How to deal with religious preferences in making DC investments

What does it mean for an employer to consider the preferences of a religious group, such as Muslims, in laying out investment options in a defined contribution pension plan? “It’s simply ensuring that their retirement savings are invested in a way that is consistent with Islamic principles,” says Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management.

It isn’t, however, always simple, since plan administrators have a fiduciary duty to invest with the best financial interests of all plan beneficiaries in mind, says Mark Firman, a partner at McCarthy Tétrault LLP in Toronto. That means showing faith-based investments produce comparable returns to their conventional counterparts.

Read: Faith and fixed income in DB pension investment

Plus, according to the Income Tax Act, “the primary purpose of every pension plan . . . must be the provision of retirement income for employees,” says Firman.

As a result, faith-based plans “could have an ancillary purpose, which would be to advance religious principles,” and may be ineligible for tax benefits, he adds.

Solid performance

But complying with Islamic principles doesn’t have to mean the investments will underperform a common stock index such as the Standard & Poor’s 500. “If you were to invest in the [200-odd] shares in the S&P that are Shariah-compliant and if you were to invest in the broader index of all 500 shares, the returns are not materially different,” says Hejazi, referring to the last 15 years. Last year, the returns on the Shariah index fell by 1.47 per cent. When it comes to the broader index, returns fell by 1.54 per cent, S&P data reveals.



What are the various prohibited investments?

Islam: Pork, alcohol, financial institutions that charge interest

Catholicism: Contraceptives, substances that induce abortion

Both: Pornography, non-defensive weapons

Duty to accommodate

Employees of all faiths “have a higher right to demand [pension] accommodations from their employer than other types of religious accommodation because the employer is getting benefits from the government as a result of setting up the pension,” says Beverly Moran, a law professor at Vanderbilt University in Nashville.

“So the point is if you’re a Muslim and your employer only designates companies that are investing in a way you’re not allowed to invest, then you’re being denied one of the benefits of the pension,” says Moran.

To develop investment options suitable for religious employees, plan sponsors should start by building solid relationships with their providers, says Doug Lauson, a benefits consultant for the Roman Catholic archdiocese of Vancouver.

Read: 2016 DC Plan Summit: Navigating the uncertainty

In terms of specific investments, Lauson says the archdiocese won’t put money towards pharmaceutical companies that manufacture contraceptives or substances that induce abortion; mining companies that ignore ecological stewardship; armament companies whose actions contravene the Geneva Convention; and any organization that deliberately discriminates against people based on race or gender.

Lauson admits that finding appropriate investments for the archdiocese can take more time than doing so for conventional plans. “When we sat down with [our plan administrator] and said, ‘Here’s our new statement of beliefs,’ it was very much, ‘OK, you guys need to go do some homework now and come back to us with ideas and options.’”

And they did. Lauson and his colleagues are planning to meet with a foreign company that doesn’t have ties to industries banned by the Catholic Church. “If their performance is within reason, then of course we will take that to the pension committee with the recommendation that we add them to our slate of options for the employees.”

Read: Pension association calls for flexibility and clarity in CAPSA governance guidelines

Sara Tatelman is associate editor at Benefits Canada.

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