AIYABEI: Operationalizing a contributory public pension scheme will ease burden on taxpayers

By Dr Jonah Aiyabei

 Over the years, Kenya’s public pension expenditure has increased exponentially, driven by the salary and demographic experience of government officers. This has weighed heavily on Kenya’s taxpayers.

Since independence, the Government of Kenya has operated a non-funded pension model for civil servants and teachers fully financed by the Exchequer.

This means that if you worked for the Government, you could expect to get retirement benefits determined based on the length of your service and your last salary at the point of exit.  

According to a report by the Parliamentary Budget Office, the Government pension expenditure for the 2023/2024 financial year will amount to Sh189.09 billion, an increase of Sh16.45 billion from the 2022/2023 financial year. There has been a significant and steadily increase of the pension bill which stood at 2.69 billion in 2013/2014 financial year. The rising pensions bill is a strain on taxpayers.

The benefits payable to retirees in a non-contributory defined benefit (DB)schemes model are financed out of annual budgetary provisions with payments solely depending on government revenues.   The burden of an increasing pension expenditure within the last decade necessitated the introduction of reforms in the public pension space.

At the same time, there is a global trend of transitioning to Defined Contribution Schemes as a way of addressing government’s funding pressure.

An OECD Pensions Outlook report noted that there has been a global emphasis on pension arrangements in which individuals assume most of the risks related to saving for retirement such as longevity and investment risks as opposed to pension arrangements where employers or the State bears risks associated with pension obligations. 

 In effect, the National Treasury issued Circular No.18 of year 2010 effectively directing that all public sector pension schemes convert to contributory pension schemes.

The reforms sought to promote sustainability in the provision of retirement benefits and manage contingent pension liability on the Exchequer.

As part of these reforms, the Government established a Defined Contribution scheme for teachers, civil servants and the Disciplined Services in 2012 through the enactment of the Public Service Superannuation Scheme (PSSS) Act. This reform marked a shift from DB to a DC arrangement.  Transitioning to a funded DC scheme also mobilizes savings, increasing the availability of capital for private and public sectors and spurring economic growth.

However, the Public Service Superannuation Scheme (PSSS) did not commence operations in 2012. Cognizant of the rising pension bill and the public wage bill in general, the Salaries and Remuneration Commission (SRC) convened a wage bill conference in November 2019 which proposed the commencement date for the PSSS Act of 2012. In this regard, the PSSS commenced on 1^st January, 2021.

In its third year, the Scheme has approximately 422,000 members, comprising of the National Police, the National Youth Service, officers in mainstream civil service and teachers employed by the Teachers Service Commission. 

All officers below 45 years at inception were enrolled in the scheme, with a few officers above 45 years joining the scheme on voluntary terms. This terminated their future accrual of retirement benefits under the Pensions Act (CAP189). 

The ongoing operationalisation of the Public Service Superannuation Scheme will in the long run help in achieving stabilization of Government expenditure by lowering the wage bill. This will transfer the cost of meeting the retirement benefits from the taxpayer, freeing up resources for other expenditures. 

A retirement benefits industry report by the Retirement Benefits Authority noted that the country’s retirement benefits assets under management climbed to Sh1.7 trillion in June 2023. Within the first three years of operation, PSSS’ assets under management climbed to about Sh94 billion, making it the second biggest pension scheme in the country. 

The writer is the Chief Executive Officer, Public Service Superannuation Scheme