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New Pension Plan for Civil Servants

 

By Allan Odhiambo, Business Daily Africa 

 

September 18, 2008

 

Kenya

 

Image

Retirees at a meeting


East African finance ministers have committed to scrapping public service pensions across the region, and replacing them with new schemes that will require civil servants to contribute towards securing their retirement. 

The move, say the ministers, will save huge amounts of tax payers’ money and free up public funds for critical investments that the region needs to make to speed up economic growth.

And as a sweetener to all those entering the new, liberalised pension schemes, any money earned on their investments will be tax-free.

The decision to axe the public service pensions comes as part of a reinvigorated effort to raise the competitiveness of East Africa by overcoming hurdles of weak infrastructure and energy provisions.

This agreement was signed despite the recent failure by Kenya to implement a similar scheme for its public officers. 

During the past two years, the country has been trying to get its public officers to join a voluntary contributory pensions scheme without much success. 

But failure to get its employees to join the new scheme has left the government with a huge and rapidly growing pensions bill that is expected to hit Sh26 billion by end of next year.

A communiqué issued at the end of the 16th meeting of the EAC Council of Ministers in Arusha said all partner states will be required to liberalise their pensions sector “to allow for competition and enhance efficiency in the pension industry.” 

Analysts said compliance with this declaration would represent a big step towards policy convergence that has been lacking in East Africa’s integration effort. 

“Funded contributory schemes offer a chance for the State to save on tax payers’ contributions for reallocation to priority areas,” said James Oyugi, the pensions manager at CFC Life.

Poor infrastructure and high cost of energy have been cited among the key issues that are affecting the region’s competitiveness, but most governments lack the money to finance their development. 

In Kenya, the pressure of huge pensions payouts is already heavily felt with projections that the annual pension bill could hit the Sh26 billion during the 2009/10 fiscal year up from Sh23.3 billion currently

This pressure from the growth in pension bills is adequately captured by the fact that in 2002 it stood at Sh15 billion. And should the pension bill strike the Sh26 billion mark as projected, it will consume 3.4 per cent of the overall budget spending going by the expenditure plans for 2007/2008 that stood at Sh760 billion. 

This would be above the World Bank’s recommended 2.5 per cent. Statistics show that pension expenditure ranks sixth behind education, defence, roads, state, and health ministries in consuming tax money.

Treasury has been trying to make civil servants pay for their own pension in order to off-load the burden from the Government, but acceptance has been slow in coming. 

Though Finance Permanent Secretary Joseph Kinyua had indicated that the new contributory scheme would take effect in the current financial year, the Business Daily has established that the plans were shelved after only 20,000 out of an estimated 500,000 civil servants agreed to join the scheme. 

Most public officers cited reduced earnings after pension’s deductions from their pay cheques as reason for not signing up. 

Treasury said it plans to organise a national pensions conference to be held later in the year to drum up support for the new scheme. Adoption of the proposal now looks certain after the union of civil servants expressed satisfaction with its provisions.

“We have received the proposals and they are good for our members. We have consulted the Directorate of Personnel Management and they have even suggested that the retirement age should be pushed to 60 years,” said Just Mugo, Treasurer of the Union of Kenya Civil Servants (UKCS).

Under the current arrangement, the Government runs an unfunded pension system in which civil servants do not contribute, but are granted a lifetime pension .But under the contributory scheme; they will be expected to contribute to the scheme, which is to be managed by a team of professional fund managers. 

Treasury is proposing that public officers contribute 7.5 per cent of their basic salary while the government tops it up with a 12.5 per cent contribution to create the fund.

To spur productivity and profitability, the proposals envisaged that the money from the fund would be invested in various segments of the economy, including bonds, and equities to generate income that will further boost pension payouts and phase out the use of taxpayers’ money in pensions payments. 

“The funded contributory system gives a chance to participate in investment ventures that would boost the pension earnings of contributors at the end of the day,” said Mr Oyugi.

Other analysts further argued that the proposed system would boost accountability in pensions management because it has a clear formula of implementation that can easily be tracked by both the employers and employees.

This upfront remittance of contributions is also vital for speedy transaction because when one retires from service, there would be readily available funds to buy out the pension claims.

Most organisations in the private sector are currently operating the funded contributory scheme for the employees where workers made monthly contributions that were topped up at agreed ratios by their employers.

If realised, the new funded scheme would be similar to operations of the state-owned National Social Security Fund (NSSF), where it is mandatory for all employers with a staff number of more than five to make contributions to the fund.

Analysts said the blanket resolve by the EAC finance ministers to adopt the funded contributory pension scheme, is expected to push individual member countries to move in that direction in the spirit of regional integration.

“The wider approach as an EAC vehicle is certain to make the realisation of the proposed funded contributory scheme much easier because no country would want to remain in isolation as others move forward in line with regional integration,” an official of the EAC ministry, who declined to be named said.

Having launched a Customs Union in 2006, members of the EAC have made major unifying steps and today have several agreements of legal importance that have vastly eased cross-border movement of people, of trading and other economic transactions, including trading in shares and mergers and acquisitions. 

The community now looks up to a common market and a possible eventual political federation that would ensure the five-member bloc operates as a unit. 


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