Affordability and Sustainability of Non-financial Defined Contribution Pension Scheme Over the Defined Benefit Scheme in the Kenya Public Sector

Abstract

The main objective of this study was to compare the affordability and sustainability of Non Financial Defined Contribution (NDC) scheme to defined benefit (DB) scheme if it were applied to the Kenya Public Sector. The study aimed to establish the operation of the current pension scheme applied by the Kenya public sector in terms of the financial burden to the government and the long term operation of the scheme. It also examined the possibility of changing the scheme to a NDC scheme and applied the formulae recommended by NDC to a fixed number of employees picked from the several departments in the public sector. The methodology adopted involved analysis of data from the Public pension office and the design of the study was descriptive. The study took data from the public service departments which included Police and prison service, Teachers, Medical personel, Mgistrated and Judges. The key results in the study found out that the DB scheme currently operated by the public service depends entirely on the consolidated fund. Over the years the bill has been growing and liabilities to the government has grown in unsustainable manner leading to the government deffering payments to pensioners. This is a result of the current system of pension which has generous awards and does not generate its revenue. On the other hand, the NDC scheme was found to result in a less generous payout coupled with the fact that the system has a revenue generating ability through contribution by the active employees and hence more sustainable. The study therefore concludes that the public service pension scheme needs to change and one of the systems that should be considered is the NDC scheme. This hybrid system may be adopted but with some adjustments to ensure it fits the Kenyan economic system as a whole.