Australian Superannuation: Investment and Defined Benefit Plans

Australian Superannuation 1
AUSTRALIAN SUPERANNUATION
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Australian Superannuation 2
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Superannuation................................................................................................................................3
Introduction......................................................................................................................................3
Superannuation in Australia............................................................................................................3
Investment choice plan....................................................................................................................3
Defined benefit plan........................................................................................................................4
Factors Considered in Superannuation Plan Choice........................................................................4
Time value of money and superannuation...................................................................................4
Taxes and superannuation............................................................................................................5
Opportunity cost and superannuation..........................................................................................5
Amount of Contributions.............................................................................................................6
Conclusion.......................................................................................................................................7
Recommendations............................................................................................................................7
Bibliography....................................................................................................................................9

Australian Superannuation 3
Superannuation
Introduction
Globally, governments face a challenge in ensuring retirees live a decent life after their
retirement. In order to overcome this challenge, some governments have imposed compulsory
contribution amongst its citizens to pension funds. The funds are normally managed by super
funds that invest the funds in different investments and in return, the funds earn interest. The
contributions, therefore, grow from the point of deposit to the point they are drawn or at the
retirement of the contributor (Williams, 2018). Different incentives exist for superannuation and
these incentives differ between countries. Some countries reduce the tax liability for the savings;
this results in greater savings and better retirement for its citizen. The growth of superannuation
has seen legislation passed to govern the schemes in countries and provide arbitration channels
for those offended. Superannuation is therefore a great way to secure an individual’s retirement
by saving during the productive years.
Superannuation in Australia
In Australia, the superannuation is a partly compulsory scheme for all the citizens. Employees
have set minimum contributions to make, and the employers must contribute to the
superannuation of its employees on top of the salaries and wages they pay them (Kingston and
Thorp, 2019). The scheme allows extra contributions made by the citizens to complement the
compulsory contributions. The compulsory contribution is referred to concessional while any
contribution above the concessional is non concessional contribution. The Australian
government has created incentives for saving by giving tax benefits on amounts contributed to
superannuation. The contribution by the employer and employee were previously set at 3%, but
there has been a gradual increase in the percentage all through. This growth has been positive
despite great resistance at the introduction stage.

Australian Superannuation 4
Graph 1: Total government support
Investment choice plan
This is a scheme whose benefits are not known during the time of contribution. In this scheme
therefore the factor that is known is the amount of contributions made. The uncertainty in the
benefits from the scheme results from unpredictable aspects in the market like investment risks
and rate of return of investments. The plan does not guarantee a known return. The beneficiary is
in this case, responsible for the costs of holding the fund. Fund investment is done in several
financial assets. Based on the risk and the return required the employees have an option of
choosing their preferred investment (Kingston and Thorp, 2019). Over time the fund allows
money to grow or accumulate. The super value depends on the choice of investment option and
the money contributed by the employer in the form of extra deposit contributions, bonus
contributions, charged fees and the funds earned from the investment.
Defined benefit plan
The defined benefit plan is one of the most common plans for retirement in Australia and the
entire world. It is sometimes referred to as a qualified pensions plan. The employer contributes
the major part of the fund. This scheme guarantees the beneficiary defined amount since the
contribution amounts are calculated actuarially (Borowski, 2013.). The scheme, therefore, covers
the expenses, and the amount to be received certain. Due to changes in the market risks, the
contribution amount is subject to adjustments according to the prevailing conditions. The
benefits at retirement are dependent on the actuarial calculations made prior to contribution.
Factors affecting defined benefit include the number of years worked/membership period, the