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at 1997 £11m pa; and at the peak year 2011 about £15m pa. If the dollar were to stabilise at, say, HK$ 20 to £1, the cost would then be about £2m pa at 1991 and 1997 and about £3m pa for 2011. The final cost of providing a safeguard will of course depend on various factors including the sterling/Hong Kong Dollar exchange rates at any given time, and there is no satisfactory way of prediciting what this will be.
5.
You will see that the peak year figure of £15m pa differs from that given in the earlier submission (£29m pa see para 7 of Annex B of Nigel Cox's letter of 29 August). In the course of careful re-checking, we discovered that we had misinterpreted the base data provided by Hong Kong. Similarly, the figure of £35m pa given in the earlier paper for the peak year at current exchange rates should have read £19m pa.
Our apologies for this slip up: though I am relieved that the revised figures considerably reduce the possible costs.
SPOS Proposals
6.
The SPOS modifications are essentially a mechanism to rationalise some of the present anomalies under the existing pensions increase arrangements. We propose to take into account any shortfall in the value of an officer's basic pension (which arises as a result of exchange rate losses) when quantifying the level of Hong Kong increases to be topped up to UK levels. However, as you will see from the earlier papers, the proposal affects individual officers in different ways, depending on their personal circumstances, and this makes it very difficult accurately to assess the cost implications. But, if the sterling safeguard (para 4 above) were to be set at 16 HK$ to £1, we estimate that this SPOS revision would give HMG a maximum additional liability of some £2m pa.
Need for the Package
7. You say that you are not at all persuaded by the arguments for any form of sterling guarantee. There are three main reasons why FCO Ministers believe that a package approach is essential:
(a) the purpose of the proposals is to keep HMOCS officers in Hong Kong. Irrespective of the safeguards in the Joint Declaration, HMOCS officers are concerned that the Government post 1997 will either be unwilling or unable fully to pay out pension to expatriates. They are also concerned about a drop in the value of the Hong Kong dollar. Our judgement, and that of the HKG, is that many officers will leave before 1997 unless we are able to give them a guarantee that their pension will be worth something. That would jeopardise our capacity to administer Hong Kong effectively until 1997. The compensation scheme on its own does not address these real worries;
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