Pension payouts hit a record Sh20.4 billion

Pension and gratuity payouts hit a record high of Sh20.44 billion in the first quarter of the current financial year, new data shows, even as the Treasury raced to clear a backlog and honour a court award to a group of retired teachers.

Statistics by the office of the Controller of Budget (CoB) shows that the value of retirement perks paid out to civil servants jumped 33.33 percent in July-September 2020 from Sh15.36 billion in a similar window of 2019 -- exposing the pension burden facing the government.

Michael Kagika, the Director of Pensions at The National Treasury, attributed the Sh5.08 billion jump to a court ruling that led to the revision of pension claims for teachers who retired between 1997 and 2003.

“Teachers who retired between July 1, 1997 and June 30, 2003 went to court and had a revision of their pension,” he told the Business Daily Monday.

“After the judgment, what this meant was that the employer (Teachers Service Commission) had to review the list and this resulted in significant increase in the pension claims. We are paying most of the claims now.”

The High Court in 2019 upheld a ruling in which the Teachers Service Commission (TSC) was ordered to process pensions for more than 50,000 teachers who retired between July 1,1997 and June 30,2003 based on salaries awarded in the 1997 agreement.

The TSC had unsuccessfully sought to overturn an October 23, 2008 by Justice David Maraga, claiming that the retired teachers had inflated the amount payable, contrary to the court’s direction of 2008. The teachers’ employer argued that the amount should have been Sh16.7 billion and not Sh43.2 billion but lost in its application to have the ruling set aside and the matter heard by a three-judge bench.

“After the judgment, what this meant was that the employer (Teachers Service Commission) had to review the list and this resulted significant increase in the pension claims. We are paying most of the claims now,” Mr Kagika said without providing details of the amount of pension payout to teachers in the July-September 2020 period.

He also attributed the jump to the Treasury’s bid to clear a backlog that has been in place for years as the State grappled with the rising burden of pension payouts.

The Treasury last year said that it would re-engineer and upgrade the pensions system to clear the pension payment backlog by December.

”We also had a backlog and increasing our efficiencies has also led to the rise in pension payouts,” Mr Kagika said.

Pension payment for retired civil servants stood at Sh13.27 billion in the first quarter of the 2017/18 year but has now increased 54 percent to Sh20.44 billion in similar period over the four years.

The jump in pension payouts comes at a time the State rolled out the long-awaited Public Service Superannuation Scheme (PSSS) where all civil servants make monthly contributions for their pension starting with this month’s salary.

More than 530,000 civil servants, including police and teachers, will starting this month take a two percent cut from their salaries for their pension contribution.

The contribution will increase to five percent in the second year and 7.5 percent in the third year.

Under the scheme, civil servants will cede about Sh2.4 billion monthly or Sh28.8 billion annually to the fund that will emerge as Kenya’s largest pension scheme.

The government will match every worker’s monthly contribution at the rate of 7.5 percent of the pensionable salary.

Civil servants had for years not been contributing to their pension, with their benefits paid straight from public coffers.

The Treasury has warned that the pension burden remains a risk to the budget.

It has budgeted Sh119.19 billion towards retirees benefits in the current year to June, an amount which is nearly three-and-a half times more than the Sh27.71 billion seven years earlier.

In October 2019, more than 300,000 retired civil servants received a three percent pay rise, adding to the cost of keeping them comfortable in old age.

The adjustment was in keeping with the tradition of increasing the monthly pension by three percent every two years to match the rising cost of living.

The pension burden on the taxpayer has been piling over the years despite a knee-jerk decision in 2009 to raise the retirement age from 55 to 60, partly due to the Treasury’s failure to push through necessary reforms, including a contributory scheme.

The increase in the retirement age was meant to slow down the number of retirees entering the pension pool and offer the government headroom to set up the contributory pension scheme, which has been shelved several times.

The looming retirement of some 25,000 teachers before 2022 in addition to other civil servants exiting service in the coming years further add to the pension burden. Between March to September 2018, more than 50,000 people exited the civil service.