Retirement Benefit Authority stand. There are more 200,000 retirees drawing monthly pension from the government. Photo/FREDRICK ONYANGO
Plans by the Government to set up a contributory pension scheme for civil servants has stalled, leaving the retirement benefits time bomb that forced the government to push the retirement age to 60 years nearing explosion.
Treasury officials said the scheme, which was to come into force on Thursday next week, could not take off for lack of an appropriate law to support it.
It will now await the outcome of the vote on the Draft Constitution, according to Anne Mugo, the Director of Pensions.
A contributory pension scheme for civil servants has been a key plank in the government’s plan to reduce the retirement benefits burden on the Exchequer that has been diverting a large chunk of public funds from critical services and development project financing.
Treasury’s annual allocation to the public pension scheme has nearly doubled from Sh13 billion in 2005 to Sh26.5 billion in the current financial year to become one of the largest single allocations in the national budget.
This build up is expected to accelerate in the next 10 years as the Uhuru generation – those born at the time of Kenya’s independence in the early 1960s – attain the retirement age.
Collapse of the contributory pension scheme leaves the government with full responsibility over the welfare of retired civil servants – an obligation that is expected to cost the tax payer Sh30 billion annually by 2012.
Through the proposed Public Service Superannuation Scheme, the government was to gradually put the welfare of its employees in retirement into their own hands – by asking them to contribute a portion of their salaries to the new scheme.
The government as the employer was to get the scheme started with the allocation of Sh11.8 billion seed money in this year’s budget.
Finance minister Uhuru Kenyatta made no such allocation, denying the plan the initial push it needed to take off.
“There was no need of tying up money in the scheme when the necessary framework is not yet ready,” said Ms Mugo.
A contributory pension scheme was seen as the best means to slashing the pension burden on taxpayers but its fate was left hanging in the balance after the majority of the 443,000 government employees rejected it in favour of the status quo.
Opposition to the scheme among civil servants is mainly linked to the fact that it amounts to taking a pay cut compared to the current arrangement that leaves the government fully in charge of their welfare in retirement.
The failure of the scheme to take off in the next financial year will deny the government a chance to use the five-year grace period it got by extending the retirement age to 60 years to reorganise its finances in readiness for looming ballooning of pension obligations.
The Government had initially planned to transfer all new and current employees aged below 45 years to the scheme but strong opposition from the union forced Treasury to climb down from an earlier requirement that all civil servants become members of the scheme to make it optional.
Proposed changes to the law governing the scheme are contained in the Public Service Superannuation Bill 2010 that the Cabinet is expected to approve, after the August 4 referendum on the Constitution.
Under the proposed plan, civil servants were to contribute a fraction of their salary into a pension fund to be co-financed by the employer.
Past attempts to have civil servants voluntarily help build their egg-nest have attracted less than a quarter of the total number forcing the State to freeze the plan.
Pension managers have over time raised the red flag on the feasibility of the government’s pay-as-you-go pension scheme for civil servants, saying a funded scheme where civil servants contribute for their sunset years during their working life would be more sustainable.
“The government could consider a review of its financing structure including moving to a partially funded or fully funded system with time,” said Sundeep Raichura, the managing director of Alexander Forbes Consulting Actuaries. “This could take the form of redesigning the pension arrangements and creating a fund from which future service benefits are met whilst past benefits are retained on a pay as you go basis.”
Industry professionals estimate that contributions to a funded retirement benefits scheme would be sufficient to cater for new claims within five years of implementation.
Treasury handles an average of 200 new claims per month at a cost of about Sh500,000 in lump-sum payments for death gratuities on top of the monthly pension disbursement roll.
There are more 200,000 retirees drawing monthly pension from the government, including former employees of the disciplined forces, teachers, parliament, semi-autonomous state firms and even former employees of the colonial government.
Mr Tom Odege, the secretary general of the Union of Kenya Civil Servants, however, accuses the government of double-speak by failing to commute funds into the current scheme or allocate seed money to the proposed contributory scheme.
Shifting part of the rising pension burden to employees could reduce Treasury’s pension obligations and free the money currently tied in the retirement kitty for spending use in productive sectors of the economy such as the building of roads, ports, railways and power plants.
If well executed, the new scheme could also help the government to deal with the accrued pension burden that is attributable to civil servants, which is estimated to stand at over Sh45 billion.
Civil servants were initially expected to contribute two per cent of their salaries to the scheme with the government paying in a sum equivalent to 15 per cent of each employee’s salary.
The workers’ contribution to their retirement kitty was expected to rise to five per cent of their pay next year and ultimately to 7.5 per cent in 2012 when the scheme was expected to become fully operational.
The funds were to be held in trust by a board with representation from the government and civil service that is charged with the responsibility of finding a fund manager to invest the members’ contributions with the aim of having enough cash flows that would suffice the pension expenditure.
Experts said civil servants stand to gain from a well-managed contributory scheme that will raise the value of their take home by large margins.
“Compulsory or optional, the scheme has benefits that civil servants cannot afford to miss,” said James Oyugi, the head of pensions at CFC Life in a previous interview.
“But those joining must be made aware of the long-term investment risks that come with it,” said Mr Oyugi.
Kenya, like most African countries, has been running an unfunded pension system that guarantees civil servants a lifetime pension without them contributing a single cent towards their retirement plan.
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