Pension time bomb returns after 5-year lull

Retired Teachers (1997) Group chairman Joseph Mwenja (left) and secretary Gidraph Kimatta refers to the Constitution during a past Press conference in Nakuru. The government is facing a pension time bomb. FILE 

By Mugambi Mutegi,

In Summary

• Taxpayers to shoulder a Sh62 billion retirement benefits burden that is to grow in the next 3 years.
• The money comprises a Sh45.9 billion provision for direct payment to retirees and Sh16.9 billion that the Treasury plans to pay into the defined contributory pension scheme for civil servants.

The pension time bomb, that stopped ticking in 2009 with a five-year extension of the retirement age for civil servants, is headed for a big jump next year when a large group of government workers are due to exit.

The taxpayers will bear a Sh62 billion public pension burden when the extension of the mandatory retirement age to 60 years ends, according to new estimates published by the Treasury.

The money comprises a Sh45.9 billion provision for direct payment to retirees and Sh16.9 billion that the Treasury plans to pay into the defined contributory pension scheme for civil servants set to become operational next year.

At Sh45.9 billion, next year’s pension budget will be 63 per cent higher than the Sh28.1 billion spent in the last financial year through the defined benefit scheme (DBS).

The expenditure plan is captured in the 2013 budget outlook paper that expects the two sets of expenditure to continue growing until 2017.

The big jump in pension expenditure is linked to the reopening of the retirement pipeline after a five year blockage that gave the government some breathing space. The first cohort of retirees that were due to leave public service in 2009 at the age of 55 will exit next year aged 60.

“We have to roll out the defined contribution scheme next year,” said Treasury secretary Henry Rotich.

“Even though the cost will be higher initially, we expect that to come down gradually,” he added.

Budgetary estimates that Mr Rotich presented to Parliament earlier this month show that the government expects to spend Sh50.5 billion on pension in the 2015/2016 fiscal year.

This figure is expected to rise further to Sh55.5 billion the following year or nearly double last year’s expenditure, assuming the entire allocation is spent.


Similarly, allocation to the contributory scheme is expected to continue growing, at least until the 2016.

The contributory scheme was mooted in 2009 as part of a double edged solution for the government as it sought to delay or defuse a looming pension crisis.

The second part of the plan was to delay the retirement of civil servants that led to the increase of the mandatory retirement age by five years beginning 2009.

The misfortune for the government is that the defined contribution scheme never took off as planned and increased public expenditure pressure in the wake of a ballooning pension bill.

“The new scheme is scheduled for implementation in January,” Mr Rotich said. “There are still pending administrative issues such as the appointment of a manager and its registration with the Retirement Benefits Authority.”

Under the new plan, civil servants will contribute two per cent of their salary to the retirement scheme in the first year, five per cent in the second and 7.5 per cent from the third year onwards.

The government plans to match every worker’s monthly contribution with 15 per cent equivalent of their salary, while taking out and maintaining a life insurance policy worth a minimum of five times each member’s annual pensionable emoluments.