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# 4. PERFORMANCE

This section reviews the relative levels of benefits provided by the funds, followed by an examination of their portfolio behavior and its underlying determinants. Effects of the latter on overall risks and returns, and the influence of fund management on fund behavior and costs, are also assessed.

# (a) Beneflts and Contributions

Comprehensive data on benefits paid are not available, and would in any case be distorted by factors such as the inclusiveness of the statistics and the degree to which pension funds cover the different sectors of the income distribution. For example, Dailey and Turner (1990) show that average retirement benefits in the US in 1989 were $6359, but as noted by Munnell (1992) they only beneflt a 'relatively privileged subset of the population". In Switzerland average benefits are $6236 and Canada $5100, but the latter may be boosted by inclusion of public sector schemes. France ($3203) and Japan ($2304) appear low, the former due to coverage of low paid workers and the latter because only annuities and not lump sums were captured. We suggest it may be better to gauge the nature of benefits offered to the plan participant more directly.

For example, in the UJnited Kingdom the nature of benefits has changed since the 1960s. Final salary based defined benefit plans, _75%_ of whose members benefit from guaranteed indexation, cover all public sector and the majority of private sector beneficiaries. Indeed, indexation of b- nefits up to an inflation rate of 5% may soon become mandatory.43 The typical replacement ratio after 40 years is 50-66%. Lump sum withdrawals at retirement are permitted, up to 150% of final salary. Meanwhile in the Netherlands 90% of pension plans are defined benefit (usually paying 70% of final salary), and 90% of members receive inflation protection. Pensions in Sweden and (in practice) in Switzerland are again indexed. Swedish pensions are based on best years of income (suitably indexed) and not final salaries, which may offer superior equity between managers and manual workers, since the latters' earnings may peak in

# mid career.

In the United States, where defined benefit schemes are again final salary, there are often discretionary pension increases to compensate for inflation after retirement, although explicit indexation for inflation is less common. Indeed, as pointed out by Bodie and Merton (1992), even the indexing of pensions **pi2r** to retirement **only** holds to the extent that the employee continues to work for the same employer; his wage keeps pace with general wage inflation; and the employer continues with the same plan. Early leavers' accrued benefits are not indexed. Unlike the other countries, preretirement cashouts from a pension plan must not necessarily be invested in a-zother pension scheme, which raises the issue of potential misuse of the tax advantages for non retirement expenditures.

In Canada even discretionary increases of benefits to allow for inflation are relatively rare (93% of private sector participants are in plans with no formal inflation protection); a fixed income related to final salary is promised in retirement. In Germany most pension funds promise an amount dependent largely on duration of employment; final salary schemes are less common than in the other countries. However, indexation is mandatory. In Japan benefits tend to relate to years of service and final basic salary, but the ratio to the latter tends to be less than in the Anglo-American countries; (such benefits are often taken as a lump sum). Only the part of pensions replacing social security is indexed. In Denmark, where funds are in any case defined contribution, there is little explicit indexation.

Inflation indexation of pensions is of course a key policy topic in its own right. The move from career average to final salary pension plans in some countries can be seen as an attempt to correct for effects of inflation prior to retirement (leaving open difficulties for early leavers, and the issue of indexing after retirement). However, in Japan the dependence of pensions on basic salary and not full remuneration may mean that pre-retirement indexation is imperfect. And as noted above, post retirement benefits are rarely