Corporate Financial Management and Superannuation Contribution

Question: Discuss about the Corporate Financial Management Superannuation Contribution. Answer: Superannuation Contribution Superannuation contribution is the contribution provided by the employee, as well as the employee that strives to provide help to the employee after their retirement. This is done by way of deduction of a prescribed sum from the salary or personal contributions are provided. In the normal scenario, the contribution is done by way of deduction from the salary as it lessens the employees taxable income and reduces the payment of tax (Damodaran, 2012). The later life of the employees demands a balanced and comfortable life, and the best answer for that is investing and saving in policies providing with retirement benefits which are very actively promoted b y each and every country. The amount being invested under the superannuation contributions is increasing every year as a result of the governments regulations which strictly bind an employee to make such investments, which will result as a boon to the employees at the time of retirement. It is the duty of the financial institutions de aling with such investments to earn positive results in the form of returns from them as to highlight the agenda and most importantly to keep up the cause of the superannuation contributions (Graham Smart, 2012). Availability of the cash is the most important necessity of company with which the deal for superannuation contributions is tied so a lot of facts and figures have to keep in mind by the fund managers for keeping the money ready for an employee after retirement. However, it forms a prominent part of the organization as it deals with the benefit of the employee. Primary, secondary and tertiary are namely the three sectors into which the whole economic sector is divided. These are the most relevant sectors. Any occurrence of root level is first identified by the tertiary employees first, so it becomes a duty of this sector to help out the other sectors by sharing its productivity and wisdom (Melville, 2013). To guarantee a positive retirement to the employees the government came out with the idea of compulsory contributions to be made by the employees, which had a rate of 3 percent which was later revised and reestablished to 5 percent by the government in the year 2005. This idea of superannuation contributions has proved to be a boon for the investors and also to the state by decreasing the burden of social security because it includes a systematic management of allocations and funding (Ferris et. al, 2010). It is also necessary and a matter to be paid attention that to which return providing sector the money has been invested. Saving recor ded over the entire year of employment is actually the returns earned from such superannuation funds. It should also be kept in mind that the sum paid to the employee during the time of retirement should be enough and it highlights that there should be the availability of cash and more important factor are discussed below. Defined Benefit Plan and Investment Choice Plan Defined Benefit Plan and Investment Choice Plan are the two main parts into which the superannuation plans are classified. Unisuper Limited is a company providing offers and services to the employees of the third sector. It is one of the biggest and a superannuation based company. It can be considered as a revolution in the industry of superannuation contributions that the employees are free to choose the type of investments they want to make, opting for a retirement option that suits them among various offers, enhanced and integrated flexibility in choosing the correct type of assets for investment in the superannuation funds contributions (Guerard, 2013). For the employees who belong to the tertiary sector and adhere to the Defined benefit plan, the contributions to superannuation are combined and invested in a portfolio of assets that is controlled by the trustees of the fund. The final advantage is determined by the formula that is the performance of the assets divided by the por tfolio of investment. However, the risk of investment does not relate to the employee as the entire responsibility is taken by the fund managers. These strikes a notion that the employee does not benefit from the gain earn by the portfolio that exceeds the requirement to meet the targets and hence, fund trustees should have a flair for investment and utilizing the benefits garnered through such assets. A brief description of all the features of all types of funds is highlighted below. Age of the employee, last drawn salary, the number of years of service, etc is the details which are taken into account while paying the amount at the end of retirement to the respective employee, as per the rules of the Defined Benefits Plan. In the case of this type of investment, the final amount is decided by a simple formula and is not affected by the portfolio returns and is not considered by the investor, but is to be view by the managers and trustees so as to guarantee that sufficient amount is available for payment of the employee (Marsh, 2009). (DB, 2017) In the case of the second type that is Investment Choice Superannuation Fund, all the amount at the end of the year including the return from portfolios are stored in an accumulating account and the management expenses are also dealt with the same account. This type of investment requires strategies and the employees are more prone towards suffering superannuation contribution risks (Northington, 2011). Factors that needs to be considered There is a marked difference between Defined Benefit Plan and Investment Choice Plan. Under the terms set up by Defined Benefit Plan an employee gets a fixed sum after retirement and the fixed sum is not at all affected by the changing returns, on the contrary that means under the Investment Choice Plan, the investors should have faith in their own analysis and also the analysis made by the company regarding the fluctuations of the returns to get higher returns. It is important to have a confident nature and an appetite for risk for the employees investing under Investment Choice Plan (Parrino et. al, 2012). The Defined Benefit Plan is designated as a much safer option for the employees with respect to the Investment Choice Plan. As per Vaitilingam (2010) it is totally in the hands of the investor to invest the money in such a plan that suits the employee. If the employee is skillful and keeps through knowledge about the rates and returns going on in the market and is capable enough to set up strategies then the one can opt for Investment Choice Plan. While the ones who are not ready to suffer any losses and are not capable enough to skillfully manage their own investments can choose Defined Benefit Plan and can designate their investment to reputed institutions to handle their money and to prevent any future losses (Matt Simon, 2014). If the employee is prone to some additional work generating assets then they can opt for Investment Choice Plan, the ones not having any additional assets should go on with Defined Benefit Plan. Value and Concept of Money consideration Future cash flows and the future values of the investments being made are generally and most importantly put under consideration of Time Value of Money. Considering the case of investments there is always some opportunity cost involved in it. It should be clearly understood that a certain amount of money like for example $50,000 is not at all going to be the same one at the time of retirement, it is possible that it can get depreciated so it is an important matter to consider all the factors for making decisions for investments (Brigham Daves, 2012). On the other hand, it should be kept it mind that chosen investment should grow as per the rate of return in the market because money grows with time. It is also the duty of the employee to understand the importance of time value of money and to choose the investment pattern wisely. This is due to the fact that the time value of money comes into consideration and the same money at the present scenario will have a different value after a period of time or in the near future. They should be thoroughly informed of the performance of the portfolio for the past years and should also take the advice of the experts in regard to such matters (Brealey et. al, 2011). It is vital for the employees to understand the future value of the currently invested amount and to make proper decisions as the contributions are life times earning. However, it needs to be noted that the selection of the plan whether defined retirement plans or investment choice plans depends entirely upon the risk taking the ability of the employee. The risk appetite depends on various factors such as salary earned, the age of the employee, working years left, promotions, etc. Hence, it is recommended that the employee must go for the plan that suits the profile and strengthens the savings. Moreover, it should not be done at a high level of risk rather risk and return must be equally blended. Efficient Market Hypothesis The efficient market hypothesis is assumed to be perfect. The reason being it inculcates all the available market information and the reactions of the market to calculate the most efficient stock price. However, there are many factors which prove that this hypothesis is not correct. The investors have an unpredictable psychology and they always do not show the correct price level (Bodie et. al, 2014). Also, the markets always do not behave rationally so it is only a myth that the markets show the fair price. If one assumes that the stock markets are performing in a proper manner then it is believed to be in line with random walk theory (Berk et.al, 2015). However, in real life, the investors are mostly rational however the uncertainty lies in the situations and the events. As there are various shortcomings as mentioned above it does not gets easy for the fund managers to select a portfolio at a time. There are several reasons for the same. A fund manager has always a defined benchmark of meeting certain risk and return goals. However, the stock market has always proved that anticipated, unanticipated and the expected risks of the portfolio cannot be controlled. As each and every stock is different with respect to the capital structure, financial potential, volatility, market competition, etc. hence the market will not suit the requirements of all the stocks. The market size for the stocks of smaller companies is relatively lower if compared to those of higher companies. The portfolio might be open to risks which do not yield rewards as it might not have been designed properly. Hence individual investors might face huge risks in respect of such portfolios (Ross et. al, 2014). As there are inherent limitations to statistical analysis, so it is a mere coi ncidence that the market performance is in line with the efficient market hypothesis. It might not be considered as a risky venture to resort to efficient market hypothesis when the investors have their major investment in riskless assets which are already yielding higher rewards otherwise such portfolios do have a high beta depending upon individuals risk preferences. One should select the portfolio based on perfect calculation and following a proper system. It has been proved that the markets have no memory and also that it is not easy to make money out of the stock markets (Arnold, 2010). Also, there are different types of risks involved in the case of long-term interest rates as compared to short-term interest rates. After discussing the various factors it is very clear that one cannot select a portfolio with great ease. There are various significant jobs which the fund managers are required to perform in order to select a perfect portfolio. The portfolio should be designed in such a manner that the advantage of special tax laws and the pension funds can be taken. If such options are provided then it becomes easier to increase the returns of the portfolio and that too without increasing the risk. Although a large number of stocks in the portfolio do not ensure proper diversification however the fund manager must ensure a diversified portfolio. 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