Pension providers are being encouraged to invest in private credit but allocations are lagging policymaker ambitions. Selin Bucak reports…
Private credit’s long-anticipated breakthrough into defined contribution (DC) pension portfolios is taking shape, but progress remains uneven across markets.
Regulatory developments in both the UK and the US have created new avenues for long-term retirement savings to enter private markets. Yet managers say the shift is still in its early stages, with education, transparency and product design emerging as the main hurdles to meaningful allocations.
One of the structures that was launched in the UK to allow easier access to private markets, the long-term asset fund, has struggled to get off the ground. Assets across all active funds since the vehicle launched in 2021 have only reached £5bn, according to Morningstar.
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So although policy plans are advancing fast, capital flows have so far not kept pace as trustees, who are more informed about private markets than they were previously, are raising crucial questions around liquidity, ability to invest and the stress in markets.
For Federated Hermes, the changes are visible on the ground. The firm has long worked with pension schemes, but the profile of investors allocating to private credit is evolving.
“Allocations are becoming bigger, which is good, but the understanding of the market seems to be getting much better amongst many of these pension funds,” said Patrick Marshall, head of private credit at the asset manager. “A few years ago it was the biggest schemes; now we’re getting schemes of different sizes, and the level of knowledge is far higher.”
According to Marshall, this shift is not just about appetite but expectations. Trustees now look for more detail in reporting, including underlying loan data. Transparency has become a central request.
“What will be required is greater transparency amongst direct lenders and a clear ability to compare,” he said, explaining that investors want to see through the portfolio and carry out their own analysis.
That, he added, will increasingly push larger accounts toward bespoke mandates, with some wanting a say in loan selection or exploring more specialised credit strategies over time.
Questions over semi-liquid structures
Semi-liquid private credit vehicles have attracted interest from pension schemes, particularly DC providers seeking a blend of long-term exposure and periodic liquidity. But questions persist around the mechanics.
“There’s a lot of interest in semi-liquid,” said Federated Hermes’ Marshall, “but there are question marks around what that means for liquidity and the illiquidity premium. If access to liquidity is real, and by that I mean how the mechanisms work, what happens with the premium? And there’s concern about intense regulatory scrutiny.”
For now, the interest is real, but the operational frameworks are still being tested. Managers face the dual challenge of preserving return profiles while meeting the governance demands of pension trustees.
Policy push in UK and US
UK policymakers have been very vocal in pushing for greater exposure to private markets within DC pensions. The landscape shifted materially in May 2025 with the launch of the Mansion House Accord, which asks pension providers to allocate 10 per cent of default funds to private markets, half of it domestically. So far, 17 providers, representing 90 per cent of active DC savers, have signed up to the scheme. This also expands on its predecessor the Mansion House Compact, which focused solely on unlisted equities, thereby giving debt managers more of an opportunity to attract pension capital.
The US, while less prescriptive, is also moving toward greater private market access for retirement savers. Public pension funds already allocate significantly to private credit, but the major development this year has been in the 401(k) ecosystem.
An August executive order from President Donald Trump directed the Department of Labor and the Securities and Exchange Commission to issue guidance on private market investments in 401(k) plans. Even incremental clarity from regulators could unlock new product development and demand.
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However, Scott McClurg, head of private credit at HSBC Alternatives, said allocations to private credit in the US and the UK reflect long-term trends, such as investor interest in yield and diversification, rather than short-term policy shifts.
“In the US, public pension funds continue to adjust allocations in line with broader market conditions,” he explained. “But the longer-term picture points to a continued increase in commitments to alternative assets, with private credit playing a central role.
“In this context, we’ve seen growing interest in European private debt strategies, reflecting investors’ desire to diversify geographically and tap into Europe’s growing fundraising activity and long-term private debt opportunities – contributing to the broader shift in global capital flows.”
Mainland Europe mulls reforms
Beyond the UK, European policymakers are studying wider pension market reforms that could reshape private credit’s role across the region. Serge Weyland, chief executive at the Association of the Luxembourg Fund Industry, pointed to proposals to adjust Solvency II to allow pension funds to take more long-term risk.
“That would create opportunities for private credit,” he said.
Engagement with pension funds across Europe has increased as firms prepare for potential changes.
The most significant proposal relates to the Pan-European Pension Plan (PEP), which has struggled since launch due to fee caps and distribution barriers, according to Weyland. A redesign is now being considered by the European Commission, repositioning it as a wrapper rather than a rigid product, making it effectively a long-term savings account that could hold both liquid and illiquid assets, which in Weyland’s opinion might make it more successful.
In addition, if employer contributions were eventually permitted – something that is being considered by the Commission – the PEP, which is now a voluntary “third pillar” product, could function partly as a “second pillar” pension – which are typically mandatory occupational pensions. But progress is constrained by the EU’s limited authority over pensions, which remain under member state control.
“We believe that could be an opportunity for a number of European member states to use such a framework to increase participation in pension type investments,” Weyland said. “That would also create opportunities for private market players and private market solutions including private credit.”
He added that a really bold move at the European level would be to harmonise funded pension regimes across the region.
“Why not create a MiFID for funded pensions?” he said. “That would be a bold move and certainly would bring us forward in Europe. But until that happens funded pension regimes are still under the control of the individual EU member states.”
That means that there are some that are still applying protectionist policies that are making investing in private markets slightly more challenging.
Education is still key
Even as opportunities expand, managers caution that education remains essential. “LPs have become increasingly sophisticated,” said McClurg, after more than a decade of investing in private credit. But as the market diversifies beyond traditional direct lending, identifying strategies that align with specific risk/return profiles has become more complex.
Pension providers are therefore drilling deeper into the fundamentals of each strategy. They want clarity on where differentiated deal flow comes from, how governance and risk management frameworks operate in practice, and whether a manager can deploy capital at a steady pace without compromising underwriting standards, McClurg explained.
Read more: UK LTAFs gain momentum as DC pensions target private markets
He also agreed with Marshall that liquidity features in evergreen and semi-liquid structures are receiving heightened scrutiny, particularly around how redemption mechanisms work in stressed environments.
In a competitive market where deal supply can be finite, managers that demonstrate consistent deployment, disciplined underwriting and robust operational controls are the ones winning the mandates.
With private credit still representing just around two per cent of global debt markets, there is substantial room for expansion, McClurg said, who expects future growth to come not only from public pensions and DC plans but also from insurers, consultant-led platforms and, importantly, the wealth channel, where lower minimums and simplified structures are widening access.
He expects deployment trends to shift toward higher-quality, lower-yielding credit, which scales better and suits a broader investor base.
“For managers, the key challenge will be developing products that meet these evolving investor needs,” he noted.
Ultimately, it seems that growing pension allocations into private credit are a question of when, not if. But the pace of adoption will depend on the industry’s efforts to educate pension providers and regulators’ efforts to create an attractive environment for these types of investments.
