New civil servants pension plan deferred for the third time

Civil servants have won a temporary reprieve from contributing to their upkeep in retirement after the government once again postponed a scheme that required them to do so beginning January.

The Treasury has suspended the contributory pension scheme by at least six months pending completion of administrative modalities needed for the roll-out.

Treasury secretary Henry Rotich said key institutions needed to successfully launch the scheme have yet to be established.

“We have not set up administrative units such as the board of trustees nor identified the fund managers,” he said. “We therefore thought it is only realistic that we move its implementation to the next financial year,” Mr Rotich said.

The decision temporarily spares government workers a pay cut they were to take with the pension contributions.

The suspension of the scheme, however, means the taxpayer will continue to bear the full burden of financing the retirement benefits of government workers that hit Sh96 billion last year.

Roll-out of the contributory pension scheme is especially critical to securing long-term sustainability of government finances that is struggling under the weight of a runaway wage bill now estimated to be more than 30 per cent of the national budget.

Civil servants will contribute two per cent of their monthly salary to the scheme in the first year, five per cent in the second and 7.5 per cent from the third year onwards.

READ: Pension time bomb returns after 5-year lull

The government will match the contributions with an amount equivalent to 15 per cent of every worker’s monthly pay. This is in addition to the Sh6.9 billion seed money it was to deposit in the scheme this year.

The Treasury allocated the amount in this year’s budget but the money has not been utilised.

Under the new retirement scheme, civil servants will also benefit from a government-sponsored life insurance cover worth a minimum of five times an individual’s annual pensionable emoluments.

The contributory scheme has since its inception in 2009 been dogged by numerous challenges that have seen its roll-out suspended twice.

The Treasury has in the past blamed the absence of proper administrative offices for the delays.

In November last year, Mr Rotich told the Business Daily that the Treasury’s pension department had appointed actuaries to help actualise the evasive scheme.

One of the main tasks that the experts were supposed to perform was to transfer the benefits of serving civil servants to the new scheme.

This was because there existed uncertainties as to how the State would handle employees aged above 45 years.

It had been proposed that such workers have the option of joining the new scheme or remain in the defined pension scheme and that their benefits be computed based on the length of service and the salaries earned.

Those aged below 45 years had no option but to join the new scheme. It has now emerged that the Treasury has yet to sort this out.

“We have not concluded discussions on the cut-off dates but are still trying to figure out the exact ages of employees who will have to join the contributory scheme and those who will go on with the current one,” Mr Rotich said.

The contributory pension scheme was initially mooted in 2009 as part of a two-pronged strategy to stop (or at least defuse) a looming wage bill crisis that has in the recent past continued to accelerate with the ballooning pension bill.

The second part of the plan was to delay the pension time bomb by as long as possible — a goal that saw the government move the retirement age from 55 to 60 years. 

Many employees, who were due to retire, took up the offer allowing the government some breathing room that has now run out. Employees who took up the offer turn 60 this year and must retire with their benefits as provided for in the current scheme that is fully financed by the taxpayer.

Budgetary estimates that Mr Rotich presented to Parliament in November last year show that a total of Sh45.9 billion will be paid out to pensioners this year under the defined benefit scheme (DBS).

The amount is expected to grow by 10 per cent to Sh50.5 billion in the 2015/2016 budget and Sh55.5 billion the following year.

Similarly, the cost of the contributory scheme is expected to continue rising at least until the 2016 budget, starting off at Sh16.9 billion this year and Sh17.5 billion next year before peaking at Sh19 billion in the 2016/2017 budget.

This means the Treasury will spend a total of Sh62 billion in pension payments in the next financial year for the two schemes.

“We have to implement the  defined contribution scheme next year (in January) even though the cost will be higher at the beginning, it will come down gradually over time,” said Mr Rotich.

Last week, Mr Rotich told the parliamentary Budget Committee that the Treasury would use the delay in implementing the contributory scheme to its advantage.

He said the government had been forced to rationalise the budget to cater for unforeseen expenditures arising from infrastructure, operations, maintenance and higher wage commitments.

READ: Infrastructure projects set to resume in mini budget

The commitments have caused a Sh121.8 billion financing hole that the unused contributory pension scheme funds would help plug.

“The recommended expenditure of Sh121.8 billion will result in a financing gap we propose to close as follows; rationalisation of non-recurrent expenditures, slow-moving projects and projects that have not started,” the minister said.

“It does not make sense to hold money which is not being used while it can be used elsewhere.”

Kenya’s public wage bill stands at Sh458 billion.

Mutava Musyimi, the Budget Committee chairman, said his team had expressed concern that the wage bill and pension payments accounted for a huge chunk of the government’s expenditure and that this was not sustainable when Mr Rotich appeared before the committee.

“I am aware that there is still a lot of push and shove going on involving workers, government agencies and the Labour ministry about the contributory scheme. This could be causing the delay but the committee has not yet interrogated the matter,” Mr Musyimi said.