5.
Option C Under this variant of option A, HMG makes savings if the HK$ increases in value on 1 July 1997, above the trigger level. Following paragraph 3 of your letter of 3 August, we have made the simplistic assumption that all actives and pensioners would accept this option. We have also assumed a sudden and lasting change in value of the HK$ on 1 July 1997. The combination of these two assumptions maximises the estimated savings to HMG from this option. (If option C is to be presented as protection for HMOCS against the HK$ falling in value from above the trigger level to below the trigger level, we should perhaps estimate option C's net costs under such a scenario.)
6.
Option D The figures for options A-C, & ER assume that all HMOCS opt to remain members of the existing "old" scheme, and commute the maximum proportion of pension allowable to lump sum. Table D indicates how the figures in the first column of Table A are affected by assuming nil commutation, and by assuming that all HMOCS opt for the "new" scheme, with nil and maximum commutation.
7. The effect of commutation is generally to delay payments that would otherwise have been made immediately on retirement. This increases the cash flow after the date of 1/7/97 when the sterling safeguard is assumed to take effect, and thus slightly increases the estimated costs. The estimated costs for "new scheme" benefits are slightly smaller than those for "old scheme" benefits, because the benefit fraction is 1/675 instead of 1/600. The estimated costs under the "new scheme" also include an allowance for the later normal retirement ages, but the effect is small.
8. Option ER (early retirement) For this option we have assumed that all HMOCS would retire on 30 June 1997, with an immediate pension based on service up to 30 June 1997. We have assumed no reduction of benefits on account of payment before normal retirement age, nor any enhancement that might be applied to encourage serving HMOCS to remain in post rather than retire early. The cost of paying serving HMOCS's future benefits is therefore increased because they are paid earlier than otherwise, but decreased because they have no opportunity to add to their reckonable service after 30 June 1997. The result is that the estimated costs of this option are slightly smaller than those of option A.
Other points
As an
9. If you wish, we can later tabulate or depict the estimated future stream of payments under each option. example, I enclose a graph corresponding to the first figure (£377 million) on Table A. I also enclose an annex that outlines how these estimates have been calculated. This might be useful for a paragraph to Ministers that summarises those features of the proposals and estimated costs that are common to all the options.
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