LONDON, March 31, 2008 — New research from BNY Mellon Asset Servicing reveals that in 2007, UK pension funds' holdings in Global Equities fell for the eighth consecutive year from 62.7% to 55.1%. This decline is largely due to funds continuing to reduce their weightings in UK Equities, which fell from 34.4% to 28.7%. This is the lowest ever allocation to this asset class. Overseas Equities also fell, from 28.3% to 26.4% and the split between UK and Overseas Equity is now almost 50/50.

The asset allocation 'winners' in 2007 were Bonds and Index-Linked which increased from 23.9% to 27.6% and from 7.8% to 9.6% respectively. Within Bonds, Non-gilts have surged in value over recent years, and marginally overtook allocations to Gilts in 2006. By the end of 2007, allocations to Non- gilts at 14.1% were well ahead of Gilts at 11.8%. Cash weightings increased to 3.1%, up from 1.7%.

According to BNY Mellon, allocation to Other Assets increased during 2007 from 0.8% to 1.6%, reflecting the greater number of pension funds investing in alternatives, particularly Hedge Funds and Private Equity. However, the overall allocation remains relatively low with just one in eight pension funds investing in Other Assets and the typical commitment being around 6% of assets.

Commenting on the changing asset allocation trends, Alan Wilcock, Performance and Risk Analytics Director at BNY Mellon Asset Servicing, said: "While UK Equities has been declining as a major asset class for UK pension funds over the last few years, 2007 saw the largest fall to date. UK Bond allocations, including Index-Linked, now exceed UK Equities for the first time ever."

Fifth consecutive year of positive performance

The weighted average return for UK pension funds for 2007 was 6.4%. This is the fifth consecutive year of positive performance, following the poor performance at the start of the decade. Over the last five years UK pension funds have averaged 12.1% per annum, which represents a real rate of return of 8.7% per annum against the Retail Prices Index and 8.2% per annum against earnings.

Over 10 years, pension fund returns have averaged 6.5% per annum, a return of 3.7% per annum in excess of price inflation.

The fund median in 2007 was 6.0% indicating that larger funds produced slightly higher returns on average compared to smaller funds over 2007. Historically, larger funds have benefited from higher weightings in Property, although this was not the case during 2007 when this sector returned -5.2%. However, larger funds did benefit from having higher weightings in key sectors such as Emerging Market Equities and Index-Linked Gilts, for which the median fund returned 39.1% and 8.6% respectively over the year.

2008 - a rollercoaster year for pension funds?

Despite the relatively turbulent market conditions since the summer of 2007, UK pension funds continued to enjoy low return volatility for periods to the end of 2007. According to BNY Mellon, 80% of schemes have seen volatility, as measured by the standard deviation, of between 5.1% per annum and 7.8% per annum over the last five years. These rates were historically very low, potentially leading investors to a have a greater sense of security than had been the case historically.

Tracking errors for pension funds relative to their scheme specific benchmarks were also historically low ranging from 0.6% to 1.8% per annum, again for 80% of schemes in the survey.

Commenting on the importance of risk, Wilcock added: "Pension funds have become accustomed to very low standard deviations and positive returns year on year. However, since the turn of the year, equity markets have fallen and this is likely to have increased both volatility and tracking error statistics. Against this background, risk management will no doubt be a critical element of any scheme's asset allocation strategy."

At the end of 2007, BNY Mellon Asset Servicing measured the performance of 423 pension funds, representing 1873 separate manager portfolios with a total market value over euro 203billion.

Standard deviation is a measure of volatility which looks at the extent to which an investment return deviates from the average over time. A large value indicates a wide dispersion of results, whilst a low value indicates that returns are closely aligned with the average.

Tracking Error measures the variability of a fund's returns relative to its benchmark over a time period. Passive portfolios and those adhering closely to their benchmark would expect low values for this statistic. More active portfolios, which seek to achieve better returns, would expect higher values as they attempt to out-perform their benchmark.

BNY Mellon Asset Servicing offers clients worldwide a broad spectrum of specialised asset servicing capabilities, including custody and fund services, securities lending, performance and analytics, and execution services. BNY Mellon Asset Servicing provides services through The Bank of New York, Mellon Bank, N.A. and other related companies.

The Bank of New York Mellon Corporation is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. The company is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has more than $23 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and services $11 trillion in outstanding debt. Additional information is available at bnymellon.com.