Chart 1 Notes
The table on the next page shows how the scheme might work on the assumption that the funds providers would operate on the basis of discounting the future payments from the Hong Kong Government to officers retiring in the ten years following the introduction of the scheme. The following notes and explanations may be helpful:-
1. The exact timing of the future cash flows has a considerable impact on the discount factor (ie the cost of borrowing). In order to render the scheme practicable, it would be necessary for the cash flows on which it was based to be aggregated and paid at regular intervals, rather than when each individual officer participating in the scheme reached his retirement age. For the purposes of illustration, I have assumed that payments would be made twice a year: it would also be possible to make a calculation based on quarterly payment dates. It seems reasonable to assume that if there is demand for the protection the scheme would offer, the officers concerned would consent to have the payment dates for gratuities aggregated in this manner.
2. The discount factor calculations were provided by an acknowledged expert in the field. The assumptions which went into calculating the discount factors were conservative. His view is that it would be difficult but not impossible to find funds providers for a scheme of this kind at the rates indicated, and that a closer study, tested in the market, might produce more attractive discount rates.
3. The assumptions about the amounts payable every six months over the ten year period are arbitrary, but are related to the amounts that might be movable oput of Hong Kong dollars without disrupting the markets.
4. The hypothetical rates of interest on deposits are based on current indicated rates in US$ for AAA borrowers, which are approximately 20 basis points (ie 0.2%) above US Treasuries. Single A borrowers would pay about 30 basis points more than AAA borrowers; and large corporate borrowers such as General Motors Acceptance Corporation (which finances GM's hire purchase programme) about 50 basis points above single A borrowers. The assumption is therefore conservative.
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