Treasury, SRC clash over pension review law
The Pensions Department in the financial year ended June struggled to honour requests due to below-target revenue performance.
The National Treasury and the Salaries and Remuneration Commission (SRC) have sharply differed over a Bill that seeks to provide for the automatic cost-of-living adjustments to the pensions earned by all retired public servants.
The Treasury has opposed the Pensions (Amendment) Bill, 2024, which also seeks to provide for use of the most current salary applicable to a job group as the basis for calculation of the pensions payable to public servants who have retired in that job group or its equivalent.
However, the SRC backed the proposals citing disparities in pension payments for current retired officers covered by the Pensions Cap 190.
Appearing jointly before the National Assembly’s Finance and National Planning committee during public participation on the Bill sponsored by Matuga MP Kassim Tandaza, the Treasury on Wednesday said the changes will introduce significant fiscal strain on the exchequer, particularly during periods of high inflation.
Director of Pensions Michael Kagika, who represented the Treasury Principal Secretary Chris Kiptoo, told the committee that the proposed amendment may distabilise budgetary planning and compromise the ability to fund other critical public services.
The Treasury said the introduction of automatic cost of living adjustment and salary-based pension computation would have significant financial implications given the rising number of pensioners and increasing life expectancy.
“These changes should therefore be informed by an actuarial valuation to assess the long-term financial sustainability of such adjustments,” Mr Kagika said.
“The Pensions Department is currently conducting an actuarial/valuation of the public service pension scheme, which will provide data driven foundation for decisions affecting the scheme, including any adjustments to pension benefits such as cost of living adjustment. We expect to receive a report from the actuary in mid-April.”
Mr Kagika told the committee, chaired by Molo MP Kuria Kimani that the 2024/25 budget for pensions for retirees stands at Sh200 billion.
Disparities and inflation
Mr Kagika said the Sh200 billion comprises of monthly pensions of Sh88.4 billion, commuted pensions (Sh70.2 billion), other pensions such payments to widows and orphans (Sh6.6 billion), and government component for new Public Service Superannuation Scheme (Sh34.4 billion).
But SRC Commissioner Wangui Muchiri said the salaries agency supports the automatic pensions increase to address the challenges of disparities and inflation.
“From the onset, the SRC supports the Bill but with some observations and recommendations. The SRC is cognisant of disparities in pensions for retirees,” she said.
Ms Michiri said the SRC undertook a study on pensions payment in 2013/14 which recommended a discretionary one-off pension increase for retirees for the period 1991 to 2005 but subject to a maximum annual increment of three percent with a minimum monetary increase of Sh1,000 per month or Sh12,000 annually.
The projected one-off payment, she said, would cost an additional pension cost of Sh112 million per month for all affected pensioners who retired between the years 2019 and July 2005.
“The recommendations were shared with the National Treasury through a letter dated October 2, 2014. However, they have not been implemented with the Treasury citing budgetary constraints,” Muchiri said.
Mr Kagika said the pensions scheme under consideration is a defined benefit arrangement governed by the Pensions Act, Cap 189. This arrangement provides for predetermined benefits based on an employee’s salary and years of service, funded directly by the exchequer.
He said the Pensions Act Cap 190 provides a structured framework for adjusting pensions for retired public servants.
The Pensions Director said the Act mandates that, beginning July 1, 2005, all specified pensions-along with any previously granted increases-shall be adjusted with a three percent increment based on the pension amount in effect at the time of the adjustment.
Mr Kagika the government, through the Tax Laws (Amendment), Bill, 2024 that took effect on December 27, 2024 exempted from tall all pension payments made from registered pension scheme, registered provident fund, registered individual retirement fund, public pension scheme, or National Social Security Fund upon attaining the retirement age.
He said the proposed tax exemption was also extended to gratuity or allowances paid under public pension schemes, retirement annuities, and withdrawals from the fund to retirement age due to ill health or after completing 20 years of membership in the fund.