Mercer’s SmartPath Shariah: Default experience, faith-aligned investing

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Auto-enrolment has brought millions of individuals into workplace pension schemes. Yet engagement remains largely passive, with 94% of Master Trust members invested in their main default strategy.¹ This challenges the industry to define what a “good default” looks like: one that is professionally managed, differentiated, and designed to serve a diverse membership. 

“That’s the thinking behind the Mercer SmartPath Shariah glidepath,” explains Ben Lewis, Head of Investment Proposition at the Mercer Master Trust. “It’s designed for members who want their savings invested in line with Shariah principles, without losing the familiar structure and governance of a modern default.

“We started with a simple goal: don’t reinvent the member experience. The journey follows the approach of the Mercer Master Trust default; automatic, phased, and designed to manage risk as retirement nears but, at the same time, every element is Shariah-compliant. Our aim is to closely match the risk and return profile of a conventional glidepath, within the Shariah opportunity set.”

What ‘Shariah-compliant investing’ means in practice

Shariah-compliant investing follows principles that shape which investments can be owned, how returns are generated, and how contracts are structured. Two practical implications for Defined Contribution (DC) retirement strategies are:

1. Avoiding prohibited activities and sectors such as, alcohol, tobacco, pork products, gambling, weapons and conventional financial services. This means the investable universe is smaller than in mainstream defaults. 
2. Avoiding interest-bearing securities. Conventional bonds which pay interest, are excluded. That matters because bonds typically play an important role in most default pension plans – helping to keep investments steady, especially as people approach retirement. Additionally, some property funds, private market deals, and hedge funds, rely on borrowing or contracts that don’t meet Shariah rules, requiring more selective and careful management.

Building a diversified DC strategy is about using the broadest toolkit available. Shariah compliance narrows that toolkit, which can have implications for diversification. Careful thought needs to be given to how best to use the asset classes available to replicate the characteristics of the default investment strategy that is offered more widely.  

Mercer’s approach

“The SmartPath Shariah glidepath is designed to evolve as you get closer to retirement,” explains Lewis. “Early on, it focuses on growth, when there is time to ride out market fluctuations. As retirement approaches, it shifts to protecting savings and providing more stable returns. We primarily use Shariah-screened equities for younger members, meaning we only invest in companies that meet strict standards, and diversify globally, incorporating asset classes like real estate and commodities, to manage risk. Instead of traditional bonds, we use global sukuk, which are Shariah-compliant, bond-like investments, where returns come from an underlying asset or contract rather than interest. Their role is similar to bonds in a typical default: smoothing volatility and adding stability as retirement approaches.”

Oversight: Shariah compliance is governed, not assumed

Shariah compliance is not a one-time label applied at the launch of a new financial product and then forgotten about. It’s an investment approach that requires governance, documentation, and ongoing monitoring as holdings and business activities evolve, just like any other investment strategy.

“SmartPath Shariah is supported through specialist oversight, alongside systematic screening processes by the fund managers to identify and exclude non-compliant investments,” continues Lewis. “That governance is essential as it creates an auditable framework that trustees and employers can trust.”

Using the full breadth of what’s permissible 

The range of available products and opportunities has broadened over time, and product development continues. As the Shariah-compliant opportunity set expands, strategies like Mercer’s SmartPath Shariah can continue to access new ways to diversify risk and improve retirement outcomes, while staying true to the principles members are choosing to follow. It’s about giving members confidence that their savings are working hard for their future, in a way that aligns with beliefs and values.

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^{1 Evolving the regulatory approach to master trusts}