27 companies. The data for the Netherlands exclude the public pension scheme (ABP), which invests virtually all its funds in loans to the government and local authorities, or government guaranteed loans to private firms. The data are from national flow-of-funds tables and are not always at market value (e.g., United States bonds and Canadian equities are at book value) and may exclude certain assets (e.g., United States property). To maintain comparability, asset holdings combine domestic and foreign assets. Hence equities in Table 14, for example, are both domestic and foreign. (In most cases, foreign asset data was obtained from separate sources.) Finally, in recent years the data may be partly misleading, given increased use of derivatives. A suitably hedged equity may have the characteristics of a bond (see the discussion in Section 5(a)) - although ownership of the company clearly remains with the equity holder.

As background, estimates of real total returns and their standard deviations for 1967-90 are shown in Table 7. The table was constructed using annual average data on summary or market indices of interest rates, yields and asset prices drawn largely from the BIS macroeconomic database. No allowance is made for taxation or transaction costs, which would affect actual returns to investors. Owing to lack of data, a number of bond price indices were estimated from changes in yields. This is of course only a sample over a relatively short period and does not necessarily ndicate long run expected returns. For example the United States real equity yield is thought to be over 8% higher than the risk free rate. (Reference: Ibbotson and Sinquefield (1990)).

Among the notable features of the data for domestic assets are that the highest return - and the highest risks - are generally offered by equities, followed by property. Both are generally in excess not only of inflation, but also - crucially for final salary plans - the growth rate of average earnings. Bonds in most countries offer a much lower real return, and generally a highly volatile return (note that the calculations are based on annual holding period returns, ie including capital gains and losses arising from changes in interest rates). The main exceptions are Germany and enmark, where real returns on bonds have been significantly higher than in other countries. Germany also has the lowest and least volatile inflation rate. Meanwhile, international diversification' in equities also offers sizeable real returns, at generally lower risk than sole focus on domestic shares, despite exchange rate risk.

In principle, the portfolio share of ligiud asets can U. small because withdrawals are predictable (the "contractual annuity' aspect noted in Section 1). German, Japanese, Dutch, Swedish, and Danish funds have accordingly always held less than 4% of assets in this form. The higher levels that have ofien been observed at various times in other countries (Table 8) are therefore likely to reflect high market returns on liquid assets relative to other assets. This was particularly true for the United Kingdom and the United States in 1974 when the equity market fell sharply. The United Kingdom has returned to roughly its pre1974 level of short-term assets, while Canada and the United States have built them up considerably. This has largely resulted from the accumulation of market paper, though deposits have grown somewhat (Table9).

These increases coincided with deregulation and expansion of short-term markets (Stigum (1990)). Swiss funds have always held a high proportion of liquid assets, which has latterly expanded to 12%, largely in the form of short term money market instruments (Table 104'), due to the shape of the term structure.

Bonds (Table 11) constitute over two thirds of pension fund assets in Sweden and Denmark, largely due to pcitfolio regulations and the nature of the domestic financial markets. As shown in Table 6, 60% of Danish assets must be invested in domestic debt instruments, while the majority of Swedish assets are to be in listed bonds and debentures (and retroverse loans). In the United States, where regulations make it optimal to hold a large proportion of bonds despite their weakness as an inflation hedge', bonds still form around 40% of pension funds' portfolios. Levels similar to the US are maintained in Canada and Japan, while being only 30%e in Germany and Switzerland. In contrast, the bond share has fallen sharply in the United Kingdom, from _50%_