Factors to Consider when Selecting the Superannuation Plan
For the past two decades in Australia, thecampaign on superannuation has been intensified, urging individuals to save and invest for their future especially for the retirement year.
The efforts of the Australian Government has been seen through the enforcement of minimum contribution policy to employers, which stipulates the minimum amount that is to be contributed by the employer to the superannuation on behalf of the employee. This minimum level of employer contribution to superannuation currently stands at 9% of the employee’s salary where it has grown from 3% since its introduction. The same policy provided by the government requires employees to set aside a percentage of their income to superannuation investment (Bancroft, Caldwell and McSweeny, 2014). The main reason why the Australian government made the superannuation policy was to relieve the social security system the burden of pension payment to the retirees.As a result of the superannuation policy introduced by the government, individuals have now started to realize the benefit of saving for the future. At the moment there are billions of superannuation contributions which are being managed by financial institutions who aim to profitably invest these funds in order provide sufficient income to the non-working population at their old age. Due to this it has been realized thatsuperannuation funds are some of the major investors in Australia’s financial market, especially on companies’ shares both locally and internationally (Berk, DeMarzo and Harford, 2013).
A defined benefit plan is retirement plan that an employer sponsors and employee benefits are computed using a given formula that consists of factors such as length of employment, age, and employee’s final average salary. It guarantees a specific payout or benefit upon retirement. These benefitscan be given as monthly payments throughout the employee’s lifetime or a lump sum upon retirement. When selecting The Superannuation Contribution in the investment choice planor defined benefit plan, an employee should consider these factors(Burton, 2017).
Length of employment is a major factor to consider. The minimum length of service needed to qualify a retirement benefit is called vesting. Working an additional year increases the benefit the employee receives. This is because, working longer increases the years of service, whichis used in the benefit formula and may increase the final salary that is a factor in computing the benefit.
Age is another major factor to put in consideration. The normal retirement age is ones normal social security retirement age that is usually at least 5years or 60months of service credit. Working past the plans, normal retirement age increases the employees benefit.
The UniSuper and its Two Types of Superannuation Plans
The average salary of the employees: There is a minimum amount that employers are required to pay based on the payroll of all the covered employees. The employees contribute 5% of their monthly compensation to their member contribution account on a pre-tax salary contribution basis (Calkins and Dauten, 2015).
The performance of the certain funds is also an important factor to consider. Usually the tertiary employees should look at the trends over a given time period, say 5years .This is because, superannuation contributions or the defined benefit plan are a long-term investment whose performance is over a period of time. The tertiary employees should also compare the different tax rates and annual fees for the different fund types when considering the performance.
Investment options are another major factor to consider when deciding to allocate superannuation contribution. The tertiary employees should choose a superannuation plan; an employee should consider one with many investment opportunities at a minimum risk. During the retirement time, the subscribers of the defined retirement plan or the investment choice plan receive a range of investment products to manage and distribute their retirement benefits. This comprises the pension as well as other options of investment such as:
Indexedpension (regular pension indexed to inflation and transferable to a spouse upon death), single life indexed pension (provides a higher income that is not transferable upon death), allocatedpension (provide income at a choice level and capital access if desired), roll over options and part cash distribution(Calkins and Dauten, 2015).
Issues contributing to the time value of money that are important in the above decision-making process.
The UniSuper, is one of the largest superfund in Australia that manages superannuation funds for employee across the educational sector. The super fund includes tertiary employees in the education sector of Australia ranging from TAFE colleges, universities as well as other educational institutions.The super funds have also realized a great revolution on their fund management and service provision as they have greatly increased the variety of products in the superannuation fund as well as the retirement options. Member now have the flexibility of products and assets on their super contribution investment. As a result UniSuper limited is now providing its members with two types of superannuation plans:
Defined Benefit Plan is one wherea formula is use to determine the amount of benefits during their retirement. The contributing factors to this formula include, the number of employment years, the age, and the final average salary. The employees’ retirement benefitsare calculated as: retirement benefit = benefit salary length of membership lump-sum factor average service fraction. Under Defined benefit Plan, employees who go for this have their contributions pooled togetherand invested on selected options by the UniSuper Ltd trustees. As a result the choice of investment the trustees choose does not affect the final benefit paid out as the benefit is calculated based on a formula that does not include the choice of investment as one of the factors. UniSuper limited bears the risk of investment on behalf of its members, which also means that employees do not as well share on the profits that are made by the superfund (Deng, 2014).
Advantages and Disadvantages of Pension and Investment Choice Plans
Employees who go for the Investment Choice Plan have the option to retain an individual investment account, which is sponsored by personal contribution as wellas the employers contributions.These accounts contributions are determined less management and administrative charges.This plan also allows the employees to choose from a variety of investment options whereby there contributions are then invested using the following strategies.
Secure Fund: Australian fixed-interest securities and cash.
- Stable Fund:
- Trustees’.
- Shares Fund::
- Indexed Pensions:
- Roll-over Options:
Pension plan helps to maintain the living standards long after one has stopped working.
The pension plan allows one to receive benefits from the employer(Deng, 2014).
The pension plan does not allow one to borrow against his/her pension fund
The plan also does not acceptemployee’s contribution
There is a maximum limit on the amount contributed.
The choice of investment is determined by a team of trustee on behalf of the members
The plan delivers your retirement income with minimal effort from your side apart from your contribution.
The plan gives a member a range of investment options where one can choose the investment he deems more profitable.
The plan has no minimum limit only a minimum limit
The plan provides the employees with the option of acquiring loans against their contributions.
Disadvantages of investment choice plan
There are charges for management and administration
The employee suffers the loss in case of a risk exposure of the investment
The investment lacks insurance.
Too many choices
Financialeconomist during a couple of years ago acknowledged the efficient market hypothesis as a factor that contributes to the “Efficient Capital Markets.” The general belief was that security market was efficient in rejecting information related to the whole market as well as the individual stocks. The reason behind this was the belief that, when the news develops , it spreads very fast and incorporated to the prices of securities, thus the study of past behaviors of the securities with the aim of predicting future prices do not count in such a situation. Moreover fundamental analysis, that aims to analyses assets, earnings, help investors to select the undervalued stock, which they then hold until the prices stabilize. The company’s financial information such as which is the analysis of financial information such as company earnings and asset values to help investors select “undervalued” stocks, would enable an investor to achieve returns greater than those that could be obtained by holding a randomly selected portfolio of individual stocks, at least not with comparable risk(Henderson, 2012). The efficient market hypothesis is explained through the use of the term associated “random walk,” The term is used in the finance literature to show the price series, which is a term loosely, used in the finance literature to characterize a price series where all subsequent price changes represent random departures from previous prices. The logic of the random walk idea is that if the now of information is unimpeded and information is immediately rejected in stock prices, and thentomorrow is price change wills reflect only tomorrow’s news and will be independent of the price changes today. However, news is by dentition unpredictable, and, thus, resulting price changes must be unpredictable and random. As a result, prices fully reflect all known information, and even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as generous as that achieved by the experts(Hillier and Clacher, 2017).
However, the reporting of market efficiency based on the empirical results above, should also consider several factors as an indication that markets are inefficient. Statistical significance should be distinguished from economic significance since the stock market cannot be a mathematically perfect random walk;the statistical dependencies giving rise to momentum are extremely small and are not likely to permit investors to realize excess returns. Anyone who pays transactions costs is unlikely to fashion a trading strategy based on the kinds of momentum found in these studies that will beat a buy-and-hold strategy. Indeed, Bancroft (2014) suggests that momentum investors do not realize excess returns. Quite the opposite a sample of such investors suggests that such traders did far worse than buy-and-hold investors did even during a period where there was clear statistical evidence of positive momentum. This is because of the large transactions costs involved in attempting to exploit whatever momentum exists.
Conclusion
Based on this information, managers therefor cannot rely on the efficient market hypothesis. This is because the hypothesis fails to consider other factors that come into play during the selection of an investment. The hypothesis can only function in an ideal world where information does not affect the prices of shares, but rather the analysis and the history of a company is what is relied upon in determining the prices of stocks. Managers therefore though the hypothesis has contributed to the development of methods that are used in determining the prices of company stocks. Investors require beingdiligent in evaluating the information as well as the companies performance.
References
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Berk, J., DeMarzo, P. and Harford, J. (2013). Fundamentals of corporate finance. 1st ed.
Burton, G. (2017). The Ef? cient Market Hypothesis and Its Critics. [online] eml.berkeley. Available at: https://eml.berkeley.edu/~craine/EconH195/Fall_14/webpage/Malkiel_Efficient%20Mkts.pdf [Accessed 20 May 2017].
Calkins, F. and Dauten, C. (2015).Business Finance: The Fundamentals of Financial Management. The Journal of Finance, 12(1), p.94.
Deng, M. (2014).Death of the Efficient Market Hypothesis. SSRN Electronic Journal.
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Hillier, D. and Clacher, I. (2017). Fundamentals of corporate finance.1st ed. London: McGraw-Hill Education.
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