TNAG-2428-FCO40-3530-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 213

To: From:

K Woodfield; AEF1

DJ Hughes; GAD

RT Foster, D G Ballantine; GAD

C Brancen, J Greig; Superannuation

S185 gra

30 June 1992

HONG KONG HMCCS STERLING SAFEGUARDS

Roy Foster and I met you and colleagues to discuss John Greig's letter to Grant Ballantine of 26 June 1992. I enclose the graphs that we promised. We discussed two HK$ scenarios (the worst case where the HK$ is worthless after 1/7/97, and an intermediate case where it depreciates in value at 28 pa compound from HK$14 to £1 at 1/4/92); and various forms of safeguard, as follows.

Guarantee for all HMOCS:

:at HK$16

:at HK$21

Guarantaa for HMOCS serving

Worst case

Intermediate case

ref 5/1

ref 6/1 ref 6/2

ref 7/1

at HK$16, delayed until deficit exceeds earlier accumulated balance

ref 6/3

at 1/7/97 at HK$16

Guarantee for all HMOCS

The reference numbers are shown on the graphs. The capitalised values of these cash flows discounted back to 1/10/91 are:

ref UK£ million

5/1 7/1

361

190

ref UKE million

6/1

78

6/2

30

6/3

71

The graphs are based on the emerging costs in Appendix 3 of our paper. Some of the capitalised values also appear in the paper: £361 million is in para 17, and £190 million is in para 19. The figures of £78 million and £20 million are slightly smaller than the corresponding figures in para 17, because they assume that the HK$ depreciates from HK$14 at 1/4/92, rather than from HK$16 at 1/7/97 as in the paper. £71 million is smaller than £78 million, because payments before. 2008/06 are omitted.

The final form of safeguard listed above is a way in which HMG could save money, if there are periods when the HK$ is more valuable than the guaranteed rate. Imagine two streams of benefit payments: (i) where HK$ are converted to UK£ at the guaranteed rate, and (ii) whers HK$ are converted to UK£ at the rate actually in force. The amounts by which (ii) exceeds (i) could be accumulated for each pensioner. In the graph (ref 6/3), they have been accumulated from 1/10/91. If the HK$ were to fall in value below the guaranteed rate, guarantee payments would begin only when their total exceeded the earlier accumulated balance.

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