The HM Treasury, Department of Work & Pensions and Department of Business & Trade have collectively begun to review the market for the availability of Shariah Compliant Pensions in the UK.

As part of that process, the Pensions Panel of the UK Islamic Finance & Halal Economy Hybrid Group has prepared a consultation paper for the government bodies. 

The paper – UK Shariah Compliant Pensions – explores the current challenges and opportunities for providing Shariah-compliant pension solutions within the UK’s financial system. 

Muslims in the UK face many challenges when it comes to pensions. There is a lack of Shariah-compliant pension options, low pension savings compared to the wider public, and a lack of understanding when it comes to pension tax benefits and employer contributions. 

A survey based on the challenges highlighted in this paper is being shared widely to gather insights from the Muslim community about the availability and demand for Shariah-compliant pensions. This survey aims to provide a unified voice highlighting the gaps and needs in the current pension offerings and the data collected would be instrumental for regulators to understand the specific requirements and develop supportive policies.

Currently, only a few master trusts offer Shariah-compliant funds. Master trusts are pension schemes that pool together the assets of multiple employers. They are designed to provide a cost-effective and efficient way for employers to offer pension benefits to their employees. 

These trusts have several advantages, including economies of scale, professional management, and reduced administrative burdens for employers. They have become increasingly popular, especially with the introduction of auto-enrolment, which requires employers to provide a workplace pension scheme. These trusts are regulated by The Pensions Regulator and must meet specific standards to operate.

Employers failing Muslim employees

Many employers and pension providers do not have suitable options, forcing Muslims to either avoid pensions or compromise their beliefs.

This gap leaves many Muslims to face financial insecurity in retirement, which can lead to broader social issues.

“The wider adoption of Shariah-compliant pensions in the UK faces several significant barriers, says the author of the paper Ajmal Bhatty,

“Firstly, many employers do not offer Shariah-compliant pension plans, leaving Muslim employees with limited or no options that align with their faith. As a result, many Muslims turn to real estate investments, missing out on the tax advantages and employer contributions that conventional pensions offer.

“There is also a general misunderstanding about the tax benefits and employer contributions associated with pensions, leading many to avoid conventional pension plans. This lack of participation can lead to financial insecurity in retirement, potentially resulting in poverty-related social issues. 

“Additionally, most master trusts do not provide Shariah-compliant options, putting employers and pension trustees at risk under the Equalities Act 2010 for potential discrimination.”

The paper underscores the urgent need for financial institutions and policymakers to address these gaps and calls for increased collaboration between Islamic financial institutions and mainstream pension providers.

How the UK can do more

The UK is in a great position to establish itself as a global hub for Islamic pensions. It has a well-developed financial infrastructure, regulatory expertise, and a diverse Muslim population.

While the UK government has taken constructive steps to accommodate Shariah-compliant pensions by offering tax relief and expanding Shariah-compliant options, more can be done. 

The paper highlights that to promote Shariah-compliant pensions, the UK government could take several specific actions and implement regulatory changes.

“Offering tax incentives or grants to pension providers for developing Shariah-compliant schemes would encourage more options. Enhanced guidelines for Shariah-compliant pension schemes, developed in collaboration with Islamic finance experts, would provide clarity and boost investor confidence,” says Ajmal. 

Ajmal emphasises the importance of educating people on Islamic pensions through outreach campaigns and partnerships with mosques. He also calls for more diverse Shariah-compliant investment options beyond just equity investments, including Islamic bonds (Sukuk), real estate, and infrastructure.

The paper highlights the lack of halal pension options, including real estate-backed Shariah compliant funds. This can be attributed to several main obstacles.

Regulatory and compliance challenges play a significant role. Developing Shariah-compliant pension products requires navigating complex regulatory environments to ensure compliance with both financial regulations and Shariah principles.

Additionally, there is often a lack of standardised guidelines for Shariah compliance, making it difficult for financial institutions to develop consistent and reliable products.

Addressing these obstacles requires a concerted effort from financial institutions, regulators, and community leaders to create a supportive environment for the development and adoption of Shariah-compliant pension options.

The future of shariah-compliant pensions

The UK’s Shariah-compliant pension sector  is likely to be significantly transformed over the next 5-10 years.

Ajmal expects developments across multiple fronts: product diversification including lifecycle funds and Sukuk, enhanced regulatory frameworks, technological integration through fintech and AI, and new solutions such as Shariah-compliant annuities and real estate income funds.

He says this maturing of the Shariah-compliant pension sector benefits everyone, directly and indirectly, as it encourages a greater flow of funds into assets and businesses that are for the common good of society. In doing so, it specifically  addresses the needs of Muslims and mitigates risks of poverty-related social issues in retirement.

“By working together, employers, financial institutions, and policymakers can significantly increase the availability and adoption of Shariah-compliant pension options, ensuring financial inclusion and security for the Muslim community,” says Ajmal.