The Australian government, through the Unisuper Limited, have been pushing and encouraging the citizens to invest their superannuation funds in either the Defined Benefit Plan or the Investment Choice Plan. The government has instructed the employers to remit 9% of the employees’ salary to the Unisuper Limited which has been mandated to manage and service superannuation funds. One of the affected sector in the tertiary employees in Australia. Under the superannuation plan, employees are can choose the best form of the plan between a Defined Benefit Plan and an investment choice plan. To choose between either of the two, several factors must be considered beside the time value of money. When considering an investment plan, investors must consider the future benefits, the cost of the investment, the years of investment and other investment options/ opportunities. This study outlines two issues. First, some factors that should be considered when choosing the form of superannuation plan to invest in by the tertiary education sector employees. Second, why the time value of money should be considered when deciding whether to invest in the scheme or not.
i. The fundamental factors that directly influence the superannuation benefits over time are;
The amount of contribution made by the employees either on a monthly or yearly basis must be considered. At the moment, each employ is expected to make a 9% contribution of their salary under the superannuation investment plan. The percentage was raised from the previous 3%. Some experts have held that switching to either the Defined Benefit Plan or the Investment Choice Plan would make some employee surplus their contribution cap (DeMuth & Stein, 2013, p. 66). The most affected are those over $278,000 and are under 50 years as well as those earning over $556,000 and are over 50 years. When the contribution cap is exceeded, such employees would either pay excess tax, or their contribution would be reduced. Regardless of the salary earned by an employee, they should be advised on how the future contribution rate would affect their salary (Shirreff, 2004, p. 54).
With the rise of Global Financial Crisis (GFC), the many people are aware of fund solvency, especially in the manufacturing sector. During the GFC, Defined Benefit Funds suffered a funding deficit of approximately 20% in Australia. Therefore, the employees in the tertiary education sector should be informed about the security of their investment and future benefits.
Under the Australian superannuation investment plan, not all employers provide their employees with the choice to switch to other plans. When no options are offered, employees cannot switch to other friendly options. Therefore, the flexibility to switch from one option to another should be considered (Grant, 2017, p. 75).
Any form of investment is associated with risks as well. However, different investment portfolio attracts a varying degree of risks. An investor is likely to go for an investment that attracts fewer risks over time. For example, an investor might consider investing in growth assets which are less risky compared to investing in the mortgages. Employees in the tertiary education sector should consider the level of investment risks associated with either of the options. Therefore, the degree of investment risks is a major factor to consider (Mackenzie, 2016, p. 12).
The Defined Benefit Plan provides an insurance cover. However, when an employee choices to switch to the Investment Choice Plan, the insurance cover may be charged or forfeited. Likewise, the default funds for the employer may offer insurance cover to the employee without extra cost. It should be noted that the insurance cover becomes expensive when the employees grow old. Employees might suffer a lot when the insurance cover previously enjoyed is lost. Before deciding on the plan to choose, the issue of insurance cover must be taken into account (Gleim, 2001, p. 81).
Employees enjoy a defined benefit pension under some Defined Benefit Funds plan. An employee is guaranteed to receive a continuous income as long as they are alive. The benefit is extended to their spouses as well for the rest of their lives. The feature lacks under the Investment Choice Plan. The Defined Benefit Pension is an important factor that should be considered by the employees in the Australian tertiary education sector when choosing between The Defined Funds Plan and the Investment Choice Plan for superannuation funds (Murden, 2014, p. 64).
Does the plan give the employees more options to access their funds? The employee should consider the different options provided under each of the plans. Are the options favourable to the employees? Employees are likely to go for the plan with favourable options. Optionality factor is also important. The employees should be informed clearly of the available options under the options (Huang, 2008, p. 55).
Conclusion
This section has provided some factors that should be used by the tertiary employees in the Australian education sector to choose between placing their superannuation contributions in whether the Defined Benefit Plan or the Investment Choice Plan. Apart from using a comparison formula of calculating the future benefits enjoyed under the two options, these factors are important as well. The study offers a summarized version of the factors. For a comprehensive discussion, the employees should seek professional advice before making a decision (Levinson, 2009, p. 49).
The understanding the concept of Time Value of money is important, especially when working in real estate and finance sectors. It’s hard to assume the time value of money when dealing with capital budgeting, financial decisions, loans and investment analysis. Although the application of the concept has been fully embraced in the financial and accounting fields, the tertiary employees in the Australian education sector still lack adequate knowledge when choosing the option to invest their superannuation funds in (Huang, 2008, p. 44).
The time value of money is a business concept which states that a dollar at hand today, has more value than a dollar to be received at a future date. For example, an investor is told to choose between by given $10,000 today and receive the same amount in 10 years’ time. Clearly, the investor would go for the first option (Huang, 2008, p. 76). The decision is made based on the following reasons;
First, there is no risk to be incurred for receiving the $10,000 today compared to receiving $10,000 in a ten year time. Second, $10,000 received today has a higher purchasing power compared to the $10,000 received later because of inflation. In other words, $10,000 received in 10 years might not have the same value as the $10,000 received today. Third, the $ 10,000 received today enjoys the opportunity cost i.e. the money can be invested to earn more income. The $10,000 to be received in 10 years lacks opportunity cost (Johnson, et al., 2008, p. 103).
In the layman’s language, the concept of time value of money is universally accepted because of two fundamental principles, which are;
The teachers have been asked to invest 9% of their salary every money to receive a higher amount in the future. For instance, when they are to deposit $ 10,000 every year and receive $200,000 after 20 years, one might be tempted to accept the offer hurriedly. However, the concept of time value of money should be applied to determine the current value of the $200,000 to be received in future using the Net Present Value discounting rate. After obtaining the present value of the amount to be received in the future, the tertiary employees should consider another form of investment which might yield more interest compared to investing in the Superannuation funds (opportunity cost) (Shirreff, 2004, p. 82).
According to the efficient market hypothesis (EMH), the price of stocks and shares in the market is affected equally by the relevant information made public at any given time. EMH also holds that the information should be made available to the market players at the same time. Likewise, the information should be understood and processed uniformly. However, the hypothesis is not fully applicable in the real world. Just like other financial theories, EHM is subjective. The subjective nature of EMH is based on the following reasons (Hallman & Rosenbloom, 2015, p. 97).
First, the EMH assumes that all the relevant information within the public domain is perceived in the same manner by all the investors. However, there are several ways of analysing and valuation of stock prices that disagree with the EMH. For example, one investor might go for an undervalued investment portfolio while the second investor chooses an investment with a potential to grow in the future. Assuming that the two investors were served with all relevant information regarding the market equally, then EMH does not hold water. The two investors have already formed a different assessment of the current fair market value of the stock. Given the situation, it is difficult to determine the worth of the stock in an efficient market (Watson, 2006, p. 61).
Second, Under the EMH, investors possess the relevant information equally. Therefore the return obtained by the investors from their investment should be identical. In other words, a single investor should not get a higher profitability after investing the same amount of money as others. However, this is not the case in the real world. This can be seen from the returns obtained from investment portfolio like investment funds, mutual funds, real estate and the stock market. Investors cannot obtain varying returns from equal cash outflows if they never had an advantage over others. Therefore, the EMH is not true. According to the hypothesis if one investor is profitable, then all the investors who had invested in the portfolio should be profitable as well (Evensky, et al., 2011, p. 90).
Third, an investor should not exceed the expected market returns even after putting the best efforts. However, in the real market, many investors have surpassed the market expectations. With the best strategies, especially from market/ business experts, many investors have consistently beaten the market return index on an annual basis (Hallman & Rosenbloom, 2015, p. 109).
In conclusion, the efficient market hypothesis cannot be achieved perfectly. Even after accessing all the relevant information equally, a single investor has to make decisions independently. Likewise, the success in the investment market is based on individual skills and the knowledge of the market. For the EMH to be true, then there should be a universally acceptable method of pricing shares. Lastly, the investors should be willing to accept identical profit or loss to one another. However, it is almost certain that these conditions cannot be met.
References
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