The intentions of the Act are repeated again in a Crown Agents' letter dated 6 July 1987:
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"Pension supplements are intended to maintain the original purchasing power of overseas service pensions, and to supplement overseas pensions to the level of United Kingdom public service pensions. ... For those pensioners therefore whose pensions are paid at a current rate of exchange, their supplements will be adjusted from one payment period to another to take account of currency fluctuations, so that the total of pensions and supplement payable in any period will be more or less constant.
Therefore, there is no doubt that the intention was for the Act to provide a sterling guarantee for overseas pensions.
The Regulations
The problem and the ODA's contradictory position originated from drafting mistakes made in the 1972 to 1975 regulations.
In order to give effect to the main principle of the Act, it was necessary to establish for an overseas pension a sterling base at the time it was awarded. Also, to calculate the amount of SPOS payable each month, account had to be taken of the pension actually paid by the overseas government in that month by converting it to sterling at the current rate of exchange. The 1972 to 1975 regulations failed to provide for a sterling base for the pension at the time it was awarded. On the other hand, these regulations correctly provided for the monthly pension payments by the overseas government to be converted to sterling at current exchange rates for the purpose of calculating the amount of SPOS payable but, in the absence of a sterling base at the time the pension was awarded, a moving sterling base using monthly (amended in 1973 to annual) exchange rates was applied to the pre-determined percentage increase to give the total pension due.
In the early 1970's sterling fell in relation to the Hong Kong dollar and, because of the drafting mistakes in the regulations which allowed a moving base, Hong Kong pensioners were receiving more SPOS than necessary to maintain the original purchasing power of their pensions, contrary to the main principle of the Act. This may be illustrated in the following example:
Table 1
Assumptions
1. A person retired from the Hong Kong civil service on a pension of HK$120,000 pa when the exchange rate was HK$12 - £1. The original purchasing power of his pension was, therefore, £10,000 in sterling terms.
2.
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One year later the HK Govt. paid a 5% increase in line with inflation in HK and the UK Govt. paid a 10% increase in line with inflation in UK. The exchange rate was then HK$10 £1. Therefore, a revised pension of £11,000 was needed to maintain its original sterling purchasing power.
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