Despite market volatility and disadvantageous tax changes, UK pension funds produced an overall return of 16% in 1997, according to the WM Company figures.

The return - just over 12% when inflation is considered - compares well with average real returns for the last ten years and the last 20 years which average about 9% a year.

The funds lost £1.2bn ($1.9bn) since June as a result of the abolition of tax credits on UK equity dividend income which over a full year would have meant a loss of £2.5 bn.

UK equity returns averaged 22%, also well ahead of the long term average, while the best performing overseas markets were the US with average returns of 34% and Europe with returns of 28%.

The domestic market while experiencing volatility performed well for much of the year, while the much vaunted correction in October was only a 6% reverse and did not even neutralise September's increase of 8%.

On the domestic market, active managers underperformed, despite being able to take advantage of the volatile fourth quarter. The reason for this was that much of the market's performance came from half a dozen large cap stocks where active managers remained underweight.

Internationally, funds had around one fifth of their overseas investments instead of the 50% which might be expected by market capitalisation in the US, but the failure to gain maximum benefit from this US performance was mitigated by relatively large holdings of European equity in what was another strongly performing region.

The Far East as would be expected produced negative returns of -19% for Japan and -31% ex Japan with many funds investing in the latter. However the Far East accounted for only 6% of assets so losses were relatively small.

UK funds did underperform the FT/S&P World ex UK index, which gave returns of 18% while the funds' return was 12%. John Lappin