Local government pension schemes managing assets totalling some 400 billion pounds ($541 billion) are among Britain’s biggest investors in non-bank “shadow lending” funds, a sector the Bank of England recently flagged concerns over.

Almost half these schemes in England and Wales have invested ​10% or more of their assets in such funds, a Reuters analysis shows, exposing the pensions of staff from classroom assistants to refuse collectors to swings in what are still ‌opaque markets.

The high and steady returns of non-bank lending in the decade to 2024 made it an attractive option for managers of such schemes, which guarantee members a final salary-linked pension.

But devaluations and default warnings in non-bank lending, including private credit, have rattled investors this year and prompted regulators to warn about risks including unclear valuation techniques and hidden leverage.

While the biggest signs of strain have been in the U.S., British banks have also disclosed hits and the BoE has raised concerns about the sector’s opacity and is stress testing private credit and ​equity.

The government has long encouraged pension schemes to invest ​up to 10% of their funds in private assets, which include private equity, infrastructure and real estate, to boost returns and support Britain’s economic growth.

A Reuters review ⁠of the annual reports of the 86 schemes showed LGPS have amassed a total of more than 32 billion pounds ($43 billion) of private and multi-asset credit exposure.

The review shows that, on average, they have invested 4.2% ​of their assets into private credit and a further 8.7% in multi-asset credit funds, opens new tab. These hold a mix of illiquid and more easily tradeable non-bank debt from corporate bonds to asset-backed and leveraged loans.

That compares with official estimates, opens new tab indicating the defined-contribution pension schemes that serve most corporate employees allocated 3.5% to all illiquid investments in 2025.

Meanwhile, of the 47 LGPS that gave private credit targets, all but four fell below them, indicating they could buy more.

PROJECTED RETURNS

Private debt funds often require investors to commit capital long term and call on more of it during downturns, which Europe’s Financial Stability Board warned, opens new tab last week could force pension investors to sell more ​liquid assets to raise cash.

“The potential negative outcome comes when the projected returns that they (LGPS) were promised or had projected are just not available,” said Mick McAteer, a campaigner for financial inclusion and a former FCA board ​member.

These ‌conditions are now ⁠threatened by the Iran war.

Ludovic Phalippou, a professor at Oxford Said Business School, said signs of stress among borrowers could lead to losses for non-bank loan funds and make it harder for schemes to exit.

While the most recently available LGPS data shows local authority retirement fund allocations to private debt were 3% of portfolios on average in 2024, a Reuters analysis showed some council schemes’ exposures were far higher.

London’s Lambeth has invested almost 26%, opens new tab of its assets in private debt and multi-asset credit, its latest published data to December 2025 showed. Cumbria’s latest annual report, for the year to March 2025, showed it had allocated 8% to private debt.

Neither scheme responded to requests for ​comment.

‘NO IMMEDIATE CONCERNS’

Investment consultant Hymans Robertson’s chief investment officer ​David Walker said, however, that council retirement schemes ⁠were not over-exposed to non-bank lending.

“They’ve got other asset classes they can rebalance into and so I don’t see any immediate concerns in terms of cashflow,” he said.

Private debt funds often tie up investors’ capital for years and multi-asset credit is widely considered as more liquid and more robust in a downturn, although some questioned ​this.

“Multi-asset credit and certain “semi-liquid” strategies often behave like private assets in stress scenarios, even if they are not labelled as such,” said Phalippou.

The liquidity management of ​British pension schemes was severely tested ⁠in 2022 when they faced capital calls on hedging positions during a gilts crisis, although many have taken action since to withstand future shocks.

Council pension fund documents showed some were making liquidity management provisions for private credit.

In West London, Hammersmith and Fulham council’s pension scheme was among a group of investors that pulled out of a private credit fund managed by Aberdeen , which the asset manager confirmed to Reuters it had now liquidated.

“In the current environment, we believe maintaining ⁠balance and flexibility ​across the portfolio is important, particularly given ongoing uncertainty around interest rates, economic growth and liquidity conditions in some private market segments,”

​Phil Triggs, tri-borough director of pensions and treasury for London schemes including Hammersmith and Fulham, told Reuters.

Gloucestershire’s local pension fund said in February it would borrow if private asset investments caused liquidity challenges “to save the fund from becoming a forced seller of assets”. The fund ​declined further comment.