Superannuation Guarantee Funds: Benefits and Complexities

The assignment explores the benefits and complexities of superannuation guarantee funds, highlighting their importance for employees' retirement security. It discusses two types of superannuation funds, defined benefit plan and investment choice plan, and provides a conclusion that superannuation guarantee funds are beneficial for employees when they get retirement from their jobs.

Financial Management

Executive Summary
The superannuation contribution should be made in either of plans where risk and return
is in balanced way. The plan will be helpful for the employees in extracting higher returns that
will be provided at the retirement. Thus, focus on important factors to be taken into consideration
would be provided to opt for better option.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
What are the factors that should be considered by tertiary sector employees when they are
deciding whether to place their superannuation contributions in Investment Choice Plan or
Defined Benefit Plan? What issues relating to concept of time value of money, taxes might be
essential in decision-making process?....................................................................................1
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Financial management is crucial for the business as immense benefits are provided by the
same. Present report deals with factors to be considered by the tertiary sector employees before
they chose for making investment in two plans such as Investment Choice Plan or Defined
Benefit Plan so that higher returns may be generated by employees. Furthermore, issues related
to the taxes, concept of time value of money are being discussed. Thus, recommendation to make
investment in either of two plans is provided.
MAIN BODY
What are the factors that should be considered by tertiary sector employees when they are
deciding whether to place their superannuation contributions in Investment Choice Plan or
Defined Benefit Plan? What issues relating to concept of time value of money, taxes might
be essential in decision-making process?
The superannuation is way of saving money for the employees which can be beneficial
for them when they get retired from their respective jobs. It is a government supported one which
induces employees to save amount when they attain retirement in the future course of action. In
relation to this, government has directed to employers that they shall pay minimum percentage of
workers' salary to a fund knows as superannuation fund which will be entitled to be received by
the employee and as such, employees are required to pay superannuation guarantee in the best
possible manner. In accordance to the Australian Government, this type of guarantee which is
required to be paid by employer's according to the legislative rule is set at 9.5 % of a salary of
employee. The superannuation fund is paid to workers apart from the salary. In simple words, the
amount is paid in addition to the normal salary drawn by employees (Anderson, Clark, Ramsay
and Shekhar, 2017).
The Australian Government is mandating employer's to pay minimum percentage on the
individual salary which is apart from the normal one so that they may be able to enjoy extra
amount in the retirement and as such, they may some additional savings in the best possible way.
When it was implemented in the initial stage, superannuation guarantee contribution was nearly
3 % on salaries of individuals. However, it has increased up to a high extent as it reached to
maximum rate of 9.5 % which is good as employees are paid in addition to their salary in
effectual manner. This is needed so that extra income can be effectively used by workers and
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they can easily take benefit out of the funds. However, employees are also urged or compel to
pay for the amount. In simpler words, they are required to allocate some part of their income in
the superannuation investment fund so that they may get earnings after retirement with much
ease.
The fund was undertaken to provide benefits to the employees and as such, millions of
fund flow in this category year which is provided to financial institutions so that such institutions
could invest contribution to fund on the individual's salary after retirement is attained. It can be
said that superannuation guarantee funds are one of the biggest and largest investors in financial
markets of the nation. Mainly tertiary sector is managed by an institution named as UniSuper
Ltd. The tertiary means that profession which is engaged in providing various types of services
in the best possible manner. It implies that this type of sector is called as third economic sector
and is categorised as service sector. There are mainly three types such as primary, secondary and
tertiary sector (Evans and Razeed, 2017). Primary one means where extraction of raw materials
are done such as farmers primarily work at this sector like wheat is taken from farms. On the
other hand, secondary sector is termed as one which is engaged in processing of the raw
materials provided by the primary sector. In simpler words, manufacturing and assembling work
is done in this sector. Next one is tertiary sector providing services to customers as finished
goods are imparted by previous sector in effective manner. Thus, this sector helps in
strengthening economy quite effectually.
Moreover, UniSuper Ltd which manages superannuation funds of employees of tertiary
sector is administered to effectively direct fund to workers. There are two superannuation
investment such as Defined Benefit Plan and Investment Choice Plan. The Defined Benefit Plan
is the plan in which an employee is paid amount on the retirement calculated by final employee
salary, length of service provided to organisation and age are taken to arrive at paying amount of
retirement to the employees (Retirement Planning. 2018). This is called as pre-determined
amount or traditional pension being paid to workers. When employees opt for this plan, they are
not entitled to receive any gains from the risk portfolio related to asset and thus, no extra gains
can be provided and only pre-determined fund is accumulated. On the other hand, Investment
Choice Plan means that employees are entitled to receive asset portfolio as they can choose type
of asset in which superannuation contribution could be invested in the best possible manner.
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Annual distribution of earned gains are provided so that invested contribution may be
accumulated in the retirement.
There are various investment strategies such as secure fund, stable, Trustee's Selection
and shares fund which consists of lower and riskier investment. Secure one implies fixed interest
securities of Australia. Stable fund means fixed bond and interest securities having less exposure
to the international and domestic property and shares. On the other hand, Trustee's Selection are
categorised as balanced property and securities and equity investments. Shares fund are
dedicated to overseas and local shares. The above discussed strategies are categorised on risk and
return. This is evident from the fact that Secure fund are less risky and thus, returns provided are
low as well. However, shares fund are more risky and provide higher returns. Thus, it can be said
that Investment Choice Plan provides adequate benefits as compared to the Defined Benefit Plan.
This is evident from the fact that employees are able to get desired returns depending upon the
chosen risk and investment strategies (McKenna, 2018).
There are numerous factors which are required to be considered by the tertiary sector
employees whether to make contribution in either of two plans. First factor is risk which is
essential to be known before an investment is made. It means that risk should be evaluated in that
way which should be beneficial for the employees as higher returns may be generated in the best
possible manner. If return is lower and risk is higher than investment should not be made. The
Defined Benefit Plan has less risk on the employee and as such, it is beneficial for them. On the
other hand, Investment Choice Plan incurs more risk as it is related to choice of investment
strategy made by the employees to place his contribution in the best possible manner. Another
factor is fund solvency which is required to be assessed by the employee before making any
choice in effective way. The security of funds should be examined in that way so that employees
may get the funds at the end of their tenure with much ease. Solvency of employer is required ro
be assess because when worker opt for Defined Benefit Plan, he is mandatory entitled to receive
pre-determined amount of extra income which is based on long-term fund solvency (Mees,
2017).
The employer have more risk as they have to pay workers when they attain retirement.
On the other hand, it is required that employees should plan accordingly and make contributions
in the best return yielding superannuation funds. Another factor is switching funds. In simpler
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words, employees should assess whether they may be able to effectively switch over one fund to
other in the normal course of action quite effectually. This means that if a particular option is
rigid in nature, then choice should be made perfectly so that retirement benefits may not get
reduced up to a high extent. It implies that investment option tends to be much flexible should be
opt for in the best possible manner. It is an important factor which employees need to take into
account for maximising benefits and reducing risks quite easily.
Another risk is related to investment risk which is based on the chosen strategy. In
addressing this, employees when chose for Defined Benefit Plan have low risk as factors such as
length of service given to organisation, average salary and other factor is taken into consideration
which is required to attain amount and they are mandated to receive at the end of period. On the
other hand, employees when opt for Investment Choice Plan have varied risks entailed in. There
are various investment strategies that are already discussed having differentiated risk and
characteristics which are chosen as per the risk taking capacity of employees (Niblock, Sinnewe
and Heng, 2017). When risk taken is high, then eventually higher returns will be generated and
vice-versa is possible as well. Thus, investment risk should be evaluated by them before taking
decisions related to superannuation guarantee funds. Another factor is insurance cover which is
needed to be carried out before taking final decisions. This means that which of the available
options will offer insurance cover to employees. Moreover, whether it could be forfeited or
whether explicitly charged for or not should be evaluated by the employees in effective manner.
If such cover is explicitly charged, it will be low cost. Furthermore, insurance cover is in direct
relation to the age of individuals. This is evident from the fact that when age gets older, the
insurance cover becomes expensive. These factors are essential to be taken into consideration by
employees so that they may chose for better investment option quite effectually.
The issues related to the concept of time value of money and taxes are numerous which
directly affects decision-making of employees as to chose for Defined Benefit Plan or
Investment Choice Plan. The time value of money means that amount of return attained today is
much more than received after some time say for 3-4 years in the future. This is essential to carry
out so that worthwhile investment may be made by the employees with much ease. However,
there are issues such as what are the variables which need to be studied, how these variables are
to be identified etc. On the other hand, tax computation is another problem which arises issues
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such as whether tax should be levied on average superannuation fund at the retirement or on
annual basis. It can be said that in relation to this, Defined Benefit Plan has more problems
despite of pre-determined amount to be paid at retirement.
The complexities which are directly linked to the investing assets prevails restricts the
use of this plan (Hanegbi, 2017). Moreover, it is required to go in depth of many factors which
requires organisation to focus on retirement administration and thus, it is complex task. Only pre-
determined return is paid which limits to opt by employees. On the other hand, Investment
Choice Plan is much beneficial as diversified investment strategies are available with the help of
which risk and return can be assessed in a better way. Hence, annual returns generated
throughout the individuals' tenure is accumulated so that he may be paid with higher returns in
the best possible manner. Thus, more superannuation fund can be attained by the employees
when they opt for this option.
CONCLUSION
Hereby it can be concluded that superannuation guarantee funds are much beneficial for
the employees when they get retirement from their jobs. When this fund is provided to them at
the end of tenure, they may easily live one's life with much ease. It helps employees so that they
may save accumulated fund which can be utilised by them. There are basically two types of
superannuation fund in which investment may be made by workers in effective way. Thus,
accordance to the risk and return, choice can be made without any difficulty.
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REFERENCES
Books and Journals
Anderson, M. E., Clark, M., Ramsay, I. and Shekhar, C., 2017. Super behaviour: a note on
young Australian adults’ engagement with their superannuation accounts.
Evans, J. and Razeed, A., 2017. Adequacy of the Australian superannuation guarantee levy: A
post-retirement analysis.JASSA, (1/2), p.6.
Hanegbi, R., 2017. Encouraging superannuation income streams with tax-free earnings to be
taken in a form that provides longevity insurance. eJournal of Tax Research. 15(3).
pp.402-423.
McKenna, B., 2018. Workers’ Capital: Industry Funds and the Fight for Universal
Superannuation in Australia. Australian Journal of Politics & History. 64(1). pp.147-149.
Mees, B., 2017. Organizational mimesis and the emergence of industry superannuation in
Australia. Journal of Management History. 23(3). pp.241-258.
Niblock, S., Sinnewe, E. and Heng, P., 2017. A review of superannuation fund performance
studies: Empirical evidence from Australia–2000 to 2014. Accounting Research Journal.
30(2). pp.224-240.
Online
Retirement Planning. 2018 [Online] Available Through:
<http://www.moneycontrol.com/glossary/retirement-planning/defined-benefit-plan-
definition_3780.html>
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