CONFIDENTIAL
Reference.
Alternatives
5.
Mr K Y Yeung had told Mr Burns' team that he was quietly exploring two other ideas (see Mr Burns' minute). One would seem to require financial institutions to take a big risk on the Hong Kong dollar/Hong Kong interest rates; but it may be that Mr Yeung will be able to find a way round it. The other was much simpler: HKG advancing the commutable element up to 5 years before retirement; but, difficult though this might be, it would offer only a very partial solution.
6. SCS told me at lunch that he would be attending a meeting with the Governor, CS and FS that afternoon to discuss partial funding of pensions, eg a roll-forward fund starting with one year's pensions (HK $3.7bn) but which could invest overseas like the Exchange Fund (which indeed could manage it) and gradually accumulate a surplus. The Financial Secretary was reluctant to agree to even this small set-aside effort, but it was all that could be done: HKG could not insure against the exchange risk or subsidize the private sector.
7.
It
Mr Waters later said that he hoped for a policy decision on partial funding within a month: if positive it could be announced that it would apply to both pensions schemes, allowing officers to consider the implications before 30 June. Setting up the fund would then take some time. could be more or less independent of government (the Teachers' Provident Fund for teachers in the subvented sector - is independent, though managed by a Treasury AD: it can invest up to 65% of funds overseas and has had a 12%-13% annual return). The fund (or the fund's surplus?) could be drawn on in specified circumstances, eg Government revenue falling below a certain measure. But pensions would still be paid in Hong Kong dollars. (HKU had previously allowed its employees to choose for their pension entitlements to be held in a balance of currencies. After consideration by ExCo, the Government asked HKU to stop this practice on policy grounds, and it was withdrawn a few years ago).
8.
I expressed much interest in this and said I was sure that if any advice from London sources would be useful we could try to arrange this. With SCS I made a strong pitch about the need for HKG to do something if we were to persuade Ministers to agree a sterling safeguard, particularly so far ahead of 1997 (Mr Waters noted that the Western Pacific POAS were made 4 or 5 years before independence in 1979).
I said that everyone agreed that there was a general problem of civil service confidence (not just HMOCS confidence) in the future. HM Treasury hoped that HKG efforts to tackle this might provide political cover for capitalization of HMOCS pensions. Another way of looking at this was that general HKG efforts would improve the background for Ministerial consideration of the HMOCS aspect: ie we could show a partnership by HMG and HKG to resolve the problem, as we had done over compensation, rather than leaving HKG
CONFIDENTIAL
CODE 18.77
KIPAJA