TNAG-2686-FCO40-3888-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1993 — Page 67

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whether or not the Government had put forward a reasonable case as to why the scheme should be based on half factors; and that the Government would have a good chance of winning.

Pensions Safeguarding

11.

12.

Pension payments are composed of three elements:

a.

the basic pension, calculated by

by age, length of service and grade, paid in Hong Kong dollars by the Hong Kong Government;

b. the local pensions increase, to reflect increases in Hong Kong living costs, paid in dollars by the Hong Kong Government;

C.

the supplementary pension for overseas service (SPOS), paid in sterling by the UK Government. This makes up any shortfall between b above and the sterling value of the increases paid on an equivalent UK public service pension.

FCO and Treasury agree that the Government must guarantee pensions at some level against the possibility that economic difficulties in Hong Kong lead to a substantial fall in their sterling value. With luck, given the Chinese interest in maintaining the value of the assets in Hong Kong, no significant payments would ever need to be made. But in the event of early economic collapse, the contingency payments could need to be made immediately and in full. (In the event of a politically-inspired default by the new Government, different commitments would come into play; they would apply regardless of whether the FCO or Treasury approach to safeguarding had been adopted and so are not considered further.)

13.

Both the FCO and the Treasury approaches would use the same methodology. The sterling value in 1992 of the pension entitlement of each officer given his or her grade, age and length of service would be calculated. That would be uprated in line with the UK RPI through to 1997 to give a nominal safeguard baseline. If at any time thereafter the value of an officer's pension, when converted from Hong Kong dollars to sterling using a specified exchange rate, were to fall below that baseline, it would be supplemented by the Government to bring it back to the baseline.

14. There are important differences in the proposals for applying this methodology.

CONFIDENTIAL