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PACC6003 Business Finance

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Course Code: PACC6003
University: The University Of Newcastle

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Country: Australia

Question:
In Australia, Superannuation helps individuals to save for retirement. Many Superannuation providers offer a range of different services to facilitate the needs of their customers.
1. Describe how Superannuation works. Specifically address the following points:a. Summarise what Superannuation is.b. What are contributions, and how are they paid?c. Do superannuation accounts have tax benefits? If yes, what are those benefits? Be specific!d. Select three Australian Superannuation providers and briefly describe them.2. Do some research regarding your selected Superannuation providers. What investment options do they offer? Describe 3 investment options per provider (total of 9 products). a. What are these products? Do they contain stocks or bonds, or another financial asset?b. How are they different in terms of risk?c. What are the historical returns of these 9 investment options? Try to collect data for as many years as possible.d. Graphically illustrate the performance of the 9 investment options in a single chart, using a ‘line’ chart in Excel. Describe your chart and draw conclusions about best vs. worst performance. Do you see a pattern?e. Report the mean, standard deviation, minimum and maximum for each of the 9 investment options.3. Assume that today is your 25th birthday and have an annual salary of $60,000 (+ super). Your salary is expected to grow by 3% per year before reaching retirement age (your 65th birthday). You are currently doing some research on superannuation choices.a. Calculate your annual salary for each year between your 25th and 65th birthday.b. Calculate your annual superannuation contribution. For simplicity, assume that your contributions happen annually, at the end of each year.c. Assuming future returns the you have calculated in 2.e. remain the same until your 65th birthday, what would be the balance in your superannuation account each year?d. Repeat 2.d., using your balance under the return assumptions of the 9 investment options. e. Discuss the differences the choice of an investment in a superannuation account makes. Is this an important choice?
Answer:

Introduction: 
Creation of pension program by an organization to ensure payment of pension to the employee of the organization consequent to their retirement from the organization can be defined as superannuation. Australian Government has made it mandatory for employers to contribute into the superannuation fund to discharge employees’ obligation in the future.  
Part 1: 
Superannuation fund is created to meet the future obligations of an organization towards discharging the liabilities of pension payment to the retired employees in the future. Also referred to as salary sacrifice arrangement due to the contributions made to the fund by the employees from their gross salary for future benefit in the form of pension (Cummings, 2016).   
Pension programs referred to as superannuation will be created and maintained with the contributions from employees and employers. A certain percentage of gross salary and wages of the employees are contributed to the superannuation fund with the employer contributing equal or larger amount in the fund to ensure that the superannuation fund will have necessary funds to meet the future obligations. The contributions of employers is compulsory in the fund whereas for employees it is generally voluntary. Since July 01, 2014 the rate of contribution of employers to the superannuation fund has been 9.5% and the employers are under obligation to contribute such amount to the superannuation fund over and above the amount of salaries and wages paid to the employees (Bird, Foster, Gray, Raftery, Thorp & Yeung, 2016). Australian Government has decided to gradually increase the compulsory contributions to the superannuation by the employer to 12% by the end of 2025 with the gradual increase in contributions starting from 2021.     
Contributions to the pension program are paid quarterly with first quarter starting from July 1 and ending on September 30. The quarterly contributions to the superannuation fund must be paid on or before the due date for the respective quarters. The table below contains the due date of payment of contributions to the superannuation fund (Gitman, Juchau & Flanagan, 2015).

Respective quarters

Date of respective quarters

Due date of contributions

First quarter

July 01 to September 30

October 28

Second quarter

October 01 to December 31

January 28

Third quarter

January 01 to March 31

April 28

Fourth quarter

April 01 to June 30

July 28

The obligation of employers in respect of superannuation fund:
Employers in Australia must follow certain rules while maintaining superannuation fund to ensure that they are complying with the Government rules and regulations in for managing superannuation fund. The following are the key rules which employers should follow to keep the superannuation obligation under control (Chardon, Freudenberg & Brimble, 2016).
Superannuation guarantee payment:
All employers must make the super guarantee contributions to the pension program. The payment shall be made to the nominated fund of the employees on or before the due date.
The employees must be offered to choose a fund:
The employers must allow the employees to nominate suitable superannuation fund as per their requirements (Anderson, Clark, Ramsay & Shekhar, 2017).
Standard choice form must be provided:
The standard choice form shall be filled by the employees to make their choices as to the particular superannuation fund clear.
No attempt by the employer to influence the employees of choice of fund:
The employers shall not take any steps to influence the employees’ choice of superannuation fund.  
Calculation of income correctly:
The contributions to the superannuation funds are dependent on the income of the employees thus, the calculation of employees’ salaries and wages must be calculated correctly to ensure that the amount of contributions are made correctly (Gerrans & Yap, 2014).
Records must be properly kept:
All records in relation to the superannuation contribution and salaries of the employees must be kept properly.
Employees shall be informed:
The payslips of the employees and workers shall contain all information about the contributions made into the superannuation fund to keep the employees informed about the contributions into the fund (Meir, Mugerman & Sade, 2016).
Providing necessary assistance to the employees in regards to salary sacrifice subsequent to request:
The employers are allowed to assist the employees to strengthen their superannuation fund if such requests are made by the employees.
Tax file number submission as per requirement:
Employee’s tax file number must be submitted to the superannuation fund managers for authorization purposes. The tax file numbers must be submitted earlier of the following:

Date on which first superannuation contribution was made for an employee. Or
Within 14 days subsequent to receiving TFN number by an employee if it was not available at the time of first superannuation contribution (Hellwig & McAllister, 2018).       

Tax benefits of superannuation accounts:
Contributions paid into the superannuation funds are allowed as deductible expenditures in computing the taxable income of an employer. Thus, the contributions made by the employers will be considered as expenditures of business in computing the taxable from of profit of such business.
In order to encourage the employees and employers to contribute significant amount of money into the pension program the government has introduced number of taxation benefits including deductibility of contributions of the employers in computing taxable profit from a business. Apart from that employees at the time of withdrawing super benefits if follow appropriate rules and regulations the rate of tax on such withdrawal can be reduced significantly (Camilleri, Cam & Hoffmann, 2018).
Three Australian superannuation providers:
ANZ Wealth:
ANZ Wealth offers different types of pension plans to the employees with simple and flexible rules to grow the superannuation fund.
ING:
Branchless banking services are provided by ING in all across Australia. It is also provides number of accounts for pension programs.
Commonwealth Bank Super:
One of leaders in providing different types of financial services in Australia, Commonwealth Bank also provides superannuation schemes for the employees in the country.  
Part 2: 
Smart choice super: Smart choice super allows the employees to make smart choices as per their requirements.  
Self-managed super: Employees are allowed to manage such funds as per their requirements.
Employer based super: Employers offer the choices to employees in this scheme.   
Life-stage scheme: Entire life stage scheme by Commonwealth Bank of Australia.  
Share option: In this plan the employees are allowed to use share option.  
Cash deposit: The cash deposit super is one of most popular superannuation fund of Commonwealth Bank (Niblock, Sinnewe & Heng, 2017).
Living super: ING’s Living super helps the employees with higher pension requirements to invest in the plan.
Safe: Employees with relatively low earnings will prefer the safe scheme of ING.  
Smart: With smart choice employees can meet their requirements after retirement.  
Historic return on these funds are as following:

Products

Historic average return (Assumptions where data have not been  found)  

Decades

1940s

1950s

1960s

1970s

1980s

1990s

2000s (Six months)

Smart choice super

4.48

6.65

8.27

9.26

9.81

9.92

3.24

Self-managed super

2.28

4.4

3.8

5.7

6.5

4.1

2.24

Employer based super

2.21

1.12

4.38

2.6

3.8

4.67

2.72

Life-stage scheme

5.65

6.5

6.4

7.5

5.7

6.8

3.23

Share option

4.97

4.28

5.27

2.8

4.89

6.67

2.28

Cash deposit

3.28

3.39

3.48

4.48

4.57

5.27

3.19

Living super

7.65

7.86

8.24

9.91

9.93

10.12

4.48

Safe

2.28

2.34

2.56

2.78

3.12

3.45

1.78

Smart

3.89

4.86

5.84

5.97

6.12

6.67

3.11

Graphical representation using a line chart:
The above chart shows that most of the products have followed a same trend as far as historic average returns are concerned. It is due to the fact that the superannuation products are operating in the economy under free market conditions thus, the conditions in the market affects all the products equally (Gupta & Jithendranathan, 2015).
It is clear that Living super of ING has performed best out of the 9 products discussed here as the average returns in different decades are highest for the product compared to other superannuation fund. Employer based super and safe products have been the worst when it comes to average return on the funds invested (Watson, Delaney, Dempsey & Wickramanayake, 2016).
Mean, minimum and maximum returns of these superannuation funds are provide below:

Products

 

 

 

Decades

Mean

Minimum

Maximum

Smart choice super

7.375714

3.24

9.92

Self-managed super

4.145714

2.24

6.5

Employer based super

3.071429

1.12

4.67

Life-stage scheme

5.968571

3.23

7.5

Share option

4.451429

2.28

6.67

Cash deposit

3.951429

3.19

5.27

Living super

8.312857

4.48

10.12

Safe

2.615714

1.78

3.45

Smart

5.208571

3.11

6.67

Part 3: 
Calculation of salary:

Year  

 (A): Annual salary  ($)

 26th Birthday  

     61,800.00

 27th Birthday  

     63,654.00

 28th Birthday  

     65,563.62

 29th Birthday  

     67,530.53

 30th Birthday  

     69,556.44

 31st Birthday  

     71,643.14

 32nd Birthday  

     73,792.43

 33rd Birthday  

     76,006.20

 34th Birthday  

     78,286.39

 35th Birthday  

     80,634.98

 36th Birthday  

     83,054.03

 37th Birthday  

     85,545.65

 38th Birthday  

     88,112.02

 39th Birthday  

     90,755.38

 40th Birthday  

     93,478.04

 41st Birthday  

     96,282.39

 42nd Birthday  

     99,170.86

 43rd Birthday  

   102,145.98

 44th Birthday  

   105,210.36

 45th Birthday  

   108,366.67

 46th Birthday  

   111,617.67

 47th Birthday  

   114,966.20

 48th Birthday  

   118,415.19

 49th Birthday  

   121,967.65

 50th Birthday  

   125,626.68

 51st Birthday  

   129,395.48

 52nd Birthday  

   133,277.34

 53rd Birthday  

   137,275.66

 54th Birthday  

   141,393.93

 55th Birthday  

   145,635.75

 56th Birthday  

   150,004.82

 57th Birthday  

   154,504.97

 58th Birthday  

   159,140.11

 59th Birthday  

   163,914.32

 60th Birthday  

   168,831.75

 61st Birthday  

   173,896.70

 62nd Birthday  

   179,113.60

 63rd Birthday  

   184,487.01

 64th Birthday  

   190,021.62

 65th Birthday  

   195,722.27 

Annual salary of 26th birthday has been calculated by multiplying the amount of salary of 25th birthday by 103%. Similarly the salary of 27th birthday has been calculated by multiplying the annual salary of 26th birthday with 103% and so on (Cheah, Foster, Heaney, Higgins, Oliver, O’Neill & Russell, 2015).
Annual contribution in the superannuation fund between 26th and 65th year:

Year  

 (A): Annual salary  

 Superannuation contribution @9.5%  

 26th Birthday  

                      61,800.00

                                                                5,871.00

 27th Birthday  

                      63,654.00

                                                                6,047.13

 28th Birthday  

                      65,563.62

                                                                6,228.54

 29th Birthday  

                      67,530.53

                                                                6,415.40

 30th Birthday  

                      69,556.44

                                                                6,607.86

 31st Birthday  

                      71,643.14

                                                                6,806.10

 32nd Birthday  

                      73,792.43

                                                                7,010.28

 33rd Birthday  

                      76,006.20

                                                                7,220.59

 34th Birthday  

                      78,286.39

                                                                7,437.21

 35th Birthday  

                      80,634.98

                                                                7,660.32

 36th Birthday  

                      83,054.03

                                                                7,890.13

 37th Birthday  

                      85,545.65

                                                                8,126.84

 38th Birthday  

                      88,112.02

                                                                8,370.64

 39th Birthday  

                      90,755.38

                                                                8,621.76

 40th Birthday  

                      93,478.04

                                                                8,880.41

 41st Birthday  

                      96,282.39

                                                                9,146.83

 42nd Birthday  

                      99,170.86

                                                                9,421.23

 43rd Birthday  

                   102,145.98

                                                                9,703.87

 44th Birthday  

                   105,210.36

                                                                9,994.98

 45th Birthday  

                   108,366.67

                                                             10,294.83

 46th Birthday  

                   111,617.67

                                                             10,603.68

 47th Birthday  

                   114,966.20

                                                             10,921.79

 48th Birthday  

                   118,415.19

                                                             11,249.44

 49th Birthday  

                   121,967.65

                                                             11,586.93

 50th Birthday  

                   125,626.68

                                                             11,934.53

 51st Birthday  

                   129,395.48

                                                             12,292.57

 52nd Birthday  

                   133,277.34

                                                             12,661.35

 53rd Birthday  

                   137,275.66

                                                             13,041.19

 54th Birthday  

                   141,393.93

                                                             13,432.42

 55th Birthday  

                   145,635.75

                                                             13,835.40

 56th Birthday  

                   150,004.82

                                                             14,250.46

 57th Birthday  

                   154,504.97

                                                             14,677.97

 58th Birthday  

                   159,140.11

                                                             15,118.31

 59th Birthday  

                   163,914.32

                                                             15,571.86

 60th Birthday  

                   168,831.75

                                                             16,039.02

 61st Birthday  

                   173,896.70

                                                             16,520.19

 62nd Birthday  

                   179,113.60

                                                             17,015.79

 63rd Birthday  

                   184,487.01

                                                             17,526.27

 64th Birthday  

                   190,021.62

                                                             18,052.05

 65th Birthday  

                   195,722.27

                                                             18,593.62 

Since Living Super of ING showed highest average return hence, it has been assumed that the employee has nominated ING’s Living super. Accordingly, the balances in superannuation account would as following after each year:
The superannuation account balance on 65th birthday udder different superannuation fund would be as following:

Products  

 Balance  

 Smart choice super

   2,014,173.85

 Self-managed super

       969,782.48

 Employer based super

       776,824.60

 Life-stage scheme

   1,447,049.04

 Share option

   1,033,620.30

 Cash deposit

       929,900.10

 Living super

   2,526,978.90

 Safe

       710,803.22

 Smart

   1,219,635.03

Graphical representation of the superannuation balance under different superannuation funds are depicted in the linear chart below:
Conclusion:
As can be seen that the decision of superannuation fund significantly affects the balance available in superannuation account hence, there is absolutely no doubt about the importance of the decision while nominating a superannuation fund for investment. Hence, it is an important choice (Bateman, Eckert, Iskhakov, Louviere, Satchell & Thorp, 2018).
References:      
Anderson, M. E., Clark, M., Ramsay, I., & Shekhar, C. (2017). Super behaviour: a note on young Australian adults’ engagement with their superannuation accounts.
Bateman, H., Eckert, C., Iskhakov, F., Louviere, J., Satchell, S., & Thorp, S. (2018). Individual capability and effort in retirement benefit choice. Journal of Risk and Insurance, 85(2), 483-512.
Bird, R., Foster, F. D., Gray, J., Raftery, A. M., Thorp, S., & Yeung, D. (2016). Who starts a self-managed superannuation fund and why?. Australian Journal of Management, 0312896217747331.
Camilleri, A., Cam, M. A., & Hoffmann, R. (2018). Nudges and Signposts–The Effect of Smart Defaults and Pictographic Risk Information on Retirement Saving Investment Choices.
Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.
Cheah, K. K., Foster, F. D., Heaney, R., Higgins, T., Oliver, B., O’Neill, T., & Russell, R. (2015). Discussions on long-term financial choice. Australian Journal of Management, 40(3), 414-434.
Cummings, J. R. (2016). Effect of fund size on the performance of Australian superannuation funds. Accounting & Finance, 56(3), 695-725.
Gerrans, P., & Yap, G. (2014). Retirement savings investment choices: Sophisticated or naive?. Pacific-Basin Finance Journal, 30, 233-250.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Gupta, R., & Jithendranathan, T. (2015). The impact of superannuation fund choice legislation and the global financial crisis on Australian retail fund flows. Financial Services Review, 24(3).
Hellwig, T., & McAllister, I. (2018). The impact of economic assets on party choice in Australia. Journal of Elections, Public Opinion and Parties, 28(4), 516-534.
Meir, A., Mugerman, Y., & Sade, O. (2016). Financial literacy and retirement planning: Evidence from Israel.
Niblock, S., Sinnewe, E., & Heng, P. (2017). A review of superannuation fund performance studies: Empirical evidence from Australia–2000 to 2014. Accounting Research Journal, 30(2), 224-240.
Watson, J., Delaney, J., Dempsey, M., & Wickramanayake, J. (2016). Australian superannuation (pension) fund product ratings and performance: A guide for fund managers. Australian Journal of Management, 41(2), 189-211.

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