Extracts from letter from Government Actuary's Department dated 6 February 1978. Reference 5964/1
"HONG KONG: FUNDING OF PENSIONS
Thank you for your letter of 3 February. It is perhaps easier to approach this question by first explaining why pension schemes
The main reasons are:- are normally funded.
(a) security for the staff. If the employer's business
fails or declines, the fund is available to provide the pensions;
(6)
(c)
the contributions to the fund ensure that provision is made for pension liabilities as the pensions are being earned. The charges made by the employer for his goods or services then include a correct 1 ding for labour costs, which should include the cost of pensions being earned, in addition to wages paid;
to equalise costs over time. The outgo on pensions increases as the scheme matures. A fund mitigates the increasing outgo by providing increasing investment income.
These reasons are much less strong in a government scheme. them in this context:
(a)
(0)
(c)
Examining
the government's security is normally as good as or better than the security of investments. This may not necessarily be so in Hong Kong because of the uncertain position when the lease expires;
the government is not normally selling its services;
if a government pension fund is invested in government stock, the government must itself pay interest on the stock, so, overall, funding in these stocks saves nothing. There are difficulties in investing a government fund in ordinary shares, eg political accusations of "national- isation by the back door", and the sheer weight of money ofter involved. Also, many government schemes are now mature so the pension costs are relatively stable already.
There can be real advantages to a small territory in investing outside its own economy, especially if that economy is dependent on
The security for a restricted range of activities, eg tourism. pensions is then not entirely dependent on the future econ omy of the territory. However, there can be difficulties, such as exchange rate fluctuations.
1
/In the
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