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IFS - Employees of Pakistani or Bangladeshi ethnic origin almost twice as likely to opt out of workplace pensions as other employees

Automatic enrolment into workplace pensions has substantially increased the share of employees saving in a workplace pension plan and has reduced gaps in pension participation by age and earnings. 

Despite this, there are still large gaps in pension participation between employees of different ethnicities in the UK. While under 10% of White employees who are eligible for automatic enrolment are not saving in a workplace pension, this rises to 16% for those of Pakistani ethnic origin and 24% for those of Bangladeshi ethnic origin (18% for the aggregated Pakistani/Bangladeshi group). ‘Opt-out’ rates among other ethnic groups are close to 10%.

New research, funded by the IFS Retirement Saving Consortium and the Economic and Social Research Council, and published today by the Institute for Fiscal Studies, investigates the drivers of these ethnic differences in pension participation and the potential implications for retirement incomes. Key findings include:

  • 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. Compared with White employees with similar individual and job characteristics and working for the same employer, Pakistani employees are 5 percentage points and Bangladeshi employees 13 percentage points more likely to opt out of workplace pension saving.
  • There is a wide range of evidence that religious beliefs and/or norms in Islam are important in driving higher opt-out rates, and 90% of Pakistani and Bangladeshi individuals are Muslims. Islamic teaching is typically seen as prohibiting receiving income from interest and investing in ‘unethical’ industries such as alcohol or tobacco.
  • Muslims who report that their religion makes a greater difference to their life are particularly likely to opt out of workplace pensions. In addition, around half of Muslims directly report that their religious beliefs affect their saving decisions, and they also hold significantly fewer interest-bearing financial assets than other groups.
  • Higher opt-out rates for Pakistani and Bangladeshi employees exist in both the public and private sectors. This is despite the fact that saving in public service pensions is generally understood to be consistent with Islamic teaching. In the private sector, employees are typically enrolled into defined contribution pension schemes where default asset allocations are not in line with these teachings – for example, investing in corporate and/or government bonds. However, employees enrolled in these schemes typically have the option to change their asset allocation to be consistent with Islamic teaching by switching to a Sharia-compliant fund.
  • This disparity in pensions participation risks substantial harmful consequences for future retirement incomes. This is because opting out of a workplace pension means missing out on an employer pension contribution and generous tax reliefs for pension saving. We estimate that together these would be worth around £16,500 per year in retirement for a Pakistani or Bangladeshi employee on average earnings who opts out of their pension throughout working life. 

Laurence O’Brien, Research Economist at IFS and an author of the report, said:

‘A significant minority of Pakistani and Bangladeshi employees are opting out of their workplace pension, with potentially substantial harmful consequences for their future retirement incomes. These opt-out rates are higher than for other employees and seem to be driven by religious beliefs and norms among some Muslims. 

‘However, most employees are actually able to save in workplace pensions consistent with Islamic teachings. Employees offered defined contribution plans typically have the option of choosing a Sharia-compliant fund, while defined benefit pensions prevalent in the public sector are typically considered Sharia-compliant. 

‘The government, employers and the pensions industry should therefore 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.’

Ethnic differences in private pension participation after automatic enrolment

Original article link: https://ifs.org.uk/news/employees-pakistani-or-bangladeshi-ethnic-origin-almost-twice-likely-opt-out-workplace

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