SYDNEY/KUALA LUMPUR: Islamic pensions are making inroads in several majority-Muslim countries, and their success may help the growth of asset management industries across much of Asia and the Middle East.
Most pension plans around the world are state-funded. But many countries are trying to develop private pension sectors as a way to deepen their financial markets, and the experience of Pakistan, Turkey and Malaysia suggests Islamic finance can become a significant part of this effort.
If state-owned pensions in major Islamic markets shifted a portion of their money into Shariah-compliant schemes, that could add between $160bn and $190bn to the sector, according to consultants Ernst & Young.
“So you’ve got a pent-up demand — your challenge is how to create a supply-side mechanism to cater to that latent demand,” said Ashar Nazim, Islamic financial services leader at E&Y.
Pakistan launched such a mechanism in 2005, creating a voluntary pension system (VPS) which now holds 3.4bn rupees ($32.4m) of Islamic assets, or 61 percent of all VPS assets.
While modest in absolute terms, Islamic pension assets account for a much larger proportion of the VPS sector than Islamic bank deposits’ 10 percent share of all Pakistani bank deposits.
All seven VPS managers offer Islamic pensions and the largest, run by a unit of Meezan Bank, is triple the size of its conventional peer. Islamic assets under management have doubled in the last year.
Growth was initially stagnant until 2010, when changes in the tax regime, favourable market conditions and a wider product range boosted the sector, said Muhammad Afzal, a director at Pakistan’s Securities and Exchange Commission.
“The popularity of Islamic pension funds can be attributed to demand from the general public for retirement products designed in accordance with the Islamic precepts,” said Afzal.
“This money can be retained for a very long-term basis given 70 percent of the country’s population is under 35 years of age,” said Wasim Akram, fund manager at HBL Asset Management, a VPS provider and a unit of Habib Bank.
“With time, I believe that the performance of the already-launched funds will attract more and more members as the opportunities for growth are enormous.”
Islamic fund managers screen their portfolios according to religious guidelines such as bans on tobacco, alcohol and gambling, in much the same way as socially responsible funds in Western markets.
They have an additional constraint, Islam’s ban on interest payments, which confines them to sukuk in the fixed-income space - a relatively small market globally where demand has exceeded supply in many countries.
Islamic fund managers see potential, however, in countries such as Turkey, where a 2001 private pension law has been energised by government reforms introduced this year. The number of contributors to private pensions has reached 3.8 million, up from 3.1 million in December, after the Turkish state began making a 25 percent contribution to private pension premium payments and fund management charges were cut.