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Pension Programs Of The Organizations For Employees

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Question:

Discuss About the Pension Programs of the Organizations for Employees?

 

Answer:

Introduction

Superannuation refers to the pension programs of the organizations for its employees. In a more precise note, superannuation can be considered as the pension plan of the business organizations. The major advantage of superannuation funds is that the amount of money invested in the superannuation funds will grow automatically without the effect of any tax implications[1]. The money in the superannuation funds are provided to the employees of the organizations at the time of their maturity. Some of the major differences can be seen between the superannuation fund and the other pension funds.

The tertiary sector staffs must take into consideration certain aspects at the time of taking the decision about the placement of the individual superannuation contribution in the specific plan of benefit as well as the choice plan of investment. In addition, several issues related with the time value of money need to be taken into consideration at the time of the investment decision-making process. The major objective of the superannuation is to encourage the people to save money and invest them in the upcoming years for their retirement. It can be seen that the Australian Government is very much proactive in the aspects of superannuation and the government is developing various regulations in the process of superannuation of the retired funds for by the employers of the organization for their employees. The decreased level of the employers that are contributing towards the superannuation was 3% on the salaries of the staffs and these aspects resulted in the increase in the minimum contribution by 9%. It has been deemed that the employees are interested to invest certain factor of their salaries in the superannuation funds[2].

 


The major objective of presenting the policy of superannuation fund is to decrease the burden of the security system of the society for the provision of pension payments. The superannuation is done in order help people after retiring. The superannuation law says that people increases the portion of saving out of the concern for their future lives after the retirement. For the increase in the awareness about savings, there are billion dollars of superannuation contribution in the recent scenario. This has been possible with of the financial institutions along with the superannuation funds. The role of these kinds of institutes is to invest the savings of the common people in the superannuation funds to get fair amount of profits and returns. In Australia, it can be seen that the superannuation funds along with the mutual funds  are considered as the largest investors in the financial market that includes the equity securities of the business organizations in the local and international share market. One can take the name of UniSuper Limited, as they are the largest individual company in the superannuation industry that offers various services and offers regarding the superannuation funds within the tertiary education industry in Australia. This includes various universities, higher education institutes, various TAFE colleges and others. Several other superannuation investment funds are there that offers various provision of services in the current year. This whole process increases the portion of money invested in the superannuation funds and increases the choice of investment options to the investors. This process ensures flexibility in the process of investment in the superannuation funds and makes it sure that the assets are invested in the right position. In this regard, it is essential to mention that UniSuper Limited uses to provide two kinds of superannuation plans to its customers; they are explained benefit plan and investment choice plan.

In case of the Explained Benefit Plan, the investors get the benefits of the plan after retirement. In this offer, some of the major formulas are employed like the final average salary of the employees along with the number of years of the particular investment plan. In a more precise note it can be said that in the process of Explained Benefit Plan, the employee’s retirement benefit is calculated as:

 

Retirement Benefit = Benefit Salary Length of Membership Lump - Sum Factor Average Service Fraction

For the employees in the tertiary education that are considering the idea of the adoption of Explained Benefit Plan, it is deemed that the trustees of UniSuper Limited determine the assets group in which the contributions of superannuation will be invested after the process of gathering them. In case of this type of investment, UniSuper Limited bears the risk of investment as the payout of benefit is calculated with the help of the above-mentioned formula and the performance of the investment in the asset portfolio is deemed to be irrelevant and this risk has no impact on the overall retirement policy. This process also indicates that the employees of the organizations may not be beneficial from certain amount of gains derived from the portfolio. It is the responsibility of the trustees of the company to attain the desertion in order to pay certain accumulated advantages on a yearly basis. However, this process a small fraction may arise in the total advantage of superannuation in the selected plan. The employees who are interested in the Explained Benefit Plan have to maintain a specific investment account that encompasses personal and the employer’s contribution for superannuation along with yearly distribution of income[3].

In the process of superannuation fund, the investors must consider the aspect of time value of money. The reason is that a dollar in hand in the current situation is more vital than a dollar that is promised in the future. The dollar in hand in the current year can be used for the purpose of capital gain and to earn significant amount of interest. The presence of inflation decreases the value of dollar that is promised in the future than the dollar in hand currently. In addition, the time value of money is considered as one of the major concepts in superannuation as it helps to reveal the amount of future cash flow that arises due to the taking into consideration of the aspect of opportunity cost of the funds. This is the reason, the time value of money is considered as a vital concept in finance. The time value of money is considered as distinct at different points.

Amount of money can be used for various productive purposes, but it can have distinct values at the time of gathering or paying. The value of money in the current year is considered as more valuable than its value in the upcoming years. The investors consider time value of money as an important aspect as the involvement of risk, uncertainty, consumption, inflation, opportunities of the investments and many others. The investors consider that the future is full of risk and the cash flow will remain in control as the individuals conduct the process of payment to the parties. Due to the reliance on the banks and the creditors, there is less uncertainty in the future cash flow. Individuals want to hold the money in present, as they are not certain about the future cash flow. In the process of Investment Selection Plan, employees have the opportunity to select the specific asset type of portfolio. In this case, the money is invested with the help of these following strategies:

 


Stable Fund: The main components of this fund are the fixed rate of interest and the bond securities with a decrease in the exposure to the international and local shares and properties.

Secure Fund: The main components are fixed-asset securities and Australian Cash.

Share Fund: In this kind of funds, Investment depends on international and domestic shares.

Trustee Selection Fund: This includes balance funds of international and local shares, properties along with investment in infrastructure and private equity.

The basis of distinguishing of these above mentioned strategies are risk and return factor along with various secured funds that use to carry different inherent risks. After the period of retirement, UniSuper Limited offers various kinds of attractive investment plans. These plans include some major investment options along with pension plans. They are as below:

Indexed Pension: This plan offers income on a regular basis and it is indexed with inflation. This plan is considered to be payable in the whole lifetime of the person. After the death of the person, this plan is transferred to his/her spouse. In some cases, the plan is relied on the death of the person.

Individual Life Indexed Pension: The main advantage of this plan is that it provides regular income on an increased basis. This plan is compassioned to the standard of the above-discussed plan. In this plan, after the death of the person, the plan is not transferrable to his/her spouse.

Allocated Pensions: This pension scheme offers regular income at a constant level. In this scheme, four types of investment strategies are there by which the money of the investors are invested. After the death of the investor, the pension amount is distributed among all the dependents of the person.

Rollover Options: This pension fund offers individuals with the transfer of their investment money. In this scheme, the money of the investors are transferred to superannuation funds, personal approved funds, investment funds along with other approved deposit funds. At the time of the investment of this scheme, a retirement savings account is also created.

 


Part-cash Distributions: This offer allows the investors to select their preferable percentage of the retirement fund that is subject to tax deduction. In addition, the investor also have the option to use the combination to address the investment issues. Risk and return profile are two of the most important aspects of this scheme[4].

The efficient market hypothesis can also be considered as the Random Walk Theory. This process considers the proportion of the hypothesis. It implies that the present stock price mainly focuses on the information about the value of the organization. It can be seen that there is not any other way to attain high value apart from this process. This process deals with the important and crucial issues of finance. It explains the reasons for the change in prices in the security market. It also explains the specific ways by which these particular changes take place. Hence, in order to take effective investment decisions, it is needed to employ various valuation and forecasting techniques. There are certain edges that the pension fund managers can turn into reasonable profits. The investors consider that the market is efficient and it is considered that the prices are extremely high or low.

In this regard, it is considered that the hypothesis regarding the efficient market is true and the pension fund manager can choose an investment portfolio with a pin. In this aspect, the case is not considered that the chosen portfolio cannot be properly diversified due to the continuous increase in the correlate stocks. Due to this reason, exceptional risks can be seen in these kinds of funds and they may not be rewarded. In addition, it needs to be mentioned that the chosen portfolio is considered to have significant systematic risks for many people. in case the individuals have significant amount of assets that they can invest them into the risk free asserts, then this is not an severe issue. However, if the investors are not wealthy, then the portfolio may result in an increase in the beta in the risk preference of the individual. Another main aspect in this regard is the existence of taxes. In this case, the tax position of the investors is deemed to be very important. Due to the equilibrium of the various assets, there can be gathering of surpluses for the increase in taxability. In this particular aspect, ‘return after tax’ of these assets for the individuals is considered to be favorable. This type of consideration is considered to make the tax status of the individuals a crucial aspect[5].

 

References

'Choosing A Super Fund' (ato.gov.au, 2017) <https://www.ato.gov.au/uploadedfiles/content/spr/downloads/spr56761nat13080.pdf> accessed 21 May 2017

'Dynamics Of The Australian Superannuation System' (deloitte.com, 2017) <https://www2.deloitte.com/content/dam/Deloitte/au/Documents/financial-services/deloitte-au-fs-dynamics-australian-superannuation-system-0913.pdf> accessed 21 May 2017

'THE EFFICIENT MARKET HYPOTHESIS: A SURVEY' (citeseerx.ist.psu.edu, 2017) <https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.4.1450&rep=rep1&type=pdf> accessed 21 May 2017

'Understanding Superannuation' (mlc.com.au, 2017) <https://www.mlc.com.au/understandingseries/understanding_superannuation.pdf> accessed 21 May 2017

'What Is Superannuation?' (camac.gov.au, 2017) <https://www.camac.gov.au/camac/camac.nsf/byheadline/pdfsuperannuation_1/$file/superannuation_sub_5.pdf> accessed 21 May 2017

[1] 'Understanding Superannuation' (mlc.com.au, 2017) <https://www.mlc.com.au/understandingseries/understanding_superannuation.pdf> accessed 21 May 2017

 [2] 'Choosing A Super Fund' (ato.gov.au, 2017) <https://www.ato.gov.au/uploadedfiles/content/spr/downloads/spr56761nat13080.pdf> accessed 21 May 2017

 [3] 'What Is Superannuation?' (camac.gov.au, 2017) <https://www.camac.gov.au/camac/camac.nsf/byheadline/pdfsuperannuation_1/$file/superannuation_sub_5.pdf> accessed 21 May 2017

 [4] 'Dynamics Of The Australian Superannuation System' (deloitte.com, 2017) <https://www2.deloitte.com/content/dam/Deloitte/au/Documents/financial-services/deloitte-au-fs-dynamics-australian-superannuation-system-0913.pdf> accessed 21 May 2017

 [5] 'THE EFFICIENT MARKET HYPOTHESIS: A SURVEY' (citeseerx.ist.psu.edu, 2017) <https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.4.1450&rep=rep1&type=pdf> accessed 21 May 2017

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