The Pensions Department has accused Auditor-General Edward Ouko of misrepresenting facts by saying Sh67.9 billion was paid to ghost retirees.
Mr Ouko, in a report tabled at the National Assembly two weeks ago, said individuals at the National Treasury may have taken advantage of the weaknesses in the Pensions Management Information System (PMIS) to authorise irregular payments.
Of the money paid out, some 962 claimants received Sh1.6 billion -- which was made way before the end of their service dates -- meaning they drew salaries despite getting their pension, the auditor said.
About 221,590 claimants with irregular or no tax PIN were paid Sh44 billion, some 7,166 others with irregular identity cards got an undisclosed amount, with 232 claimants having shared Sh152.8 million, according to the report.
Pensions director Shem Nyakutu says the report is a vote-of-no-confidence on his office, considering that he certified the payments "with a green pen".
"We had time with the auditors and explained why certain things happened. Every claim we process for those who have died or retired is scrutinised by the Controller of Budget and the Auditor-General," Mr Nyakuti said.
"Mr Ouko did not take time to go through the records to ascertain their authenticity. He went ahead and published what is clearly erroneous and misleading."
Mr Nyakuti said Mr Ouko quantified the amounts paid to claimants who did not have IDs, those who received pension more than once, those who got the money before retiring and cases where one account was used to pay up to 20,000 people.
The department is accused of paying Sh492.1 million to 213 claimants who are not on pensionable terms of service.
On that, Mr Nyakuti said some civil servants like the President, lawmakers and those in the Judiciary are not categorised as permanent and pensionable because they are never put on probation.
"What Mr Ouko is saying is that among the phantoms we are paying illegally are former presidents Daniel arap Moi and Mwai Kibaki, former vice president Moody Awori and former MPs like current Kisumu Governor Anyang Nyong'o and Trade Cabinet Secretary Peter Munya," the Pensions director said.
Those paid without IDs include non-Kenyans who worked in the country during the colonial era and East African Community employees from Uganda and Tanzania.
"Up to the 1980s, there were foreign teachers and Judiciary staff who served in Kenya. They include retired Appellate Court judge Akilano Akiwumi, who was from Ghana," he added.
"We have explained that to the auditors. It should be known that no money was lost."
The auditor said PMIS has not offered foolproof support in the processing and payment of pension and gratuity "and that is why the system allowed irregular entries and duplications in the information offered".
Some of those affected are the Judiciary, Health, Foreign, Treasury, Water and Transport ministries, State departments of Prison, Social Protection and the Teachers Service Commission.
Mr Ouko raised queries paying people who already have records (payments).
"It is true we paid them," Mr Nyakutu said, giving an example of the 5,000 teachers who retired between 1997 and 2003.
They recently won a court case to have their pension revised upwards, prompting the National Treasury to process their records afresh.
The other concern by the auditor is why a claimant would have more than one account.
Mr Nyakutu said it is possible, giving the example of a Kenya Defence Forces soldier who dies.
"That man's spouse may earn death gratuity, dependant's pension, widow and children's pension and the widow will also be entitled to a pension if she is a civil servant," he said.
"A person may have up to five accounts. Then there are people who retired as civil servants and later on as Members of Parliament. There is nothing wrong with paying them."
According to Mr Ouko, some account numbers have letters such as "O" and are being shared by more than 20,000 people.
Mr Nyakutu said during the provincial administration time, the government used to pay retirees whose pay was little using one account belonging to the District Commissioners, District Officers or Provincial Commissioners.