Local government pension schemes (LGPS) across Britain, which collectively manage assets totalling some £400 billion ($541 million) and provide final salary-linked pensions to public sector staff, have emerged as significant investors in non-bank “shadow lending” funds. A Reuters analysis reveals that almost half of these schemes in England and Wales have allocated 10% or more of their assets to such funds, exposing them to what regulators describe as opaque markets. The Bank of England has recently voiced concerns over this sector, which includes private credit and multi-asset credit.
The appeal of non-bank lending stemmed from its high and steady returns observed in the decade leading up to 2024, making it an attractive option for managers striving to boost returns. The UK government has actively encouraged pension schemes to invest up to 10% of their funds in private assets, including private equity and infrastructure, to support economic growth. However, devaluations and default warnings within non-bank lending this year have unsettled investors, prompting regulators to highlight risks such as unclear valuation techniques and hidden leverage. British banks have also reported impacts, with the BoE stress testing private credit and equity.
The Reuters review of 86 schemes’ annual reports found LGPS have amassed over £32 billion ($43 billion) in private and multi-asset credit exposure. On average, schemes invested 4.2% into private credit and 8.7% into multi-asset credit funds. While official estimates for defined-contribution schemes show lower allocations to illiquid investments, some council schemes demonstrate significantly higher exposure; London’s Lambeth, for instance, allocated almost 26% of its assets to private debt and multi-asset credit. Experts like Mick McAteer and Professor Ludovic Phalippou warn that projected returns may not materialise, and stress among borrowers could lead to losses, making exits difficult.
However, David Walker, Chief Investment Officer at Hymans Robertson, posits that council retirement schemes are not over-exposed, citing their ability to rebalance into other asset classes. He sees no immediate cashflow concerns. Despite this, some schemes are taking proactive measures; Hammersmith and Fulham council’s pension scheme pulled out of a private credit fund, which was subsequently liquidated. Gloucestershire’s fund indicated it would borrow if private asset investments created liquidity challenges to prevent being a forced seller of assets, underscoring ongoing vigilance in managing these complex exposures.
