Key Factors In Selection of Defined Benefitâ€Myassignmenthelp.Com

Question: What Is the Key Factors in Selection of Defined Benefit? Answer: Introduction Superannuation plan is the pension fund plan which is used at the time of retirement of the employees of tertiary sector (Dixon, 2012). The superannuation plan encourages savings for the old age life and also promotes the investment in the market as a strategy of financial economics. It is related to welfare schemes for employees which enables them to live their life peacefully and resourcefully after their completion of service years. With the efforts of government superannuation contribution in the tertiary sector organisation is mandatory with a fixed amount of grant in the part of employer (ASIC, 2017). It assists the employees in attaining the social security and independent source of living after their retirement. Thus, this research is focusing on the concept of superannuation and factors that influence the choice of scheme an employee should invest for the higher return of benefit. Along with this, this paper is exploring the perception on the time value of money relation wit h its impact on superannuation schemes. Factors that impacts the decision making of superannuation scheme plan Superannuation is a tax free deposit wile employee works in an organisation. The amount of superannuation is the contributed by the employee and employer both according to the basic salary structure of the employee. In Australia, tertiary sector employees are entitled to this contribution of minimum of 9.5% to 12% of super guarantee by the sponsored organisations employer (ASIC, 2017). The contribution is the fund of both employees and employers equal contribution, in which employees contribution is being deducted form the salary of worker. In some cases, to improve the pension schemes system government also encourage by contribution some amount in superannuation fund. This amount is not subject to tax until it is withdrawal or till the time of employees retirement (Iverson, 2013). It gives the advantage of tax from a long period of time and even in the end the tax imposed on the deposit is least. Therefore, it has various benefits such as saving of money without tax levied deposit t hat helps in improving the quality of life of an employee and provides long term social security. Moreover, it helps in boosting the investments in the market and ensuring cash flow of pension fund schemes effectively for the welfare of the old age employees of tertiary sector. The superannuation funds are divided into two categories that is defined benefit plan and investment choices plan (Gitman, et al. 2015). These plans are aimed to provide the choice to the employee about their money in the long run. The deposited amount is very valuable and has various options to make it a higher return. The financial planner is an external source of service provider that plays an important role in finding strategies according to the requirement of the employees to make it maximum return on benefit (ASIC, 2017). Along with this, it can be analysed in the past years that government of Australia is emphasising on the superannuation schemes to promote the saving of employees and aware them about the future investment to live a quality of life. In fact, government is making contributions in the pension fund schemes complying with special eligibilities. The eligibility to guarantee contribution entitled by the employer has conditions like employee should be older than 18ye ras of age and the salary of one month should be more than $450 before tax (ASIC, 2017). It also includes temporary resident of the Australia too. Furthermore, choice of superannuation scheme is very essential and there are certain factors that influence the decision making of employee like risk involved, rate of return from the investment. All of these influencing factors to decide the best pension fund option has been mentioned in the below discussion: Defined Benefit Plan The defined benefit plan is the fixed amount plan in which total lump sum deposit is given to the employee. The contribution of this amount is done by both employee and employer in a fixed rate of contribution (Australian Government, 2017). The definite percentage of salary is being deducted from the employees account which is not subjected to tax. The defined benefit plan can be determined with the help of certain formula that includes the age of the employee, tenure of employment and average salary amount of the employee throughout his employment. This amount is fixed and cannot be changed at the time of withdrawal. There is no risk involved in this defined benefit plan and employees already acknowledged about the amount of deposit they will receive after the completion of their job (Gitman, et al. 2015). Thus, the main feature of this plan is no risk and stable amount at the end of the service. Whereas, this plan is also drawbacks in providing higher market return to the employees . It can also be calculated in other different methods that is funded defined benefit fund, unfunded defined benefit fund and hybrid super fund (Australian Government, 2017). These funds have different rules and their calculation methods ruled by the government of Australia. Investment Choice Plans Investment choice plan is another scheme of superannuation contribution that aims to encourage investment in the market and produce higher rate of return to the employees (Maginn, et al. 2007). The investment choice plan is featured with two main characteristics that is risk involved in the asset of investment and another is return on investment involved in it. When a person chooses investment choice plan, the asset portfolios have been analysed to make the decision on which asset the investment should be made. Greater risk involves greater rate of return in the asset portfolios (ASIC, 2017). Thus, it depends on employee in which asset they want to invest their money. Along with this, knowledge of the employee in the field of investment and market trading also differs the decision making. The individual that has fair knowledge about the functioning of investment area is capable to handle it more effectively, thus recommended to carry out the investment (Power, 2012). On the other han d, employee that has no awareness about the financial economics and investment can face the hard time in this investment choice plan. As an option, external profession and expert opinion can be taken with the help of financial planners that are responsible to analyse and advice on the investment assets that yield maximum return (ASIC, 2017). Moreover, the types of investment options plan provide by the Super Fund that manages the investment of retirement contribution are as follows: Growth: In this case 85% of the amount is invested on the properties and shares. Rest is in cash or fixed interest. It has the higher return in the long term with higher risk involved. Balanced: 70% of the amount is invested in shares and property which provides good rate of return on investment but not as growth plan and has medium volatility risk in it. Conservative: conservative approach has 30% in the property and shares and rest in fixed deposit and cash. Along with this, this option has lower return than balanced plan with less risk covered (ASIC, 2017). Cash: the company fully 100% deposit with the Australian deposit taking institutions that generates some amount of return which is more than defined benefit plan but less than conservative investment plan. Furthermore, there is very low volatility risk associated with this plan. These according to the employees requirement and will to risk in the market and want to gain return, these plans can be selected for the superannuation scheme. But before choosing these employee should consider some points like fees, comfort of the investment options, extra benefits included, performance of assets and insurance and services given by the Super Fund with each option (ASIC, 2017). The concept of Time Value of Money Time value of money is the cash flow generated from the present value of money in the future period of time. This value is very necessary to insight the future consideration and return out of investment is made (Smith and Koken, 2011). The time value of money is the most prominent concept of financial accounting and determines the future value in aspect of present value. The calculation of the amount can be done in the two manners, first is discounted the future money to present time and second is compounding the present value of money for future value (Hirt, 2010). This provides essential information about the investment decision and asset performance. This calculation is also necessary in case of deciding the superannuation plan. Defined benefit plan has fixed amount that can be calculated in the time value of money and in case of investment choice plan, asset price can be taken as base to calculate the time value of money. Therefore, the higher the future values of investment, hig her the gain to the employee (Hirt, 2010). Time value of money will also help the financial planner and employee to accumulate the profits of superannuation amount. Therefore, in the above discussion, it has been interpreted that the selection of investment choice plan as well as defined benefit plan has its own advantages and disadvantages and time value of money also entails significant aspect in considering while decision making of pension scheme of tertiary sector employees superannuation plan. If the efficient-market hypothesis is true, pension fund manager might as well as select a portfolio with a pin Description and why this is not the case This part of the assignment focuses on the decision of pension fund manger affecting from the efficient-market hypothesis. Efficient- market hypothesis is the asset management in the capital market in which the entire information of the asset is provided to the investors (Smith and Koken, 2011). The information related to assets is declared without any restriction to facilitate effective decision making process regarding investment. It ensures the efficiency in the market as well as determined to facilitate entire information associated with the asset to make the decision making of investor easy. This hypothesis is being criticised by many researchers and scholars as it ignore the market concept of higher risk and higher return. At the same time, it facilitates equal opportunities by offering same return on investment with same risk associated with the asset and amount included in it. Pension fund managers are responsible for the investment in the market and provide the maximum retur n on investment to the employees. Pension fund manger analyse the market risk and ensure the greater returns to the employees superannuation plan (Rattiner, 2010). In case the hypothesis of efficient-market is true, the pension fund managers role of market analysis will become very easy and he can select the asset that gives maximum returns. The process of selection in the efficient-market hypothesis will depend on the information of the assets and it will become easy for the pension fund manager to determine the good performing assets among all (Power, 2012). Moreover, it will facilitate the collection of information about the risk and return which will give a brief on the investment that should be invested for the targeted amount of return. Thus, it will become easy for the manager to estimate return and choose the suitable asset for higher profits. . On the other hand, if this efficient-market hypothesis is not true, then the pension fund manager will go for diversified investment plan. In the diversified investment plan, the pension fund manager select option of different types of assets and invest in each of these assets. The assets will be selected from different nature and characteristics without any correlation among them. The combination of different types of assets will increase the opportunity to gain high returns with less chance of losses. In addition to this, the diversification method will help the pension fund manager to manage the funds quite efficiently as the return from some of the sources will be certain and definite. Furthermore, assets where the returns are not certain will be watched closely and recovered by other asset investment in case of losses (Power, 2012). It will reduce the risk of market fluctuation and if one asset does not perform well, other asset will recover the amount of superannuation fund in that case. Therefore, the pension fund manager is efficient to manage both the situations wisely in case the efficient-market hypothesis is true or true (Rattiner, 2010). Thus, to grab the best opportunities in the market, it is advisable to use diversified asset investment scheme in the absence of efficient-market hypothesis. It will reduce the market risk and give the better rate of return. Conclusion From the above discussion, it can be concluded that there are many factors that influence the selection of superannuation plan for the tertiary employees. In case of defined benefit plan, fixed amount is involved and hence lower risk is there but at the same time no extra profit is being earned by the employee. In case of investment plan there are four types of plan that is growth, balanced, conservative and last cash which is categorised by the risk, return and investment of different assets in the plan. The employee can choose the plan with the understanding of market fluctuation and investment concept. Apart from this financial planner can also help employee in choosing the apt scheme that gives the maximum returns. Furthermore, the time value of money should also be considered to determine the future value of the present money. Efficient-market hypothesis has also been briefly described in the paper with the role of pension fund manger influenced with its functioning. References ASIC. 2017. ASICs Money Smart Financial Guidance you can trust. [Online] Available at:https://www.moneysmart.gov.au/media/555121/super-decisions.pdf [Accessed on: 17 May 2017]. ASIC. 2017. Choosing a super fund. [Online] Available at: https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/choosing-a-super-fund[Accessed on: 17 May 2017]. ASIC. 2017. Super investment options. [Online] Available at: https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-investment-options[Accessed on: 17 May 2017]. Australian Government. 2017. Defined benefit funds. [Online] Available at: https://www.ato.gov.au/Individuals/Super/In-detail/Growing/Super-contributions---for-defined-benefit-funds-and-untaxed-funds/?page=2#Defined_benefit_funds [Accessed on: 17 May 2017]. Dixon, D. 2012. 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