Perpetual Limited - Annual Report 2019

Perpetual Limited 2019 Annual Report

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Trust is earned. Every day.

We have been earning the trust of our clients every day for more than 130 years. We pride ourselves on our long-standing client relationships, some of which span five generations. Every day.

Perpetual Limited ABN 86 000 431 827

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About Perpetual

Perpetual is an ASX-listed, diversified financial services company which has been serving Australians since 1886. Across our three businesses – Perpetual Investments, Perpetual Private and Perpetual Corporate Trust – we protect and grow our clients’ wealth, knowing that by doing so we can make a difference in their lives. Perpetual Limited has been listed on the Australian Securities Exchange (ASX:PPT) since 1964 and has offices in Sydney, Canberra, Melbourne, Brisbane, Adelaide, Perth and Singapore.

2 FY19 at a Glance 4 Chairman’s Report 6 FY19 Group Result
8 CEO’s Report 12 Business Unit Overview 18 Corporate Responsibility 20 Directors’ Report
26 Remuneration Report 62 Operating and Financial Review
83 Financial Report
142 Securities Exchange and Investor Information

Shareholder calendar

Final dividend payment 30 September 2019

Annual General Meeting

17 October 2019

Interim profit and dividend announcement

20 February 2020

Final profit and dividend announcement

20 August 2020

Please note these dates are subject to change.

PERPETUAL ANNUAL REPORT 2019

FY19 at a Glance.

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We remain focused on developing and deepening our client relationships. July Stanford partnership Stanford Center on Philanthropy and Civil Society’s third visit to Australia signals a successful three-year not-for-profit capability building partnership. August First agriculture mandate Perpetual Corporate Trust wins its first agriculture mandate – being named responsible entity of the Vitalharvest Freehold Trust managed by Australia’s goFARM Asset Management. Decades of literary philanthropy

Perpetual Corporate Trust wins its first agriculture mandate – being named responsible entity of the Vitalharvest Freehold Trust managed by Australia’s goFARM Asset Management.

Michelle de Kretser wins the 2018 Miles Franklin Literary Award for her novel The Life to Come . She is the third woman in the Award’s 61-year history to win the top prize more than once. Perpetual is trustee of the Miles Franklin Literary Award.

September

New CEO

Rob Adams joins Perpetual as Chief Executive Officer and Managing Director.

Best alternative investment manager

Perpetual is recognised in the Hedge Funds Rock and the Australian Alternative Investment Award s as the Best Alternative Investment Manager of the Year. The Perpetual Income Opportunities Fund was also awarded Best Multi Strategy Fund.

October

PIC capital raising reaches target

Perpetual Equity Investment Company’s (ASX:PIC) capital raising reaches the targeted $101 million, with the number of shareholders increasing by 20%.

November

Platform launched

Perpetual Corporate Trust launches a new capability on the Perpetual Business Intelligence platform, designed to detect potential problems, highlight early warning signs and predict future performance of the mortgage market.

February

Upgraded fund ratings

Independent research house Lonsec upgrades four funds to Highly Recommended following a review of Perpetual Investments’ Multi Asset capability.

Employer of Choice for the second year For the second year running, Perpetual is granted the Employer of Choice for Gender Equality citation from the Workplace Gender Equality Agency. April Client centric model Perpetual Private implements a new professional services organisational model allowing clients access to a broader range of services. Scholarships awarded Perpetual awards 17 scholarships to Indigenous business leaders, with

Perpetual awards 17 scholarships to Indigenous business leaders, with participants taking part in courses run by the Australian Institute of Company Directors.

March

New brand positioning

Perpetual’s new brand positioning “Trust is earned.” launches nationally.

Strong investor demand

May

Target exceeded for PCI

The launch of Perpetual Credit Income Trust (ASX:PCI) raises $440 million and lists on the ASX.

Custodian for Indigenous fund

Perpetual Corporate Trust is appointed custodian and wholesale trustee for Impact Investment Partners’ Indigenous Infrastructure Investment Fund.

June

Business advisory expertise

Fordham’s new website is officially switched on, bringing to life Fordham’s national presence and highlighting its expertise in advisory services for specialist business segments.

Fund ratings reaffirmed

Zenith Investment Partners reaffirms Perpetual Investments’ existing fund ratings, including Highly Recommended for the Concentrated Equity Fund and Share-Plus Long-Short Fund.

Top 50 financial advisers

Perpetual Private’s Chris Marshall is named in US financial investment publication Barron’s third annual ‘Top 50 Financial Advisers’ in Australia list, published by The Australian ’s business magazine, The Deal .

Highest score for employee engagement

Employee engagement remained at 73%, Perpetual’s highest-ever score and in the top quartile for Australian and New Zealand businesses.

The Perpetual Credit Income Trust offer opens, with such strong demand that General, Broker Firm and Cornerstone offers close two weeks early.

PERPETUAL ANNUAL REPORT 2019 3

Trust is earned. Every day. Chairman’s Report.

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Dear Shareholder

A strong, diversified business

Our 2019 financial year results reflect the resilience of our business in challenging market conditions and the underlying strengths of Perpetual – diversification, discipline and strong client relationships. Our revenue and profit numbers are down. This is mostly as a result of market conditions negatively impacting our value-oriented Perpetual Investments business. The dividend paid to shareholders over the year is down 9% on last year but still totals 250 cents per share.

This year’s dividend payout represents 100% of FY19 NPAT, which is consistent with our approach of maximising taxeffective income to our shareholders by paying out 80% to 100% of statutory NPAT on an annualised basis. This dividend will be fully franked. Diluted earnings per share (on NPAT) decreased 18% on FY18. Once again, Perpetual ended the financial year with a strong balance sheet and low debt.

The benefits of diversification

Our results continue to reflect the value of our diversified business. Perpetual Investments is a highly regarded investment manager, whose performance this year was impacted by market conditions that do not favour our value investing style but instead have rewarded passive, momentum and growth investing approaches.

We believe our value approach is the right one for us and for our investors, and we will maintain those disciplines – as we have for more than 50 years. Investors have been rewarded by that consistency in the past and will be again.

We were pleased with the successful launch of a new listed trust which invests in credit and fixed income assets. The launch of the Perpetual Credit Income Trust raised $440 million, and the listed Perpetual Equity Investment Company also completed a capital raising of

$101 million. These are pleasing results which demonstrate strong investor demand for our investment expertise delivered through a listed structure. Profit before tax in our Perpetual Private business was down this year, as we continue to invest in key strategic initiatives. However, the division was able to deliver another year of net growth in client numbers, funds under advice and management, despite challenging market conditions and the effects on consumer sentiment following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Perpetual Corporate Trust delivered strong growth in both revenue and profit. Growth in its new Data and Analytics Solutions business is particularly pleasing as it reflects longer-term planning and investment.

Royal Commission

Since the last annual report was published, we have seen the impacts of the Royal Commission on our industry. As promised a year ago, we have examined the report, reviewed our compliance activities and maintained our strong focus on delivering to business and community expectations. Our brand and reputation remain strong.

The Commission highlighted issues of trust and client-centricity in our industry. The disruption provides new opportunities, and both Perpetual Private and Perpetual Corporate Trust are well placed to deliver new and improved services to our chosen customer segments.

Leadership and people

Our CEO, Rob Adams, is now well established at the helm of the business and his Executive Committee has been refreshed by the addition of a new Chief Risk Officer, and some excellent internal promotions to the

roles of Chief Financial Officer and Group Executive of Perpetual Corporate Trust. The Board and I are pleased with the leadership team’s efforts and the direction in which they are driving the business.

It’s also important to recognise the contribution of all our teams – people who put the client first in ways that are recognised by our strong reputation in the industry and evidenced by our excellent client advocacy or Net Promoter Scores (our annual client satisfaction study). In the face of leadership change, market volatility and Royal Commission fallout, our employee engagement levels remain amongst the best in the Australian financial services sector and I believe that engagement is reflected in the service we offer our clients.

On behalf of the Board, the Executive Committee and all our teams, I would like to thank you, our shareholders, for your continued support of this great company.

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Tony D’Aloisio Chairman

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Our results reflect the
resilience of our
diversified
business
in challenging
market conditions.
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PERPETUAL ANNUAL REPORT 2019 5

FY19 Group Result.

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Financial results

Perpetual’s statutory net profit after tax (NPAT) and underlying profit after tax (UPAT) for the year ended 30 June 2019 were $115.9 million, 17% lower than the comparative figures in FY18. In FY19, Perpetual generated $514.1 million of total operating revenue, $19.6 million or 4% lower than in FY18.

The decline was driven by lower average funds under management (FUM) as a result of net outflows within Perpetual Investments as well as lower performance fees. Performance fees earned in FY19 were $3.5 million which was $5.7 million or 62% lower than FY18. This was partly offset by higher average funds under advice (FUA); the new business growth achieved by Perpetual Corporate Trust and Perpetual Private; and the rise in equity markets over the year.

Ongoing cost management saw total expenses contained in FY19 at $351.9 million, 4% or $14.5 million higher than FY18. Increased levels of investment in strategic initiatives to support future business growth, along with higher regulatory expenses and one-off remediation costs related to legacy matters, were offset by lower variable remuneration costs.

Perpetual maintains a strong balance sheet with a low and stable level of gearing. At the end of FY19, Perpetual’s gross corporate debt remained unchanged at $87 million. The Group’s gearing ratio remained stable at 11.6% in line with FY18 and remains well within Perpetual’s stated risk appetite limit of 30%.

Shareholder returns and dividends

The Board determined a final fully franked dividend for FY19 of 125 cents per share, bringing full year dividends to 250 cents per share, a decrease of 9% on FY18.

The final dividend represents a payout ratio of 100% and is in line with Perpetual’s policy to pay dividends within a range of 80% to 100% of NPAT on an annualised basis and maximises fully franked dividends to shareholders. The final dividend is payable on 30 September 2019. The Dividend Reinvestment Plan will be operational for shareholders wishing to participate in the Plan. No discount will apply, and the shares required will be acquired on-market.

250c 514.1m 115.9m $ $

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Market environment

Outlook

The main drivers of Perpetual’s total revenue are the value of FUM in Perpetual Investments and FUA in Perpetual Private. Both are influenced by the exposure to equity markets and their performance. At the end of FY19, Perpetual Investments’ FUM was exposed 71% to equity markets and Perpetual Private’s FUA 58%.

The long-term outlook for the Group is bolstered by Australians’ growing need for investments, advice and income in retirement. At the same time, external environmental factors, such as regulatory and political uncertainty, and market volatility, can pose near-term challenges facing not just Perpetual but also the broader financial services industry. The current environment provides both opportunity and risk for the Group. Perpetual’s diversified business model positions it well to pursue opportunities, both organic and inorganic, across all three business lines.

The S&P/ASX All Ordinaries Price Index (All Ords) closed at 6,699 on 30 June 2019, up 7% on the closing level of 6,290 on 30 June 2018. The average All Ords in FY19 was 6,196, up 3% on the average All Ords in FY18 of 5,994.

Five-year profile

Five-year profle
	JUNE	JUNE	JUNE	JUNE JUNE
	201510	2016	2017	2018 2019
Total revenue1($m)	500.7	489.6	512.7	531.4 512.1
UnderlyingEBITDA2($m)	217.2	208.4	223.0	227.0 196.0
Underlying proft before tax3($m)	188.6	177.9	189.0	196.3 162.2
Underlying proft after tax(UPAT)3($m)	133.7	128.2	136.9	139.0 115.9
Netproft after tax(NPAT)4($m)	122.5	132.0	137.3	140.2 115.9
Earningsper share(UPAT)5(cents)	290	276	293	297 246
Earningsper share(NPAT)5(cents)	265	284	294	299 246
Return on average shareholders’ equity– UPAT6(%)	23.7	21.6	22.1	21.5 17.5
Return on average shareholders’ equity– NPAT7(%)	21.7	22.2	22.1	21.6 17.5
Dividendper share – ordinary8(cents)	240	255	265	275 250
Total equityat 30 June ($m)	583.7	605.5	634.4	661.1 662.2
Funds under management – Perpetual Investments11($b)	30.2	29.4	31.4	30.8 27.1
Funds under advice – Perpetual Private11($b)	13.1	12.7	13.5	14.1 14.8
Funds under administration – Perpetual Corporate Trust11($b)	558.2	620.5	657.9	693.2 764.5
Capital expenditure ($m)	15.8	20.7	9.9	28.6 38.8
Market capitalisation ($m)	2,252	1,915	2,602	1,937 1,967
Number of shares on issue – weighted average9(m)	46.2	46.4	46.7	46.8 47.1
Number of shares on issue at 30 June9(m)	46.6	46.6	46.6	46.6 46.6
Shareprice at 30 June ($)	48.36	41.12	55.87	41.60 42.24
Shareprice range foryear($ low)	41.69	37.87	40.06	38.25 29.70
Shareprice range foryear($ high)	58.24	50.66	57.04	56.20 46.11

Excludes income from structured investments.
EBITDA represents earnings before interest, taxation, depreciation, amortisation of intangible assets, equity remuneration expense and significant items.
Excludes significant items and costs of major strategic initiatives.
Attributable to equity holders of Perpetual Limited.
Diluted earnings per share calculated using the weighted average number of ordinary shares and potential ordinary shares on issue.
Calculated using underlying profit after tax.
Calculated using net profit after tax.
Dividends declared with respect to the financial year.
Includes ordinary shares and potential ordinary shares.
In FY16, the Board approved a proposal to change the recognition of realised gains or losses resulting from the disposal of Perpetual’s seed fund investments from significant items to UPAT. Comparatives have been adjusted to reflect this change.
Represents 30 June closing balances.

PERPETUAL ANNUAL REPORT 2019

Trust is earned. Every day. CEO’s Report.

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Dear Shareholder

The environment

When I joined Perpetual about nine months ago, I said the greatest attractions were the strength of the brand, Perpetual’s people and the depth of client relationships. I’ve seen those strengths tested over what has been a challenging year for Perpetual, and for many financial services businesses. And I’ve seen them hold up in a way that I believe bodes well for the future of the business and for you, our shareholders.

The Hayne Royal Commission shook the community, put our industry under a harsh spotlight and, to my mind, had a real effect on people’s willingness to invest. However, Perpetual is well positioned for a post-Hayne world and we have had positive feedback from our clients. That’s a testament not just to the people in the business today but to a 133-year fiduciary heritage that puts the client at the centre of our thinking.

The market

Perpetual’s revenue and the returns we generate for our shareholders are closely tied to the performance of investment markets. In the past year, we have seen the market move to extremes. The December quarter was one of the toughest on record and then we saw a bounce back that also exceeded expectations.

The longer-term theme has been one of cheap money and excess liquidity – a hangover from the GFC. It’s been a good environment for passive investing and for growth investors. Indeed, it’s the longest cycle I can recall where growth and momentum investment styles have outperformed value investing. At Perpetual, a company with a 50-year heritage of successful value investing in Australia, we have seen our performance, relative to benchmarks, impacted as a result.

However, the signs increasingly suggest we are in the late stages of this economic cycle and investors will soon start to reassess what they’re paying for stocks with unproven business models or elevated valuations – and what they should be paying for companies with proven earnings capability. That’s an environment where Perpetual will do well.

Opportunities and risks

One of our mantras at Perpetual is “protect and grow”. We’ve always been a business that thinks about risk. Managing risk is key to what we do as investors – and as a trustee – protecting people’s capital and their lifestyle.

We are not about avoiding risk, we’re about understanding and managing it – getting the balance right. One of the first changes I made at Perpetual was to elevate the Chief Risk Officer role to the executive table and appoint Sam Mosse to the role. It’s important to our long-term success that we’re thinking about risk at every level of the business, and that sensible risk management is at the heart of everything that we do.

Yet I’ve also emphasised to the team the importance of looking for growth opportunities, both organic and inorganic in nature. We have a strong brand, deep client relationships, and a strong balance sheet – and it’s appropriate we make long-term investment decisions across our portfolio of businesses to drive consistent, quality growth over time.

While I want this business to be bolder, and we will be, we will remain disciplined in our approach. As part of our explicit growth strategy, we have done meaningful investigation of many acquisition opportunities over the past nine months. We will continue to work hard on finding and evaluating new opportunities whilst making quality decisions on their suitability.

What follows is my short summary of the performance of our different business units.

Perpetual Investments

It was a difficult year for the Perpetual Investments business. Our team were disciplined and focused, but the market environment was tough on value managers – and that’s reflected in the revenue and profit numbers from the business. Revenue for FY19 was down 12% to $205.0 million and profit down 29% to $79.9 million.

We have been investing using our value style for more than 50 years so we have endured similar periods of underperformance in the past. When market fundamentals reasserted themselves – as they did in the late 1980s and post GFC – we repaid the trust of our investors by protecting their capital and generating healthy returns. This was because we were invested in quality businesses and had the ability and conviction to buy more of those businesses at lower prices when the market corrected.

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While I want
this business
to be bolder
and we will be,
we will remain
disciplined in
our approach.
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PERPETUAL ANNUAL REPORT 2019 9

Trust is earned. Every day. CEO’s Report.

I am confident that pattern will be repeated in years to come. The one thing we won’t do is waver from our value approach. Our investors, whether they’re institutions, advisers or individuals, trust us to be “true-to-label”, whatever short-term factors are driving markets, and that’s what we will keep doing.

We’ve prospered over decades because we

never take our clients for granted.

Despite tough conditions, I believe the decisions we made in FY19 will pay off for our clients and our shareholders for many years to come.

The Perpetual Investments’ highlight of the year was the successful launch of the new Perpetual Credit Income Trust (ASX:PCI), which raised the maximum $440.0 million. It demonstrates investor demand for more contemporary products from Perpetual and builds on the consistent investment returns and growth in assets managed by our Australian credit and fixed income team. During FY19 our Perpetual Equity Investment Company (ASX:PIC) also completed a successful capital raising – bringing in an extra $101.2 million in capital and the number of shareholders increasing by 20% to 8,450.

Perpetual Private

Perpetual Private serves clients including high net worth investors, medical specialists, philanthropists, not-for-profits and Indigenous communities requiring investment advice and investment management services.

In FY19, profit before tax (PBT) was down 11% on our excellent FY18 result. Despite this fall, I believe Perpetual Private had a solid year. For one thing, it was the sixth consecutive year of positive flows for the business – a great achievement in the market we are operating in today.

Perhaps more importantly, post-Hayne disruption in the advice industry means we have been able to add experienced and high quality advisers to our business – advisers who are attracted by our fiduciary heritage, our business and advice model, strong client relationships and the range of services we can offer our clients. This will continue to be an opportunity in FY20.

Our fiduciary heritage has always helped us put clients first. We can see proof of that in various Net Promoter Score (NPS) results we received during the year. NPS research focuses on client advocacy, is widely used throughout the industry and is conducted and validated independently. This year key parts of our Perpetual Private business, including our not-for-profit team and our Fordham accounting and business advisory teams, received scores that place them amongst the very best in financial services across Australia.

To build on that strength, this year Perpetual Private moved to a new Professional Services Model – one which focuses even more closely on the client experience, ensures transparent pricing and builds career paths for financial advisers that reward them for a long-term commitment to their clients.

Perpetual Corporate Trust

Perpetual’s three financial services businesses have similarities but also significant differences in client bases and related services. That diversification is a strength of Perpetual, especially in challenging times and in FY19, Perpetual Corporate Trust (PCT) reported profit before tax of $47.7 million, $5.1 million or 12% higher than in FY18. Our Debt Markets Services business provides a range of services to the debt capital and securitisation markets. In FY19, this arm of the business grew revenue by 7%. PCT’s Managed Funds Services (MFS) business helps local and international asset managers via responsible entity, custody, trustee and investment management services. This year MFS grew revenue by 12%, thanks to continued growth in the sector and the beneficial impact of higher asset prices.

Most pleasingly, the payoff from our investment in our “third engine” – the Data and Analytics Solutions business within PCT – began to flow through to the bottom line.

This business highlights some of Perpetual’s key strengths. We were initially able to enter this market segment because we have a long history of providing proven trustee services – safeguarding our commercial customers’ assets. With some innovative thinking, patience and investment in the latest data visualisation and analysis

technologies, we were able to turn that trust and that data into a new business with high growth potential. In FY19, we made further investment in this capability through the purchase of RFi Analytics – a leading analytics and benchmarking business.

Trust is earned.

This year Perpetual launched our new brand positioning “Trust is earned.” At first glance, it looks like an advertising slogan, but it’s much more than that, it comes from the heart of Perpetual. It speaks to the importance of trust in all that we do. It speaks to more than 130 years of working with and for clients.

I knew it was right for us when I met a Perpetual client of more than 20 years at a function in Canberra. With no knowledge of the refreshed positioning, she said she was happy being with Perpetual – “but you have to earn my trust, every day.” She was absolutely right.

We’ve prospered over decades because we never take our clients for granted. Despite tough conditions, I believe the decisions we made in FY19 will pay off for our clients and our shareholders for many years to come.

Thanks for your support.

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Rob Adams Chief Executive Officer and Managing Director

PERPETUAL ANNUAL REPORT 2019 11

Business Unit Overview. Perpetual Investments.

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David Lane Group Executive, Perpetual Investments

A new direction combining boutique culture with institutional grade infrastructure and framework.

12% 27.1bn $ Funds under management

29% 79.9m $ Profit before tax 12% 205.0m $ Revenue

We remain committed to delivering quality investment

outcomes over time through Perpetual’s active, value investment process while also embracing new asset classes and investment styles.

Financial performance

Perpetual Investments generated operating revenue of $205.0 million in FY19. In FY18 it was $232.3 million. Profit before tax was $79.9 million, $32.6 million or 29% lower than in FY18. Revenue in FY19 was largely impacted by lower performance fees and a decline in average FUM to $28.8 billion due to the impact of outflows largely from institutional clients and the impact of prior period distributions.

Perpetual Investments’ FUM at the end of FY19 was $27.1 billion, 12% less than in FY18. The lower FUM primarily reflects outflows from Australian equities, which were partially offset by inflows within cash and fixed income portfolios, including the new Perpetual Credit Income Trust.

Average FUM revenue margins in FY19 were 71 basis points (bps), 2 bps lower than in FY18. Excluding performance fees earned, underlying average margins remained constant at 70 bps.

Total expenses for Perpetual Investments in FY19 were $125.1 million, 4% or $5.3 million higher than in FY18. The increase was mainly due to costs incurred in pursuing the Group’s growth strategy, issuance costs connected with the listed investments strategy and remediation costs related to legacy matters, partially offset by lower variable remuneration expenses and lower equity performance fee expenses.

Business commentary

Financial markets continued to deliver robust performance over the 2019 financial year with, for example, the S&P/ASX 300 Accumulation Index posting its seventh consecutive year of positive returns. These positive returns were delivered in an increasingly mature market cycle, where market risks are underappreciated.

Our active value investment style is challenged in this environment. Given where we are in the market cycle, we firmly believe that discipline and consistency have never been more important and remain fully committed to the philosophy and process that has served our clients well over the long term.

In a period of industry change, Perpetual Investments remains responsive to both our clients’ evolving needs and our shareholders’ imperative to grow. We continue to deliver new investments to market, we will embrace new investment styles and actively pursue both organic and inorganic growth opportunities.

Our commitment to delivering new strategies saw the Perpetual Credit Income Trust – a diversified and actively managed portfolio of credit and fixed income assets – list on the ASX earlier this year (ASX:PCI), after the offer closing early due to strong investor demand. In addition, Perpetual Equity Investment Company’s (ASX:PIC) capital raising reached the targeted $101.2 million.

Perpetual funds once again received high recognition for their long-term consistency and results. A review of Perpetual Investments’ Multi Asset strategy led to a number of funds being upgraded to Highly Recommended. Overall, 96% of our rating agency reviews this year resulted in funds either being upgraded or maintaining their existing status.

Perpetual Investments

Perpetual Investments
FOR THE 12-MONTH	2019 2018 CHANGE	CHANGE
PERIOD ENDED 30 JUNE	$M $M $M	%
Revenue	205.0 232.3 (27.3)	(12)
Total expenses	(125.1) (119.7) (5.3)	(4)
Proft before tax	79.9 112.5 (32.6)	(29)

PERPETUAL ANNUAL REPORT 2019 13

Business Unit Overview.

Perpetual Private.

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Mark Smith Group Executive, Perpetual Private

We are well positioned to pursue the relevant growth options that have arisen from industry dislocation.

5% 14.8bn $ Funds under advice

11% 41.2m $ Profit before tax

Steady 186.1m $ Revenue

Perpetual Private’s hallmark is the breadth of services available to clients, as we seek to meet their often complex needs at various life stages, and often across generations.

Financial performance

Perpetual Private’s total revenue was relatively steady in FY19 at $186.1 million, $0.3 million lower than in FY18. Reported profit before tax was $41.2 million, $4.9 million or 11% lower than in FY18.

Positively, Perpetual Private experienced continued new client growth within the high net worth segment and in Fordham (tax and accounting), despite the industry headwinds. The growth in average funds under advice (FUA), from stronger equity markets and positive net flows, was offset by lower non-market related revenue and a repricing of some services to align with client expectations. Perpetual Private’s market related revenue margin was 85 bps in FY19. This compared to 89 bps in FY18, and was lower due to changes in portfolio mix and legacy book repricing.

In FY19, total expenses for Perpetual Private were $144.9 million, $4.6 million or 3% higher than in FY18. The increase was primarily due to additional staff costs to support future business growth and investments in other strategic initiatives.

Perpetual Private’s FUA, as at 30 June 2019, had grown to $14.8 billion, $0.7 billion or 5% higher than FY18, primarily due to positive net flows and higher equity markets, partially offset by distributions.

Business commentary

Perpetual Private remains focused on providing advice and wealth management services through a clear, targeted segment approach to established wealthy, business owners, medical practitioners, not-for-profit organisations and native title trusts.

Our deep trustee heritage and financial advice client relationships across multiple generations position us well to pursue the relevant growth options that have arisen from the industry dislocation following the Royal Commission.

In FY19, Perpetual Private delivered stable FUA growth in our key segments. Our client advice business added 99 new high net worth clients. Fordham, which added 186 new tax and accounting clients, continues to be a lead referral source to our advice business.

In recognition of our services, client advocacy, as measured by the Net Promoter Score, lifted significantly over the year. Perpetual Private was also awarded Best Multi Strategy Fund in the Hedge Funds Rock Awards. Philanthropy and fiduciary services are a key part of Perpetual Private, and we are one of Australia’s largest managers of philanthropic funds. At the end of FY19, FUA for charitable trusts and endowment funds had grown to $2.9 billion.

Perpetual Private

Perpetual Private
FOR THE 12-MONTH	2019 2018 CHANGE	CHANGE
PERIOD ENDED 30 JUNE	$M $M $M	%
Revenue	186.1 186.4 (0.3)	(0)
Total expenses	(144.9) (140.3) (4.6)	(3)
Proft before tax	41.2 46.1 (4.9)	(11)

PERPETUAL ANNUAL REPORT 2019 15

Business Unit Overview.

Perpetual Corporate Trust.

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Richard McCarthy Group Executive, Perpetual Corporate Trust

Our ambition is to be the leading fiduciary, data management and analytics business, delivering solutions to the global banking and financial services industry.

10% 764.5bn $ Funds under administration

12% 47.7m $ Profit before tax

9% 112.9m $ Revenue

Our extensive knowledge of financial markets, our trustee heritage, broad product offerings and the expertise of our team, allow us to be the trusted partner of some of the world’s largest financial institutions.

Financial performance

Perpetual Corporate Trust had another positive year, with both Debt Markets Services and Managed Funds Services contributing to the business’ growth. In FY19, total revenues were $112.9 million, $9.6 million or 9% higher than in FY18. Reported profit before tax was $47.7 million, $5.1 million or 12% higher than in FY18.

Debt Markets Services revenue in FY19 was $61.6 million, $4.1 million or 7% higher than in FY18. The increase was primarily due to growth in Data and Analytics Solutions, including the acquisition of the RFi Analytics business in December.

Diversification is supporting growth across the Managed Funds Services business. Revenue was $51.3 million, $5.5 million or 12% higher than in FY18. Growth in the custody business was the result of continued market activity within its core commercial property and managed investment funds segments, together with higher asset prices.

Total expenses for Perpetual Corporate Trust in FY19 were $65.3 million, $4.5 million or 7% higher than in FY18. The primary drivers of the increase in expenses on FY18 were our investments in our digital strategy, including Data and Analytics Solutions growth initiatives such as the acquisition of RFi Analytics, and implementation of core technology to manage risk and deliver future efficiency gains.

At the end of FY19, total FUA had grown by 10% to $764.5 billion. Securitisation FUA in the Debt Markets Services business was $480.4 billion, an increase of $45.5 billion or 10% on FY18. In Managed Funds Services, FUA was $269.7 billion, an increase of $26.8 billion or 11% on FY18.

Business commentary

As a leading provider of corporate trustee and custody services, Perpetual Corporate Trust continued to experience growth in FY19 from its targeted client segments in Debt Markets Services (major banks, non-major banks, international banks, mutual banks and non-banks) and in Managed Funds Services (domestic high quality boutique investment managers, global asset managers of all asset classes and the Singapore real estate investment trusts market).

We retain a leadership position in our core markets and our long-term client relationships have deepened, as we have continued to provide new solutions in debt capital markets as well as attract new business from the global asset management sector.

Demonstrating this growth, during the year we won our first agriculture mandate and were appointed custodian and wholesale trustee for Impact Investment Partners’ Indigenous Infrastructure Investment Fund.

The acquisition of the RFi Analytics business – now known as Perpetual Roundtables – created the new growth engine for Data and Analytics Solutions. Our business now delivers digital solutions that provide comprehensive regulatory, risk and compliance reporting, analytics and benchmarking for the banking and financial services industry in Australia and New Zealand. In recognition of our services, Perpetual Corporate Trust’s client advocacy, as measured by the Net Promoter Score, lifted significantly over the year to a record high. Perpetual Corporate Trust was also awarded Trustee of the Year in the KangaNews Awards 2019 for the third year running.

Perpetual Corporate Trust

FOR THE 12-MONTH	2019 2018 CHANGE	CHANGE
PERIOD ENDED 30 JUNE	$M $M $M	%
Revenue	112.9 103.3 9.6	9
Total expenses	(65.3) (60.7) (4.5)	(7)
Proft before tax	47.7 42.6 5.1	12

PERPETUAL ANNUAL REPORT 2019 17

Corporate Responsibility.

We look for opportunities to build our social, environmental and financial performance in ways that embrace Perpetual’s core values and business sustainability.

Women in leadership roles increased

Perpetual has continued to positively progress its gender equality strategy. We have again been recognised by the Workplace Gender Equality Agency as an Employer of Choice for Gender Equality. In FY19, women in leadership roles increased to 36.9% (35% in FY18); our target is 40% by 2020.

Trust is earned.

We are proud of how much our brand is associated with trust and have recently refreshed our brand positioning – “Trust is earned.” By seeking to earn trust every day through every action, we look to achieve our aspirational purpose for our people, clients and the communities in which we work.

People

An engaged workforce

We understand an engaged workforce will help us to deliver sustainable business results. Our highest-ever employee engagement levels of 73%, achieved in FY18 at a time of industry and internal change, were maintained in FY19 – placing Perpetual in the top quartile of all Australian and New Zealand organisations according to Aon Hewitt research.

73%

Employee engagement – our highest score

36.9%

Women in leadership roles

Community

Commitment to reconciliation

Our focus on strengthening relationships with Aboriginal and Torres Strait Islander peoples and organisations remains important and continues through the execution of our Stretch Reconciliation Action Plan.

Stanford partnership

In partnership with the Stanford University Center on Philanthropy and Civil Society, Perpetual continues to raise awareness among not-for-profit organisations of the risks, challenges and opportunities of operating in rapidly changing times. Leaders in the charitable sector are engaged in our partnership through workshops, seminars and hosting groups to Stanford to enhance their capacity to tackle society’s toughest challenges.

$260+m Perpetual Foundation

20 years of giving

Environment

Perpetual Foundation turns 21 in Responsible investing 2019 and has grown to more than commitment $260 million. The Foundation is a vehicle for individuals wishing As an active, responsible investor, to leave a community legacy and supports the provision of non-profit the importance of environmentally research, training, governance sustainable and socially responsible workshops and organisational business practices and is committed development. to responsible investment practices.

As an active, responsible investor, Perpetual plays a key role in highlighting the importance of environmentally sustainable and socially responsible business practices and is committed to responsible investment practices.

Carbon Disclosure Project

SRI screen

Perpetual discloses its management of carbon and climate risks to the Carbon Disclosure Project annually. The long-term trend in our Scope 1 and 2 greenhouse gas emissions is declining. Our voluntary disclosure raises company-wide awareness to act on climate change, enhancing the long-term sustainability and profitability of Perpetual and better equipping ourselves for future regulatory or policy changes.

The Perpetual Ethical SRI Credit Fund invests in a diverse range of income generating, ethical and socially responsible assets. Through our Ethical SRI process, companies are evaluated on a range of criteria that are regularly enhanced. The SRI screen now excludes companies that derive a material proportion of their revenue from all types of fossil fuels, genetic engineering, cosmetic products that have been tested on animals, and pornography.

Paper reduction

To play our part in protecting the environment, we no longer print and mail to investors the Managed Investment Scheme Annual Reports for Perpetual funds (saving ~320,000 pages of paper per year).

~ 320k

Governance

ASX principles

We continue to comply with all ASX principles. Perpetual also commits to giving all shareholders timely and equal access to information concerning the company through its Continuous Disclosure Policy.

Independence of directors

Perpetual’s Board is comprised of a majority of non-executive independent directors, and in FY19, our Board comprised of 29% female non-executive directors.

29%

Female non-executive directors

Code of conduct

Perpetual’s Code of Conduct draws from, and expands on, Perpetual’s values. It applies to all directors, executives and employees and is designed to assist them in making ethical business decisions.

Pages of paper saved per year

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More details about Perpetual’s corporate responsibility can be found within the Corporate Responsibility and Sustainability Report located at

perpetual.com.au/ corporate-governance

PERPETUAL ANNUAL REPORT 2019 19

Directors’ Report for the year ended 30 June 2019

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The Directors present their report together with the consolidated financial report of Perpetual Limited (‘Perpetual’ or the ‘Company’) and its controlled entities (the ‘consolidated entity’), for the year ended 30 June 2019 and the auditor’s report thereon.

DIRECTORS

The Directors of the Company at any time during or since the end of the financial year are:

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Tony D’Aloisio AM

CHAIRMAN AND INDEPENDENT DIRECTOR BA LLB (Hons) (Age 69)

Appointed Director and Chairman-elect in December 2016 and Chairman from 31 May 2017. Mr D’Aloisio was formerly Commissioner for the Australian Securities and Investments Commission (ASIC) in 2006 and Chairman in 2007 for a four-year term. He was Chairman of the (International) Joint Forum of the Basel Committee on banking supervision from 2009-2011. Prior to joining ASIC he was Chief Executive Officer and Managing Director at the Australian Securities Exchange from 2004-2006. He is currently Chairman of IRESS Limited, a Board member of Aikenhead Centre for Medical Discovery Ltd and President of the European Capital Markets Cooperative Research Centre. He is Chairman of Perpetual’s Nominations Committee.

Mr D’Aloisio has close to 40 years’ experience in both executive and non-executive roles in commercial and Government enterprises. He has held numerous senior positions in both local and international bodies and has extensive knowledge of the financial markets sector.

Listed company directorships held during the past three financial years:

IRESS Limited (from June 2012 to present)

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Philip Bullock AO

INDEPENDENT DIRECTOR

BA MBA GAICD Dip Ed (Age 66)

Appointed Director in June 2010. Mr Bullock was formerly Vice President, Systems and Technology Group, IBM Asia Pacific, Shanghai, China. Prior to that he was Chief Executive Officer and Managing Director of IBM Australia and New Zealand. His career with IBM spanned almost 30 years in the Asia Pacific region. Mr Bullock is a Non-executive Director of Hills Limited and formerly of Healthscope Limited and CSG Limited. He also provided advice to the Federal Government, through a number of organisations, most notably as Chair of Skills Australia. He is a member of Perpetual’s Audit, Risk and Compliance Committee and People and Remuneration Committee.

Mr Bullock brings to the Board extensive management experience in Australia and Asia in technology, client relationships, marketing, talent development and government.

Listed company directorships held during the past three financial years:

Hills Limited (from June 2014 to the present)

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Sylvia Falzon

INDEPENDENT DIRECTOR

MIR (Hons) BBus FAICD SF Fin (Age 54)

Appointed Director in November 2012. Ms Falzon has worked in the financial services industry for over 27 years and during that time has held senior executive positions responsible for institutional and retail funds management businesses, both domestically and internationally. Her roles have included Head of Business Development at Aviva Investors Australia, an equity partner at Alpha Investment Management and Chief Manager International Sales & Service at National Mutual Funds Management/ AXA. Ms Falzon is currently a Non-executive Director of Regis Healthcare Limited, Premier Investments Limited, Suncorp Group Limited and Chairman of Cabrini Australia Ltd. She is Chairman of Perpetual’s People and Remuneration Committee and a member of Perpetual’s Investment Committee and Nominations Committee.

Ms Falzon brings to the Board her extensive knowledge and insight in the development of asset management businesses with a particular focus on marketing, sales/distribution, client service and operations including risk management and compliance.

Listed company directorships held during the past three financial years:

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Nancy Fox

INDEPENDENT DIRECTOR

BA JD (Law) FAICD (Age 62)

Appointed Director in September 2015. Ms Fox has more than 30 years’ experience in financial services, securitisation and risk management gained in Australia, the US and across Asia. A lawyer by training, she was Managing Director for Ambac Assurance Corporation from 2001 to 2011 and previously Managing Director of ABN Amro Australia from 1997 to 2001. She is currently Chairman of Perpetual Equity Investment Company Limited, a Non-executive Director of ING Bank Australia and Lawcover Pty Ltd and Deputy Chairman of the Board of the Taronga Conservation Society Australia. She is a member of Perpetual’s Audit, Risk and Compliance Committee and People and Remuneration Committee.

Ms Fox brings to the Board a deep knowledge of developing and leading successful financial services businesses and extensive experience with securitisation, regulatory frameworks, risk management and governance. Listed company directorships held during the past three financial years:

Perpetual Equity Investment Company Limited (from July 2017 to present)
Suncorp Group Limited (from September 2018 to present)
Premier Investments Limited (from March 2018 to present)
Regis Healthcare Limited (from September 2014 to present)
SAI Global Limited (from October 2013 to December 2016 (delisted due to company’s acquisition by private equity))

PERPETUAL ANNUAL REPORT 2019 21

Directors’ Report for the year ended 30 June 2019

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Ian Hammond

INDEPENDENT DIRECTOR

BA (Hons) FCA FCPA GAICD (Age 61)

Appointed Director in March 2015. Mr Hammond was a partner at PricewaterhouseCoopers for 26 years and during that time held a range of senior management positions including lead partner for several major financial institutions. He has previously been a member of the Australian Accounting Standards Board and represented Australia on the International Accounting Standards Board. Mr Hammond is a Non-executive Director of Suncorp Group Limited and Venues NSW and a Board Member of not-for-profit organisations including Mission Australia and Chris O’Brien Lifehouse. He is Chairman of Perpetual’s Audit, Risk and Compliance Committee and a member of Perpetual’s Investment Committee and Nominations Committee.

Mr Hammond has a deep knowledge of the financial services industry and brings to the Board expertise in financial reporting and risk management.

Listed company directorships held during the past three financial years:

Suncorp Group Limited (from October 2018 to present)

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P Craig Ueland

INDEPENDENT DIRECTOR

BA (Hons and Distinction) MBA (Hons) CFA (Age 60)

Appointed Director in September 2012. Mr Ueland was formerly President and Chief Executive Officer of Russell Investments, a global leader in multi-manager investing. He previously served as Russell’s Chief Operating Officer, Chief Financial Officer, and Managing Director of International Operations, which he led from both London and the firm’s headquarters in the US. Earlier in his career he opened and headed Russell’s first office in Australia. Mr Ueland chairs the Endowment Investment Committee for The Benevolent Society, is a Board Member of the Stanford Australia Foundation and the Supervisory Board of OneVentures Innovation and Growth Fund II. He is Chairman of Perpetual’s Investment Committee and a member of Perpetual’s Audit, Risk and Compliance Committee and Nominations Committee.

Mr Ueland brings to the Board detailed knowledge of global financial markets and the investment management industry, gleaned from more than 20 years as a senior executive of a major investment firm, along with a strong commitment to leadership development and corporate strategy development and execution.

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Rob Adams

CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR

BBus (Accounting) (Age 53)

Mr Adams joined Perpetual as Chief Executive Officer and Managing Director in September 2018.

Mr Adams is a proven financial services business leader with 30 years’ experience locally and globally across funds management, financial advice and fiduciary services.

Before Perpetual, Mr Adams was Head of Pan-Asia and a member of the Global Executive Committee of Janus Henderson where he had been for six years. Prior to that, Mr Adams was Chief Executive of Challenger Funds Management, and was previously CEO of First State Investments UK.

Mr Adams holds a Bachelor of Business degree (Accounting). He is Chairman of the Abbotsleigh Foundation.

COMPANY SECRETARY

Eleanor Padman

BA (Hons) OXON, FGIA, FCIS, GAICD

Appointed Company Secretary on 31 July 2017. Mrs Padman is also the General Counsel and General Manager of Perpetual’s Legal, Compliance and Company Secretariat teams.

Prior to joining Perpetual, Mrs Padman was General Counsel and Company Secretary of Pinnacle Investment Management Limited. Mrs Padman was previously a Special Counsel at Clayton Utz. Mrs Padman is a lawyer with over 23 years’ commercial experience gained in-house and in private practice, both in the UK and Australia. Mrs Padman has also served on a number of boards in the public, private and not-for-profit arenas.

DIRECTORS’ MEETINGS

The number of Directors’ meetings which Directors were eligible to attend (including meetings of Board Committees) and the number of meetings attended by each Director during the financial year to 30 June 2019 were:

DIRECTOR	BOARD AUDIT, RISK AND COMPLIANCE COMMITTEE (ARCC) PEOPLE AND REMUNERATION COMMITTEE (PARC) INVESTMENT COMMITTEE NOMINATIONS COMMITTEE
	ELIGIBLE TO ATTEND ATTENDED ELIGIBLE TO ATTEND ATTENDED ELIGIBLE TO ATTEND ATTENDED ELIGIBLE TO ATTEND ATTENDED ELIGIBLE TO ATTEND ATTENDED
Tony D’Aloisio Philip Bullock Sylvia Falzon Nancy Fox Ian Hammond Craig Ueland Rob Adams	20 20 – – – – – – 2 2 20 20 6 6 8 8 – – – – 20 20 – – 8 8 4 4 2 2 20 20 6 6 8 8 – – – – 20 20 6 6 – – 4 4 2 2 20 20 6 6 – – 4 4 2 2 18 18 – – – – – – – –

CORPORATE RESPONSIBILITY AND SUSTAINABILITY REPORT

Perpetual’s Corporate Responsibility and Sustainability Report, which meets the requirements of ASX Listing Rule 4.10.3, is located on the Corporate Governance page of Perpetual’s website at www.perpetual.com.au/Corporate-Governance

PRINCIPAL ACTIVITIES

The principal activities of the consolidated entity during the financial year were portfolio management; financial planning; trustee, responsible entity and compliance services; executor services; investment administration; and custody services.

PERPETUAL ANNUAL REPORT 2019 23

Directors’ Report

for the year ended 30 June 2019

REVIEW OF OPERATIONS

A review of operations is included in the Operating and Financial Review section of the Annual Report.

For the financial year to 30 June 2019, the consolidated entity reported a net profit after tax of $115.9 million compared to the net profit after tax for the financial year to 30 June 2018 of $140.2 million.

The reconciliation of net profit after tax to underlying profit after tax for the 2019 financial year is as follows:

	30 JUNE	30 JUNE
	2019	2018
	$’000	$’000
Net proft after tax attributable to equity holders of Perpetual Limited	115,929	140,227
Signifcant items after tax
Legal expenses1	–	3,479
Write back of prior year’s tax provision	–	(4,731)
Underlying proft after tax attributable to equity holders of Perpetual Limited	115,929	138,975

Prior period significant items includes $3.5 million after tax of non-recurring legal costs in connection with Perpetual Investment Management Limited (PIML) cross shareholding claim against Brickworks and Washington H Soul Pattinson (WHSP). As decided by the Perpetual Board, these costs were absorbed by the Company in order to align the client’s and the Company’s interests.

Underlying profit after tax (UPAT) attributable to equity holders of Perpetual Limited reflects an assessment of the result for the ongoing business of the consolidated entity as determined by the Board and management. UPAT has been calculated in accordance with ASIC’s Regulatory Guide 230 – Disclosing non-IFRS financial information . UPAT attributable to equity holders of Perpetual Limited has not been audited by our external auditors; however, the adjustments to net profit after tax attributable to equity holders of Perpetual Limited have been extracted from the books and records that have been audited. Underlying profit after tax attributable to equity holders of Perpetual Limited is disclosed as it is useful for investors to gain a better understanding of Perpetual’s financial results from normal operating activities.

DIVIDENDS

Dividends paid or provided by the Company to members since the end of the previous financial year were:

		TOTAL
	CENTS	AMOUNT	FRANKED1/	DATE OF
	PER SHARE	$’000	UNFRANKED	PAYMENT
Declared and paid during the fnancial year 2019
Final 2018 ordinary	140	65,204	Franked	8 Oct 2018
Interim 2019 ordinary	125	58,218	Franked	29 Mar 2019
Total		123,422
Declared after the end of the fnancial year 2019
After balance date, the Directors declared the following dividend:
Final 2019 ordinary	125	58,218	Franked	30 Sep 2019
Total		58,218

All franked dividends declared or paid during the year were franked at a tax rate of 30% and paid out of retained earnings.

The financial effect of dividends declared after year end are not reflected in the 30 June 2019 financial statements and will be recognised in subsequent financial reports.

STATE OF AFFAIRS

There were no significant changes in the state of affairs of the consolidated entity during the financial year.

EVENTS SUBSEQUENT TO REPORTING DATE

A final dividend of 125 cents per share fully franked was declared on 22 August 2019 and is to be paid on 30 September 2019.

Other than the matters noted above, the Directors are not aware of any other event or circumstance since the end of the financial year not otherwise dealt with in this report that has affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial years.

LIKELY DEVELOPMENTS

Information about the business strategies and prospects for future financial years of the consolidated entity are included in the Operating and Financial Review. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity because the information is commercially sensitive.

ENVIRONMENTAL REGULATION

The consolidated entity acts as trustee or custodian for a number of property trusts which have significant developments throughout Australia. These fiduciary operations are subject to environmental regulations under both Commonwealth and State legislation in relation to property developments. Approvals for commercial property developments are required by State planning authorities and environmental protection agencies. The licence requirements relate to air, noise, water and waste disposal. The responsible entity or manager of each of these property trusts is responsible for compliance and reporting under the government legislation.

The consolidated entity is not aware of any material non-compliance in relation to these licence requirements during the financial year.

The consolidated entity has determined that it is not required to register to report under the National Greenhouse and Energy Reporting Act 2007 , which is Commonwealth environmental legislation that imposes reporting obligations on entities that reach reporting thresholds during the financial year.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company and its controlled entities indemnify the current Directors and officers of the companies against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors of the consolidated entity, except where the liabilities arise out of conduct involving a lack of good faith. The Company and its controlled entities will meet the full amount of any such liabilities, including costs and expenses. The auditor of the Company is in no way indemnified out of the assets of the Company.

INSURANCE

In accordance with the provisions of the Corporations Act 2001 , the Company has a directors and officers’ liability policy which covers all Directors and officers of the consolidated entity. The terms of the policy specifically prohibit disclosure of details of the amount of the insurance cover and the premium paid.

CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR’S AND CHIEF FINANCIAL OFFICER’S DECLARATION

The CEO and Managing Director, and the CFO, declared in writing to the Board, in accordance with section 295A of the Corporations Act 2001 , that the financial records of the Company for the financial year have been properly maintained, and that the Company’s financial report for the year ended 30 June 2019 complies with accounting standards and presents a true and fair view of the Company’s financial condition and operational results. This statement is required annually.

PERPETUAL ANNUAL REPORT 2019 25

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

Dear Shareholder

On behalf of your Board, it is my pleasure to present our Remuneration Report for the financial year ended 30 June 2019 (FY19). Our Remuneration Report provides our shareholders and other stakeholders with a thorough and transparent explanation of how the incentive outcomes awarded for FY19 align with our performance. This performance is assessed against both financial and non-financial measures within the context of our risk management framework and our remuneration principles.

LEADERSHIP

FY19 has been a year of change at Perpetual. We were delighted to welcome Mr Rob Adams, who commenced as our new CEO on 24 September 2018. Rob’s appointment brought about a refreshed executive team. Chris Green was appointed Chief Financial Officer following the completion of his time as interim CEO; Richard McCarthy was promoted to Group Executive, Perpetual Corporate Trust; and Ms Sam Mosse joined Perpetual to take on the newly created role of Chief Risk Officer reporting directly to our CEO. The remuneration structure of these appointments is outlined in further detail in Section 7 of this report.

PERFORMANCE

The Perpetual Board, through its People and Remuneration Committee, has assessed FY19 performance against a balanced scorecard of short and long-term financial and non-financial goals with a clear expectation to deliver sustainable shareholder returns over the medium to long term. In assessing executive performance, the Board has reviewed the risk and compliance performance of the organisation led by its Executives. This process is explained in more detail in Section 5.

As reported in the Operating and Financial Review, FY19 was a challenging year that has delivered mixed results across our three divisions. Whilst good progress and above plan results were achieved on some of the growth and client measures, other measures (including short-term financial) were below target. Consequently, this mixed result has had a direct impact on variable remuneration outcomes throughout Perpetual, especially for our Executives.

REMUNERATION OUTCOMES

Given annual key performance targets were, on aggregate, below target, all Executives (including the CEO) have received an award for FY19 ranging between 50% and 75% of target.

The final long-term incentive awarded in October 2015 under our prior Executive incentive structure was due to vest in October 2018; however, neither the relative Total Shareholder Return (TSR) or Earnings Per Share (EPS) performance hurdles were achieved. Consequently, these Performance rights did not vest and lapsed in full.

In relation to fixed remuneration in FY20 there will be no Fixed Pay increases planned for the Board, CEO, Group Executives and most senior leaders in Perpetual. Perpetual employs almost 1,000 employees. Whilst the Remuneration Report only covers Key Management Personnel, we do acknowledge the many people in our organisation for their daily contribution to delivering quality client outcomes. Consequently, the Board approved a fixed salary increase budget of 2.5% for those earning $150,000 or less per annum.

CHANGES TO REMUNERATION STRUCTURES

The People and Remuneration Committee has a strong focus on the relationship between business performance, risk management and remuneration, and periodically reviews the Executive remuneration structure to ensure it remains appropriate. As a result of last year’s review, the variable equity component for our new CEO was modified to include an additional longer-term absolute TSR performance hurdle that applies to half of any allocated equity under the variable incentive plan.

The Board determined that the executive remuneration framework will operate most effectively if all participants are aligned to a structure that contains consistent measures and hurdles. Effective 1 July 2019, each Executive will also be assessed against the absolute TSR performance hurdle, ensuring a consistent approach to remuneration with that of our CEO. Further details about this and other changes can be found in Section 1.2 of this report.

Thank you for taking the time to read our Remuneration Report and we welcome your feedback.

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Sylvia Falzon Chairman, People and Remuneration Committee

The Remuneration Report is designed to provide shareholders with an understanding of Perpetual’s remuneration policies and the link between our remuneration approach and Perpetual’s performance, particularly for our Key Management Personnel (KMP) as defined under the Corporations Act 2001 . Individual remuneration is provided for Perpetual’s Non-executive Directors (NED’s), the CEO and Executives (current and former).

This report has been prepared in accordance with section 300A of the Corporations Act 2001 . The information provided in this report has been audited as required by section 308(3C) of the Corporations Act 2001 and forms part of the Directors’ Report.

1.	KeyManagement Personnel	27
2.	Governance	29
3.	Ourpeople	31
4.	Our remunerationphilosophyand structure	33
5.	Managingrisk within Perpetual	35
6.	AligningPerpetual Group performance and reward	37
7.	Variable remuneration	42
8.	Data disclosures – Executives	48
9.	Non-executive Director remuneration	56
10.	Keyterms	59

1. KEY MANAGEMENT PERSONNEL

1.1 Key Management Personnel (KMP)

The table below summarises Perpetual’s current and former KMP for FY19:

NAME	POSITION	TERM AS KMP IN FY19
CEO and Managing Director
Rob Adams1	Chief Executive Offcer and ManagingDirector	Commenced 24 September 2018
Current Executives
Chris Green2	Chief Financial Offcer	Full year
David Lane	Group Executive, Perpetual Investments	Full year
Richard McCarthy3	Group Executive, Perpetual Corporate Trust	Commenced 15 October 2018
Sam Mosse4	Chief Risk Offcer	Commenced 18 February 2019
Rebecca Nash	Group Executive, People and Culture	Full year
Kylie Smith5	Group Executive, Marketing and Communications	Full year
Mark Smith	GroupExecutive,Perpetual Private	Fullyear
Former Executives
Gillian Larkins	Chief Financial Offcer	Ceased 12 October 2018
Current Non-executive Directors
Tony D’Aloisio	Chairman	Full year
Philip Bullock	Independent Director	Full year
Sylvia Falzon	Independent Director	Full year
Nancy Fox	Independent Director	Full year
Ian Hammond	Independent Director	Full year
CraigUeland	Independent Director	Fullyear

Effective 24 September 2018 Mr Adams joined Perpetual as Chief Executive Officer (CEO) and Managing Director.
Mr Green joined Perpetual in July 2006 and held the role of Group Executive, Perpetual Corporate Trust from 2008 to 2018. Mr Green was Interim CEO from 9 June to 24 September 2018, assisting during the transition period until Mr Adams’ appointment. Effective 15 October 2018 Mr Green was appointed Chief Financial Officer.
Mr McCarthy joined Perpetual in August 2007. On 15 October 2018, Mr McCarthy was seconded from the Perpetual Corporate Trust leadership team to the position of Acting Group Executive, Perpetual Corporate Trust. Following a rigorous recruitment process, effective 1 December 2018 Mr McCarthy was promoted to the position of Group Executive, Perpetual Corporate Trust.
Ms Mosse joined Perpetual on 18 February 2019 in the newly created role of Chief Risk Officer.
Following six years with Perpetual, Ms Smith resigned as Group Executive, Marketing and Communications effective 30 June 2019.

PERPETUAL ANNUAL REPORT 2019 27

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

1.2 Summary of CEO and Group Executive remuneration arrangements

Perpetual has implemented a transparent remuneration model that is aligned to our business strategy and underpins our ability to attract and retain talented executives. The Board believes in alignment between performance incentives and long-term value creation for our clients and shareholders, with this being delivered through the adoption of a balanced set of performance measures and a majority weighting of incentives (if awarded) towards equity.

CEO remuneration

Effective 24 September 2018, Mr Rob Adams joined Perpetual as the new CEO and Managing Director. Mr Adams’ remuneration arrangements, announced to the market in May 2018, are largely in line with those of his predecessor, with Perpetual making some key changes to the variable incentive component. A decision was taken by the Board to modify his remuneration to include a longer-term hurdle which applies to half of the allocated equity component of the variable incentive with a reduction in the cash incentive.

The introduction of the additional performance hurdle on a portion of the equity award is designed to further strengthen alignment with the longer-term shareholder experience. There is also a higher proportion of the overall award payable in equity. Stretch is built into scorecards to ensure that payments awarded under the plan are commensurate with the overall performance of the Perpetual Group and value delivered to shareholders. The maximum opportunity under the variable incentive remains at 175% of target.

Full details of Mr Adams’ variable remuneration arrangements are in Section 7 of this report.

CEO Sign-on Long-Term Incentive

As previously disclosed to the market, on 24 September 2018, a sign-on equity incentive was granted to Mr Adams as Restricted shares with a face value of $900,000. Provided Mr Adams does not give notice of resignation and is not terminated for cause before the relevant vesting date, half of the sign-on incentive (Restricted shares worth $450,000) will vest on the second anniversary of his commencement date (24 September 2020) and the balance (Restricted shares worth $450,000) will vest on the fourth anniversary of his commencement date (24 September 2022).

Group Executive remuneration

Effective 1 July 2019 our Group Executives’ variable remuneration arrangements were aligned with those of the CEO. The Board believes the Executive remuneration framework will operate most effectively if all participants have consistent measures and hurdles.

Group Executives will transition to a variable incentive structure with the following key changes:

Absolute Total Shareholder Return (TSR) hurdle

an absolute Total Shareholder Return hurdle on half of the equity allocated; and
a three- and four-year vesting hurdle of 7-10% Compound Annual Growth Rate.

An uplift in equity incentive targets for Group Executives only (excludes CEO)

Given the introduction of the absolute TSR hurdle, Executives’ target equity remuneration has been increased as a result of the vesting uncertainty introduced. In a similar way, Executives’ potential remuneration was reduced when there was no additional hurdle in place at the time when the Variable Incentive Plan was introduced in FY17.

Calibration scale removal

The calibration scale, introduced in FY17 as a design feature of the Variable Incentive Plan, created a foundation to drive greater differentiation of incentive outcomes for Executives where their performance was either higher or lower than target (100%) achievement. In practice, the Board assesses overall performance for each Executive, therefore it determined the calibration scale was no longer necessary.

Further information on current Group Executive FY19 remuneration arrangements is in Section 7 of this report.

Fixed remuneration

In FY19, Mr Green, previously Group Executive Perpetual Corporate Trust, was appointed Chief Financial Officer, and Mr McCarthy was promoted into a KMP role. Both Executives received remuneration increases commensurate with their new positions. For all other Group Executives there were no remuneration increases for FY19 and it is not anticipated that there will be any increases for FY20.

There were no increases in Board or Board Committee fees.

2. GOVERNANCE

2.1 The People and Remuneration Committee

The People and Remuneration Committee (PARC) is a committee of the Board and is comprised of independent Non-executive Directors. Operating under delegated authority from the Board, the Committee evaluates and monitors people and remuneration practices to ensure that the performance of Perpetual is optimised with an appropriate level of governance while balancing the interests of shareholders, clients and employees.

The PARC’s terms of reference are available on our website (www.perpetual.com.au) and are summarised as follows:

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Review
Oversee succession and
human resources career planning
management policy for the CEO and
and practices, Managing Director,
including overall Group Executives
remuneration and other Establish and
policy key roles maintain a process for
Set the Group’s
executive performance
approach to Diversity
planning and review
and Inclusion,
to encourage superior
and Corporate Social
performance and a
Responsibility
strong risk culture
Oversee Oversee effective
employee
workplace health
engagement
and safety (WHS)
at all levels
regulations
PARC
Delegated authority
Ensure that from Perpetual
remuneration Superannuation Limited
disclosure Board to oversee
requirements remuneration policies
are met and practices
Review and
recommend Board
Ensure that
there are necessary Review and remuneration as well
human resources recommend CEO as Group Executive
in place to meet and Managing remuneration in line
Group objectives Director’s with performance
performance, which includes
remuneration assessment of risk
and contractual management
arrangements to criteria
the Board
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The terms of reference are intentionally broad, encompassing remuneration as well as the key elements of Perpetual’s people strategy. This enables the PARC to focus on ensuring high quality talent management, succession planning and leadership development at all levels of Perpetual.

The PARC met eight times during the year, with attendance details set out on page 23 of this Annual Report. A standing invitation exists to all Directors to attend PARC meetings. At the PARC’s invitation, the CEO and Managing Director and the Group Executive, People and Culture attended meetings, except where matters associated with their own performance evaluation, development and remuneration were considered.

The PARC considers advice and views from those invited to attend meetings and draws on services from a range of external sources, including remuneration advisers.

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2.2 Use of external advisers

Since 2011, the PARC has used PricewaterhouseCoopers (PwC) to provide specialist advice on Executive remuneration and other Group-wide remuneration matters. During the year, PwC provided limited general information to the PARC in respect of Executive and Non-executive Director remuneration practices and trends. This information did not include any specific recommendations in relation to the remuneration or fees paid to KMP.

2.3 Corporate Social Responsibility

Our commitment

Perpetual’s Board and management have a long-standing commitment to good corporate governance. At Perpetual, we take advantage of opportunities to build our social, environmental and financial performance in ways that reflect our core values and enhance business sustainability. Indeed, success in Perpetual’s core business, the management of people’s money and the safekeeping of assets and securities, relies on this commitment.

We draw on our people for their experience, knowledge and expertise in investing, governance, financial advice and trusteeship to contribute positively to our clients and the community. We focus on activities where we can add the most value to society while minimising our environmental impact.

We are committed to doing our part to enrich our community by:

having the highest standards of corporate governance and business probity;
investing responsibly and encouraging sustainable business practices; and
contributing time and money to charities which we know have a track record of delivering on their promises.

Some examples of how we are achieving these goals include:

signatory to the United Nations Principles for Responsible Investment;
Tax Transparency Code;
Staff Giving Program; and
facilitating $11 million in philanthropic funds across 261 endowments via the Perpetual Foundation.

In addition, the Board considers that its practices comply, and have complied throughout the year, with the ASX’s Corporate Governance Council’s Revised Governance Principles and Recommendations and is committed to transparent reporting on Sustainability risks including how the Executive and Board are mitigating these risks in pursuit of sustainable business performance.

The Corporate Responsibility and Sustainability Report

The Corporate Responsibility and Sustainability Report includes an overview of Perpetual’s sustainability philosophy, the material risks that have been identified using the Perpetual risk management framework and relevant information about the associated strategies implemented to mitigate these risks. The Corporate Responsibility and Sustainability Report also includes:

An overview of Perpetual’s philosophy as it relates to corporate governance and how Perpetual complies with the ASX Corporate Governance Principles and Recommendations, 3[rd] edition (ASX Principles).
Perpetual’s approach to mitigating Environmental, Social and Governance (ESG) risks identified as material within the Perpetual Risk Appetite Statement (RAS), which is part of Perpetual’s Risk Management Framework. This includes social sustainability, human capital and community risks.
A summary of governance structures at Perpetual.

The Corporate Responsibility and Sustainability Report is approved by the Board and can be found on Perpetual’s website at www.perpetual.com.au/Corporate-Governance.

3. OUR PEOPLE

Our people strategy, a key enabler of our business strategy, is focused on attracting and retaining the best talent with a promise of providing the opportunity to work with great people on meaningful work. The goal of the people strategy is to enable business growth by building the capabilities we need for the future and creating an environment in which our people can thrive.

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OUR PEOPLE PROMISE OUR
VALUES
• The best at what we do
• Leaders in our chosen markets
• Be part of a winning team
LEADING
EXPERTISE • Great peer network• Known for our expertise exceptional Delivering
Leaders in our outcomes
chosen markets
TRUSTED • Focus on
AND RESPECTED THRIVE professional
BRAND Be challenged and and personal
development
Wisdom and depth of experience PERPETUAL supported to grow • Flexible work
practices to achieve
• 130 year history… Great people, personal and
• Independent meaningful work • Challenging, professional goals
• Consistent, respected performance supportive and inclusive Doing what’sright
• Australia’s largest environment that
public philanthropy promotes diversity
business • Focus on health and
STRONG lifestyle to support
PARTNERSHIPS MAKE A wellbeing
DIFFERENCE
Heritage of deep
long-standing Empowered to
relationships be successful
• Four generations
of clients
• Partner with clients as
a trusted adviser and • For ‘Nimbleness’ due to size
their lives • ‘Big enough, small enough’…
not just a number
• Working together • Access to decision makers Succeedingtogether
• Broad, varied and
meaningful roles
G
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I
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T
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P P
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3.1 Diversity and Inclusion

At Perpetual, we believe that building diverse and inclusive teams is the right thing to do, will enable growth and will deliver better outcomes for our people, clients and shareholders.

The Perpetual Board is responsible for the initial approval and any subsequent amendments to Perpetual’s Diversity Policy, and PARC has oversight responsibility of this policy.

Our Diversity and Inclusion strategy is developed by our Diversity Council. The Perpetual Limited Executive Committee and PARC regularly review the progress of the Diversity and Inclusion strategy, as well as diversity metrics at the organisation and business unit level. For example:

gender equality metrics (such as: women in senior leadership metrics, gender profiling at all levels, gender representation in talent and development programs, mobility and turnover);
flexibility utilisation; and
gender pay gap analysis.

The Board will also review the Diversity and Inclusion strategy at least annually, including the objectives set for achieving gender diversity and progress towards achieving them.

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Key Diversity and Inclusion achievements in FY19 are outlined below.

DIVERSITY AND INCLUSION KEY ACHIEVEMENTS FY19

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FLEXIBILITY

Employees empowered with control over where, when, and how they deliver optimal business outcomes

✔ 86% of people feel that their leader promotes and encourages flexibility
✔ 93% of our people feel that they have the flexibility to manage work and caring responsibilities

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GENDER EQUALITY Building gender balanced leadership for Perpetual to deliver better business results

CULTURAL DIVERSITY Building relationships, respect and opportunity for Aboriginal and Torres Strait Islander peoples

✔ 97% of our people believe that sex-based harassment is not tolerated at Perpetual
✔ We are working towards a 40% Women in Leadership target by 2020
✔ Hosted 100% Human at Work Australasian Gathering – Michael Combs from Career Trackers spoke on Indigenous leadership
✔ Continued commitment to Jawun: five secondees in 2019
✔ Progress towards delivery of Stretch Reconciliation Action Plan (2016–2019)
✔ 83% of our people support Perpetual’s ✔ Progress towards focus on increasing delivery of Stretch women in leadership Reconciliation Action
✔ Achieved 50% gender Plan (2016–2019) balance in Senior ✔ Celebrated National Leadership Team high Reconciliation Week potential cohort and Harmony day
✔ Named WGEA Employer ✔ Commitment to of Choice for Gender education and Equality celebration of NAIDOC week
✔ Gender Pay Gap review and actions complete
✔ Continued targeted female talent development – Women in Banking and Finance Mentoring for Success
✔ Held Women in Asset Management Lunch for female analysts and fund managers

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INCLUSION Enabling our people to contribute in their distinctive way and recognising diversity of thought

✔ Celebration of Perpetual’s ‘Pride Day’
✔ Continuation of our Diversity and Inclusion Council

3.2 Employee benefits

We offer our employees a suite of benefits that are relevant to what we stand for as an organisation, with our employees electing to utilise what they each find most valuable. At Perpetual, we embrace the provision of health and wellness programs for our employees through our wealth, health and lifestyle benefits outlined below.

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Employee share grant plan Employee banking offer
Targeted superannuation increase Salary continuance insurance
$ to 12% by 2020 Death and TPD insurance
Superannuation on parental leave Salary packaging
Free financial health check Talent Referral Incentive Plan
WEALTH Discounted financial advice Investment employee offers
Employee health checks Mental health program
Flu vaccinations Employee assistance programs
HCF Corporate health plans Healthy workplace snacks
HEALTH
Contribution leave Education assistance
Purchased leave Paid parental leave
Flexible working Parental return to work bonus
Shopping and lifestyle discounts Sabbatical leave
LIFESTYLE
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In FY19, management arranged for an independent review of Perpetual’s WHS policy and practices. This review confirmed Perpetual’s compliance with relevant legislation and adoption of robust policies and practices while also suggesting some areas for improvement. PARC had oversight of the review and received a WHS update at each meeting.

4. OUR REMUNERATION PHILOSOPHY AND STRUCTURE

Perpetual’s remuneration philosophy is designed to enable the achievement of our business strategy, ensure that remuneration outcomes are aligned with our shareholders’ and clients’ best interests and are market competitive. To that end, we have created a set of guiding principles that direct our remuneration approach.

4.1 Remuneration principles

Our remuneration policy is designed around six guiding principles, which aim to:

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Facilitate the
Attract, motivate meaningful
Balance value creation
and retain the accumulation of
1 desired talent within 2 for shareholders, 3 Perpetual shares
clients and employees
Perpetual that drives an
ownership mentality
Be supported
by a governance
Be simple, transparent
Embed sound framework that avoids
4 risk management 5 and easily understood 6 conflict of interest and
and administered
ensures that proper
controls are in place
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4.2 Remuneration policy and practice

Perpetual has implemented a transparent remuneration model that is aligned to our business strategy and supports the attraction of talent to the business. The remuneration structure for Perpetual Executives is designed to drive our strategy, reflect the importance of sound risk management and deliver outcomes aligned to Perpetual’s shareholders and clients. The core elements of Perpetual’s remuneration strategy in FY19 include both fixed and variable incentives as follows:

Fixed	Fixed remuneration	Set in consideration of the total target remuneration package and the desired remuneration mix for the role, taking into account the remuneration of market peers, internal relativities and the skill and expertise brought to the role. Calculated on a “total cost to company” basis, consisting of cash salary, superannuation, packaged employee benefts and associated fringe benefts tax(FBT).	Paid as cash
Variable Incentive (if payable)	Cash	Each participant has a Variable Incentive target, expressed as a defned $ target amount. Annual Variable Incentive outcomes are linked to performance against key business metrics directly linked to our strategy. The Variable Incentive is paid in both cash and equity. Equity must be retained for at least four years. For Group Executives, this is frst as Share rights, then as Restricted shares. In addition, the CEO has a portion of his Equity in the form of Performance rights subject to a longer-term performance hurdle of absolute total shareholder return. The emphasis on equity ensures that Variable Incentive outcomes are linked to the shareholders’ experience through reinforcing long-term ownership of Perpetual shares.
	Equity1		Awarded as equity

From FY20, the CEO and Group Executives will operate under a consistent equity structure with vesting subject to a long-term performance hurdle on a portion of any allocated equity.

Fixed remuneration increases for FY20

Following a review of market fixed remuneration increase trends, Perpetual’s average fixed remuneration budget increase across the organisation for FY20 was 2.5% for employees whose full-time equivalent fixed remuneration is at or below $150,000 per annum. For those employees whose fixed remuneration is above $150,000, including the CEO and Group Executives, no budget increase was provided.

Asset Manager remuneration

Asset Manager (portfolio manager and investment analyst) remuneration policies align to Perpetual’s performance-based remuneration philosophy and principles. Perpetual seeks to align remuneration outcomes to long-term value creation for shareholders and clients.

All Asset Managers have a portion of their variable remuneration determined by outcomes delivered against investment performance targets, which are generally assessed over one, two and three years. Portfolio managers managing mature funds and those who are growing businesses may have a portion of their remuneration aligned to other business measures. For example, Perpetual’s Australian and Global Equities Portfolio Managers have their long-term incentives determined through a revenue share that provides a team-based goal and focus whilst also aligning a portion of their remuneration directly to shareholder outcomes.

All Asset Managers have a portion of their variable remuneration awarded as deferred or long-term incentives every year. These awards vest over a range of timeframes; principally after three years. This cycle of rolling awards ensures continuous retention arrangements are in place and avoids cliff vesting events. For most Asset Managers, deferred incentives can be invested into either Perpetual equity or units in their own funds, further aligning Asset Managers to client outcomes and shareholder interests.

In FY19, our Equities asset management team’s total variable reward outcomes are expected to be down approximately 20% on FY18.

General employee remuneration

Employees receive fixed pay, superannuation and are eligible to receive a short-term incentive.

Performance against a Company scorecard determines the size of the bonus pool for the financial year. Relative divisional performance against divisional scorecards is one of a number of factors that determine the distribution of the bonus pool to each division. An individual’s performance rating is then determined based on performance against objectives articulated at the commencement of the performance year. An individual’s STI outcome is based on this performance rating, which is reflective of performance against targets in an individual scorecard, delivery of goals against Perpetual’s ‘The Way We Work’ behavioural framework and an employee’s approach to the management of risk.

Senior employees are eligible to participate in a long-term incentive plan. All other employees are eligible to participate in the One Perpetual Share Plan whereby eligible employees can be awarded annual grants of up to $1,000 of Perpetual shares subject to Perpetual meeting its profit target. Whilst performance has been challenging in FY19, the Board decided to allocate $500 of Perpetual shares to eligible employees in recognition of their contribution and to continue to align employee and shareholder interests. In addition, Perpetual offers a comprehensive range of employee benefits across wealth, health and lifestyle categories.

5. MANAGING RISK WITHIN PERPETUAL

Risk management continues to be a fundamental focus within our business, with the Perpetual Board having the responsibility and commitment to ensure that Perpetual has a sound risk management framework in place. Perpetual’s Risk Group is a centralised corporate function, managed by Ms Sam Mosse, Chief Risk Officer, who reports to the CEO. The Risk Group has developed risk measurement systems and practices that are utilised when determining “at risk” remuneration. To this effect, risk management is a key performance metric.

Risk and behavioural performance

The Board, PARC and management have a range of mechanisms available to adjust remuneration and incentive outcomes to reflect behavioural, risk or compliance outcomes (both strong and poor) at a Group, divisional and individual level.

The table below summarises the range of mechanisms available and their intended operation.

MECHANISM	DESCRIPTION/INTENTION OF THE MECHANISM
Risk dashboards (apply at	Incentive funding can be adjusted (upwards or downwards) following a combined Audit,
a Group or divisional level)	Risk and Compliance Committee (ARCC) and PARC review of Group and divisional risk
	“dashboards”, which are produced by the Risk and Internal Audit functions throughout the year as well as leading into fnancial year-end.
Behavioural ratings – The	Behavioural assessments exist for all employees at Perpetual. The behaviours component of
Way We Work and Risk goals	the scorecard effectively moderates employee performance outcomes. Behavioural ratings
(apply to all incentive plans)	are provided across a four-point scale (Red, Amber, Green, Blue) and can result in either
	upward (Blue rating) or downward (Amber, Red) adjustments to performance ratings and
	reward outcomes. Additionally, for the last four years including FY19, consistent risk goals
	have been agreed and cascaded to all employees that participate in the Group STI plan and in FY19 Perpetual introduced a specifc risk rating for all employees.
Malus provisions (apply to	Allow for the Board to adjust or lapse any unvested incentive awards where, in the opinion of
all term incentive plans)	the Board, the participant has acted fraudulently, dishonestly, has breached their obligations
	to the Group, where outcomes have been misstated, or where the Board determines at its sole
	discretion that outcomes are inappropriate.
Clawback provisions (apply to	Allow for the Board to reclaim (or “claw back”) vested incentives where, in the opinion of
all deferred STI and long-term	the Board, vesting occurred as a result of fraud, dishonesty, a breach of obligations or where
incentive plans)	outcomes have been misstated. This applies to both current and former employees.
Board discretion	Overriding the above mechanisms, the Board, and in some instances management, has
(all incentive plans)	discretion to adjust proposed incentive or vesting outcomes, subject to the applicable rules
	governing each incentive plan. The discretion to vary incentive outcomes from the agreed
	formulas range from absolute unfettered discretions to more limited discretions which may only be applied in specifc circumstances.

In addition to the above mechanisms, Perpetual undertakes the following practices:

performing scenario testing on potential outcomes under new incentive plans;
reviewing the alignment between proposed remuneration outcomes and performance achievement for incentive plans on an annual basis; and
deferring a significant portion of variable remuneration into equity to align remuneration outcomes with longer-term shareholder value.

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Link between risk and reward

An employee’s approach to managing risk is a key factor when considering an employee’s yearly performance. Risk management performance measures are overlayed in employee scorecards as per the graphic over the page. These measures are considered when assessing overall performance and incentive payments.

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TO BE ELIGIBLE FOR A VARIABLE INCENTIVE, ALL EMPLOYEES MUST MEET MINIMUM RISK CRITERIA
Embeds appropriate Applies the Risk Escalates issues Completes
risk behaviours Appetite Statement to Risk within compliance tasks
in all endeavours in decision-making five days on time and
and effectively processes accurately (training
balances risk with and management
opportunity of obligations)
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FY19 risk performance

Overall risk performance within Perpetual has been positive with Executives across the business actively engaging in risk discussions and having a culture of high risk awareness. Perpetual will continue to evaluate the effectiveness of its risk management framework and ensure that performance and reward outcomes of Executives and employees are reflective of their, and the Company’s, performance in this regard.

Minimum shareholding guideline

A minimum shareholding guideline applies to Executives. The purpose of this guideline is to strengthen the alignment between Executives’ and shareholders’ interests related to the long-term performance of Perpetual. Under this guideline, Executives are expected to establish and hold a minimum shareholding to the value of:

CEO and Managing Director:
1.5 times fixed remuneration
Group Executives: 0.5 times fixed remuneration

The value of each vested Restricted Share still held under restriction for the Executive is treated as being equal to 50% of actual value, as this represents the value of the share in the hands of the Executive after allowing for tax. Unvested shares or rights do not count towards the target holding.

A five-year transition period, from the date of appointment to a KMP role, gives Executives reasonable time to meet their shareholding guideline. Where the guideline is not met after the required time period, Executives may be restricted from trading vested shares.

As at 30 June 2019, progress towards the minimum shareholding target for each Executive was as follows:

	VALUE OF ELIGIBLE	VALUE OF MINIMUM	TARGET DATE
	SHAREHOLDINGS AS	SHAREHOLDING	TO MEET MINIMUM
	AT 30 JUNE 2019 1	GUIDELINE	SHAREHOLDING
	$	$	GUIDELINE	GUIDELINE MET 2
Executives
R Adams	77,510	1,953,945	24 September 2023
C Green	379,188	325,000	1 October 2013	✔
D Lane	149,487	276,068	10 April 2022
R McCarthy	85,958	215,000	15 October 2023
S Mosse	–	247,500	18 February 2024
R Nash	391,607	312,045	15 August 2017	✔
K Smith3	174,113	194,868	1 September 2021
M Smith	370,403	315,740	19 November 2017	✔

Value is calculated through reference to the closing Perpetual share price at 28 June 2019 of $42.24.
Executives have a five-year transition period to meet their shareholding requirement.
The minimum shareholding guideline is no longer relevant for Ms Smith who resigned as Group Executive, Marketing and Communications effective 30 June 2019.

Hedging and share trading policy

Consistent with Corporations Act obligations, Perpetual’s Share Trading Policy prohibits employees and Directors from entering into hedging arrangements in relation to Perpetual securities. Perpetual employees and Directors cannot trade in financial products issued over Perpetual securities by third parties or trade in any associated products which limit the economic risk of holding Perpetual securities. Share dealing can only take place during agreed trading windows throughout the year and is subject to certain approvals (as set out below).

Share dealing approval

Effective 1 July 2018, Perpetual issued a new policy for trading in Perpetual Securities which stipulates certain trading black-out periods and requires all employees to seek pre-trade approval via an automated platform. A copy of the policy was lodged with the ASX and appears on Perpetual’s website at www.perpetual.com.au/about/corporate-governance/informed-market-and-share-dealings

6. ALIGNING PERPETUAL GROUP PERFORMANCE AND REWARD

6.1 Setting performance expectations

Perpetual’s purpose is enduring prosperity. For our shareholders, this means pursuing a strategy that is focused on delivering long-term sustainable value. In our view, this is best achieved by having highly engaged people creating superior client outcomes, which in turn delivers underlying earnings growth for shareholders. Successful delivery of the strategy is defined by clear client, people and financial measures which link our annual targets with our long-term strategic objectives; balancing short-term shareholder outcomes with the necessary investments for long-term sustainable growth.

As in prior years, in FY19 we adopted a balanced scorecard to measure and drive our performance. The scorecard was weighted 60% to financial measures and 40% to non-financial measures that are designed to deliver value in the current and future years, within appropriate risk tolerance levels. We set our balanced scorecard each year based on the business and financial plan approved by the Board. The business plan for FY19 was developed through a bottom-up build of strategic initiatives which support the longer-term strategy. The scorecard derived from the plan is tested with reference to a number of external market factors and in consideration of year on year progress against our strategic goals to ensure appropriate stretch is reflected in the targets for each measure.

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6.2 Five-year Group performance

One of Perpetual’s guiding principles for remuneration is that the remuneration structure should balance value creation for our shareholders, clients and employees.

This section demonstrates the strong alignment between Perpetual Group performance and remuneration outcomes for Executives over the last five years.

The table below shows Perpetual’s five-year performance across a range of metrics and corresponding incentive outcomes. The movement in the variable pay of the CEO and Group Executives, in our view, has been fair and reasonable compared to Perpetual Group performance and resulting benefits to shareholders over the past five years. This is particularly apparent in FY19, with lower variable incentive outcomes (as a percentage of target), reflecting the Group’s mixed balanced scorecard performance.

		30 JUNE	30 JUNE	30 JUNE	30 JUNE	30 JUNE
		2015	2016	2017	2018	2019
Net proft after tax reported	$m	122.5	132.0	137.3	140.2	115.9
Basic earnings per share – NPAT	cps	274	291	300	305	251
Total dividends paid/payable per ordinary share1	cps	240	255	265	275	250
Closing share price	$	48.4	41.1	55.9	41.6	42.2
One-year TSR	%	7	-10	42	-21	8
Three-year CAGR TSR	%	32	10	10	-1	7
Four-year CAGR TSR	%	22	20	16	2	2
Five-year CAGR TSR	%	15	15	23	8	3
CEO – Variable Incentive as % of target2 Group Executives – Average Variable Incentive as % of target	% %	103 108	107 105	79 91	34 76	65 56

Dividends paid are for the respective financial year.
CEO variable incentive outcomes for FY15 – FY18 are for Perpetual’s previous CEO, Mr Lloyd. Mr Lloyd ceased employment with Perpetual in FY18, and therefore FY18 represents variable incentive cash only given the forfeiture of variable incentive equity for FY18. FY19 variable incentive outcomes are for Mr Adams.

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SHAREHOLDERS CLIENTS PEOPLE
NPAT ($M) DPS (cps) 4-YEAR CAGR TSR [1] NPS [2] ENGAGEMENT
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39
123 132 137 [140] 265 275 22% 20% 33 36 34 73 73
116
71
255 16% 26
250
69
240
66
2% 2%
2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
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Note:

Four-year CAGR TSR disclosed to align with the performance hurdle period of the CEO and Group Executives from FY20.
NPS FY18 has been rebased from 39 to 34 to reflect new target markets.

Performance commentary

FY19 NPAT was 17% lower than FY18. This outcome was driven predominantly by lower revenues in Perpetual Investments. Despite higher equity markets and the successful launch of the Perpetual Credit Income Trust, net outflows and prior period distributions resulted in lower average funds under management during the year. This 17% decrease in FY19 NPAT compares to 2% growth in FY18.
Perpetual’s dividend per share has moved broadly in line with NPAT and with the Board’s policy to pay within a range of 80-100% of annualised NPAT. The decrease in the current year reflects the lower NPAT result.
Shareholder returns have experienced a mixed result over the last five years. On an absolute basis the one-year TSR of 8% compared with negative 21% in the prior year reflects the decline in the share price over the course of FY18.
The four-year TSR CAGR remains stable at 2%.
Net Promoter Score (NPS) was adopted as an organisation-wide client advocacy measure in FY13. It continues to be a critical measure, given our client-driven business and our long-term strategy. NPS targets are re-baselined each year. This includes adding and/or removing segments based on our strategy.
The continued positive trends and FY19 results in our employee and client advocacy measures, and the continued investments in the business, position Perpetual well for the future.
Our strategy recognises our people are key to our success. In FY19, we maintained our strong engagement score at 73% which positions Perpetual in the top quartile of Australian companies[ 1] .

6.3 Measuring performance in FY19

Under our Variable Incentive plans, it is critical our balanced scorecard evaluates current and future value creation with a risk management overlay. This section explains the performance outcomes for FY19.

Pay for performance

The Board’s consideration of the outcomes for the year against a balanced set of key performance targets, detailed over the page, resulted in Group Executives achieving an average of 56% of Variable Incentive targets. This outcome correlates with Company performance, and shows the strong link between Perpetual’s Company performance, incentive plans and reward outcomes. For FY19, The CEO received 65% of his Variable Incentive target and 37% of his maximum opportunity.
The range of Executive variable pay outcomes in FY19 is between 50% and 75% of target (excluding CEO), which the Board determined reflected the balance of performance outcomes across both financial and non-financial measures in FY19.
The variable pay for our Executives is intentionally linked to performance against short- and long-term drivers of our business. In FY19, Perpetual fell short of its NPAT target and some of the identified growth targets but delivered solid strategic, client and people outcomes.
Source: Kincentric (formerly Aon) 2019 Engagement benchmark data.

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Performance against our key balanced scorecard measures in FY19 is summarised below:

STRATEGIC
MEASURE	WEIGHTING	FULL YEAR PERFORMANCE
Financial		Outcome	Comments
Delivery of net proft after tax (NPAT) target	40%	Target range: $140-145m Actual: $116m	• •	In FY19 NPAT was $24 million lower than the prior year. The shortfall can be primarily attributed to lower than expected revenue in PI as a result of net outfows and lower performance fees.
		Result:
		Below Plan
Growth		Outcome	Comments
Growth in our	20%	PCT result:	PCT
target markets:		Above Plan	•	PCT exceeded its new business growth targets in its MFS business in FY19
Perpetual				with an increasingly diverse revenue portfolio.
Corporate Trust (PCT) – New business revenue			•	The acquisition and seamless integration of the RFi Roundtables business contributed to revenue growth and the establishment of a third business engine in Data and Analytics Solutions to support future growth and further
				diversify PCT.
			•	The Singapore business is the leading independent trustee acting as a trustee
				for eight Singapore real estate investment trusts (and saw a 34% increase in
				revenue from FY18).
			•	New business growth slowed in the securitisation market, due to lower public
				securitisation deals versus prior year and the impact of slower growth in
				mortgage lending and tighter credit.
Perpetual Private		PP result:	PP
(PP) – Non- market related		Below Plan	•	PP continued to report positive net fows in FY19, however fell short of agreed stretch targets.
revenue PP – Net fows			•	PP has delivered 12 consecutive halves of positive net fows driven by our key strategic segments; a result that, we believe, has outperformed the private
				wealth market.
			•	PP delivered higher Fordham revenue however this was offset by lower
				revenue from cash management facilities due to lower than average balances
				throughout the second half.
Perpetual		PI result:	PI
Investments (PI) – Annualised net revenue (ANR)		Below Plan	•	Net outfows of $3 billion in PI in FY19 contributed to the below plan outcome for the year. The negative fows were driven by institutional clients ($2.1 billion) and wholesale clients ($1.1 billion) in equities, in addition to
				ongoing outfows in legacy products ($0.5 billion).
			•	The initial public offer of our Perpetual Credit Income Trust (Credit LIT)
				resulted in strong fows of $440 million (maximum raise achieved), and
				the successful additional fundraising of $101 million for Perpetual Equity
				Investment Company Limited(PIC), partially offset the negative fows into PI.
Clients		Outcome	Comments
Improve client	10%	Target: +321	The above plan FY19 NPS result was driven by:
advocacy – external net promoter score (NPS) performance		Actual: +39 Result: Above Plan	•	a signifcant uplift in client advocacy among Perpetual Private clients, with continued outstanding results from Fordham clients and noteworthy improvements among clients of Perpetual Plus and Trust Services, with the Private Clients score a little lower and in line with expectations;
			•	solid improvements in Perpetual Corporate Trust with improved advocacy among
				clients of both Debt Markets Services and Managed Funds Services as well as
				Data Services, balancing a decrease among Australian Referral Partners; and
			•	steady state in Perpetual Investments with some mixed results across client groups.

Re-based from FY18 outcome.

STRATEGIC
MEASURE	WEIGHTING	FULL YEAR PERFORMANCE
Clients		Outcome	Comments
Deliver	10%	Target PI:	PI
investment performance for our clients.		8 of 15 Funds Result: 7 PI Funds	•	PI has seven of 15 funds with performance in the top two quartiles1in FY19 which is slightly below plan.
PI – Number of Funds in frst and		Below Plan
second quartile
over one year
PP – Percentage		Target PP: 50%	PP
of Investment portfolios in frst and second quartile over one year		of portfolios Result: 40% of portfolios	•	Two of PP’s fve investment strategies have delivered performance in the top two quartiles1in FY19 which is slightly below plan.
		Below Plan
People		Outcome	Comments
Improve the	10%	Target: 74%	•	We have maintained our engagement score at 73%. This consistent outcome
Perpetual people experience – Employee engagement		Actual: 73% Result: Below Plan	•	refects our targeted action planning across the business. Over the past six years Perpetual has increased by 20 points which is an exceptional outcome.
			•	This result positions Perpetual in the top quartile of Australian companies,
				which external research demonstrates is a lead indicator of improved business
				outcomes over time including reduced turnover, attraction of key talent
				required to deliver on the business strategy and improved productivity.
Strategy		Outcome	Comments
Deliver on	10%	Target: Projects	PCT
priority projects		are considered on plan if they have been delivered on time, on budget and have met	•	PCT Data Analytics Solutions has been extended across all key lending asset classes and has developed new credit risk management, compliance and regulatory reporting capabilities. A major long-term client is onboarding the new capabilities and the platform is now marketable for further revenue opportunities for bank and non-bank lenders.
		business case	PP
		results	•	Throughout 2019, PP re-organised Trustee Services teams and uplifted Advice
		Results:		systems to enable focus on value adding client services at scale. Change was
		PCT Data		delivered ahead of plan and has contributed to higher Trustee Services NPS
		Analytics – On Plan	scores and higher people engagement scores. PCT
		PP Operating	•	PCT platform modernisation has narrowed its focus to re-platforming core
		Model modernisation (Fusion) – Above Plan		legacy systems and as such PCT modernisation for the period was below plan. This approach however is in alignment with operational risk appetite and creates a scalable foundation on which further digital client experiences and end-to-end effciencies can follow.
		PCT platform
		modernisation
		– Below Plan

Perpetual funds assessed against the relevant Morningstar, Mercer Wholesale and Institutional surveys in their respective universes at 30 June 2019.

PERPETUAL ANNUAL REPORT 2019 41

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for the year ended 30 June 2019

Key areas of investment

Perpetual has continued to invest in programs that will provide longer-term value creation opportunities for productivity and revenue creation. These programs can be categorised by division as follows:

Perpetual Group

In FY19, Perpetual elevated its commitment to cyber security. In-house capability has been strengthened and execution of a continuous roadmap of initiatives to enhance security posture is underway. Cyber security is recognised as a fundamental part of Perpetual’s trust proposition.

Investment in analytics in support services domains is contributing to agility and rigorous decision making.

Perpetual Corporate Trust (PCT)

In FY19, PCT has continued to invest in strategic initiatives to support organic and inorganic growth. Our three-year “Telos” technology modernisation program to upgrade core systems and transition to cloud-based platforms will deliver operational efficiencies and enhanced security to combat cyber risk and fraud.

We continue to invest in Data and Analytics Solutions (DAS), the third business engine, to support future growth and further diversification to our market leading trustee business. The acquisition of the RFi Roundtables business in December 2018 has accelerated growth in DAS and provided additional products and expertise aligned to our business strategy.

Perpetual Private (PP)

Our three-year “Fusion” program to modernise the Trustee and Advice businesses and transform the client experience is in its final year. The upgrade of the technology platform supporting our advice and fiduciary clients has been delivered on or ahead of time. The centralisation of Trustee administration has led to a reduction in payment processing times for our clients. The benefits of this project include improvements in NPS across Advice and Trustee Services, controls and risk culture measures; and PP’s employee engagement.

In FY19 PP launched a new “Partner led” Professional Services operating model for our advice business designed to drive growth through deep segment knowledge and enhancing client experience, with the aim to bring the best of PP Solutions to every client interaction. The new model went live on 1 July 2019 for Partners and Advisers. Phase 2 will involve embedding the new model, centralisation of administration functions and the roll-out of a digital client advice solution over the course of FY20.

Perpetual Investments (PI)

In FY19 PI successfully raised over $540 million of new investment capital via its listed vehicle strategy. The secondary capital raising for Perpetual Investment Company Limited (PIC) in the first half was fully subscribed raising $101 million and increased the shareholder base by 28% which should increase liquidity in the stock and deliver economies of scale.

In March 2019, PI launched its second listed vehicle, the Perpetual Credit Income Trust, which received strong support with the maximum targeted raise of $440 million achieved. The listed trust commenced trading in May 2019.

Over the course of the year PI has undertaken significant work to optimise its operating model to facilitate delivery of further listed strategies to market.

PI undertook a review of the WealthFocus investment options to drive efficiencies for the product suite which includes WealthFocus Investment Advantage, Super and Pension products. The customer experience was also improved by lowering the fee for Cash Funds and rebating the fee for WealthFocus Direct clients.

Other areas of investment included an upgrade of the of pre-trade compliance controls for all portfolios.

7. VARIABLE REMUNERATION

Variable remuneration is designed to reward Executives for their performance during the performance year, provided they have achieved performance standards based on financial and non-financial measures focused on delivering short- and long-term value. The variable remuneration structure is designed to drive business strategy with outcomes being aligned to shareholders.

7.1 Executive Variable Incentive Plans

Features of the CEO Variable Incentive Plan

Under the CEO Variable Incentive Plan in FY19, the full Variable Incentive (cash and equity) is subject to performance against an annual balanced scorecard, with the CEO’s Variable Incentive equity component for FY19 delivered as a grant of Share rights (50%) and Performance rights (50%) as follows:

Share rights (Variable Incentive equity – unhurdled) will vest on 1 September 2021 and convert into Restricted shares;
half of the Performance rights (Variable Incentive equity – hurdled) will vest on 1 September 2022 subject to a three-year Compound Annual Growth Rate (CAGR) absolute Total Shareholder Return (TSR) hurdle and convert to Restricted shares; and
the remaining half of the Performance rights will vest on 1 September 2023 subject to a four-year CAGR absolute TSR hurdle and convert to unrestricted shares.

Any Restricted shares received on conversion of Share rights or Performance rights will be eligible to receive dividends and will be released from restrictions on 1 September 2023.

The absolute three and four year CAGR TSR performance hurdles will be aligned to the following achievement scale:

PERCENTAGE OF RELEVANT TRANCHE OF PERFORMANCE COMPOUND ANNUAL GROWTH IN TSR RIGHTS THAT VEST Less than 7% per annum 0% 7% to 10% per annum Straight-line vesting from 50% to 100% 10% or above per annum 100%

Malus and clawback provisions give the Board the discretion to clawback vested and unvested equity.

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25% of Variable Incentive Equity subject to a 4-year CAGR Absolute TSR hurdle
Performance rights
25% of Variable Incentive Equity subject to a 3-year Restricted shares
Initial CAGR Absolute TSR hurdle entitled to dividends
Performance rights
Performance
Year for
Variable 50% of Variable Incentive Equity Restricted shares
Incentive Share rights entitled to dividends
30 June 30 June 30 June 30 June 30 June 30 June
September September
Cash Variable Incentive Equity Vesting/Release from restrictions
----- End of picture text -----

The number of Share rights and Performance rights granted for FY19 performance was determined by dividing the relevant variable incentive award dollar amount by the face value of a Perpetual share on the trading day prior to the CEO’s commencement date, using the five-day Volume Weighted Average Price (VWAP). From FY20, the VWAP methodology will be aligned with the Group Executives; being the five-day VWAP prior to the grant date.

Features of the Group Executive Variable Incentive Plan – FY19

Under the Group Executive Variable Incentive Plan, a portion of the Variable Incentive is paid in cash shortly after the release of Perpetual’s full-year results. The balance is delivered as Share rights, which will convert to Restricted shares after two years, subject to ongoing employment conditions. The Restricted shares are subject to a further holding lock for two years, with no risk of forfeiture other than for summary dismissal.

In total, equity is held for four years. Holding equity for a total of four years from the grant date of the Share rights reinforces an ownership mentality in the Executives, aligned to our shareholders’ experience. The value to the Executive therefore is not at the grant date, rather at the conclusion of the vesting and restriction periods.

As performance has been fully assessed to calculate the amount paid as a Variable Incentive, no additional performance hurdles (except for employment conditions) apply to the Share rights or Restricted shares.

Dividends will not be payable on Share rights; however they will be payable on Restricted shares during the two-year holding lock.

PERPETUAL ANNUAL REPORT 2019 43

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Awards are granted on a face value basis using a five-day volume weighted average price in September each year following Perpetual’s full-year results.

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----- Start of picture text -----

Single Variable Incentive structure Variable Incentive delivered Equity is delivered as Share Share rights convert to Restricted
based on a balanced scorecard of as a combination of cash rights subject to a two-year shares and are subject to a further
financial and non-financial measures and equity service period two-year holding lock (dividends
– short and long term now paid)
Performance period
Variable Incentive
Variable Incentive (Share rights) Variable Incentive (Restricted shares)
unpaid (cash and equity)
Fixed Remuneration
Vested equity subject to holding lock
0 1 2 3 4 5
YEAR
----- End of picture text -----

As outlined in Section 1.2, the Variable Incentive structure has been modified for the new CEO for FY19.

Group Executive Variable Incentive Plan – FY20

As outlined in Section 1.2, from FY20, the Group Executive Variable Incentive Plan will be transitioned to the same hurdled variable incentive structure as the CEO. This includes an absolute TSR hurdle on half of the equity component, a CAGR 7-10% vesting range, an uplift to the equity component, and removal of a performance and reward calibration scale.

The Board believes it is advantageous for the CEO and Group Executives to have aligned Variable Incentive arrangements, with a majority weighting to equity providing long-term shareholder alignment.

Remuneration mix

Executives have a significant portion of their remuneration linked to performance and at risk, with the Board having the ability to risk adjust remuneration if required. There is a strong alignment to long-term incentives for Executives, as Perpetual believes in meaningful equity ownership for this key group.

Total remuneration continues to be determined using a range of factors including Perpetual’s market peers. The table below shows the FY19 on-target remuneration mix (using full-time equivalent remuneration) for the Executives under the CEO and Group Executive Variable Incentive plans.

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----- Start of picture text -----

CEO 36% 14% 50%
FIXED
GROUP
EXECUTIVES 41–61% 15–29% 18–39% VARIABLE INCENTIVE
(CASH) AVERAGE
VARIABLE INCENTIVE
0% 20% 40% 60% 80% 100% (EQUITY) AVERAGE
----- End of picture text -----

Our long-term intention is to position all Executives with a Variable Incentive mix of one-third cash and two-thirds equity.

Determining the Variable Incentive

Individual Variable Incentive awards are determined through an assessment of performance against the Perpetual Group scorecard, divisional performance against divisional priorities and individual performance, which includes an assessment of behavioural expectations for all Executives. Executives must also meet risk and compliance requirements to be eligible to receive a Variable Incentive payment. Risk performance acts as a modifier to amend an individual’s overall performance and reward outcome. In FY19, Variable Incentive weightings for Executives under the CEO and Group Executive Variable Incentive plans were as follows:

	PERPETUAL	DIVISIONAL		INDIVIDUAL
	PERFORMANCE	PERFORMANCE		PERFORMANCE
CEO	70%	0%		30%
Group Executives	70%		30%

In line with our focus on delivering One Perpetual Group outcomes, the weightings for the CEO and Group Executives are 70% Perpetual performance and 30% divisional/individual performance. This combined focus on Perpetual Group and divisional/individual performance ensures shared accountability for overall Perpetual performance amongst Executives, balanced with divisional priorities.

Members of the Senior Leadership Team (direct reports to Group Executives) also have a portion (30%) of their Variable Remuneration outcome weighted to overall Perpetual Group scorecard performance. The remaining 70% is weighted to their individual and divisional performance measures.

Approval process

The CEO and Managing Director makes recommendations to the PARC on Variable Incentive allocations for the Group Executives. The PARC makes recommendations on the Variable Incentive allocation for the CEO and Managing Director. Once recommendations are endorsed, the PARC makes recommendations for both the CEO and Group Executives to the Board for final approval.

Total Variable Incentive outcome received in FY19 for Executives

The table below provides the total Variable Incentive outcome (both cash and equity portions) received by the Executives for the FY19 performance year.

				FY19		MAXIMUM
	VARIABLE	VARIABLE	TOTAL	VARIABLE		OPPORTUNITY
	INCENTIVE	INCENTIVE	VARIABLE	INCENTIVE		@ 175% OF
NAME	CASH $	EQUITY1 $	INCENTIVE $	(AS % OF TARGET)2	PERCENTAGE FORFEITED	TARGET3 $
Current Executives
R Adams	249,315	886,508	1,135,823	65%	35%	3,057,984
C Green4	235,874	425,847	661,721	75%	25%	1,540,275
D Lane	150,000	200,000	350,000	50%	50%	1,225,000
R McCarthy5	80,153	104,167	184,320	60%	40%	537,602
S Mosse	22,045	35,673	57,718	50%	50%	202,014
R Nash	79,781	125,986	205,767	50%	50%	720,183
K Smith6	–	–	–	0%	100%	474,810
M Smith	147,854	294,521	442,375	50%	50%	1,548,313
Former Executives
G Larkins6	–	–	–	0%	100%	316,789
Total	965,022	2,072,702	3,037,724

For Group Executives, 100% of the Variable Incentive equity value will be awarded as Share rights for two years until vesting and will be satisfied by the conversion to Perpetual Limited shares for a further two-year restricted period. For the CEO, 50% of the Variable Incentive is awarded as Share rights, and 50% as Performance rights with an absolute Total Shareholder Return hurdle.
Represents the total Variable Incentive outcome for FY19 (including the equity component) as a percentage of target Variable Incentive.
Maximum opportunity Executives may earn under the CEO or Group Executive Variable Incentive Plan.
Mr Green’s Variable Incentive is reflective of his contribution as acting CEO for part of the year.
Mr McCarthy’s Variable Incentive is reflective of his KMP role only.
Ms Smith and Ms Larkins resigned from Perpetual and as per the Group Executive Variable Incentive policy, they forfeited 100% of their FY19 Variable Incentive payment.

FY19 CEO performance and reward outcomes

The CEO’s FY19 incentive outcome was determined with a 70% weighting placed on Company performance, while 30% was determined with reference to individual contribution to Perpetual during his circa nine months service.

Given the CEO commenced in September 2018, the Board recognised key priorities for FY19 as part of the 30% individual component.

Mr Adams’ performance against the agreed key priorities has been strong over this period. Key achievements include the development of a clear set of strategic priorities for the next three to five years, a well progressed operating model review that will see the implementation of a new organisation structure and consideration of both organic and inorganic growth prospects as part of the defined strategic plan.

The overall incentive outcome of 65% of target is reflective of the strong individual contribution during his initial nine months, in the context of challenging financial performance for Perpetual in FY19.

PERPETUAL ANNUAL REPORT 2019 45

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Vesting of FY17 Variable Incentive Equity grants

A key design feature of the variable incentive plan for Executives is the alignment, via equity, between Executives and shareholders. The equity granted via Share Rights, to Executives in our first year (FY17) under the combined Variable Incentive Plan, is due to vest in September 2019. These Share Rights will convert to Restricted Shares and remain under a holding lock for a further two years. Given the equity was granted at a price of $55.52, Executives will need to significantly improve share price performance during the two-year holding lock to realise the equivalent grant value by the time the shares are released from the holding lock.

Termination of employment

Treatment upon termination of employment is as follows:

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UNPAID VARIABLE VARIABLE INCENTIVE
INCENTIVE (PERFORMANCE AND VARIABLE INCENTIVE
EVENT (CASH AND EQUITY) SHARE RIGHTS) (RESTRICTED SHARES)
• Resignation No further variable incentive Forfeit Retained under the plan with
is payable restriction periods continuing
to apply
• Summary dismissal No further variable incentive Forfeit Forfeit
is payable
• Death A pro-rated variable incentive Immediate vesting (subject Immediate conversion to
based on the period of the to Board approval) unrestricted shares (subject
performance year completed to Board approval)
will be paid at the normal time
entirely in cash subject to
full-year performance
• Mutual agreement A pro-rated variable incentive Retained with vesting and Retained under the plan, with
based on the period of the restriction periods continuing restriction periods continuing
• Retirement (requires Board
performance year completed to apply to apply
approval) [1]
will be paid at the normal time
• Redundancy entirely in cash subject to
full- year performance
• Total and Permanent
Disablement (TPD)
• By Perpetual with notice
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In circumstances where the Board concludes at its absolute discretion that the participant is retiring.

This approach to treatment of incentives on termination of employment in conjunction with the broader plan design strengthens the alignment of interests between Executives and shareholders over the long term. The extended vesting and restriction periods encourage Executives to make decisions that are in the long-term interests of shareholders, with implications of those decisions extending beyond an Executive’s tenure at Perpetual while they continue to have shares retained in the plan.

Malus and clawback provisions

The Board retains discretion to clawback Variable Incentive equity awarded to Executives prior to the Share rights or Restricted shares being released. The Board may exercise clawback provisions if it becomes aware of any information that, had it been available at the time Variable Incentive awards were determined, would have resulted in a different (or zero) Variable Incentive amount being awarded.

7.2 Long-term incentive plan – closed plan

Between October 2012 and October 2015, Executives received long-term incentive (LTI) awards. These awards were granted annually and, if conditions were met, vested over a three-year period.

Whilst this LTI plan has now been replaced with the CEO and Group Executive Variable Incentive plans, Executives retained unvested LTI in this plan, with the final test being in October 2018. For this reason, the following information on LTI has been included.

Performance targets

LTI grants made to Executives up until October 2015 vest subject to two performance measures:

50% of each grant was subject to a relative total shareholder return (rTSR) performance target; and
50% was subject to an earnings per share (EPS) growth target.

Performance target testing and re-testing guidelines

A three-year performance testing period applies to relative TSR and EPS targets and performance is calculated and tested against the respective target on the third anniversary of the grant date. There is no re-testing of grants. The final test under the LTI plan occurred in October 2018 with zero shares vesting.

Termination of employment

In the event of an Executive ceasing employment with Perpetual, all unvested shares and Performance rights will be forfeited at the termination date, except if an Executive is made redundant, retires, resigns due to total and permanent disablement or dies. Unvested shares and Performance rights granted more than 12 months prior to termination are retained by the Executive (or the Executive’s estate), with vesting subject to the same performance conditions as if they had remained employed by Perpetual.

This approach strengthens the alignment of interests between Executives and shareholders over the long term, extending beyond each Executive’s tenure.

Treatment of LTI on change of control

If Perpetual were to be taken over, or if there were a partial or full change of control, LTI awards may vest in part or in full at the discretion of the Board. Guiding principles have been developed to help the Board determine vesting outcomes that are consistent, fair and reasonable, and balance multiple stakeholder interests.

Alignment of LTI to Perpetual Group performance

The following table shows the vesting outcomes of the last five years of all LTI issued to Executives with EPS and relative TSR hurdles. During FY19, the equity did not vest.

HURDLE	ANNUAL LTI GRANTS OVER THE LAST FIVE YEARS: VESTING OUTCOMES
	GRANT DATE: 1 OCTOBER 2011 VESTING DATE: 1 OCTOBER 2014 GRANT DATE: 1 OCTOBER 2012 VESTING DATE: 1 OCTOBER 2015 GRANT DATE: 1 OCTOBER 2013 VESTING DATE: 1 OCTOBER 2016 GRANT DATE: 1 OCTOBER 2014 VESTING DATE: 1 OCTOBER 2017 GRANT DATE: 1 OCTOBER 2015 VESTING DATE: 1 OCTOBER 2018
EPS rTSR	30% 100% 100% 44% 0% 100% 100% 56% 54% 0%

7.3 Employee share plans

Perpetual offers all employees the opportunity to participate in share plans. These are described below.

OPEN PLANS

Perpetual Limited Long-Term Incentive Plan

From February 2011, this is the primary plan used for LTI grants to eligible employees, and Executives in the CEO and Group Executive Variable Incentive plans.

140 members with LTI (Performance rights) 43 members with LTI (Shares)

4 members with Variable Incentive equity

One Perpetual Share Plan (OPSP)

This plan, introduced in FY15, awards eligible employees with annual grants of up to $1,000 worth of Perpetual shares subject to Perpetual meeting its profit target.

576 members

Dilution limits for share plans

Shares awarded under Perpetual’s employee share plans may be purchased on-market or issued subject to Board discretion and the requirements of the Corporations Act 2001 and the ASX Listing Rules.

As at 30 June 2019, the proportion of unvested shares and Performance rights (excluding unallocated shares as a result of forfeitures) held in Perpetual’s employee share plans as a percentage of issued shares was 1.98%. This has remained flat compared to last year.

The Board will ensure that the management of shares under employee incentive plans is in alignment with shareholder interests, and subject to the relevant regulatory requirements. Refer to page 37 for detail on the share dealing approval process.

PERPETUAL ANNUAL REPORT 2019 47

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for the year ended 30 June 2019

8. DATA DISCLOSURES – EXECUTIVES

Remuneration of Executives – statutory reporting

		SHORT-TERM	BENEFITS
		VARIABLE	NON-
	CASH	INCENTIVE	MONETARY
	SALARY1	CASH2	BENEFITS3	OTHER4
NAME	$	$	$	$
Current Executives
R Adams
2019	980,799	249,315	–	1,277
2018	–	–	–	–
C Green
2019	584,165	235,874	–	1,674
2018	481,576	225,792	–	1,703
D Lane
2019	502,383	150,000	24,899	3,458
2018	501,570	235,200	25,979	1,548
R McCarthy
20198	287,753	80,153	–	1,179
2018	–	–	–	–
S Mosse
2019	169,899	22,045	–	–
2018	–	–	–	–
R Nash
2019	582,840	79,781	10,502	1,674
2018	589,582	125,096	1,750	1,703
K Smith
2019	363,912	–	–	1,674
2018	364,174	115,520	–	1,703
M Smith
2019	606,626	147,854	–	1,674
2018	605,128	217,641	–	1,703
Former Executives
G Larkins
2019	227,419	–	–	–
2018	699,226	168,559	–	1,703
G Lloyd9
2019	453,104	–	4,289	–
2018	1,158,261	765,000	119,955	1,703
Total 2019	4,758,900	965,022	39,690	12,610
Total 2018	4,399,517	1,852,808	147,684	11,766

Cash salary is the ordinary cash salary received in the year including payment for annual, long service, sick or other types of paid leave taken.
Variable Incentive cash payments consist of cash payments to be made in September 2019 for the CEO and Group Executives.
Non-monetary benefits represents those amounts salary sacrificed from fixed remuneration to pay for benefits such as leased motor vehicles, car parking, and purchased leave.
Other short-term benefits relate to:
salary continuance and death and total and permanent disability insurance provided as part of the remuneration package; and
the value of accrued annual leave for FY19 less leave taken which is depicted as cash salary.
Share-based remuneration has been valued using the binomial method, which considers the performance hurdles relevant to each issue of equity instruments. The value of each equity instrument has been provided by PricewaterhouseCoopers. Share-based remuneration is the amount expensed in the financial statements for the year and includes adjustments to reflect the most current expectation of vesting of LTI grants with non-market condition hurdles. For grants with non-market conditions including earnings per share hurdles, the number of shares expected to vest is estimated at the end of each reporting period and the amount to be expensed in the financial statements is adjusted accordingly. For grants with market conditions such as total shareholder return hurdles, the number of shares expected to vest is not adjusted during the life of the grant and no adjustment is made to the amount expensed in the financial statements (except if service conditions are not met). The accounting treatment of non-market and market conditions is in accordance with accounting standards.

POST-EMPLOYMENT	BENEFITS	EQUITY-BASED BENEFITS5	EQUITY-BASED BENEFITS5	EQUITY-BASED BENEFITS5
	OTHER	VARIABLE
SUPER-	LONG-TERM	INCENTIVE		PERFORMANCE	TERMINATION
ANNUATION	BENEFITS6	EQUITY7	SHARES	RIGHTS	PAYMENTS	TOTAL
$	$	$	$	$	$	$
21,224	946	92,784	210,000	–	–	1,556,345
–	–	–	–	–	–	–
24,674	(7,923)	382,022	–	14,617	–	1,235,103
23,039	6,686	279,624	19,337	(122,453)	–	915,305
24,674	2,186	110,608	62,596	–	–	880,804
23,039	917	54,380	338,556	–	–	1,181,189
18,640	2,036	56,071	–	104,474	–	550,305
–	–	–	–	–	–	–
12,235	171	6,013	176,823	–	–	387,185
–	–	–	–	–	–	–
30,568	13,660	165,137	–	5,674	–	889,836
29,468	9,859	138,337	9,365	(44,744)	–	860,416
24,674	(8,561)	(54,210)	–	11,081	–	338,570
23,039	3,908	56,103	4,402	44,272	–	613,119
24,674	13,454	331,271	–	17,197	–	1,142,750
23,039	9,666	252,096	19,384	(144,070)	–	984,587
13,785	(28,116)	(140,410)	–	10,317	–	82,995
29,468	11,374	211,871	17,897	(86,448)	–	1,053,650
5,943	–	(479,221)	–	(304,176)	–	(320,062)
23,039	97,129	(20,606)	43,009	(329,869)	–	1,857,622
201,091	(12,148)	470,065	449,419	(140,817)	–	6,743,832
174,131	139,540	971,805	451,951	(683,312)	–	7,465,889

The value of accrued long service leave for FY19 less leave taken, which is depicted as cash salary.
Variable incentive equity includes costs incurred in FY19 for the final deferred STI award under the prior Executive pay structure and FY17, FY18 and FY19 Variable Incentive equity grants. Also included is the reversal of the Variable Incentive equity awarded in FY17 to Mr Lloyd, Ms Larkins and Ms Smith that was forfeited as part of their cessation of employment.
Mr McCarthy’s remuneration is reflective of his KMP role only.
Whilst Mr Lloyd was not a KMP in FY19, given he received remuneration in FY19, Mr Lloyd’s FY19 remuneration has been included. The negative equity compensation is a result of Mr Lloyd forfeiting unvested equity incentives on termination.

PERPETUAL ANNUAL REPORT 2019 49

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

Remuneration of Executives – actual remuneration received

The table below represents the actual remuneration received by the Executives during FY19. We believe by including this table, it makes it easier for shareholders and other stakeholders to understand the actual remuneration Executives received during the year. This table differs to the statutory remuneration table on pages 48–49 that has been prepared in accordance with the Corporations Act and Australian Accounting Standards. The difference between the two tables is predominantly due to the accounting treatment of the share-based payments.

				DIVIDENDS
				PAID ON
			EQUITY	UNVESTED	SIGN-ON
	TOTAL	VARIABLE	VESTED	SHARES	AND	PAYMENTS
	FIXED	INCENTIVE	DURING	DURING	RELOCATION	MADE ON
	REMUNERATION1	CASH2	YEAR3	YEAR4	BENEFITS5	TERMINATION	TOTAL
NAME	$	$	$	$	$	$	$
Current Executives
R Adams	1,003,300	–	–	26,779	–	–	1,030,079
C Green	610,513	225,792	171,302	5,634	–	–	1,013,240
D Lane	555,414	235,200	150,655	7,997	–	–	949,266
R McCarthy	307,572	–	–	1,243	–	–	308,815
S Mosse	182,134	–	–	14,893	–	–	197,027
R Nash	625,584	125,096	107,064	3,521	–	–	861,265
K Smith	390,260	115,520	154,455	1,106	–	–	661,341
M Smith	632,974	217,641	151,124	4,970	–	–	1,006,709
Former Executives
G Larkins	241,204	168,559	152,358	5,011	–	–	567,132
G Lloyd6	463,336	765,000	–	15,074	–	175,060	1,418,470
Totals	5,012,291	1,852,808	886,957	86,226	–	175,060	8,013,342

Fixed remuneration consists of cash salary, superannuation, packaged employee benefits and associated fringe benefits tax.
Represents the cash portion of Variable Incentive outcome for FY18 paid in September 2018. There is no FY18 Variable Incentive outcome for Mr Adams or Ms Mosse who joined Perpetual in FY19. There is no disclosed FY18 Variable Incentive for Mr McCarthy who was promoted to a KMP role in FY19.
Represents the value of equity grants awarded in previous years which vested during the year. For Mr Green, Ms Nash, Ms Smith, Mr Smith and Ms Larkins this represents the vesting of the deferred STI shares granted 1 September 2016 that vested 30 September 2018. For Mr Lane, this represents the second tranche of shares granted 10 April 2017, as a sign-on bonus that vested 30 September 2018. The shares were valued at $42.57, this being the closing market value of Perpetual shares on the vesting dates.
Dividends paid during FY19 on deferred STI shares, and sign-on shares granted to Mr Adams on 24 September 2018, Mr Lane on 10 April 2017 and Ms Mosse on 18 February 2019.
Mr Adams and Ms Mosse received a sign-on allocation of shares, details of which are outlined in the Unvested Shares and Performance rights table on pages 54–55. Mr Adams and Ms Mosse did not receive any additional sign-on or relocation benefits.
Whilst Mr Lloyd was not a KMP in FY19, given Mr Lloyd received remuneration in FY19, for completeness he has been included in this table. Mr Lloyd received fixed remuneration, a cash-only Variable Incentive for FY18, paid in September 2018 and a pro-rated long service leave payment of $175,060 on termination.

Remuneration components as a proportion of total remuneration

The remuneration components below are determined based on the Remuneration of the Executives – Statutory Reporting table on pages 48–49. This table includes Fixed Remuneration and Variable Incentives – cash and equity.

NAME FIXED REMUNERATION %	PERFORMANCE LINKED BENEFITS OTHER EQUITY1 TOTAL % VARIABLE INCENTIVE CASH % VARIABLE INCENTIVE EQUITY %
Current Executives R Adams 65% C Green 49% D Lane 63% R McCarthy 56% S Mosse 47% R Nash 72% K Smith2 100% M Smith 57%	16% 6% 13% 100% 19% 32% 0% 100% 17% 13% 7% 100% 15% 29% 0% 100% 6% 2% 45% 100% 9% 19% 0% 100% 0% 0% 0% 100% 13% 30% 0% 100%
Former Executives G Larkins2 100% G Lloyd3 100%	0% 0% 0% 100% 0% 0% 0% 100%

Other equity includes sign-on equity for Mr Adams, Mr Lane and Ms Mosse.
Ms Smith and Ms Larkins resigned from Perpetual. They therefore did not receive any Variable Incentive for FY19, with cash being 0% and equity being forfeited.
Mr Lloyd was not a KMP in FY19. Prior to his termination, Mr Lloyd received 100% fixed remuneration and no performance linked benefits or other equity.

PERPETUAL ANNUAL REPORT 2019 51

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

Value of unvested remuneration that may vest in future years

Estimates of the maximum future cost of equity-based remuneration granted by Perpetual should all targets be met in the future.

	30 JUNE 2020 1	30 JUNE 2021 1	30 JUNE 2022 1	30 JUNE 2023 1	30 JUNE 2024 1
	MAXIMUM	MAXIMUM	MAXIMUM	MAXIMUM	MAXIMUM
	$	$	$	$	$
CEO and Managing Director
R Adams	457,142	368,329	247,983	25,698	3,735
Current Group Executives
C Green	293,521	183,896	18,692	–	–
D Lane	170,861	93,519	8,779	–	–
R McCarthy	149,511	97,141	16,237	–	–
S Mosse	157,152	88,989	22,173	–	–
R Nash	117,492	58,911	5,530	–	–
M Smith	257,972	135,935	12,928	–	–

The minimum value of the grants is $nil if the performance targets are not met. The values above are determined in accordance with accounting standards. The fair value of granted shares is recognised as an employee expense with a corresponding increase in equity. Fair value is measured at grant date and amortised over the performance and/or service period.

From FY20 Group Executives will be aligned to the CEO incentive structure with equity vesting over a longer time horizon (two, three and four years) in line with the introduction of an absolute TSR hurdle on 50% of any allocated equity.

Shareholdings

The table below summarises the movement in holdings of ordinary shares held during the year and the balance at the end of the year, directly, indirectly, or by a related party.

	TOTAL					TOTAL	SHARES
	SHARES					SHARES	HELD
	HELD			VESTING OF		HELD AT	NOMINALLY
	AT 1 JULY		VESTING OF	PERFORMANCE	SALES/	30 JUNE	AT 30 JUNE
NAME	2018	PURCHASES	SHARES	RIGHTS	REDUCTIONS	2019	2019 1
Current Executives
R Adams2	–	1,835	–	–	–	1,835	1,055
C Green	4,953	–	4,024	–	–	8,977	–
D Lane	–	–	3,539	–	–	3,539	–
R McCarthy2	271	–	1,764	2,721	2,721	2,035	–
S Mosse	–	–	–	–	–	–	–
R Nash	6,756	–	2,515	–	–	9,271	–
M Smith	22,973	–	3,550	–	14,831	11,692	2,923
Former Executives
G Larkins	16,839	–	3,579	–	20,418	–	–
K Smith	1,896	–	790	2,872	–	5,558	–

Shares held nominally are included in the “Total shares held at 30 June 2019” column. Total shares are held directly by the KMP and indirectly by the KMP’s related parties, inclusive of domestic partner, dependents and entities controlled, jointly controlled or significantly influenced by the KMP.
Mr Adams and Mr McCarthy held these shares prior to being a KMP.

PERPETUAL ANNUAL REPORT 2019 53

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

Unvested share and Performance rights holdings of the Executives

The table below summarises the share and Performance rights holdings and movements by number granted to the Executives by Perpetual, for the year ended 30 June 2019. For details of the fair valuation methodology, refer to Section 4–1 of the notes to, and forming part of the financial statements.

NAME	INSTRUMENT	GRANT DATE	GRANT PRICE	VESTING DATE
			$
Current Executives
R Adams2	Shares	24 September 2018	42.01	24 September 2020
	Shares	24 September 2018	42.01	24 September 2022
		Aggregate value1
C Green
	Shares	1 September 2016	49.05	30 September 2018
	Performance rights	1 October 2015	33.07	1 October 2018
	Performance rights	1 September 2017	55.52	1 September 2019
	Performance rights	3 September 2018	44.29	1 September 2020
		Aggregate value
D Lane2	Shares	10 April 2017	52.27	30 September 2018
	Shares	10 April 2017	52.27	30 September 2019
	Performance rights	3 September 2018	44.29	1 September 2020
		Aggregate value
R McCarthy3
	Shares	4 September 2017	55.34	30 September 2019
	Shares	3 September 2018	44.29	30 September 2020
	Performance rights	1 October 2016	39.40	1 October 2019
	Performance rights	1 October 2017	44.64	1 October 2020
	Performance rights	1 October 2018	34.97	1 October 2021
		Aggregate value
S Mosse2	Shares	18 February 2019	35.37	1 October 2019
	Shares	18 February 2019	35.37	1 October 2021
		Aggregate value
R Nash	Shares	1 September 2016	49.05	30 September 2018
	Performance rights	1 October 2015	33.07	1 October 2018
	Performance rights	1 September 2017	55.52	1 September 2019
	Performance rights	3 September 2018	44.29	1 September 2020
		Aggregate value
K Smith	Shares	1 September 2016	49.05	30 September 2018
	Performance rights	1 October 2015	33.07	1 October 2018
	Performance rights	1 September 2017	55.52	1 September 2019
	Performance rights	3 September 2018	44.29	1 September 2020
		Aggregate value
M Smith	Shares	1 September 2016	49.05	30 September 2018
	Performance rights	1 October 2015	33.07	1 October 2018
	Performance rights	1 September 2017	55.52	1 September 2019
	Performance rights	3 September 2018	44.29	1 September 2020
		Aggregate value
Former Executives
G Larkins	Shares	1 September 2016	49.05	30 September 2018
	Performance rights	1 October 2015	33.07	1 October 2018
	Performance rights	1 September 2017	55.52	1 September 2019
	Performance rights	3 September 2018	44.29	1 September 2020
		Aggregate value
G Lloyd4	Shares	1 September 2016	49.05	30 September 2018
	Performance rights	1 October 2015	33.07	1 October 2018
		Aggregate value1

Granted aggregate value is calculated by multiplying the number of shares by the issue price. Vested and forfeited aggregate value is calculated by multiplying the number of shares by the Perpetual closing share price on the vesting date.
Mr Adams’ shares, Mr Lane’s shares and Ms Mosse’s shares are sign-on shares.
Mr McCarthy’s shares and Performance rights were granted prior to his KMP appointment date of 15 October 2018. We’ve included his holdings and movements prior to 15 October 2018 for completeness.
Mr Lloyd’s deferred STI shares granted 1 September 2016 and his Performance rights granted 1 October 2015 were forfeited 31 August 2018. Whilst Mr Lloyd was not a KMP in FY19, given his deferred shares and Performance rights were forfeited in FY19, they have been included for completeness.

HELD AT 1 JULY 2018	MOVEMENT DURING THE YEAR HELD AT 30 JUNE 2019 FAIR VALUE OF INSTRUMENT AT GRANT DATE GRANTED FORFEITED VESTED
	NUMBER OF INSTRUMENTS $
– –	10,712 – – 10,712 42.01 10,711 – – 10,711 42.01 $899,980 $– $–
4,024 12,851 9,308 –	– – 4,024 – 49.05 – 12,851 – – 19.50 – – – 9,308 46.93 9,623 – – 9,623 38.63 $426,203 $540,642 $171,302
3,539 1,148 –	– – 3,539 – 52.27 – – – 1,148 52.27 7,080 – – 7,080 38.63 $313,573 $– $150,655
2,449 – 5,076 2,240 –	– – – 2,449 55.34 994 – – 994 44.29 – – – 5,076 39.40 – – – 2,240 44.64 2,859 – – 2,859 34.97 $144,003 $– $–
– –	7,253 – – 7,253 35.37 4,661 – – 4,661 35.37 $421,398 $– $–
2,515 4,989 4,173 –	– – 2,515 – 49.05 – 4,989 – – 19.50 – – – 4,173 46.93 4,460 – – 4,460 38.63 $197,533 $209,887 $107,064
790 2,872 1,827 –	– – 790 – 49.05 – 2,872 – 19.50 – 1,827 – – 46.93 2,047 2,047 – – 38.63 $90,662 $163,638 $154,455
3,550 15,119 7,905 –	– – 3,550 – 49.05 – 15,119 – – 19.50 – – – 7,905 46.93 9,788 – – 9,788 38.63 $433,511 $636,056 $151,124
3,579 9,071 6,738 –	– – 3,579 – 49.05 – 9,071 – – 19.50 – 6,738 – – 46.93 6,751 6,751 – – 38.63 $299,002 $902,832 $152,358
10,767 35,319	– 10,767 – – 49.05 – 35,319 – – 19.50 $– $2,022,715 $–

PERPETUAL ANNUAL REPORT 2019 55

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

Termination terms for Executives

Following are the Executive contractual arrangements. During the year Mr Chris Green was promoted to the position of Chief Financial Officer. At this point his contractual arrangements were brought into line with his peers.

TERM	WHO	CONDITIONS
Duration of contract	All Executives	Ongoing until notice is given
		by either party
Notice to be provided by the Executive	CEO and Managing Director	9 months
to terminate the employment agreement	Group Executives	6 months
Notice to be provided by Perpetual to	CEO and Managing Director	9 months
terminate the employment agreement	Group Executives	6 months
without cause
Notice to be provided by Perpetual for	All Executives	No notice
summary dismissal
Post employment restraint	CEO and Managing Director	12 months from the date on which notice
	and Group Executives	of termination was given

The agreements also allow Perpetual to make a payment in lieu of notice, subject to Board approval.

9. NON-EXECUTIVE DIRECTOR REMUNERATION

9.1 Remuneration policy and data

Perpetual’s Remuneration Policy for Non-executive Directors aims to ensure that we attract and retain suitably skilled, experienced and committed individuals to serve on your Board.

Non-executive Directors do not receive performance related remuneration and are not entitled to receive performance shares or options over Perpetual shares as part of their remuneration arrangements.

Fee framework

Non-executive Directors receive a base fee. Except for the Chairman, they also receive fees for participating in Board Committees (other than the Nominations Committee), either as Chairman or as a member of a committee.

	FY18	FY19
NON-EXECUTIVE DIRECTORS’ FEES	$	$
Chairman	300,000	300,000
Directors	150,000	150,000
Audit, Risk and Compliance Committee Chairman	35,000	35,000
Audit, Risk and Compliance Committee member	17,000	17,000
People and Remuneration Committee Chairman	35,000	35,000
People and Remuneration Committee member	17,000	17,000
Investment Committee Chairman	17,500	17,500
Investment Committee member	10,000	10,000
Nominations Committee member	Nil	Nil

The fees above are inclusive of superannuation contributions, capped at the maximum prescribed under Superannuation Guarantee legislation. Non-executive Directors may receive employer superannuation contributions in one of Perpetual’s employee superannuation funds or in a complying fund of their choice. Non-executive Directors may also salary sacrifice superannuation contributions out of their base fee if they so wish.

Total remuneration available to Non-executive Directors of $2,250,000 was approved by shareholders at the 2006 Annual General Meeting and has remained unchanged since this date. Total fees paid to Non-executive Directors in FY19 were $1,242,523. More details are provided in the table on page 57.

Retirement policy

Non-executive Directors who have held office for three years since their last appointment must retire and seek re-election at the Annual General Meeting.

In order to revitalise the Board, Perpetual’s Non-executive Directors agree not to seek re-election after three terms of three years. However, the Board may invite a Non-executive Director to continue in office beyond nine years if there is a compelling reason and, as determined by the Board, if in the best interests of shareholders.

No retirement benefits are paid to Non-executive Directors.

Remuneration of the Non-executive Directors (statutory reporting)

Details of Non-executive Director remuneration are set out in the table below.

NAME	SHORT-TERM BENEFITS POST EMPLOYMENT BENEFITS TOTAL 1 $ PERPETUAL BOARD FEES $ SUPERANNUATION $
Current Non-Executive Directors T D’Aloisio 2019 2018	279,469 20,531 300,000 279,951 20,049 300,000
P Bullock 2019 2018	168,037 15,963 184,000 168,037 15,963 184,000
S Falzon 2019 2018	178,082 16,918 195,000 178,082 16,918 195,000
N Fox 2019 2018	168,037 15,963 184,000 168,037 15,963 184,000
I Hammond 2019 2018	178,082 16,918 195,000 178,082 16,918 195,000
C Ueland 2019 2018	168,516 16,007 184,523 168,493 16,007 184,500
Total 2019 Total 2018	1,140,222 102,301 1,242,523 1,140,682 101,818 1,242,500

Non-executive Directors do not receive any non-cash benefits as part of their remuneration.

PERPETUAL ANNUAL REPORT 2019 57

Directors’ Report

Remuneration Report

for the year ended 30 June 2019

Alignment with shareholder interests

The constitution requires Non-executive Directors to acquire a minimum of 500 Perpetual shares on appointment and hold a total of at least 1,000 shares when they have held office for three years. However, Non-executive Directors are encouraged to hold ordinary Perpetual shares equivalent in value to 100% of their annual base fee within a reasonable period of their appointment.

Non-executive Directors do not receive share options. Perpetual Non-executive Directors are required to comply with Perpetual’s Hedging and Share Trading policies.

Non-executive Director shareholdings

The table below summarises the Non-executive Director movement in holdings of ordinary shares held during the year and the balance at the end of the year. The table includes shares held both in total (directly or indirectly) and held by related parties.

NAME	NUMBER OF SHARES
	TOTAL SHARES HELD AT 1 JULY 2018 PURCHASES SALES/ REDUCTIONS TOTAL SHARES HELD AT 30 JUNE 2019 SHARES HELD NOMINALLY AT 30 JUNE 2019 1 1,000 SHAREHOLDING REQUIREMENT MET
T D’Aloisio P Bullock S Falzon N Fox I Hammond C Ueland	7,821 260 – 8,081 8,081 ✔ 3,608 711 – 4,319 – ✔ 2,670 2,372 – 5,042 – ✔ 3,300 700 – 4,000 – ✔ 3,949 252 – 4,201 3,081 ✔ 3,000 – – 3,000 1,500 ✔

Shares held nominally are included in the “Total shares held at 30 June 2019” column. Total shares are held directly by the KMP and indirectly by the KMP’s related parties, inclusive of domestic partner, dependents and entities controlled, jointly controlled or significantly influenced by the KMP.

10. KEY TERMS

10. KEY TERMS
Balanced scorecard	The performance measures of fnancial, client, growth and people as agreed by the Board to assess
	short- and long-term Perpetual Group performance for the purposes of determining the amount of
	variable remuneration payable(if any). More details are on pages 40–41.
CEO Variable	The Variable Incentive plan for the new CEO.
Incentive plan
EPS	Earnings per share, this being net proft after tax divided by the average number of issued shares during
	the year. Previous long-term incentive grants, that Executives still hold, and are yet to vest, had two
	performance measures, one of which was EPS.
Equity	Equity includes both Share rights and Restricted shares. Under the Variable Incentive Plan, equity
	is delivered as Share rights. After a two-year vesting period, Share rights are converted to Restricted
	shares, and are subject to a further two-year holding lock period.
Executives	The Chief Executive Offcer(CEO)and Managing Director and the Group Executives.
Fixed Remuneration	Fixed remuneration consists of cash salary, superannuation, packaged employee benefts and associated fringe benefts tax.
Group	Perpetual Limited and its controlled entities.
Group Executive	The Variable Incentive plan for Group Executives introduced from 1 July 2016. This is also the plan that
Variable Incentive plan	the former CEO participated in.
Group Executives	Direct reports of the CEO and Managing Director who are disclosed in this Report.
KMP	Key Management Personnel. Those people who have the authority and responsibility for planning,
	directing and controlling Perpetual’s activities, either directly or indirectly. Key Management Personnel
	disclosed in this Report are the CEO and Managing Director, Group Executives and Non-executive
	Directors of Perpetual.
LTI	Long-Term Incentive. Up to October 2015, Executives received LTI through the Perpetual Limited
	Long-Term Incentive Plan. Executives continue to hold unvested LTI. In FY17, the LTI Plan was replaced
	with a new Variable Incentive Plan.
Market peers	For the purposes of benchmarking remuneration practices and levels, Perpetual’s market peers refer to listed companies in the diversifed fnancial services industry (excluding major banks and other fnancial services companies in the Standard & Poor’s(S&P)/ASX 20).
NPAT	NPAT is the net proft after tax in accordance with the Australian Accounting Standards.
Orient Capital	Independent adviser to Perpetual which provides assessment of relative total shareholder return
	performance based on Perpetual’s comparative peer group.
Performance rights	Performance rights are granted to the CEO under the CEO Variable Incentive plan and were granted
	to Executives up to October 2015 under the previous Perpetual Long-Term Incentive Plan.
Restricted shares	Once Share rights are held for a two-year vesting period, and if the vesting conditions are met, Share
	rights are converted to Restricted shares on a one share for one Share right basis. Restricted shares are
	then held for a further two years.
rTSR	Total shareholder return is defned as share price growth plus dividends paid over the measurement
	period. Dividends are assumed to be reinvested on the ex-dividend date. Relative total shareholder
	return (rTSR) compares Perpetual’s TSR relative to the TSR of a comparator group of companies in the
	S&P/ASX 100 (excluding listed property trusts). Previous long-term incentive grants, that Executives
	still hold, and are yet to vest, have two performance hurdles, one of which is rTSR.
Share rights	Share rights are issued around September each year, following the performance period. Share rights
	have a two-year vesting period, at which point, if the vesting conditions are met, they are converted to
	Restricted shares on a one share for one Share right basis.
STI	A Short-Term Incentive paid to employees for meeting annual targets aimed at delivering our longer-
	term strategic plan. Under the STI Plan, employees may be paid a discretionary incentive (less
	applicable taxes and superannuation) based on their individual performance as well as business
	performance. The CEO and Group Executives participate in their own Variable Incentive plans, and
	therefore no longer participate in the Group STI plan.
Variable Incentive	Variable Incentive includes both cash and equity components of the CEO and Group Executives under
	their respective Variable Incentive plans.
Variable Remuneration	Refers to Variable Incentive payments awarded to the CEO under the CEO Variable Incentive Plan, to
	Group Executives under the Group Executive Incentive Plan, and to short-term incentives awarded to
	employees under the Group Short-Term Incentive Plan.

PERPETUAL ANNUAL REPORT 2019 59

Directors’ Report

for the year ended 30 June 2019

NON–AUDIT SERVICES PROVIDED BY THE EXTERNAL AUDITOR

Fees for non–audit services paid to KPMG in the current year were $305,784 (2018: $125,915).

The Board has a review process in relation to any non–audit services provided by the external auditor. The Board considered the non–audit services provided by the auditor and is satisfied that the provision of these non–audit services by the auditor is compatible with, and does not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:

all non–audit services are subject to the corporate governance procedures adopted by the Company and are reviewed by the Audit, Risk and Compliance Committee to ensure that they do not impact the integrity and objectivity of the auditor, and
non–audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants , as they do not involve reviewing or auditing the auditor’s own work, acting in a management or decision–making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards.

The Lead Auditor’s independence declaration for the 30 June 2019 financial year is included at the end of this report.

ROUNDING OFF

The Company is of a kind referred to in ASIC Corporations Instrument 2016/191 dated 1 April 2016 and, in accordance with that Instrument, amounts in the financial report and the Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated.

This report is made in accordance with a resolution of the Directors.

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Tony D’Aloisio Chairman

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Rob Adams Chief Executive Officer and Managing Director

Sydney 22 August 2019

Lead Auditor’s Independence Declaration

under Section 307C of the Corporations Act 2001

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Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001

To the Directors of Perpetual Limited

I declare that, to the best of my knowledge and belief, in relation to the audit of Perpetual Limited for the financial year ended 30 June 2019 there have been:

i. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and
ii. no contraventions of any applicable code of professional conduct in relation to the audit.

==> picture [57 x 28] intentionally omitted <==

==> picture [86 x 41] intentionally omitted <==

KPMG Martin McGrath

Partner

Sydney

22 August 2019

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Liability limited by a scheme approved under Professional Standards Legislation.

PERPETUAL ANNUAL REPORT 2019

Operating and Financial Review

for the 12 months ended 30 June 2019

DISCLAIMER

The following information should be read in conjunction with the Group’s audited consolidated financial statements and associated notes for the 12 months ended 30 June 2019 contained in the Annual Report for the financial year ended 30 June 2019 (FY19). The Group’s audited consolidated financial statements were subject to independent audit by KPMG.

No representation or warranty is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in this review (any of which may change without notice). To the maximum extent permitted by law, the Perpetual Group, its Directors, officers, employees, agents and contractors and any other person disclaim all liability and responsibility (including without limitation any liability arising from fault or negligence) for any direct or indirect loss or damage which may be suffered through use of or reliance on anything contained in or omitted from this review.

This review contains forward-looking statements. These forward-looking statements should not be relied upon as a representation or warranty, express or implied, as to future matters. Prospective financial information has been based on current expectations about future events but is, however, subject to risks, uncertainties, contingencies and assumptions that could cause actual results to differ materially from the expectations described in such prospective financial information. The Perpetual Group undertakes no obligation to update any forwardlooking statement to reflect events or circumstances after the date of this review, subject to disclosure requirements applicable to the Group.

TABLE OF CONTENTS	TABLE OF CONTENTS
1	About Perpetual	63
1.1	Overview	63
1.2	Group fnancial performance	64
1.3	Group fnancial position	66
1.4	Regulatory developments and business risks	68
1.5	Outlook	70
2	Review of businesses	71
2.1	Perpetual Investments	71
2.2	Perpetual Private	73
2.3	Perpetual Corporate Trust	75
2.4	Group Support Services	77
3	Appendices	78
3.1	Appendix A: Segment Results	78
3.2	Appendix B: Bridge for FY19 Statutory Accounts and OFR	80
3.3	Appendix C: Average funds under management	80
3.4	Appendix D: Full time equivalent employees	81
3.5	Appendix E: Dividend history	81
3.6	Glossary	82

NOTES

Note that in this review:

FY19 refers to the financial reporting period for the 12 months ended 30 June 2019
1H19 refers to the financial reporting period for the 6 months ended 31 December 2018
2H19 refers to the financial reporting period for the 6 months ended 30 June 2019
with similar abbreviations for previous and subsequent periods.

This is a review of Perpetual’s operations for the 12 months ended 30 June 2019 (FY19). It also includes a review of its financial position as at 30 June 2019.

The following information should be read in conjunction with the Group’s audited consolidated financial statements and associated notes for FY19.

All amounts shown are stated in Australian dollars unless otherwise noted and are subject to rounding.

Additional information is available on the Group’s website www.perpetual.com.au.

A glossary of frequently used terms and abbreviations can be found at the end of the review.

Section 1 – About Perpetual

1. ABOUT PERPETUAL

1.1 Overview

Perpetual Limited (Perpetual or the Group) is an Australian independent wealth manager operating in Australia and Singapore and provides asset management, financial advice and trustee services. In each of these businesses, Perpetual earns the majority of its revenue from fees charged on assets under either management, advice or administration. Revenue is influenced by movement in the underlying asset values, margin on assets and net client flows. The business model provides Perpetual with recurring revenue streams and leverage to movement in asset values. As a provider of high-quality financial services, employment costs comprise the largest component of the Group’s expenses.

1.1.1 Strategy

Perpetual’s strategy seeks to build on the foundation of three core businesses, forming a scalable business model supported by shared central services and a strong brand.

In pursuing its growth strategy, the Group has determined the following strategic priorities:

deepen our client relationships and improve our clients’ experience
promote a culture of innovation and empowerment to be nimble and increase productivity
embed digital solutions in how we work together and interact with our clients, and
identify and execute the right inorganic opportunities to deliver quality growth.

Perpetual Investments aims to build on its strength in active Australian equities funds management and leverage its capabilities to move into logical, adjacent products and strategies. Building on our strong commitment to value investing, we are open to investing in additional asset management capabilities in other asset classes and/or investment styles, both in Australia and globally.

Perpetual Private’s strategic objective is to lead in high net worth (HNW) advice and wealth management to its target client segments of ‘business owners’, ‘established wealthy’ and ‘professionals’. These segments play to our existing strengths across holistic advice, research, investments, fiduciary and philanthropy. Perpetual Private aims to protect and grow clients’ wealth over the long term, whilst improving the client experience.

Perpetual Corporate Trust will leverage its market-leading businesses in Debt Markets Services and Managed Funds Services. Debt Markets Services seeks to maintain its strong position in the provision of trustee, custody and standby services to debt capital and securitisation markets and enhance its service offering through the provision of value-added services via its data management and analytics solutions capability. Managed Funds Services continues to leverage its scale in the market and further extend into adjacencies such as responsible entity and investment management services to managed investment schemes.

1.1.2 Operating segments and principal activities

Perpetual Investments – supplies investment products and services to retail, corporate, superannuation and institutional clients.

Perpetual Private – delivers a range of tailored wealth advice services to high net worth individuals, charities, not-for-profit and other philanthropic organisations. The comprehensive suite of financial advisory services includes financial advice, portfolio management, estate planning and administration, and trustee services, as well as tax advice and accounting services provided by Fordham.

Perpetual Corporate Trust – provides trustee and fiduciary services to institutional clients including custodial, trustee responsible entity and other ancillary services to Managed Investment Funds in Australia and Singapore, as well as specialised trust management and accounting services to the debt capital markets and data services to the Australian securitisation market.

The business units are supported by Group Support Services comprising Group Investments, Finance, Technology, Risk and Compliance, People and Culture and Marketing and Communications.

PERPETUAL ANNUAL REPORT 2019 63

Operating and Financial Review

for the 12 months ended 30 June 2019

1.2 Group financial performance

Profitability and key performance indicators

1.2 Group fnancial performance Proftability and key performance indicators
FY19	FY18	FY19 v	FY19 v
FOR THE PERIOD $M	$M	FY18	FY18
Operating revenue 514.1	533.7	(19.6)	(4%)
Total expenses (351.9)	(337.4)	(14.5)	(4%)
Underlying proft before tax(UPBT) 162.2	196.3	(34.1)	(17%)
Tax expense (46.2)	(57.3)	11.1	19%
Underlying proft after tax(UPAT)1 115.9	139.0	(23.0)	(17%)
Signifcant items5 –	1.3	(1.3)	NM
Net proft after tax(NPAT) 115.9	140.2	(24.3)	(17%)
KEY PERFORMANCE INDICATORS (KPI)
Proftability UPBT margin on revenue (%) 32 Shareholder returns	37	–	(5)
Diluted EPS on NPAT (cps) 246.3	299.5	(53.2)	(18%)
Diluted earnings per share (EPS)2on UPAT (cps) 246.3	296.8	(50.5)	(17%)
Fully franked dividends (cps) 250.0	275.0	(25.0)	(9%)
Dividend payout ratio (%)3 100	91	9	10%
Return on Equity (ROE)4on NPAT (%) 17.5	21.6	(4.1)
Return on Equity (ROE)4on UPAT (%) 17.5 Growth($B)	21.5	(4.0)
Average funds under management (FUM) $B 28.8	31.5	(2.7)	(9%)
Average funds under advice (FUA) $B 14.2	13.6	0.6	5%
Closing Debt Markets Services FUA $B 495	450	44.6	10%
Closing Managed Funds Services FUA $B 270	243	26.8	11%

Underlying profit after tax (UPAT) attributable to equity holders of Perpetual Limited reflects an assessment of the result for the ongoing business of the Group as determined by the Board and management. UPAT has been calculated in accordance with ASIC’s Regulatory Guide 230 – Disclosing non-IFRS financial information. Refer to Appendix B for a reconciliation of the adjustments between Statutory Accounts and the OFR. UPAT attributable to equity holders of Perpetual Limited is disclosed as it is useful for investors to gain a better understanding of Perpetual’s financial results from normal operating activities.
Diluted EPS is calculated using the weighted average number of ordinary shares and potential ordinary shares on issue of 47,072,370 for FY19 (FY18: 46,826,435 shares).
Dividends paid/payable as a proportion of NPAT on ordinary fully paid shares at the end of each reporting period.
The return on equity (ROE) quoted in the above table is an annualised rate of return based on actual results for each period. ROE is calculated using the UPAT or NPAT attributable to equity holders of Perpetual Limited for the period, divided by average equity attributable to equity holders of Perpetual Limited, multiplied by the number of such periods in a calendar year in order to arrive at an annualised ROE.
Significant items include:

FOR THE PERIOD	PROFIT/(LOSS) AFTER TAX
	FY19 $M FY18 $M 2H19 $M 1H19 $M 2H18 $M 1H18 $M
Write back of taxation provision – prior years Litigation costs	– 4.7 – – 4.7 – – (3.5) – – – (3.5)
Total signifcant items	– 1.3 – – 4.7 (3.5)

1.2.1 Financial performance

For the 12 months to 30 June 2019, Perpetual’s UPAT and NPAT were $115.9 million.

FY19 UPAT was 17% lower than FY18 principally due to:

decline in average funds under management, partially offset by growth in average funds under advice
net outflows and the impact of prior period distributions and lower performance fees earned within Perpetual Investments
increased investment in organic and inorganic strategic initiatives, partially offset by
higher equity markets, and
new business growth within Perpetual Corporate Trust and Perpetual Private.

The FY19 NPAT was 17% lower than FY18, due to the UPAT result as discussed above and the significant items that occurred in FY18. There were no significant items reported in FY19.

The key drivers of revenue and expenses at a Group level are summarised below. Analysis of performance for each of Perpetual’s business units is provided in Section 2.

1.2.2 Revenue

The main drivers of total revenue are the value of funds under management (FUM) in Perpetual Investments and funds under advice (FUA) in Perpetual Private, which are primarily influenced by the level of the Australian equity market. At the end of FY19, Perpetual Investments’ FUM and Perpetual Private’s FUA were 71% and 58% exposed to equity markets respectively.

The average S&P/ASX All Ordinaries Price Index (All Ords) in FY19 was 6,196, up 3% on the average All Ords in FY18 of 5,994[ 1] .

In FY19, Perpetual generated $514.1 million of total operating revenue, which was $19.6 million or 4% lower than FY18. Revenue was negatively impacted by lower levels of FUM which was driven by net outflows and prior period distributions within Perpetual Investments, partially offset by higher equity markets, higher FUA due to continued positive net flows within Perpetual Private and new business growth in Perpetual Corporate Trust.

Performance fees earned in FY19 were $3.5 million which was $5.7 million or 62% lower than FY18.

Management has calculated the expected impact on revenue, across the business, for a 1% movement in the All Ords. Based on the level of the All Ords as at 30 June 2019, a 1% movement impacts annualised revenue by approximately $1.75 million to $2.25 million.

Note that the above revenue sensitivity is a guide only and may vary due to a number of factors, including but not limited to: the performance of funds under the Group’s management and advice; the impact and timing of flows on FUM and FUA – inflows, outflows and distributions; and changes in pricing policy, channel and product mix.

1.2.3 Expenses

Total expenses in FY19 were $351.9 million, $14.5 million or 4% higher than FY18, comprising:

costs incurred in pursuing the Group’s inorganic strategy
issuance costs connected with the listed investments strategy
other investments in strategic initiatives, including additional staff costs to support future business growth, technology uplift and new business initiatives, and
increased regulatory expenses and remediation costs related to legacy matters, partially offset by
lower variable remuneration and ongoing expense management.

1.2.4 Shareholder returns and dividends

The Board announced a final fully franked ordinary dividend of 125 cents per share to be paid on 30 September 2019, taking total dividends paid and payable to 250 cents per share for FY19.

This represents a payout ratio of 100% and is in line with Perpetual’s dividend policy to pay dividends within a range of 80% to 100% of NPAT on an annualised basis and maximising fully franked dividends to shareholders.

The Dividend Reinvestment Plan (DRP) will be operational for the interim dividend. No discount will apply and the DRP will be met by acquiring existing shares on-market. A broker will be appointed to acquire existing shares to satisfy the DRP.

Perpetual’s return on equity (ROE) was 17.5% for the period compared with 21.6% in FY18.

The All Ords closed at 6,699 on 30 June 2019, up 7% on the closing level on 30 June 2018 of 6,290.

PERPETUAL ANNUAL REPORT 2019 65

Operating and Financial Review

for the 12 months ended 30 June 2019

1.3 Group financial position

1.3 Group fnancial position
			2H19 1	1H19 1	2H18 1	1H18 1
AS AT			$M	$M	$M	$M
Assets
Cash and cash equivalents			299.6	279.8	320.2	270.1
Liquid investments			69.7	63.4	75.0	83.7
Goodwill and other intangibles			345.8	346.9	327.7	327.8
Other assets			185.1	237.7	240.1	176.2
Total assets			900.1	927.8	963.0	857.8
Liabilities
Corporate loan facility			87.0	87.0	87.0	87.0
Other liabilities			150.9	180.1	214.8	123.7
Total liabilities			237.9	267.1	301.8	210.7
Net assets			662.2	660.7	661.1	647.1
Shareholder funds
Contributed equity			519.2	521.1	508.7	508.6
Reserves			20.0	14.4	24.2	20.0
Retained earnings			123.0	125.1	128.3	118.5
Total equity			662.2	660.7	661.1	647.1

DEBT METRICS	FY19	FY18	2H19	1H19	2H18	1H18
Corporate debt $M	87.0	87.0	87.0	87.0	87.0	87.0
Corporate debt to capital ratio (%)2	11.6	11.6	11.6	11.6	11.6	11.9
Interest coverage calculation for
continuing operations(times)3	59x	75x	57x	61x	73x	76x
NTA per share($)	6.47	6.68	6.47	6.43	6.68	6.59

	FY19	FY18	2H19	1H19	2H18	1H18
CASHFLOW FOR THE PERIOD	$M	$M	$M	$M	$M	$M
Net cash from operating activities	132.7	144.3	87.5	45.2	113.7	30.6
Net cash used in investing activities	(27.8)	(21.8)	(7.4)	(20.4)	(0.8)	(21.0)
Net cash used in fnancingactivities	(125.5)	(125.8)	(60.3)	(65.2)	(62.9)	(62.9)
Net (decrease)/increase in cash and
cash equivalents	(20.6)	(3.3)	19.9	(40.5)	49.9	(53.3)

Excludes the assets and liabilities for the Perpetual Exact Market Cash Fund (EMCF) structured product.
Corporate debt/(corporate debt + equity).
EBIT/interest expense.

1.3.1 Balance sheet analysis

Key movements in Perpetual’s consolidated balance sheet during FY19 are described below.

Cash and cash equivalents decreased by $20.6 million, or 6%, to $299.6 million as at 30 June 2019.

Liquid investments decreased by $5.3 million to $69.7 million as at 30 June 2019 predominantly due to a disposal in unlisted unit trust investments during 1H19 with markets providing volatility within FY19.

Goodwill and other intangibles increased by $18.1 million due to an acquisition in 1H19 and continued technology investments.

Other assets and other liabilities have both decreased by $64 million due to the resolution of the Banksia matter. Excluding this matter, other assets increased by $9 million and other liabilities decreased by $0.1 million during FY19.

Contributed equity has increased by $10.5 million during FY19. This increase is primarily attributable to the vesting of shares under employee share plans.

Total reserves have decreased by $4.2 million to $20.0 million as at 30 June 2019 predominantly due to a decrease in the available-for-sale reserve of $5.0 million following the implementation of AASB 9 Financial Instruments from 1 July 2018, noting that transitional adjustments were recognised in retained earnings on 1 July 2018.

1.3.2 Capital management

Perpetual’s principles for its capital management are as follows:

i) maximising returns to shareholders
ii) enabling the Group’s strategy

iii) ensuring compliance with the Group’s risk appetite statement and regulatory requirements, and

iv) withstanding shocks to the market.

Perpetual maintains a conservative balance sheet with low gearing levels. As part of its capital management strategy, the Group continually reviews options to ensure that it is optimising its use of capital and maximising returns to shareholders.

The Group uses a risk-based capital model to assess its capital requirements. The model requires capital to be set aside for operational, credit and market risk and any known capital commitments.

At the end of FY19, total base capital requirements were $173 million compared to $354 million of available liquid funds.

During FY19, the Group has maintained its balance sheet strength through:

continuing to maintain the overall credit quality of the Group’s risk assets
maintaining committed debt facilities of $130 million, drawn to $87 million as at 30 June 2019, and
continued discretionary expense management within each business unit and support group.

1.3.3 Liquidity

The Group actively manages liquidity risk by preparing cash flow forecasts for future periods, reviewing them regularly with senior management, maintaining a committed credit facility, and engaging regularly with its debt providers.

In FY19, cash and cash equivalents decreased by $20.6 million compared to a decrease of $3.3 million in FY18. This represents a decrease in cash flow of $17.3 million, principally due to:

net cash from operating activities decreased by $11.6 million on FY18
net cash used in investing activities increased by $6.0 million on FY18 primarily due to an increase in payments for property, plant and equipment of $4.1 million and an increase in payments for the acquisition of a business of $12.5 million offset by an increase in net proceeds from the sale of investments of $10.6 million, and
net cash used in financing activities decreased by $0.3 million on FY18 predominantly due to a decrease in dividend payments offset by a repurchase of shares on-market.

1.3.4 Debt

At the end of FY19, Perpetual’s gross corporate debt remained unchanged at $87 million compared to FY18. The Group’s gearing ratio remained stable at 11.6% (FY18: 11.6%) at the end of FY19 and remains well within Perpetual’s stated risk appetite limit of 30%.

Perpetual’s corporate debt is currently sourced from a long-term banking relationship with the National Australia Bank. Perpetual’s gross corporate debt remains unchanged at $87 million with a further $43 million undrawn facility available to the Group. Repayment of the $87 million is not due before October 2020.

The facility is subject to annual review and the Group meeting certain debt covenants including shareholder funds as a percentage of total assets, and maximum ratio of gross debt to EBITDA. The Group complied with all the relevant covenants throughout the year.

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Operating and Financial Review

for the 12 months ended 30 June 2019

1.4 Regulatory developments and business risks

1.4.1 Regulatory developments

The financial services industry continues to be subject to legislative and regulatory reform which affects or could affect the Group’s operations. The following discussion provides an overview of key regulatory reforms and their impact on the Group where known.

Royal Commission

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry issued its final report on 1 February 2019. The Federal Government has indicated that it intends to adopt the recommendations and a program of legislative change is underway. ASIC and APRA have both indicated their intention to adopt various recommendations. The Group is monitoring developments closely.

Governance

Reinforcing the findings of the Royal Commission, there has been an increasing focus on governance, culture and accountability within the financial services industry. Whilst the Group is in compliance with existing governance requirements, any material changes to existing regulation may impact on Perpetual practices. Recent examples include:

The publication of the 4[th] edition of the ASX Corporate Governance Council’s Principles and Recommendations.
The recommendations by the Royal Commission to extend the Banking and Executive Accountability Regime (BEAR) to all APRA-regulated financial institutions and ASIC’s statement that it will also extend BEAR to all Australian financial services licensees.
ASIC’s strategic focus on the “fairness imperative”, which has been bolstered by a new enforcement posture of “why not litigate” and a more intensive supervisory approach.
The passing into Australian law of the Modern Slavery Act 2018 and the requirement to produce a modern slavery statement.

Transparency

There is increasing focus on disclosure and reporting standards. The implementation of ASIC Regulatory Guide – RG 97 continues, as does the implementation of the ATO Common Reporting Standard requirements and the FSC Asset Stewardship Standard.

There has also been a new focus on the disclosure of financial risks associated with climate change.

Despite the operational challenges and associated cost with implementation, the Group considers increased transparency a reflection of good culture and governance and continues to implement this in accordance with the respective timetables.

New investment vehicle structures and schemes

Schemes such as the introduction of the Corporate Collective Investment Vehicles and the Asia Region Funds Passport have the potential to attract greater offshore investment. As draft legislation is released, the Group is assessing relevant opportunities given its existing capabilities.

1.4.2 Business risks

Risk management framework

Perpetual’s approach to risk management is based on a risk appetite statement set by the Perpetual Board, which outlines the risk boundaries and minimum expectations of Perpetual Management. The Board’s Audit, Risk and Compliance Committee (ARCC) is responsible for overseeing Perpetual’s risk management process. Perpetual has a dedicated Group Risk function, led by the Chief Risk Officer, which has day to day responsibility for the design, implementation and maintenance of Perpetual’s risk management framework, and an independent Internal Audit department.

The risk management framework is underpinned by the ‘Three Lines of Defence model’. This model sees the first line, being business unit management, accountable for the day-to-day identification and management of risks. Perpetual’s Group Risk and Group Compliance functions represent the second line and are responsible for overseeing first line activities. Internal Audit provides independent assurance, representing the third line, and reports to the ARCC.

The Group’s risk management framework and the Three Lines of Defence model are designed to manage and formulate responses to the key business risks faced by the Group which are set out on the following page.

The primary mitigants in place to manage these risks include Perpetual’s policy, risk and compliance frameworks, clearly defined behaviours and performance assessment process, education and compliance training, defined governance processes and delegation of authorities.

1.4.3 Key business risks

The key business risks faced by Perpetual are set out below.

K CATEGORY	RISK DESCRIPTION/IMPACT RISK MITIGANTS
mpliance, al and duct	The risk that Perpetual breaches its compliance and legal obligations, leading to reputation damage, litigation, fnes, breach of contract or adverse regulatory outcomes. • Independent legal and compliance team, and training across teams • Compliance obligations are documented and monitored • Independent issues assessment
	Manifestation of behaviours and practices (conduct) that are considered unethical or unacceptable, including actions that compromise the best interests of Perpetual’s clients and the integrity of the marketplace. • Clearly defned expected behaviours of all individuals that form part of the performance assessment process • Implementation of the Three Lines of Defence risk practices • Whistleblowing arrangements managed by an independent vendor • Enterprise people, risk and compliance training arrangements
ancial	Risk of inappropriate use of Perpetual fnancial resources, drivers of fnancial performance are not well understood or managed to expectations, or fnancial results inappropriately accounted for or disclosed. • Budget planning process • Reconciliation and review processes • Regular income and expense reviews • Internal and external auditors
	Exposure to, or reliance on, revenue streams linked to equity markets resulting in potentially volatile earnings (revenue diversity and asset pricing market risk). • Diversifcation of revenue sources • Active management of the cost base
	Impact upon proftability due to the loss of key clients. • Constant focus on servicing clients to the highest standards and acting in clients’ best interests • Strong investment governance processes which support transparent and timely reporting to clients
estment	The risk of loss resulting from ineffective investment strategies, management or structures resulting in sustained underperformance relative to peers and benchmarks. • Well defned and disciplined investment processes and philosophy for selection • Established investment governance structure in place • Independent mandate monitoring and reporting
erational	The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This includes (but is not limited to) process, fraud and business continuity risks. • Clearly defned policies, procedures, roles and responsibilities • Controls testing in the form of control self-assessment • Business continuity planning and disaster recovery programs • Independent assurance
	Cyber risk, including the risk of loss (both data and fnancial) resulting from unauthorised access to and/or tampering with Perpetual’s IT systems or data. • Defned information security program and IT security policies • Implementation of operational security technology (including frewalls and antivirus) • Security(penetration)testing of key systems
sourcing	The risk that services performed by external service providers are not managed in line with the servicing contract or the operational standards required, resulting in potential negative impacts to shareholders and/or customers. • Partnered with well-regarded and proven strategic partners • Outsourced relationships are managed at a senior level • Outsourcing and vendor management framework, with legal contracts • Service level standards monitored

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Operating and Financial Review

for the 12 months ended 30 June 2019

RISK CATEGORY	RISK DESCRIPTION/IMPACT RISK MITIGANTS
People	Exposure to changes in personnel, particularly in key investment management roles. • Succession planning, talent identifcation programs, remuneration benchmarking, reporting to the People and Remuneration Committee • Alignment of remuneration outcomes, including asset manager (portfolio manager and investment analyst) remuneration, to longer-term value creation for shareholders and clients • Employee engagement monitoring
	Exposure of staff, customers and suppliers to work health and safety (WH&S) issues with potential detrimental impact. • Well defned WH&S policies, procedures and training • WH&S Committee • Incident and injury management processes
Reputation	The risk arising from negative perception on the part of both existing and prospective clients, employees, counterparties, shareholders, investors, regulators or other stakeholders that can adversely affect Perpetual’s ability to maintain existing, or establish new client relationships and business operations. • Application of risk appetite statement • Effective risk management framework that sets out how risk is managed • Effective issues management processes to respond to events that may arise • Media monitoring • Net Promoter Score measurement and reporting
Strategic	Adverse strategic decisions, ineffective implementation of strategic decisions, a lack of responsiveness to industry changes or exposure to economic, market or demographic considerations that affect Perpetual’s market position and client value proposition. • Considered strategic and business planning processes • Strategic measures cascaded through performance management • Application of Risk Appetite Statement in strategic decision-making

1.5 Outlook

The long-term outlook for the Group is bolstered by the growing need for investments, advice and income in retirement. At the same time, external environmental factors, such as regulatory and political uncertainty, and market volatility can pose near-term challenges facing not just Perpetual but also the broader financial services industry.

The current environment provides both opportunity and risk for the Group. Perpetual’s business model positions it well to pursue opportunities, both organic and inorganic, across all three business lines. In addition, our focused business model and disciplined approach within Perpetual Private provides opportunities following the issuance of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Given the sensitivity of Perpetual’s revenue and profitability to movements in Australian equity markets, net flows, and investment performance, near-term results are subject to significant variability, particularly during periods of high market volatility as experienced during FY19.

Section 2 – Review of businesses

2. REVIEW OF BUSINESSES

The results and drivers of financial performance in FY19 for the three Perpetual business units are described in the following sections. A description of revenues and expenses at the Group Support Services level is also provided.

2.1 Perpetual Investments

2.1.1 Business overview

Perpetual Investments is one of Australia’s most highly regarded investment managers, offering a broad range of investment, superannuation and retirement savings products. The business manages investments across a range of asset classes, including Australian and global equities, fixed income and multi asset strategies. It services a diverse range of client types, from large institutional investors through to smaller retail investors.

2.1.2 Financial performance

2.1.2 Financial performance
	FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
FOR THE PERIOD	$M	$M	FY18	$M	$M	$M	$M
Revenue by asset class – Equities	169.1	197.3	(14%)	81.2	88.0	96.7	100.6
– Cash and fxed income	29.0	26.7	9%	15.1	13.9	13.8	13.0
– Other FUM related	6.6	8.0	(18%)	2.8	3.7	4.0	3.9
– Other non-FUM related	0.3	0.3	1%	0.1	0.2	0.2	0.1
Total Revenue	205.0	232.3	(12%)	99.2	105.8	114.6	117.6
Operating expenses	(115.1)	(110.5)	(4%)	(60.8)	(54.3)	(55.6)	(54.9)
EBITDA	89.9	121.8	(26%)	38.4	51.5	59.1	62.7
Depreciation and amortisation	(2.6)	(2.4)	(8%)	(1.2)	(1.4)	(1.2)	(1.3)
Equity remuneration expense	(7.3)	(6.9)	(7%)	(3.7)	(3.6)	(3.5)	(3.4)
Proft before tax	79.9	112.5	(29%)	33.5	46.5	54.4	58.1

30 June 2019 versus 30 June 2018

In FY19, Perpetual Investments reported profit before tax of $79.9 million, $32.6 million or 29% lower than FY18.

The decrease was largely driven by a decline in average FUM to $28.8 billion due to net outflows and prior period distributions partially offset by higher equity markets. The cost to income ratio in FY19 was 61% compared to 52% in FY18.

2.1.3 Drivers of performance

Revenue

Perpetual Investments generated revenue of $205.0 million in FY19, $27.3 million lower than in FY18. The key factors that impacted revenue in FY19 included:

lower average FUM due to the impact of net outflows largely from institutional clients and the impact of prior period distributions
lower equities performance fees earned in FY19 compared to FY18, partially offset by
higher equity markets and inflows associated with the listed investments strategy.

Average FUM revenue margins in FY19 were 71 basis points (bps), 2 bps lower than in FY18. Excluding performance fees earned, underlying average margins remained constant at 70 bps.

Movements in average margins usually result from changes in the mix of FUM between lower-margin institutional and higher-margin retail investors, as well as changes in the mix of asset classes such as cash (generally lower margin) and equities (generally higher margin) and the contribution of performance fees earned.

Expenses

Total expenses, comprising operating expenses, depreciation, amortisation and equity remuneration for Perpetual Investments in FY19 were $125.1 million, $5.3 million or 4% higher than in FY18.

The increase in expenses on FY18 was mainly due to costs incurred in pursuing the Group’s inorganic strategy, issuance costs connected with the listed investments strategy and remediation costs related to legacy matters, partially offset by lower variable remuneration expenses and lower equity performance fee expenses.

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2.1.4 Funds under management

Revenue margin

Revenue margin
	FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
FOR THE PERIOD	BPS	BPS	FY18	BPS	BPS	BPS	BPS
By asset class:
– Equities	82	83	(1)	82	81	82	83
– Cash and fxed income	40	39	1	41	39	40	39
– Other FUM related	77	81	(4)	75	78	82	80
Average revenue margin	71	73	(2)	71	71	73	74

Performance fees ($M)

Performance fees ($M)
	FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
FOR THE PERIOD	$M	$M	FY18	$M	$M	$M	$M
By asset class:
– Equities	1.5	6.9	(78%)	1.2	0.3	2.7	4.1
– Cash and fxed income	2.0	2.3	(15%)	0.8	1.1	1.2	1.2
Total performance fees	3.5	9.2	(62%)	2.1	1.4	3.9	5.3

Closing FUM summary ($B)

	FUM MOVEMENTS NET FLOWS
	FY19 NET FLOWS OTHER 1 FY18 2H19 $B 1H19 $B 2H18 $B 1H18 $B
Institutional Intermediary (master trust and wrap) Retail Listed investment vehicles	7.0 (3.0) 0.3 9.7 (2.2) (0.8) (1.2) (0.8) 14.4 (1.3) 0.2 15.5 (0.9) (0.4) (0.2) – 4.9 (0.5) 0.1 5.3 (0.3) (0.2) (0.3) – 0.8 0.5 – 0.3 0.4 0.1 – –
All distribution channels	27.1 (4.3) 0.6 30.8 (3.0) (1.3) (1.7) (0.8)
Australian equities2 Global equities	17.4 (4.2) 0.4 21.2 (3.0) (1.2) (1.9) (0.9) 1.3 (0.2) 0.2 1.3 (0.2) – (0.1) 0.1
Equities Cash and fxed income Other	18.7 (4.4) 0.6 22.5 (3.2) (1.2) (2.0) (0.8) 7.5 0.2 – 7.3 0.2 – 0.3 – 0.9 (0.1) – 1.0 – (0.1) – –
All asset classes	27.1 (4.3) 0.6 30.8 (3.0) (1.3) (1.7) (0.8)

Includes changes in asset values, income, reinvestments, distributions, and asset class rebalancing within the Group’s diversified funds.
Listed Investment vehicles comprise the Perpetual Equity Investment Company (“PIC”) and the Perpetual Credit Income Trust (“PCI”). The prior period (1H19, 2H18 and 1H18) Australian Equities FUM has been restated to include FUM previously disclosed under “Listed Investment Company”.

The drivers of revenue margins by asset class are described below:

Equities: Revenues represent fees earned on Australian and global equities products. Revenue in FY19 was $169.1 million, a decrease of 14% on FY18. Revenue was negatively impacted by lower average FUM as a result of net outflows and prior period distributions and lower performance fees earned, partially offset by higher equity markets. The average margin in FY19 was 82 bps, 1 bp lower than FY18 mainly due to lower performance fees and changes in channel mix.

Cash and fixed income: Revenues are derived from the management of cash and fixed income products. Revenue in FY19 was $29.0 million, an increase of 9% on FY18 primarily due to higher average FUM. The revenue margin in FY19 of 40 bps increased by 1 bp when compared to FY18.

Other FUM related: Revenue includes management fees for sub-advisory mandates and external funds on the WealthFocus platform. Revenue in FY19 was $6.6 million, a decrease of 18% on FY18.

Other non-FUM related: Revenue includes the interest earned on operational bank accounts across the business.

FUM

Perpetual Investments’ FUM as at 30 June 2019 was $27.1 billion, with net outflows of $4.3 billion for the year. Points of note in relation to the FUM and flows data for FY19:

outflows in the institutional and intermediary channels were primarily in Australian Equities, and
inflows within cash and fixed income driven by the Perpetual Credit Income Trust (“PCI”) and Pure Credit Alpha, partially offset by outflows in lower margin enhanced cash mandates.

2.2 Perpetual Private

2.2.1 Business overview

Perpetual Private provides a range of advice and trustee services for high net worth individuals in the target segments of ‘business owners’, ‘established wealthy’ and ‘professionals’.

Perpetual Private aims to be the leading provider of advice and wealth management for high net worth individuals, families, businesses and not-for-profit organisations. A key part of Perpetual Private is its philanthropic business and Perpetual is one of Australia’s largest managers of philanthropic funds, with $2.9 billion in FUA for charitable trusts and endowment funds as at the end of FY19.

2.2.2 Financial performance

2.2.2 Financial performance
	FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
FOR THE PERIOD	$M	$M	FY18	$M	$M	$M	$M
Market related revenue	120.4	120.5	(0%)	59.9	60.5	59.5	61.0
Non-market related revenue	65.7	65.9	(0%)	33.5	32.1	34.2	31.8
Total revenues	186.1	186.4	(0%)	93.4	92.6	93.7	92.8
Operating expenses	(132.0)	(128.4)	(3%)	(68.3)	(63.6)	(64.8)	(63.6)
EBITDA	54.1	58.0	(7%)	25.1	29.0	28.9	29.2
Depreciation and amortisation	(9.7)	(9.0)	(8%)	(4.9)	(4.8)	(4.6)	(4.4)
Equity remuneration expense	(3.2)	(3.0)	(8%)	(1.7)	(1.5)	(1.3)	(1.6)
Proft before tax	41.2	46.1	(11%)	18.5	22.6	23.0	23.1
Funds under advice ($B) Closing FUA	$14.8B	$14.1B	5%	$14.8B	$13.7B	$14.1B	$13.7B
Average FUA	$14.2B	$13.6B	5%	$14.4B	$14.1B	$13.8B	$13.4B
Market related revenue margin	85bps	89bps	(4bps)	83bps	86bps	86bps	91bps

30 June 2019 versus 30 June 2018

In FY19, Perpetual Private reported profit before tax of $41.2 million, $4.9 million or 11% lower than in FY18.

This was mainly due to increased investment in strategic initiatives, including additional staff costs to support future business growth, and one-off remediation costs, partially offset by lower variable remuneration.

Perpetual Private experienced continued new client growth within the high net worth segment in FY19. The cost to income ratio in FY19 was 78% compared to 75% in FY18.

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2.2.3 Drivers of performance

Revenue

Perpetual Private generated revenue of $186.1 million in FY19, $0.3 million lower than in FY18.

Market related revenue was $120.4 million, $0.1 million lower than in FY18. The impact of legacy book repricing and lower margin was offset by growth in average FUA due to stronger equity markets and continued positive net flows.

Non-market related revenue was $65.7 million, $0.2 million lower than FY18. The impact of legacy book repricing and lower transactional revenue was offset by growth in Fordham (tax and accounting).

Perpetual Private’s market related revenue margin was 85 bps in FY19 compared to 89 bps in FY18 due to changes in portfolio mix, legacy book repricing and timing of rebates impacting 1H18.

Expenses

Total expenses, comprising operating expenses, depreciation, amortisation and equity remuneration for Perpetual Private in FY19 were $144.9 million, $4.6 million or 3% higher than in FY18.

The increase compared to FY18 was primarily due to additional staff costs to support future business growth, investments in other strategic initiatives (eg Professional Services Model) and remediation costs related to legacy matters, partially offset by lower variable remuneration.

2.2.4 Funds under advice

	FY19	NET FLOWS	OTHER 1	FY18	2H19	1H19	2H18	1H18
AT END OF	$B	$B	$B	$B	$B	$B	$B	$B
Total FUA	14.8	0.2	0.5	14.1	14.8	13.7	14.1	13.7

Includes reinvestments, distributions, income and asset growth.

Perpetual Private’s FUA at the end of FY19 was $14.8 billion, $0.7 billion or 5% higher than FY18, primarily due to higher equity markets and positive net flows, partially offset by distributions.

2.3 Perpetual Corporate Trust

2.3.1 Business overview

Perpetual Corporate Trust is a leading provider of corporate trustee services, comprising the following:

Debt Markets Services – provides trustee, agency, trust management, accounting, document custody and standby servicing to the debt capital and securitisation markets, acts as the Australian data warehouse for investor and regulatory reporting and provides digital solutions for the Banking and Financial Services industry, and
Managed Funds Services – provides outsourced responsible entity, custody, trustee and investment management services from both our Singapore and Australia offices across a variety of asset classes including fixed income, equity, property, infrastructure, private equity, emerging markets and hedge funds.

2.3.2 Financial performance

2.3.2 Financial performance
	FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
FOR THE PERIOD	$M	$M	FY18	$M	$M	$M	$M
Debt Markets Services	61.6	57.5	7%	32.7	28.9	29.6	27.9
Managed Funds Services	51.3	45.8	12%	26.6	24.7	24.1	21.7
Total revenues	112.9	103.3	9%	59.3	53.6	53.7	49.6
Operating expenses	(56.6)	(53.2)	(6%)	(29.6)	(27.0)	(27.3)	(25.9)
EBITDA	56.3	50.1	12%	29.7	26.6	26.4	23.7
Depreciation and amortisation	(7.5)	(6.5)	(14%)	(3.9)	(3.6)	(3.4)	(3.1)
Equity remuneration expense	(1.0)	(1.0)	(3%)	(0.5)	(0.6)	(0.3)	(0.7)
Interest expense	(0.2)	–	NM	(0.1)	(0.1)	–	–
Proft before tax	47.7	42.6	12%	25.2	22.4	22.8	19.8

30 June 2019 versus 30 June 2018

In FY19, Perpetual Corporate Trust reported profit before tax of $47.7 million, $5.1 million or 12% higher than in FY18. The cost to income ratio in FY19 was 58% compared to 59% in FY18.

2.3.3 Drivers of performance

Revenue

Perpetual Corporate Trust generated revenue of $112.9 million in FY19, $9.6 million or 9% higher than in FY18. The main drivers of the improvement by business line compared to FY18 were as detailed below.

In FY19, Debt Markets Services revenue was $61.6 million, $4.1 million or 7% higher than in FY18. The primary drivers for the increase on FY18 were the impact of the acquisition of RFi Analytics and underlying growth in the securitisation portfolio.

In FY19, Managed Funds Services revenue was $51.3 million, $5.5 million or 12% higher than FY18. The increase compared to FY18 was primarily due to continued market activity within its core commercial property and managed investment funds segments, together with higher asset prices.

Expenses

Total expenses, comprising operating expenses, depreciation, amortisation and equity remuneration, for Perpetual Corporate Trust in FY19 were $65.3 million, $4.5 million or 7% higher than in FY18.

The primary drivers of the increase in expenses on FY18 were the impact of the acquisition of RFi Analytics and other investments in strategic initiatives, including additional staff costs to support future business growth, technology uplift and increased amortisation.

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2.3.4 Funds under administration

2.3.4 Funds under administration
FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
AS AT $B	$B	FY18	$B	$B	$B	$B
Market Securitisation RMBS – bank 53.1	65.8	(19%)	53.1	60.0	65.8	59.5
RMBS – non bank 62.4	56.6	10%	62.4	60.4	56.6	53.0
CMBS and ABS 43.3	42.7	1%	43.3	43.1	42.7	45.8
Balance Sheet Securitisation RMBS – repos 243.3	199.7	22%	243.3	205.4	199.7	204.0
Covered bonds 78.3	70.1	12%	78.3	77.5	70.1	68.1
Debt Markets Services – Securitisation1 480.4	434.9	10%	480.4	446.4	434.9	430.4
Other Debt Markets Services 14.5	15.4	(6%)	14.5	14.8	15.4	17.9
Total Debt Markets Services 494.9	450.3	10%	494.9	461.2	450.3	448.3
Managed Funds Services 269.7	242.9	11%	269.7	255.8	242.9	214.2
Total FUA 764.5	693.2	10%	764.5	717.1	693.2	662.4

Includes warehouse and liquidity finance facilities.

At the end of FY19, Securitisation FUA in the Debt Markets Services business was $480.4 billion, an increase of $45.5 billion or 10% on FY18.

Positive net issuance with growth in FUA across RMBS – non bank, RMBS – repos and covered bonds, partially offset by a decrease in RMBS – bank FUA.

RMBS runoff in FY19 has been slightly slower than FY18.

Prior year Debt Markets Services – Securitisation FUA composition has been adjusted to correct a mis-classification of a number of smaller RMBS – repo transactions identified during 1H19. In FY18, 1H18 and 2H18, RMBS – repo FUA have been adjusted upwards by $7.8 billion, RMBS – bank FUA have been adjusted downwards by $5.4 billion and RMBS – non bank FUA have been adjusted downwards by $2.4 billion.

At the end of FY19, Managed Funds Services FUA was $269.7 billion, an increase of $26.8 billion or 11% on FY18, primarily driven by growth in the custody business.

2.4 Group Support Services

2.4.1 Business overview

Group Support Services consists of Group Investments, Corporate Services comprising Finance and Technology, Risk and Compliance, People and Culture, Marketing and Communications and provides technology, property, legal, risk and financial management, and human resources support, to the business units.

Costs retained by Group Support Services reflect costs that management deems to be associated with corporate functions rather than reportable business segment activity. These include costs associated with the Board of Directors and 50% of the costs associated with the Group Executives of each of the Group Support Services business units (CEO, Corporate Services, Risk and Compliance, People and Culture and Marketing and Communications). Costs and revenues associated with the capital structure of the Group, including interest income, financing costs and ASX listing fees, are also retained within Group Support Services.

2.4.2 Financial performance

2.4.2 Financial performance
	FY19	FY18	FY19 v	2H19	1H19	2H18	1H18
FOR THE PERIOD	$M	$M	FY18	$M	$M	$M	$M
Interest Income	6.3	6.2	3%	3.0	3.3	3.1	3.1
Other Income1	3.8	5.6	(32%)	6.8	(3.1)	1.8	3.7
Total revenues	10.1	11.7	(14%)	9.8	0.3	4.9	6.8
Operating expenses	(14.4)	(14.6)	2%	(8.5)	(5.8)	(9.3)	(5.4)
EBITDA	(4.3)	(2.9)	(46%)	1.3	(5.6)	(4.4)	1.5
Depreciation and amortisation	(0.2)	(0.4)	55%	(0.1)	(0.1)	(0.2)	(0.3)
Equity remuneration expense	0.5	1.1	54%	(0.3)	0.8	0.5	0.6
Interest expense	(2.6)	(2.6)	(0%)	(1.2)	(1.4)	(1.3)	(1.3)
Proft before tax	(6.6)	(4.9)	(35%)	(0.4)	(6.2)	(5.4)	0.5

Other Income includes realised gains and losses on investments, distributions and assets designated at ‘fair value through profit and loss’ (FVTPL). Previously, unrealised gains and losses on assets at FVTPL were recognised through available-for-sale reserve in equity rather than taken into the income statement. Comparatives were not restated, and transitional adjustments were recognised in retained earnings on 1 July 2018.

2.4.3 Drivers of performance

Revenue

In FY19, revenue from the Group’s cash holdings and principal investments was $10.1 million, $1.6 million or 14% lower than in FY18. The decrease was predominantly driven by a decrease in the net gain on the sale of seed funds, investing in product (IIP) and the underlying assets on model portfolios, partially offset by an increase in distribution income received from unit trust investments held for IIP and seed fund investments.

Expenses

Total expenses, comprising operating expenses, depreciation, amortisation, equity remuneration and interest expense for Group Support Services in FY19 were $16.7 million, $0.1 million or 1% higher than in FY18.

Investments in strategic initiatives including technology uplift, increased regulatory expenses and higher equity remuneration reversals in FY18 were offset by lower variable remuneration and ongoing expense management.

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Section 3 – Appendices

3. APPENDICES

3.1 Appendix A: Segment results

Section 3 – Appendices 3. APPENDICES 3.1 Appendix A: Segment results
			FY19
			PERPETUAL	GROUP
	PERPETUAL	PERPETUAL	CORPORATE	SUPPORT
	INVESTMENTS	PRIVATE	TRUST	SERVICES	TOTAL
PERIOD	$M	$M	$M	$M	$M
Operating revenue	205.0	186.1	112.9	10.1	514.1
Operating expenses	(115.1)	(132.0)	(56.6)	(14.4)	(318.1)
EBITDA	89.9	54.1	56.3	(4.3)	196.0
Depreciation and amortisation	(2.6)	(9.7)	(7.5)	(0.2)	(20.0)
Equity remuneration	(7.3)	(3.2)	(1.0)	0.5	(11.1)
EBIT	79.9	41.2	47.8	(4.0)	164.9
Interest expense	–	–	(0.2)	(2.6)	(2.8)
UPBT	79.9	41.2	47.7	(6.6)	162.2

			FY18
			PERPETUAL	GROUP
	PERPETUAL	PERPETUAL	CORPORATE	SUPPORT
	INVESTMENTS	PRIVATE	TRUST	SERVICES	TOTAL
PERIOD	$M	$M	$M	$M	$M
Operating revenue	232.3	186.4	103.3	11.7	533.7
Operating expenses	(110.5)	(128.4)	(53.2)	(14.6)	(306.7)
EBITDA	121.8	58.0	50.1	(2.9)	227.0
Depreciation and amortisation	(2.4)	(9.0)	(6.5)	(0.4)	(18.4)
Equity remuneration	(6.9)	(3.0)	(1.0)	1.1	(9.8)
EBIT	112.5	46.1	42.6	(2.3)	198.9
Interest expense	–	–	–	(2.6)	(2.6)
UPBT	112.5	46.1	42.6	(4.9)	196.3

		2H19					1H19
		PERPETUAL	GROUP				PERPETUAL	GROUP
PERPETUAL	PERPETUAL	CORPORATE	SUPPORT		PERPETUAL	PERPETUAL	CORPORATE	SUPPORT
INVESTMENTS	PRIVATE	TRUST	SERVICES	TOTAL	INVESTMENTS	PRIVATE	TRUST	SERVICES	TOTAL
$M	$M	$M	$M	$M	$M	$M	$M	$M	$M
99.2	93.4	59.3	9.8	261.8	105.8	92.6	53.6	0.3	252.3
(60.8)	(68.3)	(29.6)	(8.5)	(167.2)	(54.3)	(63.6)	(27.0)	(5.8)	(150.8)
38.4	25.1	29.7	1.3	94.6	51.5	29.0	26.6	(5.6)	101.5
(1.2)	(4.9)	(3.9)	(0.1)	(10.1)	(1.4)	(4.8)	(3.6)	(0.1)	(9.9)
(3.7)	(1.7)	(0.5)	(0.3)	(6.2)	(3.6)	(1.5)	(0.6)	0.8	(4.9)
33.5	18.5	25.3	0.9	78.2	46.5	22.6	22.5	(4.9)	86.7
–	–	(0.1)	(1.2)	(1.4)	–	–	(0.1)	(1.4)	(1.4)
33.5	18.5	25.2	(0.4)	76.9	46.5	22.6	22.4	(6.2)	85.3

		2H18					1H18
		PERPETUAL	GROUP				PERPETUAL	GROUP
PERPETUAL	PERPETUAL	CORPORATE	SUPPORT		PERPETUAL	PERPETUAL	CORPORATE	SUPPORT
INVESTMENTS	PRIVATE	TRUST	SERVICES	TOTAL	INVESTMENTS	PRIVATE	TRUST	SERVICES	TOTAL
$M	$M	$M	$M	$M	$M	$M	$M	$M	$M
114.6	93.7	53.7	4.9	266.9	117.6	92.8	49.6	6.8	266.8
(55.6)	(64.8)	(27.3)	(9.3)	(157.0)	(54.9)	(63.6)	(25.9)	(5.4)	(149.8)
59.1	28.9	26.4	(4.4)	110.0	62.7	29.2	23.7	1.5	117.1
(1.2)	(4.6)	(3.4)	(0.2)	(9.3)	(1.3)	(4.4)	(3.1)	(0.3)	(9.1)
(3.5)	(1.3)	(0.3)	0.5	(4.6)	(3.4)	(1.6)	(0.7)	0.6	(5.2)
54.4	23.0	22.8	(4.0)	96.1	58.1	23.1	19.8	1.8	102.8
–	–	–	(1.3)	(1.3)	–	–	–	(1.3)	(1.3)
54.4	23.0	22.8	(5.4)	94.8	58.1	23.1	19.8	0.5	101.5

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3.2 Appendix B: Bridge for FY19 Statutory Accounts and OFR

UPAT represents Perpetual’s measure of the results for the ongoing business of the Group as determined by the Board and management. UPAT has been calculated in accordance with ASIC’s Regulatory Guide 230 – Disclosing non-IFRS financial information has been followed when presenting this information. UPAT attributable to equity holders of Perpetual Limited has not been audited by the Group’s external auditors; however, the adjustments have been extracted from the books and records that have been audited. Underlying profit after tax attributable to equity holders of Perpetual Limited is disclosed as it is useful for investors to gain a better understanding of Perpetual’s financial results from normal operating activities.

Bridge for FY19 Statutory Accounts and OFR

	OFR ADJUSTMENTS
	FY19 STATUTORY ACCOUNTS $’000 EMCF 1 $’000 FY19 OFR $’000
Revenue	519,405 (5,299) 514,106
Staff related expenses excluding equity remuneration expense Occupancy expenses Administrative and general expenses Distributions and expenses relating to structured products Equity remuneration expense Depreciation and amortisation expense Financingcosts	(185,381) – (185,381) (17,623) – (17,623) (115,070) – (115,070) (5,299) 5,299 – (11,058) – (11,058) (20,025) – (20,025) (2,787) – (2,787)
Total expenses	(357,243) 5,299 (351,945)
Net proft before tax	162,162 – 162,162
Income tax expense	(46,233) – (46,233)
Net proft after tax	115,929 – 115,929
Net proft after tax consolidated entity	115,929 – 115,929
Net proft after tax attributable to equity holders of Perpetual Limited	115,929 – 115,929

Income from the EMCF structured products is recorded on a net basis; for statutory purposes Revenue and distributions are adjusted to reflect the gross revenue and expenses of these products.

3.3 Appendix C: Average funds under management

Average FUM by asset class

	FY19	FY18	FY19 V	2H19	1H19	2H18	1H18
FOR THE PERIOD	$B	$B	FY18	$B	$B	$B	$B
Australian equities1	19.2	23.1	(17%)	18.2	20.1	22.0	22.6
Global equities	1.4	1.1	27%	1.4	1.4	1.5	1.3
Total equities	20.6	24.2	(15%)	19.6	21.5	23.5	23.9
Cash and fxed income	7.3	6.3	16%	7.3	7.2	6.9	6.7
Other	0.9	1.0	(10%)	0.9	1.0	1.0	1.0
Total average FUM	28.8	31.5	(9%)	27.8	29.7	31.4	31.6

Listed Investment vehicles comprise the Perpetual Equity Investment Company (“PIC”) and the Perpetual Credit Income Trust (“PCI”). The prior period (1H19, 2H18 and 1H18) Australian Equities FUM has been restated to include FUM previously disclosed under “Listed Investment Company”.

3.4 Appendix D: Full time equivalent employees

Total FTE employees

3.4 Appendix D: Full time equivalent employees Total FTE employees
AT END OF 2H19 1H19 2H18	1H18
Perpetual Investments 168 161 173	162
Perpetual Private 417 396 410	402
Perpetual Corporate Trust 203 196 192	187
Group Support Services 172 163 160	159
Total operations 960 915 936	910
Permanent 931 898 912	899
Contractors 29 17 23	11
Total operations 960 915 936	910

3.5 Appendix E: Dividend history

Perpetual’s dividend policy is to maintain a payout ratio range of between 80% and 100% of net profit after tax on an annualised basis. An extended history of Perpetual’s dividends paid including the dividend reinvestment price can be found via this link: www.perpetual.com.au/about/shareholders/dividend-history

			DIVIDEND	FRANKING	COMPANY
YEAR	DIVIDEND	DATE PAID	PER SHARE	RATE	TAX RATE	DRP PRICE
FY19	Final	30 Sep 2019	125 cents	100%	30%	Not determined
						at time of
						publication
FY19	Interim	29 Mar 2019	125 cents	100%	30%	$41.62
FY18	Final	8 Oct 2018	140 cents	100%	30%	$42.20
FY18	Interim	26 Mar 2018	135 cents	100%	30%	$50.34
FY17	Final	29 Sep 2017	135 cents	100%	30%	$52.33
FY17	Interim	24 Mar 2017	130 cents	100%	30%	$51.86
FY16	Final	28 Sep 2016	130 cents	100%	30%	$45.93
FY16	Interim	24 Mar 2016	125 cents	100%	30%	$42.93
FY15	Final	25 Sep 2015	125 cents	100%	30%	$40.61
FY15	Interim	27 Mar 2015	115 cents	100%	30%	$54.20
FY14	Final	3 Oct 2014	95 cents	100%	30%	$45.54
FY14	Interim	4 Apr 2014	80 cents	100%	30%	$49.83

PERPETUAL ANNUAL REPORT 2019 81

Operating and Financial Review

for the 12 months ended 30 June 2019

3.6 Glossary

ABS	Asset backed securities
All Ords	All Ordinaries Price Index
APRA	Australian Prudential Regulatory Authority
ARCC	Audit, Risk and Compliance Committee
ASIC	Australian Securities and Investments Commission
ASX	Australian Securities Exchange
ATO	Australian Taxation Offce
B	Billion
BEAR	Banking and executive accountability regime
bps	Basis point(0.01%)
CMBS	Commercial mortgage backed securities
cps	Cents per share
DPS	Dividend(s)per share
DRP	Dividend Reinvestment Plan
EBIT	Earnings before interest and tax
EBITDA	Earnings before interest, tax, depreciation and amortisation of intangible assets, equity remuneration expense, and signifcant items
EMCF	Perpetual Exact Market Cash Fund
EPS	Earnings per share
FSC	Financial Services Council
FTE	Full time equivalent employee
FUA	Funds under advice or funds under administration
FUM	Funds under management
FVTPL	Fair value through proft and loss
Group	Perpetual Limited and its controlled entities (the consolidated entity) and the consolidated entity’s interests
	in associates
HNW	High net worth
IIP	Investing in Product
M	Million
NM	Not meaningful
NPAT	Net proft after tax
NTA	Net tangible asset
OFR	Operating and Financial Review
PCT	Perpetual Corporate Trust
PI	Perpetual Investments
PP	Perpetual Private
RMBS	Residential mortgage-backed securities
ROE	Return on equity
S&P	Standard & Poor’s
UPAT	Underlying proft after tax
UPBT	Underlying proft before tax

Financial Report

Financial Statements of Perpetual Limited and its controlled entities

for the year ended 30 June 2019

TABLE OF CONTENTS
Primary statements
Consolidated Statement of Proft or Loss and Other Comprehensive Income	84
Consolidated Statement of Financial Position	85
Consolidated Statement of Changes in Equity	86
Consolidated Statement of Cash Flows	87
Section 1 – Group performance
1-1 Operating segments	88
1-2 Revenue	90
1-3 Expenses	92
1-4 Income taxes	92
1-5 Earnings per share	95
1-6 Dividends	95
1-7 Net cash from operatingactivities	97
Section 2 – Operating assets and liabilities
2-1 Business Combinations	98
2-2 Receivables	99
2-3 Other fnancial assets	99
2-4 Property, plant and equipment	100
2-5 Intangibles	101
2-6 Provisions	103
2-7 Employee benefts	104
Section 3 – Capital management and fnancing
3-1 Cash and cash equivalents	105
3-2 Borrowings	105
3-3 Contributed equity	106
3-4 Reserves	106
3-5 Commitments and contingencies	107
Section 4 – Risk management
4-1 Financial risk management	108
Section 5 – Other disclosures
5-1 Structured products assets and liabilities	115
5-2 Parent entity disclosures	117
5-3 Controlled entities	118
5-4 Deed of cross guarantee	120
5-5 Unconsolidated structured entities	122
5-6 Share-based payments	123
5-7 Key management personnel and related parties	126
5-8 Auditor’s remuneration	126
5-9 Subsequent events	127
Section 6 – Basis of preparation
6-1 Reporting entity	128
6-2 Basis of preparation	128
6-3 Other signifcant accounting policies	130
6-4 Changes in signifcant accounting policies	132
6-5 New standards and interpretations notyet adopted	134
Directors’ declaration	135
Independent auditor’s report to the shareholders of Perpetual Limited	136
Additional Information
Securities exchange and investor information	142

PERPETUAL ANNUAL REPORT 2019 83

Financial Report Consolidated Statement of Profit or Loss and Other Comprehensive Income

for the year ended 30 June 2019

		2019	2018
	SECTION	$’000	$’000
Revenue	1–2	519,405	538,845
Expenses	1–3	(354,456)	(344,915)
Financing costs		(2,787)	(2,603)
Net proft before tax		162,162	191,327
Income tax expense	1–4	(46,233)	(51,100)
Net proft after tax		115,929	140,227
Other comprehensive income
Items that are or may be reclassifed subsequently to proft or loss:
Foreign currency translation differences		136	205
Available-for-sale fnancial assets – net change in fair value		–	4,477
Available-for-sale fnancial assets – reclassifed to proft or loss		–	(2,156)
Income tax on items that may be reclassifed to proft or loss	1–4	–	(696)
Other comprehensive income, net of income tax		136	1,830
Total comprehensive income		116,065	142,057
Total comprehensive income attributable to:
Equity holders of Perpetual Limited		116,065	142,057
Earnings per share
Basic earnings per share – cents per share	1–5	250.9	305.0
Diluted earnings per share – cents per share	1–5	246.3	299.5

The Consolidated Statement of Profit or Loss and Other Comprehensive Income is to be read in conjunction with the ‘Notes to and forming part of the financial statements’ set out on pages 88 to 134.

Consolidated Statement of Financial Position

as at 30 June 2019

	2019	2018
	SECTION $’000	$’000
Assets
Cash and cash equivalents	3–1 299,587	320,237
Receivables	2–2 99,774	160,308
Current tax assets	1–4 1,846	–
Structured products – EMCF assets	5–1 252,522	282,993
Other assets	14,538	16,516
Total current assets	668,267	780,054
Other fnancial assets	2–3 69,663	74,969
Property, plant and equipment	2–4 26,564	25,764
Intangibles	2–5 345,779	327,672
Deferred tax assets	1–4 31,512	34,919
Other assets	10,483	2,101
Total non-current assets	484,001	465,425
Total assets	1,152,268	1,245,479
Liabilities
Payables	52,574	39,285
Structured products – EMCF liabilities	5–1 252,169	282,514
Current tax liabilities	1–4 –	5,984
Employee benefts	2–7 40,716	56,482
Provisions	2–6 4,652	67,333
Total current liabilities	350,111	451,598
Payables	3,659	–
Borrowings	3–2 87,000	87,000
Deferred tax liabilities	1–4 16,244	12,618
Employee benefts	2–7 15,352	13,982
Provisions	2–6 17,663	19,147
Total non-current liabilities	139,918	132,747
Total liabilities	490,029	584,345
Net assets	662,239	661,134
Equity
Contributed equity	3–3 519,201	508,673
Reserves	3–4 20,008	24,196
Retained earnings	123,030	128,265
Total equity attributable to equity holders of Perpetual Limited	662,239	661,134

The Consolidated Statement of Financial Position is to be read in conjunction with the ‘Notes to and forming part of the financial statements’ set out on pages 88 to 134.

PERPETUAL ANNUAL REPORT 2019 85

Financial Report Consolidated Statement of Changes in Equity

for the year ended 30 June 2019

					EQUITY
GROSS	TREASURY	EQUITY			HOLDERS
CONTRIBUTED	SHARE	COMPENSATION	OTHER	RETAINED	OF
$’000 EQUITY	RESERVE	RESERVE	RESERVES	EARNINGS	PERPETUAL TOTAL
Balance at 1 July 2018 550,249 Adjustment on initial application of AASB 9, net of tax – Adjustment on initial application of AASB 15, net of tax –	(41,576) – –	18,893 – –	5,303 (5,031) –	128,265 5,031 (3,784)	661,134 661,134 – – (3,784) (3,784)
Adjusted balance at 1 July 2018 550,249	(41,576)	18,893	272	129,512	657,350 657,350
Total comprehensive income/(expense) – Movement on treasury shares 386 Repurchase of shares on-market – Equity remuneration expense – Dividends paid to shareholders –	– 12,264 (2,122) – –	– 136 (13,661) – – – 14,368 – – –		115,929 1,011 – – (123,422)	116,065 116,065 – – (2,122) (2,122) 14,368 14,368 (123,422) (123,422)
Balance at 30 June 2019 550,635	(31,434)	19,600	408	123,030	662,239 662,239

						EQUITY
	GROSS	TREASURY	EQUITY			HOLDERS
	CONTRIBUTED	SHARE	COMPENSATION	OTHER	RETAINED	OF
$’000	EQUITY	RESERVE	RESERVE	RESERVES	EARNINGS	PERPETUAL	TOTAL
Balance at 1 July 2017	550,405	(48,639)	16,734	3,473	112,408	634,381	634,381
Total comprehensive
income/(expense)	–	–	–	1,830	140,227	142,057	142,057
Movement on treasury shares	(156)	7,063	(8,276)	–	1,369	–	–
Equity remuneration expense	–	–	10,435	–	–	10,435	10,435
Dividends paid to shareholders	–	–	–	–	(125,750)	(125,750)	(125,750)
De-recognition of a
controlled entity		–	–	–	11	11	11
Balance at 30 June 2018	550,249	(41,576)	18,893	5,303	128,265	661,134	661,134

The Consolidated Statement of Changes in Equity is to be read in conjunction with the ‘Notes to and forming part of the financial statements’ set out on pages 88 to 134.

Consolidated Statement of Cash Flows

for the year ended 30 June 2019

	2019	2018
	SECTION $’000	$’000
Cash fows from operating activities
Cash receipts in the course of operations	552,125	579,133
Cash payments in the course of operations	(374,964)	(367,208)
Dividends received	180	132
Interest received	6,911	6,474
Interest paid	(2,788)	(2,620)
Income taxes paid	(48,784)	(71,638)
Net cash from operating activities	1-7 132,680	144,273
Cash fows from investing activities
Payments for property, plant, equipment and software	(20,002)	(15,907)
Payments for investments	(35,437)	(36,155)
Payment for acquisition of a business	(13,481)	(1,000)
Proceeds from sale of investments	41,134	31,289
Net cash used in investing activities	(27,786)	(21,773)
Cash fows from fnancing activities
Repurchase of shares on-market	(2,122)	–
Dividends paid	(123,422)	(125,750)
Net cash used in fnancing activities	(125,544)	(125,750)
Net decrease in cash and cash equivalents	(20,650)	(3,250)
Cash and cash equivalents at 1 July	320,237	323,487
Cash and cash equivalents at 30 June	3-1 299,587	320,237

The Consolidated Statement of Cash Flows is to be read in conjunction with the ‘Notes to and forming part of the financial statements’ set out on pages 88 to 134.

PERPETUAL ANNUAL REPORT 2019 87

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

Section 1 – Group performance

This section focuses on the results and performance of Perpetual as a consolidated entity. On the following pages you will find disclosures explaining Perpetual’s results for the year, segmental information, taxation, earnings per share and dividend information. Where an accounting policy is specific to a single note, the policy is described in the section to which it relates.

1-1 OPERATING SEGMENTS

An operating segment is a component of the consolidated entity that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the consolidated entity’s other components and for which discrete financial information is available. All operating segments’ operating results are regularly reviewed by the consolidated entity’s CEO to make decisions about resources to be allocated to the segment and assess their performance.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, head office expenses, income tax expenses, assets and liabilities.

The following summary describes the operations in each of the reportable segments:

i. Services provided

Perpetual is an independent Australian wealth manager operating in Australia and Singapore and provides a diverse range of financial products and services including asset management, financial advice and trustee services via its three business segments, supported by Group Support Services.

Perpetual Investments	Supplies investment products and services to retail, corporate, superannuation and
	institutional clients.
Perpetual Private	Delivers a range of tailored wealth advice services to high net worth individuals, charities, not-for- proft and other philanthropic organisations. The comprehensive suite of fnancial advisory services includes fnancial advice, portfolio management, estate planning and administration, trustee
	services, as well as tax advice and accounting services provided by Fordham.
Perpetual Corporate Trust	Provides trustee and fduciary services to institutional clients including custodial, trustee
	responsible entity and other ancillary services to Managed Investment Funds in Australia and
	Singapore, as well as specialised trust management and accounting services to the debt capital
	markets and data services to the Australian securitisation market.
Group Support Services	Comprising Group Investments, Finance, Technology, Risk and Compliance, People and Culture
	and Marketing and Communications.

ii. Geographical information

The consolidated entity operates in Australia and Singapore. The majority of the consolidated entity’s revenue and assets relate to operations in Australia. The Singapore operation is not material.

iii. Major customer

The consolidated entity does not rely on any major customer.

			PERPETUAL
	PERPETUAL	PERPETUAL	CORPORATE
	INVESTMENTS1	PRIVATE	TRUST	TOTAL
30 JUNE 2019	$’000	$’000	$’000	$’000
Major service lines
Equities	169,138	–	–	169,138
Cash and fxed income	27,024	–	–	27,024
Other FUM related	6,594	–	–	6,594
Market related	–	120,387	–	120,387
Non-market related	–	65,573	–	65,573
Income from structured products	7,245	62	–	7,307
Debt Markets Services	–	–	61,616	61,616
Managed Funds Services	–	–	51,232	51,232
Total revenue by Major service line	210,001	186,022	112,848	508,871
Interest revenue	303	77	67	447
Total revenue for reportable segment	210,304	186,099	112,915	509,318
Depreciation and amortisation	(2,637)	(9,738)	(7,456)	(19,831)
Reportable segment net proft before tax	79,947	41,160	47,654	168,761
Reportable segment assets	300,367	202,638	210,142	713,147
Reportable segment liabilities	(282,367)	(25,499)	(12,999)	(320,865)
Capital expenditure	402	5,699	9,145	15,246

30 JUNE 2018
Major service lines
Equities	197,274	–	–	197,274
Cash and fxed income	24,360	–	–	24,360
Other FUM related	8,000	–	–	8,000
Market related	–	120,502	–	120,502
Non-market related	–	65,839	–	65,839
Income from structured products	7,391	71	–	7,462
Debt Markets Services	–	–	57,550	57,550
Managed Funds Services	–	–	45,730	45,730
Total revenue by Major service line	237,025	186,412	103,280	526,717
Interest revenue	299	85	28	412
Total revenue for reportable segment	237,324	186,497	103,308	527,129
Depreciation and amortisation	(2,435)	(8,984)	(6,516)	(17,935)
Reportable segment net proft before tax	112,487	46,110	42,574	201,171
Reportable segment assets	325,856	211,928	249,504	787,288
Reportable segment liabilities	(307,553)	(27,056)	(69,671)	(404,280)
Capital expenditure	79	6,192	3,387	9,658

Segment information for Perpetual Investments includes the Exact Market Cash Funds, refer to section 5-1(i).

PERPETUAL ANNUAL REPORT 2019 89

Financial Report

Notes to and forming part of the financial statements

for the year ended 30 June 2019

1-1 OPERATING SEGMENTS CONTINUED

1-1 OPERATING SEGMENTSCONTINUED
	2019	2018
	$’000	$’000
Reconciliations of reportable segment revenues, net proft before tax, total assets and liabilities
Revenues
Total revenue for reportable segments	509,318	527,129
Add: Group and Support Services revenue	12,954	9,533
Net realised gains on sale of investments	426	2,183
Unrealised losses on fnancial assets	(3,293)2	–
Total revenue from continuing operations	519,405	538,845
Net proft before tax
Total net proft before tax for reportable segments	168,761	201,171
Financing costs	(2,787)	(2,603)
Legal expenses	–	(4,970)
Impairment of assets	–	(28)
Net realised gains on sale of investments	426	2,183
Group and Support Services expense	(4,238)	(4,426)
Net proft before tax	162,162	191,327
Total assets
Total assets for reportable segments	713,147	787,288
Group and Support Services assets	439,121	458,191
Total assets	1,152,268	1,245,479
Total liabilities
Total liabilities for reportable segments	320,865	404,280
Group and Support Services liabilities	169,164	180,065
Total liabilities	490,029	584,345

Segment information for Perpetual Investments includes $126,000 of unrealised losses for the Exact Market Cash Funds. Total amount of unrealised losses on financial assets for the consolidated entity is $3.4 million.

1-2 REVENUE

1-2 REVENUE
2019	2018
$’000	$’000
Revenue from contracts with customers 501,699	519,263
Income from structured products 7,307	7,462
Dividends 159	142
Interest and unit trust distributions 13,233	9,795
Net realised gains on sale of investments 426	2,183
Unrealised losses on fnancial assets (3,419)	–
519,405	538,845

Accounting policies

The consolidated entity has adopted AASB 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standard at the date of initial application (ie 1 July 2018). Accordingly, the information presented for 30 June 2018 has not been restated – ie it is presented, as previously reported, under AASB 118, AASB 111 and related interpretations.

Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The consolidated entity recognises revenue when it transfers control over a product or service to a customer.

In the comparative period, revenue was measured at the fair value of the consideration received or receivable. Revenue from the rendering of services was recognised in proportion to the stage of completion of the work performed at the reporting date.

Revenue from contracts with customers

The consolidated entity earns revenue from the provision of financial products and services. These include investment management and administration, financial advisory and trustee services (including responsible entity, superannuation, philanthropic and estate administration).

The majority of the consolidated entity’s revenue arises from service contracts where performance obligations are satisfied over time. Customers obtain control of services as they are delivered, and revenue is recognised over time as those services are provided. The implementation of AASB 15 on this type of revenue has resulted in the consolidated entity reducing opening retained earnings as at 1 July 2018 by $3.8 million and recognising an equivalent amount as a contract liability. Refer to section 6-4.

Investment management and administration revenue is calculated as a percentage of the funds invested in accordance with the investment mandates or the respective product disclosure statements. Some investment products and mandates include performance fees, which are contingent on achieving or exceeding a defined performance hurdle, and the revenue is recognised when it is highly probable that a significant reversal in the cumulative amount of the revenue would not occur. Whilst performance fees are recognised over time, they are typically constrained until meeting or exceeding the performance hurdle due to market volatility.

Revenue from financial advisory services is assessed on a contract by contract basis. Revenue is recognised over the period the services are provided. Revenue may be charged on a fixed fee, fee for service (‘time and costs’) or as a percentage of assets under administration basis:

Under fixed fee contracts, revenue is recognised as the related services are provided on a percentage of completion basis, or when specified milestones in the contract have been achieved. Fees received in advance are deferred as a contract liability until the service has been provided.
Revenue charged under fee for service contracts is recognised based on the amount the consolidated entity is entitled to invoice for services performed to date, based on the contracted rates.

Trustee Services is also assessed on a contract by contract basis. Contracts may include a fee to establish a trust, as well as ongoing trustee and other service fees. Establishment fees are recognised when the trust has been established and are based on the standalone value of the service.

A small part of the consolidated entity’s revenue is recognised at a point in time, generally when a performance obligation is linked to a particular event (ie an application or redemption transaction for a customer). Revenue is recognised when the consolidated entity executes a specific transaction on behalf of the customer. The implementation of AASB 15 has had no impact on this revenue.

Income from structured products

Income represents fees earned from managing the Exact Market Cash Funds.

Dividends

Dividend income is recognised in profit or loss on the date the consolidated entity’s right to receive payment is established which, in the case of quoted securities, is the ex-dividend date.

Interest and unit trust distributions

Interest income is recognised as it accrues taking into account the effective yield of the financial asset.

Unit trust distributions are recognised in profit or loss as they are received.

Net realised gains on sale of investments

Net gain on sale of investments represents proceeds less costs on sale of financial assets.

Unrealised gains/(losses) on financial assets

Represents movement in the fair value of the consolidated entity’s financial assets classified as Fair Value Through Profit and Loss (FVTPL).

PERPETUAL ANNUAL REPORT 2019 91

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

1-3 EXPENSES

1-3 EXPENSES
2019	2018
$’000	$’000
Staff related expenses excluding equity remuneration expense 185,381 Occupancy expenses 17,623 Administrative and general expenses 115,070 Distributions and expenses relating to structured products 5,299 Equity remuneration expense 11,058 Depreciation and amortisation expense 20,025 Impairment of assets –	194,504 18,638 98,527 5,104 9,750 18,364 28
354,456	344,915

Accounting policies

Expenses are recognised at the fair value of the consideration paid or payable for services received.

1-4 INCOME TAXES

1-4 INCOME TAXES
	2019	2018
	$’000	$’000
Current year tax expense
Current year tax expense	41,665	60,156
Prior year adjustments	(751)	(5,236)
Total current tax expense impacting income taxes payable	40,914	54,920
Deferred tax expense
Prior year adjustments	469	287
Temporary differences	4,850	(4,107)
Total deferred tax expense	5,319	(3,820)
Total income tax expenses	46,233	51,100
Net proft before tax for the year	162,162	191,327
Prima facie income tax expense calculated at 30% (2018: 30%) on proft for the year	48,649	57,398
– Recognition of previously unrecognised capital and revenue losses	(1,922)	(1,156)
– Prior year adjustments	(282)	(4,948)
– Other non-taxable income/expenses and tax credits	(295)	(369)
– Other non-deductible expenses	83	175
Total	46,233	51,100
Effective tax rate(ETR)	28.5%	26.7%
Income taxes payable at the beginning of the year	5,984	22,645
Income taxes payable for the fnancial year	40,914	54,920
Less: Tax paid during the year	(48,784)	(71,638)
Other	40	57
Income taxes(receivable)/payable at the end of the year	(1,846)	5,984
Represented in the Statement of Financial Position by:
Current tax(assets)/liabilities	(1,846)	5,984

Basis of calculation of ETR

The ETR is calculated as total income tax expenses divided by net profit before tax for the year.

The consolidated entity operates in Australia and Singapore. The Singapore operation is not material to the consolidated entity and has no material impact on the calculation of the ETR.

Explanation of variance to the legislated 30% tax rate

The consolidated entity’s effective tax rate for the year was 28.5% (2018: 26.7%). The 1.5% reduction in the effective tax rate compared to the legislated 30% is mainly attributed to the utilisation of previously unrecognised capital losses and prior year adjustments relating to the Research and Development tax concession.

Capital tax (gains)/losses calculated at 30% tax in Australia

The total tax benefits of realised capital losses are $27,872,955 (30 June 2018: $28,439,742), comprising $3,000,000 (30 June 2018: $3,000,000) recognised in deferred tax assets and $24,872,955 (30 June 2018: $25,439,742) not recognised in deferred tax assets. These are net of realised tax capital gains and losses incurred in the current and/or prior years and are available to be utilised by the Australian income tax consolidated group in future years.

Movement in deferred tax balances

Movement in deferred tax balances
		RECOGNISED	ACQUIRED
	BALANCE	IN PROFIT	IN BUSINESS	BALANCE
	1 JULY 2018	OR LOSS	COMBINATION	30 JUNE 2019
2019	$’000	$’000	$’000	$’000
Deferred tax assets
Provisions and accruals	8,791	535	236	9,562
Capital expenditure deductible over fve years	43	(33)	–	10
Employee benefts	21,118	(4,318)	52	16,852
Property, plant and equipment	1,191	349	–	1,540
Recognised revenue losses	430	(122)	–	308
Recognised capital losses	3,000	–	–	3,000
Other items	346	(106)	–	240
Deferred tax assets	34,919	(3,695)	288	31,512
Deferred tax liabilities
Intangible assets	(10,452)	1,624	(2,002)	(10,830)
Unrealised net capital gains	(2,156)	1,026	–	(1,130)
Contract liabilities	–	(1,135)	–	(1,135)
Capital raising costs	–	(2,959)		(2,959)
Other items	(10)	(180)	–	(190)
Deferred tax liabilities	(12,618)	(1,624)	(2,002)	(16,244)
Net deferred tax assets	22,301	(5,319)	(1,714)	15,268

PERPETUAL ANNUAL REPORT 2019 93

Financial Report

Notes to and forming part of the financial statements

for the year ended 30 June 2019

1-4 INCOME TAXES CONTINUED

1-4 INCOME TAXESCONTINUED
			RECOGNISED
		RECOGNISED	IN OTHER
	BALANCE	IN PROFIT	COMPREHENSIVE	BALANCE
	1 JULY 2017	OR LOSS	INCOME	30 JUNE 2018
2018	$’000	$’000	$’000	$’000
Deferred tax assets
Provisions and accruals	9,272	(481)	–	8,791
Capital expenditure deductible over fve years	379	(336)	–	43
Employee benefts	18,289	2,829	–	21,118
Property, plant and equipment	1,080	111	–	1,191
Recognised revenue losses	614	(184)	–	430
Recognised capital losses	3,000	–	–	3,000
Unrealised net capital losses	24	–	(24)	–
Other items	667	(321)	–	346
Deferred tax assets	33,325	1,618	(24)	34,919
Deferred tax liabilities
Intangible assets	(12,664)	2,212	–	(10,452)
Unrealised net capital gains	(1,484)	–	(672)	(2,156)
Other items	–	(10)	–	(10)
Deferred tax liabilities	(14,148)	2,202	(672)	(12,618)
Net deferred tax assets	19,177	3,820	(696)	22,301

Accounting policies

Income tax expense comprises current and deferred tax. Income tax expense is recognised in the net profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at reporting date and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and amounts used for taxation purposes.

Deferred tax is not recognised for the following temporary differences:

the initial recognition of goodwill
the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, or
differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets are reviewed at each balance date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax assets and liabilities are netted when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.

Perpetual Limited and its wholly owned Australian entities elected to form an income tax consolidated group as of 1 July 2002. As a consequence, all members of the tax consolidated group are taxed as a single entity and governed by a tax funding agreement. Under the agreement, all wholly owned Australian entities fully compensate Perpetual Limited for any current income tax payable assumed and are compensated by Perpetual Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Perpetual Limited under the income tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the members’ financial statements.

1-5 EARNINGS PER SHARE

1-5 EARNINGS PER SHARE
	CENTS PER SHARE
	2019 2018
Basic earnings per share Diluted earnings per share	250.9 305.0 246.3 299.5

	2019 $’000 2018 $’000
Net proft after tax attributable to equity holders of Perpetual Limited	115,929 140,227

	NUMBER OF SHARES
	2019 2018
Weighted average number of ordinary shares (basic) Effect of dilutive potential ordinary shares(including those subject to rights)	46,206,314 45,969,419 866,056 857,016
Weighted average number of ordinary shares(diluted)	47,072,370 46,826,435

Accounting policies

The consolidated entity presents basic and diluted earnings per share (EPS) data for its ordinary shares.

Basic EPS is calculated by dividing the net profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for shares held by the Company’s employee share plan trust.

Diluted EPS is determined by dividing the net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding, adjusted for shares held by the Company’s sponsored employee share plan trust and for the effects of all dilutive potential ordinary shares, which comprise shares and options/rights granted to employees under long-term incentive and retention plans.

1-6 DIVIDENDS

1-6 DIVIDENDS
		TOTAL
	CENTS PER	AMOUNT	FRANKED/	DATE OF
2019	SHARE	$’000	UNFRANKED	PAYMENT
Final 2018 ordinary	140	65,204	Franked	8 Oct 2018
Interim 2019 ordinary	125	58,218	Franked	29 Mar 2019
Total amount	265	123,422

2018
Final 2017 ordinary	135	62,875	Franked	29 Sep 2017
Interim 2018 ordinary	135	62,875	Franked	26 Mar 2018
Total amount	270	125,750

All franked dividends declared or paid during the year were franked at a tax rate of 30 per cent and paid out of retained earnings.

The Company’s Dividend Reinvestment Plan (DRP) is optional and offers ordinary shareholders in Australia and New Zealand the opportunity to acquire fully paid ordinary shares, without transaction costs. Shareholders can elect to participate in or terminate their involvement in the DRP at any time.

PERPETUAL ANNUAL REPORT 2019 95

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

1-6 DIVIDENDS CONTINUED

Subsequent events

Since the end of the financial year, the Directors declared the following dividend. The dividend has not been provided for and there are no tax consequences.

				TOTAL
			CENTS PER	AMOUNT 1	FRANKED/	DATE OF
			SHARE	$’000	UNFRANKED	PAYMENT
Final	2019	ordinary	125	58,218	Franked	30 Sep 2019

Calculation based on the ordinary shares on issue as at 30 June 2019.

The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2019 and will be recognised in subsequent financial reports.

	2019	2018
	$’000	$’000
Dividend franking account
Amount of franking credits available to shareholders for subsequent fnancial years	45,108	56,606

The above available amounts are based on the balance of the dividend franking account at 30 June 2019 adjusted for franking credits that will arise from the payment of the current tax liabilities, and franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year end.

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends proposed after the balance date, but not recognised as a liability, is to reduce it to $20,157,000 (2018: $28,660,000).

Accounting policies

Dividends are recognised as a liability in the year in which they are declared.

1-7 NET CASH FROM OPERATING ACTIVITIES

1-7 NET CASH FROM OPERATING ACTIVITIES
2019	2018
$’000	$’000
Reconciliation of proft for the year to net cash from operating activities Proft for the year 115,929	140,227
Items classifed as investing/fnancing activities: Proft on sale of investments (426)	(2,183)
Deferred acquisition consideration (3,893)	1,000
Assets acquired from business combinations (2,130)	–
Non-cash items: Depreciation and amortisation expense 20,025	18,364
Equity remuneration expense 11,058	9,750
Transfer to foreign currency translation reserve (136)	(304)
Reinvestment of dividends and unit distributions (3,253)	(2,015)
Accrued fxed asset additions 742	(763)
Mark to market movements on fnancial assets 3,419	–
Other (375)	–
(Increase)/decrease in assets Receivables 60,534	(64,000)
Current tax assets (1,846)	–
Other assets (6,404)	4,170
Deferred tax assets 3,407	(1,594)
Increase/(decrease) in liabilities Payables 16,948	(14,405)
Provisions (64,165)	65,261
Current tax liabilities (5,984)	(16,661)
Deferred tax liabilities 3,626	(1,530)
Employee benefts (14,396)	8,956
Net cash from operating activities 132,680	144,273

PERPETUAL ANNUAL REPORT 2019 97

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

Section 2 – Operating assets and liabilities

This section shows the assets used to generate Perpetual’s trading performance and the liabilities incurred as a result. Liabilities relating to the Group’s financing activities are addressed in section 3.

2-1 BUSINESS COMBINATIONS

RFi Roundtables Pty Ltd

On 3 December 2018, Perpetual acquired a 94% controlling interest in RFi Roundtables Pty Ltd (RFi).

As at 30 June 2019 the acquisition accounting balances are provisional and have been accounted for in these financial statements on that basis. These balances may be revised up to 12 months from the acquisition date in accordance with Australian Accounting Standards Board AASB 3 – Business Combinations .

The acquisition of RFi extends the consolidated entity’s ability to offer data and analytics business by providing credit risk portfolio analytics to the banking and financial services industry and is aligned with the consolidated entity’s growth strategy.

This acquisition was not material to the consolidated entity’s assets or results.

Accounting policies

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the consolidated entity. In assessing control, the consolidated entity takes into consideration potential voting rights that currently are exercisable.

The consolidated entity measures goodwill at the acquisition date as:

the fair value of the consideration transferred; plus
the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the consolidated entity incurs in connection with a business combination are expensed as incurred.

Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.

When share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and related to past services, then all or a portion of the amount of the acquirer’s replacement award is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service.

2-2 RECEIVABLES

2-2 RECEIVABLES
2019	2018
$’000	$’000
Current Trade receivables 94,352	93,583
_Less:_Provision for doubtful debts (1,407)	(1,081)
92,945	92,502
Other receivables1 6,829	67,806
99,774	160,308

Movements in the provision for doubtful debts are as follows: Balance as at beginning of the year 1,081	3,356
Doubtful debts provided for during the year 972	827
Receivables written off during the year as uncollectible (646)	(3,102)
Balance as at end of the year 1,407	1,081

Refer to section 3-5 for further information.

Movements in the provision for doubtful debts have been recognised in Administrative and general expenses in section 1-3. Amounts charged to the provision account are generally written off when there is no expectation of additional recoveries. In subsequent periods, any recoveries of amounts previously written off are credited against Administrative and general expenses in section 1-3. Based on the analysis at the end of the reporting period, the impairment under the expected credit loss (ECL) method is considered to be immaterial and no amount is recognised in the financial statements.

Accounting policies

Receivables comprise trade and other receivables. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less an allowance for ECL. Collectability of trade receivables is reviewed on an ongoing basis and at balance date, in addition to the ECL, specific impairment losses are recorded for any doubtful debts.

2-3 OTHER FINANCIAL ASSETS

2-3 OTHER FINANCIAL ASSETS
	2019	2018
	$’000	$’000
Non-current
Listed equity securities	2,383	2,343
Unlisted unit trusts	66,758	72,109
Other	522	517
	69,663	74,969

Accounting policies

Financial assets

The consolidated entity’s investments in equity securities and unlisted unit trusts have previously been classified as available-forsale financial assets. On adoption of AASB 9, these assets are now classified at FVTPL. Refer to section 4-1 (i) – (a).

PERPETUAL ANNUAL REPORT 2019 99

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

2-4 PROPERTY, PLANT AND EQUIPMENT

2-4 PROPERTY, PLANT AND EQUIPMENT
		PROJECT
PLANT AND	LEASEHOLD	WORK IN
EQUIPMENT	IMPROVEMENTS	PROGRESS	TOTAL
$’000	$’000	$’000	$’000
Year ended 30 June 2019 Cost 9,672 Accumulated depreciation (8,128)	59,897 (35,785)	908 –	70,477 (43,913)
Carrying amount 1,544	24,112	908	26,564
Movement Balance as at 1 July 2018 2,086 Additions 281 Transfers from work in progress – Depreciation (823)	18,133 289 10,492 (4,802)	5,545 5,855 (10,492) –	25,764 6,425 – (5,625)
Balance as at 30 June 2019 1,544	24,112	908	26,564

Accounting policies

Recognition and measurement

Property, plant and equipment are measured at cost or deemed cost less accumulated depreciation and impairment losses.

Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Project work in progress

Work in progress is measured at cost and relates to assets not yet available for use.

Depreciation

Depreciation is recognised on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives for the current and comparative periods are as follows:

plant and equipment: 4 to 15 years
leasehold improvements: 3 to 15 years.

The residual value, useful life and depreciation method applied to an asset are reassessed at least annually.

100

2-5 INTANGIBLES

2-5 INTANGIBLES
$’000 GOODWILL	INTANGIBLE ASSETS
	CUSTOMER CONTRACTS CAPITALISED SOFTWARE PROJECT WORK IN PROGRESS OTHER TOTAL
Year ended 30 June 2019 At cost 289,790 Accumulated amortisation –
	62,362 80,553 5,217 2,157 440,079
	(41,018) (51,625) – (1,657) (94,300)
Carrying amount 289,790	21,344 28,928 5,217 500 345,779
Balance at 1 July 2018 276,959 Additions 12,831 Transfers – Amortisation expense –	20,961 26,144 3,059 549 327,672
	6,674 398 12,437 – 32,340
	– 10,279 (10,279) – –
	(6,291) (7,893) – (49) (14,233)
Balance as at 30 June 2019 289,790	21,344 28,928 5,217 500 345,779
Year ended 30 June 2018 At cost 276,959 Accumulated amortisation –	55,688 69,875 3,059 2,157 407,738 (34,727) (43,731) – (1,608) (80,066)
Carrying amount 276,959	20,961 26,144 3,059 549 327,672
Balance at 1 July 2017 276,959 Additions – Transfers – Amortisation expense –	27,096 21,139 5,706 337 331,237 – 94 8,991 244 9,329 – 11,638 (11,638) – – (6,135) (6,727) – (32) (12,894)
Balance as at 30 June 2018 276,959	20,961 26,144 3,059 549 327,672

	2019 $’000 2018 $’000
Goodwill Impairment Testing The following cash-generating units have signifcant carrying amounts of goodwill: Perpetual Private 146,490 146,490 Perpetual Corporate Trust 139,804 126,973 Australian Equities(Perpetual Investments) 3,496 3,496
289,790 276,959

The recoverable amount has been determined on a consistent basis across each cash-generating unit (CGU) by using their value in use. The following assumptions have been applied across each CGU:

The value in use is estimated based on the net present value of future cash flow projections to be realised from each of the CGUs over the next two years plus a terminal value.
The pre-tax discount rates used in the current year ranged from 15.0% to 17.2% (2018: 14.4% to 16.7%).

The forecast cash flows used in impairment testing are based on assumptions as to the level of profitability for each business over a projected two-year period. These forecasted cash flows are based on the FY20-FY21 Business Plan which has been approved by the Board. The main drivers of revenue growth are the value of funds under management (FUM) in the Australian Equities CGU, funds under advice (FUA) in the Perpetual Private CGU and securitisation and capital flows in the Perpetual Corporate Trust CGU. A terminal value with a growth rate of 2.5% has also been applied.

Other than the normal operating changes linked to ongoing business initiatives, the assumptions do not include the effects of any future restructuring to which the consolidated entity is not yet committed or of future cash outflows by the consolidated entity which will improve or enhance the consolidated entity’s performance. At the reporting date, there is no reasonable change in key assumptions that could cause the carrying amount to exceed the recoverable amount.

The estimated recoverable amount is greater than the carrying value for each CGU. For the estimated recoverable amount to be equal to the carrying amount, the pre-tax discount rate would have to increase from 15.0% to 33.6% (2018: 14.4% to 34.7%).

PERPETUAL ANNUAL REPORT 2019 101

Financial Report

Notes to and forming part of the financial statements

for the year ended 30 June 2019

2-5 INTANGIBLES CONTINUED

Accounting policies

Goodwill

Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets.

Goodwill represents the excess of acquisition cost over the fair value of the consolidated entity’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill is allocated to cash-generating units and is not amortised, but tested for impairment annually.

Goodwill is measured at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Amortisation

For those intangible assets which are amortised, the amortisation is calculated over the cost of the asset, or another amount substituted for cost, less its residual value.

The estimated useful lives in the current and comparative periods are as follows:

capitalised software: 2.5 to 8 years
customer contracts and relationships acquired: 5 to 15 years.

Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.

Software

Certain internal and external costs directly incurred in acquiring and developing software have been capitalised and are amortised over their useful lives. Development costs include only those costs directly attributable to the development phase and are only recognised following completion of a technical feasibility study and where the consolidated entity has an intention and ability to use the asset. Costs incurred on software maintenance are expensed as incurred.

Other intangible assets

Other intangible assets acquired by the consolidated entity, which have finite useful lives, are stated at cost less accumulated amortisation and impairment losses.

Subsequent expenditure

Subsequent expenditure is capitalised only when it increases future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

102

2-6 PROVISIONS

2-6 PROVISIONS
2019	2018
$’000	$’000
Current Insurance and legal provision1 53	64,653
Operational process review provision 3,083	1,570
Lease straight line liability 1,487	1,081
Other provisions 29	29
4,652	67,333

Non-current Lease straight line liability 17,663	19,147
17,663	19,147

Refer to section 3-5 for further information.

	CARRYING	ADDITIONAL	UNUSED			CARRYING
	AMOUNT AT	PROVISION	AMOUNTS	PAYMENTS		AMOUNT AT
$’000	1 JULY 2018	MADE	REVERSED	MADE	30 JUNE 2019
Legal provision	64,653	–	(129)	(64,471)		53
Operational process review provision	1,570	5,438	(653)	(3,272)		3,083
Lease straight line liability	20,228	13,307	(156)	(14,229)		19,150
Other provisions	29	–	–	–		29
Total provisions	86,480	18,745	(938)	(81,972)		22,315

Accounting policies

A provision is recognised in the Statement of Financial Position when the consolidated entity has a present legal or constructive obligation as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle the obligation.

Management exercises judgement in estimating provision amounts. It may be possible, based on existing knowledge, that outcomes in the next annual reporting period differ from amounts provided and may require adjustment to the carrying amount of the liability affected.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The unwinding of the discount is recognised as a finance cost.

Legal provision

A provision for litigation is recognised when reported litigation claims arise and are measured at the cost that the consolidated entity expects to incur in settling the claim (refer to section 3-5).

Operational process review

A provision for operational process reviews is recognised when operational errors are identified and represents the cost that the consolidated entity expects to incur in rectification and restitution costs.

Lease straight line liability

A provision for lease expense represents the difference between the cash amount paid and the amount recognised as an expense. The provision is expected to be realised over the term of the underlying lease.

PERPETUAL ANNUAL REPORT 2019 103

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

2-7 EMPLOYEE BENEFITS

Aggregate liability for employee benefits, including on-costs

$’000	2019 2018
	CURRENT NON- CURRENT CURRENT NON- CURRENT
Provision for annual leave Provision for long service leave Other employee benefts1 Restructuring provision	5,720 – 5,626 – 7,440 3,141 6,758 2,995 27,556 12,211 43,455 10,987 – – 643 –
	40,716 15,352 56,482 13,982

Short-term incentives (STI) and deferred STI.

The non-current portion of the long service leave provision has been discounted using a rate of 2.7 per cent (2018: 3.9 per cent) which is based on the 10 year corporate bond rate.

The number of full-time equivalent employees at 30 June 2019 was 960 (2018: 936).

	CARRYING	ADDITIONAL	UNUSED	CARRYING
	AMOUNT AT	PROVISION	AMOUNTS	PAYMENTS AMOUNT AT
$’000	1 JULY 2018	MADE	REVERSED	MADE 30 JUNE 2019
Restructuring provision	643	–	(48)	(595) –

Accounting policies

Short-term employee benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the consolidated entity has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Other long-term employee benefits

The consolidated entity’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognised in profit or loss in the period in which they arise.

Restructuring

A provision for restructuring is recognised when the consolidated entity 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.

104

Section 3 – Capital management and financing

This section outlines how Perpetual manages its capital structure and related financing costs, including its balance sheet liquidity and access to capital markets. Perpetual’s objectives when managing capital are to safeguard its ability to continue as a going concern, to continue to provide returns to shareholders and benefits to other stakeholders, and to reduce the cost of capital.

3-1 CASH AND CASH EQUIVALENTS

3-1 CASH AND CASH EQUIVALENTS
	2019	2018
	$’000	$’000
Bank balances	136,044	109,137
Short-term deposits	163,543	211,100
	299,587	320,237

Short-term deposits represent rolling 90-day term deposits.

In accordance with the consolidated entity’s Group Policy – Treasury, the consolidated entity mainly holds cash and cash equivalents to support its regulatory capital requirements of $156.7 million as at 30 June 2019 (2018: $155.5 million).

3-2 BORROWINGS

3-2 BORROWINGS
	2019	2018
	$’000	$’000
The consolidated entity has access to the following line of credit:
Total facility used(Non-current)	87,000	87,000
Facility unused	43,000	43,000
Total facility	130,000	130,000

The $43 million unused bank facility may be drawn at any time at the discretion of the consolidated entity. The floating rate bank bill facility is unsecured and had a weighted average floating interest rate of 2.67 per cent at 30 June 2019, inclusive of the undrawn line fee (2018: 3.33 per cent). Repayment of the existing facility of $87 million is due on 31 October 2020.

The consolidated entity has agreed to various debt covenants including shareholders’ funds as a specified percentage of total assets, a minimum amount of shareholders’ funds, a maximum ratio of gross debt to EBITDA, a minimum interest cover and a maximum amount of structured product liabilities. The consolidated entity is in compliance with the covenants for the year ended 30 June 2019. Should the consolidated entity not satisfy any of these covenants, the outstanding balance of the loans may become due and payable.

The consolidated entity’s bank facility is subject to annual review and management intends to refinance the existing facility for a further period prior to the due date.

Accounting policies

Borrowings are initially recognised at fair value net of transaction costs incurred. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost. The financial liability under the facility has a fair value equal to its carrying amount.

Interest-bearing borrowings are removed from the Consolidated Statement of Financial Position when the obligation specified in the contract is discharged, cancelled or expired.

Financing costs comprise interest payments on borrowings and derivative financial instruments calculated using the effective interest method, and unwinding of discounts on provisions.

PERPETUAL ANNUAL REPORT 2019 105

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

3-3 CONTRIBUTED EQUITY

3-3 CONTRIBUTED EQUITY
	2019	2018
	$’000	$’000
Fully paid ordinary shares 46,574,426 (2018: 46,574,426)	550,635	550,249
Treasury shares 348,813(2018: 560,569)	(31,434)	(41,576)
	519,201	508,673

	2019 2018
	NUMBER OF SHARES $’000 NUMBER OF SHARES $’000
Movements in share capital Balance at beginning of year Shares issued: – Movement on treasury shares	46,013,857 508,673 45,832,544 501,766 211,756 10,528 181,313 6,907
Balance at end of year	46,225,613 519,201 46,013,857 508,673

The Company does not have authorised capital or par value in respect of its issued shares.

Terms and conditions

Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings.

In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any surplus capital.

Accounting policies

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.

Repurchase of share capital (treasury shares)

When share capital recognised as equity is repurchased or held by employee share plans and subject to vesting conditions, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity.

3-4 RESERVES

3-4 RESERVES
2019	2018
$’000	$’000
General reserve 103 Available-for-sale reserve – Foreign currency translation reserve 305	103 5,031 169
408 Equity compensation reserve 19,600	5,303 18,893
20,008	24,196

Accounting policies

Equity compensation reserve

The equity compensation reserve represents the value of the Company’s own shares held by an equity compensation plan that the consolidated entity is required to include in the consolidated financial statements. This reserve will be reversed against share capital when the underlying shares vest to the employee. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the consolidated entity’s own equity instruments.

106

3-5 COMMITMENTS AND CONTINGENCIES

(a) Commitments

3-5 COMMITMENTS AND CONTINGENCIES (a) Commitments
2019	2018
$’000	$’000
Capital expenditure commitments Contracted but not provided for and payable within one year 763	12,109
Operating lease commitments predominantly related to premises At 30 June, the future minimum lease payments under non-cancellable leases were payable as follows: Not later than one year 15,970	16,615
Later than one year and not later than fve years 59,807	63,335
Later than fve years 28,803	47,893
104,580	127,843

Accounting policies

Operating leases

Operating lease payments are recognised as an expense in profit or loss on a straight-line basis over the term of the lease. Incentives received by the consolidated entity on entering a lease agreement are recognised on a straight-line basis over the term of the lease.

The difference between the cash amount paid and the amount recognised as an expense is recognised as a lease provision (refer to section 2-5). The provision is expected to be realised over the term of the underlying leases.

(b) Contingencies

(b) Contingencies
	2019	2018
	$’000	$’000
Contingent liabilities
Bank guarantee in favour of the ASX Settlement and Transfer Corporation Pty Limited with respect
to trading activities	1,000	1,000
Bank guarantee in favour of the Australian Securities and Investments Commission in relation to
the provision of responsible entity services and custodial services	10,000	10,000
Bank guarantee issued in respect of the lease of premises of The Trust Company Limited	1,612	1,796
Bank guarantee issued in respect of the lease of premises of Perpetual Limited	644	644
	13,256	13,440

In the ordinary course of business, contingent liabilities exist in respect of claims and potential claims against entities in the consolidated entity. The consolidated entity does not consider that the outcomes of any such claims known to exist at the date of this report, either individually or in aggregate, are likely to have a material effect on its operations or financial position.

Banksia

In December 2012, a class action commenced for damages against The Trust Company (Nominees) Limited (TrustCo) in its capacity as trustee for the debentures issued by Banksia Securities Limited (Banksia) and other defendants including Banksia Securities Limited, Cherry Fund Limited, RSD Chartered Accountants and the directors of both Banksia Securities Limited and Cherry Fund Limited. Liquidator’s proceedings commenced in May 2015 against TrustCo.

On 10 November 2017, the plaintiffs agreed to a settlement in relation to their claim against TrustCo which was approved by the Supreme Court Victoria on 30 January 2018. Following formalisation of the settlement, a provision of $64 million was recognised (refer to section 2-2) and a corresponding receivable was recognised for the reimbursement from the insurers. The settlement amount was paid during the period.

All proceedings against TrustCo have been dismissed and this matter is now closed.

Accounting policies

Contingent liabilities

A contingent liability is a possible obligation arising from past events that may be incurred subject to the outcome of an uncertain future event not wholly within the consolidated entity’s control.

PERPETUAL ANNUAL REPORT 2019 107

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

Section 4 – Risk management

Perpetual’s activities expose it to a variety of financial and non-financial risks. Financial risks include credit risk, liquidity risk and market risks (including currency risk, interest rate risk and price risk). Key financial exposures are operational risk and a failure to meet regulatory compliance obligations. The nature of the financial risk exposures arising from financial instruments, the objectives, policies and processes for managing these risks, and the methods used to measure them are detailed below.

4-1 FINANCIAL RISK MANAGEMENT

Perpetual recognises that risk is part of doing business and that the ongoing management of risk is critical to its success. The approach to managing risk is articulated in the Risk Management Framework. The Risk Management Framework is supported by the Risk Group, who are responsible for the design and maintenance of the framework, establishing and maintaining group-wide risk management policies, and providing regular risk reporting to the Board, the Audit, Risk and Compliance Committee (ARCC) and the Group Executive Leadership Team. This framework is approved by the Perpetual Board of Directors (the Board) and is reviewed for adequacy and appropriateness on an annual basis.

The Board regularly monitors the overall risk profile of the consolidated entity and sets the risk appetite for the consolidated entity, usually in conjunction with the annual planning process. The Board is responsible for ensuring that management has appropriate processes in place for managing all types of risk, ranging from financial risk to operational risk. To assist in providing ongoing assurance and comfort to the Board, responsibility for risk management oversight has been delegated to the ARCC. The main functions of this Committee are to oversee the consolidated entity’s accounting policies and practices, the integrity of financial statements and reports, the scope, quality and independence of external audit arrangements, the monitoring of the internal audit function, the effectiveness of risk management policies and the adequacy of insurance programs. This Committee is also responsible for monitoring overall legal and regulatory compliance.

The activities of the consolidated entity expose it to the following financial risks: credit risk, liquidity risk and market risk. These are distinct from the financial risks borne by customers which arise from financial assets managed by the consolidated entity in its role as fund manager, trustee and responsible entity.

The risk management approach to, and exposures arising from, the Exact Market Cash Funds (EMCF) are disclosed in section 5-1.

i. Credit risk

Credit risk refers to the risk that a customer or counterparty to a financial instrument will fail to meet its contractual obligations resulting in financial loss to the consolidated entity. Credit risk arises principally from the consolidated entity’s cash and trade receivables.

The consolidated entity mitigates its credit risk by ensuring cash deposits are held with high credit quality financial institutions and other highly liquid investments are held with trusts operated by the entity.

The maximum exposure of the consolidated entity to credit risk on financial assets which have been recognised on the Consolidated Statement of Financial Position is the carrying amount, net of any provision for doubtful debts. The table below outlines the consolidated entity’s maximum exposure to credit risk as at reporting date.

	2019	2018
	$’000	$’000
Cash and cash equivalents	299,587	320,237
Trade receivables	92,945	92,502
Other receivables and other fnancial assets	7,351	68,323
Listed equity securities and unlisted unit trusts	69,141	74,452

The consolidated entity has adopted AASB 9 effective from 1 July 2018 which has resulted in changes to the classification and measurement of financial assets and the basis on which impairment of financial assets are measured. For further information on the impact of these changes, refer to section 6-4 (b).

Credit risk is managed on a functional basis across the various business segments. As a result of the swap agreements between the EMCF and the consolidated entity, the consolidated entity consolidates EMCF and is hence exposed to credit risk on its exposure to the $252.5 million (2018: $283.0 million) of underlying investments held by the EMCF.

The maximum exposure would only be realised in the unlikely event that the recoverable value of all the underlying investments held by the EMCF decline to $nil. Further details of the credit risk relating to the EMCF are disclosed in section 5-1.

108

(a) Investments held by incubation funds

Perpetual incubates new investment strategies through the establishment of seed funds for the purpose of building investment track records and developing asset management skills before releasing products to Perpetual’s investors. Exposure to credit risk arises on the consolidated entity’s financial assets held by the incubation funds, mainly being deposits with financial institutions and derivative financial instruments.

The exposure to credit risk is monitored on an ongoing basis by the funds’ investment managers and managed in accordance with the investment mandate of the funds.

Credit risk is not considered to be significant to the incubation funds as investments held by the funds are predominantly equity securities.

(b) Other financial assets

The consolidated entity’s exposure to trade receivables is influenced mainly by the individual characteristics of each customer.

Trade receivables are managed by the accounts receivable department. Outstanding fees and receivables are monitored on a daily basis and an aged debtors report is prepared and monitored by Group Finance. Management assesses the credit quality of customers by taking into account their financial position, past experience and other factors.

Credit risk further arises in relation to financial guarantees given to wholly owned subsidiaries. Such guarantees are only provided in exceptional circumstances and are subject to specific Board approval and are monitored on a quarterly basis as part of the consolidated entity’s regulatory reporting.

The consolidated entity held cash and cash equivalents of $299.6 million at 30 June 2019 (2018: $320.2 million). The cash and cash equivalents are held with bank and financial institution counterparties, which are rated ‘BBB’ or higher, based on Standard & Poor’s rating.

The credit quality of financial assets that are neither past due nor impaired is assessed by reference to external credit ratings, if available, or to historical information on counterparty default rates.

The tables below provide an aged analysis of the financial assets which were past due but not impaired:

	30 JUNE 2019 30 JUNE 2018
	LESS THAN 30 DAYS $’000 30 TO 60 DAYS $’000 60 TO 90 DAYS $’000 MORE THAN 90 DAYS $’000 TOTAL $’000 LESS THAN 30 DAYS $’000 30 TO 60 DAYS $’000 60 TO 90 DAYS $’000 MORE THAN 90 DAYS $’000 TOTAL $’000
Trade and other receivables	3,949 3,377 1,443 8,202 16,971 2,827 3,126 568 5,126 11,647
The nominal values of fnancial assets which were impaired and have been provided for are as follows:
2019 $’000 2018 $’000
Trade and other receivables 1,407 1,081

The impaired financial assets relate mainly to independent customers and investors who are in unexpectedly difficult economic situations, where the consolidated entity is of the view that the full carrying value of the receivable cannot be recovered. The consolidated entity does not hold any collateral against the trade and other receivables.

PERPETUAL ANNUAL REPORT 2019 109

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

4-1 FINANCIAL RISK MANAGEMENT CONTINUED

ii. Liquidity risk

Liquidity risk is the risk that the financial obligations of the consolidated entity cannot be met as and when they fall due without incurring significant costs.

The consolidated entity’s approach to managing liquidity is to maintain a level of cash or liquid investments sufficient to meet its ongoing financial obligations. The consolidated entity has a robust liquidity risk framework in place which is principally driven by the Capital Management Review (refer to section 4-1(v) for further information).

At 30 June 2019, total base capital requirements were $173 million ($157 million for operational risk, $12 million for credit risk and $4 million for market risk), compared to $354 million of available liquid funds.

The $157 million operational risk requirement supports regulatory capital which is mainly held in cash and cash equivalents as referred to in section 3-1.

The consolidated entity manages liquidity risk by continually monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets. In addition, a six-month forecast of liquid assets, cash flows and balance sheet is reviewed by the Board on a semi-annual basis to ensure there is sufficient liquidity within the consolidated entity.

The repayment of the existing utilised facility of $87 million is due on 31 October 2020 (refer to section 3-2 for further information).

The tables below show the maturity profiles of the financial liabilities for the consolidated entity. These have been calculated using the contractual undiscounted cash flows.

	30 JUNE 2019 30 JUNE 2018
	LESS THAN 1 YEAR $’000 1 TO 5 YEARS $’000 TOTAL $’000 LESS THAN 1 YEAR $’000 1 TO 5 YEARS $’000 TOTAL $’000
Liabilities Payables Borrowings	52,574 3,659 56,233 39,285 – 39,285 – 87,000 87,000 – 87,000 87,000
	52,574 90,659 143,233 39,285 87,000 126,285

There are no financial liabilities maturing in more than five years as at 30 June 2019 (2018: $nil).

iii. Market risk

Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates and equity prices – will affect the consolidated entity’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The consolidated entity is subject to the following market risks:

(a) Currency risk

The exposure to currency risk arises when financial instruments are denominated in a currency that is not the functional currency of the entity and are of a monetary nature.

A significant proportion of the monetary financial instruments held by the consolidated entity, being liquid assets, receivables, borrowings and payables, are denominated in Australian dollars. The consolidated entity is exposed to currency risk relating to the Singapore operation. The exposure to currency risk arising from this operation is immaterial. Hence the gains/(losses) arising from the translation of the controlled entities’ financial statements into Australian dollars are not considered in this note.

110

(b) Interest rate risk

Interest rate risk is the risk to the consolidated entity’s earnings and capital arising from changes in market interest rates. The financial instruments held that are impacted by interest rate risk consist of cash and borrowings.

The consolidated entity’s exposure to interest rate risk arises predominantly on the $130 million NAB facility on which $87 million is drawn (refer to section 3-2). This loan facility is rolled on a one-month, three-month or six-month term.

The consolidated entity’s exposure to interest rate risk for the financial assets and liabilities is set out as follows:

	FLOATING	FIXED	NON-
	INTEREST	INTEREST	INTEREST
	RATE	RATE	BEARING	TOTAL
	$’000	$’000	$’000	$’000
At 30 June 2019 Financial assets Cash and cash equivalents Receivables Other fnancial assets	138,387 1,298 –	161,200 – 2	– 98,476 69,661	299,587 99,774 69,663
	139,685	161,202	168,137	469,024
Financial liabilities Payables Borrowings	– 87,000	– –	56,233 –	56,233 87,000
	87,000	–	56,233	143,233
At 30 June 2018
Financial assets
Cash and cash equivalents	109,137	211,100	–	320,237
Receivables	1,340	–	158,968	160,308
Other fnancial assets	–	2	74,967	74,969
	110,477	211,102	233,935	555,514
Financial liabilities
Payables	–	–	39,285	39,285
Borrowings	87,000	–	–	87,000
	87,000	–	39,285	126,285

The table below demonstrates the impact of a 1 per cent change in interest rates, with all other variables held constant, on the net profit after tax and equity of the consolidated entity.

	30 JUNE 2019 30 JUNE 2018
	IMPACT ON NET PROFIT AFTER TAX $’000 IMPACT ON EQUITY $’000 IMPACT ON NET PROFIT AFTER TAX $’000 IMPACT ON EQUITY $’000
+/– 1 per cent	369/(369) 369/(369) 164/(164) 164/(164)

The impact on net profit after tax for the year would be mainly as a result of an increase/(decrease) in interest revenue earned on cash and cash equivalents.

(c) Market risks arising from funds under management and funds under advice

The consolidated entity’s revenue is significantly dependent on funds under management (FUM) and funds under advice (FUA) which are influenced by equity market movements. Management calculates the expected impact on revenue for each 1 per cent movement in the ASX All Ordinaries Index. Based on the level of this index at the end of 30 June 2019 (6,699), a 1 per cent movement in the market changes annualised revenue by approximately $1.75 million to $2.25 million.

PERPETUAL ANNUAL REPORT 2019 111

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

4-1 FINANCIAL RISK MANAGEMENT CONTINUED

iii. Market risk continued

(d) Market risks arising from incubation funds

The consolidated entity is exposed to equity price risk on investments held by its incubation funds. The funds may also be exposed, to a small extent, to the other risks which influence the value of those shares or units (including foreign exchange rates and interest rates).

Due to the adoption of AASB 9 Financial Instruments from 1 July 2018, unrealised gains/losses on financial assets held within incubation funds are now taken through Profit and loss (previously taken through Other comprehensive income).

The PI division’s Investment Review Committee is responsible for reviewing and recommending new incubation strategies and ensuring management has appropriate processes and systems in place for managing investment risk for each fund. The funds’ specialist asset managers aim to manage the impact of price risks through the use of consistent and carefully considered investment guidelines. Risk management techniques are used in the selection of investments, including derivatives, which are only acquired if they meet specified investment criteria. Daily monitoring of trade restrictions and derivative exposure against limits is undertaken with any breach of these restrictions reported to the General Manager – Risk and Internal Audit.

These funds may be party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in foreign exchange rates, interest rates and equity indices in accordance with the funds’ investment guidelines.

The incubation funds may be exposed to currency risk and interest rate risk. Their investment managers may enter into derivative contracts (such as forwards, swaps, options and futures) through approved counterparties to manage this risk. However, the use of these contracts must be consistent with the investment strategy and restrictions of each incubation fund, and agreed acceptable level of risk. These funds are also exposed to interest rate risk on cash holdings. Interest income from cash holdings is earned at variable interest rates and investments in cash holdings are at call.

(e) Market risks arising from the Exact Market Cash Funds

The consolidated entity is further subject to market risks through the Exact Market Cash Funds (EMCF). The funds were established with the purpose of providing an exact return, utilising the Bloomberg AusBond Bank Bill Index (the benchmark index), to investors. The impact of the EMCF on the consolidated entity’s financial results is dependent on the performance of the fund relative to the benchmark. In addition, unrealised gains/losses are now taken through profit and loss in accordance with AASB 9.

The risk management approach to, and exposures arising from, the EMCF are disclosed in section 5-1.

iv. Fair value

The following tables present the consolidated entity’s assets and liabilities measured and recognised at fair value, by valuation method, at 30 June 2019. The different levels have been defined as follows:

Level 1: quoted prices in active markets for identical assets and liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3: inputs for the asset or liability that are not based on observable market data.

	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL
	$’000	$’000	$’000	$’000
At 30 June 2019
Financial assets
Listed equity securities	2,383	–	–	2,383
Unlisted unit trusts	–	66,758	–	66,758
Structured products – EMCF assets	50,582	201,940	–	252,522
	52,965	268,698	–	321,663

112

	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL
	$’000	$’000	$’000	$’000
At 30 June 2018
Financial assets
Available-for-sale listed equity securities	2,343	–	–	2,343
Available-for-sale unlisted unit trusts	–	72,109	–	72,109
Structured products – EMCF assets	3,607	279,384	–	282,991
	5,950	351,493	–	357,443

The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading securities) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the consolidated entity is the last traded price. Marketable shares included in other financial assets are traded in an organised financial market and their fair value is the current quoted last traded price for an asset. The carrying amounts of bank term deposits and receivables approximate fair value. The fair value of investments in unlisted shares in other corporations is determined by reference to the underlying net assets and an assessment of future maintainable earnings and cash flows of the respective corporations.

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The estimates of fair value where valuation techniques are applied are subjective and involve the exercise of judgement. Changing one or more of the assumptions applied in valuation techniques to reasonably possible alternative assumptions may impact on the amounts disclosed.

The carrying amount of financial assets and financial liabilities, less any impairment, approximates their fair value, except for those outlined in the table below, which are stated at amortised cost.

outlined in the table below, which are stated at amortised cost.
	2019 2018
	CARRYING AMOUNT $’000 FAIR VALUE $’000 CARRYING AMOUNT $’000 FAIR VALUE $’000
Structured products – EMCF liabilities	252,169 252,522 282,514 282,993

v. Capital risk management

A Capital Management Review is carried out on an annual basis and is submitted to the CFO for review and approval. If changes are required to funding requirements, the capital structure or to the capital management strategy of the consolidated entity, the CFO will present their recommendation to the Board via the Audit, Risk and Compliance Committee. The Group Policy – Treasury ensures that the level of financial conservatism is appropriate for the Company’s businesses including acting as custodian and manager of clients’ assets and operation as a trustee company. This policy also aims to provide business stability and accommodate the growth needs of the consolidated entity. This policy comprises three parts:

(a) Dividend policy

Dividends paid to shareholders are typically in the range of 80-100 per cent of the consolidated entity’s net profit after tax attributable to members of the Company, which is in line with the historical dividend range paid to shareholders. In certain circumstances, the Board may declare a dividend outside that range.

(b) Review of capital and distribution of excess capital

A review of the consolidated entity’s capital base is performed at least semi-annually and excess capital that is surplus to the consolidated entity’s current requirements may potentially be returned to shareholders in the absence of a strategically aligned, value accretive investment opportunity.

(c) Gearing policy

The current gearing policy aims to target an investment grade credit rating by maintaining a corporate debt to capital ratio (corporate debt/(corporate debt + equity)) of 30% or less and EBIT interest cover (EBIT/interest expense) of more than ten times. Based on the corporate debt of $87.0 million, the gearing ratio is 11.6% as at 30 June 2019 (2018: 11.6%) and well within the stated gearing policy. The EBIT interest cover ratio for the consolidated entity as at 30 June 2019 was 73 times (2018: 75 times).

PERPETUAL ANNUAL REPORT 2019 113

Financial Report

Notes to and forming part of the financial statements

for the year ended 30 June 2019

4-1 FINANCIAL RISK MANAGEMENT CONTINUED

Accounting policies

The consolidated entity initially recognises receivables on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the consolidated entity becomes a party to the contractual provisions of the instrument.

Financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the consolidated entity becomes a party to the contractual provisions of the instrument. The consolidated entity derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

(a) Financial assets at fair value through profit or loss

Financial assets are mandatorily classified and measured at fair value through profit or loss on initial recognition. Attributable transaction costs are recognised in profit or loss when incurred. Financial assets mandatorily classified at fair value through profit or loss are measured at fair value and changes recognised in profit or loss.

(b) Receivables

Receivables are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, receivables are measured at amortised cost using the effective interest method less impairment losses.

The consolidated entity derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the consolidated entity is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the Consolidated Statement of Financial Position when, and only when, the consolidated entity has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

(c) Derivative financial instruments

The consolidated entity holds derivative financial instruments within incubation funds to hedge its interest rate, foreign exchange and market risk exposures.

Derivatives are recognised initially at fair value. Attributable transaction costs are recognised in profit or loss when incurred.

(d) Financial guarantee contracts

Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. Financial guarantees are given to wholly owned subsidiaries, within the consolidated entity. Such guarantees are only provided in exceptional circumstances and are subject to specific Board approval and are monitored on a quarterly basis as part of the consolidated entity’s regulatory reporting.

The liability is initially measured at fair value and subsequently at the higher of the amount determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation, where appropriate.

Where guarantees in relation to loans or other payables of subsidiaries are provided for no compensation, the fair values are accounted for as contributions and recognised as part of the cost of the investment.

114

Section 5 – Other disclosures

This section contains other miscellaneous disclosures that are required by accounting standards.

5-1 STRUCTURED PRODUCTS ASSETS AND LIABILITIES

i. Exact Market Cash Funds

5-1 STRUCTURED PRODUCTS ASSETS AND LIABILITIES i. Exact Market Cash Funds
	2019	2018
	$’000	$’000
Current assets
Perpetual Exact Market Cash Fund	176,610	185,513
Perpetual Exact Market Cash Fund No. 2	75,912	97,480
	252,522	282,993
Current liabilities
Perpetual Exact Market Cash Fund	176,410	185,267
Perpetual Exact Market Cash Fund No. 2	75,759	97,247
	252,169	282,514

The Exact Market Cash Funds’ current asset balances reflect the fair value of the net assets held by the funds. The current liabilities balances represent the consolidated entity’s obligation to the funds’ investors. The difference between the current assets and current liabilities balance has been recorded in profit and loss (from 1 July 2018).

The Perpetual Exact Market Cash Fund (EMCF 1) was established with the purpose of providing an exact return that matched the Bloomberg AusBond Bank Bill Index (the benchmark index), or a variant thereon, to investors. The fund’s ability to pay the benchmark return to the investors is guaranteed by the consolidated entity. National Australia Bank has provided the EMCF 1 product with a guarantee to the value of $3 million (2018: $3 million) to be called upon in the event that the consolidated entity is unable to meet its obligations. Due to the guaranteed benchmark return to investors, the consolidated entity is exposed to the risk that the return of the EMCF 1 differs from that of the benchmark. The return of the EMCF 1 is affected by risks to the underlying investments in the EMCF 1 portfolio, which are market, liquidity and credit risks.

The underlying investments of the fund are valued on a hold to maturity basis for unit pricing purposes, which is consistent with the way in which Perpetual manages the portfolio.

The Perpetual Exact Market Cash Fund No. 2 (EMCF 2) was established to provide an exact return that matches the benchmark index to investors in the fund. It has a similar structure to EMCF 1, but in addition there are specific rules that govern the withdrawal of funds. The investments held by EMCF 2 are recorded at fair value within the fund and in the consolidated entity’s financial statements. National Australia Bank has provided the fund with a guarantee to the value of $1.5 million (2018: $1.5 million) to be called upon in the event that Perpetual does not meet its obligations.

EMCF 1 and EMCF 2 (EMCF) use professional investment managers to manage the impact of the above risks by using prudent investment guidelines and investment processes. The investment manager explicitly targets low volatility and aims to achieve this through a quality screening process that is designed to assess the likelihood of default and difficult trading patterns during periods of rapid systematic risk reduction.

There is a clearly defined mandate for the inclusion of sectors and issuances. In periods of risk reduction, diversification may be narrowly focused on cash and highly liquid investment-grade assets. At times of higher risk tolerance, appropriate diversification should be expected.

Interest rate exposure is limited to +/– 90 days versus the benchmark. The portfolio is constructed with the goal of having a diversified portfolio of securities, while largely retaining the low-risk characteristics of a cash investment.

Liquidity risk of EMCF is managed by maintaining a level of cash or liquid investments in the portfolio which are sufficient to meet a level and pattern of investor redemptions (consistent with past experience), distributions or other of the fund’s financial obligations. This is complemented by a dynamic portfolio management process that ensures liquidity is increased when there is an expectation of a deterioration in market conditions. Cash flow forecasts are prepared for the funds, including the consideration of the maturity profile of the securities, interest and other income earned by the funds; and projected investor flows based on historical trends and future expectations.

Furthermore, the credit quality of financial assets is managed by the EMCF using Standard & Poor’s rating categories or equivalent, in accordance with the investment mandate of the EMCF. The EMCF’s exposure in each credit rating category is monitored on a daily basis. This review process allows assessment of potential losses as a result of risks and the undertaking of corrective actions. The investment managers have undertaken to restrict the asset portfolio of the underlying funds to securities, deposits or obligations with a Standard & Poor’s or equivalent ‘BBB-’ fund credit quality rating or higher.

PERPETUAL ANNUAL REPORT 2019 115

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

5-1 STRUCTURED PRODUCTS ASSETS AND LIABILITIES CONTINUED

i. Exact Market Cash Funds continued

The investment managers of the underlying funds invested by the EMCF enter into a variety of derivative financial instruments such as credit default swaps and foreign exchange forwards in the normal course of business in order to mitigate credit risk exposure and to hedge fluctuations in foreign exchange rates.

Details of the assets held by the underlying funds are set out below:

	AAA TO	A+ TO	BBB+ TO
	AA–	A–	BBB–	TOTAL
30 JUNE 2019	$’000	$’000	$’000	$’000
Corporate bonds and money market securities	58,792	46,046	8,405	113,243
Mortgage and asset backed securities	88,697	–	–	88,697
Cash	50,582	–	–	50,582
	198,071	46,046	8,405	252,522

	AAA TO	A+ TO	BBB+ TO
	AA–	A–	BBB–	TOTAL
30 JUNE 2018	$’000	$’000	$’000	$’000
Corporate bonds and money market securities	76,100	65,914	14,367	156,381
Mortgage and asset backed securities	122,257	748	–	123,005
Cash	3,607	–	–	3,607
	201,964	66,662	14,367	282,993

The table below demonstrates the impact of a 1 per cent change in the fair value of the underlying assets of the EMCF, due to market price movements, based on the values at reporting date.

		2019	2018
		$’000	$’000
1	per cent increase	2,525	2,304
1	per cent decrease	(2,525)	(2,304)

The actual impact of a change in the fair value of the underlying assets of the EMCF on the consolidated profit before tax is dependent on the performance of the fund relative to the benchmark index. If the fund’s performance is below the benchmark return, then the consolidated entity will be obliged to make payments to the investor. Conversely, if the fund’s performance is higher than the benchmark, then the benefit of the higher performance accrues to the consolidated entity.

In addition, any variance between the consolidated entity’s current assets EMCF balance and the consolidated entity’s current liabilities EMCF balance would be reflected in profit and loss.

Accounting policies

The EMCF product, consisting of two funds (EMCF 1 and EMCF 2), is consolidated as the consolidated entity is exposed to variable returns and has the power to affect those returns. The swap agreements result in the benchmark rate of return being paid to the unitholders in the fund. The swap agreements are inter-company transactions between a subsidiary of the Company and the funds and are eliminated on consolidation.

Assets and liabilities of the EMCF product are disclosed separately on the face of the Consolidated Statement of Financial Position as structured product assets and structured product liabilities. The benchmark return generated by the EMCF product and distributions to unitholders are disclosed in section 1-3 Expenses as distributions and expenses related to structured products.

The financial assets represented by the structured products assets balance are accounted for in accordance with the underlying accounting policies of the consolidated entity. These consist of investments that have previously been classified as available-for-sale and measured at fair value. On adoption of AASB 9, these assets are now mandatorily classified at FVTPL.

116

5-2 PARENT ENTITY DISCLOSURES

As at, and throughout, the financial year ended 30 June 2019 the parent entity of the consolidated entity was Perpetual Limited.

	2019	2018
	$’000	$’000
Result of the parent entity
Proft after tax for the year	91,584	124,927
Other comprehensive income	–	1,113
Total comprehensive income for the year	91,584	126,040
Financial position of the parent entity at year end
Current assets	297,836	280,804
Total assets	933,844	928,904
Current liabilities	211,181	187,146
Total liabilities	246,166	221,945
Total equity of the parent entity comprising:
Share capital	519,201	508,673
Reserves	19,698	23,688
Retained earnings	148,779	174,598
Total equity	687,678	706,959

Parent entity contingencies

The Directors are of the opinion that provisions are not required in respect of any parent entity contingencies, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.

	2019	2018
	$’000	$’000
Uncalled capital of the controlled entities	12,450	12,450

In the ordinary course of business, contingent liabilities exist in respect of claims and potential claims against the parent entity. The parent entity does not consider that the outcome of any such claims known to exist at the date of this report, either individually or in aggregate, are likely to have a material effect on its operations or financial position.

Operating lease commitments

At 30 June, the future minimum lease payments under non-cancellable leases were payable as follows.

	2019	2018
	$’000	$’000
Not later than one year	9,703	9,286
Later than one year and not later than fve years	43,315	41,479
Later than fve years	12,044	23,583
	65,062	74,348

Operating leases are predominantly related to premises.

Parent entity guarantees

The Company’s policy is to provide financial guarantees only to wholly owned subsidiaries and it has provided financial guarantees in respect of:

Guarantee to secure a bank facility ($87,000,000 is utilised) of a controlled entity amounting to $130,000,000 (2018: $130,000,000).

No liability was recognised by the Company in relation to these guarantees as the fair value of these guarantees is considered to be immaterial. The Company does not expect the financial guarantees to be called upon.

PERPETUAL ANNUAL REPORT 2019 117

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

5-3 CONTROLLED ENTITIES

5-3 CONTROLLED ENTITIES
NAME OF COMPANY	BENEFICIAL INTEREST COUNTRY OF INCORPORATION AND PRINCIPAL PLACE OF BUSINESS 2019 % 2018 %
Perpetual Limited5 _Controlled Entities_1 Australian Trustees Limited5 Commonwealth Trustees Pty. Ltd.2 Fordham Business Advisors Pty Ltd2 Perpetual Acquisition Company Limited5 Perpetual Assets Pty. Ltd.2 Perpetual Australia Pty Limited2,5 Perpetual Digital Holdings Pty Limited2 Perpetual Investment Management Limited Perpetual Mortgage Services Pty Limited2 Perpetual Nominees Limited Perpetual Services Pty Limited2 Perpetual Superannuation Limited Perpetual Tax and Accounting Pty Ltd2 Perpetual Trust Services Limited Perpetual Trustee Company (Canberra) Limited5 Perpetual Trustee Company Limited4 Perpetual Trustees Consolidated Limited5 Perpetual Trustees Queensland Limited5 Perpetual Trustees Victoria Limited5 Perpetual Trustees W.A. Ltd5 Queensland Trustees Pty. Ltd.2 Perpetual Australian Equity Model Portfolio Perpetual Capital Accumulation Portfolio Perpetual Exact Market Cash Fund Perpetual Exact Market Cash Fund No. 2	100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia
Entities under the control of Perpetual Acquisition Company Limited The Trust Company Limited Fintuition Pty Limited2 Fintuition Institute Pty Limited2 Skinner Macarounas Pty Limited2	100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia
Entities under the control of Perpetual Digital Holdings Pty Limited Perpetual Digital Pty Ltd2 Perpetual Roundtables Pty Limited2,6	100 100 Australia 94 – Australia
Entities under the control of Perpetual Trustee Company Limited Perpetual Corporate Trust Limited Perpetual Custodians Ltd Perpetual Legal Services Pty Limited2,7 P.T. Limited	100 100 Australia 100 100 Australia 100 100 Australia 100 100 Australia

118

NAME OF COMPANY	BENEFICIAL INTEREST COUNTRY OF INCORPORATION AND PRINCIPAL PLACE OF BUSINESS 2019 % 2018 %
Entities under the control of P.T. Limited Perpetrust Nominees Proprietary Limited2	100 100 Australia
Entities under the control of The Trust Company Limited Perpetual (Asia Holdings) Pte. Ltd. The Trust Company (Australia) Limited The Trust Company (UTCCL) Limited Perpetual C T(Asia)Limited	100 100 Singapore 100 100 Australia 100 100 Australia 100 100 Hong Kong
Entities under the control of The Trust Company (Australia) Limited The Trust Company (Nominees) Limited The Trust Company (PTAL) Limited The Trust Company(RE Services)Limited	100 100 Australia 100 100 Australia 100 100 Australia
Entities under the control of Perpetual (Asia Holdings) Pte. Ltd. Perpetual(Asia)Limited	100 100 Singapore
Entities under the control of The Trust Company (RE Services) Limited The Trust Company(Sydney Airport)Limited	100 100 Australia
Associates Loan RQ Ltd3	26 26 Australia

Entities in bold are directly owned by Perpetual Limited.
A small proprietary company as defined by the Corporations Act 2001 and is not required to be audited for statutory purposes.
The carrying amount of this investment is $nil (2018: $nil).
Perpetual Trustee Company Limited has a branch operation in New Zealand known as Perpetual Trustee Company Limited (New Zealand branch).
Company is a party to the Deed of Cross Guarantee as noted in section 5-4.
Company was acquired on 3 December 2018 as RFi Roundtables Pty Ltd. Name changed to Perpetual Roundtables Pty Limited on 21 December 2018.
Indirectly owned through Perpetual Legal Services Charitable Trust.

PERPETUAL ANNUAL REPORT 2019 119

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

5-4 DEED OF CROSS GUARANTEE

Perpetual Limited and certain wholly owned subsidiaries listed below (collectively, ‘the Closed Group’) have entered into a Deed of Cross Guarantee (‘the Deed’) effective 29 June 2017. The effect of the Deed is that Perpetual Limited has guaranteed to pay any deficiency in the event of a winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001 . The subsidiaries have also given a similar guarantee in the event that Perpetual Limited is wound up.

Pursuant to ASIC Corporations (wholly owned companies) Instrument 2016/785 (‘Instrument’), the wholly owned subsidiaries noted below within the Closed Group are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports.

The subsidiaries to the Deed forming the Closed Group are:

Perpetual Trustees Consolidated Limited
Perpetual Trustee Company (Canberra) Limited
Perpetual Trustees Victoria Limited
Perpetual Trustees Queensland Limited
Perpetual Trustees WA Limited
Perpetual Australia Pty Limited
Perpetual Acquisition Company Limited
Australian Trustees Limited

A summarised Consolidated Statement of Profit or Loss and Other Comprehensive Income and Consolidated Statement of Financial Position comprising the Closed Group as at 30 June 2019 are set out below.

	YEAR ENDED	YEAR ENDED
	30 JUNE	30 JUNE
	2019	2018
	$’000	$’000
Revenue	154,715	140,972
Expenses	(61,390)	(19,008)
Financing costs	(2,787)	(2,603)
Net proft before tax	90,538	119,361
Income tax beneft	1,414	5,610
Net proft after tax	91,952	124,971
Other comprehensive income, net of income tax	–	1,778
Total comprehensive income	91,952	126,749
Total comprehensive income attributable to:
Equity holders of the Company	91,952	126,749

120

2019	2018
$’000	$’000
Current assets Cash and cash equivalents 125,180	148,523
Receivables 201,151	118,869
Current tax assets 1,887	–
Structured Products – EMCF assets 252,522	282,993
Prepayments 12,995	14,931
Total current assets 593,735	565,316
Non-current assets Other fnancial assets 590,537	642,138
Property, plant and equipment 11,952	12,452
Intangibles 166	215
Deferred tax assets 28,912	33,754
Total non-current assets 631,567	688,559
Total assets 1,225,302	1,253,875
Current liabilities Payables 173,396	129,973
Structured Products – EMCF liabilities 252,169	282,514
Current tax liabilities –	5,984
Employee benefts 13,152	12,377
Provisions 59,645	76,334
Total current liabilities 498,362	507,182
Non-current liabilities Borrowings 87,000	87,000
Deferred tax liabilities 1,198	2,185
Employee benefts 3,141	2,995
Total non-current liabilities 91,339	92,180
Total liabilities 589,701	599,362
Net assets 635,601	654,513
Equity Contributed equity 519,201	508,672
Reserves 19,698	23,689
Retained earnings 96,702	122,152
Total equity 635,601	654,513

PERPETUAL ANNUAL REPORT 2019 121

Financial Report

Notes to and forming part of the financial statements

for the year ended 30 June 2019

5-5 UNCONSOLIDATED STRUCTURED ENTITIES

Perpetual Limited and its subsidiaries have interests in various structured entities that are not consolidated. A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

Perpetual has an interest in a structured entity when the Company has a contractual or non-contractual involvement that exposes it to variable returns from the performance of the entity. The Company’s interest includes investments held in securities or units issued by these entities and fees earned from management of the assets within these entities.

Information on the Company’s interests in unconsolidated structured entities as at 30 June is as follows:

		MAXIMUM
	CARRYING	EXPOSURE
	AMOUNT	TO LOSS 1
INVESTMENT FUNDS – COMPANY MANAGED	$’000	$’000
Year ended 30 June 2019
Statement of Financial Position line item
Other fnancial assets – non-current	66,739	63,571
Year ended 30 June 2018
Statement of Financial Position line item
Other fnancial assets – non-current	72,086	65,646

The maximum exposure to loss is the maximum loss that could be recorded through profit and loss as a result of the involvement with these entities.

Company managed investment funds

The Company manages investment funds through asset management subsidiaries. Control over these managed investment funds may exist since the Company has power over the activities of the fund. However, these funds have not been consolidated because the Company does not have the ability to affect the level of returns and is not exposed to significant variability in returns from the funds. The Company earns management fees from the management of these investment funds which are commensurate with the services provided and are reported in revenue from the provision of services. Management fees are generally based on the value of the assets under management. Therefore, the fees earned are impacted by the composition of the assets under management and fluctuations in financial markets. The revenue earned is included in Revenue from the provision of services in section 1-2.

Investment funds are investment vehicles that consist of a pool of funds collected from several investors for the purpose of investing in securities such as money market instruments, debt securities, equity securities and other similar assets. For all investment funds, the Company’s maximum exposure to loss is equivalent to the cost of the investment in the fund. Investment funds are generally financed through the issuance of fund units.

122

5-6 SHARE-BASED PAYMENTS

i. Employee share purchase plans

(a) Long-term Incentive Plan (LTI)

The LTI plan was introduced for the purpose of making future long-term incentive grants to eligible employees.

(b) One Perpetual Share Plan (OPSP)

The OPSP awards eligible employees with annual grants of up to $1,000 worth of Perpetual shares subject to the Company meeting its net profit after tax target. Shares granted under the OPSP cannot be sold or transferred until the earlier of three years from the date the shares are allocated or cessation of employment. Employees who are granted shares have full dividend and voting rights during this time.

For financial accounting purposes, shares granted under the OPSP are deemed to vest immediately because there is no risk of forfeiture. Accordingly, the fair value of the grant is recognised as an expense over the performance period with the corresponding entry directly in equity.

(c) Details of the movement in employee shares

All shares granted under the LTI and OPSP plans in the 2019 financial year were issued from the forfeited share pool at market price. Dividends on employee shares are either received directly by the employees or held in the share plan bank account depending on the likelihood of the shares vesting.

During the year, $11,058,095 (2018: $9,750,466) of amortisation relating to shares, performance rights and share rights was recognised as an expense with the corresponding entry directly in equity.

Shares are granted to eligible employees under the LTI plan. The number of shares granted is determined by dividing the value of the grant by the VWAP of Perpetual shares traded on the ASX in the five business days up to and including the grant date.

The following table illustrates the movement in employee shares during the financial year:

	OPENING		SHARES			CLOSING
	BALANCE	VESTED	PURCHASED	FORFEITED	GRANTED	BALANCE AT
NUMBER	1 JULY	SHARES	ON MARKET	SHARES	SHARES	30 JUNE
2019	560,569	(361,756)	150,000	(93,618)	93,618	348,813
2018	741,882	(181,313)	–	(73,013)	73,013	560,569

ii. Rights

During the year, the Company granted $16,393,698 (30 June 2018: $8,203,095) of share rights and performance rights in accordance with the LTI plan.

Share rights are granted to Executives under the Variable Incentive Plan. The number of share rights granted is determined by dividing the value of the grant by the VWAP of Perpetual shares traded on the ASX in the five business days up to and including the grant date.

Performance rights are granted to eligible employees under the LTI Plan. The number of performance rights granted is determined by dividing the value of the LTI grant by the VWAP of Perpetual shares traded on the ASX in the five business days up to and including the grant date, discounted for the non-payment of dividends during the performance period, as calculated by an independent external adviser.

Performance rights and share rights do not receive dividends or have voting rights until they have vested and have been converted into Perpetual shares.

PERPETUAL ANNUAL REPORT 2019 123

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

5-6 SHARE-BASED PAYMENTS CONTINUED

ii. Rights continued

ii. Rightsco	ntinued
30 JUNE 2019					MOVEMENT IN NUMBER OF RIGHTS GRANTED
			TSR							OUT-
			HURDLE							STANDING
			OR							AT
	VEST	EXPIRY	NON-TSR	ISSUE	1 JULY					30 JUNE
GRANT DATE	DATE	DATE	HURDLE	PRICE	2018	GRANTED	FORFEITED		VESTED	2019
Oct 2015 Oct 2015 Oct 2016 Sep 2017 Oct 2017 Oct 2017 Sep 2018 Oct 2018 Oct 2018 Oct 2018	Oct 2018 Oct 2018 Oct 2019 Sep 2019 Oct 2018 Oct 2020 Sep 2020 Oct 2019 Oct 2020 Oct 2021	Sep 2022 Sep 2022 Sep 2023 Sep 2032 Sep 2032 Sep 2032 Sep 2033 Oct 2033 Sep 2033 Oct 2033	TSR Non-TSR Non-TSR Non-TSR Non-TSR Non-TSR Non-TSR Non-TSR Non-TSR Non-TSR	$19.50 $33.07 $39.40 $46.93 $44.64 $44.64 $37.03 $39.77 $37.29 $34.97	38,672 184,712 124,388 29,951 3,989 119,266 – – – –	– – – – – 2,9121 39,749 112,223 1,417 292,029		(38,672) (755) (4,585) (8,565) – (5,543) (8,798) – – (1,713)	– (183,957) (12,288) – (3,989) (1,065) – – – –	– – 107,515 21,386 – 115,570 30,951 112,223 1,417 290,316
					500,978	448,330		(68,631)	(201,299)	679,378

Performance rights granted during the year and back dated to October 2017.

30 JUNE 2018					MOVEMENT	IN NUMBER	OF RIGHTS GRANTED	OF RIGHTS GRANTED
			TSR						OUT-
			HURDLE						STANDING
			OR						AT
	VEST	EXPIRY	NON-TSR	ISSUE	1 JULY				30 JUNE
GRANT DATE	DATE	DATE	HURDLE	PRICE	2018	GRANTED	FORFEITED	VESTED	2018
Oct 2014	Oct 2017	Oct 2017	TSR	$21.82	33,000	–	(15,183)	(17,817)	–
Oct 2014	Oct 2017	Oct 2017	Non-TSR	$38.00	90,713	–	(22,166)	(68,547)	–
Aug 20151	Oct 2017	Oct 2021	Non-TSR	$38.00	789	–	–	(789)	–
Oct 2015	Oct 2018	Sep 2022	TSR	$19.50	38,672	–	–	–	38,672
Oct 2015	Oct 2018	Sep 2022	Non-TSR	$33.07	238,804	–	(51,069)	(3,023)	184,712
Oct 2016	Oct 2019	Sep 2023	Non-TSR	$39.40	145,451	–	(15,139)	(5,924)	124,388
Sep 2017	Sep 2019	Sep 2032	Non-TSR	$46.93	–	51,055	(21,104)	–	29,951
Oct 2017	Oct 2018	Sep 2032	Non-TSR	$44.64	–	3,989	–	–	3,989
Oct 2017	Oct 2020	Sep 2032	Non-TSR	$44.64	–	126,098	(6,832)	–	119,266
					547,429	181,142	(131,493)	(96,100)	500,978

Valuation date 1 October 2014.

124

The fair value of services received in return for performance rights and share rights granted is based on the fair value of rights granted, measured using a face value approach for scorecard performance conditions, Monte Carlo simulation for TSR performance conditions and the Black-Scholes option pricing formula for share rights and EPS performance conditions, with the following inputs:

	VALUATION	VALUATION	VALUATION	VALUATION	VALUATION	VALUATION	VALUATION	VALUATION
	DATE	DATE	DATE	DATE	DATE	DATE	DATE	DATE
	1 OCT	1 OCT	1 SEP	1 OCT	1 SEP	1 OCT	1 OCT	1 OCT
	2015	2016	2017	2017	2018	2018	2018	2018
Performance period	3 years	3 years	2 years	3 years	2 years	1 year	2 years	3 years
Share price ($)	40.00	46.28	54.70	51.94	43.89	42.40	42.40	42.40
Dividend yield (%)	6.23	5.51	5.10	5.18	6.40	6.63	6.63	6.63
Expected volatility (%)	25	N/A	25	N/A	20	N/A	N/A	N/A
Risk free interest rate(%)	1.86	N/A	N/A	N/A	N/A	1.93	2.00	2.07

Accounting policies

Employee share purchase plans

Share incentive programs allow employees to acquire shares in the Company. The fair value of shares and/or rights granted under these programs is recognised as an employee expense with a corresponding increase in equity. Fair value is measured at grant date and amortised over the period during which employees become unconditionally entitled to the shares.

The fair value of the rights granted is measured using a binomial model, taking into account the terms and conditions upon which the rights were granted. The amount recognised as an expense is adjusted to reflect the actual number of rights that vest except where forfeiture is due to share prices not achieving their threshold for vesting.

Deferred staff incentives

The Company grants certain employees shares under long-term incentive, short-term incentive and retention plans. Under these plans, shares vest to employees over relevant vesting periods. To satisfy the long-term incentives granted, the Company purchases or issues shares under the LTI Plan.

The fair value of the shares granted is measured by the share price adjusted for the terms and conditions upon which the shares were granted. This fair value is amortised on a straight-line basis over the applicable performance and vesting period.

The consolidated entity makes estimates of the number of shares that are expected to vest. Where appropriate, revised estimates are reflected in profit or loss with the corresponding adjustment to the equity compensation reserve. Where shares containing a market linked hurdle do not vest, due to total shareholder return not achieving the threshold for vesting, an adjustment is made to retained earnings and equity compensation reserve.

Rights

Performance rights and share rights are issued for the benefit of eligible Perpetual employees pursuant to the LTI Plan.

Unlike Perpetual’s other employee share plans, there will be no treasury shares issued to employees at the rights grant date.

Over the vesting period of the rights, an equity remuneration expense will be amortised to the equity compensation reserve based on the fair value of the rights at the grant date.

On vesting, the intention is to settle the rights with available treasury shares. A fair value adjustment between contributed equity and treasury shares will be recognised to revalue the recycled shares to the fair value of the rights at the vesting date.

PERPETUAL ANNUAL REPORT 2019 125

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

5-7 KEY MANAGEMENT PERSONNEL AND RELATED PARTIES

Total compensation of key management personnel

5-7 KEY MANAGEMENT PERSONNEL AND RELATED PARTIES Total compensation of key management personnel
	2019	2018
	$	$
Short-term	5,776,222	6,411,774
Post-employment	201,091	174,131
Share-based	778,667	740,444
Other long-term	(12,148)	139,540
Total	6,743,832	7,465,889

Related party disclosures

Executives have not entered into material contracts with the Company or a member of the consolidated entity since the end of the previous financial year and there were no material contracts involving key management personnel’s interests existing at year end.

Controlled entities and associates

The consolidated entity has a related party relationship with its key management personnel (see Remuneration Report).

Business transactions with related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated.

5-8 AUDITOR’S REMUNERATION

5-8 AUDITOR’S REMUNERATION
	2019	2018
	$	$
Audit and review services
Auditor of the Company – KPMG Australia
Audit and review of fnancial statements	757,844	642,723
Other assurance and regulatory audit services	517,528	354,559
*Overseas KPMG frms:*
Audit and review services of other fnancial statements	35,531	26,494
Other assurance and regulatory audit services	22,611	25,985
	1,333,514	1,049,761
Audit and review services for non-consolidated managed funds,
superannuation funds and other funds:
Audit and review of managed funds and superannuation funds for which the
consolidated entity acts as responsible entity1	1,185,740	1,022,116
Audit of other funds for which Perpetual acts as administrator or trustee1	1,143,510	1,052,317
Other regulatory audit services1	118,766	315,856
Total audit fee attributable to the audit and review of non-consolidated funds	2,448,016	2,390,289
	3,781,530	3,440,050
Non-audit services
*KPMG Australia:*
Advisory services	256,530	93,500
Tax services	18,963	9,000
Other services	30,291	23,415
	305,784	125,915

The fees are incurred by the consolidated entity and are recovered from the funds via management fees.

Non-audit services paid to KPMG are in accordance with the Company’s auditor independence policy as outlined in Perpetual’s Corporate Responsibility and Sustainability Statement.

126

5-9 SUBSEQUENT EVENTS

A final dividend of 125 cents per share fully franked was declared on 22 August 2019 and is to be paid on 30 September 2019.

Other than the matters noted above, the Directors are not aware of any other event or circumstance since the end of the financial year not otherwise dealt with in the financial statements that has affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial years.

PERPETUAL ANNUAL REPORT 2019 127

Financial Report

Notes to and forming part of the financial statements

for the year ended 30 June 2019

Section 6 – Basis of preparation

This section sets out Perpetual’s accounting policies that relate to the financial statements as a whole. Where an accounting policy is specific to a single note, the policy is described in the note to which it relates. This section also shows new accounting standards, amendments and interpretations, and whether they are effective in 2019 or later years. We explain how these changes are expected to impact the financial position and performance of Perpetual.

6-1 REPORTING ENTITY

Perpetual Limited (‘the Company’) is domiciled in Australia. The consolidated financial report of the Company as at and for the year ended 30 June 2019 comprises the Company and its controlled entities (together referred to as ‘the consolidated entity’) and the consolidated entity’s interests in associates.

Perpetual is a for-profit entity and primarily involved in portfolio management, financial planning, trustee, responsible entity and compliance services, executor services, investment administration and custody services.

The financial report was authorised for issue by the Directors on 22 August 2019.

The Company is a public company listed on the Australian Securities Exchange (code: PPT), incorporated in Australia and operating in Australia and Singapore.

The consolidated annual report for the consolidated entity as at and for the year ended 30 June 2019 is available at www.perpetual.com.au.

6-2 BASIS OF PREPARATION

i. Statement of compliance

The financial report is a general purpose financial report prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001 .

The financial report of the consolidated entity also complies with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB).

ii. Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for financial assets which are measured at fair value.

The consolidated financial statements are presented in Australian dollars, which is the functional currency of the majority of the consolidated entity.

The Company is of a kind referred to in ASIC Corporations Instrument 2016/191 dated 1 April 2016 and in accordance with that Instrument, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated.

This is the first set of the consolidated entity’s financial report in which AASB 15 Revenue from Contracts with Customers and AASB 9 Financial Instruments have been applied. Changes to significant accounting policies are described in section 6-4.

Where necessary, comparative information has been restated to conform to changes in presentation in the current year.

Use of judgements and estimates

In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the consolidated entity’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively.

(a) Judgements

Information about critical judgements in applying accounting policies in accordance with Australian Accounting Standard AASB 10 Consolidated Financial Statements is included in section 5-3 Controlled entities.

128

(b) Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the year ended 30 June 2019 are included in the following notes:

Section 1-2 Revenue
Section 1-4 Income taxes
Section 2-5 Intangibles
Section 2-6 Provisions
Section 2-7 Employee benefits
Section 3-5 Commitments and contingencies
Section 5-1 Structured products assets and liabilities
Section 5-6 Share-based payments

Measurement of fair values

A number of the consolidated entity’s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities.

The consolidated entity has an established control framework with respect to the measurement of fair values. This includes overseeing all significant fair value measurements.

Significant unobservable inputs and valuation adjustments are regularly reviewed. If third party information, such as broker quotes or pricing services, is used to measure fair values, an assessment is made of the evidence obtained from the third parties. This is used to support the conclusion that such valuations meet the requirements of AASB, including the level in the fair value hierarchy in which such valuations should be classified.

Significant valuation issues are reported to the Audit, Risk and Compliance Committee.

When measuring the fair value of an asset or a liability, the consolidated entity uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The consolidated entity recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Further information about the assumptions made in measuring fair values is included in the following notes:

Section 2-7 Employee benefits
Section 4-1 Financial risk management
Section 5-1 Structured products assets and liabilities
Section 5-6 Share-based payments

PERPETUAL ANNUAL REPORT 2019 129

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

6-3 OTHER SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies have been included in the relevant notes to which the policies relate. Other significant accounting policies are listed below:

i. Basis of consolidation

(a) Subsidiaries

Subsidiaries are entities controlled by the consolidated entity. The consolidated entity controls an entity when it is exposed to, 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 financial statements of subsidiaries are included in the consolidated financial statements from the date control commences until the date control ceases.

(b) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated against the investment to the extent of the consolidated entity’s interest in the associate. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Gains and losses are recognised when the contributed assets are consumed or sold by the associates or, if not consumed or sold, when the consolidated entity’s interest in such entities is disposed of.

ii. Foreign currency

(a) Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit or loss.

Translation differences on financial assets and liabilities carried at fair value are reported as part of their fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale financial assets are included in the available-for-sale reserve in equity.

(b) Foreign operations

The results and financial position of subsidiaries that have a functional currency different from the presentation currency are translated into Australian dollars as follows:

Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position.
Income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions).

Foreign currency differences are recognised in other comprehensive income. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss or to non-controlling interest as part of the profit or loss on disposal.

iii. Payables

Payables are non-interest-bearing and are stated at amortised cost, with the exception of contingent consideration recognised in business combinations, which is recorded at fair value at the acquisition date.

Contingent consideration recognised in business combinations is classified as a financial liability and is subsequently remeasured to fair value with changes in fair value recognised in profit or loss.

130

iv. Impairment

(a) Financial assets (including receivables)

AASB 9 introduces a new impairment model calculated based on an ‘expected credit losses’ (ECL) basis, replacing the model under AASB 139 calculated on a ‘historical loss’ basis and applies to financial assets measured at amortised cost held by the consolidated entity.

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the difference between the present value of the cash flows due to the entity in accordance with the contract and the present value of cash flows that the consolidated entity expects to receive.

The consolidated entity has applied the simplified approach under AASB 9 to calculate expected credit losses for Receivables. Under this approach, expected credit losses are calculated based on the life of the instrument. During this process, the probability of the non-payment of the receivables is assessed using the single loss rate approach.

Impairment losses on financial assets measured at amortised cost are recognised in profit or loss and deducted from the gross carrying amount of the assets. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(b) Non-financial assets

The carrying amounts of the consolidated entity’s non-financial assets, other than deferred tax assets (see section 1-4), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘cash-generating unit’ or CGU).

Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes.

The consolidated entity’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the Statement of Comprehensive Income. Impairment losses recognised in respect of cashgenerating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then, to reduce the carrying amount of the other assets in the unit on a pro-rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each balance sheet date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

PERPETUAL ANNUAL REPORT 2019 131

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

6-4 CHANGES IN SIGNIFICANT ACCOUNTING POLICIES

Except as described below, the accounting policies applied in these financial statements are the same as those applied in the consolidated entity’s financial statements as at and for the year ended 30 June 2019.

The consolidated entity has initially adopted AASB 15 Revenue from Contracts with Customers and AASB 9 Financial Instruments from 1 July 2018. A number of other new standards are effective from 1 July 2018 but they do not have a material effect on the consolidated entity’s financial statements.

The effect of initially applying these standards is mainly attributed to the following:

Unrealised gains/losses on the consolidated entity’s financial assets are now taken through profit and loss (previously taken through other comprehensive income), refer to section 1-2.

(a) AASB 15 Revenue from Contracts with Customers

AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue , AASB 111 Construction Contracts and related interpretations.

On 1 July 2018, the consolidated entity reduced opening retained earnings by $3.8 million to reflect the cumulative effect of applying the standard. The $3.8 million has been recognised as a contract liability and will be recognised as services to which they relate are provided. The impact on the consolidated entity’s profit and loss for the current period is a $1.8 million increase. A contract liability of $2.5 million has been recognised in the current year as a result of the transition to AASB 15 from 1 July 2018.

(b) AASB 9 Financial Instruments

AASB 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces AASB 139 Financial Instruments: Recognition and Measurement .

Classification and Measurement

There are three measurement classifications for financial assets under AASB 9: amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). Financial assets are classified into these measurement classifications on the basis of two criteria:

The business model within which the financial asset is managed; and
The contractual cash flow characteristics of the financial assets, whether the contractual cash flows represent solely payments of principal and interest.

As a result, financial assets are classified are as follows:

Amortised cost: Financial assets with contractual cash flows that comprise solely payments of principal and interest (SPPI) only and which are held in a business model whose objective is to collect their cash flows;
FVOCI: Financial assets with contractual cash flows that comprise solely payments of principal and interest (SPPI) only and which are held in a business model whose objective is to collect their cash flows or to sell; and
FVTPL: All other financial assets not falling into the categories above are measured at FVTPL.

132

Fair Value Option for Financial Assets

A financial asset may be irrevocably designated at FVTPL on initial recognition when the designation eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Financial Assets – Equity Instruments

Non-traded equity investments may be designated at FVOCI on an investment by investment basis. If this election is made, gains or losses are not reclassified from other comprehensive income to profit or loss on disposal of the investment. However, gains or losses may be reclassified within equity.

At 30 June 2018 the consolidated entity held $74.5 million of Available-for-Sale (AFS) assets classified as Fair Value through Other Comprehensive Income (FVOCI), which includes the consolidated entity’s incubation funds. Movements in the fair value of these assets were taken through the AFS reserve within equity.

From 1 July 2018, these financial assets are now classified as Fair Value Through Profit and Loss (FVTPL), with the associated unrealised and realised gains and losses taken to the income statement. The $5.0 million (net of tax) of unrealised gains held within the available-for-sale reserve at 30 June 2018 will remain in equity upon realisation, and not be recycled to the income statement.

The consolidated entity’s cash and cash equivalents and receivables which had previously been classified as loans and receivables and measured at amortised cost under AASB 139 are now classified as amortised cost and continue to be measured at amortised cost under AASB 9.

The consolidated entity’s payables and borrowings which had previously been classified and measured at amortised cost under AASB 139 continued to be classified and measured at amortised cost under AASB 9.

The consolidated entity’s $252.5 million of structured products – EMCF assets also changed from FVOCI to FVTPL. There will be no change to the recognition or measurement of the corresponding $252.2 million liability that represents the obligation to fund investors and measured at cost, being redemption value. Refer to section 4-1 for further information on how these products are managed.

Net unrealised losses on the consolidated entity’s financial assets amounted to $3.4 million for the year. Refer to section 1-2.

Impairment

Refer to section 6-3 (iv) (a) for details on how the consolidated entity measures impairment under the new impairment model introduced by AASB 9.

PERPETUAL ANNUAL REPORT 2019 133

Financial Report Notes to and forming part of the financial statements

for the year ended 30 June 2019

6-5 NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

A number of new standards, amendments to standards and interpretations have been issued but are not yet mandatory. The consolidated entity has not early adopted any of these standards or amendments in this financial report. Those that are applicable to the consolidated entity and will apply to future periods are described as follows:

(a) AASB 16 Leases

AASB 16 Leases replaces existing leases guidance, including AASB 117 Leases , Interpretation 4 Determining whether an Arrangement contains a Lease , Interpretation 115 Operating Leases – Incentives and Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease . AASB 16 is effective for the consolidated entity’s financial year commencing on 1 July 2019. The consolidated entity has assessed the estimated impact that initial application of AASB 16 will have on its consolidated financial statements, as described below. The actual impact of adoption could be different as new accounting policies are subject to change until the consolidated entity presents its first financial statements that include the date of initial application.

AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use (ROU) asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – ie lessors continue to classify leases as finance or operating leases.

The consolidated entity will recognise new assets and liabilities for its operating leases of premises (refer to section 3-5). The nature of expenses related to those leases will now change because the consolidated entity will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities.

Previously, the consolidated entity recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. While no net impact on cash flows, lease payments previously recognised as an operating cash outflow are now split between financing outflow (paydown of lease liability) and operating outflow (interest expense on unwind of discounting)

In addition, the consolidated entity will no longer recognise provisions for operating leases that it assesses to be onerous. Instead, the consolidated entity will include the payments due under the lease in its lease liability.

The consolidated entity has no contracted finance leases.

Based on the information currently available, the consolidated entity estimates that it will recognise additional lease liabilities of approximately $100 million and ROU assets of approximately $80 million as at 1 July 2019. After adjusting for amounts currently recorded on the balance sheet (representing the difference between the cumulative lease expense recognised and cash paid on these leases), this results in a reduction to retained earnings of approximately $5 million.

Transition

The consolidated entity plans to apply AASB 16 initially on 1 July 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information.

The consolidated entity plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply AASB 16 to all contracts entered into before 1 July 2019 and identified as leases in accordance with AASB 117 and Interpretation 4.

134

Directors’ Declaration

for the year ended 30 June 2019

In the opinion of the Directors of Perpetual Limited (the ‘Company’):
(a) the consolidated financial statements and notes set out on pages 84 to 134, and the Remuneration Report in the Directors’ Report, are in accordance with the Corporations Act 2001 , including:
- (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2019 and of its performance for the financial year ended on that date; and
- (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001 ; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
There are reasonable grounds to believe that the Company and the certain wholly owned subsidiaries identified in section 5-4 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and these entities pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785.
The Directors have been given the declarations required by section 295A of the Corporations Act 2001 from the Chief Executive Officer and Managing Director and the Chief Financial Officer for the financial year ended 30 June 2019.
The Directors draw attention to section 6-2(i) to the consolidated financial statements which includes a statement of compliance with International Financial Reporting Standards.

Signed in accordance with a resolution of the Directors:

Dated at Sydney this 22[nd] day of August 2019.

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Tony D’Aloisio Director

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Rob Adams Managing Director

PERPETUAL ANNUAL REPORT 2019 135

Independent Auditor’s Report

to the shareholders of Perpetual Limited

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Independent Auditor’s Report

To the shareholders of Perpetual Limited

`Report on the audit of the Financial Report`

`Opinion`

We have audited the Financial Report of Perpetual Limited (the Company).

In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001 , including:

giving a true and fair view of the Consolidated Entity ’s financial position as at 30 June 2019 and of its financial performance for the year ended on that date; and
complying with Australian Accounting Standards and the Corporations Regulations 2001 .

The Financial Report comprises:

Consolidated statement of financial position as at 30 June 2019;
Consolidated statement of profit or loss and other comprehensive income, Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year then ended;
Notes (sections 1 to 6) including a summary of significant accounting policies; and
Directors’ Declaration.

The Consolidated Entity consists of Perpetual Limited (the Company) and the entities it controlled at the year end or from time to time during the financial year.

`Basis for opinion`

We conducted our audit in accordance with Australian Auditing Standards . We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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 Consolidated Entity in accordance with 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 (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code.

`Key Audit Matters`

The Key Audit Matters we identified are:

Revenue recognition;
Employee remuneration; and
Valuation of goodwill.

Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Liability limited by a scheme approved under Professional Standards Legislation.

136

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`Revenue recognition ($502m)`	`Revenue recognition ($502m)`
Refer to Section 1-2 ‘Revenue’ of the Financial Report
`The key audit matter`	`How the matter was addressed in our audit`
The Consolidated Entity generates revenue from multiple products and services, including fees from investment management, securitisation, adviser and trustee services. Revenue recognition is a key audit matter given the complexity associated with the number of different revenue streams, and the significance of revenue to the Consolidated Entity’s results. We focussed on the: �Key revenue streams, each with varying fee rates and contractual terms, which required significant audit effort to test the fees recognised. �Drivers of fee calculations, which include funds under management (FUM) and funds under advice (FUA). This information is sourced from several of the Consolidated Entity’s third party service organisations which provide investment administration, custody and unit registry services. This required us to understand the key processes and assess the key controls of these service organisations relevant to the Consolidated Entity’s revenue recognition. �Performance fees, for which the Consolidated Entity’s revenue recognition policy is dependent on varying contractual terms. We involved our senior team members in assessing the Consolidated Entity’s accounting policy for performance fees against the requirements of the accounting standards.	Our procedures included: �Enquiring of the Consolidated Entity to understand processes for key revenue streams, and testing key controls at the Consolidated Entity related to these revenue streams. �Assessing the Consolidated Entity’s policies for recognition of revenue against the requirements of the accounting standards. �Testing statistical samples of revenue across each key revenue stream. We recalculated the revenue recognised based on the various fee rates in the underlying contracts, and the underlying FUM or FUA sourced from third party service organisation reports. We compared this to the revenue recognised by the Consolidated Entity. �Analysing data within each key revenue stream to identify trends and outliers and further inform our work. Examples of outliers included months where fees exhibit an inverse movement to FUM flows or client fees falling considerably outside of statistical trends. For outliers identified, we recalculated the revenue recognised based on the underlying contracts, and the FUM or FUA. We compared this to the revenue recognised by the Consolidated Entity. �Obtaining and reading the Consolidated Entity’s third party service organisations’ GS007 (`Guidance` `Statement 007 Audit Implications of the Use of` `Service Organisations for Investment Management` `Services`) assurance reports to understand the service organisations’ processes and assess controls related to investment administration, custody and unit registry. �Assessing the reputation, professional competence and independence of the auditors of the GS007 assurance reports. �Testing a sample of performance fee revenue recognised to the Consolidated Entity’s bank statements. We recalculated the performance fee based on the underlying contractual terms and product performance relative to the market benchmark. We compared this to the performance fee revenue recognised by the Consolidated Entity.

PERPETUAL ANNUAL REPORT 2019 137

Independent Auditor’s Report

to the shareholders of Perpetual Limited

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`Employee remuneration ($196m)`

`Employee remuneration ($196m)`	`Employee remuneration ($196m)`

Refer to Section 1-3 ‘Expenses’ and Section 5-6 ‘Share-based payments’ of the Financial Report
`The key audit matter`	`How the matter was addressed in our audit`
Employee remuneration is a key audit matter due to the size of the balance relative to the Consolidated Entity’s results and its complex share incentive programs. We focussed on the: �Valuation methodology and inputs, such as the share price and vesting period, used by the Consolidated Entity and its external valuation experts in the valuation of share incentive rights granted during the year. This necessitated the involvement of senior team members to assess the valuation methodology and inputs used by the Consolidated Entity. �Largely manual calculation of equity remuneration expenses, which increases the risk of error. This required significant audit effort. �Complexity of the Consolidated Entity’s share incentive programs, which increases the risk of interpretational differences against the principles based criteria contained in accounting standards.	Our procedures included: �Enquiring of the Consolidated Entity and inspecting a sample of share incentive programs to understand the remuneration process, structure and various share incentive program offerings. �Assessing the Consolidated Entity’s accounting policy for share incentive program arrangements against the principles based criteria in the accounting standards. �Evaluating the Consolidated Entity’s external valuation expert’s scope of work, competence and objectivity with respect to their valuation of share incentive program rights granted during the year. �Assessing the valuation methodology against industry practice and the requirements of the accounting standards. �Checking the grant date share price and vesting period used in the external expert’s valuation against the Consolidated Entity’s share price and share incentive program agreements. �Testing a statistical sample of equity remuneration expenses. We checked the various inputs to the Consolidated Entity’s manual calculation, such as grants, vests and forfeitures to underlying offer letters, share incentive program agreements and the grant date fair value calculated by the Consolidated Entity’s external valuation expert. We recalculated the equity remuneration expense and compared this to the expense recognised by the Consolidated Entity. �Assessing the Consolidated Entity’s disclosures of the key terms and valuation assumptions, as required by the accounting standards.

138

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`Valuation of goodwill ($290m)`	`Valuation of goodwill ($290m)`
Refer to Section 2-5 ‘Intangibles’ of the Financial Report
`The key audit matter`	`How the matter was addressed in our audit`
The Consolidated Entity’s annual testing of goodwill for impairment is a key audit matter given the: �Size of the balance (being 25.2% of total assets); and �Net outflow of funds under management (FUM) experienced by the Consolidated Entity in the current year, which increases the possibility of goodwill being impaired. We focussed on the significant forward-looking assumptions the Consolidated Entity applied in its value in use models, including: �Forecast operating cash flows, growth rates and terminal growth rates. These assumptions include subjective drivers such as FUM, funds under advice (FUA), securitisation and capital flows which are difficult to predict as they rely on the Consolidated Entity’s expectations of future customer activity and market performance. This increases the risk of inaccurate forecasts or a wider range of possible outcomes. �Discount rates, including Cash Generating Unit (CGU) specific risk premiums. These are complicated in nature and vary according to the conditions and environment the specific CGU is subject to from time to time. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter.	Working with our valuation specialists, our procedures included: �Considering the appropriateness of the value in use method applied by the Consolidated Entity to perform the annual test of goodwill for impairment against the requirements of the accounting standards. �Assessing the integrity of the value in use models used, including the accuracy of the underlying calculation formulas. �Assessing the accuracy of previous Consolidated Entity forecasts to inform our evaluation of forecasts incorporated in the models. �Comparing the forecast cash flows contained in the value in use models to Board approved forecasts. �Challenging the Consolidated Entity’s forecast operating cash flows and growth assumptions in light of the net outflow of FUM. We compared forecast growth rates and terminal growth rates to published studies of industry trends and expectations. We considered differences for the Consolidated Entity’s operations. We used our knowledge of the Consolidated Entity, its past performance, business, customers and our industry experience. �Independently developing a range of discount rates considered comparable using publicly available market data for comparable entities, adjusted by CGU specific risk factors. �Considering the sensitivity of the models by varying key assumptions, such as forecast growth rates, terminal growth rates and discount rates, within a reasonably possible range. We did this to identify those CGUs at higher risk of impairment and to focus our further procedures. �Assessing the disclosures in the financial report using our understanding of the issues obtained from our testing, and against the requirements of the accounting standards.

PERPETUAL ANNUAL REPORT 2019 139

Independent Auditor’s Report

to the shareholders of Perpetual Limited

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`Other Information`

Other Information is financial and non-financial information in Perpetual Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information.

Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or 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. In doing so, we 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.

We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report.

`Responsibilities of the Directors for the Financial Report`

The Directors are responsible for:

preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 ;
implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and
assessing the Consolidated Entity and Company's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Consolidated Entity and Company or to cease operations, or have no realistic alternative but to do so.

`Auditor’s responsibilities for the audit of the Financial Report`

Our objective is:

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 Australian Auditing Standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error. They 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 the Financial Report.

A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report.

140

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`Report on the Remuneration Report`

`Opinion`

`Directors’ responsibilities`

In our opinion, the Remuneration Report of The Directors of the Company are responsible for Perpetual Limited for the year ended 30 June 2019, the preparation and presentation of the complies with Section 300A of the Corporations Act Remuneration Report in accordance with Section 2001 . 300A of the Corporations Act 2001 .

`Our responsibilities`

We have audited the Remuneration Report included in pages 26 to 59 of the Directors’ report for the year ended 30 June 2019.

Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards .

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KPMG Martin McGrath Partner Sydney

22 August 2019

PERPETUAL ANNUAL REPORT 2019 141

Securities Exchange and Investor Information

2019 ANNUAL GENERAL MEETING

The 2019 Annual General Meeting of the Company will be held at Perpetual’s offices, Level 18, 123 Pitt Street, Sydney on 17 October 2019 commencing at 10:00am.

SECURITIES EXCHANGE LISTING

The ordinary shares of Perpetual Limited are listed on the Australian Securities Exchange under the ASX code PPT, with Sydney being the home exchange. Details of trading activity are published in most daily newspapers.

SUBSTANTIAL SHAREHOLDERS

BlackRock Group (BlackRock Inc. and subsidiaries) has a relevant interest in 5,226,917 shares and is a substantial holder of Perpetual Limited as at 31 July 2019.

	NUMBER OF	NUMBER
DISTRIBUTION SCHEDULE OF HOLDINGS AS AT 31 JULY 2019	HOLDERS	OF SHARES
1 – 1,000 shares	18,403	7,058,185
1,001 – 5,000 shares	5,181	10,771,918
5,001 – 10,000 shares	476	3,335,236
10,001 – 50,000 shares	244	4,302,098
50,001 – 100,000 shares	15	1,095,825
100,001 and over shares	26	20,011,164
Total	24,345	46,574,426

142

TWENTY LARGEST SHAREHOLDERS AS AT 31 JULY 2019

	NUMBER OF	PERCENTAGE OF
NAME	ORDINARY SHARES	ISSUED CAPITAL
HSBC Custody Nominees (Australia) Limited	9,005,710	19.34%
JP Morgan Nominees Australia Limited	2,426,700	5.21%
Citicorp Nominees Pty Limited	1,735,862	3.73%
Milton Corporation Limited	1,231,982	2.65%
National Nominees Limited	1,158,070	2.49%
BNP Paribas Noms Pty Ltd (Agency Lending)	601,680	1.29%
CS Third Nominees Pty Limited	429,001	0.92%
Carlton Hotel Ltd	423,973	0.91%
Enbeear Pty Ltd	368,841	0.79%
Australian Foundation Investment Company Limited	360,028	0.77%
Citicorp Nominees Pty Limited (CFS Inv. A/C)	236,441	0.51%
Queensland Trustees Pty Ltd (Long Term Incentive Share Plan)1	179,215	0.38%
Queensland Trustees Pty Ltd (Executive Share Plan)1	175,829	0.38%
J S Millner Holdings Pty Limited	166,300	0.36%
HSBC Custody Nominees (Australia) Limited-GSCO ECA	164,201	0.35%
BNP Paribas Noms Pty Ltd (DRP)	161,884	0.35%
Diversifed United Investment Limited	160,000	0.34%
Pacifc Custodians Pty Limited	154,766	0.33%
AMP Life Limited	132,806	0.29%
Argo Investments Limited	130,000	0.28%
Total	19,403,289	41.66%

The total number of shares held by Queensland Trustees Pty Ltd as trustee of the various Employee Share Plans is 355,044 shares.

PERPETUAL ANNUAL REPORT 2019 143

Securities Exchange and Investor Information

OTHER INFORMATION

Perpetual Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares.

VOTING RIGHTS

Under the Company’s Constitution, each member present at a general meeting (whether in person, by proxy, attorney or corporate representative) is entitled:

on a show of hands to one vote, and
on a poll to one vote for each share held.

If a member is present in person, any proxy of that member is not entitled to vote.

VOTING BY PROXY

Voting by proxy allows shareholders to express their views on the direction and management of the economic entity without attending a meeting in person.

Shareholders who are unable to attend the 2019 Annual General Meeting are encouraged to complete and return the proxy form that accompanies the notice of meeting enclosed with this report.

ON-MARKET BUYBACK

There is no current on-market buyback.

FINAL DIVIDEND

The final dividend of 125 cents per share will be paid on 30 September 2019 to shareholders entitled to receive dividends and registered on 5 September 2019, being the record date.

ENQUIRIES

If you have any questions about your shareholding or matters such as dividend payments, tax file numbers or change of address, you are invited to contact the Company’s share registry office below, or visit its website at www.linkmarketservices.com.au or email [email protected].

Link Market Services Limited Perpetual Shareholder Information Line: 1A Homebush Bay Drive 1300 732 806 Rhodes NSW 2138 Fax: (02) 9287 0303 Locked Bag A14 Sydney South NSW 1235

Any other enquiries which you may have about the Company can be directed to the Company’s registered office, or visit the Company’s website at www.perpetual.com.au

PRINCIPAL REGISTERED OFFICE

Level 18 Tel: (02) 9229 9000 123 Pitt Street Fax: (02) 8256 1461 Sydney NSW 2000

COMPANY SECRETARY

Eleanor Padman

Website address: www.perpetual.com.au

144

Perpetual’s 2019 Annual Report is printed on Precision Laser. Precision text weights are Australian made and PEFC (Programme for the Endorsement of Forest Certification) certified, and made from elemental chlorine free bleached pulp sourced from sustainably managed forests and non-controversial sources. Precision cover weights are FSC[®] Mix Certified, which ensures that all virgin pulp is derived from well-managed forests and controlled sources. Both are manufactured by an ISO 14001 certified mill. 0919 – 2877

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AI assistant

Perpetual Limited — Annual Report 2019

10538_rns_2019-09-10_2d8c5d30-3d36-4adc-8548-07303b5f9dfc.pdf

About Perpetual

Contents

Shareholder calendar

20 August 2020

September

New CEO

Best alternative investment manager

October

PIC capital raising reaches target

November

Platform launched

February

Upgraded fund ratings

March

New brand positioning

Strong investor demand

May

Target exceeded for PCI

Custodian for Indigenous fund

June

Business advisory expertise

Fund ratings reaffirmed

Top 50 financial advisers

Highest score for employee engagement

Dear Shareholder

A strong, diversified business

The benefits of diversification

Royal Commission

Leadership and people

Financial results

Shareholder returns and dividends

Market environment

Outlook

Five-year profile

Dear Shareholder

The environment

The market

Opportunities and risks

Perpetual Investments

never take our clients for granted.

Perpetual Private

Perpetual Corporate Trust

Trust is earned.

Financial performance

Business commentary

Perpetual Investments

Perpetual Private.

Financial performance

Business commentary

Perpetual Private

Financial performance

Business commentary

Perpetual Corporate Trust

Women in leadership roles increased

Trust is earned.

People

An engaged workforce

Community

Commitment to reconciliation

Stanford partnership

20 years of giving

Environment

Carbon Disclosure Project

SRI screen

Paper reduction

~ 320k

Governance

ASX principles

Independence of directors

29%

Code of conduct

perpetual.com.au/ corporate-governance

DIRECTORS

Tony D’Aloisio AM

CHAIRMAN AND INDEPENDENT DIRECTOR BA LLB (Hons) (Age 69)

Philip Bullock AO

INDEPENDENT DIRECTOR

Perpetual Limited Annual Report 2019