Greg,

I also have a similar pond built into a hill. The retaining wall is
six courses of about 5" blocks and the liner is held down by 2" caps
with no glue. I'm in Minnesota so the blocks tend to move as the
ground freezes and glue on the liner would be a problem. Go with as
much liner overlap as your caps will allow and you'll be fine.

I put a beach into the hill-side of the pond and the birds love it.
Ten years plus and everything is fine. If you can engineer a bottom
drain that would be good.

dss