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aefl.rw/docs/1.12.11
HM Treasury
Mr Nigel Whitney
Hong Kong Dept. FCO
London SW1A 2AH
Dear Nigel,
ET MON
HKA 233/1
HONK KONG HMOCS PENSIONS SAFEGUARD
tial
Parliament Street London SWIP 3AG Telephone 071-270
612
Qızla
pa.
12 November 1992
We agreed on the telephone yesterday that I would write to confirm our understanding of how the safeguard for HK HMOCS pensions would work. Dave Fish has helpfully faxed over an explanation which accords with our understanding. This is enclosed.
Simply, the safeguard relates to a sterling amount (fixed at 1 January 1992 UK prices and uprated with the UK RPI) and not to any particular nominal exchange rate. HMG would therefore pay up only when the pension received by HK HMOCS were to fall below this sterling amount.
You may find the following hypothetical example helpful:
Pension (HK$)
Exchange rate (HK$:£)
Pension received (£)
1997
1998
1999 2000 2001
300
600
1200
2400
4800
10
20
40
80
160
30
30
30
30
30
Assumptions:
inflation in HK: 100% per annum
inflation in UK: 0% per annum
exchange rate safeguard is set at HK$30:£1 in 1992
hence pension safeguarded is £10 in each year (ie a third of the pension is safeguarded)
Under th. scenario the safeguard would not be triggered and HMG would make no payments. But if, say, the HK$ were to fall to 200:1 in 1999 and the HK$ pension received by HMOCS stayed at 1200, their sterling pension would fall to £6, and HMG would pay up £4.
I have had a word with David Hughes in the GAD and he agreed that this is the mechanism which he sought to capture in what has become point (iv) in annex A (assumptions) in the options paper. Naturally, we have always known that unless we operated the exchange rate safeguard in real terms we would be at risk of paying for HK inflationary gains.
I am copying this letter to Dave Fish and David Hughes.
Your, Kevin.
Кий
KEVIN WOODFIELD
Switchboard 071-270 5000
Fax 071-270 5653
Telex 9413704