LGPS employers at legal risk over sharia non-compliance

In 2021, personal finance website Islamic Finance Guru revealed that a third of Muslims in the UK do not have a pension due to the lack of sharia-compliant pension options available to them. 

It claimed that this has prompted Muslims to miss out on an estimated £12.8bn in savings for retirement.

As first reported by Local Government Chronicle, in March the LGPS Scheme Advisory Board discussed the legal opinion of Lydia Seymour, a pensions specialist at Outer Temple Chambers, concerning sharia-compliant investments in English and Welsh LGPS funds.

The board said that some members of LGPS funds have opted out of their schemes for religious reasons, over concerns that LGPS funds and their investments are not sharia-compliant.

These concerns are based on the way the LGPS is funded and the role of interest on its investments.

Employers are growing concerned about the risk of facing legal action on discrimination grounds by employees who feel excluded from the LGPS owing to their religious beliefs.

No claims have been made against LGPS employers

There are differing views over what constitutes a sharia-compliant pension. According to guidance published by Islamic Finance Guru in 2021, if a member’s pension fund does not have the words “Islamic” or “sharia” in its name, it is probably not compliant, or halal.

Broadly speaking, a sharia-compliant pension fund is one that is deemed acceptable under Islamic rules on finance, such as the ethics of certain investments and a ban on receiving interest.

In a legal opinion obtained by the website last year, Paul Newman, barrister at Wilberforce Chambers, argued that failure to provide a few Islamic funds for employees to choose from was against both the Equality Act 2010 and trustees’ duties.

As Seymour set out her own opinion, she did not seek to establish whether the LGPS was sharia-compliant. 

She did, however, note the view of one expert that the LGPS is Sharia compliant, along with a Pensions Ombudsman ruling in 2016 that scholars take differing views on the issue.

The board is unaware of any claims that may have been brought against LGPS employers over their failure to provide alternative pension arrangements.

However, employees could claim indirect discrimination with arguments including that their employer only offers them the LGPS, that it does not offer a halal pension scheme, and that the LGPS invests in a manner that is non-compliant.

A human rights-based challenge, meanwhile, could raise a claim arguing that the right not to be discriminated against “can extend to a requirement upon the state to treat people differently when they are in different situations”.

Input from employees would be helpful

The board cited a 2011 report into demand for sharia-compliant pensions from master trust Nest, which concluded that there was no clear consensus over what would be sufficient for individual employees to consider a pension fund halal.

Seymour suggested seeking evidence from an Islamic finance expert over the sharia-compliance of the LGPS, a summary of views that might expected from Muslim employees on the issue, and an explanation of what alternative halal schemes exist.

Helpful evidence would also include the extent to which the expert would expect consensus on the matter from Muslim employees and their views on the impact of employees resulting from opting out of the LGPS into another scheme.

She also advised seeking the opinion of an actuary on the extent to which these issues could be addressed within the existing framework, including making schemes sharia-compliant, along with any difference in benefits that would arise from alternative schemes.

An actuary could also detail the additional administrative costs linked to providing an alternative scheme to the LGPS and the impact of offering a choice to all employees, such as whether more people could be expected to opt out, or fewer.

Offering a compliant alternative could also provoke litigation

“There are two potential claims that could be brought by an employee who opts out of the LGPS on the basis of religious belief and who argues that an alternative pension scheme should be made available — a claim for indirect discrimination in the Employment Tribunal and claim under the Human Rights Act in the civil courts,” Seymour said.

Providing an alternative scheme, however, risks in itself giving rise to discrimination allegations.

“If an LGPS authority chooses to offer an alternative pension scheme to Muslim employees who opt out of the scheme for religious reasons, then that scheme would also need to be offered to all employees,” Seymour warned. 

“Any restriction of the offer would be direct discrimination on the grounds of religious belief.”

She argued that an alternative would result in different cost and benefit structures. 

“Given the various structural advantages of the LGPS, it is highly likely that any alternative scheme in which contributions were the same as the LGPS would be likely to generate lower payments at retirement,” Seymour said.

She added that there is no reason in principle why an employer should not offer a halal alternative, and that the risk of an equal pay claim linked to a difference in pension provision is low as these can only be brought in relation to pay differences between men and women.

“However, in my opinion there is a risk of claims for indirect discrimination on the grounds of religion or belief in circumstances in which employees who have opted for the alternative scheme end up with benefits which are less generous than those available under the LGPS,” she said.

Bob Holloway, pensions secretary at the Local Government Association, told Pensions Expert: “As agreed by the board when it last met, the secretariat will now seek further expert advice to resolve some of the questions from the initial advice that, in the board’s view, remain unresolved.”