The Challenger Ltd (ASX: CGF) share price has risen an exciting 24% since 26 April 2018.
Challenger is Australia's market-leading annuity provider. The main purpose of its products is to provide retirees with a guaranteed source of income for their capital.
The main driver of this increase has been a regulatory change in the Federal Budget.
The Government will introduce a change to the superannuation system, requiring trustees to offer Comprehensive Income Products for Retirement (CIPRs) that provide individuals with income for life, no matter how long they live. There will also be new means test rules for lifetime retirement income stream products.
The new means test rules will allow for new products, such as a deferred lifetime annuity. These new rules will come into effect on 1 July 2019, which is the start of FY20.
According to Challenger, once the new rules come into effect, the total outcome for the retiree of the new retirement income stream and an account based pension will often be enhanced.
These new rules, combined with the ageing tailwind and superannuation growth, could be a big deal for Challenger in FY20 and beyond. The number of people over 65 is expected to increase by 75% over the next 20 years, which means a lot of people entering retirement – this is the most common time to take out an annuity.
The tax effectiveness of super, as well as the mandatory 9.5% contribution, is seeing the total superannuation pool grow at an impressive rate.
To me, this is growth on growth. There are more people going to retire with (hopefully) bigger superannuation balances in the future.
Foolish takeaway
Challenger is currently trading at 18x FY19's estimated earnings, which seems quite reasonable. There are risks to Challenger in the medium-term and long-term. Rising interest rates could have a negative impact on its balance sheet and we won't know how effective the company has been at estimating life expectancy for many years.
