TNAG-2426-FCO40-3528-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 46

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aef1.1g/kw/2.2.3

CONFIDENTIAL

Rayson said it was the job of the private sector to price risk,

and wondered what the price might be in this case. Mr Norris said he could not identify a rational pricing model. The foreign exchange position in HK was anomalous even now, and would be difficult to assess even without a handover in 1997. The options

were to capitalise the pensions liabilities or to develop long- term HK$ instruments to match the future stream of pensions payments in HK$; the latter was very doubtful. A very short dated Bill market was emerging (up to 3 years) but this fell a long

short, of meeting post 1997 requirements. The best deal for the government in terms of minimising its exposure would be to give

individuals concerned the opportunity to commute their pensions now and to take a capital sum. The alternative of a foreign currency safeguard could be very expensive.

the

way

There were

Returning to the savings market in HK, Mr Norris said it was very rudimentary compared to London. Most of it was in US$ with very little in HK$. Pension fund and life assurance volumes were very

small and most HK pension schemes were very young, though growing

rapidly from a low base. But these were limited to high earners

and tended to be quoted in foreign currency. commercial undertakings (eg infrastructure projects) with long-

term HK$ requirements but they were borrowing and not, therefore, providing a savings pool to tap into. Even then the largest deal had been relatively small (HK$ 1 billion; £70 million).

preference share issues had gone beyond 1997 but these were very

expensive (12 per cent when interest rates were 8 per cent).

Mrs Brown asked about the scope for the market to develop.

Mr Norris thought it would develop in domestic HK$ terms, but the

issue in this case was different: it was the risk of the HK$

against foreign currencies.

Some

Mr Rayson asked if it would be possible to borrow now in return

for a lump sum to be paid in x years time. Mr Norris thought that

if it involved a narrow group of people whose benefits were crystallizing with a lump sum from government after 1997 but close to it, the individuals concerned could get some financing.

Mr Rayson said it was unclear when the pensions would crystallize; CONFIDENTIAL