Employees of Pakistani or Bangladeshi background are almost twice as likely to opt out of workplace pensions as other employees, the Institute for Fiscal Studies has found, putting this down to religious beliefs. The thinktank recommends boosting awareness of Sharia-compliant pension saving and making it easier to switch to tackle opt-outs.

Despite the success of auto-enrolment in terms of coverage, the IFS says there are still large gaps in pension participation between employees of different ethnicities in the UK. 

The thinktank has published new research which found that while fewer than one in 10 White employees eligible for auto-enrolment is not saving in a workplace pension, this rises to 16% for employees of Pakistani ethnic origin and a quarter (24%) for those of Bangladeshi ethnic origin. The opt-out rate is about 10% among other ethnicities.

The institute estimates that employees who opt out miss out on employer contributions and tax relief that together would be worth around £16,500 per year in retirement.

The research, funded by the IFS Retirement Saving Consortium and the Economic and Social Research Council, suggests the much higher opt-out rates for employees of Pakistani or Bangladeshi origin cannot be explained by differences in earnings, age, education levels, or the characteristics of the job or of their employer, but instead attributes them to religious beliefs, noting that 90% of them are Muslims.

“These opt-out rates are higher than for other employees and seem to be driven by religious beliefs and norms among some Muslims,” said IFS research economist Laurence O’Brien. 

He added that most employees can save in workplace pensions consistent with Islamic teachings, as many defined contribution schemes offer a Sharia-compliant fund to members, while defined benefit pensions prevalent in the public sector are typically considered Sharia-compliant.

Last year, the Local Government Pension Scheme Advisory Board commissioned Mufti Faraz Adam of Amanah Advisors to report on the relationship between Sharia Law and the LGPS. He concluded that, as a part of the contractual arrangement between employer and employees, Muslim employees can continue to contribute to and receive the benefits offered by the LGPS. 

The IFS suggests the onus is now on institutions to reach those savers who are likely to opt out or have already done so.

“The government, employers and the pensions industry should... look for effective ways to increase awareness of Sharia-compliant pension saving among Muslim employees and to make it easier for them to switch to Sharia-compliant investment strategies,” O’Brien said.

The IFS added that making minimum employer pension contributions regardless of whether the employee is participating, would have a particularly large impact on the retirement wealth accumulation of Pakistani and Bangladeshi employees. The institute previously suggested employer contributions should be made non-contingent on employee participation in its Pensions Review project.

Islamic teaching is typically seen as prohibiting receiving income from interest – such as through bonds – or investing in industries such as alcohol. Muslims who report that their religion makes a greater difference to their life are particularly likely to opt out of workplace pensions, both public and private sector, the IFS noted. About half directly reported that their religious beliefs affect their saving decisions, and they hold significantly fewer interest-bearing financial assets than other groups.