26 fully indexed in the US, Canada, Japan, and Denmark. Of course, social security pensions are invariably inflation indexed.

Bodie (1991) suggests that automatic indexation may be avoided by employers and not pressed for by employees in countries such as the US because of lack of an asset providing an inflation hedge (unlike index linked gilts in the UK); because via social security, real estate investment, etc, individuals already have enough inflation protection, and providing it would increase costs unacceptable for young workers; or due to money illusion. Bodie finds the third explanation most plausible. However, Blake (1992) argues that if **real** wages and hence contributions rise at 2-3% per year, and fund managers can obtain real returns of 2%, indexation to prices should be easily attainable. Vittas (1992) disputes this calculation and suggests that real returns need to ed real earnings growth by 2-3% for indexation to be possible at reasonable cost. Section 4(c) suggests that real returns of 2% in excess of real wage growth are attainable in most countries.

Given the burden on employers as outlined, policymakers in most countries have tended historically to avoid legal provisions enforcing indexation, even where, as in Switzerland and the Netherlands, de facto indexation tends to apply. However, there are signs that this is changing, as in the UK laws will shortly enforce indexation for p to 5% inflation (they already insist on preretirement indexation of accrued benefits), and as noted, indexation is mandatory in Germany and weden.

Contribution rates are generally limited by tax law to around 15% of salary, except in Denmark, where they are unlimited,' balanced by the real interest rate tax on the funds' yields. For example, in the UK, total contributions are limited to 17.5% of the employee's salary, and e maximum employee contribution is **_15%_** of salary. In Sweden, contributions are 13%. In countries such as Germany, where private pension schemes have limited "supplementary" objectives, ontributions are typically much lower, around _1.5%_ of salary. In Japan, contributions to TQPPs are limited to 3.2% of salary regardless of the condition of the fund. EPFs are more flexible - contributions are set to obtain the promised benefit given an assumed nominal return of _5.5%._ The distribution of contributions between employer and employee varies widely, although its economic implications need not be significant (employers can reduce salaries to offset their contributions). The proportion paid by the employer is 100% in Japan, 89% in Germany, 87% in the US, 70-75% in the UK, Canada, and the Netherlands, and 58% in Switzerland.

Administrative costs of pension funds are only available for a selection of countries, ai;. are not directly internationally comparable. However, some patterns do emerge from US data (Turner and Beller (1989)), namely that costs are higher for small funds than large, and defined benefit over defined contribution. For funds with assets of Sl million in 1985, costs were 2% of assets for defined benefit, and 1.4% for defined contribution. For plans with assets of $150 million, tha costs were 0.7% and 0.2%. Anecdotal evidence for the largest funds in the UK suggests figures as low as 0.1 **_%._** Evidence from several countries suggest that the costs of personal pensions are much higher than for company plans, given economies of scale, advertising, commission costs, etc.

The features of pension funds outlined in Sections 2-4(a) are summarized in Table 6.

# (b) Portfolio Distributions

The portfolio distribution and the corresponding return on the assets held are the key determinant of the cost to the company of providing a given pension benefit' (although obviously the prevailing nature of benefits in a given country, as outlined above, also influence the overall cost). This section discusses portfolio distributions per se; the next assesses their implications for performance.

Changes in portfolio distributions of pension funds over the period 1970-90 are shown in detail in Tables 8 to 20 and summarized in Table 21. It should be noted that the data generall) exclude pension funds administered by life insutance