CONFIDENTIAL
6.
In recent weeks the HKG and we have been exploring the possibility that a private sector scheme, involving the hypothecation of Hong Kong civil servants' future pension entitlement, might offer a feasible alternative to sterling safeguards. A good deal of work has now been done on such ideas, but I think that all concerned now recognise that any such scheme could offer only a very limited safeguard, eg of half the possible commutable element of a pension payable within the next 10 years. (The financial institutions are not prepared to take the long-term political and exchantge rate risk involved in lending against pensions payments due 30 or more years hence). Any such scheme, even with government subvention of one kind or another, would fall far short of fulfilling our obligation to HMOCS officrs. However David Mellor's letter raises a different idea: that if HKG launched a scheme of this kind, available to all Hong Kong civil servants, it would provide political cover for their capitalising the HMOCS pensions entitlements and transferring this sum to HMG before 1997 so that HMG might take over payment of the pensions in sterling.
7. I have thought carefully about this and have concluded, for the reasons given in paragraph 5 of my minute of 11 March, that capitalisation is not feasible, even with such "political cover". The question is not whether Hong Kong can afford capitalisation of HMOCS pensions: I agree that the improved Hong Kong fiscal position would make this easier to contemplate in theory than at the time when (in a judgement shared by your officials and by the Bank of England) the HK$25 billion commitment in the Airport Memorandum of Understanding seemed to be at the extreme limit of what was possible. However, it remains impossible for Hong Kong to capitalise its entire public service pension liability. The political, and therefore practical objections to capitalising HMOCS pensions alone and transferring these funds to the United Kingdom Government are in my view unsuperable.
ARRAFI/3
CONFIDENTIAL
TRILITY