UK insurers are set to invest £350bn into investment-grade private credit in the coming years, as legacy pension funds offload £1tn onto their balance sheets.
Large corporates, including pharmaceutical giant GSK and UK bank HSBC, currently hold sizeable legacy defined benefit (DB) pension schemes worth around £1tn.
Over the next seven to 10 years, £700bn, roughly 70 per cent, is set to be unloaded onto insurance company balance sheets, with half of this figure – £350bn – earmarked for private credit and the remainder going into public fixed income.
“Taking a step back, the aggregate amount of private credit on insurance company balance sheets today is about £100bn, so in the next seven to 10 years, UK insurers need to originate and generate 3.5 times the current quantum of private credit that exists today,” Michael Eakins, chief investment officer at the Standard Life, which is one of the UK’s largest insurers, told Alternative Credit Investor.
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Just last month, Standard Life concluded a £700m bulk purchase annuity transaction with the Deloitte UK pension scheme, bringing new assets onto the insurer’s balance sheet. Half of this, for example, will be invested in private credit, Eakins stated.
Eakins explained that the £350bn will be allocated to private credit across different currencies. “It won’t be all sterling, it will be a combination of sterling, dollar, euro, Aussie dollar and Japanese yen,” he said.
He added that the rationale for locking in £350bn in private credit includes security, higher yield and liability matching.
On yield, Eakins said: “If we look at the average uplift of private credit that we were able to extract in 2024 over public credit, it was about 70 basis points. So, the average rating on our private credit portfolio is single A- and we are able to originate that at 70 basis points wider than public credit.”
Regarding the areas where Standard Life will deploy capital in private credit, Eakins highlighted three buckets: real estate debt, infrastructure debt, and structured credit, which includes lending against collateralised loan obligations, asset-backed finance, and securitisations.
“Private credit as an asset class is set to grow significantly over the next number of years,” he said. “It is something we are increasing our expertise in, but we are not running before we walk. We are only investing as and when we have the expertise.”
The EU’s Solvency II framework and the post-Brexit Solvency UK regime have also supported the growing trend of private credit allocations on insurers’ balance sheets, providing more flexible capital treatment and encouraging investment in long-duration assets.
“Solvency II definitely helps,” said Eakins. “Some of the regulation and reforms which took place last year with Solvency UK around highly predictable cashflows, us [Standard Life] being able to invest in asset classes which have concentration risk, even though frankly we’re not doing much of that, has been really helpful.”
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Concentration risk
Private credit has been taking up an increasing share of insurance balance sheets for several years, with alternative asset managers now running mandates on behalf of insurers to deploy capital into the asset class.
However, the trend has not come without scrutiny, with concerns over transparency and potential systemic risks to the UK financial system. In response, the Bank of England has recently launched a stress test, known as a system-wide exploratory scenario, assessing both the private credit and equity markets.
With £350bn expected to flow into private credit, questions could arise of potential concentration risk. Eakins said Standard Life mitigates this by avoiding cyclical sectors such as leisure and hotels.
“We will pivot to defensive, non-cyclical sectors and we will invest across different sectors,” he said. “One other thing is we don’t just invest in sterling, we invest in dollar private credit, euro private credit, Aussie dollar and Japanese yen. When we do that, we hedge to term all of those non-sterling cash flows.”
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