How NPS Vatsalya stands out from other savings products curated for children | Mint

The unveiling of NPS Vatsalya, a contributory pension scheme for children, by Union finance minister Nirmala Sitharaman, first announced in her 2024-25 budget speech, marks an important step towards the social security of our citizens. 

The National Pension System (NPS) was envisaged in 2004 as a jointly funded contributory pension scheme for government employees and then extended to private companies, including common 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 in the furtherance of the goal of universal pension.

Our demographic trends indicate increasing longevity with a more active lifestyle post-retirement owing to betterment in sanitation and medical facilities. While this is good news, it also means that tomorrow’s retirees will have a longer retirement and must accumulate a bigger corpus for their sunset years. What could be a better way than starting early? In that context, NPS Vatsalya, with a longer vesting period, provides an appropriate vehicle for larger savings accumulation.

The differentiator 

NPS Vatsalya offers many advantages. Apart from increasing pension coverage, it enables parents to initiate retirement savings on behalf of their minor children, which seamlessly morphs into the NPS in their working life, providing uninterrupted accumulation of the savings. It, thus, harnesses the substantial benefit of ‘the 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. By nurturing financial awareness early in their children, supporting parents could lay the foundation for the long-term financial well-being of our young citizens.

NPS Vatsalya stands out from other traditional financial products for minor children, generally providing administered or fixed returns. Unlike these conventional products, NPS Vatsalya offers market-linked returns, facilitating potential higher investment growth based on asset allocation decisions and financial market performances. The scheme design assumes a dynamic approach to investing and exhibits the potential opportunity to accumulate a higher pension corpus, leveraging the benefits of financial markets and investment growth over time.

The NPS has made steady progress, with an accumulated corpus of over ₹13 trillion. It provides competitive returns. For instance, the equity component of the NPS scheme has given a compound annual growth rate (CAGR) of 14.2% since inception. Similarly, the NPS scheme for central government employees, 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 the 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. Of course, it is desirable to put more money over the minimum, making it accessible to families from different economic strata. It allows partial withdrawal of up to 25% of own contributions three times till the age of 18 years for children’s education and illness, etc. It is available to residents and non-residents through offline—the existing NPS distribution channels such as banks—and online with digital paperless 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 this proven NPS model to minors, the government is leveraging an existing successful infrastructure to address changing demographic needs.

Need of the hour

We all understand that ‘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 largely linked to occupation, with employers mandated to enrol their workers in retirement plans or citizens voluntarily participating in schemes that deliver pensions. This is challenging in our case as around 81% of our labour force is in the unoraganized sector, where there is no statutory access to workplace pensions.

At the same time, our young population, which is pivoting 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. In this direction, 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 the chairman of the Pension Fund Regulatory and Development Authority.