Report on Superannuation Contributions in Defined Benefit Plans

This report examines superannuation contributions within defined benefit plans, focusing on the tertiary sector employees' investment decisions. It contrasts defined benefit plans with investment choice plans, highlighting factors such as age, financial condition, employee mobility, and investor knowledge that influence investment choices. The report also discusses the impact of the time value of money and taxes on these investment options, ultimately recommending that employees strategically plan their superannuation investments, considering the time value of money and risk-return factors to maximize returns. Desklib provides access to this and other solved assignments to aid students.

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Territory Sector Employees
Superannuation contributions in the Defined Benefit Plan
Name of the Student

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Table of Contents
Executive summary...............................................................................................................................2
INTRODUCTION.................................................................................................................................2
DEFINED BENEFIT PLAN.................................................................................................................3
INVESTMENT CHOICE PLAN...........................................................................................................3
FACTORS INFLUENCING THE INVESTMENT OF SUPERANNUATION CONTRIBUTION......3
EFFECT OF TIME VALUE OF MONEY, TAXES.............................................................................5
Recommendation...................................................................................................................................6
CONCLUSION.....................................................................................................................................6
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Executive summary
In the era of rapid change in economic factors and business complexity, the tertiary sector
employees are in motion to get some other benefits apart from the salaries to put more efforts
in the value creation activities of the organization. Employees render their services for the
smooth operation of the organization. They are working in various sectors such as service
sectors, manufacturing sectors and other sectors. The tertiary sector employees are the
employee who serves their services in various economic sectors such as insurance, banking,
education and health. In that report, we will discuss various related factors to the decision of
investment of superannuation funds in the Defined Benefit Plans or Investment choice Plan
by the tertiary employees.
INTRODUCTION
The tertiary sector employees are the employees who engaged in the insurance,
banking, education and health sector. There are various services that are provided by such
employees. In this sector, people are working for fulfil the gap between the need of people
and its fulfilment. It’s a lot of all kind of services that provides the social satisfaction. The
employees working in such sector called as tertiary employees.
Along with the salaries, the employees of tertiary sector are in the motion to get some other
benefits too. Superannuation contribution is an additional fund created for the future benefit
of the employee. It is a fund created by the deposition of a certain amount by the employer. It
is an option for the sustainable future of the employee. The amount contributed by the
employer gets accumulated in this fund over the year and provide benefits in the future to the
employee (Chenaghlou, Parizad, and Jafarabadi, 2017). It is a kind of pension plan. This is
an additional benefit provided by the employer to employee which motivates the employees
to perform better. It also provides the security to the future of employees. At the end of the
employment, the employees get the benefits of the superannuation funds which make their
future safe. There are various options available to the employees for the investment of their
superannuation funds (Clark, Fiaschetti, and Tufano, 2017).
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DEFINED BENEFIT PLAN
Defined benefit plan is an amount of fund which is promised to be paid to the employee at the
end of his employment in form of pension or a lump sum amount of gratuity. It is created by
the contribution of a certain amount made by the employer. Employees also can contribute an
amount to the superannuation fund. This fund is known as Defined benefit Plan because it is
an already known and defined plan for the benefits of employee. The amount of contribution
to the fund is decided by the consideration of various factors. These factors are age of
employee, service tenure, pay scale and the age of retirement etc. Theses all factors are
considered for the calculation of the amount to be contributed to the superannuation fund.
The contribution to this fund made by the employer periodically. A periodic review by the
actuary is also held on the proportion of the contribution and on the rate of contribution. It is
also observed by the actuary that the contribution made by the employer is in the benefit of
the employee or not (Dean Lee, et al. , 2017).
INVESTMENT CHOICE PLAN
Investment Choice Plan is an accumulation plan. In this investment plan the employer is only
liable to pay a certain amount into the fund but is not obligated for any further action. In this
plan the employees are under the right to earn an additional interest on their accumulated
funds. The benefits under this plan is depends on the portfolio of the investment that is
chosen by the employee (Kelbaliyev, et al. 2018).
FACTORS INFLUENCING THE INVESTMENT OF SUPERANNUATION
CONTRIBUTION
To choose the option of investment of the superannuation fund is a significant financial
decision on the part of employee. The plan contains high uncertainty and due to which the
employee makes decisions on the basis of various parameters even when they are not related
to the final outcome of the investment that they will be getting. Every plan has various merits
and demerits, which are considered by the employee while taking the decision of investment.
Also every employee has different aspect of thinking, which leads them to make an analysis
on the basis of various factors which affects the possible outcome of an investment (Khodaei,
2017).
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There are several factors which influence the decision making of investment. Out of them the
age of employee is a significant factor. Younger employee has an opportunity to get the
higher proportion of the benefits form investments. The time gap between the investment and
realisation of funds is more in the case of young employees. Long term investment option
also makes the portfolio of investment better for an investor as per the economy and market.
On the other hand in case of old age employee, at the end of the employment the employees
has no more ability to take risks, so they always go for the safe and secure benefit plans. They
could not observe the daily market movements. So they want to invest in the protected and
secure benefits even when the returns are lower.
Apart from the age of employee, the financial condition of the investor also plays a vital role
in the investment decision. The employees who are financial efficient are eager to invest their
funds in the highly risky investment options. But the employees who are just earning for fulfil
their daily requirements are unable to take risks and try to go for protected and secure benefit
plans. They prefer to invest in the Definite Benefit Plans (Stannard, 2017).
Employee mobility means the changing ability of the employees. It also turns out to an
important factor in the investment decision making. The employee who tries to go for random
changes in the jobs should opt for the investment choice plan due to the reason that this is an
accumulation plan and the benefits of the employee from previous employer get transferred
and accumulated with the benefits from the current employer. To mitigate the risk of erosion
of benefits, the investment choice plan is a good option. Whereas in the Defined benefit Plan,
Frequency in the changing of jobs results into the opening of different Defined benefits plan
which contains a risk of erosion of benefits (Boston, and Prebble, 2018).
The well informed investor has more chances to earn higher benefits on his investments. The
information level of an employee also helps him a lot in choosing the better investment
option for his superannuation funds. An employee, who is well informed with the situation of
market and is known by the all related factor information, can avail high risk to earn more
profit. It also differs with the gender of investor, as men are more favourable to the highly
risky investments as compared to the women. They like to engage in the more risky plans to
get higher benefits. Defined benefit plans are less risky in the comparison of investment
choice plans. In an investment choice plan the investor needs to assess the entire option and
to construct a portfolio of investments. Similarly the investment choice plan is less secure and
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protected as compared to the defined benefit plans, as there is huge uncertainty in the arising
of the outcomes from such plans (Chenaghlou, Parizad, and Jafarabadi, 2017).
Many of the employees have a tendency to compare the two available options for investment
on the basis of their past performances. It is a very popular and basic step taken by any
investor in the way to choose the right investment option for their funds. As every employee
has his own perspective, some do not believe on the data realised from the past comparison.
The employees compare the past performance of any investment option for the time of last
six months or for twelve months only, which do not reflects the exact position of the
investment option. The employees who contain massive knowledge of finance show
eagerness to choose investment choice plans (Clark, Fiaschetti,. and Tufano, 2017).
Along with all above mentioned factors, the personal interest of employee also has its impact
on the investment decision making. Employees who are more interest in playing the market
games and highly influenced by the market fluctuations, always choose the option of
investment choice plan. These investors are more interested to make their investment
portfolio balanced. On other hand the employees who want sustainability in the investment
returns without taking more risks always sloping down towards the deferred benefit Plans
(Chenaghlou, Parizad,. and Jafarabadi, 2017).
EFFECT OF TIME VALUE OF MONEY, TAXES
Time value of money is a concept which says that the present value of certain sum of money
is more than the worth it will have in the future and this is happened due to the inflation and
increased earning capacity of future. It means the money which is lying idle is an asset with
no worth. But it can be invested properly to increase its worth and can earn the interest
returns on it. If we apply the time value of money concept on the deferred benefit plan and
investment choice plan, then the option of investment choice plan is the better one as it does
not block the money but have an alternate use of the same accumulated amount in the form of
portfolio interest returns. Whereas in the deferred benefit plans the contribution amount is
calculated by considering various factors like age, service period and pay scale of the
employee, which is equal to the amount of benefit accrued to the employee. So, according to
time concept, the deferred benefit plan is not a good option as it has no further earnings on
the contributed funds (Boston, and Prebble, 2018).
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Tax imposition on any income or gain made by the employee, is the mandatory obligation,
the payment for which has to be made by the employee to the government. This is an amount
which is to be paid without expecting any return form it. In case of defined benefit plan, the
tax liability is limited to the amount of contribution because there is no further earning has
arisen on that amount. But in the investment choice plan the earnings on the investment is
also liable to be taxed. The disclosure of such earning is also mandatory. This is the reason of
avoidance of the investment choice plans by the investors (Biondi, and Sierra, 2017).
RECOMMENDATION
The employee, who is planning to make earn returns on his investments of the
superannuation funds, needs to plan properly by considering all the related factors in his
strategic planning. The time value of money concept should mainly be considered by the
investor to get the effective returns on his investments. It helps them to mitigate the risk of
value loss of money (Bikker, 2017).
The employees should make a proper comparison between available options for the
investment of their superannuation funds to create a high value of their invested capital.
The tertiary employees should go for the plans which have less risk with higher profits. The
risk and return factors are available in all investment plans. Before investing in any particular
plan whether it is the investment choice plan or the defined benefit plan, the investor should
assess the all risk and return factors consisting under the plans (Andréasson,. and
Shevchenko, 2017).
CONCLUSION
The significant part of the economy has been held by the tertiary employees. Their
performances decide the growth of such sector. So, to motivate the employees, the employer
offers may other additional benefits to the employees along with their salaries. These
additional benefits has to be provided by the employer to the employees to make their future
secure. Superannuation fund investment decision is a significant process for the employee.
The investment of their life time contribution highly affects their future security. Many
impositions of policies and variations are made in these schemes and plans for the welfare of
employees. So that employees can operate its investment functioning smoothly. Now, to get a
conclusion of entire discussion it can be stated that before investing the superannuation funds,
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the investor should assess the all available options and the risk and return factors related to
them to earn the better returns on the investment.
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