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Online Case Studies accompanying Business Finance, 8th Edition
Chapter 3 — Unisuper Limited (The Time Value of Money: An Introduction to
Financial Mathematics)
The focus on superannuation and encouraging individuals to save and invest for their
future, and particularly their retirement years, has been increasingly emphasised in the
past two decades in Australia. The Australian Government has been especially pro-active
in this regard, mandating minimum contributions that must be made to complying
superannuation or retirement funds by employers on behalf of their employees. This
minimum level of employer contribution to superannuation was introduced at 3 per cent
of employees’ salaries and is legislated to increase to a minimum contribution of 9 per
cent by 2005. Employees will also be required to compulsorily allocate a percentage of
their income to superannuation investment by this date. The impetus for introducing these
superannuation policy initiatives is to remove the burden from the social security system
for the provision of pension payments to support individuals during the retirement stage
of their lives. Due to these mandated superannuation requirements and an increasing
realisation by individuals of the importance of saving for their future, there are currently
billions of dollars of superannuation contributions flowing to superannuation funds and
financial institutions every year, whose role it is to profitably invest these contributions to
provide sufficient income to fund the non-working component of individuals’ lives. As
such, superannuation and mutual funds are one of the largest investors in Australian
financial markets, and particularly in equity securities of companies listed on domestic
and overseas sharemarkets.
One of the largest individual industry-based superannuation funds is Unisuper Limited,
which services and manages superannuation for employees in the tertiary education
sector in Australia, including universities, TAFE colleges and other higher education
institutions. The other revolution in superannuation funds management and service
provision in recent years has been a significant increase in the variety of superannuation
fund products and investment and retirement plan options, with members now having
much greater flexibility in deciding what types of funds and assets their superannuation
contributions are invested in. In line with this increasing investment choice, Unisuper
Limited offers its members two forms of superannuation plan:
 a Defined Benefit Plan; and
 an Investment Choice Plan
As the name suggests, the Defined Benefit Plan is one where the benefit paid to
employees at retirement is determined based on a formula which factors in determinants
such as employees’ final average salary, age and the number of years that they have been
employed. Under the Defined Benefit Plan, employees’ retirement benefit is calculated
as:
Retirement Benefit = Benefit salary  Length of membership  Lump-sum factor 
Average service fraction
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For tertiary education employees who elect to follow the Defined Benefit Plan, their
superannuation contributions are pooled and invested in a selection of assets determined
by the Unisuper Limited trustees. As their final benefit pay-out is determined solely by
the above formula, the investment performance of their asset portfolio is effectively
irrelevant and does not affect their final retirement pay-out: the investment risk is borne
solely by Unisuper Limited. This implies that employees do not benefit from gains earned
by their asset portfolio (above the minimum requirement to meet their defined benefits)
and it is the responsibility of the Unisuper Limited trustees to be able to fully fund these
defined benefits. The trustees of the Defined Benefit Plan do have the discretion to pay an
additional accumulation benefit on an annual-adjusted basis, although this is not
guaranteed and will form a small proportion of overall superannuation benefits under this
plan.
For those employees who choose the Investment Choice Plan, they retain an individual
investment account comprised of employer-sponsored and personal superannuation
contributions, an annual distribution of gains earned on their invested contributions, less
any administration and management charges. Under the Investment Choice Plan,
employees can nominate the types of assets or portfolios that their superannuation
contributions are invested in, among the following four investment strategies:




Secure Fund — Australian fixed interest securities and cash.
Stable Fund — Primarily fixed interest and bond securities, with a small exposure of
domestic and overseas shares and property.
Trustee’s Selection Fund — Balanced fund of domestic and overseas shares, property
assets and infrastructure and private equity investments.
Shares Fund — Investment solely in domestic and overseas shares.
These strategies can be differentiated on their risk and return characteristics, with the
Secure Fund being the least risky and likely to provide the lowest average return,
compared with the Shares Fund, which carries the highest risk but is expected to provide
the highest overall average return. For employees who choose the Investment Choice
Fund, their final retirement pay-out is dependent on the returns generated by their chosen
investment strategy and they bear the investment risk associated with their
superannuation contributions.
At the time of retirement, Unisuper Limited provides a range of investment products for
both Defined Benefit Plan and Investment Choice Plan subscribers to manage and
distribute their retirement benefits. These include the following pension or other
investment options:

Indexed Pensions — provide a regular income that is indexed to inflation and is
payable as long as you live and is transferred to a spouse or dependent upon your
death.
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



Single Life Indexed Pension — provides a higher regular income compared to the
standard indexed pension outline above, but is not transferred to a dependent at the
time of your death.
Allocated Pensions — provide a regular income (at a level of your choosing) and
access to your capital if desired, and four available investment strategies in which
your capital can be placed. If you die, the balance of the pension is distributed to your
dependents.
Roll-over Options — you can choose to transfer (roll-over) your retirement fund
balance to an approved personal or industry superannuation or investment fund, an
approved deposit fund or a retirement savings account.
Part-Cash Distribution — a certain percentage of your retirement fund (subject to
regulatory and tax approvals) can be taken as a cash lump-sum to be used for
investment or personal consumption purposes.
Participants can also elect to undertake a combination of these alternatives, with the
decision-making very much dependent on their income and lifestyle requirements in
retirement. Within this decision-making, consideration of investment risk and return
profiles are paramount, as well as the effects of inflation and the time value of money.
Questions:
1) Outline what you think are the important factors that should be considered by tertiary
sector employees when they are deciding whether to place their superannuation
contributions in the Defined Benefit Plan or the Investment Choice Plan. What issues
relating to the concept of the time value of money may be important to this decisionmaking?
2) Explain how the time value of money has an impact on the potential investment
returns and retirement savings of participants in both the Defined Benefit Plan and the
Investment Choice Plan. Are you correct in saying that participants who opt for the
Defined Benefit Plan are forgoing potential gains in investment earnings and returns
generated in association with the time value of money?
3) Consider the retirement investment products that are offered to members by Unisuper
Limited. In terms of time value of money concepts and ideas, which of the available
alternatives do you think would be most attractive? Explain your reasoning for this
choice, using examples of present or future values calculations, if required.
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