Academics and senior administrators at the University of Nairobi are taking legal action against trustees of the university's pension fund, alleging mismanagement of KSh 1.2 billion (Pounds 11.8 million).
Lawyers representing university staff are also seeking the appointment of a competent administrator for the fund.
Fund members are accusing the trustees of unlawfully investing KSh228 million in a local mortgage company in return for subsidised houses for only 200 out of the fund's 2,500 members.
Under the deal, the Housing Finance Company of Kenya pays the pension fund a 6 per cent interest rate for its investment against the market rate of 24 per cent, while charging 10 per cent interest on members' mortgages.
The scheme, launched in 1994 to provide subsidised housing for lecturers, is alleged to have lost the pension fund more than KSh40 million.
The uncertain future of the fund is worsened by an absence of actuarial valuations and audited accounts since 1987.
Last year the university borrowed KSh350 million from the pension scheme. Vice-chancellor Francis Gichaga said it was to cut the deficit of KSh1 billion - equivalent to the institution's annual recurrent expenditure.
The university reportedly suspended retirement of some older academics when it was realised the pension fund was facing serious financial problems.
"Lecturers due for retirement this year have been asked to stay beyond the mandatory retirement age of 60, since there is no money in the pension kitty," said the source.
KSh120 million of the funds were sunk in a parastatal insurance company that collapsed years ago because of poor management and siphoning of money by executives.
Another KSh50 million is tied up in a small bank that became insolvent after advancing huge loans to directors and failing to serve customers. It has been put under Central Bank of Kenya statutory management.
Fund members are demanding separation of the pension scheme from the university administration. Officials seconded from the university's finance department administer the scheme at the moment.
The legality of investing in the mortgage scheme is being queried. "The law says retirement benefits should not be used to make direct or indirect loans to any person," sources said.