Question:

Assalamualikum, please could you tell me if local government pension scheme are permissible to join. I work in a school for the local council. jazakAllah

The Fatwa

In the Name of Allah, the Most Gracious, the Most Merciful

The Answer

The Fiqh of the Answer

The report by Mufti Faraz Adam can be summarised as follows:

The Local Government Pension Scheme (LGPS) is a defined benefit pension scheme specifically designed for local government employees in the United Kingdom. It serves over six million members and provides retirement benefits based on a member’s salary and length of service. The scheme is financed through contributions from both employees and employers, supplemented by income from investments. It is administered by over eighty local pension funds, each responsible for managing and investing the contributions to ensure the scheme’s sustainability and to meet its obligations to members.[i]

An employment contract is an Ijārah contract from a Sharīʿah perspective. The term “Ijārah” in Arabic translates to “lease” and “hire.” In its essence, the Ijārah contract pertains to hiring benefits or services in return for a consideration, typically a monetary payment. This contract revolves around the concept of gaining a specific benefit or service for a predetermined period and price. When it comes to employment, the Ijārah contract outlines the relationship wherein the employer (Musta’jir) acquires the services or skills (Manfaʿah) of an employee (Ajīr) in return for wages or a salary, thereby leasing the services of the employee. Thus, the work done by the employee and the time they commit can be viewed as a service that the employer hires.

Imam al-Sughdī (d.461 AH) and others have categorised salaries into four types:

1. Immediate salaries (Muʿajjalah) are where the payment is immediate, and the employer does not have right to defer it.
2. Deferred salaries (Mu’ajjalah) are where payment is deferred, and the employee does not have the right to demand it before the stipulated time.
3. Periodic salaries (Munajjamah) are where wages are spread across time and the period of employment, neither party has the right to delay or hasten beyond this stipulation.
4. Salaries without a reference or measure as to when payment will occur (Maskūt ʿanhā). There are four types of this:
5. Distance-Based Salary: Payment is calculated and due based on the distance travelled during the work period.
6. Time-Based Salary: Payment is calculated and due based on the amount of time spent on the job.
7. Partial Completion Salary: If the work can yield benefits even when partially completed, payment is calculated and due based on the portion of work completed.
8. Completion-Dependent Salary: If the work only yields benefits when fully completed, no payment is due until the entire task is finished.[ii]

In the context of local government employees, salaries become due at stipulated times monthly. Hence, employees have a receivable owed to them. From a Sharīʿah perspective, the employee has a claim and receivable owed to them. This right and claim is against the employer, and not to any specific money or item as such. This means that employees do not own any specified monies in the accounts of the scheme employers; instead, the employer is responsible for delivering to them an amount equalling the outstanding debt.

The above is explicitly discussed and stated in Islamic legal works. Imam al-Sarakhsī (d.483 AH) states that wages become a debt obligation on the employer that is payable to an employee.[iii] As such, the employee has a claim and receivable due to him or her. Imam al-Shilbī (d.1021 AH) in his commentary on the famous Tabyīn al-Haqā’iq states that wages become a debt obligation due to the employee if the salary was to be paid at a particular time and the time has passed.[iv]

In the context of the LGPS, the pension members and employees are owed a debt that has accrued due to their service in their employment contracts. Pension members do not own the monies in employer accounts. They merely have a claim against the employers for the outstanding pension benefits.

The monies that are used to make pension contributions are not owned or controlled by the employee, so they do not own the specific monies being used to pay the pension or that are invested in the LGPS. Rather, the risk and ownership of the actual pension contributions reside with the employer. The employee is merely entitled to a sum. The pension contribution amount deducted from one’s wage slip is just a promise from the employer, that monies that have not been paid now, and will be paid in the future. Even though a member is making a ‘contribution’, in reality, the employer is making a deduction, and has retained this amount and will use these monies to invest in the LGPS.

Hence, where and how the monies are invested cannot be attributed to the pension members and employees, as the employees never takes control and risk of the deferred salary. Possession of the deferred salary is not realised for the employee. As a consequence, the activities of the funds and the investments are not ascribed to the employees and nor is that considered ‘their money’ technically. The pension members are not accountable from a Sharīʿah perspective on how and where the LGPS is invested. 

A question arises: Does ambiguity in the amount of pension benefits after retirement render the Ijārah contract voidable?

Mufti Muhammad Taqi Uthmani addresses this query in Fiqh al-Buyūʿ as follows: “If the deferred pension payments upon retirement are deemed deferred salary, then it is unknown; the employee does not know how much he will gain precisely upon retirement. This can be responded to and answered by the fact that this type of ambiguity does not lead to dispute as this has been calculated and based on calculations. This is now a widespread customary practice and does not cause any dispute. Such ambiguity can be overlooked and is not considered material. This is similar to issue in the books of Fiqh relating to paying a fee to use a public bath, where there is ambiguity in the length and amount of water that will be used, yet it is permitted.

A question can be raised on the lawfulness for Muslim employees to take their pension benefits from the fund if the underlying fund is not Sharīʿah compliant. The response to this is as follows:

1. Pension benefits are not necessarily all paid from investment income, rather the ultimate source of these benefits is either tax allocated to the local government to pay for expenses and overheads, or revenue generated by the private sector employees who are part of the LGPS.
2. Secondly, the way in which the LGPS technically works is that the contributions of the current members are used to pay retired members at present. Those funds were earned in a lawful manner given that the services are typically lawful or paid through taxation.
3. Even if the administering authority – on behalf of the scheme employer – used the revenue generated from the fund to pay pension benefits to retired members, it is acceptable for the retired employees to accept this payment from their employers.

From a Fiqh perspective, the money owed to employees is a debt on the scheme employers. Receiving payments from non-Muslims to fulfil debt obligations is permitted regardless of where they earned the money. Imam al-Qudūrī (d.428 AH) states that if a Muslim sold alcohol, and thereafter settled a debt owed to another with the income earned, it would be severely disliked for that Muslim to accept those funds from that Muslim. However, if the seller was a non-Muslim who owed a debt to a Muslim, and he earned an income selling alcohol, there is no issue for a Muslim to accept the payment despite the source of funds.[v]

However, where a circumstance develops such that, a significant debt owed to the broader Muslim community was being entirely funded from unlawful sources and based on the growth of unlawful industries over several decades and it is organised at a macro-level – which is the LGPS context – then despite the permissibility of accepting the payment at a micro-level, the macro-level cannot simply be overlooked. Such a construct does not sit well with the broader objectives of Sharīʿah and macro-guidance for the markets and economy that Sharīʿah envisions.

At present, Muslim members may continue being members of the LGPS, and retired Muslim members may continue to receive pension benefits. However, at the same time the LGPS is encouraged to develop a Sharīʿah-compliant fund or segregated asset allocation in the funds.

And Almighty Allah Alone Knows Best 

Maulana Inaamul Hasan Chothia
Trainee Mufti

Reviewed and approved by
Mufti Faraz Adam
Darul Iftaa Muadh ibn Jabal
www.darulfiqh.com 

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[i] https://www.gov.uk/government/publications/academy-trust-financial-management-good-practice-guides/local-government-pension-scheme-lgps

[ii] أنواع الأجرة

قال والأجرة على أربعة أوجه :

إما أن تكون معجلة أو مؤجلة أو منجمة أو مسكوتا عنها .

الأجرة المعجلة – فإن كانت معجلة فليس للمستأجر أن يؤجلها .

الأجرة المؤجلة – وإذا كانت مستأجلة فليس للأجير أن يستعجلها .

الأجرة المنجمة – فإذا كانت منجمة فليس لأحدهما أن يؤخر أو يقدم من نجمها .

الأجرة المسكوت عنها – وأما إذا كان مسكوتاً عنها فإنها تكون على أربعة أوجه:

أحدها، أن تكون الإجارة واقعة على المسير فمقدار ما سار وجبت الأجرة.

 والثاني أن تكون الإجارة واقعة على الوقت فبمقدار ما يمضي من الوقت تجب الأجرة.

والثالث، أن تكون واقعة على عمل يصلح أوله دون آخره فيجب له من الأجرة بمقدار ما عمل .

والرابع أن تكون واقعة على عمل لا يصلح أوله دون آخره، ولا ينتفع من أوله بدون آخره فإنه لا يجب له الأجر حتى يتم العمل ويفرغ منه . (النتف في الفتاوى)

[iii] لأن الأجر دين على المستأجر (المبسوط للسرخسي ج 30 ص 217)

[iv] وَأَمَّا إذَا وَجَبَتْ الْأُجْرَةُ بِمُضِيِّ الْوَقْتِ وَهِيَ دَيْنٌ فَلَا بَأْسَ بِالْبَرَاءَةِ وَالْهِبَةِ وَالصَّرْفِ؛ لِأَنَّهُ دَيْنٌ وَاجِبٌ كَسَائِرِ الدُّيُونِ. اهـ.  (تبيين الحقائق شرح كنز الدقائق وحاشية الشلبي ج 5 ص 108)

[v] قال في مسلم باع خمرا وأخذ ثمنها، وكان عليه دين: إنه يكره لصاحب الدين أن يقبض دينه من ثمن الخمر [إذا علم أنه من ثمن الخمر]، وإن كان البائع نصرانيا فلا بأس…لان المسلم لا يحل له بيع الخمر، فإذا أخذ الثمن فقد أخذه بغير حق، فيكره لصاحب الدين أخذه منه.

وأما النصراني إذا باع الخمر، فلا بأس أن يأخذ المسلم ثمنها منه؛ لما روي عن النبي صلى الله عليه وسلم أنه كتب في عهدهم: وأن يذروا الربا ولا يظهروا بيع الخمر في أمصار المسلمين، وهذا يدل على أنهم لا يمنعون من بيعها سرا.

وروي عن عمر أنه قال: ولوهم بيعها وخذوا العشر من أثمانها، وهذا يدل على جواز عقدهم عليها، وإذا جاز العقد فالثمن مأخوذ بحق، فيجوز للمسلم أن يقبضه. (شرح مختصر الكرخي للقدوري)