Determinants of Defined Benefit Plan for Superannuation Contributions
What 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?
2.If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.Explain why this is not the case?
1. The superannuation policy and the continued efforts by the Australian government to encourage and persuade people to practise savings and investing are critical. Saving and investing in the future guarantees the individual a good future in retirement. For instance, the government has advocated for minimum contributions to be made by individuals towards the retirement and superannuation funds. AustralianSuper (2016) holds that the employers have a duty to remit the employees contribution to the retirement fund. The introduction of the three percent minimum contribution to superannuation investment eliminated the burden from the country’s social security system in offering the pension payments to sustain the employees in retirement (Hebner 2007). The superannuation plan offers an investment choice and defined benefit plans. Each of these plans has the determinants that are considered before venturing.
Under this plan, the employee benefits are paid in retirement. The Defined Benefit Plan for the employee is determined by various factors or determinants including the age, the final average salary of an employee, and the years worked. This is evident in the formula involved in calculating the benefit:
For the tertiary employee opting to select the Define Benefit Plan for the superannuation contributions, the Unisuper Limited Trustees have the duty to determine the selected assets (Einfeld 2012). Through this plan, the employees’ final benefits would depend on the factors captured in the formula. Based on this formula, the employee’s investment performance would be irrelevant because it will never affect the final payout. In fact, the Unisuper Limited shelves the risks associated with the investment performance of the employee’s asset portfolio. To this effect, it is important to note that no tertiary employee can ever benefit from the returns of investment earned through the asset portfolio. The trustees of the Unisuper Limited have the responsibility to fund the defined benefits. In fact, the trustees have the discretion to offer the additional accumulation benefit based on the annual adjustments. Unfortunately, the employees are never guaranteed the payouts to form as small portion of their contributions (Einfeld 2012).
Determinants of Investment Choice Plan for Superannuation Contributions
However, for the tertiary workers who opt for the Investment Choice Plan, they are required to retain their investment account encompassing personal superannuation and employer-sponsored contributions. The retained individual investment account should also contain the annual distributions of the gains such an employee has earned on the invested contributions. Conversely, the employee has to deduct the management and administrative fees. Under this plan, the tertiary employee has the powers to nominate the type of portfolios and assets (AustralianSuper 2016). This ensures that the superannuation contributions of the employees are fully invested depending on different investment strategies.
Secure Fund is an investment strategy that has been applied under the Investment Choice Plan. It involves the use of Australian fixed interest cash and securities. Stable fund is also an important strategy of investment. Under the stable fund strategy, the country applies fixed bond securities and interest. It calls for a direct exposure of overseas and domestic property and shares (Einfeld 2012). The trustee’s selection fund has also proved critical in investing the employee’s investment choice plan. This is a balanced fund of overseas and local property assets and shares. It also focuses on the private equity investments. The share fund is the last investment strategy that involves investing in the stock markets locally and internationally (Jung & Shiller 2005).
The four investment strategies are differentiated based on their return and risk features. For instance, the Secure Fund is viewed as the strategy that bears the least risks. As a result, the strategy offers the least average return on investment (ASIC 2016). On the other hand, the Share Fund strategy is the riskiest investment method, but guarantees the tertiary employee the highest return on investment. When the tertiary employees prefer the Investment Choice Plan, they must understand that the final payouts will depend on the returns earned from selected investment strategy. Unfortunately, the investors, or the employees are liable or bear the risks related to the superannuation contributions as explained by Einfeld (2012).
The Unisuper Limited offers different investment products to the employees at retirement. This is applicable for both the Investment Choice Plan and Defined Benefit Plan contributors. At the retirement time, the Unisuper Limited distributes and manages the retirement benefits of all subscribers. The pension manager uses the investment options to distribute the benefits to its subscribers. For example, the Indexed Pensions is one of the investment options for subscriber. Under the indexed pension scheme, the beneficiary is guaranteed regular income that the manager index to inflation (ASIC 2016). The indexed pensions remain payable throughout one’s life. However, upon the demise of the beneficiary, the dependent or spouse would continue receiving it.
Secure Fund Investment Strategy
The Unisuper Limited also distributes the pension through a single life indexed. Under this program, the scheme guarantees the beneficiary a higher regular income than the standardized indexed. However, this distribution option ceases upon the death of the retiree. It thus fails to guarantee the dependant regular income after the death of the beneficiary (Jung & Shiller 2005). The allocated pensions have also become an option for distributing the retirement benefits. This guaranteed income is executed regularly. The beneficiary has the privilege of choosing the time of commencement and access to the desired capital. In fact, the beneficiary has the obligation to choose the investment strategy where the contributor’s amount can be invested. Upon the death of the contributor, the Unisuper Limited would distribute the pension balance to the dependents.
The part-cash distribution is another pension distribution strategy where Unisuper Limited is allowed to distribute a proportion of the beneficiary’s retirement fund. The percentage is, however, subjected to tax and regulatory consents. This allows the beneficiary to access a cash lump sum that can be directed towards personal consumption and investment goals (Einfeld 2012). Finally, the Unisuper Limited can use the rollover options to facilitate the transfer of an individual’s balance of retirement fund. The rollover of the retirement fund for the balance is based on the sanctioned industrial and personal investment fund or superannuation (ASIC 2016). The Unisuper Limited has to consider the transferable amount based on the balance to the authorized retirement savings account or deposit fund to the retirement fund as exclaimed by ASIC (2016).
Under the Australian pension or retirement pension laws, the contributor can look beyond the Unisuper Limited to manage the retirement fund. This can see the participant electing a combination of the investment strategies. The decision to go for combined alterative will depend on different factors. Importantly, the lifestyle and income requirements are important factors in retirement (AustralianSuper 2016). Jung and Shiller (2005) have also maintained that the decision for a combined investment strategies would require the beneficiary to consider the permanency of the return profiles and investment risks. The time value of money and inflation can also influence the decision of a beneficiary.
For an individual to make a complex superannuation decision, the time value of money should be a factor. OICU-IOSCO (2015) affirms that stock market investment requires individuals to have high literacy on the operations and working of the market. In most cases, people who have low literacy levels remain scared and unwilling to invest in the share market. Without a doubt, the basic financial knowledge can allow an investor to understand the concepts of stock market because such an individual understands the time value of money, inflation, and interest compounding. With the inability of differentiating stocks and bonds, the investor can confuse the interest rates for bond prices leading to the risk of diversification (Janor, Yakob, Hashim, & Wel 2016). The primary issues that are critical in the decision making regarding the investment is the level of income and the amount intended to invest. In the stock investment, time is essential because it is never meant to help an individual to make a cash cow.
Stable Fund Investment Strategy
2. The available evidence has failed to support the efficient marketing the hypothesis reasoning. The basic reasoning of the theory rarely provides logic thus remain mistaken. The Random Walk Theory (the efficient market theory assumes) assumes that the pricing of stocks is perfect as it is determined by the inherent investment properties (Hebner 2007). The supporters of this theory believe that the knowledge or information in the stock market is shared equally among the participants. Unfortunately, this market efficiency theory exhibits various deficiencies thus calling for a swift exploration of relevance in the modern market.
The efficient market hypothesis is a subjective theory because it lacks a clear proof in finance. However, it explains the working of the stock market. Without a doubt, the hypothesis has various deficiencies, especially in explaining the behaviour of stock market. The theory assumes that the participants share and access equal information in the market (Mandelbrot 2004). The validity of this assumption is questionable because it has failed to analyse the value of stock. In most cases, all investors seek for opportunities that are available in undervalued markets. However, other investors seek for the investment opportunities based on the growth potential. Based on these two sets of investors, getting a fair value market may prove difficult.
Some actions in the market seem to support the market hypothesis theory. For instance, the interpretation of negative information would dramatically cause fall in the market prices automatically. However, where the negative news about the market fails to trigger price reduction, it can trigger the increase of price. Although the hypothesis could be correct, the conclusions drawn from it suggests the investors can never beat the market (Hebner 2007). According to Warren Buffett, this hypothesis is anchored on an imperfection because the behaviour of the financial market is unpredictable (Mandelbrot 2004). It combines cognitive biases and predictable human errors. The empirical studies show that the evidence rarely supports the efficient-market hypothesis (Chan, Gup, & Pan 2003). In fact, in the market, it is possible to identify losers based on the negative stock returns.
The speculative economic bubbles show the existence of irrational exuberance. It is an obvious anomaly because the investors operate on irrational exuberance without noticing the underlying values. In most cases, the rational investors can never profit because of the continued efforts to resolve the irrational bubbles (Mandelbrot 2004). The outcome of these irrational bubbles is the market crash that makes it impossible to realize an efficient market.
Trustee’s Selection Fund Investment Strategy
The definitive conclusion showing that investor can maximize returns or performance is itself illogical. It just follows a mere premise of this efficient market hypothesis. Even the flaring idea showing the market share value reflects the real market value is always accurately is itself a falsehood. This is because it assumes the possibility of a portfolio manager to consistently make profits from the market price changes that rarely occur (Chan et al. 2003). The market hypothesis model has nothing logical to offer the investors because they can never speculate and conduct a fundamental analysis accurately. Because of the inaccurate and asymmetric market information, active investors can mint more money than the inactive stock investors can (Chan, Gup, & Pan 2003).
In conclusion, it is indisputably that each investor would wish to maximize returns. However, the situation is different as the strategies fail to bear fruit. For instance, the fierce competition between investors has created an efficient market where the information enhances the price adjustments. An average investor is compensated for the investment and risk bore. This implies that the active security management becomes a losing proposition following the risk and transaction costs the investor has incurred. The evidence available justifies that no market can be efficient given the asymmetrical information. The market prices involve the incorporation of relevant information efficiently. Nevertheless, the practical aspects shows otherwise as there are error in logic. Therefore, even perceptive investors have no powers to outperform the market consistently.
ASIC. (2016) ‘Types of super funds’, MoneySmart, April 1. (Available at https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/choosing-a-super-fund/types-of-super-funds)
AustralianSuper. (2016) ‘Investing for your future’, Investment Choice Guide, November. (Available at https://www.australiansuper.com/~/media/Files/Guides/Investment%20Choice%20Guide.ashx)
Chan, K. C., Gup, B. E. & Pan, M-S. (2003) ‘International stock market efficiency and integration: a study of eighteen nations,’ Journal of Business Finance & Accounting, vol. 24, no. 6, pp. 803–813.
Einfeld, G. (2012) Are Defined Benefit Funds still beneficial? Financial Services Forum, April 30- May 1. (Available at https://www.actuaries.asn.au/Library/Events/FSF/2012/FSF2012PaperEinfeld.pdf)
Hebner, M.T. (2007) Index funds: the 12-step program for active investors. IFA Publishing, Sydney.
Janor, H., Yakob, R., Hashim, N.A., Zanariah, & Wel, C.A.C. (2011) ‘Financial literacy and investment decisions in Malaysia and United Kingdom: a comparative analysis’, Malaysian Journal of Society and Space, vol. 12, iss. 2, pp. 106-118.
Jung, J. & Shiller, R. (2005) ‘Samuelson’s dictum and the stock market’, Economic Inquiry, vol. 43, no. 2, pp. 221-228.
Mandelbrot, B. (2004). The (Mis) behaviour of markets: a fractal view of risk, ruin, and reward. Basic Books, New York.
OICU-IOSCO. (2015) ‘Sound practices for investment risk education: final report’, IOSC, Sept. (Available at https://www.amib.com.mx/images/IOSCOPD505SoundPracticesforInvestmentRiskEducation.pdf)
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