Treasury grapples with Sh800bn in pension liabilities

Money Markets

Treasury secretary Henry Rotich during the launch of Kenya Country Partnership Strategy report in June. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• Experts ask the State to effect contributory scheme to cut taxpayer losses.

The State says it is exploring ways of funding pension liabilities totalling a staggering Sh800 billion that go back several years.

 

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While the Treasury says one option is raising the cash through a bond, pension industry players say tax revenues and extending retirement age, as done earlier, are the other viable alternatives.

Market players though said the best solution was to move fast and implement the delayed contributory scheme given that the pension obligations have risen sharply from Sh500 billion five years ago.

Treasury secretary Henry Rotich said on Friday that the recognition bond (similar to one issued to National Bank for debts guaranteed to parastatals by the State) was a major option in consideration but other ways would also be explored.

“We are looking at the options available but the law does provide that we can use a recognition bond. We will look at the matter in the coming months and see what we can implement,” said Mr Rotich on the sidelines of a conference called by pension funds management firm, Alexander Forbes Kenya, in Nairobi.

The recognition bond was issued NBK to settle bad debts of Sh20 billion.

Market players said that taxes would be a more viable option given that the obligations do not have to be paid for at a go and could be provided in the annual national Budget annually until they are fully discharged.

“These obligations are high but tax is the first place that the government can look to raise revenues and pay them,” said Evans Nyagah, general manager for corporate business in the life and pensions division of UAP Insurance.

“They will just be spread over the coming years so it should not strain the annual Budget in any serious way.”

Mr Nyagah said that the government had made the right decision to move into the contributory benefit scheme because this would automatically curb any further increase in the non-funded scheme.

“We have seen the option of increasing retirement age as had been done earlier, but we are now tackling the matter through the contributory scheme. We will now use annuity scheme where the pension is paid over many years to the beneficiaries,” said Mr Nyagah.

According to the National Institute for Retirement Security based in Washington in the US, a funding gap in a pension scheme can be amortised over years.

“A funding gap does not need to be closed in a single year, but the payments can be spread out (or “amortised”) over a number of years — governmental accounting standards permit a pay-down period of up to 30 years.

In this way, many observers liken an unfunded liability to a mortgage, which is paid off over time,” says the institute in one of its publications.

In Kenya, the increase in the retirement age for government employees from 55 to 60 appears to have slowed down the need to pay the obligations.