By JEVANS NYABIAGE

More than 20,000 civil servants and teachers are set to retire next year, which is expected to plunge the Government into a pension expenditure crisis.
Starting April 1, 2014, the senior workers will exit the public service, following the expiry of a five-year extension period on the retirement age.
In April 2009, former Public Service Head Francis Muthaura introduced a new policy that raised the retirement age from 55 to 60 in the hope that this would ease the strain on the pensions bill.
Another five years
The affected workers welcomed the decision as it meant another five years on the payroll, while the Government tapped into the workers’ experience for longer and put off its bills.
The downside, however, is that next year, many more civil servants will be hitting 60. And worse, most of them are exiting the public service at much higher salaries — meaning the pension liability has also shot up.
“This had the impact of deferring some of the pensions outgo, and as the individuals now approach their 60th birthday, it is anticipated that there will be a spike in the Government’s pensions expenditure,” Alexander Forbes East Africa Managing Director Sundeep Raichura said.
However, Raichura added that it is important to appreciate that whereas raising the retirement age does increase the level of pension for public service employees (from the longer period of service and higher salaries), the increase in retirement age helped to reduce the overall level of unfunded liabilities.
Pension analysts have, however, faulted the decision to increase the retirement age without restructuring the Civil Service Pension Scheme, which remains non-contributory, accelerating the pensions crisis.
“This effectively means that the pensions-in-payment liability has increased to Sh38.2 billion for the next financial year,” Pensions Advisory Centre Executive Director Fred Nyayieka said.
“Why would the Government want to enslave future generations by placing the burden of civil servants’ pension on them when other Kenyans continue to save for their retirement?”
In 2009, the pensions bill stood at Sh24 billion, but has now increased by 59 per cent to Sh38.2 billion. 
Public sector workers have also been agitating for higher pay, which has seen their salaries outpace those in the private sector.
Average earnings
According to the Kenya National Bureau of Statistics’ Economic Survey 2013, the annual average earnings in the private sector grew by 4 per cent to Sh420,578 last year, up from Sh404,546 the previous year.
The public sector, however, had annual average wage earnings of Sh460,664.
This means that the average pay for a Government employee is Sh38,333 per month, while a private sector worker takes home Sh35,048 per month.
But what may best explain the growing attractiveness of Government jobs is the fact that over the past three years, the pay gap between public and private sectors has been widening.
The Government overtook the private sector in pay in 2010. At the time, the difference in annual pay was about Sh10,000. This increased to over Sh27,000 in 2011, and last year, the gap rose to Sh40,000, growing four-fold in three years.
But with higher salaries comes an increased pensions bill that taxpayers have to foot.
For the 2013/14 financial year, National Treasury Cabinet Secretary Henry Rotich has set aside Sh38.2 billion for pension payouts, a 36 per cent jump from the revised estimates of Sh28.14 billion for the current financial year ending this month.
But with the anticipated rise in retirement numbers next year, this amount is expected to go up.
The situation has been compounded by a decision to pay Sh16.7 billion in outstanding retirement arrears to teachers over a five-year period, beginning last year.
The ballooning pensions bill continues to affect the Government’s ability to invest in development projects as more resources are directed towards social welfare.
Pension managers have over time raised the red flag on the feasibility of the unfunded pension scheme for civil servants, saying a funded scheme where civil servants contribute towards their retirement during their working life would be more sustainable.
Requisite laws
Civil servants have since independence enjoyed a defined benefit scheme that is fully paid for by taxpayers through the Consolidated Fund.
Since 2008, the State has attempted to convert the pension scheme into a contributory one, but a lack of requisite laws and structures to guide the process has prevented this from happening.
However, last year’s enactment of the Public Service Superannuation Act 2012 has strengthened the Government’s hand, making it likely that the scheme will take effect this year, even though the legislation is clouded by controversy.
The new scheme will enable the more than 500,000 civil servants to start saving for their retirement, shifting the burden of ensuring social security from the State to the workers.
Although Treasury has not gazetted the commencement date of the scheme, sources indicate that it is targeting July 1, this year.
But as things stand, this deadline could be missed.
Treasury has yet to put in place governance structures — like appointing a board of trustees or fund managers — or the administration mechanisms required before contributions from both employees and employers can start being collected.
However, according to Mr Micheal Obonyo, the public relations officer at the Pensions Department, Treasury, of the Sh38.2 billion pension budget for 2013/14 fiscal year, the Government has allocated Sh6.9 billion to roll out the new scheme.
“The contributory scheme is due to commence as soon as the Cabinet Secretary for the National Treasury gazettes the commencement date of the scheme as stipulated in the Public Service Superannuation Act 2012,” Obonyo told Business Beat.
The plan will see the workers 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, will top up every employee’s monthly contribution with 15 per cent of his or her salary.
life insurance
It will also take out and maintain a life insurance policy worth a minimum of five times a member’s annual pensionable emolument.
The policy also comes with disability benefits for members.
The decision to convert the civil servants’ pension scheme into a jointly funded retirement scheme is aimed at easing the pensions bill that has been rising by double digit margins.
In the current financial year, for instance, Treasury is spending at least Sh34.5 billion to settle its pension obligations, translating to more than three per cent of the Sh1.15 trillion Budget.
This is above the 2.5 per cent maximum recommended by the World Bank.
The current unfunded Public Service scheme is sometimes called a pay-as-you-go scheme, where pension expenditure is met through Government revenue.
“The overall effect on Government pension expenditure will depend on how the implementation of the new scheme is undertaken and the changes, if any, that may apply to the current arrangements,” Raichura said.
“The level of pension expenditure in the Government scheme is a cause for concern. It has been rising rapidly in the last decade. The increase in retirement age gave a temporary reprieve, but unless the status quo is changed, it is expected to continue to increase at a rapid rate.”
However, Raichura pointed out that what is important is the level of pensions expenditure relative to GDP, and to the extent that the economy can grow at a faster rate, then it may be less of a concern. 
“Nevertheless there is the need to review the current Government pensions system and ensure its sustainability in light of the tight fiscal position and the competing demands on Government spending. There is need to address the benefit structure of the current system urgently,” he added. 
The new Government must keep the pressures on the fiscal purse sustainable while also giving priority to this matter so that current and future public service retirees can enjoy a decent retirement.
Budget speech
In his Budget speech on June 13, Rotich said that the Government plans to overhaul the Retirement Benefits Authority Act.
Although important, analysts say the Government may be missing the mark in setting its priorities.
They say the most pressing need in the sector is implementing the proposed public sector superannuation scheme.
“The decision by the Cabinet Secretary responsible for the National Treasury to only await amendments to the Retirement Benefits Act is regrettable,” said Nyayieka.
He added that, coming at a time when the Jubilee Government has renewed its commitment to achieving higher economic growth, it is not lost to industry observers that the State has ignored a very important sector.
Any reforms in the economy without an immediate comprehensive review of the national pensions policy are bound to fail in the long term, he said.
“It may not be true that by amending the Retirement Benefits Act the Government will achieve the desired objective. A quick review of the Act reveals a very good piece of legislation. However, it is the RBA that may have failed in achieving its mandate,” Nyayieka added.
For instance, more than 16 years after enactment of the Act, Kenya still lacks a national pensions policy, a mandate of the Authority.
Social security
As a result, the Government has resorted to haphazard social security programmes, like giving elderly persons cash.
“On cash transfers to elderly persons, the monetary provision has been increasing every financial year. This, again, exemplifies a lack of policy on the part of the Government,” he said.
The programme currently lacks both legal and management frameworks.
“It is the lack of the aforementioned that enables some people to receive the benefit while equally deserving and eligible citizens do not even know of its existence. The irony of it all is that the monies are paid from national revenues,” Nyayieka noted.
He added that while the introduction of social security benefits should be lauded, the current arrangement needs to be treated with caution, and if possible, deferred until a proper management and legal framework is formulated.
“In my opinion a comprehensive review of the NSSF Act should be given priority as social security benefits should be paid by it, funding sources notwithstanding,” he said.