Pension Plans, Financial Institutions Unlikely to Achieve Return Targets, According to BNY Mellon Investment Strategy and Solution Group

NEW YORK and LONDON, Feb. 6, 2013 /PRNewswire/ -- Pension plans and other institutions are not expected to achieve their target returns of seven to eight percent over the next 10 years, according to the 10-Year Capital Market Return Assumptions report released this week by the BNY Mellon Investment Strategy and Solutions Group (ISSG) and BNY Mellon Wealth Management.

"Based on our research and analysis, we are projecting extremely low fixed income returns and single-digit equities returns over the period, which will make it challenging for institutions to reach their target returns," said Jeffrey Saef, managing director for BNY Mellon and head of ISSG.  "If institutions remain intent on aiming for combined eight percent returns, they may need to seriously consider taking on more risk in their portfolios."

ISSG analysis derives an expected return of seven percent for US large cap stocks and similar risk-adjusted returns for US small and midcap stocks annually over the 10-year period. These returns are propelled by real earnings growth of two percent per year, a dividend yield of 2.25 percent and developed market inflation of 2.5 percent.  ISSG noted that the two percent earnings growth projection is significantly below the near-term consensus of six percent annually.

In fixed income, ISSG sees real cash rates rising to approximately one percent annually in the US in 10 years. ISSG said with inflation at 2.5 percent, it expects the 10-year Treasury yield to be 3.5 percent, causing long-term Treasuries to provide a negative return over the 10-year period.

Expected returns for alternatives depend heavily on the underlying asset class, with a range of three to over 11 percent for the category, ISSG said.

The report notes that interest rate increases could adversely affect returns of fixed income assets held by pension plan sponsors, many of which are underfunded. However, these same interest rate increases would also reduce plan liabilities, which might result in a net increase in funding levels.  ISSG said that concerned plan sponsors need to consider whether they need to add exposure to equities.  In addition, they could consider shortening the duration of their fixed income holdings, the report said.

"High net worth individuals, foundations and endowments aiming to preserve purchasing power also should consider revisiting their fixed income allocation over the 10-year period," said Leo Grohowski, chief investment officer for BNY Mellon Wealth Management.

For a copy of the report, please contact Mike Dunn at [email protected]  .

Note: Expected rates and returns are ISSG estimates based on historical performance and the current market environment. The capital market assumptions are not actual or guaranteed future performance. They do not represent, and are not necessarily indicative of, the results that may be achieved in the future; actual returns may vary significantly.

Notes to Editors:

The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.  In Asia, Europe, the Middle East and Africa, the ISSG offers products and services, including investment strategies that are developed by affiliated BNY Mellon Investment Management investment advisory firms, to clients through BNY Mellon Asset Management International Limited. In the US, ISSG is part of The Bank of New York Mellon.

BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.4 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. As of December 31, 2012, BNY Mellon had $26.7 trillion in assets under custody and administration, and $1.4 trillion in assets under management. Whether clients are looking to create trade, hold, manage, service, distribute or restructure investments, BNY Mellon can act as a single point of contact for their investment needs. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).  Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.

All  information source BNY Mellon as of December 31, 2012. This press release is qualified for issuance in the UK and US 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 Investment Management (US) and BNY Mellon Asset Management International Limited (ex-US) 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.  The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements.  When you sell your investment you may get back less than you originally invested. Registered office of BNY Mellon Asset Management International Limited: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorized and regulated by the Financial Services Authority. A BNY Mellon Company.

SOURCE BNY Mellon

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