Economy

Male State workers get January pay cut waiver

Money.

A man counts money. Male public servants, including teachers, police and military, will from January 2021 not suffer a pay cut when State workers start contributing for their pension savings. FILE PHOTO | NATION MEDIA GROUP

BDgeneric_logo

Summary

  • Male employees will be cushioned from the pay cuts because the State will waiver another two percent deduction for a fund labelled Widows and Children’s Pension Scheme (WCPS).
  • For female employees, it will be a double blow in a month when the Treasury will also withdraw the special reliefs that had been granted to cushion households and business from the economic shocks of the Covid-19 pandemic.
  • Monthly deductions to the civil servants pension scheme will increase to five percent of their pay in the second year and 7.5 percent in 2023.

Male public servants, including teachers, police and military, will from January not suffer a pay cut when State workers start contributing for their pension savings.

The employees attached to ministries and State agencies will see two percent of their salaries sliced for onward remittance to the soon-to-be-created Public Service Superannuation Scheme (PSSS) in the first year of fund.

But male employees will be cushioned from the pay cuts because the State will waiver another two percent deduction for a fund labelled Widows and Children’s Pension Scheme (WCPS).

Under WCPS, spouses of deceased male employees are guaranteed a share of their pension for life while children also get the pay up to the age of 24 years if the widow passes on.

Women employees do not contribute to the fund that pays out Sh4.3 billion annually to the widows and their children.

“As a male officer, you’ll not feel anything because in real sense there’s zero contribution (in the first year),” said Director of Pensions at the Treasury Michael Kagika.

“This is because the 2.0 percent you had been contributing to the WCPS appears to be the one which is being switched over to the new scheme. So it will be a very soft entry into the new scheme.”

For female employees, it will be a double blow in a month when the Treasury will also withdraw the special reliefs that had been granted to cushion households and business from the economic shocks of the Covid-19 pandemic.

The maximum pay-as-you-earn (PAYE) tax charge will revert to the previous 30 percent from the stop-gap 25 percent.

Workers on Sh50,000 pay stand to lose up to Sh4,241, while those earning Sh100,000 and Sh150,000 stand to lose Sh7,229 and Sh9,717, respectively in tax reliefs they have enjoyed since the Covid-19 relief package was implemented from May.

The Treasury reckons the tax reliefs were no longer sustainable owing to persistent revenue collection shortfalls amid a subdued economic activity which affected the implementation of the national budget.

The burden of paying for widows under the WCPS, which is partly funded by male employees, has been rising in recent years with the Treasury's allocation for the payout rising from Sh1.36 billion in the 2016 to Sh4.37 billion in the year ended June.

Monthly deductions to the civil servants pension scheme will increase to five percent of their pay in the second year and 7.5 percent in 2023.

The government will boost the contributions with an amount equivalent to 15 percent of every workers’ monthly pay.

The civil servants scheme will generate Sh2.2 billion monthly from contributions or Sh27 billion annually in what will emerge as Kenya’s largest pension scheme.

The Treasury says the new scheme is aimed at reducing the pension burden currently borne in whole by the exchequer, especially in the Covid-19 era that has seen revenue sources depleted.

Civil servants, unlike workers in the private sector, do not contribute to their pension; their benefits are paid straight from taxes.

The free benefits will increase the taxpayers’ pension burden to Sh121 billion in the year starting July from Sh15 billion in 2002.

Part of the pension burden has been attributed to the government’s failure to push through necessary reforms, including kick-starting the contributory pension scheme that was mooted eight years ago.

“Membership to the scheme will be mandatory to all new entrants upon commencement of the Act and all employees aged below 45 as at the date,” said a Treasury brief on the fund.

“Employees aged 45 years and above will have an option to join the scheme by completing the Public Service Superannuation Scheme option form.”

The Treasury is spending more to keep retired civil servants comfortable in retirement compared to health (Sh111 billion), water (Sh83.3 billion) and energy (Sh72 billion.)

The government had in 2017 timed the launch of the contributory pension scheme to coincide with a bumper review of public servants’ pay.

Civil servants’ basic pay increased by between 16 percent and 30 percent in a review that cost taxpayers Sh20 billion in the year starting July 2017, a rise that was expected to ease the pain of the pension contribution cut.

Past bids to slice a portion of the take-home pay for civil servants has been vigorously contested, leading to the delays in the implementation of the PSSS.

A 2009 actuarial study commissioned by the government found that there was a pension liability of Sh499 billion at the time owed to civil servants who have worked knowing the State would cater for the retirement costs. The liability nearly doubled to Sh990 billion in 2014.

“Benefits accrued prior to joining the new scheme shall be recognised in the form of an amount acknowledged through the issuance of a letter recognising accrued benefits at the date of joining the scheme under this Act,” said the Treasury brief.