Pakistani (16 per cent) and Bangladeshi (24 per cent) employees are twice as likely to opt out of workplace pensions compared to other ethnic groups (which average around 10 per cent), research by the Institute for Fiscal Studies (IFS) has revealed.

Despite auto-enrolment (AE) “substantially” increasing the number of employees saving into a workplace pension and reducing gaps in pension participation by age and earnings, the IFS said there are still large gaps in pension participation between employees of different ethnicities in the UK.

The research, which looked at the key drivers of these ethnic differences in pension participation and the potential implications for retirement income, found that for other ethnic groups opt-out rates were close to 10 per cent.

IFS said that the higher opt-out rates for employees of Pakistani or Bangladeshi ethnic origin could not be explained by differences in earnings, age, education levels, or the characteristics of the job or their employer.

Pakistani employees are 5 percentage points and Bangladeshi employees are 13 percentage points more likely to opt out of workplace pension saving compared to white employees with similar individual and job characteristics, and working for the same employer.

The research also found there was a "wide range of evidence" that suggested religious beliefs and/or norms in Islam were important in driving higher opt-out rates.

The majority (90 per cent) of Pakistani and Bangladeshi individuals surveyed are Muslims, and Islamic teaching is typically seen as prohibiting receiving income from interest and investing in ‘unethical’ industries, such as alcohol or tobacco.

It also found that Muslims who reported that their religion made a greater difference in their life were more likely to opt out of workplace pensions.

In addition to this, around half said their religious beliefs affect their saving decisions.

Higher opt-out rates for Pakistani and Bangladeshi employees exist in both the public and private sectors, despite saving in public service pensions being generally understood to be consistent with Islamic teaching.

However, private sector employees are typically enrolled in defined contribution (DC) pension schemes where default asset allocations are not in line with these teachings.

Yet, employees enrolled in these schemes can generally change their asset allocation to be consistent with Islamic teaching by switching to a Sharia-compliant fund.  

The IFS noted that this disparity in pension participation could have consequences for future retirement incomes, as opting out means missing out on tax relief and employer contributions.

The research estimated that this would be around £16,500 per year in retirement for a Pakistani or Bangladeshi employee on average earnings who opted out of their pension throughout working life.

Commenting on the research, IFS research economist and author of the report, Laurence O’Brien, said: “A significant minority of Pakistani and Bangladeshi employees are opting out of their workplace pension, with potentially substantial harmful consequences for their future retirement incomes.

“These opt-out rates are higher than for other employees and seem to be driven by religious beliefs and norms among some Muslims.”

However, he stated that most employees can save in workplace pensions consistent with Islamic teachings and employees offered DC plans typically have the option of choosing a Sharia-compliant fund.

Meanwhile, O'Brian said defined benefit pensions prevalent in the public sector are typically considered Sharia-compliant.

“The government, employers, and the pensions industry should therefore look for effective ways to increase awareness of Sharia-compliant pension saving among Muslim employees and to make it easier for them to switch to Sharia-compliant investment strategies,” he added.

In response to O'Brien's comments, Minister for Pensions, Torsten Bell, said: “Everyone needs the security of a decent income in retirement, so closing pension savings and entitlement gaps, whether of gender, ethnicity or faith, is important. Auto-enrolment has driven significant progress but there is further to go.

“We encourage employers to support their employees from minority backgrounds to make informed decisions about their retirement savings and raise awareness of Sharia-compliant investment options."

In addition to this, Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy, Zoe Alexander, said that people’s engagement with and attitude towards pensions varies widely, and ethnicity can play an "important part" in that.

"The PLSA supports this research, which also helps shine a light on the experiences of some under-pensioned groups, which the PLSA has championed in its work," she continued.

“Understanding how ethnicity can play a part in attitudes to pensions helps develop better policy that ultimately delivers stronger retirement outcomes for all.”

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