The Cummins UK Pension Plan has launched a fund for defined contribution members wishing to invest their pension in compliance with sharia law, while experts call for better sharia pensions provision across the UK.
In an update on its website, the diesel engine manufacturer's scheme has stated that “the fund has been made available predominantly for our members who follow the Islamic faith”.
The need for sharia compliant pension schemes is a growing market in the UK but due to limited solutions, many Muslim employees lose out
Nasir Rafiq, Islamic Relief Worldwide
It adds that “this fund is designed so that it does not invest in industries that do not comply with the teachings of Islam (such as not investing in alcohol or pork products) and achieve investment returns that are also in line with their Faith”.
Demand should be growing
The fund is also available to the scheme's additional voluntary contribution members.
The Office for National Statistics’ annual population survey from April 2017 to March 2018 shows that the UK’s Muslim population was 3.4m.
Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, says “demand [for sharia-compliant pensions] should be growing, but it’s not growing that fast”.
This could partly be due to continued low levels of engagement and understanding of pension products across all UK pension scheme members in general.
“We’re not at the stage yet where people are actually actively really going in to have a look at what they’re investing in and really thinking about their options,” she says.
Thanks to auto-enrolment, millions of people are now saving into a workplace pension.
However, many people may be auto-enrolled into something that might not be appropriate for them due to, for example, religious preferences, Nazarova-Doyle notes.
She adds that “we might see a bit of a fall back from it later on” once people realise that part of their salary has been put into a pension and invested in a way they cannot actually take advantage of.
“I really think, as a minimum, even if you are not sure about demand from your pension scheme members… it’s always just prudent, and it’s better for the quality of the choice that you’re offering your members, to have a sharia-compliant fund as part of your range,” Nazarova-Doyle adds
Once there is a sharia-compliant option in place, it is important to communicate with members to make sure they know that it is available.
A lack of a sharia-compliant option in workplace pension schemes “may be part of the reason why some people opt out” she adds.
Victor Sacks, an independent financial adviser at VS Associates, agrees that sharia-compliant funds should be more widely used.
Sacks used to work at HSBC – spending part of his career there within the South Asian Banking Unit, where sharia investments were a ‘must-have’.
“In this climate-aware, social-responsible generation we have, shariah compliance would offer an investment that meets a lot of those needs too,” he says.
Educate employers
Sacks suggested that an ethical fund that happens to meet sharia compliance should also feature in workplace or direct pension offerings, “allowing those who wish to save into a pension, but can't afford to engage with an IFA just yet, or those that want to embrace that type of investment, can do so”.
Brian Adams, director and founder of Islamic Wealth Management – part of Merlyn Wealth Management – agrees that more needs to be done to improve sharia pension provision.
He also stresses that companies must be educated on the need to cater for members who want to put their money into sharia-compliant investments.
“There’s a lot to do with HR and employers to help them understand,” Adams says.
Islamic Relief opts for sharia default
Although most sharia-compliant offerings within workplace pension schemes are through self-select options, there are some cases where a sharia-compliant default would be more appropriate for members.
When charity Islamic Relief Worldwide set up its defined contribution pension scheme, “the requirement for it to be Sharia-compliant from our employees and trustees was clear and absolute from the outset”, says Nasir Rafiq, Islamic Relief's interim finance and services director.
The humanitarian and development organisation makes sure its agreements and contracts are vetted to ensure they are sharia compliant.
“We are a faith based organisation and deliver by our values. Our trustees, the global Muslim donor base and our employees expect IRW to implement these standards,” he says.
“Staff and trustees opted for a sharia-backed scheme due to the commitment of staff and trustees to the values of the organisation, what it stood for and represented”, Rafiq notes.
It was therefore decided that the default fund should be sharia-compliant. Every year there is a governance review with the scheme’s pensions consultant to explore alternatives, but to date no suitable alternative option exists, Rafiq notes.
“The need for sharia compliant pension schemes is a growing market in the UK but due to limited solutions, many Muslim employees lose out, being reluctant to join non-sharia organisation pensions,” he says.
Rafiq adds that “much more needs to be done in raising awareness of the need, ethical nature and impact of sharia compliance pension schemes in promoting savings and investment”.
Staff were auto-enrolled in 2014. When setting up the scheme, the charity consulted and informed employees in many ways, including a staff presentation by an independent pensions consultant.
