Pension crisis deepens with 85,000 public servants set to retire
The retirement of more than 85,000 public servants in the next 3 financial years is set to put further pressure on taxpayers with pension bills projected to average nearly Sh210 billion annually.
The retirement of more than 85,000 public servants in the next three financial years is set to put further pressure on taxpayers with pension bills projected to average nearly Sh210 billion annually in the review period.
The Treasury has raised the red flag over the rising pension liabilities which, alongside debt repayment costs, will give President William Ruto’s administration sleepless nights in the next three years starting July 2023.
The Pensions Department at the National Treasury plans to process 85,400 claims in the review period, signaling the number of public workers expected to retire.
Some 30,155 workers are expected to leave work this fiscal year ending June 2024, with the number expected to fall to 28,745 in the year that follows and 26,500 thereafter, according to the estimates by the Treasury.
The pension bill towards payment of gratuity (paid in lump sum), ordinary pension (remitted monthly), and contribution to the public service retirement scheme is forecast at Sh625.55 billion in three years.
The Treasury has budgeted Sh189.09 billion towards pension expenses in the current year, a value which will climb to an estimated Sh207.85 billion in the 2024/25 financial year and further to Sh228.61 in the fiscal year that will follow.
The pension expenses triggered by the mass retirements, which have also brought to the fore a job crisis in the aging civil service, have joined debt expenses in denying the Ruto administration funds it needs for priority projects like roads, affordable housing units, and power transmission lines.
Treasury Cabinet Secretary Njuguna Ndung’u has already issued an alert over the mounting pension bill, warning that the expense is a major risk to the budget.
“With the increasing number of retired officers, dependants, and the increased life expectancy rate, the pension wage bill has been rising exponentially posing a fiscal risk,” Prof Ndung’u wrote in the 2023 Budget Policy Statement (BPS), a document that provides an expenditure guideline for the government.
“To further mitigate the fiscal risk, the Government will ensure timely remittance of the required contribution to defined contribution schemes to reduce possible litigation costs and encourage appropriate investment choices.”
Disbursements of cash towards pension, gratuity, and Public Service Superannuation Scheme (PSSS) significantly fell short of the target by Sh36.28 billion in the year ended June.
This was after the Treasury released Sh136.36 billion, which was 21.02 percent off the Sh172.64 billion goal for the fiscal year.
The pension amount disbursed represented a rare Sh9.27 billion, or 6.37 percent, fall compared with Sh145.63 the year before which marked the end of President Uhuru Kenyatta’s maximum two-term rule of five years each.
The drop in payment of retirement benefits and savings obligations, a first charge in government expenditure, came in a year Treasury scaled down the ongoing upgrade of the Pensions Management Information system aimed at automating and integrating all pension payroll systems.
The Treasury said in June it targeted to complete 60 per cent of work on the new system by the end of last fiscal year, reduced from an initial projection of 70 per cent.
“To effectively administer the public service pensions, the National Treasury will invest in modern technology and digital solutions to streamline pension processes and improve service delivery,” Prof Ndung’u wrote in Budget Statement on June 15. “In this regard, Public Service Schemes will develop user-friendly online platforms that allow pensioners to access their pension statements, make inquiries, and update their personal information conveniently.”
The pensions department usually targets to process an average of 600 files per week, with payment expected after 21 days.
Freshly retired public servants countrywide are currently required to physically bring validation documents for verification and approval to Nairobi.
The pension’s payroll has been soaring in recent years on the back of a fast-aging public service, piling pressure on taxpayers on the back of delays in implementing reforms in the past.
Contributory scheme
The pressure has continued to pile on taxpayers despite a knee-jerk decision in 2009 to raise the retirement age from 55 to 60, partly due to Treasury’s past failure to push through necessary reforms, including a contributory scheme.
This has seen pension claims, paid directly from the exchequer, surge from Sh25 billion in the financial year ending June 2009 to the Sh189.09 billion estimates for the current year ending June 2024.
The current budget comprises Sh82.93 billion 73.85 billion in ordinary pension, Sh77.56 billion in lump sum pay (commuted pension) and Sh28.46 billion in contribution to the public service pension scheme.
Civil servants, unlike workers in the private sector, were until January 2021 not contributing to their pension, until their benefits are paid straight from taxes.
This was after the Treasury rolled out a contributory pension scheme where public service workers aged below 45 initially contributed two per cent of their gross pay towards their retirement savings in 2021, rising to five percent in 2022 and 7.5 per cent from this year.
The government contributes 15 per cent of the gross pay of the public service worker.
The PSSS scheme had 369,878 permanent and pensionable public servants of age 45 and below by the end of June 2022.
Under the PSSS, workers who resign from public service are entitled to pension benefits after five years with no age restrictions. This is unlike the previous scheme where it took 10 years from the time a worker resigned from the government to get benefits or on attainment of age of 50.
Civil servants are free to increase their contributions to a rate above 7.5 percent of their pay, but the government share remains intact.
The rollout of the contributory retirement plan, after a delay of more than eight years since the Public Service Superannuation Scheme (PSSS) Act became law, was expected to ease pressure on taxpayers.
