CONFIDENTIAL
provide this for a small group of expatriates without
providing the same for the great majority of civil servants would be highly divisive. HKG cannot afford to fund the
HK$120 billion needed for capitalising the whole Civil
Service Pension Scheme. The Governor's considered judgement
is that the Legislative Council would not be willing to vote the money for a capitalisation of HMOCS pensions alone. The Governor of Hong Kong has no reserve powers over finance.
In theory HMG could amend the Letters Patent to provide such
powers and then to direct the Governor to provide the funds;
alternatively HMG could over-ride the relevant provisions of the Hong Kong Public Finance and Pensions Ordinace by a UK
Act of Parliament or Order in Council. But either of these
courses would provoke a constitutional and political crisis,
perhaps obliging HMG to impose direct rule.
14.
Chinese views on capitalisation of HMOCS pensions have
not been tested. But the advice from Peking, Hong Kong and
our Delegation to the JLG in Hong Kong is that the Chinese
would be deeply suspicious of such proposals for Hong Kong
to pay for disproportionately generous arrangements for
expatriate civil servants and that it would be dangerous to
raise the idea with them. The Chinese have also shown
intense interest in the level of Hong Kong's fiscal reserves
in 1997, cf the airport negotiations. They have expressed
concern that civil service pay and pensions will be a heavy
burden after 1997 and suggested that to reassure local civil
servants HKG might "set-aside" a fund of HK$15 bn, on top of
the HK$25 bn laid down in the Airport Memorandum of
Understanding, which could be drawn on to help meet pensions
in years of budgetary difficulty. HKG have explained that
it makes no sense to tie up funds in this way and that
pensions must continue to be met from (expanding) general
revenue. We have considered whether we could build on the
idea of set-aside to persuade the Chinese to accept the
capitalisation proposal for HMOCS officers. But whereas
set-aside would commit HKG to providing the SAR Government
in 1997 with an extra nest-egg (and thereby limiting HKG's
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