CONFIDENTIAL
it will be essential to consult the staff association in Hong Kong before we finalise and announce our package.
Your proposed amendment to option (a) (traditional scheme) so transforms it that the explanatory paragraph (para 10, former para 9) no longer makes sense, ie given this amendment there would be no cost to HMG. Surely the point is that (as para 2 of the paper makes clear) HMG has taken over the funding of all such schemes since 1971. The proposal that the successor Government should guarantee a safeguard arrangement runs into all the difficulties of persuading the Chinese to guarantee HMOCS pensions associated with the capitalisation option; and either needs to be separately examined, or dropped.
Your suggestion that capitalisation poses "problems for the Hong Kong Government" rather than "problems in the Hong Kong context" implies that it poses no problems for HMG in the UK. But if capitalisation were imposed against the wishes of HKG and LegCo, there would clearly be political problems for HMG.
Your proposed para 13 raises again the Chinese ideas for a set-aside fund for civil service pensions. We continue to believe that there are significant differences between this and capitalisation, and if the set-aside point is to be made, would propose a passage as follows:
"The Chinese have also shown intense interest in the level of Hong Kong's fiscal reserves in 1997, cf the airport negotiations. They have expressed concern that civil service pay and pensions will be a heavy burden after 1997 and suggested that to reassure local civil servants HKG might "set-aside" a fund of HK$15 bn, on top of the HK$25 bn laid down in the Airport Memorandum of Understanding, which could be drawn on to help meet pensions in years of budgetary difficulty. HKG have explained that it makes no sense to tie up funds in this way and that pensions must continue to be met from (expanding) general revenue. We have considered whether we could build on the idea of set-aside to persuade the Chinese to accept the capitalisation proposal for HMOCS officers. But whereas set-aside would commit HKG to providing the SAR Government in 1997 with an extra nest-egg (and thereby limiting HKG's ability to disburse Hong Kong funds before 1997 on projects of interest to British businessmen), capitalisation would enable HKG to transfer to HMG in the UK before 1997 a sum of money which would otherwise have been available to the SAR Government in 1997. We therefore see no prospect of convincing the Chinese that it would be in their or the SAR Government's interest thus to discharge before 1997 their future liabilities for expatriate civil servants. Instead the proposal would fuel their suspicious of British/Hong Kong asset-stripping".
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CONFIDENTIAL
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