Question :
The objective of this report is to construct a financial plan in terms of analyzing values of taxes, money and so on. The analysis of this process is essential in the decision making process. The required consideration for the analysis is:
- Identify crucial factors which requires to considered by tertiary sector employees at the time of deciding superannuation contribution in defines benefit plan.
Answer :
INTRODUCTION
Superannuation may be served as an organized pension program which is created by the firm for the welfare or benefits of personnel. Such pension plan or scheme provides employees with financial support at the time of retirement. Further, fund deposited by the personnel in superannuation grows with the high pace until retirement and withdrawal. In this, report will provide deeper insight about the factors which personnel need to consider while moving superannuation contributions in the defined benefit plan. Besides this, it will shed light on the extent to which time value of money concept, taxes etc impact decision making aspect.
Stating the important factors that tertiary sector employees should consider while deciding whether to place superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan
In the recent times, employers offer several retirement benefits to their personnel either voluntarily or for complying with statutory requirements. From assessment, it has identified that retirement benefits contain provident fund, gratuity, national pension scheme etc (Niblock, Sinnewe and Heng, 2017). Hence, superannuation implies for retirement benefits which are offered to the employees by the employer. Thus, every year employer contributes some money on the behalf of employees in superannuation policy held. Tertiary sector personnel mainly include teachers, IT sector employees, and bankers etc which offer services to the customers.
Defined benefit plan is the retirement framework that sponsored by employer. In this plan, benefits of the personnel are assessed on the basis of several factors such as length of employment, salary details etc. In other words, defined benefit pension plan is the one where employer makes promises pertaining to specific pension payment, lump-sum on retirement considering earning history of personnel, tenure of employment, age etc (What Is the Difference between a Defined Benefit Plan and a Defined Contribution Plan, 2018). Under defined pension benefit plan, formula regarding the computation of employer’s and employee contribution is clearly defined. However, in this, benefits to be paid are not clearly defined in advance.
Along with the defined benefits plan, there are several investment choices which can be undertaken for getting high returns from funds. Usually, individuals are highly concerned towards their life after retirement in terms of financial security. Moreover, for carry out daily activities more effectually after retirement individuals require enough funds. Thus, by investing money of superannuation in other investment choices individual can build up the source of fixed income generation (Chaudhry, Au Yong and Veld, 2017). Under an investment choice plan or option employees have opportunity to nominate specific type of assets. In the context of investment choice plan strategies pertaining to the same includes secure, stable, trustee’s section and shares funds. Hence, investment choice options include tax free bonds, mutual funds, immediate annuities, bank fixed deposit scheme etc. Government authorities introduce several tax free bonds which in turn provide investors with fixed income. In other words, bonds offer fixed returns on investment on the basis of predetermined rate. In addition to this, individuals also have an option in relation to making investment in mutual funds. In long-run, mutual funds offer more benefits to the investors. Mutual funds include wide range of securities and thereby diversify risk level associated with the securities to a great extent. Further, by investing money in fixed deposits investor would become able to generate enough income.
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In Australia, at the time of retirement, UniSuper Ltd provides wide range of investment products for both defined benefit and investment choice plan users. This in turn helps in managing and distributing retirement’s funds prominently. Investment choice plan includes pension and other options which are enumerated below:
Indexed pensions
: This choice plan offers regular income to the individuals that is the subject of indexed to inflation. It is payable to the concerned individuals as long as they live and thereafter transferred to spouse on death.
Single life indexed pensions
: It provides individual with more income as compared to the indexed option. However, in this, amount is not transferred to the dependent party upon the death of main individual.
Allocated pensions
: In this, as per the choice, fixed or regular income is generated by the individuals. On death, balance of pension fund is transferred to the dependants.
Roll-over pensions
: Such plan provides investor with an option to transfer or roll over retirement fund balance in either approved personal or industry superannuation.
Part-cash distribution
: This enables investors to use specific percentage of retirement fund as cash lump-sum which can be used for investment / personal consumption purposes.
However, at the time of placing superannuation contributions in the defined benefit and investment choice plan tertiary sector employees should consider several factors such as:
Retirement benefit formula
: Through assessment, it has identified that benefit formula may change over time which in turn creates issue. Hence, any type of changes which take place in benefits place material effect on the estimated pension benefit obligations of personnel.
Estimation pertaining to employee salary growth rate
: It is not possible for both employer and employee to make accurately projection about future compensation growth rate. Hence, high salary growth rate places direct impact on pension benefits obligations.
Projection about working career
: By doing evaluation, it has found that employees should consider the time frame for which they will work for the corporation. However, in this regard, tertiary sector employees face difficulty in assessing time period for which they will be able to work as an employee. Working tenure or length has significant impact on pension benefits obligations. Hence, PBO is greater when employee accrues more year of service.
Use of service years in making PBO calculation
: Guidelines revealed by Australian authority presents that pension benefit obligations consider estimation in relation to future salary growth. Nevertheless, it ignores aspects regarding potential future service (Chaudhry, Yong and Veld, 2017). Hence, as per actuarial guidelines in relation to the inclusion of potential future service estimated PBO increases dramatically.
Vesting uncertainties
: At the time of placing superannuation contribution in defined benefit plan personnel should consider the time period for which they are able to work for the employer. However, employees face issue in ascertaining time period for which they work for vesting the retirement benefits. Vesting provision increases uncertainty in relation to the estimation of PBO.
Time length pertaining to receiving monthly retirement benefit
/: Tertiary sector personnel should consider length of time while taking decision in relation to transferring superannuation in defined pension benefit plan. However, personnel face issue in assessing how long they will live after retirement. High level of influence takes place on PBO when retirees live for longer time period.
Assumption regarding retirement payout
: In addition to this, employees working in tertiary sector should also keep in mind payout option. Nevertheless, in this, difficulties regarding the type of payout option which employee will select exist. Moreover, status of beneficiary changes over the time frame. Under this, pension benefit obligations increase when time horizon benefits are expected to be paid.
Provision regarding cost of living adjustment (COLA)
: From evaluation, it has assessed that at the time of moving superannuation funds into defined benefit pension plan tertiary sector employees should consider adjustments regarding cost of living. It is highly difficult for personnel to identify cost of living will be available in the near future (Inkmann, Blake and Shi, 2017). Besides this, issues regarding the determination of COLA benefit rate take place. Type of COLA benefits increases estimation regarding PBO.
Application of discounting rate or time value of money concept
: Employees should consider time value of money concept at the time of determining pension liabilities. In this, difficulty is facing in relation to assessing discount rate which needs to be applied. Hence, it creates issue in identifying the present value of retirement benefits will be received at the time of retirement.
Applicability of discounting rate on annuity value of retirement
: Time value of money concept also creates problem in relation to assessing present value of today’s retirement benefit. PBO is lower when assumed discounting rate tends to be higher (Bateman and et.al., 2017). Hence, individuals working in tertiary sector should consider all the above aspects while determining pension benefit obligations and transferring or placing amount from superannuation to defined scheme.
At the time of placing superannuation funds in investment choice plan then several factors need to be considered by the individuals or employees such as:
Fees
: Employees require considering fees charged by super provider while making selection of investment options.
Investment options
: Employees should choose investment option which helps in getting suitable returns at minimal risk level (7 Factors to Consider in Choosing a New Super Fund, 2018). Focus should be placed on investing money in low-cost industry funds or shares related to an Australian and international firms.
Extra benefits
: Aspect pertaining to flexibility should also be considered by an investors while selecting certain or specific funds.
Performance
: On the basis of this, before making selection of investment option personnel should evaluate five years trends or performance in relation to such asset. In addition to this, fees and tax aspects also need to be considered while choosing an investment option.
Along with this, at the time of decision making regarding super fund tertiary sector employees of Australia should consider several issues associated with it. Likewise financial products, super funds or schemes include certain risk. Such risks include pertaining to the fluctuations or changes take place in interest rate, market, underlying investment, legislative, liquidity, currency aspects etc. On the basis of all such aspect, changes take place in interest rate has both positive and negative impact on return generation through super (Butt and et.al., 2018). Apart from this, changes take place in market environment also has greater impact on the value of superannuation funds. By doing evaluation, it has also assessed that variations take place in the company’s management and policies also have an impact on investment value or figure.
Tax rules and regulations regarding superannuation funds also have significant impact on the level of benefits which employee will receive over the time frame. Moreover, due to tax charged on superannuation funds overall investment benefits figure could go up or down. Further, changing laws and regulatory aspects related to lump-sum or pension also creates problem. In the context of an investment or assets which can be liquidated quickly also imposes risk. Hence, assets which can be sold at discounted price level negatively impact the overall performance of a superannuation fund. Duration or time period of an investment also have higher influence on the figure of withdrawal benefits (Wang and Wanberg, 2017). Moreover, performance of market at any point of time has direct impact on the employee’s withdrawal benefit figure.
Currency risk exists when investment choice plan or option includes overseas assets. Thus, fluctuations take place in overseas currency level expose risk in front of the individual or employee regarding benefit amount. In accordance with such aspect, changes take place in the value of Australian dollar have significant and greater impact on the value of related asset. Thus, for mitigating risk in relation to currency fluctuations and volatility hedging strategy need to be employed by tertiary sector personnel who invest money internationally.
CONCLUSION
From the above report, it has been concluded that superannuation is highly prominent which in turn offers financial benefits or support to personnel after retirement. It can be seen in the report that individuals have option pertaining to placing superannuation in defined pension benefit plan or investment choices. Further, it has been articulated that aspects in relation to the time value of money concept, employment tenure etc should be undertaken by the personnel while making selection of or placing superannuation fund in DPB. It can be summarized from the report that at the time of planning tertiary sector personnel, working in Australia should keep in mind fees, tax implications and other aspects.
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