By Bernardo Vizcaino and Al-Zaquan Amer Hamzah
SYDNEY/KUALA LUMPUR (Reuters) - 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 sharia-compliant schemes, that could add between $160 billion and $190 billion 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 3.4 billion rupees ($32.4 million) 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 (KAR:MEBL), 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, favorable 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 (KAR:HBL).
"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 energized 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.
The vast majority of private pension assets in Turkey are conventional financial instruments. But Cuneyt Cicek, chief financial officer at Asya Emeklilik, the Islamic pension unit of Bank Asya (IST:ASYAB), predicted customer preferences could help Islamic pensions reach the target of 15 percent market share by 2023 that the government has set for Islamic banks overall.
Islamic pension products reached $175 million in assets as of September, according to Turkey's Capital Markets Board. That is equivalent to about 1.5 percent of the industry.
"The asset volume and number of participants in the system are likely to grow significantly with the incentives," said Cicek.
Asya Emeklilik is one of 17 conventional and Islamic pension firms in the Turkish system; it is the only full-fledged Islamic firm, although a few others offer sharia-compliant products.
Launched in May last year, Asya Emeklilik now has 102,043 clients and its fund size is 111.6 million lira ($55.0 million); at 1,092 lira, its average amount of assets per client is much smaller than the system's average of 6,086 lira.
However, the 17 firms will soon be joined by an Islamic venture between Al Baraka Turk (ALBRK.IS) and Kuveyt Turk, 62 percent owned by Kuwait Finance House (KUW:KFIN), which was announced in March.
Malaysia is the most recent entrant to the private pension business, last year launching a Private Retirement Scheme (PRS) which now has 13 Islamic funds out of 36. Authorities are considering additional incentives for the industry.
"Some of the measures reviewed include a proposal for higher tax incentives or a government co-contribution for specific target markets, such as for the younger demographic," Ranjit Singh, Securities Commission chairman, said in a June speech.
The PRS now has 30,500 account holders with total net assets - both conventional and Islamic - of 97.5 million ringgit ($29.8 million), Singh said. The Securities Commission has estimated the overall industry could grow to as much as 30.9 billion ringgit in ten years.
Growth in Islamic pensions could accelerate if governments move beyond schemes based on voluntary contributions and actively promote employer-sponsored and state-owned pension plans. Malaysia is encouraging employer engagement, with the Securities Commission contributing to the PRS of its own staff.
Malaysia, Saudi Arabia, Qatar, the United Arab Emirates and Bahrain are among countries which may eventually carve out sharia-compliant tranches from their state-owned pension funds, said E&Y's Nazim. "Some of the funds are already considering this."
The Malaysian government plans to channel 7 billion ringgit from the state's Employees Provident Fund to Islamic fund managers.
However, a shortage of top-bracket Islamic asset management firms that could handle such inflows is a major bottleneck, Nazim said.
"The trend is positive but the size of the Islamic fund management industry is miniscule compared to the requirements of the pension industry. This is the primary challenge."
(Additional reporting by Nevzat Devranoglu in Istanbul; Editing by Andrew Torchia)
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