Challenger secures $619m annuity deal with Aware Super to de-risk defined benefit pension plans

Annuity specialists Challenger has clinched a deal with one of Australia’s largest pension funds to provide a “de-risking solution” for its defined benefit pension fund.

Challenger chief executive Nick Hamilton said the transaction reinforced the breadth of retirement income needs it can support. Picture: Britta Campion

Annuity specialists Challenger has clinched a deal with one of Australia’s largest pension funds to provide a $619m “de-risking solution” for its defined benefit pension fund.

A lifetime annuity from Challenger will help hedge defined benefit pensions of about 3,000 members – primarily from the Victorian public health sector – against investment, inflation and longevity risk, the company said.

Some super plans for government workers offer defined benefit plans where instead of a contribution like for most Australians, the employer promises a specified retirement benefit to the employee.

Outside of the public sector, most retirement funds in Australia work as defined contribution funds, which mean workers and not employers are left with investment risk.

“This partnership has enabled us to reduce the risk of future pensions for about 3,000 Victorian members in Aware Super’s defined benefit fund, which is critical in this inflationary environment,” Aware chief investment officer Damian Graham said.

“Through this innovative de-risking solution, we are protecting our defined benefit pension members from investment, inflation and longevity risks and locking-in future cash flows, providing greater certainty to their retirement income.”

The cost of the deal was not disclosed, but Challenger said that to help fund the annuity, Aware Super had made a short term investment in its Index Plus product in the fourth quarter of FY23.

The product is managed by its life insurance unit and guarantees a margin “over an index” with any shortfalls or gains above that margin going to Challenger, according to its website.

Aware Super (formerly First State Super) merged with VicSuper, the default fund for public services employees in Victoria, in 2020, to create one of the largest industry super funds with $160 billion in funds under management.

The lifetime annuity sale will be reflected in Challenger Life’s sales for the first quarter of financial 2024.

Challenger chief executive Nick Hamilton said the transaction reinforced the company’s “breadth of retirement income needs that Challenger can support across the superannuation industry.

“With the Australian savings market now very focused on retirement, the opportunity for Challenger to support the industry with guaranteed income solutions, managed and regulated in Australia, is significant.”

Mercer Consulting provided actuarial advice and helped select Challenger for the deal.