Factors to Consider in Superannuation Contribution Decision Making

FIN 200: Corporate Financial Management T119 1
FIN 200: Corporate Financial Management T119
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FIN 200: Corporate Financial Management T119 2
Introduction
Superannuation contribution refers to portions of salary that tertiary employees
voluntarily sacrifice before-tax incomes. These contributions are, in most cases, made on behalf
of employees by their employers under a given guarantee scheme (Australiansuper.com 2019).
There are two kinds of superannuation contributions, namely; non-concessional and concessional
contributions. Non-concessional contributions are not always taxed in an employee's super fund
but are derived from incomes that remain after tax.
On the other hand, concessional contributions accumulate a rate of 15% on an employee's
super fund and are always made on income before tax (Ato.gov.au 2019). Over the previous two
decades, Australia has been focusing on superannuation contribution by encouraging tertiary
employees to invest and save for the future in particular for their periods of retirement. In this
regard, the government of Australia has made it mandatory for employers to make minimum
contributions towards superannuation on behalf of various employees. The main objective of
superannuation contributions is to eliminate or reduce the burden of payment of pension funds to
employees by the system of social security to persons when they reach retirement periods. Some
of the conditions for superannuation contributions in Australia include; an employee should be
above 18 years and earns over $450per month before taxes without any considerations of the
employment status (Ato.gov.au 2019). As a result, superannuation contributions are amounting
to billions of dollars due to mandatory superannuation prerequisites and enhanced awareness
among employees about benefits associated with future savings. This paper will, therefore,
explore the different factors that should be considered by employees in the decision-making
process of their superannuation.

FIN 200: Corporate Financial Management T119 3
Factors to be considered by employees
There are two plans, namely defined benefit plan and investment choice plan that tertiary
employees should always select from in regards to making savings for meeting future needs after
retirement. The defined benefit plan is a pension outline which depicts the amounts of money or
pension payment that an employer promises to give an employee upon retirement. The plan is
determined to base on the history of earning of an employee, age, and period of services. On the
other hand, investment choice plan allows an employee to determine how his superannuation
contributions should be invested to expand his super funds for meeting retirement needs. Under
this plan, an individual may identify a given venture like shares or property that his
superannuation contributions should be invested in to realize enhancements in his super funds
(Trevor 2012). The following discussion is about the vital factors that tertiary employees should
consider when they are deciding on whether to place their superannuation contributions in the
defined benefit plan or investment choice plan.
Rates of corruption is an essential factor that needs to be considered by tertiary
employees while making decisions on either to use defined benefit plan or investment choice
plan for their future savings. Countries with high rates of corruption make it hard for employees
to make savings choices as compared to those with low rates of corruption. Moreover, a nation
which is dominated by high rates of corruption deters employees from engaging in savings or
investment practices because of reduced prospects of reaping desirable returns from their
ventures in the future. On the other hand, countries with low or no rates of corruption encourage
individuals to engage in existing saving and investment practices to meet their future needs
during retirement periods (Max 2010). Among the 175 nations across the globe, Australia is
ranked 13th in regards to countries with low rates of corruption according to Transparency

FIN 200: Corporate Financial Management T119 4
International report of 2018 (tradingeconomics.com 2018). Such a factor means that corruption
rates are significantly inferior in Australia, which makes it favourable for tertiary employees to
make effective decisions as utilization of savings plans is concerned. In this case, tertiary
employees would prefer investment choice plans to defined benefit plan due to high prospects of
reaping significantly higher returns from investment choices. For example, employees who may
utilize investment choice plans would be able to identify feasible ventures like buying shares or
property which are likely to deliver higher returns both in the short run and long run. Returns
could be in the form of accumulated dividends from the selling off shares or profits after selling
off the property which was bought during the investment of superannuation contributions. The
above returns cannot be realized when a defined benefit plan approach is used since the benefits
are fixed no matter the profits that a company may gain from an employee’s efforts (Ross et al.
2017). From the above discussion, tertiary employees should choose investment choice plans due
to low rates of corruption in Australia accompanied by higher contributions to the super funds.
The time it spends on a given job is another critical factor that tertiary employees should
consider while making savings for the future. Under the defined benefit plan, an employee is
required to spend at least ten years at a given job to qualify for the pension payments from the
employer. Moreover, tertiary employees are also faced with uncertainties like job insecurity,
which acts as a risk to opt for a selection of defined benefit plan. As such, employees who may
work with a given employer or firm for a period less than ten years before retirement will not be
entitled to pension payments and thus are not be in a position to earn any retirement benefits
(Edmund & Tonks 2012). On the other hand, investment choice plan does not necessarily
consider the number of years that an employee spends on a given job while making
superannuation contributions. Employees have the opportunity to reap their super funds for the