Private credit managers are increasingly looking to Britain’s £1tn-plus defined-benefit pension market as a source of capital, as insurers allocate a growing share of their portfolios to private assets, according to a report by the Wall Street Journal.
The trend was highlighted by a new partnership involving Standard Life, CVC Capital Partners, Goldman Sachs and PGIM, under which investors will commit $2bn to private-market assets. Standard Life said the arrangement would support its growing business taking responsibility for defined-benefit pension schemes from their corporate sponsors.
The deal is the latest example of investment firms seeking to tap the UK’s expanding market for pension risk transfers, creating a new channel through which private credit can ultimately gain exposure to long-term retirement assets.
UK defined-benefit pension schemes still have more than £1tn ($1.35tn) of liabilities that have yet to be transferred to insurers, according to Stephen Purves of consultancy XPS. Many of the schemes have been closed to new members for years, but continue to hold substantial pools of assets.
The opportunity has grown as higher interest rates reduced the value of pension liabilities and helped many schemes move into surplus. That has enabled more trustees to consider transferring their obligations to insurers through bulk annuity transactions.
Once a transaction takes place, the insurer assumes responsibility for managing the pension assets and eventually the associated retirement payments. The long-term nature of those liabilities makes private-market investments particularly attractive to insurers, which can match them against assets such as private loans, infrastructure and real estate.
The model has already attracted major private capital firms. Apollo, Brookfield and Blackstone have all expanded their involvement in the UK’s pension risk-transfer market over the past year, either through ownership stakes in insurers or by supplying private-market assets.
S&P Global estimates that roughly 40% of the assets supporting UK insurers’ rapidly expanding retirement businesses are invested in private markets and other assets that do not trade regularly on public exchanges. Around one-third of that private-market allocation consists of private credit, including loans to mid-sized companies.
The growing exposure is drawing regulatory scrutiny. The Bank of England has warned that competition for pension business and pressure to maintain profit margins could encourage insurers to take on additional investment risk without receiving sufficient compensation.
Offshore structures are also an area of concern. The Bank of England has argued that insurers do not currently hold enough capital to absorb losses associated with some offshore arrangements and plans to increase those requirements.
Blackstone, for example, has agreed to supply private-credit investments to Legal & General for its retirement portfolio. One transaction involved financing a grocery distribution centre in North Carolina. Blackstone is also gaining indirect exposure to Britain’s pension market through a Bermudian reinsurer to which it provides private-credit assets.
Brookfield has taken a different route, acquiring life insurer Just Group and planning to support its portfolio with investments in infrastructure, energy and real estate.
Apollo has made an especially significant push into the sector through Athora, the European insurer in which it holds a minority interest. Athora recently acquired Pension Insurance Corporation, a specialist in taking over corporate pension schemes. The combined business has around £118bn in assets serving approximately 3.1 million savers and retirees.
Athora expects its relationship with Apollo to provide Pension Insurance Corporation with access to private-credit assets originated by the US investment firm, with a significant portion expected to be denominated in sterling to match the insurer’s UK liabilities.
The strategy is already contributing to growth in Apollo’s asset-management business. Apollo reported an additional $65bn of fee-paying assets under management in the second quarter, driven in part by Athora’s acquisition of Pension Insurance Corporation.
