More pain for taxpayers as pension burden hits Sh71bn

Money Markets

The Treasury Building in Nairobi. FILE  

By VICTOR JUMA

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Summary

• Part of the pension time bomb build-up has been attributed to the government’s failure to push through necessary reforms, including kick-starting the long awaited contributory pension scheme.
• The time bomb has continued to grow despite the decision eight years ago to increase the retirement age from 55 years to 60 years.
• There is no pre-funding of the pension liabilities and the government runs the scheme on a pay-as-you-go basis using revenue collections.

Kenya’s public pension bill is set to rise 29.1 per cent to Sh71.8 billion in the coming fiscal year, marking the first in a series of sharp increments that will see taxpayers fork out Sh104.4 billion in 2019/20 to keep retired civil servants comfortable in old age.

Part of the pension time bomb build-up has been attributed to the government’s failure to push through necessary reforms, including kick-starting the long awaited contributory pension scheme.

The time bomb has continued to grow despite the decision eight years ago to increase the retirement age from 55 years to 60 years.

The move was meant to slow down the number of retirees entering the pension pool and offer the government some headroom to set up the contributory pension scheme, but the latest budget estimates show it has not reduced taxpayers’ burden.

The estimates show that total payouts to retired, injured or deceased public servants and their dependants will rise from Sh55.6 billion in the current financial year to Sh71.8 billion in the next budget.

At Sh71.8 billion, the amount is equivalent to about one per cent of the country’s productivity or gross domestic product (GDP) and dwarfs the Health ministry’s Sh61.6 billion allocation.  

The amount will then jump to Sh86.2 billion and Sh104.4 billion in fiscal 2018/19 and 2019/20 respectively, underlining the looming increase in the burden of the defined benefits scheme at a time when more civil servants have been hired to fill posts created by the 2010 Constitution.

There is no pre-funding of the pension liabilities and the government runs the scheme on a pay-as-you-go basis using revenue collections.

The bulk of the payouts are in the form of commuted pension –amounts pensioners elect to receive in lump sum—  a choice that has minimised the benefit of drawing out the entitlements over years.

Commuted pension, for instance, will rise from the current Sh28.5 billion to Sh37.7 billion in the next financial year while ordinary pension will jump from Sh26.8 billion to Sh33.8 billion in the same period.

The entitlements are in various forms, including service pension and gratuity that fall due on fulfilment of certain conditions.

Served minimum number of years

Pension is payable to those who have served the minimum number of years –at least 10 years for most civil servants and 12 years for subordinate forest guards, prison and police officers.

Those who have been compelled to retire early as a result of restructuring in the public service or on medical grounds are also entitled to receive the benefits.

The entitlements are not transferable and individuals who quit government employment before retirement automatically forfeit them.

The effective pension granted is a fraction of the pensionable pay at the time of one’s retirement, meaning the looming increase in public service salaries starting July will further inflate the pension bill.

Teachers take up the bulk of the entitlements in the defined benefit scheme that is estimated to cover more than half a million individuals, including nearly 200,000 pensioners.

More than 10,000 individuals join the pension pool each year upon retirement. Payouts to retired teachers and other public servants is projected to rise steadily from Sh19.2 billion this year to Sh30.7 billion in 2019/20 while disbursements to former military personnel will more than double from Sh5 billion to Sh10.3 billion over the same period.

The government has failed to move the current scheme to a defined contribution plan, a reform that has been put hold since 2013 and which would have eased pressure on taxpayers in the long term.

Under the scheme, civil servants were to 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, as the employer, was to match every worker’s monthly contribution with another 15 per cent of the salary.

Life insurance
The State was also to take out and maintain a life insurance policy worth a minimum of five times the member’s annual pensionable emoluments. The policy also envisaged disability benefits for each member of the scheme.

Those aged 45 and above were to be given the option of joining the proposed scheme or remaining in the current one where benefits paid are computed based on the length of service and salary in the final year.

Failure to implement the reforms is seen as arising from the fear of a backlash from civil servants to whom the monthly contributions would amount to a pay cut.

The 2010 Constitution also guaranteed a section of public servants that any pension changes will not leave them worse off, raising another hurdle in passing reforms.

“The law applicable to pensions in respect of holders of constitutional offices under the former Constitution shall be either the law that was in force at the date on which those benefits were granted or any law in force at a later date that is not less favourable to the person,” the Constitution says.

By keeping the status quo, the government is betting on increased economic growth to generate revenues sufficient to fund the growing pension bill and other expenditure.  

While taxpayers continue to bear the burden of compensating retired public servants, a substantial number of the recipients are also suffering from waiting for their stipends for years or even a decade, thanks to corruption and bureaucracy.

The delayed payments — captured by the Retirement Benefits Authority (RBA) and the Office of the Ombudsman’s reports — means the retirees’ benefits are eroded by inflation as they remain stuck in the bureaucratic wheel.