The Centre may give a peek into its plan to improve pension benefits for its staff within the overall framework of the National Pension System (NPS) in the interim Budget on February 1.

The plan, according to sources, may include a guarantee component that is carefully designed, not to cause any unsustainable fiscal burden.

Since the Committee formed in the budget session, the finance minister may refer to the status of its work in February budget speech. Since it will be an interim budget the government will likely make the necessary changes in NPS in the regular budget in July.

While the panel’s suggestions are yet to be revealed, analysts who track NPS said the way forward would be to strike a balance between the interest of the employees while maintaining fiscal prudence.

They said a guarantee component, which is graded, meaning guarantees to be proportionate to years in service is a possibility.

The government will take some time before announcing measures to NPS improve pensions under NPS. “The government is in no hurry. Changes in NPS would be well thought through to make it sustainable,” an official said

While there were expectations that the government could announce some tweaking in NPS in November ahead of key state assembly elections, it resisted the temptation as OPS was no longer a hot potato.

Even after rolling out OPS, Congress lost polls in Rajasthan and Chhattisgarh, underscoring the limitations of it to lure voters as the share of government employees in the electoral base is very small.

Under the non-contributory OPS (for pre-2004 staff), a government employee is entitled to 50% of her last salary as a pension if she has completed 20 years of uninterrupted service. Employees with uninterrupted service of more than 10 years and less than 20 years are entitled to pension on a pro-rata basis. Also, their pension gets inflation-adjusted twice a year.

According to extant NPS norms, a minimum of 40% of the accumulated NPS corpus from contributions during a person’s working years (the government and staff contribute 14% and 10% of pay, respectively) must be invested in annuities to generate a monthly pension, which is linked to annuity returns and not guaranteed. The balance of 60% can be withdrawn, which is tax-free.

Given the substantially higher pensionary benefits under OPS, the government staff have been demanding guaranteed pensions similar to OPS.

The high pension burden was the reason, the Centre launched NPS by making it contributory.

RBI report cautions against OPS

In a report, the Reserve Bank of India on Monday said the return to the OPS by a few states and reports of some other states moving in the same direction would exert a huge burden on state finances and restrict their capacity to undertake growth-enhancing capital expenditures.

Internal estimates by the RBI suggest that if all the State governments revert to OPS from the National Pension System (NPS), the cumulative fiscal burden could be as high as 4.5 times that of NPS, with the additional burden reaching 0.9% of GDP annually by 2060. “Thus, any reversion to OPS by the States will be a major step backwards, undermining the benefits of past reforms and compromising the interest of future generations,” it added.