Top banks in tight race for Sh31bn pension deal

Top banks are caught in a heated race for a lucrative contract to keep more than Sh31.2 billion in annual pension contributions by public servants following the rollout of the fund on January 1.

The National Treasury is set to pick three custodians of the billions collected from more than 350,000 civil servants, including police officers and teachers who started contributing to their own pension saving scheme from last month.

Bids for the custodian job closed on Wednesday with the Treasury set to begin evaluating the submissions.

“The top three ranked financial institutions will be recommended to be the custodians for the public service superannuation fund for each lot,” says Treasury.

As at 2020, there were 11 officially registered custodians of pension funds including; Bank of Africa, NCBA Bank #ticker:NCBA, Equity Bank #ticker:EQTY, I&M Bank #ticker:I&M, KCB Bank #ticker:KCB, National Bank of Kenya #ticker:NBK)and Prime Bank.

Others are SBM Bank, Stanbic Bank #ticker:SBIC, Standard Chartered Bank #ticker:SCBK, and Co-operative Bank #ticker: COOP.

Sources said all top banks tabled applications for the contract even as civil servants had their first 7.5 per cent pay cut in January as they started contributing to their pension savings scheme—ending 12 years of postponement. The idea was mooted in 2008.

Treasury Principal Secretary Julius Muia declined to comment on the selection of custodians to handle funds from the Public Service Superannuation Scheme (PSSS).

“It is too early to provide details on the bids or bidders…. the procurement is still in early stages” he told the Business Daily on Friday.

In the tender documents, Treasury said the custodian will be expected to “hold pension funds and assets in safe custody on trust for the members and beneficiaries of the retirement savings account.”

Treasury says that the PSSS will initially have about 350,000 members, with a combined employer and employee monthly contribution projected at Sh2.6 billion.

The scheme covers respective eligible employees of the various agencies grouped as civil servants under the PSC (33,494), teachers under the TSC (127,000) and other personnel (99,053).

While a financial institution is allowed bid for all the lots, no single firm will be awarded more than one lot, tender documents direct.

Selected custodians will be expected to keep all the schemes’ assets and produce quarterly financial management reports on the fund.

The financial institutions will be allocated a portfolio to be the custodians for the fund based on the scores in metrics such as experience in custodial services for pension schemes with a fund value of at least Sh10 billion.

Treasury will also consider bank charges that will be incurred for the safe custody of the money as well as the interest to be earned by the National Treasury.

The custodians will also carry out statistical analysis on the investments and returns on investments from pension funds in its custody and provide the data to the fund administrator. 

Selected custodians will carry out the services for three years, which will be renewable on expiry by mutual agreement for a further period of three years depending on performance. 

Civil servants, unlike workers in the private sector, have not been contributing to their pension and their benefits were paid straight from taxes. 

Previous attempts, from as far as 2008, to transition from non-contributory scheme to a contributory one had been thwarted until last year when Treasury gazetted the change. 

The changes paved the way for Treasury to set up governance structures for the scheme, including the appointment of the board of trustees and fund managers.

Civil servants were initially to contribute two per cent of their monthly salary to the scheme in the first year, five per cent in the second and 7.5 per cent from the third year. 

But the staggering was shelved with workers now contributing 7.5 per cent of their pay in the first year, starting January 1, 2021.

Kenya’s pension time bomb has continued to tick despite the decision 10 years ago to raise the retirement age from 55 years to 60 years.

A 2009 actuarial study commissioned by government found that there was a contingent pension liability of Sh499 billion at the time. The liability nearly doubled to Sh990 billion in 2014.

The pension budget has increased by over three-fold in the last 10 years from Sh25 billion in 2008/09 to Sh86 billion in 2018/19 financial year. 

Earlier Treasury forecasts had shown the finance office will need Sh153 billion for pension payments in the year to June 2022.