Civil servants to start paying for retirement dues

Civil servants will start contributing towards their retirement benefits in July, setting them up for a lower take-home pay that they have successfully resisted in the past five years.

The new plan, whose details are contained in a letter from the Treasury to the International Monetary Fund (IMF), requires civil servants to contribute two per cent of their salary to the retirement scheme in the first year, five per cent in the second and 7.5 per cent from the third year onwards.

“The pension reform, which replaces the defined benefit scheme (DBS) with a defined contribution scheme (DCS) for civil servants, is set to start on July 1, 2013,” the Treasury says in the letter.

The government, as the employer, will match every worker’s monthly contribution with another 15 per cent of his or her salary. The government will also take out and maintain a life insurance policy worth a minimum of five times the member’s annual pensionable emoluments.

The policy comes with disability benefits for each member of the scheme.

Migrating civil servants to a jointly funded retirement scheme is aimed at slowing down a heavy pension bill that has been rising by double digit margins annually.

“It [the contributory pension scheme] will reduce contingent liabilities by half over the medium term,” the government says in its letter to the IMF.

Estimates by the Treasury show that the total pension bill for the fiscal year 2013/14 would rise to Sh38.16 billion from the revised estimate of Sh28.14 billion for the current year ending June.

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

Kenya’s State employees have since independence enjoyed a defined benefit scheme that is fully paid for by the taxpayers through the Consolidated Fund.

The government has since 2008 attempted to convert that pension scheme to a contributory one but lack of requisite laws and structures to guide the process has prevented that from happening.

Last year’s enactment of the Public Service Superannuation Act 2012 has, however, strengthened the government’s hand, making it likely that the scheme will finally take effect on July 1.

“Commencement of the scheme will depend on the date appointed and gazetted by the Treasury Cabinet Secretary,” said Michael Obonyo, the spokesman for the Treasury’s Pension Department.

The Treasury is also required to set up governance structures for the scheme, including the appointment of the board of trustees and fund managers.

Civil servants joining the new retirement plan will have their past benefits transferred from the non-contributory scheme. The new scheme also allows employees to access part of their benefits even before the mandatory retirement age.

The law further allows government employees to transfer pension benefit credits from a former employer to another with a similar pension scheme.
Key unions representing civil servants have welcomed the new scheme terming it beneficial to the membership.

“We are looking forward to the commencement of the scheme as we agreed three years ago. We hope nothing has changed in terms of the provisions we agreed on,” said Tom Odege, the national chairman of the Union of Kenya Civil Servants (UKCS).

The Kenya National Union of Teachers (Knut) chairman Wilson Sossion termed the new scheme ‘particularly attractive’ in its offer of flexibility to members.

“Our earlier concerns with the scheme were adequately addressed. We initially had reservations about how the scheme would be managed but the structures have been laid out in law and that is no longer an issue,” said Mr Sossion.

The unions’ nod marks a departure from its earlier stand that the scheme could only take effect if the government compensates the workers for a less take-home through a pay rise and is seen as increasing the possibility of the scheme being implemented this time around.

The Treasury is required to establish the Public Service Superannuation Fund into which all contributions shall be paid.

The government is required to deduct monthly contributions from each member’s salary and pass it on to the fund’s custodian not later than 10 working days after the end of the month.

The fund will be run by a board of trustees headed by a chief executive and a chairman who shall be appointed by the Treasury Cabinet secretary.

The Public Service and the Treasury principal secretaries will serve on the board alongside representatives of the Teachers Service Commission, Public Service Commission and the National Police Service.

The board will also have a nominee each from Knut, the Kenya Union of Post Primary Education Teachers (Kuppet) and the UKSC.

The board’s manager will be required to develop a comprehensive strategy of investing and managing its funds and assets, giving regular updates on returns.

All workers who were not on permanent and pensionable terms of service but were contributing to the National Social Security Fund (NSSF) shall be admitted to the permanent and pensionable establishment.

The government is expected to ensure successful implementation of the contributory scheme in July to ease the budgetary strain arising from a huge wage bill, poor performance in tax revenue and high costs of establishing county governments.

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

This is because employees of the government aged 45 and above have the option of joining the new scheme or remaining in the old one, where the benefits paid are computed based on the length of service and the salaries earned.

Under the new scheme all benefits derived from the contributions made by the government to a member’s retirement savings account shall vest in the member after a period of five years at the rate of 50 per cent of the accumulated amount and increase by 10 per cent for each full year thereafter up to a maximum of 100 per cent after 10 years of service from the date of commencement of the Act or from the date of joining the scheme.

Where a member dies while in public service, the contributions by the government to the member’s retirement savings account shall immediately vest in the dependants.

Where a member retires upon attaining the age of 50 years, the contributions by the government shall immediately vest in the member.

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