New pension scheme long overdue
What the government pays on pensions in a year is almost equivalent to the national budget for some of the large ministries.
What you need to know:
- As a pensioner, what you end up getting when you retire is peanuts, especially when you compare it to what you were earning when you were still in employment.
- Unlike the NSSF, this scheme will be fully governed by rules and regulations of the Retirement Benefits Authority (RBA).
We have been talking about introducing a funded pension scheme for civil servants for more than 20 years. It is a statement on the lack of capacity within government to implement critical and urgent reforms within the civil service bureaucracy.
The Head of the Civil Service, Joseph Kinyua, has announced that from January 1, every civil servant under the age of 45 will have to contribute 7.5 per cent of their salary to this scheme.
On its part, the government, as the employer of all civil servants, will contribute 15 per cent of every servant’s salary into the scheme. This makes a great deal of economic sense.
The ‘pay as you go’ scheme, which the government runs right now, had become too expensive for the taxpayer. Consider the following facts: Today, the government has to raise a whopping Sh29 billion each year to pay pensioners.
Indeed, what the government pays on pensions in a year is almost equivalent to the national budget for some of the large ministries.
Contrary to what happens in the private sector, where both the employee and the employer make monthly contributions that are to be used to pay pensions whenever a worker retires, the current arrangement is that pensions for civil servants are paid from cash flows. The money is literally paid from the till.
Governed by RBA rules
Yet, successive studies by actuarial scientists kept warning us that at the rate the pension’s budget was increasing, the government would soon not be able to pay retirees.
Indeed, the incumbent civil service pension scheme neither serves the interest of the pensioner nor the government. As a pensioner, what you end up getting when you retire is peanuts, especially when you compare it to what you were earning when you were still in employment.
Pensions are supposed to be about reasonable pre-retirement income replacement. Secondly, the current arrangement does not provide for portability. Currently, a civil servant or teacher who quits and joins another employer automatically loses his or her pension.
With the contributory scheme being introduced, you have the liberty to transfer both your 7.5 per cent monthly contributions and the 15 per cent the government will have contributed for you to another licensed scheme.
Unlike the National Social Security Fund, this scheme will be fully governed by rules and regulations of the Retirement Benefits Authority (RBA). This is yet an advantage for civil servants who will be joining the new scheme because pension plans under the RBA must conduct annual audits, do regular actuarial reviews and hold annual general meetings.
Furthermore, schemes administered under RBA-rules are also required to produce, keep and to regularly disseminate monthly statements of contributions to members. Indeed, one major disadvantage of the incumbent civil service pension scheme is that it is not inflation-indexed and therefore, vulnerable to purchasing power erosion.
Once you become a pensioner, you earn the same amount for years, your fate left to the benevolence of a minister whenever they decide or choose to adjust your benefits. This is going to be a very big fund that is expected to grow to billions of shillings under management in just a few months of existence.
Abused and management
What we must hope is that this new fund will not be abused and mismanaged by the political elite in the ways the National Social Security Fund (NSSF) has over the years been raided and stolen.
Internal investment committees
Under the Moi regime, the political elite would illegally excise land belonging to the government or to public institutions, allocate it to themselves, and then force the NSSF to buy the land at inflated prices.
The way I see it, the way to insulate the new fund from the eating chiefs will be to ensure that its governance is made to strictly follow the rules and regulations of the RBA.
The fund should be run and managed like the highly successful private occupation pension schemes. In the first place, we should not allow the membership of the board of trustees to be dominated by civil servants and other appointees of politicians.
Just as happens at the well-run private occupational pension schemes, trustees should not touch any money. Once deductions are made from the payroll, it goes straight to the account of an RBA-appointed custodian.
Contrary to the situation in the NSSF where investment decisions are made by politically-manipulable internal investment committees, the money from the new civil service pension scheme should be made to go straight to an independent RBA- approved investment managers.
Can we try introducing private and independent schemes’ administrators into the equation? The civil service pension scheme will carry implications for the development of our capital markets because contributory pension schemes are important buyers of longer-dated bonds.
Managed well, the new scheme will stimulate demand for long-term financial assets.
