The scandal at the energy company Enron and the recently disclosed fraudulent accounting practices at several US companies have eroded confidence in securities markets and the financial system. One role of securities markets is to ensure that the risk linked to various investments is reflected in borrowing costs and expected returns, which are adjusted continuously through market price mechanisms. For price mechanisms to function effectively, it is essential that there is confidence in the information and results published. The US authorities have already taken measures to prevent further accounting and audit scandals. Several initiatives are also expected to be taken internationally. Smoothly functioning securities markets make an important contribution to a stable and efficient financial system. Without securities markets’ contribution to risk diversification, it is highly unlikely that the financial system could have coped as well as it did with the shocks of recent years. Norway has a well developed financial system. Financial institutions such as banks, mortgage companies and insurance companies channel assets and debt between economic agents. In the securities market, capital is channelled directly from lender to borrower through the use of standardised debt and equity instruments in the primary market. Securities can also be traded in the secondary market. Substantial volumes of debt and equity instruments are traded daily among operators. The debt market consists of bonds and short-term debt instruments, while the equity market is essentially made up of stocks.
More fund-based schemes will generate a positive stimulus to the Norwegian securities market, even if an appropriate risk diversification would imply that a large portion of the capital in pension funds is  8  BIS Review 48/2002  invested abroad. A rising share of fund-based schemes in other countries will also increase investment in Norway. The statutory regulation of pension fund investment will also be of importance. For example, today most countries have relatively stringent restrictions on the equity portion in pension funds’ portfolios. However, a proposed new EU directive would make it possible to increase this portion, which may have an impact on demand for securities. Recent developments in financial markets have shown that a substantial measure of uncertainty is associated with the return on such investments. This uncertainty is related to future economic developments, which will also apply to the pay-as-you-go system. It is true that Government can influence this through tax changes. Adverse economic developments will, however, put the ability and willingness to increase taxes in order to honour pension obligations to the test. This uncertainty will be even greater in a country like Norway that is highly reliant on one or a small number of industries. Government finances are, for example, still vulnerable in the face of a sustained decline in oil prices. The uncertainty about future developments is continuously reflected in a fund-based system. An essential question associated with a fund-based system is who is to bear the risk related to returns.