Sh36 billion civil servant pension scheme will be the biggest in town

The Sh36 billion annual contributions by 333,460 civil servants below the age of 45 in the first year alone will create one of Kenya’s largest pension schemes attracting interests from investors and state projects.

Workers are expected to contribute 7.5 per cent of their pay in the first year starting January. This will translate to about Sh1 billion monthly or Sh12 billion to the fund.

The government will match the contributions with an amount equivalent to 15 per cent of every workers’ monthly pay which will be about Sh2 billion monthly or Sh24 billion per year.

According to Zamara Pension performance watch, by the end of 2018, Stanlib held Sh99.5 billion assets in pension, Sanlam had Sh234.9 billion, Old Mutual Sh127 billion, GenAfrica had Sh191 billion, Co-Op Trust with Sh78.7 billion, CIC had Sh5.8 billion, Britam with Sh80 billion and Africa Alliance had Sh28.5 billion pension assets.

The public service scheme which will have a vesting period of five years allowing workers to access half of their savings is being eyed by the housing ministry to boost mortgages and unlock the government promise to deliver on housing.

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The scheme will also be portable allowing contributors to move with their savings when changing jobs unlike the current system which tied in civil servants until retirement.

“The Public Service Superannuation Scheme Fund will no doubt become the largest fund in the country. The fund will generate growth of Capital Markets and bring meaningful growth in unlocking value in real estate. The operations of the Scheme shall be in accordance with the Retirement Benefits Act,” Treasury Cabinet Secretary Ukhur Yatani said.

Mr. Yatani said that he was confident the fund will attract county public service boards as well which has the potential to grow the scheme even further.

The scheme will be run by Edward Odundo led Board and a CEO with membership drawn from Teachers Service Commission, National Police, Public Service Commission and the workers unions.

Contributions will come with a tax benefit allowing state workers to deduct 30 per cent of their basic salary or Sh20,000 whichever is lower before tax is calculated.

Treasury shall also take a life insurance policy that has disability benefits in favor of every member of the Scheme, for a minimum of five times of the member’s annual pensionable emoluments.

CS Yatani said that the shift from defined pension scheme to a contributory plan was inevitable given the funding pressures on the exchequer.

Civil servants have resisted pension reforms over a decade with the only notable change achieved by President Mwai Kibaki regime being raising the retirement age for civil servants from 55 to 60 in 2009 to delay the implosion of the budget by retiring workers.

“Even as we roll out this transformation, I know that segments of the stakeholders may not fully understand it or may even try to resist it. I ask them to understand that this is the only practical way to move forward,” CS Yatani said.

The proposal for the contributory scheme was passed by the Cabinet in 2003 after which an actuarial study conducted in 2004 found that the pension liability had reached Sh271.2 billion.

A 2009 actuarial study commissioned by government found that there was a contingent pension liability of Sh499 billion at the time. The liability nearly doubled to Sh990 billion in 2014.

The International Monetary Fund (IMF) in the Fiscal Transparency Evaluation Update, warned that the gap between retirement dues and actual savings continues to grow wider as pension burden hits Sh2.6 trillion or 30 per cent of GDP against tax collection of 15.6 per cent of GDP.

Pension, which is paid from tax collections, has risen 376 per cent from Sh25 billion in 2008 to Sh119 billion in 2020 with an estimated 20,000 civil servants projected to retire every year.

All public servants below the age of 45 and those who will join state workforce from next year will be put under the new scheme.

During the transition they will get a letter acknowledging their membership to the old scheme and monies accrued. Then they will have 15 years to build up new savings, all of which will be paid up on retirement.

Public servants who were not on permanent and pensionable terms of service and were contributing to the National Social Security Fund before will be admitted to the permanent and pensionable establishment under the much delayed Public Service Superannuation Scheme (PSSS) Act 2012.

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