Annuities boom boosts Challenger's results
A BOOM in demand for annuities has led Challenger to claim a commanding position in a transformation of how Australians pay for their retirement.
Challenger yesterday reported a 7 per cent increase in its preferred measure of ''normalised'' net profit after tax for the full year. Challenger's shares rose 17¢ to $4.67.
Yesterday's results showed Challenger's sale of annuities to retail investors grew by 56 per cent from $933 million to $1.46 billion.
Challenger chief executive Dominic Stevens predicted Challenger would lift the sale of annuities by a further 25 per cent in the current financial year, as a wave of retirees looked to convert savings into reliable income streams.
''There is a significant and growing amount of money now moving into retirement. The baby boomer demographic currently owns 60 per cent of the funds in the [superannuation] industry,'' Mr Stevens said.
''Over the next 20 years these people will be thinking of stable cash flow income streams and less volatile [options].''
Mr Stevens attributed the popularity of annuities to investors in recent years being confronted with the risk and volatility in the sharemarket.
He described the product as ''effectively providing very long-term deposits'', then paying investors 6.5 per cent interest annually.
Challenger makes money on the product by making a return of about 2 per cent to 3 per cent above the interest it pays, or a return of about 8.5 per cent to 9.5 per cent on its investment portfolio.
He said a study by UBS showed banks were making a similar return on their portfolios of loans.
Challenger has extensively marketed annuities to retail investors based on the security of the returns over a long period.
Challenger, whose share price fell to 88 cents during the global financial crisis, arrives at its ''normalised'' profit by adjusting the contribution of its investments in line with long-term market performance, rather than the actual experience due to volatility.
Its net profit reported in line with statutory accounting standards fell by 7.5 per cent to $261 million.