How master trusts are diversifying Sharia offerings with sukuk bonds

Earlier this year, Smart Pension spearheaded this change by teaming up with Wahed to launch the Halal Workplace Pension.  

This was the first of its kind from a major defined contribution (DC) master trust that adhered to Islamic principles and also offered a managed investment glidepath as the default investment option.   

This year, Nest has made changes to its Sharia fund by introducing a 30% allocation to sukuk bonds. Aviva also recently launched a new Sharia lifestyle investment strategy, partnering with HSBC to offer a suite of funds that include a derisking solution. 

Prior to this, Sharia-compliant pension offerings from large master trusts invested almost exclusively in equity funds. Members had to actively select such funds, which featured no risk management in the run-up to retirement age, unlike mainstream default funds.

The derisking journey

Shabna Islam, head of DC provider relations at Hyman Robertson, said the move to include sukuk bonds was important because it allows master trusts to gradually derisk as investors approach retirement.  

She said: “Single equity-type Sharia funds have been available but more recently, we saw the launch of Smart Pensions’ Sharia lifestyle default fund. 

“This is where it has more than one Sharia fund and it derisks from early years to closer to retirement. So, you move from an equity-type fund to a bond-type fund, which is lower risk. That derisking is more in line with what we see with mainstream default investment solutions.  

“That derisking wasn’t available before for Sharia-compliant funds, so they were riskier. Your only option was to invest in the single equity fund and when you chose that fund, you would be invested in that from the day you selected it all the way up to retirement. 

“That is very risky just before you’re about to retire. Bonds are less risky and more stable and that is what you want in the period before retirement. You want that stability.” 

Improving pension inclusion

These changes could also help to address the unmet need among Muslim employers and UK’s 3.9 million Muslim population.  

According to a 2022 survey by Islamic Finance Guru, more than three quarters (78%) of Muslims who did not have a pension cited Sharia compliance issues as the reason. 

Among those that did enrol into a workplace pension, approximately 40% said their employers did not offer a Sharia-compliant option. 

“Pensions are often a perceived ‘black hole’, with a lack of understanding of where funds are invested, an implicit assumption that they are not Sharia-compliant, and ambiguity as to how those assets will convert to income in retirement.”

Sultan Choudhury, Islamic Finance Council UK

Sultan Choudhury, board member at The Islamic Finance Council UK, said it was important that all Muslim employees have access to workplace options that meet the needs of their faith. Without it, fewer people would save into a pension, which could lead to poverty-related social issues in later life – and consequences for the government and ultimately taxpayers. 

He added: “Take up of pensions has been an issue in the mainstream and it is further exacerbated by the lack of Sharia-compliant options for Muslims in the workplace.  

“Education and awareness among Muslims is a major problem, as it is with the population at large. Financial literacy around pensions in the Muslim community is a challenge.   

“Pensions are often a perceived ‘black hole’, with a lack of understanding of where funds are invested, an implicit assumption that they are not Sharia-compliant, and ambiguity as to how those assets will convert to income in retirement. 

“This has meant that many Muslims invest outside of their pension in the UK with a heavy skew towards real estate. They do not understand the tax benefits of pensions, the potential for matched contributions from employers, and therefore miss out on building their retirement wealth.” 

A growing range of options

With more master trusts developing pension options that adhere to Islamic principles – as well as adding derisking in the run up to retirement – others may follow suit. 

Karen Shackleton, director at Pensions for Purpose, urged master trusts to develop Sharia funds by working closely with Islamic finance experts to ensure alignment between sound investment principles and prohibited practices. 

She added that the pensions industry had historically focused on appealing to the widest possible demand, which has sometimes meant overlooking the specific needs of diverse savers. 

“Because regulations have historically emphasised the importance of fiduciary duty, this has made it difficult for trustees to offer ethical or faith-based options to members, but over time this has begun to change.”

Karen Shackleton, Pensions for Purpose

“There are structural issues that need to be addressed,” Shackleton said. “Namely, Sharia principles impose constraints on permissible investments, excluding many conventional assets. This limits the available universe and requires innovative solutions, which have often been underdeveloped. 

“Because regulations have historically emphasised the importance of fiduciary duty, this has made it difficult for trustees to offer ethical or faith-based options to members, but over time this has begun to change.” 

Changing demographics of pension scheme memberships

Umar Yaqoob, workplace investment proposition manager at Aviva, said pension products should reflect their customer base. He argued that, as demographics change within the UK population, it is essential that pension providers evolve their propositions accordingly. 

He added: “Investing can be complex, and the job of pension providers and the industry is to demystify investments wherever possible, making them more accessible for our customers. A focus on customer communications is key to reducing this perceived complexity.    

“It’s important to offer customers a choice based on what they want. For example, offering a hands-off Sharia-compliant de-risking investment programme along-side faith-based self-select funds for those looking for a more hands-on approach to their pension savings.” 

Elizabeth Fernando, Nest’s chief investment officer, said it was important that the pensions industry recognises that Sharia-compliant investing involves complex rules and regulations that require a deep understanding of Islamic law. 

She added that the principles are also subject to interpretation by Sharia scholars, adding layers of complexity and different scholars can reach different conclusions. 

“This complexity can be daunting for pension industry professionals unfamiliar with the nuances of Islamic finance, which is why at Nest we have worked with external fund managers to offer our Sharia fund,” Fernando said.

Further reading

Muslims missing out on pensions worth £13bn due to Sharia concerns (3 June 2021)

LGPS employers at legal risk over Sharia non-compliance (13 April 2022)

Industry ‘must do better on Sharia investing’, experts say (28 March 2024)