Sep 25, 2024 08:50 PM IST
NPS Vatsalya offers many advantages. Apart from increasing pension coverage, it enables parents to initiate retirement saving for their minor children which seamlessly morphs into NPS in their working life providing uninterrupted accumulation of retirement savings
The unveiling of NPS Vatsalya, a contributory pension scheme for children, marks an important step towards ensuring the social security of citizens. The National Pension System (NPS) was envisaged in 2004 as a jointly funded contributory pension scheme for government employees. It was then extended to the private sector, other citizens, and now to children. This expanded coverage, from birth to the age of 70, provides an economic instrument to address the challenges of longevity, and could help further the goal of universal pension.
India’s demographic trends indicate an increasing longevity with a more active lifestyle post-retirement owing to better sanitation and medical facilities. While this is good news, it also means that tomorrow’s retirees will have a longer retirement and must, therefore, accumulate a bigger corpus for their sunset years. The importance of early planning for retirement cannot be overstated. In this context, NPS Vatsalya, with its longer vesting period, provides an appropriate vehicle for larger savings accumulation, emphasising the need to start planning for retirement as early as possible.
NPS Vatsalya offers many advantages. Apart from increasing pension coverage, it enables parents to initiate retirement saving for their minor children which seamlessly morphs into NPS in their working life providing uninterrupted accumulation of retirement savings. It, thus, harnesses the substantial benefit of “power of compounding” during this extended phase of pension corpus accumulation. It inculcates a positive financial habit of saving and investing from an early age. Supporting parents, by nurturing financial awareness early in their children, could lay the foundation for long-term financial well-being of our young citizens.
NPS Vatsalya stands out from other traditional financial products available for minor children, which generally provide administered or fixed returns. Unlike these, NPS Vatsalya offers market-linked returns, facilitating higher investment growth based on asset allocation decisions and financial market performance. The scheme has a potential to accumulate a higher pension corpus.
NPS has made steady progress with an accumulated corpus of over ₹13 lakh crore. It provides competitive returns. For instance, the equity component of NPS has given a compound annual growth rate (CAGR) of 14.2% since inception. Similarly, NPS for Union government employees, which is a mix of both debt and equity, has given a CAGR of 9.6% since inception. Building on this experience, NPS Vatsalya integrated within the existing NPS architecture offers all the core features and benefits of NPS, including investment choices and market-linked returns at low cost. Contributions in NPS Vatsalya can be self-determined with a minimum requirement of ₹1,000 per annum, making it accessible to families from different economic strata. Of course, it is desirable to put more money over the minimum. It allows partial withdrawal up to 25% of own contributions for three times till the age of 18 years for children’s education and illness. It is available to residents and non-residents through both offline and online modes with digital onboarding, electronic contributions, and online servicing.
In essence, NPS Vatsalya can be viewed as a digitally enabled, low-cost, market-linked children’s pension plan. By extending the proven NPS model to cater for minors, the government is leveraging a successful infrastructure to address the changing demographic needs. We all understand that a pension is essential for financial security and self-esteem in old age. However, ensuring that all citizens have access to pensions is a significant challenge. In most jurisdictions, pensions are partially funded by the State and are linked to occupation, with employers mandated to enroll their workers in retirement plans or citizens participating in schemes that deliver pensions. This is challenging in India’s case as around 81% of our labour force is in the unorganised sector, where there is no statutory access to workplace pension. At the same time, our young population, the pivot for our economic dynamism, is going to age. Currently, every tenth person is over 60 years of age; demographic projections indicate that by 2050 one in five citizens will be over 60 years requiring a pension. So, provision for social security should start now.
Our income levels are also expected to rise as we transition from a lower middle-income country to an upper middle-income country on its way to becoming a high-income country. In this process, our ability to financially empower our children will rise. NPS Vatsalya aims at enhancing the financial well-being of citizens in the long-run and engaging with the youngest population with the support of parents in nurturing the goal of developed India.
Deepak Mohanty is chairman, Pension Fund Regulatory and Development Authority.The views expressed are personal
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