Tame wage bill lest it hurts pension system

NAIROBI: A section of the media, public and opposition scoffed at President Uhuru’s statement to the effect that to pay teachers the 50-60 per cent salary award, the Government would have to find an additional Sh118 billion to meet salary and pension obligations.

The Government runs a defined benefit plan and not a defined contribution plan, which nearly all private companies, run for their employees. 

A defined benefit plan identifies the specific benefit that will be payable to an employee on retirement. It is usually based on a formula that takes into account factors like the years of service and the employees’ last salary.

The retirement benefits are generally provided in the form of regular payments over the employee’s lifetime beginning, in our case, at 60 years for public sector employees with the exception of Judges and other employees on contract.

Besides regular monthly payments, employees receive a final salary; lump sum income in retirement based on computation of pensions.

It is important to note that ‘final salary’ doesn’t necessarily mean the actual salary that an employee was earning at the time he or she retired. This final salary is not little money.

In his speech, the President indicated some 55 per cent (approximately 168,000) of all teachers employed by TSC are in job groups J to N, earning between Sh35,000 and Sh75,000 monthly.

Any of these employees is entitled to not less than Sh500,000 in severance pay and will earn a monthly pay till death.

Any increase in basic pay for civil servants translates into an increase in the pension liability of the Government.

It is on this basis that the President sounded worried that if the award were paid, the Government would require an additional Sh118 billion to meet the salary and pension obligations of the award to teachers.

The implication of these additional burdens on the economy is grim.

Given that the Government started releasing employees who attained 60 years from last year, the payments towards the “Final Salary payouts” will shoot up.

It is important to note that the Government has not paid out Final Salary payouts since 2009 when it extended the retirement age from 55 to 60 years.

Last week, Salaries and Remuneration Commission Chairperson Sarah Serem said the Commission had conducted a study into the public sector pension liabilities for teachers, disciplined forces and mainstream civil service under the Pensions Act Cap 189.

The study revealed that the public sector pension liabilities stood at Sh 900 billion as at June 30, 2013 while the Government’s annual expenditure on pensions alone stood at Sh32 billion for the financial year 2013/14 and was projected to rise to Sh 50 billion in 2014/15 due to maturity of pension liabilities from new retirees.

Neither the public nor the teachers appreciate the effect the 50-60 per cent salary award will have on the pension liability, which can only be further aggravated.

Wage and pension bill should not be such a burden to the public finance system as to deny the country the financial resources it needs for investments in roads, power, communications and access to water for domestic and industrial use.

The Government must undertake social investments in health and education, two key areas that drive a vibrant economy.

The dynamism of modern economy is grounded on citizens’ access to quality health, education and training systems.  We need widespread and enhanced investment in changes to the physical environment to expand production in irrigation, canals, ports, railways and security systems.

We also need to take advantage of advances and increasing spread of technology. It will be foolhardy to divert our scarce resources to pay salaries.

If policymakers fail to rein in this growth, a fiscal crack will be the inevitable result. One of the basic determinants of wage is the ability of the employer to pay and also the productivity of the employees.

Government can only pay from the revenues it secures from the tax regime it has established through Parliament.

The financial ability of a Government to meet a new wage bill is generally accepted as a legitimate factor in determining pay award by arbitrators or by any other body law provides to settle pay dispute between employer and employees.

Failure to appreciate the dynamics of public finance and the Public Financial Management Act, 2012, is courting disaster. Who is this so suicidal as to invite the challenges that Greece is facing on Kenyans?

Mr Ol’ tichil’lo is a commentator on social issues