Fatwa: Are defined benefit pensions halal?

This is iA the most comprehensive resource for this question on the internet.

We present views from IslamQA and Al Qalam, then our resident expert Mufti Faraz Adam presents his views, and finally IFG present a commercial perspective on the matter.

View One: Al Qalam

Q: The CARE (Career Average Revalued Earnings) is a type of defined benefit pension scheme. A defined benefit scheme guarantees a certain level of benefit at retirement, according to a fixed formula. In this respect it is similar to the current final salary sections of the NHS Pension Scheme. In a CARE scheme your pension is based on your pensionable pay right across your career. The pension you earn each year is based on pensionable pay in that year and is increased by a set revaluation rate, linked to inflation, for each year up to retirement or leaving. The final pension is calculated by adding together the pension earned in each year of membership. This came out in April, 2015. Basically, Each year you will earn a pension equal to 1/54 of your pensionable pay. So long as you are still paying into the scheme this will be revalued every year in line with increases to the Consumer Prices Index plus 1.5%. What you pay monthly is variable dependent upon your annual salary (between 5.2-14.7%). Can I opt for such pension?

الجواب حامدا ومصليا ومسلما ومنه الصدق والصواب

A: The Career Average Revalued Earnings (CARE) pension scheme, a defined income scheme, is permissible provided the job role for which the pension is earned is permissible. The previous position of the Al-Qalam was that defined income schemes were not permissible on account of the uncertainty they entailed. However, the position of the Al-Qalam panel has now changed with regards to such pensions. Further to discussions with one of my esteemed teachers, it is now the opinion of the Al-Qalam Panel that defined income pensions may be tolerated and deemed permissible as, despite the gross uncertainty they entail, the uncertainty does not lead to inordinate dispute between the pension holder and pension provider.

Source: here

View Two: IslamQA

Praise be to Allaah.

Participating in pension plans other than those organized by the government is a kind of gambling, because a person may contribute to the scheme for a number of months, then become disabled or die, so he and his heirs may get much more money than was taken from them, or he may pay many installments then what he takes from them is less than what he paid. This is gambling. For more details please see the questions on insurance on this site.

If they are investing the money deducted in haraam things such as making alcohol, or in riba-based loans, this is another reason to regard this as haraam, because that is helping them in sin and transgression.

This applies if your participation in this scheme is voluntary. It is not permissible to participate in it in this case, and whoever gives up something for the sake of Allaah, Allaah will compensate him with something better than that.

But if participation is compulsory, then there is no sin on you, but it is not permissible for you or your heirs to take more than was taken from you. You can leave the rest, or take it and donate it to charitable causes.

With regard to participating in the government pension plan, this may not come under the same ruling, in the sense that the government or treasury (bayt al-maal) is responsible for spending on the people if they need that.

And Allaah knows best.

Source: here

Mufti Faraz view:

It is permissible to be a member of and receive benefits from a defined benefit pension scheme.

Defined benefit pensions – also known as final salary schemes/career average schemes – promise to pay a retirement income based on a percentage of one’s salary. What you receive depends on how long you spent working for your employer, and how much you were earning at the time you gave up work. Outside of the public sector, this type of pension is pretty rare nowadays.

Defined benefit pensions are in essence deferred salary. Thus, the accumulated amount in the scheme is a deferred debt and future salary payable to the member in lieu of his service. The uncertainty or ambiguity in the total amount is immaterial and inconsequential as it generally does not lead to any dispute. Therefore, the investments and activity of the funds whilst its in the pension pot cannot be attributed directly to the pension member. This is unlike a defined contribution scheme, where the pension member has active participation in the investments of the funds.

The IFG view:

We have laid out our detailed view on defined benefit and defined contribution pensions here and here.

Our view in brief is that we think defined benefit pensions are permissible to take.

We think the above fatwa from IslamQA is slightly confused on how a pension works - or on a more charitable reading - is not suitable for application in the UK and Western countries. The fatwa appears to be talking about defined contribution pensions. These pensions are unambiguously permissible as long as the assets you are investing into are permissible assets.

For UK employees, another consideration is the Self-Invested Pension Plan (SIPP). We cover that here.

If you would like to invest in halal funds for your defined contribution pension or SIPP then we recommend you check out our investment comparison page where you can compare all sorts of investments and choose one that’s best for you.

If you would like to learn more about each investment and how to structure your investment strategy - check out our Halal Investing Course here.