Banks and pension funds are increasingly connected to the private credit sector through loans and investments, so credit risk is shared through less transparent, harder-to-value investments. This can affect everything from loans to retirement savings.
For years after the 2008 global financial crisis, financial regulators worked to make banks safer. But as private credit funds become a more common source of business lending, credit risk is increasingly shared beyond the banking sector.
Tighter rules for banks after 2008, combined with low interest rates that encouraged investors to seek higher returns, have created more opportunities for other types of lenders. By the end of 2024, non-banks held 51% of global financial assets. Within that broader sector, the Financial Stability Board (FSB) estimates private credit at $1.5 trillion to $2 trillion. Pension funds and insurers are also significant investors in the private credit sector.
This growth means pension savings are increasingly exposed to private credit risk. But, although private credit assets can offer higher yields, valuations are less frequent and more discretionary, and so stress may only be seen when assets are repriced.
This means your pension could be invested in a company you have never heard of, through a loan whose terms you cannot see and whose value depends on a fund manager’s judgement. For defined-contribution savers, whose pension pots depend on investment performance, delayed losses could emerge just as they retire.
As pension providers continue to invest in private market funds, how can regulators protect pension holders from absorbing any hidden losses?
What is private credit?
Imagine a German manufacturer needs €20 million to expand. Instead of borrowing from a bank or selling bonds to investors, it could negotiate a loan with an investment fund that pools money from pensions, insurers and other investors. The company pays interest on the loan and its investors receive returns after fees and losses. This is direct lending, a common form of private credit or privately arranged loan provided by non-banks.
Private credit appeals to businesses that value speed and flexible terms. Repayments can be timed around an expansion, for example, in return for higher borrowing costs. On the other hand, the investors seek higher income but must accept fees, limited access to their money and credit risk if the business fails to repay.
Private loans rarely trade, so fund managers estimate their value. As the International Monetary Fund warns, this means valuations can be outdated and are often heavily dependent on judgement.
Fair valuations matter for all investors. Where withdrawals are priced using overstated asset values, departing investors can receive too much, leaving those who remain to bear the shortfall.
The rise of private credit pension investments
Several recent market developments have made this issue particularly important for pension savers right now.
First, some private credit funds are receiving withdrawal requests above their repurchase limits. In September 2026, HPS Corporate Lending Fund, a private credit fund that lends to companies and is managed by BlackRock-owned HPS, reported shareholder requests to sell back 11.5% of its outstanding shares, but said it would repurchase only 5%. Such limits help avoid forced loan sales, but investors whose requests are not fully met must leave part of their money invested. This means they are exposed to any subsequent changes in value.
More pension savings are also being directed towards private markets. In 2025, 17 UK pension providers signed the Mansion House Accord, committing at least 10% of their main defined-contribution default funds to private markets by 2030.
Banks are very connected to the private credit sector too. In its May 2026 report, the FSB data identified around $220 billion in drawn and undrawn bank credit lines to private credit funds. While exposures remain relatively small overall, financial difficulties could spread through these connections, particularly where exposures are concentrated.
Systemic risk from private credit markets
Returning to the German manufacturer, its lender might borrow from a bank and have a Dutch pension fund and French insurer among its investors too. So, if the manufacturer struggles, any losses could affect several institutions, with loan agreements determining who bears the impact first.
A European Central Bank exercise covering euro area institutions found that a severe shock could affect insurers and pension funds more than banks. While direct private-credit losses appeared manageable, according to the exercise, the largest effects came from assumed falls in wider markets.
Protecting people from private credit risks
Regulators need to understand how these connections can cause losses to spread. With that information, they could protect pensions in the following ways:
1. Stress-test the borrowing chain
The European Systemic Risk Board should convene a voluntary pilot with relevant supervisors, banks, private credit funds, insurers and pension schemes – similar to an ongoing Bank of England private markets exercise.
The pilot should combine existing data with targeted requests to map selected borrowers, their lenders and the investors behind them, including borrowing by funds themselves. It could then test falling cash flows, higher borrowing costs and difficulty refinancing.
This would help identify who bears private credit market losses and who needs cash. The ESRB could publish aggregate findings and missing links.
2. Require valuation transparency
Pension funds and insurers should make valuation transparency a condition of any new investments. Managers should disclose when loans were valued and the share, by value, that received an independent valuation review in the past year, including the dates and scope of those reviews.
Missed payments or payment relief caused by financial difficulty should trigger prompt reassessment, with external checks focused on material, troubled loans. Pension statements should explain exposure to assets without quoted market prices and show how values are checked.
3. Publish the warning lights and act on them
Private credit fund managers should be required to submit a standard quarterly return to regulators covering interest added to debt instead of paid in cash, missed payments, loan extensions and fund borrowing relative to investor capital.
Regulators should publish aggregate trends, stating coverage and data dates. Deterioration should prompt regulatory supervisors to examine affected managers’ valuations and plans for meeting cash demands.
Where does the risk go?
Private credit can widen financing choices and improve pension savers’ returns. And many funds require investors to leave their money invested for years, reducing withdrawal pressures.
But while recent regulations may have made banks safer, risks remain in private credit and its growing connections with banks.
Savers deserve to know what they own, how reliably it is valued and who will absorb any losses.
