members, the best position would be to denominate the scheme in sterling, fixed to the current Hong Kong dollar salary points at current prevailing exchange rates and to link any future increases in salaries to UK inflation rates. While this is superficially attractive from our point of view, it does have two drawbacks: firstly, it means that we have to fix an exchange rate now and that exchange rate could only be the current exchange rate as at the time the scheme is promulgated. Secondly, a scheme denominated in sterling is likely to be viewed by the majority of Hong Kong HMOCS members as unfavourable because UK inflation and UK increases in salary have been substantially less in recent years than Hong Kong's. The serious drawback however is the fact that we would have to announce an exchange rate. This has implications for sterling safeguards for pensions from Hong Kong. The Overseas Pensioners Association (OSPA) have long been pressing HMG to guarantee Hong Kong's pensions at a sterling rate. We have resisted this and intend to continue resisting this unless and until the Hong Kong dollar suffers a collapse. At that stage we would wish to consider what level of exchange rate might be appropriate and it is likely that this would be substantially less favourable to Hong Kong pensioners than the current rate of roughly 13 to 1.
4. You are concerned about the Hong Kong Government's ability to increase salaries to its civil servants and its possible need to do so in view of the tight labour market and the large numbers of people leaving Hong Kong. This is a legitimate concern and has been borne out certainly in the last couple of years by substantial salary increases of the order of 30% over two years. However the Hong Kong Government is now in a very different fiscal position than it was two years ago. Then it had huge budget surpluses (as high as 15-20% of expenditure) and the Hong Kong economy was booming. The position is now reversed the Hong Kong economy is in a severe downturn and the fiscal position is now in deficit. This situation is unlikely to improve in the medium term given that the Government is embarking on a series of huge infrastructure projects which will suck in resources. The Government is in fact budgeting to draw down a significant proportion of its reserves. It simply cannot afford large civil service pay increases. The potential liability of a sterling safeguard at a favourable exchange rate is I suggest significantly higher than the possibility that HKG will raise salaries recklessly.
5. On the question of how long the incentive payments should last, the whole point of the scheme is to ensure that HMOCS members remain committed to Hong Kong in the long term. The intention is that they should serve out their careers in Hong Kong. We would be seen as being sincere in our actions to maintain stability and prosperity if we were to limit the scheme to say 3 years.
6.
As regards when we deadline of July 1992. decided whether to join
should announce the scheme, there is a real
By that time civil servants must have the new pension scheme promulgated in
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