With the growing importance of defined contribution (DC) pension funds around the world, concerns
have arisen over their ability to provide adequate income replacement for members and the liquidity
of their invesments. The first part of this thesis focuses on the illiquidity associated with real estate
investments. The first chapter provides a discussion of liquidity within the context of DC pension
funds. The second empirical chapter employs the tracking error optimisation procedure in the
construction of portfolios that include direct real estate and selected liquid, publicly traded assets. We
find that this helps to improve the performance of these blended portfolios. In the second part of this
thesis, we look at various ways in which the real value of DC pension contributions can be preserved.
The third empirical uses contemporary econometric approaches in the analysis of the dynamic
relationship between asset returns and inflation/interest rate changes. Real estate and bonds were
found to be a hedge against all the inflation/interest rates measures analysed. Some non-UK assets
were also found to be a good hedge against selected benchmarks. The fourth empirical chapter of this
PhD thesis examines the optimal allocation within portfolios designed to hedge against the various
inflation and interest rate benchmarks. When the investment objective is to strictly track these
benchmarks, bonds and real estate dominate the portfolios. Real estate, stocks and alternative assets
receive significant allocations within the portfolios constructed to provide maximum risk adjusted
returns relative to the minimum return benchmarks. We observe that the allocation to real estate
reduced significantly following the global financial crisis period with bonds appearing to take its place.
On the whole, this thesis contributes to the discussion on how best DC pension portfolios could be
designed to comply with current investment regulations regarding liquidity and minimum returns
requirements
