Tackling ethnic disparities in pension participation through inclusive scheme design

Automatic enrolment has transformed UK pension saving, drawing millions into workplace schemes. But not all groups are participating equally.

A recent report by the Institute for Fiscal Studies (IFS) highlights a concerning trend: employees from Pakistani and Bangladeshi backgrounds are significantly more likely to opt out of pensions, with faith-based considerations emerging as a key factor.

While this article addresses the specific challenge for the Islamic faith based on evidence from the recent report from the IFS, there are wider challenges for inclusion in product design for other faiths and perspectives – one that might be usefully addressed in the government’s adequacy review.

Overall opt-out rates have fallen since the introduction of automatic enrolment, but the picture is far from uniform. According to the IFS, 16% of Pakistani and 24% of Bangladeshi eligible employees opt out of workplace pensions – well above the average 10% rate seen elsewhere.

Even after accounting for differences in income, education, occupation, and other demographics, a gap remains. Religion appears to play a notable role.

The IFS study finds that Muslim employees with faith-based financial preferences are more likely to opt out, largely due to concerns about the compatibility of conventional pensions with Islamic finance principles.

Limited Shariah-compliant options a barrier to inclusion

Sharia-compliant investments are a form of socially responsible investing that avoids interest-based transactions, gambling, and investments in industries like alcohol, tobacco, and pornography. Instead, they focus on asset-based financing, profit-sharing, and ethical business practices.

While a handful of Sharia-compliant equity funds are available within some pension schemes, the options remain limited, particularly for savers with lower risk appetites. Without accessible, faith-aligned alternatives, many may feel that pension saving is not an option.

The 2022 case involving Uber drivers in the UK  illustrates the importance of responsive pension scheme design.

Initially, the company’s pension offering lacked Sharia-compliant options, despite its workforce being approximately 75% Muslim. Following pressure from its drivers and legal advocacy groups, the company added a Sharia-compliant pension option to its auto-enrolment scheme.

Policy ideas to support greater inclusion

Ensuring equitable pension access means addressing both supply and demand.

On the supply side, expanding the range of Sharia-compliant investment options is crucial. Encouragingly, there are signs that these offerings are being expanded to include sukuk (Islamic bonds) in pension scheme investment options.

We have seen a rise in the number of Sharia-compliant investment options coming to market in the last 12 to 18 months, but it will take time for these new options to make their way into fund ranges.

One policy lever with strong potential is non-contributory options, where employers make contributions regardless of employee participation. Currently, we have a situation where some employees who might be unable to afford their contributions are missing out on important employer contributions that they may need.

The IFS report noted that employees could see a 60% increase in retirement income by participating in pensions instead of opting out and using ISAs. However, some individuals may continue to opt out for religious reasons.

Education can play a vital role in countering the disparity in opt-out rates and help Muslim employees make more informed decisions about their opportunities for financial growth and security in retirement.

A coordinated outreach effort – led by government, providers, and Islamic finance experts – could help demystify pensions, particularly Islamic pensions, and promote greater understanding of compliant options and their benefits, including valuable tax relief and employer contributions.

Inclusion must be a cornerstone of pension policy

The introduction of automatic enrolment was a landmark in UK pension reform. But if participation gaps persist for large segments of the population, particularly among faith-led communities, the policy’s full potential will go unrealised.

Expanding access to suitable pension options is not just a matter of fairness – it’s essential to ensuring that everyone, regardless of background or belief, can build a secure retirement.

Qamar Shazad and Adam Hayes are members of the pensions board at the Institute and Faculty of Actuaries.