Discuss about the Corporate Finance for Prospects and Employees Benefit.
This report focuses on superannuation contribution choices and its importance for tertiary sector employees. The study also describes on the elements that affects the choices of superannuation contribution in tertiary sector employees regarding investment choice plan and defined benefits plan. Superannuation contribution established by Business Corporation as promoting employees welfares for retired employee’s as an organisational pension program (Power, T. 2011). This contribution is made by the employers and no tax is imposed in this deposit prepared for the employees after their retirement or at the time of withdrawal.
In order to encourage employees for future investments and saving their money for better prospects, employees benefit plans are being planned to be added in superannuation schemes. For this purpose, several countries are making efforts to integrate superannuation pension schemes to contribute minimum towards employees benefit plan as a compulsory measure (Moles, et al., 2011). This report is consolidates the benefits associated with the defined benefit plan and investment choice plan for employees plus its factors that decides the best choice among them. In addition to this, the study also illustrates time value of money aspects in terms of superannuation contribution choices in investment choice plan and defined benefits. In the end, functioning of efficient-market hypothesis is being explored while selection of a portfolio for pension funds manager.
Superannuation contribution choices for tertiary sector employees as defined benefits or investment choice plan and elements affecting the choice consideration
Tertiary sector is referred to the third type of industry sector that is related to the commercial services example service sectors like transport, warehousing, teaching, insurance, health care and advertising in production and distribution processes (Smith, 2012). Superannuation scheme are organised by a company as a pension plan where employer contributes some amount equals to definite percentage of salary of the employee as a benefit after retirement for their long-term services. There is no tax is implicated until the deposited money is being withdrawn or employee is retired. It is a very significant provision for the employees who work in service sector for their life and after retirement they do not save enough to live rest of their life with convenience (Smith, 2012).
In addition to this, superannuation fund assists them in making savings after their retirement with a benefit of free of tax implications. It can also been noted that even after withdrawal and investment they have to pay very less tax in comparison to full tax at the time of employment (Dixon, 2012). Furthermore, earning after investing the huge sum of superannuation fund lower tax rate is being implemented during retirement. This amount can also be used as a prime source of survival for employees after their retirements along with this it has also been acknowledged that this fund is protected from bankruptcy (Pettit, 2011). There are many financial planners in every country to help out with their professionalism and expert they are able to advice on best investment options or utilisation of money according to the employee’s desire (Dixon, 2012).
Superannuation amount grows in value till the retirement of the employees or withdrawal is made. In the service sector, minimum amount obligatory for the initial contribution is 3% of the monthly salary of an employee and 9% in some cases (McKeown, 2012). It is manly supported by the government to encourage employee’s welfare as retirement benefit scheme. This contribution is made by both employees as well as employer at the same percentage but only contribution made by the employer is said to be a superannuation fund (McKeown, 2012). The social security after retirement and burden related to saving in the employment period for future life is being shared with the help of superannuation contribution.
In earlier times, there was no choice were available for the superannuation fund like accumulated benefits or alternative investment strategies. With the help of Australian government and initiative towards employment welfare to encourage employees for investment and saving new schemes are being launched as benefit of retirement plan (Power, 2012). However, the concept and factors that affect the choice of benefits plan that is accumulated or alternative investment plan are being described as below:
Defined and accumulated benefit plan are associated with the pre defined specified amount of fund as a pension fund which is given by the employer after the completion of service tenure of an employee (Henderson, 2012). The calculation of this defined or pre specified amount is done with the help of age, tenure of the service and salary of the employee throughout the employment period considering all the basic pay increments. Hence, the amount which can be computed with the help of above factors and offered to the employee the entire amount at a time is known as defined benefit plan. Moreover, this amount of superannuation can be allocated in many assets which are being controlled by the UniSuper Ltd trustees (Power, 2012). The advantage in opting out the accumulated benefit plan is less risk involved without any impact of fluctuating performance of portfolio assets and thus final payment is secured and safe for future prospects. On the other hand, as a disadvantage there will be no interest or extra gain can be attained more than minimum payout of defined benefit plan.
In case of implementation of alternative investment strategies employee has several choices best for the investment purpose and requirement of an individual (Henderson, 2012). It gives opportunity to employees to choose the type of assets of portfolio in which the investment should be made along with this expert’s advice like financial planners are also there to help an employee for the same purpose. Some of the choice plan in investments entails secure fund, stable fund, share funds and choice of trustees (McKeown, 2012). When a secured cash and fixed interest is generated with securities are called as secure funds. Likewise, gain of interest and fund through investment in national and international shares as well bonds are known as stable funds. Share funds are investment made in the share of domestic and overseas company entirely (Henderson, 2012). Lastly, investment in infrastructure, property and private assets, national and international shares consists in choice of trustees.
These strategies are subjected to the factors of risks and returns with each of the investment choices. These characteristics are considered while selecting the investment strategies. Besides that the investment options have no fixed amount or formula to determine the final payments. Thus all the factors should be considered while choosing option of investment strategy (Iverson, 2013). In general, investment strategy choice is best for the employees who are already familiar with the risks and comprehension of investment, whereas defined benefit plan is for employees who have limited awareness in this field.
At the time of taking decision the main factor that affects the decision of the employee and finance manger is the determination and acknowledgement relating to the time value of money (Iverson, 2013). In case of defined benefit plan, time value of money facilitates the present and future value of money the relation between them and the final amount with the expect value at their retirement time. The lump sum amount with the future value of money is being calculated by compounding the present value of money and fixed formula associated with it. In other words, before deciding the investment option estimation of future amount received should be very important. Similarly, in case of investment choice plan as well the assets of portfolio in which the employee decides to invest can be identified with reference to the future value. In that process the assets and future events that affect the value of assets are taken into consideration for future value of money calculation (Carlon, et al., 2012). Along with this, the risk and return factors are also considered with the future amount calculated in deciding the opportunities present at that time.
Therefore, in the end it can be determined there are so many factors like risk involved in the investment, returns that are calculated on the basis of formula or with the characteristics of nature of investment plus the future value of money which is estimated with the help of compounding of present value of money. Moreover, the knowledge of investor or employee regarding the investment portfolios and awareness of risk taking and return expectation is very necessary to decide the opportunity of investment or defined benefit plan (Carlon, et al., 2012). These factors set parameters on how much an expert, or with a little knowledge can decide in the option available for superannuation fund for their future life. The experts and financial planners calculate and acknowledge about these factor in advance and with the appropriate approach and convenience of the employees is prime factor in opting out the apt strategy.
“If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin” Explanation and why this is not the case
The effective-market hypothesis analyses entire information associated with the assets of investment and provides correct information to the investors (Brealey, 2007). It is regarding minimisation of the risk related to the market and providing all the future and present information related to the investing assets. The use of this hypothesis and analysis of the share determines the future value of the assets appropriately that identifies the option in front of investors in which the future aspects of investments are good and best. However, the effective market hypothesis is a controversial and debated topic because market is associated with factors of risk and returns and if investors are provided all the information regarding the assets correctly and future aspects related to assets, it will be very easy for any individual to invest their money in the same asset. Along with this, the higher return from the possible other assets will be not been identified or realised by the market assets (Brealey, 2007). Risks pertaining to market will be knocked down, if the prices and all the information of the assets will be openly provided in the market.
The pension fund manager is responsible for the higher return and selecting minimum risk assets for the pension holders and bestows them with maximum amount of superannuation fund after retirement. Thus, selecting a good performing asset and creating portfolio substantially with higher returns and minimum risk is a duty of pension fund manager. In case, if the financial economic theory of efficient-market hypothesis is true then, the pension fund manger have solely one choice to select portfolio of asset which gives the maximum rate of return. In addition to this, the work of pension fund manager will become easy and convenient but in that case employee will have only same type of asset as an option of invest and same expected returns will be gained (Brealey, et al. 2012). If this theory is true, then different approaches to find the appropriate assets for the investment and expected amount calculation formulas are not being used by the pension fund manager. Investment will be fixed as other option and gains also provide the same return information.
However, if it is not true then pension fund manager is to select different assets based on the finest portfolio that generates higher return and minimum risks are involved. Furthermore, the different assets with no co-relation is also a challenge for pension fund manager as one non performing asset can not hamper the overall return of pension fund (Brealey, et al. 2012).
From the above discussion, it can be illustrated that for employees in the tertiary sector superannuation fund and opportunities related to the investment choices and defined benefit plan aspect is a very essential topic in providing employee welfare after retirement. It can be determined that there are various factors such as risk, return, nature if investment and knowledge of investors that influences the choice superannuation scheme. Along with this, the future value of time by compounding the present value of money is also an imperative aspect in comparing the choices and strategies of superannuation scheme. The efficient market hypothesis is the sharing all the information relating to the assets and price of the assets in future as well. Its application will ease the pension fund manger task whereas its absence will challenge the task by exploring diversified assets as option of investment for maximum benefits provided to employees.
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