UK pension insurers increase private credit exposure as scrutiny grows

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UK insurers private credit exposure

Highlights

S&P reports that private credit holdings classified as Level 3 assets now exceed 10% of portfolios at Legal & General, Standard Life, and Just Group.
Insurers plan to absorb up to £500 billion in UK pension liabilities over the next decade, intensifying reliance on long-term private debt investments.
S&P stress tests show a UK life insurer with about 12% private credit exposure retains sufficient capital for a 2008-style shock if rated investment grade.

Private asset allocations draw closer review

As reported by Financial Times, citing S&P, private credit holdings within the most opaque category of assets, those that rarely trade and lack observable pricing inputs, make up more than 10% of the portfolios of Legal & General, Standard Life and Brookfield-owned Just Group.

The ratings agency says these holdings pose a growing risk because market participants have limited visibility into insurers' exposures and the assets could be hard to sell in a crisis. Charles-Marie Delpuech, an S&P analyst, says it is difficult for the market to fully understand how much private credit sits on UK life insurers' balance sheets.

Insurers are not required to disclose details such as where borrowers are based, which sectors the loans are linked to, or whether the debt is held directly or through tranches of structured financial products. As a proxy for exposure, S&P examines Level 3 assets, which do not have observable market prices, and excludes some loan types including infrastructure debt and certain mortgages.

S&P says this approach does not capture the full extent of exposure. It adds that Pension Insurance Corporation, recently acquired by Apollo-backed insurer Athora, likely holds much of its private credit in a different Level 2 category.

Sector expansion and implications for retirement liabilities

Insurers specialising in pension risk transfer deals plan to take on as much as £500 billion in British pension liabilities over the next decade, increasing the need for long-term debt investments that match obligations running for several decades. That demand is pushing more capital into private lending as private capital groups including Apollo, Blackstone and Brookfield expand through insurer acquisitions and investment management partnerships.

These managers are helping drive a broader lending boom to AI software companies, data centres and middle-market borrowers, increasingly taking business once handled by banks. Much of that debt is finding its way into insurers' portfolios, prompting regulators and rating agencies in the U.S. and UK to study the trend more closely.

S&P says a stress test of a hypothetical UK life insurer with about 12% exposure to private credit shows it retains sufficient capital to withstand a shock similar to the 2008 financial crisis after the loans are assigned a range of investment-grade ratings. Insurers nevertheless argue that private assets remain important for asset-liability matching, with L&G's Roman Hederer saying private credit helps diversify longer-duration exposure, while Standard Life's Nuwan Goonetilleke says the assets can be a strong fit for insurers' liabilities when the right investments are available.

Our earlier article examined how UK life insurers backing retirement obligations are increasing allocations to private credit as pension risk transfer activity expands, raising the share of hard-to-value assets above 10% at several major groups. We noted S&P’s warning that limited disclosure and the use of Level 3 (and in some cases Level 2) classifications can obscure the true scale of exposure, potentially amplifying liquidity and valuation risks in a stress scenario.

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