kikket from paper agreed with Treasury retting out assumptions relating to sterling pension safeguard
ANNEX A
ASSUMPTIONS UNDERLYING THE VARIOUS OPTIONS AND COSTS
(i) The stream of annual benefit payments to HK HMOCS (ie. to current dependants, to current pensioners and their dependants, and to current actives and their dependants on death or retirement) at constant prices is projected to grow until 2007 and then decline. The peak annual outgo in 2007/2008 is projected to be about 32% higher at constant prices than the annual outgo in 1992/1993.
(ii) The incidence of safeguard payments depends on the option and exchange rate scenario. Under Option A, for example, when the HK$ is assumed to be constant after 1997, the projected safeguard payments peak in 2003/2004. Option C can be expected to defer the safeguard payments, and Option D to advance them. If the HK$ depreciates gradually after 1997, rather than remaining constant, later safeguard payments are larger, and vice versa.
(iii) The figures quoted in the tables are the present capitalised values of the projected future streams of safeguard payments for each option and exchange rate scenario.
iv) The calculations in the paper assume that the safeguard will apply to final salary benefits. In order to fix in 1992 UK prices the potential liability under Options A and C (ie to insulate the scheme against the possibility of Hong Kong salaries/pensions increasing more rapidly than UK increases), we consider that it would be necessary for HMG to safeguard only a notional pension, corresponding to the pension which would have been payable in 1992 for the actual rank and length of service at retirement, converted into sterling at the average 1991 exchange-rate (HK$13.76 : £1) and upgraded in line with the UK RPI. The effect of such an approach will vary slightly across the options and scenarios, but as a rough estimate it would reduce the potential costs by about 10%.
(v) Any chosen safeguard option would come into operation on 1 July 1997.
(vi) All officers benefiting from a scheme should be required to commute at retirement their maximum entitlement (50% or 25%, depending on whether they are on the new or old pensions scheme). This would reduce the long-term contingent liability for HMG, although if there were an early fall in the value of the HK dollar it would have the effect of bringing forward the liability.
options.1.
SLM
13
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