By Naveed Riaz, Senior Consultant, Pensions & Savings
Employers are increasingly reviewing their benefits through the lens of diversity, inclusion and employee engagement. Yet one aspect often overlooked is whether pension arrangements meet the needs of employees with different religious and ethical beliefs.
As an example, for Muslim employees, concerns about how pension savings are invested can influence their willingness to participate in a workplace pension. Understanding these concerns can help employers improve pension engagement while ensuring benefits are accessible to a diverse workforce.
Why some Muslim employees may disengage from pension saving
Most employees in the UK are automatically enrolled into a workplace pension. However, some Muslim employees choose to opt out or may feel unsure about pension saving. This is not because saving for retirement is unimportant. Instead, it’s usually due to religious and ethical concerns about how pension money is invested.
Under Islamic principles:
- Earning interest (known as riba) is not allowed
- High levels of uncertainty or speculation are avoided
- Investment in certain sectors is not allowed, including alcohol, gambling, conventional banking, tobacco and weapons
Many standard pension funds invest in things like bonds, banks and broad market investment funds, which may include these activities. If this isn’t clearly explained, or if no alternative is highlighted, some Muslim employees worry that taking part in a pension could conflict with their beliefs.
As a result:
- Some employees opt out of the workplace pension scheme and miss out on employer contributions and tax relief
- Others stay enrolled but feel unsure about where their money is invested
- Some avoid pensions altogether and rely on less effective ways of saving for the long term
Many employees are simply not aware that Islamic finance (Sharia‑compliant) pension options do exist. These options are designed specifically to address these concerns and help ensure pension saving works for everyone.
Why employers should be aware
Pension participation plays an important role in employees’ long-term financial wellbeing. Where concerns about faith and investing are not understood or addressed, employers may see lower engagement with pension benefits among some groups of employees.
By ensuring employees understand the investment options available to them, employers can help create a more inclusive benefits experience while supporting informed decision-making and improving overall engagement with workplace pensions.
What is a Sharia‑compliant pension fund?
Sharia‑compliant pension funds aim to grow savings by focusing on real economic activity, rather than earning interest.
They usually do this by:
- Investing in shares of companies whose activities are permitted under Islamic principles
- Holding real assets, such as property or infrastructure
- Sharing profits and losses, rather than lending money and earning interest
Before any company is included, it is carefully checked to make sure:
- Its main business activities are acceptable
- Its financial structure does not rely heavily on interest‑based borrowing
This approach helps keep investments aligned with Islamic principles while supporting long‑term retirement saving.
“Providing choice within pension arrangements can help remove barriers to participation. For employers, understanding the diverse needs of their workforce is an important part of creating an inclusive benefits strategy.”
David Pye, Head of Client Development
What happens to non‑compliant income? (Purification)
All companies included in Sharia‑compliant pension funds are screened to meet Islamic principles. However, in rare cases, a very small part of a company’s income may come from activities that are not fully compliant.
When this happens:
- The amount is identified and calculated
- It is removed from the fund
- The same value is donated to charity
This process is known as purification.
The charities supported usually help people in need which means many Muslims see this as closely aligned to Zakat, the religious duty to support those who are vulnerable. This process is overseen as part of the fund’s governance arrangements and is designed to help maintain alignment with Sharia principles.
How are Sharia-compliant pension funds managed?
Sharia‑compliant pension funds are overseen by a Sharia Supervisory Board.
This is an independent group of qualified Islamic finance scholars whose role is to make sure the fund always follows Islamic principles.
The Sharia Supervisory Board:
- Approves how the fund is set up
- Reviews which companies and assets can be invested in
- Monitors the fund on an ongoing basis
- Provides regular confirmation that the fund remains compliant
If a fund no longer meets Sharia requirements, changes must be made. This ongoing oversight helps provide confidence that compliance is continuous, not a one‑off check.
Does geography influence Sharia-compliant investments?
Some people worry that Sharia-compliant funds may invest in certain countries. In fact, these funds are not based on geography or politics.
Companies are included or excluded based on what they do and how they operate, not where they are located. Any differences in country exposure happen naturally because some industries are more common in some parts of the world than others.
Can employees choose a Sharia‑compliant fund within a workplace pension?
In many UK workplace pension schemes, yes.
Employees can often remain in the same pension scheme and select a Sharia‑compliant investment fund, while continuing to receive employer contributions and tax relief. Availability will depend on the pension provider and scheme design.
Who might consider a Sharia‑compliant pension fund?
Employees may wish to consider one if they:
- Want their pension savings to align with Islamic principles
- Prefer ethical or faith‑based investing
- Have previously opted out of pension saving due to religious concerns
What employers can do
Employers looking to create a more inclusive pension offering may wish to:
- Review whether their pension provider offers a Sharia-compliant investment option
- Ensure pension communications clearly explain the investment choices available
- Consider pension choice as part of broader diversity, equity and inclusion initiatives
- Monitor pension participation and engagement levels across different employee groups
- Seek feedback from employees to better understand barriers to pension engagement
Small changes in communication and awareness can make a significant difference to how employees engage with long-term savings.
Final thought
Sharia‑compliant pension funds can help make retirement saving more inclusive by providing an investment option that aligns with Islamic principles while still allowing employees to benefit from employer contributions and tax relief.
For employers, the key consideration is not simply whether a Sharia-compliant fund is available, but whether employees understand the choices open to them. When employees do not understand or feel comfortable with their pension options, they may be less likely to engage with one of the most valuable benefits you provide.
Improving awareness and communication can help remove barriers to participation, strengthen pension engagement and support a more inclusive benefits strategy.
Could pension choice be limiting engagement?
Inclusive pension design starts with ensuring employees understand the options available to them.
