Retirees handed Sh500 increase in new pension review

Senior citizens who retired by last month from the public service will earn three per cent more in their pensions, raising the spending on retirees to Sh39 billion in the current financial year.

The Pensions Department said the monthly stipend will rise by Sh500 or three per cent, signalling increased burden of funding retirees as the Treasury dithers on introducing a defined contributory pension scheme.

The July pension payouts were delayed due to what the government termed as a re-organisation following the reduction of ministries from 42 to 18.

The payouts were eventually released on Friday last week with all banks expected to have credited the pensioners and dependants accounts by Tuesday. More than 218,000 people are paid the pension under a non-contributory scheme unlike the norm in the private sector.

According to the Institute of Economic Affairs, Sh37.8 billion was spent on pensions in the fiscal ended June 30. The three per cent increase would raise this to Sh39 billion assuming the same number of beneficiaries.

Retiring civil servants are entitled to an increment in their monthly payouts in line with the Pensions Increase Act that provides for an upward review of their earnings every two years.

The pension increase is pegged at the average inflation rate but capped at a maximum of three per cent, with the next increase falling due on July 1, 2015. The previous increases were also three per cent but the minimum amount was raised from Sh300 in 2009 to Sh400 in 2011.

The government has said it will implement the contributory scheme next year under reforms meant to guarantee reasonable monthly payments for life, helping address old age poverty.

Treasury secretary Henry Rotich said the government needed to set up the necessary administrative structures before embarking on the pension overhaul that is expected to ease the pressure on public finances.

(READ: NSSF set to raise workers’ monthly contributions)

Under the proposed contributory model, civil servants would pay two per cent of their salary to the new pension scheme in the first year, rising to five per cent in the second year and 7.5 per cent from the third year onwards.

The government would top up each worker’s monthly contribution with another 15 per cent of the salary and take out a life insurance policy worth a minimum of five times the member’s annual pensionable emoluments. The policy would come with disability benefits for each member of the scheme.

The pensions department said it had been allocated Sh6.9 billion to cover the  government’s part of the contributory scheme that was earlier expected to be rolled out in July but which has been pushed forward.

Cost of pensions

The enactment of the Public Service Superannuation Act 2012, gave the government legal backing to push through the changes that will help the Treasury cut the costs of pensions. The Pensions Department said it was ready to roll out the scheme once Mr Rotich gazettes it.

The government’s spending on social benefits — including pensions — is estimated to have risen to Sh44.6 billion in the year to July, rising 42 per cent from Sh31.4 billion the year before.

About 50,000 civil servants are set to retire over the next one year, signalling an even larger pension bill for the State whose total spending has expanded to Sh1.6 trillion in the current fiscal year. Among those set to retire are 32,000 public school teachers and 20,000 civil servants in various ministries and State agencies.

The government had in 2009 raised the retirement age by five years to 60 in a bid to buy more time as pension liabilities rose. Civil servants have been bracing for the conversion of the scheme for the past five years.

But the government’s attempts to effect the changes have been hampered by a lack of requisite laws and administrative structures to guide the process.

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