Despite the UK’s status as a global pensions hub, Shariah-compliant options remain limited. For many Muslim savers, this means choosing between faith and financial security, a gap the industry can no longer afford to ignore. Halwyn Capital co-founder, Philip Rose, discusses below

The UK is well known as a global financial centre with an established pensions industry, but the widespread provision of 'suitable' Shariah-compliant pension products for the 6 per cent of Muslims that make up the national population remains wanting.

This is best demonstrated by the fact that Islamic funds rarely account for more than 1 per cent of provider assets, suggesting that for many, it may be a forced choice between religious conviction or financial security.

Mainstream non-pension investment fund platforms are often not much better, where the absence of 'Islamic' selection filters results in the need to carry out three separate word searches on 'Islamic', 'Shariah' and 'sukuk' for the unknowing prospective investor to identify the handful of options available.

Having previously managed an 'Islamic Global Balanced' fund-of-funds in the UAE, I know all too well about the more restricted range of investment expertise and funds to choose from. In the years since, there has been some improvement, but it remains a limited marketplace.

For example, the majority of defined contribution (DC) providers have an 'Islamic' option somewhere in their fund range, but often without the lifestyling options seen with conventional defaults. A few, such as L&G, have made good progress in redressing this.

However, take-up of these new options remains low, as industry fund data suggests most assets remain in passive Islamic global equity fund variants.

One reason for this is that the DJ Islamic Market Titans Index used as the underlying benchmark for such funds has a structurally higher weighting to US equities and MAG-7 stocks than the MSCI World index used by most conventional global equity funds.

This means that fund performance has been much better for the Islamic variants, even attracting non-Muslim investors who have simply screened based on past performance.

Whilst the passive approach may work well in providing a low-cost global equity solution, sukuk funds require more specific expertise. Given that more than 70 per cent of the DJ Sukuk Index is issued from the Middle East, they inherently incur a higher risk profile than the more familiar UK Gilts or US Treasuries.

When considered alongside environmental, social and governance (ESG) criteria, these petrochemical-heavy parts of the world also fare less favourably, but this is where the pension industry needs to take a step back and consider the faith-based requirements of investors.

Given that the UK is not the centre of excellence for such assets, the flow and transfer of subject matter expertise on Shariah assets has been more muted amongst providers, trustees, IGC members and even pension consultants.

Instead, the Dubai International Financial Centre (DIFC) has formed the nucleus of this particular niche skillset, with its roster of both local and international investment firms. Having a front row seat in the primary sukuk issuance market gives those investment teams a much greater degree of familiarity with the corporate and sovereign entities involved, in addition to facing local institutional demand for Islamic solutions.

On home soil, the other issue stalking the industry is the manner in which some pension solutions are structured, which may not be Shariah compliant, even if the underlying fund is.

For example, a unit-linked fund with a cash balance receiving interest would fail the test.

Ideally, pension funds should have a fatwa to confirm their Shariah compliance, plus an annual Shariah audit, to help avoid the risk of 'Shariah-washing'. Meanwhile, the absence of Shariah-compliant annuities would suggest they have also been left behind in the 'too difficult' box.

Given that The Pensions Regulator has expressed interest in how this section of the market develops from here and considering the collective, general inclusivity requirements incumbent on the industry, it is clear that further improvements are past due.

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