Insurers want to invest in private assets, but are they trapped?
Insurers are increasingly keen to invest in private markets, but the lack of opportunities which match their risk profile requirements means their options are limited
2025 has been a bumper year for the UK’s pensions bulk annuity market. The first half of the year alone saw 155 buy-in/buyout transactions, a record high and up 20 per cent from the same period in 2024, according to LCP.
Not only is deal volume booming, but strategic tie-ups and large-scale acquisitions are in the air, with Just Group and the Pension Insurance Corporation Group both having been snapped up by North American private equity firms earlier this year.
But in such a closely regulated market, how free are asset owners to take big swings in their investment decisions? And are the opportunities available for them to do so?
While each insurer sets its own strategic asset allocation, “regulation plays a major role in shaping which asset classes are most attractive”, LCP partner Charlie Finch tells AOX.
“For example, while insurers can technically invest in equities, they typically avoid doing so as their capital treatment… is punitive.”
Andrew Ward, risk transfer and defined benefit planning journey leader at Mercer, agrees “UK insurance regulations constrain the investment opportunities which BPA insurers can pursue”.
But despite these close controls, insurers are stretching their legs into alternative asset classes, notably certain types of private market.
“[They] are increasingly active in private credit, infrastructure debt and structured finance,” according to Mohamed Tabi, director of credit and portfolio management at Just Group.
“These asset classes tend to offer attractive structural protection, liquidity premiums and long-duration cash flows that align well with annuity liabilities.”
Private credit, in particular, has become the darling of many investors’ portfolios. “That’s one of the reasons that these big [North American] private equity managers are coming over: they want to take advantage of the private credit opportunities,” says Claire Altman, managing director of pension risk transfer and origination at Standard Life.
On top of this, the British government is encouraging insurers to invest in “strategic asset opportunities” as part of its push for more investment in UK private markets, Finch said.
For example the UK Solvency II reform implemented last year offers favourable capital treatment for assets with highly predictable cashflows, such as private debt and infrastructure debt.
On top of this, the PRA’s proposed Matching Adjustment Investment Accelerator would allow insurers to access favourable capital treatment quicker, by enabling them to invest limited amounts in new asset classes before going through formal regulatory approval.
“This is intended to help insurers be nimble to seize new asset opportunities when they arise,” Finch says.
Tabi expects it to prove “a significant enabler for insurers to invest in asset classes sooner”.
Yet even within the private markets, the investment landscape is not a free-for-all, and particularly not for insurers.
“The pipeline [of opportunities] is wide if you have a high tolerance to risk. Insurers… don’t have a high tolerance to risk,” Mike Ambery, retirement savings expert at Standard Life, tells AOX.
“For example, we wouldn’t want to invest in nuclear if we’re holding the risk of decommissioning nuclear power plants and otherwise.”
So insurers are keen to invest in private markets, but the opportunities which match their risk profile requirements are currently limited.
The recently announced Sterling 20, a partnership of 20 of the UK’s largest pension providers and insurers, aims to channel investment into key infrastructure and fast-growing businesses.
Ambery hopes it may go some way towards bringing together the government, investors and the private sector to create the kind of high-quality, long-term opportunities insurers could get behind.
“Insurers would like the flexibility to go further,” Finch says, “but this needs to be balanced against any extra risk that is introduced.”