Investment yield:
General earnings increases:
3.5% in excess of prices 2% in excess of prices
Once these relative rates are settled, one rate must be fixed in absolute terms to determine the others. long-term investment yield of 10% implies long-term assumed
Adopting a gross rates of earnings and price increases of about 8.41% and 6.28% respectively.
7"
The projections also depend upon assumptions about promotional salary increase, rates of retirement by age, mortality of members and their dependants, and other demographic factors. These assumptions were based on salary scale information provided by HK, on the retirement ages of current pensioners, and on the results of other relevant analyses carried out by GAD for HK and ODA.
Scenarios
8.
The costs of any form of sterling safeguard depend upon future actual rates of exchange between the f and the HK$. The greatest costs would arise if the HK$ became worthless on 1 July 1997: this is the "worst case" scenario. Under an "intermediate" scenario, the HK$ falls to a rate of HK$28 to fl in 1997: about half the rate of HK$14.4 in June 1992. "Optimistic" scenarios assume that the HK$ will increase in value against the £ after 1997.
Method of estimating costs
9.
It is assumed that any sterling safeguard will apply to all benefits and all service up to retirement, not just those in respect of service before 30 June 1997. The first stage in estimating the costs is to project the annual future payments to HMOCS members in HK$, on the basis of the data and assumptions set out above, from 1991 onwards. Payments projected in money terms increase rapidly because of the assumed increase in prices. Removing the price inflation effect gives projections in terms of 1991-92 prices. stream of annual payments grows until all currently-active members leave service, and then declines.
The
10.
The second stage is to project the annual future payments by HMT to HMOCS in £, for a given form of safeguard and for an assumed future scenario for the HK$. None of the proposed safeguards make any payments before 30 June 1997. The streams of future payments after this date may be depicted as emerging costs at constant prices. Alternatively, they may be summarised in terms of their capitalised present values, by discounting them back to 1 October 1991 at the assumed long- term rate of investment yield.
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