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5. Our objective under this head was to secure agreement from Treasury officials to the proposal that in exchange for our acceptance of the Treasury mechanism, they would agree to an exchange rate of 16:1 (with a caveat that the rest of the package was acceptable to the Governor). In order to be sure what they were committing themselves to, the Treasury commissioned the Government Actuaries Department (GAD) to produce some estimates of the maximum contingent liability under various exchange rate scenarios using the Treasury mechanism. This is a very difficult task as it requires assumptions to be made on matters such as future SPOS payments. GAD have not yet produced final figures although they hope to provide us with something usable early next week. But on the basis of the figures available so far, Treasury officials do not expect to be able to recommend agreeing to our proposal. What they have said is that once figures are available, they will set out the range of costed options for the Chief Secretary without/without making any recommendation as to which one he should accept. They recognised that if we were to accept the Treasury's proposed mechanism this would be a significant advance which would enable the Chief Secretary to move towards our position, although they commented that he is unlikely to move as far as the Foreign Secretary would like. Our best guess is that unless the Chief Secretary can be persuaded of the political need to set the rate at HKdollars16:pound 1, he will offer around HKdollar20:pound 1 in exchange for our agreeing to their mechanism.
SPOS
6. The Treasury's position on SPOS is that once a sterling safeguard is in place pensioners will have protection at a level equivalent to or better than their UK counterparts, and that to amend the operation of SPOS (as the ODA have proposed) would provide an additional level of safeguard which they considered unjustified. They have, however, hinted that they might be flexible over SPOS in exchange for a less generous sterling safeguard. We do not know what they have in mind and we do not recommend considering this option until after we hear what the Chief Secretary is prepared to offer on the sterling safeguard rate. Interestingly, the officials also said that irrespective of the merits or otherwise of amending SPOS, they would expect the Chief Secretary to take into account the political dimension: not the sort of comment they have made in the past.
COMMENT
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