Key takeaways

  • The FT reported that S&P has warned hard-to-price private assets now exceed 10% of some UK annuity portfolios, naming L&G, Standard Life and Just Group.
  • Private credit backs long-dated annuities written in a booming bulk purchase annuity market, which industry forecasters put near £70bn of risk transfer in 2026.
  • “Private credit” spans direct lending and structured private debt that often lacks observable market prices, making valuation and stress testing harder.
  • The matching adjustment under Solvency UK lets insurers hold illiquid assets against annuities, and the PRA is tightening rules on funded reinsurance and illiquid collateral.
  • Supporters cite yield pick-up and diversification; critics warn about opacity, liquidity mismatch and concentration, none of which is proven to be mispriced today.

The engine that pays millions of British company pensions is quietly changing its fuel. For decades, the insurers that take over “gold-plated” final-salary schemes backed those promises with government bonds and blue-chip corporate debt that trade in deep, liquid markets. Increasingly, they are turning to private credit: loans and structured debt arranged away from public exchanges, often to borrowers and sectors that are not routinely disclosed. On 20 July 2026, the Financial Times reported that this shift has gone far enough to catch the eye of the ratings agencies, with S&P said to have warned that hard-to-price private assets now make up more than 10% of the portfolios backing annuities at three of the market’s biggest names: Legal & General, Standard Life and Just Group.

Those July 2026 specifics — the 10%-plus figures, the identity of the three insurers and the substance of the S&P warning — come from the FT’s reporting and have not been independently verified here. What is beyond dispute, and what this article sets out to explain, is the machinery underneath the headline: a record-breaking pension risk transfer boom, a regulatory regime deliberately redesigned to let insurers hold more illiquid assets, and a long-running debate among central bankers, regulators and ratings agencies about whether “private credit insurers” are engineering higher returns for pensioners or importing opacity into the heart of the retirement system.

What the reported warning actually says

According to the FT’s account, S&P’s concern is not that any UK annuity insurer is about to fail. It is more subtle: that a growing slice of the assets standing behind guaranteed pension payments consists of instruments that lack observable market prices — sometimes described as “Level 3” assets in accounting terms — and that disclosure around them is thin. Investors and, in some cases, the pension trustees who hand over their members’ benefits may not know precisely where the money is lent, to which sectors, or whether it is held directly or wrapped inside a structured product.

The reported detail is instructive on both sides of the argument. On the reassuring side, coverage of the S&P work suggests a stress test in which a hypothetical insurer with around 12% private credit exposure would still retain enough capital to withstand a shock on the scale of the 2008 financial crisis. That is not the language of imminent danger. On the cautionary side, the worry is about the direction of travel: that exposure could creep beyond the levels regulators and agencies have modelled, and that the true risk is harder to see in an opaque asset than in a listed bond whose price updates every second.

L&G and Standard Life were reported to have offered reassuring responses, acknowledging greater reliance on private credit while stressing the quality controls around it. None of this amounts to an allegation of mispricing or wrongdoing, and no exposure figure or rating action should be treated as confirmed beyond what the named sources have published. The value of the FT peg is that it crystallises a structural question that has been building for years.

The annuity and pension risk transfer boom

To understand why private credit has migrated into pension books, start with the extraordinary growth in bulk purchase annuities (BPAs), the deals through which a company hands its defined benefit pension scheme — and the assets backing it — to an insurer, which then guarantees to pay members for life.

The market has been running hot. The consultancy WTW forecast around £70bn of UK pension risk transfer in 2026, roughly 15% up on the prior year, split between more than £50bn of bulk annuities and around £20bn of longevity swaps. WTW also noted that the cumulative UK risk transfer market has passed the £0.5tn milestone since inception. Rising interest rates over recent years improved scheme funding levels dramatically, leaving many pension funds suddenly able to afford a buy-in or buyout they could only dream of a decade ago. Trustees, keen to lock in that security, have queued up to transfer risk.

For insurers, a BPA is a long-dated liability: a promise to pay pensions that may stretch 40 years or more into the future. To back that promise profitably, an insurer needs assets whose cash flows match those payments and whose yield exceeds the price it charged the scheme. This is where the investment strategy becomes central. Because annuity liabilities are illiquid — the insurer knows, roughly, what it must pay and when, and is not exposed to sudden withdrawals in the way a bank is to deposit runs — it can afford to hold illiquid assets that pay an extra yield precisely because they cannot be sold quickly. Private credit fits that shape almost perfectly.

The competitive dynamics reinforce the trend. Analysts have flagged margin pressure across the sector: reporting around mid-2026 pointed to bulk annuity new-business margins compressing as more insurers chase the same deals, with brokers modelling declines at several large writers. When the price you can charge a pension scheme is squeezed, the temptation to reach for higher-yielding assets on the other side of the balance sheet grows. That is the commercial logic behind the shift the FT is describing.

What private credit is, and why opacity matters

“Private credit” is an umbrella term. It covers direct lending by non-bank institutions to mid-sized companies, financing for infrastructure and real estate, asset-backed lending, and increasingly loans to fast-growing areas such as data centres and technology. Large private capital firms — the likes of Apollo, Blackstone and Brookfield — have built enormous credit operations, and insurers have become important funders of that activity, either by lending directly or by buying structured instruments engineered to behave like investment-grade bonds.

The appeal is real and should not be dismissed. Private credit typically offers an illiquidity premium — extra yield to compensate the lender for tying money up — and can provide diversification away from public corporate bond markets. Cash flows can be tailored to match annuity payments. For a well-run insurer with a long-term, illiquid liability, holding some illiquid, higher-yielding credit is a coherent, even prudent, strategy, and one regulators have explicitly permitted.

The difficulty is valuation and transparency. A listed corporate bond has a market price that moves continuously and reflects the collective judgement of thousands of participants. A privately arranged loan does not. Its value is estimated using models, assumptions and, sometimes, ratings assigned by the arranger rather than by an independent agency. When credit conditions deteriorate, the price of a public bond falls visibly and immediately; the value of a private loan may adjust slowly, if at all, until a problem crystallises. Global bodies including the Financial Stability Board have highlighted vulnerabilities in private credit — around valuation, leverage, interconnectedness and data gaps — even as they acknowledge the sector’s growth has diversified the financial system away from banks. The point is not that private credit is bad; it is that it is harder to see, and harder to see is harder to stress test.

Where L&G, Standard Life and Just Group fit

The three named insurers are all central players in the UK annuity market. Legal & General is one of the largest and longest-standing writers of bulk annuities, with a substantial asset management arm that originates private assets to back its liabilities. Standard Life, now part of Phoenix Group, is a major and fast-growing force in bulk annuities and retail annuities, and has been expanding its use of private markets across both its annuity and workplace pension businesses. Just Group is a specialist retirement-income insurer that has grown strongly in both the corporate BPA market and the individual annuity and equity-release space, where illiquid, long-dated assets are a natural fit.

That these three appear together is not, in itself, surprising or damning. They are among the firms doing the most annuity business, so they are among those with the most reason to hold illiquid credit. The reported concern is about the scale and opacity of that holding, not about the legitimacy of the strategy.

The matching adjustment and the regulation around it

No account of private credit insurers makes sense without the matching adjustment (MA), the regulatory mechanism at the centre of the UK annuity model. Under Solvency II — and now the post-Brexit Solvency UK regime — insurers with predictable, long-term liabilities such as annuities can take credit for part of the extra yield on the illiquid assets backing them, provided those assets’ cash flows are closely matched to the liabilities. In effect, the MA lets insurers value their liabilities using a higher discount rate, freeing up capital, on the reasoning that a buy-and-hold investor does not suffer from short-term market price swings it will never crystallise.

The MA is powerful and, its supporters argue, entirely rational: it aligns capital rules with the economic reality of a matched, illiquid book. The Solvency UK reforms went further, broadening the range of assets eligible for MA treatment — including certain assets with more complex or “highly predictable” cash flows — with the explicit aim of channelling insurance money into productive, long-term investment in the UK economy. The Prudential Regulation Authority (PRA) has also introduced a Matching Adjustment Investment Accelerator to speed up how quickly insurers can put new assets to work.

But the PRA has paired that liberalisation with tighter scrutiny, and the direction in 2025 and 2026 has been toward more, not less, oversight of exactly the risks the FT report raises. The regulator’s supervisory statement on the matching adjustment sets expectations around asset eligibility and the “fundamental spread” — the buffer that ensures insurers do not take too much MA credit for assets that carry real default and downgrade risk. More pointedly, in 2026 the PRA consulted (via CP8/26) on a tighter capital and risk framework for funded reinsurance, the arrangements — used in roughly 15% of new BPA deals, on the regulator’s estimate — through which insurers offload longevity and asset risk to often offshore reinsurers. The proposals would raise capital treatment closer to that of directly held assets, impose “less favourable treatment for illiquid or structured assets” as collateral, and sharpen focus on concentration and correlation risk, with the consultation closing on 31 July 2026 and implementation proposed for 1 July 2027. In short, the regulatory architecture that permits private credit in annuity books is being actively recalibrated to control its risks.

The systemic-risk debate

Above the level of any single firm sits a broader question that the Bank of England has returned to repeatedly: could the migration of illiquid credit into insurers create risks for the wider financial system? The Bank’s Financial Stability Reports and its life insurance stress test exercises have examined how annuity insurers would behave under severe but plausible shocks — sharp rises in credit spreads, waves of downgrades, and stresses in the funded reinsurance chains that connect UK insurers to global reinsurers.

The concerns cluster around three ideas. First, valuation: if hard-to-price assets are worth less than models imply, capital buffers could be thinner than they appear. Second, concentration and interconnectedness: if many insurers, reinsurers and private credit funds are exposed to the same borrowers or sectors, a shock in one corner — a wave of defaults among mid-market borrowers, say, or stress in data-centre financing — could ripple across the system. Third, procyclicality: in a downturn, forced selling or collateral calls could amplify market moves, even for institutions whose liabilities are genuinely long term.

Set against that is a serious counterargument that regulators themselves make. Insurers are, structurally, among the most stable long-term investors in the economy. They are not funded by runnable deposits; their liabilities are predictable and cannot be redeemed early on a whim. That makes them natural holders of illiquid assets and, arguably, a stabilising force — capable of holding through volatility when others are forced to sell. The Bank’s own stress testing has generally found the sector resilient, and the reported S&P analysis, showing a 12%-exposed insurer weathering a 2008-scale shock, sits comfortably with that. The systemic debate, in other words, is not settled — and responsible coverage should resist the temptation to treat opacity as if it were the same thing as loss.

Impact on pensioners, policyholders and investors

For the millions of scheme members whose pensions have been bought out by an insurer, the practical position is reassuring and worth stating plainly. Their benefits are legally guaranteed by a PRA-regulated insurer, backed by capital buffers, and protected — up to 100% for annuities in payment — by the Financial Services Compensation Scheme should the worst happen. Nothing in the FT report suggests any pension is at risk today. Members do not choose the assets behind their annuity, and the security of their payments rests on the insurer’s overall strength, not on any single loan.

For policyholders and trustees weighing a buy-in or buyout, the story does argue for sharper due diligence. Trustees increasingly scrutinise not just an insurer’s price but its investment strategy, its use of funded reinsurance, and its ability to explain what sits behind the annuities it writes. Independent advisers and the actuarial disclosure standards that govern these transactions are the mechanisms through which that scrutiny operates.

For investors in the listed insurers — L&G, Phoenix (Standard Life’s parent) and Just Group — the reported warning is a reminder that annuity economics depend on getting credit risk right over decades. Private credit can enhance returns and support attractive new-business margins in a competitive market; it can also expose an insurer to losses and to reputational and regulatory pressure if a portfolio sours or disclosure is found wanting. This article does not offer a view on any share as an investment. The relevant point is analytical: the quality, transparency and diversification of the assets behind the annuities is now a central part of how these businesses should be understood.

Opportunities, challenges and material risks

The opportunities are genuine. Private credit gives insurers access to an illiquidity premium that can be passed, in part, to pension schemes through more competitive pricing, helping employers de-risk and securing members’ benefits sooner. Under Solvency UK, it can also direct long-term capital into UK infrastructure, housing and productive assets — an explicit policy goal. Well-matched, well-underwritten private credit is a legitimate and arguably conservative way to back long-dated promises.

The challenges are equally real. Valuation depends on models and assumptions that are only as good as their inputs. Disclosure is limited, so outsiders struggle to gauge concentration by sector, geography or counterparty. Funded reinsurance can move risk offshore and into structures the PRA is now moving to capitalise more heavily. And competitive pressure on margins creates an incentive to reach for yield precisely when caution is most warranted.

The material risks worth watching, none of which is a prediction, are: a credit downcycle that tests private-loan valuations; concentration in fashionable sectors such as technology and data-centre lending; liquidity and collateral strains in reinsurance chains under stress; and the possibility that reported exposure creeps beyond the levels regulators and agencies have modelled. Each is a reason for vigilance, not alarm.

A balanced reading

The honest conclusion is that both stories are true at once. Private credit has made the UK annuity market more competitive and, plausibly, delivered better outcomes for schemes rushing to secure benefits — and it has introduced assets that are harder to value, harder to see through and harder to stress test than the government and corporate bonds they partly replace. The reported S&P warning is best read not as a fire alarm but as a call for transparency: for insurers to disclose more about what backs their annuities, and for regulators to keep the capital and reporting framework ahead of the risk. On the evidence available, the UK’s largest annuity writers remain well-capitalised and closely supervised. The task now is to ensure that the opacity of the assets never gets ahead of the oversight applied to them.

What happens next

Several threads will determine how this debate evolves through the second half of 2026 and beyond. The PRA’s funded reinsurance consultation closes on 31 July 2026, and its final rules — expected to raise capital on illiquid and structured collateral and tighten concentration limits — will shape how much of this risk insurers can retain and how they price it, with implementation proposed for July 2027. The Bank of England’s Financial Stability Report and its life insurance stress testing will continue to probe insurers’ resilience to credit and reinsurance shocks. Ratings agencies, S&P among them, are likely to press for more granular disclosure of private-asset exposures, and may reflect the issue in their commentary on individual insurers. Investors will watch full-year results from L&G, Phoenix and Just Group for detail on asset mix, matching-adjustment benefit and new-business margins. And the underlying driver — a pension risk transfer market forecast near £70bn in 2026 — shows no sign of slowing, which means the volume of annuities needing to be backed, and the demand for assets to back them, will keep growing.

Conclusion

The rise of private credit insurers is one of the most consequential quiet stories in British finance: a reshaping of how the nation’s retirement promises are funded, driven by a booming buyout market, a regulatory regime designed to reward illiquid investment, and intense competition for deals. The FT’s report that hard-to-price assets now exceed 10% of some annuity portfolios at L&G, Standard Life and Just Group, and that S&P has flagged the trend, is a milestone in that story rather than a rupture. The insurers are strong, supervised and, on the reported stress tests, resilient. But the direction of travel — more illiquid credit, more structured exposure, more reliance on models and offshore reinsurance — deserves exactly the scrutiny it is now receiving. Transparency, not alarm, is the appropriate response, and the coming rounds of regulation and disclosure will show whether the system keeps opacity and oversight in balance.