Financial Management Principles For Influencing People

The Significance of Superannuation in Australia

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The development of the concentration of the influencing people on superannuation for the purpose of undertaking investments and even making savings in order to safeguard their future and this savings is mostly done for the retirement years has created extensive amount of emphasis in the economy of Australia and over their individuals. The government of Australia has been very pro-active with respect to this topic and thereby have been authorising the minimum amount of contribution that requires to be made with respect to retirement funds and superannuation by the employers for their employees in order to take care of their future (Sialm, Starks and Zhang 2015). This least amount of employer contribution that is given forward to towards superannuation was initiated with the percentage being 3% of the salaries of the employees and they are legislated to raise the least contribution of 9% within the year 2005. The employees are even required to allocate compulsorily a percentage of the overall income to the investment in the superannuation within this time period. The motivation for the introduction of these initiatives in accordance to the policies related to superannuation is to eliminate the pressure from the communal security process for the pension payment provision in order to assist the individuals at the time of the stage of retirement for their lifetime (Stiff et al. 2014). It is because of these directive requirements of superannuation and a rise in the level of realisation by the employees with regards to the significance of savings for their future course of time, it is seen that there are at present a lot of dollars that are invested in the contributions of superannuation that gets flowed towards the funds related to superannuation and the financial organizations in each of the years and their function has been to undertake investments in a profitable manner and the investments are made from the contributions in order to give out adequate  income in order to provide a funding to the elements that are non-working in nature on the lives of each and every individuals. It is due to this fact that mutual funds and superannuation funds are seen to the one of the most significant inverters in the financial market of Australia and the investments are made distinctively in the securities related to equities of the organizations that are listed in the international and the national share markets (Goldhaber and Grout 2016). 

Compulsory Employer Contributions to Superannuation

There are several individual industry reliant superannuation funds and their role has been to take care and manage the superannuation of the employees with respect to tertiary education industry in Australia that are inclusive of the universities, colleges and other kind of higher education schools and institutions. The other kind of development in the revolutions that have taken place in the superannuation management and services of the fund provision in the existing years has indicated an essential rise in the variety of the products that are available in the superannuation and the options that are associated to the investment and the retirement plans as it is seen that the members are have in the current time period has attained increased amount of flexibility in order to have an idea about the what the kind of the assets and the funds their contributions for superannuation have undertaken investments in. Dimmock et al. (2016) explained that there are two forms of plans related to superannuation and they are:

• A defined benefit plan
• An investment choice plan

Clark, Maki and Morrill (2014) explained that defined benefit plans is referred to be the one in which the benefits are paid to the employees during the time of retirement, which is ascertained by the formula that associates with the factors in some of the determinants like the final aggregate salary of the employees, tenure of the year and the age that have been employed. In accordance to the defined benefit plan, the benefits related to retirement is computed as:

“Retirement Benefit= Benefit Salary x tenure of membership x lump-sum factor x aggregate service fraction” 

In accordance to the education employees who are associated to the tertiary sector and who undertakes the decisions to follow the Defined benefit Plan, it is seen that their contributions towards the superannuation are pooled in and are invested for the purpose of the asset selection that is ascertained by trustees of the superannuation companies (Ho, Hogan and Scott Morton 2017). As the final benefit of the payout is ascertained only by the use of the formula that has been explained above, the performance of the investment of their portfolio related to the asset is efficiently immaterial and therefore does not have any kind of impact on their retirement payout that is paid that the end and the risk related to the investment is borne by the concerned organization. This explains that the employees do not gain any kind of benefit from the returns that is earned by the portfolio of their assets and it is the obligation of the trustees of the company to be capable of funding the defined benefits entirely. The trustees who are related to the defined benefit plan have their discretion to payout an extra accumulated benefit on the basis of an annual adjustment even though this thing is not guaranteed and therefore forms a smaller percentage of the entire benefits of superannuation in accordance to this plan.

Investment Options and Portfolio Allocation for Superannuation Funds

On the other other hand, the employees who are looking to undertake investments in the Investment Choice Plan tries to preserve a single investment account that constitutes of the employee supported and individual superannuation contributions, a yearly dissemination of the income that is earned on the invested contributions deducted by any kind management and the administration fees. In accordance to the Investment Choice Plan, the employees have the opportunity to nominate the sorts of portfolios and the assets that their contributions of superannuation which have been invested in and this has been done with the help of the strategies that have been explained as follows:

Secure fund: It is known as the Australian fixed interest securities and cash

Stable Fund: It is known to be bond securities and the fixed assets with a small exposure of the international and the national properties and shares.

Trustee’s Selection Fund: The balanced fund that is seen from the international and the domestic shares, assets related to the property and the investments in the private equity

Shares Fund: The investments are made only in the international and the domestic shares

These sorts of strategies are differentiated on the basis of the features of the risks and returns, with the Secure Fund being minimally risky and likely to give out the minimum average return in comparison to the Share Fund, which has the increased amount of risk but this is anticipated to to give out the increased amount of the entire aggregate return. In case of the employees who are looking to select Investment Choice Plan, the payout for the final retirement is reliant on the income that is generated by their selected strategies related to investment and they incur the risks related to the contributions from the superannuation (Jindal and Solanki 2016). There are several investments and pension options that have been provided and they are listed as follows:

Indexed Pensions:  These pensions provide normal income that is indexed to the inflation and this payable till the time one lives and this is transferred to the dependent of the death 

Single Life Indexed Pension: This provides increased amount of regular incomes in comparison to the general indexed pensions that have been explained earlier but this is not transferred to the dependent during the time of death.

Allocated Pensions: This assists in the creation of regular income and therefore accesses the capital if wished for.

Defined Benefit Plan vs Investment Choice Plan for Retirement Planning

Roll over Options: One can select the transfer of the retirement fund balance with a permitted industry or personal based investment and superannuation fund and a deposit or a retirement savings account that has been permitted.

Part Cash Distribution: It is seen that a specific percentage of the retirement fund can be considered as a cash limp amount that can be utilised for the purpose of investment or individual consumption intentions.

It is seen that the participants can even initiate a combination of these substitutes, with the process of undertaking decisions, which is very much dependent on the requirements of lifestyle and income in the time of retirement. In the process of making decisions, the considerations related to the risk and return related to investment profiles are dominant along with the impacts of inflation and the time value for money (Lee et al. 2015). These are the factors that needs to be taken into consideration in order to have an understanding of whether to place the superannuation contribution within the Defined Benefit Plan and the Investment Choice Plan.

The next question that has to been answered has been to understand the issues that are associated to the concept of time value of money and their significance on undertaking decisions. The equations that are related to the time value of money are combined generally in accordance to the users. It is seen that in case of bonds it can be priced on a frequent basis with the help of these equations, it is seen that a typical coupon bond constitutes of two sorts of payments and they are a collection of the coupon payments that are similar to the annuity and a huge amount of return on capital at the end of the maturity of the bond, which is known to be a future payment. The two equations can be amalgamated in order to ascertain the current worth of the bond (Macdonnell and White 2015).

An essential note has been that the rate of interest is actually known to the rate that is determined for the precise time period. In case of an annuity that undertakes one payment in a year, will be looked upon as the yearly rate of interest. In case of an income and a payment stream with a variable schedule for payment, the rate of interest needs to be converted into the precise periodic rate of interest. It can be explained with the help of the example that a monthly rate for a mortgage with the payments that are made monthly asks for the fact that the rate of interest needs to be divided by twelve.

The return rate in accordance to the calculations can be solved with the help of the variable or  a variable that has been pre-determined that computes the rate of discount, inflation, interest and the equity cost, debt expenses, rate of return or any number of the concepts that analogous (Friedman 2017).

In accordance to the calculations that are associated to the annuities, one must requires to take the decision in relation to the fact that whether the payments are made at the completion of each of the period, which is known as the ordinary annuity or the initiation of every period and this known as the annuity due. Hence, it is seen that this aspects that have been disclosed plays a significant role in assisting in the development of undertaking financial decisions and it is seen time value of money has extensive level of importance and significance and the use of the formulas and the values related to time value would be helpful for the companies in undertaking decisions that would be fruitful and effective for the development of the overall business activities. Time value is known to be the value of the money that is figured within a specific interest amount that is earned within a specified period of time and this is one of the core concepts of the theory related to finance. In this manner, time value of money has greater amount of significance in order to provide effective and precise decisions that are related to the development of the operational activities of a business.  

Reference List

Clark, R.L., Maki, J.A. and Morrill, M.S., 2014. Can simple informational nudges increase employee participation in a 401 (k) plan?. Southern Economic Journal, 80(3), pp.677-701.

Dimmock, S.G., Kouwenberg, R., Mitchell, O.S. and Peijnenburg, K., 2016. Ambiguity aversion and household portfolio choice puzzles: Empirical evidence. Journal of Financial Economics, 119(3), pp.559-577.

Friedman, M., 2017. Quantity theory of money. The New Palgrave Dictionary of Economics, pp.1-31.

Goldhaber, D. and Grout, C., 2016. Which plan to choose? The determinants of pension system choice for public school teachers. Journal of Pension Economics & Finance, 15(1), pp.30-54.

Ho, K., Hogan, J. and Scott Morton, F., 2017. The impact of consumer inattention on insurer pricing in the Medicare Part D program. The RAND Journal of Economics, 48(4), pp.877-905.

Jindal, P. and Solanki, A., 2016. Integrated vendor-buyer inventory models with inflation and time value of money in controllable lead time. Decision Science Letters, 5(1), pp.81-94.

Lee, L., Lee, M.P., Bertini, M., Zauberman, G. and Ariely, D., 2015. Money, time, and the stability of consumer preferences. Journal of Marketing Research, 52(2), pp.184-199.

Macdonnell, R. and White, K., 2015. How construals of money versus time impact consumer charitable giving. Journal of Consumer Research, 42(4), pp.551-563.

Sialm, C., Starks, L.T. and Zhang, H., 2015. Defined contribution pension plans: Sticky or discerning money?. The Journal of Finance, 70(2), pp.805-838.

Stiff, G., Sharpe, M. and Atkinson III, L.W., Genworth Holdings Inc, 2014. System and method for imbedding a defined benefit in a defined contribution plan. U.S. Patent 8,799,134.