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5. I would take issue with other points in paragraph 5 of
David Mellor's letter too. For example, since 1984 Hong Kong HMOCS have been expecting us to announce how we intend to fulfil our commitments regarding pensions, ie the matter has by no means been settled in their or our minds. However the key point is whether or not the Hong Kong Government can provide a pensions safeguard or whether HMG will have/to provide it.
6. In recent weeks the HKG and we have been exploring the possibility that a private sector scheme, involving the hypothecation of Hong Kong civil servants' future pension entitlement, 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 exchantge rate risk involved in lending against pensions payments due
30 or more years hence). Any such scheme, even with government subvention of one kind or another, would fall far short of fulfilling our obligation to HMOCS officrs. 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 transferring this sum to HMG before 1997 so that HMG might take over payment of the pensions in sterling.
7.
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
such "political cover". The question is not whether Hong
Kong can afford capitalisation of HMOCS pensions: I agree
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