Q: Why are defined benefit schemes not Zakatable?
A: Zakat is not due on a defined benefit scheme due to the following reasons:
The accumulated assets in the pension fund are not owned by the employee
The employee owns the rights to receive a pension, but not the assets being accumulated to pay those pension obligations. A defined benefit pension is typically run, on behalf of the employer by the Board of Trustees, who are responsible for all aspects of the scheme. Thus, the fundamental condition of ownership is not found. Therefore, the employee is not responsible to pay Zakat on the pension fund as he does not own the contributions.
The employer bears the performance risk of a defined benefit scheme
In a defined benefit scheme, the investment and performance risk of the fund is borne by the employer. The employee, on the other hand, is entitled to a secure income after retirement by virtue of membership to a defined benefit scheme. Therefore, Zakat is not binding on the employee as he does not bear performance risk of the fund.
Salary deductions are not possessed by the employee
In a defined benefit scheme, salary deductions are never possessed by the employee.
The salary is deducted from his wages prior to possession. The salary remains a deferred salary owed to him. Zakat is not binding on unpossessed deferred salaries.
The scheme administrator is not an agent of the employee and nor is he delegated by the
In a defined benefit scheme, the employee does not delegate or select the scheme administrator. Instead, the scheme administrator acts on behalf of the Board of Trustees to manage the defined benefit scheme without any form of delegation or Wakalah (agency) from the employee. Therefore, possession and access are never realised for the employee. As a consequence, Zakat does not become obligatory on the employee.
And Allah knows best!
Mufti Faraz Adam