Defined contribution pension plan sponsors are navigating the demands of a strict asset allocation guideline in accordance with Islam by incorporating Sharia-compliant funds into their plans’ investment lineups.
One reason is the increasingly diverse makeup of the Canadian workforce. According to Statis-tics Canada, the country’s Muslim population doubled between 2001 and 2021, from two per cent to 4.9 per cent — or about 1.7 million people. From these numbers, nearly three in 10 of Canada’s overall Muslim population were born in the country, while the rest were split between Pakistan (12.7 per cent), Iran (5.8 per cent), Morocco (4.2 per cent) and Algeria (4.2 per cent).
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At Bayer Inc., the introduction of a Sharia-compliant investment fund followed a review of its DC investment offerings in 2023, says Paula Moore, vice-president of tax and treasury. “Given our diverse workforce and an ask [from a plan member], we understood the need for alternative investment options for employees that best suit their needs and religious affiliations.”
Adoption could raise contributions
Sharia-compliant means adhering to the principles of Islamic law, known as Sharia, and applies to various aspects of life, including finances and investments.
Islamic finances
by the numbers
• US$5.96 TN — The estimated value of Islamic finance assets by 2025
• 10 — The number of years Malaysia earned the top ranking in the Global Islamic Economy Indicator
• 128% — The percentage of year-over-year growth seen in investments in the Islamic economy, from $11.4BN in 2021/22 to $25.9BN in 2022/23
• $492 BN — The projected value of imports to Organization of Islamic Cooperation member states
Sources: State of the Global Islamic Economy Report
These investment funds exclude companies that derive most of their income from the sale of alcohol, pork products, pornography, military equipment and weapons.
Religious restrictions have historically prevented Muslim employees from participating in a group retirement plan, says Michael Banfield, head of Canada retirement investment product and head of global retirement investment partnerships at Manulife Financial Corp. “That cohort of plan [members] has historically had very, very low participation rates. Having these types of investments available allows that cohort to participate in group plans and adhere to their religious beliefs.”
Banfield has worked with plan sponsors of different sizes to investigate the process of adding a Sharia-compliant investment fund to their line-ups. “We’re starting to see a lot more sponsors [and] a lot more consultants inquire and dive into . . . what makes up these solutions.”
For Bayer, an important consideration was ensuring employees secured an adequate return on their DC plan contributions, says Moore, noting only members with the religious restriction are allowed to invest in the Sharia-compliant fund.
Read: How DC plan sponsors can prevent a Muslim pension gap
Due to the lack of performance history for these types of funds, Bayer’s implementation was delayed because the plan sponsor wanted to find the right option for its members, she says, noting it added the fund on Jan. 1, 2024. “By accommodating religious restrictions and affiliations, employers not only fulfill a legal and ethical responsibility, but also create a more harmonious and effective workplace.”
Expect a learning curve
Dianne Tamburro, principal of investment and DC at Eckler Ltd., says plan sponsors considering Sharia-compliant funds can expect a learning curve in understanding how they work.
For example, they’ll need to update their existing investment policy statement, potentially by including exceptions, since it’s tracking the benchmark. “That explains that it may not meet their typical performance metrics.”
The funds are an indexed investment product, she adds, which carries additional fees due to the costs of an annual audit by an Islamic finance authority.
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Jeff Ray, vice-president of product development at Mackenzie Investments, is surprised Sharia-compliant funds aren’t more widely offered in Canada given the size of the country’s Muslim population. While he expects that to change, he notes one deterrent for the adoption of these funds is low investment flows compared to other investment options. “Looking at it for the first time, it looked like a massive market in terms of the number of potential investors, but what we had seen globally in terms of dollar flow at that time was quite low.”
According to financial services firm Morningstar Inc., Shariah-compliant total assets increased to $60.4 billion at the end of February 2023, compared to $30.3 billion in 2013.
“Will it be a hockey stick trajectory?” asks Tamburro. “Probably not. But these things take time . . . . It could grow to as much as five or 10 per cent at most in any one organization. But I don’t see it being much more than that.”
Bryan McGovern is an associate editor at Benefits Canada and the Canadian Investment Review.