State struggles to fix leaky public pension schemes

The National Treasury office building.

The National Treasury buildings in Nairobi.

Photo credit: Diana Ngila | Nation Media Group

The National Treasury has been trying to halt the gallop of civil servants' pensions including changing the government scheme into a contributory model from a tax-funded one.

Despite the reforms, the Treasury says the pension bill has continued to expand and now requires fresh amendments to fix the sector including bypassing workers’ paychecks to fund pension contributions directly from the Exchequer.

For the first time, Kenya’s expenditure on pensions in the first 10 months of a financial year crossed the Sh100 billion mark.

Data by the Treasury shows that the pension bill increased by Sh39.5 billion in the 10 months to April this year, the sharpest growth in five years, underlining the mounting pressure on the Exchequer in paying retired civil servants.

Kenya spent Sh113.72 billion on pensions in the period under review, a 53 percent jump from Sh74.19 billion in the corresponding period last year.

“In 2010 the government introduced reforms in the public sector which were focussed on the management of contingent liability of pension schemes on the exchequer, particularly those which had defined benefit obligations,” the National Treasury said.

“Despite the existence of an elaborate framework for the management of retirement schemes in the Retirement Benefits Act and the attendant measures that have been put in place to promote financially sound retirement benefit schemes in the public sector, the National Treasury continues to receive applications for a bailout from schemes that are insufficiently funded.”

For years Kenya has been warned about the sustainability of its tax-funded pension by the International Monetary Fund  (IMF) as the gap between retirement dues and actual savings continues to grow wider.

In Kenya, the Treasury only publishes the amount of money it sets aside to pay retired workers each year.

The IMF Fiscal Monitor 2018 report had put the net present value of pension at Sh819 billion and noted that the Treasury had failed to make use of actuarial valuations to disclose its pension liabilities.

“There are potentially significant risks associated with the sustainability of the pension scheme. The government has not undertaken a full actuarial valuation of the future obligations of its non-contributory defined benefits pension fund scheme,” the Bretton Woods lender added, citing a World Bank study that had estimated this obligation to be close to 30 percent of gross domestic product (GDP) or Sh2.6 trillion.

The IMF, which reviewed the country’s finances in 2019 in preparation for talks on a loan facility, wanted the State to institute reforms that included changing the government scheme into a contributory model from tax-funded.

And the Treasury last year finally rolled out the Public Service Superannuation Scheme (PSSS) in an attempt to ease pressure on public coffers.

Public servants currently contribute 7.5 percent of their monthly pay to the PSSS with the government matching the contributions at a rate of 15 percent of every worker’s monthly salary.

However, the Treasury has continued to get bailouts for State pension schemes owing to the failure of remitting their workers' pension contributions.

An audit report by Auditor-General Nancy Gathungu report for the year ended June 2020 shows that for instance KBC failed to remit employee retirement benefits amounting to Sh984.3 million amid a deepening cash flow crisis facing the State broadcaster.

Kenyatta National Hospital (KNH) and public universities top the list of State corporations that have accumulated more than Sh20 billion arrears in contributions to pension and medical cover benefits, pointing to a deepening liquidity crisis.

The Treasury earlier this year ordered parastatals to include pension dues in their financial budgets, and submit monthly reports on the status of staff pension contributions. This was in an attempt to improve compliance with statutory contribution laws which prohibit defaults in remission of such deductions.

The National Treasury has also formed a task force to investigate the challenges facing public sector retirement schemes that continue to stockpile billions of shillings in unremitted arrears in civil servants’ contributions.

The investigation will review the financial status of public pension schemes and the financial risk posed by the defaulting agencies.

The Treasury will also now target the direct transfer of employee statutory deductions into pension funds as part of deep reforms to help deal with a crisis in which a rising number of State corporations failed to remit billions of shillings withheld from civil servants towards the retirement perks.

The Treasury said it is seeking options for statutory deductions from the Exchequer directly into the civil servant pension funds—by passing the non-compliant State agencies that have failed to surrender pension cash collections.

Employers are, under the Retirement Benefits Act of 2020, penalised five percent of the unremitted contributions or Sh20,000, whichever is higher, for late payment within seven days after getting notice.

The law also allows the employers to submit a remedial plan upon payment of the penalty, indicating the time frame within which the accumulated contributions and interest will be offset.