A
CONFIDENTIAL
Option C:
As the average exchange rate envisaged under this option would be based on a defined period up to 1997, there would be little chance of HMG incurring actual liability for some time thereafter. Whilst the Treasury find this aspect attractive, they also appreciate that if the Hong Kong dollar was strong during the defined period and then collapsed after 1997, HMG could ultimately incur significant liability. The major disadvantage of this option for us is that it would not meet officers' concerns as it would not give them certainty now about the sterling value of their pensions.
Option D:
This option has many disadvantages, as listed in the paper. The most significant are that it would not find favour with officers as it would not provide them with any quantifiable guarantee. It might also induce them to leave early so as to guarantee the level of their safeguard.
Option E:
A gamble by the Treasury, ie aimed at sharing the exchange-rate risk with the HMOCS officers: those who wanted a safeguard could elect to participate, in which case HMG would pay their pensions at the fixed rate, gaining if the market rate were higher and losing if the market rate were lower. This might be tolerable if the rate were set at $16, but there are significant disadvantages:
(a) It is very different from traditional arrangements, and it might be thought unfair and unreasonable to ask officers, particularly the financially unsophisticated, to make such a life-long gamble on the exchange-rate.
(b) If things go badly in Hong Kong, the SAR Government would be marginally more likely to default on pensions payments to HMG than on payments to individual pensioners. Thus the risk to HMG would be greater.
(c) If over time the Hong Kong dollar again appreciated against sterling, eg to $8 or $10 to the pound, and if this rate seemed likely to be sustained, there would be strong pressure to release officers from their previous choice of payment at $16. Thus this option might store up long-term controversy.
options.comm. 1.HMOCS
mvs
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