As private credit has expanded into a mainstream asset class, trustees who manage pension fund portfolios on behalf of beneficiaries face an evolving set of challenges. This piece explores the prudent person standard that guides pension fund trustees as they navigate the information asymmetries inherent in the private credit market.

The Growth of Private Credit and the Increasing Allocation of Pension Funds

Private credit has grown significantly since the early 2000s. The Financial Stability Board (‘FSB’) May 2026 Report estimates private credit’s cross-jurisdictional aggregate at $1.5 trillion-$2 trillion at the close of 2024. This is comparable to the $2 trillion high-yield public debt market, establishing private credit firmly as a mainstream asset class, representing substantial growth from the estimated $500 billion in 2015.

Pension funds are among the most significant investors in private credit, and their allocations are growing. According to the International Organization of Securities Commissions (‘IOSCO’), private pension plans allocate an average of 5.5 percent of their assets to private credit, while public pension plans allocate approximately 4.9 percent. Similarly, the FSB 2026 report finds that pension funds are primary investors in every major private credit market, including Canada, the Euro area, South Africa, Switzerland, the United Kingdom, and the United States.

Private credit appeals to pension funds because its structural features align naturally with their core obligation to pay their beneficiaries. The advantages include longer maturities and higher yields than other forms of credit, low expected sensitivity to interest rates, protection from inflation, and diversification of their portfolios. Evan Siddall, then CEO of the Canadian pension fund manager AIMCo, stated that the firm had a “significant client mandate to grow” its private credit portfolio.

The Challenge for Trustees of Pension Funds

Pension trustees are guided by a fundamental fiduciary framework. At common law, the duty to act prudently requires trustees to exercise investment powers as a prudent person of business when investing for the benefit of others (Learoyd v Whiteley [1887]). In the context of pensions, this standard is given effect by s36 of the Pensions Act 1995 (as amended by s245 of the Pensions Act 2004), which requires trustees to exercise their powers in accordance with the Occupational Pension Schemes (Investment) Regulations 2005 (“Investment Regulations 2005”).

Reg 4 of the Investment Regulations 2005 gives effect to the prudent person principle for the purpose of guiding trustee investment decisions. Under Reg 4(3), “…powers of investment, or the discretion, must be exercised in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole”, while Reg 4(2) requires that assets are invested “in the best interests of members and beneficiaries”.

In contrast to private markets, public markets require that listed assets be subject to mandatory disclosure, continuous market pricing, external credit ratings, and regular regulatory filings, all of which provide trustees with an independently verified flow of information against which to exercise judgment (IOSCO).

Private credit presents trustees with an information asymmetry problem. Borrowers are typically unrated, deal terms are privately negotiated and not publicly available, and valuations are produced by fund managers quarterly using internal models rather than observable market prices. IOSCO considers this “infrequently updated, lagged repricing,” in contrast to public markets, which it describes as “frequent, mark-to-market” pricing of public assets.

The FSB acknowledges that this opacity in private markets “cannot be easily resolved.” This is because it is a structural feature of the typical bilateral model used in private credit. As pension funds are expanding their investments in private credit, trustees are faced with the challenge of adapting their monitoring mechanisms so that they remain in compliance with their fiduciary duties.

The information asymmetry in private credit is notable at several levels. First, the trustee is dependent on quarterly reports and manager-produced valuations. Unlike public markets, there is no independent market price to cross-reference against. Lalafaryan describes private credit as characterized by short due diligence periods and an “originate-to-suit-and-fit” model in which loans are held to maturity with no secondary market pricing. However, the same features that make the asset class attractive to borrowers limit the information available to trustees. That information is further filtered through a delegation chain. Block et al surveyed fund managers, and the responses revealed that 58 percent of European private debt funds outsource due diligence to third parties, including lawyers, accountants and consultants. This means that pension trustees are often reliant on a fund manager that itself relies on outsourced advisers.

Second, difficulty in obtaining data means investors and other stakeholders may have “only partial information and understanding of correlations and concentrations” across their private credit exposures (FSB).

Third, between regulators and the market, there are significant challenges in monitoring private credit. The FSB notes that “data challenges currently hinder effective monitoring” and that key metrics available for other forms of corporate lending are unavailable for private credit. This gap is being addressed by the Bank of England, which in June 2026 launched the first round of its private markets system-wide exploratory scenario stress test. The 46 participating firms, which included pension funds, banks and insurers, were given a hypothetical recession scenario. The results will be used to model their responses and likely outcomes to financial stress. Interim findings from Round 1 are expected later in 2026, with the final report due in 2027.

In the US context, Palladino and Karlewicz argue that fiduciary duty frameworks may need to account for the long-term risks posed by quickly growing asset classes such as private credit. The same observation applies with equal force to the prudent person standard in English law. The content of that standard is not static, and so the application of the prudent person standard can evolve alongside the complexity of the asset classes into which trustees invest beneficiaries’ funds.

The prudent person standard does not prohibit investment in private credit. Rather, it shapes how that investment should be made. As private credit lacks the information infrastructure of public markets, the standard implies that alternative measures should be taken. Pre-investment, trustees should conduct enhanced due diligence on the process that the fund managers use, such as their valuation methodology and their investment track record.

Gullifer and Payne highlight that, at the fund level, Alternative Investment Fund Managers Regulations 2013 place obligations on fund managers to disclose key information like the investment strategy, valuation methodology, and the most recent net asset value of the fund and historic performance information on record. These are all aimed at increasing transparency and providing a baseline against which trustees may scrutinize the manager’s approach.

Trustees should negotiate enhanced reporting rights, including more frequent valuations and direct engagement with fund managers. Trustees should also carefully calibrate the size of their illiquid allocation against the fund’s monthly payment obligations. Together, these measures illustrate how the prudent person standard can adapt to the developing landscape of private credit.

Conclusion

Although the FSB concedes that the data opacity in private credit cannot be easily resolved, the prudent person standard in pensions law can scale to the risk environment, requiring trustees to undertake greater due diligence and negotiate tighter disclosure obligations in the growing landscape of private credit investment. With the Bank of England’s stress test underway, trustees should be alert to findings that may reshape what counts as prudent monitoring.

Raiff Andrews is an LLM candidate at the London School of Economics and Political Science.