The issue of Shariah-compliant pensions is little discussed when it comes to workplace benefits. While many schemes will offer a Shariah investment option, little thought has often been given to how devout Muslims take their pension benefits, and whether products like annuities adhere to the principles of their faith. But this is starting to change – and this in-depth interview looks at some of the issues that HR and benefits experts need to consider when it comes to providing pensions and benefits for a multicultural workforce.
The UK’s four million Muslims are poorly served by the pensions industry, and we need innovation from regulators, government, providers and industry professionals if we are to build a system that is truly inclusive. That is the view of Islamic insurance and finance expert Ajmal Bhatty.
A member of the advisory board of the Islamic Finance Council UK, Bhatty has 35 years’ experience in the UK and around the world in advising on and developing the Islamic finance industry. Bhatty comes from an insurance background and is an actuary by profession, having established several Takaful companies for HSBC in different parts of the world such as Malaysia, Saudi Arabia and Singapore.
Inclusivity
His view of the inclusivity of the UK workplace pension system is not entirely positive. While some steps are starting to be made, there is still a long way to go. A key area of focus is around Shariah default options, most of which do not offer derisking as members approach retirement age.
“What we have right now is part of the solution but not the full solution. We have the pre-retirement build-up of the funds which are actually on a Shariah-compliant basis and that’s all good.
“But the whole purpose of having this buildup is for us for the Muslims to have regular income coming after retirement, and that’s what’s missing. There are four million Muslims in the UK and the majority don’t really know there are draw downs available and if they do, how they can actually manage it.
“This is the gap which needs to be addressed. We have a handful of master trusts available right now which actually allow the build up of pre-retirement stage funds – The People’s Pension, Smart Pension and Nest,” he says.
These defaults do this through blending equities with sukuk, a Shariah alternative to bonds. Aviva also has a Shariah default strategy that derisks in this way.
“Other providers all offer the HSBC Shariah equity fund, but do not include a lifestyling option that uses sukuk bonds,” he adds.
Limited choice
Concentration risk is a concern for Bhatty, when it comes to Shariah investment options, and the choice available to Muslims is limited.
Bhatty says: “HSBC has done really well in providing this Shariah-compliant option and their funds are huge. But then that then just concentrates everyone into funds available from just one provider.”
The limited number of sukuk bonds available also means some experts have concerns over liquidity.
Bhatty singles out Wahed, the investment platform, as a firm that is attempting to engage with other pension schemes to help develop Shariah-compliant funding arrangements. “These things are happening, but we need much more,” he says.
Virtually all commercial workplace pension schemes offer a Shariah option of some sort, usually the HSBC Islamic Global Equity Index fund, but even then, Muslims often do not know that it is there because it is not prominent in the choice architecture presented to the member when they join. As a result, some are opting out, fears Bhatty.
Bhatty says: “There are some organisations that are actually trying to provide education and awareness on these things but government needs to do a lot more on this.
Government role
“Maybe the government can play a role here in telling pension scheme trustees that they should be looking into providing Islamic pension options and to have some sort of education and knowledge of these things.”
Bhatty is on the Pensions Panel of the UK Islamic Finance & Halal Economy Hybrid Group, which brings together Islamic finance, the halal economy, and mainstream institutions to address regulatory, tax, and product development challenges.
This initiative involves both public and private sectors, often focusing on key areas like ensuring Shariah-compliant pension solutions and addressing tax liabilities associated with Islamic financial products. The goal is to promote the growth of the halal economy by improving access to finance, fostering innovation, and ensuring regulatory frameworks are clear and effective.
The Hybrid Group was approached by a representative from the Department for Work and Pensions last year, which reached out to find out what the Islamic community would like to see. The group is currently in the midst of research that is being fed into a paper to give back to the DWP for further action.
Annuity problem
One of the most obvious practical obstacles faced by the Muslim community when seeking to navigate their way through the UK pension system is securing a lifetime income, a problem compounded by the fact that annuities as currently structured are not Shariah compliant. Understanding of this fact is very limited, even in the pensions industry, but it presents significant hurdles to a flex-then-fix approach to default decumulation solutions, and any other targeted support solution that presents annuities as an option without advice.
The issue is so entrenched that the Money and Pensions Service’s Moneyhelper annuity guidance journey asks users six web pages of questions relating to age, marital status, health, alcohol and smoking and indexation but does not ask whether faith-based considerations should be taken into account. It has a series of boxes that say ‘suitable if’ and ‘unsuitable if’, that do not mention that they are unsuitable if the purchaser is a devout Muslim. As a consequence Muslim retirees may be purchasing products without being told that they may not be suitable for them.
So should all journeys, advised and non-advised, include a question as to whether the individual requires a Shariah product?
“Yes, absolutely,” says Bhatty. “The moment you ask that question then you know it begs other questions.”
Who’s responsible?
So is it the responsibility of the provider or adviser to make sure that the question is asked or is it the responsibility of the individual to know whether a product is Shariah and avoid it if it isn’t? In a nutshell, should financial products have a label saying ‘not Shariah compliant’?
“Absolutely. They should say this is not compliant and then it’s up to the person to accept it or not as the case may be,” says Bhatty.
Bhatty points out that the problem with annuities is the fact that they use interest which is ‘Riba’, which is a direct contravention of Islamic principles. But Muslims do need regular returns in retirement, and Bhatti says these could be delivered through different assets such as REITs and sukuk bonds, although the supply of these is limited.
Trust issue
Trust is a key issue for the pensions industry. Bhatty feels that there a perception in the Muslim community that the United Kingdom pension system is not 100 per cent designed for Muslims. This could result in greater opt outs and lower discretionary retirement saving. The extent to which this is happening forms part of the work being done by the Hybrid Group.
As a result, many Muslims are investing in property instead. “But then it all depends on what kind of property they’re investing in, what kind of returns they can get. So that’s also not that easy for people who are not financially savvy,” says Bhatty.
The Islamic Finance Council UK is also carrying out work in other areas of finance, such as student loans. It has worked with the UK government in developing a compliant alternative student finance product based on the Takaful system, which is a form of mutual support and contribution that avoids interest. This is expected to be available next year.
While some providers have taken steps to deal with derisking default funds, it remains to be seen when we will see a similar level of innovation in the UK retirement sector.
