CONFIDENTIAL
1997, however, if UK inflation and pension increases are
running at a level of say 4%, and the HK dollar were to
collapse within one or two years of an officer's retirement,
SPOS would protect only 4% or 8% of his pension. Thus to
rely on SPOS as a way of addressing the sterling safeguard
issue would neither fulfil our obligations nor would it
permit the achievement of our objectives regarding
continuity in the Hong Kong public service through 1997:
indeed it would be an incentive to some to retire early in
order to start accumulating the UK pension supplements.
4.
In any case we remain committed by the assurances originally given by Robert Carr and Reginald Prentice and that HMG would step in (there were to be default if as a result, or if for any other reason in relation to the payment of their pensions, HMOCS officers were to find themselves in financial difficulties. There is thus already a contingent liability: far better to define and limit it
now in the way we have proposed and thus meet our
obligations and contribute to other vital national objectives.
5. The question of the likely Chinese attitude to a proposal to capitalise HMOCS pensions before 1997 was
considered at paragraph 14 of the paper enclosed, with my
minute of 11 February (extract enclosed for ease of
reference). This paper was the fruit of many weeks of discussion between departments. The paragraph explains why this capitalisation proposal for certain expatriates is
fundamentally different from the Chinese notion of a set-
aside fund for all Hong Kong civil service pensions. The
Governor of Hong Kong, the Ambassador in Peking and the
Senior Representative to the Joint Liaison Group have unananimously advised that the Chinese would react very
negatively to a proposal that HKG should capitalise HMOCS
pensions and transfer the funds to us before 1997; and that even to raise the idea with them would be dangerous to our
wider interests. (In the worst situation it could lead to
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