TNAG-0698-FCO40-848-Policy-and-commitment-on-pensions-for-public-servants-in-Hon-1979 — Page 20

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Dear Moorehouse

HONG KONG: FUNDING OF PENSIONS

Thank you for your letter of 3 February. It is perhaps easier to approach this question by first explaining why pension schemes are normally funded.

reasons are:-

2

(a) security for the staff. If the employer's business fails or declines, the fund is available to provide the pensions; (b) the contributions to the fund ensure that provision is made The for pension liabilities as the pensions are being earned. charges made by the employer for his goods or servies then include a correct loading for labour costs, which should include the cost of pensions being earned, in addition to wages paid;

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(c) to equalise costs over time. The outgo on pensions increases as the scheme matures. A fund mitigates the increasing outgo by providing increasing investment income.

These reasons are much less strong in a government scheme. in this context:

3

The main

Examining them

(a) the government's security is normally as good as or better than the security of investments. This may not necessarily be so in Hong Kong because of the uncertain position when the lease expires; (b) the government is not normally selling its services; (c) if a government pension fund is invested in government stock, overall, the government must itself pay interest on the stock, so, funding in these stocks saves nothing. There are difficulties in investing a government fund in ordinary shares, eg political accusations of "nationalisation by the back door", and the sheer weight of money often involved. Also, many government schemes are now mature so the pension costs are relatively stable already.

There can be real advantages to a small territory in investing atside its own economy, especially if that economy is dependent on a restricted range of activities, eg tourism. The security for pensions is then not entirely dependent on the future economy of the territory. However, there can be difficulties, such as exchange rate fluctuations.

4

I think the main reason the Post Office scheme was funded was that the government, in principle, wanted the Post Office to be a self-financing body run on commercial lines. Thus while (a) probably does not apply, (b) and (c) do.

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