TREASURY AEF DIV
P.
Treasury
Parliament Street London SWIP 3AG Telephone 071-270
CONFIDENTIAL
JC Morris Esq.
Hong Kong Department
Foreign & Commonwealth Office
London SW1A 2AH
Dear Mr Morris
20 October 1992
HONG KONG HOMCS: OPTIONS FOR PENSIONS SAFEGUARD
Thank you for your letter of 7 October. I was pleased to see that you have asked the GAD for graphs covering options A, B and C, and cost estimates for safeguarding the non-commutable part of the pension only. I do have some further points, however, which I think we will need to settle for your paper to Ministers on the options.
Firstly, a point I raised in my letter to you of 28 September, we need to ask the GAD to recalculate their cost estimates for all the options at 1992 salary levels and on the basis of assumptions about UK pensions increases, and not those in HK. Our view is that it is sufficient for HMG to safeguard a notional HMOCS pension, defined in UK terms, and not to underwrite what might well be substantial real gains in HK pensionable salaries.
Secondly, on early retirement, I think the paper will need to be clear in spelling out to Ministers what this would entail for all the options. Again, as I said in my leter of 28 September, our view is that an extension of the availability of early retirement for the HMOCS should help to reduce the outstanding stock of pensions liabilities we would need to safeguard, and we should press the HKG to extend such arrangements at the HKG's expense. Thirdly, I'm afraid I cannot agree that option B should be downgraded. Though, as drafted, it may have certain drawbacks, so too does option A. The problem with a simple safeguard trigger, and why we are seeking to define an option B which is more flexible in approach, is that its operation may well be perceived as unfair between someone retiring at an exchange rate close to the trigger and someone retiring, or already retired, when the HK dollar was stronger.
I suggested in my 28 September letter that setting a fixed date (such as 1 July 1997) for calculating the percentage fluctuation before the safeguard is triggered is designed to get around the problem of arbitrariness which Mr Cox cited and which you reiterate. If it is felt that such a single date would provide insufficient comfort to HK HMOCS, then a more broadly-based formula eg taking the average HK dollar-sterling exchange rate in the three years up to 1 July 1997 - might be an alternative approach.
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