Editorial. Generation gap – The Hindu BusinessLine

With the vast majority of India’s workforce being either self-employed or with the private sector, retirement funding is a significant challenge. Recent research shows that thanks to high inflation, and despite being less well-off, Indians will need to build a larger corpus towards retirement than their counterparts in the developed world. However, most Indians get to retirement planning only in their late thirties or forties, and end up woefully under-funding their pension.

The Centre’s proposal announced in the Budget to launch NPS Vatsalya, a modified version of the NPS, is a good idea. The scheme will allow parents or guardians to open NPS accounts for minors and make contributions until they turn 18. Once the minor attains majority and starts earning, he or she can seamlessly take over the account and contribute. This will hopefully give youngsters a headstart on their retirement planning. Their investments will get a much longer runway to benefit from uninterrupted compounding and deliver the required corpus at retirement. However, the Centre should carefully structure the scheme so that it can gain popularity with savers at large.

Present reports suggest that NPS Vatsalya will replicate many features of the mainstream NPS. This may not be ideal. For one, subscribers to NPS Vatsalya will have the option, just like NPS investors, to exercise either an active choice or auto choice on allocating their contributions between equities, corporate bonds, government securities and other assets. Equity allocations under both active and auto choice are capped at 75 per cent. But given that minors are likely to have a really long investing horizon extending beyond 10 years, the Centre can consider doing away with the equity cap in Vatsalya in the interest of maximising returns. Two, reports suggest that this scheme like the NPS, may disallow premature withdrawals by subscribers before the minor turns 18. Only partial withdrawals will be allowed up to a maximum of 25 per cent of contributions, subject to end-use conditions such as education, treatment of illness, disability etc. While capping premature withdrawals may be desirable, subscribers should have some leeway on how they use their accumulated savings.

There is a proposal to allow minors to exit at 18, but with the condition that 80 per cent of the maturity proceeds be converted into an annuity, with only 20 per cent drawable as lumpsum. Given that annuity schemes in India offer poor returns and liquidity, compulsory annuitisation is one of the most unattractive features of the main NPS. This feature makes even less sense in a scheme designed for minors because at the age of 18, an individual would have a greater need for a lumpsum to fund education or skilling. This feature, if incorporated into Vatsalya, can prove to be a significant deterrent to parents/guardians. To maximise contributions, the scheme should also facilitate gifting by grandparents or other relatives into the Vatsalya account.