Pension plan could save State billions

By Luke Anami

A new pension scheme to be implemented by Government, will reduce its huge annual commitment to retired civil servants.

Unveiled by Public Service Minister Dalmas Otieno last week, the Contributory Public Service Superannuation Scheme, will be implemented by the Government in the next financial year.

It will lower the financial burden of paying out billions of shillings to retirees every year, and increase the pool of funds available for investment.

A similar scheme was rejected two years ago by the Kenya National Union of Teachers and the Kenya Civil Servants Union,

"The Government will be saving 15 per cent of the payroll each month, and public employees will be adding 7.5 per cent. The funds will be good contribution to gross national savings for Investment," said Mr Otieno.

The annual spending bill on pensions by Government stood at Sh26 billion last year. This was equivalent to 3.4 per cent of the budgeted spending of Sh760 billion for the financial year 2007/2008, way above the World Bank’s recommended threshold of 2.5 per cent of the budget.

Raise savings

"Job creation is directly related to Gross National Investment. Vision 2030 requires us to raise Gross National Savings from 15.6 per cent of GDP in 2006/07 to 26 per cent by 2012/13 and to 29 per cent of the GDP by 2030, " he said.

Under the new scheme, Government and employee contributions from civil servants, teachers and members of the Armed forces will be paid into a public service superannuation fund to be established and managed in accordance with the Retirement Benefits Act.

The Scheme, which will operate on a defined contribution basis, is a departure from the current pension scheme where the Government is the sole contributor from the Consolidated Fund. The new scheme will open the public service for entry on merit and exit on opportunity at all ages.

"Staff will not be tied anymore in the service because of past pension benefits. It will be possible for employees to transfer their services to other employers without losing their pension benefits," the minister said.

Perhaps this is what gives civil servants in Kenya the incentive to stay on the job even in cases where some have found opportunities elsewhere.

There are about 180,000 pensioners, but the number is expected to grow to 230,000 in the next three years, imposing new demands on the management of the pension system and the growing payouts competing for limited tax revenues.

The pension expenditure ranks sixth behind ministries such as Defence, Roads, State, Education and Health on items that take most of the Government’s revenue.

The money from the fund is to be invested in various investments, including bonds and equities to generate income that will further boost pension payouts.

The new system will be akin to the state owned National Social Security Fund, which is mandatory for all employers with a staff number of more than five.