Superannuation: Factors to Consider for Investment Choice and Defined Benefit Plans

A report discussing the importance of superannuation contributions, relevant factors to consider when choosing between investment choice and defined benefit plans, the concept of time value of money, and recommendations for fund managers. The report emphasizes the need for proper analysis and strategic planning to maximize returns and cater to individual expectations.

Superannuation
Executive Summary
Funding to superannuation is a major strategy because it helps the workers to multiply the
savings. It is a prudent approach because it will lead to benefits in the future. However, the
investment must be done in a prudent manner. In this report, the major emphasis will be on
the major factors that need to be taken into consideration by the tertiary sector employees
whether to place the superannuation contribution in the Defined benefit plan or the
investment choice plan. Further, various issues that surrounds the investment such as time
value of money, taxes are discussed.
1

Superannuation
Contents
Introduction...........................................................................................................................................2
Superannuation contributions...............................................................................................................2
Relevant Factors that are to be taken into account...............................................................................4
The concept of time value of money.....................................................................................................5
Recommendation..................................................................................................................................6
Conclusion.............................................................................................................................................6
References.............................................................................................................................................8
2

Superannuation
Introduction
The use of the contribution made for the superannuation has been a very keen strategy which
has indulged the workers to make saving and then use those funds in the future to invest those
funds in some kind of scheme which will allow them to multiply their savings. There should
be an analysis made before investing money of the superannuation funds because in the
tertiary sector employment there are several different types of factors which are affecting the
plan whether to invest in the investment choice or defined benefit plans. Also, time plays a
very important role in these types of cases which is thus affecting the decision making
process. If the investors will make a detailed analysis of the market, then they will be able to
determine the prices of the assets or stocks which can be helpful while making decisions
relating to the investment strategies (Power, 2014). These types of analysis mention the roles
of the fund managers in the process of deciding portfolios.
Superannuation contributions
The main purpose of contributions of the superannuation funds is to indulge the employees in
the habit of saving and thus making them invest the saved amounts in the future so that they
can have a peaceful and healthy retirement. Many of the countries have made the process of
collection of the superannuation funds necessary for the employers in which they collect the
funds on behalf of employees thus making the process mandatory in nature (Laux, 2014).
Because of the mandated rules of collecting the superannuation funds, there has been a huge
increase in the funds collected from the process thus making the role of the financial
institutions to invest the money in a proper factual manner so that it can provide the
individuals with proper returns on their saving investment (Kollmorgen , 2015).
There is three economic sectors primary, secondary and tertiary sector which have been the
relevant part of the economic sections of the superannuation contributions. The main function
of the tertiary employees is to give the employees proper advice for the investments they
need to make and also they play a major role in the implementation of the wisdom in the
productivity of different sectors. Previously the contribution of the funds was restricted to
three percent of the employee’s salary but it has now been increased to nine percent since the
year 2005. The employees indulge in the payment of the funds are also being made to pay a
specified percentage of the investments (Power, 2014). It should be duly noted that the use of
such systems have been promoted in order to mould the social security systems of the
3

Superannuation
employees which will help them to collect money for their peaceful retirement. One of the
most renowned firms which take good care of the superannuation funds is Unisuper Limited.
Also, the increases in the knowledge of the employees towards the superannuation funds have
led to a great enhancement in the field as the flexibility have also been provided to them
(Leo, 2011). They are now eligible to opt for the type of investment or assets in which the
fund collected from their salary will be invested. The two main kinds of the investment plans
are superannuation invest plans are Defined Benefit plan and Investment Choice Plan.
(Power, 2014)
On the basis of the name, the defined benefit plan clearly states that all the factors are
determined on the basis of which the amount of the superannuation funds which is to be
provided to the employees is being ascertained. The main factors on the basis of which the
amount is decided are age, average salary, etc. In this process, the payout of the employees
has been ascertained at the very beginning and there are no changes made at the time of final
payment (Porter & Norton, 2014). This also defines that the employees are not benefitted by
the gains that are being made by the use of their funds thus making it profitable for the
Unisuper limited.
4

Superannuation
The investment Choice plan consists of the benefits which the company have received after
the investment minus the administrative and the management expenses. These plans allow the
employees to choose where the funds which they have given the firm are being invested. The
employees can choose between the defend options of Secure Fund, Shares Fund, Trustees
Selection Fund, and Stable Fund and they can choose any one of them after differentiating
them on the basis of the risks and returns (Marsh, 2009).
(Kollmorgen , 2015)
Relevant Factors that are to be taken into account
While ascertaining the investment option for the superannuation funds, the employee should
have a very determined and specified decision which should be made by the proper analysis
all the factors of risk which have been present in the environment. For the employees who
have no intention to seek the risks and also at the same time, they want high returns should
make their investments in the Defined Choice Plan. Similarly, the employees who are not
afraid of risks should invest in the Investment Choice Plan as it provides a much observable
return is the investment is made by proper analysis (Petty et. al, 2012). There are many such
more factors that can be used by the employees to ascertain the plan which they want to
choose. The first thing to be done by the employees for the ascertainment of the plan is to
5

Superannuation
find and select the portfolio in which it will invest by the use of his knowledge and
experience thus allowing him to get greater returns instead of the partial losses (Ross et. al,
2014). The inability to manage the portfolios will lead the employees to suffer loss which will
make them unable to live a peaceful future. The best way to deal is to give the employer the
responsibility to invest so that is any loss is experienced then it will be suffered by the
employer thus keeping the employee safe from any kind of hazard. The use of the Investment
Choice plan is also beneficial as the employees have a specified source of income which is
providing them with their expenses, thus they can use the extra funds to invest in the plans
which may provide them with high returns and thus making the income much more beneficial
(Kollmorgen , 2015). Defined investment plan provides them with less but sure returns thus
making the choice between the two to be very hard to assess (Parrino et. al, 2012). Therefore
all the decisions should be made in the accordance to the present environment and thus the
employees should take the decisions of investment only after the proper analysis of all the
prevailing factors.
The concept of time value of money
Future cash flows can be attributed to the fact that time is money and this can be said because
of the financial decisions that are taken up by companies now which lay more importance on
the expenses and the lying future opportunities for their business. These types of concepts are
very important for the existing business policies. It is known that money’s value gets
degraded as time passes so it is important to invest in the areas rather and get profit at present
while waiting for it in a long-term scale (Vaitilingam, 2014). Present term investments can be
of more importance as it will earn interests to the investors which can be later used when and
where demanded and required. The investor re much more concerned with the existing value
of money because they want to trade now. Time value of money can be defined as the
demarcation line that the present and the future values of money have between them. Also,
the current value of money plays a key role in deciding the type of investments from their
superannuation contributions that one should undertake to get the maximum output
(Vaitilingam, 2014).
It is seen that the working staff of the companies invest a limited amount of their salary ion
superannuation funds till the date hey get money for their services. It is seen that this
collected money comes with some interest and the total amount is further invested to
maximize it. But it should also be known that this collected amount cannot be generated
6

Superannuation
within a quick succession and takes a long time to summon up (Needles & Powers, 2013). So
it is advised that the employees investing the particular amount of money should make an
evaluation beforehand to make assumptions about the money they would receive in the
future. It is said that long terms will incur more benefits to the employees. But it is also
necessary that one has a well-attained knowledge about the investments he/she is making
without which it can happen that the invested money gets degraded because of the silly
decisions made without perfect knowledge (Merchant, 2012). It is advised that one should
have a strategic plan to make the maximum benefits out of the investment. It must also be
known that the investments knot always incur benefits because there can be a negative time
which has a downfall. The undertaking plans of the employees must be perfect to cater the
investments to their expectation. Also, the level of patience is very important because a high
level of patience is required in making the investment and getting its output. So it all depends
on the decisions that one makes in relation to the time value of money.
Recommendation
There is always a confusion prevailing as to buy the low price stocks or to sell the stocks
which are at their peak because both may change over time. Though a professional’s advice
may help generate some value decisions but overpowering the market is a totally different
thing and one can also see that they are gaining benefits from stocks that were vulnerable in
nature. As in the case of pension funds, it is the duty of the manager to deliver investment
mode which has better outputs. Different types of portfolios covering various areas and
ranges must be present in hand of the manager for a different choice of peoples. If all the
correct security measures and enhanced fund featured are tapped into the portfolio then the
pin risks can be successfully eliminated (Melville, 2013). But most of the cases are found
away from this category. Also, the existing tax rates should also be paid attention to by the
fund’s manager because individual tax condition changes the selections made. But this also
set the right path for the manager to maximize the output for its client.
7

Superannuation
Conclusion
Efficient saving of money is done by the employees when they invest some part of their
earnings in the superannuation funds. This is not all because this process also helps them to
demarcate between Investment Choice Plan and Defined Choice Plan and to choose the one
which is perfect caters to their strategic plans. The time value of money theory is also an
essential one and it allows to choose the right mode of investment at the right time and to
maintain patience so that the outputs can be maximized and caters to the expectations. As in
relation to the EMH, it is advised that pin along with portfolios is not necessary for the fund
managers as they leave the whole process open for the pin risks which may either make
losses or gains to the user.
8

Superannuation
References
Kollmorgen , A. (2015) Superannuation fund performance and fees [online]. Available at:
https://www.choice.com.au/money/financial-planning-and-investing/superannuation/articles/
superannuation-funds-performance-and-fees-191115 [Accessed 11 May 2018]
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research. [online]. 44(4), 380-382. Available from
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.
Melville, A. (2013) International Financial Reporting – A Practical Guide. 4th edition.
Pearson, Education Limited, UK
Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific
Accounting Review. [online]. 24(3), 1-34. Available from
Needles, B.E & Powers, M. (2013) Principles of Financial Accounting. Financial Accounting
Series: Cengage Learning.
Needles, B.E. and Powers, M. (2013) Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker.
Texas: Cengage Learning
Power, T. (2017) Fund choice: Comparing super funds in 8 steps [online]. Available at:
https://www.superguide.com.au/boost-your-superannuation/comparing-super-funds-in-8-
steps [Accessed 11 May 2018]
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
9

Superannuation
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT
Prentice Hall.
10