Launch Partners

Tuesday, June 18, 2024

Launch Partners

ESG investing and its potential for UK’s Islamic pension fund investment schemes

Inclusivity is at the forefront of the discourse on pension fund investment schemes in the UK with the recent legal action taken against Uber by the App Drivers and Couriers Union for not providing an Islamic pension scheme despite an estimated 75% of Uber’s UK workforce being Muslim. A recent report from IFN highlights the lack of demand for Islamic pension funds in the UK and the role environmental, social and governance (ESG) investment options may play in propelling the growth of Islamic pension funds.

According to the IFN report, a contributing factor to the lack of demand for Shariah compliant pension funds in the UK is a relative absence of Islamic annuity products. It is difficult to engineer Islamic products that replicate annuity payments because of the prohibition of interest and fixed returns. It raises the question as to whether the market wants products that are merely Islamic in name but not in spirit or principle.

In addition to Islamic annuity products, another catalyst for the development of a more comprehensive Shariah compliant pension alternative in the UK is the rise of ESG investing and its crossover with Islamic finance. According to a recent study by The Private Office, 68% of UK investors want their pension invested into sustainable and responsible companies. However, over half (53%) have no idea which funds their employer is currently invested into on their behalf.

With over 40 million pension holders in the UK according to the 2019 UK Pension Survey, including 22.4 million in defined contribution schemes, this means over 20 million people do not know where their funds are currently invested in. And with over GBP2.6 trillion (US$3.23 trillion) invested into UK pensions, that is a lot of money floating around without a purpose.

Of those that did know where their pension fund was invested, 56% stated they wanted their funds to be exclusively invested in ESG-related assets such as shares and funds. This suggests that there could potentially be up to GBP650 billion (US$806.6 billion) being directed toward ethical and ESG investing. If some of these funds could be incorporated into Shariah compliant alternatives, it could be a game changer for the UK market.

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