TNAG-2429-FCO40-3531-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1993 — Page 69

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aefl.kw/docs/1.13.11

HM Treasury

Confidential

EY MON

HKA 233/1

Mr John Morris

Hong Kong Dept.

FCO

London SW1A 2AH

Dear John,

ORUIT

Parliament Street

London SWIP 3AG

Telephone 071-270

Mr Whityogh 18111

Торес.

I agreed will M, Word filed by slog home on 131/1)

cc. now rec'd. with Woodfield that

we alt correctly understood the basis

be a

614

Pole saffeguard (as defried in the options Paper) and that it did not mean that eg once the endange rate foll below the trigger rate 13 November 1992 there would automatically

pagoneers. Only when Recy vator of the pension fell below in the value we had agreed

by HM Cr, Payment to support would there be a

I said I would not be replying to

this letter. Following my letter to Nigel Whitney of yesterday, we discussed further the mechanics of how the safeguard would work.

HONG KONG HMOCS PENSIONS

(612)

M 16/1

We agreed that the safeguarded pension would be fixed in terms of 1992 on the basis of (i) 1992 salaries uprated for UK RPI, and (ii) converted to sterling in 1992 at the agreed safeguard level. To use the example in my letter to Nigel, if the pension payable in 1992 were HK$300 and the exchange rate safeguard selected were HK$30:£1, the fixed safeguarded pension would be £10. In my example, this safeguarded amount does not rise as UK inflation is assumed to be zero.

I offer the following to further clarify the importance of a scheme based on effective real and not nominal exchange rates. To return to my example (with the addition of the 1992 reference point):

Pension (HK$)

Exchange rate (HK$:£) Pension received (£) Safeguarded pension

Assumptions:

1992

1997 1998 1999 2000 2001

300

10

30

10

300 600 1200 2400 4800 10 20 40 80 160 30 30 30 30 30 10 10 10 10 10

inflation in HK: 0% pa up to 1997, 100% from 1997 on inflation in UK: 0%

safeguarded pension calculated on the basis of the two steps outlined above (ie a third of the pension is safeguarded)

As HK HMOCS do not get pensions less than £30 and as the safeguarded pension is £10, the safeguard is not triggered. But if a nominal exchange rate safeguard were to apply, this would be triggered some time in 1999 as the exchange rate falls below 30:1 to 40:1. HK HMOCS pensioners would in that year (i) be no worse off in terms of their real pensions but (ii) be getting a safeguard payment from HMG.

The scheme should therefore be designed so that the safeguard comes into action only when HK HMOCS receive less than the safeguarded sterling amount, irrespective of the particular nominal exchange rate.

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