Pension time bomb returns after 5-year lull

The pension time bomb, that stopped ticking in 2009 with a five-year extension of the retirement age for civil servants, is headed for a big jump next year when a large group of government workers are due to exit.

The taxpayers will bear a Sh62 billion public pension burden when the extension of the mandatory retirement age to 60 years ends, according to new estimates published by the Treasury.

The money comprises a Sh45.9 billion provision for direct payment to retirees and Sh16.9 billion that the Treasury plans to pay into the defined contributory pension scheme for civil servants set to become operational next year.

At Sh45.9 billion, next year’s pension budget will be 63 per cent higher than the Sh28.1 billion spent in the last financial year through the defined benefit scheme (DBS).

The expenditure plan is captured in the 2013 budget outlook paper that expects the two sets of expenditure to continue growing until 2017.

The big jump in pension expenditure is linked to the reopening of the retirement pipeline after a five year blockage that gave the government some breathing space. The first cohort of retirees that were due to leave public service in 2009 at the age of 55 will exit next year aged 60.

“We have to roll out the defined contribution scheme next year,” said Treasury secretary Henry Rotich. “Even though the cost will be higher initially, we expect that to come down gradually,” he added.

Budgetary estimates that Mr Rotich presented to Parliament earlier this month show that the government expects to spend Sh50.5 billion on pension in the 2015/2016 fiscal year.

This figure is expected to rise further to Sh55.5 billion the following year or nearly double last year’s expenditure, assuming the entire allocation is spent.
Similarly, allocation to the contributory scheme is expected to continue growing, at least until the 2016.

The contributory scheme was mooted in 2009 as part of a double edged solution for the government as it sought to delay or defuse a looming pension crisis.

The second part of the plan was to delay the retirement of civil servants that led to the increase of the mandatory retirement age by five years beginning 2009.

The misfortune for the government is that the defined contribution scheme never took off as planned and increased public expenditure pressure in the wake of a ballooning pension bill.

“The new scheme is scheduled for implementation in January,” Mr Rotich said. “There are still pending administrative issues such as the appointment of a manager and its registration with the Retirement Benefits Authority.”

Under the new plan, civil servants will 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 government plans to match every worker’s monthly contribution with 15 per cent equivalent of their salary, while taking out and maintaining a life insurance policy worth a minimum of five times each member’s annual pensionable emoluments.

READ: Civil servants to start paying for retirement dues

The plan will cost taxpayers Sh16.9 billion next year, Sh17.5 billion in the next before rising to Sh19 billion in the 2016/2017 budget. Implementation of the contributory scheme stalled in the wake of teething problems including the challenge of how to deal with employees aged above 45 years.

State employees aged 45 and above had the option of joining the contributory scheme or remaining in the old one that defined their benefits based on the length of service and the salaries earned.

The Treasury also undermined its own cause by failing to set up governance structures for the scheme including the appointment of the board of trustees and fund managers. These issues have since been resolved.

On Wednesday, Mr Rotich said the Treasury has appointed actuaries to advice on the transfer of benefits for serving civil servants to the new scheme. The scheme allows employees to access part of their benefits 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.

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

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

Last year’s enactment of the Public Service Superannuation Act has, however, strengthened the government’s hand to finally implement the scheme and help ease its budgetary strain.

Pensions have over the years weighed heavily on the government, which continues to bear full responsibility for the welfare of retired civil servants.

A recent report on parastatal reforms handed to President Kenyatta recommends the formation of a Sovereign Wealth Fund (SWF). This will be a State-owned investment fund or entity established from balance of payments surpluses, official foreign currency operations, fiscal surpluses, and/or receipts of commodity exports among other sources.

The fund will be used to, among other things, ease economic stress through stabilisation which involves “strengthening the nation’s long term financial position and financing public pensions expenditure.”