The Institute for Fiscal Studies has highlighted pension opt-out gaps among workers from different ethnic backgrounds and urged for an increase in awareness of Sharia-compliant retirement savings schemes
The Institute for Fiscal Studies (IFS) has called for increased awareness of Sharia-compliant retirement savings schemes among Muslim employees.
The IFS highlighted the pension opt-out gaps among workers from different ethnic backgrounds and urged policymakers and businesses to simplify the process of switching to Sharia-compliant investment strategies.
Despite automatic enrolment significantly increasing the share of employees saving in a workplace pension, the research institute noted that less than 10% of white employees eligible for automatic enrolment are not saving in a workplace pension. This figure rises to 16% for those of Pakistani origin and 24% for those of Bangladeshi origin.
The IFS found that, compared with white employees with similar individual and job characteristics and working for the same employer, employees from Pakistani and Bangladeshi backgrounds are still more likely to opt out of workplace pension saving. This higher opt-out rate exists in both the public and private sectors.
In the private sector, employees are often enrolled into defined contribution (DC) pension schemes, where the default asset allocations may not align with religious teachings – such as prohibitions on receiving income from interest or investing in industries like alcohol or tobacco.
Employees are often given the choice to switch their pension investments to Sharia-compliant funds, according to researchers. Laurence O’Brien, a research economist at the IFS and co-author of the report, commented: “Most employees are actually able to save in workplace pensions consistent with Islamic teachings.
“Employees offered defined contribution plans typically have the option of choosing a Sharia-compliant fund, while defined benefit pensions prevalent in the public sector are typically considered Sharia-compliant.
“The Government, employers and the pensions industry should therefore look for effective ways to increase awareness of Sharia-compliant pension saving among Muslim employees and to make it easier for them to switch to Sharia-compliant investment strategies.”
The IFS highlighted the risk of significant negative impacts on future retirement incomes due to disparities in pension participation.
Not participating in a workplace pension could result in losing out on employer contributions and tax reliefs associated with pension savings. This research received funding from the IFS Retirement Saving Consortium and the Economic and Social Research Council.
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), stated: “The pension providers covering the vast majority of the workplace pension market offer Sharia-compliant products that cater for Muslim employees, and these have generally performed very well.
“Pensions are for everyone and most of us are not saving enough to enjoy the retirement we deserve.
“It is the responsibility of employers, pension schemes and anyone with a stake in driving good retirement outcomes for the UK population to help everyone – but especially under-pensioned groups – understand how they can get the best value from the system in a way that is aligned with their values.”
Minister for pensions, Torsten Bell stated: “Everyone needs the security of a decent income in retirement, so closing pension savings and entitlement gaps, whether of gender, ethnicity or faith, is important. Automatic enrolment has driven significant progress but there is further to go.
“We encourage employers to support their employees from minority backgrounds to make informed decisions about their retirement savings and raise awareness of Sharia-compliant investment options.”