UK pension funds are the most exposed in Europe to risky shadow banking activities, a new report warns.
Fund managers who underwrite British retirement schemes have twice as much money tied up in the sector than their European counterparts, according to S&P Global.
Legal & General (L&G), Standard Life and Just Group, for example, have more than 10pc of their funds invested in illiquid private credit versus 5pc for funds in Europe, the report said.
UK pension insurers have 8.8pc allocated to private credit, with European insurers allocating 4pc and European re-insurers just 1pc.
The high levels of exposure will raise fears about risks lurking in the UK pension system.
Shadow banking has faced mounting scrutiny after investors suffered significant losses following the collapses of US firms Tricolor and First Brands, which had both taken on large private credit loans.
The collapse of Market Financial Solutions in February similarly sent shock waves through the City, as banks, including Barclays and HSBC, recorded hundreds of millions of private credit losses from the property firm's sudden failure.
Andrew Bailey, the governor of the Bank of England, also warned in May that pension funds had become dangerously intertwined with the private credit market.
City funds such as L&G and Standard Life have grown significantly in the last few years by acquiring corporate pension schemes from some of the country's largest employers, in so-called "bulk purchase annuity" deals.
The biggest private credit investors in the world have also moved into the sector, with Just Group and PIC recently acquired by Brookfield and Apollo respectively.
S&P said the recent acquisitions "have fuelled concerns that private-capital-owned insurers will increase allocations to private capital, as is already the case in the US".
Pension funds have found themselves drawn to private credit investments as it typically offers significantly higher returns to investors who are willing to lock away investments over an extended period.
However, such investments are viewed as more risky because of a widespread lack of transparency in the private credit market and difficulties in turning them into cash because of the limited pool of buyers.
