New retirement age limit faces big hurdles

Financial Standard

By John Oyuke

Parliament could be the next battleground in realizing a set of new far-reaching changes affecting civil servants and teachers as the Government wake up to realities of a pension time bomb.

Constitutional amendments may be needed before the Government can convert the current non-contributory Civil Service Pension Scheme into a Contributory Public Service Superannuation Scheme, from July 1 in line with plans announced two weeks ago. The revelations come at a time Kenya’s Parliament is deeply split as supremacy wars tear through the governing coalition, making it almost impossible to pass even well meaning legislation.

The Government increased the retirement age for civil servants to 60 years from 55 years, as its concern mounts over increasing liabilities from pension payments to current and future retirees.

The changes, announced by Public Service Minister Dalmas Otieno two weeks ago, will create a separate pool of assets the Government hopes will in the long run, reduce its ballooning pension liability.

The State’s current annual spending bill on pensions stands at Sh26 billion, equivalent to 3.4 per cent of the budgeted spending of Sh760 billion for the year 2007/2008, way above the World Bank’s recommended threshold of 2.5 per cent of the budget.

Pension experts, however, warn that the Government will be treading on ground littered with legal landmines, should it hurry to implement some of these far-reaching changes on the retiree pensions.

"The issue of the Civil Service Superannuation Scheme has not been addressed at all. What the Government has attempted to do is illegal," a Pensions Administrator, Mr Josphat Muriuki told FJ.

He said for the Government to change the funding method of the Scheme, it would have to rely on Members of Parliament who have to undertake legislative amendments including amending the Constitution.

Muriuki said with this goodwill, Government would have to do three things. These, includes a change to the Constitution which provides that all pension benefits for civil servants shall be paid from the consolidated fund.

Also needed would be amendment of the Pension Act (Cap 189), which establishes the current scheme as a non-contributory scheme and amendment of Retirement Benefits Act to include the new scheme, which is currently exempted from the provisions of the RBA Act.

Other Requirements

"Some of the laws that must be amended before the scheme may be introduced includes the Pensions Act (Cap 189), the Widow's and Children's Pensions Act (Cap195), the Pensions (Increase) Act (Cap 190) and the Retirement Benefits Act 1997," Muriuki said.

Another likely requirement, he added, could be commissioning of an actuarial valuation to determine the funding level and the correct contribution rate in the new scheme.

Muriuki doubted whether it would be possible for the Government to put in place the legal and management framework for the scheme, with only a few weeks to the proposed commencement date. RBA - the regulator and supervisor of retirement benefit schemes – however told FJ it could not comment on the proposed changes as it was still waiting for official communication from the Government.

The new contributory public service pension scheme would operate on a defined contribution basis with employees contributing 7.5 per cent while the Government chips in with 15 per cent contribution.

The contributions would be paid into a public service fund to be established and managed in accordance with the Retirement Benefits Act and would provide 100 per cent vesting within ten years.

About the scheme

It is estimated the scheme would require Sh500 billion to enable it pick up.

Under the scheme, employees will be able to transfer their services to new employers without losing their pension benefits.

According to Otieno, the employees would be allowed to access their own accumulated contributions on leaving Government service, while the State's portion would be retained as a deferred benefit, until the attainment of the mandatory retirement age.

Treasury has in the past indicated that introduction of the contributory pension scheme is a matter of urgency for the Government, with an official saying its recommendations are ready for presentation to the Cabinet for further direction.

Industry insiders argue that the looming Government pension crisis has its roots in reviews of public sector salaries in the last five years.

The Government, they have suggested, also applies a more generous accrual formula that is better than those used in the private sector.

The formula multiplies the last salary earned, and the number of years served, with a figure of 0.025 to determine the monthly pension. In banks, for instance, the figure is lower by a third at 0.017.

Last year, an amendment to the Pensions Act committed the Government to increase pension payments by three per cent after every two years.

New measure

The minimum pension was also increased from Sh500 to Sh2, 000 in July 2007, and backdated to July 2006.

It remains to been seen how the new measure is implemented as analysts observe that the Government has in the last three years tried to introduce a contributory public service scheme without success.

In 2006, the Government issued a circular, which asked civil servants to contribute partly to their pension, a move that was opposed by Kenya National Union of Teachers (KNUT) and Kenya Civil Servants Union.

Industry insiders say the move could have flopped because it lacked legal teeth after the state failed to amend Pensions Act — the law regulating administration of the Civil Service pension scheme.

In announcing introduction of the new public service scheme, Otieno said the current pension scheme would be closed to all new and existing employees who are under 45 of age as at June 30.

"Existing employees who are over 45 years as that date will be given the option to join the new scheme or remain in the old scheme," he said.

Otieno also announced that as part of the reforms in the retirement benefits industry, mandatory retirement age of public servants would be raised from 55 years to 60 years effective April 1, to help reduce increase of the number of new pensioners.

Muriuki, Manager in charge of pension administration at the Liaison Financial Services Group, said the law allows the measure to be taken.

"The law has only prescribed an early retirement age of 50 years, giving the discretion of upward adjustment to the employer, hence the Government is free to prescribe any retirement age for its employees," he added.

He said the advantage of the idea to the Government would be to reduce its pension liability in the long term as civil servants would work for a longer time and enjoy pension for a lesser period.

Population experts say though average life expectancy at birth in Kenya might have declined compared to the past, life expectancy at retirement age has increased and is expected to increase further.

Otieno said by raising the retirement age to 60 years, the Government would get more time to plan for resources to fund the new pension scheme, and allow room for its introduction and implementation. He justified the increase in retirement age, saying lessons learnt from public universities, research institutions and the Judiciary have confirmed there is still considerable capacity to perform after the age of 55 years.

Otieno noted that the Government would save 15 per cent of its payroll each month, while Civil Servants would add 7.5 per cent under the new scheme – a good contribution to Kenya’s Gross National Savings for Investment.

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