Annual Report
2022
4
Providing our customers with financial
security for a better retirement
ABOUT THIS REPORT
WELCOME
The 2022 Annual Report, including
the financial report for the year
ended 30 June 2022, can be viewed
at Challenger’s online Shareholder
Centre at:
challenger.com.au/
shareholder
2022 CORPORATE
GOVERNANCE STATEMENT
The 2022 Corporate Governance
Statement can be viewed online at:
challenger.com.au/
corporategovernance
2022
2022 SUSTAINABILITY
REPORT
The 2022 Sustainability Report
can be viewed online at:
challenger.com.au/
sustainabilityreport
2022
2021 MODERN
SLAVERY STATEMENT
Challenger’s Modern Slavery
Statement can be viewed online at:
2021
Modern slavery
statement
challenger.com.au
Challenger Limited ACN 106 842 371
challenger.com.au/
modernslavery
statement
2021
CHALLENGER LIMITED ACN 106 842 371
The 2022 Annual Report brings together key information
on our consolidated financial, operational and sustainability
performance for the financial year ended 30 June 2022.
DOING
THINGS RIGHT
FINANCIAL
SECURITY FOR
A BETTER
RETIREMENT
RESPONSIBLE
INVESTMENT
FINANCIALLY
RESILIENT
CUSTOMERS AND
COMMUNITIES
CONSTRUCTIVE
PUBLIC POLICY
SETTINGS
Please refer to the
Sustainability section
on Page 32
CONTENTS
ABOUT
Message from the Chairman
Message from the CEO
01 Key dates
02
03
04 Highlights
06 About Challenger
OPERATING AND FINANCIAL
REVIEW (OFR)
08 Life business
10 Funds Management business
12 Bank business
14 Strategic progress
18 Key performance indicators
Normalised profit and
22
investment experience
24 Five-year history
Reflecting increased commitment to
sustainability, this year Challenger’s
Annual Report incorporates the
Sustainability Report in addition to
the Operating and Financial Review,
Directors’ Report and Financial
Statements. The report provides our
stakeholders with a holistic overview
of Challenger’s governance and
performance for the year.
In this report, unless otherwise
stated, references to ‘Challenger’,
‘the Group’, ‘CGF’, ‘we’, ‘us’ and ‘our’
refer to Challenger comprising the
ASX listed entity and the Life, Funds
Management and Bank businesses.
GOVERNANCE AND SUSTAINABILITY
26 Corporate governance
29 Tax transparency
30 Risk management
32 Sustainability
DIRECTORS’ REPORT
52
54
Directors’ experience
and responsibilities
Remuneration Report
FINANCIAL REPORT
80 Financial statements
84 Notes to the financial statements
150 Directors’ Declaration
151 Independent Auditor’s Report
FURTHER INFORMATION
157 Investor information
160 Additional information
2022 Annual ReportChallenger Limited About
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Governance and Sustainability
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1
KEY DATES
ANNUAL GENERAL MEETING
BOARD NOMINATIONS
The closing date for receipt of
nominations for the Challenger
Limited Board is 24 August 2022.
21 SEPTEMBER 2022
Final dividend payment date
27 OCTOBER 2022
2022 Annual General Meeting
14 FEBRUARY 2023
Half year financial results
21 MARCH 2023
Interim dividend payment date
15 AUGUST 2023
Full year financial results
20 SEPTEMBER 2023
Final dividend payment date
26 OCTOBER 2023
2023 Annual General Meeting
Full listing of key dates available at:
challenger.com.au/shareholder/
shareholder-information/key-dates
DATE
27 October 2022
TIME
9.30 am (Sydney time)
LOCATION
The 2022 AGM will be held as a
‘hybrid’ meeting which will enable
shareholders to attend either
physically or virtually.
Venue: Wesley Conference Centre,
220 Pitt Street, Sydney NSW.
Full details of the meeting will be
included in your Notice of Annual
General Meeting, which will be sent
to shareholders in September 2022.
Dates may be subject to change.
Any change in dates will be advised
to the Australian Securities Exchange.
2
Message from
the Chairman
I am incredibly proud of what Challenger has
built and the outcomes we have achieved for
our customers, our people and our shareholders
amid continuous and rapid change.
Since I joined the Board, Australia’s
superannuation system has undergone
substantial change and successive
governments have implemented
significant regulatory reforms across the
entire financial services sector. We have
seen exponential technological change,
endured volatile and evolving market
cycles and we continue to navigate
economic and social challenges of
a global pandemic.
I have been privileged to Chair a
company whose purpose is clear –
provide our customers with financial
security for a better retirement.
With more Australians retiring every
day, the importance of why Challenger
exists cannot be overstated for the
well-being of our customers as well
as the broader economy.
DELIVERING STRONGER
SHAREHOLDER OUTCOMES
I am delighted to say Challenger
finished the year in great shape,
strongly capitalised and well positioned
for future growth. Our net profit was
toward the upper end of our guidance
range and drove stronger shareholder
returns. The results of our Life and
Funds Management businesses have
again demonstrated the strength of
Challenger’s franchise and its ability
to capitalise on the demographic and
economic realities we operate within.
Consequently, the Board has declared
a full year dividend of 23.0 cents per
share, which is fully franked and 15%
higher than last year.
LOOKING AHEAD
Today, Challenger like all businesses
exists in an environment influenced
by domestic and global trends such
as an ageing population, economic
uncertainty and geopolitical shifts
among others. We are well served
by the fact that the Board and
management have made deliberate
choices to diversify the focus of our
business to ensure we can navigate
the challenges and capture the
opportunities that come through
cyclical and structural shifts that impact
all of us. Most recently, we have
reset our strategy and refocussed the
business on where we believe clear
growth opportunities exist in the years
ahead and welcomed new executives
to the Leadership Team with bias
towards execution.
Rest assured, we intend to maintain
a rapid pace in the year ahead and
I remain confident that Challenger,
its people, its customers and the
communities we serve will all share in
the benefits delivered by our purpose.
THANK YOU
On behalf of the Board, I want to
thank all our Challenger colleagues
for their hard work and commitment
this year, particularly given the
challenging professional and personal
circumstances the pandemic has
created for everyone. I also thank
our shareholders for their continued
support and our highly engaged
and committed Board.
Upon my retirement in October, it will
be my great pleasure to hand over the
position as Chair of this very special
company to Duncan West who along
with our talented group of Directors
and senior executives will continue to
steer the business to an even greater
contribution in service of all of our
stakeholders.
I strongly believe I am leaving the
business in great hands. This year,
the Board was pleased to appoint
Nick Hamilton as Challenger’s new
CEO. Prior to this Nick was CEO of
Challenger’s Funds Management
business and has played a key role
in developing Challenger’s growth
strategy. He has a deep understanding
of our business and has a clear vision
and plan for the future. Importantly,
Nick moved quickly to execute his
plans by simplifying the organisational
structure and bringing new executives
onto the leadership team.
It has been an honour to serve as your
Chair and a Member of the Board for the
past 19 years. It is no accident Challenger
is Australia’s leading retirement income
brand and one of Australia’s largest
active fund managers with such
unwavering support from our customers,
our people and our shareholders.
PETER POLSON
INDEPENDENT CHAIR
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Message from
the CEO
Challenger is a unique business with an
extraordinary opportunity to improve the financial
outcomes of Australians in retirement, and it brings
me immense pride to have taken on the CEO role
at such an exciting time for the business.
Our Life business is Australia’s leading
retirement income brand, and our
Funds Management business is one
of the country’s largest active fund
managers with a highly diverse range
of products and managers. Our
complementary businesses create a
dynamic and contemporary platform
that combines both balance sheet
and fee-generating businesses.
FINANCIAL PERFORMANCE
Our FY22 financial performance has
been achieved against a backdrop
of ongoing economic uncertainty,
volatile investment markets, and the
global pandemic which continues to
bring challenges for the economy,
the community and our business.
Normalised net profit before tax
of $472 million was up 19% at
the upper end of our guidance
range. We achieved record Life and
annuity sales and remain disciplined
on management of our expenses.
Clearly, the macro-economic
environment presents both challenges
and opportunities with rising interest
rates benefiting annuity sales and
margins but markets triggering an
unrealised investment experience.
BUILDING A MORE
DIVERSIFIED BUSINESS
This year we have refreshed our
strategy, renewed our Leadership Team
and reorganised our business as we
execute our platform for growth.
A new Customer Division has been
formed to support this ambition,
bringing together skills and expertise
from across the Group. This approach
puts the customer at the centre of
our business, reflecting our plans to
broaden our customer reach and play
a more meaningful role in their lives.
Recognising the important role that
Australia’s world class superannuation
funds play in providing financial
security for millions of Australians,
and our ambitions to build meaningful
retirement partnerships, we have
aligned our leading investment
capabilities to create a Life Investment
and Group Solutions platform.
Our multi-affiliate business Fidante
continues to grow, welcoming new
affiliates and launching new investment
capability for our existing managers.
Our affiliate managers are building for
the future, adding investment expertise
and ensuring they retain their leading
market positions.
We have launched two significant joint
venture opportunities that will generate
new revenue streams. Our agreement
with global software provider SimCorp
will deliver a leading investment
operations platform, while our joint
venture with Apollo will see us build
a leading lending business in Australia
and New Zealand.
We continue to extend our customer
reach across Australia’s financial
advisers, having expanded our capability
to meet the needs of the rapidly
growing affluent wealth segment.
Looking back over 2022, I am
particularly proud of the way our
team have responded during the global
pandemic, and the support they have
provided to our customers and to
each other. This speaks to our strong
team culture and our One Challenger
mindset of working together to deliver
strong outcomes for our customers,
shareholders and each other.
LOOKING AHEAD
As we look to the new year, our
business is in great shape. We remain
strongly capitalised and well positioned
to leverage and benefit from our
unique competitive advantages.
Finally, I would like to acknowledge
the contribution of our outgoing
Chair, Mr Peter Polson who retires
at our Annual General Meeting in
October. Over 19 years, Peter has
provided guidance and stewardship
as a Director and as Challenger’s
Chair as we have grown to become
the incredible company we are today.
On behalf of the Board, our employees
and our shareholders I thank Peter
for his commitment and dedication
to Challenger over his long tenure.
NICK HAMILTON
MANAGING DIRECTOR AND
CHIEF EXECUTIVE OFFICER
4
FY22 Highlights
FINANCIAL PERFORMANCE
STATUTORY NET PROFIT AFTER TAX
$253.7m
NORMALISED NET PROFIT BEFORE TAX
GROUP ASSETS UNDER MANAGEMENT
$472.3m
$98.6bn
FY22
FY21
FY20
$395.8m
$506.5m
FY22
FY21
FY20
$110.0bn
$85.2bn
LIFE SALES
$9.7bn
FY22
FY21
FY20
$6.9bn
$5.1bn
FULL-YEAR DIVIDEND
23.0cps
15% on FY21
NORMALISED GROUP ROE (PRE-TAX)
11.9%
70bps on FY21
CAPITAL POSITION
1.68x
GROUP MINIMUM REGULATORY
REQUIREMENT RATIO
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OPERATIONAL HIGHLIGHTS
STRATEGIC PRIORITIES
BROADEN CUSTOMER
ACCESS ACROSS
MULTIPLE CHANNELS
LEVERAGE THE
COMBINED CAPABILITIES
OF THE GROUP
EXPAND THE RANGE OF
FINANCIAL PRODUCTS
AND SERVICES FOR A
BETTER RETIREMENT
STRENGTHEN RESILIENCE
AND SUSTAINABILITY
OF CHALLENGER
RECORD LIFE SALES
40%
Fidante – Distributor
of the Year
Bank term
deposits available
on comparison
websites
‘’One Challenger’’
approach
New market-linked
lifetime annuity
New Customer
division
New Fidante
affiliates
Bank rebrand
Bank lending
capability
extended
RISK CULTURE SCORE
90%
SimCorp Joint
Venture
Apollo strategic
partnership
UN PRINCIPLES FOR
RESPONSIBLE INVESTMENT2
A Rating
BY THE UNPRI FOR FIXED INCOME
AND PROPERTY STRATEGIES
SUSTAINABILITY
EMPLOYEE ENGAGEMENT1
GENDER DIVERSITY
81%
3% on the Australian norm
CUSTOMER SUPPORT
>$1bn
IN GUARANTEED PAYMENTS
MADE TO SUPPORT
>140,000
CUSTOMERS
60.00% Male
39.75% Female
0.25% Other
GHG EMISSIONS (tCO2-e)
15%
4,750
FY22
FY21
FY20
4,123
5,062
1. 2022 Your Voice employee engagement survey, April 2022.
2. UN PRI Rating given in 2020.
6
About Challenger
Challenger Limited (Challenger) was founded in 1985
and is Australia’s largest annuity provider as well as
one of its largest active fund managers.
Challenger is listed on the Australian
Securities Exchange (ASX) and
has offices in Australia, London,
Singapore and Tokyo. At 30 June 2022,
Challenger employed 770 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.
OUR STRATEGIC PRIORITIES
Challenger has four strategic priorities to ensure that it achieves its purpose
of providing customers with financial security for a better retirement.
Broaden customer
access across
multiple channels
Leverage the
combined capabilities
of the group
Expand the range
of financial products
and services for a
better retirement
Strengthen resilience
and sustainability
of Challenger
OUR VALUES
Act with integrity
Aim high
We do things the
right way
We deliver
outstanding results
Collaborate
Think customer
We work together to
achieve shared goals
We make decisions with
our end customers front
of mind
At Challenger, our values are integral to our culture and
linked to everything we do. They set out the behaviours
we need to deliver on our purpose and strategy and to
meet community expectations, now and in the future.
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OUR PURPOSE
To provide customers with financial security for a better retirement
To fulfil this purpose, we leverage the capabilities across our Life, Funds Management and Bank businesses.
These core operating segments are supported by shared support functions which are responsible for providing
centralised regulatory, compliance, financial reporting, tax, legal, risk management and human resources.
LIFE
FUNDS MANAGEMENT
BANK
Australia’s leading
provider of annuities
One of Australia’s largest
active fund managers
Australian-based
digital bank
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.
Funds Management focuses on
wealth accumulation predominantly
in the pre-retirement phase
by supporting customers to
build their savings by providing
investment strategies and
products that seek to deliver
superior investment returns.
The Bank provides products to
Australian customers in the form
of deposit and loan products.
It provides Challenger with access
to a wider range of customers
through multiple distribution
channels to help broaden its
customer offer.
8
Life business
Life focuses on the retirement
spending phase of superannuation,
providing products that help customers
convert retirement savings into safe
and secure income in retirement.
LIFE ASSET ALLOCATION
75.0%
Fixed income and cash (net)
14.5%
Property (net)
4.4%
Equity and Infrastructure
6.1%
Alternatives
The Life segment includes Challenger
Life Company Limited (CLC),
an APRA-regulated life insurance
company which is Australia’s leading
provider of annuities and guaranteed
retirement income products.
As Australia’s superannuation system
grows, the retirement phase of
superannuation is expected to increase
significantly. The number of Australians
over the age of 65, which is Life’s
target market, is expected to increase
by nearly 50% over the next 20 years1.
Reflecting these demographic changes,
and growth in the superannuation
system, the annual transfer from the
savings phase of superannuation to
the retirement phase was estimated to
be approximately $76 billion2 in 2021.
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 need 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. In February 2022, the
Australian Government legislated the
Retirement Income Covenant when
the Federal Parliament passed the
Corporate Collective Investment Vehicle
Framework and Other Measures Act
2022 (the Act). The covenant requires all
APRA-regulated superannuation funds to
have a documented retirement income
strategy that outlines how they plan
to assist their members in retirement.
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.
As Australia’s leading provider of
annuities3, Challenger Life is expected
to continue to benefit from the
long-term growth in Australia’s
superannuation system and the
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 14 years and
remains the dominant Australian
retirement income brand.
An important distribution channel for
Life’s products are third-party financial
advisers. Life’s products are included
on all major advice hubs’ Approved
Product Lists (APLs) and are available
on leading independent investment
and administration platforms.
Challenger is also focused on building
institutional partnerships with large
superannuation funds. As their
members transition to retirement,
major superannuation 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.
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 MS&AD Insurance
Group Holdings Inc. (MS&AD).
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
~A$530 million)4 per year5.
1. 2022 – 2042 comparison based on Australian Bureau of Statistics, Population Projections Series B, cat no. 3222.0.
2. Based on Taxation Statistics 2019–20 from Australian Taxation Office.
3. Plan for Life – March 2022 – based on annuities under administration.
4. Based on exchange rate as at 30 June 2022.
5. Reinsurance across both Australian and US dollar annuities, of at least ¥50b per year for a minimum of five years, commencing 1 July 2019.
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NET BOOK GROWTH
14.3%
In line with FY21
TOTAL LIFE SALES
$9.7bn
40.1% on FY21
“ Expanding our customer reach, broadening our
distribution channels and product innovation
helped the Life business deliver an impressive
performance, with record-breaking sales
of $9.7 billion driving book growth of over
14% for the year.’’
ANTON KAPEL
CHIEF EXECUTIVE, LIFE
This is subject to review in the event
of a material adverse change for either
MS Primary or Challenger Life.
MS Primary sales comprised 12.0% of
Life’s total annuity sales in the period.
At 30 June 2022, MS&AD held
~15% of Challenger Limited issued
share capital, and a representative
(with an alternate) from
MS&AD have been appointed to
the Challenger Limited Board.
The retirement incomes that 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 the retirement
incomes paid to Life’s customers.
PERFORMANCE
Life normalised EBIT increased by
$73.4 million (up 18.4%) due to higher
normalised COE (up $70.0 million or
13.7%) and lower operating expenses
(down $3.4 million or 3.0%).
Higher normalised Cash Operating
Earnings (COE) was largely attributable
to an increase in Life’s average
investment assets, which increased
by 13.6%.
Life generated a normalised
RoE (pre-tax) of 13.1%, up by
0.6 percentage points from the
prior corresponding period (pcp)
driven by higher normalised EBIT.
LIFE NORMALISED RESULTS
Normalised COE
Cash earnings
Normalised capital growth
Operating expenses
Normalised EBIT
2022
($m)
582.8
534.0
48.8
(110.5)
472.3
2021
($m)
512.8
478.7
34.1
(113.9)
398.9
CHANGE
($m)
CHANGE
(%)
70.0
55.3
14.7
3.4
73.4
13.7
11.6
43.1
3.0
18.4
LIFE SALES
2022
($m)
2021
($m)
CHANGE
($m)
CHANGE
(%)
Fixed-term annuities
4,636.1
3,990.4
Lifetime annuities
486.6
575.6
Total Life annuity sales
5,122.7
4,566.0
645.7
(89.0)
556.7
Other Life sales
Total Life sales
Annuity net flows
Other Life net flows
Total Life net flows
4,583.4
2,362.1
2,221.3
9,706.1
6,928.1
2,778.0
1,074.2
1,397.7
2,471.9
1,079.8
1,084.0
2,163.8
(5.6)
313.7
308.1
16.2
(15.5)
12.2
94.0
40.1
(0.5)
28.9
14.2
Total Life sales increased from
the prior period (up 40.1%), with
increased annuity sales (up 12.2%)
and other Life sales (up 94.0%).
Annuity net flows (new annuity sales
less capital repayments) were in line
with the pcp at $1,074.2 million.
Based on the opening Life annuity
book for the 2022 financial year
($13,669.9 million), annuity net book
growth for the period was 7.9%,
down from 8.6% in the pcp.
Other Life sales represents
Challenger’s Index Plus product
which increased during the period
as a result of a refresh and relaunch.
Other Life net flows for the period
were $1,397.7 million, increasing by
$313.7 million compared to the pcp.
Total Life net flows were
$2,471.9 million, representing total
Life net book growth of 14.3%
(30 June 2021: $2,163.8 million
or 14.4% book growth).
10
Funds Management
business
FUNDS UNDER
MANAGEMENT
$93.4bn
11.72% on FY21
Fidante’s business model involves
taking minority equity interests in
separately branded affiliate funds
management firms, with Challenger
providing distribution, administration
and business support, leaving
investment managers to focus entirely
on managing investment portfolios.
Fidante’s 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 Australian
affiliates remains strong with 98%
of funds and mandates outperforming
their respective benchmarks2.
Fidante 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.
Challenger Investment Management
principally originates and manages
fixed income and commercial real
estate for leading global and Australian
institutions, including Challenger Life.
Funds Management focuses
on wealth accumulation
predominantly in
the pre-retirement
phase by supporting
customers to build their
savings by providing
investment strategies
and products that seek
to deliver superior
investment returns.
Funds Management is one of Australia’s
largest active fund managers1 and is
diversifying globally with operations in
the United Kingdom and Europe, Japan
and more recently Singapore.
Funds under management are
supported by Challenger’s retail
and institutional distribution teams
and market-leading business model
focused on alignment with clients and
high-quality managers with strong
long-term investment performance.
Funds Management is well positioned
to benefit from ongoing growth in
both Australia’s superannuation system
and global pension markets.
Funds Management has extensive client
relationships. For example, over 80%
of Australia’s top 50 superannuation
funds are clients of the business.
Funds Management comprises
Fidante and Challenger Investment
Management (CIM).
1. Calculated from Rainmaker Roundup, March 2022 data.
2. As at 30 June 2022. Percentage of Fidante affiliates meeting or exceeding the performance benchmark, with performance weighted by FUM.
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“ The Funds Management business is one of
the largest active fund managers in Australia.
The team is continually looking to expand our
customer offering and our extensive and growing
line-up of affiliates continues to provide strong
long-term returns for clients.’’
VICTOR RODRIGUEZ
CHIEF EXECUTIVE, FM
FUNDS MANAGEMENT INVESTMENT PERFORMANCE
(% OF FUM OUTPERFORMING BENCHMARK)1
Since inception
5 Years
3 Years
1 Year
52%
92%
97%
98%
25%
50%
75%
100%
1. As at 30 June 2022. Percentage of Fidante’s Australian affiliates meeting or exceeding the
performance benchmark, with performance weighted by FUM.
PERFORMANCE
Funds Management normalised EBIT
increased by 16.6% for the period,
with increased net income primarily
from an increase in average FUM,
which increased by 12.5% on pcp.
Fidante’s net income includes
distribution fees, transaction fees,
administration fees and a share in the
equity accounted profits for the affiliate
investment managers in which it has an
equity interest.
Fidante’s net income improved for the
period primarily as a result of higher
FUM income (up $22.9 million) partially
offset by lower performance fees
(down $6.1 million).
Challenger Investment Management’s
(CIM, previously CIPAM) net income
increased primarily due to higher net
management fees (up $3.8 million)
and higher transaction fees (up
$0.9 million).
FM NORMALISED RESULTS
Net income
Fidante
CIM
Funds Management’s normalised RoE
(pre-tax) for the period was 31.2%, up
by 3.5 percentage points from the pcp.
Operating expenses
Normalised EBIT
Funds Management’s FUM decreased
by $12.4 billion (or 11.7%) compared
to the pcp. During the period, net
outflows were $8.5 billion (including
$5.2 billion de-recognition following
the sale of Whitehelm) compared to
net inflows of $16.1 billion in the pcp.
FM FUM AND FLOWS
Total FUM
Fidante
CIM
Net flows
Fidante
CIM
2022
($m)
191.8
125.4
66.4
(109.0)
82.8
2022
($bn)
93.4
72.4
21.0
(8.5)
(8.9)
0.4
2021
($m)
169.3
107.5
61.8
(98.3)
71.0
2021
($bn)
105.8
84.9
20.9
16.1
14.3
1.8
CHANGE
($m)
CHANGE
(%)
22.5
17.9
4.6
(10.7)
11.8
13.3
16.7
7.4
(10.9)
16.6
CHANGE
($bn)
CHANGE
(%)
(12.4)
(12.5)
0.1
(24.6)
(23.2)
(1.4)
(11.7)
(14.7)
0.5
(large)
(large)
(77.8)
12
Bank business
NET DEPOSITS FLOWS
$93.6m
The Bank is an
Australian-based
authorised deposit-taking
institution (ADI) and
digital bank.
In December 2020, Challenger
announced it had entered into an
agreement to acquire the Bank
(formerly MyLifeMyFinance Limited).
The acquisition received formal
approval from the Treasurer of the
Commonwealth of Australia and
was completed on 30 July 2021.
In June 2022, MyLifeMyFinance was
rebranded to Challenger Bank Limited
(Bank), leveraging Challenger’s
position as a leader in retirement
and pre-retirement incomes.
The Bank offers a range of savings
and lending products. This includes
government-guaranteed retail
term deposits1, which are familiar
banking products and represent
a significant portion of retiree
and pre-retiree wealth.
BANK NORMALISED RESULTS1
Net interest income
Operating expenses
Normalised EBIT
Bank impairments2
Normalised loss before tax
2022
($m)
2.3
(13.4)
(11.1)
(0.9)
(12.0)
2021
($m)
CHANGE
($m)
CHANGE
(%)
–
–
–
–
–
2.3
(13.4)
(11.1)
(0.9)
(12.0)
n/a
n/a
n/a
n/a
n/a
1. Represents normalised result since the acquisition of the Bank on 30 July 2021.
2. Represents provision for expected credit losses.
Challenger announced a strategic
review of its banking business.
Since announcing the Bank acquisition
in December 2020, market conditions
have changed and it is becoming
apparent the Bank is unlikely to realise
the expected benefits in the timeframe
anticipated. As a result, Challenger is
reviewing the Bank’s position within
the Group and has commenced a
strategic review of the business.
Challenger is considering all options in
relation to the Bank and has appointed
Gresham Partners to assist.
There will be no change to the Bank’s
operations while the review is being
undertaken. Challenger Bank will
continue to offer products and services
to existing and new customers.
PERFORMANCE
Bank’s normalised EBIT was a loss
of $11.1 million for the period and
represents approximately 11 months
of earnings since the acquisition
completed on 30 July 2021.
Net interest income for the period
was $2.3 million and represents
interest earned on the Bank’s lending
and financing assets ($3.4 million),
less interest costs associated with the
Bank’s deposit products ($1.1 million).
Bank operating expenses for the
period were $13.4 million and relate
to personnel expenses of $9.7 million
and other direct costs of $3.7 million.
1. Bank term deposits are guaranteed under the Financial Claims Scheme up to $250,000 per account-holder per authorised deposit-taking institution (ADI).
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Corporate segment
and other information
CORPORATE SEGMENT
The corporate segment
comprises central functions
such as the Group executive,
finance, treasury, legal,
tax, human resources, risk
management and strategy.
Corporate segment normalised
loss before tax was $67.6 million,
up $1.5 million as a result of lower
personnel costs (up $8.0 million)
and higher long-term incentive costs
(up $2.0 million), offset by lower other
expenses (down $8.5 million) with
the prior period including a one-off
software impairment expense.
GUIDANCE FOR THE 2023
FINANCIAL YEAR
Challenger’s FY23 normalised net
profit before tax guidance is a range
of between $485m and $535m
and implies:
– Life COE margin higher than FY22;
– Funds Management opening FUM
10% lower than FY22 average FUM;
– Bank EBIT loss of $10m; and
– Expense growth of 5% to 6%.
CORPORATE AND OTHER
NORMALISED RESULTS
Operating expenses
Normalised EBIT
Interest and borrowing costs
Normalised loss before tax
2022
($m)
(67.6)
(67.6)
(4.1)
(71.7)
2021
($m)
(69.1)
(69.1)
(5.0)
(74.1)
CHANGE
($m)
CHANGE
(%)
1.5
1.5
0.9
2.4
2.2
2.2
18.0
3.2
Throughout the year, Challenger
continued to support its employees
with flexible work practices so they
could continue to work from home
or return back to the office.
Challenger has also been supporting
its customers and business partners
throughout the pandemic, including
advisers, superannuation fund clients
and commercial property tenants.
PRINCIPAL ACTIVITIES
During the period Challenger acquired
an Australian-based digital bank and
created a new business segment
– Bank. There have been no other
significant changes in the nature of the
principal activities of the Group during
the period.
COVID-19 PANDEMIC
The ongoing COVID-19 pandemic
has presented significant challenges
to global economies and investment
markets.
Looking after the health of Challenger’s
people during this time has been a key
business priority.
14
2022 Strategic Progress
Progress over 2022 has been measured against
Challenger’s four strategic priorities.
1. BROADEN CUSTOMER ACCESS ACROSS MULTIPLE CHANNELS
FY22 PROGRESS:
Diversification
strategy
delivering
strong Life
sales
International
Funds
Management
expansion
Challenger is building more resilient sales by diversifying across a range of retail and institutional products and clients.
In FY22, Life achieved strong sales of $9.7 billion (up 40%). This was primarily driven by domestic retail sales of $2.4 billion (up 11%)
and institutional sales of $6.7 billion (up 68%), representing institutional term annuities and the Challenger Index Plus product.
Retail term annuity sales were $1.9 billion (up 13%) with term annuities seen as an attractive investment providing
retirement income.
Funds Management continues to see significant growth opportunities in Australia and diversification opportunities globally.
In recent years, Funds Management has expanded into Europe through its UK office and established a presence in Japan. More
recently, Fidante opened a Singapore office, which will provide a distribution hub and access to Asian investors.
In FY22, Ardea Investment Management (Ardea), a Fidante fixed income manager with over $23 billion of funds under management,
established a UK office and received Financial Conduct Authority authorisation. This represents the first Australian-based affiliate to
establish a business presence offshore.
To support Fidante clients and provide access to its investment products, Fidante has established Undertakings for Collective
Investment in Transferable Securities (UCITS) funds.
Fidante’s offshore distribution efforts are succeeding, including winning a €1 billion (~A$1.5 billion) UK fixed income mandate in
January 2022.
In addition, Fidante won a significant mandate from a US-based investor, with Fidante’s product included in the client’s
multi-manager fund.
Resonance Asset Management, a UK-based affiliate manager specialising in environmental assets including wind, water and waste
treatment, closed further commitments into its second Wind Fund, with total commitments of £150 million now fully deployed.
Fund raising activities are underway for a second Water Fund with a fund raise target of ~US$300m.
Award-
winning
investment
strategies
Fidante’s investment managers continue to be externally recognised. During FY22, the following funds won investment
manager awards:
– Bentham Global Income Fund – Morningstar Australasia Awards, Fund Manager of the Year – Fixed Interest (2022);
– Greencape Broadcap Fund – Financial Standard Investment Leadership Awards, Australian Equities – Active Core (2022);
– Ardea Real Outcome Fund – Financial Standard Investment Leadership Awards, Fixed Income – Aggregate Bonds (2022); and
– Alphinity Sustainable Share Fund – Financial Standard Investment Leadership Awards, ESG – Australian Equities (2022).
In addition to these investment management awards, Fidante Partners was awarded the Zenith Investment Partners’ (Zenith)
Distributor of the Year for the second consecutive year. This award recognises the quality of investment managers as well as the
operating and distribution platform which supports them.
Fidante also ranked as the top Australian active manager for retail net flows to March 2022, with the highest net flows among
146 active managers. Fidante ranked number one for domestic fixed income flows (out of 33 managers)1. For FY22, Fidante
recorded retail net flows of $2.0 billion across platforms and direct adviser channels.
Accessing
term deposit
market
Challenger
launches new
Customer
division
Challenger Bank Limited (Bank) offers a range of savings and lending products, including government guaranteed retail term deposits
which are a familiar product among retirees and those approaching retirement and form a portion of their wealth.
The Bank’s term deposits were made available online and via comparison websites and brokers. Total Bank deposit sales were
$219 million, with 77% of term deposit sales to customers above 50 years of age, Challenger’s target market.
In May 2022, Challenger announced plans to create a new Customer division as part of its broader strategy to meet the needs of
a wider range of customers across a greater number of distribution channels. The Customer division brings together Challenger’s
product, marketing, sales and customer service capabilities to put customer needs at the centre of the business.
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2. EXPAND THE RANGE OF FINANCIAL PRODUCTS AND SERVICES FOR A BETTER RETIREMENT
FY22 PROGRESS:
Innovative
new
retirement
income
solutions
New
investment
strategies
In October 2021, Challenger launched innovative market-linked payment options to its award-winning Liquid Lifetime annuity.
The market-linked annuity reflects Challenger’s commitment to expand its range of innovative retirement income solutions to meet
the needs of a wider range of customers. Combining the benefit of a monthly income with exposure to investment markets that can
be rebalanced is a compelling option for clients and their advisers.
With the market-linked payment options, customers can gain exposure to investment markets by choosing from five different
indexation options: cash, conservative, conservative balanced, balanced or growth.
In March 2022, the market-linked annuity was added to Approved Product Lists and is available for use by major advice networks.
Fidante continues to expand its product offering by developing new investment strategies for existing managers.
In September 2021, Ox Capital announced the launch of its flagship emerging markets equity fund, the Ox Capital Dynamic Emerging
Markets Fund. The fund will be a concentrated portfolio of companies in Asia (ex-Japan) and other emerging markets, diversified
across countries, sectors and thematic exposures.
In July 2021, Australian and global equities affiliate manager, Alphinity Investment Management, launched a new Alphinity Global
Sustainable Equity Fund. The Fund aims to invest in quality global companies that are supporting the transition to a more sustainable
future and are also identified as undervalued and within an earnings upgrade cycle.
New affiliates
Fidante has an active program of seeking and screening new affiliate managers to expand its product offering.
In May 2022, Fidante announced the addition of Cultiv8 to its stable of affiliate managers. Based in Orange, New
South Wales (NSW), Cultiv8 is a newly established agriculture and food technology venture capital fund with a track record of
supporting the commercialisation of new and innovative technologies, leveraging its access to Australian industry, research and
government networks. Cultiv8 is committed to building a world-class venture capital platform in agriculture and food technology in
regional Australia.
Whitehelm
Capital sale
Whitehelm Capital (Whitehelm) was established in 2014 and is a global infrastructure manager and investment adviser.
In February 2022, Challenger completed the sale of Fidante’s 30% equity interest in Whitehelm to a German-based global listed real
estate manager, PATRIZIA AG, for €32 million (~A$50 million).
Fidante seeks to build long standing relationships with affiliate partners and benefit from their long-term growth. While it is not its
strategy to sell interests in its affiliate partners, the offer provided a unique and compelling opportunity for Challenger to deliver
value for shareholders while ensuring clients benefit from a much broader and more diversified infrastructure investment offering.
Fidante continues to support the distribution activities of the Whitehelm investment capabilities under a distribution partnership with
PATRIZIA AG.
Challenger
Investment
Management
fixed income
product
expansion
Challenger is Australia’s largest fixed income manager, with Fidante managing $34 billion and CIP Asset Management fixed income
managing $17 billion across multiple strategies, comprising both public and private credit investments. CIP Asset Management will
move to a Challenger brand following the rebrand to Challenger Investment Management (CIM).
CIM is committed to growing the business that will include expanding beyond its primarily institutional client base with products
structured to also reach the high net worth and retail markets.
CIM has three income-focused credit funds that are around $1 billion in funds under management and provide investors with a range
of return and risk options. Achievements during the year include:
–
–
the launch of a new share class of its successful Multi-Sector Private Lending Fund; and
the Credit Income Fund upgraded by Zenith during the year to the top rating of Highly Recommended.
1. Plan for Life Wholesale Trust Data, Financial year to date to March 2022.
16
2022 Strategic Progress continued
3. LEVERAGE THE COMBINED CAPABILITIES OF THE GROUP
FY22 PROGRESS:
‘One
Challenger’
approach
With a ‘One Challenger’ approach, Challenger intends to bring the best of the business to even more Australians. Capitalising on the
expertise across the Group and expanding the Challenger brand from a leader in retirement incomes, to a brand synonymous with
high-quality income products and a wider retirement offering.
Under this strategy, the Bank and its products have transitioned to the Challenger brand (Challenger Bank) and CIP Asset
Management will move to Challenger Investment Management.
Leverage
Challenger
Group to
integrate the
Bank
Imaginate22
driving
innovation
Following the acquisition of MyLifeMyFinance Limited in July 2021, integration into the Challenger business has been completed.
In 1H22, the Bank’s employees relocated to Challenger’s Melbourne office and its customer contact centre was integrated into
Challenger, with the Challenger customer service team now interacting directly with Bank customers. The Bank’s general ledger
was migrated to Challenger’s systems and IT systems were also migrated, including key websites and customer interfaces.
Distribution partnerships have been formed to make Challenger term deposits available via bank-specific comparator sites,
Mozo and Canstar, and the broker channel, including Australian Money Market.
Imaginate22 is an internal program bringing together Challenger employees to innovate and generate ideas that strengthen and
grow the business. Themes for 2022 were ‘One Challenger’, growth and simplification.
Around 20% of the Challenger staff participated, with 81 ideas submitted to drive meaningful change in the business. Seven ideas
were selected and will be implemented to support the Challenger growth strategy and customer focus.
4. STRENGTHEN RESILIENCE AND SUSTAINABILITY OF CHALLENGER
FY22 PROGRESS:
Overall
Longevity
Cover
Excellence
Award 2021
Apollo
strategic
relationship
In November 2021, Challenger won the Plan For Life Overall Longevity Cover Excellence Award for 2021. The award recognises
Australian Life companies and fund managers who design products to assist retirees in meeting the challenges of longevity.
Challenger also won the Longevity Product (Non-investment Linked) award for the Liquid Lifetime annuity, the Innovation Long
Term Product Award for the market-linked lifetime annuity and Client & Adviser Technical Support Award, for its in-depth, ongoing
support for advisers, evidenced by its series of highly informative and technical information material.
Apollo (NYSE:APO) and Athene acquired approximately 19% minority interest in Challenger over the course of 2021/2022.
Challenger and Apollo share a common purpose, strong complementary skills and capabilities.
Both parties are working together on a range of opportunities to help customers achieve financial security in retirement and deliver
meaningful value for shareholders, including product and distribution opportunities.
In August 2022, Challenger and Apollo entered a definitive agreement to establish a joint venture to build a lending platform in
Australia and New Zealand.
The joint venture will aim to address a wide array of client financing needs, providing structured and asset-backed lending solutions
such as accounts receivable finance, invoice and trade finance, and equipment finance, auto finance and agricultural funding, among
other bespoke credit solutions. The joint venture will focus on lending opportunities not well served by traditional syndicated markets
and will be equally owned by Challenger and Apollo.
The execution of the binding legal documentation follows Challenger’s announcement on 17 February 2022 that it had entered into
a non-binding Memorandum of Understanding with Apollo.
The joint venture will leverage the capabilities of both Challenger and Apollo to drive opportunities for growth for both firms. It will
bring together Challenger’s operating platform and relationships across Australian lending markets with Apollo’s extensive global
scale and credit investing capabilities, whilst also providing important origination capability to support growth across Challenger’s
balance sheet.
Strategic joint
venture with
SimCorp
Challenger and SimCorp (CSE:SIM), a global leader in investment administration services, have entered into a non-binding
Memorandum of Understanding with the intention to establish a joint venture to provide a market-leading investment operations
platform, servicing customers across Australia and the Asia-Pacific region.
The joint venture will leverage the capabilities of both Challenger and SimCorp to provide Australia’s first fully technology-led,
integrated front-to-back cloud-based investment operations platform to service Challenger, Fidante and third-party clients.
The joint venture is expected to be operational in the first half of FY23. The platform will be powered by SimCorp’s investment
management solution, Dimension, and operated by Challenger’s experienced investment operations team.
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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 inspired by its purpose and values will lead to superior customer and shareholder outcomes.
Challenger’s employee engagement survey conducted by Willis Tower Watson in April 2022 demonstrated Challenger has maintained
high employee engagement. Sustainable engagement score was 81%, which was 3% above the Australian National Norm.
Challenger also has a risk-focused culture, which was reflected in a risk culture score of 90% in surveys conducted by Willis Towers
Watson. This consistently high-risk culture result confirms risk culture is embedded throughout the business. Challenger monitors its
risk culture on a regular basis through the risk culture survey, with the latest survey completed in May 2022.
The results indicate a strong risk culture that supports the business to operate consistently within its risk appetite and enables
discussing and addressing of risk management issues.
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 89% in the employee engagement survey conducted by Willis Tower Watson in April 2022. This was 10 points above the
Australian National Norm and 6 points above the Global Financial Services Norm. In addition:
– 96% of employees believe that gender-based harassment and sexual harassment is not tolerated at Challenger;
– 94% of employees believe Challenger has a working environment that is accepting of differences in personal identity; and
– 94% of employees believe they have the flexibility they need to manage their work and other commitments.
In FY22, Challenger continued to be recognised as an employer of choice for women and was included as an Employer of Choice for
Gender Equality by the Workplace Gender Equality Agency (WGEA) for the fifth year in a row.
Embed ESG
across the
business
As part of Challenger’s commitment to embed sustainability and improve understanding across the business, Challenger held
a two-day internal Sustainability Summit attended by Non-Executive Directors, the Leadership Team and senior executives. The
summit included workshops and presentations from other listed peers, investors and industry experts, with the outputs informing
Challenger’s future sustainability focus.
Second
Modern
Slavery
statement
Challenger understands the significance of modern slavery risks and is committed to addressing the risk to people throughout our
operations, investments and supply chain.
In December 2021, Challenger published its second modern slavery statement, which further strengthens the approach, and
implemented actions to reduce the risk of modern slavery.
In FY22, Challenger did not identify any instances of modern slavery and continues to monitor high-risk areas across its operations,
investments and supply chain.
Supporting
the
community
Challenger has been recognised as one of the 30 best workplaces for giving back to the community in the country. The 2021
‘Australia’s Best Workplaces to Give Back’ recognised organisations empowering their employees to create social impact through
donations, fundraising and volunteering.
In 2021, Challenger launched the Good2Give payroll-giving platform, which has donated almost $90,000 to over 90 charities.
Following the floods in New South Wales and Queensland, Challenger also donated almost $30,000 to Women Up North, a highly
regarded service for women, children and young people who have experienced domestic violence or abuse, including a number of
indigenous communities.
18
Key performance indicators (KPIs)
NORMALISED NPBT ($m)
NORMALISED NPAT ($m)
NORMALISED ROE PRE-TAX (%)
FY22
FY21
$472.3m 19.3%
$395.8m
FY22
FY21
$321.5m 15.4%
$278.5m
FY22
FY21
11.9% 0.7%
11.2%
PROFITABILITY AND GROWTH
KPIs for the year ended 30 June 2022 include:
Profitability
Statutory profit attributable
to equity holders ($m)
Normalised NPBT ($m)
Normalised NPAT ($m)
Statutory EPS (cents)
Normalised EPS (cents)
Total dividend (cents)
Total dividend franking (%)
Normalised cost to income ratio (%)
Statutory RoE after tax (%)
Normalised RoE pre-tax (%)
Normalised RoE after tax (%)
Sales, Flows, AUM
Total Life sales ($m)
Total Life net flows ($m)
Total Life net book growth (%)
Bank net deposit flows ($m)
Total FM net flows ($bn)
Total AUM ($bn)
30 JUNE
2022
30 JUNE
2021
CHANGE
(%)
253.7
592.3
(57.2)
472.3
321.5
37.5
47.6
23.0
100
38.7
6.4
11.9
8.1
395.8
278.5
88.2
41.5
20.0
100
41.2
16.8
11.2
7.9
9,706.1
2,471.9
6,928.1
2,163.8
14.3
93.6
(8.5)
98.6
14.4
–
16.1
110.0
19.3
15.4
(57.5)
14.7
15.0
–
2.5
(10.4)
0.7
0.2
40.1
14.2
(0.1)
n/a
(large)
(10.4)
Challenger’s statutory profit
attributable to equity holders for
the year ended 30 June 2022 was
substantially lower than the statutory
profit reported in the previous year.
The difference was primarily due to
investment markets impacting the
fair value of Challenger Life Company
Limited’s (CLC’s) assets and liabilities.
Investment markets were significantly
stronger last year.
Normalised NPAT increased by 15.4%,
and normalised EPS increased by 14.7%
compared to 2021, primarily reflecting
higher earnings due to an increase in
assets under management.
Investment experience after tax was
a loss of $81.2 million compared to
a $318.6 million profit in the pcp.
A final dividend of 11.5 cents was
declared, franked at 100%. The total
dividend for 2022 was 23.0 cents,
which is 3.0 cents higher than the
prior year.
Challenger’s normalised cost to
income ratio of 38.7% was lower
than 2021 (41.2%). Higher normalised
cash operating earnings for Life was
the main driver of the lower cost to
income ratio.
The normalised pre-tax return on equity
(RoE) was 11.9% in 2022 compared to
11.2% in the prior year.
Statutory RoE after tax of 6.4% has
decreased substantially compared to
the prior year (2021: 16.8%) primarily
as a result of lower investment
experience. Normalised RoE after tax
increased from 7.9% in the prior period
to 8.1%, primarily reflecting higher
normalised NPAT.
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CAPITAL MANAGEMENT
Challenger holds capital to ensure
that it can meet its regulatory
requirements and contractual
obligations to customers.
Challenger’s Australian based
companies are regulated by APRA
and/or the Australian Securities and
Investments Commission (ASIC).
Challenger’s Funds Management
business also has international
operations which are subject to
regulation in each jurisdiction.
The main minimum regulatory capital
requirements for Challenger’s regulated
businesses are determined as follows:
– CLC: capital requirements as
specified under APRA life insurance
prudential capital standards; and
– Bank: capital requirements as
specified under APRA authorised
deposit-taking institutions (ADI)
prudential capital standards.
Challenger’s capital position is
managed with the objective of
maintaining the financial stability of
the Group, CLC and the Bank while
ensuring that shareholders earn an
appropriate risk-adjusted return.
Challenger reports a consolidated
(or level 3 equivalent) capital position
across the entire business.
At 30 June 2022, the Challenger Group
was holding $1.8 billion in excess
regulatory capital, which equates
to a Group Minimum Regulatory
Requirement ratio (times) of 1.68 times
(31 December 2021: 1.75 times).
This ratio represents Challenger holding
68.0% more regulatory capital than
required by its regulators.
The following table highlights the
key capital metrics for CLC, CBL
and the Group.
CAPITAL AS AT 30 JUNE 2022
Regulatory capital base
Common Equity Tier 1 (CET1)
regulatory capital
Additional Tier 1 capital
Total Tier 1 regulatory capital
Tier 2 capital2
Total capital base
Minimum Regulatory Requirement3,4
Excess over Minimum Regulatory
Requirement
CET1 capital ratio (times)5
Tier 1 capital ratio (times) 6
Minimum Regulatory Requirement
ratio (times)7
CLC1
($m)
CBL1
($m)
GROUP1
($m)
2,858.0
119.3
2,977.3
845.0
3,703.0
399.7
4,102.7
2,563.3
1,539.4
1.11
1.44
1.60
–
845.0
119.3
3,822.3
–
399.7
119.3
4,399.5
24.3
95.0
4.91
4.91
4.91
2,625.7
1,773.8
–
–
1.68
1. Includes CLC, CBL, Funds Management, Corporate and other Life/Bank entities.
Refer to Note 12 for detailed split.
2. CLC represents subordinated debt.
3. Minimum Regulatory Requirement is equivalent to PCA for CLC.
4. Minimum Regulatory Requirement for Challenger Bank Limited represents total capital requirements
of 8% (of risk weighted assets) plus the capital conservation buffer of 2.5% (of risk weighted assets),
as stipulated under APS 110 Capital Adequacy.
5. CET1 capital ratio is Common Equity Tier 1 regulatory capital divided by Minimum
Regulatory Requirement.
6. Tier 1 capital ratio is Total Tier 1 regulatory capital divided by Minimum Regulatory Requirement.
7.
Minimum Regulatory Requirement ratio is total capital base divided by Minimum
Regulatory Requirement.
20
Key performance indicators (KPIs) continued
CAPITAL MANAGEMENT
CONTINUED
CLC REGULATORY CAPITAL BASE
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 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.
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 2022 was
1.60 times (30 June 2021: 1.63 times),
within this range of 1.3 to 1.7 times.
The CET1 ratio was 1.11 times at
30 June 2022 down from 1.14 times
at 30 June 2021.
BANK REGULATORY CAPITAL
The Bank is an ADI regulated by APRA
under the authority of the Banking Act
1959. The Bank’s regulatory capital
base and minimum regulatory capital
requirement is specified under APRA’s
ADI prudential standards.
The Bank’s regulatory capital base at
30 June 2022 was $119.3 million and
represents CET1 regulatory capital.
The CET1 regulatory capital base is
similar to the Bank’s 30 June 2022
net assets. The minimum regulatory
capital requirement for the Bank
relates to a total capital requirement
of 8% of risk weighted assets, plus a
capital conservation buffer of 2.5% as
stipulated under Prudential Standard
APS 110 Capital Adequacy (APS 110).
The Bank’s excess over the minimum
regulatory capital requirement at
30 June 2022 was $95 million and the
Bank capital ratios were as follows:
– Minimum regulatory requirement
ratio 4.91 times;
– Common Equity Tier 1 (CET1)
capital ratio 4.91 times; and
– Capital adequacy risk weighted
asset ratio 51.5%.
The Bank commenced its non-retail
lending activities in the reporting
period accompanied with a reallocation
of the investment securities managed
by the new in-house Treasury function.
These activities have resulted in the
deployment of surplus capital. The
surplus over the minimum regulatory
requirement ratio will continue to
reduce as capital is deployed.
FUNDS MANAGEMENT
AND OTHER
In addition to CLC’s and CBL’s excess
over minimum regulatory capital,
Challenger maintains cash and tangible
assets within entities outside CLC and
CBL. These assets can be used to meet
regulatory capital requirements.
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DIVIDENDS
Interim dividend (cents)1
Final dividend (cents)2
Total dividend (cents)
Interim dividend franking
Final dividend franking
30 JUNE
2022
30 JUNE
2021
CHANGE
11.5
11.5
23.0
100%
100%
9.5
10.5
20.0
100%
100%
2.0
1.0
3.0
–
–
1. Interim dividend announced on 17 February 2022 and paid on 22 March 2022 in respect of the half
year ended 31 December 2022.
2. Final dividend announced on 16 August 2022 and payable on 21 September 2022 in respect of the
half year ended 30 June 2022.
DIVIDENDS AND DIVIDEND
REINVESTMENT PLAN
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 2022 was 48.3%
(30 June 2021: 48.2%) and is within
Challenger’s targeted range.
The final dividend of 11.5 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 also be fully franked. However,
the actual dividend payout ratio
and franking level will depend on
prevailing market conditions and
capital allocation priorities.
The Company continued to operate
its Dividend Reinvestment Plan (DRP)
during the period. The participation
rate for the 2022 interim dividend
was 2.1%, and 257,086 ordinary
shares were issued to satisfy DRP
requirements on 22 March 2022.
The DRP will continue in operation for
the 2022 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.
CREDIT RATINGS
Challenger Limited and CLC are
rated by Standard & Poor’s (S&P).
In December 2021, S&P reaffirmed
both CLC and Challenger Limited’s
credit ratings.
Ratings were confirmed as:
CLC
CHALLENGER LIMITED
‘A’
with a stable
outlook
BBB+
with a stable
outlook
CBL is not currently rated by S&P.
22
Normalised profit and
investment 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 best maturity 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
from writing new annuity business.
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 (Management’s preferred 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.
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 life of the
annuity contract.
MANAGEMENT ANALYSIS – NORMALISED RESULTS
Life normalised cash operating earnings
(COE) and earnings before interest and
tax (EBIT) increased as a result of higher
Life average investment assets and
lower operating expenses.
Life’s average assets under
management (AUM) increased by
13.7% as a result of annuity net book
growth and growth in external unit
holders’ liabilities.
MANAGEMENT ANALYSIS –
NORMALISED RESULTS
Net income2
Comprising:
Life normalised COE
FM net income
Bank net income
Operating expenses2
Normalised EBIT
Comprising:
Life normalised EBIT
FM normalised EBIT
Bank normalised EBIT
2022
($m)
2021
($m)
CHANGE
($m)
CHANGE
(%)
776.9
682.1
94.8
13.9
582.8
191.8
2.3
512.8
169.3
–
70.0
22.5
2.3
(300.5)
(281.3)
(19.2)
476.4
400.8
75.6
472.3
398.9
82.8
(11.1)
71.0
–
(69.1)
(5.0)
73.4
11.8
(11.1)
1.5
0.9
13.7
13.3
–
(6.8)
18.9
18.4
16.6
–
2.2
18.0
19.3
Corporate and other normalised EBIT
(67.6)
Interest and borrowing costs
(4.1)
Normalised NPBT
472.3
395.8
76.5
Tax on normalised profit
(150.8)
(117.3)
(33.5)
(28.6)
Normalised NPAT
Investment experience after tax
Bank impairments
Significant items after tax
Statutory net profit after tax
attributable to equity holders
321.5
(81.2)
(0.9)
14.3
278.5
318.6
–
(4.8)
43.0
(399.8)
(0.9)
19.1
15.4
large
–
large
253.7
592.3
(338.6)
(57.2)
2. 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.
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Funds Management net income
increased (up $22.5 million) due
to increased equity accounted
profits and distribution fee revenue.
Funds Management average FUM
increased by 12.5%.
Operating expenses increased by
$19.2 million (or 6.8%) for the year
due to an increase in personnel
expenses and the full-year impact
of owning the Bank.
Challenger’s full-time equivalent
employee numbers increased by
32 (or 4.3%) to 770 primarily
due to including Bank employees
following the acquisition in July 2021.
The normalised effective tax rate
was higher than the prior year.
The increase in the effective tax rate
reflects the non-deductible interest
payments on Challenger Capital
Notes and the de-recognition of a
deferred tax asset in relation to an
offshore entity.
Significant items were $14.3 million
(after tax) and represent net proceeds
associated with the sale of Funds
Management affiliates partially offset
by costs relating to the integration
and goodwill impairment of the Bank.
MANAGEMENT ANALYSIS – INVESTMENT EXPERIENCE
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
2022 comprised an experience loss
of $115.3 million. These losses are
largely unrealised and primarily due to
widening fixed income credit spreads
and lower global equity markets,
partially offset by Property and
Alternatives portfolios valuation gains.
MANAGEMENT ANALYSIS – INVESTMENT EXPERIENCE
2022
($m)
2021
($m)
Actual capital growth1
Cash and fixed income
Equity and infrastructure
Property (net of debt)
Alternatives
Total actual capital growth
Normalised capital growth2
Cash and fixed income
Equity and infrastructure
Property (net of debt)
Total normalised capital growth
Investment experience
Cash and fixed income
Equity and infrastructure
Property (net of debt)
Alternatives
Policyholder liability experience3
Asset and policy liability experience
New business strain4
Investment experience before tax
Tax expense
Investment experience after tax
(442.5)
(81.5)
222.8
89.4
(211.8)
(58.7)
37.7
69.8
48.8
(383.8)
(119.2)
153.0
89.4
187.7
(72.9)
(42.4)
331.5
76.6
120.6
47.5
576.2
(51.9)
20.0
66.1
34.2
383.5
56.6
54.5
47.5
(76.1)
466.0
(10.9)
(115.3)
455.1
34.1
(136.5)
(81.2)
318.6
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.
3. Policyholder 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.
24
Five-year history
Earnings ($m)
Normalised Cash Operating Earnings (COE)
Net fee income
Bank net interest 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
Bank impairments 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 ($)
2022
2021
2020
2019
2018
582.8
191.8
2.3
–
776.9
(204.5)
(96.0)
512.8
169.3
–
–
682.1
(179.9)
(101.4)
638.9
158.1
–
0.4
797.4
(174.0)
(110.4)
670.1
149.9
–
1.0
821.0
(185.3)
(82.1)
669.6
151.2
–
1.0
821.8
(187.8)
(80.6)
(300.5)
(281.3)
(284.4)
(267.4)
(268.4)
476.4
(4.1)
472.3
(150.8)
321.5
(81.2)
(0.9)
14.3
253.7
38.7%
31.9%
29.0%
47.6
37.5
40.9
33.1
400.8
(5.0)
395.8
(117.3)
278.5
318.6
–
(4.8)
592.3
41.2%
29.6%
28.7%
41.5
88.2
33.8
68.0
513.0
(6.5)
506.5
(162.8)
343.7
(750.3)
–
(9.4)
(416.0)
35.7%
32.1%
28.9%
56.5
(68.4)
46.9
(68.4)
553.6
(5.3)
548.3
(152.2)
396.1
(88.3)
–
–
307.8
32.6%
27.8%
29.2%
65.5
50.9
56.0
44.8
553.4
(6.1)
547.3
(141.2)
406.1
(76.0)
–
(7.6)
322.5
32.7%
25.8%
22.7%
68.1
54.0
64.2
52.2
11.9%
8.1%
6.4%
11.2%
7.9%
16.8%
14.8%
10.0%
(12.1%)
15.8%
11.4%
8.9%
16.5%
12.2%
9.7%
29,725.2
29,917.9
28,461.6
27,457.5
25,300.5
25,736.9
26,092.1
25,212.0
23,834.7
21,814.7
3,988.3
3,988.3
3,970.0
3,372.1
5.86
4.96
3,825.8
3,825.8
3,518.9
3,202.0
5.69
4.76
3,249.6
3,249.6
3,424.4
2,619.2
4.90
3.95
3,622.8
3,600.3
3,462.1
3,019.1
5.94
4.98
3,485.8
3,485.4
3,323.3
2,892.5
5.79
4.81
2022 Annual ReportChallenger Limited
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25
Underlying operating cash flow ($m)
Dividends per share (cents)
Interim dividend (cents)
Final dividend (cents)
Total dividend (cents)
Normalised dividend payout ratio(%)
Statutory dividend payout ratio(%)
Sales and annuity book net flows ($m)
Annuity sales ($m)
Other Life sales ($m)
Total Life sales
Life annuity net flows ($m)
Life annuity book ($m)
Life annuity net book growth (%)
Total Life flows ($m)
Total Life book ($m)
Total Life net book growth (%)
Bank deposit sales ($m)
Bank net deposit flows ($m)
Bank deposit book ($m)
Bank deposit book growth (%)
Funds Management – net flows ($m)
Assets under management ($m)
Life
Funds Management
Bank
Elimination of cross-holdings5
Total assets under management
Other
Headcount – closing FTE
Weighted average number of ASX-listed basic shares
on issue (m)
Number of shares on issue – closing (m)
Share price – closing ($)
2022
(101.3)
2021
194.7
2020
194.7
2019
236.9
2018
197.4
11.5
11.5
23.0
48.3%
61.3%
5,122.7
4,583.4
9,706.1
1,074.2
9.5
10.5
20.0
48.2%
22.1%
4,566.0
2,362.1
6,928.1
1,079.8
17.5
–
17.5
31.0%
n/a
17.5
18.0
35.5
54.2%
69.7%
3,127.4
2,024.0
5,151.4
(251.1)
3,543.1
1,006.9
4,550.0
685.8
17.5
18.0
35.5
52.1%
65.7%
4,000.7
1,554.9
5,555.6
1,392.7
13,595.4
13,669.9
12,581.2
12,870.2
11,728.3
7.9%
8.6%
2,471.9
2,163.8
(2.0%)
315.8
5.8%
474.8
13.5%
1,796.3
17,981.8
17,302.1
14,997.0
14,836.4
13,863.3
14.3%
14.4%
2.1%
3.4%
15.0%
219.3
93.6
227.7
69.7%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8,524.8)
16,111.5
2,540.9
(2,438.4)
5,301.2
22,224.0
21,563.0
18,303.0
19,010.0
18,085.0
93,448.0 105,824.0
81,435.0
79,029.0
77,984.0
390.5
–
–
–
–
(17,492.6)
(17,427.0)
(14,501.0)
(16,269.0)
(14,926.0)
98,569.9 109,960.0
85,237.0
81,770.0
81,143.0
770
675.7
680.0
6.84
738
671.6
672.6
5.41
735
608.3
663.1
4.41
687
605.0
605.8
6.64
676
596.7
601.7
11.83
Market capitalisation at 30 June ($m) 6
4,651.2
3,638.8
2,924.3
4,022.5
7,118.1
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.
5. Life assets managed by Funds Management.
6. Calculated as share price multiplied by ordinary share capital.
26
Corporate governance
At Challenger, we have a strong governance and
risk management framework. We believe that
corporate governance enhances stakeholder
confidence and enhances business outcomes.
The way we work is
informed by our strong
corporate governance
and risk culture, which is
embedded throughout our
business. At Challenger,
good corporate governance
comes from the top. The
Board has oversight of the
risks and opportunities for
the business and acts on
behalf of all of Challenger’s
stakeholders.
Our Board guides our strategic
direction and establishes key
policies and frameworks to assist
management in delivering results for
our stakeholders. The Board ensures
appropriate governance and oversight
in the management of our business.
The Chief Executive Officer has
delegated authority from the Board
to, together with the Leadership
Team, implement key strategies and
policies, have oversight of the risks
and opportunities for the business and
act on behalf of our stakeholders.
OUR APPROACH TO CORPORATE GOVERNANCE
SHAREHOLDERS
CHALLENGER LIMITED BOARD
Acts on behalf of stakeholders and oversees the overall direction,
management and corporate governance of Challenger
AUDIT
COMMITTEE
RISK
COMMITTEE
NOMINATION
COMMITTEE
REMUNERATION
COMMITTEE
Oversight
of reporting
requirements
Oversight of risk
management
framework
Assists the Board
achieve effective
composition
and size
Oversight of
remuneration
policies
and practices
TAX RISK
MANAGEMENT
COMMITTEE
Monitor and
report on
tax risks
CHIEF EXECUTIVE OFFICER
Responsible for the day-to-day management of Challenger
and the implementation of its strategic objectives
LEADERSHIP TEAM
Delivery of strategic objectives
EMPLOYEES
EMPLOYEES
Upholding Challenger’s values and executing strategic objectives to provide
our customers with financial security for a better retirement
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,
approving and regularly monitoring
Challenger’s corporate strategy
and strategic priorities and holding
management accountable for progress.
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.
This includes annual Board strategy
offsites, regular Board reporting and
meetings, and discussion and review
with management. Similarly, the
Board ensures 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
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In addition to strategy as described
above, the Board’s role and
responsibilities include:
– 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
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 28.
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.
DIRECTORS’ SKILLS MATRIX
The Board has determined that
its members have an appropriate
collective mix of skills, experience
and expertise to:
The Board’s competencies are assessed
annually and the results of the most
recent assessment are shown in the
table below.
The Board skills matrix shows
that Board members have a high
level of competency across the
areas of expertise relevant to
Challenger’s business.
– 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.
DIRECTORS’ SKILLS MATRIX 2022
LEADERSHIP & STRATEGY
INVESTMENT & CREDIT EXPERTISE
Leadership, effective communication
and influencing skills.
Strategic thinking capability and
transactional expertise.
Credit risk management and investment
expertise across asset classes and
exposures (eg: property, fixed income,
equities, etc).
CORPORATE GOVERNANCE
CUSTOMER
Public company corporate governance.
Experience in distribution, marketing
and fostering key institutional
customer relationships.
FINANCIAL ACUMEN
PUBLIC POLICY
Financial reporting literacy including
exposure to Accounting Standards.
Experience in relevant public policy
areas and key Government and
regulator relationships.
RISK & COMPLIANCE
IT & DIGITAL
Financial services and fiduciary
regulatory awareness.
Relevant compliance and risk experience
including legal and tax risk management.
Understanding of IT strategy, the
application of technology in large
organisations, and innovation.
SECTORAL EXPOSURE
PEOPLE & REMUNERATION
Exposure to Funds Management and Life
insurance sectors, and market experience in
jurisdictions in which Challenger operates.
Experience in building capable and highly
engaged teams and understanding
of current remuneration regulation,
structuring and sectoral conditions.
Advanced competency
Average competency
28
Corporate governance continued
BOARD COMMITTEES
To assist it in undertaking its duties,
the Board has established the
following standing committees:
– Group Risk Committee –
Oversight of Challenger’s risk
management framework;
– Group Audit Committee –
Oversight of regulatory
reporting requirements;
– Group Remuneration Committee –
Oversight of remuneration policies
and practices;
– Nomination Committee – Assists
the Board to ensure it maintains
an effective composition and
size; and
– Tax Risk Management Committee –
Monitor and report on Tax risks.
Each committee has its own charter,
copies of which are available at:
challenger.com.au
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 2021
to 30 June 2022 are set out below.
Management committees and groups
that are responsible for progressing our
strategic agenda include:
– Executive Risk Management
Committee;
– ESG Steering Committee;
– Work Health and Safety Committee;
– Diversity and Inclusion Committee;
– Our Community Committee; and
– Sustainability Action Group.
Our ESG Steering Committee was
established in 2021 in response to the
increasing relevance of environmental,
social and governance topics
throughout our business. A quarterly
sustainability update is submitted to
the Group Risk Committee.
DIRECTORS’ MEETINGS
BOARD
GROUP RISK
COMMITTEE
GROUP AUDIT
COMMITTEE
GROUP
REMUNERATION
COMMITTEE
NOMINATION
COMMITTEE
DIRECTOR
TO ATTEND ATTENDED
TO ATTEND ATTENDED
TO ATTEND ATTENDED
TO ATTEND ATTENDED
TO ATTEND ATTENDED
ELIGIBLE
ELIGIBLE
ELIGIBLE
ELIGIBLE
ELIGIBLE
P Polson
N Hamilton1,2
J M Green
S Gregg
M Kobayashi
H Smith
J Stephenson3
D West
M Willis
R Howes1,2
10
6
10
10
10
10
10
10
10
4
10
6
9
10
9
10
10
10
10
4
5
–
5
5
–
5
5
5
5
–
5
–
5
4
–
5
5
5
5
–
4
–
4
4
–
4
4
4
4
–
4
–
4
3
–
4
4
4
4
–
5
–
5
5
–
–
5
–
–
–
5
–
5
5
–
–
5
–
–
–
2
–
2
2
2
2
2
2
2
–
2
–
2
2
2
2
2
2
2
–
1. The Managing Director and CEO attends the Group Risk Committee, the Group Audit Committee, the Group Remuneration Committee and the
Nomination Committee meetings at the invitation of these committees.
2. Mr Hamilton replaced Mr Howes as Managing Director and CEO on 1 January 2022.
3. Ms Stephenson was the Board Representative on the Tax Risk Management Committee and attended one meeting (being eligible to attend one meeting).
There are no management representatives appointed as members of the above-mentioned Board Committees.
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Tax transparency
Challenger is committed to paying our fair share
of taxes and we take our obligation to comply with
prevailing taxation laws, practices and reporting
requirements seriously.
2022 TOTAL TAX CONTRIBUTION
64%
Corporate income tax
2%
Employer payroll taxes
15%
GST
12%
Employee payroll taxes
1%
5%
1%
Customer withholding taxes
Stamp duty and other local and council taxes
Levies
We maintain an open
relationship with key
regulators, including the
Australian Prudential
Regulation Authority
(APRA), the Australian
Securities and Investments
Commission (ASIC) and
the Australian Taxation
Office (ATO).
Challenger’s tax disclosures meet
the requirements of the Australian
Board of Taxation’s voluntary Tax
Transparency Code (TTC) of which
Challenger is a signatory. The tax
transparency disclosures in this report
and in the tax note conform with the
TTC. Challenger’s total tax contribution
(paid and collected) to and on behalf of
the Australian Government (state and
federal) for FY22 was $415.4 million
(FY21: $191.2 million).
OUR TAX STRATEGY AND
GOVERNANCE FRAMEWORK
Since 2007, Challenger’s tax charter
governs how tax is managed within
the organisation. Our charter states
that Challenger will manage its tax
obligations in a sustainable way,
considering the commercial and
social imperatives of the business and
our stakeholders. It determines that
Challenger will comply with prevailing
laws while maintaining professional
relationships with the regulatory and
tax authorities where we operate. We
maintain transparent and collaborative
relationships with key regulators,
including APRA, ASIC and the ATO.
Challenger’s tax charter and tax risk
governance is embedded in the broader
Challenger risk governance frameworks
and is reviewed and approved by
the Challenger Board on a bi-annual
basis. Challenger does not knowingly
participate in the avoidance of tax or
facilitate and/or promote the avoidance
or evasion of tax by a third party.
Most of the tax paid by the Group
is to the ATO. The Group seeks to
maintain a “high assurance Justified
Trust” over income tax and GST with
the ATO. Under the ATO Justified
Trust framework, the Group reports all
significant transactions, risks and other
issues to the ATO on a regular basis,
and issues are resolved with the ATO
in a constructive manner.
OFFSHORE OPERATIONS
We invest offshore to secure a
diversified balanced portfolio
and to match our policy liabilities.
As at 30 June 2022, 37.0% of
Challenger Life Company Limited’s
(CLC) investment assets were offshore.
CLC is also a party to a number of
global reinsurance agreements.
Our Funds Management business
originates and manages offshore
assets on behalf of CLC and
third-party institutional investors,
such as profit-for-member
superannuation funds.
Due to offshore investments and
operations, a number of overseas
foreign structures are used to provide
certainty over commercial, legal and tax
aspects of the various transactions we
enter into. Using entities in jurisdictions
with similar laws to Australia
or those that have substantially
complied with the Organisation
for Economic Co-operation and
Development (OECD) guidelines on
tax transparency, including information
exchange with global tax authorities,
enhances certainty.
The investment returns Challenger
makes are taxable in the source country
of the investment and are also taxed
in Australia. This results in an effective
tax rate for the group of 29.0%
(2021: 28.7%) with no material tax
rate difference recognised between
the Australian and offshore operations.
30
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 its
code of conduct and 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.
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, its life
insurance subsidiary CLC and the ADI
bank CBL, which Challenger purchased
in July 2021.
2022 Annual ReportChallenger Limited About
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– 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 Section 5 of this report.
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.
– 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;
32
Sustainability
Our corporate sustainability strategy
has been developed to support the
delivery of our business strategy.
OUR SUSTAINABILITY STRATEGY
DOING
THINGS RIGHT
FINANCIAL
SECURITY FOR
A BETTER
RETIREMENT
RESPONSIBLE
INVESTMENT
FINANCIALLY
RESILIENT
CUSTOMERS AND
COMMUNITIES
CONSTRUCTIVE
PUBLIC POLICY
SETTINGS
Our corporate
sustainability
strategy reflects our
most material social,
environmental
and governance
opportunities
and is aligned
to our purpose.
FINANCIALLY RESILIENT
CUSTOMERS AND
COMMUNITIES
CONSTRUCTIVE PUBLIC
POLICY SETTINGS
RESPONSIBLE
INVESTMENT
DOING
THINGS RIGHT
Helping our customers
and communities
to be strong and
financially resilient
Taking action on issues
affecting the ability
of retirees to achieve
financial security
Investing responsibly
by incorporating,
environmental, social
and governance (ESG)
considerations
Designing business
practices that focus
on our customers,
employees, shareholders
and the environment
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STAKEHOLDER ENGAGEMENT
HIGHLIGHTS
Engaging with our
stakeholders ensures
we’re focused on the right
environmental, social
and governance topics.
At Challenger, we engage throughout
the year across a number of channels.
Through regular feedback, we have
the opportunity to understand and
assess the needs and concerns of our
stakeholders and respond to them.
The key channels are listed below.
CUSTOMERS
– Survey
– Call centre
EMPLOYEES
– Employee briefings
– Surveys
EMPLOYEE ENGAGEMENT1
81%
3% on the
Australian norm
CULTIV8, FIDANTE’S NEWEST
AFFILIATE, EXPANDS THE
PLATFORM INTO
sustainable agriculture
and food technology
– Website and social media
– Senior leadership forums
– Presentations
– ESG workshops
CUSTOMER SUPPORT
– Sustainability Education days
SHAREHOLDERS
– Investor days
$
COMMUNITIES
– Regular financial reporting
– Strategic partnership
– Management meetings with
– Workplace giving and matching
investors and prospective investors
– Chair engagement with
significant investors
– Market disclosures
– Fundraising initiatives
– Volunteering
– Shared research activities
>$1bn
IN GUARANTEED PAYMENTS
MADE TO SUPPORT AROUND
140,000
CUSTOMERS
GENDER DIVERSITY
GOVERNMENT &
REGULATORS
– Policy analysis
– Government and industry
submissions
– Industry forums and conferences
– Ongoing meetings
60.00% Male
39.75% Female
0.25% Other
1. 2022 Your Voice employee engagement
survey, April 2022.
34
FY22 Materiality process
Our annual materiality process is a key
stakeholder engagement activity that assesses
feedback gathered throughout the year.
We use this process as well
as information collected
from sustainability related
initiatives to identify
what matters most to
our stakeholders and
our business.
Other materials assessed include:
– trend reports and competitor analysis;
– guidance from the GRI Standards;
– the UN Sustainable Development Goals;
– two-day Sustainability Summit with internal and external stakeholders;
– regular Board engagement and reporting; and
– monitoring of ESG-related media coverage.
Through this process we identified the following material topics and their
relative importance to both our business and our stakeholders.
OUR MATERIAL MATTERS
MOST MATERIAL
MATERIAL
S
S
E
N
I
S
U
B
O
T
E
C
N
A
T
R
O
P
M
I
IMPORTANT
Operating
Environment
Trust and
confidence
Better customer
outcomes
Climate Change
Great place to work
Investing Responsibly
Partnerships and
collaboration
Privacy and security
Social equality and
community resilience
IMPORTANCE TO STAKEHOLDERS
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OUR MATERIAL TOPICS
MATERIAL TOPIC
DESCRIPTION
TRUST AND
CONFIDENCE
As a financial institution maintaining trust is a key priority.
Challenger recognises the importance of maintaining trust through
culture and conduct, strong governance and risk management and
effective balance sheet management.
STAKEHOLDERS
– Customers
–
Employees
– Government and regulators
–
Shareholders
– Communities
LINK TO STRATEGY
AND UNSDGs
CLIMATE
CHANGE
Climate change will impact every part of the economy. Challenger
understands the need for physical and transition risks to be
incorporated into investment decision making and overall risk
management frameworks. There are also investment opportunities
that arise from climate change strategies.
Employees
–
– Regulators
–
Shareholders
– Communities
BETTER
CUSTOMER
OUTCOMES
Challenger is committed to providing better customer outcomes
that support financial security in retirement. We achieve this
through product innovation, supporting intermediaries and
helping customers navigate a changing environment.
– Customers
– Government and regulators
OPERATING
ENVIRONMENT
As an investment management company, Challenger closely
monitors market fluctuations and regulatory shifts and takes action
when appropriate to ensure that we continue to deliver high quality
outcomes for our customers and shareholders.
– Government and regulators
–
Shareholders
INVESTING
RESPONSIBLY
Challenger recognises the importance of incorporating
environmental, social and governance considerations into our
investment process. Responsible investment also includes how
we can demonstrate the value that our business has on society
more broadly.
Employees
–
– Government and regulators
–
Shareholders
– Communities
PARTNERSHIPS
AND
COLLABORATION
Collaboration and developing successful partnerships supports
our business to deliver high quality outcomes for our stakeholders.
This includes working closely with industry, government, strategic
partners, academics and the wider community.
– Customers
– Government and regulators
–
Shareholders
– Communities
GREAT PLACE
TO WORK
Challenger seeks to build and support an engaged workforce that
embraces diverse thinking.
–
Employees
Maintaining a collaborative and open culture is critical to our
success, supporting our ability to deliver our strategy. Providing the
tools and technology to enable employees to reach their potential
are also essential elements of an engaged workplace.
SOCIAL INCLUSION
AND COMMUNITY
RESILIENCE
As a retirement income provider, Challenger plays a key role
in contributing to fiscally responsible solutions to support the
ageing population.
– Customers
– Communities
We work closely with the industry, government and the community
on how to effectively plan for retirement and improve financial
security for older Australians.
Through our giving and volunteering programs, and community
activities, we also connect with and support the communities in
which we operate.
36
Trust and
confidence
UNSDGs
Building trust and
confidence enables
us to deliver value
for our stakeholders
TRANSPARENCY
Challenger has a suite of policies that guide our business practices.
These are reviewed regularly and enhanced to ensure regulatory changes,
current issues and trends are captured and considered. These include:
Anti-Money Laundering and Counter Terrorism Financial policy
WHY IT MATTERS
Maintaining trust across all stakeholders
continues to be critical for businesses,
key to which is improving transparency
and maintaining a strong risk culture.
This is reinforced by the 2022 Edelman
Trust Barometer which found that
“societal leadership is now a core
business function”.
OUR APPROACH
As a financial institution,
maintaining trust is a key priority.
Challenger achieves this through
a strong employee culture and
conduct, robust governance and
risk management, and effective
balance sheet management.
Code of Conduct
Conflicts of Interest policy
Continuous Disclosure policy
Discrimination and Harassment policy
Financial Abuse of Elders and Vulnerable Customers framework
Fraud and Corruption policy
Gifts, Benefits and Entertainment policy
Group Compliance policy
Group Information Security policy
Human Rights statement
Inside Information policy and Practice Note
IT Acceptable Use policy
Political Donations policy
Privacy policy
Regulated Persons policy
Risk Appetite statement
Social Media policy
Staff Trading policy
Whistleblower policy
Work Health and Safety policy
Workplace Bullying policy
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FRAUD AND
CORRUPTION POLICY
During FY22, Challenger’s Fraud
and Corruption policy was reviewed
and benchmarked against the new
Australian Standard AS8001:2021
Fraud & Corruption Control.
The policy is also published on
Challenger’s website in accordance
with ASX corporate governance
recommendations.
POLITICAL DONATIONS POLICY
Challenger Political Donations
policy prohibits the company and
its employees from making political
donations and from attending political
fundraiser events as a representative
of Challenger. Challenger is committed
to engaging on the Australian
Government’s policy-making agenda
in an accountable and transparent way
while also protecting our employees’
freedom of political communication.
Throughout the year, neither
Challenger or its employees as
representatives of Challenger,
made any donations to a political
party or attended any political
fundraising event.
WHISTLEBLOWER POLICY
BALANCE SHEET MANAGEMENT
Challenger’s Whistleblower policy
outlines the process for raising
concerns as well as the systems in
place to protect the confidentiality of
individuals. We provide an independent
whistleblower service to enable users
to easily raise concerns through
multiple channels anonymously.
Challenger Life has an investment
framework that is underpinned by a
focus on capital and risk management.
A strong risk culture and capital
discipline is essential to a prudent
investment strategy that takes proper
consideration of both policyholder
and shareholder interests.
We actively encourage our employees,
contractors, former employees,
suppliers, service providers and
relatives to speak up and report
any concerns of wrongdoing.
TRANSPARENCY BUILDS TRUST
IN FINANCIAL INSTITUTIONS
Challenger has a return on equity target
of the RBA cash rate plus 12 percent
(pre-tax). To achieve this, we invest
shareholder’s capital to earn this
targeted return on equity, whilst always
giving primary consideration to its
policyholders’ best interests and overall
risk appetite. This capital discipline
informs not just asset allocation, but
also capital management, our product
pricing and sales strategy.
38
Climate
change
UNSDGs
We are committed to
supporting progress
in transitioning to a
low-carbon economy,
working with our
stakeholders to reduce
risks and create a more
resilient economy.
WHY IT MATTERS
The Intergovernmental Panel on Climate
Change (IPCC) report (released in March
2022) highlighted a number of key
global climate change risks, as well as
particular considerations for each region
across the world. The report states that
in Australia, “climate risks are projected
to increase for a wide range of
systems, sectors and communities,
which are exacerbated by underlying
vulnerabilities and exposures”.1
OUR APPROACH
Climate change will impact all sections
of the economy and managing climate
change is now considered a key part of
effective risk management. Challenger
recognises that physical and transition
risks should be incorporated into
investment decisions and overall risk
management frameworks. Investment
opportunities will also arise from
climate change strategies.
GOVERNANCE
Challenger’s governance
framework incorporates
the consideration of
climate change.
Risks and opportunities identified in
the business are taken to the Group
Risk Committee as they arise which
keeps the Board informed on the
progress of initiatives. This regular
reporting also provides guidance and
education to the Board on relevant
climate change considerations.
Climate is also a key consideration
in our investment due diligence
processes for the Fixed Income and Real
Estate portfolios, as outlined in their
Responsible Investment statements.
Challenger submitted a self-assessment
to APRA based on CPG 229 Climate
change financial risks. The outcomes of
this assessment will be used to guide
our approach going forward.
INCORPORATING CLIMATE
CHANGE INTO OUR
GOVERNANCE PRACTICES
LEADS TO CLIMATE ACTION
1. IPCC Sixth Assessment Report Australasia Fact Sheet, March 2022.
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STRATEGY
Challenger has undertaken a
climate risk analysis project
for the property portfolio
that supports our strategic
approach to climate change.
The analysis calculates the at-risk
impact of physical and transitional
risks across the portfolio including a
measure of future carbon emissions
based on a number of climate
change and carbon price scenarios.
The model also evaluates potential
carbon reduction outcomes where
new emission reduction and energy
cost saving actions are forecast for
implementation. The model will be
updated regularly to support the
development of strategies aimed at
reducing climate risk and optimising
properties across the portfolio.
SUPPORTING RENEWABLE
ENERGY PROJECTS IMPROVES
ACCESS TO SUSTAINABLE
ENERGY FOR EVERYONE
RISK MANAGEMENT
Following a climate risk
assessment, the property
portfolio was identified as
Challenger’s highest risk
asset class.
This portfolio was analysed in further
detail to identify property-level risks
and develop mitigating activities. A due
diligence framework was also developed
to assess potential new acquisitions.
Work has been undertaken to assess the
Fixed Income portfolio to understand
the impact of climate across a greater
proportion of Challenger’s assets. The
outcomes of this analysis will be used
to develop strategies to mitigate current
risks and define due diligence processes
for new investments.
METRICS AND TARGETS
We are committed to monitoring and
reducing our operational greenhouse
gas emissions. We partnered with NDevr
Environmental to calculate our emissions
to ensure we align with industry as the
transition to a low-carbon economy
evolves and matures.
Overall our emissions increased 15%
over the past year as employees began
returning to the office and corporate
travel resumed following pandemic
lockdowns and border closures.
Reflecting this, emissions relating to flights
and accommodation were up slightly on
FY21, however they were down 79%
and 62% respectively on FY20.
Emissions from electricity, water and
paper use were reduced further in
FY21, however this was offset by an
increase in emissions relating to IT
equipment and software required to
support hybrid working arrangements.
Scope 3 currently excludes the emissions
intensity of our investment and lending
activities. As the availability and
robustness of emissions data increases
we will aim to enhance our financed
emissions reporting in future periods.
Our full emissions reporting is provided on
the Sustainability section of our website.
TOTAL GHG EMISSIONS (tCO2-e)
15%
increase in GHG emissions compared to FY21
8
1
4
5
,
7
8
2
,
5
2
6
0
5
,
9
2
1
4
,
8
1
Y
F
9
1
Y
F
0
2
Y
F
1
2
Y
F
0
5
7
4
,
2
2
Y
F
Emissions increased 15% over the past
year as employees began returning to
the office and corporate travel resumed
following pandemic lockdowns and
border closures.
SCOPE 1, 2 AND 3 EMISSIONS (tCO2-e)
12%
reduction in GHG emissions since 2018
4,576
4,383
4,179
4,089
3,438
842
904
882
691
661
8
1
Y
F
9
1
Y
F
0
2
Y
F
1
2
Y
F
2
2
Y
F
Scope 1 + 2
Scope 3
40
Better customer
outcomes
UNSDGs
93%
of advisers consider
Challenger a leader
in retirement income
WHY IT MATTERS
Customer expectations continue
to evolve including a focus on
personalisation, finding help
immediately and maintaining control.
“ For companies to
succeed – and outperform
their peers – in this
environment of constant
change, a culture of
customer-centricity
is critical.”1
OUR APPROACH
Challenger is committed to providing
better customer outcomes for a
wider range of customer needs.
This is achieved through product
innovation, supporting intermediaries
and ensuring we help customers to
navigate a changing environment.
This year we established a new
Customer Division, bringing together
skills capability and expertise from
across the Group.
Challenger’s Customer Brand Health
Report conducted by Hall & Partners
in February 2022, suggests that our
business is well placed to provide
Australian retirees with better
retirement outcomes.
The report found that over half of
Australian retirees (aged 65–74) are
aware of the Challenger brand, of which
almost 80% associate the brand as a
provider of products for retirement,
and almost 60% see Challenger as a
leader in retirement income products.
IMPROVEMENTS FOR
CUSTOMERS TO ACCESS
INFORMATION
During the pandemic and move to
remote working, Challenger responded
quickly ensuring that investors and
advisers could access information easily
online and via webinars. Over the last
year, the majority of adviser, investor
and employee events were conducted
virtually (100%) and hybrid (43%).
CONTEMPORARY SOLUTIONS
In October 2021, Challenger launched
a new market-linked indexation
option within the Guaranteed Annuity
(Liquid Lifetime) product, providing
retirees with the ability to index their
lifetime payments to movements
in a number of diversified market
indices. This new indexation option
complements other available options
that index lifetime payments to inflation
and the RBA cash rate, giving our
customers a broad choice of options
that can be specifically tailored to
their retirement needs.
Our market-linked annuity is available
through financial advisers as well as
directly from Challenger.
Challenger conducted research to
ascertain the desirability of three new
product concepts with advisers and
found that for the products to be
compelling enough for their clients it
must; 1) fit within the broader, holistic
approach to managing the clients’
portfolio; and 2) offer something
that advisers cannot easily replicate
themselves through an account-based
pension (ABP). This customer-centred
approach allows Challenger to build
products and solutions that best
meet the needs of clients.
Fidante continues to drive product
innovation to address the needs of
customers in a changing market
environment. Several new funds and
affiliates were launched by Fidante
throughout the year. Alphinity launched
its Global Sustainable Fund to sit
alongside its Sustainable Strategy,
providing both a global and domestic
sustainable offering. Fidante also
launched Ox Capital, providing an
offering that looks to participate in the
growth opportunities and long-term
trends arising out of Asia and other
emerging markets. In 2022 Fidante
announced Cultiv8 as the newest
affiliate to be added to the platform.
Cultiv8 is a venture capital manager
that invests in early-stage agriculture
and food technology companies
and is based in Orange, NSW. This
new affiliate diversifies the platform
and allows Fidante to explore the
sustainable agriculture and food
technology thematic.
1. Six customer pitfalls to avoid, March 2022, McKinsey & Company.
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THROUGH DIVERSIFICATION
OF OUR PRODUCTS WE’RE
SUPPORTING SDG 8, IMPROVING
ECONOMIC PRODUCTIVITY
SUPPORTING INTERMEDIARIES
At Challenger, we also aim to support
and educate advisers. We do this
through on-the-ground support by our
highly experienced and knowledgeable
distribution team; technical expertise
from a team of retirement income and
aged care specialists; and in the delivery
of tailored adviser education programs.
The Marketing Pulse Adviser Brand
survey (June 2022) identified
Challenger as a leader in retirement
income according to 93% of advisers.
Launched in February 2022, the
Rethinking Retirement event series
showcased our range of lifetime
annuity options. Over 650 advisers
attended the main launch event and/or
subsequent workshops either virtually
or face-to-face.
Throughout the year, Challenger
also participated in over 60 adviser
webinars, focused on topical
areas such as implementation of
the Retirement Income Covenant,
industry and customer trends,
and product innovation.
We’ve also partnered with the
professional network for financial
advisers, XY Advisers. Our most
recent Professional Development
session attracted over 1,100 advisers
attending virtually.
NEW PRODUCTS AND INITIATIVES LAUNCHED IN FY22
We launched a range of new products and initiatives
during the year to support better outcomes for our customers:
Our new Market-Linked
Lifetime annuity
Fidante welcomed
Ox Capital
allows customers to link
payment to changes in
investment markets.
a new Australian-based affiliate
investment manager, specialising
in emerging market equities.
Our Rethinking Retirement event series
provided tailored education and support
to more than 650 financial advisers.
HELPING CUSTOMERS NAVIGATE A CHANGING ENVIRONMENT
We also helped nearly 9,000
customers reinvest at maturity with
a growing number choosing to do
this over the phone without the
requirement for forms and post.
In response to COVID-19, Challenger
adapted quickly, offering more
self-service and document lodgement
options for our customers. Since
January 2022, over 1,800 customers
partially self-serviced and 15%
of those fully self-serviced after
speaking with us. As our client base
is primarily over 65 years of age,
with some in aged care, this was an
important step to take quickly for
our customers.
42
Operating
environment
UNSDGs
The Retirement
Income Covenant
(RIC) will help
to significantly
improve the financial
outcomes of
Australian retirees
WHY IT MATTERS
Over the last two years, our
society has experienced significant
economic, political, and social change.
Rising inflation, geopolitical tensions
and an ageing population remain
serious challenges.
The financial services industry
has also experienced significant
regulatory change in recent years
and the industry is now moving into
the extensive implementation phase
of this regulation.
OUR APPROACH
OUR STRATEGY
Challenger’s updated strategy focuses
on building a more diverse business
that meets a wider range of customer
needs. To achieve this, Challenger will
expand its brand and deliver more
products across a greater number
of channels.
In delivering this updated strategy,
Challenger is focused on helping more
customers achieve financial security
as they plan for and enter retirement.
REGULATORY AND
GOVERNMENT POLICY
Challenger remains committed
to working constructively with
the Government.
In February 2022 the RIC and the
Corporate Collective Investment Vehicle
regime (CCIV) passed the Parliament
with bipartisan support. Challenger
has long supported and advocated for
these important reforms.
The RIC will ensure the superannuation
system works as well for its members
in retirement as it does for those in
accumulation. We are confident the
RIC will lead to new and innovative
retirement income solutions that
address the unique risks that members
face in retirement, giving them the
confidence to spend their retirement
savings as intended.
The CCIV will also assist Australian
funds management in the Asia
region. Australia has the potential to
be a regional leader in investment
management given its enviable social,
legal and governance environment,
and the CCIV regime will support this.
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ACCESS TO
APPROPRIATE ASSETS
As a regulated life insurance
company, the need for
diversification and ensuring
access to appropriate assets
is an important focus for
Challenger Life and its
stakeholders.
As part of the investment selection
process and ongoing investment
management, Challenger Life
considers environmental, social
and governance issues.
One of our core investment principles is
investing in assets that will produce cash
flows to match liabilities. This allows
Challenger Life to extract an illiquidity
premium from its investment portfolio
and minimise reinvestment risk.
Challenger’s experienced investment
team sources and manages private
assets that enable the extraction of
this illiquidity premium.
Whilst Challenger has a strong internal
investment capability, Challenger
Life also uses external managers to
source investment assets. Our robust
governance framework ensures that
the selection of external managers
considers a wide range of factors,
including investment performance, risk
management as well as environmental,
social and governance issues.
CHALLENGER’S DIVERSIFIED
APPROACH TO ASSET
ALLOCATION SUPPORTS
PRODUCTIVITY
44
Investing
responsibly
UNSDGs
Challenger has been
a signatory to the
UN PRI since 2015
THE RESPONSIBLE INVESTMENT
ASSOCIATION AUSTRALASIA’S
RESEARCH SHOWED THAT
74%
of Australians would
change providers if they
considered their current
fund manager not to be
aligned with their values.1
WHY IT MATTERS
Responsible investment is top of
mind for consumers and investors in
Australia, who increasingly expect
funds to demonstrate the positive
the impact their fund is making.
OUR APPROACH
Challenger recognises the importance
of incorporating environmental, social
and governance considerations into
our investment process. Responsible
investment also includes how we
can demonstrate the value that our
business has on society more broadly.
We have been a signatory to the
Principles for Responsible Investment
(PRI) since 2015.
Our Responsible Investment Policy
and Challenger Life’s Responsible
Investment Statement outline our
more detailed approach.
The investment team complies
with these obligations:
– requiring that managers have
a responsible investment policy
and report on ESG risks across
their portfolios; and
– incorporating ESG
considerations into internal
strategies, where relevant.
LIFE
Challenger Life Company (CLC)
acknowledges the potential
for climate change to have
a significant impact on its
investments through physical
and transition risks.
For these reasons, CLC considers ESG
risks in its own investment decision
making and ownership practices,
and when appointing managers
to act on our behalf.
1. Responsible Investment Association Australasia, March 2022 (https://responsibleinvestment.org/wp-content/uploads/2022/03/Media-Release_
FromValuestoRiches2022_2.pdf).
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FUNDS MANAGEMENT
The Fixed Income team
at Challenger Investment
Management (CIM) continues
to enhance its approach to
responsible investment.
CIM’s Fixed Income team has
developed a proprietary set of ESG
ratings intended to reflect the impact of
an environmental, social or governance
factor on the credit risk of a borrower.
These ratings drive relative value
and screening decisions. CIM’s Fixed
Income team is also increasing its
focus on assessing the carbon footprint
of borrowers.
As a result of its scale and influence in
domestic securitisation markets, the
team has also taken a more active role
in promoting responsible investment
in securitisation markets. This includes
publishing thought pieces, advocacy
within investor groups and direct
engagement with issuers on topics such
as social residential mortgage-backed
securities, and carbon footprinting of
mortgage or asset backed portfolios.
OUR INVESTMENT POLICIES
SUPPORT THE ERADICATION OF
MODERN SLAVERY THROUGH
THE WAY WE INVEST
ACHIEVEMENTS ACROSS THE AFFILIATES
Responsible investment is a core part of the Fidante affiliates’ investment
process. Our affiliates made significant progress in developing ESG initiatives
during the year:
ALPHINITY SUSTAINABLE
SHARE FUND
THE ARDEA RESEARCH TEAM IN
PARTNERSHIP WITH UTS
Winner of the Financial
Standard MAX & Investment
Leadership Awards for the ESG –
Australian Equities category
Published the paper ‘Climate
Change Transition Risk on
Sovereign Bond markets’
ARDEA
Became a signatory to the UK
Stewardship Code
MERLON AND ALPHINITY
Have both grown their ESG teams
NOVAPORT
Signed up to the Task Force on Climate
Related Financial Disclosure (TCFD)
WE TAKE ACTION ON CLIMATE
BY SUPPORTING INITIATIVES
THAT FOCUS ON EMISSIONS
REDUCTION AND NET ZERO
ALPHINITY
Published their first ESG and
Sustainability Report, including a
disclosure on engagement activity
FIDANTE (IN ASSOCIATION
WITH WHITEHELM)
Winner of the Best Social Impact
Thought Leadership for the Pensions
for Purpose Content Awards 2021
LENNOX CAPITAL PARTNERS
Became a signatory to the Net Zero
Asset Managers Initiative
ARDEA
Signed the 2021 Global Investor
Statement to Governments on
the Climate Crisis
46
Partnerships
and collaboration
UNSDGs
Developing strong
partnerships supports
Challenger to
enhance its impact
through collaboration
with industry,
government, strategic
partners, academics
and the community
WHY IT MATTERS
OUR PARTNERS
According to Forbes magazine, one of
the top business trends for 2022 is the
role of partnerships, which can provide
access to new markets and a broader
range of stakeholders:
“ The need to work
together to solve key
business challenges (not
to mention humanity’s
biggest challenges) is
great. Indeed, in the
future, it will become
increasingly difficult to
succeed without really
close partnerships with
other organisations.”1
OUR APPROACH
Collaboration and developing
successful partnerships supports
our business to deliver high quality
outcomes for our stakeholders.
At Challenger, we are committed
to developing strong partnerships
that will also enhance our impact
through collaboration with industry,
government, strategic partners,
academics and the community.
Challenger has a strong
track record of building
enduring, value creating
strategic partnerships as
we look to diversify our
business, generate scale
and drive growth.
Our long-term relationship with
the MS&AD Group, a leading
Japanese provider of foreign currency
life products with a strong and
powerful brand, has broadened
Challenger’s distribution reach to
the Japanese market.
Challenger continues to progress
its strategic partnership with Apollo,
a global alternative asset manager.
Both parties are working together
on a range of opportunities to help
customers achieve financial security
in retirement.
In 2022, Challenger also announced a
new partnership with SimCorp, a global
leader in investment administration
services, with the intention of
establishing a joint venture to provide
a market-leading investment operations
platform, servicing customers across
Australia and APAC.
1. The 8 Biggest Business Trends in 2022, Nov 2021 (https://www.forbes.com/sites/bernardmarr/2021/11/01/the-8-biggest-business-trends-in-
2022/?sh=88ad9c21da15).
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Challenger has a strong
research partnership with
National Seniors Australia
(NSA), established in 2013.
This partnership helps inform
Challenger’s understanding of what
matters to retirees and what they
need for a successful retirement.
It also provides NSA members with
greater exposure to financial concepts
regarding retirement income.
OUR INNOVATIVE PARTNERSHIPS
SUPPORT ECONOMIC
PRODUCTIVITY TO IMPROVE
DECENT WORK FOR ALL
HOW WE USE TECHNOLOGY
The integration of technology and
processes for our newly-acquired Bank
has now been completed, with all Bank
and Challenger employees serviced on
the same platforms. A new cloud-based
contact centre solution has also been
implemented, bringing our Bank and
existing contact centres under the
same platform.
Challenger supports the reuse
of computer equipment where
possible. As part of this effort,
Challenger donates laptops to the
Ethan Indigenous partners program,
which supplies these laptops to
Indigenous schools across Australia.
We will continue to support
this program as we renew older
laptops in future.
ENHANCED PRIVACY MEASURES
AND TRANSPARENCY ON THE
WAY WE WORK IMPROVES
TRUST IN INSTITUTIONS
Challenger donates laptops
to the Ethan Indigenous
partners program, which
supplies these laptops
to Indigenous schools
across Australia
48
Great place to work
Challenger was named an Employer
of Choice by the Workplace Gender
Equality Agency for the fifth year
in a row
UNSDGs
WHY IT MATTERS
The pandemic motivated people to
rethink how they work, where they
work, and why they work. People
also made it clear that they want
to work for companies where the
culture aligns with their values.
OUR APPROACH
At Challenger, we seek to build an
engaged workforce that embraces diverse
thinking. We recognise that maintaining
a great culture and capabilities is critical
to our success, supporting our ability to
deliver our strategy. Providing the tools
and technology to enable employees
are also essential elements of an
engaged workplace.
DIVERSITY & INCLUSION
NETWORKS
Challenger has four employee-led
diversity and inclusion networks
which co-ordinate initiatives on
areas that matter most to them:
LGBTQI+
Inclusion
Age
Inclusion
Cultural
Inclusion
Gender
Inclusion
We continue to make great progress
across our networks. In 2022, the
Australian Workplace Equality Index
(AWEI) benchmarking LGBTQI+
workplace inclusion scorecard
highlighted an 80% increase in
Challenger’s overall score compared
to our 2021 submission. This initiative
was driven by Together@Challenger.
CELEBRATING A RANGE
OF DIVERSITY NETWORKS
REDUCES INEQUALITIES
EMPLOYEE ENGAGEMENT
Challenger recognises that its people
are key to our success. Building an open
and honest culture, where feedback
is encouraged and acted upon,
is also critical.
One of the ways we measure this is
through our Your Voice employee
engagement survey. Our 2022
results remain strong and reinforce
Challenger’s culture of teamwork
and delivery. Employee engagement
was three points above the Australian
norm at 81%. Diversity and inclusion
was also strong at 89% with most
employees feeling Challenger promotes
a diverse and inclusive workplace and
10 points above the Australian norm.
Pleasingly, 94% of employees believe in
the goals and objectives of Challenger
and 88% said they would recommend
Challenger as a good place to work.
In 2022, Challenger hosted
Imaginate22, an employee event
where cross-divisional teams pitched
more than 80 business ideas themed
around One Challenger, growth and
simplification. Many of the ideas
explored how we can meet a wider
range of customer needs highlighting
the teams’ energy and enthusiasm
for a customer-first approach.
Challenger also held ImaginateIT22,
where the technology team focused on
ideas that build tangible and positive
change across our business. During
the one-day event, 20 teams removed
the need for approximately 521 hours
of future work and 40 hours per week
of ongoing work.
FOCUS ON GENDER EQUALITY
For the fifth consecutive year,
Challenger was named an Employer
of Choice by the Workplace Gender
Equality Agency. This recognises our
work to improve gender equality
across areas such as:
– Leadership, strategy
and accountability;
– Developing a gender-balanced
workforce;
– Gender pay equity;
– Support for caring;
– Mainstreaming flexible work;
– Preventing gender-based harassment
and discrimination, sexual
harassment and bullying; and
– Driving change beyond
the workplace.
OUR FOCUS ON GENDER
EQUALITY SUPPORTS SDG 5,
EMPOWERING WOMEN
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EMPLOYEE
ENGAGEMENT SCORE1
DIVERSITY &
INCLUSION SCORE1
81%
89%
3% on Australian norm
10% on Australian norm
SUPPORTING A HYBRID
WORKFORCE
Throughout the year, Challenger
undertook a range of initiatives to
support hybrid working and help our
people manage increased workloads
and segregation of professional and
personal lives. This included webinars
covering the impact of technology on
wellbeing, productivity and physical
health, and tools to better manage
these issues.
Virtual workshops were also organised
outlining the key capabilities and
skills needed to navigate the future
of work, creating psychological
safety, engagement and a normalised
approach to flexible and hybrid work.
Senior leaders attended seminars that
focused on providing an understanding
of the psychological impact of
COVID-19, how to re-energise teams,
and preparing for a return to the office.
We have also progressed our Future
of Work program with a focus on:
– Career growth
– Workplace design (office and
in home)
– Ways of working and flexibility
– Wellbeing
– Reward and recognition
LEARNING AND DEVELOPMENT
PROGRAMS
In 2022, our eleventh cohort of people
managers completed Challenger’s
Leadership Foundations training,
a tailored, three-day program that
gives leaders the skills to inspire
and motivate their teams.
In addition to personal and career
development, Challenger offers
employees a range of other rewards and
benefits. This includes flexible working
arrangements; the ability to purchase
additional annual leave; a super top up
worth up to $500 a year; a rolling social
events calendar; and free flu shots and
body health composition scans.
SUSTAINABILITY SUMMIT
As part of our commitment to
embed sustainability and improve
understanding across the business,
Challenger held a two-day internal
Sustainability Summit attended
by non-executive Directors, the
Leadership Team and senior
executives. This included workshops
and presentations from listed entities
and consultancies with a strong
commitment to sustainability, not
for profit organisations and clients.
The outputs from the Summit will
inform Challenger’s future focus
on sustainability and the event
received highly positive feedback
from attendees, with a satisfaction
rating of 4.6 out of 5.
PROVIDING LEARNING AND
DEVELOPMENT OPPORTUNITIES
FOR EVERYONE LEADS TO FAIR
AND DECENT WORK
SAFETY AND WELLBEING
This year we partnered with the UNSW
Gendered Violence Research Network
(GVRN) and upskilled a number of
our employees to become DFV first
responders within the organisation.
Recognising the significant impact
of the pandemic on our people,
Challenger introduced an additional
Wellbeing leave day for all employees,
to be used during the year. And in
response to employee feedback,
we implemented a weekly Meeting
Free Hour to provide valuable quiet
time across the business.
‘Our Community’ is Challenger’s
employee-led community and
social group. This year, the group
coordinated Challenger’s participation
in STEPtember, Australia’s leading
health and wellness fundraising
challenge for cerebral palsy.
>$27,000
raised by 145 employees
1. 2022 Your Voice employee engagement survey, April 2022.
50
Social inclusion
and community
resilience
UNSDGs
In FY22 we donated
$262,746
across 92 Charities
WHY IT MATTERS
Companies increasingly recognise
that supporting a wider range of
stakeholders will support future
success. In his annual letter to CEOs,
BlackRock CEO Larry Fink emphasised
the power of stakeholder capitalism to
drive mutually beneficial relationships
between business and its stakeholders.
Mr Fink highlighted the need for
businesses to create value for and be
valued by its full range of stakeholders
including the community.1
OUR APPROACH
As a retirement income provider,
Challenger plays a key role in
contributing to fiscally responsible
solutions to help support the ageing
population. Using our internal
expertise, we work closely with the
finance industry on how to effectively
plan for retirement to improve financial
security for all Australians.
Through our giving and volunteering
programs and community activities, we
also aim to connect with and support
the communities in which we operate.
EDUCATION
COMMUNITY PARTNERSHIP
Challenger is committed to helping to
educate older Australians on how to
generate better retirement incomes
and provide financial security in
retirement. We undertake research
and work closely with the government,
community and media to drive debate
on a range of issues affecting retirees.
This includes working with National
Seniors Australia (NSA) to provide their
members with practical guidance on
finance issues in retirement. We also
engage with media and retirement-
specific groups on how retirees can
plan for and enjoy a more financially
secure retirement.
VULNERABLE CUSTOMER
POLICY
Challenger recognises the implications
that elder financial abuse can have on
customers. Our ability to effectively
identify and manage the risk of
financial abuse of elders and other
vulnerable customers is central to our
purpose of providing customers with
financial security for a better
retirement. During FY22, Challenger
introduced its Financial Abuse of Elders
and Vulnerable Customers Framework,
which sets out the internal measures in
place to manage these risks and how
customers can protect themselves
during their retirement. Supporting
information has also been published
on Challenger’s website.
BY SUPPORTING VULNERABLE
CUSTOMERS, WE REDUCE
INEQUALITIES
Challenger’s partnership with Council
on the Ageing NSW (COTA NSW)
was established in 2019 to deliver
a program of research, advice and
practical support to address the
underemployment of people aged over
50. This is of fundamental importance,
both to setting older workers up for a
better retirement – by enabling them to
earn a living and save for retirement for
longer – and in promoting positive age
diversity in the workforce. The program
aims to encourage people to talk about
ways in which this important issue can
be addressed, which includes giving
employers the tools to attract and
retain older employees.
For the first phase of the partnership,
research was undertaken to understand
the needs of both employees aged
over 50 as well as employers of small,
medium and large businesses. Using
the outcomes of this research, a toolkit
was developed covering four areas:
– 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.
1. Larry Fink’s Annual letter to CEOs, 2022 BlackRock.
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The toolkit is currently being piloted
by a small group of organisations and
is intended to be released for broader
use in 2023.
More detail on the community
partnership can be found on
our website.
PARTNERING WITH NOT FOR
PROFITS TO ADDRESS A SOCIAL
PROBLEM SUPPORTS SDG17
COMMUNITY GIVING
Challenger supports payroll giving
through the Good2Give platform.
Through this platform, employees are
able to donate to their charity of choice
and Challenger will match donations
up to $500 per employee each year.
Throughout FY22, total donations
via the Good2Give platform were
$89,131 across more than 92 charities.
Challenger also continues to support
employees to volunteer, providing one
day of leave for volunteering every year.
Challenger employees visit the team from our charity partner, Women Up
North in Lismore following the devastating floods in Northern NSW.
HOW WE SUPPORTED THE COMMUNITY IN FY22
$89,131
TOTAL DONATIONS VIA GOOD2GIVE
Workplace toolkit developed
to help organisations better
support older workers
~$30,000
RAISED FOR FLOOD APPEAL FOR
WOMEN UP NORTH
Published our
Vulnerable Customer Policy
NSA and Challenger
research found only 14% of
older Australians financially
prepare for aged care costs
52
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 2022.
The information appearing on pages 1 to 51 forms part
of the Directors’ Report for the financial year ended
30 June 2022 and is to be read in conjunction with
the following information.
Directors
The names and details of the Directors of the Company holding office during the financial year ended 30 June 2022 and as at
the date of this report are listed below. Directors were in office for the entire period, unless otherwise stated.
Directorships of other listed companies:
Non-Executive Director of Tabcorp Holdings
Limited (appointed 18 July 2012, appointed
Chair 1 January 2021 and resigned
31 May 2022), Ampol Limited (formerly Caltex
Australia Limited) (appointed 9 October 2015;
appointed Chair 18 August 2017)
and The Lottery Corporation Limited
(appointed Director and Chair 20 May 2022).
Masahiko Kobayashi
Non-Executive Director
Appointed 26 August 2019
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
(Enterprise Risk Management and Investment
Risk & Operations 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:
Not applicable.
Peter Polson
John M Green
Independent Chair
Appointed 6 November 2003
Chair of Nomination Committee.
Member of the Group Audit Committee,
Group Risk Committee, and 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).
Nicolas Hamilton
Managing Director and
Chief Executive Officer
Appointed 1 January 2022
Experience and qualifications:
Masters of Business Administration (Henley
Business School, Reading, United Kingdom) and
Bachelor of Economics (University of Sydney).
Mr Hamilton has previously held a number
of senior executive roles at Challenger since
joining in 2015, including Chief Executive,
Funds Management.
Mr Hamilton has over 26 years financial
services experience. Prior to joining Challenger,
he held senior roles at Invesco in Europe
and Colonial First State where his primary
responsibilities included leading and expanding
global fund teams and building out their global
equities and multi-asset capability.
Directorships of other listed companies:
Not applicable.
Independent Non-Executive Director
Appointed 6 December 2017
Member of the Group Audit Committee,
Group Risk Committee, Group Remuneration
Committee and Nomination Committee.
Chair of Challenger Bank Limited.
Experience and qualifications:
Bachelor of Laws and Bachelor of
Jurisprudence (UNSW), 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, Deputy Chair of QBE
Insurance Group and has also been a partner at
two major law firms. He is a Director of Cyber
Security Cooperative Research Centre and
UOW Global Enterprises 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 1 January 2015 and
retired 5 May 2022).
Steven Gregg
Independent Non-Executive Director
Appointed 8 October 2012
Member of the Group Audit Committee,
Group Risk Committee, Group Remuneration
Committee and 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.
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Heather Smith
Duncan West
Richard Howes
Independent Non-Executive Director
Appointed 20 January 2021
Independent Non-Executive Director
Appointed 10 September 2018
Member of the Group Audit
Committee, Group Risk Committee
and Nomination Committee.
Chair of the Group Audit Committee.
Member of the Group Risk Committee
and Nomination Committee.
Former Managing Director
and Chief Executive Officer
Appointed 2 January 2019,
resigned 1 January 2022
Experience and qualifications:
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 departments of Industry, Innovation
and Science, and Communications and
the Arts, and as Deputy Secretary of the
Department of Prime Minister and Cabinet and
Foreign Affairs and Trade. She is a Professor at
ANU National Security College, deputy chair
of the United States Studies Centre and a
recipient of the Public Service Medal.
Directorships of other listed companies:
Non-Executive Director of ASX Limited
(appointed 29 June 2022).
JoAnne Stephenson
Independent Non-Executive Director
Appointed 8 October 2012
Chair of the Group Remuneration Committee.
Member of the Group Audit
Committee, Group Risk Committee
and 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 1 July 2021), Japara Healthcare Ltd
(appointed 1 September 2015, resigned
5 November 2021), Myer Holdings Limited
(appointed 28 November 2016, appointed
Chair 16 September 2021) and Qualitas Ltd
(appointed 4 November 2021).
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.
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) and Suncorp Group
Limited (appointed 23 September 2021).
Melanie Willis
Independent Non-Executive Director
Appointed 6 December 2017
Chair of the Group Risk Committee.
Member of the Group Audit Committee
and 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 PEXA Group Limited (appointed
11 June 2021).
Bachelor of Commerce (Hons) and Bachelor
of Economics (University of Queensland).
Mr Howes held a number of senior executive
roles at Challenger since he joined in 2003,
including Chief Executive of Distribution,
Product and Marketing, Chief Executive of
Challenger’s Life business and Chief Investment
Officer. He was most recently a consultant
to the Company following his resignation as
Managing Director and Chief Executive Officer
on 1 January 2022.
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:
Not applicable.
Hiroyuki Iioka
Non-Executive Director
(alternate for Masahiko Kobayashi)
Appointed 13 December 2019
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
(Global Business Development Department)
at MS&AD Insurance Group Holdings Inc.
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).
Company Secretary
Linda Matthews (Bachelor of Laws, University
of Technology, Sydney) is the Head of Company
Secretariat. She is a qualified 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 20 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.
54
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report
Letter from the Chair of the Remuneration Committee
Dear Shareholders
Challenger delivered a strong performance in the 2022 financial year and is well positioned to progress its growth agenda. Our
business continues to be well capitalised and our full year normalised profit before tax was at the upper end of our guidance
range and increased by 19.3% on last year. We also achieved record annuity sales and growth in all key segments. These results
highlight the benefits of our diversification strategy as we focus on building a business that meets a wider range of customer
needs.
Appointment of Nicolas Hamilton as Managing Director and Chief Executive Officer
In December 2021, the Board appointed Mr Hamilton as CEO following Richard Howes’ decision to retire. Mr Hamilton, who
previously led the Funds Management business, has made a strong start over the second half of the financial year. This is
reflected in strong financial results, the expansion of our updated strategy to bring the best of Challenger to even more
customers and the initiation of a number of strategic initiatives.
Mr Hamilton’s remuneration was increased on appointment as CEO, however his total target remuneration is 16% lower than
Mr Howes’ in line with the rebasing of remuneration as incumbents have been replaced in recent years.
Mr Howes remained employed by Challenger until 31 March 2022 to support a smooth transition of responsibilities to the new
CEO. He was eligible for a pro rata short-term incentive (STI) for 2022 and his unvested equity remained ‘on foot’ in accordance
with the terms of his employment. Mr Howes did not receive any termination payments.
Other KMP changes
There were a number of other KMP changes during the year, being:
•
•
•
In August 2021 Chris Plater was appointed Deputy CEO.
In January 2022, with the appointment of Mr Hamilton as CEO, Michael Clarke was appointed as the Acting Chief
Executive, Funds Management.
In May 2022 we announced:
–
–
–
the formation of a Customer division as part of our strategy to expand our proposition and reach more
customers across a greater number of channels. The search to fill the role to lead this function is currently
underway;
the appointment of Anton Kapel as the Chief Executive, Life and Solutions. This role encompasses Life
investments, Investment Solutions and Actuarial; and
that Angela Murphy, Chief Executive, Life will leave the business following supporting the successful transition
to this new structure.
2022 reward outcomes
Reflecting Challenger’s strong business performance, STI outcomes for 2022 include:
•
•
the incoming CEO’s STI reflected Mr Hamilton’s contribution leading the Funds Management business in the first half
of the financial year and as CEO in the second half of the financial year (107% of target); and
STIs for other KMP ranged between 39% and 111% of target (for those roles with a target opportunity in place).
While STIs are up on the last two years reflecting the stronger financial performance, LTIs will not vest in September 2022 for the
fourth consecutive year demonstrating strong alignment between executives’ realised reward and shareholder outcomes over the
longer term.
Enhanced disclosure of performance and reward outcomes
No changes have been made to the executive reward framework during 2022. However, we have continued to listen to
shareholders’ feedback and have focused on enhancing disclosures to provide greater transparency on reward outcomes and the
Board’s decision-making processes. For the 2022 report, we have provided financial targets in the balanced scorecard and made
improvements to the disclosure of awarded remuneration.
Looking forward - focus on regulatory change
Our primary focus during the 2023 financial year will be compliance with regulatory requirements, including APRA’s new
prudential standard CPS 511 Remuneration and the Financial Accountability Regime. This work is underway with the most
significant aspect from a reward framework perspective being a comprehensive review of our long-term incentive plan, including
changes to performance hurdles to meet the requirement for a material weighting to non-financial measures. As part of this
review, the Board is reflecting on shareholder feedback in relation to the use of absolute TSR as a single hurdle and the five-year
cumulative test.
In addition, we are reviewing the deferral of STIs and a range of associated governance frameworks and processes, for example,
enhancing our approach to consequence management with the introduction of clawbacks as a further tool to adjust
remuneration in the event of conduct matters. This is in addition to the malus that we already have incorporated into our
incentive plans.
We look forward to continuing to engage with our shareholders during 2023 as we make these important changes to our
reward framework.
Yours sincerely
JoAnne Stephenson
Remuneration Committee Chair
54
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Contents
Section
Key Management Personnel
2022 at a glance
Remuneration strategy and structure
Short-term incentives
Long-term incentives
2022 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
Page
55
56
57
58
62
63
64
66
67
73
76
Key Management Personnel
Challenger’s executive Key Management Personnel (KMP) for 2022 are detailed in the table below:
Name
Role
Term in 2022
Term in 2021
Detail
Current KMP
Nicolas Hamilton
Managing Director and
Chief Executive Officer
Full year
Full year
Chief Executive, Funds
Management until 31 December
2021
Michael Clarke
Rachel Grimes AM1
Acting Chief Executive,
Funds Management
Chief Financial Officer
From 1 January
2022
Full year
-
Interim appointment
From 3 May 2021
Anton Kapel
Chief Executive, Life &
Solutions
From 1 June 2022 7 December 2020
to 9 March 2021
Chris Plater
Former KMP
Richard Howes
Angela Murphy
Deputy Chief Executive
Officer
Full year
Full year
Managing Director and
Chief Executive Officer
Chief Executive, Life
Until 31 December
2021
Until 31 May 2022 Full year
Full year
Andrew Tobin
Chief Financial Officer
-
Until 31 March
2021
1. Member of the Order of Australia.
During 2021, interim appointment
as Acting Chief Executive and
Chief Investment Officer, Life
Chief Executive, Operations &
Technology until 16 August 2021
Ceased employment 31 March
2022
Employment not ceased as at 30
June 2022
Ceased employment 31 March
2021
Challenger’s Non-Executive Directors for 2022 are detailed in the table below:
Name
Term in 2022
Term in 2021
Peter Polson (Chair)
John M Green
Steven Gregg
Masahiko Kobayashi1
Heather Smith
JoAnne Stephenson
Duncan West
Melanie Willis
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
From 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.
55
56
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
2022 at a glance
Summary of 2022 reward outcomes
STI outcomes
CEO remuneration
arrangements
Annual fixed pay
increases
• The incoming CEO’s 2022 STI reflects strong Group performance and significant progress against
strategic priorities as set out in the scorecard later in this report. The outcome of 107% of target
reflects Mr Hamilton’s contribution as Chief Executive, Funds Management for the first half of the
financial year and as CEO for the second half of the financial year.
• STIs for other KMP range between 39% and 111% of target, where a target was in place. Mr
Clarke in his acting role, did not have an STI target opportunity in place, and Mr Kapel did not have
STI target opportunity in place as he was not a KMP until 1 June 2022.
• Mr Hamilton’s fixed pay was increased on his appointment as CEO. His total target remuneration is
16% lower than Mr Howes’ in line with the rebasing of remuneration as incumbents are replaced.
• Mr Howes remained employed until 31 March 2022 to support the transition to Mr Hamilton. He
was eligible for a pro rata STI for 2022 and his unvested equity remained ‘on foot’ in accordance
with the terms of the awards. Mr Howes did not receive any termination payments.
• The only annual increase to fixed pay for financial year 2022 was Mr Hamilton in his prior role as
Chief Executive, Funds Management, to reflect the additional size and complexity of this role,
noting fixed pay was still 17% lower than his predecessor in the Funds Management role.
• No annual increases are planned for financial year 2023.
• LTIs will not vest in September 2022 for the fourth consecutive year. While performance has
No vesting of LTIs
rebounded after three challenging years, the non-vesting of LTIs demonstrates the strong alignment
between executives’ realised reward and shareholder outcomes over the longer term.
Non-executive
director fees
• The Board undertook a comprehensive review in August 2022 which resulted in slight increases to
committee fees and the introduction of fees for the new Bank subsidiary board.
• No change was made to the Board Chair fee, noting the Board intends to use the retirement of the
current Chair as a natural opportunity to reset the Chair fee.
Short-term incentive outcomes The charts below set out 2022 STI outcomes ($m) together with target and maximum
opportunities (on an annualised basis) by role if the role had a target in place. The first chart includes historic STI outcomes for
the incumbent CEO as at 30 June each year.
CEO STI outcomes - 5 year history
Other KMP STI outcomes - 2022
2.5
2.0
1.5
1.0
0.5
0.0
2.5
2.0
1.5
1.0
0.5
0.0
Maximum STI
Target STI
Deferred STI
Cash STI
2018
2019
2020
2021
2022
Deputy
CEO
CFO
CE Life
CE FM
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
20%
10%
0%
-10%
-20%
2018
2019
2020
2021
2022¹
1. Indicative outcomes based on Challenger’s share price as at 30 June 2022.
56
CGF 3yr
CGF 4yr
CGF 5yr
ASX 200 Accum.
Hurdle (threshold)
Hurdle (max)
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Remuneration strategy and structure
Our purpose
To provide our customers with financial security for a better retirement
Our
strategic
priorities
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
Strengthen
resilience and
sustainability
of Challenger
Our 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
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.
Variable remuneration
Short-term incentives
Long-term incentives
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.
Longer-term ‘at risk’ remuneration
awarded as hurdled share rights.
Awards are subject to a cumulative
absolute TSR hurdle tested after four
or five years and subject to forfeiture
provisions.
Pay mix
Remuneration arrangements for KMP are set with reference
to the below pay mix framework. Where arrangements are
outside this framework, they will be transitioned over time.
% of fixed
STI target
STI max LTI face value
The CEO’s pay mix (with each component expressed as a
percentage of total reward) is set out below.
Target
22%
14.5%
14.5%
49%
CEO &
business lines
Control
functions
133%
200%
up to 225%
Maximum
19%
19%
19%
43%
100%
150%
125%
Fixed
LTI (face)
Cash STI
Deferred STI
Delivery of remuneration for 2022
Reward is realised over an extended period with a significant weighting to variable reward supporting a focus on strong risk
management and ensuring alignment with shareholders over the longer term.
FY22
Sep ‘22
Sep ‘23
Sep ‘24
Sep ‘25
Sep ‘26
Fixed remuneration
Cash STI
STI performance
assessment period
Deferred
STI
(100%)
30%
30%
20%
20%
LTI performance assessment period (absolute TSR hurdle)
Cumulative 5-year test >
57
58
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
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.
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 an STI modifier to adjust STI outcomes to reflect a broad range of factors.
STI opportunity
Target STI opportunity is set in accordance with the pay mix framework, being 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.
STI targets for the Deputy CEO and the Chief Financial Officer are currently slightly outside the
framework, however, the maximum opportunities per the framework of 200% and 150% of fixed
remuneration respectively apply. These arrangements will be transitioned over time.
Delivery
Allocation
methodology
Vesting period
50% of the STI award is delivered as cash and 50% is deferred into equity. Deferred STI awards are
delivered as Restricted Shares. Prior to 1 July 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
Vesting is subject to continued service.
Termination
treatment
Forfeiture (malus)
Termination for cause will result in forfeiture of all unvested equity awards. Where ‘good leaver’
treatment applies, all unvested awards remain ‘on foot’, except in the case of resignation where awards
will remain ‘on foot’ only if two years have elapsed from the grant date. Where awards remain ‘on
foot’ they will vest on the original vesting date.
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 2022 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
2018
30 June
2019
30 June
2020
30 June
2021
30 June
2022
406.1
396.1
343.7
278.5
321.5
68.1
11.83
35.5
65.5
6.64
35.5
56.5
4.41
17.5
41.5
5.41
20.0
47.6
6.84
23.0
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.
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2022 balanced scorecard outcome for the CEO
KPIs are aligned to Challenger’s purpose and strategy and underpinned by strong risk management practices that inform how
we deliver on our commitments to customers and shareholders. The CEO’s 2022 balanced scorecard is provided below.
Measures
Performance
Financial (40%)
Exceeded
Profitability
Not met
Met
Exceeded
Capital
Not met
Met
Exceeded
AUM
Not met
Met
Exceeded
Group normalised NPBT $472.3m – top end (top quartile) of earnings guidance range (target:
$430m - $480m guidance range).
Statutory NPAT $253.7m – below normalised NPAT ($321.5 million) as includes unrealised impact
of investment markets (no target).
Normalised ROE 11.9% – slightly below through cycle target of RBA cash rate plus 12.0% (target:
12.2%). Above normalised ROE target excluding Bank.
Challenger Life 1.60 times regulatory capital requirement – toward upper end of target (range of
1.30 to 1.70 times).
Challenger Group strongly capitalised with 1.68 times the minimum regulatory capital requirement
(no group target).
Group AUM $98.6bn (target: $124.4bn) – 20.7% (~$25.8bn) below target due to lower
investment markets, outflows from sale of Whitehelm Capital (~$5.2bn) and redemption by single
institutional investor (~$5.6bn) following asset reallocation.
Life sales $9.7bn (target: $8.4bn) – record Life sales (15.5% above target) and record annuity sales
(18.9% above target).
Life book growth 14.3% (target: 12.0%) with both retail and institutional book growth well above
target.
Funds Management net outflows $8.5bn (target $5.6bn inflow) – outflows as described above
under Group AUM.
People & culture (30%) Met
Risk culture
Not met
Met
Exceeded
Risk culture entrenched – 87% employees confident they can raise concerns regarding conflicts of
interest and ethics without fear of repercussion and 86% employees feel it is safe to speak up and
express their opinions (up 5 ppt on 2021)1.
Not met
Employee engagement Sustainable engagement – remains strong at 81% and 3ppt above Australian National Norm,
94% believe strongly in the goals and objectives of Challenger; 88% would recommend Challenger
as a good place to work1.
Flexible hybrid working – 94% have flexibility to manage work and other commitments1.
Exceeded
Met
Diversity
Not met
Met
Exceeded
Employer of Choice for gender equality – recognised by Workplace Gender Equality Agency.
Diversity and inclusion – strong at 89% and 10ppt above the Australian National Norm and 1ppt
above Global high Performing Norm; 96% recognise gender-based harassment and sexual
harassment is not tolerated1.
Female representation – in all roles 42% (target 40-60%); in management roles 39% (target:
40-60%).
1. Willis Tower Watson, April 2022.
59
60
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
Short-term incentives (continued)
Customer (20%)
Met
Customer satisfaction
and support
Not met
Met
Exceeded
Expand products and
distribution channels
Not met
Met
Exceeded
Customer division established with new leadership to focus on broadening customer and product
reach to meet more customer needs.
Customer Focus – 79% of employees believe Challenger has a strong customer focus and 92%
believe they constantly look for better ways to serve customers.
Distributor of the year – Fidante Distributor of the year at 2021 Zenith Fund Awards.
Investment performance – superior performance with 98% of FUM outperforming benchmark
over three years1.
Award winning – Challenger Life - Plan for Life Overall Longevity Cover Excellence Award and
Client & Adviser Technical Support Award; Funds Management – Greencape, Alphinity and Ardea
winners at 2022 Financial Standard Investment Leadership Awards, and Bentham winner at
Morningstar Australasia Awards; Bank – Mozo Expert Choice Award.
New products: Bank Term Deposits, Alphinity global sustainable equity fund; Challenger Market-
Linked Lifetime Annuity.
New Affiliates: Ox Capital emerging markets, Cultiv8 agriculture and food private markets.
Growth in offering: CIM fixed Income funds FUM exceeded $1bn.
New distribution channels: Bank - Online comparator sites and broker channel for Bank Term
Deposits; Funds Management - Ares Global Credit Income fund available on six platforms.
Funds Management global diversification: significant mandate wins in UK and first US based
institutional client. Multi-affiliates expanding offshore including Ardea Investment Management
establishing UK office.
Whitehelm Capital sale to deliver value for shareholders ($44.6m pre-tax profit on sale) with
expanded client product offering.
Strategic (10%)
Exceeded
Progress growth
strategy
Not met
Met
Exceeded
Apollo strategic relationship: Joint venture MOU to build Australia and New Zealand non-bank
lending platform.
SimCorp: Joint venture MOU to build market-leading investment operations platform servicing
Australia and APAC.
ESG enhancement: inaugural two-day ESG conference with significant progress made embedding
ESG principles in investment decision making processes.
Imaginate22: employee innovation forum with initiatives focused on One Challenger, growth and
simplification.
Overall outcome
Met
1. As at 30 June 2022. Percentage of Fidante Australian boutiques meeting or exceeding the performance benchmark, with performance weighted by FUM.
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Short-term incentive outcomes
2022 STI outcome for the incoming CEO:
107% of target
The Board determined an STI outcome of 107% of target (71% of maximum) which reflects the overall performance outcome
of ‘met' as set out in the balanced scorecard above together with an assessment of Mr Hamilton’s behaviours as strongly in line
with the Challenger values and risk management outcomes. In determining this outcome, the Board has taken into account Mr
Hamilton’s role for the first half of the year leading the Funds Management business, which has continued to perform well
despite heightened market volatility. The Board has determined not to apply a modifier as discussed below.
2022 STI outcome for the outgoing CEO:
39% of target
The Board determined an STI outcome of 39% of target (26% of maximum). This outcome considered Mr Howes’ contribution,
in his role as CEO and supporting a smooth transition to the incoming CEO.
Short-term incentive modifier
2022 short-term incentive outcomes for KMP
The table below sets out the 2022 STI outcomes for current
and former KMP as a percentage of target and maximum,
including the impact of the modifier.
STI outcomes for KMP range between 39% and 111% of
target (26% and 74% of maximum).
2022 STI outcomes
% of target
% of max
107%
75%
90%
39%
111%
71%
60%
68%
26%
74%
Current KMP
N Hamilton
C Plater
R Grimes AM
Former KMP
R Howes
A Murphy
Excludes the Acting Chief Executive, Funds Management as Mr Clarke does
not have an STI target. Excludes the current Chief Executive, Life & Solutions
as Mr Kapel became KMP effective 1 June 2022 and prior to this time Mr
Kapel did not have an STI target opportunity.
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 STI modifier makes explicit the magnitude of, and the
rationale for, 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 it considers is not fully reflected in the scorecard.
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. Pre-adjustment
STI outcomes reflect performance outcomes which are
informed by individual, business unit and Group
performance and an assessment of behaviours.
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)
can modify 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.
2022 STI modifier:
100%
The Board has determined not to apply a modifier to
2022 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.
In addition, the Board has reviewed the adjustments made
to 2020 and 2021 STI outcomes. The Board considers that
these adjustments, in aggregate, are proportionate to the
extent of the impact caused by the events of 2020.
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Remuneration Report (continued)
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
•
•
•
The Board determined to retain the thresholds of 7% to 10%
(compounded annually) for 2022 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.
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.
The Board is currently undertaking a comprehensive review of
LTIs to ensure they appropriately reflect Challenger’s strategic
priorities, continue to align strongly with shareholder
outcomes and comply with regulatory requirements.
Quantum for KMP
Delivery
Set in accordance with the pay mix framework, being up to 225% of fixed remuneration for CEO and
business lines and 125% for control and support functions (at face value).
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%
Termination
treatment
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. For other leaver scenarios,
good leaver provisions will apply unless the Board determines otherwise. The good leaver treatment is
that unvested awards remain ‘on foot’ on a pro rata basis based on the proportion of the performance
period which has elapsed. Awards which remain ‘on foot’ 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.
Forfeiture (malus)
As detailed in the STI table in section ‘Short-term incentives’ above.
Long-term incentive vesting outcomes
No LTIs will vest in September 2022 for the fourth consecutive year. In September 2021, LTIs awarded in 2016, 2017 and 2018
were tested with annual compound TSR results of -5.4%, -15.2% and -18.36% respectively. As illustrated in the chart on page
56, the non-vesting of LTIs reflects strong alignment of executives’ realised reward with shareholder outcomes over the longer
term.
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2022 awarded Key Management Personnel remuneration
Awarded remuneration represents the value of remuneration that has been awarded in respect of the financial year, as
determined by the Board, and includes fixed remuneration, STIs (cash and deferred) and LTIs. The value of deferred STIs realised
will depend on share price performance and LTIs will only deliver value to executives in the future if shareholder return hurdles
are achieved. This ensures strong alignment between realised executive reward and shareholder outcomes over the longer term.
Remuneration for KMP has been decreasing over time driven by the rebasing of remuneration arrangements as incumbents have
been replaced, in line with broader market trends. Realised reward for KMP has also been significantly impacted by the non-
vesting of LTIs for four consecutive years.
The presentation of awarded remuneration for 2022 has been updated to provide greater transparency and to better align with
the executive reward framework following a number of changes in recent years, noting these changes do not impact the
statutory remuneration disclosures in Section ‘Remuneration Governance’. Specifically:
•
•
•
•
STI outcomes are shown as a percentage of target opportunity following the introduction of the pay mix framework in 2021;
LTI awards are included in the financial year in which they are granted to reflect the focus on driving future performance, and
that quantum is no longer linked to performance over the previous financial year. As such, in the table below the 2021 LTI
includes the grants made in September 2020 and May 2021, and the 2022 LTI includes the awards made in September
2021;
the fair value of LTI awards is no longer included reflecting the face value allocation methodology used since 2019; and
total awarded remuneration at face value is included to provide greater transparency.
The CEO’s LTI for the 2023 financial year will be granted following shareholder approval, which will be sought at Challenger’s
Annual General Meeting. Further details will be set out in the Notice of Meeting.
Short-term incentive
Fixed1
$
% of
target
Total
$
Cash Deferred2
$
$
Other3
$
Year
— —
2022 862,500
2021 600,000
2022 250,750
2021
2022 725,000
2021 120,834
2022 50,000
2021 154,865
2022 750,000
2021 750,000
—
175,000 112,500
—
107% 1,250,000 625,000 625,000
6,944
98% 784,000 392,000 392,000
—
62,500
N/A
—
—
—
90% 735,000 367,500 367,500
—
46,000
92,000 46,000
70%
—
14,584
29,168 14,584
N/A
385
N/A
6,548
39,286 32,738
75% 900,000 450,000 450,000
—
56% 672,000 336,000 336,000 20,293
Long-term
incentive
(Face value)4
$
Total
awarded
remuneration
$
1,518,750
1,350,000
225,734
—
906,250
302,083
37,622
118,241
1,687,500
1,687,500
3,631,250
2,740,944
651,484
—
2,366,250
514,917
116,790
312,777
3,337,500
3,129,793
KMP5
Current KMP
N Hamilton
M Clarke6
R Grimes AM
A Kapel
C Plater
Former KMP
R Howes
2022 637,500
39% 333,334 166,667 166,667
—
—
970,834
A Murphy
Total
2021 1,275,000
2022 618,750
2021 610,699
2022 3,894,500
2021 3,511,398
56% 950,000 475,000 475,000 23,902
111% 916,668 458,334 458,334
—
7,674
56% 465,000 232,500 232,500
4,339,170 2,194,585 2,144,585
—
3,002,286 1,514,238 1,488,048 59,198
2,868,750
1,392,188
1,518,750
5,768,044
7,845,324
5,117,652
2,927,606
2,602,123
14,001,714
14,418,206
1. Includes base salary and superannuation.
2. Deferred STIs will be allocated based on the five-day volume weighted average price (VWAP) prior to the grant date in September 2022.
3. Values represent distributions from the CPP Trust.
4. The LTIs granted during the financial year were allocated based on the five-day VWAP prior to grant in September 2021. The fair value, which is independently
calculated and used to determine the accounting expense, differs to the face value to reflect the likelihood of performance hurdles being achieved, the deferred
nature of the award and that awards do not carry a dividend entitlement.
5. Where an individual held a KMP role for part of either the current or prior reporting period, disclosure is pro-rata for the period in which they were KMP. Refer to
Section ‘Key Management Personnel’ for further details.
6. Given Mr Clarke's acting role, his deferred STI is based on the policy that applies to non-LT members being deferral of 50% of the STI in excess of $100k. This
deferral is for two years vesting in equal tranches 50% after 1 year and 50% after 2 years.
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Remuneration Report (continued)
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
CBL, CLC and Challenger Retirement and Investment Services Limited, the principles contained in the relevant Australian
Prudential Regulation Authority standards.
Board
• The Board is responsible for ensuring effective remuneration governance and related risk management
practices.
• The 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
• The 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 2022, 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 2022, 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 2022, 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
incentive plans. No ‘remuneration recommendations’, as defined by the Corporations Act 2001, were
provided by KPMG.
• Mercer was retained in 2022 to independently value equity awards 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 2022
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 the year, the Board considered remuneration
benchmark data as an input when setting remuneration
arrangements for new appointments and determining annual
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’s
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.
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Variable remuneration governance (continued)
Employee share trading policy
The Board approved a variable remuneration pool for 2022
close to the mid-point of the target funding range (11.8%).
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.
70
60
50
40
30
20
10
0
15%
10%
5%
0%
2018
2019
2020
2021
2022
Total variable reward ($m)
Target maximum funding
Total VR as % of NNPBVRT
Target minimum funding
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 2022 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 ‘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
$2,150,000
$600,000 to
$750,000
1. Based on fees and remuneration as at 30 June 2022.
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 2022 are set out in Sections ‘Key Management
Personnel remuneration arrangements’ and ‘Non-Executive
Director disclosures’.
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 2022 (no requests in 2021).
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.
Challenger Performance Plan (CPP) Trust
The CPP Trust is an employee share trust established to
satisfy Challenger’s employee equity obligations arising
from 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.
With the change from using rights to shares for the STI
deferral, the CPP Trust is now managed to minimise the
amount of unallocated dividends. The practice of paying
distributions to employees and KMP has ceased, and
following the September 2021 payments, no further
distributions will be paid.
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risk culture pulse check surveys sent to employees
throughout the year; and
a range of key risk indicator metrics being 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.
Remuneration Report (continued)
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 bi-annually 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 2022, the Conduct Risk and Consequence
Management framework (approved by the Board in 2020) has
been further embedded with a focus on enabling a higher bar
to be applied in assessing conduct matters and considering
appropriate consequences. This has included:
•
•
raising awareness of risk management and regulatory
requirements;
transparency in relation to potential consequences for
conduct matters;
• updating policies to improve clarity;
•
•
enhancing reporting and monitoring capabilities; and
embedding risk and consequence management in the
annual performance and remuneration review.
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 2022, this
included:
•
risk culture questions included within the YourVoice
employee engagement survey;
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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.
KMP4
Current KMP
N Hamilton
M Clarke
R Grimes AM
A Kapel
C Plater
Former KMP
R Howes
A Murphy
A Tobin
Total
Short-term employee benefits
Salary1
$
Super-
annuation
Cash STIs
$
$
Long-term employee benefits
Share-based
payments3
$
Other2
$
Total
$
Year
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
841,038
581,172
238,966
—
704,683
117,301
48,325
150,357
728,781
730,844
23,568
21,694
11,784
—
23,568
3,616
1,964
5,682
23,568
21,694
625,000
392,000
112,500
—
367,500
46,000
14,583
32,738
450,000
336,000
2022
627,045
2021 1,256,237
587,922
2022
593,377
2021
—
2022
515,968
2021
2022 3,776,760
2021 3,945,256
11,784
21,694
21,604
21,694
—
16,271
166,667
475,000
458,333
232,500
—
192,500
117,840 2,194,583
112,345 1,706,738
67,769
32,030
5,291
—
5,017
115
6,133
3,241
20,447
52,862
16,066
60,861
17,075
52,214
—
6,784
137,798
208,107
884,790 2,442,165
668,516 1,695,412
493,753
125,212
—
—
184,402 1,285,170
175,578
85,380
234,284
1,070,040 2,292,836
1,183,429 2,324,829
8,546
14,375
42,266
800,785 1,622,347
1,759,563 3,573,355
727,575 1,812,509
616,699 1,516,484
—
742,645 1,474,168
3,807,179 10,034,160
5,021,664 10,994,110
—
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 30 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 value 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. Where an individual held a KMP role for part of either the current or prior reporting period, disclosure is pro-rata for the period in which they were KMP. Refer to
Section ‘Key Management Personnel’ for further details.
67
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Remuneration Report (continued)
Key Management Personnel remuneration arrangements (continued)
Split of statutory remuneration components
The splits of KMP statutory remuneration are set out below:
KMP1
Current KMP
N Hamilton
M Clarke
R Grimes AM
A Kapel
C Plater
Former KMP
R Howes
A Murphy
A Tobin
Fixed
remuneration
Year
Cash STI
Share-based
payments
Other
Total
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
35%
35%
51%
—
56%
69%
58%
66%
32%
32%
40%
36%
34%
40%
—%
36%
26%
23%
23%
—
29%
26%
17%
14%
20%
14%
10%
13%
25%
15%
—%
13%
36%
40%
25%
—
14%
5%
17%
18%
47%
52%
49%
49%
40%
41%
—%
50%
3%
2%
1%
—
1%
—%
8%
2%
1%
2%
1%
2%
1%
4%
—%
1%
100%
100%
100%
—
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
—%
100%
1. Where an individual held a KMP role for part of either the current or prior reporting period, disclosure is pro-rata for the period in which they were KMP. Refer to
Section ‘Key Management Personnel’ for further details.
Shares and Share Rights granted
Restricted Shares
Deferred short-term incentives are delivered in the form of Restricted Shares which vest in tranches over four years. Restricted
Shares granted to KMP during the year ended 30 June 2022 are detailed below:
Awarded
value from
Face value
allocation
price
$
2021
$
Total
number
of shares
granted2
Vesting (number of shares by tranche)3
Tranche 1
1 September
2022
Tranche 2
1 September
2023
Tranche 3
1 September
2024
Tranche 4
1 September
2025
Date of
grant
KMP1
Current KMP
N Hamilton
8/9/21
392,000
6.44
60,866
18,260
R Grimes AM
8/9/21
46,000
6.44
7,140
2,142
C Plater
8/9/21
336,000
6.44
52,172
15,652
18,260
2,142
15,652
12,173
1,428
10,434
Former KMP
R Howes
A Murphy
8/9/21
475,000
6.44
73,756
8/9/21
232,500
6.44
36,100
22,127
10,830
22,127
10,830
14,751
7,220
12,173
1,428
10,434
14,751
7,220
1. Mr Clarke held a KMP role from 1 January 2022 until 31 July 2022 and Mr Kapel held a KMP role from 1 June 2022. Grant and vesting outcomes prior to that are
not required to be disclosed.
2. The number of shares granted is determined by dividing the awarded value by the VWAP in the five days prior to grant (face value allocation price).
3. The fair value was $6.36 for all four tranches. The fair value is independently calculated and used to determine the accounting value which is amortised over the
vesting period. The fair value differs to the face value to reflect the deferred nature of the award.
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Hurdled Performance Share Rights
Long-term incentives are delivered in the form of HPSRs which vest after four years subject to achievement of absolute TSR
performance hurdles. HPSRs granted to KMP during the year ended 30 June 2022 are detailed below:
Grant
date
Vesting
Date
Awarded
HPSR
face value
Face value
allocation
price
$
Total
number
of HPSRs
granted2
TSR start
price3
$
Fair value
at grant
date4
Awarded
HPSR
fair value
8/9/21
8/9/21
8/9/21
N/A
8/9/21
1/9/25 1,518,750
906,250
1/9/25
1/9/25 1,687,500
6.4400
6.4400
6.4400
235,830
140,722
262,034
5.9014
5.9014
5.9014
3.59
3.59
3.59
846,630
505,192
940,702
N/A
—
1/9/25 1,518,750
N/A
6.4400
—
N/A
235,830
5.9014
N/A
3.59
—
846,630
KMP1
Current KMP
N Hamilton
R Grimes AM
C Plater
Former KMP
R Howes
A Murphy
1. Mr Clarke held a KMP role from 1 January 2022 until 31 July 2022 and Mr Kapel held a KMP role from 1 June 2022. Grant and vesting outcomes prior to that are
not required to be disclosed.
2. The number of rights granted is determined by dividing the awarded value by the VWAP in the five days prior to 8 September 2021 (face value allocation price).
3. The TSR start price is the VWAP in the 90 calendar days prior to 8 September 2021.
4. The fair value is independently calculated and used to determine the accounting value which is amortised over the vesting period. The fair value differs to the face
value to reflect the likelihood of performance hurdles being achieved, the deferred nature of the award and that HPSRs do not carry a dividend entitlement.
Shares and Share Rights vested
The following tables show the short and long-term incentives that vested during the year ended 30 June 2022 for all KMP who
were considered KMP at the vesting date.
Deferred Performance Share Rights
DPSRs which vested to KMP during the year ended 30 June 2022, are detailed below:
KMP1
Current KMP
N Hamilton
C Plater
Former KMP
R Howes
A Murphy
Date of grant
Number
Face value at grant
$
Vesting date Vested value2
$
11/9/18
9/9/19
7/9/20
11/9/18
9/9/19
7/9/20
11/9/18
9/9/19
7/9/20
11/9/18
9/9/19
7/9/20
7,233
5,653
35,495
28,935
22,342
39,231
33,999
28,266
37,363
4,340
11,872
29,890
74,991
37,497
142,335
299,995
148,199
157,316
352,498
187,494
149,826
44,997
78,749
119,859
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
47,325
36,987
232,241
189,320
146,182
256,686
222,453
184,943
244,464
28,396
77,678
195,568
1. Mr Clarke held a KMP role from 1 January 2022 until 31 July 2022 and Mr Kapel held a KMP role from 1 June 2022. Grant and vesting outcomes prior to that are
not required to be disclosed.
2. The vested value is based on the VWAP in the five days prior to the vesting date.
69
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Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
Key Management Personnel remuneration arrangements (continued)
Hurdled Performance Share Rights
No HPSR awards vested to KMP during the year ended 30 June 2022 as the absolute TSR performance hurdles were not
achieved and no HPSRs will vest in September 2022.
KMP1
Current KMP
N Hamilton
C Plater
Former KMP
R Howes4
A Murphy
Grant details
Vesting details
Grant date
Number
Fair value
at grant2
$
Vesting
date
Compound
annual TSR
outcome
Number
vested
Number
forfeited3
Number yet
to
vest or lapse
12/9/16
11/9/17
11/9/18
12/9/16
11/9/17
11/9/18
12/9/16
11/9/17
11/9/18
12/9/16
11/9/17
11/9/18
18,125
20,899
40,390
163,136
119,427
161,560
226,577
161,227
189,833
63,441
17,914
24,234
74,995
122,495
174,999
674,998
699,994
699,997
937,494
944,996
822,496
262,496
104,998
104,999
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
1/9/21
(5) %
(15) %
(18) %
(5) %
(15) %
(18) %
(5) %
(15) %
(18) %
(5) %
(15) %
(18) %
—
—
—
—
—
—
—
—
—
—
—
—
(18,125)
—
—
(163,136)
—
—
(226,577)
—
—
(63,441)
—
—
—
20,899
40,390
—
119,427
161,560
—
161,227
189,833
—
17,914
24,234
1. Mr Clarke held a KMP role from 1 January 2022 until 31 July 2022 and Mr Kapel held a KMP role from 1 June 2022. Grant and vesting outcomes prior to that are
not required to be disclosed.
2. 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.
3. HPSRs awarded in 2016 lapsed during the year as a result of the higher hurdle test applied in year 5 not being met.
4. HPSRs awarded to Mr Howes in 2017 were subsequently forfeited on termination.
Shares and Share Rights held
Details of KMP DPSRs, Restricted Shares and HPSRs held as at 30 June 2022 are set out below:
Number held
at
1 July 2021
Number
granted as
remuneration
Instrument
Number
forfeited
Number
vested
Number held
at
30 June 2022
KMP1
Current KMP
N Hamilton
R Grimes AM
C Plater
Former KMP
R Howes2
A Murphy
138,738
—
—
60,866
—
—
619,207
235,830
(18,125)
DPSRs
RS
HPSRs
DPSRs
RS
HPSRs
DPSRs
RS
—
—
75,246
211,835
—
HPSRs
1,118,865
DPSRs
RS
HPSRs
DPSRs
RS
HPSRs
224,497
—
1,724,699
131,674
—
687,416
—
7,140
140,722
—
52,172
262,034
—
73,756
—
—
36,100
235,830
—
—
—
—
—
(163,136)
—
—
(387,804)
—
—
(63,441)
(48,381)
—
—
—
—
—
(90,508)
—
—
(99,628)
—
—
(46,102)
—
—
90,357
60,866
836,912
—
7,140
215,968
121,327
52,172
1,217,763
124,869
73,756
1,336,895
85,572
36,100
859,805
1. Mr Clarke held a KMP role from 1 January 2022 until 31 July 2022 and Mr Kapel held a KMP role from 1 June 2022. Grant and vesting outcomes prior to that are
not required to be disclosed.
2. Mr Howes’ unvested DPSRs, Restricted Shares and HPSRs remained ‘on foot’ on cessation of employment, subject to the applicable time based vesting conditions
and, in the case of the HPSRs, specified performance hurdles. Mr Howes elected to forfeit HPSRs awarded in 2017.
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Key Management Personnel and their affiliates’ shareholdings in Challenger Limited
Details of KMP and their affiliates’ shareholdings in Challenger Limited as at 30 June 2022 are detailed below, along with the
number of unvested DPSRs and Restricted Shares. 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.
Opening
balance
Year
Number of
vested Share
Rights
Number of
shares (sold)/
acquired
Closing
balance of
shares
Number of
unvested
DPSRs & RS
Fully-owned
shares
Shares, RS
and DPSRs
Shareholding as a
multiple of fixed
remuneration1
KMP2
Current KMP
N Hamilton3
R Grimes AM3
A Kapel
2022
17,769
48,381
(30,000)
36,150
151,223
2021
2022
2021
2022
2021
—
—
—
—
—
17,769
—
—
—
—
—
—
—
—
—
17,769
138,738
—
—
7,140
—
2,000
15,745
—
—
C Plater
2022 212,672
90,508
(122,828)
180,352
173,499
2021 136,331
76,341
M Clarke
2022
2021
Former KMP
R Howes
2022
—
—
—
—
—
—
—
—
—
212,672
211,835
28,040
33,052
—
—
—
—
—
2021 561,478
95,648
250,000
907,126
224,497
A Murphy3
2022
—
—
2021
24,896
22,172
—
—
—
—
47,068
131,674
Total
2022 230,441
138,889
(152,828)
246,542
380,659
2021 722,705
211,930
250,000 1,184,635
706,744
0.3
0.2
—
—
—
—
1.6
1.5
0.5
—
—
3.8
—
0.4
1.5
1.4
0.1
—
0.2
—
3.2
3.1
1.0
—
—
4.8
—
1.4
1. Shareholding multiple based on 30 June 2022 closing share price of $6.84 (30 June 2021: $5.41).
2. Where an individual held a KMP role for part of either the current or prior reporting period, disclosure is pro-rata for the period in which they were KMP. Refer to
Section ‘Key Management Personnel’ for further details.
3. Mr Hamilton (KMP from 23 September 2019 and CEO from 1 January 2022), Ms Grimes AM (KMP from 3 May 2021) and Ms Murphy (KMP from 12 December
2018) are within their transition period. The requirements do not apply to Mr Clarke as he holds a KMP role on an interim basis.
71
72
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
Key Management Personnel remuneration arrangements (continued)
Nicolas Hamilton – incoming Managing Director & CEO
Mr Hamilton was appointed Managing Director & CEO effective 1 January 2022. 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 Hamilton upon termination.
Bad leaver
termination1
Notice period
Employee initiated: 12
months
Employer initiated (Poor
performance): 12 months
Employer initiated
(Misconduct): None
Payment in lieu of
notice
The Board may elect to
make a payment of
salary package in lieu of
notice
None
Eligibility for STI
No
Treatment of unvested
shares and share rights4
Lapse
Good leaver
termination2
Employee initiated: 12
months
Employee initiated (Material
change3): 3 months
Employer initiated: 12
months
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
Deferred STIs remain ‘on foot’
if termination is at least two
years after grant date.
LTIs remain ‘on foot’ pro rata
based on proportion of vesting
period served.
1. Includes where employment is terminated by Challenger for poor performance, misconduct or resignation without the prior approval of the Board.
2. Any circumstances that do not constitute a bad leaver termination.
3. Material change means where there is a substantial diminution of Mr Hamilton’s duties, status, responsibilities and/or authority arising without his agreement. In
the case of a material change, Mr Hamilton is entitled to receive a payment equal to nine months’ fixed remuneration in addition to any payment in lieu in respect
of the applicable three-month notice period.
4. Awards which do not lapse remain subject to the specified time based vesting conditions and/or performance hurdles and to the rules of the CPP.
Richard Howes – outgoing Managing Director & CEO
Mr Howes was Managing Director & CEO until 31 December 2021. He transferred to a non-KMP role effective 1 January 2022 to
support the transition to the incoming CEO and ceased employment with Challenger on 31 March 2022.
No termination payments were made to Mr Howes on ceasing employment. Mr Howes’ unvested equity was treated in
accordance with the terms of the awards and his contract of employment. As such, all unvested DPSRs, Restricted Shares and
HPSRs remained ‘on foot’ subject to the specified time based vesting conditions and/or performance hurdles and to to the rules
of the CPP. Mr Howes elected to forfeit HPSRs awarded to him in September 2017.
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 2022 (30 June 2021: 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.
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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.
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 chairs and 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.
On recommendation from the Remuneration Committee, the
Board approves the fee structure within the bounds of the
overall maximum fee pool.
Fees are benchmarked annually to align with the market and
to attract, retain and appropriately reward quality
independent directors.
As a result of the review undertaken in August 2021:
•
•
•
the fees for members of the Group Risk Committee and
Group Audit Committee were increased. This increase
provides consistency across the Board sub-committees and
more closely aligns sub-committee fees and total board
fees with relevant financial services peers;
fees for services provided in respect of the Bank subsidiary
board were introduced. These fees are set to reflect the
regulatory complexity and additional time commitment
associated with the recently acquired Bank business. Fees
in respect of services provided to other subsidiary boards
continue to be included in the Challenger Limited Board
Chair and member fees;
these changes did not impact the Board Chair fee which is
inclusive of all committee and subsidiary board fees.
However, the Board notes that it intends to use the
retirement of the current Chair as a natural opportunity to
reset the Chair fee; and
• no change was made to the maximum fee pool.
The following table summarises the fees applicable to
membership and chairmanship of the Board for the year
ended 30 June 2022. All amounts are inclusive of
superannuation, where applicable.
Board/Committee
Board1,2
Group Risk
Group Audit
Remuneration
Bank Board
2022 fee structure
Chair fee
$
Member fee
$
2021 fee structure3
Chair fee
$
Member fee
$
179,000
525,500
47,000
47,000
47,000
50,000
179,000
23,500
23,500
23,500
25,000
525,500
47,000
47,000
47,000
—
14,000
14,000
23,500
—
1. Board Chair fees are inclusive of all services provided at the committee and subsidiary board level.
2. Board member fees are inclusive of Nomination Committee fees and fees for services provided at the subsidiary board level (except in respect of the Bank Board).
3. Prior to August 2021, the fee for the Chair of the Group Risk Committee included membership of the Group Audit Committee and the fee for the Chair of the
Group Audit Committee included membership of the Group Risk Committee.
73
74
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
Non-Executive Director disclosures (continued)
Non-Executive Director fees for the year ended 30 June 2022
The following table summarises Non-Executive Director fees for the year ended 30 June 2022.
Non-Executive Director
P Polson
J M Green
S Gregg
M Kobayashi1
H Smith2
J Stephenson
D West3
M Willis
Total
Year
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
Director fees
$
Superannuation
$
—
—
23,468
18,704
23,521
20,751
—
—
21,600
8,053
23,568
21,235
—
—
23,544
19,615
115,701
88,358
525,500
475,933
264,531
196,880
242,818
218,647
—
—
216,005
84,768
282,099
232,848
251,559
205,956
257,873
206,469
2,040,385
1,621,501
Total
$
525,500
475,933
287,999
215,584
266,339
239,398
—
—
237,605
92,821
305,667
254,083
251,559
205,956
281,417
226,084
2,156,086
1,709,859
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.
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.
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75
Non-Executive Director shareholdings in Challenger Limited at 30 June 2022
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
J Stephenson2
D West1
M Willis
Total
Year
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
Opening balance
Movements
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
—
6,944
5,840
6,944
—
—
—
—
8,705
10,000
5,000
4,629
—
6,944
—
6,944
19,545
42,405
Closing balance
128,944
128,944
22,784
16,944
14,000
14,000
—
—
18,705
10,000
26,629
21,629
25,901
25,901
156,836
156,836
393,799
374,254
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 in recent years, Mr Gregg’s shareholdings as at 30 June 2022 did not satisfy the minimum shareholding requirements.
3. Mr Kobayashi is exempt from the minimum shareholding requirements. His alternate director, Mr Iioka, is also exempt.
Total remuneration of KMP and Non-Executive Directors1
KMP and Non-Executive
Directors
Non-Executive Directors
2022
2021
KMP
2022
2021
All KMP and Non-Executive
Directors
2022
2021
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other benefits
$
Total
$
2,040,385
1,621,501
115,701
88,358
—
—
—
—
2,156,086
1,709,859
5,971,343
117,840
3,807,179
137,798
10,034,160
5,651,994
112,345
5,021,664
208,107
10,994,110
8,011,728
233,541
3,807,179
137,798
12,190,246
7,273,495
200,703
5,021,664
208,107
12,703,969
1. No termination payments were made to KMPs or NEDs during the period.
75
76
Challenger Limited 2022 Annual Report
Directors’ report
Remuneration Report (continued)
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 (face value).
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 30 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 Statement of
financial position 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.
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.
VWAP
76
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Indemnification and insurance of Directors
and officers
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.
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.
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.
Significant events after the balance date
On 26 July 2022, Challenger announced the appointment of
Mr Victor Rodriguez to the role of Chief Executive, Funds
Management, effective 1 August 2022.
On 16 August 2022 Challenger announced the election of
Mr Duncan West as Challenger’s new Chair. Mr West will
replace the current Chair Mr Peter Polson, who will retire at
the conclusion of the Annual General Meeting (AGM) on
27 October 2022.
On 16 August 2022 Challenger announced a strategic review
of its banking business.
Since announcing the Bank acquisition in December 2020,
market conditions have changed and it is becoming apparent
the Bank is unlikely to realise the expected benefits within the
timeframe anticipated. As a result, Challenger is reviewing the
Bank’s position within the group and has commenced a
strategic review of the business.
Challenger is considering all options in relation to the Bank
and has appointed an external advisor to assist.
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.
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.
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 2022 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 31 Remuneration of auditor in the financial
report.
77
78
Challenger Limited 2022 Annual Report
Directors’ report
Authorisation
Signed in accordance with a resolution of the Directors of Challenger Limited:
P Polson
Independent Chair
16 August 2022
N Hamilton
Managing Director and Chief Executive Officer
16 August 2022
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 2022, 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;
b. no contraventions of any applicable code of professional conduct in relation to the audit; and
c. no non-audit services provided that contravene 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
Graeme McKenzie
Partner
16 August 2022
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
78
2022 Annual ReportChallenger Limited
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Financial Report
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About
OFR
Governance and Sustainability
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 Investment assets
Note 6 Investment and development property
Note 7 Loan assets
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 Deposits from customers
Note 15 Reserves and retained earnings
Note 16 Finance costs
Note 17 Dividends paid and proposed
Note 18 Earnings per share
Section 5: Risk management
Note 19 Financial risk management
Note 20 Fair values of investment assets and liabilities
Note 21 Collateral arrangements
Section 6: Group structure
Note 22 Parent entity
Note 23 Controlled entities
Note 24 Acquisition and disposal of subsidiaries
Note 25 Investment in associates
Note 26 Related parties
Section 7: Other items
Note 27 Goodwill and other intangible assets
Note 28 Lease assets and liabilities
Note 29 Contingent liabilities, contingent assets and credit commitments
Note 30 Employee entitlements
Note 31 Remuneration of auditor
Note 32 Subsequent events
Signed reports
Directors’ declaration
Independent auditor’s report
Investor information
Additional information
This financial report covers Challenger Limited (the Company) and its controlled entities (the Group or Challenger).
80
81
82
83
84
89
89
90
91
95
97
97
99
103
104
108
109
112
113
113
116
118
119
120
120
121
123
123
130
133
134
134
135
135
137
138
140
140
143
144
146
149
149
150
151
157
160
79
80
Challenger Limited 2022 Annual Report
Statement of comprehensive income
For the year ended 30 June
Revenue
Expenses
Finance costs1
Share of profits of associates
Profit before income tax
Income tax expense
Profit 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
Net gain/(loss) on cash flow hedges
Other comprehensive income for the year
Total comprehensive income for the year after tax
Earnings per share attributable to ordinary shareholders of
Challenger Limited
Basic
Diluted
1. Refer to Note 16 Finance costs for further information on positive finance costs in the period.
The Statement of comprehensive income should be read in conjunction with the accompanying notes.
ended
Note
1
2
16
25
4
15
15
15
18
18
2022
$m
2021
$m
1,860.7
2,769.8
(1,872.9)
(1,646.5)
331.5
38.0
357.3
(103.6)
253.7
(20.6)
20.8
0.4
0.6
(327.9)
35.2
830.6
(238.3)
592.3
(49.7)
46.8
(0.5)
(3.4)
254.3
588.9
Cents
37.5
33.1
Cents
88.2
68.0
80
2022 Annual ReportChallenger Limited
About
OFR
Governance and Sustainability
Statement of financial position
As at 30 June
Assets
Cash and cash equivalents
Receivables
Derivative assets
Investment assets
Investment and development property - held for sale
Investment and development property
Loan assets
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
Liabilities
Payables
Current tax liability
Derivative liabilities
Deposits from customers
Interest bearing financial liabilities
External unit holders’ liabilities
Provisions
Lease liabilities
Deferred tax liabilities
Life contract liabilities
Total liabilities of shareholders of Challenger Limited
Net assets of shareholders of Challenger Limited
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.
Directors’ Report
Challenger Limited 2022 Annual Report
Further Information
Financial Report
81
Note
11
10
5
6
6
7
25
28
4
27
27
4
10
14
13
9
28
4
8
12
15
15
2022
$m
733.1
647.5
577.2
2021
$m
989.4
830.4
738.3
22,805.9
22,174.7
—
396.0
3,483.3
3,389.7
551.7
570.3
19.7
24.8
74.9
53.8
29.0
137.1
579.9
7.3
26.8
28.2
83.2
63.1
34.7
4.0
579.9
9.2
29,725.2
29,917.9
726.2
1,744.1
66.5
839.6
227.7
5,783.0
4,386.4
44.3
62.5
5.3
48.1
507.6
—
6,323.5
3,632.2
35.7
70.3
60.7
13,595.4
13,669.9
25,736.9
26,092.1
3,988.3
3,825.8
2,481.5
2,425.5
(49.3)
(50.9)
1,556.1
3,988.3
1,451.2
3,825.8
81
82
Challenger Limited 2022 Annual Report
Statement of changes in equity
For the year ended
30 June 2021
Note
Contributed
equity
$m
Attributable to shareholders of Challenger Limited
Share-
based
payment
reserve
$m
Foreign
currency
translation
reserve
$m
Adjusted
controlling
interest
reserve
$m
Cash
flow
hedge
reserve
$m
Retained
earnings
$m
Total
shareholder
equity
$m
Balance at 1 July 2020
2,377.6
(56.2)
Profit for the year
15
—
—
0.1
—
(0.5)
—
5.7
922.9
3,249.6
—
592.3
592.3
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
Balance at 1 July 2021
For the year ended
30 June 2022
—
—
(0.5)
(2.9)
—
—
(3.4)
—
—
(0.5)
(2.9)
—
592.3
588.9
12
12
12
12
15
17
37.7
—
10.2
—
—
—
—
—
—
—
—
—
—
—
3.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
37.7
—
10.2
—
—
—
—
—
—
(64.0)
3.4
(64.0)
2,425.5
(52.8)
(0.4)
(3.4)
5.7 1,451.2
3,825.8
Profit for the year
15
—
—
—
—
—
253.7
253.7
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
Issued under Capital Notes 1
conversion1
Dividends paid
Balance at 30 June 2022
12
12
12
12
15
12
17
—
—
0.4
0.2
—
—
0.6
—
—
0.4
0.2
—
253.7
254.3
15.1
(7.9)
12.9
—
—
—
—
—
—
7.9
—
—
—
1.0
—
28.0
—
—
—
2,481.5
(51.8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15.1
(7.9)
12.9
—
—
7.9
—
—
1.0
—
—
28.0
—
(148.8)
(148.8)
(3.2)
5.7 1,556.1
3,988.3
1. Amount differs to the $27.7m of Capital Notes 1 repayment due to noteholders receiving a premium on conversion to equity.
The Statement of changes in equity should be read in conjunction with the accompanying notes.
82
2022 Annual ReportChallenger Limited
Directors’ Report
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Financial Report
83
About
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Governance and Sustainability
Statement of cash flows
For the year ended 30 June
Operating activities
Receipts from customers
Annuity and premium receipts
Annuity and claim payments
Bank deposit receipts
Bank deposit 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
Net cash inflows from operating activities
Investing activities
Payments for net purchases of investments
Proceeds from sale of controlled entity, net of disposal costs and cash disposed
Payments for purchase of controlled entity, net of cash acquired1
Proceeds from sale of associate
Net loan repayments
Payments for 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
Note
8
8
2022
$m
2021
$m
680.1
645.1
5,150.6
4,802.9
(4,339.1)
(3,787.9)
219.3
(125.8)
—
—
4,583.5
2,346.8
(3,436.4)
(1,397.9)
(633.3)
(589.2)
73.3
633.3
(53.8)
(264.9)
65.0
638.8
(56.1)
(90.9)
11
2,486.8
2,576.6
24
24
25
(2,310.3)
(899.6)
8.7
(28.9)
51.1
—
(2.5)
—
159.9
105.3
(2.9)
(0.9)
(12.9)
(21.3)
(2,123.3)
(831.0)
—
(0.1)
35.0
(0.2)
Net repayments from borrowings – interest bearing financial liabilities
13
(476.5)
(1,443.7)
Payments for lease liabilities
(Payments for)/proceeds from 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 from financing activities
Net (decrease)/increase 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
13
13
13
(7.8)
(1.7)
(133.7)
—
—
—
(6.9)
0.7
(64.0)
385.0
(6.7)
(317.3)
(619.8)
(1,418.1)
(256.3)
989.4
733.1
327.5
661.9
989.4
1. Payment excludes deposit of $1.75 million and acquisition costs of $0.7 million paid during the year ended 30 June 2021.
The Statement of cash flows should be read in conjunction with the accompanying notes.
83
84
Challenger Limited 2022 Annual Report
Section 1: Basis of preparation and overarching significant
accounting policies
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).
Given the dynamic and evolving nature of the disease,
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.
(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 policies and
disclosures
Investment assets
Effective 1 July 2021, the Group amended Note 5 Investment
assets at fair value through profit and loss to Note 5
Investment assets in order to encompass changes in the asset
mix following the acquisition of Challenger Bank Limited
(formerly MyLifeMyFinance Limited (MLMF)) and the
commencement of trading of precious metals commodities.
The precious metals commodities strategy is outlined on page
97. The strategy results in an immaterial exposure to the
underlying commodity price.
Historically, the Group categorised its investment assets as
investment 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, property securities and hedged commodities.
They are carried at fair value with unrealised gains and losses
being recognised through the Statement of comprehensive
income.
The newly acquired Bank has investment assets that are
primarily repo-eligible high quality fixed income securities.
These assets are measured at amortised cost as they are held
within a business model to solely collect contractual cashflows
and the contractual terms of the assets give rise on specified
dates to cash flows that are solely payments of principal and
interest (SPPI). Amortised cost is calculated by taking into
account any discount or premium on the acquisition of the
asset and any costs that are an integral part of the effective
interest rate. Gains and losses are recognised in the Statement
of comprehensive income when the assets are derecognised
or impaired.
The financial report for Challenger Limited and its controlled
entities (the Group or Challenger) for the year ended 30 June
2022 was authorised for issue in accordance with a resolution
of the Directors of the Company on 16 August 2022.
(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.
The Group has prepared the financial statements on the basis
that it will continue to operate as a going concern. The
Directors consider that there are no material uncertainties that
may cast significant doubt over this assumption. They have
formed a judgement that there is a reasonable expectation
that the Group has adequate resources to continue in
operational existence for the foreseeable future, and not less
than 12 months from the end of the reporting period.
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.
Coronavirus (COVID-19) impact
COVID-19 continues to have an impact on global economies
and equity and debt markets. The Group has considered the
associated market volatility in preparing its financial
statements and where required has applied further judgement
in the areas in which significant judgement already occurs.
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Hedged commodities
In July 2021, the Group commenced trading precious metals
futures. Precious metals are recognised in the Statement of
financial position under the ‘Investment assets’ line item.
Precious metals are disclosed in the ‘Investment assets’ note
under ‘Other investment assets’ as ‘Hedged commodities’.
Assets are measured at fair value with changes recognised in
the Statement of comprehensive income under ‘Realised and
unrealised gains/losses on hedged commodities’. Hedged
commodities are treated as Level 1 investment assets under
the fair value hierarchy on the basis that they are valued using
active market prices. Commodities futures are recorded as
‘Derivative financial instruments’ and treated as Level 1 under
the fair value hierarchy. The precious metals commodities
strategy provides Challenger an opportunity to earn a spread
between the price of physical commodities and the price of
short futures contracts, resulting in an immaterial exposure to
the underlying commodity price.
Loan assets
Loan assets are defined as loans that are not held for trading
purposes and include the Group’s lending activities to bank
customers (mortgages, personal loans, and investment loans,
as well as the existing CLC mortgages held within Special
Purpose Vehicle (SPV) trusts), which were previously disclosed
in a separate ‘Special purpose vehicles’ note. Due to the
decreasing materiality of SPV related balances, other SPV
specific disclosures have been reduced. Loans 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 expected credit losses.
Deposits from customers
Deposits from customers include variable rate at-call deposits
as well as fixed rate term deposits from retail and wholesale
customers. All bank customer deposits are initially recognised
at the fair value of the amount received adjusted for any
transaction costs. Deposits from customers are derecognised
when they are extinguished, discharged, cancelled or
matured. After initial recognition, deposits are measured at
amortised cost using the effective interest rate method.
Interest is calculated on the daily balance. Interest expense is
recognised in the Statement of comprehensive income on an
accrual basis.
Interest Rate Benchmark Reform
Background
Interbank Offered Rates (IBORs), including the LIBOR and
Euribor are interest rate benchmarks which are commonly
used to determine interest rates and payment obligations for a
wide range of financial arrangements such as loans, bonds
and derivatives.
One of the reforms mandated by the Financial Stability Board
following the financial crisis was to advocate for benchmark
IBORs, such as LIBOR, to be replaced by new official
benchmark rates, known as alternative Reference Rates
(ARRs). In March 2021 the UK’s Financial Conduct Authority
(FCA) announced the cessation of the publication of the
following LIBOR settings after 31 December 2021: all GBP,
EUR, CHF and JPY LIBOR settings and the one-week and two-
month USD LIBOR settings. The remaining USD LIBOR settings
including the overnight, one-, three-, six- and 12-month
settings will cease to be published based on panel bank
submissions after 30 June 2023.
Transitioning to ARRs is a complex process as ARRs are
structurally different from IBORs. It is expected most financial
arrangements that provide for IBOR-based payments will need
to be modified to accommodate this transition.
Impact on financial statements
In 2018, the IASB added a project to its agenda to consider
the financial reporting implications of interest rate benchmark
reform. Resulting amendments to accounting standards were
issued in two phases.
• Phase 1 pre-replacement issues - AASB 2019-3
Amendments to Australian Accounting Standards –
Interest Rate Benchmark Reform was issued by AASB in
October 2019 and amended hedge accounting
requirements to provide relief from the potential effects of
uncertainty caused by interest rate benchmark reform. The
Group was not materially affected by this amendment.
• Phase 2 replacement issues - AASB 2020-8 Amendments
to Australian Accounting Standards – Interest Rate
Benchmark Reform – Phase 2 was issued by the AASB in
September 2020, with mandatory adoption for periods
starting on or after 1 January 2021. The Phase 2
Amendments provide the following changes in respect of
financial instruments that are directly affected by the
reform:
1.
2.
3.
4.
a practical expedient when accounting for changes in
the basis for determining the contractual cash flows of
financial assets and liabilities, to require the effective
interest rate to be adjusted – the group does not have
to derecognise or adjust the carrying amount of
financial instruments subject to change as a result of
the reform, but instead updates the effective interest
rate to reflect the change to the alternative benchmark
rate;
reliefs from discontinuing hedge relationships;
temporary relief from having to meet the separately
identifiable requirement when an ARR instrument is
designated as a hedge of a risk component; and
additional disclosures – the group is required to
disclose additional information about new risks arising
from the report and how it manages the transition to
alternative benchmark rates.
The Group’s approach
The Group is exposed to the interest rate benchmark reform
through the use of various financial instruments including
derivatives and investment assets.
The Group has established a project to manage the transition
for any of the contracts which may be affected. The project is
led by the Head of Derivatives and includes members from a
number of teams including front office, investment
operations, systems, projects and legal. It provides regular
updates to the Challenger Project Control Group. As at 30
June 2022 the Group had no exposure to instruments
referencing rates which had ceased publication. Contracts
held by the Group that referenced LIBOR or other IBORs that
have ceased publication have been transitioned to ARR or
closed out. The Group has a detailed plan in place for the
remaining contracts, which are expected to transition prior to
30 June 2023.
The IBOR transition also exposes the Group to various
additional risks which are detailed in Note 19 Financial Risk
Management.
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Challenger Limited 2022 Annual Report
New accounting standards and amendments
that are effective in the current financial year
There have been no other new or revised accounting
standards or interpretations that are effective from the year
beginning on 1 July 2021 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 will not be early
adopting 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 requirements affect recognition, measurement,
presentation and disclosure relating to insurance contracts.
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 are not expected to be material, based
on preliminary responses from the Australian Prudential
Regulation Authority (APRA). The impacts on income tax are
unknown, pending responses from the Treasury and the
Australian Taxation Office (ATO).
APRA released additional draft prudential and reporting
standards for consultation in April 2022, which includes
changes to current capital and reporting requirements
impacted by the introduction of AASB 17. The Group’s
response to APRA’s Quantitative Impact Study (QIS) was
submitted in March 2022, which incorporated APRA’s
proposed changes to the reporting standards.
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 in
prior years and has implemented a project team to assess and
implement the requirements of AASB 17. The Group has
identified the following focus areas.
• Measurement model – The Group will adopt the General
Measurement Model (GMM). In principle, the GMM is
similar to the current MoS methodology as prescribed under
86
AASB 1038. The GMM is a detailed methodology that will
require enhanced data capture and storage for additional
modelling and processes.
• Contracts affected – The Group expects that the majority of
its 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
compared to AASB 1038.
• Under AASB 17, assumptions are to be reviewed on an
annual basis at a minimum with some items requiring more
frequent review.
• Level of aggregation – AASB 17 requires insurance contracts
that are subject to similar risks and managed together, to 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;
2. a group that at initial recognition has no significant
possibility of becoming onerous subsequently; and
3. 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 but the loss component will
need to be tracked under AASB 17.
• Risk adjustment – The Group expects the risk adjustment
methodology to align with the cost of capital approach.
• Discount rates – The Group expects to apply a ‘bottom-up
approach’ which uses risk-free rates adjusted to reflect the
illiquidity characteristics of the insurance contracts.
• 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 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.
• Transition balance sheet – 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 the year to
30 June 2023. The first half year financial statements under
AASB 17 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 the use
of hindsight, in which case either a modified retrospective
approach or a fair value approach may be applied. The
Group is currently assessing its transition approach across
groups of contracts.
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The Group is in the process of implementing its AASB 17
calculation platform and data solutions in order to produce
the results and disclosures required under AASB 17 as well as
working through remaining material judgements under
consideration in order to finalise its AASB 17 related
accounting policies. The interpretation and implementation of
the various components of AASB 17 is extremely complex and
this effect can be particularly material for the Group’s long
duration longevity reinsurance business, which has significant
levels of profit margins under the current AASB 1038
measurement basis, due to the use of different discount rates
for the fulfilment cash flows and CSM.
While the Group is progressed in its implementation of
AASB 17 as noted above, due to the complexities of the
requirements and evolving interpretations and views from an
accounting, Treasury, ATO and APRA perspective, it is not yet
practicable to reasonably quantify the financial impact to the
Group.
(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.
Foreign controlled entities
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.
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 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.
(ix) Other assets
Other assets are mainly comprised of prepayments.
Prepayments are recognised in the Statement of financial
position at the value of the prepayment. These are amortised
in the Statement of comprehensive income when the related
expense is incurred; generally, within the subsequent 12
months.
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Challenger Limited 2022 Annual Report
(x)
Provisions
(xii) 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 2021.
(xiii) 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.
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.
(xi)
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.
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Section 2: Key numbers
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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, loan assets and cash
Interest revenue1
Net realised and unrealised (losses)/gains on fixed income securities
Investment property and property securities
Property rental revenue
Dividend and distribution revenue
Net realised and unrealised gains on investment property and property securities
Equity and infrastructure investments
Dividend and distribution revenue
Net realised and unrealised gains on equity investments
Net realised and unrealised losses on infrastructure investments
Other
Net realised and unrealised gains/(losses) on foreign exchange translation and hedges
Net realised and unrealised (losses)/gains on interest rate derivatives
Net realised and unrealised gains/(losses) on equity swap derivatives
Net realised and unrealised (losses)/gains on credit default swap derivatives
Net realised and unrealised losses on commodities derivatives
Net realised and unrealised gains on hedged commodities
Fee revenue
Management and performance fee revenue
Transaction fee revenue
Other revenue
Life insurance contract premiums and related revenue2
Change in life insurance contract liabilities
Change in life investment contract liabilities
Change in reinsurance contract liabilities
Gain on disposal of subsidiary and associate3
Total revenue
30 June
2022
$m
30 June
2021
$m
634.4
(1,384.7)
269.8
2.5
149.1
27.5
131.2
(40.9)
140.3
(474.0)
46.2
(101.4)
(2.9)
12.2
240.1
23.0
1,120.4
722.0
293.4
(0.8)
53.3
1,860.7
662.7
42.8
275.2
5.6
114.6
22.1
124.8
(13.0)
(78.6)
384.2
(16.1)
23.6
—
—
190.7
22.8
1,600.6
(622.0)
29.8
—
—
2,769.8
1. This includes interest revenue earned for items measured at amortised cost using the effective interest method $21.6 million (30 June 2021: $29.7 million) and
interest revenue earned for items measured at fair value through profit and loss $612.8 million (30 June 2021: $633.0 million).
2. Changes in life insurance and investment contract liabilities arising from new business, annuity payments, discount rates, inflation rates and other assumptions are
recognised as revenue, with other movements being included in Note 2 Expenses.
3. Gain on the disposal of Accurium Pty Ltd & Whitehelm Capital Pty Limited. Refer to Notes 24 and 25 for further detail.
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.
• Interest revenue is recognised as it accrues using an
effective interest rate method, taking into account the
effective yield of the investment 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.
• Gains or losses arising from changes in the fair value of
financial instruments and hedged commodities are classified
as fair value through profit and loss and recognised as
revenue in the Statement of comprehensive income when
the change in value is recognised in the Statement of
financial position.
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Challenger Limited 2022 Annual Report
Note 1 Revenue (continued)
Accounting policy (continued)
• 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.
• 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.
• 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. The Group
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
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
Cost of deposits from customers
Investment property-related expenses1
Management and performance fee expense
Distribution expenses
Employee expenses
Employee share-based payments
Occupancy expense – operating lease
Amortisation of right-of-use lease asset
Depreciation and amortisation expense
Technology and communications
Professional fees
Other expenses
Total expenses
30 June
2022
$m
954.0
128.7
166.3
1.1
73.1
151.1
52.7
201.6
13.0
4.7
5.8
8.2
36.1
40.5
36.0
1,872.9
30 June
2021
$m
852.4
104.1
125.6
—
75.3
140.3
56.4
168.6
11.5
4.2
6.0
9.3
29.5
37.3
26.0
1,646.5
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.
• Servicing costs incurred on deposits from customers are
calculated using the effective interest rate method, which
90
discounts the deposits’ estimated future cash payments to
their present value and allocates the interest expense over
their expected life.
• 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.
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Note 3
Segment information
Operating segments
The reporting segments1 of the Group have been identified as follows.
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30 June 2022
Net income
Operating expenses
Normalised EBIT
Interest and borrowing costs
Normalised net profit/(loss)
before tax
Tax on normalised profit
Normalised net profit after tax
Other adjustments4
Profit attributable to
shareholders
30 June 2021
Net income
Operating expenses
Normalised EBIT
Interest and borrowing costs
Normalised net profit/(loss)
before tax
Tax on normalised profit
Normalised net profit after tax
Other adjustments
Profit attributable to
shareholders
Investment
experience
after tax
Significant
items
after tax
Profit
attributable to
shareholders
$m
$m
Life
$m
FM
$m
Bank2
$m
Corporate
and
other3
$m
582.8
191.8
2.3
(110.5)
(109.0)
(13.4)
472.3
82.8
(11.1)
—
—
—
—
(67.6)
(67.6)
(4.1)
472.3
82.8
(11.1)
(71.7)
—
—
(0.9)
—
(81.2)
14.3
512.8
169.3
(113.9)
(98.3)
398.9
71.0
—
—
—
—
—
—
—
(69.1)
(69.1)
(5.0)
398.9
71.0
—
(74.1)
—
—
—
—
318.6
(4.8)
$m
776.9
(300.5)
476.4
(4.1)
472.3
(150.8)
321.5
(67.8)
253.7
682.1
(281.3)
400.8
(5.0)
395.8
(117.3)
278.5
313.8
592.3
1. Refer below for definitions of the terms used in the management view of segments.
2. Bank represents a new segment in the current year, hence there are no comparative figures for 30 June 2021.
3. Corporate and other includes corporate companies and Group eliminations.
4. Amount within the Bank segment relates to expected credit loss provision.
Other statutory information
Life
2022
$m
FM
Bank
Corporate and
other
Total
2021
$m
2022
$m
2021
2022
2021
$m
$m
$m
2022
$m
2021
$m
2022
$m
2021
$m
976.7 1,918.1 249.6 204.9
— —
630.9
662.2
—
—
3.4 —
—
0.1
— 1,226.3 2,123.0
0.5
634.4
662.7
370.9
(291.2)
(1.3)
(1.3)
— —
(38.1)
(35.4)
331.5
(327.9)
(41.8)
(44.8)
41.8
44.8
— —
—
—
—
—
(3.9)
(4.6)
(3.4)
(3.5)
(0.1) —
(0.8)
(1.2)
(8.2)
(9.3)
—
Revenue from external
customers1
Interest revenue
Interest expense
Intersegment revenue
Depreciation and
amortisation
As at 30 June
Segment assets
22,766.8 22,337.1 320.0 300.6 391.1 — 6,247.3 7,280.2 29,725.2 29,917.9
Segment liabilities
Net assets
attributable to
shareholders
(19,234.2) (18,790.0)
(28.8)
(28.4) (271.1) — (6,202.8) (7,273.7) (25,736.9) (26,092.1)
3,532.6 3,547.1 291.2 272.2 120.0 —
44.5
6.5 3,988.3 3,825.8
1. Funds Management revenue from external customers is predominantly management fees. Bank revenue is predominantly comprised of interest income from fixed
income securities and customer loans.
91
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Challenger Limited 2022 Annual Report
Note 3
Segment information (continued)
Definitions
Operating segments
The following segments are identified on the basis of internal
reporting to Key Management Personnel, including the Chief
Executive Officer 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.
During the year, a new segment, ‘Bank’, was created
following the acquisition of MyLifeMyFinance Limited. The
division is responsible for the provision of a range of banking
products and services to customers in Australia.
Life
The Life segment principally includes the annuity and life
insurance business carried out by CLC. CLC offers fixed rate
and other 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&AD. CLC
invests in assets providing long-term income streams for
customers.
Funds Management
Funds Management earns fees from its Fidante and CIM
operations, providing an end-to-end funds management
business. Funds Management has equity investments in a
number of Fidante’s affiliate fund managers and, through the
CIM business, offers a range of managed investments across
fixed income and property.
Bank
The Bank provides a range of savings and lending products,
including government guaranteed term deposits to customers
in Australia. The Bank provides Challenger with access to a
wide range of customers through multiple distribution
channels, including new intermediated channels, such as the
broker term deposit market and retail aggregator websites.
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 view of
revenue:
• normalised cash operating earnings (Life segment);
• net interest margin (Bank segment);
• net income (Funds Management segment); and
• other income (Corporate and other segment).
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 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 valuations
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.
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Normalised capital growth
Significant items after tax
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 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 the same.
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.
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.
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 Mitsui Sumitomo
Primary Life Insurance Company Limited (“MS Primary”)
accounted for $606.0 million of the Group’s life insurance
premium income in the 2022 financial year out of total life
insurance premium income of $1,092.6 million (2021: $788.1
million out of a total of $1,363.7 million) and comprised
16.1% of total policy liabilities outstanding as at 30 June 2022
(2021: 15.2%); 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.
93
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Challenger Limited 2022 Annual Report
Note 3
Segment information (continued)
Reconciliation of management to statutory view of after-tax profit
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
Bank impairments
Significant items after tax
Statutory view of profit after tax
Reconciliation of management view of revenue to statutory revenue
Operating segments
Net income (management view of revenue)
Expenses and finance costs offset against revenue
Loan asset expenses and finance costs offset against loan asset income
Bank expenses and finance costs offset against Bank 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
Gain on disposal of subsidiary and associate
Adjustment for 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
2022
$m
30 June
2021
$m
544.0
(71.7)
472.3
(150.8)
321.5
(81.2)
(0.9)
14.3
253.7
776.9
776.9
2.8
1.1
52.7
1,249.0
73.1
(373.2)
151.1
53.3
(10.8)
(211.8)
(48.8)
187.7
(42.4)
1,860.7
469.9
(74.1)
395.8
(117.3)
278.5
318.6
—
(4.8)
592.3
682.1
682.1
3.3
—
56.4
1,082.1
75.3
289.0
140.3
—
(13.8)
576.2
(34.1)
(76.1)
(10.9)
2,769.8
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Note 4
Income tax
Reconciliation of income tax expense
Profit 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
- other items
Income tax expense
Underlying effective tax rate
Analysis of income tax expense
Current income tax expense for the year
Current income tax benefit prior year adjustment
Deferred income tax benefit/(expense)
Deferred income tax (expense)/benefit prior year adjustment
Income tax expense
Income tax benefit on translation of foreign entities
Income tax expense on hedge of net investment in foreign operations
Income tax benefit/(expense) from other comprehensive income
30 June
2022
$m
357.3
(107.2)
(8.6)
4.2
9.7
(1.7)
30 June
2021
$m
830.6
(249.2)
(7.9)
8.4
10.6
(0.2)
(103.6)
29.0 %
(238.3)
28.7 %
30 June
2022
$m
(293.1)
7.4
190.3
(8.2)
(103.6)
9.1
(8.9)
0.2
30 June
2021
$m
(140.0)
1.9
(101.6)
1.4
(238.3)
17.4
(20.1)
(2.7)
Analysis of deferred tax
Deferred tax assets
Accruals and provisions
Employee entitlements
Tax losses
Unrealised net losses on investments
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 benefit/(expense) recognised in
Statement of comprehensive income
Statement of financial
position
Statement of comprehensive
income
30 June
2022
$m
30 June
2021
$m
30 June
2022
$m
30 June
2021
$m
40.4
6.3
7.5
78.1
17.8
150.1
(13.0)
49.3
5.5
6.1
—
19.0
79.9
(75.9)
137.1
4.0
(2.7)
—
(15.6)
(18.3)
13.0
(7.7)
(124.1)
(4.8)
(136.6)
75.9
(5.3)
(60.7)
(8.8)
0.8
(5.4)
78.1
(2.4)
62.3
6.7
124.0
(10.9)
119.8
(0.1)
0.4
(86.0)
—
0.7
(85.0)
(3.5)
(9.5)
(2.2)
(15.2)
182.1
(100.2)
95
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Challenger Limited 2022 Annual Report
Note 4
Income tax (continued)
Tax Transparency Code Disclosures
Australia and overseas tax expense
Total Australia
Total overseas
Income tax expense
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
30 June
2022
$m
(94.2)
(9.4)
(103.6)
30 June
2021
$m
(228.5)
(9.8)
(238.3)
30 June
2022
$m
48.1
293.1
(7.4)
(0.4)
(264.9)
(2.0)
66.5
Change
$m
134.3
0.4
134.7
30 June
2021
$m
1.0
140.0
(1.9)
(0.4)
(90.9)
0.3
48.1
30 June
2022
30 June
2021
$m
8.9
56.4
$m
7.6
56.4
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.
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Section 3: Operating assets and liabilities
This section discloses information relating to the assets and liabilities underpinning 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
Investment assets
Investment assets held at fair value through profit and loss
Investment assets held at amortised cost
Total investment assets
Held at fair value through profit and loss
Domestic sovereign bonds and semi-government bonds
Floating rate notes and corporate bonds
Residential mortgage and asset-backed securities
Non-SPV/ADI 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
Hedged commodities1
Other investment assets
Total investment assets – fair value through profit and loss
Current
Non-current
30 June
2022
$m
30 June
2021
$m
22,561.9
22,174.7
244.0
—
22,805.9
22,174.7
30 June
2022
$m
4,540.1
6,079.3
9,342.0
96.7
30 June
2021
$m
6,054.8
6,576.3
7,653.6
112.2
20,058.1
20,396.9
194.3
1,374.0
1,568.3
49.7
251.1
300.8
90.2
90.2
544.5
544.5
143.1
1,201.3
1,344.4
48.8
296.6
345.4
88.0
88.0
—
—
22,561.9
22,174.7
14,368.3
11,911.1
8,193.6
22,561.9
10,263.6
22,174.7
1. The precious metals commodities strategy provides Challenger an opportunity to earn a spread between the price of physical commodities and the price of short
futures contracts, resulting in an immaterial exposure to the underlying commodities price.
97
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Challenger Limited 2022 Annual Report
Note 5
Investment assets (continued)
Held at amortised cost
Floating rate notes
Negotiable certificates of deposits
Corporate and government bonds
Residential mortgage backed securities
Deposits with credit unions/ADIs
Fixed income securities
Less: allowance for expected credit losses
Total investment assets – amortised cost2
Current
Non-current
30 June
2022
30 June
20211
$m
77.3
67.0
79.7
19.3
1.1
244.4
(0.4)
244.0
115.9
128.1
244.0
$m
—
—
—
—
—
—
—
—
—
—
—
1. No investment assets held at amortised cost prior to the acquisition of the Bank on 30 July 2021.
2. The fair values of assets held at amortised cost are materially in line with their amortised cost values due to the short duration of these investments. These assets
would be classified as Level 2 in the fair value hierarchy table.
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 19 Financial risk management for further
disclosure.
Accounting policy
The Group categorises its investment assets as investment
assets - fair value through profit and loss (being initially
designated as such) and investment assets at amortised cost.
Assets designated as fair value through profit and loss consist
of fixed income, equity, infrastructure, property securities and
hedged commodities. They are carried at fair value, with
unrealised gains and losses being recognised through the
Statement of comprehensive income. Assets designated as
amortised cost are primarily primarily repo-elgible high quality
fixed income securities held by the Bank. They are held within
a business model to solely collect contractual cashflows and
the contractual terms of the assets give rise on specified dates
to cash flows that are solely payments of principal and interest
(SPPI). Amortised cost is calculated by taking into account any
discount or premium on the acquisition of the asset and costs
that are an integral part of the effective interest rate. Gains
and losses are recognised in the Statement of comprehensive
income when the assets are derecognised or impaired.
Purchases and sales of investment 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. Investment assets are then
derecognised when the right to receive cash flows from the
asset has expired.
The fair value of investment assets that are actively traded in
organised financial markets are 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 funds are required to be
designated as fair value through profit and loss in accordance
with AASB 1038 Life Insurance Contracts when permitted
by other Australian Accounting Standards.
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Note 6
Investment and development property
Investment property held for sale1
Investment property in use
Development property held for sale2,3
Total investment and development property4
1. Investment property held for sale: No properties held for sale (30 June 2021: County Court).
2. Development property held for sale: No development properties held for sale (30 June 2021: Maitland).
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.
30 June
2022
$m
—
3,483.3
—
3,483.3
30 June
2021
$m
388.0
3,389.7
8.0
3,785.7
Investment property
held for sale
Investment property
in use
30 June
2022
30 June
2021
30 June
2022
30 June
2021
Investment property
under development
30 June
2021
30 June
2022
Development
property held for
sale
30 June
2022
30 June
2021
$m
$m
$m
$m
$m
$m
$m
$m
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
– disposals
(388.7)
—
—
—
—
—
(8.0)
– net transfers to/(from)
investment property held for
sale
– transfers to/(from)
investment property under
development
– capital expenditure
– net revaluation gain
– foreign exchange loss
Balance at the end of the
year
Accounting policy
—
326.0
—
(326.0)
—
—
—
—
—
0.7
—
—
—
0.7
—
19.4
61.3
155.2
—
50.3
75.8
—
(81.0)
(90.1)
—
—
—
—
(6.2)
—
—
—
—
—
—
—
—
388.0 3,483.3 3,389.7
—
—
—
6.2
0.1
1.7
—
8.0
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 and development 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 or 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).
99
100
Challenger Limited 2022 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.
Investment property under construction is held at cost until an
estimate of the fair value can be reliably determined.
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.
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 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).
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.
100
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101
Analysis of investment property as at
30 June
Investment property in use and held for sale
Australia
Acquisition
date1
Carrying
value
2022
$m
Total
cost2
$m
Cap
rate
2022³
%
Last
external
valuation
date
Carrying
value
2021
$m
Cap
rate
2021³
%
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, VIC4
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
127.7
100.8
47.8
29.5
157.5
151.4
62.7
260.5
111.7
212.0
158.7
88.5
91.4
—
104.8
35.4
123.3
160.8
57.9
16.6
67.9
187.6
281.0
85.0
29.5
32.7
241.0
259.0
51.0
227.0
155.0
254.0
79.1
89.0
181.3
—
173.0
49.0
110.0
155.5
51.0
28.9
79.0
195.0
4.63 31-Dec-21
6.25 31-Dec-21
7.25 30-Jun-22
6.75 30-Jun-22
5.00 30-Jun-22
5.13 31-Dec-21
5.63 30-Jun-22
5.88 31-Dec-21
4.88 31-Dec-21
4.63 30-Jun-22
7.00 31-Dec-21
6.75 30-Jun-22
3.75 30-Jun-22
—
4.88 30-Jun-22
5.50 30-Jun-22
6.34 31-Dec-21
6.00 30-Jun-22
6.88 31-Dec-21
5.00 31-Dec-21
6.00 30-Jun-22
5.50 31-Dec-21
—
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
6.50
7.75
7.25
5.13
5.38
5.75
6.00
5.00
4.75
7.25
7.25
4.50
n/a
5.13
5.75
6.34
6.25
7.50
5.75
6.75
6.00
2,354.5 2,806.0
3,021.2
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. Classified as ‘held for sale’ in 2021 and sold during 2022.
101
102
Challenger Limited 2022 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, NSW5
Total investment property under
development and development
property held for sale
Acquisition
date1
Carrying
value
2022
$m
Total
cost2
$m
Cap
rate
2022³
%
Last
external
valuation
date
Carrying
value
2021
$m
Cap
rate
2021³
%
31-Dec-08
20.3
10.0
7.00 30-Jun-22
9.8
7.00
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
118.8
77.7
32.2
11.7
69.7
13.3
12.2
25.2
27.9
33.0
25.2
17.0
9.8
86.7
27.7
42.5
19.9
32.2
748.2
30.9
12.2
113.9
67.3
27.8
12.1
63.6
11.8
13.1
19.3
31.0
33.0
24.7
16.3
9.3
80.7
21.3
37.3
18.6
23.1
677.3
5.40 31-Dec-21
5.60 30-Jun-22
4.50 31-Dec-21
4.60 30-Jun-22
5.50 30-Jun-22
5.80 31-Dec-21
4.80 31-Dec-21
5.50 31-Dec-21
4.10 30-Jun-22
5.07 31-Dec-21
4.20 30-Jun-22
4.30 30-Jun-22
4.90 30-Jun-22
5.70 31-Dec-21
5.20 30-Jun-22
5.50 31-Dec-21
5.80 31-Dec-21
5.20 30-Jun-22
4.70 31-Dec-21
5.10 30-Jun-22
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
5.60
4.50
4.60
5.50
5.90
4.80
5.50
4.10
5.07
4.20
4.30
4.90
5.70
5.20
5.50
5.80
5.20
4.70
5.10
3,102.7 3,483.3
3,777.7
6-Dec-06
—
—
—
—
8.0
n/a
—
—
8.0
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 2022, the investment property portfolio occupancy rate for Australia was 90.3% (30 June 2021: 90.3%) with a weighted average lease expiry of
5.3 years (30 June 2021: 5.1 years), Europe 100.0% (30 June 2021: 100.0%) with a weighted average lease expiry of 0.1 years (30 June 2021: 0.1 years) and
Japan 99.6% (30 June 2021: 99.5%) with a weighted average lease expiry of 8.6 years (30 June 2021: 9.4 years).
5. Classified as ‘held for sale’ in 2021 and sold during 2022.
102
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Note 7
Loan assets
Loan assets
Residential mortgages1
Investment loans2
Reverse mortgages3
Personal loans4
Chattel mortgages5
Commercial loans6
Less: provision for impairment
Balance at the end of the year
Directors’ Report
Challenger Limited 2022 Annual Report
Further Information
Financial Report
103
30 June
2022
$m
407.0
133.8
4.3
0.5
0.2
16.5
(10.6)
551.7
30 June
2021
$m
421.8
160.3
—
—
—
—
(11.8)
570.3
1. Residential mortgages are held both by the Bank and CLC. The CLC book is held within Special Purpose Vehicle (SPV) trusts that hold residential mortgage-backed
assets and issue securitised financial liabilities. The trusts are entities that funded pools of residential mortgage-backed securities (RMBS). All borrowings of these
SPVs are limited in recourse to the assets of the SPV. Bank’s mortgages are core investment assets that are funded by term deposits of the business and include
owner occupied loans.
2. Investment loans are loans to resident households for the purpose of housing, where the funds are used for a residential property that is not owner occupied.
3. Reverse mortgages represent loans provided by the Bank to individuals to supplement income while in retirement and are secured over residential property.
4. Personal loans represent secured and unsecured loans provided by the Bank to individuals for the financing of such items as the acquisition of a new vehicle,
funding renovations or the consolidation of debt.
5. Chattel mortgages are loans used to purchase motor vehicles or other major business equipment, where the lender retains ownership of the asset until the loan is
repaid.
6. Commercial loans are non-retail corporate loans provided by the Bank to corporate entities.
Accounting policy
Loans and advances 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. These are held at amortised cost.
Key estimates and assumptions
The Group continues to primarily apply the historical
provisioning methodology to its mortgage assets held within
the NIM SPV structure, which is considered to be materially
consistent with the provision estimated under the expected
credit loss (ECL) impairment model.
The ECL impairment model is used for mortgage assets and
non-retail lending products, including commercial loans held
by the Bank. In estimating ECL, 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 a workout process.
Analysis of loan assets impairment provision
Balance at the beginning of the year
Increase in provision
Utilisation of provision against incurred losses and adjustments to estimates
Balance at the end of the period1
1. Impairment provision balance includes provision of $0.2m million related to the Bank loan assets.
30 June
2022
$m
11.8
0.2
(1.4)
10.6
30 June
2021
$m
11.5
0.5
(0.2)
11.8
103
104
Challenger Limited 2022 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
Outwards reinsurance contract liabilities – at margin on services value
Total life contract liabilities
30 June
2022
$m
6,748.4
6,847.2
(0.2)
30 June
2021
$m
6,230.4
7,440.5
(1.0)
13,595.4
13,669.9
Life investment
contract liabilities
30 June
2022
$m
30 June
2021
$m
Life insurance
contract liabilities
30 June
2022
$m
30 June
2021
$m
Outwards
reinsurance
contract liabilities
30 June
2022
$m
30 June
2021
$m
Total life contract
liabilities
30 June
2022
$m
30 June
2021
$m
6,230.4 5,867.8 7,440.5 6,714.4
(1.0)
(1.0) 13,669.9 12,581.2
Movement in life contract
liabilities
Balance at the beginning of the
year
Deposits and premium receipts
4,030.2 3,202.3 1,120.4 1,600.6
Payments and withdrawals
(3,385.1) (2,935.5)
(954.0)
(852.4)
Revenue per Note 1
Expense per Note 2
(293.4)
(29.8) (1,842.4)
(978.6)
166.3
125.6 1,082.7
956.5
—
—
0.8
—
— 5,150.6 4,802.9
— (4,339.1) (3,787.9)
— (2,135.0) (1,008.4)
— 1,249.0 1,082.1
Balance at the end of the year
6,748.4 6,230.4 6,847.2 7,440.5
(0.2)
(1.0) 13,595.4 13,669.9
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 investment experience in respect of life insurance contracts
Difference in actual and assumed investment experience in respect of life investment
contracts
Difference in actual and assumed other experience in respect of life insurance contracts
Difference in actual and assumed other experience in respect of life investment contracts
Loss arising from assumption changes on life insurance contracts
Profit/(loss) arising from assumption changes on life investment contracts
Profit arising from difference between actual and assumed experience
Investment earnings on assets in excess of life contract liabilities
Life contract profit after tax
30 June
2022
$m
6,375.7
173.0
173.7
(673.4)
6,049.0
798.0
6,847.0
68.2
68.2
31.4
(41.3)
(52.6)
132.5
140.9
12.4
3.9
(2.2)
0.8
225.8
38.5
264.3
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)
274.5
255.9
2.9
8.1
(8.5)
(1.5)
415.6
212.1
627.7
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.
104
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Accounting policy
Life insurance claims expense
The operations of the Group include the selling and
administration of life contracts through 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
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, benefit payments and expenses) are projected into
the future. The liability is calculated as the net present value of
these projected cash flows using an appropriate discount rate
curve as determined by the Appointed Actuary.
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
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 2021. Discount rates applied for
Australian liabilities were between 1.8% - 4.5% per annum
(30 June 2021: 0.3% - 2.8%).
105
106
Challenger Limited 2022 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 and investment
expenses are then 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 3.2% per annum for short-
term inflation and 2.2% per annum for long-term inflation
(30 June 2021: 2.0% short-term, 2.3% 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 2021: 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 2021: 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 0.4% - 2.6% per annum
(30 June 2021: 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 2021: 0.2% - 2.3%). 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
Investment 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 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 Funds 1, 2, 3 and 4 are set out
below.
Life contract liabilities
Statutory Fund 1
Statutory Fund 2
Statutory Fund 3
Statutory Fund 4
Total life contract liabilities
30 June
2022
30 June
2021
$m
1.4
11,401.9
2.5
2,189.6
13,595.4
$m
1.5
11,582.4
3.0
2,083.0
13,669.9
106
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Current/non-current split for total life
contracts
Directors’ Report
Challenger Limited 2022 Annual Report
Further Information
Financial Report
107
There is a fixed settlement date for the majority of life contract
liabilities. Approximately $4,643.8 million on a discounted
basis (30 June 2021: $3,099.3 million) of life contract liabilities
have a contractual maturity within 12 months of the reporting
date. Based on assumptions applied for the 30 June 2022
valuation of life contract liabilities, $4,938.4 million of
principal payments on fixed term and lifetime business are
expected in the year to 30 June 2023 (expected in the year to
30 June 2022: $3,685.7 million).
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.
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
expectations.
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.
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
2022
30 June
2021
30 June
2022
30 June
2021
30 June
2022
30 June
2021
30 June
2022
30 June
2021
Insurance risk sensitivity analysis
$m
$m
$m
$m
$m
$m
$m
$m
50% increase in the rate of mortality
improvement
30.5
43.3
29.1
42.7
21.3
30.3
20.3
29.9
10% increase in maintenance expenses
16.2
18.3
16.2
18.3
11.4
12.8
11.4
12.8
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 19 Financial risk management.
Undiscounted life insurance
contract liabilities
2022
2021
Actuarial information
1 year or less
$m
1-3 years
$m
3-5 years
$m
>5 years
$m
1,036.9
863.9
1,664.1
1,465.8
1,255.3
1,158.7
4,551.3
4,817.7
Total
$m
8,507.6
8,306.1
Mr M Considine 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.
107
108
Challenger Limited 2022 Annual Report
Note 9
External unit holders’ liabilities
Current
Non-current
Total liabilities to external unit holders
Accounting policy
The Group controls a number of guaranteed index return
trusts that contain contributed funds in respect of fixed term
and daily liquid 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.
30 June
2022
$m
4,072.8
313.6
4,386.4
30 June
2021
$m
3,090.1
542.1
3,632.2
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.
108
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Note 10
Derivative financial instruments
Directors’ Report
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Further Information
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109
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
Future contracts
Less than one year
One to three years
Total futures contracts
Commodities futures contracts
Less than one year
Total commodities 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
30 June 2022
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
30 June 2021
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
19,806.1
20,550.6
13,777.0
47,648.5
101,782.2
—
243.0
72.0
735.0
722.0
1,772.0
14,676.0
327.8
15,003.8
546.3
546.3
1.4
17.6
21.7
314.8
355.5
—
—
0.1
—
25.3
25.4
—
0.1
0.1
—
—
(16.5)
(68.9)
(50.6)
(402.9)
(538.9)
210.1
5,086.2
9,083.3
11,294.6
42,527.3
67,991.4
—
(7.7)
(0.1)
(57.2)
(13.8)
(78.8)
300.0
243.0
387.0
1,092.0
2,022.0
(2.4)
—
(2.4)
17,055.6
—
17,055.6
—
—
—
—
3,535.0
3,535.0
28.4
28.4
(37.8)
(37.8)
2,850.1
2,850.1
3,253.3
3,204.8
4,222.3
362.6
11,043.0
1,363.2
731.0
2,094.2
62.3
61.8
36.2
1.6
161.9
5.9
—
5.9
(52.6)
(73.2)
(164.4)
(10.6)
(300.8)
1,397.7
3,187.4
2,482.5
765.0
7,832.6
(43.6)
(24.8)
(68.4)
1,475.0
308.9
1,783.9
8.8
47.0
80.6
315.1
451.5
—
—
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
(2.7)
(47.4)
(79.6)
(437.9)
(567.6)
216.7
(2.3)
—
(4.6)
(28.0)
(34.9)
(1.0)
—
(1.0)
—
—
(22.5)
(22.5)
(17.9)
(40.5)
(29.2)
(9.8)
(97.4)
—
(0.4)
(0.4)
109
110
Challenger Limited 2022 Annual Report
Note 10
Derivative financial instruments (continued)
30 June 2022
Net fair
value
assets
$m
Net fair
value
liabilities
$m
30 June 2021
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
Notional
value
$m
—
770.2
770.2
136,546.7
Analysis of derivative financial
instruments (continued)
Credit default swaps
Less than one year
Three to five years
Total credit default swaps
Total Non-SPV
SPV
Interest rate swaps – SPVs
Less than one year
One to three years
Three to five years
Total interest rate swaps – SPV
Cross-currency swaps – SPVs
Greater than five years
165.5
Total cross-currency swaps – SPV
165.5
Total SPV
166.8
Total derivative financial instruments2 136,713.5
0.6
0.5
0.2
1.3
—
—
—
577.2
—
(22.4)
(22.4)
63.4
1,218.8
1,282.2
(839.4) 100,817.8
0.3
96.4
96.7
738.3
—
—
—
(507.1)
—
—
—
—
(0.1)
—
—
(0.1)
7.2
0.7
0.6
8.5
—
—
—
577.2
(0.1)
(0.1)
(0.2)
212.1
212.1
220.6
(839.6) 101,038.4
—
—
—
—
—
—
—
738.3
(0.1)
—
—
(0.1)
(0.4)
(0.4)
(0.5)
(507.6)
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 $315.0 million (30 June 2021: $284.9 million) and
the derivative liabilities would decrease by $315.0 million (30 June 2021: $284.9 million).
Accounting policy
The Group uses derivative financial instruments predominantly
to hedge its risks associated with interest rate, inflation 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 a foreign controlled entity 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 cash flows or foreign exchange
difference and are assessed on an ongoing basis to determine
that they actually have been highly 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, and 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-
investment asset or liability, the amounts taken to equity are
transferred to the initial carrying amount of the non-
investment asset or liability.
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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 2022, a post-tax gain of
$20.8 million (30 June 2021: post-tax gain of $46.8 million)
was recognised in Other comprehensive income (OCI) for the
hedging of exposure to the net investment in foreign currency
operations.
Derivatives designated as cash flow hedges
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 19 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 entered into to hedge currency
movements on foreign denominated RMBS. The SPVs apply
hedge accounting to both types of transaction, with the fair
value change on the effective portion of the derivative being
recognised in OCI.
For the year ended 30 June 2022, a post-tax gain of
$0.4 million (30 June 2021: post-tax loss $0.5 million) was
recognised in equity for cash flow hedges with no Statement
of comprehensive income impact of any ineffective portions
during either the current or prior comparative period.
111
112
Challenger Limited 2022 Annual Report
Note 11
Notes to Statement of cash flows
Reconciliation of profit to operating cash flow
Profit 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 of associates and Bank goodwill
Share-based payments
Dividends from associates
Change in operating assets and liabilities
Decrease in receivables
Decrease in other assets
Increase in payables
Increase in provisions
Increase in deposits from customers2
Increase in life contract liabilities
Increase in external unit holders’ liabilities
(Decrease)/increase in net tax liabilities
Net cash flows from operating activities
1. Changes relate to movements through the Statement of comprehensive income.
2. Movement in deposits from customers represents the increase since the acquisition of Challenger Bank.
Reconciliation of cash
Cash at bank and on hand
Total cash and cash equivalents1
1. All cash and cash equivalents are considered current.
Accounting policy
30 June
2022
$m
253.7
1,524.9
(38.0)
(886.0)
14.0
19.2
13.0
42.5
12.9
21.4
11.5
8.6
93.5
811.5
754.2
(170.1)
2,486.8
30 June
2022
$m
733.1
733.1
30 June
2021
$m
592.3
(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
989.4
989.4
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.
The carrying amount of cash and cash equivalents is materially
equal to fair value due to the assets being highly liquid. For
the purposes of the Statement of cash flows, cash and cash
equivalents are stated net of bank overdrafts.
112
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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
Employee 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
Issued under Capital Notes 1 conversion1
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 share purchases
Balance at the beginning of the year
Settled forward purchases
Balance at the end of the year
30 June 2022
30 June 2021
No. of shares
m
Value of shares
$m
No. of shares
m
Value of shares
$m
682.2
(1.0)
(1.2)
680.0
676.0
—
2.4
3.8
682.2
1.4
0.8
(1.2)
1.0
2.0
(0.8)
1.2
2,505.5
(9.6)
(14.4)
2,481.5
2,462.4
—
15.1
28.0
2,505.5
14.6
7.9
(12.9)
9.6
22.3
(7.9)
14.4
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
1. No physical transfer of cash. Amount differs to the $27.7 million of Capital Notes 1 repayment, due to noteholders receiving a premium on conversion to equity.
Accounting policy
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 30
Employee entitlements for further details.
Components of contributed equity
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.
Employee shares treated as Treasury shares
Restricted Shares (RS)
A Restricted Share is a beneficial interest in a fully-paid
ordinary Challenger share. RS provide an entitlement to vote
and a right to dividends, however legal ownership of these
shares still resides with Challenger, therefore RS are treated as
Treasury shares for the basic EPS calculation. After the vesting
period, legal ownership transfers to the employee and RS
cease to be considered Treasury shares and are included in the
dilutive EPS calculation.
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 treated as Treasury shares
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.
113
114
Challenger Limited 2022 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 period.
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.
CLC’s target surplus
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.
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 2022 was 1.60 times (30 June 2021:
1.63 times), within this range of 1.3 to 1.7 times. The CET1
ratio was 1.11 times at 30 June 2022 down from 1.14 times
at 30 June 2021.
Bank regulatory capital
During the period, management enhanced the presentation of
minimum capital requirements and capital base to encompass
the addition of the new operating segment – Bank. For
completeness, Funds Management and Corporate was also
included, which has resulted in a Group-wide view of the
capital position as detailed on the following page.
Other than the change above, there were no material changes
to the Group’s capital management process during the period.
The Bank is an authorised deposit-taking institution regulated
by APRA under the authority of the Banking Act 1959. APRA
sets minimum regulatory capital requirements for banks based
on the Basel Committee on Banking Supervision guidelines.
For the purposes of meeting capital adequacy as prescribed by
APRA, certain items such as intangibles and deferred tax
assets do not qualify as capital and are excluded from the
calculation.
All of the Group’s regulated entities have at all times during
the current and prior financial period complied with the
externally imposed capital requirements to which they are
subject.
Prescribed capital amount (PCA)
PCA refers specifically to CLC’s regulatory capital
requirements.
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.
Regulatory capital is divided into Common Equity Tier 1
(CET1), Additional Tier 1 Capital and Tier 2 Capital. The Bank’s
regulatory capital base at 30 June 2022 was $119.3m and
represents CET1 regulatory capital and is in compliance with
APRA’s minimum capital adequacy requirements. The capital
adequacy ratio of 51.5% reflects this capital as a percentage
of total risk weighted assets.
To manage its capital, management reviews its adequacy
continuously and reports its capital position to the Executive
Leadership Team and Asset and Liability Committee on a
monthly basis.
Funds Management and Other capital
In addition to CLC's and the Bank’s excess regulatory capital,
Challenger maintains cash and tangible assets within the
Funds Management and Corporate legal entities. These assets
can be used to meet regulatory capital requirements.
Challenger also has a Corporate debt facility of $400.0 million
in place, which provides additional financial flexibility. The
facility was undrawn as at 30 June 2022 (30 June 2021:
undrawn).
114
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Capital as at
30 June 2022
Regulatory capital base
Shareholder equity4
Goodwill and other intangibles
Other adjustments5
Eligible regulatory debt
Total capital base
Minimum Regulatory Requirement1,2
Excess over Minimum Regulatory Requirement
Common Equity Tier 1 (CET1) regulatory capital
Additional Tier 1 capital
Total Tier 1 regulatory capital
Tier 2 capital6
Total capital base
CET1 capital ratio (times)7
Tier 1 capital ration (times)8
Minimum Regulatory Requirement ratio (times)9
CLC1
$m
3,270.7
(70.4)
(342.3)
1,244.7
4,102.7
2,563.3
1,539.4
2,858.0
845.0
3,703.0
399.7
4,102.7
1.11
1.44
1.60
CBL2
$m
119.3
—
—
—
119.3
24.3
95.0
119.3
—
119.3
—
119.3
4.91
4.91
4.91
Other3
$m
598.3
(516.8)
96.0
—
177.5
38.1
139.4
—
—
—
—
177.5
—
—
4.66
Group
$m
3,988.3
(587.2)
(246.3)
1,244.7
4,399.5
2,625.7
1,773.8
2,977.3
845.0
3,822.3
399.7
4,399.5
—
—
1.68
1. Minimum Regulatory Requirement is equivalent to PCA for CLC.
2. Minimum Regulatory Requirement for Challenger Bank Limited represents total capital requirements of 8% (of risk weighted assets) plus the capital conservation
buffer of 2.5% (of risk weighted assets), as stipulated under APS 110 Capital Adequacy.
3. Includes Funds Management, Corporate and other Life/Bank entities. Funds Management Minimum Regulatory Requirement (MRR) for capital based on
requirements set by ASIC and regulators in other foreign jurisdictions. Challenger Retirement and Investment Services Limited MRR based on APRA and ASIC
requirements.
4. Balances differ to Note 3 Segment information as regulatory requirements are applicable to individual legal entities.
5. Other adjustments predominantly related to deferred tax asset and intercompany items.
6. Refers to subordinated debt for CLC.
7. CET1 capital ratio is Common Equity Tier 1 regulatory capital divided by Minimum Regulatory Requirement.
8. Tier 1 capital ratio is Total Tier 1 regulatory capital divided by Minimum Regulatory Requirement.
9. Minimum Regulatory Requirement ratio is total capital base divided by Minimum Regulatory Requirement.
Credit ratings
Dividend Reinvestment Plan (DRP)
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 2021:
‘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 2022
was 48.3% of normalised profit after tax (30 June 2021:
31.0%).
The Company resumed the DRP for the 2021 final dividend,
and on 22 September 2021 issued 2,109,802 ordinary shares
to satisfy the plan. The DRP issue price per share for the 2021
final dividend was $6.4010 and represented the volume
weighted average share price over the 10 trading days from
2 September 2021 to 15 September 2021. The final DRP
participation rate was 19.0% of all issued shares.
The Group continued the DRP for the interim 2022 dividend,
and on 22 March 2022 issued 257,086 ordinary shares to
satisfy the plan. The DRP issue price per share for the interim
2022 dividend was $6.4972 and represented the volume
weighted average share price over the 10 trading days from
1 March 2022 to 14 March 2022. The interim DRP
participation rate was 2.1% of all issued shares.
Capital Notes 1 conversion
On 25 May 2022, Capital Notes 1 converted to ordinary
shares, having satisfied the mandatory conversion conditions
on that date. 3,822,281 shares were issued on conversion, at
a total value of $28.0 million.
115
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Note 13
Interest bearing financial liabilities
30 June 2021
Non-cash movements
30 June 2022
Facility
$m
Opening
balance
$m
Cash flow
repayments
$m
Foreign
exchange
$m
Fair value
changes
$m
Other
$m
Closing
balance
$m
Facility
$m
Bank loans
Corporate1
Controlled property trusts2,3
Controlled infrastructure trusts3
Term funding4
Repurchase agreements
Total bank loans
Non-bank loans
Subordinated debt
Challenger Capital Notes 13
Challenger Capital Notes 23
Challenger Capital Notes 33
Loan notes – SPV
Total non-bank loans
Total interest bearing
financial liabilities
Current
Non-current
400.0
394.9
—
392.3
179.3
—
179.3
—
4,111.1 4,111.1
5,085.3 4,682.7
400.0
404.5
27.7
27.7
460.0
456.3
385.0
379.0
373.3
373.3
1,646.0 1,640.8
—
(17.5)
(7.2)
—
(341.2)
(365.9)
—
—
—
—
(110.6)
(110.6)
—
(40.7)
—
—
—
(40.7)
—
—
—
—
—
—
—
0.8
—
—
—
0.8
(6.1)
—
—
—
—
(6.1)
—
1.0
— 400.0
335.9 334.0
0.2
172.3 172.3
5.4
5.4
5.4
— 3,769.9 3,769.9
6.6 4,283.5 4,681.6
—
—
(27.7)
1.9
1.2
—
398.4 400.0
—
458.2 460.0
380.2 385.0
262.7 262.7
(24.6) 1,499.5 1,507.7
6,731.3 6,323.5
(476.5)
(40.7)
(5.3)
(18.0) 5,783.0 6,189.3
4,683.3
1,640.2
6,323.5
4,191.6
1,591.4
5,783.0
1. No amounts were drawn from the facility in the period.
2. Total facility limit consists of non-redraw loan facilities limits totalling $334.0 million (30 June 2021: $394.9 million).
3. Held at amortised cost. The fair value of these are: Challenger Capital Notes 1 nil (30 June 2021: $27.8 million), Challenger Capital Notes 2 $460.7 million (30 June
2021: $480.8 million), and Challenger Capital Notes 3 $392.3 million (30 June 2021: nil); controlled property trusts $345.9 million (30 June 2021: $396.3 million);
controlled infrastructure trusts $175.5 million (30 June 2021: $182.3 million).
4. Reserve Bank of Australia (RBA) Term Funding Facility made available to ADIs. Balance taken on as part of the Bank’s acquisition. The Bank accessed its allowance
to the facility in two tranches: in September 2020 with a repurchase date in September 2023 and in June 2021 with repurchase date in June 2024.
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
Bank loans
Corporate1
Controlled property trusts2,3
Controlled infrastructure trusts3
Repurchase agreements
400.0
50.0
453.8
453.8
185.8
185.8
5,393.4 5,393.4
(50.0)
(17.5)
(6.5)
(1,282.3)
—
(45.9)
—
—
—
0.5
—
—
—
— 400.0
1.4
392.3 394.9
179.3 179.3
—
— 4,111.1 4,111.1
Total bank loans
6,433.0 6,083.0
(1,356.3)
(45.9)
0.5
1.4 4,682.7 5,085.3
Non-bank loans
Subordinated debt
Challenger Capital Notes 13
Challenger Capital Notes 23
Challenger Capital Notes 3
Loan notes – SPV
Total non-bank loans
Total interest bearing
financial liabilities
Current
Non-current
400.0
345.0
460.0
—
460.7
395.7
345.0
454.5
—
460.7
1,665.7 1,655.9
8,098.7 7,738.9
6,413.5
1,325.4
7,738.9
—
(317.3)
—
385.0
(87.4)
(19.7)
—
—
—
—
—
8.8
—
—
—
8.8
—
—
1.8
(6.0)
—
27.7
404.5 400.0
27.7
456.3 460.0
379.0 385.0
373.3 373.3
(4.2) 1,640.8 1,646.0
(1,376.0)
(45.9)
9.3
(2.8) 6,323.5 6,731.3
4,683.3
1,640.2
6,323.5
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 $50.0m 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. 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), 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).
116
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Accounting policy
All borrowings and subordinated debt are financial liabilities
and are initially recognised at fair value. For those financial
liabilities which require subsequent measurement 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.
Financial liabilities, other than those held by CLC’s statutory
funds or their controlled entities, are 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.
Repurchase agreements are all short-term in nature, and are
therefore valued at amortised cost which approximates fair
value.
Details of liabilities
Bank loans
Corporate
Type Maturity
Facility Tranche 1: $150m expiring
Rate type Ranking/security
Variable
Security by guarantees between members of the Group
on 31 December 2024
Tranche 2: $250m expiring
on 31 December 2026
Controlled property
trusts1
Loan March 2023 to October
Variable
2024
First ranking mortgages over Japanese investment
properties: $335.8 million (30 June 2021: $378.6
million)
First ranking mortgages over Gateway, NT $0.1 million
(30 June 2021: $0.1 million)
First ranking mortgage over County Court, VIC: Nil (30
June 2021: $13.7 million)
First ranking mortgages over infrastructure assets
Controlled
infrastructure trusts2
Term funding
Facility December 2035
Variable
Facility Tranche 1: $3.1m expiring
September 2023
Tranche 2: $2.3m expiring
June 2024
Fixed
Security by sufficient repo-eligible high quality liquid
assets
1. Controlled property trusts consists of multiple loans with maturity dates from March 2023 to October 2024. At 30 June 2022 $334.0 million (30 June 2021:
$378.5 million) of these loans are held at amortised cost. The fair value of these liabilities at 30 June 2022 was $345.9 million (30 June 2021: $396.3 million).
2. Controlled infrastructure trusts relates to a loan facility for Oaklands Wind Farm and was refinanced during the year. This loan is held at amortised cost. The fair
value of this liability at 30 June 2022 is $175.5 million (30 June 2021: $182.3 million).
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 are 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 2022 are current
and all mature by July 2022. 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.
The Bank has entered into repurchase agreements with the
RBA 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.
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.
Challenger Capital Notes – 1, 2 and 3 (Notes 1, Notes 2
and Notes 3)
On 19 May 2021, the Group completed the repurchase
offering of outstanding Challenger Capital Notes 1 with $19.7
million of applications received leaving $27.7 million of Notes
1 holdings outstanding as at 30 June 2021. The remaining
Capital Notes 1 converted to ordinary shares on 25 May 2022,
having satisfied the mandatory conversion conditions on that
date. The mandatory conversion conditions and associated
conversion calculations are designed to ensure the Capital
Note 1 holders receive approximately $101 worth of ordinary
shares for each $100 Capital Note 1 they hold, based on the
20 day volume weighted average price of ordinary shares
(VWAP) immediately preceding 25 May 2022. Upon
conversion Challenger derecognised the interest-bearing
liability at the current carrying value and recognised the full
amount in share capital. The premium paid to note holders
was recognised in the Statement of comprehensive income.
117
118
Challenger Limited 2022 Annual Report
Note 13
Interest bearing financial liabilities (continued)
Details of liabilities
Challenger Capital Notes – 1, 2 and 3 (Notes 1, Notes 2
and Notes 3) (continued)
Issue date
Notes 1
9 October
2014
Notes 2
7 April
2017
Notes 3
25 November
2020
The remaining Notes 2 and 3 have similar structural
characteristics 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.
The costs associated with the issue of Notes 2 and 3 have
been capitalised against the relevant liability and are being
recognised in the Statement of comprehensive income over
the life of the notes.
Issue amount
$345.0 million $460.0 million $385.0 million
Outstanding
amount
Optional
Exchange
Mandatory
Conversion1
Nil
$460.0 million $385.0 million
25 May 2020 22 May 2023 22 May 2026
25 May 2022 22 May 2025 22 May 2028
1. Conversion to a variable number of shares.
SPV loan notes
SPV interest bearing 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
Subordinated debt valuation
Subordinated debt is recognised at fair value and is valued by
reference to market observable inputs at balance date.
The change recognised in the Statement of comprehensive
income in respect of valuation changes for the year ended
30 June 2022 was a gain of $6.1 million (30 June 2021: loss
of $8.8 million).
Note 14
Deposits from customers
Deposits from customers
At call
Term deposits
Total deposits from customers
Maturity analysis
At call
Up to 3 months (excluding at call)
From 3 to 6 months
From 6 to 12 months
From 1 to 5 years
Total deposits from customers
30 June 2022 30 June 20211
$m
$m
64.5
163.2
227.7
—
—
—
30 June 2022 30 June 20211
$m
$m
64.5
51.4
32.2
67.9
11.7
227.7
—
—
—
—
—
—
1. No deposits from customers existed prior to the acquisition of the Bank on 30 July 2021.
Accounting policy
All deposits from customers are initially recognised at the fair
value of the amount received, adjusted for any directly
attributable transaction costs, and are subsequently measured
at amortised cost using the effective interest rate method.
Deposits from customers are held at amortised cost as they
are not held for trading nor designated as being FVTPL.
Interest expense incurred is recognised in the Statement of
comprehensive income on an accrual basis.
Financial liabilities are classified and measured at amortised
cost unless they are held for trading and designated by the
entity as being at fair value through profit and loss (FVTPL).
118
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Note 15
Reserves and retained earnings
Share-based payments reserve
Balance at the beginning of the year
Share-based payments for the year
Releases from share-based payments reserve
Tax in equity
Balance at the end of the year
Cash flow hedge reserve – loan assets1
Balance at the beginning of the year
Gain/(loss) on cash flow hedges
Balance at the end of the year
Foreign currency translation reserve1
Balance at the beginning of the year
Loss 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
Balance at the end of the year
Total reserves
Retained earnings
Balance at the beginning of the year
Profit attributable to equity holders
Dividends paid
Total retained earnings
Directors’ Report
Challenger Limited 2022 Annual Report
Further Information
Financial Report
119
30 June
2022
$m
30 June
2021
$m
(52.8)
13.0
(12.9)
0.9
(51.8)
(0.4)
0.4
—
(3.4)
(20.6)
20.8
(3.2)
5.7
5.7
(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
(49.3)
(50.9)
1,451.2
253.7
(148.8)
922.9
592.3
(64.0)
1,556.1
1,451.2
1. These items may eventually be recognised in the profit and loss section of the Statement of comprehensive income.
2. Net of tax.
Accounting policy
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 – loan assets
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 and delivery of shares to employees they
are subsequently recognised as an increase in contributed
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.
119
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Challenger Limited 2022 Annual Report
Note 16
Finance costs
Interest expense1
Interest expense – lease liabilities
Interest expense – loan notes - SPV
Interest expense – property trusts
Interest expense – Challenger Capital Notes 1, 2 and 3
Other finance costs
Total finance costs
30 June
2022
$m
(377.5)
2.8
2.8
4.3
31.3
4.8
(331.5)
30 June
2021
$m
283.7
3.0
3.3
5.3
28.4
4.2
327.9
1. Interest expense includes ($393.6 million) external unit holders’ liabilities finance costs, representing the return to the external unit holders on assets held in the
consolidated external unit holder liability investment trusts. The amount is a function of the performance of the underlying guaranteed index plus the agreed
margin. The amount is an expense/(income) when the performance of the underlying guaranteed index plus the agreed margin is positive/(negative).
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 weighted average capitalisation rate to the
expenditure on that asset.
Accounting policy
Finance costs represent interest incurred on interest bearing
financial liabilities (primarily external unit holders’ liabilities
return, repurchase agreements, the securitised residential
mortgage-backed securities (RMBS) issued by the consolidated
Special Purpose Vehicles (SPVs), 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
those assets. Revenue earned on the investment of specific
borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalisation.
Note 17
Dividends paid and proposed
Dividends declared and paid during the year
Final 30 June 2021 100% franked dividend: 10.5 cents (30 June 2020: nil)
Interim 30 June 2022 100% franked dividend: 11.5 cents (30 June 2021: 9.5 cents 100%
franked dividend)
Total dividends paid
Dividend proposed (not recognised as a liability at 30 June 2022)
30 June
2022
$m
70.8
78.0
148.8
30 June
2021
$m
—
64.0
64.0
Final 30 June 2022 dividend: 100% franked dividend: 11.5 cents (30 June 2021: 10.5 cents
100% franked dividend)
78.4
70.8
Refer to Note 12 Contributed equity for details of the dividend policy.
Dividend franking credits
Franking credits available to shareholders are $323.8 million
(30 June 2021: $118.8 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 2 and 3. The impact of the proposed dividend
will be to reduce the balance of the franking account by
$33.6 million. All dividends are franked at a tax rate of 30%.
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Note 18
Earnings per share
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Basic earnings per share
Diluted earnings per share
Profit 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
2022
cents
37.5
33.1
$m
253.7
28.3
6.3
288.3
30 June
2021
cents
88.2
68.0
$m
592.3
26.1
6.0
624.4
Number
Number
678,145,134 675,201,946
(3,550,972)
(2,362,878)
Weighted average ordinary shares for basic earnings per share
675,782,256 671,650,974
Adjusted for potential ordinary shares:
Weighted average effect of Challenger Performance Plan
Weighted average effect of Challenger Capital Notes 1, 2 and 31
Weighted average effect of CLC Subordinated Notes
Weighted average ordinary shares for diluted earnings per share
10,702,190
8,744,057
126,293,826 178,254,426
59,070,235
58,337,603
871,115,875 917,719,692
1. Capital Notes 1 have a dilutive effect only for the period up to 25 May 2022, the date of conversion to ordinary shares.
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.
During the year, Capital Notes 1 converted to ordinary shares.
Note holders received approximately $101 worth of ordinary
shares for each $100 Capital Note 1 they held, based on the
20 day volume weighted average price of ordinary shares
(VWAP) immediately preceding date of conversion. The
conversion resulted in the issue of 3,822,281 ordinary shares.
The weighted average number of Treasury shares for the
period was 2,362,878 (30 June 2021: 3,550,972).
121
122
Challenger Limited 2022 Annual Report
Note 18
Earnings per share (continued)
Accounting policy (continued)
Accounting treatment of Capital Notes and
subordinated debt
Challenger Capital Notes 2 and 3 and subordinated debt are
an effective source of funding for Challenger.
Each of the Capital Notes 2 and 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 which converted to
ordinary shares on 25 May 2022, it is Challenger’s current
intention to refinance each of the remaining 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 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:
Face value of debt
Conversion factor x Challenger’s 20-day VWAP share price
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.
The profit attributable to ordinary shareholders is adjusted by
$34.6 million interest on the Notes and CLC Subordinated
Notes (30 June 2021: $32.1 million) 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.
122
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Section 5: Risk management
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Further Information
Financial Report
123
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 19
Financial risk management
Governance and risk management framework
Interest rate risk
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),
the Life Risk Committee (LRC), the Bank Risk Committee
(BRC), the Group Audit Committee (GAC), the Life Audit
Committee (LAC) and the Bank Audit Committee (BAC) 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, BRC, GAC, BAC 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, investment assets at fair value
through profit and loss and at amortised cost, payables, life
contract liabilities, derivatives, loan assets, deposits from
customers 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 are
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 (amongst
others) 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).
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 Bank is exposed to interest rate risk in the banking book,
that is, the exposure to risk as a result of interest rate changes
on its fixed rate assets and liabilities and the mismatches
between repricing dates of these assets and liabilities. The net
interest rate margin risk on the banking book is measured and
reported to the Board monthly, and any excess exposures are
rectified through altering interest rates on available investment
assets and term deposit liabilities. The Bank does not currently
undertake derivatives as this ‘on book’ hedging strategy is
considered adequate in addressing its interest rate exposure
given the Bank’s size and complexity.
123
124
Challenger Limited 2022 Annual Report
Note 19
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 investment 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%) movement 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 2022
30 June 2022
30 June 2021
30 June 2021
Non-loan exposure
Loan exposure
Total
Change in variable
+100bps
-100bps
+100bps
-100bps
+100bps
-100bps
$m
(3.6)
3.6
0.8
(0.8)
(2.8)
2.8
$m
(3.6)
3.6
0.8
(0.8)
(2.8)
2.8
$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)
Interest Rate Benchmark Reform
Interbank Offered Rates (IBORs), including LIBOR and Euribor,
are interest rate benchmarks which are commonly used to
determine interest rates and payment obligations for a wide
range of financial arrangements such as loans, bonds and
derivatives.
During 2020 and 2021 a project team led by the Head of
Derivatives was established to manage impacts of the interest
rate benchmark reform, including overseeing the transition
from IBORs to Alternative Reference Rates (ARRs).
As at 30 June 2022 the Group had no exposure to
instruments referencing rates which had ceased publication.
Contracts held by the Group that referenced LIBOR and other
IBORs that have ceased publication have been transitioned to
ARRs or closed out.
Given the progress of the transition noted above, there is a
significant reduction in the remaining LIBOR transition effort
and risks. The Group has a detailed plan in place for the
remaining contracts, which are expected to transition prior to
30 June 2023.
Material inherent risks arising from transition of remaining
USD LIBOR contracts include:
•
•
•
financial risk: includes value transfers during transition to
ARRs and basis risk from products and currencies
moving at different times;
legal risk: includes counterparty disputes over
amendment terms; and
operational risk: includes updates to infrastructure and
processes that result in errors upon transition.
The interest rate benchmark reform including transition from
LIBOR to ARRs has not resulted in changes to the Group’s risk
management strategy and these risks are managed within the
existing risk management framework.
124
The AUD notional value of the Group’s financial instruments
which are yet to be transitioned to ARRs as at the reporting
date are:
•
•
derivatives: USD LIBOR exposure $16,818.7 million; and
non-derivative financial assets: USD LIBOR exposure
$1,569.7 million.
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 primarily low beta and absolute return
strategies, where returns are generally considered to have low
or no correlation 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.
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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 2022
30 June 2022
30 June 2021
30 June 2021
$m
6.3
(6.3)
7.6
(7.6)
153.7
(153.7)
167.6
(167.6)
$m
6.3
(6.3)
7.6
(7.6)
153.7
(153.7)
167.6
(167.6)
$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)
125
126
Challenger Limited 2022 Annual Report
Note 19
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
2022, 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
$131.5 million in respect of fixed income securities partially
offset by an unrealised gain/loss of $66.3 million million in
respect of policy liabilities (30 June 2021: $146.9 million fixed
income securities, $81.8 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 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. 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.
The following table details the Group’s net exposure to
foreign currency as at the reporting date in Australian dollar
equivalent amounts:
GBP
$m
USD
$m
Euro
$m
JPY
$m
Other
$m
30 June 2022
Investment assets
Investment liabilities
558.7
3,496.8
(2.9)
(1,544.0)
896.7
(6.5)
349.0
(0.1)
Foreign currency contracts and cross currency swaps
(557.1)
(1,965.2)
(900.1)
(345.6)
Net exposure in Australian dollars
(1.3)
(12.4)
(9.9)
3.3
2.1
—
(1.6)
0.5
30 June 2021
Investment assets
Investment liabilities
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)
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Change in
Change in
Profit/(loss)
equity
Profit/(loss)
equity
30 June 2022
30 June 2022
30 June 2021
30 June 2021
US Dollar (USD)
Euro (EUR)
Japanese Yen (JPY)
Other
Total
Movement in
variable against $
+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
(0.8)
0.8
(0.7)
0.7
0.3
(0.3)
—
—
(1.2)
1.2
$m
(0.8)
0.8
(0.7)
0.7
0.4
(0.4)
—
—
(1.1)
1.1
$m
0.4
(0.4)
—
—
0.2
(0.2)
—
—
0.6
(0.6)
$m
0.4
(0.4)
—
—
0.8
(0.8)
—
—
1.2
(1.2)
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 investment 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 2022
Cash and cash equivalents
Receivables
Loan assets
Investment grade
A
$m
AA
$m
AAA
$m
Non-inv.
grade
$m
BBB
$m
733.1
—
33.3
483.8
—
5.2
180.8
54.7
139.2
—
18.2
71.5
—
52.8
16.5
Fixed income securities (held at fair value)
Fixed income securities (held at amortised cost)1
Derivative assets
Financial leases
8,380.0 3,990.3 1,949.6 2,461.9 3,095.4
19.3
31.8
87.9
105.4
—
—
556.4
20.8
—
4.1
—
4.8
—
—
10.8
Other
$m
Total
$m
—
733.1
54.2
647.5
89.0
551.7
180.9 20,058.1
(0.4)
244.0
—
—
577.2
19.7
Total assets with credit exposures
9,346.5 5,117.0 2,206.8 2,661.8 3,175.5
323.7 22,831.3
30 June 2021
Cash and cash equivalents
Receivables
Loan assets
989.4
—
—
15.4
106.0
127.3
270.3
59.5
175.6
—
24.0
63.9
—
—
989.4
3.7
554.0
830.4
—
1.0
570.3
Fixed income securities (held at fair value)
9,162.3 3,559.8 1,984.7 3,023.4 2,427.1
239.6 20,396.9
Derivative assets
Financial leases
—
—
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
1. Other relates to ECL provision in the Bank.
127
128
Challenger Limited 2022 Annual Report
Note 19
Financial risk management (continued)
Credit default risk (continued)
Loan assets
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
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.
Loan assets (Bank)
The credit risk on the Bank’s loan assets is determined by the
risk appetite of the Bank Board and responsibility for
overseeing it is delegated to the Loans Committee. Credit risk
provisioning is determined through the application of AASB 9
Financial Instruments and its requirements using the
expected credit loss model. Refer to Note 7 Loan assets for
further details on the recognition of expected credit losses.
APRA prescribes prudential limits on exposure to an individual
counterparty (or group of related parties) as a proportion of
an ADI’s Tier 1 regulatory capital - currently 10%. In the event
that this is exceeded, a large exposure is considered to exist
and APRA requires that the ADI must inform the regulator of
these exposures through prudential reporting. APRA may
impose additional capital requirements if it considers the
aggregate exposure to all loans over the 10% capital
benchmark to be higher than acceptable. The Bank is not
materially exposed to groupings of individual loans which
concentrate risk and create exposure to particular segments.
Ageing/maturity of amortised cost investment assets
The table below gives information regarding the carrying value
of the Group’s investment 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 investment assets
30 June 2022
Receivables
Fixed income securities (at amortised cost)
Loan assets1
Finance leases
Past due
Not past
due
$m
0-1
months
$m
1-3
months
$m
3-6
months
$m
6+
months
$m
Total
$m
640.2
244.0
487.6
19.7
0.9
—
0.7
—
20.1
14.1
—
—
0.5
—
3.3
—
3.8
5.2
647.5
—
244.0
26.6
551.7
—
19.7
31.8 1,462.9
Total amortised cost investment assets
1,391.5
21.0
14.8
30 June 2021
Receivables
Loan assets1
Finance leases
825.1
487.3
26.8
0.8
0.4
0.3
23.8
14.4
36.4
—
—
—
3.8
8.4
—
830.4
570.3
26.8
Total amortised cost investment assets
1,339.2
24.6
14.8
36.7
12.2 1,427.5
1. Past due balances where the Group considers that principal and interest plus any associated costs will be recovered in full.
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.
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
investment 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
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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 IC is a committee of
investment professionals from within CLC and represents the
first line of defence. 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
of defence for CLC and CBL. 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.
Maturing profile of undiscounted financial liabilities
30 June 2022
Payables
Interest bearing financial liabilities
Deposits from customers
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
30 June 2021
Payables
Interest bearing financial liabilities
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
The Bank has separate policies and processes to manage
liquidity risks. The policy is approved by the Bank Risk
Committee and is subject to APRA’s review for compliance
with Prudential standards.The Bank’s policy is to maintain
adequate cash reserves, liquidity support facilities and reserve
borrowing facilities in order to meet customer withdrawal
demands when requested. Prudential liquidity ratios are
monitored regularly, daily cashflows and longer term cashflow
forecasts are reviewed continuously and contingency funding
plans are in place to address liquidity shortfalls.
1 year or
less
$m
1-3
years
$m
3-5
years
$m
>5
years
$m
Total
$m
699.9
5.1
21.2
—
726.2
4,522.8 1,016.6
526.8
221.4 6,287.6
216.0
11.7
4,072.8
313.6
—
—
—
227.7
— 4,386.4
4,248.7 2,043.1
357.7
280.6 6,930.1
1,036.9 1,664.1 1,255.3 4,551.3 8,507.6
160.8
152.8
205.6
320.4
839.6
14,957.9 5,207.0 2,366.6 5,373.7 27,905.2
1,711.6
5.1
27.4
— 1,744.1
4,553.5 1,183.1
855.5
134.1 6,726.2
3,090.1
542.1
—
— 3,632.2
3,100.5 2,464.8
418.9
372.2 6,356.4
863.9 1,465.8 1,158.7 4,817.7 8,306.1
130.1
58.3
96.4
222.8
507.6
13,449.7 5,719.2 2,556.9 5,546.8 27,272.6
1. Disclosure of life insurance contract liabilities is not required under AASB 7 Financial Risk Management, however for reference purposes these have been
included. Refer to Note 8 Life contract liabilities for further details.
129
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Challenger Limited 2022 Annual Report
Note 20
Fair values of investment 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.
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. Where an asset is liquid or
maturing within three months, the carrying value is
determined to approximate fair value. This assumption is
applied to liquid assets and other short-term investment assets
and liabilities.
The mortgage SPVs have total equity attributable to residual
income unitholders (RIU) at amortised cost of
nil (2021: ($0.4) million), being net of $0.1m assets and
$0.1m liabilities, relates to interest rate swaps and cross
currency swaps. The fair value of this RIU holders’ asset is
$21.2 million (2021: $31.3 million) and would be classified as
Level 3 in the fair value hierarchy.
The Bank’s fixed income investments are held at amortised
cost. Their fair values are materially in line with their amortised
cost values due to the short duration of these investments.
These assets would be classified as Level 2 in the fair value
hierarchy table.
Challenger Capital Notes 2 and 3 have carrying values
(inclusive of unamortised issue costs) of $458.2 million and
$380.2 million respectively. The fair value of these notes is
$460.7 million and $392.3 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
Investment assets 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.
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30 June 2022
Derivative assets
Fixed income securities1
Equity and other alternatives
Infrastructure investments1
Hedged commodities
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 2021
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
—
—
0.9
—
544.5
—
—
545.4
2.3
853.0
—
—
855.3
—
—
1.2
—
—
—
1.2
0.8
916.5
—
—
917.3
577.3
18,147.4
1,401.8
0.1
—
—
—
20,126.6
837.4
398.4
4,386.4
40.6
5,662.8
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
—
1,910.8
165.6
300.7
—
90.2
3,483.3
5,950.6
—
—
—
6,707.8
6,707.8
—
1,874.8
155.0
345.4
88.0
3,389.7
5,852.9
—
—
—
6,183.2
6,183.2
577.3
20,058.2
1,568.3
300.8
544.5
90.2
3,483.3
26,622.6
839.7
1,251.4
4,386.4
6,748.4
13,225.9
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. 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 2022 the carrying value of
asset-backed financing assets was $37.1 million (30 June 2021: $76.7 million) with no undrawn commitments (30 June 2021: $56.4 million) and securitisations
was $9,260.3 million (30 June 2021: $4,517.9 million) plus $59.1 million undrawn commitments (30 June 2021: $20.4 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 2022
30 June 2021
Assets
$m
5,852.9
(69.4)
2,391.5
(2,226.1)
1.7
5,950.6
Liabilities
$m
6,183.2
(127.3)
4,016.5
(3,364.6)
—
6,707.8
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
Unrealised (losses)/gains included in the Statement of
comprehensive income for assets and liabilities held at the
Statement of financial position date
(69.4)
127.3
(54.7)
(95.2)
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 was $49.1 million (30 June 2021: Nil) of transfers into level 3 from level 2 and $47.4 million of
transfers out of level 3 into level 2 during the reporting period (30 June 2021: $407.8 million of transfers out of Level 3 and into Level 2).
131
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Challenger Limited 2022 Annual Report
Note 20
Fair values of investment 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 input2,3,4
30 June 2022
Fixed income securities
1,910.8
12.5
(14.3) Discounted cash flow
Primarily credit spreads
Equity and other alternatives
165.6
12.2
Infrastructure investments
300.7
4.3
Property securities
90.2
Investment contract liabilities
(6,707.8)
4.5
2.6
(13.5) 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
(4.5) External financial report 5% change in valuation
(2.6) Discounted cash flow
Primarily expense assumptions
Investment and development
property
Total Level 3
30 June 2021
3,483.3 164.8
(129.4) Market capitalisation,
Discounted cash flow
Primarily capitalisation rate
(757.2)
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
Property securities
88.0
Investment contract liabilities
(6,183.2)
4.4
2.4
(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
(4.4) External financial report 5% change in valuation
(2.4) Discounted cash flow
Primarily expense assumptions
Investment and development
property
Total Level 3
3,389.7 152.3
(124.9) Market capitalisation,
Discounted cash flow
Primarily capitalisation rate
(330.3)
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 changes in non-observable inputs at 30 June 2022 are unchanged from 30 June 2021.
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Note 21 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 2022 $85.9 million (30 June
2021: $264.5 million cash received from third parties -
derivative credit support payables) cash received from third
parties as collateral is recorded in payables and $115.4 million
(30 June 2021: $74.6 million rehypothecated securities -
collateral assets repledged) of collateral assets received from
counterparties was repledged by the Company to third
parties.
Collateral pledged as security
Cash
Other investment assets1
Total collateral pledged
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 investment 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 investment assets pledged are as follows:
30 June
2022
$m
483.8
6,309.2
6,793.0
30 June
2021
$m
269.9
6,675.5
6,945.4
1. Includes assets sold under repurchase agreements. Please refer Note 13 Interest bearing financial liabilities for more information.
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Challenger Limited 2022 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 22
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
Investment 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
2022
$m
30 June
2021
$m
288.7
(31.6)
257.1
0.9
258.0
244.3
(28.5)
215.8
0.6
216.4
2.9
2.9
1,749.8
1,594.5
845.0
4.8
2,457.2
5,059.7
567.6
65.8
838.6
1,472.0
3,587.7
872.5
1.3
2,416.6
4,887.8
544.1
45.0
863.3
1,452.4
3,435.4
2,505.6
2,462.4
(108.8)
1,190.9
3,587.7
(109.0)
1,082.0
3,435.4
1. Investment 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 29 Contingent liabilities, contingent assets and credit commitments for details of any contingent liabilities applicable to the parent entity.
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Note 23
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 2022:
Entity name
Challenger Limited
Challenger Group Holdings Limited
Challenger Group Services Pty Ltd
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
Challenger HoldCo2 Holdings Pty Ltd
Challenger Bank Limited (formerly “MyLifeMyFinance Limited”)
Principal activity
Corporate
Corporate
Corporate
Corporate
Funds Management
Funds Management
Funds Management
Funds Management
Life
Life
Banking
Banking
Challenger’s percentage holding of the above entities is 100% and all are incorporated in Australia unless otherwise stated.
Accounting policy
Principles of consolidation
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.
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, where they exist,
represent the share in the net assets of subsidiaries
attributable to equity interests not owned directly or indirectly
by the Group.
Note 24
Acquisitions and disposals of subsidiaries
Acquisition of Challenger Bank (formerly MyLife MyFinance)
On 23 December 2020, Challenger Limited entered into an
agreement to acquire 100% of the equity of
MyLifeMyFinance Limited (subsequently rebranded to
Challenger Bank Limited), a small ADI providing a suite of
savings and lending products. The acquisition received
formal approval from the Treasurer of the Commonwealth
of Australia on 29 July 2021, with the transaction
completing on 30 July 2021.The acquisition provides the
Group a highly strategic opportunity to significantly expand
its secure retirement income offering, and access to
Australia’s term deposit market.
From the date of acquisition, the Bank contributed
$3.4 million of interest revenue and a normalised loss of
$11.1 million before tax. Acquisition related transaction
costs of $0.7 million have been incurred and recorded in
other expenses in the Statement of comprehensive income
in the prior year. Details of the fair values of the assets and
liabilities acquired and goodwill on acquisition are as
follows.
Total purchase price consideration
Less: fair value of net identifiable assets acquired
Goodwill on acquisition1
1. Goodwill was subsequently impaired. Refer to Note 27 Goodwill and other intangible assets for further information.
30 Jun
2022
$m
37.0
(17.9)
19.1
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Challenger Limited 2022 Annual Report
Note 24
Acquisitions and disposals of subsidiaries (continued)
Acquisition of Challenger Bank (formerly MyLife MyFinance) (continued)
Assets
Cash and cash equivalents
Investment assets – amortised cost
Loan assets
Receivables
Deferred tax asset
Other assets
Property, plant and equipment
Total assets
Liabilities
Payables
Provisions
Deposits from customers
Interest bearing liabilities
Total liabilities
Net assets
Disposal of Accurium
Acquiree’s
carrying
amount
$m
Fair value
$m
6.4
37.4
106.7
0.2
—
0.3
0.1
6.4
37.4
106.7
0.2
7.7
0.3
0.1
151.1
158.8
0.7
0.6
134.2
5.4
140.9
10.2
0.7
0.6
134.2
5.4
140.9
17.9
On 1 November 2021, Challenger sold 100% of its equity
in Accurium Pty Ltd and its parent entity Accurium Holdings
Pty Ltd to CountPlus Limited for total purchase
consideration of $9.1 million.
At the time of sale, the combined tangible net assets of
Accurium totalled $0.2 million.
The Group recognised $8.7 million profit before tax from
the sale. The profit on the sale is calculated as proceeds less
tangible net assets less the relative value of goodwill
associated with the operation being disposed of, and less
disposal costs incurred. The relative goodwill amount was
assessed as immaterial.
Cash consideration
Less: carrying value of net assets of Accurium
Less: disposal costs
Total gain on disposal
30 Jun
2022
$m
9.1
(0.2)
(0.2)
8.7
Other than the acquisition of the Bank and the disposal of Accurium, there were no other significant acquisitions or disposals of
controlled entities.
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Note 25
Investment in associates
Associates
Name of company
Alphinity Investment Management Pty Ltd
Ardea Investment Management Pty Ltd
Ares Australia Management Pty Ltd
Avenir Capital Pty Ltd2
Bentham Asset Management Pty Ltd
Cultiv8 Funds 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 Ltd4
Wyetree Asset Management Pty Ltd
Total investment in associates5
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
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Country of
domicile
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
UK
Australia
Australia
Australia
UK
30 June
2022
%1
30
30
35
—
49
36
40
45
40
30
49
—
40
33
—
—
30 June
2021
%1
30
30
35
40
49
—
40
47
40
30
49
—
40
33
30
49
30 June
2022
$m
1.9
24.6
0.3
—
0.9
—
1.0
37.3
1.9
2.1
0.2
0.7
1.8
2.2
—
—
74.9
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
1. Represents voting rights percentages.
2. On 15 September 2021, Challenger sold its equity investment in Avenir Capital Holdings for a nominal value.
3. Challenger is deemed to have significant influence, due to its ownership of non-voting shares with optionality of conversion to voting shares, as well as its
Directorship on the Board.
4. On 1 February 2022, Challenger sold its 30% equity interest in Whitehelm Capital Pty Ltd to PATRIZIA AG. Please see below for further detail.
5. 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
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
Disposal of Whitehelm Capital Pty Ltd
In September 2021, Challenger announced that it has entered
into an agreement to sell its 30% equity interest in Whitehelm
Capital Pty Ltd to PATRIZIA AG for $51.1 million (€32 million).
Challenger’s sale consideration was paid in cash, with the
transaction completing on 1 February 2022.
30 June
2022
$m
30 June
2021
$m
83.2
—
38.0
(46.2)
(0.1)
74.9
63.0
21.3
35.2
(32.6)
(3.7)
83.2
38.0
35.2
43.6
5.4
49.0
25.5
2.5
28.0
21.0
45.7
4.8
50.5
21.7
3.0
24.7
25.8
Following completion, Group recorded a $44.6 million pre-tax
gain on sale of associate which is reported as a significant
item. The Group also derecognised $6.5 million of investment
in associate in relation to Whitehelm Capital Pty Ltd.
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Challenger Limited 2022 Annual Report
Note 25
Investment in associates (continued)
Accounting policy
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.
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.
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 economic 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 and joint venture entities are consistent
with those of the Group. The consolidated Statement of
comprehensive income reflects the economic share of the
results of operations of associates.
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.
Note 26 Related parties
Key Management Personnel
The Directors and key executives of Challenger Limited during the reporting period were as follows:
Directors1
Peter Polson
Nicolas Hamilton
John M Green
Steven Gregg
Masahiko Kobayashi2
Heather Smith
JoAnne Stephenson
Duncan West
Melanie Willis
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
1. Where an individual held a KMP role for part of either the current or prior reporting period, refer to section Key Management Personnel of the Remuneration
report for further details.
2. Hiroyuki Iioka is an Alternate Director to Masahiko Kobayashi.
Key executives1
Current KMP
Nicolas Hamilton
Chris Plater
Anton Kapel
Michael Clarke
Rachel Grimes AM
Former KMP
Richard Howes
Andrew Tobin
Angela Murphy
Managing Director and Chief Executive Officer
Deputy CEO
Chief Executive, Life & Solutions
Acting Chief Executive, Funds Management
Chief Financial Officer
Managing Director and Chief Executive Officer
Chief Financial Officer
Chief Executive, Life
1. Where an individual held a KMP role for part of either the current or prior reporting period, refer to section Key Management Personnel of the Remuneration
report for further details.
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Controlled entities and associates
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 23 Controlled entities.
Other related parties
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.
Transactions were also entered into between the Group and
associated entities (refer to Note 25 Investment in associates)
for the provision of distribution and administration services.
The Group earned fee income during the year of $67.7 million
(2021: $54.5 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.
Loans to Directors and key executives
There were no loans made to Directors or key executives as at
30 June 2022 (30 June 2021: 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
2022
2021
KMP
2022
2021
All KMP and Non-Executive Directors
2022
2021
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other
benefits
$
Total
$
2,040,385
1,621,501
115,701
88,358
—
—
—
—
2,156,086
1,709,859
5,971,343
5,651,994
117,840
112,345
3,807,179
5,021,664
137,798
208,107
10,034,160
10,994,110
8,011,728
7,273,495
233,541
200,703
3,807,179
5,021,664
137,798
208,107
12,190,246
12,703,969
1. No termination payments were made to KMPs or NEDs, while in their capacity, during the year.
139
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Challenger Limited 2022 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 27
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
Identifiable intangible (Assetsecure)
Less: accumulated amortisation
Less: asset reclassification3
Total other intangible assets
30 June
2022
$m
579.9
30 June
2021
$m
579.9
22.2
(15.6)
—
—
6.6
0.9
(0.2)
0.7
—
—
—
—
7.3
32.1
(15.2)
(1.1)
(7.5)
8.3
0.9
—
0.9
1.7
(0.1)
(1.6)
—
9.2
1. Impairment in prior year of capitalised software following management assessment for indicators of impairment.
2. Reclassification in prior year of previously capitalised cloud computing software deployment costs following the IFRS Interpretations Committee guidance issued in
April 2021.
3. Reclassification in prior year of Assetsecure identifiable intangible to capitalised software.
Goodwill
Software
Commercial
agreement
Identifiable
intangible
30 June
2022
30 June
2021
30 June
2022
30 June
2021
30 June
2022
30 June
2021
30 June
2022
30 June
2021
$m
$m
$m
$m
$m
$m
$m
Balance at the beginning of
the year
579.9
579.9
Additions
Impairment
Amortisation expense1
Reclassification
19.1
(19.1)
—
—
—
—
—
—
Balance at the end of the year
579.9
579.9
8.3
1.0
—
(2.7)
—
6.6
16.5
0.9
4.9
(1.1)
(4.5)
(7.5)
8.3
—
—
(0.2)
—
0.7
—
0.9
—
—
—
0.9
—
—
—
—
—
—
$m
1.6
—
—
—
(1.6)
—
1. Amortisation expense for the year ended 30 June 2022 differs from the movement in accumulated amortisation due to the reclassification of assets within the
30 June 2021 disclosure.
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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 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.
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Challenger Limited 2022 Annual Report
Note 27
Goodwill and other intangible assets (continued)
Sensitivity to change in assumptions
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 2022. 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
Life
Depreciation method
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
Key estimates and assumptions (continued)
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 Jun
2022
$m
30 Jun
2021
$m
30 Jun
2022
%
452.3 452.3 10.0 10.2
30 Jun
2021
Cash
flow
horizon
% (years)
3
127.6 127.6
579.9 579.9
9.4
9.7
3
CGU
Life
Funds
Management
Total
Bank CGU
During the year, the Group created a new CGU through the
acquisition of the Bank. Being a new business operation, the
Bank was identified as a standalone CGU. Goodwill was
recognised on acquisition and represents the excess of the
consideration paid over the fair value of the net assets and
liabilities acquired.
As at 30 June 2022, given the operating performance of the
business, Challenger has impaired the goodwill on acquisition
of the Bank, resulting in a $19.1m impairment recognised in
the Statement of comprehensive income.
On 16 August 2022 Challenger announced a strategic review
of its banking business.
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Note 28
Lease assets and liabilities
Right-of-use lease asset
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Cost
Less: accumulated depreciation
Right-of-use lease asset
Balance at the beginning of the year
Additions
Depreciation expense
Balance at the end of the year
30 June
2022
$m
45.5
(16.5)
29.0
30 June
2021
$m
45.4
(10.7)
34.7
Office premises1
Property, plant and
equipment2
30 June
2022
$m
30 June
2021
$m
30 June
2022
$m
30 June
2021
$m
34.4
0.1
(5.7)
28.8
32.0
8.4
(6.0)
34.4
0.3
—
(0.1)
0.2
0.4
(0.1)
—
0.3
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 remaining lease terms of between 9 months and 6 years at 30 June 2022. Renewal terms are 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.
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 16 for interest expense on lease liabilities and the Statement of cash flows for total cash outflow for leases.
30 June
2022
30 June
2021
$m
8.1
8.9
28.2
17.3
62.5
$m
8.0
8.2
26.7
27.4
70.3
30 June
2022
30 June
2021
$m
8.1
54.4
62.5
$m
8.0
62.3
70.3
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
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.
143
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Challenger Limited 2022 Annual Report
Note 28
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 29
Contingent liabilities, contingent assets and credit commitments
Warranties
Third party guarantees
Over the course of its corporate activity, the Group has given,
as a vendor of assets including real estate properties,
warranties to purchasers on several agreements that are
outstanding as at 30 June 2022. 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.
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.
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 2022 there are potential
future commitments totalling $496.6 million (30 June 2021:
$867.9 million) in relation to these opportunities.
The Group has made capital commitments to associates to
subscribe for up to $12.3 million (30 June 2021: $11.8 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.
In the normal course of the Bank’s business the Company
made commitments to extend credit to its customers of
$24.5 million.
Subsidiary guarantees
CLC has provided a guarantee to a third party regarding the
performance of its subsidiary in respect of certain reinsurance
arrangements.
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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
Net commitments owed to Group
30 June
2022
$m
4.2
0.8
2.9
7.3
30 June
2021
$m
2.6
0.8
2.9
7.3
15.2
13.6
(187.8)
(173.2)
(374.9)
(683.5)
(219.8)
(174.5)
(412.8)
(784.3)
(1,419.4)
(1,404.2)
(1,591.4)
(1,577.8)
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 fit out
commitments and acquisition of investment properties that
have exchanged prior to the balance date and will settle
subsequent to the balance date.
145
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Challenger Limited 2022 Annual Report
Note 30 Employee entitlements
Annual leave
Long service leave
Employee1 entitlements provision
1. The total number of employees of the Group at 30 June 2022 was 770 (30 June 2021: 738) on a full-time equivalent (FTE) basis.
30 June
2022
30 June
2021
$m
9.6
11.4
21.0
$m
8.4
9.9
18.3
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.
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.
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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 2022 and movements on previous
issues.
The DPSRs instruments was replaced with RS instruments
(refer below) during the year, consequently no new DPSRs
were issued.
Grant date
Latest date
for vesting1
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2021
Granted
during the
year
Vested
during the
year
Forfeited
during the
year
Outstanding
at 30 June
2022
7 Sep 2020
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
9 Sep 2019
1 Sep 2023
9 Sep 2019
1 Sep 2022
9 Sep 2019
1 Sep 2021
4.010
4.010
4.010
4.010
6.633
6.633
6.633
6.633
6.633
6.633
11 Sep 2018
1 Sep 2021
10.368
3.35
3.50
3.67
3.84
6.94
7.23
7.55
5.93
6.19
6.45
9.66
336,831
336,831
530,179
548,860
15,377
15,377
23,065
200,681
200,681
301,049
338,805
—
—
—
(2,739)
(10,434)
323,658
(2,739)
(10,434)
323,658
(4,109)
(15,655)
510,415
—
(547,849)
(1,011)
—
—
—
—
—
—
—
(23,065)
(1,507)
(1,507)
—
(301,049)
—
(338,805)
—
—
—
—
—
—
—
—
15,377
15,377
—
199,174
199,174
—
—
Total
2,847,736
— (1,223,369)
(37,534)
1,586,833
1. At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
Restricted Shares (RS)
A Restricted Share is a beneficial interest in a fully-paid
ordinary Challenger share acquired for zero consideration. RS
are subject to disposal restrictions and vest subject to
satisfaction of an employment condition.
RS provide an entitlement to vote and a right to dividends. RS
granted to KMP during the year ended 30 June 2022 are
detailed below:
Grant date
Expected
date for
vesting
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2021
Granted
during the
year
Vested
during the
year
Forfeited
during the
year
Outstanding
at 30 June
2022
8 Sep 2021
1 Sep 2025
8 Sep 2021
1 Sep 2024
8 Sep 2021
1 Sep 2023
8 Sep 2021
1 Sep 2022
6.440
6.440
6.440
6.440
6.36
6.36
6.36
6.36
Total
— 168,865
— 168,865
— 253,330
— 253,330
— 844,390
—
—
—
—
—
(3,983)
164,882
(3,983)
164,882
(5,976)
247,354
(5,976)
247,354
(19,918)
824,472
147
148
Challenger Limited 2022 Annual Report
Note 30
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 2019,
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 2022 and movements on previous issues:
Grant date
Expected
date for
vesting1
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2021
Granted
during the
year
Vested
during the
year
Forfeited
during the
year
Outstanding
at 30 June
2022
23 Mar 2022
1 Sep 2025
8 Sep 2021
1 Sep 2025
10 May 2021
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
5.901
6.440
4.880
4.752
4.010
6.729
6.729
6.633
11 Sep 2018
1 Sep 2022
10.368
11 Sep 2018
1 Sep 2021
10.368
11 Sep 2017
1 Sep 2021
12.264
11 Sep 2017
1 Sep 2020
12.264
12 Sep 2016
1 Sep 2020
12 Sep 2016
1 Sep 2019
9.156
9.156
4.37
3.59
2.64
2.58
132,848
848,268
1.87
5,921,438
4.22
4.42
432,483
90,618
3.10
2,800,292
3.94
4.56
5.42
6.11
3.80
572,686
989,593
476,508
845,367
599,653
4.33
1,052,525
—
27,949
—
—
27,949
— 3,640,608
—
(255,164)
3,385,444
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
132,848
848,268
—
(298,222)
5,623,216
—
—
—
—
—
—
—
—
432,483
90,618
(77,302)
2,722,990
(38,495)
534,191
(66,519)
923,074
(83,948)
392,560
—
(148,934)
696,433
—
(599,653)
— (1,052,525)
—
—
Total
14,762,279 3,668,557
— (2,620,762) 15,810,074
1 . At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
148
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Share-based payments
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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
a Monte Carlo simulation model for HPSRs which utilises the
TSR share price hurdles. A discounted cashflow methodology
is used to determine the fair value of RS. Key inputs into the
valuation models for equity awards granted during the year
are as follows:
Input
Dividend yield (%)
Risk-free rate (%)
Volatility2 (%)
Valuation ($)
1. Staggered deferred vesting applies to these grants.
2. Forecast volatility rate implied from historic trend. Volatility is only applicable to HPSRs.
Note 31
Remuneration of auditor
8 Sep 2021
RS
RS1
8 Sep 2021
HPSR
HPSR1
23 Mar 2022
HPSR
HPSR1
3.6
3.6
3.6
0.01-0.67
0.01-0.67
1.51-2.47
N/A
6.36
44
3.59
45
4.37
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
2022
$
30 June
2021
$
2,042,255
1,896,553
680,300
735,446
574,733
843,358
49,500
77,000
74,000
—
3,584,501
3,388,644
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
410,874
416,795
Other services in relation to the Group
– taxation services
Total auditor remuneration1
62,500
68,000
473,374
484,795
4,057,875
3,873,439
1. Auditor’s remuneration for the Group is paid by Challenger Group Services Limited, a wholly owned entity within the Group.
Note 32
Subsequent events
On 26 July 2022, Challenger announced the appointment of
Mr Victor Rodriguez to the role of Chief Executive, Funds
Management, effective 1 August 2022.
On 16 August 2022 Challenger announced the election of
Mr Duncan West as Challenger’s new Chair. Mr West will
replace the current Chair Mr Peter Polson, who will retire at
the conclusion of the Annual General Meeting (AGM) on
27 October 2022.
On 16 August 2022, Challenger announced a strategic review
of its banking business.
Since announcing the Bank acquisition in December 2020,
market conditions have changed and it is becoming apparent
the Bank is unlikely to realise the expected benefits within the
timeframe anticipated. As a result, Challenger is reviewing the
Bank’s position within the Group and has commenced a
strategic review of the business.
Challenger is considering all options in relation to the Bank
and has appointed an external advisor to assist.
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.
149
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Challenger Limited 2022 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) giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its performance for the
year ended on that date; and
(ii)
complying with Australian Accounting Standards and the Corporations Regulations 2001 (Cth);
b)
c)
d)
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 2022.
On behalf of the Board
P Polson
Independent Chair
16 August 2022
N Hamilton
Managing Director and Chief Executive Officer
16 August 2022
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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 2022, 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 2022 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.
151
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Challenger Limited 2022 Annual Report
Independent auditor’s 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 2022: $13,595.4 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 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.
We performed a recalculation for a sample of the life contract
liability valuations.
In conjunction with our IT specialists, we assessed whether
policy information was extracted accurately from the Group’s
underlying administration system into the valuation process.
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.
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2
Valuation of Level 3 Investment and Property Assets
Financial report reference: Note 20
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, which include some fixed
income securities, equity and other alternatives, infrastructure
investments, property securities, and investment property.
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 2022: $5,950.6 million), and
the degree of judgment and estimation uncertainty associated
with the valuations.
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 considered consistency with the Group’s
documented methodology and assumptions.
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.
Evaluated the key assumptions associated with
property valuations and agreed key inputs to tenancy
schedules. 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.
Evaluated the suitability of the property 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.
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.
Where appropriate, we involved our valuation specialists in the
above procedures.
We assessed the adequacy and appropriateness of the related
financial report disclosures.
153
154
Challenger Limited 2022 Annual Report
Independent auditor’s report
3
Recoverability of Goodwill
Financial report reference: Note 27
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 2022: $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 CGU.
Agreed the projected cash flows used in the
impairment models to the Board approved 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
2022.
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 considered the adequacy of the
related financial report disclosures.
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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 2022 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.
155
156
Challenger Limited 2022 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 55 to 76 of the Directors’ Report for the year ended 30 June 2022.
In our opinion, the Remuneration Report of Challenger Limited for the year ended 30 June 2022, 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.
Ernst & Young
G McKenzie
Partner
Sydney
16 August 2022
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Directors’ Report
Further Information
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Financial Report
157
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 30 June 2022
Apollo Global Management, Inc. / Athene Life Reinsurance Ltd 1
MS&AD Insurance Group Holdings Inc 1
20 largest individual shareholders as at 31 July 2022
HSBC Custody Nominees (Australia) Limited
1.
Citicorp Nominees Pty Limited
2.
J P Morgan Nominees Australia Pty Limited
3.
HSBC Custody Nominees (Australia) Limited
4.
National Nominees Limited
5.
BNP Paribas Noms Pty Limited
6.
Argo Investments Limited
7.
HSBC Custody Nominees (Australia) Limited
8.
9. Mutual Trust Pty Ltd
10. Citicorp Nominees Pty Limited
11.
12. CPU Share Plans Pty Ltd
13.
14. UBS Nominees Pty Ltd
15. Netwealth Investments Limited
16. CPU Share Plans Pty Limited
17. HSBC Custody Nominees (Australia) Limited - A/C 2
18.
19. Australian Executor Trustees Limited
20. Navigator Australia Ltd
BNP Paribas Nominees Pty Limited Hub24 Custodial Serv Limited
Sandhurst Trustees Limited
Roche Group Pty Limited
Total 20 largest individual shareholders – issued capital
Total remaining shareholders balance
1. Number of shares for substantial shareholders as at 31 July 2022 not available at the time of releasing this report.
Distribution of shares (as at 31 July 2022)
Number of
shares
% of issued
capital
128,907,226
102,687,805
201,243,170
148,604,463
95,879,892
53,956,792
23,093,135
12,639,157
5,440,311
3,570,603
3,020,136
2,400,411
1,532,197
824,472
763,918
747,228
724,004
651,987
620,129
600,000
594,656
594,508
557,501,169
124,744,492
18.89
15.05
29.50
21.78
14.05
7.91
3.38
1.85
0.80
0.52
0.44
0.35
0.22
0.12
0.11
0.11
0.11
0.10
0.09
0.09
0.09
0.09
81.72
18.28
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Unmarketable parcels
Minimum $500.00 parcel at $6.84 per unit
ASX listing
Challenger Limited shares are listed on the ASX under code
CGF. Share price details and company information can be
accessed via either the Company website:
› challenger.com.au
or the ASX website:
Number of
shareholders
15,877
Number of
shares
7,213,259
% of issued
capital
1.06
15,005
36,519,246
3,373
2,117
24,326,826
43,448,219
82
570,738,111
36,454 682,245,661
5.35
3.57
6.37
83.65
100.00
Minimum
parcel size
72
Holders
1,216
Units
29,020
› asx.com.au
Voting rights
On a show of hands, every member present at the meeting in
person or by proxy shall have one vote and upon a poll each
share shall have one vote.
157
158
Challenger Limited 2022 Annual Report
Investor information (continued)
Buy-back
There is currently no market buy-back.
On market acquisitions for employee incentive schemes during the financial year ended
30 June 2022
No Challenger Limited ordinary shares were purchased on market to satisfy entitlements under Challenger’s employee incentive
schemes.
Top 20 noteholders of Challenger Capital Notes 2 as at 31 July 2022
20 largest individual noteholders as at 31 July 2022
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
HSBC Custody Nominees (Australia) Limited
Citicorp Nominees Pty Limited
BNP Paribas Nominees Pty Limited Hub24 Custodial Serv Limited
J P Morgan Nominees Australia Pty Limited
Australian Executor Trustees Limited
Mutual Trust Pty Ltd
Netwealth Investments Limited
Taverners No 11 Pty Limited
BNP Paribas Nominees Pty Ltd
Navigator Australia Limited
National Nominees Limited
Navigator Australia Limited
HSBC Custody Nominees (Australia) Limited - A/C 2
Australian Executor Trustees Limited
15.
16.
17.
18.
19.
20.
Nulis Nominees (Australia) Limited
Trustees Of Church Property For The Diocese Of Newcastle
Certane Ct Pty Limited
G C F Investments Pty Ltd
Australian Executor Trustees Limited
Total 20 largest individual noteholders – issued notes
Total remaining noteholders balance
Distribution of notes (as at 31 July 2022)
Number of
notes
278,162
184,181
180,863
159,348
96,777
87,529
83,939
54,689
53,478
53,354
49,519
40,972
36,600
33,872
31,071
29,270
25,291
23,129
20,000
17,691
1,539,735
3,060,265
% of issued
notes
6.05
4.00
3.93
3.46
2.10
1.90
1.82
1.19
1.16
1.16
1.08
0.89
0.80
0.74
0.68
0.64
0.55
0.50
0.43
0.38
33.47
66.53
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Unmarketable parcels
Number of
holders
4,896
Number of
notes
1,542,514
% of notes
33.53
522
1,107,775
30
30
4
229,532
917,625
802,554
24.08
4.99
19.95
17.45
4,600,000
100.00
5,482
Minimum
parcel size
Holders
Units
5
Minimum $500.00 parcel at $100.16 per unit
5
4
158
2022 Annual ReportChallenger Limited
About
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Governance and Sustainability
Directors’ Report
Further Information
Challenger Limited 2022 Annual Report
Financial Report
159
Top 20 noteholders of Challenger Capital Notes 3 as at 31 July 2022
20 largest individual noteholders as at 31 July 2022
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
J P Morgan Nominees Australia Pty Limited
HSBC Custody Nominees (Australia) Limited
Citicorp Nominees Pty Limited
BNP Paribas Nominees Pty Ltd
BNP Paribas Nominees Pty Limited Hub24 Custodial Serv Limited
Diocese Development Fund -Catholic Diocese Of Parramatta
Mutual Trust Pty Limited
Australian Executor Trustees Limited
Eastcote Pty Ltd
National Nominees Limited
Berne No 132 Nominees Pty Ltd <684168 A/C>
Netwealth Investments Limited
BNP Paribas Nominees Pty Limited
Sandhurst Trustees Limited
Vision Australia Foundation
Berne No 132 Nominees Pty Ltd <2853115 A/C>
MF Investments No 1 Pty Ltd
GCF Investments Pty Ltd
Navigator Australia Ltd
270 King Street Pty Ltd
Total 20 largest individual noteholders – issued notes
Total remaining noteholders balance
Distribution of notes (as at 31 July 2022)
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Unmarketable parcels
Number of
holders
3,486
349
29
22
5
3,891
Minimum
parcel size
Number of
notes
357,354
292,942
244,798
122,316
119,351
76,177
73,471
44,703
41,600
41,556
38,489
30,102
27,507
26,068
25,500
22,500
21,493
20,000
18,440
17,600
1,661,967
% of issued
notes
9.28
7.61
6.36
3.18
3.10
1.98
1.91
1.16
1.08
1.08
1.00
0.78
0.71
0.68
0.66
0.58
0.56
0.52
0.48
0.46
43.17
2,188,033
56.83
Number of
notes
1,180,927
704,816
205,301
622,195
1,136,761
% of notes
30.67
18.31
5.33
16.16
29.53
3,850,000
100.00
Holders
Units
—
Minimum $500.00 parcel at $100.16 per unit
5
—
ASX listing
Shareholder queries
Challenger Capital Notes 2 are listed on the ASX under the
trade symbol CGFPB. Challenger Capital Notes 3 are listed on
the ASX under the trade symbol CGFPC. Note price details can
be accessed via the ASX website:
› asx.com.au
Voting rights
Challenger Capital Notes 2 and 3 do not confer any voting
rights in the Company but if they are exchanged or converted
for ordinary shares in accordance with their terms of issue,
then the voting rights of the ordinary shares will be the same
as for ordinary shares.
For any administrative matters in respect of your Challenger
Limited shareholding or noteholding, please contact the
Company’s share registrar, Computershare:
Computershare Investor Services Pty Limited
Level 3, 60 Carrington Street, Sydney NSW 2000
Telephone: 1800 780 782
Website: › computershare.com.au
To assist with all enquiries, please quote your unique Security
Reference Number (SRN) and your current address when
dealing with Computershare.
159
160
Additional information
PRINCIPAL PLACE OF
BUSINESS AND REGISTERED
OFFICE IN AUSTRALIA
MANAGE YOUR SHAREHOLDING
AT COMPUTERSHARE
INVESTOR SERVICES
Level 2
5 Martin Place
Sydney NSW 2000
Telephone: 02 9994 7000
Investor services: 13 35 66
DIRECTORS
Peter Polson (Chair)
Nicolas Hamilton (Managing Director
and Chief Executive Officer)
John M Green
Steven Gregg
Masahiko Kobayashi
Heather Smith
JoAnne Stephenson
Duncan West
Melanie Willis
COMPANY SECRETARY
Linda Matthews
WEBSITE
challenger.com.au
Computershare Investor Services
Pty Limited
Level 3
60 Carrington Street
Sydney NSW 2000
Telephone: 02 8234 5000
computershare.com.au
AUDITOR
Ernst & Young
200 George Street
Sydney NSW 2000
GO ELECTRONIC
Challenger can deliver all of your
shareholder communications
electronically, by updating your details
via Computershare Investor Services.
ONLINE DIGITAL VERSION
OF THIS REPORT
The 2022 Annual Report is available at:
challenger.com.au/annualreport2022
2022 Annual ReportChallenger Limited