3
CONFIDENTIAL
5.
Unlike the Basic Pension, SPOS is payable by HMG. OSPA consider the present system, whereby the sterling value of the pension on which SPOS is calculated is based on the officers' last day of service, to be a "lottery".
OSPA's proposed solution for (a) would involve an arrangement whereby Hong Kong pays its pension commitments to HMG in Hong Kong dollars, which would be converted into sterling by HMG at a fixed rate of exchange before payment to pensioners. HMG would benefit or lose depending on the prevailing exchange rate each month. The arrangement would in practice amount to HMG taking over responsibility for Hong Kong HMOCS pensions from the Hong Kong Government. On (b), they propose changing to a system of calculation of SPOS based on a fixed rate of exchange such as the rate prevailing in May 1985 (when the Joint Declaration was signed).
6. A sterling guarantee system as proposed by OSPA could be very costly for HMG, depending on exchange rate movements. Any commitment in respect of sterling guarantee would inevitably be open-ended. When OD (K) considered these matters in 1985 they took the view that the aim should be to negotiate safeguards for the sterling value of pensions earned by HMOCS up to 1997, the cost being met by the Hong Kong (SAR) Government. The questions of the nature of such safeguards and the timing of their introduction were left open.
It was also agreed that the question of HMG taking over the pensions entitlements of HMOCS officers in Hong Kong, at the expense of the Hong Kong Government, should be reviewed in 1990.
7. On the separate but related matter of the SPOS calculation (which has never been specifically considered by Ministers) it is clear that a system based on the May 1985 exchange rate would also involve considerable extra expenditure by HMG; other solutions (eg a system based on an average exchange rate over a period of time) would still create anomalies. The present system of calculation was introduced following consultation with OSPA. This is a highly technical subject which ODA are currently studying in depth.
8.
Under these circumstances, pending further consideration by Ministers, it is recommended that Lord Glenarthur sends an entirely