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Contents
Group performance highlights
Operating and financial review
Five-year history
Directors’ report
Directors
Company Secretary
Corporate governance summary
Remuneration report
Indemnification and insurance of Directors and officers
Indemnification of auditor
Environmental regulation and performance
Significant events after the balance date
Rounding
Non-audit services
Authorisation
Auditor’s independence declaration
Sustainability
Financial statements
Statement of comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows
Signed reports
Investor information
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Key dates
22 September 2021
Final dividend payment date
28 October 2021
2021 Annual General Meeting
17 February 2022
Half year financial results
22 March 2022
Interim dividend payment date
16 August 2022
Full year financial results
21 September 2022
Final dividend payment date
27 October 2022
2022 Annual General Meeting
Full listing of key dates available at:
> challenger.com.au/shareholder/shareholder-
information/key-dates
Dates may be subject to change. Any change in
dates will be advised to the Australian Securities
Exchange.
About this Annual Report
The 2021 Annual Report, including the
financial report for the year ended 30 June
2021, can be downloaded from Challenger’s
online Shareholder Centre at:
> challenger.com.au/shareholder
2021 Annual Review
The 2021 Annual Review is intended to
provide you with useful information about
your company in an easy-to-read document.
Included in the Annual Review is an
operational and financial performance
update, reports from the Chair and the Chief
Executive Officer, and information on the
environmental, social and governance
matters that affect your company.
The Annual Review can be viewed online at:
> challenger.com.au/annualreview2021
2021 Corporate
Governance Statement
The 2021 Corporate Governance Statement
can be viewed online at:
> challenger.com.au/
corporategovernance2021
2021 Sustainability Report
The 2021 Sustainability Report can be
viewed online at:
> challenger.com.au/
sustainabilityreport2021
2021 Annual General
Meeting
Location
To be determined and subject to COVID-19
pandemic requirements.
Date
28 October 2021
Time
9.30am (Sydney time)
Full details of the meeting will be included in
your Notice of Annual General Meeting,
which will be sent to shareholders in
September 2021.
Board nominations
The closing date for receipt of nominations
for the Challenger Limited Board is 25
August 2021.
Group performance highlights
Challenger Limited 2021 Annual Report
Group performance highlights
Statutory net profit/(loss) after tax
($m)
Normalised net profit after tax
($m)
Normalised net profit after tax and investment
gains on Life’s investment portfolio
Reflects more defensive portfolio settings and
higher levels of capital
Dividend
(cps)
20.0 cps fully franked
48% of normalised earnings paid
Group assets under management
($bn)
Strong growth across both Life and
Funds Management
Life sales
($bn)
Sales up 35% on 2020
Strong contribution from institutional sales
Funds Management net flows
($bn)
Diversified client base and product offering
Record net flows and FUM growth
1
308(416)59220192020202135.517.520.0InterimFinal2019202020214.65.16.92019202020213963442792019202020218285110201920202021(2.4)2.516.1201920202021 Challenger Limited 2021 Annual Report
Operating and financial review
Operating and financial review
1 About Challenger
Challenger Limited (Challenger, CGF, the Group or the
Company) was founded in 1985 and is Australia’s largest
annuity provider1 as well as one of its largest2 active fund
managers.
Challenger is listed on the Australian Securities Exchange
(ASX) and has offices in Australia, London, Singapore and
Tokyo. At 30 June 2021, Challenger employed 738 people on
a full-time equivalent (FTE) basis.
Challenger is regulated by the Australian Prudential Regulation
Authority (APRA), the Australian banking, superannuation and
insurance regulator. Challenger’s activities are also subject to
supervision by other regulatory agencies both in Australia and
the other offshore markets in which it operates.
Challenger’s assets under management (AUM) were
$110.0 billion, increasing by 29.1% for the year ended 30
June 2021 (30 June 2020: $85.2 billion).
Normalised net profit before tax (NPBT) for the year was
$395.8 million, decreasing by $110.7 million or 21.9%
(30 June 2020: $506.5 million). Sections 2 and 8 contain a
description of Challenger’s operating segments and its
normalised cash operating earnings (NCOE) framework.
Normalised net profit after tax (NPAT) was $278.5 million,
decreasing by $65.2 million or 19.0% for the year (30 June
2020: $343.7 million).
Statutory net profit after tax was $592.3 million, which
includes investment experience, being the valuation
movements on assets and liabilities supporting the Life
business, and increased by $1,008.3 million for the year
(30 June 2020: loss of $416.0 million).
Challenger’s total equity as at 30 June 2021 was $3.8 billion
(30 June 2020: $3.2 billion).
2 Operating segments and principal
activities
Challenger’s purpose is to provide customers with financial
security for a better retirement. To fulfil this purpose,
Challenger leverages capabilities across its two operating
segments, Life and Funds Management. These core operating
segments are supported by shared support functions which
are responsible for providing centralised regulatory,
compliance, financial reporting, legal, risk management and
human resources.
Life — the Life operating segment focuses on the retirement
spending phase of superannuation, providing products that
help customers convert retirement savings into safe and
secure income in retirement. The Life segment includes
Challenger Life Company Limited (CLC), an APRA-regulated
life insurance company and is Australia’s leading provider of
annuities and guaranteed retirement income products.
As Australia's leading provider of annuities, Life is expected to
benefit from the long-term growth in Australia’s
superannuation system and regulatory reforms designed to
enhance the retirement phase.
The purpose of the superannuation system is to provide
income in retirement to substitute or supplement the
Government-funded age pension. With the transition from
Government-funded age pensions to private pensions, retirees
are seeking retirement income products that convert savings
into regular and secure income, helping to provide financial
security in retirement.
Life has been recognised as a retirement income product
innovator and has won the Association of Financial Advisers
‘Annuity Provider of the Year’ for the last 13 years, and is the
dominant retirement income brand in Australia.
Life is also focused on building institutional partnerships in the
profit-for-member sector of the superannuation system, which
is growing strongly. As their members transition to retirement,
profit-for-member funds are increasing their focus on
providing more comprehensive retirement solutions. As the
retirement system develops, the profit-for-member sector
provides a significant growth opportunity.
Life has an annuity relationship with Mitsui Sumitomo Primary
Life Insurance Company Limited (MS Primary), a leading
provider of Australian dollar and US dollar annuities in Japan.
MS Primary is part of MS&AD Insurance Group Holdings Inc.
(the MS&AD Group).
The retirement incomes which Life pays are backed by a high-
quality investment portfolio, predominantly invested in fixed
income and commercial property investments. These long-
term investments generate regular and predictable investment
income streams which are used to fund retirement income
payments to Life’s customers.
Funds Management — the Funds Management segment
focuses on accumulating wealth for retirement. As people
work and save for retirement, Funds Management supports
them building their retirement savings by providing investment
strategies that seek to deliver superior investment returns.
Funds Management is Australia’s third largest active fund
manager2 and is diversified globally with operations in Europe,
Japan and Singapore.
The Funds Management operating segment comprises two
business divisions: Fidante Partners and CIP Asset
Management (CIPAM).
Fidante Partners invests in minority equity interests in
individually branded boutique investment management firms.
Fidante Partners provides distribution, administration and
business support services to the boutique investment
managers and shares in the profits of these businesses
through equity ownership.
Fidante Partners’ business model has allowed it to attract and
build successful active equity, active fixed income and
alternative investment managers, which deliver strong
investment performance.
CIPAM principally originates and manages fixed income and
commercial real estate, along with providing investment
solutions for leading global and Australian institutions,
including CLC.
1 Plan for Life – March 2021 – based on annuities under administration.
2 Consolidated FUM for Australian Fund Managers – Rainmaker Roundup, March 2021.
2
Operating and financial review
Challenger Limited 2021 Annual Report
2 Operating segments and principal
4 Risk management
The management of risk is fundamental to Challenger’s
business and to building long-term shareholder value. The
Board’s Risk Appetite Statement outlines the level of risk that
is acceptable and is combined with an effective risk
management framework which monitors, mitigates and
manages the risks to which Challenger is exposed.
The Board recognises the broad range of risks that Challenger
faces as a participant in the financial services industry. These
include:
•
•
•
•
funding and liquidity risk;
investment and pricing risk;
counterparty risk;
strategic, business and reputation risk;
• operational risk;
•
•
•
climate change risk;
conduct risk; and
licence and regulatory risk.
An integral part of risk management for Challenger is the
maintenance of a strong risk culture amongst its employees.
Challenger’s expectations of its employees are encapsulated in
the ‘Challenger I ACT’ values of:
• Act with integrity;
• Aim high;
• Collaborate; and
•
Think customer.
All employees are assessed against the Challenger I ACT
values as part of the annual performance review process, and
this outcome contributes to their overall performance rating
and individual remuneration outcomes.
activities (continued)
Principal activities – there have been no significant changes
in the nature of these principal activities or the state of affairs
of the Company during the year.
In December 2020, Challenger announced the acquisition of
MyLifeMyFinance Limited (MyLife MyFinance, the Bank), an
Australian-based customer digital bank, for $35.0 million. The
acquisition price is subject to a completion adjustment and is
based on a net asset value of $18.0 million. The acquisition
received formal approval from the Treasurer of the
Commonwealth of Australia on 29 July 2021 and was
completed on 30 July 2021. The acquisition is highly strategic
and provides Challenger the opportunity to significantly
expand its secure retirement income offering, including
entering Australia's term deposit market. In the 2022 financial
year, the Bank will represent a third operating segment of the
Group.
3 Challenger’s purpose and strategic
priorities
Challenger’s purpose is to provide customers with financial
security for a better retirement.
In June 2021, Challenger announced a refreshed corporate
strategy that builds on the foundations of the core strategic
pillars that have been in place for many years.
The refreshed strategy will make Challenger stronger and
more relevant for the future as the Company seeks to further
expand offerings for retirees, including more direct acquisition
of customers.
Providing customers with financial security for a better
retirement remains Challenger’s purpose, which will be served
by providing both guaranteed income products such as
lifetime annuities and term deposits, as well as non-
guaranteed funds management products that help people
save for retirement.
Challenger has also introduced explicit vision statements for
each key stakeholder group: customers, shareholders,
employees, and the community, to help clarify Challenger’s
objectives and long-term ambitions.
Challenger has four strategic priorities to ensure that it
achieves its purpose of providing customers with financial
security for a better retirement.
The four strategic priorities are to:
• broaden customer access across multiple channels;
•
•
•
expand the range of financial products and services for a
better retirement;
leverage the combined capabilities of the Group; and
strengthen resilience and sustainability of Challenger.
3
Challenger Limited 2021 Annual Report
Operating and financial review
5 Challenger’s 2021 strategic progress
2021 strategic progress
Progress in 2021 against our strategic priorities is set out below:
Increase the use of
secure retirement
income streams
Challenger is focused on growing the allocation of Australian retirement savings to secure and stable
incomes.
2021 progress
Strategy to diversify sales delivering – Life sales up 35% to $6.9 billion
Challenger is building more resilient sales by diversifying across a range of retail and institutional
products and clients.
In 2021, sales increased across all key Life product categories, including domestic retail annuities (up
19%), institutional annuities and Index Plus (up 53%) and Japanese annuities (up 6%).
Total Life sales increased by 35% and are benefiting from Challenger’s diversification strategy, which
includes:
•
• working with a wider range of independent financial advice networks following structural change in
increasing focus on institutional sales;
•
the domestic financial advice market; and
expansion of the annuity relationship with MS Primary in Japan and expanding the relationship to
include the reinsurance of US dollar-denominated annuities.
Stabilisation of structural change to Australian financial advice market
Life has traditionally relied upon third-party financial advisers, both independent and part of major
advice hubs, to distribute its products. The Australian wealth management and financial adviser markets
have been significantly disrupted following public hearings and completion of the Royal Commission
into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) in
2019.
These industry changes impacted Challenger’s annuity sales, particularly term annuity sales, which had
been well supported by advisers aligned to the wealth management operations of major banks.
With adviser movement from major banks to Independent Financial Adviser (IFA) networks and advisers
exiting the industry stabilising over the last 12 months, the scope for further impact on Challenger’s
domestic retail term sales has reduced.
The contribution to Challenger term annuity sales by major banks has stabilised and accounted for
approximately 9% of 2021 domestic fixed term annuity sales, which was consistent with the
contribution in 2020 (approximately 12%).
Sales disruption from COVID-19 pandemic
Since March 2020, the COVID-19 pandemic has impacted the ability of financial advisers to meet new
clients, and their focus has been on servicing their existing client base, rather than on‑boarding new
clients. New clients on-boarded at the point of retirement represent an opportunity to recommend
annuities, particularly lifetime and aged care-focused annuities. Despite this, retail lifetime annuity sales
increased by 6% in 2021.
The COVID-19 pandemic has also delayed retirees entering aged care. Despite this, CarePlus sales were
up 11% on 2021.
Extending customer reach and entering Australia’s term deposit market
In December 2020, Challenger announced the acquisition of MyLifeMyFinance Limited (MyLife
MyFinance), an Australian-based customer digital bank, for $35 million1. The acquisition received formal
approval from the Treasurer of the Commonwealth of Australia and was completed in July 2021.
The acquisition is highly strategic and provides Challenger the opportunity to expand its secure
retirement income offering, including entering Australia's term deposit market.
Adding an Authorised Deposit-Taking Institution capability to sit alongside the Life and Funds
Management businesses will both broaden Challenger’s product and distribution reach and help fulfil
Challenger’s vision to provide customers with financial security for a better retirement.
1
1 Acquisition price subject to completion adjustments and based on a net asset value of $18 million.
4
Operating and financial review
Challenger Limited 2021 Annual Report
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Increase the use of
secure retirement
income streams
(continued)
Extending customer reach and entering Australia’s term deposit market (continued)
Term deposits are Government guaranteed2 and a familiar product amongst both retirees and those
approaching retirement, and they form a significant portion of their wealth allocation.
The acquisition also provides Challenger the opportunity to attract and engage with customers at an
earlier age as they approach and enter the retirement phase, increasing Challenger’s brand recognition
in early age demographics.
Lead the retirement
incomes market
and be the partner
of choice
Challenger's strategy includes being the partner of choice for superannuation fund advisers, wealth
managers and investment platforms in providing retirement income solutions. Challenger has deep
expertise in retirement income, including knowledge of the regulatory landscape and significant
experience and track record in managing the financial risks that retirees face. Challenger is the market
leader in annuities with 80%3 market share.
2021 progress
Annuity provider of the year
Life is a market leader in Australian retirement incomes and won the Association of Financial Advisers
Overall Annuity Provider of the Year and Long Term Income Stream of the Year. Life was also the
winner of Plan For Life’s Overall Longevity Cover Excellence Award for 2020, which recognises
Australian life insurance companies and fund managers who design products to assist retirees in
meeting the challenges of rising longevity.
Building institutional partnerships
Challenger is focused on providing institutional investors with targeted solutions that help address their
strategic and fiduciary objectives. Challenger does this by offering innovative strategies catering to the
needs of superannuation funds, insurance companies and multi-managers.
Challenger’s institutional offering provides institutional clients with access to Challenger Life’s
capabilities, including:
•
•
•
investment and structuring skills;
asset and liability management; and
intellectual property and thought leadership, especially around retirement income.
Challenger’s institutional approach is solutions led and an enabler providing components to client
solutions, helping them build more comprehensive retirement solutions.
Challenger Life’s institutional business (annuities and other institutional products) continues to grow
strongly and increased by 81% in 2021, and has increased by 32% Compound Annual Growth Rate
(CAGR) over the past four years.
Sales are benefiting from an expansion in the institutional product offering, including introducing
institutional term annuities, and an increase in the institutional client base. The number of institutional
clients has more than doubled over the past five years, and covers profit-for-member funds, insurance
companies and multi-managers.
With the low interest rate environment, Challenger’s institutional clients are focused on diversifying
their investment returns. Significant growth in institutional term annuity sales was achieved in 2021,
which accounted for 36% of annuity sales, up from 19% in 2020.
Total institutional sales (annuities and other institutional products) was $4.0 billion in 2021,
representing 58% of total Life sales.
The focus on more comprehensive solutions, including using guaranteed income products by profit-for-
member funds, represents a significant growth opportunity for Challenger.
Superannuation fund clients are increasing their focus on providing retirement income solutions for
their members and are engaging with Challenger on the support it can provide to help them build more
comprehensive retirement solutions for their members. The Retirement Income Covenant is also
increasing superannuation funds’ focus on providing their members with products that provide
longevity risk protection.
2,3
2 The Financial Claims Scheme provides protection to depositors of up to $250,000 per account holder per authorised deposit-taking institution (ADI).
3 Plan For Life – March 2021 – based on annuities under administration at 30 March 2021.
5
Challenger Limited 2021 Annual Report
Operating and financial review
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Lead the retirement
incomes market
and be the partner
of choice
(continued)
Enhanced customer digital engagement through Challenger Investor Online
Challenger is committed to providing a high-quality service and experience for its customers.
In 2021, Challenger’s online customer portal was enhanced to provide an improved customer
experience and increased security.
The enhancements also drive efficiencies by transitioning customers from paper processes to digital
engagement, and provide a range of new features, including online self-service. The enhancements also
increased security, including introducing two-factor authentication.
Leading adviser ratings
Despite structural changes in the Australian financial advice market and new competitors entering the
retirement incomes market, Challenger has remained the dominant retirement income brand.
Among Australian financial advisers, Challenger continues to be the most recognised retirement income
provider, with 90%4 of financial advisers rating Challenger as a leader in retirement income.
Challenger’s retirement income leadership position, which supports new distribution and product
relationships, is 35 percentage points above its nearest competitor.
Excellent customer experience
Challenger has a reputation for excellent customer experience demonstrated by Challenger’s Net
Promoter Score of 35%5, up from 22% in 2020. Overall client satisfaction was 91%, with 67% of
customers very satisfied and 24% somewhat satisfied. Customer satisfaction scores were broadly
consistent across all product types and distribution channels (advised vs non-advised).
When surveying customer experience with Challenger compared to other financial institutions, 60%
rated it better and 38% rated it the same as other companies5.
The Customer Satisfaction and Advocacy research5 also shows 90% of customers agree that Challenger
products provide them with confidence in retirement and 87% agree that Challenger is a trustworthy
company.
Retirement Essentials Age Pension Concierge Service pilot
Challenger trialled a Retirement Essentials Age Pension Concierge Service, aimed at helping to simplify
the process of applying for the age pension. Retirement Essentials is a specialist provider of age pension
eligibility and entitlements tools, which were made available to advisers to help cut Centrelink red tape
and improve the client experience.
The objective for Challenger was to drive increased adviser engagement and sales of lifetime annuities
through its retirement income leadership position. The pilot resulted in an increase in lifetime sales and
engagement with advisers focused on retirement issues, including accessing the age pension for clients.
Enhanced online origination process
Challenger has enhanced its online origination process to improve the digital experience for its
customers. A range of manual and paper-based processes have been replaced with editable PDFs,
digital signatures and other automated processes. The enhanced online origination process led to:
• 69% improvement in turnaround time from quote to application;
• 100% improvement in the take-up of online ID and verification; and
• 25% reduction in rework on eSignature applications.
Adviser referral program
Changes in the advice landscape continue to impact customers, who are looking for a closer
relationship with Challenger as a retirement expert. Customers want information about changes that
impact retirees and are concerned about how to find a new adviser. Challenger has implemented an
Adviser Referral program, referring new and existing customers who do not have a financial adviser, to
an external panel of advisers who have experience in retirement planning and income advice. This
program has assisted customers with a referral to an accredited Financial Planner.
4,5
4 Marketing Pulse Adviser Study, December 2020.
5 Fifth Quadrant, February 2021.
6
Operating and financial review
Challenger Limited 2021 Annual Report
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Provide customers
with excellent
funds management
solutions
Challenger is focused on providing excellent funds management solutions in order to help people build
their wealth and savings for retirement.
2021 progress
Distributor of the year
In 2021, Funds Management is one of the fastest growing6 Australian active investment managers,
attracting net inflows of $16 billion, representing 20% of opening period FUM.
FUM growth is benefiting from a diverse range of boutique managers covering key asset classes and
high-quality retail and institutional sales teams. In 2021, FUM increased in all but one of Fidante
Partners’ boutiques. Four boutiques finished 2021 with FUM exceeding $10 billion, up from one
boutique in 2020.
Fidante Partners’ distribution capability continues to be externally recognised and in 2021 won
Distributor of the Year at the annual Zenith Investment Partners (Zenith) Fund Awards. Zenith
recognised Fidante Partners’ sales teams and broad distribution footprint.
Top ranking wholesale trust for inflows
Fidante ranked as the top Australian active manager for retail net flows in 2021 with the highest net
flows among 117 active managers6. Fidante Partners also ranked number one for retail flows in both
fixed income and equities.
The Ardea Real Outcome Fund achieved the highest inflows of any wholesale investment trust in the
entire Australian market for the second consecutive year7 and is the fastest growing Active Exchange
Traded Fund (ETF) in Australia8. The Ardea Real Outcome Fund also received its highest conviction rating
in retail with Lonsec upgrading it to Highly Recommended.
Adding new boutiques and investment strategies
Fidante Partners continues to expand its product offering by developing new investment strategies for
existing managers, adding new boutiques and forming partnerships with best-in-class investment
managers.
New products for existing managers
Ardea Investment Management launched the Ardea Global Alpha Fund, a relative value fixed income
fund investing in a global portfolio of high-quality government bonds and related derivatives. The fund
is an Undertakings for the Collective Investment in Transferable Securities (UCITS) compliant version of
the Ardea Real Outcome Fund which is one of the fastest growing fixed income strategies in Australia
and provides a platform for offshore investors to access a strategy that has been very popular with
Australian investors. The fund will be distributed across the United Kingdom and select European
markets and will be among a number of products available for Southeast Asian distribution.
In November 2020, Ares Australia Management launched its second product - the Ares Diversified
Credit Fund (ADCF), which offers investors direct access to global private credit markets not readily
accessible by Australian wholesale investors. In May 2021, the Ares Global Credit Income Fund received
a recommended rating from Zenith Investment Partners.
Alphinity Investment Management launched a new Global Sustainable Equity Fund. The fund aims to
invest in quality global companies that are supporting a transition to a more sustainable future and are
also identified as undervalued and within an earnings upgrade cycle. A Sustainable Advisory Compliance
Committee, including two recognised independent ESG experts, will provide specialist insights and
ensure the Fund remains ‘true to label’ and aligned with the fund’s Charter.
New boutiques
Fidante Partners has an active program of seeking and screening potential new boutique managers. In
2021, Fidante Partners announced the launch of a new emerging market boutique manager, Ox Capital
Management.
Ox Capital Management brings together a team of highly experienced portfolio managers and analysts
with extensive experience investing in Asia and other dynamic emerging markets. Ox Capital
Management will launch a long-only and a long-short emerging market equity fund in 2022.
6,7,8
6 Plan For Life Wholesale Trust Data, September 2020, December 2020 and March 2021.
7 Plan For Life Wholesale Trust Data, September 2020.
8 ASX Investment Products monthly update July-June 2021, inflows/outflows.
7
Challenger Limited 2021 Annual Report
Operating and financial review
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Provide customers
with excellent
funds management
solutions
(continued)
New partnerships
In April 2021, Fidante Partners and global specialist asset manager Impax Asset Management Limited
entered into a new partnership agreement, with Fidante Partners becoming Impax’s exclusive
distribution partner in Australia and New Zealand. Impax Asset Management Group is a global leader
dedicated to investing in the transition to a more sustainable global economy.
Fidante Partners’ European business partnered with Proterra Investment Partners, a leading private
equity fund manager focused on the food and agribusiness sectors, providing European investors with
access to Asia’s food sector. Proterra Asia’s Food Strategy invests across the entire food value chain in
Asia, with a particular focus on the fast-growing and high return-oriented branded food sector.
Funds Management also entered into a distribution partnership agreement with the number one
Japanese investment trust manager, Nomura Asset Management. Fidante Partners has been selected to
distribute the Nomura Global Dynamic Bond Fund and Nomura Global Multi-Theme Equity Fund
products in Australia and New Zealand on behalf of Nomura Asset Management.
CIP Asset Management fixed income product expansion
Challenger is Australia’s largest fixed income manager, with Fidante Partners managing $41 billion and
CIP Asset Management (CIPAM) fixed income franchise managing over $16 billion across multiple
strategies, comprising both public and private credit investments.
CIPAM was formed over 20 years ago, with the business evolving from providing investment
management for Challenger Life to managing money for institutional clients. Over the past four years,
the business has expanded its offering to a wider group of investors, which include retail and high net
worth clients. In 2020, it rebranded to CIP Asset Management as it increased its focus on retail
investors.
Following this rebrand, CIPAM launched a retail version of the CIP Asset Management Credit Income
Fund in October 2020, which is a floating rate, multi-sector credit strategy investing in public and
private debt markets. The Fund aims to provide high net worth investors with capital stability and
income on a regular basis accompanied by lower levels of volatility than traditional fixed income
strategies. The fund also received its first retail research ratings, a Recommend rating from both Zenith
Investment Partners and Lonsec.
In December 2020, CIPAM launched its third income-oriented fund and attracted external seeding. The
CIPAM Private Lending Opportunities Fund is a higher returning fund open to institutional investors,
focusing on floating rate investments in mezzanine private lending opportunities, primarily within
Australia and New Zealand.
In May 2021, CIPAM launched a new wholesale share class of its flagship Multi Sector Private Lending
Fund, providing the opportunity for wholesale/sophisticated individual investors to access the offering.
The fund was launched in February 2020 and is a multi-sector credit strategy investing in Australian and
New Zealand private securitised, corporate and real estate lending.
In addition to a range of institutional client mandates, CIPAM now has three income focused credit
funds that provide investors with a range of return and risk options, ranging from cash plus three
percent (credit income fund) per annum, cash plus five percent (multi asset fund) per annum and cash
plus eight percent (private lending opportunities fund) per annum.
Diversifying globally
Funds Management continues to see significant growth opportunities in Australia and recognises the
opportunity to diversify globally. Distribution efforts over the past few years are now showing great
momentum and are expected to support future net flows.
Funds Management has been selectively expanding offshore and is focusing on markets where it has
the right product, there is the right market structure and where it can build the right sales capability.
After selectively expanding into the European and Japanese markets through our presence in London
and Tokyo, Challenger opened an office in Singapore in May 2021. The Singapore office will provide a
distribution hub to access investors across Asia.
In Europe, Fidante Partners 2021 sales remained robust despite the disruption from the pandemic on
European sales activity. A range of investment strategies have been successful and are attracting new
customers. More recently, Fidante Partners won its first major multi-geography (Australia and UK)
mandate win of over A$1 billion, which will be funded in 2022.
8
Operating and financial review
Challenger Limited 2021 Annual Report
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Provide customers
with excellent
funds management
solutions
(continued)
In Japan, CIPAM won its first mandate to manage Japanese real estate for a third-party client, investing
in a diverse portfolio of real estate assets across Japan.
Maintaining superior investment performance
Funds Management has a long track record of achieving superior investment performance, which has
helped attract strong net flows over many years.
Long-term investment performance for Fidante Partners Australian boutiques remains very strong with
92% of FUM outperforming benchmark over three years and 96% over five years9. Since fund
inception, 84% of Fidante Partners’ funds have achieved either first or second quartile investment
performance10.
Award-winning investment strategies
Fidante Partners’ investment managers continue to be externally recognised. During 2021, the following
funds won investment manager awards:
• Greencape Capital – Zenith Fund Awards - Australian Equities - Large Cap (2020);
• Alphinity's Sustainable Share Fund – Money magazine Best of the Best Awards - Best Australian Share
ESG Fund (2021);
• Eiger Australian Small Companies Fund – Money Management 2021 FMOTY Awards – Emerging
Manager;
• Greencape Broadcap Fund – Financial Standard Investment Leadership Awards – Australian Equities
Active Core (2021);
• Ardea Investment Management – Zenith Fund Awards - Global and Diversified Fixed Interest (2020);
and
• Alphinity Sustainable Share Fund, Greencape Broadcap Fund, Greencape High Conviction Fund –
Canstar 2021 Managed Fund Star Ratings and Awards Australian Shares Large Cap (funds that invest
in domestic stocks which are in the top 70% of the stock market by value).
In addition to these investment manager awards, Fidante Partners was awarded the Zenith Distributor
of the Year award 2020. This award recognises the quality of investment managers as well as the
operating and distribution platform which supports them.
Highly rated retail investment products
Fidante Partners’ investment managers and funds are highly rated by external asset consultants:
• 35% of ratings are the top rating (e.g. ‘Highly Recommended’ or ‘Gold’) compared to an average of
approximately 12% across the Australian funds management industry; and
• 80% of ratings are a ‘buy’ rating compared to an average of approximately 73% across the
Australian funds management industry.
The quality and performance of Fidante Partners’ investment managers and funds continue to receive
strong independent validation. At 30 June 2021, Zenith rated 20 out of the 24 ratings awarded to
Fidante Partners’ funds as either Recommended or Highly Recommended.
In addition to the retention of a number of ratings, there were a number funds that received rating
upgrades from primary research houses. These included two ‘Highly Recommended’ (from
‘Recommended') by Lonsec, one 'Highly Recommended’ (from 'Recommended') by Zenith and one to
Bronze by Morningstar11. There were also eight first time ratings, of which six were ‘buys’ across
ActiveX, Alphinity, Ares Australia Management, CIPAM and Whitehelm managers.
Embedding ESG across the Funds Management platform
Principles for Responsible Investment (UNPRI) is a United Nations-supported international network of
investors working together to implement its six aspirational principles. Its goal is to understand the
implications of sustainability for investors and support signatories to facilitate incorporating these issues
into their investment decision-making and ownership practices.
9,10,11
9 As at 30 June 2021. Percentage of Fidante Partners Australian boutiques meeting or exceeding performance benchmark.
10 Mercer as at June 2021.
11 Ardea Real Outcome Fund and Lennox Microcap Fund both upgraded to Highly Recommended by Lonsec and Lennox Small Companies Fund upgraded to Bronze
by Morningstar.
9
Challenger Limited 2021 Annual Report
Operating and financial review
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Provide customers
with excellent
funds management
solutions
(continued)
Embedding ESG across Funds Management’s platform (continued)
Reflecting Challenger’s commitment to sustainable investing, Funds Management established a
Responsible Investment Committee during the year. In the Principles for Responsible Investment
Assessment Report 2020, Challenger received an “A” rating.
In 2021, Challenger continued to develop its ESG practices and supported Fidante Partners to embed
ESG practices within their boutique fund managers. All boutiques have developed their own standalone
ESG policies and are now signatories to the UNPRI.
Within Fidante Partners’ boutiques, Alphinity launched a Global Sustainable Share Fund, and Whitehelm
Listed Core Infrastructure Fund rebranded as Low Carbon Infrastructure Fund to better represent their
ESG approach.
Maintain leading
operational and
people practices
Challenger believes maintaining a highly engaged, diverse and agile workforce committed to
sustainable business practices with a strong risk and compliance culture is essential for providing
customers and shareholders with superior outcomes.
2021 progress
High employee engagement and strong risk culture
Employee engagement measures the strength of the relationship between an organisation and its
employees. Challenger believes having a highly engaged team that is inspired by its business purpose
and its values will lead to superior customer and shareholder outcomes.
Challenger’s employee engagement survey conducted by Willis Towers Watson in April 2021 showed
that despite the COVID-19 pandemic and shift to work from home, Challenger has maintained high
employee engagement achieving an overall sustainable engagement score of 85%. This was 1% higher
than Challenger’s 2019 result and in line with the global high performing norm.
Challenger has a strong risk culture, which was reflected in a risk culture score of 86% in the latest
employee engagement score. The score was four points above the Global High Performing Norm, and
10% higher than the Australian National Norm. The consistently high risk culture result confirms risk
culture is embedded right across the business.
Diversity and inclusion
Challenger believes that a diverse and inclusive workplace delivers better outcomes for employees, the
business and the community.
Challenger continued to make progress implementing its Diversity and Inclusion strategy and achieved a
Diversity and Inclusion score of 94% in the annual employee engagement survey. This was 11 points
above the Australian National Norm and 12 points above the Global High Performing Norm. In addition:
• 98% of employees believe gender-based harassment and sexual harassment is not tolerated;
• 95% of employees believe we have a working environment that is accepting of differences in
personal identity; and
• 94% of employees have the flexibility they need to manage their work and other commitments.
During 2021, Challenger continued to be recognised as an employer of choice for women, and was
included in:
• Workplace Gender Equality Agency (WGEA) Employer of Choice for Gender Equality;
• Equileap Global Top 100 employer for gender equality; and
• The Bloomberg Global Gender Equality Index.
Challenger also joined the Pride in Diversity network – a leading not-for-profit support program
providing inclusion strategies for LGBTQI+ persons, and submitted responses to the Australian
Workplace Equality Index’s annual questionnaire on how supported LGBTQI+ persons feel at work.
10
Operating and financial review
Challenger Limited 2021 Annual Report
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Maintain leading
operational and
people practices
(continued)
Refreshing approach to sustainability
Challenger evolved its sustainability strategy in 2021 to reflect Challenger’s most material social,
environmental and governance opportunities and align it to its purpose.
With focus on responsible investment across stakeholder groups increasing, Challenger’s updated
sustainability strategy reflects a strengthened focus on responsible investing.
Challenger’s sustainability strategy focuses on:
• Financially resilient customers and communities;
• Constructive public policy settings;
• Doing things right; and
• Responsible investment.
To support the implementation of Challenger’s sustainability strategy, a group-wide ESG steering
committee has been established. The committee includes representatives from across the business that
meet regularly to assess and progress ESG related initiatives. The committee also provide updates and
recommendations to the Challenger Board.
Health and wellbeing of our people during the COVID-19 pandemic
Looking after the health of employees during the COVID-19 pandemic is a key business priority. Prior to
the COVID-19 pandemic, Challenger had strong flexible work foundations. During the pandemic this
was accelerated with almost 100% of employees moving to remote work. Business continuity has been
maintained throughout the pandemic.
Challenger recognises that the way employees work has changed forever, and organisations need to
adapt to leverage the benefits. Challenger is promoting and supporting a hybrid work model that
supports employee engagement and delivers on Challenger’s organisational strategy. Challenger is
supporting leaders and employees to introduce new ways of working that balance the needs of the
team, organisation and individuals, providing an opportunity to build an even more diverse and inclusive
workplace.
To support hybrid work, Challenger has adopted cloud-based collaboration tools and rolled out new
laptops to employees. A Future of Work Group has been formed to work with employees to constantly
evolve Challenger’s work practices.
Community partnership with the Council on the Ageing NSW (COTA)
Challenger’s partnership with COTA was established in 2019 to deliver a program of research, advice
and practical support to address the underemployment of people over 50. The program aims to
encourage people to talk about ways to tackle perceptions and misconceptions around older workers.
This includes giving employers the tools to attract and retain older employees.
Enabling people to work for as long as they wish provides a range of benefits for individuals and the
economy and aligns strongly with Challenger’s purpose of helping provide financial security for a better
retirement.
In 2021, working alongside both COTA and Newgate Research, Challenger published its first piece of
research on understanding the needs of older workers and how businesses can enhance their
workplaces for older Australians.
Based on insights of this research, a program and toolkit are being designed, covering:
• Education and advice for hiring managers;
• Support for auditing existing programs and policies, and building new ones to promote age diversity;
• Advice on fostering connections between age diverse groups at work; and
• Developing training programs to deliver equal access to upskilling and training opportunities.
Launched a mental health and wellbeing strategy
Challenger is committed to maintaining a positive and inclusive workplace culture where everyone feels
safe and encouraged to talk about mental health and reach out for support when needed. In these
unprecedented times, providing a supportive and caring environment has never been more important.
Guiding Challenger’s approach are three core areas:
• Improving understanding of mental health and combating stigma;
• Promoting positive health and wellbeing; and
• Increasing awareness and support for impacted employees.
11
Challenger Limited 2021 Annual Report
Operating and financial review
5 Challenger’s 2021 strategic progress (continued)
2021 strategic progress (continued)
Maintain leading
operational and
people practices
(continued)
Commitment to effective climate change management
Challenger recognises climate change is one of the biggest challenges facing society now and for future
generations. It is a shared global challenge that requires input from governments, businesses and
individuals.
Challenger is committed to supporting progress in transitioning to a low carbon economy. This year,
Challenger published its first climate change statement outlining its overall approach to climate change
and how it considers climate-related risks and opportunities. This includes working with internal and
external stakeholders to find ways to reduce risk and create a more resilient economy.
Challenger’s strong governance supports the resilience of its business, with the Board having oversight
of climate-related risks and opportunities. A newly established ESG Steering Committee that provides
quarterly reporting to the Group Risk Committee, will enhance this process in 2022.
Became a signatory to the Investors Against Slavery and Trafficking initiative
Investors Against Slavery and Trafficking (IAST) Asia-Pacific is an investor-led initiative engaging with
companies to pursue real action to combat modern slavery, human trafficking and labour exploitation.
Challenger understands the importance of industry collaboration and supports the IAST Asia-Pacific
initiative. Challenger has joined other signatories to add focus to this important issue. As a signatory to
this initiative, Challenger is included on a letter sent to all S&P/ASX100 companies setting out investor
expectations on how these issues are considered in their practices.
Fidante UK joined Pensions for Purpose
Fidante UK joined the Pensions for Purpose initiative in the United Kingdom (UK). This is a collaborative
initiative of impact managers, pension funds, social enterprises and others involved or interested in
impact investment. Its aim is to promote understanding of impact investing in companies, organisations
and funds that have the commercial purpose of solving social or environmental problems.
Fidante UK joined this initiative to demonstrate their commitment to ESG and interest in impact
investing. Fidante UK, together with Fidante Partners UK-based boutique managers, plan to launch a
thought leadership series on ESG investing across various asset classes and showcase this on the
Pensions for Purpose platform.
6 Market overview and outlook
Challenger’s purpose is to provide customers with financial
security for a better retirement. To fulfil this purpose,
Challenger will leverage capabilities across its Life, Funds
Management, and recently acquired Bank businesses.
Challenger’s Life and Funds Management businesses are
expected to benefit from the long-term growth in Australia's
superannuation system.
Australia’s superannuation system commenced in 1992 and is
the fifth largest pension system globally and one of the fastest
growing, with assets increasing by 11% per annum over the
past 20 years1.
Critical features driving the growth of Australia’s
superannuation system include government-mandated and
increasing contributions, tax incentives to encourage
retirement savings and an efficient and competitive
institutional model.
Australia’s superannuation system is forecast to grow from
approximately $3 trillion today2 to almost $7 trillion3 over the
next 15 years.
Growth in the retirement phase of the system is supported by
ageing demographics and the Government’s focus on
enhancing this component of superannuation.
Life outlook
Life focuses on the retirement spending phase of
superannuation, providing products that help customers
convert retirement savings into safe and secure income in
retirement.
As Australia’s superannuation system grows, the retirement
phase of superannuation is expected to increase significantly.
As Australia’s leading provider of annuities4, Challenger Life is
expected to benefit from this growth. The number of
Australians over the age of 65, which is Life's target market, is
expected to increase by 50% over the next 20 years5.
Reflecting these demographic changes, and growth in the
superannuation system, the annual transfer from the
retirement savings phase of superannuation to the retirement
phase was estimated to be approximately $70 billion6 in 2020.
1 Thinking Ahead Institute - Global Pension Assets Study 2021.
2 APRA, as at March 2021.
3 Rice Warner Superannuation Market Projections Report 2020.
4 Plan For Life – March 2021 – based on annuities under administration.
5 2020 – 2040 comparison based on Australian Bureau of Statistics, Population Projections Series B, cat no. 3222.0.
6 Based on Taxation Statistics 2018-19 from Australian Taxation Office.
12
Operating and financial review
Challenger Limited 2021 Annual Report
6 Market overview and outlook (continued)
Life outlook (continued)
The purpose of the superannuation system is to provide
income in retirement to substitute or supplement the
Government-funded age pension. With the transition from
Government-funded age pensions to private pensions, retirees
are seeking retirement income products that convert savings
into regular and secure income, helping to provide financial
security in retirement.
The Australian Government is progressing a range of
retirement income regulatory reforms designed to enhance
the retirement phase and better align it with the overall
objective of the superannuation system.
These reforms provide an opportunity to increase the
proportion of savings invested in products that deliver stable,
regular and reliable retirement income.
Annuities currently represent only a small part of the
retirement phase, with lifetime annuities representing less
than 2% of the annual transfer to the retirement phase.
As Australia's leading provider of annuities, Challenger Life is
expected to continue to benefit from the long-term growth in
Australia’s superannuation system and regulatory reforms
designed to enhance the retirement phase.
Challenger has been recognised as a retirement income
product innovator and has won the Association of Financial
Advisers ‘Annuity Provider of the Year’ for the last 13 years
and remains the dominant retirement income brand in
Australia.
An important distribution channel for Life’s products is third-
party financial advisers. Life’s products are included on all
major advice hubs’ Approved Product Lists (APLs) and are
available on the leading administration platforms.
Challenger is also focused on building institutional
partnerships with large super funds. As their members
transition to retirement, major super funds are increasing their
focus on providing more comprehensive retirement solutions
to their members. As the retirement system develops, the
profit-for-member sector provides a significant growth
opportunity for Challenger.
In Japan, Life has an annuity relationship with Mitsui
Sumitomo Primary Life Insurance Company Limited (MS
Primary) to provide Australian dollar and US dollar annuities.
MS Primary is a leading provider of annuity products in Japan
and is part of the MS&AD Insurance Group Holdings Inc. (the
MS&AD Group).
Under a reinsurance arrangement with MS Primary, which
commenced in July 2019, MS Primary provides Challenger an
annual amount of reinsurance, across both Australian and US
dollar annuities, of at least ¥50 billion (equivalent to
approximately A$600 million7) per year8. This is subject to
review in the event of a material adverse change for either MS
Primary or Challenger Life.
At 30 June 2021, MS&AD held approximately 15% of
Challenger Limited issued share capital and a representative
from the MS&AD Group and an Alternate Director have been
appointed Non-Executive Directors of Challenger Limited.
The retirement incomes Life pays are backed by a high-quality
investment portfolio, predominantly invested in fixed income
and commercial property investments.
These long-term investments generate regular and predictable
investment income which is used to fund retirement income
paid to Life’s customers.
Funds Management outlook
Funds Management focuses on building savings for
retirement. As people work and save for retirement, the
business supports them to build their wealth and savings by
providing investment strategies that seek to deliver superior
investment returns.
Funds Management is one of Australia’s fastest growing9 and
third largest active fund manager10 and is diversifying globally
with operations in Europe, Japan and Singapore.
Growth in funds under management can be attributed to the
strength of Challenger's retail and institutional distribution
teams, a market-leading business model focused on alignment
with clients and high quality managers with strong long-term
investment performance.
Funds Management comprises Fidante Partners and CIP Asset
Management.
The Fidante Partners’ business model involves taking minority
equity interests in separately branded boutique funds
management firms, with Challenger providing distribution,
administration and business support, leaving investment
managers to focus entirely on managing investment
portfolios.
Fidante Partners’ business model has allowed it to attract and
build successful active equity, active fixed income and
alternative investment managers, while maintaining strong
investment performance. Over the last three years, long term
performance for Fidante Partners’ Australian boutiques
remains strong with 92% of funds and mandates
outperforming their respective benchmarks.
Fidante Partners is focused on broadening its product offering,
which includes partnering with best-in-class managers,
expanding the product offering of existing managers and
accessing new distribution channels.
Funds Management has extensive client relationships, for
example 45 of Australia’s top 50 superannuation funds are
clients of Fidante Partners.
CIP Asset Management principally originates and manages
fixed income and commercial real estate, along with providing
investment solutions for leading global and Australian
institutions, including Challenger Life.
CIP Asset Management is transitioning from being an
internally focused to an externally focused manager, and
Challenger is committed to growing the business and building
on CIP Asset Management’s breadth of investment expertise.
Funds Management is well positioned to benefit from ongoing
growth in both Australia’s superannuation system and global
pension markets.
7 Based on the exchange rate as at 30 June 2021.
8 Challenger Life entered into a new agreement with MS Primary to commence reinsurance, across both Australian and US dollar annuities, of at least ¥50 billion
per year for a minimum of five years. Challenger will provide a guaranteed interest rate and assume the investment risk in relation to those policies issued by MS
Primary and reinsured by Challenger.
9 Plan For Life Wholesale Trust Data, September 2020, December 2020 and March 2021.
10 Consolidated FUM for Australian Fund Managers – Rainmaker Roundup March 2021.
13
Challenger Limited 2021 Annual Report
Operating and financial review
6 Market overview and outlook (continued)
Challenger has also been supporting its customers and
business partners throughout the pandemic, including
advisers, superannuation fund clients and commercial property
tenants.
Investment market conditions have been significantly
disrupted by the COVID-19 pandemic, initially resulting in a
market sell-off and increased market volatility. Following the
pandemic related market sell-off in March 2020, Challenger
Life actively repositioned its investment portfolio to more
defensive settings, which will be maintained.
As a result of this repositioning, Life was holding over
$3 billion of cash and liquid investments at the start of 2021.
Excess cash and liquids instruments have been progressively
redeployed over the course of the year predominantly into
higher yielding fixed income investments.
Challenger has enhanced its capital settings to more closely
align with its brand and purpose of providing financial security
for a better retirement. From 2022, Challenger is extending its
target capital ratios and intends to operate toward the top of
its target range providing increased flexibility for investment
market volatility and reducing the risk of realising negative
investment experience during significant market shocks.
Risks
The above outlook for the Life and Funds Management
businesses is subject to the following key business risks:
•
investment market volatility;
• ongoing impact of COVID-19 pandemic on the global
economy and the ability of individuals, businesses, and
governments to operate;
• general uncertainty around the global economy and its
impact on markets in which Challenger operates and
invests;
•
regulatory and political changes impacting financial
services markets participants;
• demand for and competition with Challenger products,
including annuities and managed funds; and
• operational risk.
Other risks to which Challenger’s businesses are exposed are
summarised in Section 5 Risk management and in the
Corporate Governance Statement.
Bank acquisition
Challenger is diversifying its product offering and extending its
customer reach.
In December 2020, Challenger announced the acquisition of
MyLifeMyFinance Limited (MyLife MyFinance), an Australian-
based customer digital bank, for $35 million11.
The acquisition received formal approval from the Treasurer of
the Commonwealth of Australia and was completed in July
2021.
MyLife MyFinance is an Australian-based authorised deposit-
taking institution (ADI) and digital bank, offering a range of
simple savings and lending products. MyLife MyFinance has an
ADI licence with an existing term deposit offering.
The acquisition is highly strategic and provides Challenger the
opportunity to significantly expand its secure retirement
income offering, including entering Australia's term deposit
market.
Adding an Authorised Deposit-taking Institution (ADI)
capability to sit alongside the existing Life and Funds
Management operations will broaden both Challenger’s
product and distribution reach and help fulfil its purpose: to
provide customers with financial security for a better
retirement.
The Bank provides Challenger the opportunity to attract and
engage with customers at an earlier age, as they approach
and enter the retirement phase, increasing Challenger’s brand
recognition in early age demographics.
Initially, Challenger will offer government guaranteed retail
term deposits, which are familiar banking products and
represent a significant portion of both retiree and pre-retiree
wealth.
The Bank will provide Challenger with access to a wider range
of customers through multiple distribution channels, including
new intermediated channels such as the broker term deposit
market, and will accelerate Challenger’s direct-to-customer
capability. To ensure speed to market, term deposits will
initially be marketed under the MyLife MyFinance brand and
will transition to the Challenger brand during 2022.
The asset and lending strategy for the Bank will centre on
broadening the lending capability and embedding a strong
risk management approach in order to deliver the Group’s
return on equity target once the business scales.
The acquisition price and capital requirements, including
regulatory capital to support its initial growth, was funded by
a $100 million distribution from Challenger Life Company
Limited (CLC) paid during the March 2021 quarter.
Integration is well progressed, with integration costs expected
to be between $5 million and $8 million incurred over 2021
and 2022, which will be reported as a significant item.
COVID-19 pandemic
The COVID-19 pandemic has presented significant challenges
to global economies and investment markets.
Looking after the health of our people during this time has
been a key business priority for Challenger, which transitioned
almost all its employees to working from home arrangements
from mid-March 2020 and again in July 2021. Challenger
continues to comply with national and state public health
orders.
11 Acquisition price subject to completion adjustments.
14
Operating and financial review
Challenger Limited 2021 Annual Report
7 Key performance indicators (KPIs)
7.1 Profitability and growth
KPIs for the year ended 30 June 2021 (with the year to
30 June 2020 being the prior comparative period (pcp), unless
otherwise stated) include:
Profitability
Statutory profit/(loss)
attributable to equity holders
($m)
2021
2020
Change
%
592.3
(416.0)
large
Normalised NPBT ($m)
395.8
506.5
(21.9)
Normalised NPAT ($m)
278.5
343.7
(19.0)
Statutory EPS (cents)
88.2
(68.4)
large
Normalised EPS (cents)
Total dividend (cents)
Total dividend franking
Normalised cost: Income
ratio
41.5
20.0
56.5
(26.5)
17.5
14.3
100%
100%
—
41.2%
35.7%
(5.5)
Statutory RoE after tax
16.8%
(12.1%)
28.9
Normalised RoE pre-tax
11.2%
14.8%
Normalised RoE after tax
7.9%
10.0%
(3.6)
(2.1)
Sales, Flows, AUM
Total Life sales ($m)
6,928.1 5,151.4
34.5
Total Life net flows ($m)
Total Life net book
growth (%)
2,163.8
315.8
large
14.4%
2.1%
12.3
Total FM net flows ($bn)
16.1
2.5
large
Total AUM ($bn)
110.0
85.2
29.1
The recovery of market conditions, since the World Health
Organization declared the outbreak of COVID-19 a pandemic
in March 2020, resulted in Challenger recognising significant
investment experience gains in the year ended 30 June 2021.
Challenger’s statutory profit attributable to equity holders for
the year ended 30 June 2021 was substantially higher than
the statutory loss reported in the previous year. The material
increase was driven by large positive net fair value changes on
Challenger Life Company Limited’s (CLC’s) assets and liabilities
as a result of the investment market recovery.
Normalised NPAT decreased by 19.0%, and normalised EPS
decreased by 26.5% compared to 2020, reflecting lower
earnings in Life as a result of the sharp decline in credit
spreads over the year which were not fully reflected in
customer pricing. This was partially offset by higher earnings
in the Funds Management business.
Investment experience profit after tax was $318.6 million
compared to a $750.3 million loss in the pcp.
A final dividend of 10.5 cents was announced, franked at
100%, taking the total dividend for 2021 to 20.0 cents
franked at 100% for 2021, which is 2.5 cents higher than the
prior year.
Challenger’s normalised cost to income ratio of 41.2% is
higher than the ratio in 2020 (35.7%). Lower normalised cash
operating earnings (NCOE) for Life was the main driver of the
higher normalised cost to income ratio for the year. Operating
costs were lower than the previous period despite reflecting
the adoption of the International Financial Reporting
Standards Interpretations Committee (IFRIC) agenda decisions
which have resulted in a reclassification of deployment costs
associated with Software-as-a-Service (SaaS) arrangement
from intangible assets to recognition as an expense in the
Statement of comprehensive income.
The normalised pre-tax return on equity (RoE) was 11.2% in
2021 compared to 14.8% in the prior year due to the reduced
NCOE combined with higher average capital levels. The RoE
outcome was below the target of the Reserve Bank of
Australia (RBA) cash rate plus 14%. In June 2021, consistent
with Challenger’s deliberately higher capital levels, the group
revised its pre-tax return on equity target to the RBA cash rate
plus 12%.
Statutory RoE after tax of 16.8% has increased substantially
compared to the prior year (2020: negative 12.1%) as a result
of the materially higher statutory NPAT primarily as a result of
the positive net fair value movements on CLC’s assets and
liabilities. These movements were experienced as a result of
the recovery in investment market values following the
volatility caused by COVID-19. Normalised RoE after tax
decreased from 10.0% in the prior period to 7.9%, primarily
reflecting lower normalised NPAT.
7.2 Capital management
Challenger’s capital position is managed at both the Group
and the prudentially-regulated CLC level, with the objective of
maintaining the financial stability of the Group and CLC while
ensuring that shareholders earn an appropriate risk-adjusted
return.
On 22 June 2020, Challenger announced an underwritten
institutional placement of equity in the amount of
$270.0 million together with a non-underwritten share
purchase plan (SPP) for retail shareholders which was
targeting to raise up to $30 million. The institutional
placement of $270 million was completed on 23 June 2020
and injected directly into CLC on 26 June 2020. The SPP was
completed on 24 July 2020, raising $35 million. The majority
of the SPP proceeds ($30 million) were also subsequently
injected into CLC on 31 July 2020 and form part of the capital
base for CLC for the current period.
15
Challenger Limited 2021 Annual Report
Operating and financial review
7 Key performance indicators (KPIs) (continued)
In addition to CLC’s excess regulatory capital, Challenger
maintains cash at a Group level which can be used to meet
regulatory capital requirements. Challenger further maintains
a Group corporate debt facility of $400 million in order to
provide additional financial flexibility.
The facility was fully drawn in March 2020 in response to the
investment market volatility caused by COVID-19 and had
$50 million outstanding at 30 June 2020. This was fully repaid
during the period, $25 million on each of 22 March 2021 and
22 June 2021. The amount drawn at the end of the period
was nil.
Dividends and dividend reinvestment plan
Dividends
Interim dividend (cents)1
Final dividend (cents)2
Total dividend (cents)
Interim dividend franking
Final dividend franking
2021
9.5
10.5
20.0
100%
100%
10.5
2020 Change
(8.0)
17.5
—
17.5
100%
—%
2.5
—
—
1 Interim dividend declared on 9 February 2021 and paid on 23 March 2021 in
respect of the half year ended 31 December 2020.
2 Final dividend declared on 9 August 2021 and payable on 22 September 2021
in respect of the half year ended 30 June 2021.
The Board targets a dividend payout ratio range of 45% to
50% of normalised earnings per share. The dividend payout
ratio for the year ended 30 June 2021 was 48.2% (30 June
2020: 31.0%) and therefore within this range.
The final dividend of 10.5 cents will be fully franked. The
Company seeks to frank its dividends to the maximum extent
possible and expects future dividends over the medium term
to be also fully franked. However, the actual dividend payout
ratio and franking will depend on prevailing market conditions
and capital allocation priorities at the time.
The Company recommenced operating its Dividend
Reinvestment Plan (DRP) during the year. The participation
rate for the 2021 interim dividend was 4.5%, and 441,762
ordinary shares were issued to satisfy DRP requirements on
23 March 2021.
The DRP will continue in operation for the 2021 final dividend,
and the Board has determined that new shares will be issued
to fulfil DRP requirements in respect of the final dividend. The
new shares will not be issued at a discount to the prevailing
Challenger share price.
No shares were bought back during the year.
7.2 Capital management (continued)
The decision to raise additional capital was taken to further
protect CLC’s capital position in the wake of COVID-19 while
at the same time being used to further enhance returns once
deployed.
On 25 November 2020, Challenger completed its third capital
notes issue, Challenger Capital Notes 3, raising $385 million
through the issue of 3.850 million notes for $100 each. On
the same date, Challenger confirmed the repurchase and
redemption of approximately 2.975 million Challenger Capital
Notes 1 with a face value of $100 each. The net proceeds of
these transactions provided incremental Additional Tier 1
regulatory capital for CLC.
On 25 May 2021, Challenger completed the off-market
repurchase of 197,308 Challenger Capital Notes 1 that were
offered by eligible holders of Challenger Capital Notes 1 under
the repurchase invitation announced by Challenger on
27 April 2021. Challenger accepted all valid offers by
participating holders of Challenger Capital Notes 1 for a
repurchase price of $102 per Challenger Capital Note 1.
Following the completion of the repurchase, approximately
$27.7 million of Challenger Capital Notes 1 remain on issue.
The following table highlights the key capital metrics for CLC
and the Group:
Capital
Net assets attributable to
equity holders ($m)
CLC excess capital over
PCA ($m)
Group cash ($m)1
CLC excess capital over PCA
+ Group cash ($m)
2021
2020 Change
3,825.8 3,249.6 576.2
1,650.0 1,584.7
223.0 146.1
65.3
76.9
1,873.0 1,730.8 142.2
CLC PCA ratio (times)
1.63
1.81
(0.18)
CLC CET1 ratio (times)
1.14
1.20
(0.06)
1 Pcp included $50.0 million of the Group corporate debt facility drawn.
CLC regulatory capital base
CLC holds capital in order to ensure that, under a range of
adverse scenarios, it can continue to meet its regulatory and
contractual obligations to its customers. CLC is regulated by
APRA and is required to hold a minimum level of regulatory
capital. CLC has ongoing and open engagement with APRA.
CLC maintains a level of capital representing the Prescribed
Capital Amount (PCA) plus a target surplus. The target surplus
is a level of excess capital that CLC seeks to carry over and
above APRA’s minimum requirement in order to provide a
buffer against adverse market conditions, having regard to
CLC’s credit rating.
CLC uses internal capital models to determine its target
surplus, which are risk-based and are responsive to changes in
CLC’s asset allocation and market conditions. To underpin
Challenger’s growth strategy, the group has revised its target
capital range to 1.3 times to 1.7 times the APRA PCA,
extending the upper end of the range (previously 1.6 times)
and outlined an intention to operate at around 1.6 times. This
range may change over time and is dependent on a number
of factors. CLC’s PCA ratio was 1.63 times as at 30 June
2021.
16
Operating and financial review
Challenger Limited 2021 Annual Report
7 Key performance indicators (KPIs)
(continued)
7.3 Credit ratings
Management analysis – normalised results
Challenger Limited and CLC are rated by Standard & Poor’s
(S&P). In November 2020, S&P reaffirmed both CLC and
Challenger Limited’s credit ratings but revised the outlook
from positive to stable as a result of the uncertainty caused by
COVID-19.
Net income1
Comprising:
2021
2020 Change Change
$m
$m
$m
%
682.1 797.4 (115.3)
(14.5)
Ratings were confirmed as:
• CLC: ‘A’ with a stable outlook; and
• Challenger Limited: ‘BBB+’ with a stable outlook.
– Life normalised COE 512.8 638.9 (126.1)
(19.7)
– FM net income
– Corporate and
other income
169.3 158.1
11.2
7.1
—
0.4
(0.4)
(large)
8 Normalised profit and investment
Operating expenses1
(281.3) (284.4)
3.1
1.1
experience
Normalised framework (Non-IFRS)
CLC and its consolidated entities are required by AASB 1038
Life Insurance Contracts to value all assets and liabilities at
fair value where permitted by other accounting standards.
This gives rise to fluctuating valuation movements on assets
and liabilities being recognised in the profit and loss in CLC
and on consolidation in Challenger Limited. CLC is generally a
long-term holder of assets, due to holding assets to match the
term of life contract liabilities. As a result, Challenger takes a
long-term view of the expected capital growth of the portfolio
rather than focusing on short-term movements. Investment
experience represents the difference between actual
investment gains/losses (both realised and unrealised) and
expected gains/losses based on CLC’s medium to long-term
expected returns together with the new business strain1 that
results from writing new annuities. Investment experience also
includes any impact from changes in economic and other
actuarial assumptions.
A reconciliation between statutory revenue and the
management view of revenue and net income is included in
the financial report as part of Note 3 Segment information.
This note also includes a reconciliation of statutory NPAT and
normalised NPAT (the management view of post-tax profit).
The application of the normalised profit framework has been
reviewed by Challenger’s independent auditor to ensure that
the reported results are consistently applied in accordance
with the methodology described in Note 3 Segment
information in the financial report.
Normalised EBIT
400.8 513.0 (112.2)
(21.9)
Comprising:
– Life normalised EBIT 398.9 524.7 (125.8)
(24.0)
– FM normalised EBIT
– Corporate and
71.0
57.7
13.3
23.1
other normalised
EBIT
Interest and
borrowing costs
Normalised NPBT
Tax on normalised
profit
Normalised NPAT
Investment
experience after tax
Significant items after
tax
Statutory net
profit/(loss) after
tax attributable to
equity holders
(69.1)
(69.4)
0.3
0.4
(5.0)
(6.5)
1.5
23.1
395.8 506.5 (110.7)
(21.9)
(117.3) (162.8)
45.5
27.9
278.5 343.7
(65.2)
(19.0)
318.6 (750.3) 1,068.9
large
(4.8)
(9.4)
4.6
48.9
592.3 (416.0) 1,008.3
large
1 ‘Net income’ and ‘Operating expenses’ are internal classifications and are
defined in Note 3 Segment information in the financial report. These differ
from the statutory revenue and expenses classifications, as certain costs
(including distribution expenses, property expenses, management fees, special
purpose vehicle expenses and finance costs) are netted off against gross
revenues. These classifications have been made in the Directors’ report and in
Note 3 Segment information to reflect how management measures business
performance. While the allocation of amounts to the above items and
investment experience differ to the statutory view, both approaches result in
the same total net profit after tax attributable to equity holders.
1 New business strain is a non-cash accounting adjustment recognised when annuity rates on new business are higher than the risk-free rate used to fair value
annuities. The new business strain unwinds over the annuity contract.
17
Challenger Limited 2021 Annual Report
Operating and financial review
8 Normalised profit and investment experience (continued)
Management analysis – normalised results (continued)
Management analysis – investment experience
Life normalised cash operating earnings (COE) and earnings
before interest and tax (EBIT) decreased as a result of lower
investment yield generated on the portfolio and a lower
contribution from normalised capital growth, due to both a
composition change in Life investment assets as well as a
reduction in normalised capital growth factors when
compared to the prior year.
Life’s average assets under management (AUM) increased by
2.6% as a result of the net book growth in annuities and
external unit holders’ liabilities accompanied by favourable
valuation movements on investment assets.
Funds Management net income increased (up $11.2 million)
due to increased equity accounted profits and distribution fee
revenue. Funds Management average FUM increased by
15.0% as a result of mark-to-market gains on investments
and exceptionally strong net inflows over the year.
Operating expenses decreased by $3.1 million (or 1.1%) for
the year despite reflecting the adoption of the IFRIC agenda
decisions which have resulted in a reclassification of
deployment costs associated with SaaS arrangement from
intangible assets to recognition as an expense in the
Statement of comprehensive income.
Actual capital growth1
Cash and fixed income
Equity and infrastructure
Property (net of debt)
Alternatives
Infrastructure
Equity and other investments
Total actual capital growth
Normalised capital growth2
Cash and fixed income
Equity and infrastructure
Property (net of debt)
Alternatives
Infrastructure
Equity and other investments
2021
$m
2020
$m
331.5
(528.8)
76.6
—
120.6
(155.3)
47.5
—
—
(114.9)
—
(269.3)
576.2 (1,068.3)
(52.0)
(46.4)
20.0
—
66.1
66.6
—
—
—
—
28.0
72.0
Total normalised capital growth
34.1 120.2
Challenger’s full-time equivalent employee numbers increased
by 3 (or 0.4%) to 738.
The normalised effective tax rate was lower than the prior year
due to the availability of foreign tax offsets and no deferred
tax asset impairments being recognised in the period.
Significant items were negative $4.8 million (after tax) in the
period and represent costs associated with the acquisition of
MyLife MyFinance as well as the write-down in the carrying
value of one Funds Management boutique.
Investment experience
Cash and fixed income
Equity and infrastructure
Property (net of debt)
Alternatives
Infrastructure
Equity and other investments
Policy liability experience3
383.5
(482.4)
56.6
—
54.5
(221.9)
47.5
—
—
(142.9)
—
(341.3)
(76.1)
86.1
Asset and policy liability experience 466.0 (1,102.4)
New business strain4
(10.9)
31.9
Investment experience before tax
455.1 (1,070.5)
Tax (expense)/benefit
(136.5) 320.2
Investment experience after tax
318.6 (750.3)
1 Actual capital growth represents net realised and unrealised capital gains or
losses and includes the attribution of interest rate, inflation and foreign
exchange derivatives that are used to hedge exposures.
2 Normalised capital growth is determined by multiplying the normalised capital
growth rate for each asset class by the average investment assets for the
period. The normalised capital growth rates represent Challenger’s
expectations for each asset class over the investment cycle. The annual
normalised growth rate is +4.0% for equity and infrastructure, +2.0% for
property, 0.0% for alternatives, and -0.35% for cash and fixed income in
order to allow for credit defaults. The rates have been set with reference to
medium to long-term market growth rates and are reviewed to ensure
consistency with prevailing market experience.The asset classes’ composition
changed from 1 July 2020. The annual normalised growth rates for the pcp
were as follows, and reflect the composition of the portfolio at that time:
+3.5% for equity and other investments, +4.0% for infrastructure, +2.0% for
property, and -0.35% for cash and fixed income.
3 Policy liability experience represents the impact of changes in macroeconomic
variables, including bond yields and inflation factors, expense assumptions
and other factors applied in the valuation of life contract liabilities.
4 New business strain is a non-cash accounting adjustment recognised when
annuity rates on new business are higher than the discount rate, being a
risk-free rate plus an illiquidity premium used to fair value annuities. The new
business strain unwinds over the annuity contract.
18
Operating and financial review
Challenger Limited 2021 Annual Report
Life generated a normalised RoE (pre-tax) of 12.4%, down by
4.2 percentage points from the prior year as a result of lower
normalised EBIT.
Total Life sales increased from the prior period (up 34.5%),
with increased Lifetime sales (up 38.8%), increased fixed-term
sales (up 47.1%) and other Life sales (up 16.7%). Lifetime
sales increased by 38.8% due to new institutional
relationships and rebuilding of momentum across the retail
advised channel.
CLC participates in the Japanese foreign currency annuity
market via a reinsurance agreement with MS Primary, a
Japanese life insurance company and subsidiary of
MS&AD Insurance Group Holdings, Inc. The reinsurance
agreement with MS Primary provides CLC with an annual
amount of reinsurance across both Australian and US dollar
annuities of at least ¥50.0 billion (approximately A$600.0
million based on the exchange rate at 30 June 2021)1 each
year for a minimum of five years commencing from 1 July
2019. The MS Primary reinsured sales comprised 17.3% of
Life’s total annuity sales in the period, which is a decrease on
the pcp (23.8%).
Life sales
2021
$m
2020 Change Change
%
$m
$m
Fixed-term annuities
3,990.4 2,712.8 1,277.6
Lifetime annuities
Total Life annuity
sales
575.6 414.6 161.0
4,566.0 3,127.4 1,438.6
Other Life sales
2,362.1 2,024.0 338.1
47.1
38.8
46.0
16.7
Total Life sales
6,928.1 5,151.4 1,776.7
34.5
Annuity net flows
1,079.8 (251.1) 1,330.9
Other Life net flows
1,084.0 566.9 517.1
large
91.2
Annuity net flows (new annuity sales less capital repayments)
increased to $1,079.8 million, driven by higher annuity sales.
Based on the opening Life annuity book for the 2021 financial
year ($12,581.2 million), annuity net book growth for the
period was 8.6%, up from (2.0)% in the prior period.
Other Life sales represents Challenger’s Index Plus products
and increased as a result of new client sales during the period.
Other Life net flows for the period were $1,084.0 million,
increasing by $517.1 million compared to positive
$566.9 million in the prior period. Total Life net flows were
$2,163.8 million, representing, total Life net book growth of
14.4% (30 June 2020: $315.8 million or 2.1% book growth).
8 Normalised profit and investment
experience (continued)
Management analysis — investment experience
(continued)
Investment experience after tax relates to changes in the fair
value of Life’s assets and liabilities. Investment experience is a
mechanism employed to remove the volatility arising from
asset and liability valuation movements and new business
strain from Life business earnings so as to more accurately
reflect the underlying performance of the Life business.
Pre-tax investment experience in 2021 comprised an asset and
policyholder liability experience gain of $466.0 million and a
loss of $10.9 million from Life’s new business strain. These
gains are largely unrealised and were primarily due to the
improvement of fixed income and equity markets during the
year.
9 Life segment results
Life focuses on the retirement spending phase of
superannuation, providing products that help customers
convert retirement savings into safe and secure income in
retirement. The Life segment includes Challenger Life
Company Limited (CLC), an APRA-regulated life insurance
company and is Australia’s leading provider of annuities and
guaranteed retirement income products.
CLC is regulated by APRA, and its financial strength is rated by
Standard & Poor’s, with an ‘A’ credit rating and a stable
outlook. CLC is strongly capitalised, with significant excess
capital above APRA’s minimum regulatory requirements.
Life normalised
results
2021
2020 Change Change
$m
$m
$m
%
Normalised COE
512.8 638.9 (126.1)
(19.7)
– Cash earnings
– Normalised
478.7 518.7
(40.0)
(7.7)
capital growth
34.1 120.2
(86.1)
(71.6)
Operating expenses (113.9) (114.2)
0.3
0.3
Normalised EBIT
398.9 524.7 (125.8)
(24.0)
Life normalised EBIT decreased by $125.8 million (down
24.0%) due to lower normalised COE (down $126.1 million or
19.7%), which was partially offset by operating expenses
decreasing $0.3 million (or 0.3%). The lower normalised COE
was the result of lower asset yields and contribution from
normalised capital growth. The lower yields were mainly
attributable to earnings on the Cash and fixed income
portfolio, impacted by higher levels of cash and liquid assets
held in the portfolio, and lower distributions in the Equity and
infrastructure and Alternative portfolios. CLC held $3.0 billion
of cash and liquid assets at the start of the period given the
COVID-19 related market volatility, and the majority of this
was gradually deployed into higher yielding assets, mainly
investment-grade and sub-investment grade fixed income
assets, over the course of 2021. The cash and liquid assets
balance has reduced to $1.4 billion at 30 June 2021. The
lower contribution from normalised capital growth of
$34.1 million is due to both a composition change in Life
investment assets, as well as a decline in normalised capital
growth across Equity, Infrastructure and Other investments, as
well as a net reduction in the normalised capital growth factor
for Alternatives.
1 This is subject to review in the event of a material adverse change for either MS Primary or Challenger.
19
Challenger Limited 2021 Annual Report
Operating and financial review
10 Funds Management segment
results
The Funds Management (FM) operating segment focuses on
accumulating wealth for retirement. As people work and save
for retirement, the business supports them building their
wealth and savings by providing investment strategies that
seek to deliver superior investment returns.
Funds Management is Australia’s third largest active fund
manager1 and has diversified distribution capability in Europe,
Japan and Singapore.
The Funds Management segment comprises two business
divisions, Fidante Partners and CIP Asset Management
(CIPAM).
Fidante Partners’ multi-boutique platform comprises a number
of separately branded funds management businesses. The
model seeks to align the interests of investors, boutique
investment managers and Fidante Partners.
Fidante Partners’ FUM increased by $22.6 billion (or 36.3%)
compared to the prior year.
During the period, Fidante Partners’ net inflows were
$14.3 billion compared to a net inflows of $3.8 billion in the
prior year.
11 Corporate and other segment
results
The Corporate and other segment comprises central functions
such as the Group executive, finance, treasury, legal, tax,
human resources, risk management and strategy.
The financial results also include interest received on Group
cash balances and any interest and borrowing costs associated
with Group debt facilities.
CIPAM develops and manages fixed income and commercial
property assets for CLC and third-party institutional investors.
Corporate and other
normalised results
2021 2020 Change Change
%
$m
$m
$m
2021
2020 Change Change
Net income
— 0.4
(0.4)
(large)
%
7.1
Operating expenses
(69.1) (69.8)
(69.1) (69.4)
0.7
0.3
1.0
0.4
Normalised EBIT
Interest and
borrowing costs
Normalised loss
before tax
(5.0)
(6.5)
1.5
23.1
(74.1) (75.9)
1.8
2.4
Normalised EBIT for the Corporate and other segment was up
$0.3 million as a result of lower operating expenses.
12 Guidance for the 2022 financial
year
Challenger’s 2022 normalised net profit before tax guidance is
a range of between $430 million and $480 million. The mid-
point of the guidance range ($455 million) represents
Challenger’s best estimate and would result in Challenger
achieving its Normalised RoE (pre tax) target.
Consistent with Challenger’s growth strategy to maintain
higher capital levels, the Group has revised its go-forward
normalised pre-tax return on equity target from the Reserve
Bank of Australia (RBA) cash rate plus a margin of 14% to the
cash rate plus a margin of 12%.
Subject to regulatory requirements and market conditions,
Challenger continues to target a dividend payout ratio in the
range of between 45% to 50% of normalised profit after tax
and aims to frank dividends to the maximum extent possible.
FM normalised
results
$m
$m
$m
Net income
169.3 158.1
11.2
– Fidante Partners
107.5 96.3
11.2
11.6
– CIPAM
61.8 61.8
Operating expenses
(98.3) (100.4)
—
2.1
—
2.1
Normalised EBIT
71.0 57.7
13.3
23.1
Funds Management normalised EBIT increased by 23.1% for
the year, with increased net income primarily from the Fidante
Partners business.
Fidante Partners’ net income includes distribution fees,
transaction fees, administration fees and a share in the equity
accounted profits for the boutique fund managers in which it
has an equity interest.
Fidante Partners’ net income improved for the period primarily
as a result of higher equity accounted profits, performance
fees and distribution fees (up $11.2 million).
CIPAM’s net income remained stable with a mix shift to more
recurring management fees and lower one-off transaction
fees.
Funds Management’s normalised RoE (pre-tax) for the year
was 27.7%, up by 3.4 percentage points from the prior year.
2021
2020 Change Change
FM FUM and flows
$bn
$bn
$bn
Total FUM
105.8 81.4
24.4
– Fidante Partners
84.9 62.3
22.6
– CIPAM
Net flows
20.9 19.1
1.8
16.1
– Fidante Partners
14.3
– CIPAM
1.8
(1.3)
2.5
3.8
13.6
10.5
3.1
%
30.0
36.3
9.4
large
large
large
1 Consolidated FUM for Australian Fund Managers – Rainmaker Roundup, March 2021.
20
Five-year history
Challenger Limited 2021 Annual Report
Five-year history
Earnings ($m)
Normalised cash operating earnings
Net fee income
Other income
Total net income
Personnel expenses
Other expenses
Total expenses
Normalised EBIT
Interest and borrowing costs
Normalised profit before tax
Normalised tax
Normalised profit after tax
Investment experience after tax
Significant items after tax
Profit attributable to equity holders
Normalised cost to income ratio (%)
Normalised effective tax rate (%)
Statutory effective tax rate (%)
Earnings per share (EPS) (cents)
Basic EPS – normalised profit
Basic EPS – statutory profit
Diluted EPS – normalised profit
Diluted EPS – statutory profit
Capital management (%)
Normalised return on equity – pre-tax
Normalised return on equity – post-tax
Statutory return on equity – post-tax
Statement of financial position ($m)
Total assets
Total liabilities
Net assets1
Net assets2
Net assets2 – average3
Net tangible assets4
Net assets per basic share ($)
Net tangible assets per basic share ($)
1 Including minority interests.
2 Excluding minority interests.
3 Calculated on a monthly basis.
4 Excludes right-of-use lease asset, goodwill and other intangible assets.
2021
2020
2019
2018
2017
512.8
169.3
—
682.1
(179.9)
(101.4)
(281.3)
400.8
(5.0)
395.8
(117.3)
278.5
318.6
(4.8)
592.3
41.2%
29.6%
28.7%
638.9
158.1
0.4
797.4
(174.0)
(110.4)
670.1
149.9
1.0
669.6
151.2
1.0
631.4
134.0
0.8
821.0
821.8
766.2
(185.3)
(187.8)
(179.3)
(82.1)
(80.6)
(76.6)
(284.4)
(267.4)
(268.4)
(255.9)
513.0
553.6
553.4
510.3
(6.5)
(5.3)
(6.1)
(5.3)
506.5
548.3
547.3
505.0
(162.8)
(152.2)
(141.2)
(120.1)
343.7
(750.3)
(9.4)
396.1
(88.3)
—
406.1
(76.0)
(7.6)
(416.0)
307.8
322.5
35.7%
32.1%
28.9%
32.6%
27.8%
29.2%
32.7%
25.8%
22.7%
41.5
88.2
33.8
68.0
56.5
(68.4)
46.9
(68.4)
65.5
50.9
56.0
44.8
68.1
54.0
64.2
52.2
384.9
12.7
—
397.6
33.4%
23.8%
23.3%
68.5
70.7
65.8
67.8
11.2%
7.9%
16.8%
14.8%
10.0%
(12.1%)
15.8%
11.4%
8.9%
16.5%
12.2%
9.7%
18.3%
14.0%
14.4%
29,917.9
26,092.1
3,825.8
3,825.8
3,518.9
3,202.0
5.69
4.76
28,461.6
27,457.5
25,300.5
23,026.7
25,212.0
23,834.7
21,814.7
20,125.4
3,249.6
3,622.8
3,485.8
2,901.3
3,249.6
3,600.3
3,485.4
2,888.1
3,424.4
3,462.1
3,323.3
2,753.8
2,619.2
3,019.1
2,892.5
2,299.7
4.90
3.95
5.94
4.98
5.79
4.81
5.14
4.09
21
Challenger Limited 2021 Annual Report
Five-year history
Five-year history (continued)
Underlying operating cash flow ($m)
194.7
194.7
236.9
197.4
2021
2020
2019
2018
2017
299.9
17.0
17.5
34.5
50.4%
48.8%
9.5
10.5
20.0
48.2%
22.1%
17.5
—
17.5
17.5
18.0
35.5
17.5
18.0
35.5
31.0%
n/a
54.2%
69.7%
52.1%
65.7%
4,566.0
2,362.1
6,928.1
1,079.8
13,669.9
8.6%
2,163.8
3,127.4
3,543.1
4,000.7
4,011.2
2,024.0
1,006.9
1,554.9
941.2
5,151.4
4,550.0
5,555.6
4,952.4
(251.1)
685.8
1,392.7
900.4
12,581.2
12,870.2
11,728.3
10,322.2
(2.0%)
315.8
5.8%
474.8
13.5%
1,796.3
9.4%
1,312.9
17,302.1
14,997.0
14,836.4
13,863.3
12,010.0
14.4%
2.1%
3.4%
15.0%
12.1%
16,111.5
2,540.9
(2,438.4)
5,301.2
6,220.6
21,563
105,824
(17,427)
109,960
18,303
19,010
18,085
81,435
79,029
77,984
15,677
66,906
(14,501)
(16,269)
(14,926)
(12,595)
85,237
81,770
81,143
69,988
738
735
687
676
655
671.6
676.0
5.41
608.3
667.5
4.41
605.0
611.6
6.64
596.7
610.9
11.83
562.2
572.0
13.34
3,657.2
2,943.7
4,061.0
7,226.9
7,630.5
Dividends per share (cents)
Dividend – interim
Dividend – final
Total dividend
Dividend payout ratio – normalised profit (%)
Dividend payout ratio – statutory profit (%)
Sales and annuity book net flows ($m)
Annuity sales
Other Life sales
Total Life sales
Life annuity net flows
Life annuity book
Life annuity net book growth (%)
Total Life flows
Total Life book
Total Life net book growth (%)
Funds Management – net flows
Assets under management ($m)
Life
Funds Management
Elimination of cross-holdings1
Total assets under management
Other
Headcount – closing full-time employees
Weighted average number of ASX-listed basic shares on
issue (m)
Number of shares on issue – closing (m)
Share price – closing ($)
Market capitalisation at 30 June ($m)2
1 Life assets managed by Funds Management.
2 Calculated as share price multiplied by ordinary share capital.
22
Directors’ report
Challenger Limited 2021 Annual Report
Directors’ report
The Directors of Challenger Limited (the Company) submit their report, together with the financial report of the Company and its
controlled entities (the Group or Challenger), for the year ended 30 June 2021.
The information appearing on pages 1 to 22 forms part of the Directors’ report for the financial year ended 30 June 2021 and is
to be read in conjunction with the following information.
1 Directors
The names and details of the Directors of the Company
holding office during the financial year ended 30 June 2021
and as at the date of this report are listed below. Directors
were in office for the entire period, unless otherwise stated.
Peter L Polson
(appointed 6 November 2003)
Independent Chair.
Chair of Nomination Committee.
Member of the Group Audit Committee, Group Risk
Committee, and the Group Remuneration Committee.
Experience and qualifications:
Bachelor of Commerce (Witwatersrand University,
Johannesburg, South Africa), Master of Business Leadership
(University of South Africa, Pretoria, South Africa),
Management Development Program (Harvard Graduate
School of Education, Boston, United States).
Mr Polson’s experience spans international and domestic
markets in banking, insurance and funds management. Mr
Polson previously held the positions of Group Executive,
Investment and Insurance Services at Commonwealth Bank
and Chief Executive of Colonial First State Limited.
Directorships of other listed companies:
Chair of IDP Education Limited (appointed 21 March 2007).
Richard J Howes
(appointed 2 January 2019)
Managing Director and Chief Executive Officer.
Experience and qualifications:
Bachelor of Commerce (Hons) and Bachelor of Economics
(University of Queensland).
Mr Howes has previously held a number of senior executive
roles at Challenger since joining in 2003, including Chief
Executive of Distribution, Product and Marketing, Chief
Executive of Challenger’s Life business and Chief Investment
Officer.
Mr Howes has over 25 years financial services experience. Prior
to joining Challenger, he held senior roles at Zurich Capital
Markets, Macquarie Bank and Bankers Trust where his primary
responsibility was providing risk management solutions to
major companies and institutions globally.
Directorships of other listed companies:
Nil.
John M Green
(appointed 6 December 2017)
Independent Non-Executive Director.
Member of the Group Audit Committee, Group Risk
Committee, Group Remuneration Committee and the
Nomination Committee. Chair of MyLifeMyFinance Limited,
appointed 30 July 2021.
Experience and qualifications:
Bachelor of Law and Bachelor of Jurisprudence (University of
New South Wales), Fellow of the Australian Institute of
Company Directors and Life Member and Senior Fellow of
FINSIA.
Mr Green was previously an executive director at Macquarie
Group and has also been a partner at two major law firms. He
is Deputy Chair of QBE Insurance Group Limited, director of
Cyber Security Cooperative Research Centre and also a
novelist and co-founder of book publisher Pantera Press.
Directorships of other listed companies:
Non-executive director of QBE Insurance Group Limited
(appointed 1 March 2010, appointed Deputy Chair on 1
January 2015).
Steven Gregg
(appointed 8 October 2012)
Independent Non-Executive Director.
Member of the Group Audit Committee, Group Risk
Committee, Group Remuneration Committee and the
Nomination Committee.
Experience and qualifications:
Bachelor of Commerce (University of New South Wales).
Mr Gregg has held a number of executive roles in
management consulting and investment banking. His more
recent senior executive roles included Partner and Senior
Adviser at McKinsey & Company and Global Head of
Investment Banking at ABN AMRO. His experience has
spanned both domestic and international arenas, because of
his work in both the US and the UK.
Directorships of other listed companies:
Non-executive director of Tabcorp Holdings Limited
(appointed 18 July 2012, appointed Chair on 1 January 2021)
and Ampol Limited (formerly Caltex Australia Limited)
(appointed 9 October 2015; appointed Chair on 18 August
2017).
Masahiko Kobayashi
(appointed 26 August 2019)
Non-Executive Director.
Experience and qualifications:
Master of Business Administration (Questrom School of
Business, Boston University, Boston, United States), Bachelor
of Law (Kyoto University, Kyoto, Japan) and is a Certified
Internal Auditor.
Mr Kobayashi has over 30 years expertise in general and life
insurance and is currently Director and Senior Executive Officer
(Corporate Planning and Enterprise Risk Management) of
MS Primary, a subsidiary of MS&AD Insurance Group Holdings
Inc. Prior to joining MS Primary, he held a number of executive
and director roles within the MS&AD Group, including in
Singapore and the United Kingdom.
Directorships of other listed companies:
Nil.
23
Challenger Limited 2021 Annual Report
Directors’ report
1 Directors (continued)
Heather Smith
(appointed 20 January 2021)
Independent Non-Executive Director.
Member of the Group Audit Committee, Group Risk
Committee and the Nomination Committee.
Experience and qualifications:
Bachelor of Economics (Hons 1) (University of Queensland),
PhD in Economics (Australian National University).
Dr Smith has over 20 years experience in government,
including as Secretary of the Australian Department of
Industry, Innovation and Science, Secretary of the Department
of Communications and the Arts, and Deputy Secretary of the
Department of Prime Minister and Cabinet. She holds the
position of Professor at ANU National Security College and is
deputy chair of the United States Studies Centre. She is a
recipient of the Public Service Medal.
Directorships of other listed companies:
Nil.
JoAnne M Stephenson
(appointed 8 October 2012)
Independent Non-Executive Director.
Chair of the Group Remuneration Committee.
Member of the Group Audit Committee, Group Risk
Committee and the Nomination Committee.
Experience and qualifications:
Bachelor of Commerce and Bachelor of Laws (Honours)
(University of Queensland), member of Chartered Accountants
Australia and New Zealand and member of the Australian
Institute of Company Directors.
Ms Stephenson has extensive experience in financial services
both in Australia and in the United Kingdom. Ms Stephenson
was previously a partner with KPMG and has significant
experience in internal audit, risk management and consulting.
Directorships of other listed companies:
Non-executive director of Asaleo Care Limited (appointed
30 May 2014 and ceased on 1 July 2021), Japara Healthcare
Ltd (appointed 1 September 2015) and Myer Holdings Limited
(appointed 28 November 2016).
Duncan G West
(appointed 10 September 2018)
Independent Non-Executive Director.
Chair of the Group Audit Committee.
Member of the Group Risk Committee and the Nomination
Committee.
Experience and qualifications:
Bachelor of Science in Economics (University of Hull, Hull,
United Kingdom), Fellow of the Chartered Insurance Institute,
member of the Australian Institute of Company Directors and
a Senior Associate of the Australian and New Zealand Institute
of Insurance and Finance.
24
Mr West has over 30 years experience in financial services in
the UK and Australia. He has held a series of senior executive
positions including as CEO of Vero Insurance and CGU
Insurance, and as EGM of Insurance at MLC.
Directorships of other listed companies:
Non-executive Director of Genworth Mortgage Insurance
Australia Limited (appointed 1 September 2018).
Melanie V R Willis
(appointed 6 December 2017)
Independent Non-Executive Director.
Chair of the Group Risk Committee.
Member of the Group Audit Committee and the Nomination
Committee.
Experience and qualifications:
Bachelor of Economics (University of Western Australia),
Master of Law, Tax (University of Melbourne) and a Fellow of
the Australian Institute of Company Directors.
Ms Willis has significant senior executive experience in
corporate finance, strategy and innovation and funds
management. Ms Willis previously held the position of Chief
Executive Officer of NRMA Investments and senior executive
roles at Deutsche Bank and Bankers Trust. She is also a Non-
Executive Director of PayPal Australia Pty Limited and QBE
Australia Pacific Limited.
Directorships of other listed companies:
Non-executive director of Southern Cross Media Group
Limited (appointed 26 May 2016) and Property Exchange
Australia Ltd (PEXA) (appointed 11 June 2021).
Hiroyuki Iioka
(appointed 13 December 2019)
Non-Executive Director (alternate for Masahiko Kobayashi).
Experience and qualifications:
Master of Business Administration (Duke University, Durham,
United States) and Bachelor of Economics (Kobe University,
Kobe, Japan).
Mr Iioka is currently Senior General Manager (Business
Development Department) at MS&AD Insurance Group
Holdings, Inc. (MS&AD) in Japan.
Directorships of other listed companies:
Non-executive director of Phoenix Group Holdings PLC, listed
on the London Stock Exchange (appointed 23 July 2020).
2 Company Secretary
Linda Matthews (Bachelor of Laws) is the Head of Company
Secretariat. She is a qualified as a solicitor and was appointed
as Company Secretary on 1 January 2021. Ms Matthews’
responsibilities at Challenger involve the oversight of all
company secretarial functions. Ms Matthews joined
Challenger in 2013 as a Senior Legal Counsel in the
Challenger Corporate and Investments Legal team from
commercial law firm Norton Rose Fulbright, where she was a
senior associate in the Banking and Finance practice. Ms
Matthews has over 18 years experience as a solicitor and is
admitted to practise in New South Wales and New York. Ms
Matthews is an affiliated member of the Governance Institute
of Australia.
Directors’ report
Challenger Limited 2021 Annual Report
3 Corporate governance summary
3.1 Roles and responsibilities of Board and
management
The role of the Board and delegations
The Board is accountable to shareholders for the activities and
performance of Challenger by overseeing the creation of
sustainable shareholder value within an appropriate risk
framework and having regard for stakeholder interests and
community expectations.
The Board is responsible for setting Challenger’s corporate
strategy and strategic priorities. Challenger’s purpose is to
provide our customers with financial security for a better
retirement. This is a long-term purpose and the Board sets
strategic priorities each year to work towards fulfilling this
purpose.
Directors are actively involved in setting, approving and
regularly monitoring Challenger’s strategic priorities and
holding management accountable for progress.
This process includes one annual Board strategy offsite,
regular Board reporting and meetings, and discussion and
review with management. Similarly, the Board ensures that
rigorous governance processes operate effectively to guide
decision-making across the business.
The Board’s responsibilities are set out in the Board Charter,
which is available at:
> challenger.com.au/about-us
The Board’s role and responsibilities include:
•
•
•
•
•
•
establishing, promoting and maintaining the strategic
direction of Challenger;
approving business plans, budgets and financial policies;
considering management recommendations on strategic
business matters;
establishing, promoting and maintaining proper processes
and controls to maintain the integrity of accounting and
financial records and reporting;
fairly and responsibly rewarding executives, having regard
to the performance of the executives, Challenger’s risk
management framework and culture, the interests of
shareholders, market conditions and Challenger’s overall
performance;
adopting and overseeing of implementation of corporate
governance practices;
• overseeing the establishment, promotion and maintenance
of effective risk management policies and processes;
• determining and adopting Challenger’s dividend policy;
•
•
reviewing Board composition and performance;
appointing, evaluating and remunerating the Chief
Executive Officer (CEO) and approving the appointment of
the Chief Financial Officer (CFO), Chief Risk Officer (CRO),
General Counsel and Company Secretary; and
• determining the CEO’s delegated authority.
The Board has established committees to assist in carrying out
its responsibilities and to consider certain issues and functions
in detail. The Board committees are discussed on page 26.
Management responsibility
The Board has delegated to the CEO the authority and powers
necessary to implement the strategies approved by the Board
and to manage the business affairs of Challenger within the
policies and delegation limits specified by the Board from time
to time. The CEO may delegate authority to management, but
remains accountable for all authorities delegated to
management.
3.2 Directors’ skills matrix
The Board has determined that its current members have an
appropriate collective mix of skills, experience and expertise
to:
•
exercise independent judgement;
• have a proper understanding of, and competence to deal
with, current and emerging issues of the business;
•
•
encourage enhanced Challenger performance; and
effectively review and challenge the performance of
management.
The Board’s competencies are assessed annually and the
results of the most recent assessment are shown in the table
on page 26.
The Board skills matrix shows that Board members have a high
level of competency across the areas of expertise relevant to
Challenger’s business.
25
Challenger Limited 2021 Annual Report
Directors’ report
3 Corporate governance summary (continued)
3.2 Directors’ skills matrix (continued)
3.3 Board committees
To assist it in undertaking its duties, the Board has established
the following standing committees:
• Group Risk Committee;
• Group Audit Committee;
• Group Remuneration Committee; and
• Nomination Committee.
Each committee has its own charter, copies of which are
available at:
> challenger.com.au
Directors’ meetings
The charters specify the composition, responsibilities, duties,
reporting obligations, meeting arrangements, authority and
resources available to the committees and the provisions for
review of the charter.
Details of Directors’ membership of each committee and those
eligible members’ attendance at meetings throughout the
period from 1 July 2020 to 30 June 2021 are set out below.
Board
Group Risk
Committee
Group Audit
Committee
Group
Remuneration
Committee
Nomination
Committee
Eligible
to attend Attended
Eligible
to attend Attended
Eligible
to attend Attended
Eligible
to attend Attended
Eligible
to attend Attended
Director
P Polson
3
R Howes1
—
J M Green
3
S Gregg
3
M Kobayashi
3
H Smith2
1
J Stephenson
3
D West
3
M Willis
3
1 The Managing Director and CEO attends the Group Risk Committee, the Group Audit Committee, the Group Remuneration Committee and the Nomination
11
11
11
11
11
5
11
11
11
11
11
10
10
11
5
11
11
11
3
—
3
3
3
1
3
3
3
5
—
5
5
—
—
5
—
—
4
—
3
4
—
2
4
4
4
4
—
4
4
—
2
4
4
4
4
—
3
4
—
2
4
4
4
4
—
4
4
—
2
4
4
4
5
—
4
5
—
—
5
—
—
Committee meetings at the invitation of these committees.
2 Ms Smith was appointed a Director, and joined the Group Risk Committee, the Group Audit Committee, the Group Remuneration Committee and the Nomination
Committee on 20 January 2021.
There are no management representatives appointed as members of any Board Committee.
26
Directors’ report
Challenger Limited 2021 Annual Report
3 Corporate governance summary (continued)
•
credit risk – is the risk of loss due to a counterparty failing
to discharge its contractual obligations when they fall due,
a change in credit rating, movements in credit spreads, or
movements in the basis between different valuation
discount curves;
• property risk – is the potential impact of movements in the
market value of property investments on Challenger’s
income and includes leasing and tenant default risk which
may impact the cash flows from these investments;
•
•
equity risk – is the potential impact of movements in the
market value of listed equity investments, unlisted equity
investments and investments in absolute return strategies.
Absolute return strategies are generally uncorrelated to
listed equity market returns. Challenger holds equities as
part of its investment portfolio in order to provide
diversification across the investment portfolio; and
life insurance risk – represents both longevity risk and
mortality risk. Through selling lifetime annuities and
assuming wholesale reinsurance agreements, CLC takes
longevity risk, which is the risk that customers live longer,
in aggregate, than expected. This is in contrast to mortality
risk, which is the risk that people die earlier than expected.
CLC is exposed to mortality risk on its wholesale mortality
reinsurance business.
Challenger seeks to minimise the risks for which it does not
consider an appropriate return can be generated. These risks
include:
•
•
•
foreign exchange risk – is the risk of a change in asset
values as a result of movements in foreign exchange rates;
interest rate risk – is the risk of fluctuations in Challenger’s
earnings arising from movements in interest rates;
inflation risk – is the risk of fluctuations in Challenger’s
earnings from movements in inflation rates;
• operational risk – is the risk of loss resulting from
inadequate or failed internal processes, people and
systems or from external events; and
•
regulatory and compliance risk – is the risk of legal or
regulatory sanctions or loss as a result of Challenger’s
failure to comply with laws, regulations or regulatory
policy applying to its business.
Further details on Challenger’s approach to risk management
are included in both the 2021 Sustainability Report and
Section 5 of this report.
3.4 Risk management framework
Challenger’s Board is responsible, in conjunction with senior
management, for the management of risks associated with
the business and implementing structures and policies to
adequately monitor and manage these risks.
The Board has established the Group Risk Committee (GRC)
and the Group Audit Committee (GAC) to assist in discharging
its risk management responsibilities. In particular, these
committees assist the Board in setting the appropriate risk
appetite and for ensuring that there is an effective risk
management framework that is able to manage, monitor and
control the various risks to which the business is exposed.
The Executive Risk Management Committee (ERMC) is an
executive committee chaired by the Chief Risk Officer which
assists the GRC, GAC and Board in discharging their risk
management obligations by implementing the Board-
approved risk management framework. On a day-to-day basis,
the Risk division, which is separate from the operating
segments of the business, has the responsibility for monitoring
the implementation of the risk framework, including the
monitoring, reporting and analysis of the various risks faced by
the business, and providing effective challenge to activities
and decisions that may materially affect Challenger’s risk
profile.
Challenger has a robust risk management framework which
supports its operating segments, and its risk appetite
distinguishes risks from which Challenger will seek to make an
economic return from those which it seeks to minimise and
which it does not consider will provide a return. The
management of these risks is fundamental to Challenger’s
business, customers and to building long-term shareholder
value. Challenger is also prudentially supervised by APRA,
which prescribes certain prudential standards that must be
met by Challenger and its life insurance subsidiary, CLC. APRA
also supervises authorised deposit-taking institutions (ADI) and
accordingly will supervise prudential standards relevant to
MyLifeMyFinance Limited, the bank which Challenger agreed
to purchase in December 2020.
In addition to having a separate risk management function,
Challenger recognises that a requirement for an effective risk
management framework is for there to be a strong risk culture
throughout the organisation, where risk is everybody’s
business. The foundation of this risk culture is a set of values,
the Challenger IACT values. All employees are assessed
against the Challenger IACT values as part of the annual
performance review process, and this outcome contributes to
the overall performance rating and remuneration outcomes. In
addition to this, Challenger regularly assesses its risk culture
with a combination of external reviews and internal staff
surveys to ensure that the management of risk and day-to-day
compliance remains entrenched within the way in which
Challenger operates. Challenger’s risk appetite statement
provides that, subject to earning acceptable economic returns,
it can retain exposure to credit risk, property risk, equity risk
and life insurance risk.
27
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report
Letter from the Chairs of the Board and Remuneration Committee
Dear Shareholders
Following the significant disruptions of recent years, Challenger finished 2021 in strong shape, with a high level of capital, record
assets under management, more diversified distribution and a clear strategy for growth.
This year we have taken significant steps to respond to shareholder concerns about remuneration outcomes last year, with
changes to our framework and communications, and differentiated outcomes for executives that reflect the performance of our
different businesses.
Our response to shareholder concerns in relation to the 2020 remuneration report
At our 2020 Annual General Meeting, we incurred a ‘first strike’ with 28.25% of votes cast against the adoption of the 2020
remuneration report. The Board takes this outcome very seriously and recognises that decisions we made last year about how we
reward our executives were not in line with the expectations of all of our shareholders.
We have taken significant action during 2021, which has focused on three key aspects:
• working closely with shareholders to ensure that their concerns are well understood;
• reviewing the executive reward framework to ensure it remains ‘fit for purpose’ in the current environment; and
• ensuring 2021 reward decisions appropriately reflect performance and are communicated clearly.
Primarily, shareholders were disappointed that we awarded short term incentives (STIs) in a year where Challenger incurred a
large statutory loss and shareholders experienced a decline in share price and reduced dividend income. Shareholders also told us
that there was insufficient transparency around discretion applied to reduce STI outcomes.
Other concerns included the role of normalised earnings in determining STI outcomes, specific features of our long term
incentives (LTIs) and Non-Executive Director fees. We have responded to these concerns in a range of ways set out on page 30 of
this report.
2021 reward outcomes
Shareholder concerns have been front of mind in making reward decisions during 2021. Supported by the framework changes
outlined below, key reward decisions for 2021 include:
• the CEO’s STI outcome is 56% of target (37% of maximum);
• STI outcomes for other Key Management Personnel (KMP) range between 56% and 98% of target opportunity (37% and
65% of maximum) with the degree of differentiation reflective of the relative performance of the Life and Funds Management
businesses;
• in determining these STI outcomes, the Board used its discretionary modifier to apply a 30% downward adjustment to further
reflect the extent of the impact caused by the events of 2020 and the flow-on impact into 2021; and
• no LTIs will vest in September 2021 for the third consecutive year demonstrating strong alignment of executives’ realised
reward with shareholder outcomes.
We have also continued to take advantage of opportunities to rebase remuneration arrangements. In 2021 this has included the
appointment of a new Chief Financial Officer and the expansion of Ms Murphy’s role on appointment as Chief Executive, Life,
both with significantly lower target and maximum total reward than their predecessors. Across all KMP roles, STI targets have
been set materially below historic outcomes.
The Board notes that following a period of lower employee movement in our sector, there is now strong demand for financial
services executives and it is important to ensure our framework continues to support us to attract and retain top talent.
A more transparent reward framework
We have reflected on concerns raised by shareholders in relation to our approach to STIs last year. The Board exercised
significant discretion in 2019 and 2020 to reduce STIs and acknowledges that communication of the link between reward and
performance in these circumstances can be improved.
We have made two changes to the reward framework that are designed to work together to address these concerns. Firstly, we
have introduced STI targets for executives to provide clarity on what the Board considers to be an appropriate STI outcome for
individual and business performance in line with expectations, thereby supporting a clearer link between pay and performance.
Secondly, we have introduced an STI modifier which makes explicit the rationale for, and magnitude of, discretionary
adjustments made by the Board.
Importantly, we have included additional disclosures to provide greater transparency on performance outcomes and to clearly
communicate the Board’s decision-making processes and use of discretion in determining reward outcomes.
Looking forward
Continuing to engage with you as our shareholders will be a key priority for 2022 and beyond. This will be particularly important
as we expect to make further changes to our reward framework when APRA finalises its new prudential standard on
remuneration.
Yours sincerely
Peter Polson
Board Chair
28
JoAnne Stephenson
Remuneration Committee Chair
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.1 Contents
Section
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Key Management Personnel
Our response to shareholder concerns in relation to the 2020 remuneration report
Remuneration strategy and structure
Short term incentives
Long term incentives
2021 awarded Key Management Personnel remuneration
Remuneration governance
Risk and reward
Key Management Personnel remuneration arrangements
Non-Executive Director disclosures
Summary of key terms and abbreviations used in the remuneration report
4.2 Key Management Personnel
Challenger’s executive Key Management Personnel (KMP) for 2021 are detailed in the table below:
Name
Role
Current KMP
Term as KMP in 2021
Richard Howes
Managing Director & Chief Executive Officer
Full year
Rachel Grimes1
Chief Financial Officer
From 3 May 2021
Page
29
30
33
34
37
38
39
41
42
48
51
Nick Hamilton
Chief Executive, Funds Management
Angela Murphy2
Chief Executive, Life
Chief Executive, Operations & Technology
Full year
Full year
Full year
Chris Plater3
Former KMP
Anton Kapel4
Acting Chief Executive & Chief Investment Officer, Life
From 7 December 2020 until 9 March 2021
Andrew Tobin5
Chief Financial Officer
Until 31 March 2021
1 Ms Grimes was appointed to the role of Chief Financial Officer on 3 May 2021 and was designated as KMP from the date of appointment.
2 Ms Murphy was appointed to the role of Chief Executive, Life on 10 March 2021. Prior to this, Ms Murphy held the role of Chief Executive, Distribution, Product &
Marketing. Ms Murphy was designated as KMP for the full year.
3 Mr Plater was appointed to the role of Chief Executive, Operations & Technology on 7 December 2020. Prior to this, Mr Plater held the role of Chief Executive &
Chief Investment Officer, Life. Mr Plater was designated as KMP for the full year.
4 Mr Kapel was appointed to the role of Acting Chief Executive & Chief Investment Officer, Life from 7 December 2020 until 9 March 2021. Mr Kapel was
designated as KMP for the duration of the interim appointment.
5 Mr Tobin ceased employment on 31 March 2021 and was designated as KMP until this date.
Challenger’s Non-Executive Directors for 2021 are detailed in the table below:
Name
Peter Polson (Chair)
John M Green
Steven Gregg
Masahiko Kobayashi1
Heather Smith
JoAnne Stephenson
Duncan West
Melanie Willis
Term as Non-Executive Director in 2021
Full year
Full year
Full year
Full year
Appointed 20 January 2021
Full year
Full year
Full year
1 Hiroyuki Iioka is an alternate director to Masahiko Kobayashi.
The term KMP is used throughout the Remuneration Report to refer to executive KMP only.
29
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.3 Our response to shareholder concerns in relation to the 2020 remuneration report
The Board takes shareholder concerns very seriously and has taken significant action during 2021, with a focus on:
1. Shareholder engagement
2. Reward framework changes
3. 2021 reward decisions
Engagement increased
Concerns well understood
Consultation on proposed changes
Introduction of STI targets
Introduction of an STI modifier
Enhanced governance and disclosures
Linked to performance
Appropriately differentiated
Clearly communicated
Our understanding of shareholder concerns and how we have sought to address these concerns is summarised below. Further
detail on reward framework changes and a summary of 2021 reward outcomes are provided on the following pages.
What we heard
STI outcomes were not aligned
to performance
Shareholders’ primary concern was
that payment of STIs to KMP for
2020 was not appropriate given the
large statutory loss and the
shareholder experience.
What we changed and why
• Introduced STI target opportunities to support a clearer link between performance and
reward by providing clarity on what the Board considers to be an appropriate STI
outcome for individual and business performance in line with our high expectations.
• Enhanced the disclosures of performance and STI outcomes, including an assessment
against each sub-measure in the CEO’s balanced scorecard and a new table showing
KMP STI outcomes as a percentage of target and maximum.
• Determined 2021 STI outcomes for KMP which are linked to overall group performance
and appropriately differentiated to reflect business unit and individual performance.
Use of discretion in determining
STI outcomes was not clear
There was insufficient transparency
in relation to the rationale for, and
the magnitude of, the Board’s
exercise of discretion to reduce STI
outcomes.
• Introduced an STI modifier to make explicit the range of factors considered by the Board
in applying discretion to performance and reward outcomes. This retains discretion as
an important governance tool while enhancing transparency around the magnitude of,
and the rationale for, adjustments.
• The modifier works together with the STI targets to support clear differentiation of
reward outcomes to reflect variation in business unit and individual performance while
demonstrating the shared accountability for group performance and material matters
with a group-wide impact.
STIs are too closely linked to
normalised profit
Shareholders questioned the role of
normalised profit in determining
both STI outcomes for the KMP and
the size of the group variable
reward pool.
• Clarified that normalised profit is one of a range of performance measures rather than
the sole or predominant measure in determining STIs and the variable reward pool via:
– enhanced disclosures in the CEO’s scorecard which clarify the range of financial
measures included in assessing performance and performance against each of them;
– introduced an STI modifier (as noted above) which makes the factors driving
discretionary adjustments, which may include financial measures, more explicit; and
– enhanced disclosures relating to the variable reward pool to clarify that the pool is
built on a ‘bottom-up’ basis with a range of ‘top-down’ lenses applied, of which the
target funding range of 10% to 15% of normalised profit is one.
• The Board is committed to continuing to review the appropriateness of key financial
measures and their role in determining reward outcomes.
Overall quantum of KMP
remuneration is too high
Shareholders considered total
awarded remuneration to be high,
primarily driven by the quantum of
LTI awards.
• Set new STI targets which represent a reduction versus historic outcomes. For example,
the CEO’s target is set 33% below the actual 2018 outcome for his predecessor.
• Reduced the maximum STI opportunity (from 200% to 150% of fixed pay) and the
quantum of LTI awards (from 225% to 125% of fixed pay) for control and support
function roles1 under the new framework.
• Re-based remuneration arrangements with the appointment of Ms Grimes as Chief
Single LTI hurdle and cumulative
five-year test
Shareholders questioned the
appropriateness of the absolute TSR
as a single measure and the
cumulative five-year test.
Financial Officer (total reward opportunity is 26% lower than her predecessor) and Ms
Murphy as Chief Executive, Life (10% lower than her predecessor).
• Committed to undertaking a comprehensive review, including extensive consultation
with shareholders, once APRA’s new standard2 is finalised.
• Determined to retain the current LTI structure at this time having reflected deeply on:
– the inherent challenges with shareholder return measures (both absolute and relative),
particularly during periods of market volatility;
– adding a second financial measure, noting this would not align with upcoming
regulatory requirements to have a material weighting to non-financial measures and
that multiple changes to measures may lead to inconsistent vesting outcomes; and
– the appropriateness of the five-year cumulative test, noting that the test is applied
against a higher hurdle and therefore differs from traditional ‘re-tests’.
Non-Executive Director fees
Non-Executive Director fees are
considered high versus market with
particular concern expressed in
relation to the Chair’s fees.
• Engaged KPMG to conduct an independent review of Non-Executive Director fees
which will be finalised in 2022 once changes to committee and sub-Board structures as
a result of the acquisition of MyLife MyFinance are confirmed.
• The Board notes that the retirement of the current Chair will provide a natural
opportunity to review and, if appropriate, reset the Chair fees.
1 Grandfathering arrangements apply for the Chief Executive, Operations & Technology.
2 APRA’s new prudential standard CPS511 Remuneration.
30
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.3 Our response to shareholder concerns in relation to the 2020 remuneration report (continued)
Summary of 2021 reward outcomes
Shareholder concerns have also been front of mind in making reward decisions during 2021, including annual reward outcomes
and remuneration arrangements for new appointments during the year. These are summarised in the table below.
STI outcomes for KMP
Annual fixed remuneration
increases for KMP
Remuneration arrangements
for new appointments
• STI outcomes are significantly down again on historic outcomes. The CEO’s 2021 STI is
56% of target (37% of maximum) and STIs for other KMP range between 56% and 98%
of target (37% and 65% of maximum).
• These outcomes reflect a 30% discretionary adjustment (via the new STI modifier) which
the Board determined to apply to reflect the extent of the impact of the events of 2020
and the flow-on impact into 2021.
• No annual increases were applied for KMP for financial year 2021.
• The only annual increase to fixed remuneration planned for financial year 2022 is for the
Chief Executive, Funds Management, to reflect the additional size and complexity of this
role and to recognise the importance of retaining Mr Hamilton, noting fixed pay will still
be 17% lower than his predecessor.
• Ms Murphy’s fixed remuneration was increased on her appointment as Chief Executive,
Life in March 2021. Her fixed remuneration is 10% lower than her predecessor, noting
the size and complexity of the role has significantly increased.
• In addition, the rebasing of remuneration arrangements as incumbents have been
replaced has continued, with Ms Grimes’ total maximum remuneration opportunity on
appointment as Chief Financial Officer being 26% lower than her predecessor.
No vesting of LTIs for third
consecutive year
• LTIs will not vest in September 2021 for the third consecutive year, demonstrating the
strong alignment between executives’ realised reward and shareholder outcomes.
Short term incentive outcomes
The chart below sets out 2021 STI outcomes ($m) together with target and maximum opportunities (on an annualised basis) by
role. Outcomes are in respect of the incumbent as at 30 June each year (prior incumbents are denoted with an asterisk).
Chief Executive
Officer
Chief Financial
Officer
Chief Executive,
Life
Chief Executive,
Funds Management
Chief Executive,
Operations &
Technology
Long term incentive vesting outcomes
The chart below illustrates Challenger’s compound annual TSR performance over time versus the S&P/ASX 200 Accumulation
Index five year compound annual growth rate (CAGR).
100% of LTIs vested
No LTIs vested
1 Indicative outcomes based on Challenger’s share price as at 30 June 2021.
31
Maximum STITarget STIDeferred STICash STI2018*2019202020212018*2019*2020*20212018*2019*2020*20212018*2019*2020202120182019202020210.00.51.01.52.02.5CGF 3yr compound annual TSRCGF 4yr compound annual TSRCGF 5yr compound annual TSRASX 200 Accum. 5 yr CAGRHurdle (threshold)Hurdle (max)20172018201920202021¹-20%-10%0%10%20%30%40% Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.3 Our response to shareholder concerns in relation to the 2020 remuneration report (continued)
Further detail on reward framework changes
Pay mix framework and short term incentive targets
A pay mix framework, including STI targets, has been
introduced to provide greater transparency and consistency
in setting executive remuneration packages. The
framework, which includes STI targets and LTI as a
percentage of fixed pay, is set out below.
STI target
(% of fixed)
STI max
(% of fixed)
LTI face value
(% of fixed)
133%
200%
225%
100%
150%
125%
CEO &
business
lines
Control &
support
functions
Maximum STI opportunity is 150% of target which retains
the maximum opportunity of 200% of fixed pay (which
was introduced in 2019) for the CEO and business lines and
results in a reduction in maximum opportunity for control
and support functions.
For completeness, the chart below illustrates the pay
components as a percentage of total reward for the CEO at
both target and maximum.
Pay mix is differentiated between business lines and control
functions with a lower weighting to variable reward for
control functions. This aligns with regulator and
shareholder expectations and promotes the independence
of control functions. A significant portion continues to be
delivered as LTI to provide alignment with shareholders.
The new STI targets:
• provide a reference point reflecting what the Board
considers to be an appropriate STI outcome for
individual and business performance in line with
expectations. This builds on the maximum STI
opportunity which has applied since 2019;
set a consistent ratio of target to maximum reward
(maximum is 150% of target) providing appropriate
leverage to differentiate for outperformance; and
support a clearer link between performance and reward
outcomes and facilitates comparisons against internal
and external benchmarks.
•
•
The application of this framework aligns with the rebasing
of executive remuneration packages over time. The STI
targets are lower than historic outcomes for prior
incumbents and, as noted above, the maximum STI
opportunity is reduced for control function roles.
The STI outcomes chart on the previous page illustrates
how the new STI targets are positioned versus historic
outcomes, noting that 2018 is considered a more typical
performance year than 2019 or 2020.
32
STI targets have been set in line with the framework for the
majority of roles. However, arrangements for Mr Plater
have been ‘grandfathered’ by applying the business line
pay mix and setting the STI target above 133% of fixed pay
(maximum STI opportunity and LTI are per the framework).
The Board considers this approach to be appropriate given:
• Mr Plater’s STI opportunity in his former role as Chief
•
•
Executive & Chief Investment Officer, Life;
the criticality of the Chief Executive, Operations &
Technology role in delivering on strategic priorities; and
the importance of retaining Mr Plater as key talent and
developing leadership capability.
The pay mix for the newly appointed Chief Financial Officer
is slightly outside the framework with an STI target of
112.5% of fixed pay. These arrangements will be
transitioned over time.
Short term incentive modifier
The other significant change is the introduction of a
modifier to make explicit the factors considered by the
Board in applying discretion in determining STI outcomes.
The modifier provides greater transparency in the Board’s
decision-making processes by quantifying the magnitude of
discretionary adjustments. In applying the modifier, the
Board considers a broad range of factors, including the
quality of financial results, risk and conduct matters with a
group-wide impact and any other matter which the Board
considers is not fully reflected in scorecard outcomes.
STI outcomes for KMP (excluding the CEO) are calculated
by applying the modifier to pre-adjustment STI outcomes,
as recommended to the Board by the CEO and as
illustrated below. Pre-adjustment STI outcomes reflect
performance outcomes which are informed by individual,
business unit and group performance and an assessment of
behaviours against the Challenger values.
Pre-adjustment
STI outcome
(0-150% of target)
x
Modifier
(0-100%)
=
Final STI outcome
(0-150% of target)
The modifier can vary between zero and 100% thereby
acting as a gateway and a downwards adjustment
mechanism. The modifier cannot adjust STI outcomes
upwards as individual behaviours (including risk behaviours)
already act as a modifier in determining individual
performance outcomes.
A consistent modifier generally applies for all KMP to reflect
shared accountability for group performance and other
significant factors, for example, where a risk or conduct
matter has a group-wide impact.
Enhancements to disclosures
Performance disclosures have been enhanced to provide
greater transparency via an assessment against each sub-
measure in the scorecard.
The Board has elected not to disclose specific targets as it
deems this information to be commercially sensitive due to
KPIs being linked directly to Challenger’s strategic priorities.
The Board will review this practice on an ongoing basis and
consider input from stakeholders regarding changing this
practice in the future.
22%19%14.5%19%14.5%19%49%43%FixedSTI — cashSTI — deferredLTI (face)CEO paymix (target)CEO paymix (max) Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.4 Remuneration strategy and structure
Our vision and strategic priorities for 2021
Challenger IACT values: Act with Integrity, Aim High, Collaborate, Think Customer
Remuneration strategy — guiding principles
Market-competitive
Performance-based
and equitable
Aligned with
shareholders
Underpinned by sound
risk management
Remuneration structure for KMP
Fixed remuneration
Variable remuneration
Base salary, salary-sacrificed
benefits and applicable fringe
benefits tax. Employer
superannuation contributions.
Positioned around the market
median using appropriate
benchmarks, reflecting size and
complexity of role, responsibilities,
experience and skills.
Short term incentives
Maximum opportunity of 200% of fixed
remuneration (150% for control and support
functions).
Annual ‘at risk’ remuneration, rewarding
Challenger performance and individual
performance and behaviours.
50% is deferred into equity vesting over four
years, subject to forfeiture provisions.
Long term incentives
225% of fixed remuneration at face value
(125% for control and support functions).
Longer-term ‘at risk’ remuneration.
Awarded as hurdled share rights vesting up
to five years.
Awards are subject to a cumulative absolute
TSR hurdle tested after four or five years and
subject to forfeiture provisions.
Delivery of remuneration for 2021
Reward is realised over an extended period supporting a focus on strong risk management and long-term performance.
Significant weighting to variable remuneration means a large proportion of executive reward is at risk and issued in equity with
long deferral, ensuring strong alignment with shareholders.
33
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.5 Short term incentives
Structure of short term incentives
STIs provide annual ‘at risk’ remuneration which rewards Challenger and individual performance and behaviours. A significant
portion is deferred into equity to provide strong alignment with shareholder interests and support retention. STI terms are set out
in the table below.
The introduction of STI target opportunities for 2021 provides greater transparency on reward opportunity and enables
Challenger to demonstrate more clearly the link between performance and reward outcomes. In addition, the new STI modifier
makes explicit the range of factors considered by the Board in making discretionary adjustments to STI outcomes. The operation
of the new STI targets and the modifier in determining 2021 STI outcomes for KMP is detailed on page 32.
Performance period Annual in line with Challenger’s financial year.
Award
determination
STIs are determined with reference to the performance of Challenger, and individual performance and
behaviours. Individual performance is assessed based on:
• a balanced scorecard comprising financial, people and culture, customer and strategic KPIs and
application of, and adherence to, the risk management framework; and
• behaviour in line with the Challenger values which is a gate-opener and a modifier.
The The Board may apply the new STI modifier to adjust STI outcomes to reflect a broad range of factors.
STI opportunity
Delivery
Allocation
methodology
Vesting period
Target STI opportunity is 133% of fixed remuneration for the CEO and business line roles and 100% of
fixed remuneration for control function roles. Maximum STI opportunity is 150% of target STI.
Ordinarily, 50% of the STI award is delivered as cash and 50% is deferred into equity. For 2020, there
was no cash STI for KMP as 100% was deferred into equity.
Deferred STI awards are delivered as Restricted Shares. Prior to 2021, deferred STI awards were
delivered as Deferred Performance Share Rights (DPSRs) which represent the right to receive a fully-paid
ordinary Challenger share for nil consideration subject to continued employment at the time of vesting.
Face value with the number of Restricted Shares or DPSRs granted based on the five-day VWAP of
shares prior to grant date.
Deferred STI awards vest over a four-year period in accordance with the schedule below:
At the end of year
1
2
3
4
% of grant vesting
30%
30%
20%
20%
Vesting conditions
Termination
treatment
Forfeiture (malus)
Awards made prior to September 2019 vested in two equal tranches after one and two years.
Vesting is subject to continued service.
Termination for cause will result in forfeiture of all unvested equity awards.
Awards issued from 1 July 2019 onwards are subject to specific good leaver conditions specified at the
time of grant, which apply unless the Board exercises its discretion to do otherwise. Where the ‘good
leaver’ treatment applies, unvested equity remains ‘on foot’ i.e. it will vest on the original vesting date.
Board discretion applies in relation to unvested awards issued prior to 30 June 2019.
The Board has the ability to adjust unvested equity (including to zero) in a range of circumstances,
including to protect financial soundness or respond to unexpected or unintended consequences that
were significant and unforeseen by the Board (such as material risk management breaches, unexpected
financial losses, reputational damage or regulatory non-compliance).
Summary of 2021 financial performance
This section provides performance information including five-year trends and key financial and operational outcomes for the
year. Further commentary on performance is provided in the CEO’s balanced scorecard on the following page.
For the year ended
Normalised NPAT1 ($m)
Normalised EPS (cents)
Closing share price ($)
Dividends per share (cents)
30 June
2017
30 June
2018
30 June
2019
30 June
2020
30 June
2021
384.9
384.9
396.1
343.7
278.5
68.5
68.1
13.34
11.83
34.5
35.5
65.5
6.64
35.5
56.5
4.41
17.5
41.5
5.41
20.0
1 Normalised NPAT excludes asset or liability valuation movements that are above or below expected long-term trends and significant items that may positively or
negatively impact financial results. Refer to the Operating and financial review section for further information.
34
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.5 Short term incentives (continued)
2021 balanced scorecard outcome for the CEO
KPIs are aligned to Challenger’s vision and strategy and underpinned by strong risk management practices that inform how we
deliver on our commitments to customers and shareholders. The CEO’s 2021 balanced scorecard is provided below.
Measures
Financial (40%)
Profitability
Capital
AUM
Performance
Partially met
Group normalised NPBT: $395.8 million, within guidance range ($390.0m to $440.0m)
Statutory profit after tax: $592.3 million, up $1.0 billion on 2020 with full reversal of unrealised
pandemic market losses
Normalised ROE: 11.2%, below the through-the-cycle ROE target as expected due to holding
significant cash balance through the pandemic
Capital position: strong at 1.63 times APRA’s prescribed capital amount (PCA) and above the top
end of 1.3 to 1.6 times target range which applied during the year
Group AUM: up 29.1% to $110.0 billion, significantly above target
Life sales: $6.9 billion up 34.5%, with growth in all key segments and significantly above target
Life book growth: 14.4%, significantly above target
Funds Management net flows: $16.1 billion, one of the fastest growing Australian active
managers, industry leading and significantly above target. Fidante ranked top active manager for
retail net flows1
Funds Management FUM: $105.8 billion, up 30.0% and significantly above target. Four boutique
fund managers’ FUM exceeded $10m (one in 2020)
People & culture (30%) Met
Risk culture
Risk culture: strong at 86%2, which is 4% above Global High Performance Norm (GHPN) and 10%
above Australian National Norm. Risk focus supported by internal and external auditors
Responsible investment: ‘A’ rating Principles for Responsible Investment Assessment Report 2020
Employee engagement
Sustainable engagement: high at 85%2, which is up 1% on 2019 and in line with the GHPN
Flexible hybrid working: model established for employees with focus on technology upgrades and
support for mental health
Diversity
Customer (20%)
Customer satisfaction &
support
Expand products &
distribution channels
Gender equality: recognised as Employer of Choice by Workplace Gender Equality Agency,
included in 2021 Bloomberg Gender-Equality Index and Equileap Global Top 100 employer for
gender equality. Female representation at 44% overall (target: 45%) with 41% in management
(target: 40%) and 37.5% on the executive team, being the highest ever level
Met
Customer satisfaction: high satisfaction rating (91%) maintained, Net Promoter Score up 13
percentage points to 35%3, 60% rate Challenger as better than other financial companies and 87%
rate Challenger as trustworthy
Awards: winner of ‘Long Term Income Stream’ and ‘Overall Annuity Provider’ categories at 2021
Association of Financial Advisers Life Company of the Year Awards, Fidante named distributor of the
year at 2020 Zenith Fund Awards
Process improvements: online origination process delivered, improving average application
turnaround time by 69%
Fidante Partners partnerships & products: new partnerships with Impax Asset Management,
Proterra Investment Partners and Nomura; new boutique Ox Capital Management; new products
from Ares Australia Management, Alphinity and Ardea
Life institutional channel: significant growth with AUM increasing 50% through enhanced
product offering and new profit-for-member fund relationships
Funds Management global diversification: significant offshore mandates won and new
Singapore office
CIP Asset Management expansion: three new retail-focused credit funds and won Japanese real
estate mandate
Met
Strategic (10%)
Progress growth strategy Digital bank acquisition: extends customer and product reach and accelerates strategy to enter
term deposit market and build more direct customer relationships.
Corporate strategy: refreshed to drive future growth following acquisition of the Bank and
updated sustainability strategy with increased focus on responsible investing
Overall outcome
Partially met
1 Top performing fund manager among 117 active managers - Plan for Life Wholesale Trust Data, September 2020
2 Willis Towers Watson employee engagement survey April 2021.
3 Fifth Quadrant, February 2021.
35
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.5 Short term incentives (continued)
2021 short term incentive outcomes
2021 STI outcome for the CEO (as a % of target):
The Board determined a pre-adjustment STI outcome of 80% of target which reflects the overall performance outcome of
'partially met' as set out in the balanced scorecard above together with an assessment of Mr Howes' behaviours as strongly in
line with the Challenger values and risk management outcomes. The Board has applied a modifier of 70% to the pre-
adjustment outcome (as discussed in further detail below) to reflect the extent of the impact of the events of 2020 and the
flow-on impact into 2021. After application of the modifier the final STI outcome is 56% of target (37% of maximum).
56%
2021 modifier
2021 short term incentive outcomes for KMP
The Board recognises that the balanced scorecard outcome
does not always capture the full range of factors that are
relevant to making reward decisions and that the ability to
make discretionary adjustments is an important governance
mechanism.
The table below sets out the 2021 STI outcomes for current
KMP as a percentage of target and maximum, including the
impact of the modifier. STI targets do not apply to former
KMP; however, a discretionary adjustment has been applied
to what would otherwise have been awarded.
The new modifier makes explicit these discretionary
considerations and enables the Board to clearly
communicate the magnitude of, and the rationale for,
adjustments to STI outcomes.
STI outcomes for other KMP are calculated by applying the
modifier to pre-adjustment STI outcomes as recommended
to the Board by the CEO as illustrated below.
Pre-adjustment STI outcomes, expressed as a percentage of
target STI, reflect individual performance outcomes which
are assessed based on:
•
a balanced scorecard comprising financial, people and
culture, customer and strategic KPIs and application of,
and adherence to, the risk management framework;
and
• behaviours in line with the Challenger values which is a
gate-opener and a modifier.
2021 STI modifier:
70%
The Board has determined to apply a modifier to 2021 STI
outcomes for KMP.
The Chief Risk Officer has confirmed that no risk or
conduct matters have been identified which would
warrant the application of the modifier.
However, the Board considers it appropriate to adjust
outcomes to recognise the extent of the impact caused by
the events of 2020 and the flow-on impact into 2021.
Pre-adjustment
STI outcome
(0-150% of target)
x
Modifier
(0-100%)
=
Final STI outcome
(0-150% of target)
STI outcomes for KMP range between 56% and 98% of
target (37% and 65% of maximum). While aggregate
outcomes are up on 2020, they are still materially down
versus historical outcomes as illustrated in the chart in
section 4.3.
2021 STI outcomes
Pre-
adjustment
Final
% of target % of target % of max
R Howes
R Grimes
N Hamilton
A Murphy
C Plater
Average
80%
100%
140%
80%
80%
96%
56%
70%
98%
56%
56%
67%
37%
51%
65%
37%
45%
47%
There is significant variability in outcomes to differentiate
for business unit and individual performance. Most notably,
the outperformance of the Funds Management business is
reflected in the STI outcome for Mr Hamilton.
In addition, accountability for the performance of the Life
business is reflected in the outcomes for both:
• Ms Murphy given both her current expanded role as
Chief Executive, Life and her previous role as Chief
Executive, Distribution, Product & Marketing; and
• Mr Plater who was Chief Executive & Chief Investment
Officer, Life for the first five months of the year before
taking on the role of Chief Executive, Operations &
Technology.
36
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.6 Long term incentives
Long term incentive structure
LTIs are awarded annually to support a continued focus on
long-term performance and strong shareholder alignment.
The meaningful weighting ensures a significant proportion of
total reward is ‘at risk’ and directly linked to shareholder
outcomes.
LTI terms are set out in the table below.
The Board considers that TSR is an effective measure of
shareholder outcomes and that an absolute rather than a
relative TSR performance measure is appropriate because:
•
•
•
there are no other listed companies in the Australian
market with a retirement income business that are directly
comparable to Challenger;
a broader index is not considered an appropriate peer
group as there is risk of misalignment between
remuneration and shareholder value creation; and
if the absolute TSR threshold performance target is set at a
level above average market returns over the long term,
vesting will be directly linked to the delivery of superior
returns to shareholders.
As part of its annual review, the Board determined to retain
the thresholds of 7% to 10% (compounded annually) for
2021 on the basis they continue to be challenging in a low
growth and low interest rate environment and represent a
relatively strong return for shareholders. Over four years, 7%
annual compound return represents total shareholder return
of 31%, and 10% represents total shareholder return of 46%.
Where the hurdle is not satisfied at four years, a higher test is
applied in year five (requiring total shareholder returns above
40% for any vesting to occur and total shareholder returns
above 61% for full vesting to occur).
As a higher hurdle applies in year five, Challenger’s approach
differs from traditional ‘re-tests’ and reflects our commitment
to driving focus on long-term performance and strong risk
management. Any unvested awards lapse after five years.
The Board continues to consider the appropriateness of
introducing a second LTI performance measure and intends to
undertake a comprehensive review of LTIs in light of
impending regulatory change.
Quantum for KMP
225% of fixed remuneration for CEO and business lines and 125% for control and support functions.
Delivery
Hurdled Performance Share Rights (HPSRs) which represent the right to receive a fully-paid ordinary
Challenger share for nil consideration subject to satisfaction of an employment condition and a
performance hurdle.
Allocation
methodology
Vesting period and
conditions
Face value with the number of HPSRs granted based on the five-day VWAP of shares prior to grant date.
HPSRs for the CEO are granted following the shareholder vote at the Annual General Meeting using the
same allocation price as other KMP.
LTI awards vest after four or five years subject to satisfaction of an employment condition and
Challenger satisfying the absolute TSR performance hurdle. Awards are tested after four years with any
unvested HPSRs subject to a final cumulative test after five years.
Awards made prior to September 2019 will continue to be tested after three or four years and subject
to a final cumulative test after five years. Two-thirds of an award is eligible to commence vesting after
three years and the final third after four years.
Performance hurdle Vesting is subject to an absolute TSR performance hurdle set out in the table below:
Absolute TSR hurdle
Less than 7% p.a.
% of HPSRs that vest
0%
7% to 10% p.a.
Straight-line vesting between 50% and 100%
10% p.a. and above
100%
The start and end price for absolute TSR performance testing is calculated using a 90-day VWAP leading
up to the relevant performance start or end date. A 90-day VWAP eliminates the potential for short-
term price volatility to impact vesting outcomes.
Termination for cause will result in forfeiture of all unvested equity awards.
Awards issued from 1 July 2019 onwards are subject to specific ‘good leaver’ conditions specified at the
time of grant, which apply unless the Board exercises its discretion to do otherwise. Where the ‘good
leaver’ treatment applies, unvested equity remains ‘on foot’, i.e. it will vest on the original vesting date,
subject to satisfaction of the performance hurdle. Board discretion applies in relation to unvested
awards issued prior to 30 June 2019.
Termination
treatment
Forfeiture (malus)
As detailed in the STI table in section 4.5 above.
Long term incentive vesting outcomes
No LTIs will vest in September 2021 for the third consecutive year. In September 2020, LTIs awarded in 2015, 2016 and 2017
were tested with annual compound TSR results of -4%, -11% and -25% respectively. As illustrated in the chart on page 31, the
non-vesting of LTIs reflects strong alignment of executives’ realised reward with shareholder outcomes.
37
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.7 2021 awarded Key Management Personnel remuneration
Awarded remuneration represents the value of remuneration that has been awarded for the financial year, as determined by the
Board, and includes fixed remuneration, STIs (cash and deferred) and LTIs. The actual value realised will depend on future
performance outcomes, and LTIs will only deliver value to executives in the future if shareholder return hurdles are achieved. This
ensures strong alignment with shareholder interests.
Awarded remuneration for KMP has been decreasing over time. This is driven by reductions to STI outcomes, reflecting the
impact of challenging conditions on performance over the last three years, and the rebasing of remuneration arrangements as
incumbents have been replaced, in line with broader market trends.
Short term incentive
Long term incentive
Fixed1
$
Total STI
$
Year
% of
max
Cash STI
$
Deferred
STI2
$
Other3 Face value2
$
$
Fair value2
$
2021 1,275,000 950,000
2020 1,275,000 500,000
92,000
2021 120,834
2020
—
—
2021 600,000 784,000
2020 464,286 367,560
2021 610,699 465,000
2020 583,298 400,000
2021 750,000 672,000
2020 750,000 525,000
46,000
—
37% 475,000 475,000
— 500,000
20%
46,000
51%
—
—
65% 392,000 392,000
40%
— 367,560
37% 232,500 232,500
34%
— 400,000
45% 336,000 336,000
— 525,000
35%
23,902 2,868,750 1,270,856
25,709 2,868,750 1,199,138
600,118
—
672,806
436,661
783,776
564,300
747,563
705,375
— 1,208,333
—
—
6,944 1,518,750
3,696 1,044,643
7,674 1,687,500
5,959 1,350,000
20,293 1,687,500
20,519 1,687,500
2021 154,865
39,286
13%
32,738
6,548
385
118,241
52,381
—
—
2020
—
—
2021
2020 192,262
—
2021 525,000 385,000
2020 700,000 470,000
2021 4,036,398 3,387,286
2020 3,964,846 2,262,560
—
—
—
—
—
—
—
—
37% 192,500 192,500
— 470,000
34%
1,706,738 1,680,548
— 2,262,560
—
—
—
—
—
—
—
—
—
—
—
—
17,079 1,575,000
658,350
59,198 9,089,074 4,127,500
72,962 8,525,893 3,563,824
KMP
Current KMP
R Howes
R Grimes4
N Hamilton5
A Murphy
C Plater
Former KMP
A Kapel6
I Saines7
A Tobin8
Total
1 Includes base salary and superannuation.
2 To be formally granted in September 2021 and allocated based on the five-day volume weighted average price (VWAP) prior to the grant date. Mr Howes' LTI will
be granted following shareholder approval, which will be sought at Challenger’s 2021 Annual General Meeting and allocated based on the same five-day VWAP as
other KMP. The fair value is independently calculated and is also used to determine the accounting value which is amortised over future vesting periods. The fair
value of 2021 LTIs has been estimated at 44.3% of face value based on the average fair value relative to face value of awards over the past three years. The fair
value of 2020 LTIs was estimated at 41.8% of face value. Includes additional awards granted in May 2021 to Ms Grimes on appointment as Chief Financial Officer
and Ms Murphy on appointment as Chief Executive, Life.
3 Values represent estimated distributions from the CPP Trust.
4 Ms Grimes became a KMP on 3 May 2021. The 2021 disclosure is pro-rata for the period in which she was KMP.
5 Mr Hamilton transferred to a KMP role on 23 September 2019. The 2020 disclosure is pro-rata for the period in which he was KMP.
6 Mr Kapel held a KMP role from 7 December 2020 to 9 March 2021. The 2021 disclosure is pro-rata for the period in which he was KMP.
7 Mr Saines ceased to be a KMP on 22 September 2019. The 2020 disclosure is pro-rata for the period in which he was KMP.
8 Mr Tobin ceased to be a KMP on 31 March 2021. The 2021 disclosure is pro-rata for the period in which he was KMP.
38
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.8 Remuneration governance
Challenger’s remuneration governance structures, outlined in the table below, provide strong oversight of remuneration
practices and policies. Detailed information concerning the scope of the Board and the Remuneration Committee’s
responsibilities can be found under the corporate governance section of Challenger’s website.
Remuneration governance arrangements promote compliance with the provisions of the ASX Listing Rules, the ASX Corporate
Governance Council’s Corporate Governance Principles and Recommendations, the Corporations Act 2001 and, in respect of
CLC and Challenger Retirement and Investment Services Limited, the principles contained in the Australian Prudential Regulation
Authority standards CPS 510 and SPS 510 respectively.
Board
• The Board is responsible for ensuring effective remuneration governance and related risk management
practices.
• Board approves remuneration principles and structures and ensures that they are competitive and equitable
and that they support the long-term interests of Challenger.
• The Board receives recommendations from the Remuneration Committee and approves these remuneration
recommendations, where appropriate.
Remuneration
Committee
• Board convenes a Remuneration Committee comprising at least three Independent Directors to assist the
Board in discharging its responsibilities.
Independent
remuneration
advisers
• The Remuneration Committee meets at least five times during the year, with additional meetings scheduled
as required. For the year ended 30 June 2021, five meetings were held.
• The Remuneration Committee determines and recommends to the Board various principles and policies
(including remuneration, recruitment, retention, termination and diversity), Managing Director & CEO and
KMP remuneration, incentives, superannuation and life insurance arrangements, and the Directors’
remuneration framework.
• The Board, independent of management, appoints an adviser to the Remuneration Committee.
• In 2021, the Board continued its engagement of KPMG. This engagement is based on a defined set of
protocols. The Board is satisfied with KPMG’s remuneration structure and quantum-related advice and that
such advice is free from undue influence.
• During 2021, KPMG attended all the Remuneration Committee meetings and provided advice with respect
to KMP remuneration arrangements, updates on regulatory developments, tax advice and a review of sales
incentive plans. No ‘remuneration recommendations’, as defined by the Corporations Act 2001, were
provided by KPMG.
• Mercer was retained in 2021 to independently value DPSRs and HPSRs and test HPSR vesting outcomes.
Remuneration benchmarking
Variable remuneration governance
Challenger’s remuneration strategy is supported by a strong
focus on benchmarking remuneration against the external
market to roles with comparable financial services, banking,
insurance and capital markets skills.
Annually, the Board approves the peer groups to be used
when benchmarking KMP remuneration, and in 2021
approved the following peer groups:
1. Financial Industry Remuneration Group survey:
This peer group supports consideration of roles with
comparable financial services, banking, insurance and
capital markets skills to Challenger’s KMP.
2. Financial services publicly disclosed data:
Data is comprised of publicly disclosed KMP remuneration
data for select financial services companies. This peer
group supports consideration of roles with comparable
skills to Challenger’s KMP.
During 2021, the Board considered remuneration benchmark
data as an input when introducing STI targets, setting
remuneration arrangements for new appointments and
determining 2021 remuneration outcomes for KMP. The
Board is confident that awarded remuneration reflects
performance and is positioned and structured at a market-
competitive level reflective of the markets in which Challenger
competes for talent, and the specialist nature of the skills and
experience of Challenger KMP.
The Board approves a pool for total variable remuneration
(cash STI and share-based) annually.
The group pool is built on a bottom-up basis with individual
allocations informed by internal and external market
remuneration levels and individual contribution. Divisional
pools for business lines are adjusted by the CEO to reflect
contribution to group financial results with pools for control
and support functions informed by the quality and integrity of
support provided. Divisional pools may also be adjusted for
other factors, including risk management outcomes.
A number of top-down lenses are applied in determining the
group pool which is an aggregation of individual and
divisional pools. Historically, the Board has used a range of
10-15% of normalised net profit before variable reward and
tax (NNPBVRT) as one of these lenses.
While this continues to act as a guide, the Board considers a
range of factors in assessing the appropriateness of the pool,
including:
• overall business results against plan (financial and non-
financial performance measures);
• progress against short and long term strategic objectives;
•
•
•
•
•
external remuneration levels and movements;
the retention of key talent;
the cost and amount of capital employed;
factors beyond management’s control; and
the management of risk, including adjustments for any risk
and conduct matters with a group-wide impact.
39
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.8 Remuneration governance (continued)
Variable remuneration governance (continued)
Employee share trading policy
The Board approved a variable remuneration pool for 2021
which is within the target funding range (12%) and
materially down on historic levels (excluding 2020). The
Board considers that the pool reflects a reasonable and
equitable distribution between shareholders and employees
and provides a clear line of sight to, and a strong
relationship between, performance and remuneration
outcomes.
Minimum shareholding guidelines
The Board reviews KMP and Non-Executive Director
minimum shareholding guidelines annually in order to
ensure alignment with shareholders and market practice.
The 2021 review determined that no changes were
required to the guidelines at this time. Challenger’s
minimum shareholding guidelines do not count unvested
deferred equity towards minimum holdings; however, for
completeness the shareholding disclosures in Section 4.10
Key Management Personnel remuneration arrangements
also show unvested deferred STIs.
Minimum shareholding requirements are detailed in the
following table:
Group
Non-Executive
Directors (NEDs)
Managing
Director & CEO
Other KMP
Requirement
One times base
fees
Two times fixed
remuneration
One times fixed
remuneration
Implied value1
Chair: $525,500
NEDs: $179,000
$2,550,000
$600,000 to
$750,000
1 Based on fees and remuneration as at 30 June 2021.
A five-year transitional period in which to acquire the
required shareholding applies for Non-Executive Directors
and KMP. The Board retains discretion to allow Non-
Executive Directors and KMP to vary from this guideline.
Where fees are paid to the employer of the Non-Executive
Director, the guidelines do not apply.
The shareholdings of Non-Executive Directors and KMP at
30 June 2021 are set out in Sections 4.10 Key
Management Personnel remuneration arrangements and
4.11 Non-Executive Director disclosures.
40
Employees, including Directors and KMP, must comply with
Challenger’s employee share trading policy and are
required to obtain pre-approval from the Company if they
wish to trade in Challenger shares.
Employees are prohibited from trading during specified
periods, including prior to the release of Challenger’s
financial results.
Employees are prohibited from hedging their unvested
equity awards, as this would not be consistent with
Challenger’s remuneration strategy or appropriate
governance outcomes and is contrary to the intention of
equity-based remuneration arrangements. Any breach of
this requirement would be regarded as serious misconduct
and may result in dismissal.
Challenger prohibits KMP and employees from taking out
margin loans on Challenger shares, with any exceptions to
this rule requiring Board approval. There have been no
requests for exceptions to this policy for the year ended 30
June 2021 (no requests in 2020).
Employee share ownership
The Board believes that greater employee share ownership
increases alignment with shareholders.
The Tax Exempt Share Plan provides permanent Australian
employees a means to acquire Challenger shares at no cost,
and to participate in the future growth and performance of
Challenger. Eligible employees are offered $1,000 worth of
fully-paid Challenger ordinary shares on an annual basis,
subject to a three-year minimum holding period.
As at 30 June 2021, 82% of permanent employees hold
unvested Challenger equity (77% in 2020), which
constitutes 2% of Challenger’s issued capital (2% in 2020).
Challenger Performance Plan (CPP) Trust
The CPP Trust is an employee share trust established to
satisfy Challenger’s employee equity obligations arising
from Restricted Shares, DPSRs and HPSRs.
Challenger shares held by the CPP Trust generate dividend
income. The CPP Trust does not receive dividends from
forward share purchase agreements.
The Trustee of the CPP Trust has absolute discretion to
determine whether any net income earned from shares
held by the CPP Trust is distributed to beneficiaries. Any
undistributed income at the end of the year is taxed at the
maximum marginal tax rate (which exceeds the company
tax rate) and carries no franking credits.
In 2021, a distribution was paid in respect of DPSRs that
vested in September 2020 only (equal to Challenger’s
dividend per share less tax paid in the Trust).
Any income distributed to KMP from the CPP Trust is
considered by the Remuneration Committee and the Board
when considering remuneration recommendations. CPP
Trust distributions paid or payable to KMP are disclosed
within the remuneration tables.
Total variable reward ($m)Total VR as % of NNPBVRTTarget maximum fundingTarget minimum funding201720182019202020210102030405060700%5%10%15% Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.9 Risk and reward
The Board seeks to align remuneration with effective risk
management, the generation of appropriate risk-based returns
and Challenger’s risk appetite.
The Board has agreed a risk management framework which
sets out the Board’s tolerance to risk exposures and the
management of risk. Challenger’s risk profile is continuously
monitored and managed against its risk appetite and any
divergence is resolved within Challenger through a series of
escalations and delegated authorities culminating with the
Board. All business activities are carried out in accordance with
this risk management framework, regardless of potential
remuneration outcomes.
During the year, the Risk Committee provides reports to the
Remuneration Committee and the Board summarising risk
management and risk outcomes, including any breaches of
the risk management framework or other compliance policies.
In addition, the Consequence Management Committee, which
comprises representatives from Risk and Human Resources,
reports to the Remuneration Committee six-monthly on
matters referred to it. The Remuneration Committee and the
Board consider these reports when finalising remuneration
pools and individual allocations.
All employees are required to comply with Challenger’s
policies and other risk management and regulatory
requirements as they apply to their role and business area.
Breaches of compliance with these policies and other
requirements are taken seriously and may result in a range of
potential consequences including disciplinary action and
termination of employment.
All employees are assessed against the Challenger values,
which includes risk behaviours, as part of the annual
performance review process. The values rating contributes to
the overall performance rating and remuneration outcomes.
Satisfactory assessment of behaviours against the Challenger
values is treated as a gate-opener for variable reward and
behaviours can either increase or decrease reward outcomes.
During 2021, a range of activities have been undertaken to
embed the Conduct Risk and Consequence Management
framework which was approved by the Board in 2020. This
has focused on raising awareness of risk management and
regulatory requirements, transparency in relation to potential
consequences for conduct matters, updating policies to
improve clarity, and enhancing reporting and monitoring
capabilities.
The Remuneration Committee and the Board consider
potential risk implications of performance targets when
setting performance measures for variable reward plans.
The Board also places significant focus on risk culture and
monitors and assesses Challenger’s risk culture. In 2021, this
included:
•
•
•
risk culture questions included within the YourVoice
employee engagement survey;
risk culture pulse check surveys sent to employees through
the year;
as part of its internal audit program, KPMG provided an
assessment of risk culture arising from interviews and
control findings;
•
•
Ernst & Young undertook an analysis of verbatim
responses to risk culture surveys to provide greater
insights; and
a range of key risk indicator metrics are monitored and
assessed throughout the year.
Variable reward forfeiture provisions
Under the terms of the CPP, DPSRs, Restricted Shares and
HPSRs may be reduced or forfeited should the Board
determine that a KMP or employee:
• has committed an act of dishonesty;
•
•
is ineligible to hold their office for the purposes of Part
2D.6 Disqualification from managing corporations of the
Corporations Act 2001; or
is found to have acted in a manner that the Board
considers to be gross misconduct or is dismissed with
cause.
In addition, the Board may resolve that an award of DPSRs,
Restricted Shares or HPSRs should be reduced or forfeited in
order to:
• protect financial soundness;
•
•
respond to unexpected or unintended consequences that
were significant and unforeseen by the Board (such as
material risk management breaches, unexpected financial
losses, reputational damage or regulatory non-
compliance); and
respond to any examples of misconduct, risk events, acts
or omissions or breaches of law or regulation.
Prior to any awards vesting, the Chief Risk Officer confirms
whether there are any matters that should be considered by
the Board, including any ongoing investigations into potential
matters.
41
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.10 Key Management Personnel remuneration arrangements
This audited remuneration report describes Challenger’s KMP and Non-Executive Director remuneration arrangements as
required by the Corporations Act 2001.
Statutory remuneration
Statutory remuneration represents the accounting expense of remuneration in the financial year. It includes fixed remuneration,
cash STI awards, the fair value amortisation expense of deferred share awards granted, distributions from the CPP Trust, long
service leave entitlements and insurance.
KMP
R Howes
R Grimes4
N Hamilton5
A Kapel6
A Murphy
C Plater
I Saines7
A Tobin8
Total
Short-term employee benefits
Salary1
$
Super-
annuation
Cash STIs
$
$
Long-term employee benefits
Share-based
payments3
$
Other2
$
Year
Total
$
2021 1,256,237
2020 1,256,195
117,301
2021
—
2020
581,172
2021
449,799
2020
150,357
2021
—
2020
593,377
2021
565,863
2020
730,844
2021
730,970
2020
—
2021
187,511
2020
515,968
2021
688,605
2020
2021 3,945,256
2020 3,878,943
21,694
21,003
3,616
—
21,694
16,252
5,682
—
21,694
21,003
21,694
21,003
—
4,751
16,271
21,003
475,000
—
46,000
—
392,000
—
32,738
—
232,500
—
336,000
—
—
—
192,500
—
112,345 1,706,738
—
105,015
60,861
46,552
115
—
32,030
13,793
3,241
—
52,214
20,083
52,862
32,571
—
2,278
6,784
28,296
208,107
143,573
8,546
—
1,759,563 3,573,355
1,750,168 3,073,918
175,578
—
668,516 1,695,412
805,503
325,659
234,284
42,266
—
—
616,699 1,516,484
435,196 1,042,145
1,183,429 2,324,829
1,332,901 2,117,445
—
—
263,185
457,725
742,645 1,474,168
1,141,362 1,879,266
5,021,664 10,994,110
5,248,471 9,376,002
1 Includes the cost of death, total permanent disability and salary continuance insurances.
2 Values represent distributions paid or payable from the CPP Trust and long service leave accruals.
3 Calculated on the basis outlined in Note 28 Employee entitlements and reflects the fair value of the benefit derived at the date at which they were granted. Fair
value is determined using an option pricing model and is undertaken by an independent third party. The HPSRs included in share-based payments are subject to
market-based performance conditions; consequently, no adjustment to the fair valuation following grant date is permitted to be made for the likelihood of
performance conditions not being met. As a result, the value of the share-based payments included in the table may not necessarily have vested during the
financial year.
4 Ms Grimes became a KMP on 3 May 2021. The 2021 disclosure is pro-rata for the period in which she was KMP.
5 Mr Hamilton transferred to a KMP role on 23 September 2019. The 2020 disclosure is pro-rata for the period in which he was KMP.
6 Mr Kapel held a KMP role from 7 December 2020 to 9 March 2021. The 2021 disclosure is pro-rata for the period in which he was KMP.
7 Mr Saines ceased to be a KMP on 22 September 2019. The 2020 disclosure is pro-rata for the period in which he was KMP.
8 Mr Tobin ceased to be a KMP on 31 March 2021. The 2021 disclosure is pro-rata for the period in which he was KMP.
42
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.10 Key Management Personnel remuneration arrangements (continued)
Split of statutory remuneration components
The splits of KMP statutory remuneration are set out below:
KMP
R Howes
R Grimes1
N Hamilton2
A Kapel3
A Murphy
C Plater
I Saines4
A Tobin5
Fixed
remuneration
36%
41%
69%
—
35%
58%
66%
—%
40%
56%
32%
35%
—%
42%
36%
37%
Year
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Cash STI
13%
—
26%
—
23%
—
14%
—
15%
—
14%
—
—%
—
13%
—
Share-based
payments
49%
57%
5%
—
40%
40%
18%
—%
41%
42%
52%
63%
—%
57%
50%
61%
Other
2%
2%
—%
—
2%
2%
2%
—%
4%
2%
2%
2%
—%
1%
1%
2%
Total
100%
100%
100%
—
100%
100%
100%
—%
100%
100%
100%
100%
—%
100%
100%
100%
1 Ms Grimes became a KMP on 3 May 2021. The 2021 disclosure is pro-rata for the period in which she was KMP.
2 Mr Hamilton transferred to a KMP role on 23 September 2019. The 2020 disclosure is pro-rata for the period in which he was KMP.
3 Mr Kapel transferred to a KMP role from 7 December 2020 to 9 March 2021. The 2021 disclosure is pro-rata for the period in which he was KMP.
4 Mr Saines ceased to be a KMP on 22 September 2019. The 2020 disclosure is pro-rata for the period in which he was KMP.
5 Mr Tobin ceased to be a KMP on 31 March 2021. The 2021 disclosure is pro-rata for the period in which he was KMP.
Share Rights granted
Deferred Performance Share Rights
The number of DPSRs granted is determined based on the five-day volume weighted average price (VWAP) of shares prior to
grant date. This is the face value allocation price that determines the number of DPSRs granted.
DPSRs granted to KMP during the year ended 30 June 2021 are detailed below:
Awarded
DPSR
value
from 2020
$
500,000
Face value
allocation
price
$
Total
number
of DPSRs
granted
4.0100 124,544
Date of
grant
7/9/20
KMP
R Howes
N Hamilton
475,000
4.0100 118,316
7/9/20
A Murphy
400,000
4.0100
99,634
7/9/20
C Plater
A Tobin
525,000
4.0100 130,770
7/9/20
470,000
4.0100 117,070
7/9/20
Vesting
Tranche 1
1 September
2021
Tranche2
1 September
2022
Tranche 3
1 September
2023
Tranche 4
1 September
2024
Number1
37,363
Number1
37,363
Number1
24,909
Number1
24,909
35,495
29,890
39,231
35,121
35,495
29,890
39,231
35,121
23,663
19,927
26,154
23,414
23,663
19,927
26,154
23,414
1 The number of DPSRs granted is determined by dividing the dollar value of the award by the allocation price which is determined based on the VWAP in the five
days prior to grant. The fair value of each tranche was $3.84 for Tranche 1, $3.67 for Tranche 2, $3.50 for Tranche 3 and $3.35 for Tranche 4. The fair value is
independently calculated and is used to determine the accounting value which is amortised over future vesting periods. The fair value differs to the face value
allocation price as the DPSRs do not carry a dividend entitlement and reflect the deferred nature of the award.
43
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.10 Key Management Personnel remuneration arrangements (continued)
Hurdled Performance Share Rights
The table below includes the awarded face value of the granted HPSRs as well as the fair value which takes into account the
likelihood of vesting and is in line with accounting standards.
HPSRs granted to KMP during the year ended 30 June 2021 are detailed below:
KMP
R Howes
R Grimes
N Hamilton
A Murphy
A Murphy
C Plater
A Tobin
Awarded
HPSR
face value
2,868,750
301,736
1,350,000
1,350,000
168,556
1,687,500
1,575,000
Face value
allocation
price
$
4.0100
4.0100
4.0100
4.0100
4.0100
4.0100
4.0100
Grant
date
2/11/20
10/5/21
7/9/20
7/9/20
10/5/21
7/9/20
7/9/20
Vesting
Tranche 1
1 September 2024
Total
number
of HPSRs
granted1
714,579
75,246
336,272
336,272
42,034
420,340
392,318
TSR start
price2
$
4.4968
4.4968
4.4968
4.4968
4.4968
4.4968
4.4968
Fair value
at grant
date3
2.58
2.64
1.87
1.87
2.64
1.87
1.87
Awarded
HPSR
fair value
1,843,614
198,649
628,829
628,829
110,970
786,036
733,635
1 The number of HPSRs granted is determined by dividing the dollar value of the award by the face value allocation price. This is the VWAP in the five days prior to
grant date.
2 The TSR start price for all awards granted during the year ended 30 June 2021 is the VWAP in the 90 calendar days prior to 7 September 2020.
3 The fair value is independently calculated and is also used to determine the accounting value which is amortised over future vesting periods. The fair value differs to
the face value and the TSR start price as the HPSR vesting events are subject to achieving future TSR hurdles, do not carry a dividend entitlement and reflects the
deferred nature of the award.
Share Rights vested
The following tables show the short and long-term incentives that vested during the year ended 30 June 2021.
Deferred Performance Share Rights
DPSRs which vested to KMP during the year ended 30 June 2021 are detailed below:
Date of grant
11/9/17
11/9/18
9/9/19
11/9/17
11/9/18
9/9/19
11/9/17
11/9/18
9/9/19
11/9/17
11/9/18
9/9/19
11/9/17
11/9/18
9/9/19
Number
33,022
34,360
28,266
4,280
7,836
5,653
3,669
6,631
11,872
24,461
29,538
22,342
22,015
22,304
19,221
Face value at grant
$ Vesting date
404,988
356,241
187,494
52,491
81,243
37,497
44,997
68,750
78,749
299,995
306,247
148,199
269,996
231,246
127,497
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
Vested value
$
132,148
137,503
113,116
17,128
31,358
22,622
14,683
26,536
47,510
97,889
118,206
89,409
88,100
89,257
76,919
KMP
R Howes
N Hamilton
A Murphy
C Plater
A Tobin
44
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.10 Key Management Personnel remuneration arrangements (continued)
Hurdled Performance Share Rights
No HPSR awards vested to KMP during the year ended 30 June 2021 as the minimum absolute TSR performance hurdles were
not achieved. It should also be noted that no HPSRs will vest in September 2021.
Grant details
Vesting details
KMP
R Howes
N Hamilton
A Murphy
C Plater
A Tobin3
Grant date
13/9/15
12/9/16
11/9/17
12/9/16
11/9/17
13/9/15
12/9/16
11/9/17
13/9/15
12/9/16
11/9/17
13/9/15
12/9/16
Fair value
at grant1
$
287,502
937,494
944,996
74,995
122,495
75,002
262,496
104,998
112,501
674,998
699,994
Number
101,233
226,577
161,227
18,125
20,899
26,409
63,441
17,914
39,613
163,136
119,427
Vesting
date
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
1/9/20
70,422
199,998
1/9/20
145,009
599,995
1/9/20
1/9/20
Number
vested
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Number
forfeited2
(101,233)
—
—
—
—
(26,409)
—
—
(39,613)
—
—
(70,422)
—
—
Compound
annual TSR
outcome
(4) %
(11) %
(25) %
(11) %
(25) %
(4) %
(11) %
(25) %
(4) %
(11) %
(25) %
(4) %
(11) %
(25) %
Number
yet to
vest or
lapse
—
226,577
161,227
18,125
20,899
—
63,441
17,914
—
163,136
119,427
—
145,009
107,485
11/9/17
107,485
629,998
1 The fair value is independently calculated and has been determined by the Board as the best estimate of the awarded financial value at the grant date.
2 HPSRs awarded in 2015 lapsed during the year as a result of the higher hurdle test applied in year 5.
3 HPSR awards subsequently forfeited on termination.
Share Rights held
Performance Share Rights held
Details of KMP DPSRs and HPSRs held as at 30 June 2021 are set out below:
KMP
R Howes
R Grimes
N Hamilton
A Murphy
C Plater
A Tobin
Number held
at
1 July 2020
195,601
Number
granted as
remuneration
124,544
Instrument
DPSRs
Number
forfeited
—
Number
vested
(95,648)
1,111,353
714,579
(101,233)
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
—
—
—
—
—
(26,409)
—
—
38,191
282,935
54,212
335,519
157,406
738,138
132,260
693,644
—
75,246
118,316
336,272
99,634
378,306
130,770
420,340
117,070
392,318
Number held
at
30 June 2021
224,497
1,724,699
—
75,246
138,738
619,207
131,674
687,416
211,835
—
—
—
(17,769)
—
(22,172)
—
—
(76,341)
(39,613)
—
1,118,865
—
(63,540)
(937,807)
—
185,790
148,155
45
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.10 Key Management Personnel remuneration arrangements (continued)
Key Management Personnel and their affiliates’ shareholdings in Challenger Limited
Details of KMP and their affiliates’ shareholdings in Challenger Limited as at 30 June 2021 are detailed below, along with the
number of unvested DPSRs. The CEO and other KMP are required to have a minimum shareholding equal to two times, and one
times, their fixed remuneration respectively. From the date of appointment, KMP have a five-year transition period to reach the
minimum shareholding. Mr Howes held substantially more than the minimum requirement as at 30 June 2021. Mr Plater
achieved the minimum requirement during the period and all other current KMP remain within their transition period.
KMP
R Howes
R Grimes2
N Hamilton3
A Murphy4
C Plater
A Tobin5
Total
Number of
vested
DPSRs and
HPSRs
95,648
99,886
—
—
17,769
—
22,172
24,896
76,341
81,486
—
63,384
211,930
269,652
Opening
balance
561,478
461,592
—
—
—
—
24,896
—
136,331
54,845
—
364,765
722,705
881,202
Number of
shares
acquired
250,000
—
—
—
—
—
—
—
—
—
—
—
Closing
balance of
shares
907,126
561,478
—
—
17,769
—
47,068
24,896
212,672
136,331
—
428,149
250,000 1,184,635
— 1,150,854
Number of
unvested
DPSRs
224,497
195,601
—
—
138,738
38,191
131,674
54,212
211,835
157,406
—
132,260
706,744
577,670
Year
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Shareholding as a
multiple of fixed
remuneration1
Fully-
owned
shares
3.8
1.9
—
—
0.2
—
0.4
0.2
1.5
0.8
—
2.7
Shares and
DPSRs
4.8
2.6
—
—
1.4
0.3
1.4
0.6
3.1
1.7
—
3.5
1 Shareholding multiple based on 30 June 2021 closing share price of $5.41 (30 June 2020: $4.41).
2 Ms Grimes transferred to a KMP role on 3 May 2021 and has a five year transition period in which to acquire the required shareholding.
3 Mr Hamilton transferred to a KMP role on 23 September 2019 and has a five year transition period in which to acquire the required shareholding.
4 Ms Murphy transferred to a KMP role on 12 December 2018 and has a five year transition period in which to acquire the required shareholding.
5 Mr Tobin ceased to be a KMP on 31 March 2021.
46
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.10 Key Management Personnel remuneration arrangements (continued)
Richard Howes – Managing Director & CEO
Mr Howes was appointed Managing Director & CEO effective 2 January 2019. All equity awards for the Managing Director &
CEO are satisfied by the purchase of shares on market. The following table summarises the notice periods and payments which
apply to Mr Howes upon termination.
Bad leaver
termination1
Good leaver
termination2
Notice period
Employee initiated: 6 months
Employer initiated (Poor
performance): 12 months
Payment in lieu of notice
The Board may elect to make
a payment of salary package
in lieu of notice
Eligibility for STI
No
Employer initiated
(Misconduct): None
None
Treatment of
unvested
performance rights
Lapse
Employee initiated: 6 months
Employee initiated (Material
change): 1 month
Employer initiated: 12
months3
The Board may elect to make
a payment of salary package
in lieu of notice
Eligible for a pro-
rata STI payable at
the usual payment
date
Continued vesting4
1 Bad leaver termination will occur where employment is terminated by Challenger for poor performance, misconduct or resignation without the prior approval of
the Board.
2 Good leaver termination will occur if employment ends in any circumstances that do not constitute a bad leaver termination.
3 Material change means where there is a substantial diminution of Mr Howes’ duties, status, responsibilities and/or authority arising without his agreement.
4 Unvested performance rights will remain on foot subject to the specified time based vesting conditions and/or performance hurdles and to the rules of the CPP.
Key Management Personnel (excluding Managing Director & CEO) employment agreements and notice periods
KMP do not have fixed terms of employment. The notice period for Challenger and the KMP is 26 weeks unless terminated for
cause.
Upon termination, if the KMP is considered a good leaver (such as cessation of employment due to redundancy), they will be
entitled to a pro-rata STI award. Board discretion applies in relation to unvested awards issued under the CPP prior to 30 June
2019. Awards issued under the CPP from 1 July 2019 onwards are subject to specific good leaver conditions specified at the time
of grant, which apply unless the Board exercises its discretion to do otherwise.
Loans and other transactions
There were no loans made to Directors or key executives as at 30 June 2021 (30 June 2020: nil). From time to time, Directors of
the Company or their Director-related entities may purchase products from the Company. These purchases are on the same
arm’s length terms and conditions as those offered to other employees or customers.
47
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.11 Non-Executive Director disclosures
Fee pool
The maximum aggregate amount of annual fees is approved
by shareholders in accordance with the requirements of the
Corporations Act 2001.
On recommendation from the Remuneration Committee, the
Board approves the fee structure within the bounds of the
overall maximum fee pool.
The current fee pool of $2,500,000 was approved by
shareholders in 2016.
Fee framework and review
Challenger aims to attract and retain suitably skilled and
experienced Non-Executive Directors to serve on the Board
and to reward them appropriately for their time and expertise.
Non-Executive Directors are remunerated by way of fees paid
in recognition of membership of the Board and its
committees.
Additional fees are paid to the Chair of the Board and sub-
committee members to reflect added responsibilities.
The Board is committed to periodically reviewing the fee
framework in order to ensure that fees remain appropriate
against the external market and support the attraction and
retention of high quality Non-Executive Directors.
The fee structure is benchmarked annually to align with the
market and to attract, retain and appropriately reward quality
independent directors. Board and committee fees remain
unchanged for the year ended 30 June 2021, noting the
temporary reduction outlined below.
The following table summarises the fees applicable to
membership and chairmanship of the Board and its sub-
committees, inclusive of services provided at a subsidiary
board level, for the year ended 30 June 2021. All amounts are
inclusive of superannuation, where applicable.
Reduction to Board fees
In response to the impact of the COVID-19 pandemic on
Challenger’s performance, the Board determined to reduce its
base fees by 20% for a period of six months, commencing
1 June 2020.
Board/Committee
Board1
Group Risk3
Group Audit4
Remuneration
2021 fee structure
2020 fee structure
Chair fee2
$
Member fee
$
Chair fee2
$
525,500
47,000
47,000
47,000
179,000
14,000
14,000
23,500
525,500
47,000
47,000
47,000
Member fee
$
179,000
14,000
14,000
23,500
1 Board fees include Nomination Committee fees.
2 The Board Chair fees reported in the table are inclusive of committee fees paid to the Board Chair.
3 The fee for the Chair of the Group Risk Committee includes membership of the Group Audit Committee.
4 The fee for the Chair of the Group Audit Committee includes membership of the Group Risk Committee.
The fee framework includes services provided at a subsidiary board level.
48
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.11 Non-Executive Director disclosures (continued)
Non-Executive Director fees for the year ended 30 June 2021
The following table summarises Non-Executive Director fees for the year ended 30 June 2021.
Non-Executive Director
P Polson
J M Green
S Gregg
M Kobayashi1
H Smith2
J Stephenson
D West3
M Willis
L Zwier4
Total
Year
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Director fees
$
Superannuation
$
—
21,003
18,704
19,739
20,751
21,003
—
—
8,053
—
21,235
21,003
—
—
19,615
20,650
—
—
88,358
103,398
475,933
495,739
196,880
207,778
218,647
245,514
—
—
84,768
—
232,848
245,014
205,956
204,017
206,469
217,367
—
44,750
1,621,501
1,660,179
Total
$
475,933
516,742
215,584
227,517
239,398
266,517
—
—
92,821
—
254,083
266,017
205,956
204,017
226,084
238,017
—
44,750
1,709,859
1,763,577
1 Mr Kobayashi as a shareholder representative, does not receive fees. Similarly his alternate Director, Mr Iioka, does not receive fees.
2 Ms Smith was appointed as Director on 20 January 2021. The 2021 remuneration reflects fees on a pro-rata basis.
3 Mr West provides a service through a company; fees exclude GST.
4 Mr Zwier retired from the Board on 31 October 2019. The 2020 remuneration reflects fees earned on a pro-rata basis.
Superannuation
Non-Executive Directors receive superannuation contributions where required by Superannuation Guarantee legislation.
Equity participation
Non-Executive Directors do not receive equity as part of their remuneration and do not participate in any incentive arrangements.
49
Challenger Limited 2021 Annual Report
Directors’ report
4 Remuneration report (continued)
4.11 Non-Executive Director disclosures (continued)
Non-Executive Director shareholdings in Challenger Limited at 30 June 2021
Details of the Non-Executive Directors’ and their affiliates’ shareholdings in Challenger Limited are set out below:
Non-Executive Director
P Polson
J M Green1
S Gregg2
M Kobayashi3
H Smith1,4
J Stephenson2
D West1
M Willis
L Zwier5
Total
Year
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Shares held at the
beginning of the year
Movements
122,000
122,000
10,000
10,000
14,000
14,000
—
—
—
—
17,000
15,000
18,957
18,957
149,892
149,892
—
7,360
331,849
337,209
6,944
—
6,944
—
—
—
—
—
10,000
—
4,629
2,000
6,944
—
6,944
—
—
(7,360)
42,405
(5,360)
Shares held at the
end of the year
128,944
122,000
16,944
10,000
14,000
14,000
—
—
10,000
—
21,629
17,000
25,901
18,957
156,836
149,892
—
—
374,254
331,849
1 Mr Green, Mr West and Ms Smith are within the five-year transitional period in which to acquire the required shareholding.
2 Due to significant share price movement during 2021, Mr Gregg and Ms Stephenson’s shareholdings as at 30 June 2021 did not satisfy the minimum shareholding
requirements.
3 Mr Kobayashi is exempt from the minimum shareholding requirements. His alternate director, Mr Iioka, is exempt also.
4 Ms Smith joined the Board on 20 January 2021.
5 Mr Zwier retired from the Board on 31 October 2019, so his holding disclosure is removed under ‘movements’.
Total remuneration of KMP and Non-Executive Directors1
KMP and Non-Executive
Directors
Non-Executive Directors
2021
2020
KMP
2021
2020
All KMP and Non-Executive
Directors
2021
2020
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other benefits
$
Total
$
1,621,501
1,660,179
88,358
103,398
—
—
—
—
1,709,859
1,763,577
5,651,994
112,345
5,021,664
208,107
10,994,110
3,878,943
105,015
5,248,471
143,573
9,376,002
7,273,495
200,703
5,021,664
208,107
12,703,969
5,539,122
208,413
5,248,471
143,573
11,139,579
1 No termination payments were made to KMPs or NEDs during the period.
50
Directors’ report
Challenger Limited 2021 Annual Report
4 Remuneration report (continued)
4.12 Summary of key terms and abbreviations used in the remuneration report
Key term
Awarded
remuneration
Board
CPP
CPP Trust
DPSR
Face value
Fair value
HPSR
KMP
LTI
Normalised
NPAT
Normalised
RoE (pre-tax)
Normalised
NPBVRT
Remuneration
Committee
Restricted
Share
Statutory
remuneration
STI
TSR
Description
Represents the value of remuneration that has been awarded for the financial year. This includes fixed
remuneration, STI (cash and deferred) and LTI.
The Board of Directors of Challenger Limited is the main body responsible for the implementation of effective
remuneration governance and related risk management practices at Challenger.
Challenger Performance Plan. Deferred equity awards are issued under the CPP.
Challenger Performance Plan Trust. The CPP Trust was established in 2006 for the purpose of acquiring,
holding and transferring shares to employees upon the vesting of their equity awards.
Deferred Performance Share Right. Prior to 1 July 2021, deferred STI awards were delivered as DPSRs
under the CPP. DPSRs represent the right to receive a fully-paid ordinary Challenger share for zero
consideration subject to continued employment at the time of vesting. DPSRs do not provide an entitlement
to vote or a right to dividends; however, employees with unvested DPSRs may receive a distribution of
income from the CPP Trust. The Board has discretion to amend or withdraw DPSRs at any point.
The number of DPSRs, Restricted Shares and/or HPSRs granted to KMP is determined based on the face value
of the shares using a five-day volume weighted average price (VWAP) prior to the grant date.
The number of HPSRs awarded to KMP prior to 1 July 2019 was calculated by reference to the fair value. The
fair value for HPSRs is calculated on the basis outlined in Note 28 Employee entitlements and reflects the fair
value of the benefit derived at the date at which they were granted. An independent third party determines
the fair value using an option pricing model and discounted cash flow methodology, as appropriate.
Hurdled Performance Share Right. LTI awards are delivered as HPSRs under the CPP. HPSRs represent the
right to receive a fully-paid ordinary Challenger share for zero consideration subject to satisfying an
employment condition and Challenger satisfying the absolute TSR performance hurdle. HPSRs do not provide
an entitlement to vote or a right to dividends. The Board has discretion to amend or withdraw HPSRs at any
point.
Key Management Personnel. Persons having authority and responsibility for planning, directing and
controlling the activities of an entity, directly or indirectly, including any Director (whether executive or
otherwise) as defined in AASB 124 Related Party Disclosures.
Long term incentive. LTIs are awarded annually to KMP to support a continued focus on long-term
performance outcomes. Executives will only realise value from LTIs if total shareholder returns exceed the
hurdles set, ensuring a direct link between executive reward and shareholder outcomes.
Normalised net profit after tax. Excludes asset or liability valuation movements that are above or below
expected long-term trends and significant items that may positively or negatively impact financial results.
Refer to the Operating and financial review section for further information.
Normalised return on equity (pre-tax). Normalised profit before tax divided by average net assets.
Normalised net profit before variable reward and tax. Excludes any asset or liability valuation
movements that are above or below expected long-term trends and any significant items that may positively
or negatively impact the financial results, and excludes STI expense, employee share award expense and tax.
The Board convenes a Remuneration Committee comprising Independent Non-Executive Directors and which
is a delegated committee of the Board to assist the Board in discharging its responsibilities.
Deferred STI awards are delivered as Restricted Shares under the CPP. A Restricted Share is a beneficial
interest in a fully-paid ordinary Challenger share acquired for zero consideration. Restricted Shares are subject
to disposal restrictions and vest subject to satisfaction of an employment condition. Restricted Shares provide
an entitlement to vote and a right to dividends.
Represents the accounting expense of remuneration for the financial year. This includes fixed remuneration,
cash STI awards, the fair value amortisation expense of share-based awards granted up to balance sheet
date, distributions from the CPP Trust, long service leave entitlements and insurance.
Short term incentive. STIs are used to reward KMP and employees for significant contributions to
Challenger’s results over the course of the financial year. Individual STI awards are allocated on the basis of
annual contribution and with reference to STI targets and market benchmarks. The Board has discretion to
amend or withdraw the STI at any point. STIs may be awarded in the form of cash and/or equity.
Total shareholder return. TSR represents the change in share price plus dividends received over a given
timeframe. Challenger uses absolute TSR as the measure of performance for HPSRs.
Variable
remuneration
Consists of cash STI and share-based awards. Share-based awards comprise Restricted Shares (DPSRs prior to
1 July 2021) and HPSRs.
VWAP
Volume weighted average price. Ratio of the value of shares traded to total volume traded over a time
horizon. A five-day VWAP is used to calculate the number of DPSRs per dollar of deferred STIs. A five-day
VWAP is used to calculate the number of HPSRs per dollar of LTIs. A 90-day VWAP is also used for absolute
TSR performance testing (start and end price) for HPSR awards.
51
Challenger Limited 2021 Annual Report
Directors’ report
5 Indemnification and insurance of
8 Significant events after the
Directors and officers
balance date
In accordance with its Constitution, and where permitted
under relevant legislation or regulation, the Company
indemnifies the Directors and officers against all liabilities to
another person that may arise from their position as Directors
or officers of the Company and its subsidiaries, except where
the liability arises out of conduct that is fraudulent, dishonest,
criminal, malicious or a reckless act, error or omission.
In accordance with the provisions of the Corporations Act
2001, the Company has insured the Directors and officers
against liabilities incurred in their role as Directors and officers
of the Company. The terms of the insurance policy, including
the premium, are subject to confidentiality clauses and
therefore the Company is prohibited from disclosing the
nature of the liabilities covered and the premium paid.
6 Indemnification of auditor
To the extent permitted by law, the Company has agreed to
indemnify its auditor, Ernst & Young, as part of the terms of
its audit engagement agreement. The primary purpose of the
indemnity is to indemnify Ernst & Young for any loss that it
may suffer as a result of a false representation given by
Challenger management where a claim is made against Ernst
& Young by a third party.
There is a caveat if Ernst & Young’s loss results from its own
negligence or wrongful or wilful acts or omissions. No
payment has been made to indemnify Ernst & Young during
or since the end of the financial year.
7 Environmental regulation and
performance
Some members of the Group act as a trustee or responsible
entity for a number of trusts that own assets both in Australia
and overseas. Some of these assets are subject to
environmental regulations under Commonwealth, state and
offshore legislation. The Directors are satisfied that adequate
systems are in place for the management of the Group’s
environmental responsibilities and compliance with various
legislative, regulatory and licence requirements. Further, the
Directors are not aware of any breaches of these
requirements, and to the best of their knowledge all activities
have been undertaken in compliance with environmental
requirements.
On 23 December 2020, Challenger agreed to acquire 100%
of MyLifeMyFinance Limited, an Australian-based customer
digital bank, for $35.0 million. The acquisition price is subject
to a completion adjustment and is based on a net asset value
of $18.0 million. Provisional Goodwill on acquiring the
business is estimated to be approximately $17.0 million and
may be subsequently adjusted in accordance with the
requirements of AASB 3 Business Combinations. The
acquisition received formal approval from the Treasurer of the
Commonwealth of Australia on 29 July 2021 and was
completed on 30 July 2021. The acquisition is highly strategic
and provides Challenger the opportunity to significantly
expand its secure retirement income offering, including
entering Australia's term deposit market. In the 2022 financial
year, the Bank will represent a third operating segment of the
Group.
At the date of this financial report, no other matter or
circumstance has arisen that has, or may significantly affect,
the Group’s operations, the results of those operations or the
Group’s state of affairs in future financial years which has not
already been reflected in this report.
9 Rounding
The amounts contained in this report and the financial report
have been rounded to the nearest $100,000, unless otherwise
stated, under the option available to the Group under
Australian Securities and Investments Commission (ASIC)
Corporations Instrument 2016/191.
10 Non-audit services
The Group Audit Committee has reviewed details of the
amounts paid or payable for non-audit services provided to
Challenger during the year ended 30 June 2021 by the
Company’s auditor, Ernst & Young.
The Directors are satisfied that the provision of those non-
audit services by the auditor is compatible with the general
standard of independence for auditors imposed by the
Corporations Act 2001 and did not compromise the auditor
independence requirements of the Corporations Act 2001
for the following reasons:
• All non-audit services were approved in accordance with
the Auditor Independence Policy which outlines the
approval process that must occur for all non-audit services
and which involves the Challenger CEO, CFO or delegate,
depending on size and circumstances; and
• No non-audit services were carried out that were
specifically excluded by the Auditor Independence Policy.
For details of fees for non-audit services paid to the auditors,
refer to Note 29 Remuneration of auditor of the financial
report.
52
Directors’ report
Challenger Limited 2021 Annual Report
11 Authorisation
Signed in accordance with a resolution of the Directors of Challenger Limited:
P Polson
Independent Chair
9 August 2021
R Howes
Managing Director & Chief Executive Officer
9 August 2021
12 Auditor’s independence declaration
The Directors received the following declaration from the auditor of Challenger Limited:
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Auditor’s independence declaration to the Directors of Challenger Limited
As lead auditor for the audit of the financial report of Challenger Limited for the financial year ended 30 June 2021, I declare to
the best of my knowledge and belief, there have been:
a. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
b. no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Challenger Limited and the entities it controlled during the financial year.
Ernst & Young
T Johnson
Partner
Sydney
9 August 2021
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
53
Challenger Limited 2021 Annual Report
Sustainability
Sustainability
Sustainability is embedded across Challenger. Through a
refreshed strategy, Challenger aims to create value for
customers, shareholders, employees and the community.
The sustainability strategy supports Challenger’s purpose to
provide financial security for a better retirement through:
•
•
responsible business practices that focus on customers,
employees, shareholders and the environment;
acting on issues affecting the ability of retirees to achieve
financial security;
• helping customers and communities to be strong and
•
financially resilient; and
investing responsibly by incorporating environmental,
social and governance (ESG) considerations when making
investment decisions.
Challenger’s 2021 Sustainability Report outlines the Group’s
approach to sustainability and is available from the company
website:
investment portfolios, with market, legal and reputation risks
occurring across many industries.
Product and technology innovation
Dynamic market conditions require innovation to ensure
Challenger is keeping up with the pace of change. Ensuring
the Company has appropriate digital tools and technology in
place is key to this. In addition, partnerships and collaboration
with stakeholders will allow Challenger to develop products
and services that continue to meet the changing needs of
customers.
Privacy and security
The global pandemic accelerated the growing trend to move
business operations online. The speed of change has increased
the risk of exposure to cyber threats and fraud. As Challenger
increases digital customer interaction, there is an increased
focus on ensuring the privacy and security of both customer
and business data.
> challenger.com.au/about-us
Great place to work
This report covers Challenger’s key initiatives and
achievements and the Group’s approach to addressing
Challenger’s most material matters. It also demonstrates the
Company’s contribution to the UN Sustainable Development
Goals (SDGs).
Material matters
Trust and confidence
Operating ethically, with strong governance practices and high
levels of trust is critical to Challenger’s ability to deliver to
customers, shareholders, employees and the broader
community. Challenger recognises the importance of
maintaining a strong culture and high levels of conduct;
providing open and transparent disclosures; and responsibly
managing risks.
Better customer outcomes
Challenger is committed to providing better customer
outcomes that lead to improved satisfaction and support our
customers to achieve financial security for a better retirement.
Challenger does this by investing in research to understand
more about the Group’s customers; designing products that
meet customer needs; and continuing to provide a trusted
brand.
Economic, market and regulatory conditions
As an investment management company, Challenger is
impacted by market volatility and uncertainty as well as the
low interest rate trend. The need for diversification and
ensuring access to appropriate assets remains an important
focus for Challenger’s business and stakeholders.
Investing responsibly
There has been growing pressure for companies to consider
ESG issues when setting investment strategies. These
considerations will help make Challenger more resilient.
Changing stakeholder expectations highlight the importance
of responsible lending and investment practices that support
good ESG outcomes.
Climate risk
The physical and transition risks related to climate change will
have financial impacts on Challenger if not considered.
The physical risks will have an impact on Challenger’s real
assets, considering their ability to withstand extreme weather
events. Transition risks will be felt more widely through
Challenger seeks to provide an engaged and enabled
workforce that embraces diverse thinking and has positive
labour practices. The Company recognises that maintaining a
great culture and capabilities is critical to success, supporting
Challenger’s ability to deliver the business strategy. Providing
the tools and technology to enable employees are essential
elements of an engaged workplace.
Community connection and resilience
As a retirement income provider, Challenger plays a key role in
contributing to fiscally responsible solutions to funding the
ageing population. Using internal expertise, Challenger
supports the industry in understanding how to effectively plan
for retirement to improve financial security. Investing
strategically in the community to address a social issue further
enhances Challenger’s contribution to this. Through giving
and volunteering programs, and plans for future community
activities, Challenger aims to connect with and support the
communities in which the Company operates.
Providing a great workplace
Challenger’s strategy provides a clear, coherent, unifying
statement of who it is, where it is going and how it will get
there. A key component of this strategy is an employee vision
to bring together a diverse group of top talent, inspired by the
Company’s purpose, with strong culture and capabilities to
deliver shared success.
While COVID-19 has proven disruptive for many businesses, a
big priority for Challenger has been, and continues to be,
focusing on the wellbeing of employees. Throughout the
pandemic Challenger achieved this in a variety of ways,
including communicating regularly and keeping employees up
to date with the Company’s approach; setting up a new
working from home hub on the intranet; and holding online
discussion forums with leaders.
The results of a pulse survey in March 2021 showed that many
employees have enjoyed the benefits of remote working,
something Challenger is committed to offering on an ongoing
basis.
At the same time, the survey revealed that nearly everyone
(96%) wanted to mix this with the personal connection and
collaboration time that being in the office offers.
To deliver this, Challenger is rolling out a team-based
approach to hybrid work, where teams work together with
their leaders to agree more formally on their work patterns,
taking into account the needs of the team, Challenger and
individuals.
54
Sustainability
Challenger Limited 2021 Annual Report
Sustainability (continued)
Making diversity count
Challenger knows that ensuring business success relies on a
workforce with diverse thinking and experience. As such,
Challenger actively looks to recruit and retain employees from
a range of backgrounds.
To make this a reality, Challenger continues to make progress
on implementing the Company’s Diversity and Inclusion
strategy. Key focus areas for this are to: build a truly inclusive
and diverse workforce; advance gender equality; and create
meaningful employment opportunities for people over 50.
This year Challenger advanced a number of initiatives through
four diversity and inclusion networks, focused on gender, age,
LGBTQI+ and cultural diversity. This included rolling out a
series of diversity videos challenging misconceptions and
biases; joining the Pride in Diversity network – Australia’s
leading not for profit support program providing inclusion
strategies for LGBTQI+ persons; and submitting Challenger’s
responses to the Australian Workplace Equality Index’s annual
questionnaire on how supported LGBTQI+ persons feel at
work.
While COVID-19 meant employees couldn’t come together to
celebrate key diversity milestones such as Mardi Gras, Lunar
New Year, Diwali and Ramadan this year, Challenger
continued to promote employee involvement in these events
outside of work through the company intranet and other
internal channels.
Risk is everybody’s business
The management of risk is fundamental to Challenger’s
business, supporting better outcomes to our customers and
building long-term shareholder value. At Challenger, risk is
everybody’s business.
The Board’s Risk Appetite Statement outlines the level of risk
that is acceptable to the business to achieve its strategic
objectives. This is combined with its risk management
framework, which monitors, mitigates and manages the risks
to which Challenger is exposed.
The Board recognises the broad range of risks Challenger
faces as a participant in the financial services industry,
including funding and liquidity risk; investment and pricing
risk; counterparty risk; strategic, business and reputation risk;
operational risk; licence and regulatory risk; climate change
risk; and conduct risk. The Board also maintains a focus on
contemporary and emerging risks, monitoring key risks to
Challenger’s strategy.
The Leadership team is accountable for managing identified
risks within their divisions and is required to manage risk as
part of business objectives with risk management integrated
across business processes.
There are clear accountabilities for risk management for all
Challenger employees and these are measured through
Challenger’s annual performance management process.
Challenger’s risk management framework also incorporates
key ESG issues. The Company’s range of policies and practices
carefully consider ESG risks and opportunities when making
business decisions.
More detailed information about Challenger’s risk
management approach is provided in the 2021 Sustainability
Report.
Investing in the community
Challenger’s partnership with Council on the Ageing (COTA)
NSW was established in 2019 to deliver a program of
research, advice and practical support to address the
underemployment of people over 50.
This year, working alongside both COTA NSW and Newgate
Research, Challenger published research on understanding the
needs of older workers and how businesses can enhance their
workplaces.
Based on the insights of this research, a program and toolkit
are being designed, covering:
•
•
•
education and advice for hiring managers;
support for auditing existing programs and policies, and
building new ones to promote age diversity;
advice on fostering connections between age diverse
groups at work; and
• developing training programs to deliver equal access to
upskilling and training opportunities.
Challenger introduced a new payroll giving platform this year,
allowing employees to donate to the charities that are most
important to them. Challenger matches employee donations
up to $500 for each employee every year. Employees also
have one paid day of leave for volunteering every year and are
given opportunities to support personal charities throughout
the year.
Managing Challenger’s impact on the
environment
Challenger is committed to supporting progress in
transitioning to a low-carbon economy. This includes working
with internal and external stakeholders to find ways to reduce
risk and create a more resilient economy.
Challenger’s strong governance supports the resilience of the
business, with the Board having oversight of climate-related
risks and opportunities. A newly established ESG Steering
Committee which provides quarterly reporting to the Group
Risk Committee, will enhance this process for 2022.
Each year, Challenger calculates the impact from direct
operations, including scope 1, 2 and 3 emissions. To ensure
accuracy and transparency, an external consultant supported
this work, which was audited by a third party. These emissions
are offset using high-quality credits which support projects
that improve the environment in Australia and around the
world.
Challenger’s full commitment to sustainability is outlined in
the 2021 Sustainability Report, which can be viewed at:
> challenger.com.au/sustainabilityreport2021
55
Challenger Limited 2021 Annual Report
Financial statements
Statement of comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows
Notes to the financial statements
Section 1: Basis of preparation and overarching significant accounting policies
Section 2: Key numbers
Note 1 Revenue
Note 2 Expenses
Note 3 Segment information
Note 4 Income tax
Section 3: Operating assets and liabilities
Note 5 Financial assets – fair value through profit and loss
Note 6 Investment and development property
Note 7 Special Purpose Vehicles
Note 8 Life contract liabilities
Note 9 External unit holders’ liabilities
Note 10 Derivative financial instruments
Note 11 Notes to Statement of cash flows
Section 4: Capital structure and financing costs
Note 12 Contributed equity
Note 13 Interest bearing financial liabilities
Note 14 Reserves and retained earnings
Note 15 Finance costs
Note 16 Dividends paid and proposed
Note 17 Earnings per share
Section 5: Risk management
Note 18 Financial risk management
Note 19 Fair values of financial assets and liabilities
Note 20 Collateral arrangements
Section 6: Group structure
Note 21 Parent entity
Note 22 Controlled entities
Note 23 Investment in associates
Note 24 Related parties
Section 7: Other items
Note 25 Goodwill and other intangible assets
Note 26 Lease assets and liabilities
Note 27 Contingent liabilities, contingent assets and credit commitments
Note 28 Employee entitlements
Note 29 Remuneration of auditor
Note 30 Subsequent events
Signed reports
Directors’ declaration
Independent auditor’s report
Investor information
Additional information
57
58
59
60
61
65
65
66
67
70
72
72
73
77
78
82
82
85
86
86
89
92
93
94
94
96
96
101
105
106
106
107
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109
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Inside back cover
This financial report covers Challenger Limited (the Company) and its controlled entities (the Group or Challenger).
56
Statement of comprehensive income
For the year ended 30 June
Revenue
Expenses
Finance costs
Share of profits of associates
Profit/(loss) before income tax
Income tax (expense)/benefit
Profit/(loss) for the year after income tax
Profit/(loss) attributable to shareholders of Challenger Limited
Profit/(loss) attributable to non-controlling interests
Profit/(loss) for the year after income tax
Other comprehensive income
Items that may be reclassified to profit and loss, net of tax
Translation of foreign entities
Hedge of net investment in foreign entities
Cash flow hedges – SPV1
Other comprehensive income for the year
Total comprehensive income for the year after tax
Comprehensive income attributable to shareholders of Challenger Limited
Comprehensive income attributable to non-controlling interests
Total comprehensive income for the year after tax
Earnings per share attributable to ordinary shareholders of
Challenger Limited
Basic
Diluted
1 SPV = Special Purpose Vehicles.
The statement of comprehensive income should be read in conjunction with the accompanying notes.
Challenger Limited 2021 Annual Report
ended
Note
1
2
15
23
4
14
14
14
17
17
2021
$m
2020
$m
2,785.7
1,132.8
(1,662.4)
(1,538.9)
(327.9)
(213.8)
35.2
830.6
(238.3)
592.3
592.3
—
29.3
(590.6)
169.5
(421.1)
(416.0)
(5.1)
592.3
(421.1)
(49.7)
46.8
(0.5)
(3.4)
588.9
588.9
—
1.6
0.5
—
2.1
(419.0)
(413.9)
(5.1)
588.9
(419.0)
Cents
88.2
68.0
Cents
(68.4)
(68.4)
57
Challenger Limited 2021 Annual Report
Statement of financial position
As at 30 June
Assets
Cash and cash equivalents
Cash and cash equivalents – SPV
Receivables
Derivative assets
Financial assets – fair value through profit and loss
Investment and development property - held for sale
Investment and development property
Mortgage assets – SPV
Finance leases
Property, plant and equipment
Investment in associates
Other assets
Right-of-use lease assets
Deferred tax assets
Goodwill
Other intangible assets
Total assets of shareholders of Challenger Limited and non-controlling
interests
Liabilities
Payables
Current tax liability
Derivative liabilities
Interest bearing financial liabilities
Interest bearing financial liabilities – SPV
External unit holders’ liabilities
Provisions
Lease liabilities
Deferred tax liabilities
Life contract liabilities
Total liabilities of shareholders of Challenger Limited and non-controlling
interests
Net assets of shareholders of Challenger Limited and non-controlling
interests
Equity
Contributed equity
Reserves
Retained earnings
Total equity of shareholders of Challenger Limited
The Statement of financial position should be read in conjunction with the accompanying notes.
Note
11
7
10
5
6
6
7
23
26
4
25
25
4
10
13
7
9
26
4
8
12
14
14
2021
$m
928.6
60.8
830.4
738.3
2020
$m
603.9
58.0
594.1
1,112.5
22,174.7
20,834.0
396.0
—
3,389.7
3,685.9
570.3
706.6
26.8
28.2
83.2
63.1
34.7
4.0
579.9
9.2
31.7
25.9
63.0
65.8
32.4
49.8
579.9
18.1
29,917.9
28,461.6
1,744.1
1,640.9
48.1
507.6
1.0
725.4
5,950.2
7,278.2
373.3
460.7
3,632.2
2,415.8
35.7
70.3
60.7
35.5
67.6
5.7
13,669.9
12,581.2
26,092.1
25,212.0
3,825.8
3,249.6
2,425.5
2,377.6
(50.9)
1,451.2
(50.9)
922.9
3,825.8
3,249.6
58
Statement of changes in equity
Challenger Limited 2021 Annual Report
Attributable to shareholders of Challenger Limited
Share-
based
payment
reserve
Cash flow
hedge
reserve
–SPV
Foreign
currency
translation
reserve
Adjusted
controlling
interest
reserve
Contributed
equity
Retained
earnings
Total
shareholder
equity
Non-
controlling
interests
$m
$m
$m
$m
$m
$m
$m
$m
Total
equity
$m
2,093.7
(57.7)
0.1
(2.6)
7.8 1,559.0 3,600.3
22.5 3,622.8
—
—
—
—
—
(3.7)
(3.7)
—
(3.7)
For the year ended
30 June 2020
Note
Balance at 1 July 2019
Transition of new leasing
standard net of tax
Restated balance at
1 July 2019
Loss for the year
14
—
—
2,093.7
(57.7)
0.1
—
(2.6)
7.8 1,555.3 3,596.6
22.5 3,619.1
—
— (416.0)
(416.0)
(5.1) (421.1)
Other comprehensive
income for the year
Total comprehensive income
for the year
Other equity movements
Ordinary shares issued
Treasury shares purchased
Treasury shares vested
Settled forward purchases
of Treasury shares
Share-based payment
expense net of tax less
releases
Dividends paid
Other movements
Balance at 30 June
2020 and 1 July 2020
For the year ended
30 June 2021
—
—
—
2.1
— —
2.1
—
2.1
—
—
—
2.1
— (416.0)
(413.9)
(5.1) (419.0)
12
12
12
269.4
(8.8)
14.5
—
—
—
—
—
—
—
—
—
— —
269.4
— 269.4
— —
— —
(8.8)
14.5
—
(8.8)
— 14.5
12
8.8
—
—
—
— —
8.8
—
8.8
14
16
—
—
—
1.5
—
—
—
—
—
—
—
—
— —
1.5
—
1.5
— (216.4)
(216.4)
— (216.4)
(2.1) —
(2.1)
(17.4)
(19.5)
2,377.6
(56.2)
0.1
(0.5)
5.7 922.9 3,249.6
— 3,249.6
Profit for the year
14
—
—
—
—
— 592.3
592.3
— 592.3
Other comprehensive
income for the year
Total comprehensive
income for the year
Other equity
movements
—
—
(0.5)
(2.9)
— —
(3.4)
—
(3.4)
—
—
(0.5)
(2.9)
— 592.3
588.9
— 588.9
Ordinary shares issued
12
37.7
—
—
—
— —
37.7
— 37.7
Treasury shares purchased
Treasury shares vested
12
12
—
10.2
—
—
—
—
—
—
— —
—
— —
— —
10.2
— 10.2
Settled forward purchases
of Treasury shares
Share-based payment
expense net of tax less
releases
Dividends paid
Other movements
Balance at 30 June
2021
12
—
—
—
—
— —
—
— —
14
16
—
—
—
3.4
—
—
—
—
—
—
—
—
— —
3.4
—
3.4
—
(64.0)
(64.0)
—
(64.0)
— —
—
— —
2,425.5
(52.8)
(0.4)
(3.4)
5.7 1,451.2 3,825.8
— 3,825.8
The Statement of changes in equity should be read in conjunction with the accompanying notes.
59
Note
8
8
2021
$m
2020
$m
645.1
630.0
4,802.9
3,162.9
(3,787.9)
(3,747.0)
2,346.8
2,024.0
(1,397.9)
(1,670.9)
(589.2)
(593.3)
65.0
638.8
(56.1)
(90.9)
66.0
733.6
(104.6)
(15.8)
484.9
(936.1)
(1,623.4)
—
105.3
(12.9)
(21.3)
(10.2)
164.7
(9.3)
—
(865.0)
(1,478.2)
35.0
(0.2)
275.3
(5.9)
823.7
(5.1)
(8.3)
(216.4)
—
—
—
863.3
(130.0)
791.9
661.9
Challenger Limited 2021 Annual Report
Statement of cash flows
For the year ended 30 June
Operating activities
Receipts from customers
Annuity and premium receipts
Annuity and claim payments
Receipts from external unit holders
Payments to external unit holders
Payments to vendors and employees
Dividends received
Interest received
Interest paid
Income tax paid
Investing activities
Payments on net purchases of investments
Payments for purchase of controlled entities
Net mortgage loan repayments
Payments for net purchases of property, plant and equipment
Payments for purchase of associate interest
Net cash outflows from investing activities
Financing activities
Proceeds from issue of ordinary shares
Costs associated with issue of ordinary shares
Net cash inflows from operating activities
11
2,576.6
Net (repayments)/proceeds from borrowings – interest bearing financial liabilities
13
(1,409.7)
Payments for lease liabilities
Proceeds from/(payments) for Treasury shares
Net dividends paid
Proceeds from the issue of Challenger Capital Notes 3
Costs associated with the issue of Challenger Capital Notes 3
Repayment of Challenger Capital Notes 1
Net cash (outflows)/inflows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The Statement of cash flows should be read in conjunction with the accompanying notes.
13
13
13
(6.9)
0.7
(64.0)
385.0
(6.7)
(317.3)
(1,384.1)
327.5
661.9
989.4
60
Section 1: Basis of preparation and overarching significant
accounting policies
Challenger Limited 2021 Annual Report
Challenger Limited (the Company or the parent entity) is a
company limited by shares, incorporated and domiciled in
Australia, whose shares are publicly traded on the Australian
Securities Exchange (ASX).
The financial report for Challenger Limited and its controlled
entities (the Group or Challenger) for the year ended 30 June
2021 was authorised for issue in accordance with a resolution
of the Directors of the Company on 9 August 2021.
(i)
Basis of preparation and
statement of compliance
This is a general purpose financial report that has been
prepared in accordance, and complies, with the requirements
of the Corporations Act 2001, Australian Accounting
Standards and other authoritative pronouncements of the
Australian Accounting Standards Board (AASB) and
International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB).
Challenger Limited is a for-profit entity for the purposes of
preparing financial statements.
Unless otherwise stated, amounts in this financial report are
presented in Australian dollars and have been prepared on an
historical cost basis. The assets and liabilities disclosed in the
Statement of financial position are grouped by nature and
listed in an order that reflects their relative liquidity. In the
disclosure, the current/non-current split is between items
expected to be settled within 12 months (current) and those
expected to be settled in greater than 12 months (non-
current).
(ii)
Significant accounting
judgements, estimates and
assumptions
The carrying values of amounts recognised on the Statement
of financial position are often based on estimates and
assumptions of future events. The key estimates and
assumptions that have a significant risk of causing a material
adjustment to the recognised amounts within the next annual
reporting period are disclosed individually within each of the
relevant notes to the financial statements. The impact of
COVID-19 has been considered in relation to the disclosures
made in these financial statements.
Coronavirus (COVID-19) impact
Background
COVID-19, a respiratory illness caused by a new virus, was
declared a worldwide pandemic by the World Health
Organization in March 2020. COVID-19, as well as measures
to slow the spread of the virus, have since had a significant
impact on global economies and equity and debt markets. The
Group has considered the impact of COVID-19 and associated
market volatility in preparing its financial statements. The
impact of COVID-19 has resulted in the application of further
judgement in the areas in which significant judgement already
occurs. Given the dynamic and evolving nature of COVID-19,
limited recent experience of the economic and financial
impacts of such a pandemic, changes to the estimates and
outcomes that have been applied in the measurement of the
Group’s assets and liabilities may arise in the future.
Processes applied
As a consequence of COVID-19 and in preparing these
consolidated financial statements, management:
•
•
•
•
•
re-evaluated whether there were any additional areas of
judgement or estimation uncertainty;
reviewed external market communications to identify
other COVID-19-related impacts;
reviewed public forecasts and experience from previous
downturns and conducted several internal processes to
ensure consistency in the application of the expected
impact of COVID-19 across all asset classes;
assessed the carrying values of its assets and liabilities and
determined any impact that may occur as a result of
market inputs and variables impacted by COVID-19;
ran multiple stress-testing scenarios, which are an integral
component of the Group’s risk management framework
and a key input to the capital adequacy assessment
process, to assess the potential impacts of the COVID-19
pandemic on its portfolio, which assists in the
organisation’s prudent risk management; and
•
considered the impact of COVID-19 on the Group’s
financial statement disclosures.
As a result of applying these processes, the Group has made
additional disclosures in respect of the impact of COVID-19 on
accounting judgements and estimates for the following:
• Basis of preparation and overarching significant
accounting policies; (xi) Receivables;
• Note 6 Investment and development property;
• Note 7 Special Purpose Vehicles;
• Note 19 Fair values of financial assets and liabilities; and
• Note 25 Goodwill and other intangible assets.
(iii) New and revised accounting
standards and policies
Except for the matter referred to below, the accounting
policies and methods of computation are the same as those
adopted in the annual report for the prior comparative period.
Changes to significant accounting policy
Software-as-a-Service (SaaS)
The International Financial Reporting Standards Interpretations
Committee (IFRIC) issued a final decision in April 2021 which
impacts SaaS arrangements. The decision discusses whether
configuration or customisation expenditure relating to SaaS
arrangements can be recognised as an intangible asset and if
not, the time period over which the expenditure should be
expensed in the Statement of comprehensive income.
61
Challenger Limited 2021 Annual Report
(iii) New and revised accounting standards and policies (continued)
The Group’s accounting policy has historically been to
capitalise all costs related to the configuration and
deployment of SaaS arrangements as intangible assets in the
Statement of financial position. The adoption of the above
decision by IFRIC has resulted in the recognition of an expense
of $7.5 million in the Statement of comprehensive income in
the current period. Refer to Note 25 Goodwill and other
intangible assets for more detail.
New accounting standards and amendments
that are effective in the current financial year
There have been no new or revised accounting standards or
interpretations that are effective from the year beginning on
or after 1 July 2020 which materially impact the financial
results. Where applicable, comparative figures have been
updated to reflect any changes in the current period.
Accounting standards and interpretations issued
but not yet effective
AASB 17 Insurance Contracts
AASB 17 Insurance Contracts replaces AASB 4 Insurance
Contracts, AASB 1038 Life Insurance Contracts and AASB
1023 General Insurance Contracts, and is effective for
Challenger from 1 July 2023. The Group is not expected to
early adopt the standard. AASB 17 Insurance Contracts
establishes globally consistent principles for the recognition,
measurement, presentation and disclosure of life insurance
contracts issued. Life investment contracts are currently
measured under the financial instruments standard and will
continue to be recognised under this standard.
AASB 17 introduces changes to the profit emergence profiles
of life insurance contracts but does not affect the underlying
economics or cash flows of the contracts. The impacts on
capital requirements and income tax are unknown, pending
regulatory responses from APRA and the Australian Taxation
Office (ATO) respectively.
The main changes anticipated for the Group under AASB 17
are set out below:
• Insurance contract portfolios will be disaggregated to more
granular levels and will be required to be evaluated by risk
type, issue year and profitability.
• Although conceptually similar, the Contractual Service
Margin (CSM) recognises profit on a different basis to the
current Margin on Services (MoS) approach and therefore
the profit signature is likely to change for portfolios with
positive profit margins.
• A new risk adjustment for non-financial risk will be
introduced which reflects the compensation that the Group
requires for bearing the uncertainty in relation to the
amount and timing of cash flows. The confidence level used
to determine the risk adjustment will need to be disclosed.
• Additional disclosures will be more extensive, requiring
increased granularity and more analysis of movements.
The Group has conducted a business impact assessment and
has identified the following focus areas:
methodology that will require enhanced data capture and
storing for additional modelling and processes.
• Contracts affected – the Group expects that all contracts
classified as insurance contracts under AASB 1038 will meet
the definition of insurance contracts under AASB 17.
• Separating components – the Group has assessed the
requirement to unbundle features and components under
AASB 17 and expects that no change will be required given
no contracts are currently unbundled under AASB 1038.
• Under AASB 17, assumptions are to be reviewed on an
annual basis at a minimum with some items requiring more
frequent review.
3.
2.
• Level of aggregation – AASB 17 requires insurance contracts
that are subject to similar risks and managed together, be
allocated to a portfolio. AASB 17 requires that each
portfolio be divided into a minimum of:
1.
a group that is onerous (loss-making) at initial
recognition;
a group that at initial recognition has no significant
possibility of becoming onerous subsequently; and
a group of any remaining contracts in the portfolio.
The Group has conducted a high-level review of
historical data to ascertain the feasibility of meeting
the level of aggregation required by AASB 17. In
addition, the Group will be formalising a policy for
defining portfolios and contract groups. Due to the
nature of the insurance products that Challenger offers
its customers, the Group expects that most of the
portfolios will be designated as onerous. If a portfolio
is designated as onerous, a CSM calculation will not be
required. Alternatively, the tracking of the loss
component will be required under AASB 17.
• Risk adjustment – the Group expects the risk adjustment
methodology to align with the cost of capital approach.
• Disclosure - AASB 17 introduces a new way of viewing life
insurance revenue and expenses and accompanying
financial disclosures. Under AASB 17, insurance contract
revenue will be allocated to each period in a proportion to
the reduction in liability over the remaining coverage period.
The Group has assessed the capability of the Group’s
general ledger system and confirms that no issues are
anticipated for configuring the system to meet the new
financial reporting and disclosure requirements under AASB
17.
• Insurance contracts will need to be restated at 1 July 2023
(being the date of initial application). The first full year
financial statements presented under AASB 17 will be for
the year ended 30 June 2024 with comparatives required
for 30 June 2023. The first half year financial statements will
be for the period ended 31 December 2023, with
comparatives required for 31 December 2022. The Group
notes that the full retrospective approach may be
impracticable in some cases, especially for older cohorts
where assumptions cannot be determined without
hindsight.
While the standard is expected to impact the Group’s
comprehensive income, it is not yet practicable to determine
the quantum.
• Measurement model – the Group will adopt the General
Model approach, also referred to as the Building Block
Approach (BBA). In principle, the General Model approach is
similar to the current MoS methodology as prescribed under
AASB 1038. The General Model approach is a more detailed
Existing standards and interpretations not yet effective
Other amendments to existing standards or interpretations
that are not yet effective are not expected to result in a
material impact to the Group’s financial statements.
62
Challenger Limited 2021 Annual Report
(iv)
Comparatives
Where necessary, comparative figures have been reclassified
to conform to any changes in presentation made in this
financial report.
(v)
Rounding of amounts
Unless otherwise stated, amounts contained in this report and
the financial report have been rounded to the nearest
$100,000 under the option available to the Group under ASIC
Corporations Instrument 2016/191.
(vi)
Foreign currency
Both the presentation currency and the functional currency of
the Company and its controlled Australian entities are
Australian dollars. A number of foreign controlled entities
have a functional currency other than Australian dollars.
Transactions in foreign currency are translated into the
functional currency at the foreign exchange rate ruling at the
date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated into
Australian dollars at the foreign exchange rate at the
Statement of financial position date.
Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the
exchange rate as at the date of the transaction.
Non-monetary items measured at fair value in a foreign
currency are translated to the functional currency using the
exchange rates at the date when the fair value was
determined. Derivatives are used to hedge the foreign
exchange risk relating to certain transactions. Refer to Note 10
Derivative financial instruments.
The collectability of lease receivables is assessed on an
ongoing basis and a provision for expected credit loss is made
using inputs such as historical rates of arrears and the current
delinquency position of the portfolio. Bad debts are written
off as incurred.
(viii) Property, plant and equipment
Items of property, plant and equipment are stated at cost, or
deemed cost, less accumulated depreciation and impairment
losses. Depreciation is calculated on a straight line basis to
realise the net cost of each class of these assets over its
expected useful life. Estimates of remaining useful lives are
made on a regular basis for all assets, with annual
reassessments for major items. The expected useful life of
property, plant and equipment is three to five years.
The carrying values of property, plant and equipment and
infrastructure fixed assets are reviewed for impairment when
events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment losses are recognised in
the Statement of comprehensive income.
Any impairment losses recognised in prior periods are reversed
through the Statement of comprehensive income if there has
been a change in the estimated useful life used to determine
the asset’s recoverable amount since the last impairment loss
was recognised.
The increased carrying amount of an asset attributable to a
reversal of an impairment loss would not exceed the carrying
amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been
recognised for the asset in prior years.
Foreign controlled entities
(ix)
Provisions
On consolidation, the assets and liabilities of foreign
subsidiaries whose functional currency differs from the
presentation currency are translated into Australian dollars at
the rate of exchange at the Statement of financial position
date. Exchange differences arising on the retranslation are
taken directly to the foreign currency translation reserve in
equity.
The change in fair value of derivative financial instruments
designated as a hedge of the net investment in a foreign
controlled entity is also recognised in the foreign currency
translation reserve.
On disposal of a foreign controlled entity, the deferred
cumulative amount recognised in equity relating to that
particular foreign operation is recognised in the Statement of
comprehensive income.
(vii) Finance leases
Where Challenger acts as a lessor, leases are classified at their
inception as either operating or finance leases based on the
economic substance of the agreement so as to reflect the risks
and benefits incidental to ownership. Contracts to lease assets
and hire purchase agreements are classified as finance leases
for accounting purposes if they transfer substantially all the
risks and rewards of ownership of the asset to the customer or
an unrelated third party. Assets held under a finance lease are
recognised at the beginning of the lease term at an amount
equal to the net investment in the lease which comprises the
gross investment in the lease discounted at the interest rate
implicit in the lease.
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event; it
is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and a reliable
estimate can be made of the amount of the obligation. A
provision for restructuring is recognised when the Group has
approved a detailed and formal restructuring plan, and the
restructuring has either commenced or has been announced
publicly. Future operating costs are not provided for. When
the Group expects some or all of a provision to be
reimbursed, for example, under an insurance contract, the
reimbursement is recognised as a separate asset only when
the reimbursement is virtually certain. The expense relating to
any provision is presented in the Statement of comprehensive
income net of any reimbursement.
Provisions are measured at the present value of management’s
best estimate of the expenditure required to settle the
obligation at the Statement of financial position date. If the
effect of the time value of money is material, provisions are
discounted using a current pre-tax rate that reflects the time
value of money and the risks specific to the liability. The
increase in the provision resulting from the passage of time is
recognised in finance costs.
63
Challenger Limited 2021 Annual Report
(x)
Goods and services tax (GST)
Revenue, expenses and assets are recognised net of the
applicable amount of GST, except where the amount of the
GST incurred is not recoverable from the taxation authority. In
these circumstances, the GST is recognised as part of the cost
of the acquisition of the asset or as part of the expense.
Receivables and payables are stated with the applicable
amount of GST included. The net amount of GST recoverable
from, or payable to, the ATO is included as an asset or liability
in the Statement of financial position.
Cash flows are included in the Statement of cash flows on a
gross (GST-inclusive) basis. The GST components of cash flows
arising from investing and financing activities that are
recoverable from, or payable to, the ATO are classified as
operating cash flows.
(xi)
Receivables
Receivables are recognised at amortised cost using the
effective interest method, less any allowance for expected
credit losses. The entity has applied a simplified approach to
measuring expected credit losses, which uses a lifetime
expected loss allowance. To measure the expected credit
losses, receivables have been grouped based on days overdue.
The modelling methodology applied in estimating expected
credit losses in these financial statements is consistent with
that applied in the financial statements for the year ended
30 June 2020.
The impact of COVID-19 on the global economy and how
governments, businesses and consumers respond is uncertain.
This uncertainty is reflected in the Group’s assessment of
expected credit losses from its receivables portfolio which are
subject to a number of management judgements and
estimates.
The judgements and associated assumptions have been made
within the context of the impact of COVID-19, and reflect
historical experience and other factors that are considered to
be relevant, including expectations of future events that are
believed to be reasonable under the circumstances. In relation
to COVID-19, judgements and assumptions include the extent
and duration of the pandemic, the impacts of actions of
governments and other authorities, and the responses of
businesses and consumers in different industries, along with
the associated impact on the global economy. Accordingly,
the Group’s expected credit losses estimates are inherently
uncertain and, as a result, actual results may differ from these
estimates.
(xii) Payables
Payables represent unsecured non-derivative, non-interest
bearing financial liabilities in respect of goods and services
provided to the Group prior to the end of the financial year.
They include accruals, trade and other creditors and are
recognised at amortised cost, which approximates fair value.
64
Challenger Limited 2021 Annual Report
Section 2: Key numbers
This section presents the results and performance of the Group for the year and provides additional information about
those line items on the Statement of comprehensive income that the Directors consider most relevant in the context of
understanding the financial components of the Group’s operations.
Note 1 Revenue
Investment revenue
Fixed income securities and cash
Interest revenue1
Net realised and unrealised gains/(losses) on fixed income securities
Investment property and property securities
Property rental revenue
Dividend and distribution revenue
Net realised and unrealised gains/(losses) on investment property and property securities
Equity and infrastructure investments
Dividend and distribution revenue
Net realised and unrealised gains/(losses) on equity investments
Net realised and unrealised losses on infrastructure investments
Other
Net realised and unrealised losses on foreign exchange translation and hedges
Net realised and unrealised gains/(losses) on interest rate derivatives
Net realised and unrealised losses on equity swap derivatives
Net realised and unrealised gains/(losses) on credit default swap derivatives
Fee revenue
Management and performance fee revenue
Transaction fee revenue
Other revenue
Life insurance contract premiums and related revenue
Change in life insurance contract liabilities
Change in life investment contract liabilities
Change in reinsurance contract liabilities
Total revenue
30 June
2021
$m
30 June
2020
$m
662.7
42.8
291.1
5.6
114.6
22.1
124.8
(13.0)
(78.6)
384.2
(16.1)
23.6
190.7
22.8
774.2
(90.5)
283.9
2.0
(112.1)
37.9
(12.7)
(96.7)
(51.6)
(99.8)
(202.2)
(199.7)
183.3
41.2
1,600.6
(622.0)
29.8
—
2,785.7
1,192.7
(502.1)
(15.4)
0.4
1,132.8
1 Interest revenue earned for items measured at amortised cost using the effective interest method $29.7 million (30 June 2020: $41.0 million) and interest revenue
earned for items measured at fair value through profit and loss $633.0 million (30 June 2020: $733.2 million).
Accounting policy
Revenue is recognised at an amount that reflects the
consideration to which the Group expects to be entitled in
exchange for providing services to a customer. Revenues and
expenses are recognised on an accrual basis. The following
specific policies are applied:
• Gains or losses arising from changes in the fair value of
financial instruments classified as fair value through profit
and loss are recognised as revenue in the Statement of
comprehensive income when the change in value is
recognised in the Statement of financial position.
• Interest revenue is recognised as it accrues using an
effective interest rate method, taking into account the
effective yield of the financial asset. The effective interest
rate is the rate that discounts estimated future cash flows
through the expected life of a financial instrument, or
where appropriate, a shorter period.
• Interest revenue on finance leases is recognised on a basis
that reflects a constant periodic return on the net
investment in the finance lease.
• Property rental revenue is accounted for on a straight line
basis over the lease term. Contingent rental income is
recognised as income in the period in which it is earned.
• Lease incentives granted are recognised as part of the total
rental income. Operating lease rental income is recognised
on a straight line basis over the life of the contract.
65
Challenger Limited 2021 Annual Report
Note 1
Revenue (continued)
Accounting policy (continued)
• Dividend revenue from listed equity shares and listed
property securities is recognised as income on the date the
share is quoted ex-dividend. Dividend revenue from unlisted
equity shares and unlisted property securities is recognised
when the dividend is declared.
The Company recognises revenue from performance fees
over the contract period, but only to the extent that it is
highly probable that a significant reversal of revenue will not
occur in subsequent periods.
• Transaction fee revenue is accrued when the transaction is
• Management fees are invoiced quarterly based on a
percentage of the funds under management (FUM).
The fees relate specifically to the services provided in that
quarter, and are distinct from services provided in other
quarters.
• Performance fees are based on returns in excess of a
specified benchmark market return, over the contract
period. Performance fees are typically received at the end of
the performance period specified in the contract.
executed.
• Life insurance contract premiums are recognised as revenue
when risk is transferred to the Group.
• Changes in life insurance and investment contract liabilities
arising from discount rates, inflation rates and other
assumptions are recognised as revenue, with other
movements being included in Note 2 Expenses.
Refer to Note 8 Life contract liabilities for more details on the
accounting policy of life contract liabilities.
Note 2
Expenses
Life insurance contract claims and expenses
Cost of life insurance contract liabilities
Cost of life investment contract liabilities
Investment property related expenses1
Management fee expense
Distribution expenses
Employee expenses
Employee share-based payments and superannuation
Occupancy expense – operating lease
Depreciation of right-of-use lease asset
Depreciation and amortisation expense
Technology and communications
Professional fees
Other expenses
Total expenses
30 June
2021
$m
852.4
104.1
125.6
91.2
140.3
56.4
158.8
21.3
4.2
6.0
9.3
29.5
37.3
26.0
1,662.4
30 June
2020
$m
749.6
99.2
121.9
85.1
163.1
47.6
146.4
23.6
6.0
4.7
10.6
26.7
20.0
34.4
1,538.9
1 Investment property related expenses relate to rental income generating investment properties.
Accounting policy
Expenses are recognised on an accrual basis. The following
specific policies are applied:
• Investment property expenditure, including rates, taxes,
insurance and other costs associated with the upkeep of a
building, are brought to account on an accrual basis. Repair
costs are expensed when incurred. Rental expenses incurred
under an investment property operating lease are
recognised on a straight line basis over the term of the
lease. Other amounts that improve the condition of the
investment are capitalised into the carrying value of the
asset.
• Life insurance contract claims and expenses are recognised
when the liability to the policyholder under the contract has
been established.
• Cost of life insurance and life investment contract liabilities
recognised as an expense consists of the interest expense on
the liability and any loss on the initial recognition of new
business less the release of liability in respect of expenses
incurred in the current period. The interest expense on the
liability represents the unwind of the discount on the
opening liability over the period, whereas the impacts of
changes in the discount rate applied for the current
valuation are included in the change in life contract liabilities
disclosed in Note 1 Revenue.
Refer to Note 8 Life contract liabilities for more details on the
accounting policy of life contract liabilities.
66
Segment information
Note 3
The reporting segments1 of the Group have been identified as follows:
Challenger Limited 2021 Annual Report
For the year ended
30 June
Net income
Life
Funds
Management
Total reporting
segments
Corporate and
other2
Total
2021
2020
2021
2020
2021
2020
2021
2020
2021
$m
512.8
$m
$m
638.9 169.3 158.1
$m
$m
682.1
$m
797.0
$m
—
$m
0.4
$m
682.1
2020
$m
797.4
Operating expenses
(113.9)
(114.2)
(98.3) (100.4)
(212.2)
(214.6)
(69.1)
(69.8)
(281.3)
(284.4)
Normalised EBIT
Interest and
borrowing costs
Normalised net
profit/(loss)
before tax
Tax on normalised
profit
Normalised net
profit after tax
Investment
experience after tax
Significant items
after tax
Profit/(loss)
attributable to the
shareholders of
Challenger Ltd
Other statutory
segment
information
Revenue from
external customers3
Interest revenue
Interest expense
Intersegment
revenue
Depreciation and
amortisation
As at 30 June
Segment assets
398.9
524.7 71.0 57.7
469.9
582.4
(69.1)
(69.4)
400.8
513.0
—
— — —
—
—
(5.0)
(6.5)
(5.0)
(6.5)
398.9
524.7 71.0 57.7
469.9
582.4
(74.1)
(75.9)
395.8
506.5
(117.3)
(162.8)
278.5
343.7
318.6
(750.3)
(4.8)
(9.4)
592.3
(416.0)
1,918.1
148.4 204.9 210.2 2,123.0
358.6
662.2
772.6 — —
662.2
772.6
—
0.5
— 2,123.0
358.6
1.6
662.7
774.2
(291.2)
(172.8)
(1.3)
(0.5)
(292.5)
(173.3)
(35.4)
(40.5)
(327.9)
(213.8)
(44.8)
(43.6) 44.8 43.6
—
—
—
—
—
—
(4.6)
(3.4)
(3.5)
(2.3)
(8.1)
(5.7)
(1.2)
(4.9)
(9.3)
(10.6)
22,337.1 19,481.7 300.6 291.7 22,637.7 19,773.4 7,280.2 8,688.2 29,917.9 28,461.6
Segment liabilities
(18,790.0) (16,543.3)
(28.4)
(36.0) (18,818.4) (16,579.3) (7,273.7) (8,632.7) (26,092.1) (25,212.0)
Net assets
attributable to
shareholders
3,547.1 2,938.4 272.2 255.7 3,819.3 3,194.1
6.5
55.5 3,825.8 3,249.6
1 Refer below for definitions of the terms used in the management view of segments.
2 Corporate and other includes corporate companies, corporate SPV, non-controlling interests and Group eliminations.
3 Funds Management revenue from external customers is predominantly management fees.
Definitions
Operating segments
The following segments are identified on the basis of internal
reporting to Key Management Personnel, including the Chief
Executive Officer (the chief operating decision maker) of the
Group, and comprise component parts of the Group that are
regularly reviewed by senior management in order to allocate
resources and assess performance:
Life
The Life segment principally includes the annuity and life
insurance business carried out by CLC and Accurium Pty
Limited (provision of self-managed superannuation fund
actuarial certificates). CLC offers fixed rate retirement and
superannuation products that are designed for Australian
investors who are seeking a low-risk, fixed term or lifetime
investment and reliable income. CLC also offers fixed term
and lifetime investments to investors in Japan through its
reinsurance arrangement with MS Primary. CLC invests in
assets providing long-term income streams for customers.
67
Challenger Limited 2021 Annual Report
Note 3
Segment information (continued)
Definitions (continued)
Funds Management
Funds Management earns fees from its Fidante Partners and
CIPAM operations, providing an end-to-end funds
management business. Funds Management has equity
investments in a number of the Fidante Partners boutique
fund managers and, through the CIPAM business, offers a
range of managed investments across fixed income and
property.
Corporate and other
The Corporate and other segment, which is not considered an
operating segment of the Group, is used to reconcile the total
segment results back to the consolidated results and consists
of other income and costs that fall outside the day-to-day
operations of the reportable segments. These include the costs
of the Group CEO and CFO, shared services across the Group,
long-term incentive costs, Directors’ fees, corporate
borrowings and associated borrowing costs and shareholder
registry services. To reconcile to Group results, the Corporate
and other segment also includes eliminations and non-core
activities of the Group.
Transactions between segments
All transactions and transfers between segments are generally
determined on an arm’s length basis and are included within
the relevant categories of income and expense. These
transactions eliminate on consolidation.
Normalised vs. statutory results
Net income and operating expenses differ from revenue and
expenses as disclosed in the Statement of comprehensive
income as certain direct costs (including distribution expenses,
property expenses and management fees) included in
expenses are netted off against revenues in deriving the
management view of net income above. Net income consists
of the following sub-categories of management views of
revenue:
• normalised cash operating earnings (Life segment);
• net income (Funds Management segment); and
• other income (Corporate and other segment).
In addition, the revenues, expenses and finance costs from
Special Purpose Vehicles (SPVs) are separately disclosed in the
statutory view but are netted off in net income.
Revenue also includes investment gains and losses which are
excluded from the management view as they form part of
investment experience (refer below).
Normalised cash operating earnings
This is calculated as cash earnings plus normalised capital
growth (refer below). Cash earnings represent the sum of
investment yield (being the management view of revenue
from investment assets, such as net rental income, dividends
and interest), interest expense, distribution expenses and fees.
Normalised EBIT
Normalised earnings before interest and tax (EBIT) comprises
net income less operating expenses, as defined above. It
excludes investment experience, corporate interest and
borrowing costs, tax and any significant items (refer below).
Tax on normalised profit
This represents the consolidated statutory tax expense or
benefit for the period, less tax attributable to non-controlling
interests, investment experience and significant items.
Investment experience after tax
The Group is required by accounting standards to value
applicable assets and liabilities supporting the life insurance
business at fair value. This can give rise to fluctuating
valuation movements being recognised in the Statement of
comprehensive income, particularly during periods of market
volatility.
As the Group is generally a long-term holder of assets, due to
assets being held to match the term of life contract liabilities,
the Group takes a long-term view of the expected capital
growth of the portfolio rather than focusing on short-term
volatility. Investment experience is a mechanism employed to
isolate the volatility arising from asset and liability valuation
within the results so as to more accurately reflect the
underlying performance of the Group.
Investment experience is calculated as the difference between
the actual investment gains/losses (both realised and
unrealised) and the normalised capital growth (refer below)
plus life contract valuation changes and new business strain.
Investment experience after tax is investment experience net
of tax at the prevailing income tax rate.
Normalised capital growth
This is determined by multiplying the normalised capital
growth rate for each asset class by the average investment
assets for the period. The normalised growth rates represent
the Group’s medium to long-term capital growth expectations
for each asset class over the investment cycle.
The annual normalised growth rates are +4.0% for equity and
infrastructure, +2.0% for property, 0.0% for alternatives and
-0.35% for cash and fixed income. The asset classes and
normalised growth rates changed from 1 July 2020. The rates
have been set with reference to the composition of the asset
classes and medium to long-term market growth rates, and
are reviewed to ensure consistency with prevailing market
conditions. The rates for the prior period were as follows, and
reflect the composition of the portfolio at that time: +3.5%
for equity and other investments, +4.0% for infrastructure,
+2.0% for property, and -0.35% for cash and fixed income.
Life contract valuation experience
Life contract valuation experience represents the impact of
changes in macroeconomic variables including bond yields and
inflation factors, illiquidity premium, expense assumptions and
other factors applied in the valuation of life contract liabilities.
It also includes the attribution of the corresponding interest
rate, foreign exchange and inflation derivatives used for
hedging.
68
Challenger Limited 2021 Annual Report
Note 3
Segment information (continued)
Definitions (continued)
New business strain
New business strain is a non-cash valuation adjustment
recognised when annuity rates on new business are higher
than the risk-free rate used to fair value life contracts.
Maintenance expense allowances over the expected future
term of the new business are also included in the life contract
valuation. New business strain reported in the period
represents the valuation loss on new sales generated in the
current period net of the reversal of new business strain of
prior period sales.
Significant items after tax
The Group presents additional non-IFRS financial information
to the market to provide meaningful insights into the financial
condition of the business. Due consideration has been given
to ensure that disclosure of Challenger’s normalised profit
framework is explained, reconciled and calculated consistently
period-on-period. Within this framework, Challenger defines
significant items as non-recurring or abnormal income or
expense items.
Major customers
No individual customer amounted to greater than 10% of the
Group’s segment as defined above.
Geographical areas
The Group operates predominantly in Australia, hence no
geographical split is provided to the chief operating decision
maker. Reinsurance of annuities issued by MS Primary
accounted for $901.6 million of the Group’s life insurance
premium income in 2021 out of total life insurance premium
income of $1,363.7 million (2020: $742.6 million out of a
total of $1,157.1 million) and comprised 15.2% of total policy
liabilities outstanding as at 30 June 2021 (2020: 13.7%);
while the underlying annuitant resides in Japan, the
reinsurance service provided by CLC is considered to be
Australian business and is therefore not recognised as a
geographically separate segment.
Reconciliation of management to statutory view of after-tax profit/(loss)
Operating segments normalised net profit before tax
Corporate and other normalised net loss before tax
Normalised net profit before tax (management view of pre-tax profit)
Tax on normalised profit
Normalised net profit after tax
Investment experience after tax
Significant items after tax
Profit/(loss) attributable to the shareholders of Challenger Limited
Loss attributable to non-controlling interests excluded from management view
Statutory view of profit/(loss) after tax
Reconciliation of management view of revenue to statutory revenue
Operating segments
Corporate and other
Net income (management view of revenue)
Expenses and finance costs offset against revenue
SPV expenses and finance costs offset against SPV income
Distribution expenses offset against related income
Change in life contract liabilities and reinsurance contracts recognised in expenses
Property related expenses offset against property income
Interest and loan amortisation costs
Management fee expenses
Adjustment for non-controlling interests and other items
Difference between management view of investment experience and
statutory recognition
Actual capital growth
Normalised capital growth
Life contract valuation experience
New business strain
Statutory revenue (refer Note 1 Revenue)
30 June
2021
$m
30 June
2020
$m
469.9
(74.1)
395.8
(117.3)
278.5
318.6
(4.8)
592.3
—
592.3
682.1
—
682.1
3.3
56.4
1,082.1
91.2
289.0
140.3
(13.8)
576.2
(34.1)
(76.1)
(10.9)
2,785.7
582.4
(75.9)
506.5
(162.8)
343.7
(750.3)
(9.4)
(416.0)
(5.1)
(421.1)
797.0
0.4
797.4
11.1
47.6
970.7
85.1
160.3
163.1
(32.0)
(1,068.3)
(120.2)
86.1
31.9
1,132.8
69
Challenger Limited 2021 Annual Report
Note 4
Income tax
Reconciliation of income tax (expense)/benefit
Profit/(loss) before income tax
Prima facie income tax based on the Australian company tax rate of 30%
Tax effect of amounts not assessable/deductible in calculating taxable income:
– Challenger Capital Notes distributions
– non-assessable and non-deductible items
– tax rate differentials
– tax adjustment in respect of non-controlling interests
– other items
30 June
2021
$m
830.6
(249.2)
(7.9)
8.4
10.6
—
(0.2)
Income tax (expense)/benefit
Underlying effective tax rate1
1 The calculation of the underlying effective tax rate excludes the non-controlling interests’ profit of nil (30 June 2020: loss $5.1 million).
(238.3)
28.7%
Analysis of income tax (expense)/benefit
Current income tax expense for the year
Current income tax benefit prior year adjustment
Deferred income tax (expense)/benefit
Deferred income tax benefit/(expense) prior year adjustment
Income tax (expense)/benefit
Income tax benefit on translation of foreign entities
Income tax expense on hedge of net investment in foreign operations
Income tax (expense)/benefit from other comprehensive income
30 June
2021
$m
(140.0)
1.9
(101.6)
1.4
(238.3)
17.4
(20.1)
(2.7)
30 June
2020
$m
(590.6)
177.2
(8.3)
(5.3)
5.9
(1.5)
1.5
169.5
28.9%
30 June
2020
$m
(28.6)
3.9
198.3
(4.1)
169.5
5.0
(0.2)
4.8
Statement of financial
position
Statement of comprehensive
income
30 June
2021
$m
30 June
2020
$m
30 June
2021
$m
30 June
2020
$m
49.3
5.5
6.1
19.0
79.9
(75.9)
49.4
5.1
92.1
16.6
163.2
(113.4)
4.0
49.8
(7.7)
(124.1)
(4.8)
(136.6)
75.9
(1.9)
(114.6)
(2.6)
(119.1)
113.4
(60.7)
(5.7)
(0.1)
0.4
(86.0)
0.7
(85.0)
(3.5)
(9.5)
(2.2)
(15.2)
10.2
1.2
80.9
3.6
95.9
12.3
68.4
17.6
98.3
(100.2)
194.2
Analysis of deferred tax
Deferred tax assets
Accruals and provisions
Employee entitlements
Losses
Other
Total deferred tax assets
Set off of deferred tax assets
Net deferred tax assets recognised in Statement of
financial position
Deferred tax liabilities
Unrealised foreign exchange movements
Unrealised net gains on investments
Other
Total deferred tax liabilities
Set off of deferred tax liabilities
Net deferred tax liabilities recognised in Statement of
financial position
Deferred income tax (expense)/benefit recognised in
Statement of comprehensive income
70
Note 4
Income tax (continued)
Tax Transparency Code Disclosures
Australia and overseas tax (expense)/benefit
Total Australia
Total overseas
Income tax (expense)/benefit
Analysis of current tax liability
Opening balance
Current income tax expense for the year
Current income tax prior year adjustment
Tax in equity
Income tax paid
Other
Closing balance
Unrecognised deferred tax balances
Non-tax consolidated group revenue losses – tax effected
Tax consolidated group capital losses – tax effected
Accounting policy
Income tax expense
Challenger Limited 2021 Annual Report
30 June
2021
$m
(228.5)
(9.8)
(238.3)
30 June
2020
$m
176.6
(7.1)
169.5
30 June
2021
$m
1.0
140.0
(1.9)
(0.4)
(90.9)
0.3
48.1
Change
$m
(405.1)
(2.7)
(407.8)
30 June
2020
$m
(2.7)
28.6
(3.9)
(1.8)
(15.8)
(3.4)
1.0
30 June
2021
30 June
2020
$m
7.6
56.4
$m
7.4
56.2
Income tax expense for the year comprises current and
deferred tax. Income tax is recognised in the Statement of
comprehensive income except to the extent that it relates to
items recognised directly in equity.
intention to settle on a net basis. Deferred tax assets are
recognised for the carryforward of unused tax losses to the
extent that it is probable that future taxable profit will be
available against which the unused tax losses can be utilised.
Current tax assets and liabilities
Tax consolidation
Current tax assets and liabilities for the current and prior
periods are the amounts expected to be recovered from or
paid to the taxation authorities based on the respective
period’s taxable income. The tax rates and tax laws used to
compute the amounts are those that are enacted or
substantively enacted as at the Statement of financial position
date. Current tax assets and liabilities have been offset where
there is a legally enforceable right to set off.
Deferred income tax assets and liabilities
Deferred income tax is provided on temporary differences at
the Statement of financial position date between the tax bases
of assets and liabilities and their carrying amounts for financial
reporting purposes.
Deferred income tax assets and liabilities are recognised for
deductible or taxable temporary differences and are measured
at the tax rates that are expected to apply to the year the
asset is realised or the liability is settled, based on the tax rates
(and tax laws) that have been enacted or substantially enacted
as at the Statement of financial position date. Deferred
income tax assets and liabilities have been offset where they
relate to income tax levied by the same taxation authority on
either the same taxable entity or different taxable entities
within the same taxable group who have a legal right and an
Challenger Limited and its 100% owned Australian resident
subsidiaries formed a tax consolidated group with effect from
1 July 2002 and are therefore taxed as a single entity from
that date. Challenger Limited is the head entity of the tax
consolidated group.
Tax effect accounting by members of the tax group
Members of the tax consolidated group have applied tax
funding principles under which Challenger Limited and each
of the members of the tax consolidated group agree to pay or
receive tax equivalent amounts to or from the head entity,
based on the current tax liability or current tax asset of the
member. Such amounts are reflected in the amounts
receivable from or payable to each member and the head
entity. The group allocation approach is applied in
determining the appropriate amount of current tax liability or
current tax asset to allocate to members of the tax
consolidated group.
Key estimates and assumptions
Deferred tax assets are recognised for deductible temporary
differences and unused tax losses only if it is probable that
future taxable amounts will be available to utilise those
temporary differences and losses.
71
Challenger Limited 2021 Annual Report
Section 3: Operating assets and liabilities
This section discloses information relating to the assets and liabilities underlying the Group’s financial performance and the
key sources of funding for those assets. It further presents the derivative financial instruments employed to hedge the
Group’s financial risk exposures, and consolidated information relating to the cash flows of the Group.
Note 5
Financial assets – fair value through profit and loss
30 June
2021
$m
6,054.8
6,576.3
7,653.6
112.2
30 June
2020
$m
8,610.3
4,915.6
5,809.2
139.8
20,396.9
19,474.9
143.1
1,201.3
1,344.4
48.8
296.6
345.4
88.0
88.0
97.8
804.9
902.7
55.9
324.2
380.1
76.3
76.3
22,174.7
20,834.0
11,911.1
8,339.2
10,263.6
12,494.8
22,174.7
20,834.0
Key estimates and assumptions
Unlisted investment valuations
Investments held at fair value through profit and loss for
which there is no active market or external valuation available
are valued making as much use of available and supportable
market data as possible and keeping judgemental inputs to a
minimum, either by:
•
reference to the current market value of another
instrument that is substantially the same;
• using recent arm’s length market transactions;
• option pricing models refined to reflect the issuer’s specific
circumstances;
• discounted cash flow analysis; or
• other methods consistent with market best practice.
Refer to Note 18 Financial risk management for further
disclosure.
Domestic sovereign bonds and semi-government bonds
Floating rate notes and corporate bonds
Residential mortgage and asset-backed securities
Non-SPV mortgage assets
Fixed income securities
Shares in listed and unlisted corporations
Unit trusts, managed funds and other
Equity securities
Units in listed and unlisted infrastructure trusts
Other infrastructure investments
Infrastructure investments
Indirect property investments in listed and unlisted trusts
Property securities
Total financial assets – fair value through profit and loss
Current
Non-current
Accounting policy
The Group categorises its financial assets as financial assets –
fair value through profit and loss (being initially designated as
such). Assets designated as fair value through profit and loss
consist of fixed income, equity, infrastructure, and property
securities. They are carried at fair value with unrealised gains
and losses being recognised through the Statement of
comprehensive income.
Purchases and sales of financial assets are recognised on the
date on which the Group commits to purchase or sell the
asset and when all risks and rewards of ownership have been
substantially transferred. Financial assets are then
derecognised when the right to receive cash flows from the
asset has expired.
The fair value of financial assets that are actively traded in
organised financial markets isre determined by reference to
quoted market bid prices at the close of business on the
Statement of financial position date. Assets backing life
contract liabilities of the statutory fund are required to be
designated at fair value through profit and loss in accordance
with AASB 1038 Life Insurance Contracts when permitted
by other Australian Accounting Standards.
72
Note 6
Investment and development property
Investment property held for sale1
Investment property in use
Investment property under development
Development property held for sale2,3
Total investment and development property4
Challenger Limited 2021 Annual Report
30 June
2021
$m
388.0
3,389.7
—
8.0
3,785.7
30 June
2020
$m
—
3,679.7
6.2
—
3,685.9
1 Investment property held for sale: County Court (30 June 2020: Nil).
2 Development property held for sale: Maitland (30 June 2020: Nil).
3 Development property held for sale is recognised at fair value.
4 Investment and development property held for sale is considered current. All other investment property is considered non-current.
Investment property
held for sale
Investment property
in use
30 June
2021
30 June
2020
30 June
2021
30 June
2020
Investment property
under development
30 June
2020
30 June
2021
Development
property held for
sale
30 June
2021
30 June
2020
$m
$m
$m
$m
$m
$m
$m
$m
—
166.5 3,679.7 3,384.3
6.2
178.4
—
—
—
—
(155.9)
—
—
105.1
—
—
—
—
—
—
—
—
—
—
326.0
(10.7)
(326.0)
10.7
—
—
—
—
—
0.7
61.3
—
—
0.1
—
—
—
173.7
(6.2)
(173.7)
50.3
75.8
(90.1)
72.8
(78.4)
11.5
—
—
—
0.2
1.3
—
6.2
0.1
1.7
—
388.0
— 3,389.7 3,679.7
—
6.2
8.0
—
—
—
—
—
Reconciliation of carrying
amounts
Balance at the beginning of
the year
Movements for the year
– acquisitions1
– disposals
– net transfers to/(from)
investment property held for
sale
– transfers to/(from)
investment property under
development
– capital expenditure
– net revaluation gain/(loss)
– foreign exchange gain
Balance at the end of the
year
1 Investment property acquisitions: Nil (30 June 2020: Acquisition of remaining 50% of Lennox, NSW $33.5m, Aeon Matsusaka XD, Japan $14.7m, Kotesashi
Towers, Japan $25.2m and Yorktown Toride, Japan $31.7m).
Accounting policy
Investment and development property
Investment and development property is initially recognised at
cost, including transaction costs. Subsequent to initial
recognition, investment and development property is
recognised at fair value.
Investment and development property is classified as held for
sale if its carrying value will be recovered principally through a
sale transaction rather than through continuing use. This
condition is met only when management is committed to the
sale, and the sale is highly probable to occur in the next 12
months. Investment and development property held for sale is
carried at fair value, being the latest valuation available, or
agreed sale price.
Gains or losses arising from changes in the fair values of
investment properties are included in the Statement of
comprehensive income in the period in which they arise.
Investment and development properties are derecognised
when they have either been disposed of or when the
investment property is permanently withdrawn from use and
no future benefit is expected from its disposal. Any gain or
loss on the retirement or disposal of an investment and
development property is recognised in the Statement of
comprehensive income in the year of retirement or disposal.
Where properties are debt financed, that finance is provided
either by secured mortgages or by funding that contains a
number of negative undertakings (including undertakings not
to create or allow encumbrances, and undertakings not to
incur financial indebtedness which ranks in priority to existing
debt).
73
Challenger Limited 2021 Annual Report
Note 6
Investment and development property (continued)
Accounting policy (continued)
Investment property under development
When redevelopment of an existing investment property
commences, it continues to be classified and measured as
investment property when the asset is being redeveloped for
continued future use as an investment property.
Valuers are required to provide valuation methodology and
calculations for fair value including reference to annual net
market income, comparable capitalisation rates, and
property-specific adjustments. The values of investment
property do not reflect anticipated enhancement from future
capital expenditure.
Investment property under construction is held at cost until an
estimate of the fair value can be reliably determined.
Impact of COVID-19
As at 30 June 2021 the real estate markets to which the
Group’s investment properties belong were still being
impacted by significant uncertainty caused by the COVID-19
pandemic. This has continued to create valuation uncertainty
for the year ended 30 June 2021.
The valuation uncertainty has affected key inputs, assumptions
and processes used in the valuation of the Group’s investment
properties, being:
•
•
estimating and forecasting the net income that a property
can produce; and
converting that income to value by applying investment
rates of return which are derived from analysis of recent
market transactions.
Income uncertainty
The impact of COVID-19 on the income-earning potential of
the Group’s properties remains uncertain. The Group leases
commercial space to a range of businesses from where they
conduct their operations. Restrictions imposed by Government
to combat COVID-19 has, in a majority of cases, impacted the
ability for these businesses to operate effectively from their
premises, or has affected their ability to operate in the usual
manner prior to the onset of COVID-19.
In response to this and the Government’s Code of Conduct
for commercial tenancies, the Group is currently finalising the
cost-sharing program introduced by the Code of Conduct for
each tenant that has been affected. This involves the Group
either deferring or waiving rent owed by the tenant
depending on the individual circumstances. The legislative
period for this relief has now ended across all states and there
remains a small portion of rent relief negotiations in progress
which are yet to be finalised. Since 30 June 2021, the NSW
and Victorian Governments have reintroduced restrictions to
combat several COVID-19 outbreaks within each state. These
restrictions will impact the operations of businesses across all
sectors in which the Group has property exposure. To assist
businesses through these restrictions, the Government has
announced business relief packages for those that are hardest
hit. The Group will continue to monitor the Government's
position on these business support packages and work with
those tenants that have been severely impacted.
Rent receivable balances in respect of current and deferred
rent recognised in the Statement of financial position for the
reporting period, have been assessed for impairment. An
approach has been adopted which applies a lifetime expected
credit loss and assesses all possible default events over the
expected life of the receivables balance.
Impact of COVID-19
Across all sectors, particularly retail, some tenants have sought
rent relief due to the impact the COVID-19 pandemic has had
on their ability to meet rental obligations. Rent relief is
granted after considering various factors and individual tenant
circumstances. Rent amounts will fall into the following
categories: (i) current rent due and payable now; (ii) deferred
rent, payable at a later date; or (iii) waived rent, not payable.
If relief is given for current and deferred rent, income will
continue to be recognised on a straight line basis over the
term of the lease. The resulting rent receivable assets
recognised in the Statement of financial position as at
30 June 2021 have been assessed for impairment.
The methodology adopted for determining whether these rent
receivable assets should be impaired is aligned to the
requirements of AASB 9 Financial Instruments.
When an agreement is made between the landlord and tenant
to waive rent:
• rent waived relating to future occupancy is spread over the
remaining lease term and recognised on a straight line basis;
• rent waived relating to past occupancy is expensed
immediately, except to the extent of a pre-existing provision
for expected credit losses relating to unpaid rent.
Key estimates and assumptions
Independent valuations for all investment properties are
conducted at least annually by suitably qualified valuers, and
the Directors make reference to these independent valuations
when determining fair value. For the year ended
30 June 2021, all investment properties were valued by
external valuers.
Each independent valuer is appointed in line with the
valuation policy, which requires that valuers are authorised to
practise under the law of the relevant jurisdiction where the
valuation takes place and have at least five years of
continuous experience in the valuation of property of a similar
type to the property being valued and on the basis that they
are engaged for no longer than two consecutive years on an
individual property.
The valuer must have no pecuniary interest that could conflict
with the valuation of the property, must be suitably
indemnified, and must comply with the Australian Property
Institute (API) Code of Ethics and Rules of Professional
Conduct (or foreign equivalent).
Fair value for the purposes of the valuation is market value as
defined by the International Assets Valuation Standards
Committee. In determining market value, valuers examine
available market evidence and apply this analysis to both the
traditional market capitalisation approach and the discounted
cash flow approach (using market-determined risk-adjusted
discount rates).
74
Challenger Limited 2021 Annual Report
Note 6
Investment and development property (continued)
Key estimates and assumptions (continued)
An appropriate loss rate has then been determined after
considering the following factors:
•
•
•
the asset sector in which the affected rent receivable is
recognised. Each sector is affected differently by COVID-19
and this needs to be reflected in any loss assumption;
the ranking of tenants by most to least affected by
COVID-19 impacts; and
the ageing of rent receivables.
After taking these factors into consideration and the
cost-sharing program undertaken with tenants, an impairment
of $2.7 million was recognised in the Statement of
comprehensive income as at 30 June 2021 (30 June 2020:
$2.2 million) which includes an impairment for current and
deferred rent, as well as waived rent impaired immediately.
This assessment was conducted based on reasonable and
supporting information readily available, and considering
current and expected future economic conditions.
Valuation uncertainty
Valuation uncertainty has also arisen from a lack of
transactional evidence from which to gauge current market
pricing with strong conviction.
Due to uncertainty relating to the impact of COVID-19,
transaction volumes were low through the first half of the
year ended 30 June 2021. Although activity has begun to
improve, at this point in time, the repercussions of the
pandemic on the property market remains uncertain and
market pricing cannot be known with certainty until such time
as the market stabilises.
In response to this valuation uncertainty, the Group
determined that all directly held investment properties would
be independently valued by external valuers at 30 June 2021.
The Group’s independent valuers have accounted for this
income and investment uncertainty by adjusting valuation
inputs and estimates to acknowledge the potential impact of
COVID-19 on investment property values. In addition to
having regard to the available sales evidence to determine
capitalisation and discount rates, they have also, where
appropriate, adopted lower growth rates in the short to
medium term, increased vacancy rates and letting up
allowances and lower market rental levels. Notwithstanding
the end of the legislated period for rent relief, valuers have
continued to make deductions for the estimated cost of rent
relief to tenants for occupancy disruption resulting from the
COVID-19 pandemic.
Acquisition
date1
Analysis of investment property as at
30 June
Investment property in use and held for sale
Australia
6 Chan Street (formerly DIBP Building),
ACT
14 Childers Street, ACT
21 O'Sullivan Circuit, NT
31 O'Sullivan Circuit, NT
35 Clarence Street, NSW
45 Benjamin Way (formerly ABS
Building), ACT
82 Northbourne Avenue, ACT
215 Adelaide Street, QLD
565 Bourke Street, VIC
839 Collins Street, VIC
Bunbury Forum, WA
Channel Court, TAS
Cosgrave Industrial Park, Enfield, NSW
County Court, VIC
Discovery House, ACT
Executive Building, TAS
Gateway, NT
Golden Grove, SA
Karratha, WA
Kings Langley, NSW
Lennox, NSW
North Rocks, NSW
Total Australia
01-Dec-01
01-Dec-17
27-Jan-16
27-Jan-16
15-Jan-15
01-Jan-00
01-Jun-17
31-Jul-15
28-Jan-15
22-Dec-16
03-Oct-13
21-Aug-15
31-Dec-08
30-Jun-00
28-Apr-98
30-Mar-01
01-Jul-15
31-Jul-14
28-Jun-13
29-Jul-01
27-Jul-13
18-Sep-15
Carrying
value
2021
$m
Total
cost2
$m
Cap
rate
2021³
%
Last
external
valuation
date
Carrying
value
2020
$m
Cap
rate
2020³
%
127.5
98.8
47.8
29.4
154.0
150.2
62.3
256.7
109.1
212.0
158.2
87.8
91.4
219.1
104.6
35.1
124.1
159.9
57.1
16.6
64.2
187.0
261.0
85.5
31.4
28.5
229.0
251.0
51.8
225.0
148.0
246.5
78.1
80.0
139.4
388.0
164.0
49.0
102.9
148.0
45.4
24.7
65.0
179.0
4.88 30-Jun-21
6.50 30-Jun-21
7.75 30-Jun-21
7.25 30-Jun-21
5.13 30-Jun-21
5.38 30-Jun-21
5.75 30-Jun-21
6.00 30-Jun-21
5.00 30-Jun-21
4.75 30-Jun-21
7.25 30-Jun-21
7.25 30-Jun-21
4.50 30-Jun-21
n/a 30-Jun-21
5.13 30-Jun-21
5.75 30-Jun-21
6.34 30-Jun-21
6.25 30-Jun-21
7.50 30-Jun-21
5.75 30-Jun-21
6.75 30-Jun-21
6.00 30-Jun-21
202.0
91.0
32.1
23.5
235.0
223.0
53.3
230.5
147.5
238.5
82.0
76.0
131.9
326.0
152.5
46.5
105.1
147.0
44.3
23.0
61.0
171.1
5.50
6.50
8.50
8.50
5.00
5.75
6.00
6.13
5.00
4.75
7.50
7.75
5.00
n/a
5.63
7.00
6.34
6.25
7.50
6.25
6.75
6.25
2,552.9 3,021.2
2,842.8
1 Acquisition date represents the date of initial acquisition or consolidation of the investment vehicle holding the asset.
2 Total cost represents the original acquisition cost plus additions less full and partial disposals since acquisition date.
3 The capitalisation rate is the rate at which net market income is capitalised to determine the value of the property. The rate is determined with regard to market
evidence.
75
Challenger Limited 2021 Annual Report
Note 6
Investment and development property (continued)
Analysis of investment property as at
30 June (continued)
Europe
Avenue de Savigny, Aulnay sous Bois
Japan
Aeon Kushiro
Aeon Matsusaka XD
Carino Chitosedai
Carino Tokiwadai
DeoDeo Kure
Fitta Natalie Hatsukaichi
Izumiya Hakubaicho
Kansai Super Saigo
Kojima Nishiarai
Kotesashi Towers
Life Asakusa
Life Higashi Nakano
Life Nagata
MaxValu Tarumi
Seiyu Miyagino
TR Mall Ryugasaki
Valor Takinomizu
Valor Toda
Yaoko Sakato Chiyoda
Yorktown Toride
Total international
Total investment property in use and
held for sale4
Investment property under
development and development
property held for sale
Maitland, NSW
Total investment property under
development and development
property held for sale
Acquisition
date1
Carrying
value
2021
$m
Total
cost2
$m
Cap
rate
2021³
%
Last
external
valuation
date
Carrying
value
2020
$m
Cap
rate
2020³
%
31-Dec-08
20.3
9.8
7.00 30-Jun-21
10.1
7.33
31-Jan-10
26-Sep-19
31-Jan-10
31-Jan-10
31-Jan-10
28-Aug-15
31-Jan-10
31-Jan-10
31-Jan-10
28-Nov-19
31-Jan-10
31-Jan-10
31-Jan-10
28-Aug-15
31-Jan-10
30-Mar-18
31-Jan-10
31-Jan-10
31-Jan-10
05-Mar-20
30.5
14.7
118.4
77.6
32.2
11.7
69.6
13.3
12.2
25.2
27.9
32.9
25.2
17.0
9.8
86.7
27.4
42.5
19.8
31.9
746.8
34.2
13.7
127.2
75.5
31.2
13.4
71.4
13.2
14.6
21.5
35.1
36.7
27.7
18.2
10.6
90.5
23.5
41.7
20.9
25.9
756.5
5.40 30-Jun-21
5.60 30-Jun-21
4.50 30-Jun-21
4.60 30-Jun-21
5.50 30-Jun-21
5.90 30-Jun-21
4.80 30-Jun-21
5.50 30-Jun-21
4.10 30-Jun-21
5.07 30-Jun-21
4.20 30-Jun-21
4.30 30-Jun-21
4.90 30-Jun-21
5.70 30-Jun-21
5.20 30-Jun-21
5.50 30-Jun-21
5.80 30-Jun-21
5.20 30-Jun-21
4.70 30-Jun-21
5.10 30-Jun-21
38.5
14.5
138.6
85.9
35.3
14.8
78.0
14.7
16.4
24.3
38.6
40.7
30.3
20.6
12.0
98.7
26.5
46.3
22.8
29.3
836.9
5.40
5.80
4.50
4.70
5.60
6.00
5.00
5.30
4.40
5.10
4.30
4.40
4.20
5.60
5.20
5.60
5.50
5.10
4.90
5.30
3,299.7 3,777.7
3,679.7
6-Dec-06
5.7
8.0
n/a
30-Jun-21
6.2
n/a
5.7
8.0
6.2
1 Acquisition date represents the date of initial acquisition or consolidation of the investment vehicle holding the asset.
2 Total cost represents the original acquisition cost plus additions less full and partial disposals since acquisition date.
3 The capitalisation rate is the rate at which net market income is capitalised to determine the value of the property. The rate is determined with regard to market
evidence.
4 At 30 June 2021, the investment property portfolio occupancy rate for Australia was 90.3% (30 June 2020: 90.7%) with a weighted average lease expiry of
5.1 years (30 June 2020: 5.5 years), Europe 100.0% (30 June 2020: 100.0%) with a weighted average lease expiry of 0.1 years (30 June 2020: 0.1 years) and
Japan 99.5% (30 June 2020: 99.5%) with a weighted average lease expiry of 9.4 years (30 June 2020: 9.7 years).
76
Note 7
Special Purpose Vehicles
Consolidated
Cash and cash equivalents
Mortgage assets1
Derivative assets
Total assets
Payables
Derivative liabilities
Interest bearing financial liabilities2
Total liabilities
Net assets
Cash flow hedge reserve
Total equity attributable to residual income unit holders
Challenger Limited 2021 Annual Report
30 June
2021
$m
60.8
570.3
—
631.1
257.7
0.5
373.3
631.5
(0.4)
(0.4)
(0.4)
30 June
2020
$m
58.0
706.6
0.4
765.0
303.9
0.3
460.7
764.9
0.1
0.1
0.1
1 $138.9 million (30 June 2020: $137.7 million) of the Mortgage assets balance is considered current.
2 $90.9 million (30 June 2020: $89.8 million) of the Interest bearing financial liabilities balance is considered current.
Accounting policy
The Group manages and services Special Purpose Vehicle (SPV)
trusts that hold residential mortgage-backed assets and issue
securitised financial liabilities. The trusts are entities that fund
pools of residential mortgage-backed loans via the issuance of
residential mortgage-backed securities (RMBS). All borrowings
of these SPVs are limited in recourse to the assets of the SPV.
As the Group retains the beneficial interest to the residual
income of these trusts, it is deemed to control them and, as a
result, they are consolidated. However, the significant risks
and rewards (most notably credit risk) lie with the RMBS
holders.
The assets and liabilities of the SPV have been separately
disclosed in the financial report as this presentation is
considered to provide a more transparent view of the Group’s
financial position. Transactions between the SPV and other
entities within the Group are eliminated on consolidation.
SPV cash and cash equivalents are financial assets and
comprise cash at bank and in hand plus short-term deposits
with an original maturity of three months or less that are
readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. Cash and
cash equivalents are initially recognised at fair value and
subsequently carried at amortised cost.
SPV mortgage assets are non-derivative financial loan assets
with fixed or determinable payments that are not quoted in an
active market. They are recognised net of any credit loss
provision.
The Group uses derivative financial instruments to hedge the
risks associated with SPV interest rate and foreign currency
fluctuations. All these derivative financial instruments are
stated at fair value. Gains or losses arising from fair value
changes on derivatives that do not qualify for hedge
accounting are recognised in the Statement of comprehensive
income.
SPV payables represent unsecured non-derivative, non-interest
bearing financial liabilities in respect of services provided to
the trusts prior to the end of the financial year. They include
accruals and other creditors and are recognised at amortised
cost.
SPV interest bearing financial liabilities are initially recognised
at fair value calculated net of directly attributable transaction
costs, and subsequently measured at amortised cost. Any
difference between the proceeds (net of transaction costs) and
the redemption amount is recognised in the Statement of
comprehensive income over the period of the contract using
the effective interest rate method.
Key estimates and assumptions
The Group continues to apply the historical provisioning
methodology which is considered to be materially consistent
with the provision estimated under the Expected Credit Loss
(ECL) impairment model. In estimating ECL for individual
mortgage loans, the Group makes judgements and
assumptions in relation to expected repayments, the realisable
value of the secured property, the prospects of the customer,
the value of any mortgage insurance and the likely cost and
duration of the work-out process. Judgements and
assumptions in respect of these matters have been updated to
reflect the potential impact of COVID-19. The Group has also
considered historical probabilities of default, the relative age
of the mortgage loan portfolio and the loan to valuation ratios
applicable to the mortgage loans and has determined that the
current provision estimated by the ECL impairment model is
adequate and no further overlay for the impact of COVID-19
is required.
Analysis of SPV mortgage assets impairment provision
Balance at the beginning of the year
Increase in provisions
Utilisation of provision against incurred losses and adjustments to estimates
Balance at the end of the year
30 June
2021
$m
11.5
0.5
(0.2)
11.8
30 June
2020
$m
10.2
0.9
0.4
11.5
77
Challenger Limited 2021 Annual Report
Note 8
Life contract liabilities
Fair value of life contract liabilities
Life investment contract liabilities – at fair value
Life insurance contract liabilities – at margin on services value
Reinsurance contract liabilities – at margin on services value
Total life contract liabilities
30 June
2021
$m
6,230.4
7,440.5
(1.0)
30 June
2020
$m
5,867.8
6,714.4
(1.0)
13,669.9
12,581.2
Life investment
contract liabilities
30 June
2021
$m
30 June
2020
$m
Life insurance
contract liabilities
30 June
2021
$m
30 June
2020
$m
Outward
reinsurance
contract liabilities
30 June
2021
$m
30 June
2020
$m
Total life contract
liabilities
30 June
2021
$m
30 June
2020
$m
5,867.8 6,757.7 6,714.4 6,113.1
(1.0)
(0.6) 12,581.2 12,870.2
Movement in life contract
liabilities
Balance at the beginning of the
year
Deposits and premium receipts
3,202.3 1,970.2 1,600.6 1,192.7
Payments and withdrawals
(2,935.5) (2,997.4)
(852.4)
(749.6)
Revenue per Note 1
Expense per Note 2
(29.8)
15.4
(978.6)
(690.6)
125.6
121.9
956.5
848.8
—
—
—
—
— 4,802.9 3,162.9
— (3,787.9) (3,747.0)
(0.4) (1,008.4)
(675.6)
— 1,082.1
970.7
Balance at the end of the year
6,230.4 5,867.8 7,440.5 6,714.4
(1.0)
(1.0) 13,669.9 12,581.2
Analysis of life insurance and reinsurance contract liability and expenses
Best estimate liability
Value of future life insurance contract benefits
Value of future expenses
Value of future acquisition expenses
Value of future premiums
Total best estimate liability
Value of future profit margins
Net life insurance and reinsurance contract liability
Life insurance and reinsurance contract operating expenses
Maintenance expenses
Total life insurance and reinsurance contract operating expenses
Analysis of life contract profit
Profit margin release on life insurance contracts
Loss recognition in respect of life insurance contracts1
Loss recognition in respect of life investment contracts
Difference in actual and assumed experience in respect of life insurance contracts
Difference in actual and assumed experience in respect of life investment contracts
Profit/(loss) arising from difference between actual and assumed experience
Investment earnings on assets in excess of life contract liabilities
Life contract profit/(loss) after tax
30 June
2021
$m
6,928.6
196.6
175.1
(902.1)
6,398.2
1,041.3
7,439.5
61.6
61.6
23.5
(50.6)
(88.7)
267.8
278.5
430.5
197.3
627.8
30 June
2020
$m
6,435.1
171.3
166.9
(889.3)
5,884.0
829.4
6,713.4
54.9
54.9
27.8
(43.5)
(54.2)
(74.5)
(68.6)
(213.0)
(123.6)
(336.6)
1 Under margin on services (MoS), any profits expected over the life of a contract are recognised over the life of the contract; however, if on the liability valuation
basis the contract is expected to be loss making, the capitalised value of these future losses is recognised at the point of sale. Retail insurance contracts are in loss
recognition because the liability valuation basis uses a risk-free discount rate but the rates offered to customers are higher.
78
Challenger Limited 2021 Annual Report
Note 8
Life contract liabilities (continued)
Accounting policy
Life insurance claims expense
The operations of the Group include the selling and
administration of life contracts through Challenger Life
Company Limited (CLC). These contracts are governed under
the Life Insurance Act 1995 (the Life Act) and are classified
as either life insurance contracts or life investment contracts.
Life insurance and life investment contract liabilities are
collectively referred to as life contract liabilities or policy
liabilities.
Life investment contract liabilities
Life investment contracts are contracts regulated under the
Life Act but which do not meet the definition of life insurance
contracts under AASB 1038 Life Insurance Contracts and
similar contracts issued by entities operating outside of
Australia.
For fixed term policies, the liability is based on the fair value of
the income payments and associated expenses, being the net
present value of the payments and expenses using an
appropriate discount rate curve as determined by the
Appointed Actuary.
Life insurance contract liabilities
Life insurance contracts are contracts regulated under the Life
Act that involve the acceptance of significant insurance risk.
Insurance risk is defined as significant if, and only if, an
insured event could cause an insurer to pay significant
additional benefits in any scenario, excluding scenarios that
lack commercial substance (i.e. have no discernible effect on
the economics of the transaction).
The financial reporting methodology used to determine the
value of life insurance contract liabilities is referred to as
margin on services (MoS). Under MoS, the excess of premiums
received over payments to customers and expenses (the
margin) is recognised over the life of the contract in a manner
that reflects the pattern of risk accepted from the policyholder
(the service) unless future margins are negative, in which case
the future losses are recognised in the Statement of
comprehensive income immediately. The planned release of
this margin is recognised in the Statement of comprehensive
income as part of the movement in life insurance contract
liabilities.
Life insurance contract liabilities are usually determined using
a projection method, whereby estimates of policy cash flows
(premiums, payments and expenses) are projected into the
future. The liability is calculated as the net present value of
these projected cash flows using a risk-free discount rate
curve.
The key areas of judgement in the determination of the
actuarial assumptions are the duration of claims/policy
payments, mortality, surrenders, acquisition and maintenance
expense levels, and economic assumptions for discount and
inflation rates.
Life insurance premium revenue
Life insurance premiums are recognised as revenue when risk
is transferred to the Group.
Life insurance claims expense is recognised in expenses when
the liability to the policyholder under the contract has been
established.
Inwards reinsurance
The Group has maintained inwards reinsurance arrangements
during the period that meet the definition of a life insurance
contract. The MoS methodology requires the present value of
future cash flows arising from reinsurance contracts to be
included in the calculation of life insurance contract liabilities.
Valuation
The MoS valuation, calculated in accordance with APRA
Prudential Standards and AASB 1038 Life Insurance
Contracts results in the systematic release of planned margins
over the life of the policy via a ‘profit carrier’. The Group
maintains life insurance contracts, including individual lifetime
annuities, wholesale mortality, wholesale morbidity, longevity
reinsurance and wholesale lifetime annuities. Annuity
payments are used as the profit carrier for lifetime annuities
and premium receipts, or best estimate claim payments are
used as the profit carrier for wholesale mortality, wholesale
morbidity and longevity reinsurance.
Key assumptions applied in the valuation of life contract
liabilities
Tax rates
The bases of taxation (including deductibility of expenses) are
assumed to continue in accordance with legislation current at
the reporting date.
Discount rates
Under APRA Prudential Standards and AASB 1038 Life
Insurance Contracts, life insurance contract liabilities are
calculated by discounting expected future cash flows at a risk-
free rate, set at the Commonwealth Government Bond curve
plus an illiquidity premium where applicable or for foreign-
denominated liabilities, a curve derived from the yields of
highly liquid AAA-rated sovereign risk securities in the
currency of the policy liabilities plus an illiquidity premium
where applicable. The illiquidity premium is determined by
reference to observable market rates including Australian
sovereign debt, corporate, securitised and collateralised debt
publicly placed in the domestic market, and market swap
rates.
Life investment contract liabilities are calculated under the fair
value through profit and loss provisions of AASB 9 Financial
Instruments. The discount rates are determined based on the
current observable, objective rates that relate to the nature,
structure and term of the future liability cash flows.
For both insurance and investment contracts the approach is
the same as adopted at 2020. Discount rates applied for
Australian liabilities were between 0.3% - 2.8% per annum
(30 June 2020: 0.9% - 2.4%).
79
Challenger Limited 2021 Annual Report
Note 8
Life contract liabilities (continued)
Valuation (continued)
Key assumptions applied in the valuation of life contract
liabilities (continued)
Expenses
Forecasted expenses for the next year are allocated between
acquisition, maintenance and investment based on the nature
of the expense. Forecasted maintenance expenses then are
converted to a per-contract unit cost or percentage of account
balance, depending on the nature of the expense.
Inflation
Inflation estimates are based on long-term expectations and
reviewed at least annually for changes in the market
environment based on a comparison of real and nominal
yields of instruments of equivalent term and credit risk. The
current assumption for Australia is 2.0% per annum for short-
term inflation and 2.3% per annum for long-term inflation
(30 June 2020: -0.2% short-term, 1.8% long-term).
Surrenders
For life investment contracts, no surrenders or voluntary
discontinuances are assumed. For Australian life insurance
contracts where a surrender value is payable on withdrawal, a
rate of surrenders is assumed in line with Challenger’s own
experience on these products, currently between 0.0% - 2.1%
per annum (30 June 2020: 0.0% - 2.1%). For inwards
reinsurance of Japanese business a rate of surrenders is
assumed in line with local experience in relation to similar
contracts, currently 3.5% per annum (30 June 2020: 3.5%).
Where policyholders have the option to commute a life
insurance contract, the value of this option is included within
the life contract liabilities. We also assume surrender rates
based on past experience for this business which vary by
product types and duration in-force for the contract.
Mortality
Base mortality rates for individual lifetime annuities are
determined as a multiple of annuitant experience based on
LML08 and LFL08 tables, adjusted for Challenger’s own recent
experience. LML08 and LFL08 are mortality tables developed
by the Continuous Mortality Investigation (CMI) based on
United Kingdom annuitant lives experience from 2007–2010.
The tables refer to male and female lives respectively. Rates
are adjusted for expected future mortality improvements
based on observed and expected improvements. For the age
ranges and cash flow projection periods that contribute the
majority of CLC’s exposure, rates of future mortality
improvement applied are between 0.3% - 2.5% per annum
(30 June 2020: 0.3% - 2.5%).
Base mortality rates for wholesale mortality and longevity
reinsurance are determined as a multiple of pensioner
mortality rates (based on the self-administered pension
schemes or SAPS3 tables mortality investigation developed by
the Institute and Faculty of Actuaries (UK) using United
Kingdom data collected between 2009–2016). Rates are
adjusted for expected future mortality improvements based on
observed and expected improvements.
For the age ranges and cash flow projection periods that
contribute the majority of CLC’s exposure, rates of future
mortality improvement applied are between 0.2% - 2.3% per
annum (30 June 2020: 0.6% - 2.1%). Base mortality rates for
the inwards reinsurance of Japanese business are determined
as a multiple of Japanese population mortality rates.
Mortality assumptions have been reviewed but not adjusted in
light of the COVID-19 pandemic.
Impact of changes in assumptions on life insurance
contracts
Under MoS, changes in actuarial assumptions are recognised
by adjusting the value of future profit margins in life insurance
contract liabilities. Changes in future profit margins are
released over future periods unless that product group is in an
expected net loss position (loss recognition), in which case
changes in assumptions are recognised in the Statement of
comprehensive income in the period in which they occur. The
valuation impact of changes to discount rate assumptions as a
result of market and economic conditions, such as changes in
benchmark market yields, are recognised in the Statement of
comprehensive income in the period in which the changes
occur.
Restrictions on assets
Financial assets held in the Group can only be used within the
restrictions imposed under the Life Insurance Act 1995 (the
Life Act). The main restrictions are that the assets in a
statutory fund can only be used to meet the liabilities and
expenses of that statutory fund, to acquire investments to
further the business of the statutory fund or as distributions
when capital adequacy requirements are met.
Statutory fund information
The life contract operations of CLC are conducted within four
separate statutory funds. Both the shareholders’ and
policyholders’ interests in these statutory funds are reported in
aggregate in the financial report of the Group. Fund 1 is a
non-investment-linked fund and Fund 3 is investment-linked.
Both of these are closed to new business. Funds 2 and 4 are
the principal operating funds of the Group. Fund 2 contains
non-investment-linked contracts, including the Group’s term
annuity business, lifetime annuity policies and the related
outwards reinsurance, plus the wholesale mortality, wholesale
morbidity and longevity inwards reinsurance. Fund 4 contains
inwards reinsurance of annuity business written in Japan.
Life contract liabilities for Statutory Funds 1, 2, 3 and 4 are:
Life contract liabilities
Statutory Fund 1
Statutory Fund 2
Statutory Fund 3
Statutory Fund 4
Total life contract
liabilities
30 June
2021
$m
1.5
11,582.4
3.0
2,083.0
30 June
2020
$m
1.5
10,854.4
2.6
1,722.7
13,669.9
12,581.2
80
Challenger Limited 2021 Annual Report
Note 8
Life contract liabilities (continued)
Current/non-current split for total life
contracts
There is a fixed settlement date for the majority of life contract
liabilities. Approximately $3,099.3 million on a discounted
basis (30 June 2020: $2,596.5 million) of life contract liabilities
have a contractual maturity within 12 months of the reporting
date. Based on assumptions applied for the 30 June 2021
valuation of life contract liabilities, $3,685.7 million of
principal payments on fixed term and lifetime business are
expected in the year to 30 June 2022 (expected in the year to
30 June 2021: $3,327.7 million).
Life insurance risk
The Group is exposed to longevity risk on its individual lifetime
annuities (both direct and reinsured) and wholesale longevity
reinsurance. Longevity risk is the risk that policyholders may
live longer than expectations. The Group is exposed to
mortality risk on the wholesale mortality reinsurance and
reinsurance of fixed term business written in Japan. This is the
risk that death rates in the reference portfolios exceed
expectations. The Group is also exposed to morbidity risk on
the wholesale morbidity reinsurance. That is the risk that
morbidity rates in the reference portfolios exceed expectation.
The Group manages the longevity risk by regular reviews of
the portfolio to confirm continued survivorship of
policyholders receiving income plus regular review of longevity
experience to ensure that longevity assumptions remain
appropriate.
In addition, the Group maintains a reinsurance arrangement
to manage longevity risk in respect of part of the closed book
of individual lifetime annuities.
The Group manages the mortality and morbidity risk by
regular reviews of the portfolio to ensure that mortality and
morbidity assumptions remain appropriate. The Company’s
insurance risk policy is approved by the Board and sets out the
relevant risk limits for insurance exposures, to ensure the
insurance risk portfolio is appropriately diversified and
contains no significant concentrations of insurance risk.
Insurance risk sensitivity analysis
The following table discloses the sensitivity of life insurance
contract liabilities, profit after income tax and equity to
changes in the key assumptions relating to insurance risk,
both gross and net of reinsurance:
Increase in life insurance contract
liabilities
Loss after tax and equity impact
Gross
Net
Gross
Net
30 June
2021
30 June
2020
30 June
2021
30 June
2020
30 June
2021
30 June
2020
30 June
2021
30 June
2020
$m
$m
$m
$m
$m
$m
$m
$m
43.3
35.4
42.7
34.8
(30.3)
(24.8)
(29.9)
(24.4)
Insurance risk sensitivity analysis
50% increase in the rate of mortality
improvement
10% increase in maintenance expenses
18.3
16.3
18.3
16.3
(12.8)
(11.4)
(12.8)
(11.4)
Liquidity risk for insurance contracts
The following table summarises the undiscounted maturity
profile of the Group’s life insurance contract liabilities. The
analysis is based on undiscounted estimated cash outflows,
including interest and principal payments. The undiscounted
maturity profile of life investment contracts is disclosed in
Note 18 Financial risk management.
Undiscounted life insurance
contract liabilities
2021
2020
Actuarial information
1 year or less
$m
863.9
775.4
1-3 years
$m
3-5 years
$m
>5 years
$m
1,465.8
1,272.1
1,158.7
1,014.4
4,817.7
4,574.9
Total
$m
8,306.1
7,636.8
Mr A Kapel FIAA, as the Appointed Actuary of CLC, is satisfied
as to the accuracy of the data used in the valuations of life
contract liabilities in the financial report and the tables in this
note.
The life contract liabilities have been determined at the
reporting date in accordance with the Life Act, APRA
Prudential Standards, AASB 1038 Life Insurance Contracts,
and AASB 9 Financial Instruments.
81
Challenger Limited 2021 Annual Report
Note 9
External unit holders’ liabilities
Current
Non-current
Total liabilities to external unit holders
Accounting policy
30 June
2021
$m
3,090.1
542.1
3,632.2
30 June
2020
$m
1,587.3
828.5
2,415.8
The Group controls a number of guaranteed index return
trusts that contain contributed funds in respect of fixed term
wholesale mandates. The fixed term and guaranteed nature of
the mandates effectively places the balance of the risks related
to the performance of the trusts with the Group. As a result,
the Group is deemed to control these trusts. The contributed
funds for these trusts are classed as external unit holders’
liabilities on the Statement of financial position and represent
the funds owing to third parties on these mandates. The
liability is recognised at fair value.
Note 10 Derivative financial instruments
30 June 2021
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
30 June 2020
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
5,086.2
9,083.3
11,294.6
42,527.3
67,991.4
—
300.0
243.0
387.0
1,092.0
2,022.0
16,168.8
16,168.8
2,850.1
2,850.1
1,397.7
3,187.4
2,482.5
765.0
7,832.6
1,475.0
308.9
1,783.9
8.8
47.0
80.6
315.1
451.5
—
(2.7)
(47.4)
(79.6)
(437.9)
(567.6)
216.7
7,511.9
8,962.4
8,739.3
37,974.2
63,187.8
—
—
2.5
10.0
60.3
72.8
—
—
32.0
32.0
17.8
29.9
11.6
7.5
66.8
16.4
2.1
18.5
(2.3)
—
(4.6)
(28.0)
(34.9)
211.0
243.0
72.0
1,407.0
1,933.0
(1.0)
(1.0)
18,101.9
18,101.9
(22.5)
(22.5)
2,947.5
2,947.5
(17.9)
(40.5)
(29.2)
(9.8)
(97.4)
—
(0.4)
(0.4)
1,268.7
2,332.3
1,332.1
825.4
5,758.5
596.6
—
596.6
7.1
34.7
100.7
539.0
681.5
—
7.6
10.1
3.0
164.0
184.7
—
—
63.2
63.2
29.2
69.8
36.6
25.3
160.9
20.0
—
20.0
(5.2)
(38.3)
(72.0)
(693.0)
(808.5)
259.0
(1.4)
—
(7.8)
(43.0)
(52.2)
(0.6)
(0.6)
(46.9)
(46.9)
(44.0)
(15.3)
(10.5)
(5.5)
(75.3)
—
—
—
Analysis of derivative financial
instruments
Non-SPV
Interest rate swaps
Less than one year
One to three years
Three to five years
Greater than five years
Total interest rate swaps
Collateral securities1
Inflation-linked swaps
Less than one year
One to three years
Three to five years
Greater than five years
Total inflation-linked swaps
Futures contracts
Less than one year
Total futures contracts
Forward currency contracts
Less than one year
Total forward currency contracts
Cross-currency swaps
Less than one year
One to three years
Three to five years
Greater than five years
Total cross-currency swaps
Equity swaps
Less than one year
One to three years
Total equity swaps
82
Challenger Limited 2021 Annual Report
Note 10 Derivative financial instruments (continued)
Analysis of derivative financial
instruments (continued)
Credit default swaps
Less than one year
One to three years
Three to five years
Total credit default swaps
Options
Less than one year
Total options
Total non-SPV
30 June 2021
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
30 June 2020
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
63.4
—
1,218.8
1,282.2
—
—
99,931.0
0.3
—
96.4
96.7
—
—
738.3
—
—
—
—
—
67.9
—
67.9
—
1.2
—
1.2
—
(0.6)
—
(0.6)
—
—
(507.1)
2.5
2.5
92,595.7
0.6
0.6
1,112.1
—
—
(725.1)
SPV
Interest rate swaps – SPV
Less than one year
One to three years
Three to five years
Total interest rate swaps – SPV
Cross-currency swaps – SPV
Greater than five years
212.1
Total cross-currency swaps – SPV
212.1
Total – SPV
220.6
Total derivative financial instruments2 100,151.6
7.2
0.7
0.6
8.5
—
—
—
—
(0.1)
—
—
(0.1)
5.1
7.6
0.5
13.2
—
—
—
—
—
—
—
738.3
(0.4)
(0.4)
(0.5)
(507.6)
261.0
261.0
274.2
92,869.9
0.4
0.4
0.4
1,112.5
(0.1)
(0.1)
—
(0.2)
(0.1)
(0.1)
(0.3)
(725.4)
1 Collateral securities relates to centrally cleared interest rate swaps.
2 The Group’s derivative financial instruments are subject to enforceable netting arrangements under International Swaps and Derivatives Association (ISDA) Master
Agreements with derivative counterparties, allowing for net settlement as a single arrangement of multiple instruments with a counterparty in the event of default
or other specified circumstances. If applied to the derivative portfolio, the derivative assets would decrease by 284.9 million (30 June 2020: $474.1 million) and the
derivative liabilities would decrease by $284.9 million (30 June 2020: $474.1 million).
Accounting policy
The Group uses derivative financial instruments predominantly
to hedge its risks associated with interest rate and foreign
currency fluctuations and to gain exposure to different
markets. All derivative financial instruments are stated at fair
value. Gains or losses arising from fair value changes on
derivatives that do not qualify for hedge accounting are
recognised in the Statement of comprehensive income. For
the purpose of hedge accounting, hedges are classified as:
• cash flow hedges when they hedge the exposure to
variability in cash flows that is attributable either to a
particular risk associated with a recognised asset or liability
or to a forecast transaction; or
• hedges of net investments in foreign operations when they
hedge the exposure to changes in the value of the assets
and liabilities of foreign-controlled entities when they are
translated from their functional currency to the presentation
currency.
At the inception of a hedge relationship to which the Group
wishes to apply hedge accounting, the Group formally
designates and documents the hedge relationship and the risk
management objectives and strategies for undertaking the
hedge. The documentation includes identification of the
hedging instrument, the hedged item or transaction, the
nature of the risk being hedged and how the entity will assess
the effectiveness of the instrument in offsetting the exposure
to changes in the hedged item.
Such hedges are expected to be highly effective in achieving
offsetting changes in fair values, cash flows or foreign
exchange differences and are assessed on an ongoing basis to
determine that they actually have been effective over the
period that they were designated.
Cash flow hedges
Cash flow hedges are hedges of the Group’s exposure to
variability in cash flows attributable to a particular risk
associated with a recognised asset or liability, or a highly
probable forecast transaction, that could affect the Statement
of comprehensive income. The effective portion of the gain or
loss on the hedging instrument is recognised directly in equity,
while the ineffective portion is recognised in the Statement of
comprehensive income.
Amounts recognised in equity are transferred to the
Statement of comprehensive income when the hedged
transaction affects profit or loss, such as when hedged income
or expenses are recognised or when a forecast sale or
purchase occurs. When the hedged item is the cost of a non-
financial asset or liability, the amounts taken to equity are
transferred to the initial carrying amount of the non-financial
asset or liability.
83
Challenger Limited 2021 Annual Report
Note 10 Derivative financial instruments (continued)
Accounting policy (continued)
Cash flow hedges (continued)
Derivatives designated as cash flow hedges
If the forecast transaction is no longer expected to occur,
amounts previously recognised in equity are transferred to the
Statement of comprehensive income.
If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation
as a hedge is revoked, amounts previously recognised in
equity remain in equity until the forecast transaction occurs.
Hedges of net investments in foreign operations
The gain or loss on the effective portion of the hedging
instrument is recognised directly in equity and the gain or loss
on the ineffective portion is recognised immediately in the
Statement of comprehensive income. The cumulative gain or
loss previously recognised in equity is recognised in the
Statement of comprehensive income on disposal or partial
disposal of the foreign operation.
Derivatives designated as hedges of net investment in
foreign currency operations
The Group hedges its exposure to accounting gains and losses
arising from translation of foreign-controlled entities from
their functional currency into the Group’s presentation
currency on consolidation. At 30 June 2021, a post-tax gain of
$46.8 million (30 June 2020: post-tax gain of $0.5 million)
was recognised in Other comprehensive income (OCI) for the
hedging of exposure to the net investment in foreign currency
operations.
The Group applies hedge accounting when it can demonstrate
that all, or a portion of, the value movements of a derivative
financial instrument effectively hedges the variability in cash
flows attributable to a specific risk associated with a
recognised asset or liability or probable future transaction. As
described in Note 18 Financial risk management, SPVs enter
into interest rate swap agreements to hedge the interest rate
risk between variable rate loans, which generally reprice with
changes in official interest rates, and issued RMBS that reprice
with changes in the 30-day and 90-day bank bill swap rates.
Cross-currency swaps are also used to hedge currency
movements on foreign denominated RMBS. The SPVs apply
hedge accounting to both types of transactions, with the fair
value change on the effective portion of the derivative being
recognised in OCI.
For the year ended 30 June 2021, a post-tax loss of
$0.5 million (30 June 2020: post-tax result of nil) was
recognised in OCI for cash flow hedges with no Statement of
comprehensive income impact in relation to any ineffective
portions during either the current or prior comparative period.
84
Note 11 Notes to Statement of cash flows
Reconciliation of profit to operating cash flow
Profit/(loss) for the year
Adjusted for
Net realised and unrealised losses/(gains) on investment assets
Share of associates’ net profit
Change in life contract liabilities1
Depreciation and amortisation expense
Impairment in intangible assets, associates and other investments
Share-based payments
Dividends from associates
Change in operating assets and liabilities
Decrease in receivables
Decrease/(increase) in other assets
Increase in payables
Increase in provisions
Increase/(decrease) in life contract liabilities
Increase in external unit holders’ liabilities
Increase/(decrease) in net tax liabilities
Net cash flows from operating activities
1 Changes relate to movements through the Statement of comprehensive income.
Reconciliation of cash
Cash at bank and on hand
Cash at bank and on hand – SPV
Total cash and cash equivalents1
1 All cash and cash equivalents are considered current.
Accounting policy
Challenger Limited 2021 Annual Report
30 June
2021
$m
30 June
2020
$m
592.3
(421.1)
(582.3)
(35.2)
73.7
15.3
12.3
11.5
33.7
72.1
1.7
2.0
0.2
1,015.0
1,216.4
147.9
2,576.6
30 June
2021
$m
928.6
60.8
989.4
866.6
(29.3)
295.1
15.3
12.8
14.2
22.4
7.9
(9.2)
27.0
16.3
(584.1)
449.6
(198.6)
484.9
30 June
2020
$m
603.9
58.0
661.9
Cash and cash equivalents are financial assets and comprise
cash at bank and on hand plus short-term deposits with an
original maturity of three months or less that are readily
convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value.
Cash and cash equivalents are recognised and carried at fair
value. For the purposes of the Statement of cash flows, cash
and cash equivalents are stated net of bank overdrafts.
85
Challenger Limited 2021 Annual Report
Section 4: Capital structure and financing costs
This section outlines how the Group manages its capital structure and related financing costs, as well as capital adequacy
and reserves. It also provides details on the dividends and earnings per share of the Company.
Note 12
Contributed equity
Analysis of contributed equity
Ordinary shares issued and fully paid
CPP Trust shares treated as Treasury shares
CPP deferred share purchases treated as Treasury
shares
Total contributed equity
Movements in contributed equity
Ordinary shares
Balance at the beginning of the year
Equity placement
Issued under dividend reinvestment plan
Balance at the end of the year
CPP Trust
Balance at the beginning of the year
Shares purchased (including settled forwards)
Vested shares released to employees
Balance at the end of the year
CPP deferred share purchases
Balance at the beginning of the year
Settled forward purchases
Balance at the end of the year
30 June 2021
30 June 2020
No. of shares
m
Value of shares
$m
No. of shares
m
Value of shares
$m
676.0
(1.4)
(2.0)
672.6
667.5
8.1
0.4
676.0
2.4
—
(1.0)
1.4
2.0
—
2.0
2,462.4
(14.6)
(22.3)
2,425.5
2,424.7
34.8
2.9
2,462.4
24.8
—
(10.2)
14.6
22.3
—
22.3
667.5
(2.4)
(2.0)
663.1
611.6
55.2
0.7
667.5
3.0
0.8
(1.4)
2.4
2.8
(0.8)
2.0
2,424.7
(24.8)
(22.3)
2,377.6
2,155.3
264.1
5.3
2,424.7
30.5
8.8
(14.5)
24.8
31.1
(8.8)
22.3
Accounting policy
Terms and conditions of contributed equity
Ordinary shares are classified as equity and have no par value.
Issued capital in respect of ordinary shares is recognised as the
fair value of the consideration received by the parent entity.
Incremental costs directly attributable to the issue of new
shares or options are shown in equity as a deduction, net of
tax, from the proceeds.
Treasury shares are ordinary shares in the Company held by
the Challenger Performance Plan (CPP) Trust or under CPP
deferred share purchase agreements in respect of equity
incentive plan awards to employees. Refer to Note 28
Employee entitlements for further details.
Ordinary shares
A holder of an ordinary share is entitled to receive dividends
and to one vote on a show of hands and on a poll.
Challenger Performance Plan (CPP) Trust
The CPP Trust is a controlled entity and holds shares in the
Company. As a result, the CPP Trust’s shareholding in the
Company is disclosed as Treasury shares and deducted from
equity. Dividends paid from the Company to the CPP Trust are
eliminated on consolidation.
CPP deferred share purchases
The shares purchased under forward agreements are treated
as Treasury shares from the date of the agreement. Shares are
transferred to the CPP Trust on the future settlement date.
86
Challenger Limited 2021 Annual Report
Note 12
Contributed equity (continued)
Capital management
A company is generally limited in the risk-taking activities that
it can engage in by the amount of capital it holds, with capital
acting as a buffer against risk, ensuring that there are
sufficient resources to enable the company to continue normal
business in the event of an unexpected loss.
The prudentially-regulated Challenger Life Company Limited
(CLC) manages capital via an Internal Capital Adequacy
Assessment Process (ICAAP). Under the prudential standards,
a life company must have in place an ICAAP, documented in
an ICAAP Summary Statement. CLC complied with these
requirements at all times during the year.
The objective of the ICAAP is to ensure that CLC maintains
adequate capital in respect of the risks to which it is exposed
so that it can fulfil its obligations to policy owners (in
particular the duty to give priority to the interests of owners
and prospective owners of policies referable to a fund). The
ICAAP also enables CLC to invest both strategically and
tactically in opportunities that deliver a return on equity above
the cost of capital for shareholders.
There were no material changes to the Group’s capital
management process during the period. All of the Group
regulated entities have at all times during the current and
prior financial year complied with the externally imposed
capital requirements to which they are subject.
Share Purchase Plan (SPP)
During the period, the Company conducted a non-
underwritten share purchase plan (SPP) raising $35.0 million
with 8.1 million shares issued to retail shareholders at a price
of $4.32 per share. Total issue costs (net of tax) were
$0.2 million, resulting in net proceeds of $34.8 million. Of the
proceeds from the SPP, $30.0 million was injected into CLC as
Common Equity Tier 1 capital.
Credit ratings
Standard & Poor’s long-term credit ratings for the Company
and CLC at the Statement of financial position date are
‘BBB+’ (stable) and ‘A’ (stable) respectively (30 June 2020:
‘BBB+’ (stable) and ‘A’ (stable) respectively). There were no
changes to either the Company’s or CLC’s ratings during the
period.
Dividends
The Group has historically targeted a dividend payout ratio of
between 45% - 50% of normalised profit after tax over the
medium term, subject to prevailing market conditions and
alternate uses of capital.
The dividend payout ratio for the year ended 30 June 2021
was 48.2% of normalised profit after tax (30 June 2020:
31.0%). The increase is due to the resumption of dividends in
2021, following the Board’s decision not to declare and pay a
final dividend for the year ended 30 June 2020 given the
significant investment experience losses incurred in the second
half and in order to continue to protect the Group’s strong
capital position given the uncertainty caused by COVID-19.
Dividend Reinvestment Plan (DRP)
As a result of the uncertain economic conditions caused by
COVID-19, and to maintain a strong capital position of the
Life business, no final dividend was declared for 2020. With
no final dividend having been paid, the DRP was not in
operation in respect of the final 2020 dividend.
The Group resumed the DRP for the interim 2021 dividend,
and on 23 March 2021 issued 441,762 ordinary shares to
satisfy the plan. The DRP issue price per share for the interim
2021 dividend was $6.5302 and represented the volume
weighted average share price over the 10 trading days from
26 February 2021 to 11 March 2021. The interim DRP
participation rate was 4.5% of all issued shares, resulting in
proceeds of $2.9 million.
87
Challenger Limited 2021 Annual Report
Note 12
Contributed equity (continued)
Capital management (continued)
Prescribed capital amount (PCA)
CLC’s target surplus
CLC holds capital in order to ensure that under a range of
adverse scenarios it can continue to meet its regulatory and
contractual obligations to its customers. CLC is regulated by
APRA and is required to hold a minimum level of regulatory
capital. CLC’s regulatory capital base and PCA have been
calculated based on the prudential standards issued by APRA.
CLC’s internal capital models result in a target PCA ratio range
under current circumstances of 1.3 to 1.7 times. This range
can change over time and is dependent on numerous factors.
The PCA ratio at 30 June 2021 was 1.63 times (30 June 2020:
1.81 times), within this range of 1.3 to 1.7 times. The CET1
ratio was 1.14 times at 30 June 2021 down from 1.20 times
at 30 June 2020.
CLC maintains a target level of capital representing APRA’s
PCA plus a target surplus. The target surplus is a management
guide to the level of excess capital that CLC seeks to hold over
and above APRA’s minimum requirements. CLC’s target
surplus is set to ensure that it provides a buffer against
adverse market conditions and having regard to CLC’s credit
rating. CLC uses internal capital models to determine its target
surplus, which are risk-based and are responsive to changes in
CLC’s asset allocation and market conditions.
Details of the CLC capital adequacy multiple are below:
CLC capital
CLC’s excess capital under prudential standards
Common Equity Tier 1 regulatory capital
Additional Tier 1 regulatory capital
Tier 2 regulatory capital – subordinated debt1
CLC total regulatory capital base
CLC's prescribed capital amount
Asset risk charge2
Insurance risk charge
Operational risk charge
Aggregation benefit
CLC prescribed capital amount
CLC excess over prescribed capital amount
Capital adequacy ratio (times)
Common Equity Tier 1 ratio (times)
30 June 2021
30 June 2020
$m
$m
2,971.2
872.7
405.4
4,249.3
2,481.8
227.0
57.9
(167.4)
2,599.3
1,650.0
1.63
1.14
2,337.0
805.0
396.7
3,538.7
1,842.8
199.5
56.5
(144.8)
1,954.0
1,584.7
1.81
1.20
1 Differs from $404.5 million (30 June 2020: $395.7 million) disclosed in Note 13 Interest bearing financial liabilities due to $0.9 million (30 June 2020: $1.0 million)
of accrued interest.
2 Asset risk charge includes the combined stress scenario adjustment and default stress.
88
Challenger Limited 2021 Annual Report
Note 13
Interest bearing financial liabilities
30 June 2020
Facility
$m
Opening
balance
$m
Cash flows
proceeds/
(repayments)
$m
Non-cash movements
30 June 2021
Foreign
exchange
$m
Fair value
changes
$m
Other
$m
Closing
balance
$m
Facility
$m
—
0.5
—
—
0.5
8.8
—
—
—
8.8
—
1.4
— 400.0
392.3 394.9
179.3 179.3
—
— 4,111.1 4,111.1
1.4 4,682.7 5,085.3
27.7
404.5 400.0
—
27.7
—
456.3 460.0
1.8
(6.0)
379.0 385.0
(4.2) 1,267.5 1,272.7
Bank loans
Corporate1
Controlled property trusts2,4
Controlled infrastructure
trusts4
Repurchase agreements
Total bank loans
Non-bank loans
Subordinated debt
Challenger Capital Notes 14
Challenger Capital Notes 24
Challenger Capital Notes 34
Total non-bank loans
Total interest bearing
financial liabilities
Current
Non-current
400.0
453.8
50.0
453.8
(50.0)
(17.5)
—
(45.9)
185.8
185.8
5,393.4 5,393.4
6,433.0 6,083.0
(6.5)
(1,282.3)
(1,356.3)
—
—
(45.9)
—
(317.3)
—
385.0
67.7
—
—
—
—
—
400.0
345.0
460.0
—
395.7
345.0
454.5
—
1,205.0 1,195.2
7,638.0 7,278.2
5,468.9
1,809.3
7,278.2
(1,288.6)3
(45.9)
9.3
(2.8) 5,950.2 6,358.0
4,310.0
1,640.2
5,950.2
1 In March 2020, the Group elected to fully draw its $400.0 million banking facility in order to provide additional financial flexibility during the COVID-19 crisis.
$350.0 million of this drawing was repaid in June 2020. The remaining $50.0 million was repaid during the year ending 30 June 2021.
2 Total facility limit consists of non-redraw loan facilities limits totalling $394.9 million (30 June 2020: $453.8 million).
3 Differs to Statement of cash flows due to $121.1 million (30 June 2020: $134.8 million) repayments relating to SPV. Net cash proceeds comprise $385.0 million
(30 June 2020: $1,344.9 million) proceeds from borrowings and $1,673.6 million (30 June 2020: $521.2 million) repayments of borrowings.
4 Held at amortised cost except for the controlled property trust loan in respect of County Court. The fair value of these are: Challenger Capital Notes 1 $27.8 million
(30 June 2020: $340.9 million), Challenger Capital Notes 2 $480.8 million (30 June 2020: $457.7 million), and Challenger Capital Notes 3 $407.9 million (30 June
2020: nil); controlled property trusts $396.3 million (30 June 2020: $474.9 million); controlled infrastructure trusts $182.3 million (30 June 2020: $189.8 million).
30 June 2019
Facility
$m
Opening
balance
$m
Cash flows
proceeds/
(repayments)
$m
Non-cash movements
30 June 2020
Foreign
exchange
$m
Fair value
changes
$m
Other
$m
Closing
balance
$m
Facility
$m
Bank loans
Corporate1
Controlled property trusts2,4
Controlled infrastructure
trusts4
Repurchase agreements
400.0
—
459.8
459.8
192.0
192.0
4,448.5 4,448.5
Total bank loans
5,500.3 5,100.3
Non-bank loans
Subordinated debt
Challenger Capital Notes 14
Challenger Capital Notes 24
Other finance
Total non-bank loans
Total interest bearing
financial liabilities
Current
Non-current
400.0
345.0
460.0
12.7
403.8
343.6
452.7
12.7
1,217.7 1,212.8
6,718.0 6,313.1
4,473.2
1,839.9
6,313.1
50.0
(17.7)
(6.2)
944.9
971.0
—
—
—
(12.5)
(12.5)
—
6.8
—
—
6.8
—
—
—
—
—
—
2.2
—
—
—
50.0 400.0
2.7
453.8 453.8
—
185.8 185.8
— 5,393.4 5,393.4
2.2
2.7 6,083.0 6,433.0
(8.1)
—
—
(0.2)
—
1.4
1.8
—
395.7 400.0
345.0 345.0
454.5 460.0
—
—
(8.3)
3.2 1,195.2 1,205.0
958.53
6.8
(6.1)
5.9 7,278.2 7,638.0
5,468.9
1,809.3
7,278.2
1 In March 2020, the Group elected to fully draw its $400.0 million banking facility in order to provide additional financial flexibility during the COVID-19 crisis.
$350.0 million of this drawing was repaid in June 2020.
2 Total facility limit consists of non-redraw loan facilities limits totalling $453.8 million (30 June 2019: $459.8 million).
3 Differs to Statement of cash flows due to $134.8 million (30 June 2019: $189.0 million) repayments relating to SPV. Net cash proceeds comprise $1,344.9 million
(30 June 2019: $632.8 million) proceeds from borrowings and $521.2 million (30 June 2019: $315.4 million) repayments of borrowings.
4 Held at amortised cost except for the controlled property trust loan in respect of County Court. The fair value of these are: Challenger Capital Notes 1 and 2
$340.9 million and $457.7 million (30 June 2019: $350.3 million and $485.7 million) respectively; controlled property trusts $474.9 million (30 June 2019: $458.0
million); controlled infrastructure trusts $189.8 million (30 June 2019: $192.5 million).
89
Challenger Limited 2021 Annual Report
Note 13
Interest bearing financial liabilities (continued)
Accounting policy
All borrowings and subordinated debt are financial liabilities
and are initially recognised at fair value. For borrowings and
subordinated debt that are subsequently measured at fair
value through profit or loss, directly attributable transaction
costs are expensed with movements on fair value recognised
in the Statement of comprehensive income.
Borrowings and subordinated debt, other than those held by
CLC’s statutory funds or their controlled entities, are
subsequently measured at amortised cost. Any difference
Details of liabilities
Bank loans
between the proceeds (net of transaction costs) and the
redemption amount is recognised in the Statement of
comprehensive income over the period of the contract using
the effective interest rate method.
Repurchase agreements are all short-term in nature, and are
therefore valued at amortised cost which approximates fair
value.
Bank loans
Corporate
Type Maturity
Facility Tranche 1: $150m
Rate type Ranking/security
Floating
Security by guarantees between members of the Group
expiring on 30 June 2022
Tranche 2: $250m
expiring on 30 June 2024
June 2022 to October
2024
Variable
Loan
Controlled
property
trusts1
Facility June 2022
Variable
Controlled
infrastructure
trusts2
First ranking mortgages over Japanese investment properties:
$378.5 million (30 June 2020: $426.6 million)
First ranking mortgage over County Court, VIC: $13.7 million
(30 June 2020: $27.0 million)
First ranking mortgages over infrastructure assets
1 Controlled properties trusts consists of multiple loans with maturity dates from June 2022 to October 2024. At 30 June 2021 $378.5 million (30 June 2020:
$426.6 million) of these loans are held at amortised cost. The fair value of these liabilities at 30 June 2021 was $396.3 million (30 June 2020: $474.9 million).
2 These loans are held at amortised cost. The fair value of these liabilities at 30 June 2021 was $182.3 million (30 June 2020: $189.8 million).
Challenger Capital Notes – 1, 2 and 3 (Notes 1, Notes 2
and Notes 3)
On 25 November 2020, the Company completed its third
capital notes issue, Challenger Capital Notes 3 (Notes 3),
raising $385 million of new debt funding in order to replace
its 2014 capital notes issue (Notes 1).
Under the reinvestment offer, $237.5 million of Notes 1
holders elected to reinvest into the new Notes 3, and under
the repurchase invitation, $60 million of Notes 1 were
repurchased by the Company. Following the completion of
the issue, $47.5 million of Notes 1 remained on issue. On 27
April 2021, the Group offered eligible holders of the residual
Notes 1 the option to have their holding repurchased by
Challenger at a price of $102.0 per unit (face value $100.0
per unit). Repurchase applications were received for
$19.7 million leaving $27.7 million of Note 1 holdings
outstanding. These outstanding notes will mandatorily convert
to ordinary Challenger shares on or before May 2022. In the
interim, these Note 1 holdings will continue to receive
quarterly distribution payments up until their conversion.
Repurchase agreements
CLC has entered into repurchase agreements with certain
counterparties whereby fixed income securities are sold for
cash while simultaneously agreeing to repurchase the fixed
income security at a fixed price and fixed date in the future.
These agreements finance bonds held for hedging purposes
and are interest bearing, with interest factored into the price
at which the bonds are repurchased and paid on repurchase.
All agreements as at 30 June 2021 are current and all mature
by August 2021. They will continue to be rolled into new
agreements in the future.
CLC uses Australian Government and Semi-Government
Bonds with repurchase agreements, interest rate swaps and
bond futures to hedge movements in interest rates on its asset
portfolio, annuity policy liabilities, Guaranteed Index Return
mandates and the Challenger Index Plus Fund.
Non-bank loans
Subordinated debt
CLC issued subordinated notes of $400.0 million on 24
November 2017 with a call date on 24 November 2022.
Holders of the subordinated notes have the option to convert
their holding into ordinary shares of Challenger Limited on 24
November 2024 if CLC has not exercised its call option on 24
November 2022. If holders do not elect to convert the
subordinated notes to ordinary shares of Challenger Limited,
the subordinated notes will be fully eligible as Tier 2 regulatory
capital of CLC until 24 November 2038.
90
Note 13
Interest bearing financial liabilities (continued)
Challenger Limited 2021 Annual Report
Details of liabilities
Challenger Capital Notes – 1, 2 and 3 (Notes 1, Notes 2
and Notes 3) (continued)
Issue date
Notes 3 have similar structural characteristics to Challenger
Capital Notes 1 and 2, including:
• quarterly, floating, discretionary, non-cumulative
distributions based on a margin over 3 month BBSW;
• optional exchange whereby notes may be redeemed or
resold for cash or converted to ordinary shares in the
Company, at the Company’s option, on the relevant
Optional Exchange Date (or on an earlier date in certain
circumstances), subject to APRA’s prior written approval;
and
• mandatory conversion to ordinary shares in the Company
on the relevant Mandatory Conversion Date, subject to
certain conditions being satisfied. If the conditions to
mandatory conversion are not met on the relevant
Mandatory Conversion Date, conversion will be deferred to
a later date when the conditions are retested.
Like Notes 1 and 2, the costs associated with the issue of
Notes 3 have been capitalised against the relevant liability and
will be expensed to the Statement of comprehensive income
over the life of Notes 3. The Notes 3 issue does not constitute
regulatory capital of the Company. The proceeds from the
issue of Notes 3 were used to fund a subscription for notes
issued by CLC. The issue of notes by CLC was approved by
APRA and constitutes Additional Tier 1 capital of CLC.
Notes 1
9 October
2014
Notes 2
7 April
2017
Notes 3
25 November
2020
Issue amount
$345.0 million $460.0 million $385.0 million
Outstanding
amount
Optional
Exchange Date
Mandatory
Conversion
$27.7 million $460.0 million $385.0 million
25 May 2020 22 May 2023 22 May 2026
25 May 2022 22 May 2025 22 May 2028
Key estimates and assumptions
Subordinated debt valuation
Subordinated debt is recognised at fair value and is valued by
reference to the ask price observable in the market at balance
date.
The change recognised in the Statement of comprehensive
income in respect of valuation changes for the year ended
30 June 2021 was a loss of $8.8 million (30 June 2020: gain
of $8.1 million).
91
Challenger Limited 2021 Annual Report
Note 14
Reserves and retained earnings
Share-based payments reserve
Balance at the beginning of the year
Share-based payments for the period
Releases from share-based payments reserve
Tax in equity
Balance at the end of the year
Cash flow hedge reserve – SPV1
Balance at the beginning of the year
Loss on cash flow hedges
Balance at the end of the year
Foreign currency translation reserve1
Balance at the beginning of the year
(Loss)/gain on translation of foreign entities2
Gain on hedge of net investment in foreign entities2
Balance at the end of the year
Adjusted controlling interests reserve1
Balance at the beginning of the year
Change in holdings in controlled entities
Balance at the end of the year
Total reserves
Retained earnings
Balance at the beginning of the year
AASB 16 adjustment
Profit/(loss) attributable to equity holders
Dividends paid
Total retained earnings
1 These items may eventually be recycled to the profit and loss section of the Statement of comprehensive income.
2 Net of tax.
Accounting policy
30 June
2021
$m
30 June
2020
$m
(56.2)
11.5
(10.2)
2.1
(52.8)
0.1
(0.5)
(0.4)
(0.5)
(49.7)
46.8
(3.4)
5.7
—
5.7
(57.7)
14.2
(14.5)
1.8
(56.2)
0.1
—
0.1
(2.6)
1.6
0.5
(0.5)
7.8
(2.1)
5.7
(50.9)
(50.9)
922.9
1,559.0
—
592.3
(64.0)
1,451.2
(3.7)
(416.0)
(216.4)
922.9
Share-based payments reserve
Adjusted controlling interests reserve
An expense is recognised over the vesting period of share-
based payments granted to employees. This expense is based
on the valuation of the equity benefits conferred at the grant
date. When an instrument is granted, and an expense
incurred, there is a corresponding increase in the share-based
payments reserve directly in equity.
This reserve relates to changes arising from movements in the
ownership interests in entities already controlled by the
Group. The difference between the fair value of the
consideration paid/received for the change in holding and the
change in the Group’s share of the net assets of the entity is
recorded in this reserve.
Cash flow hedge reserve – SPV
This comprises the effective portion of the cumulative net
change in the fair value of cash flow hedging instruments
related to hedged transactions.
The total of this reserve is net of any gain or loss realised on
the disposal of forfeited shares held within the schemes. On
vesting of the award they are subsequently recognised as an
increase in equity and a reduction in share-based payment
reserve at an average acquisition price, which may be higher
or lower than the initial recognised valuation price.
Foreign currency translation reserve
This reserve is used to record foreign exchange differences
arising from the translation of the foreign subsidiaries. It also
includes the effective portion of fair value changes on foreign
exchange derivative contracts designated as hedges of a net
investment in a foreign entity.
92
Note 15
Finance costs
Interest expense
Interest expense – lease liabilities
Interest expense – SPV
Interest expense – property trusts
Interest expense – Challenger Capital Notes 1, 2 and 3
Other finance costs
Total finance costs
Accounting policy
Finance costs represent interest incurred on interest bearing
financial liabilities (primarily external unit holders’ liabilities
distributions, repurchase agreements, the securitised
residential mortgage-backed securities (RMBS) issued by the
consolidated Special Purpose Vehicles (SPV), subordinated
debt, bank loans and other borrowings) and are recognised as
an expense in the period in which they are incurred.
Finance costs that are directly attributable to the acquisition,
construction or production of qualifying property assets (being
assets that take a substantial period of time to develop for
their intended use or sale) are capitalised as part of the cost of
Challenger Limited 2021 Annual Report
30 June
2021
$m
283.7
3.0
3.3
5.3
28.4
4.2
327.9
30 June
2020
$m
155.5
2.9
11.1
6.1
31.1
7.1
213.8
that asset. Revenue earned on the investment of specific
borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalisation.
To the extent that the Group allocates general borrowed
funds for the purpose of obtaining a qualifying property asset,
the borrowing costs eligible for capitalisation are determined
by applying a capitalisation rate to the expenditure on that
asset.
93
Challenger Limited 2021 Annual Report
Note 16 Dividends paid and proposed
Dividends declared and paid during the year
Final 30 June 2020 100% franked dividend: nil (30 June 2019: 18.0 cents 100% franked
dividend)
Interim 30 June 2021 100% franked dividend: 9.5 cents (30 June 2020: 17.5 cents 100%
franked dividend)
Total dividends paid
Dividend proposed (not recognised as a liability at 30 June)
Final 30 June 2021 dividend: 100% franked dividend: 10.5 cents (30 June 2020: nil)
Refer to Note 12 Contributed equity for details of the dividend policy.
Dividend franking credits
30 June
2021
$m
30 June
2020
$m
—
109.7
64.0
64.0
106.7
216.4
70.8
—
Franking credits available to shareholders are $118.8 million
(30 June 2020: $12.4 million), based on a tax rate of 30%.
The amount is calculated from the balance of the franking
account as at the end of the reporting period, adjusted for
franking credits that will arise after the end of the reporting
period from the settlement of current liabilities for income tax
and franking debits in respect of interest on Challenger
Capital Notes 1, 2 and 3. The impact of the proposed dividend
will be to reduce the balance of the franking account by
$30.3 million. All dividends are franked at a tax rate of 30%.
Note 17
Earnings per share
Basic earnings per share
Diluted earnings per share
Profit/(loss) attributable to ordinary shareholders
Add back interest expense on Challenger Capital Notes 1, 2 and 3
Add back interest expense net of tax on CLC Subordinated Notes
Total earnings used in the calculation of diluted earnings per share
Number of shares
Weighted average of ordinary shares issued
Weighted average of Treasury shares
30 June
2021
cents
88.2
68.0
$m
592.3
26.1
6.0
624.4
30 June
2020
cents
(68.4)
(68.4)
$m
(416.0)
—
—
(416.0)
Number
Number
675,201,946 612,872,293
(4,540,931)
(3,550,972)
Weighted average ordinary shares for basic earnings per share
671,650,974 608,331,362
Adjusted for potential ordinary shares:
Weighted average effect of Challenger Performance Plan
Weighted average effect of Challenger Capital Notes 1, 2 and 3
Weighted average effect of CLC Subordinated Notes
8,744,057
178,254,426
59,070,235
—
—
—
Weighted average ordinary shares for diluted earnings per share
917,719,692 608,331,362
Accounting policy
Basic earnings per share is calculated by dividing the total
profit for the year attributable to equity holders of the
Company by the weighted average number of ordinary shares
outstanding during the financial year. The number of ordinary
shares outstanding is net of Treasury shares held by the
Challenger Performance Plan (CPP) Trust or under CPP
deferred share purchase agreements in respect of equity
incentive plan awards to employees.
During the year, the Company conducted a non-underwritten
share purchase plan (SPP) raising $35.0 million with 8.1 million
shares issued to retail shareholders at a price of $4.32 per
share.
The weighted average number of Treasury shares for the
period was 3,550,972 (2020: 4,540,931).
94
Note 17
Earnings per share (continued)
Challenger Limited 2021 Annual Report
Accounting policy (continued)
Accounting treatment of Capital Notes and
subordinated debt
Challenger Capital Notes 1, 2 and 3 and subordinated debt
are an effective source of funding for Challenger.
Each of the Capital Notes 1, 2, 3 and subordinated debt have
convertibility features which would result in these instruments
converting to ordinary shares under certain circumstances,
including APRA determining CLC to be non-viable.
With the exception of Challenger Notes 1, it is Challenger’s
current intention to refinance each of these instruments at
their respective call dates, or prior to the Mandatory
Conversion Date, and therefore conversion to ordinary shares
is unlikely.
However, under AASB 133 Earnings per Share, convertible
debt is considered dilutive whenever the interest per potential
ordinary share for each of these instruments is less than
Challenger’s basic EPS for the period. As such, a test is
required at each reporting period to determine if they are
included in the dilutive share count.
Diluted earnings per share is calculated by dividing the total
adjusted profit attributable to equity holders of the Company
by the weighted average number of ordinary shares
outstanding during the year adjusted for the effects of dilutive
shares that may be converted under the terms of Challenger
Capital Notes 1, 2 and 3 (Notes), CLC Subordinated Notes and
shares granted under the Challenger Performance Plan (CPP).
The dilutive share count for Challenger’s convertible debt
(Challenger Capital Notes 1, 2 and 3 and subordinated debt) is
based on the following formula:1
Face value of debt
Conversion factor x Challenger’s 20-day VWAP1 share price
11
The conversion factor on all Challenger’s convertible debt is
99% of the weighted average Challenger share price over the
last 20 days of trading (subject to a minimum VWAP floor) in
each reporting period.1
An assessment of the dilutive impact of convertible securities
is usually done by reference to the determination as to
whether the interest received would be more or less than the
EPS and whether it would be rational for a holder to receive
coupon from the convertible security or dividends from
holding the shares. In the prior year, as the company was in a
loss position the dilutive EPS is capped at the basic EPS. This is
because the dilutive impact of issuing more shares means that
the loss incurred is spread over a higher number of shares
which results in a lower loss per share. In these circumstances,
the dilutive EPS cannot be lower than the basic EPS. As a
result, the potential shares that might be considered dilutive
by virtue of their conversion to equity, are considered non-
dilutive in a loss position and are therefore not included in the
calculation. In the prior year this results in no adjustment for
potential dilution from the conversion of securities to ordinary
shares.
The profit attributable to ordinary shareholders is adjusted by
$32.1 million interest on the Notes and CLC Subordinated
Notes (30 June 2020: no adjustment) for the diluted
calculation when the Notes and CLC Subordinated Notes are
considered dilutive.
There have been no other transactions involving ordinary
shares or potential ordinary shares between the reporting date
and the date of authorisation of these financial statements.
1 Volume-weighted average share price
95
Challenger Limited 2021 Annual Report
Section 5: Risk management
This section outlines how financial risk is managed within the Group and provides additional information about how the
overall risk management program seeks to minimise potentially adverse financial effects associated with key financial risks.
This section also provides disclosures on the fair values of assets and liabilities of the Group, the valuation techniques used in
determining the fair value of those assets and liabilities, and the sensitivities of assets categorised as Level 3 instruments to
reasonably possible changes in valuation assumptions.
Note 18
Financial risk management
Governance and risk management framework
Interest rate risk
Interest rate risk is the risk of fluctuations in the Group’s
earnings and equity arising from movements in market
interest rates, including changes in the absolute levels of
interest rates, the shape of the yield curve, the margin
between the different yield curves and the volatility of interest
rates.
It is the Group’s policy to minimise the impact of interest rate
movements on debt servicing capacity, Group profitability,
business requirements and company valuation. The amount of
drawn net recourse corporate interest bearing liabilities, and
their duration, is determined with reference to the annual
budget and the most current forecasts. The Group’s strategy is
to have no interest rate hedges with a duration of greater
than five years and targets average hedge duration of three
years.
CLC’s market risk policy is approved by the CLC Board and
sets out the relevant risk limits for interest rate exposure. It is
CLC’s policy to minimise the impact of interest rate
movements on its projected future cash flows. The
management of the risks associated with life investment and
life insurance contracts, including interest rate risk, is subject
to the prudential requirements of the Life Act and APRA. This
includes satisfying capital adequacy requirements, which in
turn include consideration of how the interest rate sensitivity
of assets and liabilities are matched.
For the SPV entities, the impact of a rising/falling bank bill
swap rate (BBSW) results in an increase/decrease in the cost of
funding and therefore on the profit of the trusts. This interest
rate risk is mitigated by actively adjusting the interest rates
charged to borrowers if a sustained adverse differential to the
benchmark is evidenced. SPV entities are also exposed to the
risks arising from borrowers fixing the rates on their
mortgage. This interest rate risk is managed by using cash
flow hedges to swap the fixed rate to a floating rate exposure
at an amount equal to the notional value of the mortgages
being fixed.
The Group’s activities expose it to a variety of financial risks,
such as market risk (including currency risk, interest rate risk,
inflation risk, equity price risk and credit spread risk), credit
default risk and liquidity risk. The management of these risks is
fundamental to the Group’s business and to building
shareholder value. The Board is responsible, in conjunction
with senior management, for understanding the risks
associated with the activities of the Group and implementing
structures and policies to adequately monitor and manage
those risks.
The Board has established the Group Risk Committee (GRC)
and the Group Audit Committee (GAC) to assist in the
discharge of certain responsibilities. In particular, the GRC
assists the Board in setting the risk appetite and ensuring the
Group has an effective risk management framework
incorporating management, operational and financial controls.
The Executive Risk Management Committee (ERMC) is an
executive committee, chaired by the Chief Risk Officer (CRO),
which assists the GRC, GAC and Board in the discharge of
their risk management obligations by implementing the
Board-approved risk management framework.
The Group’s Risk division has day-to-day responsibility for
monitoring the implementation of the framework with
oversight, analysis, monitoring and reporting of risks. The CRO
provides regular reporting to the GRC and the Board.
The Group’s principal financial instruments consist of cash and
cash equivalents, receivables, financial assets at fair value
through profit and loss, payables, life insurance contract
liabilities, life investment contract liabilities, derivatives and
other interest bearing financial liabilities.
Details of the significant accounting policies and methods
adopted, including the criteria for recognition, the basis of
measurement and the basis on which income and expenses
are recognised, in respect of each class of financial
instruments, are disclosed in Section 1: Basis of preparation
and overarching significant accounting policies and included in
the relevant notes to the financial statements.
Market risk
Market risk is the risk that the fair value and/or future cash
flows from a financial instrument will fluctuate as a result of
changes in market factors. Market risk comprises (among
others) of interest rate risk (due to fluctuations in market
interest rates), price risk (due to fluctuations in the fair value
of equities and other alternatives or credit spreads) and
currency risk (due to fluctuations in foreign currency exchange
rates).
96
Challenger Limited 2021 Annual Report
Note 18
Financial risk management (continued)
Interest rate risk (continued)
Interest rate sensitivity
The Group’s sensitivity to movements in interest rates in
relation to the value of financial assets and liabilities is shown
in the table below. It is assumed that the change happens at
the Statement of financial position date and that there are
concurrent movements in interest rates and parallel moves in
the yield curve. All material underlying exposures and related
hedges are included in the analysis which includes investment
properties with leases, where the future income stream is
duration-hedged for interest rate movements. The impact on
profit and equity is post-tax at a rate of 30%. The risks faced
and methods used in the sensitivity analysis are the same as
those applied in the comparative period. As shown below,
100 basis points (1%) movements in interest rates would have
minimal impact on the Group’s financial position:
Change in
Change in
Profit/(loss)
equity
Profit/(loss)
equity
30 June 2021
30 June 2021
30 June 2020
30 June 2020
Change in variable
+100bps
-100bps
+100bps
-100bps
+100bps
-100bps
$m
1.7
(1.7)
(0.2)
0.2
1.5
(1.5)
$m
1.7
(1.7)
(0.2)
0.2
1.5
(1.5)
$m
0.8
(0.8)
(0.3)
0.3
0.5
(0.5)
$m
0.8
(0.8)
(0.3)
0.3
0.5
(0.5)
Non-SPV
SPV
Total
Price risk
Price risk is the risk that the fair value of a financial instrument
will fluctuate as a result of changes in market prices (other
than those arising from interest rate or currency risk), whether
those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting all similar
financial instruments. The Group is exposed to equity price risk
on its holdings in equity securities, which include a range of
investments in absolute return strategies where returns are
considered to be generally uncorrelated to listed equity market
returns, and credit spread risk on its fixed income securities.
The Group is required to fair value all equities and fixed
income securities held to back life contract liabilities.
Equity risks will arise as a natural result of CLC’s Asset
Allocation Plan. Equity prices can be driven by a range of risk
factors specific to an individual exposure including broad
macroeconomic and instrument specific factors that may be
uncorrelated with broader equity markets. The Group’s
primary tools for managing investment price risks are CLC’s
Internal Capital Adequacy Assessment Process (ICAAP) and the
Asset Allocation Plan.
Equity price risk sensitivity
The potential impact of movements in the market value of
listed and unlisted equities on the Group’s Statement of
comprehensive income and Statement of financial position is
shown in the sensitivity analysis. This sensitivity analysis has
been performed to assess the direct risk of holding equity
instruments; therefore, any potential indirect impact on fees
from the Group’s funds management business has been
excluded.
The impact on profit and equity is post-tax at a rate of 30%.
The risks faced and methods used in the sensitivity analysis are
the same as those applied in the comparative period. As
shown below, a 10% movement in equity prices would have a
material impact on the consolidated Group’s financial
position. It is assumed that the relevant change occurs as at
the Statement of financial position date.
Equities and other
alternatives
Property securities
Infrastructure investments
Other equities and
alternative assets
Total assets
Change in
variable
+10%
-10%
+10%
-10%
+10%
-10%
+10%
-10%
Change in
Change in
Profit/(loss)
equity
Profit/(loss)
equity
30 June 2021
30 June 2021
30 June 2020
30 June 2020
$m
6.2
(6.2)
7.8
(7.8)
108.8
(108.8)
122.8
(122.8)
$m
6.2
(6.2)
7.8
(7.8)
108.8
(108.8)
122.8
(122.8)
$m
5.3
(5.3)
3.9
(3.9)
55.5
(55.5)
64.7
(64.7)
$m
5.3
(5.3)
3.9
(3.9)
55.5
(55.5)
64.7
(64.7)
97
Challenger Limited 2021 Annual Report
Note 18
Financial risk management (continued)
Price risk (continued)
Credit spread risk sensitivity
The Group is exposed to price movements resulting from
credit spread fluctuations through its fixed income securities
(net of subordinated debt) and policy liabilities. As at 30 June
2021, a 50 basis point increase/decrease in credit spreads
would result in a post-tax (at 30%) unrealised loss/gain in the
Statement of comprehensive income and equity of
$146.9 million in respect of fixed income securities partially
offset by an unrealised gain/loss of $81.8 million million in
respect of policy liabilities (30 June 2020: $102.9 million fixed
income securities, $77.8 million policy liabilities).
Currency risk
It is the Group’s policy to minimise the exposure of all
Statement of financial position items to movements in foreign
exchange rates other than instruments considered to be Tier 2
capital under regulatory standards. Currency exposure arises
primarily as a result of investments in the Eurozone, Japan, the
United Kingdom and the United States, so currency risk
therefore arises from fluctuations in the value of the euro,
Japanese yen, British pound and US dollar against the
Australian dollar. In order to protect against foreign currency
exchange rate movements, the Group has entered into foreign
currency derivatives.
In addition, the Group has exposure to foreign exchange risk
upon consolidation of its foreign currency denominated
controlled entities and materially mitigates this by designating
foreign currency derivatives as hedges of net investments in
foreign entities in equity to match its foreign currency
translation reserve exposure. Effectiveness is monitored on a
regular basis to ensure that the hedge remains effective and
any ineffective portion of the hedge is recognised directly in
the Statement of comprehensive income.
The SPV entities hedge exposure to foreign currency risk
arising from issuing mortgage-backed securities in foreign
currencies. The currencies impacted are primarily the British
pound, euro and US dollar. All derivatives in the SPV entities
are designated as cash flow hedges. These hedges are
effective and there is no material impact on the profit and
loss. The following table details the Group’s net exposure to
foreign currency as at the reporting date in Australian dollar
equivalent amounts:
30 June 2021
Financial assets
Financial liabilities
GBP
$m
USD
$m
Euro
$m
JPY
$m
Other
$m
765.7
1,999.1
1,164.7
387.2
574.6
(3.2)
(1,190.4)
(4.4)
0.1
—
Foreign currency contracts and cross currency swaps
(762.2)
(802.7)
(1,161.3)
(376.7)
(576.0)
Net exposure in Australian dollars
0.3
6.0
(1.0)
10.6
(1.4)
30 June 2020
Financial assets
Financial liabilities
560.3
1,940.2
(4.7)
(648.8)
899.7
(1.7)
420.3
(0.8)
514.3
—
Foreign currency contracts and cross currency swaps
(550.8)
(1,260.3)
(895.4)
(405.5)
(513.6)
Net exposure in Australian dollars
4.8
31.1
2.6
14.0
0.7
The analysis in the currency risk table shows the impact on the
Statement of comprehensive income and equity of a
movement in the Group’s major foreign currency exposure
exchange rates against the Australian dollar using the net
exposure at the balance date. All underlying exposures and
related hedges are included in the analysis.
A sensitivity of 10% has continued to have been applied as it
still reflects a reasonable measurement given the current level
of exchange rates and the volatility observed during the
conditions created by the COVID-19 crisis. The impact on
profit and equity is post-tax at a rate of 30%.
The risks faced and methods used in the sensitivity analysis are
the same as those applied in the comparative period. As
shown in the table on the following page, a 10% movement
in foreign currency exchange rates would have minimal impact
on the Group’s financial position.
98
Note 18
Financial risk management (continued)
Currency risk (continued)
Challenger Limited 2021 Annual Report
Change in
Change in
Profit/(loss)
equity
Profit/(loss)
equity
30 June 2021
30 June 2021
30 June 2020
30 June 2020
British Pound (GBP)
US Dollar (USD)
Euro (EUR)
Japanese Yen (JPY)
Other
Total
Movement in
variable against $
+10%
-10 %
+10%
-10 %
+10%
-10 %
+10%
-10 %
+10%
-10 %
+10%
-10 %
Credit default risk
The Group makes use of external ratings agencies (Standard &
Poor’s, Fitch, Moody’s or other reputable credit rating
agencies) to determine credit ratings. Where a counterparty or
debt obligation is rated by multiple external rating agencies,
the Group will use Standard & Poor’s ratings where available.
All credit exposures with an external rating are also rated
internally and cross-referenced to the external rating, if
applicable. Where external credit ratings are not available,
internal credit ratings are assigned by appropriately qualified
and experienced credit personnel who operate separately from
the risk originators.
Each business unit is responsible for managing credit risks that
arise with oversight from a centralised credit risk management
team.
$m
—
—
0.4
(0.4)
—
—
0.2
(0.2)
(0.1)
0.1
0.5
(0.5)
$m
—
—
0.4
(0.4)
—
—
0.8
(0.8)
(0.1)
0.1
1.1
(1.1)
$m
0.4
(0.4)
2.2
(2.2)
0.2
(0.2)
—
—
—
—
2.8
(2.8)
$m
0.4
(0.4)
2.2
(2.2)
0.2
(0.2)
1.0
(1.0)
—
—
3.8
(3.8)
COVID-19 has led to a number of external and internal ratings
downgrades and loan restructures and amendments.
Credit exposure by credit rating
The table below provides information regarding the maximum
credit risk exposure of the Group in respect of the major
classes of financial assets by equivalent credit rating. The
maximum credit exposure is deemed to be the carrying value
of the asset not including any collateral or other credit
protection in place. The analysis classifies the assets according
to internal or external credit ratings. Assets rated investment
grade are those rated by Standard & Poor’s at BBB– or above,
with non-investment grade therefore being below BBB–.
30 June 2021
Cash and cash equivalents
Cash and cash equivalents – SPV
Receivables
Mortgage assets – SPV
Fixed income securities
Derivative assets
Financial leases
Investment grade
AAA
$m
AA
$m
A
$m
Non-inv.
grade
$m
BBB
$m
Other
$m
Total
$m
928.6
60.8
—
—
—
—
15.4
106.0
127.3
270.3
59.5
175.6
—
—
24.0
63.9
—
—
—
—
928.6
60.8
3.7
554.0
830.4
—
1.0
570.3
9,162.3 3,559.8 1,984.7 3,023.4 2,427.1
239.6 20,396.9
—
—
590.2
51.6
96.5
—
—
5.8
9.7
11.3
—
—
738.3
26.8
Total assets with credit exposures
10,437.4 4,315.5 2,345.0 3,217.5 2,442.1
794.6 23,552.1
30 June 2020
Cash and cash equivalents
Cash and cash equivalents – SPV
Receivables
Mortgage assets – SPV
Fixed income securities
Derivative assets
Financial leases
603.9
58.0
27.7
—
—
—
—
—
—
—
—
—
—
603.9
58.0
41.7
58.2
21.6
5.9
439.0
594.1
348.5
68.3
125.4
164.4
—
—
706.6
11,308.4 1,189.9 2,113.0 2,474.7 2,114.5
274.4 19,474.9
— 1,033.4
—
—
78.4
11.4
0.1
7.3
0.6
13.0
— 1,112.5
—
31.7
Total assets with credit exposures
12,346.5 2,333.3 2,386.4 2,668.1 2,134.0
713.4 22,581.7
99
Challenger Limited 2021 Annual Report
Note 18
Financial risk management (continued)
Credit default risk (continued)
Mortgage assets – SPV
Concentration risk
Mortgage assets – SPV are funded via securitised residential
mortgage-backed securities (RMBS). As a result, the Group is
not exposed to significant credit risk on these assets as this is
borne by the RMBS holder.
The credit risk framework includes an assessment of the
counterparty credit risk in each business unit and at a total
Group level. The Group has no significant concentrations of
credit risk at the Statement of financial position date.
Collateral held over assets
Ageing of amortised cost financial assets
In the event of a default against any of the mortgages in any
SPV, the trustee has the legal right to take possession of the
secured property and sell it as a recovery action against
settlement of the outstanding account mortgage balance. At
all times of possession, the risks and rewards associated with
ownership of the property are held by the trustee on behalf of
the RMBS holder.
The table below gives information regarding the carrying value
of the Group’s financial assets measured at amortised cost.
The analysis splits these assets by those that are not past due
and those that are past due (including an ageing analysis at
the Statement of financial position date):
Amortised cost financial assets
30 June 2021
Receivables
Mortgage assets – SPV
Finance leases
Past due
Not past
due
$m
0-1
months
$m
1-3
months
$m
3-6
months
$m
6+
months
$m
825.1
487.3
26.8
0.8
0.4
0.3
23.8
14.4
36.4
—
—
—
3.8
8.4
—
Total
$m
830.4
570.3
26.8
Total amortised cost financial assets
1,339.2
24.6
14.8
36.7
12.2 1,427.5
30 June 2020
Receivables
Mortgage assets – SPV
Finance leases
587.8
598.2
31.7
—
4.5
1.8
26.1
26.7
51.2
—
—
—
—
4.4
—
594.1
706.6
31.7
Total amortised cost financial assets
1,217.7
26.1
31.2
53.0
4.4 1,332.4
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty
in raising funds to meet cash commitments associated with
financial instruments. This may result from the inability to sell
financial assets at their fair values; a counterparty failing on
repayment of a contractual obligation; the inability to
generate cash inflows as anticipated; or an unexpected
increase in cash outflows.
The Group aims to ensure that it has sufficient liquidity to
meet its obligations on a short, medium and long-term basis.
In setting the level of sufficient liquidity, the Group considers
new business activities in addition to current contracted
obligations. It considers: minimum cash requirements;
collateral and margin call buffers; APRA and Australian
Financial Services Licence (AFSL) requirements; cash flow
forecasts; associated reporting requirements; other liquidity
risks; and contingency plans.
The basis of the approach to liquidity management is to target
sufficient liquidity to meet all cash requirements of the Group
over an ensuing 12 month period which ensures that the
regulatory guidelines set out in ASIC Regulatory Guide
166 Licensing: Financial requirements for holders of an
AFSL are met.
The Life liquidity management policy is approved by the CLC
Board and sets out liquidity targets and mandated actions
depending on actual liquidity levels relative to those targets.
Detailed forecast cash positions are reported regularly to the
Financial Risk Committee (FRC). The FRC and the Investment
Committee (IC) replaced the CLC Asset Liability Committee
(ALCo) from 1 July 2019. The IC is a committee of investment
professionals from within CLC and represents the first line.
The FRC is a committee of professionals mainly from the Risk
division that is separate from the investment team of CLC. The
FRC represents the second line for CLC. At the reporting date,
all requirements of the CLC Board-approved liquidity
management policy were satisfied.
Maturity profile of undiscounted financial
liabilities
The table on the following page summarises the maturity
profile of the Group’s undiscounted financial liabilities. This is
based on contractual undiscounted repayment obligations.
Totals differ to the amounts in the Statement of financial
position by the amount of time value of money discounting
reflected in the Statement of financial position values.
100
Note 18
Financial risk management (continued)
Challenger Limited 2021 Annual Report
Maturing profile of undiscounted financial liabilities
30 June 2021
Payables
Payables – SPV
Interest bearing financial liabilities
Interest bearing financial liabilities – SPV
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
30 June 2020
Payables
Payables – SPV
Interest bearing financial liabilities
Interest bearing financial liabilities – SPV
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
1 year or
less
$m
1-3
years
$m
3-5
years
$m
>5
years
$m
Total
$m
1,710.7
0.9
5.1
—
27.4
—
— 1,743.2
—
0.9
4,386.9
969.1
735.4
0.7 6,092.1
166.6
214.0
120.1
133.4
634.1
3,090.1
542.1
—
— 3,632.2
3,356.7 2,948.9
459.6
372.2 7,137.4
863.9 1,465.8 1,158.7 4,817.7 8,306.1
130.1
58.3
96.4
222.8
507.6
13,705.9 6,203.3 2,597.6 5,546.8 28,053.6
1,555.5
—
—
27.9 1,583.4
2.0
10.2
45.3
—
57.5
5,458.0 1,336.0
453.2
168.8 7,416.0
139.9
260.6
147.1
170.2
717.8
1,587.3
828.5
—
— 2,415.8
2,966.4 2,325.5
542.5
427.0 6,261.4
775.4 1,272.1 1,014.4 4,574.9 7,636.8
97.1
48.7
80.7
498.9
725.4
12,581.6 6,081.6 2,283.2 5,867.7 26,814.1
1 Disclosure of life insurance contract liabilities is not required under AASB 7 Financial Risk Management, for reference purposes they have been included. Refer to
Note 8 Life contract liabilities for further details.
Note 19
Fair values of financial assets and liabilities
Fair value determination and classification
Fair value reflects the price that would be received on sale of
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The
majority of the Group’s financial instruments are held in the
life insurance statutory funds of CLC and, as a result, are
required by AASB 1038 Life Insurance Contracts to be
designated at fair value through profit and loss where this is
permitted under AASB 9 Financial Instruments.
Financial instruments measured at fair value are categorised
under a three level hierarchy, reflecting the availability of
observable market inputs when estimating the fair value. If
different levels of inputs are used to measure a financial
instrument’s fair value, the classification within the hierarchy is
based on the lowest level that is significant to the fair value
measurement. The three levels are set out below.
Level 1
Level 2
Level 3
Unadjusted quoted prices in active markets are the valuation inputs for identical assets or liabilities (i.e. listed
securities).
Valuation inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (as prices) or indirectly (derived from prices) are used.
There are valuation inputs for the asset or liability that are not based on observable market data (unobservable
inputs).
The unobservable inputs into the valuation of the Group’s
Level 3 assets and liabilities are determined based on the best
information available, including the Group’s own assessment
of the assumptions that market participants would use in
pricing the asset or liability. Examples of unobservable inputs
are estimates about the timing and amount of cash flows,
discount rates, earnings multiples and internal credit ratings.
Valuation techniques
The majority of the Group’s listed and unlisted fixed income
securities, over-the-counter derivative financial instruments
and interest bearing liabilities including the subordinated debt
issuance are classified as Level 2. This recognises the
availability of a quoted price but not from an active market as
defined by the accounting standard.
101
Challenger Limited 2021 Annual Report
Note 19
Fair values of financial assets and liabilities (continued)
Challenger Capital Notes 1, 2 and 3 have carrying values
(inclusive of unamortised issue costs) of $27.7 million, $456.3
million and $379.0 million respectively. The fair value of these
notes is $27.8 million, $480.8 million and $407.9 million
respectively and they are classified as Level 1 in the fair value
hierarchy.
Valuation process
For financial instruments and investment properties
categorised within Level 3 of the fair value hierarchy, the
valuation process applied in valuing such instruments is
governed by the CLC Practice Note on Investment Asset and
Financial Liability Valuation. The Practice Note outlines the
Valuation Committee’s responsibilities in the valuation of
investment assets and financial liabilities for the purposes of
financial reporting. All significant Level 3 financial instruments
are referred to the Valuation Committee which generally
meets monthly, or more frequently if required.
All financial instruments and investment properties carried at
fair value are measured on a recurring basis. Refer Note 5
Financial assets – fair value through profit and loss and Note 6
Investment and development property for further details on
the valuation process applied to unlisted financial instruments
and investment properties.
The table on the following page summarises the financial
instruments and investment properties measured at fair value
at each level of the fair value hierarchy as at the Statement of
financial position date.
Valuation techniques (continued)
Fixed income securities where market observable inputs are
not available are classified as Level 3. The Group’s derivative
financial instruments are traded over-the-counter so, while
they are not exchange traded, there is a market observable
price. Most of the fixed income securities and all of the
government/semi-government securities have market
observable prices.
Externally rated unlisted fixed income securities are valued by
applying market observable credit spreads on similar assets
with an equivalent credit rating and are classified as Level 2.
Internally-rated fixed income securities are classified as Level 3
as the determination of an equivalent credit rating is a
significant non-observable input.
Equity, infrastructure and property securities that are
exchange traded are generally classified as Level 1. Where
quoted prices are available, but are not from an active market,
they are classified as Level 2. If market observable inputs are
not available, they are classified as Level 3. Valuations can
make use of cash flow forecasts discounted using the
applicable yield curve, earnings-multiple valuations or, for
managed funds, the net assets of the trust per the most
recent financial report.
External unit holders’ liabilities are valued at the face value of
the amounts payable, being an approximation of fair value,
and classified as Level 2. The portion of life investment
contract liabilities classified as Level 2 represents products or
product options for which the liability is determined based on
an account balance, rather than a discounted cash flow as
applied to the rest of the portfolio.
Cash and cash equivalents are carried at amortised cost. To
determine a fair value where the asset is liquid or maturing
within three months, the fair value is approximate to the
carrying amounts. This assumption is applied to liquid assets
and the short-term elements of all other financial assets and
financial liabilities.
The mortgage SPVs have total equity attributable to residual
income unitholders (RIU) at amortised cost of
($0.4) million (2020: $0.1 million). The fair value of this RIU
holders’ asset is $31.3 million (2020: $41.0 million) and would
be classified as Level 3 in the fair value hierarchy.
102
Note 19
Fair values of financial assets and liabilities (continued)
Challenger Limited 2021 Annual Report
Valuation process (continued)
30 June 2021
Derivative assets
Fixed income securities1
Equity and other alternatives
Infrastructure investments1
Property securities
Investment and development property2
Total assets
Derivative liabilities
Interest bearing financial liabilities
External unit holders’ liabilities
Life investment contract liabilities
Total liabilities
30 June 2020
Derivative assets
Fixed income securities
Equity and other alternatives
Infrastructure investments1
Property securities
Investment and development property2
Total assets
Derivative liabilities
Interest bearing financial liabilities
External unit holders’ liabilities
Life investment contract liabilities
Total liabilities
Level 1
$m
Level 2
$m
Level 3
$m
Total
$m
—
—
1.2
—
—
—
1.2
0.8
916.5
—
—
917.3
—
—
0.5
—
—
—
0.5
—
798.6
—
—
798.6
738.3
18,522.1
1,188.2
—
—
396.0
20,844.6
506.8
418.2
3,632.2
47.2
4,604.4
1,111.9
17,566.5
627.8
9.8
—
—
19,316.0
725.4
422.7
2,415.8
49.9
3,613.8
—
1,874.8
155.0
345.4
88.0
3,389.7
5,852.9
—
—
—
6,183.2
6,183.2
0.6
1,908.4
274.4
370.3
76.3
3,685.9
6,315.9
—
—
—
5,817.9
5,817.9
738.3
20,396.9
1,344.4
345.4
88.0
3,785.7
26,698.7
507.6
1,334.7
3,632.2
6,230.4
11,704.9
1,112.5
19,474.9
902.7
380.1
76.3
3,685.9
25,632.4
725.4
1,221.3
2,415.8
5,867.8
10,230.3
1 The Group has exposures to structured entities (entities designed so that voting or similar rights are not the dominant factor in determining who controls the entity;
for example, when any voting rights relate purely to administrative tasks) via investments in asset-backed finance vehicles (where it may act as a lender or purchaser
of notes and/or residual income units) and securitisations (such as mortgages, finance leases and other types of collateralised vehicles). The Company assesses, at
inception and at each reporting date, whether a structured entity should be consolidated based on the accounting policy. The maximum exposure to loss is limited
to the reported fair value of the underlying securities plus any guaranteed undrawn commitments to the counterparties. At 30 June 2021 the carrying value of
asset-backed financing assets was $76.7 million (30 June 2020: $91.1 million) with $56.4 million undrawn commitments (30 June 2020: $32.0 million) and
securitisations was $4,517.9 million (30 June 2020: $5,386.5 million) plus $20.4 million undrawn commitments (30 June 2020: $107.2 million).
2 Refer Note 6 Investment and development property for valuation techniques and key unobservable inputs.
Level 3 reconciliation
The following table shows a reconciliation of the movement in the fair value of financial instruments categorised within Level 3
of the fair value hierarchy during the year:
Balance at the beginning of the year
Fair value movements
Acquisitions
Maturities and disposals
Transfers to other categories1,2
Balance at the end of the year
30 June 2021
30 June 2020
Assets
$m
6,315.9
(54.7)
1,688.0
(1,688.5)
(407.8)
5,852.9
Liabilities
$m
5,817.9
95.2
3,208.7
(2,938.6)
—
6,183.2
Assets
$m
6,420.7
(187.5)
2,764.2
(2,666.0)
(15.5)
6,315.9
Liabilities
$m
6,712.2
135.7
1,992.4
(3,022.4)
—
5,817.9
Unrealised losses included in the Statement of
comprehensive income for assets and liabilities held at the
Statement of financial position date
(54.7)
(95.2)
(187.5)
(135.7)
1 The Group transfers between levels of the fair value hierarchy when there is a change in the observability of the pricing inputs or a change to valuation
methodology.
2 Transfers to/from other categories are due to changes in the market observability of inputs used in the valuation of financial instruments. There were no transfers
between Level 1 and Level 2 during the reporting period. There were no transfers into Level 3 (30 June 2020: $2.5 million) and there were
$407.8 million (30 June 2020: $18.0 million) of transfers out of Level 3 and into Level 2 during the reporting period.
103
Challenger Limited 2021 Annual Report
Note 19
Fair values of financial assets and liabilities (continued)
Level 3 sensitivities
The following table shows the sensitivity of Level 3 financial instruments to a reasonably possible change in alternative
assumptions in respect of the non-observable inputs into the fair value calculation:
Level 3
value1
$m
Positive
impact
$m
Negative
impact
$m Valuation technique
Reasonably possible change in
non-observable input2,3
30 June 2021
Fixed income securities
1,874.8
13.5
(54.0) Discounted cash flow
Primarily credit spreads
Equity and other alternatives
155.0
12.0
Infrastructure investments
345.4
4.3
(13.0) Discounted cash flow,
external financial report
(4.2) Discounted cash flow,
external financial report
Mortality rate, 5% change in
valuation
Primarily discount rate on cash
flow models
Property securities4
88.0
4.4
(4.4) External financial report 5% change in valuation
Investment contract liabilities
(6,183.2)
2.4
(2.4) Discounted cash flow
Primarily expense assumptions
Investment and development
property
3,389.7 152.3
(124.9) Market capitalisation,
Discounted cash flow
Primarily capitalisation rate
Total Level 3
30 June 2020
Derivative assets
(330.3)
0.6
—
— Discounted cash flow
Primarily credit spreads
Fixed income securities
1,908.4
23.1
(74.9) Discounted cash flow
Primarily credit spreads
Equity and other alternatives
274.4
18.8
Infrastructure investments
370.3
4.4
(20.1) Discounted cash flow,
external financial report
(4.3) Discounted cash flow,
external financial report
Mortality rate, 5% change in
valuation
Primarily discount rate on cash
flow models
Property securities4
76.3
3.8
(3.8) External financial report 5% change in valuation
Investment contract liabilities
(5,817.9)
2.3
(2.3) Discounted cash flow
Primarily expense assumptions
Investment and development
property
3,685.9 165.3
(116.9) Market capitalisation,
Discounted cash flow
Primarily capitalisation rate
Total Level 3
498.0
1 The fair value of the asset or liability would increase/decrease if the credit spread or discount rate decreases/increases or if expense assumptions and the other
inputs increase/decrease.
2 Specific asset valuations will vary from asset to asset as each individual industry profile will determine appropriate valuation inputs to be utilised.
3 The effect of a change to reflect a reasonably possible alternative assumption was calculated by moving the credit band by one tier, adjusting the discount rates by
between 50bps – 100bps, adjusting property capitalisation rates by 25bps (Australia) or 10bps (Japan), adjusting credit spreads by 50bps, changing the valuation of
the unlisted schemes by 5% and adjusting the expense assumption allocation splits by 10%.
4 The effect of a change to reflect a reasonably possible alternative assumption was calculated by moving the capitalisation rate by 25bps (Australia) / 10bps (Japan).
The COVID-19 pandemic has had a significant impact on the
economy and continues to drive uncertainty across the
commercial property market. Independent valuers have noted
these uncertainties in respect of the assumptions applied in
the course of performing the independent valuation
assessments for the direct property portfolio as at the
reporting date. As a result of this uncertainty, a further
sensitivity analysis has been undertaken to assess the impact
on fair value when the significant non-observable input
(capitalisation rates) experience a more material movement.
Under this additional sensitivity scenario, the capitalisation rate
is moved by 50bps (Australia) / 20bps (Japan), resulting in a
positive impact of $309.6 million and a negative impact of
$247.7 million across the direct property portfolio.
Fixed income also forms a material part of the Level 3 asset
class held by the Group. This portfolio primarily consists of
internally rated securities where the valuation is derived from
applying the market observable comparable spread. The key
non-observable inputs in these valuations are the internally
derived credit ratings which are based upon credit
assessments undertaken by the Risk division. The COVID-19
pandemic has impacted many businesses across various
industries and the long-term effects are difficult to assess and
not all industries and businesses have been impacted equally.
An assessment of the current impact of COVID-19 on the
performance of the Level 3 component of the fixed income
portfolio has been undertaken and that performance has not
changed sufficiently to warrant any additional sensitivity being
included.
104
Challenger Limited 2021 Annual Report
Note 20 Collateral arrangements
Accounting policy
CLC receives collateral, where it is considered necessary, when
entering into certain financial arrangements. The amount of
collateral required is subject to management’s credit
evaluation of the counterparty which is performed on a case-
by-case basis. As at 30 June 2021 $264.5 million (30 June
2020: $471.8 million) cash received from third parties as
collateral is recorded in payables and $74.6 million (30 June
2020: $221.4 million) of collateral assets received from
counterparties was repledged by the Company to third
parties.
Except in the event of default, collateral received can be called
back by the counterparty in accordance with the financial
arrangement. CLC is required to pledge collateral, as part of
the standard terms of transactions, when entering into certain
financial arrangements. Cash paid to third parties as collateral
is recorded in receivables. Other financial assets transferred as
collateral are not derecognised from the Statement of
financial position as the risks and rewards of ownership
remain with CLC. At the balance sheet date the fair value of
cash and financial assets pledged are as follows:
Collateral pledged as security
Cash
Other financial assets1
Total collateral pledged
1 Includes assets sold under repurchase agreements. Please refer Note 13 Interest bearing financial liabilities for more information.
30 June
2021
$m
269.9
6,675.5
6,945.4
30 June
2020
$m
97.8
7,730.9
7,828.7
105
Challenger Limited 2021 Annual Report
Section 6: Group structure
This section provides details and disclosures relating to the parent entity of the Group, controlled entities, investments in
associates and any acquisitions and/or disposals of businesses in the year. Disclosure for related parties is also provided in
this section.
Note 21
Parent entity
Company
Statement of comprehensive income for the year ended
Dividends and interest from controlled entities
Finance costs
Profit before income tax
Income tax benefit
Total comprehensive income for the year
Statement of financial position as at
Assets
Cash and cash equivalents
Receivables
Financial asset – fixed income securities1
Deferred tax assets
Investment in controlled entities
Total assets
Liabilities
Payables
Current tax liabilities
Interest bearing financial liabilities
Total liabilities
Net assets
Equity
Contributed equity
Share-based payments reserve
Retained earnings
Total equity
30 June
2021
$m
30 June
2020
$m
244.3
(28.5)
215.8
0.6
216.4
232.5
(31.1)
201.4
1.7
203.1
2.9
3.0
1,594.5
1,439.0
872.7
1.3
2,416.4
4,887.8
544.1
45.0
863.3
1,452.4
3,435.4
805.0
84.1
2,373.8
4,704.9
661.6
—
799.8
1,461.4
3,243.5
2,462.4
2,424.7
(109.0)
1,082.0
3,435.4
(111.0)
929.8
3,243.5
1 Financial asset – fixed income securities relates to the subscription by the Company of notes issued by CLC that qualify as Additional Tier 1 capital of CLC.
Refer Note 27 Contingent liabilities, contingent assets and credit commitments for details of any contingent liabilities applicable to the parent entity.
106
Note 22
Controlled entities
The table below presents the hierarchical structure of Challenger Limited showing its controlled entities that form the main
composition of the Group as at 30 June 2021:
Challenger Limited 2021 Annual Report
Entity name
Challenger Limited
Challenger Group Holdings Limited
Challenger Group Services Pty Limited
Challenger Treasury Limited
Challenger Japan Holdings Pty Limited
Challenger Funds Management Holdings Pty Limited
Fidante Partners Holdings Pty Limited
Fidante Partners Holdings Europe Limited (incorporated in the UK)
Challenger Investment Partners Limited
Challenger Life Company Holdings Limited
Challenger Life Company Limited
Principal activity
Corporate
Corporate
Corporate
Corporate
Funds Management
Funds Management
Funds Management
Funds Management
Life
Life
Challenger’s percentage holding of the above entities is 100% and all are incorporated in Australia unless otherwise stated.
Accounting policy
Controlled entities are consolidated from the date on which
control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out
of the Group. The acquisition method of accounting is applied
on acquisition or initial consolidation. This method ascribes fair
values to the identifiable assets and liabilities acquired. The
difference between the net fair value acquired and the fair
value of the consideration paid (including the fair value of any
pre-existing investment in the entity) is recognised as either
goodwill on the Statement of financial position or a discount
on acquisition through the Statement of comprehensive
income.
Principles of consolidation
The financial statements consolidate the financial information
of controlled entities. An entity is controlled when the
Company is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity. The Statement of
financial position date and the accounting policies of
controlled entities are consistent with those of the Company.
The Company assesses, at inception and at each reporting
date, whether an entity should be consolidated based on the
accounting policy.
All intercompany balances and transactions, including
unrealised profits arising from intra-group transactions, are
eliminated in full. Non-controlling interests represent the share
in the net assets of subsidiaries attributable to equity interests
not owned directly or indirectly by the Group.
107
Challenger Limited 2021 Annual Report
Note 23
Investment in associates
Name of company
Alphinity Investment Management Pty Ltd
Ardea Investment Management Pty Ltd2
Ares Australia Management Pty Ltd
Avenir Capital Pty Ltd
Bentham Asset Management Pty Ltd
Eiger Capital Pty Ltd
Greencape Capital Pty Ltd
Lennox Capital Partners Pty Ltd
Merlon Capital Partners Pty Ltd
Novaport Capital Pty Ltd
Resonance Asset Management Limited3
Ox Capital Management Pty Ltd
Wavestone Capital Pty Ltd
Whitehelm Capital Pty Ltd
Wyetree Asset Management Pty Ltd
Total investment in associates4
Principal activity
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Country of
domicile
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
UK
Australia
Australia
Australia
UK
30 June
2021
%1
30
30
35
40
49
40
47
40
30
49
—
40
33
30
49
30 June
2020
%1
30
30
35
40
49
40
48
40
30
49
—
—
33
30
49
30 June
2021
$m
1.9
25.6
0.4
—
1.1
1.0
38.1
3.3
2.3
0.3
0.7
—
2.5
5.9
0.1
83.2
30 June
2020
$m
2.0
3.3
0.2
3.3
0.7
0.8
39.8
2.0
2.0
0.3
0.7
—
2.2
5.6
0.1
63.0
1 Represents voting rights percentages.
2 During the year ending 30 June 2021 Challenger's economic interest increased to 49.9%. Voting rights remained unchanged.
3 Challenger is deemed to have significant influence.
4 Investment in associates is all considered non-current.
Movements in carrying amount of investment in associates
Opening balance
Acquisition of investment in associates
Share of associates’ net profit
Dividends and net capital redemptions
Reclassification to investment in controlled entities
Impairment of investment in associates
Carrying amount at the end of the year
Share of associates’ profit or loss
Profit after tax for the year
Share of the associates’ Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Accounting policy
30 June
2021
$m
30 June
2020
$m
63.0
21.3
35.2
(32.6)
—
(3.7)
83.2
58.1
—
29.3
(21.9)
(0.6)
(1.9)
63.0
35.2
29.3
45.7
4.8
50.5
21.7
3.0
24.7
25.8
38.0
4.6
42.6
21.8
1.4
23.2
19.4
Associates are entities over which the Group has significant
influence of the entities’ financial and operating policies but
not control. Investments in associates, other than those
backing life contracts, are accounted for under the equity
method whereby investments are carried at cost adjusted for
post-acquisition changes in the Group’s share of the net assets
of the entity.
Associates’ financial reports are used to apply the equity
method and both the financial year end date and accounting
policies of associate entities are consistent with those of the
Group.
The consolidated Statement of comprehensive income reflects
the share of the results of operations of associates.
108
Note 23
Investment in associates (continued)
Challenger Limited 2021 Annual Report
The Group determines the dates of obtaining or losing
significant influence of another entity based on an assessment
of all pertinent facts and circumstances that affect the ability
to significantly influence the financial and operating policies of
that entity.
Accounting policy (continued)
Where there has been a change recognised directly in the
associate’s equity, the Group recognises its share of any
changes in the Statement of changes in equity.
Key estimates and assumptions
An assessment is performed at each Statement of financial
position date to determine whether there is any indication of
impairment and whether it is necessary to recognise any
impairment loss against the carrying value of the net
investment in associates.
Note 24 Related parties
Key Management Personnel
The Directors and key executives of Challenger Limited during the reporting period were as follows:
Directors
Peter Polson
Richard Howes
John M Green
Steven Gregg
Masahiko Kobayashi1
Heather Smith (appointed 20 January 2021)
JoAnne Stephenson
Duncan West
Melanie Willis
1 Hiroyuki Iioka is an Alternate Director to Masahiko Kobayashi.
Independent Chair
Managing Director and Chief Executive Officer
Independent Non-Executive Director
Independent Non-Executive Director
Non-Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Key executives
Current KMP
Richard Howes
Rachel Grimes1
Nick Hamilton
Angela Murphy
Chris Plater
Former KMP
Anton Kapel2
Andrew Tobin3
Managing Director and Chief Executive Officer
Chief Financial Officer
Chief Executive, Funds Management
Chief Executive, Life
Chief Executive, Operations & Technology
Acting Chief Executive & Chief Investment Officer, Life
Chief Financial Officer
1 Rachel Grimes commenced being a key executive on 3 May 2021.
2 Anton Kapel commenced being a key executive on 7 December 2020 and ceased being a key executive on 9 March 2021.
3 Andrew Tobin ceased being a key executive on 31 March 2021.
Controlled entities and associates
Other related parties
Unless an exception applies under relevant legislation,
transactions between commonly-controlled entities within the
Group (except where otherwise disclosed) are conducted on
an arm’s length basis under normal commercial terms and
conditions. The Group’s interests in controlled entities are
disclosed in Note 22 Controlled entities.
During the year, there were transactions between the Group
and Challenger-sponsored managed funds for the provision of
investment management, transaction advisory and other
professional services.
109
Challenger Limited 2021 Annual Report
Note 24
Related parties (continued)
Other related parties (continued)
Loans to Directors and key executives
Transactions were also entered into between the Group and
associated entities (refer to Note 23 Investment in associates)
for the provision of distribution and administration services.
The Group earned fee income during the year of $54.5 million
(2020: $47.4 million) from transactions entered into with non-
controlled funds and associates. Transactions are conducted
on an arm’s length basis under normal commercial terms and
conditions.
There were no loans made to Directors or key executives as at
30 June 2021 (30 June 2020: nil).
Group products
From time to time, Directors or key executives of the Company
or their related entities may purchase products from the
Group. These purchases are on the same arm’s length terms
and conditions as those offered to other employees or
customers.
Total remuneration of Key Management Personnel and Non-Executive Directors1
KMP and Non-Executive Directors
Non-Executive Directors
2021
2020
KMP
2021
2020
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other
benefits
$
Total
$
1,621,501
1,660,179
88,358
103,398
—
—
—
—
1,709,859
1,763,577
5,651,994
3,878,943
112,345
105,015
5,021,664
5,248,471
208,107
143,573
10,994,110
9,376,002
All KMP and Non-Executive Directors
2021
2020
1 No termination payments were made to KMPs or NEDs during the period.
7,273,495
5,539,122
200,703
208,413
5,021,664
5,248,471
208,107
143,573
12,703,969
11,139,579
110
Challenger Limited 2021 Annual Report
Section 7:Other items
This section provides information that is less significant in understanding the financial performance and position of the
Group perhaps due to lack of movement in the amount or the overall size of the balance. Nevertheless, these items assist in
understanding the Group or are required under the Australian or International Accounting Standards, the Corporations
Act 2001 and/or the Corporations Regulations.
Note 25 Goodwill and other intangible assets
Goodwill
Other intangible assets
Software at cost
Less: accumulated amortisation
Less: asset impairment1
Less: asset reclassification2
Commercial agreement
Less: accumulated amortisation
Foreign exchange gain
Less: impairment
Identifiable intangible (Assetsecure)
Less: accumulated amortisation
Less: asset reclassification3
Total other intangible assets
30 June
2021
$m
579.9
32.1
(15.2)
(1.1)
(7.5)
8.3
0.9
—
—
—
0.9
1.7
(0.1)
(1.6)
—
9.2
30 June
2020
$m
579.9
32.6
(10.7)
(4.1)
(1.3)
16.5
5.9
(0.7)
0.7
(5.9)
—
1.7
(0.1)
—
1.6
18.1
1 Impairment of capitalised software following management assessment for indicators of impairment.
2 Reclassification of previously capitalised cloud computing software deployment costs following the IFRS Interpretations Committee guidance issued in April 2021.
3 Reclassification of Assetsecure identifiable intangible to capitalised software.
Goodwill
Software
Commercial
agreement
Identifiable
intangible
30 June
2021
30 June
2020
30 June
2021
30 June
2020
30 June
2021
30 June
2020
30 June
2021
30 June
2020
$m
$m
$m
$m
$m
$m
$m
Balance at the beginning of
the year
579.9
557.3
16.5
18.0
Additions
Impairment
Amortisation expense
Foreign exchange gain
Reclassification
—
—
—
—
—
22.6
—
—
—
—
Balance at the end of the year
579.9
579.9
4.9
(1.1)
(4.5)
—
(7.5)
8.3
6.9
(4.1)
(3.0)
—
(1.3)
16.5
—
0.9
—
—
—
—
0.9
5.9
—
(5.9)
(0.2)
0.2
—
—
1.6
—
—
—
—
(1.6)
—
$m
—
1.7
—
(0.1)
—
—
1.6
111
Challenger Limited 2021 Annual Report
Note 25 Goodwill and other intangible assets (continued)
Accounting policy
Goodwill
Goodwill acquired in a business combination is initially
measured at cost, being the excess of the fair value of the
consideration for the business combination over the Group’s
interest in the net fair value of the acquiree’s identifiable
assets, liabilities and contingent liabilities. Following initial
recognition, goodwill is measured at cost less any
accumulated impairment losses.
For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated
to each of the Group’s cash generating units (CGUs), or
groups of CGUs, that are expected to benefit from the
synergies of the combination, irrespective of whether other
assets or liabilities of the Group are assigned to those units or
groups of units.
Each unit, or group of units, to which the goodwill is allocated
represents the lowest level within the Group at which the
goodwill is monitored for internal management purposes.
Impairment is determined by assessing the recoverable
amount of the CGU (or group of CGUs) to which the goodwill
relates.
When the recoverable amount of the CGU (or group of CGUs)
is less than the carrying amount, an impairment loss is
recognised and allocated first to reduce the carrying amount
of any goodwill allocated to that CGU, then to reduce the
carrying amount of the other assets in the unit on a pro rata
basis. Impairment losses recognised for goodwill are not
subsequently reversed.
CGUs within the Group are predominantly business
operations.
When goodwill forms part of a CGU (or group of CGUs) and
an operation within that unit is disposed of, the goodwill
associated with the operation disposed of is included in the
carrying amount of the operation when determining the gain
or loss on disposal of the operation. Goodwill disposed of in
this manner is measured based on the relative values of
the operation disposed of and the portion of the CGU
retained.
Other intangible assets
Other intangible assets acquired are recorded at cost less
accumulated amortisation and impairment losses. The cost of
an intangible asset acquired in a business combination is its
fair value as at the date of acquisition.
Amortisation is calculated based on the timing of projected
cash flows over the estimated useful lives.
Certain internal and external costs directly incurred in
acquiring and developing on-premise software have been
capitalised and are being amortised on a straight line basis
over their useful lives.
Software-as-a-Service (SaaS)
SaaS arrangements are service contracts providing the Group
with the right to access the cloud provider’s application
software over the contract period. As such the Group does
not receive a software intangible asset at the contract
commencement date. The Group does not have control over
the software nor can it restrict others’ access to the benefits of
the software.
The following outlines the accounting treatment of costs
incurred in relation to SaaS arrangements:
Accounting treatment
Recognise as an operating
expense over the term of the
service contract
Recognise as an operating
expense as the service is
received
Costs
• Fee for use of application
software
• Configuration costs
• Customisation costs
• Data conversion and
migration costs
• Testing costs
• Training costs
Key estimates and assumptions
Goodwill recoverable amounts
The Group assesses whether goodwill is impaired at least
annually in accordance with the accounting policy. The
recoverable amount of each CGU is determined based on
value in use calculations that utilise cash flow projections
based on financial forecasts approved by senior management
which cover an appropriate time horizon. In determining these
cash flow projections management considers:
•
current and expected performance of each CGU;
• Board and management-approved budgets and strategic
plans; and
•
changes in Australian and international economic and
market environments.
112
Note 25 Goodwill and other intangible assets (continued)
Key estimates and assumptions (continued)
Sensitivity to change in assumptions
Challenger Limited 2021 Annual Report
The impact of COVID-19 has had a profound effect on
economies and markets. In addition, the duration and extent
of the pandemic together with government responses to it
remains uncertain. Notwithstanding, management has made
reasonable assumptions of the impact of COVID-19 when
determining the cash flow projections to be used for the value
in use calculations.
The cash flow projections determined by management are
discounted using an appropriate discount rate. The
determination of the discount rate is a matter of judgement
and is based on a number of factors including a theoretical
calculation, observation of third party reports and discount
rates used by comparable financial services companies.
The relevant assumptions in deriving the value of the CGU are
as follows:
•
•
the budgeted net profit after tax for each CGU for each
year within the cash flow projection period;
the discount rate; and
• growth rates, which are consistent with long-term trends
in the industry segments in which the CGUs operate.
The derived values in use for each CGU are in excess of the
carrying values of goodwill.
The following CGUs represent the carrying amounts of
goodwill:
Discount rate
30
June
2021
$m
30
June
2020
$m
30
June
2021
%
30
June
2020
Cash
flow
horizon
% (years)
5
452.3 452.3 10.2 10.0
127.6 127.6
579.9 579.9
9.7 10.0
5
CGU
Life
Funds
Management
Total
Management is of the view that reasonable changes in the
key assumptions, such as an increase in the discount rate by
1% or a change in projected cash flows of 5%, would not
cause the respective recoverable amounts for each CGU to fall
short of the carrying amounts as at 30 June 2021. All goodwill
is non-current.
Other intangible assets amortisation
Useful lives of intangible assets used in the calculation of the
amortisation expense are examined on an annual basis and
where applicable, adjustments are made on a prospective
basis.
Intangible
Goodwill
Software
Useful
Depreciation method
Life
Indefinite
Not applicable
3-10 years Straight line basis over its
Commercial
agreement
5.5 years
useful life, usually a period of
five years
Straight line basis over the
life of the intangible, based
on the terms of the
agreement.
113
Challenger Limited 2021 Annual Report
Note 26
Lease assets and liabilities
Right-of-use lease asset
Cost
Less: accumulated depreciation
Right-of-use lease asset
Balance at the beginning of the year3
Additions
Depreciation expense
Balance at the end of the year
30 June
2021
$m
45.4
(10.7)
34.7
30 June
2020
$m
37.1
(4.7)
32.4
Office premises1
Property, plant and
equipment2
30 June
2021
$m
30 June
2020
$m
30 June
2021
$m
30 June
2020
$m
32.0
8.4
(6.0)
34.4
36.7
—
(4.7)
32.0
0.4
(0.1)
—
0.3
—
0.4
—
0.4
1 The Group has entered into commercial leases for the rental of properties where it is not in the best interests of the Group to purchase these properties. These
leases have terms ranging between one and 12 years with renewal terms included in the contracts. Renewals are at the specific option of the entity that holds the
lease.
2 Property, plant and equipment relates to leases for photocopying equipment.
3 The balance in prior year arose due to the adoption of AASB 16.
Lease liabilities
Maturity analysis of contractual discounted cash flows
Amounts due in less than one year
Amounts due between one and two years
Amounts due between two and five years
Amounts due in greater than five years
Total lease liabilities
Current
Non-current
Total lease liabilities1
1 Refer to Note 15 for interest expense on lease liabilities and the Statement of cash flows for total cash outflow for leases.
30 June
2021
30 June
2020
$m
8.0
8.2
26.7
27.4
70.3
$m
6.3
6.8
22.4
32.1
67.6
30 June
2021
30 June
2020
$m
8.0
62.3
70.3
$m
6.3
61.3
67.6
Accounting policy
Right-of-use-lease assets
The Group recognises right-of-use lease assets at the
commencement date of the lease (i.e. the date the underlying
asset is available for use). Right-of-use lease assets are
measured at cost, less any accumulated depreciation and
impairment losses, and less any adjustments for any
remeasurement of lease liabilities. The cost of right-of-use
lease assets includes the amount of lease liabilities recognised,
initial direct costs incurred, and lease payments made at or
before the commencement date less any lease incentives
received.
Unless the Group is reasonably certain to obtain ownership of
the leased assets at the end of the lease term, the recognised
right-of-use lease assets are depreciated on a straight line
114
basis over the shorter of its estimated useful life and the lease
term. Right-of-use lease assets are subject to impairment.
Lease liabilities
At the commencement date of the lease, the Group
recognises lease liabilities measured at the present value of
lease payments to be made over the lease term. The lease
payments include fixed payments (including in-substance fixed
payments), less any lease incentives receivable, variable lease
payments that depend on an index or a rate, and amounts
expected to be paid under residual value guarantees.
Challenger Limited 2021 Annual Report
Note 26
Lease assets and liabilities (continued)
Accounting policy (continued)
The lease payments include the exercise price of a purchase
option reasonably certain to be exercised by the Group and
payments of penalties for terminating a lease, if the lease term
reflects the Group exercising the option to terminate.
The variable lease payments that do not depend on an index
or a rate are recognised as an expense in the period in which
the event or condition that triggers the payment occurs. In
calculating the present value of lease payments, the Group
uses the incremental borrowing rate at the lease
commencement date if the interest rate implicit in the lease is
not readily determinable. After the commencement date, the
amount of lease liabilities is increased to reflect the accretion
of interest and reduced for the lease payments made. In
addition, the carrying amount of lease liabilities is remeasured
if there is a modification, a change in the lease term, a change
in the in-substance fixed lease payments or a change in the
assessment to purchase the underlying asset.
Significant judgement in determining the lease term of
contracts with renewal
The Group determines the lease term as the non-cancellable
term of the lease, together with any periods covered by an
option to extend the lease if it is reasonably certain to be
exercised, or any periods covered by an option to terminate
the lease, if it is reasonably certain not to be exercised.
The Group has the option, under some of its leases to lease
the assets for additional terms. The Group applies judgement
in evaluating whether it is reasonably certain to exercise the
option to renew. That is, it considers all relevant factors that
create an economic incentive for it to exercise the renewal.
After the commencement date, the Group reassesses the lease
term if there is a significant event or change in circumstances
that is within its control and affects its ability to exercise (or
not exercise) the option to renew.
Note 27
Contingent liabilities, contingent assets and credit commitments
Warranties
Contingent future commitments
CLC has made capital commitments to external counterparties
for future investment opportunities such as development or
investment purchases. As at 30 June 2021 there are potential
future commitments totalling $867.9 million (30 June 2020:
$419.7 million) in relation to these opportunities.
The Group has made capital commitments to associates to
subscribe for up to $11.8 million (30 June 2020: $7.2 million)
of non-redeemable preference shares to enable them to meet
their working capital requirements. Contractual obligations for
future property repairs and maintenance are in place but
cannot be quantified until required.
On 23 December 2020, Challenger entered into an agreement
to acquire MyLifeMyFinance Limited, an Australian-based
customer savings and loans bank, for an acquisition price of
$35.0 million. The acquisition price is subject to a completion
adjustment and based on a net asset value of $18.0 million.
Challenger has paid a deposit of $1.8 million with the
remaining balance expected to be completely settled by
August 2021.
Over the course of its corporate activity the Group has given,
as a seller of companies and as a vendor of assets, including
real estate properties, warranties to purchasers on several
agreements that are still outstanding as at 30 June 2021.
Other than noted below, at the date of this report no material
claims against these warranties have been received by the
Group.
Parent entity guarantees and undertakings
The Company has extended the following guarantees and
undertakings to entities that form part of the Group:
1. a guarantee supporting the corporate banking facility and
certain other financial commitments, such as hedging
arrangements;
2.
letters of support in respect of certain subsidiaries in the
normal course of business. The letters recognise the
Company’s intention to provide support to those
subsidiaries so that they can continue to meet their
obligations;
3. Australian Financial Services Licence deeds of undertaking
as an eligible provider; and
4. guarantees to support contractual commitments on
warranties to certain third parties.
Third party guarantees
Bank guarantees have been issued by third party financial
institutions on behalf of the Group and its subsidiaries for
items in the normal course of business, such as rental
contracts. The amounts involved are not considered to be
material to the Group.
115
Challenger Limited 2021 Annual Report
Note 27
Contingent liabilities, contingent assets and credit commitments
(continued)
Subsidiary guarantees
CLC has provided a guarantee to a third party regarding the
performance of its subsidiary in respect of certain reinsurance
arrangements.
Contingent tax assets and liabilities
From time to time the Group has interactions and matters
under review, audit or dispute with the Australian Taxation
Office in relation to the taxation treatments of various matters
including reportable tax positions.
Any potential tax liability resulting from these interactions is
only provided for when it is probable that an outflow will
occur and a reliable estimate of the amount can be made. No
specific contingent liability amounts have been disclosed in
relation to these matters as it is considered that it would be
prejudicial to their conduct and outcome.
Analysis of credit commitments
Contracted capital expenditure
Amounts due in less than one year
Amounts due between one and two years
Amounts due between two and five years
Amounts due in greater than five years
Total capital expenditure commitments
Non-cancellable operating leases – Group as lessor
Amounts due in less than one year
Amounts due between one and two years
Amounts due between two and five years
Amounts due in greater than five years
Total operating leases – Group as lessor
Other contracted commitments
Amounts due in less than one year
Total other contracted commitments
Net commitments owed to Group
30 June
2021
$m
30 June
2020
$m
2.6
0.8
2.9
7.3
13.6
(219.8)
(174.5)
(412.8)
(784.3)
18.7
0.8
—
—
19.5
(221.0)
(213.5)
(511.3)
(954.3)
(1,591.4)
(1,900.1)
—
—
6.2
6.2
(1,577.8)
(1,874.4)
Other information
Contracted capital expenditure commitments
In the normal course of business, the Group enters into
various contracts that could give rise to contingent liabilities in
relation to performance obligations under those contracts. At
the date of this report, the possibility of any outflow in
settlement is remote.
These represent amounts payable in relation to capital
expenditure commitments contracted for at the Statement of
financial position date but not recognised as liabilities. They
primarily relate to the investment property portfolio and
property, plant and equipment.
Operating leases
Group as lessor
Investment properties owned by the Group are leased to third
parties under operating leases. Lease terms vary between
tenants and some leases include percentage rental payments
based on sales volumes.
Other contracted commitments
This represents amounts payable in relation to fitout
commitments and acquisition of investment properties that
have exchanged prior to the balance date and will settle
subsequent to the balance date.
116
Challenger Limited 2021 Annual Report
Note 28 Employee entitlements
Annual leave
Long service leave
Employee1 entitlements provision
1 The total number of employees of the Group at 30 June 2021 was 738 (30 June 2020: 735) on a full-time equivalent (FTE) basis.
30 June
2021
30 June
2020
$m
8.4
9.9
18.3
$m
7.8
9.4
17.2
Accounting policy
Superannuation funds
Obligations for contributions to superannuation funds are
recognised as an expense in the Statement of comprehensive
income as they are incurred. The Group does not hold or pay
into any defined benefit superannuation schemes on behalf of
employees.
Wages, salaries, annual leave and non-monetary
benefits
Liabilities for wages and salaries, including non-monetary
benefits and annual leave expected to be settled wholly within
12 months of the Statement of financial position date, are
recognised in respect of employees’ services up to the
Statement of financial position date. They are measured at the
amounts expected to be paid when the liabilities are settled.
Liabilities for accumulated sick leave are recognised when the
leave is taken and are measured at the rates paid or payable.
Long service leave
A liability for long service leave is recognised as the present
value of estimated future cash outflows to be made in respect
of services provided by employees up to the Statement of
financial position date. The estimated future cash outflows are
discounted using yields from Australian corporate bonds
which have durations to match, as closely as possible, the
estimated future cash outflows. Factors which affect the
estimated future cash outflows such as expected future salary
increases, experience of employee departures and period of
service, are included in the measurement.
Share-based payment transactions
Long-term equity-based incentive plan
The Group has an employee share incentive plan for the
granting of non-transferable share rights to executives and
senior employees. Shares in the Company held by the
employee share trust are classified as Treasury shares and
presented in the Statement of financial position as a
deduction from equity.
Employees of the Group receive remuneration in the form of
share-based payment transactions, whereby employees render
services in exchange for shares or rights over shares (equity-
settled transactions).
The cost of equity-settled transactions with employees is
measured by reference to the fair value at the date at which
they are granted. The fair value is determined using an option
pricing model.
Share-based payment transactions (continued)
In accordance with Australian Accounting Standards, the cost
of equity-settled transactions is recognised in the Statement of
comprehensive income, together with a corresponding
increase in equity, over the period in which the performance
conditions are fulfilled, ending on the date on which the
relevant employees become fully entitled to the award (vesting
date).
At the Company level, the cost of Treasury shares is
recognised as a reduction in equity. On vesting of the award
they are subsequently recognised as an increase in equity and
a reduction in share-based payment reserve at an average
acquisition price.
The cumulative expense or investment recognised for equity-
settled transactions at each Statement of financial position
date reflects the extent to which the vesting period has
expired and the best estimate of the number of awards that
will ultimately vest.
No adjustment is made for the likelihood of market
performance conditions being met as the effect of these
conditions is included in the determination of fair value at
grant date. This results in the share-based payment expense
being recognised in the Statement of comprehensive income
and an increase in equity being recognised even if the market
performance conditions are not met at the vesting date and
the share rights ultimately lapse.
Where the terms of an equity-settled award are modified, as a
minimum an expense is recognised as if the terms had not
been modified. In addition, an expense is recognised for any
increase in the value of the transaction as a result of the
modification, as measured at the date of modification.
Where an equity-settled award is cancelled during the vesting
period (other than an award cancelled when the vesting
conditions are not satisfied), it is treated as if it had vested on
the date of cancellation, and any expense not yet recognised
for the award is recognised immediately.
However, if a new award is substituted for the cancelled
award, and designated as a replacement award on the date
that it is granted, the cancelled and new awards are treated as
if they were a modification of the original award.
117
Challenger Limited 2021 Annual Report
Note 28
Employee entitlements (continued)
Accounting policy (continued)
Employee share acquisition plan
Share-based compensation benefits are provided to employees
via the Challenger Performance Plan (CPP). The Group has
formed a trust to administer the Group’s employee share
acquisition plan (CPP Trust).
The CPP Trust is consolidated, as the substance of the
relationship is that the trust is controlled by the Group.
Through contributions to the CPP Trust, the Group typically
purchases shares in the Company on market. Shares acquired
are held by the CPP Trust, are disclosed as Treasury shares and
are deducted from contributed equity.
In addition to shares held by the CPP Trust, the Group has
entered into forward purchase agreements (CPP deferred
share purchases) to hedge unvested performance share rights.
The CPP deferred share purchase agreements have exercise
dates that broadly match the vesting dates of the performance
rights issued by the CPP and they require the delivery of
Challenger Limited shares to the CPP Trust, by a third party,
for the contracted price. The shares to be purchased under
these agreements are treated as Treasury shares from the date
of the agreement.
In such deferred contracts, changes in the fair value arising
from variations in market rates do not affect the amount of
cash to be paid or the number of Challenger shares to be
received, and these contracts are classified as equity
instruments. Changes in the fair value of an equity instrument
are not recognised in the financial statements. The liability to
the third party is recorded on the balance sheet at present
value and the discount is unwound through the Statement of
comprehensive income over the duration of the contract.
Deferred Performance Share Rights (DPSRs)
This instrument is a performance right which gives a right to a
fully-paid share in the Company at the end of the vesting
period. The vesting period is typically between one and four
years on existing awards.
The table below sets out the details of the DPSRs granted
under the CPP during 2021 and movements on previous
issues.
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2020
Granted
during the
year
Vested
during the
year
Expired
during the
year
Outstanding
at 30 June
2021
Grant date
7 Sep 2020
Latest date
for vesting1
1 Sep 2024
7 Sep 2020
1 Sep 2023
7 Sep 2020
1 Sep 2022
7 Sep 2020
1 Sep 2021
11 Nov 2019
1 Sep 2023
11 Nov 2019
1 Sep 2022
11 Nov 2019
1 Sep 2021
11 Nov 2019
1 Sep 2020
9 Sep 2019
1 Sep 2023
9 Sep 2019
1 Sep 2022
9 Sep 2019
1 Sep 2021
9 Sep 2019
1 Sep 2020
4.010
4.010
4.010
4.010
6.633
6.633
6.633
6.633
6.633
6.633
6.633
6.633
11 Sep 2018
1 Sep 2021
10.368
11 Sep 2018
1 Sep 2020
10.368
3.35
3.50
3.67
3.84
7.87
7.55
7.23
6.94
5.93
6.19
6.45
6.73
9.66
9.94
— 339,587
— 339,587
— 534,315
— 552,996
—
—
—
—
—
—
—
(23,065)
(2,756)
336,831
(2,756)
336,831
(4,136)
530,179
(4,136)
548,860
—
—
—
—
15,377
15,377
23,065
—
—
—
—
(1,015)
200,681
(1,015)
200,681
(1,523)
301,049
—
—
—
—
—
—
—
—
(302,573)
—
—
—
—
(13,501)
338,805
—
(355,854)
—
—
—
15,377
15,377
23,065
23,065
201,696
201,696
302,572
302,573
352,306
355,854
11 Sep 2017
1 Sep 2020
12.264
11.39
289,229
—
(287,191)
(2,038)
Total
2,082,810 1,766,485 (968,683)
(32,876)
2,847,736
1 At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
118
Challenger Limited 2021 Annual Report
Note 28
Employee entitlements (continued)
Accounting policy (continued)
Hurdled Performance Share Rights (HPSRs)
This instrument is a performance share right that gives a right
to a fully-paid share in the Company at certain vesting dates,
subject to the achievement of performance conditions based
on total shareholder returns (TSR). The HPSRs are awarded
based on a range of criteria reflecting, in addition to current
year performance, the longer-term ability for an employee to
add significant value to Challenger and for retention purposes.
The award of HPSRs ensures longer-term alignment of
interests between Challenger and its employees.
For grants made between 1 July 2015 and 30 June 2020,
subject to continued employment and meeting the absolute
TSR performance target, two-thirds of a HPSR award will be
eligible to commence vesting on the third anniversary and the
final third on the fourth anniversary following grant. For
grants from 1 July 2019, subject to continued employment
and meeting the absolute TSR performance target, a HPSR
award is eligible to commence vesting on the fourth
anniversary and is subject to a final cumulative test on the fifth
anniversary. This change has the effect of increasing the
vesting period.
To the extent that the absolute TSR performance targets are
not satisfied for a particular tranche of award, unvested HPSRs
have the opportunity to vest at the end of the following
tranche’s vesting period, subject to the higher absolute TSR
performance requirements which reflect another year of
compound growth. Unvested awards have the opportunity to
vest on the fifth anniversary following grant. Any unvested
awards lapse at the end of the fifth anniversary following
grant. This approach is applied to ensure that Key
Management Personnel and employees are motivated to
deliver strong long-term performance. HPSRs are converted to
ordinary fully paid shares upon vesting.
The table below sets out details of the HPSRs granted under
the CPP during 2021 and movements on previous issues:
Grant date
10 May 2021
Expected
date for
vesting1
1 Sep 2024
2 Nov 2020
1 Sep 2024
7 Sep 2020
1 Sep 2024
9 Dec 2019
1 Sep 2023
11 Nov 2019
1 Sep 2023
9 Sep 2019
1 Sep 2023
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2020
Granted
during the
year
Vested
during the
year
Expired
during the
year
Outstanding
at 30 June
2021
— 132,848
— 848,268
—
—
—
—
132,848
848,268
— 6,511,001
—
(589,563)
5,921,438
4.497
4.497
4.497
6.729
6.729
6.729
2.64
2.58
1.87
4.22
4.42
432,483
90,618
3.10
3,187,371
11 Sep 2018
1 Sep 2022
11.720
3.94
680,175
11 Sep 2018
1 Sep 2021
11.720
4.56
1,175,334
11 Sep 2017
1 Sep 2021
12.732
11 Sep 2017
1 Sep 2020
12.732
12 Sep 2016
1 Sep 2020
12 Sep 2016
1 Sep 2019
13 Sep 2015
1 Sep 2019
9.017
9.017
7.013
5.42
6.11
3.80
552,924
980,933
698,334
4.33
1,225,732
2.84
820,577
—
—
—
—
—
—
—
—
—
—
—
—
—
—
432,483
90,618
—
(387,079)
2,800,292
—
(107,489)
572,686
—
(185,741)
989,593
—
(76,416)
476,508
—
(135,566)
845,367
—
(98,681)
599,653
—
(173,207)
1,052,525
—
(820,577)
—
Total
9,844,481 7,492,117
— (2,574,319) 14,762,279
1 At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
119
Challenger Limited 2021 Annual Report
Note 28
Employee entitlements (continued)
Key estimates and assumptions
Share-based payments
The Group measures the cost of equity-settled transactions
with employees granted during the year by reference to the
fair value of the share rights at the date at which they are
granted. The fair values are determined by independent
external valuers using a Black-Scholes model for DPSRs and
Input
Dividend yield (%)
Risk-free rate (%)
Volatility2 (%)
Valuation ($)
1 Staggered deferred vesting applies to these grants.
2 Forecast volatility rate implied from historic trend.
Note 29
Remuneration of auditor
a Monte Carlo simulation model for HPSRs which utilises the
TSR share price hurdles. Key inputs into the valuation models
for equity awards granted during the year are as follows:
7 Sep 2020
PSR
DPSR1
7 Sep 2020
HPSR
DPSR1
2 Nov 2020
HPSR
HPSR1
4.6
4.6
4.6
10 May 2020
HPSR
HPSR1
4.6
0.26-0.44
0.26-0.44
0.11-0.28
0.08-0.67
N/A
3.84 - 3.35
43
1.87
43
2.58
44
2.64
Amounts received or due and receivable by Ernst & Young (Australia) relating to:
Full year audit and half year review of the Group financial report
Other audit services – audit and review of trusts and funds
Other assurance services
Other services in relation to the Group
– taxation services
– other assurance services
30 June
2021
$
30 June
2020
$
1,896,553
1,928,488
574,733
843,358
525,568
633,388
74,000
157,500
—
45,000
3,388,644
3,289,944
Amounts received or due and receivable by other overseas member firms of Ernst &
Young (Australia) for:
Fees for auditing the financial report of any controlled entities
416,795
391,810
Other services in relation to the Group
– taxation services
Total auditor remuneration1
68,000
90,238
484,795
482,048
3,873,439
3,771,992
1 Auditor’s remuneration for the Group is paid by Challenger Group Services Limited, a wholly owned entity within the Group.
Note 30
Subsequent events
On 23 December 2020, Challenger agreed to acquire 100%
of MyLifeMyFinance Limited, an Australian-based customer
digital bank, for $35.0 million. The acquisition price is subject
to a completion adjustment and is based on a net asset value
of $18.0 million. Provisional Goodwill on acquiring the
business is estimated to be approximately $17.0 million and
may be subsequently adjusted in accordance with the
requirements of AASB 3 Business Combinations. The
acquisition received formal approval from the Treasurer of the
Commonwealth of Australia on 29 July 2021 and was
completed on 30 July 2021.
The acquisition is highly strategic and provides Challenger the
opportunity to significantly expand its secure retirement
income offering, including entering Australia's term deposit
market. In the 2022 financial year, the Bank will represent a
third operating segment of the Group.
At the date of this financial report no other matter or
circumstance has arisen that has, or may, significantly affect
the Group’s operations, the results of those operations or the
Group’s state of affairs in future financial years which has not
already been reflected in this report.
120
Challenger Limited 2021 Annual Report
Directors’ declaration
In accordance with a resolution of the Directors of Challenger Limited, we declare that, in the opinion of the Directors:
a)
the financial statements and notes of Challenger Limited and its controlled entities (the Group) are in accordance with the
Corporations Act 2001 (Cth), including:
(i)
year ended on that date; and
giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its performance for the
b)
c)
d)
(ii)
complying with Australian Accounting Standards and the Corporations Regulations 2001 (Cth);
the financial statements and notes of the Group also comply with International Financial Reporting Standards as issued by the
International Accounting Standards Board, which is disclosed in Section 1(i) Basis of preparation and statement of
compliance;
there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and
payable; and
this declaration has been made after receiving the declarations required to be made to the Directors from the Chief Executive
Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 (Cth) for the financial
year ended 30 June 2021.
On behalf of the Board
P Polson
Independent Chair
9 August 2021
R Howes
Managing Director and Chief Executive Officer
9 August 2021
121
Challenger Limited 2021 Annual Report
Independent auditor’s report
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Independent auditor’s report to the shareholders of Challenger
Limited
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of Challenger Limited (the Company) and its subsidiaries (collectively the Group), which
comprises the consolidated statement of financial position as at 30 June 2021, the consolidated statement of comprehensive
income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to
the financial statements, including a summary of significant accounting policies, and the directors’ declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:
a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2021 and of its consolidated
financial performance for the year ended on that date; and
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for Opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent
of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical
requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional
Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia.
We have also fulfilled our other ethical responsibilities in accordance with the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in
forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description
of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section
of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to
respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures,
including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying
financial report.
122
Independent auditor’s report
Challenger Limited 2021 Annual Report
1
Valuation of Life Contract Liabilities
Financial report reference: Note 8
Why significant to the audit
The Group recognised a provision for future claims associated
with life insurance policies. The valuation methodology to
estimate the provision adopted by the Group involves complex
and subjective judgments about future events.
Key assumptions used in the Group’s model to determine the
value of the life contract liabilities include:
• Discount rates
• Inflation
• Future claims administration expenses
• Mortality rates and redemptions
These assumptions, along with policy information, are used as
inputs to the Group’s model to calculate the Life Contract
Liabilities.
This was a key audit matter due to the value of the balance
(30 June 2021: $13,669.9 million), relative to total liabilities
and the degree of judgment and estimation uncertainty
associated with the valuation.
How our audit addressed the key audit matter
Our audit procedures involved an assessment of the
effectiveness of relevant controls over assumptions and policy
information used as inputs into the Group’s model. Our IT
specialists were involved to assess whether policy information
was extracted accurately from the Group’s underlying
administration system into the valuation process.
Our audit procedures included the following in the evaluation
of the assumptions used by the Group:
• Considered the Group’s governance process and controls to
determine the methodology and assumptions.
• Assessed the results of the experience investigations carried
out by the Group to determine whether they supported the
assumptions used by the Group.
• Assessed the movements in modelled profit margins and
best estimate liabilities for insurance risk transactions.
• Performed a recalculation for a sample of the life contract
liability valuations.
Where appropriate, we involved our life insurance actuarial
specialists in the above procedures and overall assessment of
the valuation methodology, key assumptions and models
deriving the valuation of the life contract liabilities.
We assessed the adequacy of the related financial report
disclosures.
123
Challenger Limited 2021 Annual Report
Independent auditor’s report
2
Valuation of Level 3 Non-Property Investment Assets
Financial report reference: Note 19
Why significant to the audit
The Group holds a portfolio of assets carried at fair value, for
which an observable market value is not readily available.
These assets are classified as Level 3 assets within the fair value
hierarchy of the financial report.
Level 3 assets require judgment to be applied in determining
their fair value, as the valuation inputs for these assets are not
based on observable market transactions or other readily
available market data.
The Group exercised judgment to arrive at their best estimates
of fair value of these assets. There is complexity in this process,
as well as uncertainty associated with the valuation and
modelling methodologies and the assumptions adopted.
This was a key audit matter due to the value of the balance
relative to total assets (30 June 2021: $5,852.9 million), and
the degree of judgment and estimation uncertainty associated
with the valuation.
How our audit addressed the key audit matter
The valuation of Level 3 assets is inherently subjective given
that there are alternative assumptions and valuation methods
that may result in a range of values.
Our audit procedures included the following, using sampling
techniques:
• Considered the Group’s controls over the valuation of Level
3 assets.
• Tested the mathematical accuracy of the valuation models
and consistency with the Group’s documented methodology
and assumptions.
• Our valuation specialists assessed the Group’s valuation and
modelling methodologies and assessed the key judgmental
inputs used in the year-end valuations, including the
discount rate and the terminal value.
• Obtained valuation statements provided by external
investments managers in respect of unit trusts and alternate
funds. We assessed the valuations of investments as
provided by external investment managers, including an
assessment of the reliability of the information received and
the appropriateness of the underlying valuation method.
We assessed the adequacy and appropriateness of the related
financial report disclosures.
124
Independent auditor’s report
Challenger Limited 2021 Annual Report
3
Valuation of Level 3 Property Investment Assets
Financial report reference: Note 6
Why significant to the audit
The Group owns a diversified portfolio of investment property
assets. The carrying value of investment properties is measured
at the fair value of each property, which is assessed by the
directors with reference to external independent property
valuations and based on market conditions existing at the
reporting date.
The fair value of investment property is inherently subjective
and impacted by factors such as prevailing market conditions,
its geographic location, expected future income and the
characteristics and attributes of the subject property.
As at 30 June 2021 there is significant valuation uncertainty
arising from the COVID-19 pandemic and the response of
Governments to it. This means that the property values may
change significantly and unexpectedly over a relatively short
period of time.
Given the market conditions at balance date, a number of
independent valuers have reported on the basis of the
existence of ‘material valuation uncertainty’, noting that less
certainty, and a higher degree of caution, should be attached
to the valuations than would normally be the case. In this
situation the disclosures in the financial statements provide
particularly important information about the assumptions
made in the property valuations and the market conditions at
30 June 2021.
We have considered this a key audit matter due to the number
of judgments required in determining fair value and the value
of the balance relative to total assets (30 June 2021: $3,389.7
million).
How our audit addressed the key audit matter
The valuation of investment properties is inherently subjective
given that there are alternative assumptions and valuation
methods that may result in a range of values. The impact of
COVID-19 at 30 June 2021 has resulted in a wider range of
possible values than at past valuation points.
Our audit procedures included the following:
• We assessed the following matters with management:
• movements in the Group’s investment property portfolio;
• changes in the condition of selected properties;
• controls in place relevant to the valuation process; and
• the impact that COVID-19 has had on the Group’s
investment property portfolio including rent abatements
offered to tenants and tenant occupancy risk arising from
changes in the estimated lease renewals.
• We performed the following procedures for selected
properties, using sampling techniques:
• Evaluated the key assumptions and agreed key inputs to
tenancy schedules. These assumptions and inputs included
market and contractual rent, occupancy rates including
forecast occupancy levels, forecast rent, lease terms, re-
leasing costs, operating expenditure and future capital
expenditure. We assessed the effectiveness of relevant
controls over the leasing process and associated tenancy
reports which are used as source data in the property
valuations by testing a sample of the relevant controls.
• Assessed whether COVID-19 relief provided to tenants had
been factored into the valuations and that changes in tenant
occupancy risk were also considered.
• Where relevant we compared the valuation against
comparable transactions utilised in the valuation process.
• Evaluated the suitability of the valuation methodology across
the portfolio based on the type of asset. We considered the
reports of the independent valuers to gain an understanding
of the assumptions and estimates used and the valuation
methodology applied. This included the impact that
COVID-19 has had on key assumptions such as the
capitalisation, discount or growth rate and future forecast
rentals. We have also considered and responded to
restrictions imposed on the valuation process, if any, and the
market conditions at balance date.
Where appropriate, we involved our real estate valuation
specialists in the above procedures.
We assessed the adequacy and appropriateness of the related
financial report disclosures, in particular those relating to the
valuation uncertainty.
125
Challenger Limited 2021 Annual Report
Independent auditor’s report
4
Recoverability of Goodwill
Financial report reference: Note 25
Why significant to the audit
Goodwill has been recognised as a result of the Group’s
historical acquisitions, representing the excess of the purchase
consideration over the fair value of assets and liabilities
acquired. On acquisition date, the goodwill has been allocated
to the applicable Cash Generating Units (CGUs).
An impairment assessment is performed at each reporting
period, comparing the carrying amount of each CGU
containing goodwill with its recoverable amount. The
recoverable amount of each CGU is determined on a value in
use basis. This calculation incorporates a range of assumptions,
including future cash flows, discount rate and terminal growth
rate.
This was a key audit matter due to the value of Goodwill
relative to total assets (30 June 2021: $579.9 million), and the
degree of judgment and estimation uncertainty associated
with the impairment assessment.
How our audit addressed the key audit matter
Our audit procedures included the following:
• Assessed the valuation methodology used to calculate the
recoverable amount of each CGUs.
• Agreed the projected cash flows used in the impairment
models to the Board approved five-year plan of the Group.
• Compared the Group’s implied growth rate assumption to
comparable companies.
• Considered the accuracy of historical cash flow forecasts.
• Assessed the methodology and assumptions used in the
calculation of the discount rate, including comparison of the
rate to market benchmarks.
• Tested the mathematical accuracy of the impairment model
for each CGU.
• Considered the carrying amount of the net assets of the
Group against its market capitalisation at 30 June 2021 and
subsequent to year end up to the date of our opinion.
• Considered the Group’s sensitivity analysis and evaluated
whether any reasonably foreseeable change in assumptions
could lead to a material impairment.
Our valuation specialists were involved in the above
procedures where appropriate.
We assessed the Group’s determination of the CGUs to which
goodwill is allocated and the adequacy of the related financial
report disclosures.
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Independent auditor’s report
Challenger Limited 2021 Annual Report
Information Other than the Financial Report and Auditor’s Report Thereon
The directors are responsible for the other information. The other information comprises the information included in the
Company’s 2021 Annual Report, but does not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not express any form of
assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion.
In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilities of the Directors for the Financial Report
The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in
accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors
determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material
misstatement, whether due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern,
disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the Audit of the Financial Report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of this financial report.
As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain
professional scepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the
financial report represents the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the
Group audit. We remain solely responsible for our audit opinion.
We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on
our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the
financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine
that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
127
Challenger Limited 2021 Annual Report
Independent auditor’s report
Report on the Audit of the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 42 to 51 of the Directors’ report for the year ended 30 June 2021.
In our opinion, the Remuneration Report of Challenger Limited for the year ended 30 June 2021, complies with section 300A of
the Corporations Act 2001.
Responsibilities
The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance
with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based
on our audit conducted in accordance with Australian Auditing Standards.
G McKenzie
Partner
Sydney
9 August 2021
Ernst & Young
T Johnson
Partner
Sydney
9 August 2021
128
Challenger Limited 2021 Annual Report
Investor information
Substantial shareholders
The number of shares held by substantial shareholders and their associates, based on the latest substantial shareholder
notifications, and the 20 largest individual shareholders are as follows:
Substantial shareholders as at 31 July 2021
Apollo Global Management, Inc. / Athene Life Reinsurance Ltd1
MS&AD Insurance Group Holdings Inc
Allan Gray Australia Pty Ltd and its related bodies
Citicorp Nominees Pty Limited
J P Morgan Nominees Australia Pty Limited
HSBC Custody Nominees (Australia) Limited
HSBC Custody Nominees (Australia) Limited
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