Civil servants escape pay cut as new pension plan is shelved

Taxpayers will shoulder the ballooning civil servants’ pension burden for longer after the government shelved plans to introduce a contributory retirement scheme that would have seen state workers surrender a fraction of their salaries to a retirement savings fund. 

The Treasury had allocated Sh15 billion as seed money for the civil servants’ contributory pension scheme in the Budget Policy Statement released mid last month, but the amount has been removed from next year’s expenditure estimates that were tabled in Parliament last week.

The plan to migrate civil servants to a jointly funded retirement scheme was aimed at averting a budget crisis as the annual pension bill, which has been rising by double digit margins, touches Sh41 billion mark next year.

READ: Civil servants to enjoy life cover in new pension plan

Ann Mugo, the Pensions Secretary at the Treasury, said the contributory scheme has been put on hold because the law authorising the government to deduct civil servants’ salaries is not expected to be in place by July 1 — when contributions into the scheme were expected to start.

“It would take some time to set up the governance structures like appointing the board of trustees, fund managers and the administration mechanism before contributions from both employees and employers commence,” said Ms Mugo.

The Civil Servants Superannuation Bill, which sought to make it mandatory for all government workers below the age of 45 to contribute a percentage of their pay towards their retirement savings, is still at the committee stage in Parliament.

The government raised the retirement age for civil servants to 60 years from 55 in 2009 as it sought to re-organise their retirement scheme.
It is estimated that about 20,000 civil servants retire each year.

Benefits of the contributory scheme are, however, only likely to be felt after about 15 years when civil servants who are currently aged 45 and below go on retirement.

The Sh41 billion pension bill projected for next year represents a more than threefold jump since 2005.

Failure to implement the new scheme in the next financial year will deny the government a chance to use the five-year grace period it created to re-organise the retirement scheme.

The Permanent Secretary in the Ministry of Public Service, Titus Ndambuki, had earlier said that the new scheme was on course for launch in July.

“We are asking the Treasury to avail funding so that the scheme can take off in July according to plan - it is a very critical issue for the State,” said Mr Ndambuki, while acknowledging the there were no funds for the scheme in the draft Budget. “The growing pension bill is a big concern for the State”.

However, Ms Mugo said cash could be allocated in the supplementary budget later in the financial year to kick-start the scheme.

Workers above the age of 45 have an option to either join the new scheme or remain in the old one, where the benefits paid are computed based on the length of service and their salaries—also called a defined benefit scheme.