Key Takeaways
- • Local government pension schemes (LGPS) in England and Wales managing about 400 billion pounds ($541 billion) are among Britain's biggest investors in non-bank "shadow lending" funds, according to a Reuters analysis.
- • Almost half of these schemes have put 10% or more of their assets into such funds, exposing public-sector staff pensions to opaque markets.
- • A Reuters review of 86 schemes' annual reports found LGPS hold more than 32 billion pounds ($43 billion) in private and multi-asset credit, averaging 4.2% in private credit and 8.7% in multi-asset credit.
- • Of 47 LGPS with private credit targets, all but four sit below them, indicating room to add exposure, while the Bank of England and Financial Stability Board have flagged liquidity and valuation risks.
Summary
Local government pension schemes managing assets of roughly 400 billion pounds ($541 billion) are among Britain's largest investors in non-bank "shadow lending" funds, a sector the Bank of England has recently flagged concerns over, according to Reuters. A Reuters analysis shows that almost half of these schemes in England and Wales have invested 10% or more of their assets in such funds, exposing the pensions of staff ranging from classroom assistants to refuse collectors to swings in markets that remain opaque.
A Reuters review of the annual reports of 86 schemes found LGPS have amassed more than 32 billion pounds ($43 billion) of private and multi-asset credit exposure. On average, schemes have allocated 4.2% of assets to private credit and a further 8.7% to multi-asset credit funds, which hold a mix of illiquid and more easily tradeable non-bank debt. These averages cover schemes that specified allocations to each asset class, around 76% and 72% respectively. By comparison, official estimates indicate defined-contribution schemes allocated 3.5% to all illiquid investments in 2025. Of the 47 LGPS that set private credit targets, all but four fell below them. While the most recent LGPS data shows private debt allocations averaged 3% in 2024, some individual schemes are far higher. London's Lambeth reported almost 26% of assets in private debt and multi-asset credit as of December 2025, and Cumbria allocated 8% to private debt for the year to March 2025. Neither scheme responded to requests for comment.
Risks are rising. Devaluations and default warnings in non-bank lending, including private credit, have unsettled investors this year, and regulators have warned of unclear valuation techniques and hidden leverage. The Financial Stability Board warned last week that such fund structures could force pension investors to sell more liquid assets to raise cash. Oxford's Ludovic Phalippou said signs of borrower stress could cause losses for non-bank loan funds and make exits harder, and campaigner Mick McAteer, a former FCA board member, warned that projected returns may not materialise in current conditions. Investment consultant Hymans Robertson's David Walker, by contrast, said council schemes were not over-exposed and that he saw no immediate cashflow concerns, given they can rebalance into other asset classes. The UK government has long encouraged pension schemes to invest up to 10% of funds in private assets.
Liquidity management has already been tested. British pension schemes faced capital calls on hedging positions during the 2022 gilts crisis, and some council funds are now making liquidity provisions for private credit. Hammersmith and Fulham council's pension scheme was among investors that pulled out of a private credit fund managed by Aberdeen, which the manager confirmed it has liquidated. Gloucestershire's pension fund said in February it would borrow if private asset investments caused liquidity challenges. The Financial Conduct Authority declined to comment on LGPS exposures, and the Pensions Regulator referred enquiries to it.
A Reuters review of the annual reports of 86 schemes found LGPS have amassed more than 32 billion pounds ($43 billion) of private and multi-asset credit exposure. On average, schemes have allocated 4.2% of assets to private credit and a further 8.7% to multi-asset credit funds, which hold a mix of illiquid and more easily tradeable non-bank debt. These averages cover schemes that specified allocations to each asset class, around 76% and 72% respectively. By comparison, official estimates indicate defined-contribution schemes allocated 3.5% to all illiquid investments in 2025. Of the 47 LGPS that set private credit targets, all but four fell below them. While the most recent LGPS data shows private debt allocations averaged 3% in 2024, some individual schemes are far higher. London's Lambeth reported almost 26% of assets in private debt and multi-asset credit as of December 2025, and Cumbria allocated 8% to private debt for the year to March 2025. Neither scheme responded to requests for comment.
Risks are rising. Devaluations and default warnings in non-bank lending, including private credit, have unsettled investors this year, and regulators have warned of unclear valuation techniques and hidden leverage. The Financial Stability Board warned last week that such fund structures could force pension investors to sell more liquid assets to raise cash. Oxford's Ludovic Phalippou said signs of borrower stress could cause losses for non-bank loan funds and make exits harder, and campaigner Mick McAteer, a former FCA board member, warned that projected returns may not materialise in current conditions. Investment consultant Hymans Robertson's David Walker, by contrast, said council schemes were not over-exposed and that he saw no immediate cashflow concerns, given they can rebalance into other asset classes. The UK government has long encouraged pension schemes to invest up to 10% of funds in private assets.
Liquidity management has already been tested. British pension schemes faced capital calls on hedging positions during the 2022 gilts crisis, and some council funds are now making liquidity provisions for private credit. Hammersmith and Fulham council's pension scheme was among investors that pulled out of a private credit fund managed by Aberdeen, which the manager confirmed it has liquidated. Gloucestershire's pension fund said in February it would borrow if private asset investments caused liquidity challenges. The Financial Conduct Authority declined to comment on LGPS exposures, and the Pensions Regulator referred enquiries to it.
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