CONFIDENTIAL
15. The Treasury proposal
is
designed to ensure that the safeguard would cut in only when the sterling value of a person's pension had fallen to the point where it was comparable to the equivalent UK pension. To achieve this:
16.
a.
The assumed dollar:sterling exchange rate would be set at 26:1, compared with a current rate of 11:1 and the HMOCS Association's proposal of 13.76:1 (the average actual rate for 1991).
b.
The safeguard would apply to the total pension - ie elements a, b and c of paragraph [11]. Over time, elements b and c account for a progressively larger proportion of the total. The higher the rate of inflation, the faster that proportion grows. Hong Kong inflation is expected to remain at around 10 per cent for the foreseeable future. This would progressively diminish the value of the safeguard.
The FCO argue that comparability with the UK has never applied in previous cases, even though it has generally been true that the salaries and pensions of overseas civil servants have surpassed those of UK staff, and should not now. Under their proposal:
17.
a.
The assumed exchange rate would be 16:1, which they consider to be
to be the
the furthest it is reasonable to go in recognising Hong Kong:UK relativities.
b. The safeguarding mechanism would apply only to the basic pension, and not to the pensions increase elements.
c.
FCO want
The SPOS element would be amended. At present if a pensioner gains from fluctuations in the dollar: sterling rate, that is counted against his SPOS entitlement. But if he loses, SPOS does not make up the loss. reductions in the value of a pension resulting from exchange rate fluctuations to
fluctuations to be taken into
be taken into account in calculating SPOS entitlements.
This would cost an estimated £1-2m.
Liabilities under the safeguarding scheme would be contingent. The maximum exposure under the Treasury approach is estimated at
at some £100m; under the FCO approach it would be
£250m.
18.
Treasury Counsel's opinion suggests that, so long as some
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