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Kenya’s Civil Service Pension Needs Review

By Fred Nyayieka, www.allafrica.com


August 6, 2007

It is often recognized that Kenya — like many other developing countries — has a huge debt. The public debt, especially the domestic aspect of it, is very high relative to GDP. But policy makers give inadequate attention to the issue of pensions.

What is lost to policy makers is the pension burden that future generations will have to shoulder. Successive regimes at Treasury have not deemed it fit to fix this problem. Here is the genesis of the problem.

All permanent and pensionable civil servants participate in the Civil Service Pension Scheme established under the Pensions Act (Cap 189) of the Laws of Kenya. Civil servants who joined service from 1971 also participate in the Widows and Children’s Pension Scheme established under the Widow’s and Children’s Pensions Act (Cap 195). Pensions are guaranteed increases under the Pensions (Increase) Act (Cap 190).

The Civil Service Pension Scheme is a non-contributory defined benefit scheme. The scheme is not funded and no assets have been set aside or invested. Pension benefits are paid out of the Consolidated Fund from general revenues.

Pension under the Civil Service Pension Scheme is accrued at 1/480 times number of months in service multiplied by the annual basic salary. Members are eligible for pension after a minimum of 10 year’s service.

In July 2006, the government attempted to introduce contributions by the members without identifying the key considerations and practice in current pension arrangements. That led to deferring of the decision and the scheme remains non-contributory and unfunded.

The world over, it has lately been typical for governments to review retirement benefits arrangements for their employees. Governments with unfunded retirement arrangements are finding their pension liabilities unsustainable and are opting for more radical reforms.

The rationale for introducing a contributory scheme for civil servants in Kenya was largely driven by the realisation that the pension liability is set to rise to unsustainable levels.

IN ORDER to guarantee the pension benefits promised and further protect the interests of civil servants, the government requires a completely different funding setup, coupled with a strict set of competencies that enables it to take charge of uncertainties in pension liability.

The need for a new setup is driven by two main factors. First, the government’s acceptance that funding pensions from the exchequer is inadequate and unsustainable in the long run and secondly, the realisation that a well-managed funded scheme is imperative for enhanced mobilisation of long-term economic independence.

A fund provides a perfect solution to this problem by enabling the creation of a significant pool of long-term resources that can be invested. These resources can be deployed into investments that enhance the returns that funds obtain and so relieve the government from direct funding of past pension liabilities.

It is in the best interests of both the government and civil servants that a comprehensive review of the pension provisions be considered and civil servants contribute to a new scheme.

The government should consider coming up with a draft Bill on a new pension arrangement for discussion with stakeholders before implementation. The Pensions Act should be amended to incorporate the new proposals.

ON INVESTMENTS, should members be required to make contributions from their own salaries, as they will be then stakeholders. The government should come up with a management structure that guarantees civil servants a market return on their contributions. A broad policy on investments should be integrated into the new law.

One of the major challenges at the moment is administration of the Civil Service Pension Scheme. The Office of Director of Pensions is currently ill equipped to handle the magnitude of administrative work. It should be delinked from the government and made into an autonomous corporate body.

Currently, contributions are credited and benefits debited to the Consolidated Fund. If the practice is to remain, then it negates the purpose of reviewing the current system as mere accruals in financial estimates will only compound the problem of unsustainability. This calls for segregation of pension assets and safe custody of those assets by a separate corporate entity.

ANY INTRODUCTION of an umbrella contributory scheme for all civil servants will create a massive scheme with all the challenges this entails for its management.  In order to safeguard the interests of the government and civil servants, there is a need to establish three separate schemes, one each for mainstream civil servants, teachers and the disciplined forces respectively.

A review of the current pension arrangement for civil servants is a complex matter that requires comprehensive consultation and independent professional input. A review would reveal considerable savings on the part of the government after restructuring the current pension arrangement, taking into consideration civil servants’ unique needs.

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