TNAG-2396-FCO40-3483-Hong-Kong-Civil-Service-policy-1992 — Page 13

CONFIDENTIAL

give no certainty that the SAR government will not change them post-1997. Civil servants are looking for the

government fully to fund pensions and for the funds to be

invested in private sector institutions, substantially

overseas, to reduce the chances of massive exchange rate

depreciation or interference by the SARG. Because of the huge sums involved in funding pensions, the Hong Kong

Government has refused to contemplate such a significant

step. Instead it has looked at 4 options:

(a) Partial funding of pensions.

This would involve setting aside and maintaining a separate reserve fund sufficient at any time to meet estimated

pension payments for the next (say 5) years. HKG has rejected this on the basis of the initial sum required say HK $15 billion; the difficulty in justifying setting

aside funds on this scale for the benefit of a small section

of the society; and the provisions in the Joint Declaration

and Basic Law that pensions will be paid.

(b) A Hypothecated Pension Fund Scheme.

This would involve institutions lending to a notional

corporation which would be backed by the future flow of lump

sum payments from the Government to individuals as they

became due. The scheme is unlikely to be feasible: lending institutions would be unlikely to lend for more than a

10 year period (and if they did the cost would become

prohibitive) so the scheme could only benefit a few

officers; and the investment return would be unlikely to

cover the cost of financing the borrowing, so individuals

would be out of pocket.

(c) Higher Commutation of Pensions.

This would involve allowing civil servants to commute more

than the current 50%

say 75%. The main drawbacks to this

JUDADG/2

CONFIDENTIAL