To date, Muslim savers have only had a limited choice of investment options for their workplace pensions. However, a number of providers are now expanding the range of Sharia-compliant investments available to ensure members have a variety of lifestyle and lower-risk options to choose from, while still investing in ways that align with their faith.
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A Sharia-compliant fund (sometimes spelled ‘Shariah’ in English) avoids investing in areas prohibited by Islamic law, such as firms involved in alcohol, gambling, and lending, as it is specifically forbidden to generate profits from interest. Funds are overseen by a board of Islamic scholars to ensure all underlying investments are compliant.
In terms of workplace pensions, many providers offer the HSBC Islamic Global Equity Index Fund, citing its reputable brand, strong industry presence, and cost-effectiveness as key reasons for their choice.
This is a 100 per cent passively managed equity fund, tracking the Dow Jones Islamic Market Titans 100 Index, which follows the largest 100 global stocks that comply with Islamic investment guidelines.
HSBC also offers other Sharia-compliant funds, including a global sukuk fund—a type of Sharia-compliant bond—and a Sharia multi-asset fund, though these are not always available in all UK workplace pensions.
Some providers note a lack of choice in selecting Sharia options. Nest’s chief investment officer, Elizabeth Fernando, explains that until recently there have been relatively few Sharia-compliant products to choose from. “I think the reason [many providers] have ended up using the HSBC equities product is it’s very high quality. It has a board of scholars overseeing it, so you’re not just relying on an index provider interpreting faith appropriately; you have scholars performing that extra level of check for you. It’s also a reasonably large fund, which helps with liquidity and access, and we’ve been able to negotiate very good terms for accessing it.”
Legal & General Head of DC Investments Jesal Mistry agrees: “We were looking to partner with an organisation that was credible in this space, with the scale and size in this area. There are other funds out there that are more actively managed, but some of them, from a pricing perspective, were more expensive.”
However, there are some downsides to solely offering this HSBC fund. As a 100 per cent equity fund, it is less suitable for members who are more risk-averse, particularly those nearing retirement.
The composition of this index also means it is overweight in technology stocks, which can add to the risk profile. That said, this fund, like other Sharia-equity options, has performed well in recent years, leading some non-Muslim savers to invest as well.
Wider investment choice
The landscape has recently evolved with the emergence of more sophisticated lifestyle arrangements. Providers are now launching their own lifestyle solutions, integrating both sukuk and existing equity funds into their offerings.
Franklin Templeton, like HSBC offers standalone Sharia equity and sukuk funds, and is working with providers like Standard Life to use building blocks to build a Sharia glidepath option for members.
As Franklin Templeton’s head of retirement Ian Hollingworth points out this can offer a more balanced approach to risk. “Until now many DC Sharia options have only been available on a self-select basis, which requires the individual to be more engaging and make decisions about de-risking. But working with providers to offer glidepath options can offer an investment option more aligned to what is offered to non-Muslim members.”
Meanwhile, Smart recently launched a Halal Workplace Pension in partnership with Wahed, offering managed investment glidepath to reduce risk as members approach retirement.
Smart Pension director of investment proposition James Lawrence says this approach addresses the concerns of Muslim employees, who remain a particularly underserved part of the DC pension market.
Wahed head of UK private client services Abul Fazal Salahuddin says this offers asset diversification, transitioning from higher-risk equities to lower-risk sukuk, gold, and cash 15 years before retirement.
Previously Muslim members approaching retirement have been exposed to significant volatility, for example in the 2020 market crash due to Covid-19. Wahed follows rules set by the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), with an independent review board to audit compliance.
Other providers are also adopting similar approaches. Legal & General, in partnership with HSBC, offers a range of Sharia-compliant options, including sukuk bonds and multi-asset funds, which include a Sharia-compliant lifestyle plan for members nearing retirement.
Mistry says this is an important part of L&G’s DEI strategy, and should help enhance pension adequacy for ethnic minorities.
Meanwhile, Nest has adapted its Sharia-compliant fund for workplace pensions, shifting from a 100 per cent equity allocation to 70 per cent equities and 30 per cent sukuk bonds. Fernando says this will help drive more consistent returns over the long term, in all market conditions.
“Nest has wanted to reduce the risk levels of its Sharia Fund, but was previously restricted to investing only in one asset class due to the limited availability of suitable diversifiers—such as sukuk funds—at an affordable price.
But the market has evolved over the last decade, and there are now more suitable offerings available.”
She notes that the addition of sukuk may result in a slight reduction in the fund’s real returns, but it will significantly reduce volatility: “We expect a projected reduction in fund volatility of almost 4 per cent—an annualised reduction rate from 14 per cent to 10.9 per cent.”
She says this change will allow Muslim members to have a comparable risk profile to those in ethical funds or default strategies.
Tick-box exercise
Despite these changes, Hymans Robertson head of DC provider relations Shabna Islam points out that for many Muslim pension savers, Sharia-compliant options remain limited compared to conventional funds.
She says: “If you don’t have that belief, then you’ve got a choice of hundreds or thousands of funds.” She says she would like to see more options and a wider variety of lifestyle arrangements, including those targeting cash, annuity, or drawdown.
Salahuddin says many providers have been hesitant to adopt Sharia-compliant options due to a lack of understanding and expertise. In some cases, he says providers have included just one Sharia fund as a “mere tick-box exercise.”
He also says a significant educational effort was needed between Wahed and trustees, investment management teams, and corporate advisers to clarify what Sharia compliance entails. He is optimistic this will change, as more companies introduce fully compliant, actively managed options.
Diversification
Experts say partnering with established asset managers in this sector, like Franklin Templeton and HSBC, and developing in-house solutions both have advantages, but providers also need to better evaluate investor needs.
They emphasise that members considering Sharia investment products should recognise that, while these options align with their values, they also involve concentration risks, particularly in tech stocks.
Mistry highlights the importance of diversifying Sharia-compliant equity funds, where possible, due to their concentration in US tech stocks. If this, sector underperforms, it could significantly impact these funds, he says, given nearly 50 per cent of these investments can be in the top 10 tech names. To mitigate this risk, L&G has introduced additional asset classes and options for members.
“Equities can be very volatile and the heavy concentration, in US tech stocks, brings its own set of risks. Sukuk, on the other hand, has different risk factors that are more asset-based rather than market-driven. The limited choice in Sharia-compliant investments has restricted investors’ experiences. However, we believe diversifying risks across different asset types can benefit members, especially as their fund values grow and they seek more stability in drawing their income over time.”
Salahuddin also emphasises the importance of diversification, pointing out that relying on a single fund limits risk management.
To enhance diversification, Salahuddin explains that portfolios now incorporate multiple funds, increasing stock holdings to 300-400—compared to the 100 stocks in the single HSBC equity fund.
While some tech stock overlap remains, this approach broadens exposure to emerging markets, such as Latin America and the Far East.
Salahuddin highlights the inclusion of HSBC Sharia-compliant funds that track other indices, enhancing geographic and industry exposure, which he says is essential for a well-rounded investment portfolio.
Better communication
In most cases, Sharia-compliant investments are not the default choices for members, so engagement is crucial to encourage Muslim members to invest.
Smart has made its Wahed product the default for its members but stresses that engagement and good communication are central to its approach. Lawrence says Smart raises awareness through digital campaigns, app nudges and outreach in Muslim communities, promoting Sharia-compliant pensions to employers and advisers and using digital tools to boost engagement.
Wahed also emphasises that these offerings aren’t solely for Muslim investors, using investment guides to explain Sharia compliance and highlighting differences between traditional and asset-backed bonds for those unfamiliar with Islamic finance. Wahed offers an educational series for accountants and decision-makers ensuring employers and employees are well-informed.
Islam notes that many employers rely on providers and standard communication channels to introduce Sharia-compliant products. She says employers should go further, evaluating these products’ suitability and benefits for employees and clearly communicating this. Engaging internal community groups, such as Diversity, Equity, and Inclusion (DEI) forums, can help raise awareness and encourage use of these benefits.
Most employers have community groups within their organisations focused on minority groups, and tapping into this resource can be effective for communication. This is an important issue for employers, trustees and providers, particularly given the ethnicity savings gap.
Mistry says: “We need to focus much more on this. The Muslim population is growing, and we’ve seen a significant gap in savings between them and other communities.” Having products that meet the needs of a wider range of Muslim savers and effectively communicating information about them can begin to address this problem, helping this faith-based group save for their future.