Our view is that Ministers may wish to hold back on the announcement of the precise details of a safeguard scheme when not to do so, given the many uncertainties, might lead to HMG paying an unwarranted high cost. Option B should therefore remain in the main body of the paper. Moreover, option B should have a fourth choice which is higher than 50% in order to bring it into line with the fourth choice (a 30:1 exchange rate) in option A.
We feel that it is for Ministers to consider the financial, political and presentational merits of all the options and, with this in mind, another option occurs to us which we think is worth consideration. This could be called the "UK comparator" option as it would set a variable safeguard to ensure that HK HMOCS' pensions would be protected at the level of those received by equivalent grades in the UK. We envisage it operating as follows:
say we were in 1999 and a UK civil servant's pension is worth £100 (for simplicity). The HK dollar has fallen to 30:1 against sterling. If the pension received by the equivalent grade HMOCS in HK is less than HK$3,000, HMG steps in to make up the difference. If it is more than HK$3,000, then the safeguard is not triggered.
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This option would seem to combine the advantages of option A giving HK HMOCS security about where their pensions will be safeguarded, ie at the level of their UK counterparts with the flexibility of option B. It would overcome the inequities which concern you about both the current main options (A and B) and, because it would give HMOCS officers clear information on which to base decisions, fulfil our policy goal of encouraging them to stay on in HK.
Whether, given the high salaries they command, it is reasonable for HMG to underwrite their pensions at UK levels, or whether it should be something less than this, would be for Ministers to decide. We should also need to flag up other possible drawbacks such as administrative feasibility (though it seems to us that this option would do away with the red tape of SPOS), and whether basing a safeguard so clearly on UK developments might encourage the Chinese to default on payments of the pensions. Indeed, the paper would benefit from a commentary which raises wider considerations, such as the Chinese dimension, on all the options.
Finally, I have seen Mr Stone's letter to me of 12 October attaching advice from HK on private sector options for funding the communtable part of the pension. The Hongkong and Shanghai Bank seems to suggest that, while an external guarantee would facilitate a private sector scheme, it would not be essential. Indeed, HMG already provides a background of assurance, through Carr-Robertson, to individual HMOCS officers in the event of a default on pensions payments by the post-1997 HK administration. As for exchange rate risk, I fail to see why a guarantee should be needed if, under the Hongkong and Shangai Bank's proposal, the bank holds a callable margin on the sterling deposit it holds as collateral. We are seeking the advice of the Bank of England and may well see a case for pursuing this matter further in HK.
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