Analyze The Factors Impacting The Superannuation Decisions in Corporat

Question: Discuss about the Corporate Financial Management Analyze The Factors Impacting The Superannuation Decisions. Answer: Introduction This report has been developed in order to analyze the factors impacting the superannuation decisions of tertiary sector employees. In this context, the important characteristics of defined benefit and investment choice plan are discussed in detail to support the decision-making process of employees relating to place their superannuation contributions. Also, the report at the end presents a critical evaluation of the statement If the efficient market hypothesis is true, the pension fund manager can select a portfolio with a pin. Factors Impacting the Selection of Superannuation Contributions in Defined Benefit or Investment Choice plan by Tertiary Sector Employees The term Superannuation refers to the retirement benefit offered to the employees under their contract if employment. The term is defined in the Occupational Superannuation Standards Act 1987 as funds that are entitled to be provided to the employees upon their retirements from employment. There are different types of superannuation funds plan offered to the employees for saving money to secure their future life. The major advantage of placing pension funds under the superannuation schemes is that the funds are likely to increase without any implications of tax. The tertiary sector employees are the service sector employees while the other two economic sectors being the agriculture and manufacturing sectors. The pension plans are extremely important for tertiary sector employees as they are bound to retire from their employment tenure at a certain age and this they need to save money for future in order to live an independent life after retirement (Dixon, 2012). The two major types of superannuation funds offered to the employees are defined benefit and investment choice plan for placing their superannuation contributions. The defined benefit plan is a retirement plan that is provided on the behalf of employer to employees and is calculated through the use of a fixed formula. The formula employed for the calculations of the retirement payout under this type of plan takes into account the factors such as age, term of employment and salary history. The responsibility of managing the portfolio and all type of investment risk is undertaken by the company. The performance of the portfolio does not impact the retirement payout of the employees under this type of plan. The employee takes all the investment decisions and thus assumes all type of risk relating to investment in defined benefit plan. This is known as defined benefit plan as the benefits offered to the employees under it is fixed and is known to them in advance (Henderson, 2012). The employees under this type of plan gains benefits such as they have to not spend time in managing their pension funds as all type of decisions are undertaken by the employer. Also, the employees receive the fixed income as their pension amount in this type of plan without any investment risk. Thus, it is the most secured type of superannuation plan provided to the employees by the employer.However, there also some limitation associated with this type of plan. The major limitation is that the employees are not likely to receive any extra benefit depending on the performance of their portfolio. Also, the retirement payout is impacted the age factors and salary history. Thus, the employees with older age and more salary will receive more benefits in this type of plan (Smith and Koken, 2011). Investment choice plan is contrary to the define benefit plan completely. The investment choice plan is completely controlled and managed by the employees with no role of the employer. The employees hold the possession of their superannuation contributions and as such they can select the type of assets in which they want to invest. The investment choice has different features as compared to defined benefit plan as the retirement income in this type of plan cannot be determined in advance. The employees take the assistance of professionals in selecting the different type of assets in which they want to place their superannuation contributions. There are different types of investment choice offered to the employees under this type of plan (McKeown, 2012). The employees can select the best plan for them based on the risk and return characteristics of each. The investment choices under this type of plan are as follows: Cash Option: This type of option is mainly for the risk-averse investors as it mainly involves investing the superannuation funds in fixed-interest investment such as bonds and bank deposits. The funds invested under it remain stable and are not subjected to any market fluctuations. Conservative Option: This type of options involves low to medium level of risk. The superannuation funds are mainly deposited in fixed-interest investment but some proportion is also invested in growth assets such as shares and property. Balanced Option: This type of option is for the employees who like to take some risk with their superannuation funds. The superannuation funds under this type of plan are invested mainly on high risk growth assets such as shares and property and remaining proportion is deposited in lower-risk securities such as cash, bonds etc. Growth Option: This option is mainly for the employees who are prepared to take high risk as it involves investing completely the superannuation funds in growth asset such as shares and property (Henderson, 2012). The main drawback of this type of plan is that income is not fixed and thus sometimes it can be more or less as compared to define benefit plan depending on returns generated. Also, the employees have to invest a significant proportion of their time for monitoring the investment of their superannuation funds. However, the employees can realize higher returns under this type of plan that it is not impacted by the factors such as age, tenure of employment and salary history. This proves to be major benefit of investment choice plan in comparison to defined benefit. Thus, tertiary sector employees have to analyze and examine the features of all type of superannuation plans before determining their retirement goals. The employees cab select one option or a combination of options to meet their long-term retirement goals (Iverson, 2013). Time Value of Money Relevance to Decision-Making Process of Placing Superannuation Contributions The time value of money principle can largely support the decision-making of employees in regard to invest their superannuation contributions. The concept states that money has the capacity to grow in value over a future period of time. Thus, as per the principle same amount of money has more worth today than in the future. The investors can gain significant benefit from implementing the principle of time value of money as the concept states that receiving cash today is more beneficial and valuable as compared to some future point of time. The money can be invested to earn interest over a period of time and this is the reason for its present worth more than the later worth (Smith and Koken, 2011). The investors can identify the timing of cash flows through the application of concept of time value of money. The time value of money principle found extensive application in determining the present and future value of cash flows. There are mainly two techniques used by the investors in de termining the present and future value of cash flows that are, discounting and compounding. Discounting involves determining the present value of money that is likely to be received in future period of time.It is calculated through the application of discount rate to the sum of money that is to be received in the future period of time. On the other hand, compounding involves determining the future value of an investment or series of periodic payments that is likely to be received in the future (Hirt, 2010). Thus, the concept of time value of money can prove to be of high significance for the employees at the time of deciding their superannuation contributions. The compounding technique can help in determining the future value of present day investment made by the employees under the superannuation contributions. They can easily determine the future amount that they will receive under defined benefit or investment choice plan through the application of compounding technique. The future value of investment under the investment choice plan can be accessed through the use of asset prices. The return on assets fluctuates rapidly and thus can de predicted through the use of continuous compounding technique (Gitman et al., 2015). The employees cans select their superannuation plan from defined benefit or investment choice on the basis of comparing the future amount that will receive under both the plans. Therefore, the principle of time value of money can prove to be the core of decision-makin g process in relation to the selection of superannuation plans. The planning of superannuation investment strategy by the employees can be supported by the time value of money principle that helps in analyzing the worth of investment in future by taking into the account the impact of compound interest. The future value is dependent mainly on the original amount invested, rate of interest and number of compounding periods (Dixon, 2012). If the Efficient-Market Hypothesis is true, the pension fund manager might as well select a portfolio with a pin The theory of efficient-market hypothesis states that current price of assets reflects all the relevant information to the investors about the value of a firm. The investors cannot realize higher profits by using this information as it is equally available to all the investors. The theory has argued that any change in the assets properties are rapidly absorbed by its current prices and therefore investors cannot earn profits from predicting price movements (Moles et al., 2011). However, this is not case as investors have outperforms the market by investing in undervalued and overvalued securities. The investors identifies undervalued securities whose prices to increase in value over future period of time and thus they can outperform the market. The employees investing their pension fund in different types of superannuation schemes aims to receive higher payout after their retirement. The role of pension fund manager in this case is to maximize returns for the employees by developing a portfolio that provides them higher returns and is associated with lesser risk (Maginn et al., 2007). However, if the findings of efficient-market hypothesis were true, the pension fund manager can easily construct a portfolio without analyzing the risk and return characteristics of assets as their prices reflect all available information about them. On the contrary, the pension fund manager cannot select a portfolio with a pin as they incorporates the use of variety of forecasting and valuation techniques for taking decisions relating to investment of pension funds of their clients. They have to select securities that will provide higher returns in future period of time so that employees realize higher income from their pension funds (Rattiner, 2010). As such, the pension fund manager has to diversify the market risk by investing the pension fund in different type of assets. The diversification reduces the market risk as there are different classes of assets so that returns generated by an asset are not impacted by other asset returns. Thus, pension fund manager can outperform the market through diversification of the assets. Also, the pension fund manager should select the assets that have negative or low coo-relation between them so that if one asset underperforms it does not impact the performance of other assets. The pension fund manager also conducts technical and fundamental analysis for analyzing the future performance of an asset before selecting it in the portfolio. Thus, it can be stated that pension fund manager have to carefully select the type of asset under a portfolio and there is no benefits realized through the development of efficient-market hypothesis (Power, 2012). Conclusion It is summarized from the overall discussion that tertiary sector employees should analyze and examine well the features of defined benefit and investment choice pan before placing their superannuation contributions. The concept of time value of money will prove to be highly beneficial for the employees in taking this decision. Also, the pension fund manager cannot select a portfolio with a pin as stated by the theory of efficient-market hypothesis. References Dixon, D. 2012. Securing Your Superannuation Future: How to Start and Run a Self Managed Super Fund. John Wiley Sons. Gitman, L. J. et al. 2015. 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