Annual Report
2023
1
Providing financial security
for a better retirement
drives everything we do.
It is our purpose.
To deliver this and create lasting
value for our shareholders, we’re
building a more customer-centric
business – one that leverages
our leading retirement franchise
to meet our customers’ needs in
more ways each and every day.
DUNCAN WEST
Independent Non-Executive
Director and Chair
NICK HAMILTON
Managing Director &
Chief Executive Officer
Read more about how we’re growing our business and delivering
for our customers, shareholders, staff and the community
MESSAGE FROM THE CEO > P5
Challenger acknowledges the Traditional Owners of
Country throughout Australia and we pay our respects
to Elders past and present. We recognise the continuing
connection that Aboriginal and Torres Strait Islander
peoples have to this land and acknowledge their unique
and rich contribution to society.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
2
About this report
The 2023 Annual Report brings
together key information on
our consolidated financial,
operational and sustainability
performance for the financial
year ended 30 June 2023.
Reflecting continued commitment to sustainability,
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.
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 offshore markets
in which it operates.
2023 Annual ReportChallenger Limited 3
Reporting suite
About this report
The 2023 Annual Report, including
the financial report for the year
ended 30 June 2023, can be
viewed at Challenger’s online
Shareholder Centre at:
challenger.com.au/
shareholder
2023 Corporate
Governance Statement
The 2023 Corporate Governance
Statement can be viewed online at:
challenger.com.au/
corporategovernance
2023
2023 Sustainability Report
The 2023 Sustainability Report
can be viewed online at:
challenger.com.au/
sustainabilityreport
2023
2022 Modern
Slavery Statement
Challenger’s Modern Slavery
Statement can be viewed online at:
challenger.com.au/
modernslavery
statement2022
Contents
About
Key dates
3
4 Message from the Chair
5 Message from the CEO
6
8
Highlights
About Challenger
Operating and Financial Review (OFR)
Life business
Funds Management business
Strategic progress
10
12
15
19 Key performance indicators (KPIs)
22 Normalised profit and
investment experience
Five-year history
24
Directors’ Report
62
64
Directors’ experience
and responsibilities
Remuneration report
Financial Report
Financial statements
90
95 Notes to the financial statements
162 Directors’ declaration
163 Independent auditor’s report
Further information
170 Investor information
173 Additional information
Governance and Sustainability
26 Corporate governance
29 Tax transparency
30 Risk management
32 Sustainability
Key dates
Annual General Meeting
Date
26 October 2023
Time
9.30am (Sydney time)
Location
The 2023 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 2023.
Dates may be subject to change.
Any change in dates will be advised to
the Australian Securities Exchange.
20 September 2023
Final dividend payment date
26 October 2023
2023 Annual General Meeting
13 February 2024
Half year financial results
19 March 2024
Interim dividend payment date
13 August 2024
Full year financial results
18 September 2024
Final dividend payment date
24 October 2024
2024 Annual General Meeting
Full listing of key dates available at:
challenger.com.au/shareholder/
shareholder-information/key-dates
Board nominations
The closing date for receipt of nominations for the Challenger Limited Board is
23 August 2023.
Challenger Limited
ACN 106 842 371
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 4
Message from the Chair
Reflecting on my first year as Chair
of Challenger, I feel very proud of the
important role that our company plays
in helping Australian retirees achieve
financial security.
2023 was a pivotal year for our industry as
demographic, economic and policy shifts
highlighted the urgent need to improve
our retirement system. Whilst Australia
has a first-class accumulation savings
system, we are only just beginning to focus
on the importance of providing income
in retirement.
As Australia’s leading retirement income
brand, Challenger is uniquely positioned to
play a significant role in the development
of the retirement income market
and provide customers with financial
confidence in retirement, now and into
the future.
Stronger shareholder
outcomes
Challenger has delivered a strong financial
outcome this year. Normalised net profit
before tax was $521 million and in the
top half of our guidance range, with the
business achieving record annuity sales
as it meets the growing demand for
guaranteed income.
This result underscores the strength
of our business and speaks to the
significant opportunity in Australia’s
growing retirement income market as
more Australians seek financial security
in retirement.
Given Challenger’s strong financial
performance and our confidence in the
business, the Board has determined a
full-year dividend of 24.0 cents per share,
up 4.3% on last year.
Corporate governance
Challenger has a highly talented and
diverse team who are committed to going
above and beyond for our employees,
shareholders and customers. I am proud to
work with such capable and driven teams
at both the Board and Leadership level.
We continue to consider the skills
and expertise required to guide the
implementation of our strategy at the
Board level.
Reflecting our strong commitment
to diversity, our Leadership team now
comprises 40% women as we strive to
achieve gender balance on our executive
team by 2030 and expect to continue the
process of Board renewal over time.
Ensuring fair and appropriate remuneration
outcomes remains a key focus, with our
reward framework closely aligned with
shareholder interests. Executive short-term
incentives reflect our business performance
this year, as detailed on the balanced
scorecard in the Remuneration Report.
Long term incentives will not vest this
year, as they are tied directly to achieving
total shareholder return targets, which
demonstrates our ongoing commitment
to ensuring remuneration is aligned to
long-term shareholder outcomes.
Sustainability
Challenger is committed to creating a
sustainable future for our customers,
people, shareholders and wider
stakeholders.
DUNCAN WEST
Independent Non-Executive
Director and Chair
Our 2023 Sustainability Report
outlines the comprehensive review
we have undertaken to better
understand our environmental, social
and governance (ESG) performance
against our purpose and core business
activities. Importantly, the report also
details focus areas that Challenger will
progress over the coming years.
We recognise the important role we must
play in helping communities across the
country and have continued to support
Australians through our retirement
policy advocacy as well as expanding
our community charity program.
On behalf of the Challenger Board,
I would like to thank our customers and
shareholders for their ongoing support
this year.
Our business remains strong, and I am
confident in our ability to deliver strong
outcomes for customers at the same time
as delivering sustainable long-term growth
for shareholders.
2023 Annual ReportChallenger Limited Message from the CEO
5
Challenger is uniquely positioned to play
a leading role in Australia’s developing
retirement income market. Leveraging our
expertise across retirement income and
funds management, we are committed to
delivering on our purpose and providing
customers with financial security for a
better retirement.
In 2023, Challenger focused on improving
the experience for our customers,
enhancing our product offering and
addressing a wider range of customer
needs – all in service of providing retirees
with financial confidence.
I am very pleased with the progress we
have made, as we seize the opportunity
to take a broader stance in retirement
and continue to drive growth across
our business.
Responding to more
customer needs
A key tenet of building a more
customer-centric business is making it
easier for financial advisors, institutions
and customers to integrate with our
term and lifetime income solutions.
This includes using technology to
materially improve the customer experience.
The launch of our new guaranteed direct
fixed term annuity allows customers access
to our fixed term products online in a
matter of minutes. We have also expanded
our range of retirement income products,
which support our customers to meet
their retirement and savings goals through
different stages of life.
In our Life business, we have focused
on deepening our relationships
with institutional clients, leveraging
our retirement expertise to support
superannuation funds with retirement
solutions. New partnerships with
Aware Super and TelstraSuper highlight
the breadth of our capability and the
significant opportunity ahead as funds
seek to deliver better outcomes for their
members in retirement.
Our Funds Management business has
performed well in more challenging market
conditions, demonstrating the strength of
our diversified, multi-affiliate platform and
investment capabilities. We have expanded
our offering to meet the growing demand
for alternative investments, including
strategic investments into Cultiv8 and
Elanor Investors Group, as well as
expanding our affiliate relationships with
Proterra and Resonance.
We have also made some important
strategic decisions as we seek to focus on
our core competitive strengths in Life and
Funds Management. This includes the sale
of Challenger Bank and our Australian
real estate business. This last year we
have invested to expand our fixed income
platform and our spin-out investment
operations business, Artega. Our strategic
partnership with Apollo is progressing well,
allowing us to leverage their investment
and retirement services capability. And
we continue our successful relationship
with the MS&AD Group in Japan that we
have built over many years.
Looking ahead
In FY24, we will focus on growing our core
retirement and investment businesses,
accelerating growth through Life sales,
while continuing to grow our Funds
Management business.
Given demographic and regulatory
changes underway, the Australian
savings market is increasingly focused
on retirement – the very purpose of our
superannuation system.
NICK HAMILTON
Managing Director &
Chief Executive Officer
As Australia’s leading
retirement income franchise,
we are well positioned to help
superannuation funds develop
innovative retirement solutions to help
meet their members’ needs, and we
have an exciting pipeline of opportunities.
Underpinning all our efforts are our
talented and motivated team, who
I thank for their dedication and energy
this year. Our impressive achievements are
the result of teamwork, innovation and
commitment to constantly raise the bar.
I look forward to our continued success
in delivering stronger outcomes for both
our customers and shareholders next
year and beyond.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 6
Highlights
Overview
Challenger has delivered a strong
performance this year as we focus on
expanding our customer reach and
driving growth initiatives. The result
reflects the strength of our franchise
and our ability to meet the growing
demand for guaranteed income as
an increasing number of customers
seek financial security in retirement.
For further details on this year’s performance, refer to the
Key performance indicators section > P19
STATUTORY NET PROFIT AFTER TAX
13.3% on FY22
$287.5m
NORMALISED NET
PROFIT BEFORE TAX
GROUP ASSETS
UNDER MANAGEMENT
$520.7m
$105.0bn
NORMALISED GROUP
ROE (PRE-TAX)
80bps on FY22
12.7%
FY23
FY22
FY21
$472.3m
$395.8m
FY23
FY22
FY21
$98.6bn
$110.0bn
FULL YEAR DIVIDEND
LIFE SALES
CAPITAL POSITION
24.0cps
$9.7bn
FY23
FY22
FY21
23.0cps
20.0cps
FY23
FY22
FY21
$9.7bn
$5.1bn
1.59x
Challenger Life
Company PCA ratio
2023 Annual ReportChallenger Limited 7
Customers
Employees
Communities
LAUNCH OF OUR
Employee Value
Proposition
IN MARCH 2023
DIVERSITY & INCLUSION SCORE4
89%
5
INVESTMENT MANAGERS
WITH SUSTAINABLE
OFFERINGS5
Partnership with
the Australian
Academy of
Technological
Sciences and
Engineering (ATSE)
TO SUPPORT INDIGENOUS
LEADERSHIP IN STEM
83%
EMPLOYEES RECOMMEND
CHALLENGER AS A GREAT
PLACE TO WORK4
ADVOCATE FOR
REFORMS THAT
improve
financial security
for retirees
~$6 billion
PAYMENTS MADE
TO CUSTOMERS1
Top 25
OF THE LARGEST
SUPERANNUATION FUNDS
CLIENTS OF CHALLENGER2
93%
BRAND LEADER
IN RETIREMENT INCOME3
1. FY23 annuity interest and capital payments.
2. Based on total assets held by trustee, quarterly My Super statistics as at 31 March 2023, APRA.
3. Marketing Pulse Study June 2023.
4. 2023 Your Voice employee survey, March 2023.
5. Alphinity, Resonance, Proterra, Cultiv8, Impax Asset Management.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information$ 8
About Challenger
Challenger Limited (Challenger) was founded in 1985
and is Australia’s leading retirement income brand1
as well as one of its largest fund managers2.
London
Tokyo
Australia
817
FULL-TIME
EMPLOYEES
ASX 100
LISTED
ESTABLISHED
1985
APRA
REGULATED LIFE COMPANY
Building on its core Life and Funds Management businesses, Challenger has developed
relationships with strategic partners that bring capabilities that can significantly
enhance the value for Challenger. This includes MSAD Insurance Group Holdings Inc.,
Apollo (NYSE:APO) and SimCorp (CSE:SIM).
Our purpose
To provide customers with financial
security for a better retirement.
Our strategic pillars
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
We do things the right way
Aim high
Collaborate
We deliver outstanding results
We work together to achieve shared goals
Think customer
We make decisions with our end customers front of mind
1. Plan For Life – March 2023 – based on annuities under administration.
2. Consolidated FUM for Australian Fund Managers – Rainmaker Roundup, March 2023.
2023 Annual ReportChallenger Limited 9
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 10
Life business
Life focuses on the
retirement income phase
of superannuation,
with products helping
customers convert
retirement savings into
safe, secure and reliable
retirement income.
Life’s annuity products appeal to
retirees as they provide security and
certainty of guaranteed1 income while
protecting against the risks of investment
market downturns and rising inflation.
By providing certainty of income,
Challenger ensures customers have
more confidence in retirement.
NET BOOK GROWTH
in line with FY22
5.2%
LIFE SALES
53% increase on
retail annuity sales
$9.7bn
LIFE ASSET ALLOCATION
Lifetime annuities protect retirees from the
risk of outliving their savings by paying an
income for life. Depending on the payment
option selected, payments will either
be fixed, indexed to inflation, linked to
changes in the RBA cash rate or indexed to
investment markets to provide retirees with
greater income security.
The retirement incomes that Life pays to
its customers are backed by a high-quality
investment portfolio, predominantly
invested in high-grade fixed income.
These investments generate reliable
investment income, which is used to fund
the retirement incomes paid to customers.
Life is Australia’s leading retirement income
brand2 and has won the Association of
Financial Advisers ‘Annuity Provider of
the Year’ for the last 15 years, and won
Plan for Life’s Overall Longevity Cover
Excellence Award in 2022.
Life is expected to continue to benefit
from the long-term growth in Australia’s
superannuation system and regulatory
reforms designed to enhance the retirement
phase of superannuation.
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 is expected to increase by nearly 50%
over the next 20 years3. 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 $87 billion4 in 2022.
The purpose of superannuation is to
provide income in retirement to substitute
or supplement the Government-funded
age pension.
As the superannuation system grows
and individual superannuation savings
increase, retirees are transitioning from
Government-funded age pensions to
private superannuation-funded pensions.
Retirees need retirement income products
that convert their superannuation savings
into safe, secure and reliable income,
which helps provide financial security
and confidence to spend 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 objective of
the superannuation system. The Retirement
Income Covenant took effect from
1 July 2022 as part of the Superannuation
Industry Supervision Act 1993 (SIS Act) and
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 retirees stable,
regular and reliable retirement income.
Annuities deliver these benefits yet currently
only represent a very small part of the
retirement phase of superannuation.
Life’s products are distributed in Australia
via both independent financial advisers and
financial adviser administrative platforms.
Life’s products are included on all major
advice hubs’ Approved Product Lists (APLs)
and are available on leading independent
investment and administration platforms.
Life is also building institutional partnerships
with superannuation funds that are
increasingly focused on supporting their
members in retirement by providing more
comprehensive retirement income solutions.
A number of funds also have defined
benefit pension liabilities and are looking
to de-risk. This provides a significant growth
opportunity for Challenger as funds look to
engage trusted partners to deliver de-risking
and retirement proposition solutions.
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 the reinsurance arrangement,
MS Primary reinsures at least ¥50 billion
(equivalent to ~A$520 million)5 of its
Australian and US dollar annuities with
Challenger Life each year6. This is subject
to review in the event of a material
adverse change for either MS Primary
or Challenger Life.
76% Fixed income and cash (net)
13% Property
10% Alternatives
1% Equity and Infrastructure
1. The word ‘guaranteed’ means payments are guaranteed by Challenger Life Company Limited (CLC) from assets of
either its relevant statutory fund or shareholders’ funds.
2. Plan For Life – March 2023 – based on annuities under administration.
3. 2022–2042 comparison based on Australian Bureau of Statistics, Population Projections Series B, cat no. 3222.0.
4. Based on Taxation Statistics 2020–21 from Australian Taxation Office.
5. Based on exchange rate as at 30 June 2023.
6. Reinsurance across both Australian and US dollar annuities, of at least ¥50 billion per year for a minimum of five
years, commencing 1 July 2019.
2023 Annual ReportChallenger Limited 11
MS&AD also hold ~15% equity interest
in Challenger Limited and an MS&AD
representative has been appointed to
the Board.
Performance
Life’s normalised EBIT was $541m in FY23
and increased by $68m (14.4%) on FY22.
The increase in EBIT reflects a $70m (12.0%)
increase in Normalised Cash Operating
Earnings (COE) and a $2.0m (1.8%) increase
in expenses.
Life’s normalised ROE (pre-tax) was 15.1%
in FY23 and increased by 200 bps on FY22,
driven by an increase in Normalised COE.
FY23 Normalised COE was $653m and
increased by $70m (12.0%) on FY22.
Normalised COE increased as a result of:
– higher COE margin, which increased
by 22 bps on FY22 to 2.82%; and
– higher average investment assets,
which increased by 3.2% on FY22.
Challenger is building more resilient sales
by diversifying across a range of retail and
institutional products and clients.
Total Life sales were $9.7b and stable on
FY22, driven by record retail sales and
strong Japanese annuity sales, largely
offset by lower institutional sales.
In FY23, Challenger Life achieved record
annuity sales of $5.5b, up $0.4b or 7.7%
on FY22.
FY23 annuity net flows of $385m
represents annuity book growth of 2.8%
for the year and is calculated as FY23
annuity total net flows divided by the
opening period (FY23) annuity liability of
$13,595m.
FY23 annuity net flows benefited
from an increase in sales (up 7.7%
on FY22), partially offset by a higher
maturity rate of 37.7% (up from
29.6% in FY22).
Other Life sales represents Challenger’s
Index Plus product. Other Life net flows for
the period were $550.8 million, decreasing
by $846.9 million compared to the prior
corresponding period (pcp).
Total Life net flows were $935.9 million,
representing total Life net book growth of
5.2% (30 June 2022: $2,471.9 million or
14.3% book growth).
“Challenger Life delivered
a strong performance in
FY23 with record annuity
sales. The result reflects the
strength of our franchise and
our ability to meet the growing
demand for guaranteed income as
an increasing number of customers
seek financial security in retirement.”
ANTON KAPEL
Chief Executive, Life and Solutions
LIFE NORMALISED
RESULTS
Normalised COE
Cash earnings
Normalised
capital growth
2023
($m)
653.0
627.0
26.0
2022
($m)
582.8
534.0
48.8
CHANGE
($m)
CHANGE
(%)
70.2
93.0
12.0
17.4
(22.8)
(46.7)
Operating expenses
Normalised EBIT
(112.5)
540.5
(110.5)
472.3
(2.0)
68.2
(1.8)
14.4
LIFE SALES
Fixed-term
annuities
2023
($m)
2022
($m)
CHANGE
($m)
CHANGE
(%)
4,794.6
4,636.1
158.5
3.4
Lifetime annuities
722.7
486.6
Total Life
annuity sales
5,517.3
5,122.7
236.1
394.6
Other Life sales
4,229.3
4,583.4
(354.1)
Total Life sales
9,746.6
9,706.1
Annuity net flows
Other Life net flows
385.1
550.7
1,074.2
1,397.7
40.5
(689.1)
(846.9)
Total Life net flows
935.8
2,471.9
(1,536.1)
48.5
7.7
(7.7)
0.4
(64.2)
(60.6)
(62.1)
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
12
Funds Management
business
Funds Management
focuses on wealth
accumulation,
predominantly in the
pre-retirement phase
of superannuation, by
supporting customers
build savings through
providing contemporary
investment strategies
and products that seek
to deliver superior
investment returns.
FUNDS UNDER MANAGEMENT
5.4% on FY22
$98.4 bn
Funds Management is one of Australia’s
largest active fund managers1 with funds
under management (FUM) of $98 billion,
which has more than doubled over the last
10 years (up from $41 billion in 2013).
Fidante has been successful in attracting
and building active equity, active fixed
income and alternative investment
managers, while also maintaining
strong investment performance.
Growth in FUM is supported by
Challenger’s award-winning retail and
institutional distribution teams and business
model, which is focused on high-quality
managers with strong long-term investment
performance and alignment with clients.
Funds Management comprises Fidante
and Challenger Investment Management
(CIM), with operations in Australia,
the United Kingdom, Europe and Asia.
Funds Management, through its Fidante
affiliates and CIM, invests across a broad
range of asset classes, including fixed
income, Australian and global equities
and alternative investments.
Over the last five years, long-term
performance of Fidante’s Australian
affiliates was strong with 99% of
investments outperforming their
respective benchmarks.1,2
Fidante is focused on broadening its product
and investment offering, which includes
partnering with best-in-class managers,
and accessing new distribution channels.
CIM principally originates and manages
fixed income and commercial real
estate for leading global and Australian
institutions, including Challenger
Life. Challenger Life accounts for
approximately 80% of CIM’s FUM.
Funds Management has extensive client
relationships. For example, over 70% of
Australia’s top 50 superannuation funds
are clients.
Funds Management remains well
positioned to benefit from ongoing
growth in both Australia’s superannuation
system and global pension markets.
Fidante’s business model involves taking
minority equity interests in separately
branded affiliate funds management firms,
with Challenger providing distribution
services and business support, and Artega
Investment Administration (Artega)
providing investment administration
services, leaving investment managers
to focus entirely on managing
investment portfolios.
Performance
Funds Management normalised EBIT
decreased by 25.6% for the year, with net
income lower primarily due to a decrease
in average FUM, which was down 8.9%
on pcp, and higher operating expenses
(increase of 7.5%).
Fidante’s net fee income includes
FUM-based distribution and administration
fees, transaction fees, performance fees
and a share in the equity-accounted profits
of affiliate investment managers.
FUNDS MANAGEMENT INVESTMENT PERFORMANCE
(% of FUM outperforming benchmark)4
Since Inception
5 Years
3 Years
1 Year
90%
99%
75%
52%
1. Calculated from Rainmaker Roundup, March 2023 data.
2. As at 30 June 2023. Percentage of Fidante affiliates meeting or exceeding the performance benchmark, with gross
performance weighted by FUM.
3. Fidante income includes equity-accounted profits, distribution fees, administration fees and Fidante Europe
transaction fees.
4. As at 30 June 2023. Percentage of Fidante’s Australian affiliates meeting or exceeding the performance
benchmark, with performance weighted by FUM.
2023 Annual ReportChallenger Limited 13
Fidante’s net income was down
$9.7 million for the year primarily
as a result of a decrease in Fidante
income3 (down $10.4 million), which
was driven by lower average FUM,
partially offset by higher performance
fees (up $0.7 million).
Challenger Investment Management’s
(CIM) net income decreased by $3.3 million
primarily due to lower net management
fees (down $0.2 million) and lower
transaction fees (down $3.1 million)
following the transfer of the Solutions
Group from CIM to the Life business.
Funds Management’s normalised ROE
(pre-tax) for the year was 21.7%, down
by 9.5 percentage points from the pcp.
ROE was impacted by the decrease
in normalised EBIT and an increase in
average net assets.
Funds Management’s FUM increased by
$5.0 billion (or 5.4%) compared to the
pcp. During the year, net outflows were
$0.5 billion compared to net outflows of
$8.5 billion in the pcp (which included
$5.2 billion de-recognition following the
sale of Whitehelm).
FM NORMALISED
RESULTS
Net income
Fidante
CIM
Operating
expenses
2023
($m)
178.8
115.7
63.1
2022
($m)
191.8
125.4
66.4
(117.2)
(109.0)
CHANGE
($m)
CHANGE
(%)
(13.0)
(9.7)
(3.3)
(8.2)
(6.8)
(7.7)
(5.0)
(7.5)
Normalised EBIT
61.6
82.8
(21.2)
(25.6)
FM FUM
AND FLOWS
Total FUM
Fidante
CIM
Net flows
Fidante
CIM
2023
($bn)
98.4
78.0
20.4
(0.5)
0.4
(0.9)
2022
($bn)
93.4
72.4
21.0
(8.5)
(8.9)
0.4
CHANGE
($bn)
CHANGE
(%)
5.0
5.6
(0.6)
8.0
9.3
(1.3)
5.4
7.7
(2.9)
(94.1)
(large)
(large)
“The Funds Management
business delivered
another solid performance
notwithstanding tougher
industry conditions. We have
consistently outperformed peers
over many years and are widely
recognised for our investment
capability.”
VICTOR RODRIGUEZ
Chief Executive, Funds Management
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
14
Corporate segment and
other information
Corporate segment
The Corporate division
comprises central
functions such as Group
executives, finance,
treasury, tax, legal,
human resources, risk
management and
commercial.
Corporate normalised EBIT was
a loss of $69 million in FY23, up
$1 million (1%) from FY22. EBIT loss
was similar year on year, with higher
other expenses (up $2 million), offset
by lower long-term incentive costs
(down $2 million). Personnel expenses
were broadly in line with FY22.
Interest and borrowing costs were
broadly in line year on year.
Guidance for the
2024 financial year
Challenger’s FY24 normalised net profit
before tax guidance is a range of between
$555m and $605m, which assumes:
– ~$5m investment in Artega’s operating
platform to migrate to the cloud and
support onboarding new external clients;
– ~$5m in additional costs including
initiatives focused on branding,
risk and cybersecurity; and
– Given the pending sale of the Bank,
it has been excluded from FY24
guidance, with the sale expected to
complete in 1H24 subject to regulatory
approval in Australia and New Zealand.
The mid-point of the FY24 normalised net
profit before tax guidance ($580m) is 11%
above FY23 normalised net profit before
tax of $521 million.
In FY24, Challenger will target a cost to
income ratio of 35% to 37% which is
below FY23 normalised cost to income
ratio of 37.7%.
Commencing from FY24, Challenger will
target a dividend payout ratio of between
30% and 50% of normalised profit after
tax and seeks to frank the dividend to the
maximum extent possible.
The target dividend payout range
has been extended from 45% to 50%
(prior to FY24) to support Challenger’s
growth profile and provide flexibility,
especially in periods of higher growth
and attractive market conditions.
However, the actual dividend payout ratio
will depend on prevailing market conditions
and capital allocation priorities at the time.
Principal activities
During the period Challenger announced
the sale of Challenger Bank to Heartland.
There have been no other significant
changes in the nature of the principal
activities of the Group during the year.
CORPORATE AND OTHER NORMALISED
RESULTS
Net income
Operating expenses
Normalised EBIT
Interest and borrowing costs
Normalised loss before tax
2023
($m)
1.6
(70.2)
(68.6)
(4.0)
(72.6)
2022
($m)
CHANGE
($m)
CHANGE
(%)
–
(67.6)
(67.6)
(4.1)
(71.7)
1.6
(2.6)
(1.0)
0.1
(0.9)
n/a
(3.8)
(1.5)
2.4
(1.3)
2023 Annual ReportChallenger Limited Strategic progress
Progress over 2023 has been measured against
Challenger’s four strategic priorities.
15
1. Broaden customer access across multiple channels
FY23 PROGRESS:
Diversification
strategy
delivering
strong Life sales
Building
a more
customer-
centric
business and
playing a more
meaningful
role in
customer lives
Modernising
the customer
experience
Challenger is delivering higher quality Life sales through focusing on longer duration business across both retail and institutional products and clients.
In FY23, the Life business achieved sales of $9.7 billion, driven by record annuity sales of $5.5 billion (up 8%).
Annuity sales benefitted from very strong domestic retail sales of $3.6 billion (up 53%) that included retail term annuity sales of $2.9 billion
(up 53%) and lifetime1 sales of $0.7 billion (up 49%).
Annuity sales are benefitting from a supportive market environment, rising demand for guaranteed lifetime income and a growing number of
Australians entering retirement.
In March 2023, Challenger launched a targeted marketing campaign for lifetime annuities. Centering around longevity protection, the campaign
highlighted how a lifetime annuity can benefit retirees by providing them with confidence to spend in retirement, while protecting against the risks
of rising inflation and outliving their savings.
In FY23, demand for longer-dated annuities improved with 74% of new business annuity sales greater than 2 years2 compared with 50% in FY22.
The tenor on new business annuity sales also increased to 5.8 years, up from 4.9 years in FY22. The contribution of longer-dated annuity sales is
helping to reduce the maturity rate, which is expected to fall to 26% in FY24, down from 33% in FY23.
Retail sales continue to benefit from stronger demand and are supported by an increase in adviser quoting levels, which increased 59% on the prior
corresponding period (pcp).
Throughout FY23, Challenger took steps to reorganise itself around customers and focus on their needs, leveraging its core capabilities in much
more meaningful ways.
The newly formed Customer division oversees all customer functions for the Group, including customer strategy, product development, sales and
marketing, and customer service, delivering a clearer operating model and prioritising customers’ needs.
In 1H23, an experienced sales, marketing and distribution executive, Ms Mandy Mannix, was appointed Chief Executive, Customer. The appointment
follows the creation of a range of new leadership roles, as Challenger focuses on building a more customer-centric business. New leadership
roles include the Chief Commercial Officer and expanding responsibilities of the Chief Executive, Life to include oversight for Life’s Institutional
Solutions Group.
As part of creating a more customer-centric business, Challenger is investing in its customer experience and customer journeys. These innovations
are designed to make it easier and quicker for customers to do business with Challenger and expand customer reach and improve engagement.
In 1H23, Fidante launched a new registry service and a range of new digital tools. Fidante’s new registry service now provides online transacting and
registry services to over 60 funds managed by Challenger and support the expansion of Fidante’s suite of Exchange Traded Funds (ETFs). Investors
have access to a new online investor portal and can self-service, allowing investors and advisers to manage portfolios directly and provide easy access
to a wide range of services.
The Life business is also working on a range of initiatives to improve its customer experience. In May 2023, Challenger launched a new direct online
channel that allows customers to buy simple fixed term annuities online in under ten minutes. This new digital direct channel will allow Challenger
to capture targeted growth by meeting the needs of customers who prefer to invest directly while providing greater process efficiencies.
In FY23, online digital branding across the Funds Management and Life businesses was refreshed to provide a more contemporary look and feel.
This included the rebrand of Fidante and launch of its new website (Fidante.com).
The rebrand reflects Fidante’s diverse, contemporary offering, which includes 19 affiliate partners and covers most major asset classes. The new
website is more personalised and user friendly, offering greater content, comparison tools and interactive charts that will provide a more
sophisticated and contemporary customer experience.
1. Includes CarePlus annuity sales.
2. FY23 new business annuity sales by tenor excluding reinvestment sales and Japanese sales.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 16
Strategic progress continued
1. Broaden customer access across multiple channels continued
Deepening
relationships
with
institutions
A key focus for FY23 for Challenger has been to build on institutional customer relationships, particularly with the leading superannuation funds.
Challenger’s offering for institutional customers extends from simple, short-term yield products, through to longer-duration lifetime income and
institutional longevity solutions.
As Australia’s leading provider of longevity protection with decades of experience, Challenger via the Solutions Group is well placed to help
superannuation funds simplify their business and de-risk their defined benefit liabilities. There are opportunities to support them to develop more
comprehensive retirement income propositions to meet their members’ needs.
Currently, Challenger has a business relationship with the 25 largest Australian superannuation funds.1 Challenger sees partnerships with super
funds as a key growth opportunity and has been engaging with funds to help support them as they develop their retirement income propositions,
as required under the Retirement Income Covenant.
In May 2023, Challenger announced a strategic partnership with profit-to-member fund TelstraSuper to provide its members lifetime annuities,
which provide them with longevity and inflation protection. The partnership is expected to commence in 1H24 and generate ongoing lifetime
annuity sales for Challenger.
In July 2023, Challenger announced it had been selected as Aware Super Pty Ltd’s (Aware Super) defined benefit fund partner. Commencing in
July 2023, Challenger will provide a group lifetime annuity policy to the value of $619 million that will cover approximately 3,000 members and
de-risk the fund’s lifetime pension liabilities.
The defined benefit pension market presents a significant growth opportunity for Challenger as an increasing number of corporate pension plans
and superannuation funds look to de-risk their defined benefit pension liabilities.
International
Funds
Management
expansion
Funds Management is well positioned for growth opportunities in Australia and is diversifying its operations globally.
Funds Management has expanded its distribution business into Europe through its UK office and has established a presence in Japan. To support
offshore clients and provide access to its investment products, Fidante is establishing Undertakings for Collective Investment in Transferable Securities
(UCITS) funds. Fidante is continuing to seek opportunities to bring new product to the offshore market through targeting institutional and wholesale
UK, European and Asian investors.
In November 2023, Fidante’s emerging markets affiliate, Ox Capital Management, launched the Ox Capital Dynamic Asia UCITS Fund investing
in Asian equities, excluding Japan. The fund holds a concentrated portfolio of 30 to 50 stocks, focused on technology, healthcare, financials and
consumer discretionary sectors.
Award-
winning
investment
strategies
and products
Challenger is a market leader in Australian retirement incomes. In March 2023, Challenger Life won the Association of Financial Advisers
‘Annuity Provider of the Year’ for the 15th consecutive year, along with the ‘Long Term Income Stream’ award.
93% of financial advisers regard Challenger as a leader in retirement income – more than 35 percentage points ahead of its closest peer.2
Challenger was also the winner of Plan For Life’s ‘Overall Longevity Cover Excellence Award’ for 2022, which recognises Australian life
companies and fund managers who design products to assist retirees in meeting the challenges of longevity. Challenger also won the Plan
For Life ‘Longevity Product Award’ for its Liquid Lifetime annuity and the ‘Client & Adviser Technical Support Award’, for its in-depth, ongoing
support provided to advisers.
Fidante’s investment managers continue to be externally recognised.
During FY23, the following affiliates won investment manager awards:
– Ardea Real Outcome Fund – Lonsec – Active Global Fixed Income Fund;
–
Ardea Real Outcome Fund – Money Magazine – Best Australian Fixed Interest Fund (Diversified) and Financial Standard –
Best Credit/Absolute Return Fund;
– Alphinity Investment Management – Zenith Investment Partners – Australian Equities, Large Cap; and
– Bentham Global Income Fund – Money Management – Global Fixed Income Fund of the Year.
Fidante was recognised as Australia’s leading retail funds management distributor, winning Zenith Investment Partners (Zenith) Distributor of the Year
in October 2022 for a third consecutive year. This award recognises the quality of Zenith’s ratings across Fidante’s product suite, access to Fidante
affiliate investment professionals and the quality of its adviser support and sales team. Fidante’s products are continually recognised externally as
high quality, with 21 of the 30 strategies rated Highly Recommended by research houses.3
1. By total assets, quarterly My Super statistics as at 31 March 2023, APRA.
2. Marketing Pulse Adviser Study June 2023 based on (% agree/strongly agree).
3. As at 13 June 2023.
2023 Annual ReportChallenger Limited 17
2. Expand the range of financial products and services for a better retirement
FY23 PROGRESS:
Innovative
retirement
income
solutions
With a ‘One Challenger’ approach, Challenger brings the best of the business to more customers.
Challenger does this by capitalising on the expertise across the Group and is expanding the Challenger brand from a leader in retirement incomes,
to a brand synonymous with high-quality income products with a wider retirement offering. Challenger is also focused on improving the way it
delivers its retirement products, longevity solutions and investment capability to customers and partners.
In July 2022, the Challenger Solutions Group launched the Challenger Solutions Liquid Alternatives Balanced Fund. The Fund seeks to deliver
positive absolute returns in excess of the cash rate regardless of the market environment and is the first in a series of solutions being developed by
Challenger’s Solutions Group. The Fund delivered a gross annual return of 15.2% in the 12 months to 30 June 2023.
In September 2022, Challenger Life introduced a new accelerated payments option for its Market-Linked Annuity offering. This option allows
customers to increase the starting lifetime annuity payment in exchange for lower future indexation.
In April 2023, Fidante’s affiliate, Cultiv8, made three initial investments in early-stage agricultural and food technology companies as part of its
Agriculture and Food Technology Fund. The fund focuses on capital growth and sustainability with a portfolio comprised of 20 to 30 seed to series B
investments in Australian and global Agri-Food Technology companies. The fund targets a gross return of 20% per annum over the recommended
nine-year timeframe.
Expanding
distribution
channels
through active
ETF market
There continues to be strong demand from investors for simple and easy-to-access liquid investment products. Exchange Traded Funds (ETFs)
have experienced strong growth in a number of markets as they provide the ability to deliver diversified investment strategies in a liquid and
easy-to-execute format.
In January 2023, Fidante launched two new ETFs to deliver diversified investment strategies in a liquid and easy-to-execute format: the Alphinity
Global Equity Fund (Managed Fund) (ASX: XALG) and Alphinity Global Sustainable Equity Fund (Managed Fund) (ASX: XASG). The funds sit
alongside Fidante’s existing ETFs, which include the Ardea Real Outcome Bond Fund (Managed Fund) (ASX: XARO) and the Kapstream Absolute
Return Income Fund (Managed Fund) (CBOE: XKAP).
New Fidante
affiliates
The Alphinity Global Equity Fund (Managed Fund) seeks to build a portfolio of high-quality global companies that are identified as undervalued and
within an earnings upgrade cycle. The Alphinity Global Sustainable Equity Fund (Managed Fund) aims to build a portfolio of high-quality companies
that can have a net positive alignment with one or more of the 17 United Nations’ Sustainable Development Goals (SDGs), exceed Alphinity’s
minimum environmental, social and governance (ESG) criteria, and which are also identified as undervalued and within an earnings upgrade cycle.
Fidante is committed to growing its series of ETFs and expects to launch more. Total Fidante FUM invested in ETF strategies at 30 June 2023 was
$817 million, across approximately 11,000 investors.1
Fidante is focused on growing its alternatives platform in response to increasing demand from investors for high-quality alternative investment capabilities.
In July 2023, Challenger formed a strategic real estate partnership with Elanor Investors Group (ASX:ENN), which will include an exclusive distribution
arrangement whereby Fidante will distribute Elanor’s existing and new funds and Elanor will become Challenger’s commercial real estate partner in
Australia and New Zealand.
As part of the agreement, Challenger sold its Australian real estate business (CRE) to Elanor for total consideration of $38 million2 which was received
in new securities issued by Elanor. Challenger’s holding in Elanor represents approximately 14% of issued capital and Elanor will become a new
Fidante affiliate manager offering a very compelling proposition for retail, high-net-worth and institutional customers.
In June 2023, Fidante expanded its existing distribution arrangement with Proterra Investment Partners Asia (Proterra Asia), a leading private equity
investor focused on the Asian food and agribusiness sectors. Under an expanded relationship, Fidante has a 12.5% revenue share in the business.
This strategic partnership builds on the existing well-established distribution agreement between Fidante and Proterra Asia in the UK and Europe,
with the new arrangement including Australia, Japan, and other agreed jurisdictions.
In July 2023, Fidante completed commercial agreements to acquire an equity stake in Resonance Asset Management (Resonance) and now has
35% ownership of the company. Fidante is also the exclusive distributor in covered regions for future strategies.
3. Leverage the combined capabilities of the Group
FY23 PROGRESS:
Sale of
Challenger
Bank
In October 2022, Challenger announced it had entered into a share sale agreement with Heartland Group Holdings Limited (NZX/ASX:HGH)
(Heartland) to sell the Bank for cash consideration of approximately $36 million.3
The sale is expected to generate a pre-tax gain on sale of approximately $11 million, which will be reported as a significant item once completed.4
The sale is subject to regulatory approvals in both Australia and New Zealand and is expected to complete in 1H24.
In April 2023, Challenger received approval from APRA to release $50 million of excess Bank capital, which was injected into Challenger Life.
The remaining excess capital of approximately $40 million is expected, subject to regulatory approvals in Australia and New Zealand, to be returned
to Challenger prior to or on completion of the sale providing additional financial flexibility to support growth in the Life business.
Capital notes
and Tier 2
subordinated
debt finance
In September 2022, Challenger Life Company Limited (CLC) issued $400 million of fixed-to-floating rate, unlisted, unsecured subordinated notes.
The proceeds from the issuance were used to repay $400 million of subordinated notes that had a call date in November 2022.
In April 2023, Challenger issued $350 million of Challenger Capital Notes 4 (ASX:CGFPD) to help fully repay $460 million Challenger Capital Notes 2
(ASX:CGFPB) that had an Optional Exchange Date in May 2023.
These refinancing initiatives reflect Challenger’s long-standing approach to proactively managing the Group’s capital position, ensuring it remains
well capitalised and ensuring there is no shareholder dilution with existing subordinated notes converting into Challenger shareholder equity.
1. Includes listed FUM and holders only.
2. Before tax, transaction costs and other adjustments and subject to certain milestones being met.
3. Price subject to completion adjustments and based on a net asset value of approximately $25 million.
4. Any difference between purchase price and net assets of ~$25 million will be reduced by transaction costs and other costs associated with the sale.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 18
Strategic progress continued
4. Strengthen resilience and sustainability of Challenger
FY23 PROGRESS:
Apollo strategic
relationship
Apollo (NYSE:APO) and Athene are Challenger strategic partners and hold a minority interest of approximately 20% of issued share capital.
Challenger and Apollo share a common purpose, with strong complementary skills and capabilities.
Both parties are working together on a range of opportunities to help Challenger’s customers achieve financial security in retirement and deliver
meaningful value for shareholders, including balance sheet investment, capital, product development and distribution opportunities.
Challenger and Apollo have agreed to form a distribution partnership, under which Fidante will bring the Apollo Aligned Alternatives (AAA) capability
to the Australian market in 1H24. Under the agreement, Challenger will build an Australian AAA feeder fund and is expected to launch in 1H24.
AAA is positioned as an equity replacement product and will provide clients with access to invest alongside Apollo, across a full cross-section of
alternative investments.
Artega
Investment
Administration
operational
In November 2022, Artega Investment Administration (Artega), an independently branded joint venture between Challenger and SimCorp
(CSE:SIM), was launched. Artega will provide market-leading investment administration services to investment managers and asset owners
across Australia.
Artega leverages 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 investment managers and asset owners.
In 1H23, Artega became operational and commenced providing investment administration services to its existing clients, Challenger and Fidante
affiliates. In 2H23, investment operations staff from Challenger Life and Funds Management transferred and became full-time employees of Artega
to support its business activities.
To date, a number of clients have chosen Artega as their administration provider.
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 its
latest employee engagement survey (conducted March 2023). Results of the survey included:
– 95% of employees believe that gender-based harassment and sexual harassment is not tolerated; and
– 91% of employees believe Challenger has a working environment that genuinely supports equality between women and men.
In FY23, 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 Equity Agency (WGEA) for the sixth year in a row.
Embedding
ESG across the
business
Challenger recognises its growth and success should be sustainable to benefit customers, partners and communities. This means factoring ESG
considerations into all decision making.
In FY23, Challenger took significant steps to better understand current ESG performance against Challenger’s purpose, operating model and core
business activities. This included the completion of a comprehensive ESG review covering technology systems, data maturity, governance practices,
risk identification and ESG related decision-making processes. The review benchmarked current ESG practices against a range of stakeholder
perspectives. This provided a comprehensive understanding of areas Challenger could improve over time and opportunities to strengthen
Challenger’s approach to ESG governance. Following this review, Challenger commenced a range of initiatives which are outlined in the 2023
Sustainability Report.
Challenger recognises the importance of incorporating ESG considerations into its investment process. Challenger has been a signatory to the
Principles for Responsible Investment (PRI) since 2015. Investment managers follow a formal responsible investment policy, report on ESG risks across
their portfolios and incorporate ESG considerations into internal strategies.
Sustainability affiliate investment managers include:
– Cultiv8 Funds Management, a sustainability-aligned fund focused on investments in innovative agricultural and food technologies;
– Proterra Asia, a private equity fund manager focused on the Asian food and agribusiness sectors; and
–
Resonance Asset Management, an alternative asset management firm investing in sustainable water, energy, and waste management
infrastructure.
Challenger believes climate change will impact every part of the economy. In 2023, Challenger undertook preliminary work to understand Scope 3
financed emissions across its investment portfolio, initially focusing on listed equities and corporate bonds.
In FY23, Challenger overhauled its Modern Slavery Statement, including implementing an improved structure for addressing and assessing modern
slavery risks. Supporting this work, Challenger rolled out training for key teams to help them understand modern slavery risks and how to identify
them, with over 90% of teams completing the training.
Challenger also plays an active role in advocating for public policy and reforms that are in the best interests of its customers, shareholders and wider
stakeholders, particularly those in relation to retirement.
As a leading retirement income provider, Challenger also recognises the important role it plays in contributing to a more sustainable and equitable
future for all Australians and is committed to supporting communities across the country.
In June 2023, Challenger established a new partnership with the Australian Academy of Technological Sciences and Engineering (ATSE) to support
Indigenous leadership in STEM and technological innovation. This partnership reflects Challenger’s commitment to investing in knowledge and
embracing innovation.
2023 Annual ReportChallenger Limited Key performance indicators (KPIs)
NORMALISED NPBT ($M)
NORMALISED NPAT ($M)
NORMALISED ROE PRE-TAX (%)
FY23
FY22
$520.7m
10.2%
$472.3m
FY23
FY22
$364.0m
13.2%
$321.5m
FY23
FY22
12.7%
0.8%
11.9%
19
Profitability and growth
KPIs for the year ended 30 June 2023 include:
Certain financial measures detailed in
this report are not accounting measures
within the scope of International
Financial Reporting Standards (IFRS).
Management use these financial metrics
to measure the Group’s overall financial
performance and position and believe
the presentation of the financial measure
provide useful information to analysts
and investors regarding the results of the
Group’s operations.
Challenger’s statutory profit attributable
to equity holders for the year ended
30 June 2023 was higher than the
statutory profit reported in the previous
year. The difference was primarily due
to higher Life normalised cash operating
earnings from stronger performance in
Life’s investment portfolio, partly offset
by lower Funds Management net fee
income earned on lower average FUM.
In addition, expenses across the Group are
higher driven by investment in strategic,
technology and customer initiatives.
Normalised NPAT increased by 13.2%,
and normalised EPS increased by 12.0%
compared to 2022.
Investment experience after tax was a
loss of $67.8 million, compared to a loss
of $81.2 million in the pcp. The loss this
year is primarily driven by a reduction in
commercial property valuations and losses
in alternatives investments partially offset
by gains in fixed income investments.
A final dividend of 12.0 cents was declared,
franked at 100%. The total dividend for
2023 was 24.0 cents, which is 1.0 cent
higher (4.3%) than the prior year.
Profitability
Statutory profit attributable to
equity holders ($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 (%)
Total FM net flows ($bn)
Total AUM ($bn)
30 JUN
2023
30 JUN
2022
CHANGE
(%)
287.5
253.7
520.7
364.0
42.1
53.3
24.0
100%
37.7%
7.0%
12.7%
8.9%
472.3
321.5
37.5
47.6
23.0
100%
38.7%
6.4%
11.9%
8.1%
9,746.6
935.8
5.2%
(0.5)
105.0
9,706.1
2,471.9
14.3%
(8.5)
98.6
13.3
10.2
13.2
12.3
12.0
4.3
–
1.0
0.6
0.8
0.8
0.4
(62.1)
(9.1)
(large)
6.5
Challenger’s normalised cost to income
ratio of 37.7% was lower than 2022
(38.7%). 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 12.7% in 2023 compared to
11.9% in the prior year.
Statutory ROE after tax of 7.0% has
increased compared to the prior year
(2022: 6.4%) which is primarily as a result
of higher statutory NPAT. Normalised ROE
after tax increased from 8.1% in the prior
period to 8.9%, primarily reflecting higher
normalised NPAT.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
20
Key performance indicators (KPIs) continued
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 2023, the Challenger Group
was holding $1.8 billion in excess
regulatory capital, which equates
to a Group Minimum Regulatory
Requirement ratio (times) of 1.66 times
(31 December 2022:1.67 times). This ratio
represents Challenger holding 66.0%
more regulatory capital than required
by its regulators.
The following table highlights the
key capital metrics for CLC, Challenger
Bank Limited (CBL) and the Group.
CAPITAL AS AT 30 JUNE 2023
Regulatory capital base
Common Equity Tier 1 (CET1)
regulatory capital
Additional Tier 1 capital
Total Tier 1 regulatory capital
Tier 2 capital1
Other non regulatory capital2
Total capital base
Minimum Regulatory Requirement3,4
Excess over Minimum Regulatory
Requirement
CET1 capital ratio (times)5
Tier 1 capital ratio (times) 6
Minimum Regulatory Requirement
ratio (times)7
CLC
($m)
CBL
($m)
GROUP
($m)
3,110.5
60.5
3,171.0
735.0
3,845.5
411.3
–
4,256.8
2,681.9
1,574.9
1.16
1.43
1.59
–
735.0
60.5
3,906.0
–
–
60.5
13.1
47.4
4.62
4.62
4.62
411.3
218.8
4,536.1
2,734.9
1,801.2
–
–
1.66
1. CLC represents subordinated debt.
2. Includes CLC, CBL, Funds Management, Corporate and other Life/Bank entities. Refer to Note 12 for detailed split.
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) plus the counter
cyclical buffer of 1% (of risk weighted assets), as stipulated under APS 110 Capital Adequacy as at 30 June 2023.
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.
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 2023 was
1.59 times (30 June 2022: 1.60 times),
within this range of 1.3 to 1.7 times.
The CET1 ratio was 1.16 times at
30 June 2023, an increase from
1.11 times at 30 June 2022.
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 2023 was $60.5m and represents
CET1 regulatory capital. The CET1
regulatory capital base is similar to the
Bank’s 30 June 2023 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).
2023 Annual ReportChallenger Limited
21
30 JUN
2023
30 JUN
2022
CHANGE
12.0
12.0
24.0
100%
100%
11.5
11.5
23.0
100%
100%
0.5
0.5
1.0
–
–
1. Interim dividend announced on 17 February 2023 and paid on 22 March 2023 in respect of the half year ended
31 December 2023.
2. Final dividend announced on 15 August 2023 and payable on 20 September 2023 in respect of the half year ended
30 June 2023.
The Company continued to operate its
Dividend Reinvestment Plan (DRP) during
the period. The participation rate for
the 2023 interim dividend was 33.0%
and 3,695,743 ordinary shares were
issued to satisfy DRP requirements on
21 March 2023.
The DRP will continue in operation for the
2023 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.
Credit ratings
Challenger Limited and CLC are
rated by Standard & Poor’s (S&P).
In December 2022, S&P reaffirmed both
CLC and Challenger Limited’s credit ratings.
Ratings were confirmed as:
CLC
A with a
stable outlook
CHALLENGER LIMITED
BBB+ with a
stable outlook
The Bank’s excess over the minimum
regulatory capital requirement at
30 June 2023 was $47.4m and the Bank
capital ratios were as follows:
– Minimum Regulatory Requirement ratio
4.62 times;
DIVIDENDS
Interim dividend (cents)1
Final dividend (cents)2
Total dividend (cents)
– Common Equity Tier 1 (CET1) capital
Interim dividend franking
Final dividend franking
ratio 4.62 times; and
– Capital adequacy risk-weighted asset
ratio 53.2%.
A significant portion of the Bank financing
and lending assets are invested in cash and
cash equivalents and lending activity has
slowed during the period given the sale of
the bank.
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.
Dividends and Dividend
Reinvestment Plan
The dividend payout ratio for the
year ended 30 June 2023 was 45.0%
(30 June 2022: 48.3%) and is within
Challenger’s targeted range.
The final dividend of 12.0 cents will be
fully franked.
In recognition of Challenger’s growth
profile and to provide capital flexibility
to fund this growth, commencing from
FY24 Challenger will target a dividend
payout ratio of between 30% and 50%
of normalised profit after tax. The target
payout range has been extended from
45% to 50% (prior to FY24) to allow the
dividend to help support Challenger’s
growth requirements, especially in periods
of higher growth. However, the actual
dividend payout ratio will depend on
prevailing market conditions and capital
allocation priorities at the time.
Challenger will continue to seek to
frank the dividend to the maximum
extent possible.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 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 sales
and reallocation of assets paying higher
investment yield.
Life’s average assets under management
(AUM) increased by 3.2% as a result of
growth in investment assets and index plus
fund liabilities.
Net income2
Comprising:
Life normalised COE
FM net income
Bank net income
Corporate and other income
Operating expenses2
Normalised EBIT
Comprising:
Life normalised EBIT
FM normalised EBIT
Bank normalised EBIT
Corporate and other normalised EBIT
Interest and borrowing costs
Normalised NPBT
Tax on normalised profit
Normalised NPAT
Investment experience after tax
Bank impairments after tax2
Significant items after tax
Statutory net profit after tax
attributable to equity holders
2023
($m)
2022
($m)
CHANGE
($m)
CHANGE
(%)
842.2
776.9
65.3
8.4
653.0
178.8
8.8
1.6
582.8
191.8
2.3
–
(317.5)
(300.5)
524.7
476.4
540.5
472.3
61.6
(8.8)
(68.6)
(4.0)
82.8
(11.1)
(67.6)
(4.1)
520.7
472.3
(156.7)
(150.8)
364.0
321.5
(67.8)
(81.2)
(1.4)
(7.3)
(0.9)
14.3
287.5
253.7
70.2
(13.0)
6.5
1.6
(17.0)
48.3
68.2
(21.2)
2.3
(1.0)
0.1
48.4
(5.9)
42.5
13.4
(0.5)
(21.6)
33.8
12.0
(6.8)
large
n/a
(5.7)
10.1
14.4
(25.6)
(20.7)
(1.5)
2.4
10.2
(3.9)
13.2
(16.5)
n/a
large
13.3
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.
2023 Annual ReportChallenger Limited 23
Funds Management net income decreased
(down $13.0 million) due to lower average
FUM. Funds Management average FUM
decreased by 8.9%.
Operating expenses increased by
$17.0 million (or 5.7%) for the year
due to increased spend on technology,
customer and strategic initiatives.
Challenger’s full-time equivalent employee
numbers increased by 47 (or 6.1%) to
817 primarily due to Artega and Customer
to support increased activity.
The normalised effective tax rate was lower
than the prior year. The decrease in the
effective tax rate reflects a tax benefit in
relation to tax rate differentials. The rate
is broadly in line with the statutory rate
of 30%.
Significant items were $7.3 million
(after tax) and represent the costs related
to the sale of the Real Estate business
to Elanor (ASX: ENN), costs related to
the implementation of AASB 17 and
costs related to the sale of the Bank
to Heartland.
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.
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 benefit
Investment experience after tax
Pre-tax investment experience in
2023 comprised an experience loss of
$99.4 million comprising a $13 million asset
and policy liability loss and a $87 million
loss in relation to new business strain.
2023
($m)
2022
($m)
171.6
(13.8)
(158.4)
(105.5)
(106.1)
(442.5)
(81.5)
222.8
89.4
(211.8)
(60.7)
(58.7)
22.5
64.2
26.0
232.3
(36.3)
(222.6)
(105.5)
119.6
(12.5)
(86.9)
(99.4)
31.6
(67.8)
37.7
69.8
48.8
(383.8)
(119.2)
153.0
89.4
187.7
(72.9)
(42.4)
(115.3)
34.1
(81.2)
1. Actual capital growth represents net realised and unrealised capital gains or losses and includes the attribution of
interest rate, inflation and foreign exchange derivatives that are used to hedge exposures.
2. Normalised capital growth is determined by multiplying the normalised capital growth rate for each asset class
by the average investment assets for the period. The normalised capital growth rates represent Challenger’s
expectations for each asset class over the investment cycle. The annual normalised growth rate is +4.0% for equity
and infrastructure, +2.0% for property, 0.0% for alternatives, and -0.35% for cash and fixed income in order to
allow for credit defaults. The rates have been set with reference to medium to long-term market growth rates and
are reviewed to ensure consistency with prevailing market experience.
3. Policyholder liability experience represents the impact of changes in macroeconomic variables, including bond
yields and inflation factors, expense assumptions and other factors applied in the valuation of life contract liabilities.
4. New business strain is a non-cash accounting adjustment recognised when annuity rates on new business are
higher than the discount rate, being a risk-free rate plus an illiquidity premium used to fair value annuities.
The new business strain unwinds over the annuity contract.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
24
Five-year history
Earnings ($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/(loss) 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
2023
2022
2021
2020
2019
653.0
178.8
8.8
1.6
842.2
(201.9)
(115.6)
(317.5)
524.7
(4.0)
520.7
(156.7)
364.0
(67.8)
(1.4)
(7.3)
287.5
37.7%
30.1%
27.6%
53.3
42.1
46.3
37.9
12.7%
8.9%
7.0%
582.8
191.8
2.3
–
776.9
(204.5)
(96.0)
(300.5)
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
512.8
169.3
–
–
682.1
(179.9)
(101.4)
638.9
158.1
–
0.4
797.4
(174.0)
(110.4)
(281.3)
(284.4)
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)
670.1
149.9
–
1.0
821.0
(185.3)
(82.1)
(267.4)
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
11.9%
8.1%
6.4%
11.2%
7.9%
16.8%
14.8%
10.0%
(12.1%)
15.8%
11.4%
8.9%
2023 Annual ReportChallenger Limited 25
2023
2022
2021
2020
2019
30,938.0
29,725.2
29,917.9
28,461.6
27,457.5
26,773.6
25,736.9
26,092.1
25,212.0
23,834.7
4,164.4
4,160.4
4,091.0
3,552.7
6.09
5.20
323.7
12.0
12.0
24.0
45.0%
57.0%
5,517.3
4,229.3
9,746.6
385.1
3,988.3
3,988.3
3,970.0
3,372.1
5.86
4.96
(101.3)
11.5
11.5
23.0
48.3%
61.3%
5,122.7
4,583.4
9,706.1
1,074.2
3,825.8
3,825.8
3,518.9
3,202.0
5.69
4.76
194.7
9.5
10.5
20.0
48.2%
22.7%
4,566.0
2,362.1
6,928.1
1,079.8
3,249.6
3,249.6
3,424.4
2,619.2
4.90
3.95
194.7
17.5
–
17.5
31.0%
N/A
3,127.4
2,024.0
5,151.4
(251.1)
3,622.8
3,600.3
3,462.1
3,019.1
5.94
4.98
236.9
17.5
18.0
35.5
54.2%
69.7%
3,543.1
1,006.9
4,550.0
685.8
13,930.0
13,595.0
13,669.9
12,581.2
12,870.2
2.8%
935.8
7.9%
2,471.9
8.6%
2,163.8
(2.0%)
315.8
5.8%
474.8
19,199.0
17,981.8
17,302.1
14,997.0
14,836.4
5.25%
14.3%
14.4%
2.1%
3.4%
(472.3)
(8,524.8)
16,111.5
2,540.9
(2,438.4)
23,538.0
22,224.0
21,563.0
18,303.0
19,010.0
98,467.0
93,448.0
105,824.0
81,435.0
79,029.0
225.4
390.5
–
–
–
(17,278.0)
(17,492.6)
(17,427.0)
(14,501.0)
(16,269.0)
104,966.0
98,569.9
109,960.0
85,237.0
81,770.0
817
682.1
683.8
6.48
770
675.7
680.0
6.84
738
671.6
672.6
5.41
735
608.3
663.1
4.41
687
605.8
605.8
6.64
4,431.0
4,651.2
3,638.8
2,924.3
4,022.5
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 ($)
Underlying operating cash flow ($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 ($m)
Total Life net book growth (%)
Funds Management – net flows ($m)
Assets under management ($m)
Life
Funds Management
Bank
Elimination of cross-holdings5
Total assets under management
Other
Headcount – closing FTE
Weighted average number of ASX-listed basic shares on issue (m)
Number of shares on issue – closing (m)
Share price – closing ($)
Market capitalisation ($m) 6
1. Including non-controlling interests.
2. Excluding non-controlling 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.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
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
(CEO) 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.
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.
Our approach to corporate governance
SHAREHOLDERS
CHALLENGER LIMITED BOARD
Acts on behalf of shareholders and oversees the overall direction,
management and corporate governance of Challenger
GROUP AUDIT
COMMITTEE
GROUP RISK
COMMITTEE
NOMINATION
COMMITTEE
GROUP
REMUNERATION
COMMITTEE
TAX RISK
MANAGEMENT
COMMITTEE
Oversight
of reporting
requirements
Oversight of risk
management
framework
Assists the Board
achieve effective
composition
and size
Oversight of
remuneration
policies and practices
Monitoring and
reporting 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
Upholding Challenger’s values and executing strategic objectives to provide
our customers with financial security for a better retirement
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
off sites, 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
2023 Annual ReportChallenger Limited 27
In addition to strategy, 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 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.
The Board’s competencies are assessed
annually and the results of the most recent
assessment are shown 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.
Board skills matrix
The Board has determined that its
members have an appropriate collective
mix of skills, experience and expertise to:
– exercise independent judgement;
– have a proper understanding of, and
competence to deal with, current and
emerging issues of the business;
– encourage enhanced Challenger
performance; and
– effectively review and challenge the
performance of management.
Board skills matrix 2023
LEADERSHIP
STRATEGY
Leadership, effective communication
and influencing skills
Strategic thinking capability and
transactional expertise
100% Expert
100% Expert
INDUSTRY EXPERIENCE
PEOPLE AND CULTURE
Experience in life insurance, funds
management or financial sector, and
management of complex investment portfolios
50% Expert
38% Advanced
Experience in building capable and highly
engaged teams, managing effective
workplace culture and understanding
remuneration structures
12% Capable
62% Expert
38% Advanced
RISK, LEGAL AND GOVERNANCE
FINANCE AND ACCOUNTING
Financial services and fiduciary
regulatory awareness.
Relevant compliance and risk experience
including legal and tax risk management.
Public company corporate governance
Financial reporting literacy including
exposure to Accounting Standards
75% Expert
25% Advanced
87.5% Expert
12.5% Advanced
IT AND DIGITAL
STAKEHOLDERS
Understanding of IT strategy, the application
of technology in large organisations, IT and
digital innovation and cyber risks
Experience in understanding key
stakeholders needs, relevant regulatory
relationships and shareholder engagement
12% Expert
63% Advanced
25% Capable
50% Expert
50% Advanced
SUSTAINABILITY
Understanding community expectations,
relevant regulatory developments
and disclosure requirements on
sustainability issues
38% Expert
62% Advanced
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 28
Corporate governance continued
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.
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
year from 1 July 2022 to 30 June 2023 are
set out below.
Management committees and groups
that are responsible for progressing our
strategic agenda include:
– Executive Risk Management
Committee;
– Group Environmental Social and
Governance Steering Committee;
– Work Health and Safety Committee;
– Diversity and Inclusion Committee;
– Our Community Committee; and
– Sustainability Action Group.
Directors’ meetings
BOARD
GROUP RISK
COMMITTEE
GROUP AUDIT
COMMITTEE
GROUP
REMUNERATION
COMMITTEE
NOMINATION
COMMITTEE
ELIGIBLE
ELIGIBLE
ELIGIBLE
ELIGIBLE
ELIGIBLE
TO ATTEND ATTENDED
TO ATTEND ATTENDED
TO ATTEND ATTENDED
TO ATTEND ATTENDED
TO ATTEND ATTENDED
9
9
9
9
9
9
9
9
4
9
9
9
9
9
9
9
9
4
5
–
5
5
–
5
5
5
2
4
–
5
5
–
5
5
5
1
4
–
4
4
–
4
4
4
1
4
–
3
4
–
4
4
4
1
3
–
7
7
–
–
7
–
4
3
–
6
7
–
–
7
–
3
4
–
4
4
4
4
4
4
1
4
–
4
4
4
4
4
4
1
DIRECTOR
D West1,2
N Hamilton3
J M Green
S Gregg
M Kobayashi
H Smith4
J Stephenson
M Willis
P Polson5
1. Mr West replaced Mr Polson as Chair of the Board and member of the Group Remuneration Committee on 27 October 2022.
2. Mr West was a member of the Tax Risk Management Committee (TRMC) until 25 November 2022 and attended 1 meeting (being eligible to attend 1 meeting).
3. The Managing Director and CEO attends the Group Risk Committee, the Group Audit Committee, the Group Remuneration Committee and the Nomination Committee at the
invitation of these Committees.
4. Ms Smith was appointed a member of the TRMC on 25 November 2022 with no meetings held in the 2023 financial year following her appointment.
5. Mr Polson ceased to be a Director on 27 October 2022.
2023 Annual ReportChallenger Limited 29
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.
2023 TOTAL TAX CONTRIBUTION
54%
Corporate income tax
4%
8%
Employer payroll taxes
GST
22%
Employee payroll taxes
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.
Customer withholding taxes
Stamp duty and other local and council taxes
Offshore operations
2%
8%
2%
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 FY23 was $234.8 million
(FY22: $415.4 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.
We invest offshore to secure a diversified
balanced portfolio and to match our policy
liabilities. As at 30 June 2023, 40.0%
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 27.6% (2022: 29.0%)
with no material tax rate difference
recognised between the Australian and
offshore operations.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 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.
2023 Annual ReportChallenger Limited 31
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.
Challenger may take foreign exchange
risk as part of an overlay strategy to
reduce risk given the procyclicality of
the AUD;
– interest rate risk – is the risk
of fluctuations in Challenger’s
earnings arising from movements
in interest rates;
– inflation risk – is the risk of
fluctuations in Challenger’s earnings
from movements in inflation rates;
– operational risk – is the risk of loss
resulting from inadequate or failed
internal processes, people and systems
or from external events; and
– regulatory and compliance risk –
is the risk of legal or regulatory
sanctions or loss as a result of
Challenger’s failure to comply with
laws, regulations or regulatory policy
applying to its business.
Further details on Challenger’s approach
to risk management are included in
Section 5 of this report.
Challenger regularly assesses its risk culture
through internal staff surveys and other
metrics 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
alternative and relative value strategies.
Alternative and 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.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 32
Sustainability
Driven by our purpose
of providing customers
with financial security
for a better retirement,
Challenger is committed
to creating a sustainable
future for our customers,
people, shareholders
and wider stakeholders.
Challenger is a unique business
with an opportunity to improve the
financial outcomes of Australians
in retirement. Our Life business
is Australia’s leading provider of
guaranteed income, and our Funds
Management business is one of
the country’s largest active funds
managers, offering a diverse range of
products and managers. We manage
approximately $100 billion1 on behalf
of our clients across a range of asset
classes, including fixed income,
equities, commercial real estate,
private assets and alternatives.
Key points
Significant improvement to
Challenger’s ESG approach
Enhanced ESG governance
and Board oversight
Commitment to evolving
ESG practices in line with
stakeholder expectations
The road ahead
The review has informed focus areas that
Challenger will progress, including:
– Carbon neutrality – we will develop a
plan to reduce Scope 1 and 2 emissions
in FY24, with a view to becoming
carbon neutral certified.
– Data and insights – We will
continue to improve the quality and
expand the coverage of ESG data,
particularly relating to climate and
financed greenhouse gas emissions
across our asset portfolio. This will
enable a stronger understanding of
Challenger’s ESG risks and opportunities
to improve investment processes and
enhance better decision-making across
the business.
– Reporting and disclosure – We will
evolve our ESG reporting and align it
with international frameworks such
as the International Sustainability
Standards Board (ISSB), Task Force on
Climate-Related Financial Disclosures
(TCFD), Sustainability Accounting
Standards Board (SASB) and Partnership
for Carbon Accounting Financials
(PCAF). This will also provide a more
comprehensive view of our progress.
– Scenario testing – We aim to develop
a range of future climate scenarios
and assess and quantify the impact
of those scenarios on the investment
portfolios and wider business
operations. The insights gained will
ensure Challenger can proactively
manage ESG risks and opportunities
that arise from these scenarios.
– Integration into strategy
and operations – We will continue
to embed ESG considerations into
our strategy, decision-making and
risk management approach. Uplifting
our investment management
systems will play a critical role in
integrating ESG considerations into
the day-to-day decision-making of
our investment teams.
Over the last year, Challenger has
undertaken a comprehensive review
of our sustainability approach and
ESG performance to ensure we remain
aligned to current and future international
and domestic standards, regulation
and legislation.
This year’s Sustainability Report has
been restructured to align with the
Task Force on Climate-Related Financial
Disclosures’ (TCFD) four thematic areas.
These represent the core elements of how
organisations such as Challenger operate,
and includes a focus on risk management,
strategy, governance, and metrics and
targets. We recognise that the TCFD
focuses on climate; however, this report
covers a wider range of sustainability
initiatives and our ESG performance.
Challenger’s sustainability strategy reflects
our most material environmental, social
and governance opportunities. Activity
across our four pillars – responsible
investment, financially resilient customers
and communities, doing things right and
constructive policy settings – is outlined
in the Strategy section of the report.
Progressing our ESG journey
Over the last year,
Challenger has taken
significant steps to better
understand our current ESG
performance against our
purpose, operating model
and core business activities.
This included the completion of a
comprehensive ESG review (the review)
covering technology systems, data
maturity, governance practices,
risk identification and ESG-related
decision-making processes. The review
benchmarked our current state against
a range of stakeholder perspectives,
including institutional clients, regulators,
the Australian Government and proxy
advisers. This provided a comprehensive
understanding of areas where Challenger
could improve its ESG practices over time.
Following this review, we commenced
a range of initiatives which are outlined
in this year’s Sustainability Report.
1. As at 30 June 2023.
Commitment to evolving
ESG practices in line with
stakeholder expectations
2023 Annual ReportChallenger Limited 33
Our sustainability strategy
Challenger’s sustainability strategy reflects
our most material social, environmental and
governance opportunities.
Activity across our four pillars is outlined in the Strategy
section of the report.
Doing things right
Designing business practices
that focus on our customers,
employees, shareholders and
the environment
Responsible
investment
Investing responsibly
by incorporating
environmental, social
and governance (ESG)
considerations
Financial security
for a better
retirement
Financially resilient
customers and
communities
Helping our customers
and communities to be
strong and financially
resilient
Constructive public
policy settings
Taking action on issues affecting
the ability of retirees to achieve
financial security
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 34
Risk management and material topics
Challenger’s approach
to materiality
Challenger undertakes a process to identify
and prioritise the most significant ESG
issues for our business. A broad range of
stakeholders are considered throughout
the materiality process, including
customers, shareholders and investors,
government, regulators, industry groups,
financial advisers, media, community
groups and employees.
As our material issues are not expected
to significantly change year to year, a full
materiality assessment is conducted every
three years. The full materiality assessment
includes interviews and surveys with external
stakeholders and quantitative and qualitative
analysis of material topics. A full materiality
assessment will next be undertaken in
2024. In the interim periods, including this
year, we focus on qualitative analysis and
engagement with key internal stakeholders
such as Challenger’s Leadership Team and
Board Group Risk Committee.
In this report, we have
assessed and disclosed
the risks associated with
material ESG topics and
described the measures
taken to manage and
mitigate these risks.
Key points
Clearer ESG material topics
that better reflect stakeholder
views and business requirements
Material ESG topics and
risks linked
Expanded governance topic
in this year’s report
In the 2023 materiality review we
undertook the following steps:
– Identify and define – Our list of
material topics was drawn from the nine
material topics identified in the 2021
full materiality assessment. Those topics
were ranked across a materiality
matrix (as previously disclosed in the
2021 Sustainability Report) according
to their ‘importance to our business’
and ‘importance to our stakeholders’.
This year, analysis was supplemented with
inputs from the Sustainability Accounting
Standards Board (SASB) material topics
framework and the MSCI materiality
matrix (for asset management).
– Prioritise – We reviewed the ranking
of our material topics and assessed
whether the topics were still relevant
or if new topics should be included.
Our analysis was informed by insights
from customer and adviser surveys,
proxy advisory firm guidance notes
and peer group analysis.
– Validate and disclose – Topics were
validated through forums, including
the Group ESG Steering Committee,
Leadership Team and individual sessions
with key stakeholders including investor
and client-facing teams. The final
assessment was approved by the
Challenger Board.
What’s changed
We have taken the opportunity
to make our material topics
clearer, more specific and
relevant to Challenger’s business,
and created stronger alignment
to international frameworks.
The substance of Challenger’s material
topics has not changed significantly;
however, two topics from the 2022
materiality assessment have been
removed – operating environment
and social equality, and community
resilience. These were assessed as
overlapping with other materiality topics
(including business ethics and sustainable
retirement income system and adequacy)
and have been incorporated elsewhere
in the 2023 material topic definitions.
The material topics outlined in this report
will inform our ESG work program and
initiatives in FY24.
2023 Annual ReportChallenger Limited Challenger’s FY23 material topics
FY22 MATERIAL
TOPICS
FY23 MATERIAL
TOPICS
DESCRIPTION
BETTER
CUSTOMER
OUTCOMES
SUSTAINABLE
RETIREMENT
INCOME SYSTEM
AND ADEQUACY
Includes designing products with the wellbeing of individuals in
mind and contributing to discussions and debates that improve
the sustainability of Australia’s retirement income system.
35
RATIONALE
– Reflects Challenger’s
commitment to building a
customer-centric business
– Stronger alignment to
Challenger’s purpose
– More specific to the impact
of Challenger’s products on
its customers
– Better aligns with Challenger’s
client objectives
– Alignment to SASB
REPRESENTATION
OF PRODUCTS
AND INVESTMENT
STRATEGIES
Addresses issues including the transparency, accuracy, and
comprehensibility of marketing statements, advertising, and labelling
of products and investment strategies.
– Clearer alignment to Challenger’s
commitment to acting in
customers’ best interests
GREAT PLACE
TO WORK
EMPLOYEE
WELLBEING,
DIVERSITY AND
INCLUSION
Addresses hiring and promotion practices, inclusion, diversity on the
basis of race, gender, ethnicity, religion, sexual orientation, and other
factors. Also includes the safety and wellbeing of our workforce and
expectation that our people act in line with our IACT values.
PRIVACY AND
SECURITY
DATA PRIVACY
AND CYBER
SECURITY
Addresses the management of risks related to the collection, retention,
and use of sensitive, confidential and/or proprietary customer or user
data. It includes social issues that may arise from incidents such as
data breaches in which personally identifiable information and other
user or customer data may be exposed.
TRUST AND
CONFIDENCE
BUSINESS
ETHICS
Addresses the company’s approach to managing risks surrounding
ethical conduct of business, including fraud, corruption, bribery and
facilitation payments, fiduciary responsibilities, conflicts of interest
and misrepresentation.
GOOD
CORPORATE
GOVERNANCE
AND
COMPLIANCE
Describes the way we act in the best interests of stakeholders through
the provision of accurate and timely information, ensuring individuals
are accountable for their actions, the appropriate composition
and focus of the Board, preservation of shareholder rights and
contemporary remuneration policies. This also describes the way
we oversee and comply with regulations relevant to our business.
– Incorporates regulator feedback
and focus on product transparency
– Alignment to SASB
– Specific to the people outcomes
that Challenger is striving
to achieve
– More measurable
– SASB alignment
– Reflects Challenger’s focus on
strengthening its cyber security
capabilities
– Addresses feedback provided
by proxy advisors
– More specific to changes in the
cyber security landscape
– Alignment to SASB
– Stronger connection to business
practices and regulatory settings
– Alignment to SASB
– Highly relevant to
Challenger’s business
– Key focus area for stakeholders
CLIMATE
CHANGE
CLIMATE
CHANGE
PARTNERSHIPS
AND
COLLABORATION
PARTNERSHIPS
AND
COLLABORATION
INVESTING
RESPONSIBLY
INVESTING
RESPONSIBLY
Describes Challenger’s commitment to supporting progress in
transitioning to a low-carbon economy. This includes working with
stakeholders to find ways to reduce risks and create a more resilient
economy. Also covers the business’ recognition that the physical and
transition risks related to climate change, if not considered, will have
financial impacts on our business and the wider economy.
– Climate change is incorporated
into our investment decisions
and overall risk management
frameworks – remains a
material topic
Describes Challenger’s ability to work with governments,
strategic partners, not for profits and academia to address complex
ESG challenges and build consensus on important ESG issues for our
business and stakeholders. It also concerns Challenger’s relationships
with its investors, proxy advisory firms and ability to engage with
them in the interest of enhancing ESG performance.
– Highlights that collaboration and
successful partnerships support
our business to deliver high quality
outcomes for our stakeholders –
remains a material topic
Addresses the integration of ESG considerations in the management
of Challenger’s assets and assets managed on behalf of others,
alongside pure financial considerations. This includes incorporating
ESG criteria into investment analysis and actively engaging with
companies to improve their ESG performance where we can
make a difference.
– Highlights the importance of
incorporating environmental, social
and governance considerations
into our investment process –
remains a material topic
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
36
Risk management and material topics (continued)
Better understanding our ESG risks
By leveraging Challenger’s existing risk
framework and profile, we have assessed
the associated risks for each of our material
topics. This included reviewing our top 10
risks from the annual Board risk workshop
which are reviewed throughout the year.
We also analysed more than 200
individual risks within Challenger’s
risk register, tagged the relevant
risks against our material topics
and identified mitigating actions.
This process provided a more
comprehensive understanding of areas
where there were gaps between our
material topics and risk profile, or where
further analysis was required. This is
particularly relevant to risks relating to
climate change, which will become a greater
focus for Challenger in the years ahead.
Linking material ESG topics to our risks and mitigants
MATERIAL ESG TOPICS ASSOCIATED RISKS
MITIGATING ACTIONS
INVESTING
RESPONSIBLY
SUSTAINABLE
RETIREMENT
INCOME SYSTEM
AND ADEQUACY
– Poor investment decisions due to lack of
– Responsible Investment Policy
ESG considerations
– Failure to understand customers and their needs
– Product misaligned to customer needs
– Poor recognition and accommodation of vulnerable
customer needs
– Systems and processes inadequate in
servicing customers
– Product Lifecyle Policy
– Centralised Customer division focused on end-to-end customer needs
– Product roadmap
– Market intelligence and analysis
– Review and improvement of customer journeys
– Financial abuse of elders and vulnerable customers framework
– Complaints management process
– Customer feedback quarterly forums
BUSINESS ETHICS
– Conduct misaligned to community expectations
and regulatory environment
– Fraudulent activities by third party managed
investments
– Fraudulent activities within key operational or
financial teams
– Fraud, bribery or corruption with respect to
major transactions
– Conflicts of interest
– Insider trading
– Handling confidential information
– False or misleading information or marketing
– Incorrect or misleading corporate messaging
– Conflicts of Interest Policy
– Information Barriers Policy
– Related Party Transactions Policy
– Staff Trading Policy
– Delegated Authorities Policy
– Conduct Risk and Consequence Management Framework
– Risk culture assessments and action planning
– Ongoing review of Conflicts of Interest Register
– Ongoing review of Gifts and Entertainment Register
– Regulatory and compliance training
– Consequence Management Committee
– All marketing material subject to approval process
– Product disclosure review and approvals
– Compliance reporting for distribution activities
– Marketing Compliance Policy and training
– Unauthorised access, disclosure or use of data and
– Information security controls to monitor and
personal information
– Risk of successful cyber security incident
maintain a secure technology platform
– Phishing and education campaigns
– Information Security Policy
– Information Retention and Storage Policy
– IT Acceptable Use Policy
– Privacy Policy
– Inadequate support for employee health,
safety and wellbeing
– Inability to attract and retain the right people
– Implementation of new Employee Value Proposition
– Remuneration practices approved by management and the Board
– Ongoing analysis of employee engagement and feedback to action
and improve employee experience
– Gender targets at Group, management, leadership and Board level,
which are disclosed in the Annual Report and are considered in
determining variable remuneration outcomes
– Employee-led Diversity and Inclusion networks
– Range of employee events to support diversity
– Employee Assistance Program
– Mental health first aiders
REPRESENTATION
OF PRODUCTS
AND INVESTMENT
STRATEGIES
DATA PRIVACY AND
CYBER SECURITY
EMPLOYEE
WELLBEING,
DIVERSITY AND
INCLUSION
2023 Annual ReportChallenger Limited
37
Identifying and assessing climate-related risks
Climate risk refers to potential consequences that arise from climate change including physical and transition risks.
As we progress our approach to assessing climate-related risks, we will focus on:
– Data capture – We will continue
to assess the quality and coverage
of our data of the asset classes we
invest in. Using the Partnership for
Carbon Accounting Financials (PCAF)
methodology, we have commenced
assessing the datasets currently
available for various asset classes that
comprise Challenger’s total funds under
management (FUM). As we begin
assessing Scope 3 Financed Emissions
profile, we will initially focus on the
listed equities and corporate bonds
asset classes.
– Baselining financed emissions –
This will form a starting point for
measuring and tracking greenhouse gas
emissions associated with Challenger’s
investment and financing activities
across the asset classes we invest
in (Scope 3 Financed Emissions).
With an initial focus on listed equities
and corporate bonds, we will expand
our analysis to additional asset classes
over the next 12 to 24 months.
Understanding our financed emissions
will assist in target setting and informed
key strategic decisions relating to
climate risks and opportunities.
The 2023 Sustainability Report includes
reporting of Challenger’s investment
and financing activities for listed
equities and corporate bonds.
– Scenario analysis – This will be
based on a range of global climate
scenarios developed by bodies such
as the International Energy Agency
and the Intergovernmental Panel on
Climate Change, and will provide a
range of potential future climate states.
Scenarios will be used to evaluate the
potential resiliency of our strategic
plans, investment strategies and
operational policies and ensure that
we continue to meet legislative and
regulatory requirements.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
38
Our sustainability strategy
Responsible investment
Challenger is cognisant
of the world that current
and future customers
will retire into, and the
opportunity we have
to make a positive
difference through our
investment activities.
We believe ESG factors
have an impact on the
long-term performance
of investment
markets and company
performance, and ESG
integration should
improve risk-adjusted
returns over time.
Key points
Challenger manages
approximately
~$100 billion1
in FUM across asset classes,
including fixed income, equities,
commercial real estate, private
assets and alternatives
We actively consider ESG factors
in our investment processes
and engage with companies to
improve their ESG performance
and reduce investment risk
Our Responsible Investment Policy
integrates ESG considerations into
our investment processes
Our approach to
ESG integration
Challenger takes ESG risks into
consideration in our investment
decision-making and ownership practices,
portfolio construction and appointment
of managers acting on our behalf.
This approach helps Challenger build a
more resilient organisation and protects
the business and our customers from
financial and non-financial risks.
The ESG risks and opportunities are
considered across different asset classes
as outlined below:
CONSIDERATIONS & EXAMPLES
Environmental
Climate change (e.g. greenhouse gas
emissions, emissions trading, physical
risks and opportunities, transition risks,
adaptation, mitigation), biodiversity loss,
building energy performance, energy
consumption, pollution, natural resource
use and degradation (e.g. water scarcity),
land use, waste, clean technology products
and services, environmental management
practices and product lifecycle
management.
Social
Human capital, workplace health and
safety, labour relations and standards,
human rights, modern slavery,
demographic changes, supply chain,
responsible lending, data privacy,
Indigenous cultural heritage, animal
welfare and community impacts.
Governance
Board composition and independence,
executive remuneration and incentive
plans, corporate accountability structures,
compliance, negligence, bribery and
corruption, conflicts of interest and
related-party transactions, shareholder
rights, board oversight of ESG risks,
accounting and audit quality.
1. As at 30 June 2023.
Challenger’s Responsible
Investment Policy
Challenger’s Responsible Investment Policy
is reviewed annually and requires the
Challenger Limited Board, ESG Steering
Committee, Challenger Leadership Team
and investment teams to have responsibility
for integrating ESG considerations into
the investment process. Senior investment
leaders across Challenger also have
key performance indicators (KPIs) that
are linked to responsible investment
and ESG integration. Performance
against these KPIs is assessed as part
of the annual remuneration cycle and
determining investment leaders’ variable
remuneration outcomes.
We undertake investment activity across
Challenger Life and Funds Management.
Within the Funds Management business,
Challenger Investment Management (CIM)
and Fidante affiliates manage money on
behalf of Challenger Life and third-party
external clients.
The consideration of ESG factors for the
Challenger investment teams is governed
by the Responsible Investment Statements
specific to their investment team. However,
they are all governed by our overarching
Responsible Investment Policy. Detailed
asset class approaches to ESG integration
can be found on the Challenger website.
Fidante affiliates are governed by their
own ESG policies and frameworks.
Challenger Life Company
The Challenger Life Company (CLC) holds
$24 billion in assets under management1.
The majority of Life’s investment portfolio
is either outsourced to Challenger
Investment Management (CIM) or
managed by external third-party managers.
CLC direct investment
Where Challenger Life makes a direct
investment and is exposed to a company
directly (either by way of an equity or debt
investment), it will identify material ESG
issues and engage with the company to
discuss their ESG risk management policies,
strategies, performance, disclosure and
management capabilities, with the purpose
of reducing the risk of the underlying
investment.
2023 Annual ReportChallenger Limited 39
ESG governance
CHALLENGER LIMITED
BOARD/GRC
CHALLENGER LEADERSHIP TEAM
ESG STEERING COMMITEE
RESPONSIBLE INVESTMENT POLICY
CLC RI
STATEMENT
CIM FI RI
STATEMENT
CIM RE RI
STATEMENT
CLC may elect not to proceed with
investments where ESG risks are deemed
to be high. CLC also engages with
companies on its existing investments
to discuss changes in ESG-related
risks and may choose to divest some
investments where it deems ESG risk falls
outside of its risk appetite. CLC does not
undertake any ESG screening on passive
(index) exposures.
ESG due diligence
CLC undertakes an extensive ESG due
diligence process for any third-party
investment manager that it considers
appointing as an external investment
manager. This process is conducted by
Challenger’s Senior ESG Specialist and
considers:
– ESG philosophy, approach
and capability;
– Responsible Investment Policy
and Stewardship Policy; and
– Confirmation of the Manager being
or intending to be a signatory
to the Principles for Responsible
Investment (PRI).
Challenger expects any
third-party investment
manager will demonstrate:
– An acceptable level of
commitment to the management
of key ESG risks and opportunities,
including following the PRI
Principles and effectively assessing,
measuring and monitoring climate
risks and opportunities;
– Modern slavery risks are considered as
part of the ESG integration process; and
– The application of principles of active
ownership and investment stewardship,
particularly in relation to proxy advisory
voting and engagement.
Challenger Investment
Management (CIM)
Fixed income
CIM has a systematic approach to
incorporating ESG considerations into its
investment process, and its specialty in
private lending markets provides a greater
opportunity for active engagement. CIM
determines materiality by considering which
ESG risks and opportunities the industry is
most exposed to as well as any ESG risks
and opportunities specific to the issuer itself.
CIM has developed a proprietary framework
to assign a rating for ESG risk factors on each
potential investment. This assessment forms
a key part of the investment process. Further
detail on the ratings process can be found in
the CIM Responsible Investment Statement.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 40
Strategy
Responsible investment (continued)
Real Estate
Fidante sustainable offering
CIM Real Estate is committed to the
integration of ESG considerations into
its property investment decision-making
and asset management. Integration of
ESG practices is a part of the Real Estate
team’s day-to-day business operations.
The climate change section of this report
provides additional information on the
NABERS rating outcomes achieved
for the CIM Real Estate commercial
office portfolio.
In April 2023, Challenger entered into an
agreement with Elanor Investors Group,
an Australian listed real estate investment
and funds management business, to form
a strategic real estate partnership. As part
of the agreement, Challenger sold its
Australian Real Estate business (within
Challenger Investment Management)
to Elanor. The transaction completed in
July 2023, with the Real Estate portfolio
now covered by Elanor’s ESG framework.
Fidante
Fidante is a multi-affiliate platform that takes
a minority equity interest in independent
branded and operated funds management
businesses and provides investment
administration and distribution services to
those businesses. Fidante affiliates offer
strategies across equities, fixed income,
private investments and alternative assets.
Fidante affiliate managers value responsible
investment practices and integrate ESG
factors into their investment processes.
ESG is a core part of the due diligence
process when Fidante considers partnering
with a new affiliate manager, with
its investment managers expected to
align to Challenger’s ESG values and
principles, as outlined in our Responsible
Investment Policy.
As part of this commitment, Fidante works
with all affiliate investment teams on ESG
integration. Every Fidante affiliate is a
signatory of the PRI and implements their
own ESG framework including ESG and
Stewardship policies. Affiliates also work
with the Fidante ESG team to continually
enhance and upgrade their ESG practices
and frameworks.
Fidante has partnered with a range of affiliates that have a sustainability objective as a
core part of their investment philosophy, including:
Alphinity Investment management
has two sustainable funds with a focus on
investments with a net positive alignment
to the UN Sustainable Development Goals.
Proterra Investment Partners Asia has
a strategy focused on food technologies
that contribute to safe, high-quality and
sustainable food products.
Cultiv8 Funds Management invests
in early-stage sustainable agricultural
and food technologies.
Impax Asset Management invests in
opportunities arising from the transition
to a sustainable economy.
Resonance Asset Management invests
in sustainable, circular and industrial
infrastructure that produces renewable
energy, cleans contaminated water and
recovers valuable resources.
Alphinity Workplace Culture Report
Following cultural issues in the resources sector, Alphinity undertook a research and
engagement project to explore the related risks across the industry and deepen
their understanding of the factors that drive, or mitigate, harmful behaviour within
a company. Industry reports and one-on-one interviews with 10 S&P/ASX 200
companies in the mining and industrial sectors formed the basis of the investigation.
Alphinity subsequently developed a framework for investors to assess workplace
culture characterised by three overarching pillars:
– Strong governance: A holistic safety culture driven from the top down,
with Board oversight and remuneration linked to People and Culture;
– Safe and inclusive operating environment: A speak-up culture and strong
diversity, equity and inclusion strategy integrated through the operating
environment, together with effective training and awareness programs; and
– Engaged employees: An engaged workforce (that includes contractors under
the same policies), supported by a strong engagement survey approach and
transparent reporting of turnover and absenteeism data.
The Alphinity Workplace Culture Report can be reviewed here.
Strategic partnership with Proterra Asia
In FY23, Fidante formed a strategic partnership with Proterra Investment Partners Asia,
a leading private equity investor focused on the Asian food and agribusiness sectors.
This partnership capitalises on the growing consumer demand for safe, high-quality food
products that prioritise health, nutrition, convenience, social impact and sustainability.
2023 Annual ReportChallenger Limited 41
Cultiv8 – From the Ground Up: reimagining the food and farming system
Zetifi
FutureFeed
Zetifi has created technology to
deliver last-mile connectivity solutions
via long-range Wi-Fi to improve
rural connectivity. Zetifi offers
low-cost, easily installed and scalable
wireless technology to users with
poor coverage.
Zetifi’s products help to transform the
way regional communities live and
work, enabling farmers, agribusiness
and essential service providers to
unlock the power of connected
digital technology.
FutureFeed has created the IP
behind an innovative livestock feed
supplement derived from red seaweed
species Asparagopsis. The active
ingredient bromoform, found naturally
in the seaweed, is concentrated
and added to feed. Used in small
quantities, the feed additive can
reduce livestock methane emissions
by 80% and improve feed conversion.
FutureFeed manages the IP and
provides licences to seaweed
producers.
In October 2022, Fidante partnered
with Cultiv8 Funds Management,
a global agricultural and food
technology investment team based
in Orange, regional New South
Wales. The team launched the Cultiv8
Agriculture and Food Technology Fund
targeting seed to series B investments
in Australian and global agri-food
tech companies.
Cultiv8 focuses on sustainability,
investing in agricultural and food
technologies, enhancing adoption to
create opportunities that reimagine
the food and farming system. Cultiv8
has also established relationships
with Australia’s leading research and
development providers and industry
bodies including NSW Department of
Primary Industries, Meat and Livestock
Australia and Grains Research and
Development Corporation.
Collaborating for change
At Challenger, we engage
collaboratively across
the industry to effect
change and advocate
for our Investment
Managers through our
ESG, Sustainability and
Distribution teams.
The ESG team actively engages with
the Principles for Responsible Investment
(PRI), Financial Services Council ESG
Working Group, Responsible Investment
Association of Australasia (RIAA) and the
Investors Against Slavery and Trafficking
Initiative (IAST).
Responsible Investment Association of Australasia (RIAA) –
Investor Toolkit on Human Rights and Armed Conflict
Armed conflict impacts communities and investors across the world.
The Russia-Ukraine conflict, with its severe economic and humanitarian
consequences, highlighted the need to manage the complex financial
and moral dilemmas of armed conflict in real time.
In response, Challenger engaged with the RIAA Human Rights Working Group
and international experts to develop a comprehensive toolkit to empower investors
and companies in safeguarding human rights and mitigating risks associated with
armed conflict.
The toolkit provides detailed guidance for investors to identify where portfolio
companies may be operating in a conflict-affected context, and how to identify
actual and potential adverse human rights and international humanitarian
law impacts. The toolkit also provides detailed guidance on how investors
can engage with companies on these issues.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 42
Our sustainability strategy
Financially resilient customers
and communities
Challenger’s purpose
reflects our commitment
to customers –
to provide them with
financial security for
a better retirement –
and is more relevant
than ever given
the economic and
demographic shifts
of the last year.
Key points
95%
Customer service
satisfaction rate
Embedded new
Customer division
Launched guaranteed
fixed term annuity to
direct customers
Cost of living concerns, combined with
market and economic instability, mean
today’s retirees face far greater uncertainty.
Our research and experience highlight
retiree confidence is directly impacted by
their sense of financial security – two-thirds
of retirees expect to outlive their savings.
Of those, 85% are worried about having
a materially lower standard of living
during retirement.
Through an improved customer
experience, expanded product offering
and relationships with advisers and
strategic partners, Challenger is focused
on providing that certainty and addressing
a wider range of customer needs.
As a leading retirement income provider,
Challenger also recognises the important
role it plays in contributing to a more
sustainable and equitable future for all
Australians and is committed to supporting
communities across the country.
Improving the
customer experience
This year, Challenger focused on improving
the customer experience as we continue to
build a more customer-centric business.
Challenger established a Customer division,
bringing together skills and capability
from across the group. This division is now
embedded with the needs of the customer
at the centre of our business. The teams
are focused on simplifying our operations
and enhancing the way our products and
solutions are delivered to customers.
In 2023, we’ve used digital technology to
introduce new ways to materially improve
the customer experience. This includes
the launch of our guaranteed annuity
fixed term direct, where customers or
their adviser can purchase a fixed term
annuity online in as little as five minutes.
This initiative greatly improves the
accessibility of our fixed term product,
providing customers greater access to
guaranteed income products.
Meeting a wider range of
customer needs
Challenger is Australia’s leading provider
of guaranteed lifetime annuities, offering
a comprehensive suite of options from
immediate to deferred payments to suit a
wide range of income needs in retirement.
This includes a new accelerated payment
option for retirees who seek more income
earlier in retirement. Our customers can
also now purchase annuities that align
income to the Reserve Bank of Australia
cash rate, CPI or to a range of investment
market indices, while also choosing
the timing of when to receive those
income payments.
In a changing market environment,
annuities provide certainty to our
customers. Challenger’s annuity rates
reached 10-year highs in 2023, supported
by rising interest rates, with Challenger
passing on higher interest rates to
our customers.
In June 2023, we launched the House of
Income Solutions campaign. This promoted
our wide range of products suitable
for different life stages and needs.
This was the first time the Challenger
and Fidante brands were promoted
together, positioning the business as an
industry leader across both savings and
income categories.
Challenger is also focused on building a
unique retirement solutions capability,
partnering with superannuation funds to
deliver lifetime income to their members.
In 2023, Challenger announced a
partnership with TelstraSuper to provide
the lifetime income component of its
retirement offering to its members,
ensuring TelstraSuper members will
have more options to help them achieve
financial security in retirement.
Fidante continued to drive innovation
to address the needs of customers in a
changing market environment. Several
new funds were launched throughout
the year, including two new active ETFs
for Alphinity – the Global Equity Funds
and the Alphinity Global Sustainable
Fund, highlighting our ability to respond
to customers who want to transact
using different vehicles.
2023 Annual ReportChallenger Limited 43
Advisers, on behalf of their clients,
are increasingly interested in private market
and alternative investments. To meet this
growing demand, Fidante expanded its
range of alternatives, including strategies
with strong ESG credentials. For further
information, please see the Responsible
Investment section of our Report.
Strategic partnerships
Challenger has a strong track record of
building strategic partnerships, leveraging
their scale and expertise as we focus on
our competitive advantages.
In FY23, Challenger entered into an
agreement with Elanor Investors Group,
an Australian listed real estate investment
and funds management business, to form
a new strategic real estate partnership. As
part of the agreement, Challenger sold
its Australian real estate business (within
Challenger Investment Management) to
Elanor who has now become our exclusive
commercial real estate partner in Australia
and New Zealand.
Challenger continued to build our
long-term relationship with the MS&AD
Group, a leading Japanese provider of
foreign currency life products. Through this
partnership, we deliver guaranteed foreign
currency returns to MS Primary, MS&AD’s
Japanese Life insurer, which in turn are
used to support income payments to
their clients.
Our strategic partnership with
Apollo, a global alternative asset
manager, is progressing. An agreement
has been formed for Fidante to become
Apollo’s distribution partner in Australia
for their Apollo Aligned Alternatives
(AAA) product. This will see Fidante make
Apollo’s alternatives capability available
to Australian investors, providing an
alternative to traditional stocks and bonds
investments, which should help customers
save for retirement and achieve financial
security in retirement.
Esme – providing customers with financial
security in retirement
Esme is a 95-year-old customer who lost her husband this year. In 1990, Esme and her
husband paid $40,000 for a Challenger annuity to begin the retirement phase of their
lives. Esme contacted Challenger’s customer service team recently, concerned that the
$6,000 annual payment she’d received was a mistake as it appeared too high.
Esme was delighted to learn that there was no mistake – over the years, the payment
had kept pace with inflation and more than doubled. Esme will continue to receive a
guaranteed and increasing income for the remainder of her life.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 44
Our sustainability strategy
Financially resilient customers and communities (continued)
Challenger partnership with the
Australian Academy of Technological
Sciences and Engineering
In June 2023, Challenger established a new partnership with the Australian Academy
of Technological Sciences and Engineering (ATSE) to support Indigenous leadership in
STEM and technological innovation.
The partnership includes sponsorship of ATSE’s inaugural Traditional Knowledge
Innovation Award, which recognises STEM leaders who are applying Traditional
Knowledge to solve modern problems. Award winners will receive funding to support
development of their innovation and mentoring from Challenger executives.
This partnership reflects Challenger’s commitment to investing in knowledge and
embracing innovation. Challenger also hopes to provide opportunities for Aboriginal
and Torres Strait Islander people who are using Traditional Knowledge to solve some
of today’s many challenges for the benefit of all Australians.
Working with advisers
Challenger has built longstanding
relationships with Australian advisers,
working with approximately 8,000 advisers
who support both our Life and Funds
Management businesses.
Customer feedback and
taking action to improve
Challenger uses a range of tools to track,
measure and report how we deliver for our
customers and, importantly, what actions
we can take to improve.
Throughout 2023, we also
continued to grow our affiliate presence
on external Approved Product Lists
and platforms, making our strategies
more accessible to more advisers and
their clients.
Advisers continued to recognise the
strength of our annuities offering, with a
36% increase in the number of Australian
advisers writing lifetime annuities
and a 72% increase in those writing
multiple policies.
We are committed to supporting
adviser education, and throughout the
year we held 70 retirement workshops
across the country, helping financial
advisers understand the financial risks
and considerations their clients face in
retirement and when entering aged care.
Overall, feedback shows customers feel
heard and are highly valued. In FY23,
Challenger maintained a high customer
service satisfaction rate of 95% and
our Net Promoter Score was 75.
Improving the customer experience
and how feedback is addressed is an
ongoing priority. In 2023, in response
to customer feedback we launched
the online application process for term
annuities and laid the foundations for
continuous improvement of our customer
experience. We also introduced a Voice of
the Customer (VOCA) forum, which meets
quarterly to share customer feedback and
identify and prioritise opportunities for
improvement, and which is attended by
senior executives including Challenger’s
Chief Executive, Customer.
Vulnerable customers
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.
Challenger’s Financial Abuse of Elders and
Vulnerable Customers Framework 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.
Education
Challenger is committed to helping
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 financial 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.
Managing the impact of inflation on
retirement portfolios is now rated as the
top priority for investors and financial
advisers. This year, Challenger’s Retirement
Income Research team published several
research papers aimed at educating
advisers on the impact of inflation in
retirement, and approaches to managing it.
Community giving
Challenger supports payroll giving through
the Good2Give platform. Through this
platform, employees can donate to
their charity of choice and Challenger
will match donations up to $500 per
employee each year.
Throughout FY23, total donations via
the Good2Give platform were over
$78,000 across 80 charities. Challenger
also continues to support employees to
volunteer, providing one day of leave
for volunteering every year.
2023 Annual ReportChallenger Limited 45
Foodlab Sydney – a meaningful partnership with the
Challenger Real Estate team
Food entrepreneurs with high-barrier backgrounds have been given the chance to rent
affordable kitchen space and grow their food business from Foodlab’s shared kitchen
space in Challenger’s industrial estate, ‘The Junction’, at Enfield, Sydney.
Foodlab Sydney is a not-for-profit and self-funded social enterprise. It has evolved into
a thriving mentorship program and culinary business incubator, offering a safe and
professional workspace for refugee, migrant, Aboriginal Australian and low-income
food entrepreneurs.
Challenger is delighted to provide Foodlab with a social value-based $1 per annum
nominal rent, with a three-year lease term which commenced in June 2023.
Women up North (WUN)
In 2022, Challenger and
its employees donated
$30,000 to Women
Up North, following
the devastating
floods in northern
New South Wales.
WUN is a charity that provides vital services
for women, children and young people
who have experienced domestic violence
or abuse, including servicing a number of
Indigenous communities.
In 2023, Challenger continued to
strengthen this partnership. Members
of the team, including Challenger’s CEO
Nick Hamilton, visited WUN to discuss how
Challenger’s capabilities could help support
their work and further their mission.
During the year, Challenger established
a team of volunteers to support WUN,
with an initial focus on activities
such as refreshing their website,
marketing as well as strategic planning.
Additional support included sending
furniture and other equipment to
help re-establish the charity’s premises.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 46
Our sustainability strategy
Doing things right
Our People
Employee engagement
Our people are key to
the long-term success
and sustainability of
our business. Building
a highly motivated
workforce, with a
growth and commercial
mindset and culture
of innovation and
collaboration, is
a priority.
Key points
Focus on building a
collaborative, innovative,
growth culture
Commenced assessing
Scope 3 Financed Emissions
Uplifted practices to
reduce modern slavery risks
Strong commitment to
cyber security processes
and governance
One of the ways Challenger measures
employee engagement is through the
annual Your Voice survey – an important
checkpoint after a period of organisational
change where we positioned the business
for the future.
In 2023, Challenger’s employee engagement
score was 68%, two percentage points
below the Australian median. Whilst the
results show that our people are engaged
in Challenger’s strategy and objectives,
feedback highlighted opportunities to
improve legacy processes and systems.
Challenger has now agreed to a program
of investment to improve the customer
experience, which will not only improve
the customer experience but will also make
it easier for our people to do their jobs.
Diversity and inclusion remained strong at
89%, while 89% also believed that their
manager acts in a way that is consistent
with the IACT values, setting an important
cultural tone for our business. 82% would
also recommend Challenger as a great
place to work.
OUR VALUES
Our values are the bedrock of what we
do every day at Challenger – Act with
Integrity, Aim High, Collaborate and
Think Customer (IACT).
We recognise that to help achieve
these values, our people need to feel
valued, recognised and contributing to
meaningful work.
EMPLOYEE VALUE PROPOSITION
In 2023, Challenger launched its new
employee value proposition (EVP) following
consultation with over 120 employees from
across the business. The new EVP reflects
Challenger’s commitment to putting its
people first and is based on three pillars –
grow and realise your potential; stronger
together, supporting each other; and
make things happen.
IMAGINATE23
In 2023, Challenger hosted Imaginate, its
annual ideas forum, driven by our people
with ideas to help improve outcomes for
our customers and make Challenger a
better place to work. This year Imaginate23
involved over 20% of our people. Ideas
were themed around Unlock, Create and
Simplify, with ideas focused on delivering
better customer outcomes, simplifying
processes and enhancing efficiency for
clients and advisers. Of the 21 semi-finalist
ideas pitched, 17 will progress to delivery,
highlighting the calibre of pitches across
the business.
Imaginate23
At this year’s Imaginate, there was no shortage of innovative and creative ideas across
the three themes of Unlock, Create and Simplify. This year’s winning idea focused on
developing a central register. Employees can provide details and resource commitments
of what they perceive to be inefficient processes, which will be referred to an internal
governance forum to determine whether the processes can be improved.
2023 Annual ReportChallenger Limited 47
Learning and development
Offering a comprehensive training and
development program is key to helping
our people realise their potential and
achieve their career goals. In 2023,
Challenger launched and refreshed a
program of learning and development
opportunities, including:
– a new graduate program, with
graduates undertaking placements
across investment management,
actuarial, finance, technology
and marketing;
– Lead@Challenger, a bespoke six-month
leadership program for frontline leaders;
– LinkedIn Learning, where employees
have access to over 16,000 courses
covering topics that include
leadership skills, customer service, risk
management and innovation; and
– a structured 12-month mentor
program offered across all levels
of the organisation.
Challenger’s hybrid working approach
This year, Challenger implemented a
hybrid working approach which balances
the flexibility of hybrid working with the
importance of teams coming together
to implement strategy, collaborate and
build engagement.
Under this approach, employees work
from the office for at least three days a
week, which includes a Challenger-wide
day, a divisional day and an additional
in-office team day. For the remaining two
days of the week, employees can work
remotely. This model has been informed
by employee feedback, reviewing work
habits and learning from best practice
both in Australia and internationally.
Our values are the bedrock of what we do
every day at Challenger – Act with Integrity,
Aim High, Collaborate and Think Customer
(IACT). We recognise that to help achieve
these values, our people need to feel valued,
recognised and contributing to meaningful work.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
48
Our sustainability strategy
Doing things right (continued)
Female representation FY23
Women in
all roles
Women in
management
Women in
leadership team
FY23
FY23 TARGET
FY25 TARGET
FY30 TARGET
43.1%
40–60%
40–60 %
40–60%
38.7%
40–60%
40–60%
40–60%
40%
37.5%
40–60%
40–60%
Board
37.5%
33.3%
40–60%
40–60%
Focus on gender equality
Challenger is committed to achieving
gender equality and the many
benefits this delivers. Initiatives to help
achieve this include implementation
of talent management programs for
high-potential females.
We recognise business outcomes can
be improved through gender balance,
and gender composition targets are
reported to the Board monthly. In FY23,
Challenger met its targets for women in
all roles, women in the Leadership Team
and at Board level.
Challenger’s female representation across
the business, management, leadership and
Board level in FY23 is noted to the left.
Challenger continues to be a Workplace
Gender Equality Agency (WGEA) Employer
of Choice citation holder. This recognises
our work to improve gender equality across
areas such as leadership and strategy;
developing a gender-balanced workforce,
preventing gender-based harassment
and discrimination, sexual harassment
and bullying; and driving change beyond
the workforce.
Challenger also remains a signatory to
HESTA’s 40:40 vision that seeks to achieve
gender balance in executive leadership
across all ASX 300 companies by 2030.
Challenger is a one of eight signatories to
the Financial Services Council (FSC) Women
in Investment Management Charter that
focuses on improving gender balance
in investment management teams. As a
signatory, Challenger has agreed to adopt
the Charter’s four principles, including
appointing a senior executive within
the investment management team who
is responsible for gender diversity and
setting and reporting on internal targets.
Fidante UK is also a signatory to the
UK-led Diversity Project. The Diversity
Project champions a more inclusive
culture within the savings and investment
profession. The project aims to champion
diversity in its broadest sense spanning
gender, ethnicity, socioeconomic
background, degree discipline, LGBTQIA+,
neurodiversity, mental health, military
veterans and disability.
2023 Annual ReportChallenger Limited 49
Launch of CEO awards
This year, Challenger launched its biannual CEO employee awards program,
which builds on our existing Making a Difference program, to provide additional
recognition of those who go above and beyond and live our IACT values.
The calibre of nominations across the two categories – an individual CEO award and
CEO One Challenger Team award – highlighted the talent across our business.
Charlotte O’Meara, Senior ESG Specialist, was the winner of the Individual CEO
award. Recognised for the high quality of her work in managing ESG and sustainability
initiatives, Charlotte’s achievements include supporting Challenger’s affiliates navigate
evolving legislation, playing a crucial role in addressing client demands and progressing
the ESG Steering Committee. She has also gained external recognition as one of
Australia’s 50 most influential corporate ESG leaders.
Diversity and Inclusion Networks
Challenger has five employee-led diversity
and inclusion networks, which contribute
to our diversity agenda, and recognise
and celebrate the different perspectives
and backgrounds of people across the
business. This includes our newest diversity
employee network Tessellate, focused
on raising awareness, understanding and
support about disability and chronic illness
in the workplace.
We have also been a participant to the
Australian Workplace Equality Index
since 2019.
Superstars of STEM program
In 2023, Program Manager Neelima Kadiyala was
selected as one of 60 women across Australia to take
part in Superstars of STEM program, supported by
the Federal Government’s Science and Technology
Association. Superstars of STEM is an innovative
initiative to address gender assumptions about
who can work in science, technology, engineering
and maths.
As part of the program, Neelima has taken part in
a wide range of initiatives including engaging with
politicians at the Federal Parliament to discuss bridging
the skills gap through gender equality and diversity.
Age
Inclusion
Gender
Inclusion
Cultural
Inclusion
LGBTQIA+
Inclusion
Disability
Inclusion
Together @ Challenger LGBTQIA+ Awareness and
Inclusion Training
The Together @ Challenger network highlights how the business’ diversity and
inclusion groups promote positive change in our workplace. In response to
employee feedback, Challenger held training to provide a deeper understanding
of LGBTQIA+, the challenges communities and individuals face and how to support
them. The training was attended by our CEO, members of the Leadership Team
and employees from across the business, and reinforces our commitment to a
diverse and inclusive workplace.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 50
Our sustainability strategy
Doing things right (continued)
Employee health, safety and wellbeing
Modern slavery
Challenger’s Work Health and Safety Policy
outlines our commitment to creating a
workplace that meets work health and
safety obligations and protects the health,
safety and wellbeing of our employees.
Whistleblowing policy
Challenger’s Whistleblower Policy sets
out 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 people to raise concerns
anonymously via a range of channels.
We actively encourage employees,
contractors, former employees, suppliers,
service providers and relatives to speak up
and report any concerns of wrongdoing.
Code of Conduct
Challenger’s Code of Conduct describes
the expectations for how we act, solve
problems and make fair and balanced
decisions. It brings together our IACT
values and Group policies and applies
to everyone who works at Challenger,
including permanent and fixed-term
employees, contractors, consultants and
directors, irrespective of their seniority
or any other factor. The Code details
expectations in the way we conduct
business in a professional and honest way
and how we should measure ourselves
against the highest possible standards.
Challenger is committed
to upholding the highest
possible standards of
ethics in all aspects of
our business.
This involves decisions about who we
partner with in our supply chain or where
we invest funds we manage on behalf of
our clients.
We do not tolerate modern slavery in any
aspect of our business operations and have
worked to understand the risks we need
to address and implement appropriate
measures to minimise those risks.
In 2023, Challenger engaged an external
human rights consultant to undertake a
review of our initiatives to date, as well
as provide recommendations for the
future. The review concluded that whilst
Challenger had laid solid foundations,
a number of initiatives could be
implemented to strengthen the business’
approach to addressing risks related to
modern slavery.
Following the review, Challenger
overhauled its 2022 Modern Slavery
Statement, including implementing
an improved structure for addressing
and assessing modern slavery risks.
Investors Against Slavery and
Trafficking (IAST APAC) – Anti-Slavery
Australia Collaboration Award
In 2023, the IAST APAC initiative was honoured with the Collaboration Award
at the Anti-Slavery Australia Freedom Awards. The IAST APAC initiative consists
of 37 investors with a combined AUM of $8.2 trillion, and Challenger is an
active participant.
IAST APAC has distributed an investor statement to ASX 200 companies on the
impacts of modern slavery, including measures to mitigate modern slavery risks. IAST
APAC has advocated for the funds management industry with the Government on the
Modern Slavery Act review. The group also collectively engaged with companies across
a wide range of sectors to push for actions to identify, address and prevent modern
slavery in business practices and supply chains.
Supporting this work, Challenger rolled
out training for key teams to help them
understand modern slavery risks and how
to identify them, with over 90% of teams
completing the training.
Challenger’s Modern Slavery Working
Group will oversee the implementation
of a range of initiatives based on the
review’s recommendations as we continue
to improve our practices and strengthen
our processes, systems and controls.
Customer complaints
and disputes
Challenger’s ongoing
responsibility to customers
requires us to be responsive
to their needs, especially
when things don’t go
to plan.
In these cases, we are focused on resolving
issues as quickly as possible as well as
learning from the experience. Challenger’s
Customer Resolution team is responsible
for responding to and resolving complaints.
Our policy is to acknowledge any complaint
within 24 hours or as soon as practicable.
We investigate, properly consider and
decide how we intend to resolve a
complaint and communicate our decision
to customers within 30 days (45 days if
customers invested with superannuation
monies). In many instances, we resolve
the complaint to the customer’s
satisfaction within 24 hours.
Our number of customer complaints
continued to decrease. We recorded
195 complaints in 2023, an improvement
from 225 complaints in 2022, that’s
approximately 18 complaints per month;
less than one every working day, and
approximately 60% of complaints are
closed in one day.
Customer complaint trends also contain
important insights into the root causes
of customer pain points. These insights
are shared in a range of customer
management forums and have delivered
initiatives that strengthen our processes
and the overall customer experience,
including improvements to the ways
we communicate with customers.
2023 Annual ReportChallenger Limited 51
Cyber security
Continuous improvement
Fraud and corruption
Challenger adopts a continuous
improvement approach to information
security management. We use a range
of technologies and security activities to
minimise the likelihood and impact of
a cyber incident. Technologies include
advanced endpoint threat detection and
response software, and activities such
as regular penetration testing to test our
ability to resist and attack. Challenger
also conducts routine simulations with
the Board, Leadership Team and Crisis
Management Team to test our preparedness
to respond to a cyber security incident and
identify areas for improvement.
No material cyber security breaches were
experienced during FY23. Our protection
mechanisms ensured almost six million
emails containing malware and phishing
threats were filtered out of Challenger’s
systems over a 90-day period alone,
highlighting the robustness of our
security settings.
Challenger is committed
to the highest ethical
standards.
We have zero tolerance for fraud and
corruption in any form both within
the organisation and in relation to our
external partners.
Our fraud and corruption policy and
controls are overseen by the Board Group
Risk Committee and all employees have a
role to play in fraud and corruption control.
Our fraud and corruption policy prohibits
our people from inducing, receiving,
facilitating or making payments which
can be constituted as a bribe.
In 2023, Challenger
continued to strengthen its
cyber security capabilities.
We ensure every possible
effort is made to protect
the security of our
customer’s information
via a range of mechanisms.
Governance
Challenger’s Board has ultimate
responsibility and oversight of our
information security controls and practices.
The Board’s Group Risk Committee
formally discusses information security
every quarter, reviewing the health of
our security controls, including their
overall effectiveness, external factors
such as emerging threats and the impact
of strategy decisions on information
security. The Board endorses Challenger’s
information security strategy and approves
ongoing funding in response to changes
to the threat landscape.
The Board is supported by a management-
led security risk and governance committee
whose membership includes the Chief
Risk Officer, Chief Executive Technology,
the Chief Information Security Officer
and other senior members of the risk
and technology functions. Cyber security
subject matter experts provide day-to-day
oversight of our security environment
and controls, and the Risk and Internal
Audit functions independently assure the
security-related processes.
Risk management
Our cyber security team are responsible
for designing and implementing a range of
security processes and controls. They drive
a strong cyber security culture, including
preparing our employees for cyber security
attacks, simulated phishing exercises as
well as regular testing of risk controls.
All employees undertake mandatory cyber
security training each year and awareness
programs are regularly included in
employee communications. Our processes
also include technical reviews of projects
and technology solutions, and due
diligence of third parties, to ensure robust
security practices and controls exist and
present acceptable risk to Challenger.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 52
Our sustainability strategy
Doing things right (continued)
Tax transparency
Challenger is committed
to paying its fair share
of taxes and we take our
obligation to comply with
prevailing taxation laws,
practices and reporting
requirements seriously.
Our tax charter governs how tax is
managed within the organisation and
outlines Challenger will manage its tax
obligations in a sustainable way, considering
the commercial and social imperatives of
the business and our stakeholders.
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 biannual 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
Australian Taxation Office (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.
More detailed information is available in
the Tax Transparency section of the 2023
Challenger Annual Report.
Climate
Challenger believes climate
change will impact every
part of the economy. We
recognise the importance
of supporting the transition
to a low-carbon economy
and are working with
peers, clients, industry and
the regulators to reduce
risks and create a more
sustainable economy.
Climate change presents a range of
physical and transition risks to our business,
the investments we manage and the wider
community. Such risks are incorporated
into our investment decisions and overall
risk management frameworks.
Climate is also a key consideration in our
investment due diligence processes for
the Life, Fixed Income and Real Estate
portfolios, as outlined in their Responsible
Investment statements.
2023 Annual ReportChallenger Limited 53
Operational greenhouse gas emissions
At Challenger, we’re committed to
measuring, monitoring and reducing our
operational greenhouse gas emissions.
We have partnered with NDevr
Environmental to calculate our emissions
to ensure the calculation aligns with
industry practice.
Overall, Challenger’s emissions have
increased by 4% over the past year,
reflecting employees continued return
to the office under our hybrid working
approach and corporate travel resuming
following pandemic lockdowns in
recent years.
Reflecting this, emissions relating to flights
and accommodation increased in FY23;
however, they were down 48% and 45%
respectively on pre-pandemic levels (FY20).
Emissions from electricity, postage and brand
promotion also reduced further in FY23.
Scope 3 Financed Emissions
Challenger recognises measuring financed emissions is an important consideration in
managing climate related risks and opportunities. In 2023, we undertook preliminary
work to understand the Scope 3 Financed Emissions across our portfolio, initially
focusing on listed equities and corporate bonds.
ASSET CLASS
Corporate bonds
Listed equities
PORTFOLIO WACI
(tCO2e/$A’m)
SCOPES 1 AND 2
BENCHMARK WACI
(tCO2e/$A’m)
SCOPES 1 AND 2
27.94
52.00
27.30 iBoxx $ Liquid
Investment Grade Index
60.72 S&P/ASX 300
Accumulation Index
PCAF
RATING
3.50
3.50
1. Fidante holds a minority stake in the large majority of its affiliates and acts as Responsible Entity for the
majority of products. On investment management, this function is outsourced to the affiliates.
2. The calculations for listed equities exclude Funds Management mandates.
3. Portfolio and Benchmark WACI refers to weighted average carbon intensity in tCO2e/$A’m invested as
calculated using Emmi Solutions Pty Ltd proprietary forecasting methodology.
SCOPE 3 FINANCED EMISSIONS
METHODOLOGY
Challenger’s normalised financed emissions
measurement covers Scope 1 and 2
emissions for the investments that sit
within the asset classes noted above.
Our attributed emissions for listed equities
and corporate bonds are calculated in
accordance with the Partnership for
Carbon Accounting Financials (PCAF)
methodology and apportions the
percentage of carbon emissions to
the financial institution based on the
level of ownership of equity or debt of
the investment.
Working with our financed emissions
partner, Emmi, we have constructed
data based on portfolio holdings as at
31 May 2023, using machine learning
models trained on historical reported
and verified emissions.
Machine learning estimates provide data
for the specified reporting period across
all covered holdings. This provides a
comprehensive and up-to-date picture of
financed emissions for Challenger’s listed
equities and corporate bond portfolios.
As Challenger undertakes initial work to
understand its Scope 3 Financed Emissions,
we have focused on data with a better
PCAF quality rating to ensure our reporting
reflects usable and accurate information,
noting that 1 reflects the highest rating
and 5 is the lowest. The overall PCAF rating
for the asset classes selected is 3.50.
Challenger is committed to extending
the coverage of its portfolio emissions
measurement as new emissions
methodologies are developed and as data
availability, methodologies and data quality
continue to improve.
Real Estate office portfolio –
NABERS ratings uplift
Challenger Investment Management has
undertaken capital expenditure works
across a number of properties in the
office portfolio, demonstrating the team’s
commitment to address the ESG risks and
opportunities arising from climate change.
This work has also positively impacted both
the NABERS energy and water ratings of
individual buildings.
In 2018, the commercial office portfolio
achieved an average NABERS energy rating
of 3.95 stars and over the past five years
this has improved to an average of 4.9 in
2022. In 2018, the average NABERS water
rating achieved was 3.3 stars, improving to
an average of 4.45 stars in 2022.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 54
Our sustainability strategy
Constructive public policy settings
Policy advocacy
Challenger plays an
active role in advocating
for public policy and
reforms that are in
the best interests
of our customers,
shareholders and wider
stakeholders. This year,
we have been at the
forefront of discussions
relating to Australia’s
superannuation
and retirement
income system.
Key points
Challenger has advocated for
reforms to improve affordability
and access to financial advice
Supported Federal Government’s
move to place retirement income
at the centre of its proposed
Objective for Superannuation
Participated in a range of
consultations focused on
improving the quality of
climate risk disclosures
We undertake direct advocacy with
members of parliament, relevant Federal
Government departments such as the
Treasury, and regulatory agencies, such
as the Australian Prudential Regulation
Authority (APRA) and the Australian
Securities and Investments Commission
(ASIC), on matters of policy that impact
our business and customers.
Financial advice policy
Challenger supported the Federal
Government’s proposals to reform financial
advice regulations under the Quality of
Advice Review. We strongly agree that
simplifying the financial advice regulatory
framework will better enable the provision
of high-quality, accessible and affordable
financial advice.
In its submission, Challenger also
explained that low financial literacy and
a misunderstanding of the intent of
superannuation have meant Australians
are not adequately planning for their
retirement and are limiting the value they
can generate from their assets during
retirement.
Superannuation policy
Challenger has been a strong advocate
of retirement income reforms that will
enhance the lives of older Australians.
We supported the Federal Government’s
plan to legislate an objective for
superannuation that will give guidance to
policy makers to prioritise the provision
of retirement income. We also believe the
objective should contribute to the financial
wellbeing and sustainability of retirement
incomes for the growing number of
Australian retirees, creating significant
economic and social policy benefits.
Climate disclosure policy
Treasury consultation –
Climate-related financial disclosures
Challenger, through its active membership
of the Financial Services Council, plays
a key role in Treasury’s consultations on
the proposed climate-related financial
disclosure regime.
The proposed climate risk disclosure regime
aims to help Australian companies and
investors mitigate the risks and maximise
the opportunities arising from climate
change. The proposed approach includes
mandatory reporting on a range of
climate-related areas including emissions
(Scopes 1 to 3), risks and scenarios.
Challenger will be included in the first
phase of mandatory reporting, and
meeting these proposed obligations
will form a core part of our future
ESG work program.
International Sustainability
Standards Board (ISSB)
The ISSB’s final standards aim to provide
a comprehensive global baseline of
sustainability disclosures for investors and
financial markets. International Financial
Reporting Standards (IFRS) Foundation S1
General Requirements for Disclosure of
Sustainability-related Financial Information,
and IFRS S2 Climate-related Disclosures
were released in June 2023.
IFRS S1 aims to help companies
communicate the sustainability-related risks
and opportunities they face over the short,
medium and long term. IFRS S2 sets out
specific climate-related disclosures and is
designed to be used with IFRS S1.
Australian Government’s
sustainable finance agenda
Challenger intends to play an active
role in the development of the Federal
Government’s Sustainable Finance Strategy.
The strategy will examine options and
priorities for addressing key data challenges
relating to ESG and provide clearer
guidance in these areas.
2023 Annual ReportChallenger Limited 55
Political donations
Challenger seeks to strike the right balance
between our commitment to a robust ESG
framework, our constructive involvement in
the Australian Government’s policy-making
agenda, and protection of our employees’
freedom of political communication.
Challenger does not make political
donations to any political party, member
of parliament, elected official or candidate
for political office. Employees, directors
and contractors are not permitted to
attend political fundraising events as a
representative of Challenger.
Challenger is committed to engaging with
political parties and members of parliament
in a bipartisan way to progress its advocacy
efforts both directly and indirectly through
industry associations.
Industry groups
Challenger participates in a range of
finance and sustainability-focused industry
groups. We are committed to working
with these stakeholders through our
membership, and participation in policy
committees and consultations.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 56
Governance
Challenger understands
that our customers
place their trust in
us to help provide
long-term security
during retirement. We
take this responsibility
seriously and believe
good governance plays
a key role in achieving
our purpose.
Key points
Improvements to governance
and oversight of ESG
across Challenger
Reinvigorated Challenger’s ESG
Steering Committee to improve
decision-making and focus
Recognising the increased importance
of ESG issues to Challenger and our
stakeholders, we have enhanced our
framework for ESG governance to ensure
efforts are co-ordinated across the business.
Board oversight
Challenger’s Board plays a vital role in
ESG governance. It provides oversight,
strategic guidance and accountability
to ensure the company’s ESG practices
align with overall business strategy and
stakeholder expectations.
The Board skills matrix shows Board
members have a high level of competency
across areas of expertise relevant to ESG
and Challenger’s business, including
customer, corporate governance, public
policy, risk, strategy and people.
At a minimum, ESG is discussed and
considered at each Board Group Risk
Committee meeting. The Board receives
regular reports from management through
the Group ESG Steering Committee.
Both the GRC and Board consider and
oversee specific ESG issues, which have
included cyber security, modern slavery,
diversity and inclusion.
The Board also considered the internal
review of Challenger’s ESG approach and
endorsed changes proposed to the way
ESG is overseen and operationalised in
the business.
Leadership team oversight
The Leadership Team’s commitment to ESG
governance focuses on driving sustainable
practices, promoting responsible business
behaviour and enhancing long-term
value creation for both the company
and its stakeholders.
ESG issues are discussed as part of the
Leadership Team’s engagement with
a range of stakeholders and feedback
is incorporated into Challenger’s
ESG materiality assessments and
associated responses.
Group ESG Steering
Committee
In 2023, Challenger initiated a review of
its Group ESG Steering Committee to
orientate its focus more strongly towards
Challenger’s core business activities and
their impact on ESG issues.
Chaired by Challenger’s General Manager
Corporate Affairs and Sustainability, the
Group ESG Steering Committee meets
monthly and includes senior executives
such as Challenger Life’s Chief investment
Officer, the Group Chief Risk Officer and
representatives from Funds Management
and Finance. Its revised remit involves
assisting Challenger’s Leadership Team and
Board to develop the Group’s ESG strategy,
initiatives to implement the strategy,
reporting on ESG risks and associated
controls, and external assessment of the
Group’s ESG performance.
First line of defence – role in
enhancing ESG approach
The role of the first line of defence
is to incorporate and oversee ESG
considerations into Challenger’s day-to-day
operations and business activities. The first
line of defence plays a crucial role in
implementing and managing Challenger’s
ESG practices and initiatives include:
Integration of ESG factors
Responsible for integrating ESG factors
into operational and investment processes,
systems and decision-making. Challenger
Life Company, Challenger Investment
Management and Fidante consider ESG
factors and apply ESG risk ratings to all
material transactions. ESG reviews are
conducted by Challenger’s Senior ESG
Specialist whose findings are considered
by the CEO of the relevant business
division. For further information, please
see the Responsible Investment section
of this report.
Risk identification and management
Identifies ESG risks relevant to their
operations and assesses their impact.
They develop and implement risk
management strategies and controls
to mitigate those risks.
Compliance and regulatory adherence
Ensures compliance with ESG
regulations, laws and standards and
establishes processes and practices.
This has included a business review of
all market-facing documentation to
ensure ESG representations contained in
Challenger’s products are accurate.
2023 Annual ReportChallenger Limited 57
Performance assessment and reporting
Group policies
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
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
Collects and analyses data on the
company’s ESG performance such as
energy consumption, employee diversity,
health and safety. The data is incorporated
into reporting at business unit, group,
leadership and Board level and is used
to measure and track progress, initiate
improvement opportunities and fulfil
external reporting requirements.
ESG training and awareness
Initiates and participates in ESG training
and awareness programs to promote a
culture of ESG awareness and encourage
employees to contribute to ESG objectives.
This includes monthly ESG podcasts, lunch
and learn sessions, external presentations
and specific training in targeted areas such
as modern slavery.
Remuneration
We recognise the importance of culture to
the long-term sustainability of our business.
This has become increasingly prevalent
as the business prepares for the
implementation of APRA’s new prudential
standard on remuneration, CPS 511, which
will ensure entities maintain remuneration
arrangements that appropriately incentivise
individuals to manage risk and apply
consequences for poor risk outcomes.
Challenger has undertaken extensive
planning for the standard, which became
effective from 1 July 2023 for our business.
In particular, the Board has reviewed a
range of non-financial measures to meet
our CPS 511 obligations and determined
that including a culture measure as part
of the long-term incentive (LTI) plan will
focus our leaders on protecting and
strengthening our culture and support
the long-term sustainability of our
business. This measure will be assessed
using a suite of key metrics (including risk
culture, employee engagement scores and
specific culture-related questions from the
engagement surveys).
These metrics have been measured internally
for a number of years, are quantifiable and
can be benchmarked externally to other
Australian financial services organisations.
The Board will also review these metrics
in conjunction with relevant operational
metrics at the end of the performance
period, ensuring no unintended or adverse
outcomes are rewarded.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 58
Metrics and targets
Environment
2023 greenhouse gas emissions
EMISSIONS
Scope 1
Natural gas
Total Scope 1
Scope 2
Electricity
Total Scope 2
Scope 3
Utilities
Natural gas
Electricity
Electricity (base building)
Water
Equipment & services
Paper
Printing
IT equipment
Postage & couriers
Brand promotion
Travel & commuting
Accommodation
Flights
Employee commuting
Taxis and hire cars
Food & beverage
UNITS
SOURCE
DATA
2023
tCO2-e
2022
tCO2-e
GJ
GJ
676.74
676.74
34.87
34.87
40.671
40.67
MWh
MWh
948.81
948.81
670.91
670.91
660.03
660.03
GJ
MWh
MWh
ML
676.74
948.81
716.44
0.09
8.87
56.39
614.47
13.87
10.34
75.30
714.87
2.28
tonnes
$0 (000)
3.59
337.42
9.16
87.01
4.60
321.47
$0 (000)
12,259.51
1,700.58
1,817.48
$0 (000)
$0 (000)
223.41
491.59
occupancy nights
1,218
(000) km
6,442.42
(000) km
2,946.89
(000) km
125.28
52.85
59.04
40.24
882.13
505.52
25.05
80.04
306.42
27.87
352.19
142.48
9.96
Food and catering (from major events)
$0 (000)
407.87
81.10
81.83
Waste
Landfill
Working from home
Working from home
Total Scope 3
Overall total
1. Note FY22 natural gas emissions and corresponding calculations have been restated:
– FY22 Scope 1 natural gas, 789.22GJ, 40.67 tCO2-e;
– Total Scope 3 4,099.14 tCO2-e; and
– Overall total emissions, 4,799.85 tCO2-e.
tonnes
3.57
4.13
3.17
tCO2-e
210.61
151.71
148.85
4,292.12
4,099.14
4,997.90
4,799.85
2023 Annual ReportChallenger Limited 59
FTE
817.71
HEADCOUNT
837
FEMALE
MALE
NOT
SPECIFIED
TOTAL
268
55
16
3
342
463
8
19
2
492
3
0
0
0
3
734
63
35
5
837
TOTAL
171
25
2
198
People
Employee profile
Number of employees
Overall total
Employees by contract type and gender
CONTRACT TYPE
Permanent
Full time
Part time
Fixed term
Full time
Part time
Total
Contingent workers by type
CONTRACT TYPE
Agency contractor
Independent contractor
Intern – contingent worker
Total
Parental leave return rate
Employees who took parental leave during the period1
Employees who returned to work during the period, after parental leave during the prior 12-month period
Employees who returned to work after parental leave in the prior 12-month period2
Parental leave attachment rate (%)3
FEMALE
MALE
27
14
93%
57%
44
26
100%
94%
1. Commenced leave between 1 July 22 and 30 June 23.
2. Commenced leave between 1 July 21 and 30 June 22, and returned from leave before 30 June 23.
3. Returned from leave between 1 July 21 and 30 June 22, and remained employed on 30 June 23.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 60
Metrics and targets (continued)
Employees by region and gender
REGION
Adelaide
Brisbane
Hobart
Melbourne
Perth
Sydney
London
Tokyo
Other
Total
FEMALE
MALE
NOT
SPECIFIED
TOTAL
1
8
0
20
2
303
3
3
2
342
2
10
1
36
3
414
15
9
2
492
0
0
0
0
0
3
0
0
0
3
3
18
1
56
5
720
18
12
4
837
TOTAL
65
60
42
15
3
185
FEMALE
MALE
NOT
SPECIFIED
TOTAL
0
2
7
83
2
0
94
1
2
4
76
5
2
90
0
0
0
1
0
0
1
1
4
11
160
7
2
185
Employees by age group
New hires by age group
TOTAL
AGE GROUP
133
256
317
105
26
837
Under 30
30–39
40–49
50–59
60 and over
Total
AGE GROUP
Under 30
30–39
40–49
50–59
60 and over
Total
New hires by region and gender
REGION
Adelaide
Brisbane
Melbourne
Sydney
London
Tokyo
Total
2023 Annual ReportChallenger Limited 61
TOTAL
20
29
21
7
1
78
FEMALE
MALE
TOTAL
1
0
2
2
24
1
0
0
30
0
1
0
3
42
0
1
1
48
FEMALE
MALE
NOT
SPECIFIED
21
14
51
86
26
11
73
110
1
1
2022
0.67
2
2.06
0
423
1
1
2
5
66
1
1
1
78
TOTAL
47
25
125
197
2023
0
1
3.23
0
487
Voluntary turnover by age group
AGE GROUP
Under 30
30–39
40–49
50–59
60 and over
Total
Voluntary turnover by region and gender
REGION
Adelaide
Brisbane
Hobart
Melbourne
Sydney
London
Tokyo
Other
Total
Internal employee movement by gender
Transfer
Secondment
Promotion
Total
Employee safety and wellbeing
WORK HEALTH AND SAFETY
Lost time injury frequency rate (days)
Workers compensation claims
Absenteeism days per FTE
Fatalities
Work health and safety training
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
62
Directors’ Report
Directors’ experience and responsibilities
The names and details of the Directors of the Company holding office during the financial year ended 30 June 2023 and as at the date of
this report are listed below. Directors were in office for the entire period, unless otherwise stated.
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.
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
and appointed Chair 18 August 2017) and
The Lottery Corporation Limited (appointed
Director and Chair 20 May 2022).
Duncan West
Independent Chair
Appointed 10 September 2018
Chair of Nomination Committee.
Member of the Group Audit Committee,
Group Risk Committee and Group
Remuneration Committee.
Experience and qualifications:
Bachelor of Science in Economics (University
of Hull, Hull, United Kingdom), Fellow of the
Chartered Insurance Institute, member of the
Australian Institute of Company Directors and
a Senior Associate of the Australian and New
Zealand Institute of Insurance and Finance.
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 Helia Group
Limited (formerly Genworth Mortgage
Insurance Australia Limited) (appointed
1 September 2018) and Suncorp Group
Limited (appointed 23 September 2021).
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.
John M Green
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).
2023 Annual ReportChallenger Limited 63
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.
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:
Directorships of other listed companies:
Chair of IDP Education Limited
(appointed 21 March 2007).
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
(International Business Planning 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.
Non-Executive Director of Asaleo Care Limited
(appointed 30 May 2014 and ceased 1 July 2021),
Japara Healthcare Ltd (appointed 1 September
2015 and resigned 5 November 2021), Myer
Holdings Limited (appointed 28 November 2016
and appointed Chair 16 September 2021) and
Qualitas Limited (appointed 4 November 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
resigned 31 August 2022) and PEXA Group
Limited (appointed 11 June 2021).
Peter Polson
Former Independent Chair
Resigned on 27 October 2022
Former Chair of Nomination Committee
and former 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).
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.
Heather Smith
Independent Non-Executive Director
Appointed 20 January 2021
Chair of the Group Audit Committee.
Member of Group Risk Committee and
Nomination Committee.
Experience and qualifications:
Bachelor of Economics (Hons 1) (University of
Queensland), PhD in Economics (Australian
National University).
Dr Smith has over 20 years experience in
government, including as Secretary of the
Australian 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, National President of the
Australian Institute of International Affairs 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.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 64
Challenger Limited 2023 Annual Report
Challenger Limited 2023 Annual Report
Directors’ report
Directors’ report
Remuneration report
Remuneration report
Letter from the Chair of the Remuneration Committee
Letter from the Chair of the Remuneration Committee
Dear Shareholders
I am pleased to present Challenger’s remuneration report for the 2023 financial year. Challenger has delivered a strong
Dear Shareholders
performance with our full year normalised profit before tax at the top half of our guidance range at $521 million, representing
I am pleased to present Challenger’s remuneration report for the 2023 financial year. Challenger has delivered a strong
an increase of 10%. Higher earnings were driven by record annuity sales with the result highlighting the significant progress we
performance with our full year normalised profit before tax at the top half of our guidance range at $521 million, representing
have made executing our growth strategy. With the teams’ achievements this year, the Board is confident in Challenger's ability
an increase of 10%. Higher earnings were driven by record annuity sales with the result highlighting the significant progress we
to drive future growth by building a more customer-centric business that is uniquely positioned to meet the growing demand for
have made executing our growth strategy. With the teams’ achievements this year, the Board is confident in Challenger's ability
guaranteed income.
to drive future growth by building a more customer-centric business that is uniquely positioned to meet the growing demand for
Changes in Key Management Personnel (KMP)
guaranteed income.
Changes in Key Management Personnel (KMP)
There were a number of KMP changes during the year:
There were a number of KMP changes during the year:
In August 2022, Michael Clarke stepped down as Acting Chief Executive, Funds Management and Victor Rodriguez
was appointed Chief Executive, Funds Management.
In August 2022, Michael Clarke stepped down as Acting Chief Executive, Funds Management and Victor Rodriguez
In September 2022, Chris Plater transitioned from his role as Deputy Chief Executive Officer following his appointment
was appointed Chief Executive, Funds Management.
as CEO of the Challenger and Apollo Joint Venture.
In September 2022, Chris Plater transitioned from his role as Deputy Chief Executive Officer following his appointment
In December 2022, Alexandra Bell was appointed as Chief Financial Officer following Rachel Grimes’ departure.
as CEO of the Challenger and Apollo Joint Venture.
•
•
•
•
•
2023 reward outcomes
In December 2022, Alexandra Bell was appointed as Chief Financial Officer following Rachel Grimes’ departure.
•
2023 reward outcomes
Reflecting Challenger’s business performance, STI outcomes for 2023 include:
the CEO’s STI at 105% of target and 70% of maximum; and
Reflecting Challenger’s business performance, STI outcomes for 2023 include:
STIs for other KMP ranged between 84% and 100% of target (56% to 67% of maximum).
the CEO’s STI at 105% of target and 70% of maximum; and
•
•
•
•
STIs for other KMP ranged between 84% and 100% of target (56% to 67% of maximum).
Long-term incentives (LTIs) will not vest in September 2023 for the fifth consecutive year, demonstrating strong alignment
between executives’ realised reward and shareholder outcomes over the longer term.
Long-term incentives (LTIs) will not vest in September 2023 for the fifth consecutive year, demonstrating strong alignment
Preparing for regulatory change in 2024
between executives’ realised reward and shareholder outcomes over the longer term.
Preparing for regulatory change in 2024
No changes have been made to the executive reward framework in 2023 with our primary focus ensuring compliance with
APRA’s new prudential standard CPS 511 Remuneration, which came into effect from 1 July 2023 for Challenger. This has
No changes have been made to the executive reward framework in 2023 with our primary focus ensuring compliance with
involved a comprehensive review of our LTI plan, with changes made to performance hurdles to ensure a material weighting
APRA’s new prudential standard CPS 511 Remuneration, which came into effect from 1 July 2023 for Challenger. This has
to non-financial measures is included.
involved a comprehensive review of our LTI plan, with changes made to performance hurdles to ensure a material weighting
The Board considered a range of non-financial measures and has determined a culture measure would be the most appropriate
to non-financial measures is included.
to ensure the long-term sustainability of our business. This measure will be introduced into the LTI plan from FY24 with a 25%
The Board considered a range of non-financial measures and has determined a culture measure would be the most appropriate
weighting and will be assessed using a suite of key metrics, including risk culture, engagement and specific culture-related
to ensure the long-term sustainability of our business. This measure will be introduced into the LTI plan from FY24 with a 25%
questions from the engagement survey. These metrics have been measured internally for a number of years, are quantifiable and
weighting and will be assessed using a suite of key metrics, including risk culture, engagement and specific culture-related
can be benchmarked to other Australian financial services organisations. The Board will also review these metrics in conjunction
questions from the engagement survey. These metrics have been measured internally for a number of years, are quantifiable and
with relevant operational metrics at the end of the performance period, ensuring no unintended or adverse outcomes
can be benchmarked to other Australian financial services organisations. The Board will also review these metrics in conjunction
are rewarded.
with relevant operational metrics at the end of the performance period, ensuring no unintended or adverse outcomes
Looking ahead
are rewarded.
Looking ahead
With the introduction of the non-financial measure to the LTI plan, the Board will transition from using a percentage range of
normalised net profit before variable reward and tax (NPBVRT) to determine the variable reward (VR) pool. The inclusion of
With the introduction of the non-financial measure to the LTI plan, the Board will transition from using a percentage range of
equity into the VR pool calculation is no longer reflective of best market practice and will also be impacted by the accounting
normalised net profit before variable reward and tax (NPBVRT) to determine the variable reward (VR) pool. The inclusion of
assumption used for non-financial measures. The Board will continue to consider a range of factors in assessing the
equity into the VR pool calculation is no longer reflective of best market practice and will also be impacted by the accounting
appropriateness of the pool, including overall business results and progress against short and long-term strategic objectives.
assumption used for non-financial measures. The Board will continue to consider a range of factors in assessing the
In reviewing measures for the LTI plan, we also reflected on shareholder feedback in relation to the use of absolute total
appropriateness of the pool, including overall business results and progress against short and long-term strategic objectives.
shareholder return (TSR) as a single financial measure and the five-year cumulative test. Whilst the Board continues to view
In reviewing measures for the LTI plan, we also reflected on shareholder feedback in relation to the use of absolute total
absolute TSR as an effective measure of shareholder outcomes for our business, we are also exploring a second financial
shareholder return (TSR) as a single financial measure and the five-year cumulative test. Whilst the Board continues to view
measure.
absolute TSR as an effective measure of shareholder outcomes for our business, we are also exploring a second financial
We have also reviewed a range of associated governance frameworks and processes, such as enhancing our approach to
measure.
consequence management with the introduction of post-vesting disposal restrictions and clawbacks as a further tool to adjust
We have also reviewed a range of associated governance frameworks and processes, such as enhancing our approach to
remuneration in the event of conduct matters. This is in addition to the malus we already have incorporated into our incentive
consequence management with the introduction of post-vesting disposal restrictions and clawbacks as a further tool to adjust
plans.
remuneration in the event of conduct matters. This is in addition to the malus we already have incorporated into our incentive
Finally, in light of the changes to our LTI plan to meet CPS 511 requirements, the Board will be adjusting the FY24 STI scorecard
plans.
measures and intends to reduce the FY24 STI deferral arrangements for executives, from four to two years. to ensure alignment
Finally, in light of the changes to our LTI plan to meet CPS 511 requirements, the Board will be adjusting the FY24 STI scorecard
with evolving market practice and to maintain the overall intent of our reward framework.
measures and intends to reduce the FY24 STI deferral arrangements for executives, from four to two years. to ensure alignment
We look forward to continuing to engage with our shareholders during 2024 as we make these important changes to our
with evolving market practice and to maintain the overall intent of our reward framework.
reward framework.
We look forward to continuing to engage with our shareholders during 2024 as we make these important changes to our
Yours sincerely
reward framework.
Yours sincerely
JoAnne Stephenson
Remuneration Committee Chair
JoAnne Stephenson
Remuneration Committee Chair
64
64
2023 Annual ReportChallenger Limited
Directors’ report
Contents
Section
Key Management Personnel
2023 at a glance
Remuneration strategy and structure
Short-term incentives
Long-term incentives
2023 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
Challenger Limited 2023 Annual Report
65
Page
65
66
67
68
72
74
75
77
78
84
87
Key Management Personnel
Challenger’s executive Key Management Personnel (KMP) for 2023 are detailed in the table below:
Name
Role
Term in 2023
Term in 2022
Detail
Current KMP
Nicolas Hamilton
Managing Director and
Chief Executive Officer
Full year
Full year
Chief Executive, Funds
Management until
31 December 2021
Alexandra Bell
Chief Financial Officer
From
1 December 2022
Full year
—
From 1 June 2022
Chief Executive,
Life & Solutions
Chief Executive,
Funds Management
From
1 August 2022
—
Anton Kapel
Victor Rodriguez
Former KMP
Michael Clarke
Rachel Grimes AM1
Acting Chief Executive,
Funds
Chief Financial Officer
Management
Until 31 July 2022 From 1 January
Interim appointment
Until 30 November
2022
Until 14
September 2022
2022
Full year
Full year
Ceased employment 1 July 2023
Appointed Chief Executive Officer,
Challenger and Apollo Joint
Venture from 15 September 2022
Christopher Plater
Deputy Chief Executive
Officer
1. Member of the Order of Australia.
Challenger’s Non-Executive Directors for 2023 are detailed in the table below:
Name
Term in 2023
Term in 2022
Duncan West (Chair)
John M Green
Steven Gregg
Masahiko Kobayashi1
Heather Smith
JoAnne Stephenson
Melanie Willis
Former Director
Peter Polson
Full year; Chair from
27 October 2022
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Until 27 October 2022
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.
65
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 66
Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
2023 at a glance
Summary of 2023 reward outcomes
STI outcomes
• The CEO’s 2023 STI reflects 105% of target and 70% of maximum.
• STIs for other KMP range between 84% and 100% of target, and 56% and 67% of maximum.
CEO remuneration
arrangements
Executive KMP
remuneration
arrangements
No vesting of LTIs
Non-Executive
Director fees
• CEO remuneration arrangements were unchanged for 2023 and no increase is planned for the
financial year 2024.
• There were no fixed pay increases awarded to executive KMP in the financial year 2023.
• No changes in fixed pay or variable remuneration arrangements are planned for the financial year
2024.
• LTIs will not vest in September 2023 for the fifth consecutive year. The non-vesting of LTIs
demonstrates the strong alignment between executives’ realised reward and shareholder outcomes
over the longer term.
• With the retirement of the outgoing Chair in October 2022, the Board reset the Chair fee at 14.4%
lower for the incoming Chair.
• No other changes were made to the fees payable for other NEDs in the financial year 2023.
Short-term incentive outcomes
The charts below set out 2023 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 - 2023
2.5
2.0
1.5
1.0
0.5
0.0
1.5
1.0
0.5
0.0
Maximum STI
Target STI
Deferred STI
Cash STI
2019
2020
2021
2022
2023
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).
No LTIs vested
20%
10%
0%
-10%
-20%
CGF 3yr
CGF 4yr
CGF 5yr
ASX 200 Accum.
Hurdle (threshold)
Hurdle (max)
2019
2020
2021
2022
2023¹
1. Indicative outcomes based on Challenger’s share price as at 30 June 2023. LTIs prior to September 2019 are tested after three or four years and subject to a final
cumulative test after five years. LTIs granted after this date are tested after four years and subject to a final cumulative test after five years.
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67
Remuneration strategy and structure
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 pay mix framework below. Where arrangements are
outside this framework, they will be transitioned over time.
% of fixed
STI target STI max
LTI face value
CEO &
business lines
133%
200%
up to 225%
CFO
100%
150%
125%
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%
Maximum
19%
19%
19%
43%
Fixed
LTI (face)
Cash STI
Deferred STI
Delivery of remuneration for 2023
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.
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Challenger Limited 2023 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
Delivery
Allocation
methodology
Vesting period
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.
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 poor performance, misconduct or resignation without the prior approval of the Board
constitutes bad leaver termination and will result in the forfeiture of all unvested equity awards. In
circumstances that do not constitute a bad leaver termination, all unvested awards will 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 2023 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
2023
30 June
2022
30 June
2021
30 June
2020
30 June
2019
364.0
321.5
278.5
343.7
396.1
53.3
6.48
24.0
47.6
6.84
23.0
41.5
5.41
20.0
56.5
4.41
17.5
65.5
6.64
35.5
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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2023 balanced scorecard outcome for the CEO
KPIs are reviewed and approved each year by the Board, ensuring they 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 2023 balanced scorecard is provided below.
Measures
Performance
Financial (40%)
Met
Profitability growth
Group normalised NPBT $521m – up 10% on last year and top half of the guidance range (target:
$485m - $535m).
Statutory NPAT $287.5m – below normalised NPAT ($364.0 million) as includes unrealised impact
of investment markets and revaluation impact of property portfolio (no target).
Normalised ROE 12.7% – up 80 bps on last year; however, below through cycle target of RBA cash
rate plus 12% (target: 14.9%). Below through cycle target largely due to lag between the timing of
changes in the RBA cash rate and lower contribution from Funds Management. Strong increase in
Life ROE, up 200 bps on last year to 15.1%.
Normalised cost to income 37.7% - improved by 100 bps on last year and ahead of target (target:
38.2%).
Strong capital position Challenger Life 1.59 times regulatory capital requirement – top half of target range (1.30 to 1.70
Asset growth
Risk (15%)
Strong risk culture
People (15%)
An engaged and high-
performing diverse
team
times).
Tier 2 subordinated debt refinance – refinanced $400 million of unsecured subordinated notes,
with the proceeds used to repay $400 million of subordinated notes in November 2022.
Challenger Capital Notes 4 (ASX: CGFPD) – issued Challenger Capital Notes 4 to the value of
$350 million, with the proceeds used to partially redeem Challenger Capital Notes 2.
Group AUM $105.0bn (target $108.7bn) – below target due to lower Funds Management net
flows.
Life sales $9.7bn (target $9.5bn) with record annuity sales.
Annuity sales $5.5bn (target $5.2bn) – 8% above last year and 6% above target, driven by record
retail annuity sales increasing by a very strong 53% on last year.
Extend tenor of book – longer tenor new business annuity sales driven by strong retail sales, with
73% of new business annuity sales greater than two years. Defined Benefit partnership with Aware
Super, resulting in $0.6bn long-term lifetime annuity sales.
Life book growth 5.2% (target: 0.3%) driven by strong retail book growth.
Funds Management net outflows $0.5bn (target $7.9bn net flows) – below target due to
investment market environment.
Met
Risk appetite compliance – risk appetite is considered as part of decision-making and risk
tolerances are generally positive.
Entrenched risk culture – 83% risk culture score (target: 85%); 84% believe risk management is
regularly considered and reflected in core decision-making and 89% believe that people in their part
of the business behave in a way that is consistent with Challenger IACT values.1
Met
Engagement – 68% engagement score, two percentage points below the Australian median;
79% believe strongly in the goals and objectives of Challenger; 82% feel proud to work for
Challenger and 83% would recommend Challenger as a good place to work2.
Flexible hybrid working – 75% have flexibility to manage work and other commitments and
89% believe their manager behaves in a way that is consistent with our IACT values2.
Employer of Choice for gender equality – continue to be recognised by Workplace Gender
Equality Agency.
Diversity and inclusion – 89% of people believe Challenger values diversity; 95% believe gender-
based harassment and sexual harassment is not tolerated; 91% feel that their manager genuinely
supports equality between women and men2.
Female representation in all roles 43.1% (target: 40-60%); in management roles 38.7%
(target:40-60%); on Board 37.5% (target: 33.3%).
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Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
Short-term incentives (continued)
Customer (20%)
Met
Great customer
experience
Growth initiatives
Customer division – appointment of Chief Executive, Customer to focus on building a more
customer-centric business.
Customer focus – 77% of employees believe Challenger has a strong customer focus and 92%
believe Challenger constantly looks for better ways to serve customers.
Award-winning capability – Challenger Life Association of Financial Advisers — Annuity Provider
of the Year Award and Long Term Income Stream Award and winner of Plan for Life Longevity
Cover Excellence Award and Client & Adviser Technical Support Award; Funds Management -
Fidante Zenith Distributor of the Year, Ardea Real Outcome Fund winner of Lonsec Active Global
Fixed Income Fund of the Year, Alphinity winner of Australian Equities – Large Cap category at
Zenith Investment Partners Awards.
Expanded strong institutional relationships – delivering on strategy to deepen relationships with
largest investors – top 25 Australian superannuation funds are Challenger clients.
Leading origination and investment capability – no. 1 Australian fixed income house and
strong investment performance with 90% of FUM outperforming benchmark since inception3.
New direct to customer channels – Challenger Life - new fixed term annuity allowing annuities to
be bought by customers online in under 10 minutes; Fidante - new website (Fidante.com) and
registry service providing online transaction and registry services to over 60 funds managed by
Challenger and Fidante.
Brand refresh in both Life and Funds Management – refreshed digital content and branding
and content to be more relevant and contemporary and support engagement levels across
Australian financial advisers.
New products – Life: Lifetime Annuity Market Linked (Accelerated Payments), Challenger Solutions
Liquid Alternatives Balanced Fund; Funds Management: Cultiv8 Agri-Food Tech Fund, Ox Capital
Dynamic Asia UCITS Fund, Alphinity Global Equity ETF and Alphinity Global Sustainable Equity ETF.
New Fidante affiliates – Proterra Investment Partners Asia and Elanor Investors Group (ASX:ENN).
Partnerships (10%)
Met
Strengthen and grow
strategic partnerships
Institutional retirement partnerships – announced strategic retirement income partnership with
TelstraSuper to bring lifetime income products to their members.
Apollo – Distribution agreement with Fidante becoming exclusive distributor of Apollo Aligned
Alternatives fund (AAA), launching in September 2024.
Artega Investment Administration – joint venture between Challenger and SimCorp (CSE:SIM)
to provide investment administration services to investment managers and owners across Australia
and Asia, with a number of new external clients won.
Real Estate strategic partnership – sale of Challenger’s Australian commercial real estate business
and formation of a strategic real estate partnership with Elanor, who will become Challenger’s
commercial real estate partner in Australia and New Zealand, and Challenger to become Elanor’s
exclusive distribution partner.
Sale of Challenger Bank – to simplify the business and allow focus on Challenger’s core Life and
Funds Management businesses.
Overall outcome
Met
1. CultureAmp, May 2023.
2. CultureAmp, March 2023.
3. As at 30 June 2023. Percentage of Fidante Affiliates meeting or exceeding the performance benchmark, with gross performance weighted by FUM.
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71
Short-term incentive outcomes
2023 STI outcome for the CEO:
105% of target
The Board determined an STI outcome of 105% of target (70% 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. The Board has determined not to apply a modifier as discussed
below.
Short-term incentive modifier
2023 short-term incentive outcomes for KMP
The table below sets out the 2023 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 84% and 100% of
target (56% and 67% of maximum).
2023 STI outcomes
% of target
% of max
105%
100%
100%
84%
70%
67%
67%
56%
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
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.
2023 STI modifier:
100%
The Board has determined not to apply a modifier to
2023 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.
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Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
Long-term incentives
Long-term incentive structure
Changes planned for 2024
LTIs are awarded annually to support a continued focus on
long-term performance and strong shareholder alignment.
The meaningful weighting ensures a significant proportion
of total reward is ‘at risk’ and directly linked to shareholder
outcomes. LTI terms are set out in the table below.
The Board considers that TSR is an effective measure of
shareholder outcomes and that an absolute rather than a
relative TSR performance measure is appropriate because:
•
•
•
there are no other listed companies in the Australian
market with a retirement income business that are directly
comparable to Challenger;
a broader index is not considered an appropriate peer
group as there is risk of misalignment between
remuneration and shareholder value creation; and
if the absolute TSR threshold performance target is set at a
level above average market returns over the long term,
vesting will be directly linked to the delivery of superior
returns to shareholders.
The Board determined to retain the thresholds of 7% to 10%
(compounded annually) for 2023 on the basis they continue to
be challenging in the current environment and represent a
relatively strong return for shareholders. Over four years, 7%
annual compound return represents TSR of 31%, and 10%
represents TSR of 46%.
Where the hurdle is not satisfied at four years, a higher test is
applied in year five (requiring TSRs above 40% for any vesting
to occur and TSRs above 61% for full vesting to occur). As a
higher hurdle applies in year five, Challenger’s approach
differs from traditional ‘re-tests’ and reflects our commitment
to driving focus on long-term performance and strong risk
management. Any unvested awards lapse after five years.
The Board has conducted a comprehensive review of the LTI
plan to ensure it appropriately reflects Challenger’s strategic
priorities, continues to align strongly with shareholder
outcomes and complies with regulatory requirements.
An additional performance measure of culture will be
introduced in the 2024 financial year that will comprise
25% of the LTI award value. The culture measure will be
assessed using a suite of eleven key metrics (including risk
culture, engagement scores and specific culture-related
questions from the engagement surveys) to assess how well
our leaders have protected and strengthened our culture over
the four-year period of the plan. These metrics have been
measured internally for a number of years, are quantifiable,
and can be benchmarked against other Australian financial
services organisations. Each metric will have a target and
stretch performance range set at the start of each
performance period and progress will be measured
throughout the performance period, with a final assessment
after four years. To ensure the results are reflective of the
employee experience, these metrics will be reviewed against
relevant operational metrics including, but not limited to,
employee turnover and incidents reported to the
Consequence Management Committee, and the Board will
determine an appropriate vesting outcome once all inputs
have been considered.
In consideration of this change for LTIs, the Board will also
make changes to the STI balanced scorecard of the CEO and
other KMP to ensure that measures remain appropriate and
minimise unnecessary overlaps across STIs and LTIs.
Specifically, the Board will increase the weighting of Financial
measures to 50%, introduce Sustainability as a measure into
the scorecard, and reduce the weighting of measures for Risk
and People.
Post-vesting disposal restrictions and clawbacks will be
introduced as a further tool to adjust remuneration in the
event of conduct matters. This is in addition to the malus we
already have incorporated into our incentive plans.
72
2023 Annual ReportChallenger Limited Directors’ report
Quantum for KMP
Delivery
Allocation
methodology
Vesting period and
conditions
Challenger Limited 2023 Annual Report
73
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.
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 poor performance, misconduct or resignation without the prior approval of the Board
constitutes bad leaver termination and will result in the forfeiture of all unvested equity awards.
In circumstances that do not constitute a bad leaver termination, all unvested awards will 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 2023 for the fifth consecutive year. In September 2022, LTIs awarded in 2017 and 2018 were
tested with annual compound TSR results of -7.83% and -8.48% respectively. As illustrated in the chart on page 67, the
non-vesting of LTIs reflects strong alignment of executives’ realised reward with shareholder outcomes over the longer term.
73
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Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
2023 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 five consecutive years.
The presentation of awarded remuneration for 2023 provides:
•
•
•
•
STI outcomes shown as a percentage of target opportunity;
LTI awards 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
2022 LTI includes the awards made in September 2021, and the 2023 LTI includes the awards made in September 2022;
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 2024 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.
KMP4
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
Former KMP
M Clarke5
R Grimes AM
C Plater
R Howes
A Murphy
Total
Year
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Short-term incentive
Fixed1
$
% of
target
Total
$
Cash Deferred2
$
$
Long-term
incentive
(Face value)3
$
Total
awarded
remuneration
$
1,075,000
862,500
437,500
—
600,000
50,000
550,000
—
41,667
250,750
302,083
725,000
156,250
750,000
—
637,500
—
618,750
3,162,500
3,894,500
105% 1,505,000 752,500
107% 1,250,000 625,000
435,000 217,500
100%
—
—
800,000 400,000
100%
N/A
14,584
618,750 309,375
84%
—
—
29,168
—
—
752,500
625,000
217,500
—
400,000
14,584
309,375
—
N/A
N/A
—
90%
N/A
75%
—
39%
—
111%
—
6,250
72,900
6,250
175,000 112,500
—
735,000 367,500
36,450
900,000 450,000
—
333,334 166,667
—
916,668 458,334
—
62,500
—
367,500
36,450
450,000
—
166,667
—
458,334
3,437,900 1,722,075 1,715,825
4,339,170 2,194,585 2,144,585
—
—
2,417,702
1,518,750
937,093
—
1,199,481
37,622
1,199,481
—
—
225,734
905,857
906,250
1,499,349
1,687,500
—
—
—
1,392,188
8,158,963
5,768,044
4,997,702
3,631,250
1,809,593
—
2,599,481
116,790
2,368,231
—
47,917
651,484
1,207,940
2,366,250
1,728,499
3,337,500
—
970,834
—
2,927,606
14,759,363
14,001,714
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 2023.
3. The LTIs granted during the financial year were allocated based on the five-day VWAP prior to grant in September 2022.
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.
5. Given Mr Clarke's acting role in the prior year, 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. Mr Clarke's 2023 remuneration is calculated on a pro-rata
basis for the period he was KMP during the year.
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75
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 2023, seven 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 2023, 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 2023, 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 2023 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 2023
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. 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.
75
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 76
Challenger Limited 2023 Annual Report
Directors’ report
Employee share trading policy
Employees, Directors and KMP must comply
with Challenger’s employee share trading policy, including
being 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 2023 (no requests in 2022).
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 $1,000 worth of
fully paid Challenger ordinary shares on an annual basis,
subject to a three-year minimum holding period.
Challenger Performance Plan (CPP) Trust
The CPP Trust is an employee share trust established to
satisfy Challenger’s employee equity obligations arising
from DPSRs, Restricted Shares and HPSRs.
Challenger shares held by the CPP Trust generate dividend
income. The CPP Trust does not receive dividends from
forward share purchase agreements.
The Trustee of the CPP Trust has absolute discretion to
determine whether any net income earned from shares
held by the CPP Trust is distributed to beneficiaries. The
practice of paying distributions to employees and KMP
ceased in 2021.
CPP Trust is now managed to minimise the amount of
unallocated dividends. Any undistributed income at the
end of the year is taxed at the maximum marginal tax rate
(which exceeds the Company tax rate) and carries no
franking credits.
Remuneration report (continued)
Remuneration governance (continued)
Variable remuneration governance (continued)
The Board approved a variable remuneration pool for 2023
which represents 11.8% of normalised NPBVRT. The Board
considers that the pool reflects a reasonable and equitable
distribution between shareholders and employees and
provides a clear line of sight to, and a strong relationship
between, performance and remuneration outcomes. This
outcome is consistent with last year and includes the
impact of the LTI fair value assumption on LTI awards from
1 July 2023 with the introduction of a non-financial
measure.
70
60
50
40
30
20
10
0
15%
10%
5%
0%
2019
2020
2021
2022
2023
Total variable reward ($m)
Total VR as % of NNPBVRT
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 2023 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: $450,000
NEDs: $179,000
$2,150,000
$600,000 to
$750,000
1. Based on fees and remuneration as at 30 June 2023.
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 2023 are set out in Sections ‘Key Management
Personnel remuneration arrangements’ and ‘Non-Executive
Director disclosures’.
76
2023 Annual ReportChallenger Limited Directors’ report
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, was established to support the management of
conduct risk matters and to oversee the application of
consequences for conduct matters. The Consequence
Management Committee meets on a monthly basis and
reports to the Remuneration Committee bi-annually on
matters referred to it. Where applicable, consequences range
from written warnings, remedial training and coaching,
through to more serious outcomes that may include
remuneration consequences, termination/dismissal and
matters being reported to regulatory or law enforcement
bodies. 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.
Challenger Limited 2023 Annual Report
77
During 2023, 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 2023,
this included:
•
•
•
risk culture questions included within the Your Voice
employee engagement survey;
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.
77
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 78
Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
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, long service leave entitlements and
insurance.
KMP3
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
Former KMP
M Clarke
R Grimes AM
C Plater
R Howes
A Murphy
Total
Short-term employee
benefits
Long-term employee
benefits
Salary1
$
Super-
annuation
Cash STIs
$
$
Share-based
payments and other2
$
1,052,062
841,038
423,180
—
578,593
48,325
529,558
—
31,226
238,966
293,033
704,683
151,534
728,781
—
627,045
—
587,922
3,059,186
3,776,760
25,292
23,568
14,754
—
25,292
1,964
23,185
—
2,108
11,784
10,539
23,568
5,269
23,568
—
11,784
—
21,604
106,439
117,840
752,500
625,000
217,500
—
400,000
14,583
309,375
—
6,250
112,500
—
367,500
36,450
450,000
—
166,667
—
458,333
1,722,075
2,194,583
1,335,732
952,559
419,170
—
380,221
20,508
257,371
—
20,869
130,503
165,375
189,419
260,138
1,090,487
—
816,851
—
744,650
2,838,876
3,944,977
Year
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Total
3,165,586
2,442,165
1,074,604
—
1,384,106
85,380
1,119,489
—
60,453
493,753
468,947
1,285,170
453,391
2,292,836
—
1,622,347
—
1,812,509
7,726,576
10,034,160
1. Includes the cost of death, total permanent disability and salary continuance insurances.
2. Calculated on the basis outlined in Note 29 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. Other long-term employee benefits include long service leave entitlements.
3. 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.
78
2023 Annual ReportChallenger Limited Directors’ report
Challenger Limited 2023 Annual Report
79
Split of statutory remuneration components
The splits of KMP statutory remuneration are set out below:
KMP1
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
Former KMP
M Clarke
R Grimes AM
C Plater
R Howes
A Murphy
Fixed
remuneration
Year
Cash STI
Share-based
payments and
other
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
34%
35%
41%
—%
44%
58%
49%
—%
55%
51%
65%
56%
36%
32%
—%
40%
—%
34%
24%
26%
20%
—%
29%
17%
28%
—%
10%
23%
—%
29%
8%
20%
—%
10%
—%
25%
42%
39%
39%
—%
27%
25%
23%
—%
35%
26%
35%
15%
56%
48%
—%
50%
—%
41%
Total
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
The following tables show the short and long-term incentives that were granted during the year ended 30 June 2023 for all KMP
who were considered KMP at the date of grant.
Restricted Shares
Deferred short-term incentives are delivered in the form of Restricted Shares which vest in tranches up to four years.
Restricted Shares granted to KMP during the year ended 30 June 2023 are detailed below:
Awarded
value
from
2022
$
Face
value
allocation
price
$
Total
number
of shares
granted1
Grant
date
Vesting (number of shares by tranche)2
Tranche 1
1 June
2023
Tranche 1
1 September
2023
Tranche 2
1 December
2023
Tranche 2
1 September
2024
Tranche 3
1 September
2025
Tranche 4
1 September
2026
KMP
Current KMP
N Hamilton
9/9/22 625,000
6.26
99,840
—
29,952
—
29,952
19,968
19,968
A Bell
9/12/22 400,000
7.13
56,100
28,050
—
28,050
A Kapel
V Rodriguez3
Former KMP
R Grimes
C Plater
9/9/22 175,000
6.26
27,954
9/9/22 175,000
6.26
27,954
9/9/22 367,000
6.26
58,704
9/9/22 450,000
6.26
71,882
—
—
—
—
8,386
13,977
17,611
21,565
—
—
—
—
—
8,386
13,977
—
5,591
—
—
5,591
—
17,611
21,565
11,741
14,376
11,741
14,376
1. 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).
2. 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.
3. Mr Rodriguez held a KMP role from 1 August 2022 and the vesting dates are based on awards prior to his KMP role on a policy that applies to non-LT members.
79
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 80
Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
Key Management Personnel remuneration arrangements (continued)
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 2023 are detailed below:
Grant
date
Vesting
date
Awarded
HPSR
face value
Face value
allocation
price
$
Total
number
of HPSRs
granted1
TSR start
price2
$
Fair value
at grant
date3
Awarded
HPSR
fair value
10/11/22
9/12/22
9/9/22
9/9/22
1/9/26 2,417,702
1/9/26
937,093
1/9/26 1,199,481
1/9/26 1,199,481
6.2573
6.2573
6.2573
6.2573
386,381
149,760
191,693
191,693
6.7178
6.7178
6.7178
6.7178
4.39 1,696,213
666,432
4.45
688,178
3.59
688,178
3.59
9/9/22
10/11/22
1/9/26
905,857
1/9/26 1,499,349
6.2573
6.2573
144,768
239,616
6.7178
6.7178
3.59
519,717
4.39 1,051,914
KMP
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
Former KMP
R Grimes
C Plater
1. The number of rights granted is determined by dividing the awarded value by the VWAP in the five days prior to 9 September 2022 (face value allocation price).
2. The TSR start price is the VWAP in the 90 calendar days prior to 9 September 2022.
3. 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 2023 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 2023 are detailed below:
KMP
Current KMP
N Hamilton
A Kapel
V Rodriguez
Former KMP
C Plater
Grant date
Number
Face value at grant
$
Vesting date Vested value1
$
7/9/20
9/9/19
7/9/20
9/9/19
7/9/20
9/9/19
7/9/20
9/9/19
35,495
3,768
3,923
1,356
10,274
5,276
39,231
14,894
142,335
24,994
15,731
8,995
41,199
34,997
157,316
98,795
1/9/22
1/9/22
1/9/22
1/9/22
1/9/22
1/9/22
1/9/22
1/9/22
223,867
23,765
24,742
8,552
64,798
33,276
247,430
93,936
1. The vested value is based on the VWAP in the five days prior to the vesting date.
80
2023 Annual ReportChallenger Limited Directors’ report
Restricted Shares
Challenger Limited 2023 Annual Report
81
Restricted Shares (RS) which vested to KMP during the year ended 30 June 2023 are detailed below:
KMP
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
Former KMP
R Grimes
C Plater
Grant date
Number
Face value at grant
$
Vesting date Vested value1
$
8/9/21
9/12/22
8/9/21
8/9/21
8/9/21
8/9/21
18,260
28,050
1,164
6,987
2,142
15,652
117,594
199,997
7,496
44,996
13,794
100,799
1/9/22
1/6/23
1/9/22
1/9/22
1/9/22
1/9/22
115,166
172,003
7,341
44,067
13,510
98,717
1. The vested value is based on the VWAP in the five days prior to the vesting date.
Hurdled Performance Share Rights
No HPSR awards vested to KMP during the year ended 30 June 2023 as the absolute TSR performance hurdles were not
achieved and no HPSRs will vest in September 2023.
Grant details
Vesting details
Grant date
Number
Fair value
at grant1
$
Vesting
date
Compound
annual TSR
outcome
Number
vested
Number
forfeited2
Number yet
to
vest or lapse
11/9/17
11/9/18
11/9/17
11/9/18
11/9/17
11/9/18
20,899
40,390
39,240
8,078
59,713
56,546
122,495
174,999
153,330
99,995
349,994
244,998
11/9/17
11/9/18
119,427
161,560
699,994
699,997
1/9/22
1/9/23
1/9/22
1/9/23
1/9/22
1/9/23
1/9/22
1/9/23
(7.83) %
(8.48) %
(7.83) %
(8.48) %
(7.83) %
(8.48) %
(7.83) %
(8.48) %
—
—
—
—
—
—
—
—
(20,899)
—
(39,240)
—
(59,713)
—
—
40,390
—
8,078
—
56,546
(119,427)
—
—
161,560
KMP
Current KMP
N Hamilton
A Kapel
V Rodriguez
Former KMP
C Plater
1. The fair value is independently calculated and has been determined by the Board as the best estimate of the awarded financial value at the grant date.
2. HPSRs awarded in 2017 lapsed during the year as a result of the higher hurdle test applied in year 5 not being met.
Shares and Share Rights held
Details of KMP DPSRs, Restricted Shares and HPSRs held as at 30 June 2023 are set out below:
Number held
at
1 July 20221
Number
granted as
remuneration
Instrument
Number
forfeited
Number
vested
Number held
at
30 June 2023
KMP
Current KMP
N Hamilton
A Bell
A Kapel
V Rodriguez
DPSRs
RS
HPSRs
DPSRs
RS
HPSRs
DPSRs
RS
HPSRs
DPSRs
RS
HPSRs
90,357
60,866
836,912
2,260
—
167,448
11,865
3,880
258,366
34,524
23,290
539,456
—
99,840
386,381
—
56,100
149,760
—
27,954
191,693
—
27,954
191,693
—
—
(39,263)
(18,260)
51,094
142,446
(20,899)
—
1,202,394
—
—
(122,678)
—
—
(39,240)
—
—
(59,713)
(1,130)
(28,050)
—
(5,279)
(1,164)
—
(15,550)
(6,987)
—
1,130
28,050
194,530
6,586
30,670
410,819
18,974
44,257
671,436
81
1.Opening balances include awards granted to the individual prior to becoming a KMP.
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 82
Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
Key Management Personnel and their affiliates’ shareholdings in Challenger Limited
Details of KMP and their affiliates’ shareholdings in Challenger Limited as at 30 June 2023 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.
Shareholding as a
multiple of fixed
remuneration1
KMP2
Current KMP
N Hamilton3
A Bell3
A Kapel3
V Rodriguez3
Total
Year
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Opening
balance
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
36,150
17,769
—
—
2,000
—
45,874
—
84,024
17,769
57,523
48,381
29,180
—
6,443
—
22,537
—
115,683
48,381
—
(30,000)
—
—
—
—
—
—
—
93,673
36,150
29,180
—
8,443
2,000
68,411
45,874
193,540
151,223
29,180
—
37,256
15,745
63,231
—
199,707
323,207
(30,000)
84,024
166,968
0.6
0.3
0.4
—
0.1
—
0.8
—
1.7
1.5
0.9
—
0.5
—
1.6
—
1. Shareholding multiple based on 30 June 2023 closing share price of $6.48 (30 June 2022: $6.84).
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 Bell (KMP from 1 December 2022), Mr Kapel (KMP from 1 June 2022)
and Mr Rodriguez (KMP from 1 August 2022) are within their transition period.
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2023 Annual ReportChallenger Limited Directors’ report
Challenger Limited 2023 Annual Report
83
Nicolas Hamilton – Managing Director & CEO
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
Good leaver
termination2
Employee initiated:
12 months
Employee initiated
(Material change3):
3 months
Employer initiated:
12 months
Eligibility for STI
No
Treatment of unvested
shares and share rights4
Lapse
Payment in lieu of
notice
The Board may elect to
make a payment of
salary package in lieu of
notice
None
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.
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 bad leaver (i.e. terminated by Challenger for poor performance, misconduct or
resignation without the prior approval of the Board), all unvested awards will be forfeited. In all other circumstances, the KMP is
considered a good leaver and entitled to a pro-rata STI award and any awards issued under CPP from 1 July 2019 onwards are
subject to specific good leaver conditions specified at the time of grant. Board discretion applies in relation to unvested awards
issued under the CPP prior to 30 June 2019.
Loans and other transactions
There were no loans made to Directors or key executives as at 30 June 2023 (30 June 2022: 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.
83
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Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
Non-Executive Director disclosures
Fee pool
The maximum aggregate amount of annual fees is approved
by shareholders in accordance with the requirements of the
Corporations Act 2001.
On recommendation from the Group Remuneration
Committee, the Board approves the fee structure within
the bounds of the overall maximum fee pool.
The current fee pool of $2,500,000 was approved by
shareholders in 2016.
Fee framework and review
Challenger aims to attract and retain suitably skilled and
experienced Non-Executive Directors to serve on the Board
and to reward them appropriately for their time and expertise.
Non-Executive Directors are remunerated by way of fees paid
in recognition of membership of the Board and its
committees.
Additional fees are paid to the Chair of the Board and
sub-committee chairs and members to reflect added
responsibilities.
Fees are benchmarked annually to align with the market
and to attract, retain and appropriately reward quality
independent directors.
Following the review undertaken in July 2022:
• no changes were made to Board or Committee Chair
and Member fees; and
• no change was made to the maximum fee pool.
With the retirement of Mr Polson in October 2022, the Board
took the opportunity to reset the Board Chair fee, which is
inclusive of all committee and subsidiary board fees, for the
incoming Chair.
The following table summarises the chair and member
fees applicable to the Board for the year ended
30 June 2023. All amounts are inclusive of superannuation,
where applicable.
Board/Committee
Board1,2
Group Risk Committee
Group Audit Committee
Group Remuneration Committee
Bank Board4
2023 fee structure
Chair fee3
$
Member fee
$
450,000
179,000
2022 fee structure
Chair fee
$
525,500
Member fee
$
179,000
47,000
47,000
47,000
50,000
23,500
23,500
23,500
25,000
47,000
47,000
47,000
50,000
23,500
23,500
23,500
25,000
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. The Chair fee for 2023 was reset in October 2022.
4. The Bank Board fee includes membership of any Bank Board committees.
84
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Challenger Limited 2023 Annual Report
85
Non-Executive Director fees for the year ended 30 June 2023
The following table summarises Non-Executive Director fees for the year ended 30 June 2023.
Non-Executive Director
D West1
J M Green
S Gregg
M Kobayashi2
H Smith
J Stephenson
M Willis
Former Non-Executive Director
P Polson3
Total
Year
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Director fees
$
383,167
251,559
274,208
264,531
244,208
242,818
—
—
241,928
216,005
287,708
282,099
264,208
257,873
Superannuation
$
—
—
25,292
23,468
25,292
23,521
—
—
25,292
21,600
25,292
23,568
25,292
23,544
Total
$
383,167
251,559
299,500
287,999
269,500
266,339
—
—
267,220
237,605
313,000
305,667
289,500
281,417
170,996
525,500
1,866,423
2,040,385
—
—
126,460
115,701
170,996
525,500
1,992,883
2,156,086
1. Mr West was appointed as Chair on 27 October 2022. He provides a service through a company; fees exclude GST.
2. Mr Kobayashi as a shareholder representative, does not receive fees. Similarly his alternate Director, Mr Iioka, does not receive fees.
3. Mr Polson retired from the Board on 27 October 2022.
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.
85
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 86
Challenger Limited 2023 Annual Report
Directors’ report
Remuneration report (continued)
Non-Executive Director disclosures (continued)
Non-Executive Director shareholdings in Challenger Limited at 30 June 2023
Details of the Non-Executive Directors’ and their affiliates’ shareholdings in Challenger Limited are set out below:
Non-Executive Director
D West1
J M Green
S Gregg2
M Kobayashi3
H Smith1
J Stephenson
M Willis
Former Non-Executive Director
P Polson
Total
Year
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Opening balance
25,901
25,901
22,784
16,944
14,000
14,000
—
—
18,705
10,000
26,629
21,629
156,836
156,836
128,944
128,944
393,799
374,254
Movements
16,000
—
—
5,840
—
—
—
—
—
8,705
—
5,000
—
—
—
—
16,000
19,545
Closing balance
41,901
25,901
22,784
22,784
14,000
14,000
—
—
18,705
18,705
26,629
26,629
156,836
156,836
128,944
128,944
409,799
393,799
1. 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 2023 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
2023
2022
KMP
2023
2022
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other benefits
$
Total
$
1,866,423
2,040,385
126,460
115,701
—
—
—
—
1,992,883
2,156,086
4,781,261
5,971,343
106,439
117,840
2,825,481
3,807,179
13,395
7,726,576
137,798
10,034,160
All KMP and Non-Executive Directors
2023
2022
6,647,684
8,011,728
232,899
233,541
2,825,481
3,807,179
13,395
9,719,459
137,798
12,190,246
1. No termination payments were made to KMPs or NEDs during the period.
86
2023 Annual ReportChallenger Limited Directors’ report
Challenger Limited 2023 Annual Report
87
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 29 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, long service leave entitlements and insurance.
Short-term incentive. STIs are used to reward KMP and employees for significant contributions to
Challenger’s results over the course of the financial year. Individual STI awards are allocated on the basis
of annual contribution and with reference to STI targets and market benchmarks. The Board has discretion
to amend or withdraw the STI at any point. STIs may be awarded in the form of cash and/or equity.
Total shareholder return. TSR represents the change in share price plus dividends received over a given
timeframe. Challenger uses absolute TSR as the measure of performance for HPSRs.
Variable
remuneration
Consists of cash STI and share-based awards. Share-based awards comprise Restricted Shares (DPSRs prior
to 1 July 2021) and HPSRs.
VWAP
Volume weighted average price. Ratio of the value of shares traded to total volume traded over a time
horizon. A five-day VWAP is used to calculate the number of DPSRs per dollar of deferred STIs. A five-day
VWAP is used to calculate the number of HPSRs per dollar of LTIs. A 90-day VWAP is also used for absolute
TSR performance testing (start and end price) for HPSR awards.
87
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 88
Challenger Limited 2023 Annual Report
Directors’ report
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.
88
Significant events after the balance date
Elanor strategic partnership and sale of Australian Real
Estate business
On 7 July 2023, Challenger completed the sale of its
Australian real estate business to Elanor Investors Group
(ASX:ENN; Elanor).
Consideration of $38 million was received in new securities
issued by Elanor, which was calculated using an issue price
based on Elanor’s one-month volume weighted average price
on 5 April 2023, on an ex-entitlement basis. Elanor has issued
24.8 million new securities representing approximately 17%
of Elanor securities on issue on a non-diluted basis and subject
to claw-back provisions over a three-year period linked to
achieving performance hurdles. Up to half of the securities
issued can be clawed back by Elanor.
As part of the transfer of the ADIC mandate, Challenger
agreed to transfer 4.5 million of the 24.8 million new
securities in Elanor to ADIC resulting in Challenger’s and
ADIC’s holding in Elanor representing approximately 14%
and 3% of total Elanor securities on issue respectively.
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.
Challenger announced as Aware Super’s partner to
provide defined benefit solution
Challenger was selected to provide a group lifetime annuity
policy to the value of $619 million that will de-risk the fund’s
lifetime pension liabilities from investment, inflation and
longevity risk. The policy commenced from 31 July 2023.
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 2023 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 30 Remuneration of auditor in the
financial report.
2023 Annual ReportChallenger Limited Directors’ report
Authorisation
Signed in accordance with a resolution of the Directors of Challenger Limited:
Challenger Limited 2023 Annual Report
89
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
D West
Independent Chair
14 August 2023
N Hamilton
Managing Director and Chief Executive Officer
14 August 2023
Auditor’s Independence Declaration to the Directors of Challenger
Limited
Auditor’s independence declaration
a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in
The Directors received the following declaration from the auditor of Challenger Limited:
relation to the audit;
As lead auditor for the audit of the financial report of Challenger Limited for the financial year ended 30
June 2023, I declare to the best of my knowledge and belief, there have been:
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
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
relation to the audit.
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
This declaration is in respect of Challenger Limited and the entities it controlled during the financial year.
Auditor’s Independence Declaration to the Directors of Challenger
Limited
Ernst & Young
As lead auditor for the audit of the financial report of Challenger Limited for the financial year ended 30
June 2023, I declare to the best of my knowledge and belief, there have been:
Graeme McKenzie
Partner
14 August 2023
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
14 August 2023
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
89
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 90
Challenger Limited 2023 Annual Report
Financial statements
Financial report
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
Financial statements
Statement of comprehensive income
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
91
92
93
94
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
Note 12 Contributed equity
Note 13 Interest bearing financial liabilities
Note 14 Reserves and retained earnings
Note 15 Finance costs
Note 16 Dividends paid and proposed
Note 17 Earnings per share
Section 2: Key numbers
Note 2 Expenses
Note 1 Revenue
Note 3 Segment information
Section 5: Risk management
95
99
99
101
102
Section 6: Group structure
Note 21 Parent entity
Note 22 Controlled entities
Note 23 Discontinued operation and business
held for sale
Note 24 Investment in associates and joint ventures
Note 25 Related parties
Section 7: Other items
Note 26 Goodwill and other intangible assets
Note 27 Lease assets and liabilities
Note 28 Contingent liabilities, contingent assets
and credit commitments
Note 29 Employee entitlements
Note 4 Income tax
Section 3: Operating assets and liabilities
Note 18 Financial risk management
Note 19 Fair values of investment assets and liabilities
Note 20 Collateral arrangements
106
108
Note 5 Investment assets
108
Note 30 Remuneration of auditor
Note 31 Subsequent events
Note 7 Loan assets
Note 6 Investment property
Note 8 Life contract liabilities
Section 6: Group structure
Note 21 Parent entity
Note 22 Controlled entities
Note 23 Discontinued operation and business held for sale
Note 24 Investment in associates and joint ventures
Note 25 Related parties
Note 11 Notes to Statement of cash flows
Note 10 Derivative financial instruments
Note 9 External unit holders’ liabilities
123
120
110
119
114
113
Signed reports
Directors’ declaration
Independent auditor’s report
Investor information
Section 7: Other items
Section 4: Capital structure and financing costs
124
Note 12 Contributed equity
Note 13 Interest bearing financial liabilities
Additional information
Note 26 Goodwill and other intangible assets
Note 27 Lease assets and liabilities
Note 28 Contingent liabilities, contingent assets and credit commitments
Note 29 Employee entitlements
Note 30 Remuneration of auditor
Note 31 Subsequent events
132
132
127
124
131
Note 14 Reserves and retained earnings
Note 16 Dividends paid and proposed
Note 15 Finance costs
Note 17 Earnings per share
Signed reports
Section 5: Risk management
Directors’ declaration
Note 18 Financial risk management
Independent auditor’s report
Note 19 Fair values of investment assets and liabilities
Investor information
Note 20 Collateral arrangements
Additional information
133
134
134
141
144
This financial report covers Challenger Limited (the Company) and its controlled entities (the Group or Challenger).
This financial report covers Challenger Limited (the Company) and its controlled entities (the Group or Challenger).
90
91
92
93
94
95
99
99
100
102
106
108
108
110
113
114
145
145
119
146
120
123
147
124
149
124
150
127
130
152
152
132
155
132
133
156
134
158
134
161
140
161
144
145
145
162
146
163
146
149
170
150
152
173
152
155
156
158
161
161
162
163
169
173
2023 Annual ReportChallenger Limited Statement of comprehensive income
For the year ended 30 June
Revenue
Expenses
Finance costs
Share of profits of associates and joint ventures
Profit before income tax
Income tax expense
Profit for the year after income tax from continuing operations
Loss for the year after income tax from discontinued operations
Total profit for the year after income tax2
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 on cash flow hedges
Other comprehensive (loss) / income for the year
Total comprehensive income for the year after tax2
Earnings per share attributable to ordinary shareholders of
Challenger Limited on continuing operations
Basic
Diluted
Challenger Limited 2023 Annual Report
91
ended
Note
1
2
15
24
4
23
14
14
14
16
16
2023
$m
20221
$m
2,459.3
1,212.7
(1,527.3)
(1,209.8)
(549.3)
25.3
408.0
(112.5)
295.5
331.5
38.0
372.4
(108.1)
264.3
(8.0)
(10.6)
287.5
253.7
(6.3)
(4.2)
0.2
(10.3)
277.2
Cents
42.1
37.9
(20.6)
20.8
0.4
0.6
254.3
Cents
37.5
33.1
1. Comparative information has been restated to reflect the sale of the Challenger Bank as detailed in Note 23.
2. Profit from non-controlling interests for the year ended 30 June 2023 was less than $0.1 million (30 June 2022: nil).
The Statement of comprehensive income should be read in conjunction with the accompanying notes.
91
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92
Challenger Limited 2023 Annual Report
Statement of financial position
As at 30 June
Assets
Cash and cash equivalents
Receivables
Current tax assets
Derivative assets
Investment assets
Bank assets held for sale1
Investment 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 and non-controlling
interests
Liabilities
Payables
Current tax liability
Derivative liabilities
Bank liabilities held for sale
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 and non-controlling
interests
Net assets of shareholders of Challenger Limited and non-controlling
interests
Equity
Contributed equity
Reserves
Retained earnings
Total equity of shareholders of Challenger Limited
Non-controlling interest
Total equity of shareholders of Challenger Limited and non-controlling
interests
1. Current year balances have been impacted by Challenger Bank being held for sale. For details refer to Note 23.
The Statement of financial position should be read in conjunction with the accompanying notes.
92
Note
4
10
5
23
6
7
24
27
4
26
26
4
10
23
13
9
27
4
8
12
14
14
2023
$m
593.4
697.1
6.1
601.1
2022
$m
733.1
647.5
—
577.2
24,317.3
22,805.9
206.7
3,269.2
374.9
24.9
23.5
81.9
43.9
24.3
86.3
579.9
7.5
—
3,483.3
551.7
19.7
24.8
74.9
53.8
29.0
137.1
579.9
7.3
30,938.0
29,725.2
854.6
—
611.3
182.0
—
5,836.6
5,268.8
28.2
54.7
7.4
726.2
66.5
839.6
—
227.7
5,783.0
4,386.4
44.3
62.5
5.3
13,930.0
13,595.4
26,773.6
25,736.9
4,164.4
3,988.3
2,513.1
2,481.5
(35.8)
(49.3)
1,683.1
4,160.4
4.0
1,556.1
3,988.3
—
4,164.4
3,988.3
2023 Annual ReportChallenger Limited Statement of changes in equity
Attributable to shareholders of Challenger Limited
Challenger Limited 2023 Annual Report
93
Contributed
equity
Share-
based
payment
reserve
Cash flow
hedge
reserve
Foreign
currency
translation
reserve
Note
$m
$m
$m
2,425.5
(52.8)
(0.4)
—
—
0.4
0.4
—
—
—
—
—
—
—
—
—
—
For the year ended
30 June 2022
Balance at 1 July 2021
Profit for the year from
continuing operations
Loss for the year from
discontinued operations
Other comprehensive
income
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
Shares issued under Capital
Notes 1 conversion
Dividends paid
Balance at
30 June 2022
For the year ended
30 June 2023
Profit for the year from
continuing operations
Loss for the year from
discontinued operations
Other comprehensive
income
Total comprehensive
income for the year
Other equity movements
Ordinary shares issued
Treasury shares purchased
Treasury shares vested
Settled forward purchases of
Treasury shares
Share-based payment
expense net of tax less
releases
Dividends paid
Other movements
Balance at
30 June 2023
—
—
—
—
15.1
(7.9)
12.9
7.9
—
—
—
—
—
—
—
—
—
1.0
28.0
—
—
—
2,481.5
(51.8)
—
—
—
—
38.0
(30.4)
9.6
14.4
—
—
—
—
—
—
—
—
—
—
—
12.8
—
—
12
12
12
12
16
12
12
12
12
16
Controlling
interest
reserve
Retained
earnings
Total
shareholder
equity
Non-
controlling
interests1
$m
$m
$m
$m
Total
equity
$m
5.7 1,451.2
3,825.8
— 3,825.8
—
264.3
264.3
—
264.3
—
(10.6)
(10.6)
—
(10.6)
—
—
0.6
—
0.6
—
253.7
254.3
—
254.3
—
—
—
—
—
—
—
—
—
—
—
—
15.1
(7.9)
12.9
7.9
—
—
—
—
15.1
(7.9)
12.9
7.9
1.0
—
1.0
28.0
—
28.0
— (148.8)
(148.8)
— (148.8)
$m
(3.4)
—
—
0.2
0.2
—
—
—
—
—
—
—
(3.2)
5.7 1,556.1
3,988.3
— 3,988.3
—
—
—
295.5
295.5
—
295.5
—
—
(8.0)
(8.0)
(8.0)
—
(10.3)
—
(10.3)
0.2
(10.5)
0.2
(10.5)
—
287.5
277.2
—
277.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
38.0
(30.4)
9.6
—
—
—
38.0
(30.4)
9.6
14.4
—
14.4
—
—
12.8
—
12.8
— (160.5)
(160.5)
— (160.5)
11.0
—
11.0
4.0
15.0
2,513.1
(39.0)
0.2
(13.7)
16.7 1,683.1
4,160.4
4.0 4,164.4
1 Profit from non-controlling interests for the year ended 30 June 2023 was less than $0.1 million (30 June 2022: nil).
The Statement of changes in equity should be read in conjunction with the accompanying notes.
93
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 94
Challenger Limited 2023 Annual Report
Statement of cash flows
For the year ended 30 June
Operating activities
Receipts from customers
Annuity and premium receipts
Annuity and claim payments
Bank deposit receipts1
Bank deposit payments1
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 acquired
Proceeds from sale of associate
Loan repayments
Payments for purchases of property, plant and equipment and other intangibles
Payments for purchase of associate interest
Net cash outflows from investing activities
Financing activities
Costs associated with issue of ordinary shares
Net proceeds from borrowings – interest bearing financial liabilities
Payments for lease liabilities
Payments for Treasury shares
Dividends paid
Proceeds from issue of ordinary shares in subsidiaries
Proceeds from the issue of Challenger Capital Notes 4
Costs associated with the issue of Challenger Capital Notes 4
Repayment of Challenger Capital Notes 2
Net cash outflows from financing activities
Net decrease in cash and cash equivalents from continuing operations
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents prior to transfers
Net increase in cash and cash equivalents from discontinued operations
Cash and cash equivalents transferred to assets held for sale
Cash and cash equivalents at the end of the year
1. Current year cash flows have been impacted by Challenger Bank being held for sale. For details refer to Note 23.
The Statement of cash flows should be read in conjunction with the accompanying notes.
94
Note
8
8
2023
$m
2022
$m
707.6
680.1
5,546.4
5,150.6
(5,529.8)
(4,339.1)
—
—
219.3
(125.8)
4,229.3
4,583.5
(3,687.4)
(3,436.4)
(651.0)
(633.3)
66.9
894.3
(180.1)
(122.6)
73.3
633.3
(53.8)
(264.9)
11
1,273.6
2,486.8
(1,492.1)
(2,310.3)
—
—
—
8.7
(28.9)
51.1
163.7
159.9
(7.9)
(1.2)
(2.9)
(0.9)
(1,337.5)
(2,123.3)
—
215.9
(7.8)
(19.0)
(0.1)
(476.5)
(7.8)
(1.7)
(122.5)
(133.7)
15.0
350.0
(6.6)
(460.0)
(35.0)
(98.9)
733.1
634.2
17.3
(58.1)
593.4
—
—
—
—
(619.8)
(256.3)
989.4
733.1
—
—
733.1
13
13
13
13
23
23
2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
95
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).
The financial report for Challenger Limited and its controlled
entities (the Group or Challenger) for the year ended
30 June 2023 was authorised for issue in accordance
with a resolution of the Directors of the Company on
14 August 2023.
(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.
Where necessary, comparative information has been restated
to conform to presentation as required in the current period.
Discontinued operations are excluded from the results of the
continuing operations and are presented as a single line item
‘loss for the year after income tax from discontinued
operations’ in the Statement of comprehensive income. Assets
and liabilities of discontinued operations have been presented
separately as held for sale on the Statement of financial
position.
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.
(iii) New and revised accounting
standards and policies
The accounting policies and methods of computation are
the same as those adopted in the annual report for the
prior comparative period, unless otherwise stated.
Interest rate benchmark reform
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). USD LIBOR settings including the overnight,
one, three, six and twelve-month settings, ceased publication
on 30 June 2023.
The Group was exposed to interest rate benchmark reform
through various financial instruments including derivatives
and investment assets. As at 30 June 2023, 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 were transitioned to ARRs or closed out.
New accounting standards and amendments
that are effective in the current financial year
The Group has adopted all the new and revised Standards and
Interpretations issued by the Australian Accounting Standards
Board (AASB) that are relevant to its operations and effective
for an accounting period that begins on or after 1 July 2022.
New and revised Standards and amendments thereof and
interpretations effective for the current year that are relevant
to the Group include:
• AASB 2020-6 Amendments to Australian Accounting
Standards – Classification of Liabilities as Current or
Non-current – Deferral of Effective Date; and
• AASB 2021-7 Amendments to Australian Accounting
Standards – Effective Date of Amendments to AASB 10
and AASB 128 and Editorial Corrections (insofar as the
Standard relates to editorial corrections that are effective in
the current year.)
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.
95
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Challenger Limited 2023 Annual Report
(iii) New and revised accounting
standards and policies (continued)
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.
Due to the nature of the insurance products that Challenger
offers its customers, most of the portfolios will be designated
as onerous. If a portfolio is designated as onerous, a CSM
calculation will not be required; however, tracking the loss
component will be required under AASB 17.
• Risk adjustment – The Group is expecting to adopt a risk
adjustment methodology that aligns with the cost of capital
approach.
• Discount rates – The Group is expecting to apply a ‘bottom-
up approach’, which uses risk-free rates adjusted to reflect
the illiquidity characteristics of the insurance contracts.
The impact of unwinding the discount and changes in
discount rates (referred to as insurance finance income/
expense) will be fully recognised in profit and loss, as
opposed to disaggregating it between profit and loss
and comprehensive income as allowed by the standard.
• 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.
• Transition balance sheet – Insurance contracts will need to
be restated at 1 July 2022 (being the transition date). The
Group intends to apply the full retrospective approach to
derive the transition adjustment; however, the Group notes
it may be impracticable in some cases, especially for older
cohorts where assumptions cannot be determined without
the use of hindsight, in which case a fair value approach will
be applied.
Financial impact on AASB 17 transition
Based on the assessment performed to date, the expected
impact of adopting AASB 17 on the Group’s net assets as at
1 July 2022 is a reduction of between $190 million and
$290 million (pre-tax), with a corresponding impact on
retained earnings. The impact is primarily driven by the
requirement to apply current discount rates for measuring the
fulfilment cash flows, and locked in discount rates for
measuring the CSM on non-onerous contracts, disaggregating
non-onerous portfolios from onerous portfolios whereby
profits will now be progressively released rather than released
immediately, as well as the introduction of a risk adjustment.
Prior period reclassifications
As part of the AASB 17 implementation project, the Group
completed a review of insurance risk across the liability
portfolio and determined that several contract types previously
classified as life insurance do not carry significant insurance
risk. Insurance risk is significant if an insured event could cause
an insurer to pay significant additional benefits in any
scenario, excluding scenarios that lack commercial substance.
Significant insurance risk is required to meet the definition of
an insurance contract under AASB 1038 Life Insurance
Contracts and AASB 17 Insurance Contracts. While the
impacted contracts carry features that may result in the Group
paying additional benefits, these additional benefits are not
expected to be significant and they arise primarily due to
Accounting standards and interpretations
issued but not yet effective (continued)
The first full year financial statements presented under AASB
17 will be for the year ended 30 June 2024 with restated
comparatives for the year to 30 June 2023 and restated
opening balance sheet as at 1 July 2022. The first half year
financial statements under AASB 17 will be for the period
ended 31 December 2023, with restated comparatives for the
period to 31 December 2022.
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 AASB 9 Financial
Instruments and will continue to be measured in the
same way.
On 27 September 2022, APRA finalised changes to the capital
and reporting frameworks for insurance in response to the
introduction of AASB 17. The revised prudential and reporting
standards will come into effect from 1 July 2023 and the
impact on capital requirements is not expected to be material.
The impact on income tax is uncertain, pending responses
from Treasury and the Australian Taxation Office (ATO).
Key changes 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 will 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 materially completed its implementation
program, including finalising material judgements and
accounting policies and upgrading data and systems that will
produce valuation and key disclosures required under AASB
17. Key considerations for the Group during implementation
of AASB 17 were:
• Measurement model – The Group is adopting the General
Measurement Model (GMM). In principle, the GMM is
similar to the current MoS methodology as prescribed under
AASB 1038. The GMM is a detailed methodology that
requires enhanced data capture and storage for additional
modelling and processes.
• Separating components – The Group has assessed the
requirements to unbundle features and components under
AASB 17 and is satisfied no unbundling is required.
• 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;
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97
Prior period reclassifications (continued)
discounting factors. Accordingly, those identified contracts
have been retrospectively reclassified as investment contracts.
The reclassification is immaterial on both net asset and
reported earnings, but the following financial statement
disclosures have been impacted:
•
• Note 1 Revenue;
• Note 2 Expenses;
• Note 3 Segment information;
• Note 8 Life contract liabilities;
• Note 18 Financial risk management; and
• Note 19 Fair values of investment assets and liabilities.
Statement of comprehensive income;
For more information on the accounting policy for life contract
liabilities, refer to Note 8 in the financial statements.
(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 observable indications that the asset’s value has
increased significantly during the period as a result of
favourable changes in the technological, market, economic or
legal environment that determined 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.
97
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98
(ix) Other assets
(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 2022.
(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.
Other assets are mainly comprised of prepayments and rental
bond deposits. 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.
(x)
Provisions
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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2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
99
Section 2: Key numbers
This section presents the results and performance of the Group for the year and provides additional information about
those line items on the Statement of comprehensive income that the Directors consider most relevant in the context of
understanding the financial components of the Group’s operations.
Note 1 Revenue
Investment revenue
Fixed income securities, loan assets and cash
Interest revenue1
Net realised and unrealised gains/(losses) on fixed income securities
Investment property and property securities
Property rental revenue
Dividend and distribution revenue
Net realised and unrealised (losses)/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 on foreign exchange translation and hedges
Net realised and unrealised gains/(losses) on interest rate derivatives
Net realised and unrealised gains on equity swap derivatives
Net realised and unrealised gains/(losses) on credit default swap derivatives
Net realised and unrealised gains/(losses) on commodities derivatives
Net realised and unrealised (losses)/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 revenue4,5
30 June
2023
$m
30 June
2022
$m
982.9
31.9
631.0
(1,384.7)
238.1
2.4
(165.7)
40.2
51.7
(8.7)
74.3
226.1
43.0
63.1
27.6
(1.4)
225.7
24.2
426.5
34.4
142.9
0.1
—
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
290.0
743.0
458.2
(0.8)
53.3
2,459.3
1,212.7
1. This includes interest revenue earned for items measured at amortised cost using the effective interest method $16.3 million (30 June 2022: $18.2 million) and
interest revenue earned for items measured at fair value through profit and loss $966.6 million (30 June 2022: $612.8 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. There were no subsidiary or associate disposals during the year. (30 June 2022: Gain on the disposal of Accurium Pty Ltd and Whitehelm Capital Pty Limited.)
4. Comparative information has been restated to reflect the Bank being classified as a discontinued operation. See Note 23.
5. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior comparative period total revenue was $1,860.7 million.
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100
Challenger Limited 2023 Annual Report
Note 1 Revenue (continued)
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.
• 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.
• Proceeds from the sale of rental assets are recognised upon
disposal of the relevant assets.
• 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.
100
2023 Annual ReportChallenger Limited Note 2 Expenses
Life insurance contract claims and expenses
Cost of life insurance contract liabilities
Cost of life investment contract liabilities
Investment property-related expenses1
Management 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 expenses2,3
Challenger Limited 2023 Annual Report
101
30 June
2023
$m
348.9
164.3
408.7
69.3
148.4
63.9
194.6
16.8
4.8
6.0
8.5
33.4
48.3
11.4
1,527.3
30 June
2022
$m
309.5
96.6
198.4
73.1
151.1
52.7
194.0
13.0
4.7
5.8
8.0
30.5
37.6
34.8
1,209.8
1. Investment property-related expenses relate to rental income generating investment properties.
2. Comparative information has been restated to reflect the Bank being classified as a discontinued operation. See Note 23.
3. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior comparative period total expenses was $1,872.9 million.
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
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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102
Challenger Limited 2023 Annual Report
Note 3
Segment information
Operating segments
The reporting segments1 of the Group have been identified as follows.
Life
$m
FM
$m
Bank
$m
Corporate
and
other2
$m
Investment
experience
after tax
$m
Significant
items
after tax4
$m
653.0
178.8
8.8
(112.5)
(117.2)
(17.6)
540.5
61.6
(8.8)
—
—
—
1.6
(70.2)
(68.6)
(4.0)
540.5
61.6
(8.8)
(72.6)
—
—
(1.4)
—
(67.8)
(7.3)
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
30 June 2023
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 adjustments3
Profit attributable to the
shareholders of Challenger Ltd
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 adjustments3
Profit attributable to the
shareholders of Challenger Ltd
Total
$m
842.2
(317.5)
524.7
(4.0)
520.7
(156.7)
364.0
(76.5)
287.5
776.9
(300.5)
476.4
(4.1)
472.3
(150.8)
321.5
(67.8)
253.7
1. Refer to following page for definitions of the terms used in the management view of segments.
2. Corporate and other includes corporate companies, SPV, non-controlling interests and Group eliminations.
3. The amount within the Bank segment relates to expected credit loss provision and fair value adjustments.
4. FY23 significant items of $7.3 million (after tax) represents the costs related to the sale of the Real Estate business to Elanor (ASX: ENN), costs related to the
implementation of AASB 17 and costs related to the sale of the Bank to Heartland. FY22 significant items of $14.3 million (after tax) largely 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.
102
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
103
Note 3
Segment information (continued)
Other statutory information
Life
2023
$m
FM
Bank2
Corporate and
other
Total
2022
$m
2023
$m
2022
$m
2023
2022
$m
$m
2023
$m
2022
$m
2023
$m
2022
$m
Revenue from
external customers1 1,241.1
976.7 235.3 249.6
— —
Interest revenue
981.1
630.9
0.3
—
— —
—
1.5
(525.5)
370.9
(0.6)
(1.3)
— —
(23.2)
(38.1)
(549.3)
— 1,476.4 1,226.3
0.1
982.9
631.0
331.5
(46.9)
(41.8)
46.9
41.8
— —
—
—
—
—
(3.8)
(3.9)
(3.6)
(3.4)
— —
(1.1)
(0.8)
(8.5)
(8.1)
Interest expense
Intersegment
revenue
Depreciation and
amortisation
As at 30 June
Segment assets
24,157.7 22,766.8 332.7 320.0 242.6 391.1 6,205.0 6,247.3 30,938.0 29,725.2
Segment liabilities
(20,426.4) (19,234.2)
(23.0)
(28.8)
(182.0) (271.1) (6,142.2) (6,202.8) (26,773.6) (25,736.9)
Net assets
3,731.3 3,532.6 309.7 291.2
60.6 120.0
62.8
44.5 4,164.4 3,988.3
1. Funds Management revenue from external customers is predominantly management fees.
2. The Bank has been classified as held for sale and a discontinued operation in the period. See Note 23.
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.
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.
Corporate and other
The Corporate and other segment, which is not considered an
operating segment of the Group includes its share of profit or
loss in Artega and the Apollo Joint Venture. It is also 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.
Operating segments — discontinued operations
Bank
The Bank provides a range of savings and lending products,
including government guaranteed term deposits to customers
in Australia. On 20 October 2022, Challenger Limited
announced that it has entered into a share sale agreement
to sell Challenger Bank Limited to Heartland Group Holdings
Limited. The Bank is now classified as held for sale and is
considered to be a discontinued operation in line with
AASB 5 Non-current Assets Held for Sale and
Discontinued Operations.
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.
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104
Challenger Limited 2023 Annual Report
Note 3
Segment information (continued)
Normalised vs statutory results
Normalised capital growth
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. Net income consists of the
following sub-categories of management view of revenue:
• normalised cash operating earnings (Life segment);
• net interest margin (Bank segment — this has been
included as a discontinued operation);
• 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. 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.
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 unchanged.
Asset and liability experience
Asset and liability experience is calculated as the difference
between actual investment gains/losses (both realised and
unrealised and based on fair value) and the normalised capital
growth in relation to assets plus any economic and actuarial
assumption changes in relation to policy liabilities for
the period.
New business strain
New business strain is a non-cash valuation adjustment
recognised when annuity rates on new business are higher
than the risk-free rate used to fair value life contracts.
Maintenance expense allowances over the expected future
term of the new business are also included in the life contract
valuation. New business strain reported in the period
represents the valuation loss on new sales generated in the
current period net of the reversal of new business strain of
prior period sales.
Significant items after tax
The Group presents additional non-IFRS financial information
to the market to provide meaningful insights into the financial
condition of the business. Due consideration has been given
to ensure that disclosure of Challenger’s normalised profit
framework is explained, reconciled and calculated consistently.
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 $740.9 million of the Group’s annuity and
premium receipts in the 2023 financial year out of the total
annuity and premium receipts of $5,546.4 million (2022:
$616.6 million out of total of $5,150.5 million) and comprised
17.5% of total policy liabilities outstanding as at 30 June 2023
(2022: 16.1%); 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.
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2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
105
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 — other adjustments
Significant items after tax
Statutory view of profit after tax
Reconciliation of management view of revenue to statutory revenue
Operating segments
Corporate and other
Net income (management view of revenue)
Expenses and finance costs offset against revenue
Loan asset expenses and finance costs offset against loan asset income
Distribution expenses offset against related income
Change in life contract liabilities and reinsurance contracts recognised in expenses1
Property-related expenses offset against property income
Interest and loan amortisation costs
Management fee expenses
Gain on disposal of subsidiary and associate
Net income of discontinued operations2
Adjustment for other items
Difference between management view of investment experience and
statutory recognition
Actual capital growth
Normalised capital growth
Policyholder liability experience
New business strain
Statutory revenue (refer Note 1 Revenue)1
30 June
2023
$m
30 June
2022
$m
593.3
(72.6)
520.7
(156.7)
364.0
(67.8)
(1.4)
(7.3)
287.5
840.6
1.6
842.2
8.2
63.9
921.9
69.3
491.2
148.4
—
6.5
7.1
544.0
(71.7)
472.3
(150.8)
321.5
(81.2)
(0.9)
14.3
253.7
776.9
—
776.9
2.8
52.7
604.5
73.1
(373.2)
151.1
53.3
(2.3)
(10.8)
(106.1)
(26.0)
119.6
(86.9)
2,459.3
(211.8)
(48.8)
187.7
(42.4)
1,212.7
1. Comparative information has been restated to reflect a number of contract types being reclassified to investment contracts following a review of insurance risk
across the liability portfolio.
2. The Bank has been included as a segment within management’s view but is a discontinued operation for statutory reporting. Therefore, the reconciliation removes
the net income of discontinued operations in reconciling to the statutory revenue balance. Prior year balances have been restated accordingly.
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106
Challenger Limited 2023 Annual Report
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 rate1
1Comparative information has been restated to reflect the Bank being classified as a discontinued operation. See Note 23.
Analysis of income tax expense
Current income tax expense for the year
Current income tax (expense)/benefit prior year adjustment
Deferred income tax (expense)/benefit for the year
Deferred income tax benefit/(expense) prior year adjustment
Income tax expense
Income tax benefit on translation of foreign entities
Income tax benefit/(expense) on hedge of net investment in foreign operations
Income tax benefit from other comprehensive income1
1.Comparative information has been restated to reflect the Bank being classified as a discontinued operation. See Note 23.
30 June
2023
$m
408.0
(122.4)
(12.8)
14.9
9.8
(2.0)
(112.5)
27.6 %
30 June
2023
$m
(47.7)
(16.0)
(63.2)
14.4
(112.5)
0.5
1.8
2.3
30 June
2022
$m
372.4
(111.7)
(8.6)
4.2
9.7
(1.7)
(108.1)
29.0 %
30 June
2022
$m
(297.7)
7.4
190.4
(8.2)
(108.1)
9.1
(8.9)
0.2
Statement of financial
position
Statement of comprehensive
income
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
30 June
2022
$m
45.3
5.6
6.9
54.7
13.7
126.2
(39.9)
40.4
6.3
7.5
78.1
17.8
150.1
(13.0)
86.3
137.1
(31.6)
(9.5)
(6.2)
(47.3)
39.9
(2.7)
—
(15.6)
(18.3)
13.0
(7.4)
(5.3)
7.0
(0.6)
(0.5)
(23.4)
—
(17.5)
(31.1)
(9.5)
9.3
(31.3)
(8.7)
0.8
(5.4)
78.1
(2.4)
62.4
6.7
124.0
(10.9)
119.8
(48.8)
182.2
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 (expense)/benefit recognised in
Statement of comprehensive income
106
2023 Annual ReportChallenger Limited
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 (asset)/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
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.
Current tax assets and liabilities
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 2023 Annual Report
107
30 June
2023
$m
(104.8)
(7.7)
(112.5)
30 June
2022
$m
(98.7)
(9.4)
(108.1)
Change
$m
(6.1)
1.7
(4.4)
30 June
2023
30 June
2022
$m
66.5
47.7
16.0
(9.8)
$m
48.1
293.1
(7.4)
(0.4)
(122.6)
(264.9)
(3.9)
(6.1)
(2.0)
66.5
30 June
2023
30 June
2022
$m
12.9
56.4
$m
8.9
56.4
intention to settle on a net basis. Deferred tax assets are
recognised for the carry forward 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.
Tax consolidation
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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Challenger Limited 2023 Annual Report
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-Special Purpose Vehicle (SPV)/ADI mortgage assets
Fixed income securities
Shares in listed and unlisted corporations
Unit trusts, managed funds and other
Equity securities
Simple Agreement for Future Equity
Debt 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
2023
$m
30 June
2022
$m
24,317.3
22,561.9
—
244.0
24,317.3
22,805.9
30 June
2023
$m
4,632.7
6,317.6
9,229.4
272.1
30 June
2022
$m
4,540.1
6,079.3
9,342.0
96.7
20,451.8
20,058.1
21.2
2,623.0
2,644.2
30.8
1,537.5
1,568.3
20.0
20.0
51.9
232.2
284.1
89.3
89.3
827.9
827.9
—
—
49.7
251.1
300.8
90.2
90.2
544.5
544.5
24,317.3
22,561.9
15,981.6
14,368.3
8,335.7
8,193.6
24,317.3
22,561.9
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.
2. ADI = Authorised deposit-taking institution.
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Challenger Limited 2023 Annual Report
109
Key estimates and assumptions
Unlisted investment valuations
Investments held at fair value through profit and loss for
which there is no active market or external valuation available
are valued making as much use of available and supportable
market data as possible and keeping judgemental inputs to a
minimum, either by:
•
reference to the current market value of another
instrument that is substantially the same;
• using recent arm’s length market transactions;
• option pricing models refined to reflect the issuer’s specific
circumstances;
• discounted cash flow analysis; or
• other methods consistent with market best practice.
Refer to Note 18 Financial risk management for further
disclosure.
Note 5
Investment assets (continued)
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.
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.
109
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Challenger Limited 2023 Annual Report
Note 6
Investment property
Investment property in use
Total investment property
30 June
2023
$m
3,269.2
3,269.2
30 June
2022
$m
3,483.3
3,483.3
Investment property held
for sale
Investment property in
use
Development property
held for sale
30 June
2023
30 June
2022
30 June
2023
30 June
2022
30 June
2023
30 June
2022
Reconciliation of carrying
amounts
$m
$m
$m
$m
$m
Balance at the beginning of the year
—
388.0
3,483.3
3,389.7
Movements for the year
– acquisitions1
– disposals2
– net transfers to/(from) investment
property held for sale
– capital expenditure
– net revaluation (loss)/gain
– foreign exchange loss
—
—
(78.2)
(388.7)
79.1
0.1
(1.0)
—
—
0.7
—
—
10.4
—
(79.1)
33.8
(160.7)
(18.5)
—
—
—
19.4
155.2
(81.0)
Balance at the end of the year
—
—
3,269.2
3,483.3
—
—
—
—
—
—
—
—
1. Investment property acquisitions: Helicon Drive, SA $10.4m (30 June 2022: Nil).
2. Investment and development property disposals: Bunbury Forum, WA $78.2m (30 June 2022: County Court, VIC $388.7m and Maitland, NSW $8.0m).
$m
8.0
—
(8.0)
—
—
—
—
—
Accounting policy
Investment and development property
Investment and development property is initially recognised at
cost, including transaction costs. Subsequent to initial
recognition, investment and development property is
recognised at fair value.
Investment and development property is classified as held for
sale if its carrying value will be recovered principally through a
sale transaction rather than through continuing use. This
condition is met only when management is committed to the
sale, and the sale is highly probable to occur in the next
12 months. Investment and development property held for
sale is carried at fair value, being the latest valuation available,
or agreed sale price.
Gains or losses arising from changes in the fair values of
investment properties are included in the Statement of
comprehensive income in the period in which they arise.
Investment and development properties are derecognised
when they have either been disposed of or when the
investment 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).
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111
Note 6
Investment property (continued)
Accounting policy (continued)
Key estimates and assumptions
Independent valuations for all investment properties are
conducted at least annually by suitably qualified valuers, and
the Directors make reference to these independent valuations
when determining fair value. For the year ended 30 June
2023, all investment properties were valued by external
valuers.
Each independent valuer is appointed in line with the
valuation policy, which requires that valuers are authorised to
practise under the law of the relevant jurisdiction where the
valuation takes place and have at least five years of
continuous experience in the valuation of property of a similar
type to the property being valued, and on the basis that they
are engaged for no longer than two consecutive years on an
individual property.
The valuer must have no pecuniary interest that could conflict
with the valuation of the property, must be suitably
indemnified and must comply with the Australian Property
Institute (API) Code of Ethics and Rules of 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.
Analysis of investment property as
at 30 June
Investment property in use and held for sale
Australia
Acquisition
date1
Carrying
value
2023
$m
Total
cost2
$m
Cap
rate
2023³
%
Last
external
valuation
date
Carrying
value
2022
$m
Cap
rate
2022³
%
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
01-Dec-01
128.6
265.0
01-Dec-17
101.3
27-Jan-16
27-Jan-16
47.9
34.2
81.5
28.9
35.2
15-Jan-15
163.3
229.0
01-Jan-00
152.9
247.0
82 Northbourne Avenue, ACT
01-Jun-17
62.9
45.5
215 Adelaide Street, QLD
31-Jul-15
266.6
209.5
565 Bourke Street, VIC
839 Collins Street, VIC
Bunbury Forum, WA4
Channel Court, TAS
28-Jan-15
113.2
134.2
22-Dec-16
212.0
232.0
03-Oct-13
—
—
21-Aug-15
89.1
86.5
Cosgrave Industrial Park, Enfield, NSW 31-Dec-08
93.1
185.9
Discovery House, ACT
Executive Building, TAS
Gateway, NT
Golden Grove, SA
Helicon Drive, SA
Karratha, WA
Kings Langley, NSW
Lennox, NSW
North Rocks, NSW
Total Australia
28-Apr-98
105.7
166.0
30-Mar-01
35.8
47.2
01-Jul-15
123.6
108.7
31-Jul-14
162.3
153.0
05-Oct-22
28-Jun-13
29-Jul-01
27-Jul-13
10.8
58.5
16.6
68.7
10.0
49.5
28.0
75.0
18-Sep-15
190.0
187.0
2,237.1 2,604.6
4.88
6.50
7.25
7.00
5.50
5.25
6.13
6.88
5.75
5.13
—
7.00
4.25
5.00
6.25
6.61
6.25
5.75
7.50
5.50
6.25
5.75
30-Jun-23
281.0
30-Jun-23
30-Jun-23
30-Jun-23
85.0
29.5
32.7
30-Jun-23
241.0
30-Jun-23
259.0
30-Jun-23
51.0
30-Jun-23
227.0
30-Jun-23
155.0
30-Jun-23
254.0
N/A
30-Jun-23
79.1
89.0
30-Jun-23
181.3
30-Jun-23
173.0
30-Jun-23
49.0
30-Jun-23
110.0
30-Jun-23
155.5
30-Jun-23
30-Jun-23
30-Jun-23
30-Jun-23
—
51.0
28.9
79.0
30-Jun-23
195.0
2,806.0
4.63
6.25
7.25
6.75
5.00
5.13
5.63
5.88
4.88
4.63
7.00
6.75
3.75
4.88
5.50
6.34
6.00
—
6.88
5.00
6.00
5.50
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 Sold in November 2022.
111
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Challenger Limited 2023 Annual Report
Note 6
Investment property (continued)
Analysis of investment property as
at 30 June (continued)
Acquisition
date1
Europe
Carrying
value
2023
$m
Total
cost2
$m
Cap
rate
2023³
%
Last
external
valuation
date
Carrying
value
2022
$m
Cap
rate
2022³
%
Avenue de Savigny, Aulnay sous Bois
31-Dec-08
20.3
10.0
7.75
30/6/2023
10.0
7.00
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 Sakado Chiyoda
Yorktown Toride
Total international
31-Jan-10
26-Sep-19
30.5
14.7
30.5
12.2
31-Jan-10
119.2
110.1
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
77.9
32.2
12.0
69.9
13.3
12.2
25.2
28.0
33.2
25.2
17.0
9.8
86.7
28.0
42.5
19.9
32.2
749.9
68.1
27.0
11.8
61.7
11.6
13.0
18.7
30.5
32.0
24.2
15.9
9.1
79.7
21.0
36.3
18.5
22.7
664.6
5.40
5.20
4.40
4.50
5.50
5.80
4.80
5.40
4.30
5.00
4.10
4.20
4.20
5.70
5.10
5.40
5.70
5.20
4.60
5.20
Total investment property in use4
2,987.0 3,269.2
5.40
5.60
4.50
4.60
5.50
5.80
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
30-Jun-23
30.9
30-Jun-23
12.2
30-Jun-23 113.9
30-Jun-23
67.3
30-Jun-23
27.8
30-Jun-23
12.1
30-Jun-23
63.6
30-Jun-23
11.8
30-Jun-23
13.1
30-Jun-23
19.3
30-Jun-23
31.0
30-Jun-23
33.0
30-Jun-23
24.7
30-Jun-23
16.3
30-Jun-23
9.3
30-Jun-23
80.7
30-Jun-23
21.3
30-Jun-23
37.3
30-Jun-23
18.6
30-Jun-23
23.1
677.3
3,483.3
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 2023, the investment property portfolio occupancy rate for Australia was 91.8% (30 June 2022: 90.3%) with a weighted average lease expiry of
5.7 years (30 June 2022: 5.3 years); Europe 100.0% (30 June 2022: 100.0%) with a weighted average lease expiry of 5.3 years (30 June 2022: 0.1 years); and
Japan 99.5% (30 June 2022: 99.6%) with a weighted average lease expiry of 7.7 years (30 June 2022: 8.6 years).
112
2023 Annual ReportChallenger Limited
Note 7
Loan assets
Loan assets
Residential mortgages1
Investment loans2
Reverse mortgages
Personal loans
Chattel mortgages3
Commercial loans
Less: provision for impairment
Total loan assets4
Challenger Limited 2023 Annual Report
113
30 June
2023
$m
254.0
108.5
—
—
21.5
—
(9.1)
374.9
30 June
2022
$m
407.0
133.8
4.3
0.5
0.2
16.5
(10.6)
551.7
1. Residential mortgages are held both by the Bank and CLC in the prior comparative year. 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. 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.
4. The loan assets of Challenger Bank are currently held for sale. See Note 23 for further detail.
The Group has considered historical probabilities of default,
the relative age of the mortgage loan portfolio and the loan
to valuation ratios applicable to the mortgage loans, and has
determined that the current provision estimated by the ECL
impairment model is adequate.
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, which is considered to be
materially consistent with the provision estimated under the
expected credit loss (ECL) impairment model. In estimating
ECL for individual mortgage loans, the Group makes
judgements and assumptions in relation to expected
repayments, the realisable value of the secured property,
the prospects of the customer, the value of any mortgage
insurance and the likely cost and duration of 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 other adjustments
Balance at the end of the year1
1. Balance includes provision of $0.1m (30 June 2022: $0.2m) related to Challenger Bank loan assets.
30 June
2023
$m
10.6
1.5
(3.0)
9.1
30 June
2022
$m
11.8
0.2
(1.4)
10.6
113
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114
Challenger Limited 2023 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 liabilities1
30 June
2023
$m
9,855.5
4,074.8
(0.3)
30 June
2022
$m
9,650.7
3,944.9
(0.2)
13,930.0
13,595.4
Life investment
contract liabilities
Life insurance
contract liabilities
Outwards
reinsurance
contract liabilities
Total life contract
liabilities
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
30 June
2022
$m
Movement in life contract liabilities
Balance at the beginning of the year
9,650.7 9,079.6 3,944.9 4,591.3
(0.2)
(1.0) 13,595.4 13,669.9
Deposits and premium receipts
5,119.9 4,860.5 426.5 290.0
Payments and withdrawals
(5,180.9) (4,029.6)
(348.9)
(309.5)
—
—
— 5,546.4 5,150.5
— (5,529.8) (4,339.1)
Revenue per Note 1
(142.9)
(458.2)
(460.9) (1,033.0)
(0.1)
0.8
(603.9) (1,490.4)
Expense per Note 2
Balance at the end of the year1
408.7 198.4 513.2 406.1
—
— 921.9 604.5
9,855.5 9,650.7 4,074.8 3,944.9
(0.3)
(0.2) 13,930.0 13,595.4
1. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior comparative period: Life investment contract liabilities $6,748.4 million, Life insurance contract liabilities $6,847.2 million.
114
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Challenger Limited 2023 Annual Report
115
Note 8
Life contract liabilities (continued)
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
Profit/(loss) arising from assumption changes on life insurance contracts
(Loss)/profit 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 tax2,3
30 June
2023
$m
30 June
2022
$m
3,813.2
138.4
8.5
(564.7)
3,395.4
679.2
4,074.6
3,662.3
148.7
9.1
(673.4)
3,146.7
798.0
3,944.7
18.0
18.0
29.8
(19.2)
(80.2)
52.9
156.3
13.5
(0.8)
9.1
(1.4)
160.0
184.4
344.4
18.5
18.5
31.4
(19.3)
(74.6)
76.1
197.4
11.8
4.5
(5.3)
3.9
225.9
38.4
264.3
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.
2. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior comparative period amounts were total best estimate liability $6,049.0 million, net life insurance and reinsurance contract liability
$6,847.0 million and total life insurance and reinsurance contract operating expenses $68.2 million.
3. Equivalent to the statutory profit for Challenger Life Company.
115
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116
Challenger Limited 2023 Annual Report
Note 8
Life contract liabilities (continued)
Accounting policy
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,and
similar contracts issued by entities operating outside of
Australia.
For life investment contracts (excluding cash business), 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.
The key areas of judgement in the determination of the
actuarial assumptions are the 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
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 June 2022. Discount rates applied for
Australian liabilities were between 4.7% and 5.1% per
annum (30 June 2022: 1.8% and 4.5%).
116
2023 Annual ReportChallenger Limited Note 8
Life contract liabilities (continued)
Challenger Limited 2023 Annual Report
117
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 2.7% per annum for short-
term inflation and 2.8% per annum for long-term inflation
(30 June 2022: 3.2% short-term, 2.2% 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% and
2.1% per annum (30 June 2022: 0.0% and 2.1%).
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% and 2.6% per
annum (30 June 2022: 0.4% and 2.6%).
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 and 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% and 2.3%
per annum (30 June 2022: 0.2% and 2.3%). Base mortality
rates for the inwards reinsurance of Japanese business are
determined as a multiple of Japanese population mortality
rates.
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 adequacy requirements are met.
Statutory fund information
The life contract operations of CLC are conducted within four
separate statutory funds. Both the shareholders’ and
policyholders’ interests in these statutory funds are reported in
aggregate in the financial report of the Group. Fund 1 is a
non-investment-linked fund and Fund 3 is investment-linked.
Both of these are closed to new business. Funds 2 and 4 are
the principal operating funds of the Group. Fund 2 contains
non-investment-linked contracts, including the Group’s term
annuity business, lifetime annuity policies and the related
outwards reinsurance, plus the wholesale mortality, wholesale
morbidity and longevity inwards reinsurance. Fund 4 is a non-
investment-linked fund and 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
2023
30 June
2022
$m
0.9
11,488.7
2.8
2,437.6
13,930.0
$m
1.4
11,402.1
2.5
2,189.4
13,595.4
117
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118
Challenger Limited 2023 Annual Report
Note 8
Life contract liabilities (continued)
Current/non-current split for total life contracts
There is a fixed settlement date for the majority of life contract
liabilities. Approximately $3,149.6 million on a discounted
basis (30 June 2022: $4,109.4 million) of life contract liabilities
have a contractual maturity within 12 months of the reporting
date. Based on assumptions applied for the 30 June 2023
valuation of life contract liabilities, $4,167.7 million of
principal payments on fixed term and lifetime business are
expected in the year to 30 June 2024 (expected in the year to
30 June 2023: $4,938.4 million).
Life insurance risk
The Group is exposed to longevity risk on its individual lifetime
annuities (both direct and reinsured) and wholesale longevity
reinsurance. Longevity risk is the risk that policyholders may
live longer than expectations. The Group is exposed to
mortality risk on the wholesale mortality reinsurance and
reinsurance of fixed term business written in Japan. This is the
risk that death rates in the reference portfolios exceed
expectations. The Group is also exposed to morbidity risk on
the wholesale morbidity reinsurance. That is the risk that
morbidity rates in the reference portfolios exceed
expectations.
The Group manages the longevity risk by regular reviews of
the portfolio to confirm continued survivorship of
policyholders receiving income plus regular review of longevity
experience to ensure that longevity assumptions remain
appropriate.
In addition, the Group maintains a reinsurance arrangement
to manage longevity risk in respect of part of the closed book
of individual lifetime annuities.
The Group manages the mortality and morbidity risk by
regular reviews of the portfolio to ensure that mortality and
morbidity assumptions remain appropriate. The Company’s
insurance risk policy is approved by the Board and sets out the
relevant risk limits for insurance exposures, to ensure the
insurance risk portfolio is appropriately diversified and
contains no significant concentrations of insurance risk
Insurance risk sensitivity analysis
The following table discloses the sensitivity of life insurance
contract liabilities, profit after income tax and equity to
changes in the key assumptions relating to insurance risk,
both gross and net of reinsurance.
Increase in life insurance contract
liabilities
Loss after tax and equity impact
Gross
Net
Gross
Net
30 June
2023
30 June
2022
30 June
2023
30 June
2022
30 June
2023
30 June
2022
30 June
2023
30 June
2022
Insurance risk sensitivity analysis
$m
$m
$m
$m
$m
$m
$m
$m
50% increase in the rate of mortality
improvement
10% increase in maintenance
expenses1
36.6
30.5
36.3
29.1
25.6
21.3
25.4
20.3
13.0
13.8
13.0
13.8
9.1
9.7
9.1
9.7
1. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior period comparative sensitivity was gross and net increase in life insurance contract liabilities $16.2 million, gross and net loss after tax
and equity impact $11.4 million.
Liquidity risk for insurance contracts
The following table summarises the undiscounted maturity
profile of the Group’s life insurance contract liabilities. The
analysis is based on undiscounted estimated cash outflows,
including interest and principal payments. The undiscounted
maturity profile of life investment contracts is disclosed in
Note 18 Financial risk management.
Undiscounted life insurance
contract liabilities
2023
2022
Actuarial information
1 year or less
$m
338.0
312.1
1-3 years
$m
663.5
603.8
3-5 years
$m
711.9
599.9
>5 years
$m
3,957.2
3,735.4
Total
$m
5,670.6
5,251.2
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.
118
2023 Annual ReportChallenger Limited
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.
Challenger Limited 2023 Annual Report
119
30 June
2023
$m
4,100.9
1,167.9
5,268.8
30 June
2022
$m
4,072.8
313.6
4,386.4
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.
119
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120
Challenger Limited 2023 Annual Report
Note 10
Derivative financial instruments
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 2023
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
30 June 2022
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
46,490.6
21,014.4
15,213.1
34,190.1
116,908.2
—
—
493.0
611.0
481.0
1,585.0
14,930.1
38.5
14,968.6
1,627.6
1,627.6
5,857.6
5,857.6
2,823.7
4,455.6
4,703.5
104.7
12,087.5
1,694.9
—
1,694.9
1.9
26.6
53.5
308.3
390.3
—
—
1.3
1.0
17.7
20.0
—
—
—
—
—
46.9
46.9
18.8
34.4
19.8
0.1
73.1
42.7
—
42.7
19,806.1
(12.2)
20,550.6
(28.4)
13,777.0
(22.8)
(436.3)
47,648.5
(499.7) 101,782.2
119.5
—
—
(33.3)
(62.7)
(2.7)
(98.7)
243.0
72.0
735.0
722.0
1,772.0
(2.0)
—
(2.0)
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
(7.7)
(0.1)
(57.2)
(13.8)
(78.8)
(2.4)
—
(2.4)
—
—
(37.3)
(37.3)
3,535.0
3,535.0
28.4
28.4
(37.8)
(37.8)
(13.5)
(37.5)
(40.8)
(0.6)
(92.4)
3,253.3
3,204.8
4,222.3
362.6
11,043.0
(0.6)
—
(0.6)
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)
(43.6)
(24.8)
(68.4)
120
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
121
Note 10
Derivative financial instruments (continued)
Analysis of derivative financial
instruments (continued)
Credit default swaps
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
Total cross-currency swaps – SPV
Total SPV
Total derivative financial instruments2,3
30 June 2023
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
Notional
value
$m
30 June 2022
Net fair
value
assets
$m
Net fair
value
liabilities
$m
1,014.0
1,014.0
155,743.4
27.9
27.9
600.9
—
—
770.2
770.2
(611.2) 136,546.7
—
—
577.2
(22.4)
(22.4)
(839.4)
0.1
0.6
—
0.7
—
—
—
—
—
—
—
—
0.6
0.5
0.2
1.3
—
—
—
—
(0.1)
—
—
(0.1)
130.0
130.0
130.7
155,874.1
0.2
0.2
0.2
601.1
(0.1)
(0.1)
(0.1)
165.5
165.5
166.8
(611.3) 136,713.5
—
—
—
577.2
(0.1)
(0.1)
(0.2)
(839.6)
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 $287.0 million (30 June 2022: $315.0 million) and
the derivative liabilities would decrease by $287.0 million (30 June 2022: $315.0 million).
3. The Group actively manages its bond holdings for hedging purposes which requires the rebalancing of duration risk using interest rate swaps, increasing the
reported gross notional value. Compression trades are implemented periodically to net down offsetting pay and receive positions to reduce gross notional amounts.
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.
If the forecast transaction is no longer expected to occur,
amounts previously recognised in equity are transferred to the
Statement of comprehensive income.
121
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122
Challenger Limited 2023 Annual Report
Note 10
Derivative financial instruments (continued)
Cash flow hedges (continued)
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 2023, a post-tax loss of
$4.2 million (30 June 2022: post-tax gain of $20.8 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 18 Financial risk management, SPVs enter
into interest rate swap agreements to hedge the interest rate
risk between variable rate loans, which generally reprice with
changes in official interest rates, and issued RMBS that reprice
with changes in the 30-day and 90-day bank bill swap rates.
Cross-currency swaps are also 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 2023, a post-tax gain of
$0.2 million (30 June 2022: post-tax gain $0.4 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.
122
2023 Annual ReportChallenger Limited Note 11
Notes to Statement of cash flows
Reconciliation of profit to operating cash flow
Profit for the year after income tax1
Adjusted for
Net realised and unrealised losses/(gains) on investment assets
Share of associates’ net profit
Change in life contract liabilities2
Depreciation and amortisation expense
Impairment of associate and bank assets
Share-based payments
Dividends from associates
Change in operating assets and liabilities
Decrease in receivables
(Decrease)/increase in other assets
Increase in payables
(Decrease)/increase in provisions
Increase in deposits from customers
Increase in life contract liabilities
Increase in external unit holders’ liabilities
Decrease in net tax liabilities
Net cash flows from operating activities
Challenger Limited 2023 Annual Report
123
30 June
2023
$m
295.5
(341.9)
(25.3)
318.0
14.5
—
16.8
23.5
62.3
(1.2)
47.4
(16.1)
—
16.6
882.4
(18.9)
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)
1,273.6
2,486.8
1. Profit for year after income tax excludes discontinued operations for 30 June 2023 (30 June 2022: includes continued operations).
2. Changes relate to movements through the Statement of comprehensive income.
Accounting policy
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.
123
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124
Challenger Limited 2023 Annual Report
Section 4: Capital structure and financing costs
This section outlines how the Group manages its capital structure and related financing costs, as well as capital adequacy
and reserves. It also provides details on the dividends and earnings per share of the Company.
Note 12
Contributed equity
Analysis of contributed equity
Ordinary shares issued and fully-paid
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
Issued under Dividend Reinvestment Plan
Issued under Capital Notes 1 conversion
Balance at the end of the year
CPP Trust
Balance at the beginning of the year
Shares purchased (including settled forwards)
Vested shares released to employees
Balance at the end of the year
CPP deferred share purchases
Balance at the beginning of the year
Settled forward purchases1
Balance at the end of the year
30 June 2023
30 June 2022
No. of shares
m
Value of shares
$m
No. of shares
m
Value of shares
$m
687.6
(3.8)
—
683.8
682.2
5.4
—
687.6
1.0
3.7
(0.9)
3.8
1.2
(1.2)
—
2,543.5
(30.4)
—
2,513.1
2,505.5
38.0
—
2,543.5
9.6
30.4
(9.6)
30.4
14.4
(14.4)
—
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
1. On 25 August 2022, Challenger settled the final remaining share forwards with National Australia Bank (NAB).
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 Trust in respect of equity
incentive plan awards to employees. Refer to Note 29
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 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,
124
legal ownership transfers to the employee and RS cease to be
considered Treasury shares and are included in the dilutive EPS
calculation. At 30 June 2023, 1.9 million RS are on issue to
employees.
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.
From 24 March 2023 to 31 March 2023, Challenger acquired
1.8 million shares on market to place in the CPP Trust. These
shares have been acquired to satisfy Deferred Performance
Share Rights, which are expected to vest in September 2023,
and any restricted units that are expected to be awarded.
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.
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
125
Bank regulatory capital
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.
Regulatory capital is divided into Common Equity Tier 1
(CET1), Additional Tier 1 and Tier 2. The Bank’s regulatory
capital base at 30 June 2023 was $60.5m and represents
CET1 regulatory capital and an immaterial amount of Tier 2
regulatory capital. The capital adequacy ratio of 53.2%
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 2023
(30 June 2022: undrawn).
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.
There were no material changes to the Group’s capital
management process during the period.
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.
CLC’s regulatory capital
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.
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 and Tier 2.
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 2023 was 1.59 times (30 June 2022:
1.60 times), within this range of 1.3 to 1.7 times. The CET1
ratio was 1.16 times at 30 June 2023, an increase from 1.11
times at 30 June 2022.
125
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 126
Challenger Limited 2023 Annual Report
Note 12
Contributed equity (continued)
Capital as at
30 June 2023
Regulatory capital base
Shareholder equity2
Goodwill and other intangibles
Other adjustments3
Eligible regulatory debt
Total capital base
Minimum Regulatory Requirement4,5
Excess over Minimum Regulatory Requirement
Common Equity Tier 1 (CET1) regulatory capital
Additional Tier 1 regulatory capital
Total Tier 1 regulatory capital
Tier 2 regulatory capital6
Other non regulatory capital
Total capital base
CET1 capital ratio (times)7
Tier 1 capital ratio (times)8
Minimum Regulatory Requirement ratio (times)9
CLC
$m
3,395.2
(70.0)
(214.7)
1,146.3
4,256.8
2,681.9
1,574.9
3,110.5
735.0
3,845.5
411.3
—
4,256.8
1.16
1.43
1.59
CBL
$m
61.9
—
(1.4)
—
60.5
13.1
47.4
60.5
—
60.5
—
—
60.5
4.62
4.62
4.62
Other1
$m
707.3
(517.4)
28.9
—
218.8
39.9
178.9
—
—
—
—
218.8
218.8
—
—
5.48
Group
$m
4,164.4
(587.4)
(187.2)
1,146.3
4,536.1
2,734.9
1,801.2
3,171.0
735.0
3,906.0
411.3
218.8
4,536.1
—
—
1.66
1. Includes Funds Management, Corporate and other Life/Bank entities. Funds Management Minimum Regulatory Requirement (MRR) for capital is based on
requirements set by ASIC and regulators in other foreign jurisdictions. Challenger Retirement and Investment Services Limited MRR is based on APRA and ASIC
requirements.
2. Balances differ to Note 3 Segment information as regulatory requirements are applicable to individual legal entities.
3. Other adjustments predominantly related to deferred tax asset and intercompany items.
4. Minimum Regulatory Requirement is equivalent to PCA for CLC.
5. 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) plus the counter cyclical buffer of 1% (of risk weighted assets), as stipulated under APS 110 Capital Adequacy as at 30
June 2023.
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 2022:
‘BBB+’ (stable) and ‘A’ (stable) respectively).
Dividends
The Group has historically targeted a dividend payout ratio of
between 45% and 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 2023
was 45.0% of normalised profit after tax (30 June 2022:
48.3%).
The Company continued the DRP for the 2022 final dividend,
and on 21 September 2022 issued 1,672,557 ordinary shares
to satisfy the plan. The DRP issue price per share for the 2022
final dividend was $6.3456 and represented the volume
weighted average share price over the 10 trading days from
1 September 2022 to 14 September 2022. The final DRP
participation rate was 13.0% of all issued shares.
The Group continued the DRP for the 2023 interim dividend,
and on 21 March 2023 issued 3,695,743 ordinary shares to
satisfy the plan. The DRP issue price per share for the interim
2023 dividend was $7.3995 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 33.0% of all issued shares.
126
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
127
Note 13
Interest bearing financial liabilities
30 June 2022
Facility
$m
Opening
balance
$m
Cash flows
proceeds/
(repayments)
$m
Non-cash movements
30 June 2023
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 funding5
Repurchase agreements5
Total bank loans
Non-bank loans
Subordinated debt3
Challenger Capital Notes 24
Challenger Capital Notes 34
Challenger Capital Notes 44
Loan notes – SPV
Total non-bank loans
Total interest bearing
financial liabilities
Current
Non-current
400.0
334.0
—
335.9
172.3
5.4
172.3
5.4
3,769.9 3,769.9
4,681.6 4,283.5
398.4
400.0
458.2
460.0
380.2
385.0
—
—
262.7
262.7
1,507.7 1,499.5
—
(45.4)
(8.1)
—
334.6
281.1
—
(460.0)
—
350.0
(71.8)
(181.8)
—
(7.7)
—
—
—
(7.7)
—
—
—
—
—
—
—
—
—
—
—
—
4.6
—
—
—
—
4.6
—
0.8
— 400.0
283.6 281.9
0.2
(5.4)
164.4 164.4
—
(34.8) 4,069.7 4,069.7
(39.2) 4,517.7 4,916.0
—
—
—
1.8
1.2
(6.4)
—
403.0 400.0
—
381.4 385.0
343.6 350.0
190.9 190.9
(3.4) 1,318.9 1,325.9
6,189.3 5,783.0
99.3
(7.7)
4.6
(42.6) 5,836.6 6,241.9
4,191.6
1,591.4
5,783.0
4,483.2
1,353.4
5,836.6
1. No amounts were drawn from the facility in the period.
2. Total facility limit consists of non-redraw loan facilities limits totalling $281.9 million (30 June 2022: $334.0 million).
3. In September 2022, CLC issued $400.0m of new subordinated debt. Subsequently, CLC repaid its existing $400.0m subordinated debt on its optional redemption
date in November 2022.
4. Held at amortised cost. The fair value of these are Challenger Capital Notes 2 nil (30 June 2022: $460.7 million), Challenger Capital Notes 3 $401.7 million
(30 June 2022: $392.3 million), Challenger Capital Notes 4 $352.3 million (30 June 2022: nil); controlled property trusts $295.4 million (30 June 2022:
$345.9 million); and controlled infrastructure trusts $167.4 million (30 June 2022: $175.5 million).
5. The Reserve Bank of Australia (RBA) term funding facility ($5.4 million) and the repurchase agreements ($58.8 million) of Challenger Bank were reclassified to held
for sale in 1H23. The repurchase agreements were repaid in 2H23. Prior to sale completion, the Bank intends to cash settle the term funding facility. See Note 23
for further detail.
127
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
128
Challenger Limited 2023 Annual Report
Note 13
Interest bearing financial liabilities (continued)
30 June 2021
Facility
$m
Opening
balance
$m
Cash flows
proceeds/
(repayments)
$m
Non-cash movements
30 June 2022
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
400.0
—
—
—
394.9
392.3
(17.5)
(40.7)
179.3
—
179.3
—
4,111.1 4,111.1
(7.2)
—
(341.2)
—
—
—
—
0.8
—
—
—
—
— 400.0
1.0
335.9 334.0
172.3 172.3
0.2
5.4
5.4
5.4
— 3,769.9 3,769.9
Total bank loans
5,085.3 4,682.7
(365.9)
(40.7)
0.8
6.6 4,283.5 4,681.6
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
27.7
460.0
385.0
373.3
404.5
27.7
456.3
379.0
373.3
1,646.0 1,640.8
6,731.3 6,323.5
4,683.3
1,640.2
6,323.5
—
—
—
—
(110.6)
(110.6)
—
—
—
—
—
—
(6.1)
—
—
—
—
—
(27.7)
1.9
1.2
—
—
398.4 400.0
—
458.2 460.0
380.2 385.0
262.7 262.7
(6.1)
(24.6) 1,499.5 1,507.7
(476.5)
(40.7)
(5.3)
(18.0) 5,783.0 6,189.3
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), Challenger Capital Notes 3 $392.3 million (30 June 2021: $407.9 million); controlled property trusts $345.9 million
(30 June 2021: $396.3 million); and controlled infrastructure trusts $175.5 million (30 June 2021: $182.3 million).
4. The Reserve Bank of Australia (RBA) term funding facility ($5.4 million) and the repurchase agreements ($58.8 million) of Challenger Bank were reclassified to held
for sale in 1H23. The repurchase agreements were repaid in 2H23. Prior to sale completion, the Bank intends to cash settle the term funding facility. See Note 23
for further detail.
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.
128
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
129
Note 13
Interest bearing financial liabilities (continued)
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
Controlled property
trusts1
Loan
on 31 December 2024
Tranche 2: $250m expiring
on 31 December 2026
April 2024 to October
2024
Variable
First ranking mortgages over Japanese investment
properties: $281.8 million (30 June 2022: $333.9
million)
First ranking mortgage over Gateway, NT $0.1 million
(30 June 2022: $0.1 million)
Controlled
infrastructure trusts2
Term funding
Facility December 2035
Variable
First ranking mortgages over infrastructure assets
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 April 2024 to October 2024. At 30 June 2023, $281.9 million (30 June 2022:
$378.5 million) of these loans are held at amortised cost. The fair value of these liabilities at 30 June 2023 was $295.4 million (30 June 2022: $345.9 million).
2. Controlled infrastructure trusts relates to a loan facility for Oaklands Wind Farm. This loan is held at amortised cost. The fair value of this liability at 30 June 2023 is
$167.4 million (30 June 2022: $175.5 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 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 2023 are current and all mature
by July 2023. 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 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. These
repurchase agreements were all repaid in the period.
Non-bank loans
Subordinated debt
In September 2022, CLC issued $400.0 million of
fixed-to-floating rate, unlisted, unsecured subordinated notes.
The subordinated notes qualify as Tier 2 regulatory capital
under APRA’s prudential standards and have a term of
15 years, with a maturity date in September 2037.
The subordinated notes include an option for CLC to
redeem the subordinated notes in September 2027
subject to APRA’s approval.
Expenses incurred of $2.8 million were recognised in
the Statement of comprehensive income in relation to
the issuance.
Subsequently, on 24 November 2022, CLC redeemed
$400.0 million of floating rate unsubordinated notes which
were issued on 24 November 2017, in accordance with the
note’s terms of issue.
Challenger Capital Notes – 2, 3 and 4
(Notes 2, Notes 3 and Notes 4)
On 5 April 2023, the Group completed its fourth capital notes
issue, Challenger Capital Notes 4 (Notes 4), raising
$350.0 million of new debt funding. Proceeds were used
to partially redeem Challenger Capital Notes 2 (Notes 2)
for $224.0 million, with the remaining balance of Notes 2
($236.0 million) redeemed on 22 May 2023, using a
combination of $126.0 million of remaining proceeds
from Notes 4 and $110.0 million of cash from CLC.
The remaining Notes 3 and 4 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.
Consistent with Notes 1, 2 and 3, the costs associated with
the issue of Notes 4 have been capitalised against the relevant
liability and are being recognised in the Statement of
comprehensive income over the life of the notes.
129
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Challenger Limited 2023 Annual Report
Note 13
Interest bearing financial liabilities (continued)
Notes 2
Notes 3
Issue date
7 April 2017 25 November
Notes 4
5 April 2023
2020
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 2023 was a gain of $4.6 million (30 June 2022:
gain of $6.1 million).
Issue amount
Outstanding
amount
Optional
Exchange
Date
Mandatory
Conversion1,2
$460.0 million $385.0 million $350.0 million
Nil
$385.0 million $350.0 million
22 May 2023 25 May 2026
25 May 2029
25 Aug 2029
25 Nov 2029
25 Feb 2030
22 May 2025 25 May 2028
25 Feb 2032
1. Conversion to a variable number of shares.
2. Notes 2 will not be converted on 22 May 2025. These notes were redeemed
in full on 22 May 2023.
Loan notes — SPV
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.
130
2023 Annual ReportChallenger Limited Note 14
Reserves and retained earnings
Challenger Limited 2023 Annual Report
131
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 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
Change in holdings in controlled entities3
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
30 June
2023
$m
30 June
2022
$m
(51.8)
16.8
(9.6)
5.6
(39.0)
—
0.2
0.2
(3.2)
(6.3)
(4.2)
(13.7)
5.7
11.0
16.7
(35.8)
(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
(49.3)
1,556.1
1,451.2
287.5
(160.5)
253.7
(148.8)
1,683.1
1,556.1
1. These items may eventually be recognised in the profit and loss section of the Statement of comprehensive income.
2. Net of tax.
3. Represents equity in subsidiaries that is not attributable, directly or indirectly to the parent company.
Accounting policy
Share-based payments 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.
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 the 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.
Adjusted controlling interests reserve
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.
131
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
132
Challenger Limited 2023 Annual Report
Note 15
Finance costs
Interest expense1
Interest expense – lease liabilities
Interest expense – loan notes - SPV
Interest expense – property trusts
Interest expense – Challenger Capital Notes 1, 2, 3 and 4
Other finance costs
Total finance costs
30 June
2023
$m
487.4
1.3
8.2
3.8
44.6
4.0
549.3
30 June
2022
$m
(377.5)
2.8
2.8
4.3
31.3
4.8
(331.5)
1. In the prior year, 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 16
Dividends paid and proposed
Dividends paid
For the year ended 30 June 2023
Final dividend determined in respect of the year ended 30 June 2022
Interim dividend determined in respect of the year ended 30 June 2023
Total dividends paid by the Group
For the year ended 30 June 2022
Final dividend determined in respect of the year ended 30 June 2021
Interim dividend determined in respect of the year ended 30 June 2022
Total dividends paid by the Group
Amount per
share
Cents
Total
amount
$m
11.5
12.0
10.5
11.5
78.4
82.1
160.5
70.8
78.0
148.8
Final dividend determined in respect of the year ended 30 June 2023
12.0
82.3
1. Refer to Note 12 Contributed equity for details of the dividend policy.
Dividend franking credits
Franking credits available to shareholders are $287.7 million
(30 June 2022: $323.8 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 debits that will arise after the end of the reporting
period from the refund of current assets for income tax and
franking debits in respect of accrued interest on Challenger
Capital Notes 3 and 4.
132
The impact of the proposed dividend will be to reduce the
balance of the franking account by $35.3 million. All dividends
are franked at a tax rate of 30%.
2023 Annual ReportChallenger Limited
Note 17
Earnings per share
Basic earnings per share
Diluted earnings per share
Profit attributable to ordinary shareholders
Add back interest expense on Challenger Capital Notes 1, 2, 3 and 41
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
Challenger Limited 2023 Annual Report
133
30 June
2023
cents
42.1
37.9
$m
287.5
42.6
15.9
346.0
30 June
2022
cents
37.5
33.1
$m
253.7
28.3
6.3
288.3
Number
Number
684,575,248 678,145,134
(2,362,878)
(2,514,397)
Weighted average ordinary shares for basic earnings per share
682,060,851 675,782,256
Adjusted for potential ordinary shares:
Weighted average effect of Challenger Performance Plan
Weighted average effect of Challenger Capital Notes 1, 2, 3 and 41
Weighted average effect of CLC Subordinated Notes
Weighted average ordinary shares for diluted earnings per share
15,039,064
10,702,190
140,713,509 126,293,826
58,337,603
74,299,212
912,112,636 871,115,875
1. On 5 April 2023, the Group completed its fourth capital notes issue, Challenger Capital Notes 4, to replace Challenger Capital Notes 2, which were fully redeemed
on 22 May 2023.
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.
The weighted average number of Treasury shares for the
period was 2,514,397 (30 June 2022: 2,362,878).
Accounting treatment of Capital Notes and
subordinated debt
Challenger Capital Notes 3 and 4 and subordinated debt are
an effective source of funding for Challenger.
Each of the Capital Notes 3 and 4 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.
Challenger may choose to redeem or resell (rather than
convert) all or some of the notes for their face value at a
future date, subject to APRA approval and market conditions.
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 3 and 4 (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 3 and 4 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.
An assessment of the dilutive impact of convertible securities
is usually done by reference to the determination as to
whether the interest received would be more or less than the
earnings per share and whether it would be rational for a
holder to receive coupon from the convertible security or
dividends from holding the shares.
The profit attributable to ordinary shareholders is adjusted by
$58.5 million interest on Notes and CLC Subordinated Notes
(30 June 2022: $34.6 million) for the diluted calculation when
the Notes and CLC Subordinated Notes were 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.
133
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134
Challenger Limited 2023 Annual Report
Section 5: Risk management
This section outlines how financial risk is managed within the Group and provides additional information about how the
overall risk management program seeks to minimise potentially adverse financial effects associated with key financial risks.
This section also provides disclosures on the fair values of assets and liabilities of the Group, the valuation techniques used in
determining the fair value of those assets and liabilities, and the sensitivities of assets categorised as Level 3 instruments to
reasonably possible changes in valuation assumptions.
Note 18
Financial risk management
Governance and risk management framework
Interest rate risk
Interest rate risk is the risk of fluctuations in the Group’s
earnings and equity arising from movements in market
interest rates, including changes in the absolute levels of
interest rates, the shape of the yield curve, the margin
between the different yield curves and the volatility of
interest rates.
It is the Group’s policy to minimise the impact of interest rate
movements on debt servicing capacity, Group profitability,
business requirements and company valuation. The amount of
drawn net recourse corporate interest bearing liabilities, and
their duration is determined with reference to the annual
budget and the most current forecasts. The Group’s strategy is
to have no interest rate hedges with a duration of greater
than five years and targets average hedge duration of
three years.
CLC’s market risk policy is approved by the CLC Board and
sets out the relevant risk limits for interest rate exposure.
It is CLC’s policy to minimise the impact of interest rate
movements on its projected future cash flows. The
management of the risks associated with life investment and
life insurance contracts, including interest rate risk, is subject
to the prudential requirements of the Life Act and APRA.
This includes satisfying capital adequacy requirements,
which in turn include consideration of how the interest
rate sensitivity of assets and liabilities are matched.
For the SPV entities, the impact of a rising/falling bank bill
swap rate (BBSW) results in an increase/decrease in the cost of
funding and therefore on the profit of the trusts. This interest
rate risk is mitigated by actively adjusting the interest rates
charged to borrowers if a sustained adverse differential to the
benchmark is evidenced. SPV entities are also exposed to the
risks arising from borrowers fixing the rates on their
mortgage. This interest rate risk is managed by using cash
flow hedges to swap the fixed rate to a floating rate exposure
at an amount equal to the notional value of the mortgages
being fixed.
The 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 assets and liabilities The interest rate risks are
monitored by the Bank’s Asset and Liability Committee (ALCO)
and reported to the Board. . The Bank does not currently
undertake derivatives; rather, organic tools are employed to
minimise interest rate risk between assets and liabilities, which
is considered adequate in addressing its interest rate exposure
given the Bank’s size and complexity.
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).
134
2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
135
Note 18
Financial risk management (continued)
Interest rate risk (continued)
Interest rate sensitivity
The Group’s sensitivity to movements in interest rates in
relation to the value of 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.
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 point (1%) movements in interest
rates would have a minimal impact on the Group’s
financial position.
Change in
Change in
Profit/(loss)
equity
Profit/(loss)
equity
30 June 2023
30 June 2023
30 June 2022
30 June 2022
Non-loan exposure
Loan exposure
Total
Change in variable
+100bps
-100bps
+100bps
-100bps
+100bps
-100bps
$m
0.7
(0.7)
(0.1)
0.1
0.6
(0.6)
$m
0.7
(0.7)
(0.1)
0.1
0.6
(0.6)
$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
Equity risks will arise as a natural result of CLC’s Asset
Allocation Plan. Equity prices can be driven by a range of risk
factors specific to an individual exposure, including broad
macroeconomic and instrument-specific factors that may
be uncorrelated with broader equity markets. The Group’s
primary tools for managing investment price risks are CLC’s
Internal Capital Adequacy Assessment Process (ICAAP) and
the Asset Allocation Plan.
Equity price risk sensitivity
The potential impact of movements in the market value of
listed and unlisted equities on the Group’s Statement of
comprehensive income and Statement of financial position
is shown in the below sensitivity analysis.
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 reporting date.
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). Contracts
held by the Group that referenced LIBOR and other IBORs that
have ceased publication transitioned to ARRs or closed out.
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.
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 alternative and relative
value 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.
135
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information 136
Challenger Limited 2023 Annual Report
Note 18
Financial risk management (continued)
Price risk (continued)
Equity price risk sensitivity (continued)
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 2023
30 June 2023
30 June 2022
30 June 2022
$m
6.3
(6.3)
7.5
(7.5)
179.3
(179.3)
193.1
(193.1)
$m
6.3
(6.3)
7.5
(7.5)
172.9
(172.9)
186.7
(186.7)
$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)
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.
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
2023, 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
$124.9 million in respect of fixed income securities partially
offset by an unrealised gain/loss of $65.5 million in respect of
policy liabilities (30 June 2022: $131.5 million fixed income
securities, $66.3 million policy liabilities).
Currency risk
It is the Group’s policy to seek to minimise the impact of
movements in foreign exchange rates on statement of
financial position items contributing to CLC’s regulatory
capital base, with the exception of exposures arising from
currency overlay positions. Currency exposure arises primarily
as a result of investments in Europe (including the United
Kingdom), Japan and the United States, and US dollar
liabilities reinsured from MS Primary in Japan. As a result,
currency risk arises primarily from fluctuations in the value of
the Euro, British pound, Japanese yen, and US dollar against
the Australian dollar. In order to manage foreign currency
exchange rate risk, 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.
136
2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
137
Note 18
Financial risk management (continued)
Currency risk (continued)
GBP
$m
USD
$m
Euro
$m
JPY
$m
Other
$m
30 June 2023
Investment assets
Investment liabilities
542.4
3,885.8
1,500.5
(1.7)
(1,898.0)
(0.8)
388.9
(0.1)
Foreign currency contracts and cross-currency swaps
(536.9)
(1,972.8)
(1,499.4)
(379.5)
Net exposure in Australian dollars
3.8
15.0
0.3
9.3
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
4.5
—
(1.5)
3.0
2.1
—
(1.6)
0.5
Change in
Change in
Profit/(loss)
equity
Profit/(loss)
equity
30 June 2023
30 June 2023
30 June 2022
30 June 2022
British pound (GBP)
US dollar (USD)
Euro (EUR)
Japanese yen (JPY)
Other
Total
Movement in
variable against $
+10%
-10 %
+10%
-10 %
+10%
-10 %
+10%
-10 %
+10%
-10 %
+10%
-10 %
Credit default risk
The Group makes use of external ratings agencies
(Standard & Poor’s, Fitch, Moody’s or other reputable
credit rating agencies) to determine credit ratings. Where a
counterparty or debt obligation is rated by multiple external
rating agencies, the Group will use Standard & Poor’s ratings
where available. All credit exposures with an external rating
are also rated internally and cross-referenced to the external
rating, if applicable. Where external credit ratings are not
available, internal credit ratings are assigned by appropriately
qualified and experienced credit personnel who operate
separately from the risk originators.
Each business unit is responsible for managing credit risks that
arise with oversight from a centralised credit risk
management team.
$m
0.3
(0.3)
1.0
(1.0)
—
—
0.3
(0.3)
0.3
(0.3)
1.9
(1.9)
$m
0.3
(0.3)
1.0
(1.0)
—
—
0.7
(0.7)
0.3
(0.3)
2.3
(2.3)
$m
—
—
(0.8)
0.8
(0.7)
0.7
0.2
(0.2)
—
—
(1.3)
1.3
$m
—
—
(0.8)
0.8
(0.7)
0.7
0.3
(0.3)
—
—
(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–.
137
AboutOFRGovernance and SustainabilityDirectors’ ReportFinancial ReportFurther Information
138
Challenger Limited 2023 Annual Report
Note 18
Financial risk management (continued)
Credit default risk (continued)
30 June 2023
Cash and cash equivalents
Receivables
Loan assets
Investment grade
A
$m
AA
$m
AAA
$m
Non-inv.
grade
$m
BBB
$m
Other
$m
Total
$m
593.4
—
—
77.3
185.8
276.3
112.2
69.0
81.8
—
26.3
89.4
—
—
593.4
77.8
53.6
697.1
—
22.5
374.9
Fixed income securities (held at fair value)
7,831.0 4,820.1 1,732.4 2,561.0 3,354.7
152.6 20,451.8
Derivative assets
Financial leases
Bank assets held for sale1
Total assets with credit exposures
30 June 2022
Cash and cash equivalents
Receivables
Loan assets
—
487.2
113.9
—
3.2
0.1
48.2
2.0
27.4
—
1.4
51.5
—
7.0
—
—
601.1
14.4
74.8
24.9
205.1
8,617.1 5,610.4 2,233.8 2,729.6 3,439.5
317.9 22,948.3
733.1
—
33.3
483.8
—
5.2
180.8
54.7
139.2
—
18.2
71.5
—
52.8
16.5
—
733.1
54.2
647.5
89.0
551.7
Fixed income securities (held at fair value)
8,399.3 4,022.1 2,037.5 2,567.3 3,095.4
180.5 20,302.1
Derivative assets
Financial leases
—
—
556.4
20.8
—
4.1
—
4.8
—
10.8
—
—
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
1. Bank assets held for sale excludes non-financial assets in the Bank and therefore have no credit default risk.
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.
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.
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.
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 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).
138
2023 Annual ReportChallenger Limited
Note 18
Financial risk management (continued)
Credit default risk (continued)
Challenger Limited 2023 Annual Report
139
Amortised cost investment assets
30 June 2023
Receivables
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
694.7
313.9
24.9
0.4
0.2
23.0
15.0
—
—
0.1
4.2
—
4.3
0.5
—
3.3
—
3.8
1.7
697.1
18.8
374.9
—
24.9
20.5 1,096.9
5.2
—
26.6
—
647.5
244.0
551.7
19.7
31.8 1,462.9
Total amortised cost investment assets
1,033.5
23.4
15.2
30 June 2022
Receivables
Fixed income
Loan assets1
Finance leases
640.2
244.0
487.6
19.7
0.9
—
0.7
—
20.1
14.1
—
—
Total amortised cost investment assets
1,391.5
21.0
14.8
1. Past due balances where the Group considers that principal and interest plus any associated costs will be recovered in full.
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.
Bank
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 cash flows and longer-term cash
flow forecasts are reviewed continuously, and contingency
funding plans are in place to address liquidity shortfalls.
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
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.
Life
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 Investment Committee 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.
139
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140
Challenger Limited 2023 Annual Report
Note 18
Financial risk management (continued)
Maturity profile of undiscounted financial liabilities (continued)
Maturing profile of undiscounted financial liabilities
30 June 2023
Payables
Interest bearing financial liabilities
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
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 liabilities1,2
1 year or
less
$m
1-3
years
$m
3-5
years
$m
>5
years
$m
Total
$m
833.8
5.2
15.6
—
854.6
4,266.0 1,025.5
606.4
552.1 6,450.0
4,100.9 1,167.9
—
— 5,268.8
4,315.5 3,889.0 1,391.3 1,382.5 10,978.3
338.0
663.5
711.9 3,957.2 5,670.6
220.2
88.2
113.7
189.2
611.3
14,074.4 6,839.3 2,838.9 6,081.0 29,833.6
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
4,973.6 3,103.4 1,013.1 1,096.4 10,186.5
312.1
603.8
599.9 3,735.4 5,251.2
160.8
152.8
205.6
320.4
839.6
14,958.0 5,207.0 2,366.6 5,373.6 27,905.2
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.
2. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior to restatement, total Life investment contract liabilities and total Life insurance contract liabilities in the prior comparative period were
$6,930.1 million and $8,507.6 million respectively.
140
2023 Annual ReportChallenger Limited
Note 19
Fair values of investment assets and liabilities
Challenger Limited 2023 Annual Report
141
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.
To determine a fair value where the asset is liquid or maturing
within three months, the fair value is approximated to the
carrying amounts. 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 (2022: nil), 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 $11.8 million
(2022: $21.2 million) and would be classified as Level 3
in the fair value hierarchy.
Challenger Capital Notes 3 and 4 have carrying values
(inclusive of unamortised issue costs) of $381.4 million and
$343.6 million respectively. The fair value of these notes is
$401.7 million and $352.3 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 governance of
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 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.
141
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Challenger Limited 2023 Annual Report
Note 19
Fair values of investment assets and liabilities (continued)
Valuation process (continued)
30 June 2023
Derivative assets
Fixed income securities1
Equity and debt securities
Infrastructure investments1
Hedged commodities
Property securities
Investment property2
Total assets
Derivative liabilities
Interest bearing financial liabilities3
External unit holders’ liabilities
Life investment contract liabilities
Total liabilities
30 June 2022
Derivative assets
Fixed income securities1
Equity and other alternatives
Infrastructure investments1
Hedged commodities
Property securities
Investment property2
Total assets
Derivative liabilities
Interest bearing financial liabilities3
External unit holders’ liabilities
Life investment contract liabilities4
Total liabilities
Level 1
$m
Level 2
$m
Level 3
$m
Total
$m
—
—
1.0
—
827.9
—
—
828.9
1.9
754.0
—
—
755.9
—
—
0.9
—
544.5
—
—
545.4
2.3
853.0
—
—
855.3
601.1
18,562.8
2,457.3
—
—
—
—
21,621.2
609.4
403.0
5,268.8
37.7
6,318.9
577.2
18,147.4
1,401.8
0.1
—
—
—
20,126.5
837.4
398.4
4,386.4
40.6
5,662.8
—
1,889.0
205.9
284.1
—
89.3
3,269.2
5,737.5
—
—
—
9,817.8
9,817.8
—
1,910.7
165.6
300.7
—
90.2
3,483.3
5,950.5
—
—
—
9,610.0
9,610.0
601.1
20,451.8
2,664.2
284.1
827.9
89.3
3,269.2
28,187.6
611.3
1,157.0
5,268.8
9,855.5
16,892.6
577.2
20,058.1
1,568.3
300.8
544.5
90.2
3,483.3
26,622.7
839.7
1,251.4
4,386.4
9,650.6
16,128.1
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 2023, the carrying value of
asset-backed financing assets was $18.4 million (30 June 2022: $37.1 million) with no undrawn commitments (30 June 2022: nil ) and securitisations was
$9,105.3 million (30 June 2022: $9,260.3 million) plus $28.3 million undrawn commitments (30 June 2022: $59.1 million).
2. Refer to Note 6 Investment property for valuation techniques and key unobservable inputs.
3. Not all the interest bearing liabilities are included within the fair value determination and classification table as a number of interest bearing liabilities are valued at
amortised cost.
4. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior to the change, Level 3 Life investment contract liabilities in the comparative period was $6,707.8 million.
142
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Challenger Limited 2023 Annual Report
143
Note 19
Fair values of investment assets and liabilities (continued)
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 year3
30 June 2023
30 June 2022
Assets
$m
5,971.8
(133.3)
3,255.2
(3,262.8)
(79.1)
5,751.8
Liabilities
$m
9,610.0
264.8
5,112.6
(5,169.6)
—
9,817.8
Assets
$m
5,884.2
(37.7)
2,391.5
(2,218.8)
(47.4)
5,971.8
Liabilities
$m
9,085.4
(127.3)
4,016.5
(3,364.6)
—
9,610.0
Unrealised (losses)/gains included in the Statement of
comprehensive income for assets and liabilities held at the
Statement of financial position date
(133.3)
(264.8)
(37.7)
(127.3)
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 the valuation
methodology and are deemed to have occurred at the end of the reporting period.
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 $4.5 million (30 June 2022: $49.1 million) of transfers into Level 3 from Level 2
and $83.6 million of transfers out of Level 3 into Level 2 during the reporting period (30 June 2022: $47.4 million of transfers out of Level 3 and into Level 2).
3. Comparatives have been restated to reflect the reclassification of life contract types that do not carry significant insurance risk from life insurance contracts to life
investment contracts. Prior to the change, Level 3 liabilities balance in the comparative period was $6,707.8 million.
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 2023
Fixed income securities
1,889.0
12.3
(31.7) Discounted cash flow
Primarily credit spreads
Equity and other alternatives
205.9
12.9
Infrastructure investments
284.1
4.1
Property securities
89.3
Investment contract liabilities
(9,817.8)
4.5
7.7
Investment property
3,269.2 157.2
(13.5) Discounted cash flow,
external financial report
(4.0) 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
(7.7) Discounted cash flow
Primarily expense assumptions
(111.8) Market capitalisation,
Discounted cash flow
Primarily capitalisation rate
Total Level 3
(4,080.3)
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
(9,610.0)
4.5
5.5
Investment property
3,483.3 164.8
(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
(5.5) Discounted cash flow
Primarily expense assumptions
(129.4) Market capitalisation,
Discounted cash flow
Primarily capitalisation rate
Total Level 3
(3,659.4)
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 50 bps and 100 bps, adjusting property capitalisation rates by 25 bps (Australia) or 10 bps (Japan), adjusting credit spreads by 50 bps, changing the
valuation of the unlisted schemes by 5% and adjusting the expense assumption allocation splits by 10%.
4. The sensitivity inputs to a reasonably possible change in a non-observable input are consistent with the year ended 30 June 2023.
143
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144
Challenger Limited 2023 Annual Report
Note 20 Collateral arrangements
Accounting policy
CLC receives collateral, where it is considered necessary,
when entering into certain financial arrangements.
The amount of collateral required is subject to management’s
credit evaluation of the counterparty which is performed
on a case-by-case basis. As at 30 June 2023, $103.0 million
(30 June 2022: $85.9 million cash received from third parties -
derivative credit support payables) cash received from third
parties as collateral is recorded in payables and $106.9 million
(30 June 2022: $115.4 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 assets
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. As at the reporting date, the fair value
of cash and investment assets pledged are as follows:
30 June
2023
$m
391.2
7,165.7
7,556.9
30 June
2022
$m
483.8
6,309.2
6,793.0
144
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Challenger Limited 2023 Annual Report
145
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.
Refer to Note 28 Contingent liabilities, contingent assets and credit commitments for details of any contingent liabilities applicable to the
parent entity.
Note 21
Parent entity
Company
Statement of comprehensive income
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
Assets
Cash and cash equivalents
Receivables
Investment asset – fixed income securities1
Current tax asset
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
2023
$m
30 June
2022
$m
214.3
(45.6)
168.7
0.9
169.6
288.7
(31.6)
257.1
0.9
258.0
2.3
2.9
1,922.8
1,749.8
735.0
845.0
8.8
3.8
2,474.1
5,146.8
779.9
—
725.0
1,504.9
3,641.9
—
4.8
2,457.2
5,059.7
567.6
65.8
838.6
1,472.0
3,587.7
2,543.6
2,505.6
(101.6)
1,199.9
3,641.9
(108.8)
1,190.9
3,587.7
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.
145
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146
Challenger Limited 2023 Annual Report
Note 22
Controlled entities
The table below presents the hierarchical structure of Challenger Limited showing its controlled entities that form the main
composition of the Group as at 30 June 2023:
Entity name1
Challenger Limited
Challenger Group Holdings Limited
Challenger Group Services Pty Ltd
Challenger Treasury Limited
Challenger Japan Holdings Pty Limited
Artega Investment Administration Pty Limited
Challenger Funds Management Holdings Pty Limited
Fidante Partners Holdings Pty Limited
Fidante Partners Holdings Europe Limited (incorporated in the UK)
Challenger Investment Partners Limited
Challenger Life Company Holdings Limited
Challenger Life Company Limited
Principal activity
Corporate
Corporate
Corporate
Corporate
Corporate
Funds Management
Funds Management
Funds Management
Funds Management
Life
Life
1. Challenger’s percentage holding of the above entities is 100% with the exception of Artega (80% holding) and all are incorporated in Australia unless otherwise
stated.
Accounting policy
Controlled entities are consolidated from the date on which
control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out
of the Group. The acquisition method of accounting is applied
on acquisition or initial consolidation. This method ascribes fair
values to the identifiable assets and liabilities acquired. The
difference between the net fair value acquired and the fair
value of the consideration paid (including the fair value of any
pre-existing investment in the entity) is recognised as either
goodwill on the Statement of financial position or a discount
on acquisition through the Statement of comprehensive
income.
Principles of consolidation
The financial statements consolidate the financial information
of controlled entities. An entity is controlled when the
Company is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity. The Statement of
financial position date and the accounting policies of
controlled entities are consistent with those of the Company.
The Company assesses, at inception and at each reporting
date, whether an entity should be consolidated based on the
accounting policy.
All intercompany balances and transactions, including
unrealised profits arising from intra-group transactions, are
eliminated in full. Non-controlling interests, where they exist,
represent the share in the net assets of subsidiaries
attributable to equity interests not owned directly or indirectly
by the Group.
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2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
147
Note 23
Discontinued operation and business held for sale
Sale of Challenger Bank
On 20 October 2022, Challenger Limited announced that it
entered into a share sale agreement to sell Challenger Bank
Limited to Heartland Group Holdings Limited.
Goodwill of $19.1 million was initially recognised upon
acquisition of the Bank on 30 July 2021. This was fully
impaired in the year ended 30 June 2022.
The Bank has been classified as held for sale and a
discontinued operation in line with AASB 5 Non-current
Assets Held for Sale and Discontinued Operations.
The Group is expected to receive approximately
$33.0 million, subject to completion of adjustments,
for the sale of the Bank. This is based on expected net
assets of approximately $22.0 million. The Group acquired
Challenger Bank (previously MyLifeFinance Limited) for
total consideration of $37.0 million.
The completion of the sale to Heartland Group Holdings
Limited is expected to occur by Q2 2024. Completion of
the transaction is subject to various regulatory approvals
in Australia and New Zealand.
Income statement
For the year ended
Revenue
Expenses
Finance costs
Loss before income tax
Income tax benefit
Loss after income tax on discontinued operations1
1. Differs from note 3 due to the segment note representing a business unit view.
Cash flow statement
For the year ended
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Net cash inflows from discontinued operations
30 June
2023
30 June
2022
$m
15.3
(21.0)
(5.4)
(11.1)
3.1
(8.0)
$m
3.4
(17.4)
(1.1)
(15.1)
4.5
(10.6)
30 June
2023
30 June
2022
$m
(65.0)
167.1
(84.8)
17.3
$m
6.4
(40.5)
65.6
31.5
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148
Challenger Limited 2023 Annual Report
Note 23
Discontinued operation and business held for sale (continued)
Statement of financial position
The Statement of financial position of Challenger Bank is set out in the table below (none of the Bank’s assets and liabilities were
present as held for sale in the prior year).
Assets held for sale
Cash and cash equivalents
Investment securities
Loan assets
Receivables
Deferred tax asset
Other assets
Total assets1
Liabilities held for sale
Payables
Provisions
Deposits from customers
Interest bearing liabilities
Total liabilities
Net assets held for sale
30 June
2023
$m
58.1
75.0
70.5
1.5
1.2
0.4
206.7
2.6
2.3
171.7
5.4
182.0
24.7
1 The total assets of the Bank segment were $242.6 million as at 30 June 2023. As 30 June 2023, $21.5 million of loan assets and financial leases $14.4 million have
not been classified as held for sale because they will be transferred within the Group prior to sale completion. This transfer will result in an increased cash balance,
which the Bank intends to use towards a capital distribution to the Group. The net assets at the date of the sale are expected to be approximately $22.0 million.
Key estimates and judgements
Management has exercised judgement in determining the
classification of assets and liabilities of the Bank that are
held for sale. Assets held for sale are considered to be held
for sale on the basis that it is highly probable they will be
sold, as management is committed to selling those assets
and there is a suitable buyer. All assets are available for
immediate sale in their present condition.
Accounting policy
A disposal group is classified as held for sale if the Group
will recover its carrying amount principally through the sale
rather than through continuing use. The criteria for held for
sale classification is considered to be met only when the
sale is highly probable, and the disposal group is available
for immediate sale in its present condition and the sale is
expected to be completed within 12 months from the date
of the classification.
Assets and liabilities of the disposal groups are separately
presented on the balance sheet. Comparatives in the
Statement of financial position are not restated.
Disposal groups held for sale are measured in accordance
with AASB 5 Non-current Assets Held for Sale and
Discontinued Operations.
Discontinued operations represent components of the
Group that have either been disposed of or are classified
as held for sale and constitute a separate major line of the
business. The post-tax results of discontinued operations
are presented as a single amount in the Statement of
comprehensive income and are therefore excluded from
the results of continuing operations. Comparatives in the
Statement of comprehensive income are restated.
Assets classified as held for sale are measured at the lower
of their carrying amount and fair value less costs to sell
with the exception of the following balances:
• Deferred tax assets (AASB 112 Income Taxes);
•
•
Employee benefit balances (AASB 119
Employee Benefits); and
Financial assets within the scope of AASB 9
Financial Instruments.
148
2023 Annual ReportChallenger Limited
Note 24
Investment in associates and joint ventures
Associates
Challenger Limited 2023 Annual Report
149
Name of company
Alphinity Investment Management Pty Ltd
Ardea Investment Management Pty Ltd
Ares Australia Management Pty Ltd
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
Ox Capital Management Pty Ltd
Resonance Asset Management Limited2
Wavestone Capital Pty Ltd
Total investment in associates3
Lending JV Holdco Pty Ltd4
Total investment in joint ventures
Total investment in associates and joint
ventures3
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
Country of
domicile
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
UK
Australia
30 June
2023
%1
30
30
35
49
36
40
45
40
30
49
40
—
33
30 June
2022
%1
30
30
35
49
36
40
45
40
30
49
40
—
33
30 June
2023
$m
1.6
27.1
0.5
0.7
1.5
1.0
38.1
1.8
1.9
0.4
3.2
0.7
2.2
30 June
2022
$m
1.9
24.6
0.3
0.9
—
1.0
37.3
1.9
2.1
0.2
1.8
0.7
2.2
Lending
Australia
50
—
80.7
1.2
1.2
74.9
—
—
81.9
74.9
1. Represents voting rights percentages.
2. 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.
3. Investment in associates and joint ventures is all considered non-current.
4. The Lending JV is equally owned by Challenger and Apollo (NYSE:APO).
Movements in carrying amount of investment in associates and joint ventures
Opening balance
Acquisition of investment in joint venture
Share of joint venture net profit
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’ and joint ventures' profit or loss
Profit after tax for the year
Share of the associates’ and joint ventures' Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
30 June
2023
$m
30 June
2022
$m
74.9
1.2
(0.1)
25.3
(19.5)
—
81.8
83.2
—
—
38.0
(46.2)
(0.1)
74.9
25.3
38.0
39.8
6.0
45.8
20.6
2.7
23.3
22.5
43.6
5.4
49.0
25.5
2.5
28.0
21.0
149
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Challenger Limited 2023 Annual Report
Note 24
Investment in associates and joint ventures (continued)
Accounting policy
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.
A joint venture is a type of joint arrangement whereby the
parties that have joint control of the arrangement have rights
to the net assets of the joint venture. Joint control is the
contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control.
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.
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.
Note 25 Related parties
Key Management Personnel
The Directors and key executives of Challenger Limited during the reporting period were as follows:
Directors1
Current Directors
Duncan West (appointed Chair on 27 October 2022)
Independent Chair
Nicolas Hamilton
John M Green
Steven Gregg
Masahiko Kobayashi2
Heather Smith
JoAnne Stephenson
Melanie Willis
Former Directors
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
Peter Polson (resigned 27 October 2022)
Former Independent Chair
1. Where an individual held a KMP role for part of either the current or prior reporting period, refer to the Key Management Personnel section of the Remuneration
report for further details.
2. Hiroyuki Iioka is an Alternate Director to Masahiko Kobayashi.
Key executives1
Current KMP
Nicolas Hamilton
Anton Kapel
Victor Rodriguez
Alexandra Bell
Former KMP
Rachel Grimes AM
Michael Clarke
Chris Plater
Managing Director and Chief Executive Officer
Chief Executive, Life & Solutions
Chief Executive, Funds Management
Chief Financial Officer
Chief Financial Officer
Acting Chief Executive, Funds Management
Deputy Chief Executive Officer
1. Where an individual held a KMP role for part of either the current or prior reporting period, refer to the Key Management Personnel section of the Remuneration
report for further details.
150
2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
151
Note 25 Related parties (continued)
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 22 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 24 Investment in associates
and joint ventures) for the provision of distribution and
administration services.
The Group earned fee income during the year of $72.5 million
(2022: $67.7 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 2023 (30 June 2022: 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
2023
2022
KMP
2023
2022
All KMP and Non-Executive Directors
2023
2022
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other
benefits
$
Total
$
1,866,423
2,040,385
126,460
115,701
—
—
—
—
1,992,883
2,156,086
4,781,261
5,971,343
106,439
117,840
2,825,481
3,807,179
13,395
137,798
7,726,576
10,034,160
6,647,684
8,011,728
232,899
233,541
2,825,481
3,807,179
13,395
137,798
9,719,459
12,190,246
1. No termination payments were made to KMPs or NEDs, while in their capacity, during the year.
151
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152
Challenger Limited 2023 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 2001.
Note 26
Goodwill and other intangible assets
Goodwill
Other intangible assets
Software at cost
Less: accumulated amortisation
Commercial agreement
Less: accumulated amortisation
Total other intangible assets
30 June
2023
$m
579.9
30 June
2022
$m
579.9
22.4
(18.3)
4.1
3.9
(0.5)
3.4
7.5
22.2
(15.6)
6.6
0.9
(0.2)
0.7
7.3
Goodwill
Software
Commercial agreement
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
Balance at the beginning of
the year
Additions1
Impairment
Amortisation expense
579.9
579.9
—
—
—
19.1
(19.1)
—
Balance at the end of the year
579.9
579.9
6.6
0.2
—
(2.7)
4.1
8.3
1.0
—
(2.7)
6.6
0.7
3.0
—
(0.3)
3.4
1. During the year Fidante Partners entered into a commercial agreement with Proterra Investment Partners Asia.
30 June
2022
$m
0.9
—
—
(0.2)
0.7
152
2023 Annual ReportChallenger Limited
Note 26
Goodwill and other intangible assets (continued)
Challenger Limited 2023 Annual Report
153
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.
153
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Challenger Limited 2023 Annual Report
Note 26
Goodwill and other intangible assets (continued)
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
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 2023. 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.
• 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.
Intangible
Goodwill
Software
Useful
Depreciation method
Life
Indefinite
Not applicable
3-10 years Straight-line basis over its
useful life, usually a period of
five years
Commercial
agreement
5-10 years Straight-line basis over the
life of the intangible, based
on the terms of the
agreement
The following CGUs represent the carrying amounts
of goodwill:
Discount rate
30
June
2023
$m
30
June
2022
$m
30
June
2023
%
30
June
2022
Cash
flow
horizon
% (years)
3
452.3 452.3 10.0 10.0
127.6 127.6
579.9 579.9
9.7
9.4
3
CGU
Life
Funds
Management
Total
154
2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
155
Note 27
Lease assets and liabilities
Right-of-use lease asset
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
2023
$m
46.8
(22.5)
24.3
30 June
2022
$m
45.5
(16.5)
29.0
Office premises1
Property, plant and
equipment2
30 June
2023
$m
30 June
2022
$m
30 June
2023
$m
30 June
2022
$m
28.8
1.3
(5.9)
24.2
34.4
0.1
(5.7)
28.8
0.2
—
(0.1)
0.1
0.3
—
(0.1)
0.2
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 (1) and 12 years with remaining lease terms of between 9 months and 5 years at 30 June 2023. 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 15 for interest expense on lease liabilities and the Statement of cash flows for total cash outflow for leases.
30 June
2023
30 June
2022
$m
8.9
8.8
31.0
6.0
54.7
$m
8.1
8.9
28.2
17.3
62.5
30 June
2023
30 June
2022
$m
8.9
45.8
54.7
$m
8.1
54.4
62.5
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.
155
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156
Challenger Limited 2023 Annual Report
Note 27
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 28
Contingent liabilities, contingent assets and credit commitments
Warranties
Third party guarantees
Over the course of its corporate activity, the Group has given,
as a seller of companies, including the sale of Challenger Bank
Limited to Heartland, and as a vendor of assets, including
real estate properties, warranties to purchasers on several
agreements that are still outstanding as at 30 June 2023.
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 2023, there are potential
future commitments totalling $957.1 million (30 June 2022:
$496.6 million) in relation to these opportunities.
The Group has made capital commitments to associates to
subscribe for up to $9.1 million (30 June 2022: $12.3 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
$10.4 million.
Subsidiary guarantees
CLC has provided a guarantee to a third party regarding the
performance of its subsidiary in respect of certain reinsurance
arrangements.
156
2023 Annual ReportChallenger Limited Challenger Limited 2023 Annual Report
157
Note 28
Contingent liabilities, contingent assets and credit commitments
(continued)
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.
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
2023
$m
8.9
0.9
0.9
12.6
23.3
(184.5)
(158.6)
(354.5)
(614.0)
30 June
2022
$m
4.2
0.8
2.9
7.3
15.2
(187.8)
(173.2)
(374.9)
(683.5)
(1,311.6)
(1,288.3)
(1,419.4)
(1,404.2)
Other information
Contracted capital expenditure commitments
In the normal course of business, the Group enters into
various contracts that could give rise to contingent liabilities in
relation to performance obligations under those contracts.
At the date of this report, the possibility of any outflow in
settlement is remote.
These represent amounts payable in relation to capital
expenditure commitments contracted for at the Statement
of financial position date but not recognised as liabilities.
They primarily relate to the investment property portfolio
and property, plant and equipment.
Operating leases
Group as lessor
Investment properties owned by the Group are leased to third
parties under operating leases. Lease terms vary between
tenants and some leases include percentage rental payments
based on sales volumes.
Other contracted commitments
This represents amounts payable in relation to fitout
commitments and acquisition of investment properties that
have exchanged prior to the balance date and will settle
subsequent to the balance date.
157
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158
Challenger Limited 2023 Annual Report
Note 29 Employee entitlements
Annual leave
Long service leave
Employee1 entitlements provision
1. The total number of employees of the Group at 30 June 2023 was 817 (30 June 2022: 770) on a full-time equivalent (FTE) basis.
30 June
2023
30 June
2022
$m
9.5
10.7
20.2
$m
9.6
11.4
21.0
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.
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).
When an employee’s employment is terminated during the
vesting period, their share rights are treated as vesting at the
date of termination of employment except to the extent that
there is an explicit or implied service condition that extends
to the end of the performance period.
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.
158
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
159
Note 29 Employee entitlements (continued)
Employee share acquisition plan
Share-based compensation benefits are provided to employees
via the Challenger Performance Plan (CPP). The Group has
formed a trust to administer the Group’s employee share
acquisition plan (CPP Trust).
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.
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 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
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 2023 and movements on previous issues
The DPSR instruments was replaced with Restricted Shares
instruments (refer below) in 2021, and since then, no new
DPSRs have been issued.
Grant date
Latest date
for vesting1
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2022
Granted
during the
year
Vested
during the
year
Forfeited
during the
year
Outstanding
at 30 June
2023
7 Sep 2020
1 Sep 2024
7 Sep 2020
1 Sep 2023
7 Sep 2020
1 Sep 2022
11 Nov 2019
1 Sep 2023
11 Nov 2019
1 Sep 2022
9 Sep 2019
1 Sep 2023
9 Sep 2019
1 Sep 2022
4.010
4.010
4.010
6.633
6.633
6.633
6.633
3.35
3.50
3.67
6.94
7.23
5.93
6.19
323,658
323,658
510,415
15,377
15,377
199,174
199,174
—
—
—
—
(4,483)
319,175
(4,483)
319,175
—
(498,632)
(11,783)
—
—
—
—
—
—
—
—
15,377
(15,377)
—
(1,080)
198,094
—
(198,094)
(1,080)
—
Total
1,586,833
— (696,726)
(38,286)
851,821
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.The table below sets out the details of the RS
granted in current and prior periods and movements on
those awards in the current period.
Expected
date for
vesting
1 Dec 2023
1 Jun 2023
1 Sep 2026
1 Sep 2025
1 Sep 2024
1 Sep 2023
1 Sep 2026
1 Sep 2025
1 Sep 2024
1 Sep 2023
1 Sep 2025
1 Sep 2024
1 Sep 2023
1 Sep 2022
Reference
price
$
7.130
7.130
6.260
6.260
6.260
6.260
6.260
6.260
6.260
6.260
6.440
6.440
6.440
6.440
Grant date
9 Dec 2022
9 Dec 2022
9 Sep 2022
9 Sep 2022
9 Sep 2022
9 Sep 2022
9 Sep 2022
9 Sep 2022
9 Sep 2022
9 Sep 2022
8 Sep 2021
8 Sep 2021
8 Sep 2021
8 Sep 2021
Total
Fair value
at grant
$
7.20
7.20
6.33
6.33
6.33
6.33
6.33
6.33
6.33
6.33
6.36
6.36
6.36
6.36
Outstanding
at 1 July
2022
Vested
during the
year
Granted
during the
year
28,050
—
28,050
—
91,930
—
—
91,930
— 137,894
— 137,894
16,338
—
—
54,298
— 409,783
— 409,783
—
—
—
—
—
(28,050)
—
—
—
—
—
—
—
—
—
164,882
—
164,882
—
247,354
247,354
(243,051)
824,472 1,405,950 (271,101)
Forfeited
during the
year
Outstanding
at 30 June
2023
28,050
—
91,930
91,930
137,894
137,894
16,338
51,104
384,978
384,978
157,244
157,244
235,895
—
1,875,479
—
—
—
—
—
—
—
(3,194)
(24,805)
(24,805)
(7,638)
(7,638)
(11,459)
(4,303)
(83,842)
159
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160
Challenger Limited 2023 Annual Report
Note 29
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 of 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 based on a
higher absolute TSR reflective of another year of compound
growth based on a higher absolute TSR reflective of another
year of compound growth on the fifth anniversary.
This change has the effect of increasing the vesting period.
Furthermore, as the absolute TSR performance target is a
market-based vesting condition, the related share based
payment expense is recognised over the vesting period even if
the target is ultimately not met and the HPSR does not vest.
The table below sets out details of the HPSRs granted under
the CPP during 2023 and movements on previous issues:
Grant date
Expected
date for
vesting1
Reference
price
$
Fair value
at grant
$
Outstanding
at 1 July
2022
Granted
during the
year
Vested
during the
year
Forfeited
during the
year
Outstanding
at 30 June
2023
— 149,760
— 814,015
—
—
—
—
149,760
814,015
— 2,970,353
—
(124,961)
2,845,392
9 Dec 2022
1 Sep 2026
10 Nov 2022
1 Sep 2026
9 Sep 2022
1 Sep 2026
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
7.130
7.120
6.260
5.901
6.440
4.880
4.752
4.010
6.729
6.729
6.633
11 Sep 2018
1 Sep 2021
10.368
11 Sep 2018
1 Sep 2022
10.368
11 Sep 2017
1 Sep 2021
12.264
11 Sep 2017
1 Sep 2020
12.264
Total
4.45
4.39
3.59
4.37
27,949
3.59
3,385,444
2.64
2.58
132,848
848,268
1.87
5,623,216
4.22
4.42
432,483
90,618
3.10
2,722,990
4.56
3.94
5.42
534,191
923,074
392,560
6.11
696,433
—
15,810,074 3,934,128
—
—
—
—
—
—
—
—
—
—
—
—
—
27,949
—
(525,001)
2,860,443
—
—
(28,495)
104,353
—
848,268
—
(549,940)
5,073,276
—
—
—
—
—
—
432,483
90,618
(91,443)
2,631,547
(55,079)
479,112
—
(104,055)
819,019
—
(392,560)
—
(696,433)
—
—
— (2,567,967) 17,176,235
1. At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
Key estimates and assumptions
Share-based payments
The Group measures the cost of equity-settled transactions
with employees granted during the year by reference to the
fair value of the share rights at the date at which they are
granted. The fair values are determined by independent
external valuers using a Black-Scholes model for DPSRs and
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:
Input2
Dividend yield (%)
Risk-free rate (%)
Volatility2 (%)
Valuation ($)
09 Sept
2022 RS
RS
3.4
09 Sept
2022 HPSR
HPSR1
10 Nov 2022
HPSR
HPSR1
3.4
3.4
3.02 - 3.27
3.02 - 3.27
N/A
6.33
45
3.59
3.16 - 3.42
46
4.39
09 Dec 2022
RS
RS
3.4
3.04 - 3.11
N/A
7.20
09 Dec 2022
HPSR
HPSR1
3.4
3.04 - 3.11
46
4.45
1. Staggered deferred vesting applies to these grants.
2. Prior to 1 July 2021, deferred STI awards were delivered as DPSRs.
3. Forecast volatility rate implied from historic trend. Volatility is only applicable to HPSRs.
160
2023 Annual ReportChallenger Limited
Challenger Limited 2023 Annual Report
161
Note 30
Remuneration of auditor
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 services
30 June
2023
$
30 June
2022
$
2,235,464
2,042,255
721,815
1,618,085
680,300
735,446
45,000
—
49,500
77,000
4,620,364
3,584,501
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
407,403
433,494
Other services in relation to the Group
– taxation services
Total auditor remuneration1
91,500
62,500
498,903
495,994
5,119,267
4,080,495
1. Auditor’s remuneration for the Group is paid by Challenger Group Services Limited, a wholly owned entity within the Group.
Note 31
Subsequent events
Elanor strategic partnership and sale of
Australian Real Estate business
On 7 July 2023 Challenger completed the sale of its
Australian Real Estate business to Elanor Investors Group
(ASX:ENN; Elanor).
Consideration of $38 million was received in new securities
issued by Elanor, which was calculated using an issue price
based on Elanor’s one-month volume weighted average price
on 5 April 2023, on an ex-entitlement basis. Elanor has issued
24.8 million new securities representing approximately 17%
of Elanor securities on issue on a non-diluted basis and subject
to claw-back provisions over a three-year period linked to
achieving performance hurdles. Up to half of the securities
issued can be clawed back by Elanor.
As part of the transfer of the ADIC mandate, Challenger
agreed to transfer 4.5 million of the 24.8 million new
securities in Elanor to ADIC resulting in Challenger’s and
ADIC’s holding in Elanor representing approximately 14%
and 3% of total Elanor securities on issue respectively.
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.
Challenger announced as Aware Super’s partner to
provide defined benefit solution
Challenger was selected to provide a group lifetime annuity
policy to the value of $619 million that will de-risk the fund’s
lifetime pension liabilities from investment, inflation and
longevity risk. The policy commenced from 31 July 2023.
161
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Challenger Limited 2023 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 2023 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 2023.
On behalf of the Board
D West
Independent Chair
14 August 2023
N Hamilton
Managing Director and Chief Executive Officer
14 August 2023
162
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163
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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 2023, 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)
b)
giving a true and fair view of the consolidated financial position of the Group as at 30 June 2023
and of its consolidated financial performance for the year ended on that date; and
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.
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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.
1. Valuation of Life Contract Liabilities
Financial report reference: Note 8
Why significant to the audit
How our audit addressed the key audit matter
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 2023: $13,930
million), relative to total liabilities and the
degree of judgment and estimation
uncertainty associated with the valuation.
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.
For a sample of life insurance and investment contract
policies, we performed an independent recalculation 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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3
2. Valuation of Level 3 Investment and Property Assets
Financial report reference: Note 19
Why significant to the audit
How our audit addressed the key audit matter
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 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 2023: $5,737.5 million), and the
degree of judgment and estimation
uncertainty associated with the valuations.
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 securities and real
estate valuation specialists in the above procedures.
We assessed the adequacy and appropriateness of the
related financial report disclosures.
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3. Recoverability of Goodwill
Financial report reference: Note 26
Why significant to the audit
How our audit addressed the key audit matter
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
2023: $579.9 million), and the degree of
judgment and estimation uncertainty
associated with the impairment assessment.
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 2023.
• 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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5
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 2023 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.
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6
•
•
•
•
•
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.
Report on the Audit of the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 65 to 87 of the directors' report for the year
ended 30 June 2023.
In our opinion, the Remuneration Report of Challenger Limited for the year ended 30 June 2023,
complies with section 300A of the Corporations Act 2001.
A member firm of Ernst & Young Global Limited
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2023 Annual ReportChallenger Limited
169
7
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
Graeme McKenzie
Partner
Sydney
14 August 2023
A member firm of Ernst & Young Global Limited
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Investor information
Substantial shareholders
Challenger Limited 2023 Annual Report
The number of shares held by substantial shareholders and their associates, based on the latest substantial shareholder
notifications, and the 20 largest individual shareholders are as follows:
Substantial shareholders as at 31 July 2023
Apollo Global Management, Inc. / Athene Life Reinsurance Ltd1
MS&AD Insurance Group Holdings Inc1
20 largest individual shareholders as at 31 July 2023
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 Ltd
6.
BNP Paribas Nominees Pty Ltd
7.
Argo Investments Limited
8.
9.
HSBC Custody Nominees (Australia) Limited
10. Mutual Trust Pty Ltd
11. Citicorp Nominees Pty Limited
12. CPU Share Plans Pty Ltd
13. CPU Share Plans Pty Ltd
14.
15. HSBC Custody Nominees (Australia) Limited
16.
17. Charles & Cornelia Goode Foundation Pty Ltd
18. Neweconomy Com Au Nominees Pty Limited <900 Account>
19. CPU Share Plans Pty Limited
20.
BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd
BNP Paribas Noms Pty Ltd
BNP Paribas Noms (Nz) Ltd
Total 20 largest individual shareholders – issued capital
Total remaining shareholders balance
1. Number of shares for substantial shareholders as at 31 July 2023 available at the time of releasing this report.
Distribution of shares (as at 31 July 2023)
Number of
shares
% of issued
capital
136,482,520
104,353,125
195,815,238
155,731,466
96,679,376
55,418,307
26,222,956
9,576,826
6,021,400
5,440,311
5,149,752
3,016,724
2,648,218
2,024,044
1,800,000
1,768,110
1,564,788
1,127,512
923,485
844,958
792,910
746,356
573,312,737
114,301,224
19.85
15.18
28.48
22.65
14.06
8.06
3.81
1.39
0.88
0.79
0.75
0.44
0.39
0.29
0.26
0.26
0.23
0.16
0.13
0.12
0.12
0.11
83.38
16.62
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 $7.17 per unit
Number of
shareholders
14,957
Number of
shares
6,783,655
% of issued
capital
0.99
13,796
33,390,780
3,056
1,927
21,857,405
39,204,586
78
586,377,535
33,814 687,613,961
4.86
3.18
5.70
85.27
100.00
Minimum
parcel size
70
Holders
1,141
Units
23,567
ASX listing
Voting rights
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
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.
or the ASX website:
› asx.com.au
169
2023 Annual ReportChallenger Limited
171
Challenger Limited 2023 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 2023
During the year, 2.5 million Challenger Limited ordinary shares were purchased on market to satisfy entitlements under
Challenger’s employee incentive schemes.
Top 20 noteholders of Challenger Capital Notes 3 as at 31 July 2023
20 largest individual noteholders as at 31 July 2023
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Pty Limited
BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd
Citicorp Nominees Pty Limited
BNP Paribas Nominees Pty Ltd
Diocese Development Fund -Catholic Diocese Of Parramatta
Mutual Trust Pty Ltd
IOOF Investment Services Limited
Netwealth Investments Limited
Eastcote Pty Ltd
National Nominees Limited
Vision Australia Foundation
Navigator Australia Ltd
BNP Paribas Nominees Pty Ltd
NULIS Nominees (Australia) Limited
Berne No 132 Nominees Pty Ltd <2853115 A/C>
Sandhurst Trustees Ltd
MF Investments No 1 Pty Ltd
GCF Investments Pty Ltd
Mr David Fox
Total 20 largest individual noteholders – issued notes
Total remaining noteholders balance
Distribution of notes (as at 31 July 2023)
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
notes
311,228
168,490
139,949
130,304
118,712
112,177
84,857
49,986
41,904
41,600
39,467
35,500
32,170
28,193
26,044
22,500
22,499
21,493
20,000
17,600
1,464,673
% of issued
notes
8.08
4.38
3.64
3.38
3.08
2.91
2.20
1.30
1.09
1.08
1.03
0.92
0.84
0.73
0.68
0.58
0.58
0.56
0.52
0.46
38.04
2,385,327
61.96
Number of
holders
3,872
Number of
notes
1,324,044
% of notes
34.39
388
29
19
6
777,934
212,098
555,064
980,860
20.21
5.51
14.42
25.47
4,314
Minimum
parcel size
3,850,000
100.00
Holders
Units
—
Minimum $ 500.00 parcel at $ 105.07 per unit
5
—
170
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172
Challenger Limited 2023 Annual Report
Investor information (continued)
Top 20 noteholders of Challenger Capital Notes 4 as at 31 July 2023
20 largest individual noteholders as at 31 July 2023
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
HSBC Custody Nominees (Australia) Limited
BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd
Citicorp Nominees Pty Limited
Netwealth Investments Limited
BNP Paribas Nominees Pty Ltd
J P Morgan Nominees Australia Pty Limited
Navigator Australia Ltd
National Nominees Limited
BNP Paribas Nominees Pty Ltd
Trustees Of Church Property For The Diocese Of Newcastle
G C F Investments Pty Ltd
Netwealth Investments Limited
Bowen Family Super Co Pty Ltd
15.
16.
17.
18.
19.
20.
Skyplaza Investments Pty Ltd
NULIS Nominees (Australia) Limited
Invia Custodian Pty Limited
Navigator Australia Ltd
Mrs Lynette Maree Rex
Pupgall Pty Ltd
Total 20 largest individual noteholders – issued notes
Total remaining noteholders balance
Distribution of notes (as at 31 July 2023)
Number of
notes
293,351
191,219
134,467
73,294
61,908
48,637
47,887
38,604
33,104
29,270
28,280
20,000
19,442
15,150
15,000
14,852
14,400
13,533
12,900
11,640
1,116,938
2,383,062
% of issued
notes
8.38
5.46
3.84
2.09
1.77
1.39
1.37
1.10
0.95
0.84
0.81
0.57
0.56
0.43
0.43
0.42
0.41
0.39
0.37
0.33
31.91
68.09
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
3,995
Number of
notes
1,171,201
% of notes
33.46
462
32
20
3
935,132
244,577
530,053
619,037
26.72
6.99
15.14
17.69
3,500,000
100.00
4,512
Minimum
parcel size
Holders
Units
—
Minimum $500.00 parcel at $103.10 per unit
5
—
ASX listing
Shareholder queries
Challenger Capital Notes 3 are listed on the ASX under the
trade symbol CGFPC. Challenger Capital Notes 4 are listed on
the ASX under the trade symbol CGFPD. Note price details can
be accessed via the ASX website:
› asx.com.au
Voting rights
Challenger Capital Notes 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.
171
2023 Annual ReportChallenger Limited
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Financial Report
Further Information
173
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
Duncan West (Chair)
Nicolas Hamilton (Managing Director
and Chief Executive Officer)
John M Green
Steven Gregg
Masahiko Kobayashi
Heather Smith
JoAnne Stephenson
Melanie Willis
COMPANY SECRETARY
Linda Matthews
WEBSITE
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 2023 Annual Report is available at:
challenger.com.au
challenger.com.au/annualreport2023