January 14, 2011

BNY Mellon Asset Servicing Study Highlights Funding Pressures Facing US Retirement Plans

Challenge to provide benefits without causing further strain on balance sheets of government budgets

NEW YORK, January 14, 2011 — A new study published by BNY Mellon Asset Servicing, the global leader in securities servicing, highlights the unprecedented cost pressures faced by US providers of retirement plans in providing their programs. The study confirms that many are reducing the benefits they offer or looking to rebalance funding between employers and employees as they attempt to manage their finances.

Produced in conjunction with research and consulting firm Finadium LLC, the study – Redefining Retirement: What Changes to Defined Benefit and Defined Contribution Plans Mean for Plan Sponsors and Their Service Providers – concludes that there is little question in the minds of plan executives that they will either pay now for their retirees' benefits or that they, or society, will pay later: The main questions are how much and interrelated are those two costs and how far will the implications stretch," the study notes.

Key findings of the study included:

  • Retirement benefits packages continue to be seen as an important part of employee hiring and retention. 50% of private company executives surveyed said that their plans made them more competitive as an employer, whereas 73% of public plan executives felt that their plans were an asset.
  • The attractiveness of defined contribution plans for employers lies in the reduction of funding volatility; in the long run, funding costs for defined contribution may be higher or lower than current costs, but the ability to control volatility is seen as an unparalleled advantage.
  • Hybrid defined benefit/defined contribution plans offer the professional management of defined benefit with the portability of defined contribution; some type of hybrid plan may be the best solution for employers and employees if employer costs can be managed effectively.
  • Executives are looking to their service providers for help with some of their most pressing challenges, including assessing performance for private equity and other illiquid assets, and defining new strategies for assuring a stable retirement for their employees.

Josh Galper, managing Principal at Finadium, said: "Selecting a retirement plan implies not only a financial commitment but also a strategy for ensuring the well-being of tomorrow's retirees. The plan executives surveyed for this study recognize the importance of this decision, along with the need to do more with less for the good of their employers."

Laurin Moore, Head of the U.S. Tax Exempt Business at BNY Mellon Asset Servicing, said: "The most pressing question that sponsors of defined benefit and defined contribution plans have to answer today is how to provide retirement benefits that offer employees sufficient funding without causing further strain to employer balance sheets or government budgets. To meet this challenge, plan sponsors are looking to their custodians and asset managers for not only investment returns, but also tools for managing performance and ideas for successful program structures."

In particular, as the study notes, 55% of plan sponsors surveyed expect to need greater assistance in respect of performance measurement, while 35% expect the same in respect of risk management, particularly for illiquid investments in their defined benefit programs.

The study is based on interviews with large US pension plans conducted during June 2010, accounting for US$749.9 billion in assets across 30 retirement systems (16 corporations and 14 public entities). Of the systems surveyed, 81% of assets were in DB plans with the remainder in DC and a handful of health care retirement accounts. Over two-thirds of the plans surveyed held assets in the US$5 billion to US$50 billion range.

The study is available at http://www.bnymellon.com/foresight/pdf/redefiningretirement.pdf.

Finadium is a research and consulting firm focused on financial markets. In its research practice, the firm assists brokers, custodians, hedge funds, private equity and technology firms with understanding the market for alternative asset services and in maximizing the effectiveness of their resources. Finadium research is available on a subscription basis. Finadium also conducts consulting assignments in trading and asset services for plan sponsors, mutual funds and service providers in the financial markets industry. For additional information please visit www.finadium.com.

BNY Mellon Asset Servicing offers clients worldwide a broad spectrum of specialized asset servicing capabilities, including custody and fund services, securities lending, performance and analytics, and execution services.

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, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $24.4 trillion in assets under custody and administration and $1.14 trillion in assets under management, services $12.0 trillion in outstanding debt and processes global payments averaging $1.6 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.