Aspects to consider for investment decision-making
What do you think are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan? What issues relating to the concept of the time value of money, taxes etc., might be important in this decision-making process? Explain.
The market consists of 3 sector. These sectors are:
- The primary sector (i.e. the sectors engaged in extracting of resources, for example raw material)
- The Secondary sector (i.e. the sector that is produces the final product, i.e. in terms of manufacturing) and
- The tertiary sector (i.e. the sector that is responsible for providing services).
The third sector i.e. the sector which gives service facilities are held in this sector. Many types of services are there, these are to give instructions, awareness, testes, capability and efficiency, and job. This sector enagages in delivering services to other divisons and other customers too. From the last century, we have seen a great movement from the primary sector and secondary sector in the direction of the service providing economy. The slow movement is referred to as tertiarisation. The service class individulas are engaged in giving away assistance to rests class of business and also to the consumers. The tertiary sector is the fastest expanding class and between the largest class in the market in the western world. The economies are made to follow a expanding headway that reatins them aloof with burdened reliance on the primary sector, to the way of enhancing the manufacturing (e.g. building of ship, textile, steel, etc) and at last towards the third sector i.e. the service providing class. The foremost class of economy to receive this manner in the present world is UK (United Kingdom). The fast growing at which entire market have lead their movement to the service class economy is expanding by time. These services are distributing of good from the manufacturing to the final end user, as in case of wholeseller, and retailer or entertaining, transportation. The primary attention is on dealing with the people.
Discussed underneath are the aspects that decides the results of service sector employees to the Investment Choice Plan or the Defined Benefit Plan. Furthermore we have checked the time value of money and taxes, etc in this decision making process.
Aspects to govern the contributions:
Term:
This is the utmost esstential aspect for planning investment. It shows upto what extent the investment will remain be invested. The short term maturity investments are made where there are low certainity of going down with respect to their value inorder to make sure that the amount is always ready incase of need. We know that short term investments are profitable for risk reverse investors and long term investements are profitable for investors being risk averse (Alsagoff, 2010).
Unisuper Ltd: Defined Benefits and Investment Choice Plan
Tolerance level of Risks:
It refers to the amount of risk to be borne by an investor if the value of the investment made by him/her lowers drastically. In many scenarios, we get to know that greater risks tolerating earns big returns, while low risk bearance gives lower profits. It is in the hands of the investor, that whether he is in a stage to tolerate higher risk or if he is ready to bear the possibility of incurring losses for earning greater profit on investment made (Boghossian, 2017).
Know-how of Investment:
The knowledge and efficiency of the individuals are the essential parameters for the selecting where to invest. The fresh investors may choose to belive on the advice of the near and dear ones, office people, relatives, or with the advice of investment banker so that they can opt for the respective investment that they wll make (Cayon, Thorp, & Wu, 2017). Those individual who have proper capability & knowledge shall resolve to opt on their own terms. In order to get a accurate knowledge of the higher profit earning, and because of getting a transparent sight of the losses that might involve, helps the individuals to opt if the inventories, bonds, and rest investments tallies with the holdings.
Revenue and Net Worth:
The income of the investor and the net worth are necessary factors to engage the investment preferences. For example, in order to acquire few equity shares (equity based investment), such as stocks, it usually engages incurring of large dollars capital, while when we invest our investment in mutual funds, it shall want only some hundred dollars. Those individuals which have a big amount saved as capital, shall have accessibility to a broader range of investement options, while new and small investors that have less capital net worth, will have accessibility to nearabout very limited options for investment preferences (Coate & Mitschow, 2017).
The biggest superannuation fund is “Unisuper Ltd” that manages the superannuation for the service sector employees in Australia. With the growing options in investments, “Unisuper ltd” provides its peers 2 types of methods of superannuation:
- Defined Benefit Plans
- Investment Choice Plan.
Defined Benefit Plans:
Defined Benefit Plans is the plan, where the gain contributed to employees at the time of retirement is computed with the help of a formula, that takes into consideration, the various qualities like, age of the employees, final average salary, and no. of years, since the day they are in employment. The risks in investment is tolerated by “Unisuper Ltd” only. It explains that the employees do not earn from the revenue gained by their asset portfolio. It will be the function of the trustees of “Unisuper Ltd” to grant funds to these defined benefits (Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis, 2017). The charges of benefits plan is not easily calculated. It needs a software of actuary, else the valuation shall be done with the help of an actuary.
Retirement Investment Plans offered by Unisuper Ltd:
Investment Choice Plan:
The employees who choose for Investment choice plan shall hold and the individual investment account consisting of the contribution of employer and that of the individual superannuation contributions and an annual distribution of gain earned by the invested contributions, less any charges of administration and management. With this plan, the employees shall select the category of assets that their offer to superannuation is invested in, by choosing in four investment strategy:
- Secure Fund: Those securities that pay interest at a particular rate and cash.
- Stable Fund: It is a basic fixed interest and bonds, that has a small role to domestic and foreign shares & property.
- Selection fund of Trustees: The left funds of home and foreign shares, private equity investements and assets of property.
- Shares Fund: The only investement in domestic and foreign shares.
With the time of retiring, “Unisuper Ltd” gives a broad range of investment plans for both Direct Benefit Plan and Investment choice plan, and the members to manage and give away the gain of retirement. This shall include the below listed pension and rest investement criterias:
Indexed Pension: It gives a standardized income that is indexed to inflation, and reward till the life of investor and thereafter can be transferred to the partner or the dependent person at the time of death.
Single Life Indexed Pension: It provides a comparatively more gain with that to systematic indexed pension as stated above, but the drawback is that it is not transferable in the name of partner or any dependent at the time of death (Wang, Chiu, li, & Hsiao, 2018).
Allocated Pensions: It gives standardised imcome, accessibility to the capital, if esstential and other four holded strategic investment, according with which the capital could be invested. At the time of death, the balance left in pension is given away to the dependants.
Roll-over Options : It gives an option to convey the left fund in retirement, to a personally approved, investment fund, or industry superannuation, the deposit fund which is approved or a retirement savings account.
Part cash Distributions: It provides an option to withdraw small % of the retirement fund, as a lump sum cash, so that it can be invested or can be used for individual personal consuming purposes. The investors can opt a mixture of all the above types, with a cautious view to meet their earnings and standard of living at the time of retirement (Eisemann, Parker, & Alstyne, 2017).
The big challenges that relates to time value of money and taxes for decision making process, to consider for the Defined benefit plans:
- The computation of retirement benefit can vary over the period of time.
- The growth rates of future repayment are difficult to forcast.
- It is not possible to look for the discount rate, that is to be implied to compute the present value of the retirement benefit today.
- It is also not possible to analyse before, as to how long will an employee live post retirement.
- Impossible to know in advance as to how long will an employee work for an organisation.
- The actuaries rules and regulations makes it essential that the pension benefit obligation considers the growth estimates in salary, but gradually it fails to take into account any would be future service.
- It is not possible to judge how long the personnels will work for the employer long enough to attain the gain and achieve their benefits of retirement.
- It is difficult to judge that type of payout option the employee shall select, as their beneficiary may alter over the time period.
Conclusion:
The only aim of the employees to invest in some kind of funds is to make their future safe. The good points of these funds is that they help in making future safe by providing funds in the long term. It is important that employees should be encouraged to safe money, to invest some part of their funds in such funds, so that in future they need not depend on other people. The only thing that is difficult with such kind of funds is that it is hard for lower level employees to understand how it functions in the long run. They need to understand how and in what areas they need to put in their money, and what advantages should be there if they do these. There are variety of pension plans to choose from, and each plan should be seen and changes based on the recommendations that the financial advisers make. If in any case there are many changes to be made with respect to such plans, these employees can also sought help from the employers. Both employee and employer should contribute their funds in these plans.
In order to achieve the superannuation fund, it is necessary that the person obtains APRA license. There are few steps that needs to be followed to obtain such license from the entity-
- The minimal criteria with regards to competence needs to be met. I is very criteria specific.
- Minimum resources should be there so that the person can get it.
- Proper risk management plan must be etched and should be followed. It is very important that the entity makes proper plan to meet the criteria aversing the risk elements.
- It is very important to make way for outsourcing and make effective arrangements.
- Rules needs to be followed, to obtain the license which would be used for longer time.
References
Alsagoff, N. (2010). Microsoft Excel as a tool for digital forensic accounting.
Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), 244-253.
Cayon, E., Thorp, S., & Wu, E. (2017). Immunity and infection: Emerging and developed market sovereign spreads over the Global Financial Crisis. Emerging Markets Review.
Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility.
Eisemann, T., Parker, G., & Alstyne, M. (2017). STRATEGIES FOR TWO SIDED MARKETS.
Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis. (2017). Accunting and Finance, Carson,E;Fargher,N;Zhang,Y;.
Wang, Z., Chiu, Y., li, Y., & Hsiao, L. (2018). Performance appraisal for the operation and management of listed and OTC Taiwanese companies with DEA benchmarking model
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