Report Found that Dynamic, Outcome-Orientated Strategies Significantly Increase the Probability of Achieving a Desired Pension Target

LONDON, 5 October, 2011 — There is a need for more innovative alternatives to the 'lifestyling' approach typically employed in defined contribution (DC) pension schemes, a recent report from Cass Business School, part of City University London, sponsored by BNY Mellon, has found.

Traditional DC investment strategies adopt a strategy known as 'lifestyling', where investors' pension pots are "automatically and mechanistically" switched out of equities to government bonds in the ten years preceding retirement. The report found that pension schemes that use lifestyling are producing smaller pension pot sizes for savers than ever before.

Cass Business School Professor of Asset Management Andrew Clare, who co-authored the paper with Cass Senior Lecturer Dr Douglas Wright, said: "Our research has shown that the equity bear market and the decline in annuity rates over the last ten to fifteen years has had a devastating effect on the final pensions of DC savers who have relied upon the mechanical lifestyling approach. A more enlightened and more flexible approach to the DC accumulation phase is definitely needed."

Instead, the report finds evidence to suggest that DC pension schemes should adopt a 'dynamic' investment strategy that is "outcome-driven, recognises investors' attitudes to risk and takes a flexible approach to the 'decumulation' phase". In doing do, investors will receive a tailored investment solution and thus a greater chance of achieving pension targets.

Clare added: "The paper challenges the asset management industry to respond with workable products, solutions and technology. These approaches will require the industry to rethink how it engages with scheme members, and challenge assumptions on the key inputs for future product developments."

"Few now dispute that the future of pension provision, not just in the UK but in other developed countries, seems to be the DC model", said David Calfo, Group head of DC strategy, BNY Mellon. "In moving, albeit gradually, from a DB to a DC world, the burden of risk that retirement income will not be at the desired level is shifting from employers and their shareholders, to individuals. It is therefore right to ask whether the investment approach taken to DC pension provision is appropriate".

The key will be to treat people as individuals. Calfo said: "Past and present solutions treat people of a like age and or number of years before they retire as if they have the same income objectives in retirement, and fail to consider how close individuals are to actually achieving their target retirement sum. In practice this means that in most DC schemes two people of the same age, with entirely different retirement income objectives, where one 'on target' and the other significantly 'under target', will have identical asset allocation profiles. This is clearly wrong and something pension schemes need to address to assist individuals to attain financial well being."

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $26.3 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.7 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available at www.bnymellon.com and through Twitter@bnymellon.

Cass Business School, which is part of City University London, delivers innovative, relevant and forward-looking education, training, consultancy and research. Located in the heart of one of the world's leading financial centres, Cass is the business school for the City of London.

Cass's MBA, specialist Masters and undergraduate degrees have a global reputation for excellence, and the School supports nearly 100 PhD students. Cass offers the widest portfolio of specialist Masters programmes in Europe and our Executive MBA is ranked tenth in the world by the Financial Times.

Cass has the largest faculties of Finance and Actuarial Science and Insurance in Europe. It is ranked in the top 10 UK business schools for business, management and finance research and 90% of the research output is internationally significant.

Cass is a place where students, academics, industry experts, business leaders and policy makers can enrich each other's thinking. For further information visit: www.cass.city.ac.uk.

This press release is issued by The Bank of New York Mellon to members of the financial press and media and the information contained herein should not be construed as investment advice. This press release is qualified for issuance in the UK 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 authorised. The opinions expressed herein are the opinions of the individuals quoted; they are not the opinions of The Bank of New York Mellon.
All information and figures source: The Bank of New York Mellon, unless otherwise stated, as at June 30, 2011. The Bank of New York Mellon, London Branch, registered in England and Wales with FC005522 and BR000818
Branch office: One Canada Square, London E14 5AL Authorised and regulated in the UK by the Financial Services Authority.