Essay: Superannuation In Australia - Saving For Retirement.

Government's Contribution Requirements

Question:

Discuss about the Corporate Financial Management and Superannuation Benefit.

The main concentration of the superannuation is to help the individuals to save for their future and this is mainly for the retirement years. This is the concept which is being emphasised upon during the past 2 decades. The government of the country of Australia has been very active when it comes to making the contributions to be made by the various individuals mandatory that must comply with the superannuation or the funds of the retirement by the employers for the employees. The minimum level of the contribution of the employer to the superannuation for the employees was something which was introduced at the rate of 3% of the salaries that are earned by the employees and this was then decided to be increased in the terms of the minimum contribution of 9% by the year 2005. The employees are also duty bound to allocate a certain % of the income that they earn towards the investment of superannuation till this date. The main of the introduction of this policy is to remove the burden which exists from the social security system for the providing of the payments towards the pensions in order to support the individuals during the age of the retirement of their lives. Mainly because of the reason of the requirements of the mandated superannuation and also because of an increase in the realisation by the individuals of the importance of their savings for their future, there are many billions of dollars of the contributions of the superannuation which flows to the funds of the superannuation and also of the financial institutions in each one of the year. The role of the same is every much profitable so when it comes to making an investment in the contributions since they help in providing an enormous amount of income so that the non-working components of the lives of the individuals could easily be invested. The superannuation and the mutual funds is the largest investor in the market of the country of Australia and this is somewhat particular in the equity securities of the companies that have been listed on the domestic and the overseas markets which deals in the shares.

The major superannuation funds in the stated country is the Unisuper limited which is the company that services and also manages the superannuation for the employees that are working in the tertiary education sector in the country of Australia and this includes the various universities, TAFE colleges and other such educational institutions. There has been a significant rise in the amounts of the management and the service provision of the superannuation funds in these recent years and also there has been a significant rise in the investment and also in the options of the retirement plan. The members have a greater amount of flexibility when it comes to deciding to the type of the funds and the assets in which the amount must be invested. This is in line with an increase in the choice of the investment. There are mainly two forms of the superannuation plan:

• A defined benefit plan
• An investment choice plan

Major Superannuation Funds in Australia

The defined benefit plan is the plan wherein there are benefits which flows to the employees as and when they retire and this is somewhat based on the formula which depends on the average amount of the salary that has been earned by the employee for  his age and the number of the years that they have been employed.

For tertiary education employees who elect to follow the Defined Benefit Plan, their superannuation contributions are pooled and invested in a selection of assets determined by the

The final amount which has been paid to the employees mainly depends on the above stated formula and also on the performance of the investment of the portfolio of the asset which is very much effective but the effectiveness of which is not relevant. This also affects the final retirement pay out for the employees in which the risk associated with the investment is borne mainly by the company. This means that the employees would not benefit from the gains that have been earned by their asset portfolio in which the minimum requirement is the meeting up of the defined benefits. This is the responsibility of the trustees of the company so that they are able to understand the defined benefits of the funds. The trustees of the company that has given the defined benefit plan would have these fully funded defined benefit plans. These trustees would also have the right to decide to pay the additional accumulation benefit on the basis of the annual adjustment but the same is not guaranteed and that would still form a very small portion of the entire benefits of the superannuation under the stated plan.

The investment of each one of the individual in the account which consists of the employer sponsored and also the personal superannuation contributions. These annual distributions of the gains have been earned on the amounts of the invested contributions less any amount of the administration and the management charges. Under the plan of investment choice, the employees would be entitled to nominate the assets or the portfolio that their superannuation contribution would be invested in. the following are some of the strategies that could be considered by these employees for making an investment:

• Secured fund which is the fixed interest securities and the cash in the country of Australia
• Stable fund which is mainly fixed interest along with the bond securities and there is a smaller exposure of the domestic and overseas shares and the property
• Trustees selection funs which is the investment mainly in the domestic and in the overseas shares

The above are the different strategies that could be differentiated on the basis of the risk and the return characteristics and there is a secured fund which is considered to be less risky and is also likely to provide the lowest amount of the return on the investment when compared with the shares fund. The shares fund carries the highest rate of the risk and a greater rate of return is also expected from the same. In respect of the employees that its for the investment choice fund, the final amount that would be paid to them would depend on the returns that have been generated by the strategy that they have chosen for making an investment and also, they bear the risk of the investment which is connected with their superannuation contributions (Small business chron, 2017).

Defined Benefit Plan and Investment Choice Plan

At the time of the retirement, the company would also provide the range of some of the investment products that would comprise of both the defined benefit plan and also the investment choice plan which would help in the management and the distribution of the retirement benefits. The same would include the following pension or the other options of making an investment:

• Indexed pensions which helps in providing a regular income which would be indexed to inflation and would be payable as the employee lines and then is transferred to the spouse or is dependent upon the death of the employee.
• Single life indexed pension which provides an increased amount of the income when the amount is brought as against the standard indexed pension funds. But then the same is not transferred at the time of the death of the employee.
• Allocated pension which provides a regular amount of income and also has an access to the capital that is desired and also 4 of the available strategies in which the capital could easily be replaced. In case, the employee dies, then the balance of the pension would be distributed to the dependents of the employee.
• Roll over options in which the amount would be transferred on the retirement in order to fund the balance to an approved personal or the industry or investment funds and there is also an approved deposit fund or the retirement savings account
• Part cash distribution which is a % of the retirement fund that could be taken up as the cash lump sum that could be used for making an investment or for the purposes of personal consumption (Boundless, 2017)

The employees can take up any option as they fit necessary and useful and the main factor on which the selection of the strategy would depend upon is the amount of the income and the lifestyle requirements in the case of retirement. In the stated case of the decision making, the consideration is of the investment risk and also of the return profiles that would be adjusted with the rate of the inflation and also with the time value of money (Your business central, 2017).

The term time value of money is the concept which means that the money which is available with us or is in our hands right now would be worth more due to its earning capacity. This is the main principle of the finance which provides that the money could earn some interest and any amount of the money is much more worth than sooner the same it is received. It is also called present discounted value. We always save money for our hard times but it is certain that we would always require some money in order to satisfy the needs that are not certain. Hence, saving money today would have the value in the future in the terms of the fulfilment of the future necessities (E finance management, 2017).

An efficient market hypothesis is the theory which states that the prices of the assets reflect the full information about that asset. It is very much not possible to beta the market on the basis of the risk adjustments since the market prices would fully react to the new amount of the information or the changes in the rates of the discount (Open education, 2017).

This concept was developed by Professor Eugene Fama who stated that the stock would always trade at their fair value which would make it possible for the investors to purchase the stocks that are undervalued or sell the stocks at the inflated prices. It must not be possible to outperform the overall market through the selection of the expert stock or the market timing. Further, this is the only way through which the investor would be able to obtain the higher returns by chance or by the way of purchasing the investments that are considered to be risky. The professor further stated that the distribution of the normal returns of the US mutual funds are very much the same to the fund managers that had no skills which is one necessary condition to be held for an efficient market hypothesis (Princeton, 2017).

The portfolio has to be well diversified so that the risk could be mitigated. This would leave the fund with some unique risk which would never be rewarded. The portfolio which is the result of the diversification would be exposed to an increased amount of systematic risk for the various individuals. In case, the individuals have a certain amount of an additional wealth, then they would invest their money in the assets that are risk free, and then there would not be any problem and if not, then the portfolio would offer a higher beta keeping in mind the preferences of the individual risk (Morning star, 2017).

Also, the world is very much not perfect when it comes to the taxes. The taxation position of any investor is very critical. This is mainly because there are certain assets that provide an increased amount of income and hence, they are exposed to a higher amount of taxes. The return after taxes on such assets to the individuals would be in low brackets which would be favourable. This is the consideration which makes the status of the taxes an important thing to consider (Wharton, 2017).

Hence, the efficient market hypothesis is not true.

References:

Boundless. (2017). Importance of the Time Value of Money. [online] Available at: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/introduction-to-the-time-value-of-money-54/importance-of-the-time-value-of-money-255-8367/ [Accessed 18 May 2017].

eFinanceManagement. (2017). Time Value of Money. [online] Available at: https://efinancemanagement.com/investment-decisions/time-value-of-money [Accessed 18 May 2017].

finance.wharton.upenn.edu. (2017). Efficient market hypothesis. [online] Available at: https://finance.wharton.upenn.edu/~acmack/FNCE100_PS5.pdf [Accessed 18 May 2017].

Morningstar.com. (2017). Efficient Market Hypothesis. [online] Available at: https://www.morningstar.com/InvGlossary/efficient_market_hypothesis_definition_what_is.aspx [Accessed 18 May 2017].

OpenLearn. (2017). The financial markets context. [online] Available at: https://www.open.edu/openlearn/money-management/money/accounting-and-finance/the-financial-markets-context/content-section-3 [Accessed 18 May 2017].

Smallbusiness.chron.com. (2017). Why Is the Time Value of Money So Important in Capital Budgeting Decisions?. [online] Available at: https://smallbusiness.chron.com/time-value-money-important-capital-budgeting-decisions-61898.html [Accessed 18 May 2017].

www.princeton.edu. (2017). The Efficient Market Hypothesis and Its Critics. [online] Available at: https://www.princeton.edu/ceps/workingpapers/91malkiel.pdf [Accessed 18 May 2017].

Yourbusiness.azcentral.com. (2017). Why Is the Time Value of Money So Important in Capital Budgeting Decisions?. [online] Available at: https://yourbusiness.azcentral.com/time-value-money-important-capital-budgeting-decisions-12009.html [Accessed 18 May 2017].