Financial Management -Tertiary Sector

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What are the factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in Investment Choice Plan or Defined Benefit Plan? What issues relating to concept of time value of money, taxes might be essential in decision-making process?

The superannuation is way of saving money for the employees which can be beneficial for them when they get retired from their respective jobs. It is a government supported one which induces employees to save amount when they attain retirement in the future course of action. In relation to this, government has directed to employers that they shall pay minimum percentage of workers' salary to a fund knows as superannuation fund which will be entitled to be received by the employee and as such, employees are required to pay superannuation guarantee in the best possible manner. In accordance to the Australian Government, this type of guarantee which is required to be paid by employer's according to the legislative rule is set at 9.5 % of a salary of employee. The superannuation fund is paid to workers apart from the salary. In simple words, the amount is paid in addition to the normal salary drawn by employees (Anderson, Clark, Ramsay and Shekhar, 2017).

The Australian Government is mandating employer's to pay minimum percentage on the individual salary which is apart from the normal one so that they may be able to enjoy extra amount in the retirement and as such, they may some additional savings in the best possible way. When it was implemented in the initial stage, superannuation guarantee contribution was nearly 3 % on salaries of individuals. However, it has increased up to a high extent as it reached to maximum rate of 9.5 % which is good as employees are paid in addition to their salary in effectual manner. This is needed so that extra income can be effectively used by workers and they can easily take benefit out of the funds. However, employees are also urged or compel to pay for the amount. In simpler words, they are required to allocate some part of their income in the superannuation investment fund so that they may get earnings after retirement with much ease.

The fund was undertaken to provide benefits to the employees and as such, millions of fund flow in this category year which is provided to financial institutions so that such institutions could invest contribution to fund on the individual's salary after retirement is attained. It can be said that superannuation guarantee funds are one of the biggest and largest investors in financial markets of the nation. Mainly tertiary sector is managed by an institution named as UniSuper Ltd. The tertiary means that profession which is engaged in providing various types of services in the best possible manner. It implies that this type of sector is called as third economic sector and is categorised as service sector. There are mainly three types such as primary, secondary and tertiary sector (Evans and Razeed, 2017). Primary one means where extraction of raw materials are done such as farmers primarily work at this sector like wheat is taken from farms. On the other hand, secondary sector is termed as one which is engaged in processing of the raw materials provided by the primary sector. In simpler words, manufacturing and assembling work is done in this sector. Next one is tertiary sector providing services to customers as finished goods are imparted by previous sector in effective manner. Thus, this sector helps in strengthening economy quite effectually.

Moreover, UniSuper Ltd which manages superannuation funds of employees of tertiary sector is administered to effectively direct fund to workers. There are two superannuation investment such as Defined Benefit Plan and Investment Choice Plan. The Defined Benefit Plan is the plan in which an employee is paid amount on the retirement calculated by final employee salary, length of service provided to organisation and age are taken to arrive at paying amount of retirement to the employees (Retirement Planning. 2018). This is called as pre-determined amount or traditional pension being paid to workers. When employees opt for this plan, they are not entitled to receive any gains from the risk portfolio related to asset and thus, no extra gains can be provided and only pre-determined fund is accumulated. On the other hand, Investment Choice Plan means that employees are entitled to receive asset portfolio as they can choose type of asset in which superannuation contribution could be invested in the best possible manner. Annual distribution of earned gains are provided so that invested contribution may be accumulated in the retirement.

There are various investment strategies such as secure fund, stable, Trustee's Selection and shares fund which consists of lower and riskier investment. Secure one implies fixed interest securities of Australia. Stable fund means fixed bond and interest securities having less exposure to the international and domestic property and shares. On the other hand, Trustee's Selection are categorised as balanced property and securities and equity investments. Shares fund are dedicated to overseas and local shares. The above discussed strategies are categorised on risk and return. This is evident from the fact that Secure fund are less risky and thus, returns provided are low as well. However, shares fund are more risky and provide higher returns. Thus, it can be said that Investment Choice Plan provides adequate benefits as compared to the Defined Benefit Plan. This is evident from the fact that employees are able to get desired returns depending upon the chosen risk and investment strategies (McKenna, 2018).

There are numerous factors which are required to be considered by the tertiary sector employees whether to make contribution in either of two plans. First factor is risk which is essential to be known before an investment is made. It means that risk should be evaluated in that way which should be beneficial for the employees as higher returns may be generated in the best possible manner. If return is lower and risk is higher than investment should not be made. The Defined Benefit Plan has less risk on the employee and as such, it is beneficial for them. On the other hand, Investment Choice Plan incurs more risk as it is related to choice of investment strategy made by the employees to place his contribution in the best possible manner. Another factor is fund solvency which is required to be assessed by the employee before making any choice in effective way. The security of funds should be examined in that way so that employees may get the funds at the end of their tenure with much ease. Solvency of employer is required ro be assess because when worker opt for Defined Benefit Plan, he is mandatory entitled to receive pre-determined amount of extra income which is based on long-term fund solvency (Mees, 2017).

The employer have more risk as they have to pay workers when they attain retirement. On the other hand, it is required that employees should plan accordingly and make contributions in the best return yielding superannuation funds. Another factor is switching funds. In simpler words, employees should assess whether they may be able to effectively switch over one fund to other in the normal course of action quite effectually. This means that if a particular option is rigid in nature, then choice should be made perfectly so that retirement benefits may not get reduced up to a high extent. It implies that investment option tends to be much flexible should be opt for in the best possible manner. It is an important factor which employees need to take into account for maximising benefits and reducing risks quite easily.

Another risk is related to investment risk which is based on the chosen strategy. In addressing this, employees when chose for Defined Benefit Plan have low risk as factors such as length of service given to organisation, average salary and other factor is taken into consideration which is required to attain amount and they are mandated to receive at the end of period. On the other hand, employees when opt for Investment Choice Plan have varied risks entailed in. There are various investment strategies that are already discussed having differentiated risk and characteristics which are chosen as per the risk taking capacity of employees (Niblock, Sinnewe and Heng, 2017). When risk taken is high, then eventually higher returns will be generated and vice-versa is possible as well. Thus, investment risk should be evaluated by them before taking decisions related to superannuation guarantee funds. Another factor is insurance cover which is needed to be carried out before taking final decisions. This means that which of the available options will offer insurance cover to employees. Moreover, whether it could be forfeited or whether explicitly charged for or not should be evaluated by the employees in effective manner. If such cover is explicitly charged, it will be low cost. Furthermore, insurance cover is in direct relation to the age of individuals. This is evident from the fact that when age gets older, the insurance cover becomes expensive. These factors are essential to be taken into consideration by employees so that they may chose for better investment option quite effectually.

The issues related to the concept of time value of money and taxes are numerous which directly affects decision-making of employees as to chose for Defined Benefit Plan or Investment Choice Plan. The time value of money means that amount of return attained today is much more than received after some time say for 3-4 years in the future. This is essential to carry out so that worthwhile investment may be made by the employees with much ease. However, there are issues such as what are the variables which need to be studied, how these variables are to be identified etc. On the other hand, tax computation is another problem which arises issues such as whether tax should be levied on average superannuation fund at the retirement or on annual basis. It can be said that in relation to this, Defined Benefit Plan has more problems despite of pre-determined amount to be paid at retirement.

The complexities which are directly linked to the investing assets prevails restricts the use of this plan (Hanegbi, 2017). Moreover, it is required to go in depth of many factors which requires organisation to focus on retirement administration and thus, it is complex task. Only pre-determined return is paid which limits to opt by employees. On the other hand, Investment Choice Plan is much beneficial as diversified investment strategies are available with the help of which risk and return can be assessed in a better way. Hence, annual returns generated throughout the individuals' tenure is accumulated so that he may be paid with higher returns in the best possible manner. Thus, more superannuation fund can be attained by the employees when they opt for this option.

CONCLUSION

Hereby it can be concluded that superannuation guarantee funds are much beneficial for the employees when they get retirement from their jobs. When this fund is provided to them at the end of tenure, they may easily live one's life with much ease. It helps employees so that they may save accumulated fund which can be utilised by them. There are basically two types of superannuation fund in which investment may be made by workers in effective way. Thus, accordance to the risk and return, choice can be made without any difficulty.

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