Businesses must take more action to ensure they provide Sharia-compliant pension schemes for their Muslim employees.
Ten years ago, Shakil Butt was HR and OD director at Islamic Relief Worldwide, and was facing an uphill struggle trying to find a pension fund that was Sharia-compliant.
“There was barely anything out there,” he recalls, when questing to auto-enrol staff onto a defined contribution pension scheme that didn’t invest money in industries such as tobacco, alcohol, gambling and weapons, and which also did not derive any interest (what Muslims call al-ribā – or exploitative gains).
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Fast forward to today, and observers could be forgiven for thinking little has changed. In April, trade union ADCU announced it was launching legal proceedings against taxi firm Uber for failing to have Sharia-compliant pension arrangements for its staff – 75% of which are Muslim.
As of 31 March 2021, data seen by HR magazine from Nest shows investments in its Sharia fund comprise just 0.41% of its assets under management (around £70 million).
Meanwhile, The People’s Pension (which has offered a compliant pension since auto-enrolment launched), has only £60 million invested in its Sharia fund – or 0.3% of total assets. But around 5% of the UK population (some 3.2 million people) are Muslim.
It’s predicted a third of Muslims don’t have a pension due to a lack of Sharia-compliant pension options, according to a 2021 poll by investment adviser Islamic Finance Guru (IFG).
It also found 40% of Muslims polled said their employer ‘did not have’ an Islamic pension option – meaning Muslims are missing out on an estimated £12.8bn in savings for retirement.
The fact both Nest and The People’s Pension have a Sharia-compliant option that Muslims can simply opt into if it was communicated to them suggests HR isn’t itself alive to its responsibilities to communicate it.
“Awareness of Sharia-compliant pensions among HR departments and management more broadly just isn’t getting through,” says IFG’s CEO, Ibrahim Khan. “The onus is still on Muslim staff bringing the topic up, but since they almost don’t expect one, they often don’t, meaning nothing changes.”
Butt adds: “Media sensationalism around what Sharia means adds to the problem, with HR fear of the unknown often being the first hurdle.
“Exacerbating this is the fact there just aren’t many HRDs from an Islamic faith background, and so even considering whether they are communicating options for their Muslim staff isn’t happening.”
A possible contributing factor to sporadic provision, admits Brian Adams, director, Islamic Wealth Management, is that technically “there is not a single UK-approved pension that holds a Fatwa certificate – the Sharia-compliant certificate issued by an Islamic accreditation body”.
Instead, funds are reliant on being judged compliant by the scholars providers use – and opinion can change over time.
“I eventually went with a Friends Provident Fund,” says Butt. “A few years later, they changed their definition and the fund was no longer compliant.”
But failure to offer information about Sharia-compliant pensions could be breaking the 2010 Equality Act, which bans discrimination on the basis of protected characteristics such as race, gender and religion. “I could be flippant and say HRDs almost don’t care,” says Adams. “In my experience, they just know very little about it.”
So is there change afoot? “The Uber case might do some good by bringing lack of awareness into the spotlight,” says Butt.
Last month (May), the Local Government Pension Scheme received a report from barrister Lydia Seymour, after the scheme’s advisory board asked her to advise on the risk of a successful claim for discrimination from an eligible employee complaining of a failure by LGPS employer to provide a Sharia-compliant scheme.
Seymour said: “Claims relating to discrimination in schemes are rising. Until recently, these were mostly claims for age, sex and disability discrimination, but more recently issues of religious discrimination have arisen in relation to pension schemes.”
She adds: “Showing group disadvantage for the purpose of a religious discrimination claim is not a high hurdle – it is generally enough for even a small proportion of people of a particular faith to be disadvantaged by the provision, provided that the disadvantage is linked to their religious belief.”
Defined benefit schemes shouldn’t, argue Adams and Khan, fall foul of being discriminatory – as a DB scheme is a promise to continue paying a (reduced) salary.
DC schemes are more problematic – especially, argues Adams, if an employer isn’t with Nest/Peoples Pension and has to find a scheme itself.
Adams says: “Although there’s a limited pool of providers, HRDs often still don’t look at the breadth of a scheme. The main fund – HSBC’s Islamic Global Equity Index fund – for example is considered high risk.
“It aims for around 8-12% return per year, but you can see drops of 20-25% some years. This compares to a more medium risk option that might only return 5-6%, but may drop only a maximum of 12%.”
He adds: “The problem is, HRDs don’t want to pay for financial advice for what they consider a niche need.”
Caught in the middle are Muslim employees themselves. “What can be forgotten,” admits Khan, “is that for many Muslims, being halal trumps the size of their pot’s return, and so it’s not for HRD departments to decide for them if a fund is low performing.
“Just having a Sharia-compliant fund is often better than not. The belief system counts more.”
For this reason alone, he and others contend a different sort of engagement with Muslims about pensions is needed. “Muslims themselves have different levels of adherence to the faith,” says Butt. “So actually, assuming everyone is at the same starting place would be wrong.”
Khan adds: “HRDs also need to remember many Muslims’ lived experience is not having any options open to them – something that has historically seen them favour investments, like property. Many aren’t in the headspace or even thinking about pensions. So the task is two-fold for HR departments – not just having a fund, but educating a cohort not used to pension saving about the benefits.”
“Just having a Sharia-compliant fund is often better than not. The belief system counts more.”
Where employers don’t have an existing Sharia-compliant firm, Khan says it’s possible for employers to pay into an employees’ own existing SIPP. Here though, employers aren’t legally required to match the employee’s contributions and it is so administratively fraught, he doesn’t recommend it.
“The starting place should be reducing frictions,” says Khan. “That means have the fact they offer a Sharia option part of any onboarding pensions advice. HRDs need to learn more about them, so they can talk about scholar advice if questioned.”
For employers that do have a pension scheme with a Sharia-compliant option, it is a simply case of promoting it. Charlotte Ashdown, people director at outsourced telephone answering service Moneypenny says: “We offer our benefits as ‘pick and mix’, allowing people to choose the benefits that best suits them.
“As part of this benefits package, we offer top-ups on our workplace pension run by Smart Pension, and there is a choice in the plan to opt into a Sharia Fund, which meets Islamic investment principles.”
What’s apparent is that unless both providers and HR departments step up and offer their own solutions, individuals could feel they have no choice but to arrange their own personal pensions, leaving employer conversations about saving for later falling on deaf ears.
Seymour suggests employee concern over the provision of particular pension schemes could go beyond the issue of Sharia-compliance and that people with other protected religious or philosophical beliefs could also seek alternative schemes.
She says: “Companies should look at whether any other philosophical beliefs such as pacifism or ethical veganism could lead employees to ask for alternative schemes or funds.”
Georgie Burks, head of brand marketing at Penfold – which started in the personal pension space, but launched its first workplace pension scheme six months ago – said it’s time for HRDs to act: “While our own workplace pension offers the HSBC Sharia-compliant fund, what we’re seeing is that pensions are becoming more about an employee experience rather than about a fund’s performance.
“So there’s an opportunity to engage staff in pensions that meet their needs – across a range of beliefs.”
Chris Reilly, head of clients and governance at B&CE/The People’s Pension, added: “The issue is education. Some 98% of members go for our default fund. We only have eight funds – but the Sharia-compliant one is one of them, so anyone can see we offer it as an option. If it’s not being exposed to staff, there is some disconnect going on.
“Someone in the chain needs to be communicating the options.”
There is agreement that pension providers must better flag up their Sharia compliancy better. Burks says Penfold makes all its pension options visible to HRDs, and backs this up with HR-audience seminars.
But she concedes: “There probably is a higher educational need around Sharia-compliant pensions, perhaps because Muslims have been neglected by the industry.” Adams is more pointed: “There’s no real set up issue – it’s all around knowledge. I still feel HR departments know very little about this area.”
Whether more Muslims will enter the pensions fold is an unknown. But it seems uptake relies on more than just having the options available to them, but having them explained by HR in a way they understand.
The full piece of the above appears in the May/June 2022 print issue. Subscribe today to have all our latest articles delivered right to your desk.