1.What are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan?
2.If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case?
1. There are varieties of factors that the staff of the tertiary sector must consider and taken care of at the decision-making period related to the individual superannuation contribution. The decision is done on whether the individual superannuation contribution must be placed with the choice of the investment plans. There is a wide range of difficulties and issues having an association with the concept of the time value of money. The concept of time value additionally supports the process of decision-making. Superannuation fund concept has been made to help people save money and uphold the same for their upcoming years of retirement. The Government of Australia is proactive towards obtaining a minimum amount of contribution towards the funds of retirement or superannuation on the behalf of the employees backed up by the employers. There was an increase of approximately 9% of total contributions. Further, there was a decline in the level of contributions of the employers that was about 3% of total salaries of staff members (Blake et al. 2014). The employees have been motivated for saving a proportion of their income for further investment in the superannuation funds.
The motive of taking on the initiatives related to the policies of the superannuation and retirement funds. The force is towards the decline in the burden of the security of the individuals towards the payments of the pension and other provisions to act as a saviour at the time of retirement. As per the laws related to superannuation there has been an increase in the consciousness and awareness among the individuals. The individuals have become more aware about the benefits that can be derived in the future times. As per the current scenario, there are superannuation contributions of about a billion dollars. All the financial institutions apply the scenario and the procedure of contribution.
Furthermore, the role considers the investment of the contributions in a profitable manner for offering with appropriate profits in the direction of supporting all the aspects of non-workers. Additionally, the largest investors are deemed to invest in the mutual funds other than the superannuation funds. For example, one of the principal individual and industry specific superannuation funds providers is UniSuper Ltd. The company offers services and has dealing with the superannuation of employees surrounded by the tertiary industry of education in the country Australia. The company consider the higher education institutions, several TAFE colleges and universities.
A variety of revolutions has occurred within the administration of the superannuation funds and currently carrying on the provisioning of the services. The revolutions have led to an assurance of the growth and augmentation in the superannuation funds and other products that has a relation with the alternatives and choices of a variety of plans related to investment and retirement. There is thus maintenance of growth in the flexibleness among the members that takes place at the time of investment in the superannuation funds and such type of investments and funding. There are two types of superannuation funds among a wide range of funds that has been considered by the company UniSuper Ltd. The funds have increased the selection of the investments and the two categories include the plans of explained benefit and investment choice.
The Explained Benefit Plan, as the name indicates is one among the many plans that offers many benefits to be offered at the time of retirement for the employees. The Plan is elucidated and clarified with the employment of a formula that comprise of a variety of factors like age along with number of years of the employees and the final average remuneration of employees. Additionally, the Plan takes into account the calculation and computation of the benefits provided to the employees
In case of the tertiary education sector, the employees that adopt the above Explained Benefit Plan is taken into account by the trustees of the company i.e. UniSuper Ltd. The account takes into account the collection of the contributions made towards the superannuation funds and the trustees take the asset group under the determination process. The payout that is considered at the time of final payment is calculated by the formula given and the performance of the portfolio of the asset is considered of an irreverent nature as it do not have any impact on the overall payout at the time of retirement. The company on giving up the overall payout at the time of retirement includes the risk of investment that is faced by UniSuper Ltd.
The above analysis presents an indication that there might not be any benefits from the portfolio of assets and that is excessive of the minimal amount of requirements in addressing the advantages of a define nature and character. The trustees of the Plan have obtained caution and judgment in terms of paying away the advantages of accumulation on an adjusted basis yearly. On the other hand, it does not show any amount of certainty and guarantee and there might be a development of a smaller fraction or proportion of the superannuation rewards (Walden 2014). The employees that consider the selection of the Plan of Investment Selection collect an account of individual investments. The plan takes into account the superannuation of personal nature and the ones sponsored by the employees. It also considers the annual allotment of proceeds assembled in the devoted contributions that has led to a decline in the charges of the management and administration.
The value of time value is of significant nature, as the investors have to consider the value of a dollar in the upcoming years for the dollar that remains in the hand of investors. The amount of the dollar in the present year can be utilised towards investing for earning the capital gains and interest earned. Due to the inflationary fluctuations, the dollar in the recent years will be of a decreased value that has been promised for the forthcoming years. The time value of money is thus an efficient part of the investment decisions and other plans related to the investments.
The money can be utilised in a productive and profitable manner and thus there might be distinctiveness in the value that has a reliance on the period at which it is collected or paid. Particularly, the worth and the actual value of the amount of wealth selected are considered valuable in comparison to the upcoming values. There might be considerations made by the investors regarding the time value that the money has due to a variety of reasons and factors. The reasons take into account consumption, inflation, risk and uncertainty and the opportunities related to the investment. The investors can also give a thought related with the risky nature and uncertainty in the outflows of the cash in the upcoming future years. Further, there is uncertainty in the inflows of the cash in future as they have a reliance on the creditors and the financial institutions like banks (Turner 2014).
The employees have an option of selecting a number of types of assets or portfolios and can undertake the selection of the strategies that are described as under:
- Shares fund: The savings has a reliance on the shares of both domestic and international nature.
- Secure fund: The cash and securities of fixed-asset nature in Australia
- Stable fund: The amount of fixed interests and securities of bonds and reduced disclosure to the property and shares of both local and international concerns
- Trustees selection fund: Property assets and the investments of private equity and infrastructure, Balanced fund of the shares of both local and international concerns
The overall payout at the time of retirement for the employees considering the selection of the funds of investment selection has a reliance on the returns collected. The returns are gathered by the means of the investment strategy chosen and they have a dealing related to the risk of related investments. The company UniSuper Ltd offers their employees a wide variety of products for investment at the time of retirement. The offers include the investment selection plan and the Explained Benefit Plan for providing them with a number of advantages at the time of retirement. The offers take in the options of investment and the plans of pension that include the following:
- Individual life indexed pensions: These pension plans are not provided at the time of the death of individuals. Instead, they are provided an amount of income that will be higher than the regular income. The amount is paid in consideration to the benchmark set with the indexed pension, discussed below.
- Indexed pensions: These pensions provide an ordinary amount of income that is indexed in relation to the price increases. These pensions are well thought-out to be due for the period of the lives of individuals. The pensions are then relocated to the spouse of person and have a reliance on the demise of the individuals.
- Rollover options: These pensions provide the person to select the shifting intended for rolling over the retirement fund of the individual.
- Allocated pensions: These pensions provide income of regular nature at the selection stage. It also offers accessibility to the individuals towards their capital along with four separate strategies of investments that helps the capital to be invested by people. The balance remaining in the account of pension after the death of the individual is dispersed to the dependents of the individual.
- Part-cash distributions: In such cases, the individuals are offered with the options of collecting a percentage desired by the retirement fund of an individual. The distributions are subjected to tax and other approvals and regulations as the amount distributed is utilised and consumed for the investment and individual purposes. The individual participating in the same can also go with the selection of combing a number of options that are important to use the income for meeting up the requirements of the lifestyle. Some important factors are to be considered by the individuals in the decision making process that has a relation with the risk of investments and profiles off returns. The important factors include the aspects that have relation with the inflation and time value of money (Lekander 2015).
2. Efficient market hypothesis is a theory that takes into account the assumption about the fact that the current prices of stocks have a major focus on the information obtainable about the value of the company. It is also known as the Random Walk Theory and it suggests that there is no other way to attain profits rather than getting access to the data of the company. The theory has dealing with the major concerns related to finance and goes into the search of the reason of the changes in the prices that occurs in the markets and securities. The changes are marked and the same are determined for knowing the cause behind the same.
A number of investors attempt to disclose a particular amount of securities that are rated too low and have been under the prediction of getting their value enhanced in upcoming years. The investors in majority consider the selection of the securities and stock that could outperform the entire market and the investors include the manager of the pension funds. For the above reasons, there is a tendency of utilising the numerous tools and techniques related to the forecasting and valuation. The same can help in the facilitation of taking efficient decisions related to the investments. In addition, the processed edges formed by a manager of pension funds can be altered into considerable and significant amount of profits. The investors take into account the considerations that an efficient market is to be thought of along with the indications of the high and low prices (Martinsuo 2013).
There is a conception that even a manager of the pension funds can chose a portfolio easily in the occasion of the efficient market hypothesis being accurate. On the other hand, it is contrasted, as is it not necessary that the diversified portfolio will have a similar structure and correlation with the stocks in an increasing manner. Thus, the funds constitute higher and exceptional amount of risks that may not fall under the rewarding criteria. For a wide range of people, the portfolio derived as a result is taken to be excessive in terms of systematic risks. The issue is removed on grounds in which the individuals are capable of investing more wealth than their capacity. The investment is to be done in the particular range of assets that are risk free in nature. There might be situations where there might be an increase in the beta of the portfolio along with the preferences of risk of the individuals (Klingebiel and Rammer 2014). The existence of taxes and such other impositions are to be considered well in the world, which is imperfect. They are considered the most vital part for the investors and as per the process of equilibrium, due to the liability increase, there can be a collection of huge surpluses.
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