Pension crisis as 50,000 government staff retire

The retirement of about 50,000 civil servants is burdening taxpayers after the pension bill jumped by 63.03 percent or Sh10 billion in the first four months to October as the Treasury raised the red flag over the rising expense.

Treasury data shows that public pension expenses stood at Sh27.8 billion in the four months to October compared to Sh17.06 billion a year earlier — making it the fifth largest Budget item behind debt repayment, teachers’ pay and police salaries.

The rise came in a period when more than 50,000 public servants had retired between March 2018 and September while another 10,300 are expected to go home in the remaining seven months to the end of the financial year.

The pension expenses triggered by the mass retirements, which have also brought home a job crisis in the ageing civil service, have joined debt expenses in denying the State cash it requires for critical spending like roads, health and water supply.

The Treasury has issued an alert over the mounting pension bill, warning that the expense is a risk to the Budget.

“The pension Budget has increased by over three-fold in the last 10 years from Sh25 billion in the financial year 2008/09 to Sh86 billion in FY 2018/19. This is unsustainable,” the Treasury informed Parliament in a note.

The Treasury forecasts it will need Sh109 billion in the year starting next July for pension payouts, rising to Sh153 billion in the year ended June 2022 when President Uhuru Kenyatta will leave office — reflecting a 20 percent rise.

The Sh27.8 billion is more than double the Sh11.3 billion health budget meant to cure Kenya’s rickety public hospitals and above the Sh23.35 billion spent on various infrastructure projects in the four months.

It is equivalent to37.60 percent of Sh73.99 billion used in development spend in the four months to October 2019 period and 42.08 percent of the Sh66.11 billion channelled to the 47 counties.

Part of the pension build-up has been blamed on the Government’s failure to push through necessary reforms, including starting the long-awaited contributory pension scheme.

Civil servants, unlike workers in the private sector, do not contribute to their pension and their benefits are paid straight from taxes.

Under the scheme, civil servants were supposed to contribute two percent of their salary to the retirement scheme in the first year, five percent in the second and 7.5 percent from the third year onwards.

The government was to match every worker’s monthly contribution with another 15 percent of the salary.

This was meant to ensure civil servants pensions were paid by the scheme and not taxes, modelling the public retirement plan on the private sector.

The pension time bomb has continued to tick despite the decision 10 years ago to raise the retirement age from 55 years to 60 years.

This was meant to slow down the number of retirees entering the pension pool and to offer the Government headroom to set up the contributory pension scheme, which has been shelved several times.

The more than 300,000 retired civil servants in October received a three percent pay rise, adding to the cost of keeping them happy in old age.

The adjustment is in keeping with the tradition of increasing the monthly pension by three percent every two years in the race to match the rising cost of living.

At three percent, the enhancement still trails inflation – or the cost of living measure — which stood at 4.3 percent last year and 9.2 percent in 2017. The move is equivalent to an increase of Sh1.5 billion based on the pension bill of Sh50.1 billion — which excludes the Sh54 billion paid as gratuity — for the year to June.

The mass retirements have left the public service facing a jobs crisis, given that the recent retirees account for more than 10 percent of the half a million public sector workers.

The most affected staff are in the senior management levels and technical cadres with critical skills and competencies. This could force the State to retain some workers beyond the retirement age of 60 due to a skills shortage.

The State plans to introduce management trainee programme this year to fast-track graduates into executive roles, trigger promotions and review the blanket ban of fresh hiring to ease effects of the ageing workforce. This would have an effect on the ballooning wage bill.

Public servants’ salaries consume half of all revenues and the pension payments are set to put a further strain on the Exchequer.