Inherited Burden: County Pension Liabilities Function Under Kenyan Law

You pay your monthly contributions to your retirement scheme, look at your payslip, and assume that money is sitting safely in a fund somewhere earning interest.

If you work for a county government in Kenya, that assumption might be dead wrong.

Across Kenya's 47 devolved units, thousands of workers face a quiet financial crisis. It is not just that county governments are broke; it is that the legal machinery meant to protect municipal pensions broke down during a historic transition, leaving devolved units with billions of shillings in inherited liabilities they are legally bound to pay, but regularly ignore.

When Kenya overhauled its governance structure under the 2010 Constitution, the 175 defunct local authorities, from the Nairobi City Council to tiny town councils, were dissolved. Taking their place were 47 newly minted county governments.

Under Section 55 of the Urban Areas and Cities Act, alongside the transition laws that created devolution, county governments became the legal successor entities to these old councils. That meant inheriting not just city halls, tractors, and land, but every single debt, contractual duty, and unremitted employee deduction.

Among those inherited liabilities were massive unremitted contributions owed to two primary retirement schemes: the Local Authorities Pension Trust (LAPTRUST) and the Local Authorities Provident Fund (LAPFUND).

To understand why county governments owe so much money today, you have to understand how these two retirement bodies actually work.

How the two schemes differ

While both schemes serve employees in county governments and the water companies owned by local authorities, their underlying economic structures are fundamentally different.

LAPTRUST operates primarily as a Defined Benefit (DB) scheme. In a defined benefit arrangement, the retirement payout is calculated using a set formula based on an employee's salary and years of service, rather than the investment returns of the fund.

The employer guarantees this payout. If an employer fails to remit both the worker’s deducted contribution and the matching employer share, the scheme faces an actuarial deficit, a shortfall between the money it holds and the future pension promises it must honour.

The eventual retirement benefit depends entirely on total contributions plus cumulative investment returns. When a county government deducts money from a worker's monthly salary for LAPFUND but fails to transfer that cash to the scheme, it is effectively withholding the worker’s own earned income.

The legal workings of inherited debt

When devolution took effect in 2013, county governments did not start with a clean financial slate. The transition laws explicitly stated that all existing liabilities accrued by defunct councils automatically transferred to the new county administrations.

That legal obligation is where the problem multiplied.

When a county government fails to remit pension deductions on time, the law does not view it as a simple delay. Under Retirement Benefits Authority regulations, unremitted contributions attract interest penalties, often charged at compounding statutory rates of 3 per cent per month or the prevailing central bank rate.

Over a decade, a principal debt of KSh 100 million accrued by a defunct municipal council can compound into a multi-billion-shilling liability for a modern county government.

The structural failure happens in county revenue allocation. Counties receive their equitable share of national revenue from the National Treasury, alongside their own source revenue collected locally from parking fees, single business permits, and property rates.

When Treasury disbursements are delayed, a frequent occurrence in Kenyan public finance, county treasuries prioritise immediate operational costs, such as net salaries and fuel, over statutory deductions.

The worker gets their net salary banked, but the statutory deductions for LAPTRUST and LAPFUND remain on paper as unpaid accounts payable.

What this means for workers and taxpayers

For county workers, the consequence is immediate and painful.

When a worker retires, pension schemes calculate benefits based on actual received contributions. If a county government owes years of unremitted funds, the retirement scheme may delay processing the pension or issue reduced monthly payouts until the employer settles the arrears.

For the broader economy and taxpayers, unremitted pension liabilities represent a growing public finance risk.

As accrued interest penalties outpace revenue collection, county governments spend an increasing share of local revenues paying off interest on legacy debt rather than building health centres, maintaining roads, or funding agricultural extension services.

The law leaves county governors with no legal escape route: these debts cannot be written off unilaterally because they represent contractual rights belonging to individual workers and trust funds.

IGeBC Retirement Benefits Authority debt-swaps policy

The Intergovernmental Budget and Economic Council, alongside the National Treasury and the Retirement Benefits Authority, continues to push for debt-clearing frameworks, including debt-swaps where counties transfer physical land or assets to pension funds to cancel outstanding debts.

Treasury is also considering direct deduction mechanisms, where pension arrears are deducted directly from a county’s equitable share allocation at source before the funds are released to regional accounts.

Until structural enforcement mechanisms are fully applied, the legal obligation remains pinned directly on county governments, turning legacy municipal debt into a persistent drag on local economic development.

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