Treasury faces expenditure crisis as 20,000 Kenya’s civil servants set to retire

NAIROBI, KENYA: James Mwangi Itothe retires in July, ending his 33-year-long career at the Judiciary when he reaches 60, the mandatory retirement age for civil servants.

In 1981 at the age of 27, Itothe, from Kiambu County, was employed as a clerk in the Judiciary, where he has worked since. “Although I earned an average salary, I am at peace with what I have done. I have taken my children to school and served my country,” he said.

Itothe says all is well with him but the Government now has to seek for billions of shillings to shoulder the pension burden of Itothe and thousands of other civil servants who will be retiring.

Itothe is among thousands of civil servants whose retirement was pushed back in 2009 by the then Government ostensibly for lack of money to pay their pensions.

Five years ago, the then Public Service Head Francis Muthaura, introduced a new policy that raised retirement age for civil servants from 55 to 60 hoping it would ease the strain on the pensions Bill. For the cash-strapped former President Mwai Kibaki’s administration, it was a temporary relief as it had bought itself another five years to raise enough cash to pay off thousands of workers’ retirement benefits.

The economy was still recovering from the shocks of the 2007/08 post-election violence and the global recession that saw a decline in foreign investments and tourist arrivals.

The argument then was that at 55, those set for retirement were still productive. Others contended that the cumulative on-job experience of this lot was too valuable to be dispensed with that early.

Itothe does not regret the decision: “Money is hard to find. The five-year extension gave me a chance to complete a house I was building back home.”

Between April 1 and August this year, The Standard on Sunday has established that more than 20,000 senior and experienced civil servants and teachers are hitting 60.

On the one hand, this should be good news to the Jubilee government, which has promised to create at least 500,000 jobs per year, mainly for throngs of unemployed youth.

However, there is no certainty of this happening. The country is grappling with a ballooning wage bill brought about by, among others, the creation of new governance structures by the Constitution. Besides being the single largest retirements of public servants ever, this “retirement tide” is expected to plunge the Government into a pension expenditure crisis. And worse, most of the retirees 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 60, it is anticipated that there will be a spike in the Government’s pensions expenditure,” Alexander Forbes, East Africa Managing Director Sundeep Raichura says.

Chairperson of the Public Service Commission Prof Margaret Kobia confirmed that those who are supposed to retire this year received notification six months ago but insists that the number is  much to low  to warrant any cause of alarm.

“There is a number retiring from April 1, June 30 and others next year,” Kobia told The Standard on Sunday but declined to reveal the number. “We do not expect any problem with their exit as they are not leaving at the same time,” she said.

Kobia said that currently the Government was carrying out a rationalisation programme to establish the public service talent needs and structure. On the impeding retrenchment in the public service, she said: “From where I sit this will not happen until the rationalisation exercise is completed.” She said the first preliminary report will be out in December 2014, which will guide the Government in its restructuring of the civil service.

However, what is known is that the wage bill has to be trimmed. Kenya’s wage bill stands at 12 per cent of Gross Domestic Product. This compares what the country pays in wages to what it produces. The global best practice is for wages to not exceed seven  per cent of GDP.

DIRECT PAYMENT

Jasper Obonyo, the public relations manager at the Pensions Department at the Treasury, confirmed thousands of civil servants were to retire starting April 1 as per a circular issued in 2009 by Muthaura.

He said, in the next Budget to be read on June 12, the Government has allocated funds for  the retiring civil servants. “This has been taken care of in the Budget,” Obonyo said.

According to Treasury estimates, taxpayers will bear Sh62.8 billion pension burden to fund this retirement. This amount comprises Sh45.9 billion provision for direct payment to retirees and Sh16.9 billion that the Treasury plans to pay into the defined contributory pension scheme for civil servants, which has since been suspended.

Pension analysts, however, fault 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 in the current 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,” he asks. In 2009, the pensions Bill stood at Sh24 billion, but in the 2013/14 financial year, the Government is spending Sh38.2 billion for pensions. This translates to more than four percent of the Sh1.6 trillion Budget in the 2013/14 financial year. 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 pension Bill could balloon further should more employees, aged  50 also opt to call it a day. The law allows a civil servant to voluntarily choose to retire once they hit 50 — such are entitled to retirement benefits.

Public sector workers have also been agitating for higher pay, which has seen their salaries outpace those in the private sector.  In the past five years, the annual average earnings in the economy have risen by 35.7 per cent.

According to the Kenya National Bureau of Statistics’ Economic Survey 2014, the public service earnings rose by 57 per cent compared to 26.6 per cent for the private sector.  The annual average earnings in the private sector grew by 11.2 per cent to Sh467,689.70 last year compared to previous year’s Sh420,570.10.

The public sector, however, had annual average wage earnings of Sh565,755.20. This means that the average pay for a Government employee is Sh47,146.27 per month, while a private sector worker takes home Sh38,974.14 per month.

HIGHER SALARIES

But what may best explain the growing attractiveness of Government jobs is the fact that over the past five 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 Sh10,559.40. This increased to over Sh28,000 in 2011, and in 2012 the gap widened to Sh64,445.90.

This gap rose to Sh98,065.50, growing nine times in four years. This means on average, employees in the public service earn Sh8172.125 more monthly compared to those in the private sector. But with higher salaries comes an increased pensions bill that taxpayers have to foot.

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. 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, 2012’s enactment of the Public Service Superannuation Act 2012 has strengthened the Government’s hand. But 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.

But the exact date for the implementation of the scheme has been a moving target. Two months ago, the Government said it had suspended the implementation of the scheme—the Civil Servants Contributory Pension to the next financial year.

Treasury instead diverted the Sh6.9 billion that had been budgeted in the 2013/14 financial year for the scheme to other projects as revenue collections for the first nine months of the current financial year fell short of target by a massive Sh52.4 billion. “We differed the scheme to July because we delayed in setting up the National Civil Service Contributory Fund. This scheme has been delayed because of administrative issues,” said Henry Rotich, Cabinet Secretary National Treasury.  “Yes the delay in the implementation of the civil service contributory pension scheme is going to have an impact on employees’ savings. We are pushing it to July. The Sh6.9 billion was the government’s contribution while employees would have put theirs.” 

Treasury is 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 be collected.