Millions of people save into pension funds each year, in the hope that their money will grow enough to help pay for their retirement. But each of these savers have different ideas about what makes a ‘good’ investment – and the pension industry has to cater for them all.
Pension funds have found a myriad of ways to reflect their savers’ interests: from investment styles that prioritise climate change, to strategies based on religious beliefs.
Over the past decade City fund managershave ventured into ‘Shariafinance’, designing funds that invest in a way that complies with Islamic finance principles. This means that millions of British Muslims, who otherwise would not have been able to build a retirement pot, can do so.
These pension funds are, in reality, very similar to investment funds that screen out companies based on environmental, social and governance (ESG) criteria. Shariafunds must avoid ‘sin’ stocks, such as companies involved in gambling, p*rn and tobacco.
Where these funds truly diverge from the norm is their avoidance of ‘riba’, which is an asset that bears interest – this means they cannot invest in bonds. They also do not invest in ‘gharar’ assets, which are deemed to have excessive risk of uncertainty. This excludes certain types of derivatives, which are complex financial securities.
The exclusion of fixed income means Sharia funds are much more risky than a traditional balanced investment fund that puts savers’ money into a mix of equities and bonds.
But the strategy, by fault or design, appears to have paid off – with Sharia funds outperforming their conventional rivals.
Who offers Sharia pension funds – and what do they invest in?
Mostof the largest workplace pension providers on the market offer Sharia pension funds, such as government-backed Nest, as well as The People’s Pension and Scottish Widows.
Both funds are screened by Islamic scholars to ensure they meet Sharia principles.
Nest’s Sharia fund’stop 10 holdings include technology companies such as Microsoft, Apple, Amazon and the chip-maker Nvidia. Its investment objectives are to grow each saver’s pot in real terms over the course of their savings career – but it warns that savers should expect a long-term “volatility average” of 22pc.
This means it is likely the value of your fund could fluctuate by more than a fifth, either upwards or downwards.
The People’s Pension Sharia fund tracks the Dow Jones Islamic Market Titans index, which is a tracker fund that follows a basket of Sharia-compliant companies. It has a similar set of top 10 holdings to Nest’s Sharia fund, made up mostly of American technology giants.
Its second-largest allocation by sector is in healthcare, where 16pc of the money is invested in companies such as the multi-billion dollar pharmaceutical business Eli Lilly and Company.
Why have Sharia pension funds outperformed?
In a strategy known as ‘lifestyling’, most pension funds gradually allocate more of people’s savings towards lower-risk investments, typically bonds and money market funds, as they get closer to a set retirement date.
This means that the value of their pension pot is less likely to fluctuate dramatically in the run up to their retirement, which could knock their plans to leave work off-course.
However, this process is not possible in Sharia pension funds. The money remains completely invested in stocks the whole time, which means they record both bigger gains and steeper losses.
For the past decade, stocks have vastly outperformed the bond market. This has meant that while traditional pension funds have recorded steady gains, tempered by their exposure to fixed income, Sharia pension funds have stormed ahead.
In the past five years alone, the Nest’s Sharia fund has delivered returns of 117pc, compared with 40pc from its 2040 Retirement Plan fund (which is designed for people reaching retirement age in 2040).
How to ask for a Sharia pension fund
You do not have to be Muslim to invest in a Sharia pension fund – but anyone considering this move for non-religious reasons should think carefully about whether it is worth taking on such a high-risk approach to your retirement savings.
If you want to switch your pension to this type of investment, you need to log into your pension provider’s online portal to check if they offer a Sharia fund, and then be directed on how to move your money over. Nest and the People’s Pension allow you to do this online.
If your provider does not offer a Sharia fund, you can leave the scheme and open a self-invested personal pension, or ‘Sipp’, with an investment broker.
This gives you control over how your retirement savings are invested – and opens up a range of funds that are Sharia-compliant. Popular funds include the HSBC Islamic Global Equity Index and Schroder Islamic Global Equity.
You can achieve a similar effect (but withoutthe exclusion of sin stocks) by opting for a conventional but higher-risk fund.
The simplest way to do this in a workplace pension is to pick a fund that targets a retirement far in the future. If you’re investing in a Sipp or Isa, you can pick a tracker that either mimics a particular index or sector.
Financial advisers often recommend the Vanguard LifeStrategy range of tracker funds where you can decide the balance between shares and bonds, starting from 20pc exposure to shares, up to to 100pc.
Are you invested in a Sharia fund? Let us know how well they have performed for you in the comments below, or email [email protected]
