The Association of British Insurers (ABI) – Written evidence (PMG0019)

About us

The ABI is the definitive voice of the UK’s world-leading insurance and long-term savings industry, which is the largest sector in Europe and the third largest in the world.

We represent more than 300 firms within our membership including most household names and specialist providers, providing peace of mind to customers across the UK.

Our sector is productive, inclusive and essential to the UK economy and together, we are driving change to protect and build a thriving society.

Find out more at abi.org.uk

The ABI response

Why pension and insurance providers invest in private markets

1. Private assets are playing an increasingly significant role in the portfolios of pension schemes and insurance providers. They offer an attractive means of raising capital for businesses while supporting the real economy, thereby enhancing productivity and contributing to a more sustainable UK. Private markets have helped to provide a range of funding sources, particularly as structural shifts in public markets now mean deal sizes have become too large for many small and middle market companies.
2. For investors, several factors are driving the increased allocation to private assets. These investments offer portfolio diversification through returns that are less correlated with public markets, provide a degree of inflation protection, and tend to exhibit lower volatility. Additionally, they can enhance income generation and total returns, helping providers better meet their return and payout objectives while maximising outcomes for members. Private assets also come with a distinct risk-return profile - typically involving higher risk, but with the potential for greater rewards. Crucially, they offer diversification benefits by providing alternatives to often concentrated public markets. This diversification helps strengthen the resilience of Defined Contribution (DC) pension pots and annuity investment portfolios.
3. As more companies choose to raise capital privately, pension and insurance providers should be able to invest in private markets in order to access a broader opportunity set. Private lending (or private credit) and private equity are expected to continue growing, driven by the flexibility they offer to investee companies, offering the ability for companies to customise funding solutions to the needs of their business. They also ensure more certainty of execution than the public markets, and the ability to partner with a single or small group of lenders to work through any issues as part of a long-term relationship allowing a greater focus on long-term growth and performance.
4. Pension and annuity providers make investment decisions with the aim to deliver the best outcomes for their members or consumers and must be allowed to continue to do so. Not all investments in private assets are appropriate for every provider and each investment should be assessed on its individual merits. Fiduciary duty and Consumer Duty are paramount to ensure that pensions and annuities are managed in the best interests of savers. The proposed reserve power to mandate pension investments under the Pension Schemes Bill undermines these critical safeguards. Unlike voluntary industry initiatives, such as the Mansion House Accord and the Mansion House Compact, which are governed by fiduciary duty and the Consumer Duty, mandation would compel investments regardless of consumer outcomes. Insurers are also subject to Solvency UK, which also includes robust safeguards; their private credit allocations are subject to strict Matching Adjustment eligibility and capital rules under Solvency UK.

Proportion of investments in private markets

5.               Changes to the prudential regulatory regime, now known as Solvency UK, aimed to make it easier for annuity providers to invest in productive assets – which are typically large-scale and long-term debt investments, expected to generate greater returns over time. During discussions at the time of the reforms, annuity providers pledged to invest £100 billion in UK productive assets over the next decade. As part of this pledge, annuity investors invested £10.9 billion in 2024, of which £6.9 billion (63%) are private assets. This first update on the progress sets out more details on the investments as well as enablers for further progress.

6.               While we don’t know the proportion of annuity investors’ portfolios that is allocated to private assets, insurers have been increasingly interested in private markets since the Global Financial Crash and the low-interest rate environment.

7.               The average allocation to private assets in DC default funds is 3.57% across growth strategies, according to Corporate Adviser Master Trust and GPP Default Report 2025. However, much more is expected to be allocated in the years to come.

8.               In July 2023, 11 pension providers came together and agreed to the Mansion House Compact, an ambition to allocate at least 5% of DC default funds into unlisted equities and more generally, increase investments in unlisted equities from pensions and other relevant assets. We have taken the role of tracking this pledge and in the first year, the progress has been good, with signatories taking important enabling steps in changing the strategic allocation and operationalising a higher exposure to private equities. Earlier this year, 17 providers led by the ABI, Pensions UK and the City of London Corporation, signed the Mansion House Accord, which is a broader pledge (10% of DC default funds to be allocated to private assets), with a specific UK commitment (5% to UK private assets).

9.               These pledges are an important mechanism to help pension providers to diversify, and they ensure that fiduciary and consumer duty are the first priority, unlike the proposed reserve power to mandate pension investment in private/domestic assets.

10.               Below are some examples of private asset investments that our members make. They show the role they play in the economy, transition to net zero and quality of life.

Case Studies

Just Group, PIC, Nest, & Aviva provide financing for landmark aqueduct renewal

ABI members including Just Group, Pension Insurance Corporation (PIC), Nest, and Aviva have provided financing for the Haweswater Aqueduct Resilience Programme (HARP), a major infrastructure project that will support the delivery of drinking water to 2.5 million people. HARP is the first project commissioned by Ofwat’s Direct Procurement for Customers model, with UK pension funds investing over £3.2 billion via GLIL infrastructure.

Nest invests £200 million into offshore wind

In 2022, Nest invested £200 million via an Octopus Energy Generation-managed fund in Hornsea 1, the first UK wind farm with a capacity of over 1GW. The project generates enough clean energy for a million homes. The project exemplifies the role of private capital in accelerating UK net zero goals, boosting local economies, and supporting energy resilience.

Barriers and policy enablers

11.               Given private assets play a key role in making the UK more productive, getting it closer to net zero and providing an important diversification role and potential higher returns, the industry wants to be able to invest more in such assets. However, several barriers stand in the way.

12.               DC providers are affected by the over-focus on minimising cost (as opposed to increasing long-term value) and by the misalignment of the charge cap regulations between the Financial Conduct Authority (FCA) and the Department for Work and Pensions (DWP). This makes it very difficult for them to increase exposure to private assets – which are more expensive – within their existing investment budgets. 

13.               The government and regulators are looking to deliver on these critical enablers to support providers to meaningfully increase private assets exposures:

• The Value for Money framework is expected to refocus the DC provider market on value rather than cost minimisation. To ensure success, the framework should drive innovation in investment approach through the investment performance metrics chosen.
• Ensuring that employee benefits consultants incorporate this framework in their decision-making is crucial, so the government should continue to consider bringing them under the FCA’s regulatory perimeter.
• The FCA is assessing whether to align with The Pensions Regulator (TPR) charge regulations, which allow for performance fees to be excluded from the charge cap.  We believe alignment is necessary to allow FCA regulated pension schemes to increase their investments in private markets.

Employer Related Investments/Employer Related Loans regulations may also act as a barrier for some pension schemes investing in private markets which may require addressing.

14.               Annuity providers also face barriers to investment and are committed to solving them. The ABI has established the Investment Viability Group (IVG), bringing together stakeholders including HM Treasury, the National Wealth Fund (NWF), the Prudential Regulation Authority (PRA), and industry firms to explore how strategic infrastructure projects can be made suitable for insurers’ Matching Adjustment portfolios through risk sharing mechanisms. An early example of an investment in partnership between an insurer and the NWF is Rothesay’s £150m commitment for social housing retrofit.

15.               The PRA should consider expanding the definition of ‘highly predictable’ assets eligible for the Matching Adjustment (MA) to include hybrid assets with both debt and equity components, provided the risks are well understood and appropriately reflected through Fundamental Spread adjustments. This would require changes to the current PRA Rulebook. Additionally, we suggest the PRA remain open to reviewing the new MA limits, such as the 10% cap on highly predictable assets, if the associated risks they were designed to address do not materialise. This would support greater investment in UK productive finance.

16. Both pension and annuity providers need a clear pipeline of investable opportunities identifying appropriate investors suited to different nationally and locally strategic projects, in order to deliver on their respective pledges.  The government has taken steps to facilitate a pipeline of UK private assets, including by setting out an industrial and an infrastructure strategy, setting up the National Wealth Fund and introducing an infrastructure pipeline tool. Continuing this work to enhance project visibility will support the industry to deliver greater investment into strategic private markets.

17.               The government and bodies such as the NWF must take a longer-term view to consider how to strategically deploy the full spectrum of finance across the landscape of projects, appropriately sharing and allocating risk to efficiently crowd in capital from as many types of investors as possible, simultaneously helping to reduce refinancing risk.

18. To summarise, in order to further unlock the potential of private markets, the ABI recommends:

•                Continuing to support DC scheme access to private markets through the Value for Money reform (and regulate employee benefit consultants) and alignment of the charge cap regulations between FCA and TPR
•                Expanding the definition of “highly predictable” assets to include hybrid instruments
•                Reviewing Matching Adjustment limits to allow greater flexibility under prudent conditions
•                Enhancing infrastructure project visibility via tools like the Infrastructure Pipeline
•                Encouraging collaboration between government, regulators, and industry to de-risk strategic projects
•                Taking a longer-term view to consider how to strategically deploy the full spectrum of finance and crowd in private investment

Managing the challenges associated with private markets

19.               Private markets have an increasingly important role in boosting resilience of pension pots and the annuity investment funds supporting millions of people’s retirement incomes. They increase diversification, and potential returns.  At the same time, as with listed investments, private assets present specific challenges of their own that need to be monitored and managed by the industry and regulators. They have been identified to include: vulnerabilities from leverage and investment illiquidity, valuation of illiquid assets, management of conflicts of interests, and opacity and potential non-uniform treatment of investors. These risks were raised in the International Organisation of Securities Commissions (IOSCO) 2023 report on the ‘Emerging Risk in Private Finance’.

20.               Since private markets are growing and are increasingly available to pensions schemes, as well as to retail customers (though to a lesser extent), we agree that these challenges need to be well understood and monitored, and we are pleased that the regulators are keeping these under review. Equally, it’s important to ensure that the regulation of UK firms is proportionate and that the risks are understood internationally; therefore, the role of the FCA and PRA in global institutions is welcome.

21.               Our view and approach on how these challenges are monitored and managed is set out below:

Leverage and transparency

• We welcome the recent recommendation by the Financial Stability Board’s report on leverage in Nonbank Financial Intermediation for a stronger risk monitoring and greater market transparency and the FCA’s direction to “carefully consider which risk metrics are most useful” and how best to align with other jurisdictions. Reporting data to regulators can mean a significant opportunity cost and ensuring that only useful data is collected is the right approach.

Valuations and managing conflicts of interest

• Earlier this year, the FCA assessed valuation practices of private market participants. It highlighted general good practice, and set expectations in areas in need of improvement, such as valuation-related conflicts, and ad-hoc valuations and ensuring sufficient independence to ensure consistent approach and expert challenge.

Liquidity and managing volatility

• Pension and annuity providers are long term investors, so short-term volatility does not impact them as much as other financial institutions.
• Day-to-day liquidity should be manageable in large DC schemes with significant inflows. With increasing exposure to illiquid assets and older DC savers moving closer to decumulation, liquidity will remain an important consideration. However, there are guidelines available to support the design of liquidity strategies - the Productive Finance Working Group liquidity guide and TPR Liquidity Risk Management Plans. In addition, pension providers who are insurers are also regulated by the PRA and are already required to have sophisticated risk management controls and practices in place to manage liquidity in times of stress.

• Annuity providers are ‘buy and hold’ investors, with a clear view of the cashflows of their liabilities, both in terms of size and time. This makes managing liquidity a more straightforward process.

22.               We identified two aspects could be improved in collaboration with the private capital industry, to help pension providers manage these investments more effectively:

• DC schemes could be aided by the private capital sector with longer lead times on capital (i.e. allowing pension schemes more time to send capital once it has been requested by the private capital funds). This would allow DC schemes to hold less liquidity and therefore, it would minimise the performance drag that this creates.

• Consistency of data between private capital companies would help pensions providers more effectively manage key areas of their investment strategy such as risk analysis and responsible investment.

18 September 2025

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