TNAG-2422-FCO40-3524-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 188

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possibility that a private sector scheme, involving the

hypothecation of Hong Kong civil servants' future pension

entitlements, might offer a feasible alternative to sterling

safeguards. A good deal of work has now been done on such

ideas, but I think that all concerned now recognise that any

such scheme could offer only a very limited safeguard, eg of

half the possible commutable element of a pension payable

within the next 10 years. (The financial institutions are not prepared to take the long-term political and exchange rate risk involved in lending against pensions payments due

30 or more years hence.) Any such scheme, even with

government subvention of one kind of another, would fall far

short of fulfilling our obligation to HMOCS officers.

However David Mellor's letter raises a different idea: that

if HKG launched a scheme of this kind, available to all Hong

Kong civil servants, it would provide political cover for

their capitalising the HMOCS pensions entitlements and

transfering this sum to HMG before 1997 so that HMG might take over payment of the pensions in sterling.

6. I have thought carefully about this and have concluded,

for the reasons given in paragraph 5 of my minute of

11 March, that capitalisation is not feasible, even with

this "political cover". The question is not whether Hong

Kong can afford capitalisation of HMOCS pensions: I agree

that the improved Hong Kong fiscal position would make this easier to contemplate in theory than at the time when (in a

judgement shared by your officials and by the Bank of

England) the HK$25 billion commitment in the Airport

Memorandum of Understanding seemed to be at the extreme

limit of what was possible. However, it remains impossible for Hong Kong to capitalise its entire public service pension liability. The political, and therefore practical objections to capitalising HMOCS pensions alone and

transferring these funds to the United Kingdom Government

are in my view insuperable.

1.

Further confirmation of the Chinese approach came at the

NOCACF/3

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