IRP 69 – Exploring a Shari’ah-Compliant Model for Retirement Annuity Plans

Islamic insurance, hereafter referred to as takāful, is established on the concepts of mutual assistance (taʿāwun), mutual security (taḍāmun), and mutual protection and assurance among participating members, who agree to mutually guarantee and indemnify one another in the event of a defined occurrence. This foundational concept has been widely applied in structuring various takāful products, ranging from general to family takāful, with features that closely replicate those of conventional insurance. However, not all features of conventional insurance can be readily adopted or offered by takāful operators (TOs). This limitation is particularly evident in the current absence of a Sharīʿah-compliant model for retirement annuity plans with defined benefit features within the takāful industry.

The present study proposes that takāful operators adopt a hibah muʿallaqah (conditional gift) contract structured together with a wakālah (agency) contract in order to offer a Sharīʿah-compliant retirement annuity plan. At the outset, the participants agree to enter into a wakālah contract with a TO whereby the participants appoint the TO as an agent (wakīl) to manage the plan and invest the funds. Immediately, the participants agree to enter into hibah muʿallaqah whereby they will donate the accumulated contributions and their profits into a tabarruʿ fund. Upon reaching the age of retirement, or some other specified age, the participants shall be entitled, by their mutual agreement, to an income stream in the form of a series of regular payments.

The study identifies several potential Sharīʿah issues entangling the proposed model, mainly the issue of hibat al-thawāb (gift with expected compensation), the issue of gharar (uncertainty), features of maysir (gambling), and the issue of a defined unfortunate event. These issues have, however, been dealt with in the paper.

The issue of hibat al-thawāb arises since the participants who donate their funds stipulate a condition to enjoy a benefit from their donation in the form of periodic payouts during their lifetime. In this regard, the overwhelming majority of jurists are of the view that hibat al-thawāb is no longer considered to have the ruling of hibah (gift); rather, its characteristics resemble those of a muʿāwaḍah (exchange) contract; in this case, a sale contract. However, a narration from Imām Aḥmad ibn Ḥanbal and one view from the Shāfiʿī School held the opinion that hibat al-thawāb remains as hibah with all its ruling and Sharīʿah implications; it does not change in any way the status of hibah to an exchange contract.

The implication of the first view, that the ruling of hibat al-thawāb is the same as that of an exchange (muʿāwaḍah) contract, is that it would invoke the issue of ribā al-faḍl (the exchange of money for money in unequal amounts). This is because the money the participants receive in the form of regular payouts will almost inevitably be higher or lower than the actual amount contributed. It may also trigger the issue of ribā al-nasīʾah in that the exchange of money is not done on the spot; it is deferred. However, if we adopt the second view, that hibat al-thawāb remains a hibah contract, the issue of ribā is irrelevant. This is because “ribā exists only in muʿāwaḍāh contracts and is not applicable in the hibah contract, [which is a type of] tabarruʿ” (Affendī, 1411H, 2:428). For the purpose of this proposed structure, the latter view is adopted. Although the latter view is held by a minority of jurists, it is sound and strong.

The issue of gharar may emerge in regard to the total amount of payments which will be received by the participants. Since the annuity plan is intended to provide a regular income stream to the participants starting from their retirement age, or after a deferred period (if applicable), and lasting the rest of their lives, the total amount to be paid by the TO cannot be determined as it all depends upon the participants’ lifespans. If they live longer they will receive more, and vice versa. They may also enjoy an actual payment higher than the total contribution they accumulated. In this regard, the Ḥanafī, Shāfiʿī and Ḥanbalī Schools are of the opinion that the element of gharar affects the validity of the hibah contract (al-Mawsūʿah al-Fiqhiyyah, 1404-1427 AH). In contrast, the Mālikī School holds the view that the element of gharar in hibah does not invalidate the contract. For the purpose of this structure, the Mālikī view is adopted. Although this is a minority view, the Mālikī stand is sound and adopted by well-known international contemporary standard-issuing bodies. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), for example, allows the application of hibah muʿallaqah (which contains the element of uncertainty) for the purpose of providing an incentive (ḥāfiz) to the investment agent.

Another possible Sharīʿah issue which may arise in the proposed structure is the existence of gambling; i.e., features of a zero-sum game. Some participants will receive more benefits and some less. Some of them may even receive nothing or substantially less than what they have contributed. In all cases, the payment is tied to the demise of the participants; the payment ceases at the point they die. This implies the element of betting, which is prohibited by the Sharīʿah. However, if we refer to the proposed Sharīʿah structure above, it is clear that the element of gambling does not exist. This is because the characteristics of the proposed structure do not match the characteristics of the betting that is prohibited by the Sharīʿah. If a participant dies after the retirement age or after the deferred period (if any) but before receiving any payout, he is not losing his money. This is because all money in the fund is no longer owned by the participants since they have already entered into a tabarruʿ contract. However, in case the participant survives, he will be entitled to enjoy the benefit in the form of a series of payments from the tabarruʿ fund to which he contributed. The right to the financial benefit is based on a mutually agreed condition to benefit from their donations at the time the hibah contract is executed. Hence the periodic payment he receives cannot be considered as a gain at the expense of others; rather, it is made to meet the conditions agreed by all the participants.

The last Sharīʿah issue in the proposed structure is the definition of “unfortunate event”. One may question the validity of the incorporation of the tabarruʿ concept via hibah muʿallaqah in the proposed plan since the objective of mutual help may not be applicable given the fact that no element of unfortunate event actually occurs in the plan. This doubt may be addressed with the fact that the income for an employee who reaches retirement age will eventually cease, or at least be reduced, as he will not receive his usual monthly salary after retirement. However, he still needs to survive and bear the expenses of his dependents. Therefore, the doubt that no unfortunate event or defined financial loss exists in the annuity plan is in most cases incorrect. In fact, although the unfortunate event may not arise, the application of tabarruʿ in the proposed structure is still relevant and valid from a Sharīʿah point of view. It is because there is no requirement in hibat al-thawāb that consideration be contingent upon an unfortunate event. The Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) has resolved that the payment of takāful benefits from tabarruʿ funds can be made contingent upon specific events beyond those arising from a defined financial loss or a misfortune; for example, a survival benefit for retirement and an annuity plan.

Aside from the potential Sharīʿah issues, the development of a Sharīʿah-compliant retirement annuity plan is hindered by two major complex operational issues: longevity risk and the lack of investment avenues. As the retirement annuity plan is designed to provide benefit for a long term, there is a need for investment avenues offering a regular income stream for a long duration. Apparently, the conventional type of investment that is able to meet these requirements is bonds. Sukūk is a Sharīʿahcompliant investment instrument that resembles in most aspects the characteristics and features of conventional bonds. However, the availability of longterm sukūk in particular is very limited. According to Thomson Reuters, there are only 33 sukūk that have a maturity of 20-50 years available in the market. The rest are short- and medium-term sukūk; 189 sukūk have a maturity of less than one year; 1134 sukūk have a maturity of 1-9 years; and 302 sukūk have a maturity of 10-19 years. On the conventional side, there are approximately 7,093 bonds with tenures between 20 and 50 years (Thomson Reuters, 2014). In addition, the coupon (in the form of rental fee or profit sharing) for long-term sukūk (20 years and above) in the market is commonly distributed semi-annually, leading to mismatch and liquidity issues as the annuity requires a regular fixed-income stream, commonly on a monthly basis. In contrast, the coupons for long-term bonds are issued quarterly and sometimes even monthly.

Another major issue is longevity risk. The United Nations (UN) found that the aging population has undergone a significant increase from year to year throughout the world. The population segment aged 60 and above is the fastest growing segment in the world. It is expected that this number will triple by 2100: from 841 million in 2013 to 2 billion in 2050 and to 3 billion by 2100. The UN also reported that the population aged 80 years or above is projected to increase nearly sevenfold by 2100 (United Nations, 2013).