Treasury pumps Sh4bn more into pension fund

The rising number of civil servants leaving at the end of the five-year retirement freeze has forced the Treasury to seek an additional Sh4 billion for pension, underlining the growing social security burden on taxpayers.

The mini-budget that was tabled in Parliament last week shows that the spending on civil servants’ pension is expected to increase 26 per cent or Sh4 billion above the Sh15.2 billion the Treasury set aside for retirees in the current financial year.

“There was an extension of the five-year rule whose implication is being felt now and besides, there is usually a pension adjustment of 2.5 per cent every two years,” said Francis Anyona, the director of budget at the Treasury.

“This (extra Sh4 billion) is to cover for the next four months as the expense was high due to age-60 retirees.”

The freeze on retirement was imposed in 2009 when the age for leaving the civil service was increased from 55 to 60 years to slow down the rising pension bill.

More than 20,000 civil servants started retiring annually from last year, forcing the Treasury to set aside billions of shillings to finance the upkeep of retirees who do not contribute for their pension.

The Treasury’s estimates show that the annual pension bill could hit Sh42.9 billion in the current financial year ending June and will rise to Sh66 billion in the next fiscal year, making it one the largest budget items. The bill has risen from Sh15 billion in 2002.

READ: Pension headache for State as 32pc of workers retire

Economists warn that the pension crisis will grow more acute because the government has delayed plans to have civil servants contribute to a fund that will pay for their retirement.

The Public Service Commission (PSC) says that nearly a third of civil servants are above 50 years.

This will derail government efforts to shift public spending to farming and building roads, ports, railways and power plants among other productive sectors of the economy to jumpstart the slowing economy.

“The sooner civil servants start shouldering their pension burden the better for the economy as this will ease budgetary pressures and free up cash for development,” said Kwame Owino, the chief executive of the Institute of Economic Affairs.

Kenya’s government employees have since independence enjoyed retirement benefits that are fully paid for by the taxpayers through the Consolidated Fund.

Civil servants are to start contributing for their upkeep in retirement in a move that is expected to reduce taxpayers’ exposure to the burden of financing their pension – which is expected to cross the Sh100 billion mark in five years.

The contributory pension scheme was initially mooted in 2009 as part of a two-pronged strategy to stop a looming wage bill crisis as pension payments continued to balloon but its rollout has been suspended more than thrice.

The increase of retirement age from 55 to 60 years was part of the government’s plan to slow down the rising pension bill as it launched the contributory scheme.

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.

The government will match the contributions with an amount equivalent to 15 per cent of every worker’s monthly pay.

This means that the workers’ benefits will be paid from the fund and determined by the performance of the scheme.

Presently, civil servants’ monthly pension is based on their last salary and years spent working for the government.

Civil servants aged above 45 were given the freedom to either join the contributory scheme or remain in the current free model that shields them from taking a pay cut.

The PSC report indicates that 48 per cent of public servants are above 45 years, signalling a larger pension bill.