7.5pc pension shocker for civil servants
Thursday, August 6th, 2020
- Largest fund: Treasurer Cabinet Secretary Ukur Yatani said he was persuaded that the Public Service Superannuation Scheme Fund will become the largest fund in the country.
- Brings growth: The fund, he said, will generate growth of Capital Markets and bring meaningful growth in unlocking value in real estate.
More than 500,000 civil servants will contribute 7.5 per cent of their pay to a new pension scheme.
The government has introduced a new pension scheme that will see teachers, police and prison officers, among other civil servants, contribute to the scheme.
Records on the current service pension scheme indicate there are 375,000 teachers, 128,000 police and prison staff, more than 270,000 pensioners and 75,000 dependants.
The Pension Savings Scheme, which was introduced yesterday by Treasury Cabinet Secretary Ukur Yatani, is aimed at reducing the pension burden currently shouldered by the Exchequer.
Yatani said that upon commencement of the contributory scheme, the current Public Service Pension arrangement will be closed to all new employees and all serving employees who will be aged below 45 years as at January 1, 2021.
“Employees aged 45 years and above as at that date will be given an option to join the new scheme or remain in the old one.
It’s important to note that there will be over 333,460 public servants who will be below the age of 45 Years as at January 1, 2021,” Yatani said.
Under the new scheme, monthly contributions by employees of up to 30 per cent of their basic salary or Sh20,000 whichever is lower will be tax-deductible.
This means that the contribution is deducted from the salary before tax is calculated.
In effect, it reduces the tax level and improves the pay of an employee as well as avoiding double taxation of pension contributions and payouts.
“Employees attached to ministries and other state agencies will also suffer a pay cut for onward remittance in the newly created Public Service Superannuation Scheme,” Yatani disclosed.
The introduction of the new scheme will see civil servants cede close to Sh28 billion yearly to the scheme, which will be the largest in the country.
Yatani also said membership to the scheme will be mandatory to all new entrants upon commencement of the Act.
Yatani said the move taken by the State is aimed at reducing the pension burden shouldered by the Exchequer.
Under the current pension scheme, civil servants, unlike workers in the private sector, do not contribute to their pension and their benefits are paid from taxes.
According to Yatani, the free benefits will increase the taxpayers’ pension burden to Sh121 billion in the year starting July from Sh15 billion in 2002.
Past government efforts to introduce a pay cut for civil servants to fund pension schemes have been contested leading to the delays in its implementation.
Yatani said that plans were underway to have all civil servants registered biometrically.
The Institutional Framework of the Scheme comprises the Public Service Superannuation Fund and the Board of Trustees.
The board, which draws membership from both the employer and the workers’ unions, is charged with the responsibility of operating and managing the fund.
Yatani disclosed that all contributions will be paid into the Fund and conversely, all the benefits and any other payments required under the provisions of the Act shall be paid out of the Fund.
In 2010, the National Treasury issued a policy circular that largely set in motion the trend towards the harmonisation of pension policies for public sector workers, with the introduction of some pre-funding or fully funded complementary pension schemes.
The CS said the process has been driven mainly by the necessity to alleviate the fiscal burden imposed by relatively generous public employees’ pension schemes, enhanced labour mobility and the desire to build more equitable and financially sustainable social security systems.
Yatani said the Public Service Superannuation Scheme Act, 2012, which was assented to on May 9, 2012, established the contributory Public Service Superannuation Scheme (PSSS) to provide retirement benefits to public servants.
“The law requires that the Cabinet Secretary appoints and gazettes the commencement date of the scheme.
Despite numerous challenges that have occasioned the delay, I have now gazetted the January 1, 2021 as the commencement date of the Act,” Yatani said when he launched the scheme.
He said he has also constituted the Board of Trustees in line with provisions of the Act.
“I beseech all actors in the Public Service to render support to the Board and the staff for a smooth implementation of the scheme,” Yatani said.
Under the new scheme, civil servants attaining retirement date, will be allowed to access their own accumulated contributions and a further 50 per cent of the Government portion on leaving service.