Pension funds sponsored by public entities belong to contributors and are not public funds subject to State procurement laws, the Supreme Court has ruled.
In a landmark victory for the retirement benefits industry and pensioners, the apex court ruled that pension savings managed under public entity-sponsored schemes are private trust funds owned by employees and cannot be treated as public money under the Public Procurement and Asset Disposal Act (PPADA).
‘Based on what we have stated so far, we entertain no doubt that a pension fund sponsored by a public entity was not contemplated in the enactment of Article 227 of the Constitution to be an entity that was intended to undertake public procurement and thereby to be bound by the provisions of the PPADA,’ the court said.
The country’s top court overturned earlier decisions by both the High Court and Court of Appeal, which had held that pension schemes linked to public institutions qualified as public entities because of their public function and State oversight.
The Supreme Court instead found that Section 2(o) of the PPADA unconstitutionally expanded the meaning of a public entity beyond what was envisaged under Article 227 of the Constitution.
‘Ultimately, we find merit in the appeal and accordingly allow it. We set aside the judgment of the Court of Appeal dated April 28, 2022, and in terms of Article 2(4) of the Constitution, declare Section 2(o) of the PPADA inconsistent with Article 227(1) of the Constitution and therefore void to the extent that it subjects pension funds for a public entity to the application of public procurement systems,’ the judges ruled.
The case was filed by the Association of Retirement Benefits Schemes, representing pension schemes, employers and service providers in Kenya’s retirement benefits industry.
The association challenged the constitutionality of Section 2(o) of the PPADA after pension funds sponsored by public entities were required to comply with public procurement laws in the disposal and acquisition of assets.
The association argued that pension schemes are established as irrevocable trusts under the Retirement Benefits Act and are fundamentally private arrangements between employees and trustees.
According to the association, employers merely remit contributions as part of contractual obligations, while the funds remain autonomous entities separate from sponsoring public institutions.
The association told the court that subjecting such schemes to procurement laws imposed ‘onerous responsibilities’ with severe financial implications for retirees and beneficiaries.
They also argued that the law discriminated against pension funds linked to public entities, because private sector pension schemes were exempt from the same requirements despite operating under the same legal framework.
According to the association, the additional compliance burden increased administrative costs and ultimately reduced members’ retirement benefits, infringing on constitutional protections for property rights and equality.
The Retirement Benefits Authority (RBA), which had initially supported the petition before the High Court and the Court of Appeal, later changed its position before the Supreme Court, stating the constitutionality of the challenged section.
The Authority argued that procurement oversight was necessary to prevent corruption and mismanagement of pension savings.
RBA maintained that pension schemes sponsored by public bodies served a public interest because they involved contributions from public employees and employers. It also argued that procurement safeguards promoted transparency, accountability and good governance.
However, the Supreme Court criticised the Authority’s shift in position and rejected the argument that State regulation automatically transforms pension funds into public entities.
The judges held that pension schemes, whether public or private, are savings vehicles managed independently by trustees solely for the benefit of employees.
‘It was therefore in error for the two courts below, to conclude that pension funds perform duties of a public nature and are public bodies,’ the court stated.
The judges emphasised that once pension contributions are remitted into a scheme, they cease to be public property and instead become private trust funds belonging to employees.
‘This legal structure effects a fundamental transformation. Once the contributions are made into an employee’s account in the scheme, it ceases to be public property. They become part of a private trust fund, held and managed by trustees for the exclusive benefit of the members,’ the court said.
The court further noted that trustees and administrators of pension funds do not perform government functions and are not paid from the Consolidated Fund or through parliamentary appropriations.
The court warned against equating pension savings with public funds merely because the employer is a public institution.
‘With this autonomy, it matters not that the sponsor is a public entity. Pension, just as a salary, is a benefit to the employee,’ the court observed.
‘Extrapolating the findings of the courts below would be absurd, as that would be tantamount to asserting that merely because an employee earns a salary from a public entity, then the employee’s expenditure should equally be regulated as part of public funds.’
The court distinguished between regulatory oversight and direct State control, saying the Retirement Benefits Authority’s supervisory role did not make pension schemes instruments of government.
‘The test requires more than mere regulatory oversight; it requires such a degree of control that the entity can be seen as an instrumentality of the State. The retirement benefit schemes lack this character,’ the judges ruled.
The Supreme Court also found that Article 227 of the Constitution was intended to govern public procurement involving taxpayer-funded entities and State organs, not private pension savings.
‘There was never any intention by the makers of the Constitution to include private enterprises and private pension funds, and in particular a segment of the funds sponsored by public entities, as part of the public finance and funds,’ the court stated.