New developments in Islamic finance abound since Shariah-compliant investment structures are now also entering the wealth and asset management segment. One such development is the implementation of Shariah-compliant pension funds, be it as state-backed funding vehicles or as private retirement funds. The basic idea is to provide Shariah-compliant pension funds for Muslims who want to make provisions for retirement without compromising their faith, but it can be an alternative investment vehicle for long-term financial planning for non-Muslims as well, and, on a larger scale, a financial market instrument for a government to boost the wider Islamic finance market, particularly for sukuk and Shariah-compliant equities.
One example for a state-back Shariah-compliant pension fund is the Islamic savings scheme option introduced as part of Malaysia’s state pension plan Employees Provident Fund last year, whereby $25bn of the fund’s entire assets of $160bn have been dedicated to a new Shariah-compliant investment line.
“Shariah-compliant investments now represents 15% of the fund’s entire investment, which makes it the largest standalone Islamic pension fund globally, which is rare in the industry,” says Moody’s global head of Islamic finance, Khalid Howladar, in an assessment of the fund’s investment strategy.
Although the Employees Provident Fund already invests about a third of its portfolio in stocks and bonds that comply with Islamic principles, the new explicit Shariah-compliant line is expected to attract new money and trigger the issuance of a number of sukuk and Shariah-compliant equities for investments by the pension fund, boosting demand for sukuk and Islamic securities in Malaysia as a whole.
Another country where Islamic pension funds are in growing demand is Pakistan, where a number of banks, financial service providers and fund managers, among them Al Ameen, Al Mazeen, National Investment Trust, NAFA Islamic Pension Fund and Pakistan Islamic Pension Fund, are offering private or voluntary state-supported retirement savings schemes whose investments are made strictly in Shariah-compliant instruments under the supervision of Shariah advisory boards.
The next country with a large number of voluntary Islamic pension funds is Turkey, where those funds are known as participation retirement schemes which are allowed to invest in property and commodity bonds or funds, Shariah-compliant equities, government bonds and other permissible vehicles.
In the Western World, the UK and Australia were the first to offer Islamic pension schemes. For example, under the government’s Child Trust Fund, the UK became the first Western country to issue Islamic bonds in order to raise money from the Middle East and to provide halal retirement savings options for the country’s large Muslim population as early as in 2008, arguing that “the inclusion of a Shariah-compliant investment choice is important to encourage participation among ethnic minority groups.”
Later on, the then-Islamic Bank of Britain, one of the largest Shariah-compliant banks in the UK and today known as Al Rayan Bank, followed by creating the Islamic Pension Trust that enables Muslim employers and charities to provide a fully Shariah-compliant workplace pension that meets all of the government’s criteria for an auto-enrolment scheme. Another workplace-related option for Islamic pension schemes in the UK is the National Employment Savers Trust, which offers a Shariah-compliant fund option, while a number of private fund managers provide a wide choice of Shariah-compliant personal pension plans in various asset management structures.
In Australia, the first private Islamic pension funds were launched in 2012, followed by other investment instruments such as halal superannuation funds.
Interestingly, in the Gulf Cooperation Council (GCC) countries, Islamic pension funds are yet comparably small, particularly state-backed ones. According to consultancy EY, only a fifth of assets is invested locally and even less in a Shariah-compliant manner. This might have to do with the region’s unique labour market structure and existing government incentives for citizens, but plans came up over the past years to establish Shariah-compliant retirement funds with an aim to boost the Islamic finance market in the region. The UAE contemplated a state-back pension fund scheme back in 2013, saying it would be a major boon to the country’s Islamic asset management industry. Saudi Arabia, Qatar, Kuwait and Bahrain are also working on carving out more Shariah-compliant tranches from their state pension funds.
Overall, the potential of Islamic pension funds for the entire Islamic finance sector should not be underestimated. According got EY, public pension funds (conventional and Islamic) in the GCC alone amount to around $400bn, whereby more than half of this volume would preferably be invested in a Shariah-compliant manner if enough Islamic investment opportunities existed. Adding Malaysia, Indonesia, Turkey, Pakistan and other Islamic finance jurisdictions, we are quickly in the trillions.