Why the default option usually fails

If you have never chosen an investment option, your super is in the default, usually called Balanced or MySuper. Roughly two thirds of Australians are in one, and it is not a bad product. It is diversified, cheap by global standards, and professionally run.

It is also, on an AAOIFI screen, close to unsalvageable. This lesson explains why, using the tools the Shariah-compliant vehicles lesson already gave you.

What a default balanced option holds

The composition varies between funds, but the shape is consistent. Around seventy percent in growth assets and thirty percent in defensive ones, spread across roughly these buckets:

• Australian shares, typically a broad index or close to it.
• International shares, same approach, global.
• Fixed interest, meaning government and corporate bonds.
• Cash, held in interest-bearing deposits.
• Unlisted assets: property, infrastructure and private equity.

Now apply the screening rules to that list, in the order they are usually applied.

The problems, in order of severity

The fixed interest and cash allocations are the decisive ones. A bond is a loan with interest attached, and cash held on deposit earns interest. Both are riba (the extra charged for the use of money) directly, not by association. Typically a quarter to a third of a balanced option sits here. This is not a threshold question that a screen might tolerate at the margins. It is the core mechanism of the holding.

The Australian shares allocation is dominated by banks. The ASX is unusually concentrated in financials, so a broad Australian index puts the major banks among its largest positions by construction. Conventional banking fails the business-activity screen outright, and this happens without anyone choosing it, because the index is built by size.

The international shares allocation fails on ratios rather than activity. Most global companies are not in a prohibited business, but many carry debt or interest-bearing deposits above the thresholds the Shariah-compliant vehicles lesson described. The failures are quieter but numerous.

Unlisted property and infrastructure are typically debt-financed. These assets are usually acquired with substantial conventional borrowing, which means the return partly reflects leverage on interest-bearing debt even where the underlying asset is uncontroversial.

Why this is worth more than it sounds

Compare it to everything else people worry about. Whether a particular bank account earns a few dollars of interest, whether a rewards card is acceptable, whether a specific stock is borderline. Those are real questions and the riba lesson dealt with them.

Against those, Amina's superannuation portfolio was projected to reach roughly $824,756 by age 60, on a modest salary with no voluntary contributions at all. That entire sum sits, for thirty years, in the option described above. If you are going to spend attention anywhere, the ratio of consequence to effort here is better than anywhere else in your finances, and it is a decision you make once rather than daily.

The disputed part, stated as disputed

Super is compulsory. You cannot decline it, and until relatively recently there were very few compliant options. That raises a real question that qualified scholars answer differently.

One position holds that compulsion creates a genuine necessity, that a person who cannot avoid the system is not culpable for its composition, and that the obligation is to move to a compliant option once one is genuinely available and to purify (calculating the tainted portion of your return and giving it away) in the meantime.

Another position holds that because compliant options now demonstrably exist in Australia and switching is a form anyone can complete, the necessity argument no longer applies, and remaining in a default is a choice rather than a constraint.

There are further differences about what purification should cover if you remain in a default for a period, and whether the calculation applies to the whole return or only to the identifiably interest-derived portion.

No position is taken on that here. What both positions agree on is the direction of travel: once a genuinely compliant option is available to you, the case for staying in the default is weak under either view. Take the specifics of your own situation to a scholar you trust.

What the site already covers

The detailed research on what Australian default options actually hold, fund by fund, with the screening applied and the sources cited, is in the guide Is my super halal?. That guide is maintained and this lesson deliberately does not duplicate its figures, because fund holdings change and a dated snapshot here is worse than none.

Read that for the evidence. The next lesson deals with what to actually do about it, which is a narrower and more practical question than it first appears.