TNAG-2685-FCO40-3886-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1993 — Page 158

cst.ps/dr/4mp13.1

CONFIDENTIAL

Sterling safeguard

4.

alternatives

While I have accepted the principle of a sterling safeguard if one proves necessary, we should take all steps to ensure that which have no cost to the UK taxpayer have been fully explored before an announcement is made. For example, I understand the HK Government is now to consider partial funding of HK civil service pensions. This would add force to the case for the HKG, at no expense to itself, to extend such a capital

transfer to HK HMOCS pensions, which could then be converted into sterling.

In deciding how much of the pension an HMG-funded safeguard

protect we need to bear in mind that:

5. should

HK HMOCS' pensions already have substantial protection in sterling terms from HMG through the Supplementary Pensions for Overseas Service (SPOS) Regulations. SPOS gives 100 per cent exchange rate protection to that part of the HK HMOCS officer's total pension benefit that he accumulates in the form of pensions increases. Over time the pensions increase element forms the bulk of the total pension benefit, so that many existing HMOCS pensioners already have much of their pension safeguarded against exchange rate risk. For those retired longest, SPOS protects virtually all their pension and the safeguard will be of little interest to them. Of course, the position is different for more recent retirees and those retiring in the future;

the past cases you cite involve HMG stepping in to pay - not to safeguard HMOCS' pensions. This action was taken as an aid measure. That HK and the HMOCS officers serving there are well off puts this case into a different bracket;

legal advice indicates that comparability with the benefits accruing to UK civil servants could reasonably be taken into account when constructing a safeguard, and should not be vulnerable to successful legal challenge.

6. I am therefore reinforced in my view that we should not go beyond offering a safeguard element which takes UK comparability as its guiding principle. This can be achieved by:

(a)

(b)

the sterling amount of the pension to be safeguarded to be fixed in 1992 terms. This would be based on what the pensioner would have received had he retired in 1992 (but based on his final grade and actual number of years' service);

in this calculation the conversion of HK dollars to sterling would be at a rate of $HK26:£1; this would protect around half the average HK HMOCS pension and, by SO doing, safeguard at a level comparable to pension benefits received by UK civil servants;