White Paper Introduces BNY Mellon's Target Surplus Strategies

BOSTON, June 2, 2010 — Companies should set funding-based objectives for pension plans that can be achieved within a specific time frame to improve the management of their pension plans over the long term, according to a recent study by BNY Mellon Asset Management.  The study recommends the adoption of a Target Surplus strategy that establishes a glide path for pension plans to help them reach the desired outcome such as full funding or plan termination by a specific deadline.

"Aiming for specific goals such as full funding or plan termination by a specific deadline will take pension plans to the next step beyond liability driven investing (LDI), which has helped plan sponsors lower their exposure to market volatility and has helped to preserve the funding status of a pension plan," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management.    

The funding status of pension plans can directly affect the balance sheets and cash contribution requirements of corporations under accounting and funding rules in the U.S.  Austin said, "We believe that corporations that implement a Target Surplus strategy are more likely to achieve the funding necessary to either maintain the plan in the future with dramatically reduced financial stress, or allow them to terminate the plan."

While LDI strategies have been effective at defining and managing funding risk and helping to preserve the funded status of a pension plan, for the most part they do not incorporate specific funding goals or a comprehensive asset allocation program that reallocates assets to achieve and preserve the funding target, according to the BNY Mellon study.

The BNY Mellon paper asserts the Target Surplus strategy is more dynamic in that it creates a framework which helps corporate pension plan sponsors to decide when to vary the asset allocation as the funded status of the plan changes.  Once a plan achieves its funding target, an endgame asset allocation could then be implemented which reflects the ultimate risk profile for the pension plan on an ongoing basis, according to the study.

Plans with a low funded status are more likely to have a higher initial allocation to equities, with the allocation to bonds increasing as the funded status of the plan improves, according to the study.  Higher equity allocations in many cases reflect the plan sponsor's desire to limit plan contributions by achieving higher expected returns.  However such strategies tend to be accompanied by increased risk. Fixed income remains the most effective hedge against volatility in the funded status of a plan, according to the BNY Mellon study.

In developing the glide path, BNY Mellon's Target Surplus model incorporates such factors as capital market assumptions, sponsor contribution expectations, sponsor risk preferences and plan design consistency.  BNY Mellon's model is dynamic, allowing sponsors to reconsider their forecasts following shocks to the capital markets or other major factors that could influence funding status.

"The last eight years have been difficult for pension plan sponsors," said Austin. "We believe the time is right for an approach that offers plan sponsors a long-term answer to address the significant financial risk represented by pension plans.  Our Target Surplus strategy is designed to be that answer."

BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). BNY Mellon 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. BNY Mellon 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 $22.4 trillion in assets under custody and administration, $1.1 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. Additional information is available at www.bnymellon.com.

All information source BNY Mellon Asset Management as of March 31, 2010. This press release is qualified for issuance in the US only and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorized. This press release is issued by BNY Mellon Asset Management to members of the financial press and media and the information contained herein should not be construed as investment advice.  Past performance is not a guide to future performance.
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