TNAG-2427-FCO40-3529-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 3

CONFIDENTIAL

XCCI(92)46

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However, if the scheme covered only future service and did not safeguard retirement benefits already accrued by officers, it would not be regarded by staff as a pension safeguard. Its contributory nature would also reduce its attraction. Moreover, the lead time, say one to two years, required for its establishment would limit its effectiveness in staff's eyes.

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In the longer run and with the introduction of compulsory retirement funds for the private sector, Government may come under public pressure to follow suit. If we did so, this would be for new appointees and would not provide a pension safeguard for serving officers.

"Hypothecated Pension Fund"

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Under this proposal officers would effectively set up their own pension funds by borrowing up to their maximum accrued commuted pension gratuity from financial institutions, with their future pension entitlements as a lien. The funds raised would then be managed by the financial institutions and converted into a portfolio designed to achieve long term capital appreciation in a mixture of foreign currencies. An officer could only have access to his fund, with any accumulated yields, when he had reached statutory retirement age and had repaid the original loan from the commuted pension lump sum.

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The Administration engaged an independent consultant to conduct a feasibility study into this proposal. The consultant has now concluded that such a scheme is technically feasible, but cannot be implemented until a market for long term fixed rate Hong Kong dollar debt instruments develops. To create such a market, the consultant recommended that consideration be given by Government to requiring private sector pension schemes to maintain 50% of their assets in Hong Kong dollars.

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As an alternative, the consultant recommended that a "receivable purchase" scheme (under which an institution would "purchase" the commuted portion of the pension in advance but at a discounted rate) and an exchange rate hedging scheme be explored.