income with lower sensitivity to changes in interest rates.

5. Shorter lives and amortisation

Finally, the loans typically have shorter average lives, and a strategy can also invest in amortising tranches. As these loans repay principal progressively over their life, they can provide greater predictability around capital repayments while naturally generating liquidity within the portfolio.

These combined characteristics could make parallel lending particularly well suited to a role within a decumulation portfolio.

Liquidity remains critical

There is an obvious tension between private credit and retirement portfolios: the underlying loans are illiquid, while a decumulation portfolio needs sufficient liquidity to meet member withdrawals. Parallel lending should therefore be considered not as a standalone decumulation solution, but as one component within a broader portfolio or glidepath, as illustrated in our case study.

A retirement default solution could combine highly liquid assets to meet near-term payments and unexpected withdrawals, growth assets to help preserve the purchasing power of savings over a potentially long retirement, and income-generating assets that contribute recurring cash flows. Parallel lending could potentially play a role within this income-generating allocation, with contractual cash coupons contributing to the cash flows available to support withdrawals.

Liquidity therefore needs to be managed across the whole portfolio, rather than requiring every underlying investment to offer the same level of liquidity.

From allocation targets to retirement outcomes

The debate around private markets in DC has understandably concentrated on access and allocation levels. The next phase, we argue, should focus on outcomes.

For an asset intended to play a role in decumulation, schemes also need to consider how returns are generated, how much is delivered as cash income, how dependable those cash flows are, what happens when markets fall and how the asset interacts with the liquidity requirements of the wider portfolio.

This is where we believe parallel lending deserves consideration.

It will not solve every challenge associated with delivering sustainable retirement income, and it should not replace the liquid assets needed to meet members’ immediate requirements. But we believe senior-secured, floating-rate corporate loans that generate recurring cash income could provide a useful building block within a diversified decumulation portfolio.

As DC evolves from accumulating retirement savings towards supporting members in generating an income in retirement, schemes will need to consider not only how much to allocate to private markets, but also the role those assets can play in delivering retirement outcomes.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of October 2026 and may change without notice.

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