Saturday, December 7, 2019
Corporate Financial Management Tertiary Sector Employees
Question: Discuss about theCorporate Financial Managementfor Tertiary Sector Employees. Answer: Introduction Tertiary Sector Employees are the third of the three economic sectors following the Primary and Secondary Sectors. This tertiary sector employees main area of work is to provide services such as advice, discuss plans, share their experiences and apply their knowledge to improve the productivity and performances put in by the primary and secondary sectors. The concept of Superannuation funds emerged as a motivational programme among individuals in order to inculcate in them the idea of saving and investing funds for their future and also the benefits of these funds to be used during their retirement period. It is a good long term savings plan, which will provide a channel to income when employees retire and even benefits to the beneficiaries or nominees on the death of the employee or disablement to the employee (Choi Meek, 2011) . Therefore it can be rightly termed as the main source of retirement income. The government has made it compulsory that the minimum level of employer contribution to superannuation fund is to be three per cent which has now increased to nine percent and can increase to up to twelve percent in coming years. On the other hand, employees have also been instructed to mandatorily allocate a portion of their income to a superannuation fund. This plan of a superannuation fund is also beneficial from a taxation point of view as superannuation funds investment is taxed at lower rate compare to other similar investments. In the recent years, this method of saving has gained a wide variety of popularity worldwide. There has been a tremendous increase in the variety of superannuation fund products, investments, and retirement plan options. The employees of tertiary sectors are now gaining much more flexibility in deciding the types of funds and investments their superannuation fund are invested in. The superannuation benefits are released after satisfying certain rules a nd regulation such as when an employee reaches the age of sixty-five or the preservation age and the employee must have permanently retired or entered the transition to retire, but in both the conditions there should be a set minimum age. There are several types of a superannuation fund to be invested in namely Employer Fund, Personal Fund, Industry Funds and Self-Managed Super Funds. Based on the multiple types of investment the compiled up two most famous type of superannuation fund namely the Direct Benefit Plan and the Investment Choice Plan, where the Superannuation Fund contributions can be invested is offered by UniSuper Ltd, one of the largest individual, superannuation fund manager which gives services and manages the superannuation for employees in the tertiary sector (Brigham Daves, 2012). The Defined Benefit is where the employees put in their fund and the benefits received by the employees is a substantial amount fixed on the basis of employee's final average salary, t he number of years he has given the tertiary services in employment and the age of the employees. It is generally calculated on the basis of a formula and that is why it is called Defined Benefit Plan as the formula is well ahead defined and fixed for calculations. Here the employer and the company manage the portfolios of the employees and therefore the investment risk involved in the plan is also borne by the employer and the company. The Investment Choice Plan is where the employees individually manage its portfolios and retain an individual investment account. Under this plan, the employees itself chooses the type of assets or portfolios where their superannuation fund would be invested in. Here the employers give a part of their contribution adding the personal savings of the employees through Superannuation fund resulting from an annual distribution of gains earned on the basis of the contributions made by the employer and the employees (Libby et. al, 2011). Under this plan, t he since the employees return is generated on the basis of the selection of their choice if portfolios and investment strategy, therefore, they bear the risk associated with the same. The investment Choice plan is further bifurcated into four investment options namely Secure Fund, Stable Fund, Trustees Selection Fund and Shares Fund comprising of least risk in Secure Fund also in return providing the lowest average return and highest risk involved in Shares fund thereby providing the highest average returns respectively (Brealey et. al, 2011). Important Factors that need to be Considered The important factors to be considered while deciding whether to place their superannuation fund contributions in the Defined Benefit Plan or the Investment Choice Plan is to analyze the risk factor whether is to be borne or not. The employees who do not want to bear any risk and want to get substantial return payout at the time of retirement should always go with the Define Pension Plan. On the other hand, the employees who can bear the risk and expect the overall higher rate of return through their investment can select an appropriate Investment strategy according to their risk appetite (Christensen, 2011). The other factor to be considered while selecting the investment method is the ability to choose and manage portfolios there are people who have vast knowledge, experience and source through which they can manage their investment assets and portfolios very easily thereby reducing chances of much loss, on the other hand, employees who cannot manage with adequate knowledge their p ortfolios on their own should not opt for maintaining their own portfolio account thereby transferring the risk to the employer and if any funding shortfall arises, employers must take the companys earnings to make up the difference. The decision for investment in any of the above-mentioned plan also relates to what an employee wants the standard of living to be maintained after his retirement. If an employee is having other source of income after retirement other than this fund interest he can choose investment choice plan because of the higher risk borne he can have stability with the other source of income already in pocket and meanwhile he can also expect a higher rate of return through his contribution fund since high risk was taken and if vice versa situation is there where the only source of income for the employee is through superannuation fund he should always go for defined benefit plan to have the stability of income after retirement with minimum or nil risk involved in t his plan (Merchant, 2012). Concept of Time Value of Money Time value of money forms an important aspect of investment point of view. The money invested now will in average span of time return what portion of benefit reveals the time value of money. In another view point to be seen the value of a certain amount of money today is more valuable that the value of it tomorrow and the reason are not the uncertainty involved with time but it is purely based on the account of timing. This difference in the value of money today and tomorrow is referred as the Time value of money. The issues relating to the concept of time value of money marks an important part in the decision making or selecting on which type of fund to be invested in by employees through their superannuation fund (Graham Smart, 2012). During the working life, the employees make a contribution to a superannuation fund and the earnings they receive are reinvested building up the value over time. The fund invested by the employees and employers in superannuation fund only grows over a time span and not in seconds. It is necessary for every employee to before investing in their choice of a superannuation fund to utilize the time value of money by calculating the future value of a present portion of their money invested in. It is safely said that the more the time span increased the more can be the resulting benefit. Without understanding the investment concept base of which is time values of money any individual can be a sufferer of bad advice or decision taken. By investing in the correct type of portfolio through superannuation fund an employee can avail lifetime benefit which is going to give a wide variety of benefits when the employees retire. The time value can be determined with the growing interest in these investments aim in higher average returns over a longer period of time but there can be a risk of losses in bad years. Employees should wisely plan out their strategy as to for what time span they want to invest and in which portfolios. A balanced strategy over a period of more than fifteen years has always given better returns than other short time investment options (Melville, 2013). Time value of money issues is simultaneously linked with whether the employee's risk appetite is worth the waiting and patience required in getting the reward after the retirement period of employees. Efficient Market Hypothesis Efficient Market Hypothesis is a theory or study which explains that in the financial economy an assets or a stocks price itself speaks about the entire relevant informant needed by an investor to invest in. It indicates to the market that none of the investors can go beyond the market or beat the market through any experienced advice or expert selection of stocks (Fama, 1998). According to this hypothesis stock always trade at their fair prices on stock exchanges. Therefore it brings a big barrier making it impossible to invest either in undervalued shares or sell stocks, shares at an inflated price. Here even the time factor fails to determine any possible ways to beat the market without undertaking riskier investments which can obtain higher returns (Hand, 1990). Therefore even if the efficient market hypothesis prevails or not in practical world it never states or indicates that any portfolio selection should be done with a pin. Pin risk occurs when the seller of an option cannot predict with certainty whether the option at that time can be exercised or not, therefore the seller cannot hedge or pool his position and so it can be a gain or loss situation (Ball, 1995). The fund manager should always keep in mind before investing the funds of their clients the risk appetite they can bear up to. In the case of pension funds, the manager should opt for safer investments with stable returns that indicate of choosing such shares, stocks or bonds which have lower beta or lower risk. As per Deegan (2011), the Fund manager should also keep in mind to invest in diversified folios. Diversified folios do not mean investing in a large number of stocks, but diversification can also signify even if the investment is made in stocks which could be all from the same type of industries. The pension fund manager should always keep in mind that throwing pin at the stock sheet can give him diversified portfolio but there the main factor which prevails as a major barrier is the un certainty of higher amount of risk of profits or losses and almost no way to curb the expected stable return or the amount of risk involve in it (Goyal Wahl. 2008). If the individual pension holder on whose behalf the investment is made by the fund manager has equipped risk appetite, additional wealth and another source of income then the problem of throwing pin does not occur which happens in rare cases but in general the portfolio of a pension holder might not permit too high risk to invest in (Ball, 1995). One of the other essential points to take care by the pension fund manager is the presence of taxes involved. The tax position of the individual investor is the main criterion for investing its funds. The fund manager should always choose the portfolio which has the benefit of special tax laws that can be only taken advantage of only in pension funds (Kalpan Schoar, 2005). These special tax laws make it convenient to increase the return of the portfolio without indulging in i ncreasing risk. References Ball, R 1995, The Theory of Stock Market Efficiency: Accomplishments and Limitations, Journal of Corporate Finance, vol. 8, pp. 4-18 Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: Brigham, E. Daves, P 2012, Intermediate Financial Management , USA: Cengage Learning. Choi, R.D. Meek, G.K 2011, International accounting, Pearson . Christensen, J 2011, Good analytical research, European Accounting Review, vol. 20, no. 1, pp. 41-51 Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill. Fama, E.F 1998, Market Efficiency, Long-term Returns, and Behavioral Finance, Journal of Financial Economics, vol. 49, pp. 283-306 Goyal, A Wahal . S. 2008, The Selection and Termination of Investment Management Firms by Plan Sponsors, Journal of Finance , vol. 63, pp. 1802?1827. Graham, J. Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Hand. J.R 1990, A Test of the Extended Functional Fixation Hypothesis, Accounting Review, vol. 65, pp. 740?753 Kalpan , S.N Schoar, A 2005, Private Equity Performance: Returns, Persistence, and Capital Flows, Journal of Finance vol. 60, pp. 1795?1823. Libby, R, Libby, P Short, D 2011,Financial accounting, New York: McGraw-Hill/Irwin. Melville, A 2013, International Financial Reporting A Practical Guide, 4th edition, Pearson, Education Limited, UK Merchant, K. A 2012, Making Management Accounting Research More Useful, Pacific Accounting Review, vol. 24, no.3, pp. 1-34.
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