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17 December 1991
MJC Waters esq
Civil Service Branch Government Secretariat Lower Albert Road Hong Kong
Dear Mike,
CONFIDENTIAL
HKB 233/1
Civil Service Pensions
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farm ple
Mr Burns Mr Cox o/ the Stora My fell
HK Consultant's all report
on the happoikecation option
In response to your desire to have a preliminary report before Christmas, I enclose a copy of the draft of my full report, which is nearing completion. It may be helpful to you in your preliminary consultations with Exco and/or the staff associations if I summarise my main conclusions to date, and indicate to you the areas which require further work:-
(a) The actuarial, investment and legal aspects of the proposal do not appear to contain any insurmountable difficulties.
(b) The idea of vesting the entitlements in a specially created corporation which could then issue debt securities does appear to be feasible in principle.
(c) The acquiescence of the Inland Revenue would be required for the granting of a lien over future pension receivables. There is a strong argument for such aquiescence to be given.
(d) The problem area (not surprisingly) is the funding. For the scheme to work without any Government support, there would have to be demand for long term fixed rate Hong Kong dollar obligations which does not at the moment exist.
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(e) Government support would cost money (although the cost of the interest rate hedges envisaged in the report would be a fraction of the cost of even partial funding of pensions).
(f) Government support in the form of interest rate guarantees could result in a conflict of interest for the makers of monetary policy, who might feel that there freedom to raise interest rates was constrained by the knowledge that raising them beyond a certain level would impose direct costs on the Government.
The areas which require further study are:-
(a) The extent to which legislation on compulsory pension schemes might increase the demand for Hong Kong dollar instruments of the type required to fund the scheme.
(b) The construction of a model based on historical data to test the workability of funding by rolling issues of six month paper; and to test the cost of an interest rate guarantee if such a scheme had been in existence during periods of crisis whenHong Kong dollar interest rates moved sharply upwards.
CONFIDENTIAL
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