Michael Omondi, All Africa

Kenya

December 13, 2007

Civil servants will start paying for their own pension next year as the government moves to shift part of its rising pension burden to its employees.

The new pension plan, which is known as a contributory scheme, is designed to ease the government’s growing exposure to future pension debt by asking workers to pay a portion of their monthly salary towards building their individual retirement funds. 

Kenya, like most African countries, runs an unfunded pension system which guarantees civil servants a lifetime pension without them contributing a single cent towards their retirement plan. 

Under the proposed scheme, State workers will contribute 7.5 per cent of their basic salary and the Government is to put in 12.5 per cent, according to sources at Treasury who did not want to be named because of the sensitivity of the matter.

Treasury is also considering making it compulsory for State employees to sign-up to the scheme besides pushing the retirement age to 60 from 55 years, which has the effect of delaying pension payments for five years.

The move is driven by the need to reduce the burden on the government by limiting its role to paying the 12.5 per cent with the performance of scheme and payment of pensions being left to a fund manager. 

The Business Daily has established the Directorate of Personnel Management (DPM) and the pension department is tying the loose ends of the pension plan, which will be unveiled in February.

The permanent secretary in the finance ministry Mr. Joseph Kinyua confirmed that a new pension plan was being worked on. 

“We are considering the new scheme for introduction in the next financial year,” Kinyua said. “It couldn’t be implemented this year since we have to consider the advice from actuaries.”

Talk of the new pension plans come months after Treasury withdrew a similar plan when only 20, 000 of the 405, 000 government workers agreed to the deal.
Ms. Ann Mugo, the Government’s director of pensions, said in June that the Government had put on hold the scheme after failing to get a quorum following nearly one year of marketing the scheme to the civil servants.

Pension experts attributed the low uptake to the fact that civil servants feared taking home less money after their contribution had been deducted from their salaries.

“The prospect of having their salary subjected to the pension deduction was not encouraging at all,” says Mr. James Oyugi the pensions manager at CFC Life. 

To guard against a repeat of the low uptake, Treasury made it mandatory for all civil servants to be part of the scheme.

This move would model the civil service pension scheme on the state owned National Social Security Fund (NSSF), which makes it mandatory for all employers with a staff number of more than five to make contributions to the fund. 
Experts have welcomed plans to make it compulsory for civil servants to sign up the funded scheme, arguing that most Kenyan workers would likely opt out of making pension contributions if made voluntary.

“Compulsion is the way to go and this has worked very well for the NSSF,” Mr. Oyugi said.

The shift to a contributory civil service retirement scheme means that workers will have to make a contribution just like the government to form funding kitty, which will be managed by a team of fund managers. 

This money will in turn be invested in various investments, including bonds, equities and in cash to generate an investment income that will further boost pension payouts and cut the injection of tax payers’ money meeting pension payments.

Mr. Oyugi reckons that civil servants, who are normally paid peanuts in the form of pensions, stands to get a higher pension payment as they benefit from the huge investment income generated by the funded kitty.

This is well illustrated by the robust growth of the funded private sector schemes that have continued to post high annual returns on the funds, thanks to the ongoing economic boom.

In 2006, for instance, that average rate of return for the industry stood at 19 per cent with some schemes posting returns of up to 30 per cent.

Today, civil services retirees have not done well because of poor pay and a survey by the Retirements Benefits Authority (RBA) - the industry regulator- indicates that over 5,000 of them die every year because of post-retirement poverty. 

In the rural areas where pensioners are single breadwinners and have no culture of saving for retirements, the deaths of these workers have left desperate families.

The need to have a contributory funded scheme is now more important than ever before as the government pension bill continues to eat a huge chunk of tax money. And policy analysts warn that the bill is set to grow bigger as tens of thousands of workers, who joined the civil service from the mid-70s, reach the maximum retirement age of 55.

This could reduce the money available for social services, like health and education, for a population that has more than a half aged below 25 years.

The government is this year expected to pay Sh24 billion to the pensioners and the bill rising at 15 per cent annually, which is estimated to hit Sh80 billion by 2016.

At least 20, 000 workers join the civil service pension’s payroll annually but the number is expected to increase drastically in the next decade, according to Ms. Mugo. 

Currently there are about 171, 000 pensioners, but this number is expected to grow to 230,000 in the next three years, imposing new demand on the management of the pension system and threatening to bankrupt the stated coffers.

With the government under pressure to shift expenditure to productive sectors of the economy, analysts believe that allocating such a huge amount to pensions for retired civil servants is not sustainable.

At 4 per cent of the total state expenditure of Sh580 billion for the year 2007/2008, Sh24 billion is seen as a very large spending amount. World Bank notes that the pension bill should not exceed 2.5 per cent of the budget.

Currently, pension expenditure ranks fifth behind the state, education, health and roads ministries on the items that take most of the Government’s taxes. 
Actuaries had sounded alarm that the pension expenditure will climb the state expenditure rankings in coming years, warning that meeting future pension obligations would be difficult and this will force the government to eat deep into the national coffers. 

With the pension bill expected to rise to 80 billion by 2017, the government would be forced to increase taxes aggressively to match the payments or the entire system could go broke if the economy does not grow much faster than anticipated. 

Faced with these pressures, the Treasury has opted for the funded contributory pension scheme to keep the bill under control and provide an adequate retirement nest egg for its employees, who receive peanuts in the form of pensions.

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