IMF warns of Kenya’s pensions time bomb

The International Monetary Fund (IMF) has warned of a ticking time bomb in Kenya’s pension sector as the gap between retirement dues and actual savings continues to grow wider.

Kenya, which in 2009 opted to delay the implosion by raising the retirement age for civil servants from 55 to 60, is now facing pension obligations that have ballooned to Sh2.6 trillion — about 30 percent of GDP. This is much higher than what Kenyans pay as taxes. The country’s tax collection aggregate currently stands at 15.6 percent of GDP.

The cost of settling pensions has risen 600 per cent in the last 15 years with an estimated 20,000 civil servants projected to retire every year.

Pension, which is paid from tax collections, rose from Sh86 billion in 2018 to Sh104 billion in 2019.

“There is potentially significant risks associated with sustainability of the pension scheme. The government has not undertaken a full actuarial valuation of the future obligations of its non-contributory defined benefits pension fund scheme,” the Bretton Woods lender adds, citing a World Bank study that has estimated this obligation to be close to 30 percent of GDP.

In Kenya, the Treasury only publishes the amount of money it sets aside to pay retired workers each year. The 2018 IMF Fiscal Monitor report had put the net present value of pension at Sh819 billion and noted that the Treasury had failed to make use of actuarial valuations to disclose its pension liabilities.

IMF, which reviewed the country’s finances last year in preparation for talks on a loan facility, wants the State to institute reforms that include changing the government scheme into a contributory model from tax funded. The Treasury has already taken first step to comply with this requirement. Details contained in the draft Budget policy statement for the 2020/2021 financial year shows that National Treasury has now committed to gazette the much delayed Public Service Superannuation Scheme (PSSS) Act 2012, which will require about 70,000 civil servants to start contributing to their pension saving in four months.

“The Act was assented to on May 9, 2012. The Cabinet Secretary is expected to appoint and gazette May 1, 2020 to be the commencement date of the Act,” the Treasury says.

Once the commencement date is gazetted, the legislation will pave way for civil servants to start contributing 7.5 percent of their monthly pensionable salary towards retirement, similar to the model used in the private sector. The government will then make a contribution for each civil servant at the rate of at least 15 percent of each member’s monthly pensionable salary. The PSSS also allows a member to make voluntary addition to their contributions towards their retirement benefits.

The State has also been pushing for changes in the National Social Security Fund (NSSF) Act 2013, proposing to raise contributions to 12 percent of workers’ salaries, up from the current uniform rate of Sh200. These provisions can help the Treasury net over Sh1 billion in collections each year.

In 2014, the Central Organisation of Trade Unions (Cotu) and the Federation of Kenya Employers (FKE) moved to court to block the law but have since agreed on an out-of-court settlement. Senior citizens in developed countries like France and Russia have resisted pension reforms through massive protests, which recently saw French President Emmanuel Macron withdraw plans to raise the full-benefits retirement age from 62 to 64.

Pension managers have over time raised the red flag on the feasibility of the unfunded pension scheme for civil servants, saying a funded scheme where civil servants contribute towards their retirement during their working life would be more sustainable. Civil servants have since independence enjoyed a defined benefit scheme that is fully paid for by taxpayers through the Consolidated Fund.

However, a huge State bureaucracy on implementation of devolution and workers seeking huge send-off packages have been pushing the retirement benefits bill higher each year.