State pay to retirees falls by Sh36bn amid cash crunch

Exchequer payments to retired civil servants fell by more than a third, or 36.9 billion shillings, in the nine months to March, amid monetary pressures indicating delays in the disbursement of state pensions.

The Pensions Service paid out Ksh54.48 billion to retired civil servants in the period to March compared to Sh95.4 billion in the same period a year earlier, reflecting a drop of 38.71 per cent in an economy where 21,000 civil servants retire annually.

This is the first drop in pension payments since Kenya began making monthly public spending in 2013 and the lowest payment since 2019.

Analysts associate this decline with the delay in paying newly retired civil servants, who receive a monthly pension and a lump sum or bonus, which increases the cost of retirement benefits.

Paying retirees already on the state payroll is considered a priority payment along with the president’s salary and debt repayment.

The government said it failed to pay civil servants’ salaries in March on time, a delay that points to liquidity pressures for the government, which is facing unprecedented financial obligations, including payments to creditors.

The cash crunch stands out at a time when the retirement of more than 20,000 civil servants annually as of 2018 weighed heavily on taxpayers as the Treasury raised a red flag about rising expenses.

Pension expenditures from mass retirements, which have also led to a jobs crisis in the aging civil service, have joined debt expenditures in depriving the state of the cash it needs for important spending such as roads, health and water supplies.

The Treasury Department has issued an alert about the escalating pension bill, warning that the expense is a risk to the budget.

The Treasury expects it will spend Sh172 billion in the year to June on pension payments, rising to Sh153 billion in the previous year and Sh32.3 billion in 2015.

Treasury Secretary Nguguna Ndongo has listed pension liabilities, along with debt repayment costs, among the major financial risks giving President William Ruto’s administration such a headache.

Professor Ndongo wrote in the 2023 Budget Policy Statement, a document that provides spending guidance for the government.

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“To further mitigate financial risks, the government will ensure the timely transfer of required contribution to defined contribution plans to reduce potential litigation costs and encourage appropriate investment choices.”

Dr. Ruto won a closely contested election last August on a platform of planning to lift millions out of poverty, but he faces challenges from a rising cost of living and mounting debt payments.

The debt burden, compounded by a weak local currency and turmoil in international markets caused by a banking crisis, has led some market participants to speculate that Kenya could default as soon as Zambia and Ghana.

But the chief economic adviser to the president, David Ndi, says Kenya has no plans to go down that path.

The pension payments for the nine months to March represent 33.88 per cent of the Sh172.64 billion budgeted by the Treasury for the current fiscal year.

This is the lowest rate of old-age payment in the country since the Treasury began declaring monthly expenditures from the government’s main account in line with the Public Financial Management Act.

It’s also the first annual decline, based on publicly available data, barring the peak of Covid-19 when moves were curtailed, which hurt claims processing.

The budget for the current fiscal year for retirees consists of Sh73.85 billion in lump sum wages (compensated pension), Sh66.55 billion in ordinary pensions and Sh31.90 billion in contribution to the Public Service Pension Scheme.

Civil servants, unlike those in the private sector, were until January 2021 not contributing to their pensions.

The Treasury launched a pension plan where public service workers under 45 initially contributed 2% of their gross pay for their retirement savings in 2021, rising to 5% in 2022 and 7.5% as of this year.

The government contributes 15 percent of the total salary of a public service worker.

Under the Public Service Pension Scheme (PSSS), workers who resign from the public service are entitled to receive pensions after five years without age restrictions.

This is in contrast to the previous scheme where it took 10 years from the time a worker resigned from the government to receive benefits, or upon reaching the age of 50.

Civil servants are free to increase their contributions to a rate of over 7.5 percent of their salary, but the government’s share remains the same.

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The introduction of a contributory retirement plan, after a delay of more than eight years since becoming public service pension scheme (PSSS) law, was expected to ease pressure on taxpayers.

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