Employers may have to check whether the pension investment choices they offer are ethical and comply with Islamic law if staff request that they do so, DLA Piper Rudnick Gray Cary has warned.
However under different laws they could find they are damned if they do and damned if they don't.
Sandra Wallace, an employment partner in the Birmingham office of the law firm, cautioned that discrimination on the grounds of religion or belief is banned under the Employment Equality (Religion or Belief) Regulations 2003, and this applies equally to occupational pension schemes.
She said: "As a result, under both employment and pensions law, employers and trustees of occupational pension schemes cannot discriminate against an individual because of his or her religion or belief."
She said that DLA Piper had recently been asked to advise on the issue, specifically a company which had a defined contribution pension scheme, offering members a range of investment choices.
The issue was whether the company was obliged to provide a fund which was not only "ethical" but which would comply with Islamic law, following a request from employees.
Mrs Wallace said: "Clearly, certain investments such as alcohol, tobacco and pork products would be prohibited in an Islamic fund.
"Not only are Islamic mortgages being provided more widely, but the indications are that investment funds which comply with Islamic law may be increasing in availability."
She said that DLA Piper was advising employers to review the investment options they provided and undertake a cost-benefit analysis so that they could objectively justify their position.
"Progressive employers may choose to provide a fund of this type where doing so is perceived as a worthwhile component of their diversity strategy.
"In a defined contribution scheme the member accepts the investment risk. This type of Islamic fund is likely to perform less well than a mainstream equities fund and, accordingly, the employee should be advised to take independent financial advice before selecting this option."
In the case of defined benefit-schemes any cost-benefit analysis undertaken is unlikely to justify the whole scheme investing in this way.
Objective justification may be found in the fact that to change the investment strategy in this way may itself amount to a breach of the trustees' investment duties under the Pensions Act 1995, under which they must have regard to the suitability and diversification of the scheme's assets.
Mrs Wallace went on: "There is no case law yet on discrimination under the implied anti-discrimination rule in pension schemes but our expectations are that it is only a matter of time.
"In order to minimise the risk of claims all employers need to carry out an audit of their policies and practices to identify high risk areas and evaluate the business rationale behind the practices that could adversely impact on grounds of religion or belief."
