Rob Pearce of HSBC explores a form of socially reponsible investing based in Shariah
The Muslim community currently makes up approximately 4% of the UK population.
This is set to double to 8% over the next two decades. Yet the proportion of the estimated £500bn UK DC assets† invested in Islamic funds is a minuscule fraction of this amount. As pension scheme professionals should this matter to us and how can we help rectify the situation?
Auto-enrolment brings many challenges and opportunities, as well as an additional five to eight million individuals who will be saving more or joining a pension scheme for the first time. With an average age of only 28§, many of these new investors will be Muslims. They like many other inexperienced savers will be ideal candidates for the government’s new pension scheme, NEST.
This scheme, which many in the pensions industry predict will set the benchmark, has a Shariah option. But what about other DC schemes? Many contract-based schemes do include a Shariah investment option, but is it actively promoted? And for the majority of trust-based DC schemes its inclusion is likely to be an oversight.
Yet as the UK population and our workforce become more diverse, it is becoming increasingly important to recognise the different needs of scheme members.
Islamic finance is a unique form of investment that can be compared with the values of socially responsible investing and derives its principles from Shariah (Islamic law).
The most distinctive element of Islamic finance is the prohibition of interest of any type, meaning that conventional interest-based lending and bonds are ruled out.
Investing in stocks and equity funds is permitted as long as it conforms to certain guidelines. The good news for trustees is that many major financial companies are now offering Shariah-compliant investment funds as part of their range.
The most common types are equity funds, real estate funds and money market funds. The fund managers act on the advice of a board of respected Islamic scholars to ensure that the funds are fully Shariah-compliant.
Trustees therefore do not need any particular knowledge or expertise to include these funds as an investment option. Shariah-compliant equity funds operate in a similar way to other socially responsible funds, in that they screen investments, in this case to exclude any company whose main activity is banned by Islamic law.
The prohibited sectors are financial services (including most banks), alcohol, pork, gambling, tobacco, media and pornography.
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