Superannuation Contributions
Discuss about the Superannuation Contributions and Saving.
In order to have a promising and a protective future, it is very important for every individual to stimulate savings and make investments that ensure better returns. Superannuation contributions have been introduced so as to encourage all individuals to develop the habit of savings and make the legitimate investment in funds which can ensure rewards in the future. In the case of tertiary sector employees, there are many factors that need to be considered in order to decide if to invest such superannuation contributions in Defined Benefit Plan or Investment Choice. Also, in such case for the purpose of the proper decision-making process, the time value of money plays a very important role. An investor for making legitimate investment decisions is hugely assisted in knowing about the price of assets or stocks by an efficient market hypothesis (ASIC, 2016). For deciding a portfolio, an efficient market hypothesis also highlights the role of fund managers.
There has been a significant enhancement in the superannuation contributions in the recent years. The people have started considering superannuation contributions in order to save and invest for their retirement years. It has been made mandatory by the governments of most countries for the employers on behalf of employees to contribute a minimum amount towards superannuation contributions (ASIC, 2016). Every year there are enormous amounts of superannuation contributions owing to such mandatory contributions and belief of individuals to make savings for their retirement years (Kollmorgen, 2015). It is the responsibility of the financial institutions to invest these accumulated funds so as to provide returns to the individuals in their retirement years.
Primary, Secondary and Tertiary are 3 economic sectors. The productivity of primary and secondary sector depends on the advice, experiences, and wisdom offered by the employees of the tertiary sector (Petty et. al, 2012). Earlier the employers made 3 percent contribution from their salaries to superannuation contribution which is now revised to 9 percent from 2005. Also, with regards to superannuation investment, it is mandatory for the employers to provide a portion of their income. In order to suppress the burden of social security systems for the provision related to pension payment, such policies are implemented which will later be of help to individuals in their retirement years (Kollmorgen, 2015). Unisuper Ltd manages and services the superannuation funds of employees in the tertiary sector. It is one of the biggest individual industry-based superannuation funds. There has been the introduction of varieties of superannuation fund products, retirement and investment plan options in the recent years. This allows the employees to choose the best kind of assets and funds for their superannuation contributions to be invested in amongst a variety of options (Parrino et. al, 2012). Defined Benefit Plan and Investment Choice Plan are the two main kinds of superannuation plans.
Defined Benefit Plan
Defined Benefit Plan is a plan in which a formula is used to determine the benefits that need to be paid to the employees during their retirement. The determinants considered to determine the total benefit in the formula were age, final average salary, etc. The trustees of Unisuper Ltd designed various assets that can be selected by the tertiary employees who opt for Defined Benefit Plan where they are allowed to pool and invest their superannuation contributions (Needles & Powers, 2013). The final retirement payout of an employee under Defined Benefit Plan is unaffected with the investment performance of their portfolio of assets as their performance becomes insignificant at their retirement. It is the responsibility of the trustees of Unisuper Ltd to provide benefits to the tertiary employees under this scheme as these employees are not liable to benefit from the gains ascertained by the performance of their portfolio of assets.
In Investment choice plan, tertiary employees can choose from a variety of assets were their superannuation contributions are to be invested in Shares Fund, Tertiary Selection Fund, Stable Fund and Secure Fund. In this plan, the employees hold private superannuation funds and an investment account accommodating employer-sponsored. On the attributes of risk and return, such strategies can be easily differentiated (Power, 2017). The yearly allocation of benefits is attained on contributions invested fewer expenses related to management and administration. The final retirement payout of an employee under Investment choice plan depends on the returns that are scored by their strategy of investment.
In the case of a Defined choice plan
It is important and relevant for the tertiary employees to evaluate factors related to risks while opting for Investment choice plan or Defined choice plan. Employees who desire higher returns but fear of taking risks can opt for the Defined choice plan while the employees who anticipate higher returns and are not afraid of taking risks can always opt for the desired Investment choice plan given the extent of risk they are ready to take. Apart from risks and returns, there are many other factors that require being taken into due consideration while selecting the Defined choice plan and Investment choice plan. It is very important to evaluate the employee’s capability with regards to selecting and managing their portfolios for it is easier for an employee to manage his portfolio and other investments if he is extremely knowledgeable and experienced. This will eradicate the possibility of any future losses. If an employee is not having knowledge and experience in managing his portfolios and other investments the possibility of losses are confirmed in the future. No doubt the responsibility of managing portfolios and other investments must not be taken by such employee. Such employees should transfer the headache of managing his portfolio and other investments on his employer. It is the employer who will be responsible to compensate the employee for the losses that incurred.
In the case of Investment choice plan
Investment Choice Plan
Tertiary employees who have few other sources of income for themselves can consider Investment choice plan. Such employees will be less petrified of risks if they have additional sources of income apart from superannuation fund interests. The employees will be more confident in taking risks in order to have greater returns because of reliance on their additional sources of income. Employees who do not have additional sources of income to rely upon can always go for Defined benefit plan as the risks are lower and the returns that are paid to them at their retirement are uniform.
It can be construed that it is important for an employee to consider his capability to handle risks and consider return profiles and then opt for the plan respectively.
This concept forms a relevant aspect of investment. Time value of money is where the maturity amount is determined and calculated on the basis of financial decisions and considering the opportunity cost of funds. It is desirable for investors to prefer money in the present rather than in the future as money loses its considerate value over time. Also, the investors can earn interest and upgrade their financial assets if they invest a dollar in the present rather than in the future. Such earnings of interest and enhancement of financial assets could later be utilized as per their needs. Moreover, investors live in the current time and so the current value of money is more important (Ross et. al, 2014). The time value of money is a concept all about the difference between present value of money and future value of money. The concerns in context with the time value of money also assist the employees in the selection of the funds that they need to invest in as per their best knowledge, capability, and experience through their superannuation contributions (Ross et. al, 2014). Not only this, such concerns play a significant role in the decision-making process as well.
An employee in his entire work life not just contributes a significant percentage of his salary in superannuation funds but also reinvest the receipt of earnings i.e. interest from such funds so as to create further value. It takes years for such value to grow. It is important for the employees to calculate the future value of money invested in the present with the help of the time value of money concept (Melville, 2013). Also, as per many researchers, greater returns come with higher time investment. Therefore, an employee might face poor rewards if he is not aware and used to the time value of money concept as it will hamper his decision making. Hence, in order to reap multiple rewards from superannuation contributions, an employee should consider an effective portfolio for investment.
Relevant factors to be considered
The concept of time value of money also has a risk of losses which may or may not happen. This is because the concept focuses on greater rewards ignoring bad years. Keeping in mind the aforesaid risk it is necessary for an employee to evaluate his portfolio for investment and the time that can be spared by them for it to yield returns. The employees’ capability of taking and bearing risks and patience to reap the desired rewards should also be considered for taking legitimate decisions (Porter & Norton, 2014). Such concern is important for the decision-making process and thus forms a part of this concept. The time value of money can be better ascertained with the help of EMH.
When it comes to an efficient market, the return on a security is compensating the investor for the time value of money and risk (Marsh, 2009). As per this theory, all available information is completely depicted by the prices of assets. It is an investment theory in financial economics. As per Efficient market hypothesis, all the significant information is reflected by the efficiency of the stock market that results in a current price of shares to always adjust and as a result of which it is impossible to overcome or pre-assume the market. Hypothesis stock is traded at its nominal values on its stock exchanges due to the aforesaid theory. Therefore, the investors face problems in selling their stocks (Laux, 2014). They either sell them at an exaggerated price or purchase undervalued stocks. An investor can only earn higher rewards if he buys riskier investments as it becomes hectic for him to surpass the aggregate market by expert selection of stocks or through the timing of the market.
It is required for the employers to select such investments in pension funds that yield better and greater returns considering the time value of money. To yield higher returns diversifying of portfolios is also required together with a proper emphasis on the time value of money. If the pension fund manager highlights the risk appetite, additional sources of income, extra resources and such other valuable information of the individual pension holder, then the issue of throwing pin cannot take place (Melville, 2013). The portfolio of pension holders does not always encourage higher risk for investment in maximum scenarios. The pension fund managers must always consider the prevalence of taxes as it plays an important part in such cases. The significance of the tax position of an employee for decisions related to investments must be considered (Marsh, 2009).
Conclusion
Superannuation funds encourage individuals in stimulating savings and making investments and also paves way for the employees to chose between Investment Choice Plan and Defined Choice Plan as per their risk appetite, knowledge, experience and additional sources of income. The employees’ capability of taking and bearing risks and patience to reap the desired rewards should also be considered for taking legitimate decisions. Such concern is important for the decision-making process and thus forms a part of the Time value of money concept. As per Efficient market hypothesis, all the significant information is reflected by the efficiency of the stock market that results in a current price of shares to always adjust and as a result of which it is impossible to overcome or pre-assume the market.
References
ASIC . (2016) Type of funds [online]. Available at: https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/choosing-a-super-fund/types-of-super-funds [Accessed 15 May 2018]
Kollmorgen, A. (2015) Superannuation fund performance and fees [online]. Available at: https://www.choice.com.au/money/financial-planning-and-investing/superannuation/articles/superannuation-funds-performance-and-fees-191115 [Accessed 15 May 2018]
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting. Accounting and Business Research. [online]. 44(4), 380-382. Available from
Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.
Melville, A. (2013) International Financial Reporting – A Practical Guide. 4th edition. Pearson, Education Limited, UK
Needles, B.E & Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning
Power, T. (2017) Fund choice: Comparing super funds in 8 steps [online]. Available at: https://www.superguide.com.au/boost-your-superannuation/comparing-super-funds-in-8-steps [Accessed 16 May 2018]
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
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