Civil servants pension to use old formula

Malawi government has reverted to the old formula of calculating pensions for civil servants, a development that will put the whole burden on taxpayers in the current ailing economy.

This arrangement is in sharp contrast to the practice in the private sector where employees and employers share the contributions.

Civil servants have for a long time fought against contributions to their pensions and former High Court Judge Rezine Mzikamanda, now director-designate of the Anti-Corruption Bureau (ACB), recently ruled that civil servants’ pensions be calculated using the old formula, in which the employer pays all premiums.

Under the old formula—which has been announced in a circular, and does not place any obligation on public servants—the civil servants’ pension is calculated based on annual salary multiplied by the number of years in service (in months) and divided by 360.

But the new system—which would have been effected in two years’ time for the civil servants—requires that the employer (government, in this case), contributes 10 percent and the public servant puts in five percent of their monthly salary.

In the 2012/13 national budget, Finance Minister Ken Lipenga pegged pensions and gratuities at K18.70 billion (about $56.6 million) owing to increased number of retirees and the need to start contributing to the pension fund.

But in an October 17 2012 circular to all principal secretaries and heads of department, secretary for Human Resource Management and Development (HRM&D) Sam Madula informs civil servants of what is good news to them.

He says: “I am pleased to inform you that government has approved that we revert to the old pension formula. Be advised that apart from the denominator, the discounting factor on the computation of gratuity should also be removed.”

In an interview last week, spokesperson for the HRM&D Rudo Kayira acknowledged the new arrangement will increase pressure on the national budget, but said “all factors have been considered.”

She said in an e-mail response: “The change has been necessitated by a ruling of the courts that people who were paid under the five-year and three-year salary averaging method should have their pensions recalculated using this [the one quoted in the October 17th circular] formula.

“Of course, the change will have an impact on the pension budget, but this decision has been arrived at by government having considered all factors including the financial implications.”

This news was obviously sweet to Eliah Kamphinda Banda, president of the Civil Servants Trade Union (CSTU), who has fought tooth and nail against the current change in pension calculation.

“CSTU is very happy that the original pension calculation is back. Nothing is sweeter than this,” he said.

But he has his own views on the impact this move will have on the public purse.

“My thinking is that when citizens have reasonable cash, commodities on the market are sold and economically, the country performs, unlike the opposite. Mind you, civil servants were not living longer when they retired. Now it’s going to be opposite,” he said.

During a debate on whether to change pension system in the country, Treasury argued that the old system (now back in use) was expensive such that it would increase the pension burden on government by 400 percent.

At the material time, government wanted to spend K10.3 billion (about $31.2 million) for the purchase of maize to feed more than four million people and to subsidise fertiliser, thus the argument that government would not sustain the 400 percent increase in pension budget.

But now, there is a different tune from Treasury.

Said Treasury spokesperson Nations Msowoya in an e-mail interview: “Pensions and gratuities are statutory expenditures which mean that the government has to find resources to pay all pensioners whenever they retire. The current pension budget of K18.7 billion has taken into account arrears for pensioners who were affected by the new pension formula and necessarily the increasing number of retirees.”

He also said the current budget took care of the effects of the switch to the old pension formula.

FAST FACTS

—Under the old formula, the one being reverted to, the civil servants’ pension will be calculated based on annual salary multiplied by the number of years in service (in months) and divided by 360.

—Unlike in the private sector, where employees contribute to their premiums, government will now be paying the full bill.