TNAG-2269-FCO40-3268-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1991 — Page 12

CONFIDENTIAL

Reference

Officers continuing in employment enjoy no less favourable terms of service than beforehand.

- Officers' pensions are safeguarded ie so as to be no less favourable than beforehand. This involves:

5.

(i) an exchange rate safeguard

(ii) protection against UK inflation

(iii) an undertaking that in the event of default HMG would

step in with loan advances in lieu of safeguards (in practice HMG has generally taken over payment of pensions).

In the case of Hong Kong:

(a) the Joint Declaration and Basic Law provide for public servants' continued employment and payment of pensions on no less favourable terms than before; they also provide for the Hong Kong dollar to remain freely convertible and for no exchange control policy to be applied;

(b) Ministers have agreed that HMG should pay for a scheme to provide compensation to HMOCS members on the change of sovereignty, but with a large inducement element to encourage them to continue in service. We have accepted that because of Hong Kong's special circumstances the total amount payable, even to officers who stay for the full 8 years after 1997 needed to obtain the maximum, will be substantially less than under traditional schemes. The Treasury are pressing for the payments to be targeted, ie distinguishing between the officers whose continued services will be particularly valuable and the others; we shall resist this complicating innovation;

(c) again because of Hong Kong's special circumstances we do not envisage officers being able to retire in 1997 with immediate payment of pension: officers wishing to retire need not forfeit their pension entitlement (ie they can join the new HKG pension scheme) but will have to wait until their normal retirement date before payment begins;

(d) we originally envisaged that nearer to 1997 we would seek to negotiate an arrangement whereby Hong Kong would guarantee the sterling value of HMOCS pensions. However we now see virtually no prospect that it would be politically feasible for Hong Kong to offer such a guarantee. We are therefore arguing that HMG should announce that it will take on the contingent liability, stepping in if the Hong Kong dollar dropped below, say HK$16 to £1. The Treasury strongly oppose this proposal;

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CONFIDENTIAL