I am likely to induce a few yawns during the course of this article, as the prevalence of the word “pension” in any article is always a dangerous thing for blogs.
But bear with me, because pensions happens to be most people’s biggest pot of savings, and the money they will be relying on to live life for a good few decades after retirement – so making this pension money halal as possible is an important consideration for every Muslim who wants to be truly sharia-compliant.
Making this pension money as halal as possible is an important consideration for every Muslim who wants to be truly sharia-compliant.
First off, everyone makes an employee national insurance contribution – you have to pay this, and the state will give you a state pension at the end of your working life as a result of this. There’s nothing very controversial about this from a fiqhi view – you have to pay this money to the government by law and then you get money back after retirement.
Then there’s your pension contribution. There are broadly two types of pension available today:
- Final salary; and
- Money purchase
In a final salary (or sometimes called a defined benefit) pension, the individual retiring will get a sum of money equivalent to a multiple of the individual’s final salary and will often be linked to the number of years the individual has worked at the company.
In a money purchase (or sometimes called a defined contribution) pension, the individual receives a sum of money on his retirement based on the value of the underlying pot of money he (and his employer on his behalf) has been contributing into for his entire working life.
There has not been a great deal written on modern pensions from a shari’ perspective, but an important contribution to this debate is found here by Mufti Zubair Butt. His conclusions are that someone can take the money from a final salary pension, however such person is sinful because he or she entered into a defective contract from an Islamic perspective. Money purchase pensions on the other hand are generally fine, so long as they are invested in Islamic funds. However Mufti Zubair is against the purchasing of an annuity, presumably due to the standard arguments over purchasing insurance and insurance-like products and of the purchasing of a deferred payment at less/more than par value.
Let’s take a closer look at each.
Money Purchase Pension (aka Defined Contribution Pension or Workplace Pension)
“Money purchase pension” sounds complicated but really all you’re doing is contributing to a pot of money which is being invested in things as chosen by you. All you must do from a sharia-compliance perspective is make sure that where this money is being invested, is sharia-compliant. We will shortly also be running an article on all the sharia-compliant funds currently out there for you to invest in – so look out for that.
On annuities: the analysis really hinges upon whether an annuity is the same as any insurance. Arguments for this view are that annuities have the same kind of contract and have a benefit to them linked to offsetting risk on the part of beneficiaries.However, arguments against are that it is not really a pooling of risk and protection against harm in the sense of car insurance, it is the purchase of a fixed income using a pot of money. In other words, I’m kicking this one down the road to another article.
Final Salary Pension (aka Defined Benefit Pension)
A final salary pension is an interesting beast that has an interesting story behind it. They are generally being wound down and wrapped up these days, and most new pensions are now money purchase pensions. But they have historically been the main kind of pension offered by public sector employers and large companies until the early noughties. The key characteristic they have is that they are a pot of money set aside for the employee, and invested on its behalf by a board of trustees, and in the case of under performance, the employer has legal duties to meet this shortfall to ensure that the pot is capable of meeting all the pension payments that the pot will be relied upon to make.
Legally, this kind of pension is understood as a deferred salary. Accordingly, Mufti Zubair outlines the Hanafi position that where an employment contract has gross uncertainty inherent within it, it is defective and, rather than going by the letter of the contract, one must come to a judgement on what is a fair amount and pay that instead. He outlines a few examples where there is minor uncertainty (e.g. a wet nurse for whom you also pay for food, clothing and board etc. – so the precise remuneration is unknown) but explains that these are tolerated as they do not generally give rise to disputes. So under this analysis the key question is whether a final salary pension does give rise to such disputes generally, and Mufti Zubair’s view (implied in his article) is that it does give rise to disputes and as such amounts to gross uncertainty.
Now I am not entirely convinced that final salary pensions do amount to such uncertainty as to amount to gross uncertainty. Using the key criterion of whether such uncertainty causes dispute, we do know that there have certainty been disputes over defined benefit/final salary pensions in the recent past, in cases such as the BHS/Philip Green case.
I also know that pension schemes do often go to court on the interpretation of certain rules within their scheme rulebook and that disputes arise out of that. However, in the Philip Green case (and in many other cases where there is a deficit in the pension) the issue is not that the amount is under dispute from pure calculation perspective, but rather that the company has not and does not want to make the necessary contributions in order to make the pension pot sustainable. So that is not a dispute about the contract, it is a dispute about a company’s behavior as to meeting its obligations.
And in the case of the court claims on pensions – I have not done a detailed analysis of how many pension schemes are disputed, but I am comfortable in saying it is not the vast majority. So to my mind, a final salary pension does not amount to a grossly uncertain element of an employment contract. Indeed, one could argue that as final salary pensions use quite precise numbers (x number of years in employment etc) one can calculate these with more certainty than a money purchase pension which relies on the performance of the underlying investments in the stock market.
So simply put, my conclusion is the same as Mufti Zubair’s in that I am of the view that you can take such final salary pensions, but I don’t entirely agree that taking such a payment is sinful as the uncertainty of such a remuneration does not strike me as grossly uncertain. Nor do I necessarily agree (though I am not sure I disagree strongly) that one should change from their final salary pension and instead go for a money purchase pension where one has that choice.
I am of the view that you can take such final salary pensions
An additional contour to this debate is that while having a pension is not yet compulsory, it is certainly heading in that direction. I mean, when an employer is literally going to give you free money and match your pension contribution up to a certain threshold, it would be silly to turn it down. And on the employers’ side, they are legally bound to match pensions up to a certain threshold, and to automatically enroll all employees into a pension scheme from the start of their employment. So if you do want to opt out, you would actually have to put in a bit of effort and research and liaise with HR departments to do that.
In other words, it is possible for a Muslim to turn down a significant chunk of their salary in order to avoid uncertainty (that is in the context of final salary schemes) but it isn’t particularly realistic or advisable.
And given that most public sector employers and large corporates have historically offered such pensions, from a macro perspective if you say that Muslims are not allowed to take their pensions when they work for such employers, the Muslim community would lost out to the tune of billions over the course of their working lives, and would be left with a defective pension (if they have one at all). Alternatively, Muslims simply choose not to work for such employers – but again, that is unrealistic and counterproductive (the NHS is a huge employer of Muslims, and it has a defined benefit pension scheme for example).
A point to note: as you do not control where a final salary pension is invested, and rather you are simply in a contractual agreement with the employer to be remunerated a fixed amount based upon the rules of your pension scheme, you are not in control of where the pension scheme invests the money and as such your returns are not directly linked to the underlying investment and consequently you would not be required to purify your income for any investments made by the pension scheme in impermissible avenues. However, to the extent you can push your pension scheme to invest in halal avenues, you should try to push for that as much as you can.
Finally, from a macro perspective, final salary pension schemes are excellent from an employee perspective as they guarantee in a much more definitive way, a certain basic level of pension for an employee post-retirement. It puts the onus on large corporates and public sector employers to ensure their employees are properly looked after, after their years of service have ended – rather than expose them to the vagaries of the stock market as to their ultimate pension.
As we have been hearing these last few years, pensioners in the UK are often quite poor, because their pensions turn out to be inadequate to live upon. So,while I am still reflecting on this point (and interested in your thoughts too), prima facie, I am not at all convinced that what Islam wants from us is a money purchase pension plan where the employee takes all the risk, and the rich corporates/shareholders get richer as a result of not having to guarantee certain pension payments.
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