Mr Stone
CONFIDENTIAL
HKA 233/1
File
Reference
492
PENSIONS FUNDING : SOME CALCULATIONS
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490
It is worth noting down how we worked the figures in Hong Kong telno 2056 to reach those in FCO telno 1190.
1.
2.
Hong Kong reckoned that they would need to set aside HK$ 7.5 billion (1992 prices) a year for 15 years to establish a fund then able to cover the commutable element of pensions (which they put at 50% of the total pensions liability). On the assumption that this calculation did not involve re-investment of interest earned by the fund during the 15 year build-up period, this implies that the size of fund required by 2007/08 would be HK$ 112.5 billion (1992 prices).
3. We queried this figure by reference to the figure given to the Chinese as a forecast of total pensions expenditure in 2004/05 of HK$ 18.7 billion in money-of-the-day prices, which deflated at 9% (the HK figures showed 9.5% and 8.5% as reasonable assumptions) gives under HK $ 5 billion in 1992 prices. We do not know what proportion of this spending would be recurrent and what proportion lump sums, but if the lump sums amounted to 50%, the required free income of the fund in 2004/05 would be only HK$ 2.5 billion (1992 prices).
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4 One should not need a fund much larger than HK$ 50 billion (1992) to be confident of producing this sort of return. (of course one would also have to do some actuarial calculations to see how the pensions bill is likely to grow in real terms in future years, as the effect of civil service expansions in recent years works through. One would then need to consider whether it is realistic to aim at establishing a fund large enough from the outset to meet this expanding demand; or whether one should aim for continuing SARG contributions to the fund after payments have begun to be made from it and if so how this could best be arranged.)
5.
You pointed out the discrepancy with the figure quoted by the Chief Secretary in LegCo for a total pensions liability in 1997 of HK$ 120 billion. (I am not sure whether that figure was given in present-day prices or 1997 prices?) But we agreed that at this stage we wanted to encourage Hong Kong to focus on the much lower figures given to the Chinese for annual pensions outgoings rather than the accumulated liability.
6. Even working towards the Hong Kong figure of HK $ 112.5 billion in 2007/08, we worked out that one could reach a similar level by making a first annual payment into the fund
pensions.calcs/HMOCS
njc
CODE 18-77
CONFIDENTIAL
1