Summary

UK life insurers are taking on more company pension schemes through bulk annuity deals, and backing those long-term promises with a growing share of private credit and illiquid, hard-to-value assets. Around 40% of insurers' matching adjustment portfolios are now illiquid, and about a third of those assets lack an external credit rating. The Prudential Regulation Authority, part of the Bank of England, has stepped up scrutiny: its first public life insurance stress test in November 2025 showed a resilient sector, with solvency coverage falling from 185% to 154% but all eleven participants staying above requirements. In April 2026 the PRA proposed lifting capital held against funded reinsurance from roughly 2-4% towards 10% of liabilities from October 2026. The core risks are valuation, because private loans are priced by models not markets, and liquidity, because illiquid assets are slow to sell when cash is needed.

Five Key Takeaways

  1. Bulk annuity deals are transferring billions of pounds of company pension promises from employers to insurers, and the assets backing them are becoming less liquid.
  2. Private credit and other hard-to-value assets are attractive because they can pay more, but they are difficult to price and slow to sell in a crisis.
  3. The PRA's first public life insurance stress test in November 2025 showed a resilient sector, yet flagged funded reinsurance and concentrated risks as areas to watch.
  4. Regulators are tightening rules on funded reinsurance and liquidity reporting rather than trying to stop insurers investing in illiquid assets.
  5. The core issue is trust: pensioners are relying on promises that stretch for decades, so the assets behind them must hold up when markets turn.

What Happened

A quiet but very large shift has taken place in how Britain funds its retirement promises. Company pension schemes that once managed their own investments have increasingly handed their obligations to insurers through bulk annuity deals, and the assets backing those pensions are moving away from simple government and corporate bonds towards private credit and other illiquid, hard-to-value investments.

A bulk annuity, sometimes called a buy-in or buy-out, is easier to picture than the jargon suggests. An employer with a final-salary pension scheme pays an insurer a large upfront premium, and in return the insurer takes on the duty to pay members' pensions for life. Moving pension risk off company balance sheets this way is known as pension risk transfer, and it has boomed as higher interest rates left many schemes well funded enough to afford one.

Private credit is the other half of the story. It means lending money directly to borrowers, such as companies or infrastructure projects, rather than buying bonds traded on public markets or leaving the lending to banks. Because these loans are private, they are not priced on a screen every day; their value rests on models and judgement. That is what makes them hard-to-value assets, and why regulators pay attention.

The scale is now substantial. In an April 2026 speech, the PRA's Gareth Truran noted that bulk annuity premiums had exceeded £135bn over three years, more than a third of the total written over the previous two decades, with a record 354 deals in a single year and thirteen active insurers.

Alongside that growth, the assets backing annuities have become steadily more illiquid. Around 40% of insurers' matching adjustment portfolios, the ring-fenced pools of assets set against long-term annuity promises, are now illiquid holdings, predominantly secured lending against property and infrastructure. Roughly one-third of those assets carry no external credit rating at all.

This is the backdrop against which the Bank of England has stepped up its scrutiny. In November 2025 the PRA published the results of its first life insurance stress test to disclose individual firm outcomes, and in April 2026 it set out proposals to tighten the treatment of funded reinsurance. The direction is clear: closer supervision of a sector holding a growing pile of assets that are hard to price and slow to sell.

Why It Matters

The reason this matters is straightforward. Bulk annuity deals move the retirement incomes of millions onto insurers' balance sheets, and those incomes depend on the assets behind them holding their value for decades. If the assets are hard to value or hard to sell, the margin for error in a downturn narrows.

Valuation risk is the first concern. When a loan is not traded publicly, no live market price tells you what it is worth. Insurers rely instead on internal models and their own credit assessment, which is reasonable in normal times but harder to trust in a stressed one. With about a third of matching adjustment assets lacking an external rating, much rests on the quality of that internal judgement.

Liquidity risk is the second. Illiquid assets cannot be sold quickly without accepting a lower price, yet insurers can face sudden cash demands, such as collateral calls on the hedges they use to manage their books. A firm that is solvent on paper can still be squeezed if it cannot raise cash fast enough, which is why the PRA introduced new liquidity reporting for the largest insurers from September 2025.

There is also a pricing angle. Truran warned that annuity premiums fell to historically low levels in 2025 as competition intensified. When insurers compete hard to win deals, there is a temptation to accept thinner margins and reach for higher-yielding, riskier assets to make the numbers work, a pattern regulators watch carefully.

The stakes go beyond any single firm. The Bank of England's Financial Policy Committee has cautioned that stress in private markets could spread through the wider economy, so a problem in insurers' illiquid holdings would not stay neatly contained. That is the systemic worry behind the technical detail, and it pulls against a live policy goal: ministers, including the new government under Andy Burnham, want long-term insurance money invested in British infrastructure and productive assets to support growth.

Detailed Analysis

To weigh the warning properly, it helps to separate three things: what these assets and deals actually are, where the valuation and liquidity risks really sit, and how the regulator is responding without trying to halt the trend.

Private credit and bulk annuities in plain terms

Start with the plumbing. A defined benefit, or final-salary, scheme promises members a set income in retirement. Paying those pensions for decades is a long, uncertain commitment, and many employers would rather be free of it. A bulk annuity lets them pay an insurer to take it on permanently, so the insurer, not the company, now owes the pensions.

Insurers are suited to this because their business is matching long-term promises with long-term assets. To back an annuity that must pay out for thirty or forty years, an insurer wants investments that produce steady, predictable cash over the same horizon. Government bonds do that, but so, in theory, does lending to an infrastructure project or against commercial property.

That is where private credit fits. Instead of buying a bond anyone can trade, the insurer lends directly, often to a single borrower on bespoke terms, and holds the loan to maturity. In return for giving up the ability to sell easily, it typically earns a higher yield, the so-called illiquidity premium, which for a buy-and-hold investor with predictable outgoings can be a sensible trade.

The complication is valuation. A publicly traded bond has a market price; a private loan does not. Its worth depends on assumptions about the borrower, the collateral and future cash flows. In calm conditions those hold, but in a downturn different firms can value similar assets very differently, and true values may only emerge when something is sold or defaults.

None of this is inherently reckless. Truran noted that credit quality across matching adjustment portfolios remains relatively strong, with around 40% of assets in the highest rating bands and less than 1% below investment grade. The point is not that the assets are bad, but that they are complex and opaque, so the systems used to monitor and value them must be correspondingly robust.

Where the valuation and liquidity risks sit

The matching adjustment is central to the risk. Under UK rules, insurers can take credit today for the extra yield they expect on illiquid assets held to back annuities, which reduces the capital they must hold. That is reasonable if the assets deliver, but it also creates a strong incentive to load these portfolios with higher-yielding, less liquid holdings.

With roughly 40% of those portfolios now illiquid, mainly secured lending against property and infrastructure such as commercial mortgages and equity release loans, the sector's fortunes are increasingly tied to assets that trade rarely. The concern is not day-to-day; it is what happens if a wave of downgrades or property falls hits several positions at once.

The PRA's own stress test illustrates the sensitivity. In the 2025 exercise, a severe but plausible scenario pushed £12.9bn of assets below investment grade across the sector and cut aggregate capital surplus by £8.6bn. The headline was reassuring: sector solvency coverage fell from 185% to 154% and all eleven participating insurers, representing more than 90% of annuity liabilities, stayed above their requirements.

Liquidity is the quieter risk. Insurers hold derivatives to hedge interest rate and currency moves, and when markets swing sharply they can be required to post cash collateral at short notice. If most of their assets are illiquid loans that cannot be sold quickly at a fair price, meeting those calls becomes harder. The 2022 gilt market turmoil showed how fast such pressures can build.

Reporting from July 2026 suggests the sector has so far absorbed these pressures. Industry analysis noted that UK insurers looked resilient under stress despite growing private credit allocations, and direct private credit exposures remain relatively small for now. Yet resilience today is not a guarantee for a larger, more concentrated book tomorrow, which is the regulator's essential point.

Funded reinsurance and the PRA's response

The fastest-moving strand of the debate is funded reinsurance. Here an insurer that has taken on a block of annuities passes the investment risk, and the assets, to a reinsurer, often offshore, in exchange for a fee. It can free up capital, but it also creates a heavy dependence on that reinsurer and on the quality of the collateral behind the arrangement.

The numbers explain the attention. Funded reinsurance premiums reached about £6.5bn in 2025 and total exposure is estimated at around £40bn and growing. In its November 2025 stress test, the PRA warned that recapturing reinsured liabilities if a counterparty failed could meaningfully dent solvency, and that risks could amplify as the technique spreads.

In April 2026 the PRA proposed a fix. It found firms holding capital worth only about 2-4% of the relevant liabilities against funded reinsurance, against roughly 11-15% for comparable direct investments, a gap it judged too wide. Its consultation would introduce a standardised charge lifting that towards 10% of liabilities, applying to new transactions from 1 October 2026.

The design of the response is telling. Rather than banning illiquid assets or funded reinsurance, the PRA is raising the capital and reporting requirements so that the buffers match the risk. Gareth Truran, the PRA's Executive Director for insurance supervision, has framed the aim as sustaining innovation and competition in the annuity market while keeping it resilient, not choking it off.

That balance is deliberate. A competitive bulk annuity market helps employers offload pension risk safely, and the government wants insurers investing in long-term British assets. The regulator's task is to let that continue while ensuring the promises made to pensioners are not quietly underpinned by assets worth less, or harder to sell, than they appear on a good day.

What Happens Next

The immediate milestone is the funded reinsurance reform, with the tighter capital treatment set to apply to new deals from 1 October 2026. How insurers restructure their arrangements ahead of that date, and whether the final rules land as proposed, will shape the economics of a fast-growing corner of the market.

Beyond that, expect the new liquidity reporting regime to bed in. Having required the largest insurers to submit detailed liquidity data from September 2025, the PRA will use it to compare firms and probe how they would cope with a sudden demand for cash. Firms with clear risk appetites and strong management information will be better placed than those relying on optimism.

The market itself shows little sign of slowing. Advisers point to continued strong demand for pension risk transfer, with some forecasting bulk annuity volumes could approach £70bn in a single year. More deals mean more assets to invest, and the pressure to find yield in private markets is unlikely to ease while competition keeps premiums keen. Any government push to channel that money into UK infrastructure will have to be squared with the PRA's caution about illiquid, hard-to-value holdings.

For savers and pensioners, the practical message is one of vigilance rather than alarm. The stress tests suggest the sector is currently robust, but the assets underneath it are becoming more complex, so transparent valuation, sound liquidity planning and adequate capital matter more than ever.

Conclusion

The growth of private credit and illiquid assets in UK annuity insurers is a genuine development worth understanding, but on the current evidence it is not a looming disaster. The PRA's first public stress test pointed to a resilient sector that absorbed a severe scenario while staying above its requirements.

What has changed is the composition of the risk. As bulk annuity deals pile more pension promises onto insurers, backed increasingly by loans that trade rarely and are valued by models, the premium on getting the details right rises. Valuation discipline and liquidity planning are no longer technicalities; they are the safeguards standing behind millions of retirements.

The regulator's response has been measured. Instead of reversing the trend, it is raising capital requirements on funded reinsurance, collecting better liquidity data and pressing firms to stress test their assumptions harder. That is supervision adapting to a market that has moved, rather than a fire alarm.

The story to follow is whether that balance holds as the market keeps growing. If insurers, reinsurers and the PRA keep the buffers and the transparency ahead of the risk, the shift into private credit can support both retirement security and the investment Britain wants. If pricing pressure is allowed to erode standards, the warning implicit in the phrase hard-to-value assets would eventually be tested for real.