CONFIDENTIAL
that I understood that: HMG had an interest in HKG's meeting the HK $25 bn target in the MOU, and it made sense to have some cushion above it. But how big a cushion was needed? If a political decision were taken that the problem of civil service morale required something to be done, would our proposal be really unaffordable? If so, what would be affordable? Were there other, technical objections to what we proposed? Mr Wilson said that the question was essentially political and eventually agreed that, subject to the views of FS, S for Tsy and PS/GH, Finance Branch and the Treasury could do some rough calculations to see what sort of progression of Government contributions would be necessary to build up a fund in 10 years or 15 years, which could then take on the liability for the commutable element of pensions.
4.
This then represents a measure of progress. We did not get much into the details of the proposal, but several points came up in discussion:
CSB seem well-disposed to our idea, but have been inhibited from pushing it by the FS's and Governor's opposition.
Sir R McLaren's objections seem to hinge on the idea that the fund would be managed by independent trustees; but it ought to be possible to find a compromise which met both civil service objectives and Chinese concerns; The key point is that Government should be able to decide not to make an annual contribution if the fiscal position was unfavourable, but it should not be able to divert money from the Fund to non-pensions purposes. The question of the Fund's authorising payments in foreign currency could be left to the future.
- The Chinese might like the symmetry of a 10-year
proposal, whereby HKG contributed for 5 years and then the SARG for another 5, but a 15-year proposal would be cheaper for HKG, and we should probably start discussions with some negotiating fat.
- There is a danger that any discussion with the Chinese
would end with their demanding that HKG fund the entire pre-1997 pensions liability; but this would go beyond the JD and should be possible to resist: particularly as we we would be offering an effective HKG set-aside approaching HK $ 15 bn.
If the fund was successful, there would be no need to stop at partial funding: one might then move on to full funding. It is for consideration whether after say 10 years it should take on full responsibility for the commutable element, or whether there should be a phased takeover.
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