Britain’s biggest pension scheme is planning a major shift in how it invests workers’ retirement savings, with billions set to move into less transparent private markets.
The move has raised concerns among industry observers about the growing exposure to so-called "shadow banking" within the system.
The National Employment Savings Trust has sparked concern with ambitious plans to channel approximately £30billion into private markets before the decade concludes.
The state-backed fund, which manages retirement savings for 13 million workers enrolled through the Government’s auto-enrolment scheme, plans to invest 30 per cent of its assets in this area.
This would almost double its current level of investment and puts it well ahead of similar schemes overseas.
For example, pension funds in Australia typically invest around 20 per cent in comparable assets.
Pension specialists, economists and a former pensions minister have all expressed unease about the aggressive strategy to The Telegraph.
Lord Hollick, a member of the House of Lords financial services regulation committee, characterised Nest's approach as being "at the overweight end of the market".
He urged funds to "look at your risk appetite very closely" in light of several prominent failures within private markets.
Pension specialists have all expressed unease about the aggressive strategy
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The asset class encompasses various long-term investments such as infrastructure and property.
However, mounting warnings from experts and policymakers have focused particularly on private credit and private equity, which represent the industry's fastest-expanding segments.
"We previously said we'd smelt a rat but hadn't yet seen one," Lord Hollick observed. "Since then, a few rats have appeared."
Private credit, frequently termed "shadow banking", operates differently from conventional lending. Rather than banks providing loans, financing comes from hedge funds and other financial institutions.
Private credit, frequently termed "shadow banking", operates differently from conventional lending
| GETTYThis sector has expanded rapidly since the 2008 financial crisis, largely because it faces less stringent regulation than traditional bank lending. The global private credit market now stands at approximately £2.4trillion.
The industry's swift growth has attracted increasing scrutiny from regulators and financial authorities concerned about systemic risks building outside the conventional banking system.
Andrew Bailey, the Bank of England Governor, has cautioned that turmoil in the private credit market could escalate into a financial crisis resembling the 2008 collapse.
His warning comes amid broader economic and financial pressures linked to the Iran war.
Two American firms both heavily dependent on private credit, collapsed despite being assessed as financially sound shortly beforehand
| GETTYRecent events have heightened these concerns. Two American firms, Tricolor and First Brands, both heavily dependent on private credit, collapsed despite being assessed as financially sound shortly beforehand.
JP Morgan chief executive Jamie Dimon has suggested more "cockroaches" may yet emerge from the sector.
Lord Hollick noted: "Jamie Dimon has talked about cockroaches, and the governor of the Bank of England has discussed a canary in the coalmine."