You need to call VS. You are right you can't just change a name so would need to cancel and start a new booking. Very few airlines allow for a name change on a ticket unless in some very specific circumstances such as a name change following marriage, divorce or adoption when it is clear it is the same person involved.
Don't just cancel Niece 1s ticket because there is no guarantee it would be immediately released back for people to be able to book.
If you phone the agent should be able to cancel on booking and then should be able put a hold on the reward seat whilst they book it for Niece 2.
Be very clear from the start what you are asking. Don't start by saying 'I need to cancel a ticket' and once that has been done ask to book for Niece 2
Say something like 'I need to cancel one ticket and then also book another identical one for the same dates but for someone else'
You'll have to pay the cancellation fee which I think is £35 / $50. And it's possible the VS surcharge fee part of the fare will have increased as well.