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proposed scheme is consistent with previous schemes and would be acceptable to the HMOCS Association, the body representing the officers concerned.
Pension Protection
On pension protection arrangements, the FCO and Treasury agree that HMG must guarantee pensions at some level against the possibility that problems in Hong Kong might lead to a substantial fall in their sterling value or that the Chinese Government reneged on their treaty obligation to pay pensions. This is a contingent liability: it would cost nothing unless the Hong Kong dollar fell below the safeguarded level.
The officers maintain that to be consistent with earlier schemes their pensions should be protected at the exchange rate of HK$13.76: £1 (the average exchange rate for 1991 when consultations on HMOCS commenced). The Chief Secretary has argued that, in judging what is fair, it is reasonable to take into account the difference between comparable Hong Kong and UK staff in their salary and pension entitlements. He proposes that the safeguard would operate only when the sterling value of the pension had fallen to the point where it was comparable to the equivalent UK pension. He proposes that the rate should be HK$26: £1.
The Foreign Secretary takes the view that comparability with the UK has never applied in previous cases and that it should not now. He has proposed a compromise of HK$16: £1. This represents a discount of some 35% on present exchange rates, and the Hong Kong dollar has never fallen to this level against sterling. The Governor believes that this would be a fair compromise between the demands of the HMOCS Association and the Chief Secretary's offer.
The maximum contingent liability (ie in the hypothetical circumstances of the Hong Kong dollar becoming worthless) with payments spread over fifty years would be about £106 million at a rate of HK$26: £1, and £230 million at a rate of HK$ 16: £1. Given the value of assets backing the Hong Kong dollar, it is most unlikely that the safeguard would ever be needed.
There is a separate issue on the calculation of Supplementary Pensions for Overseas Service (SPOS). These supplementary pensions are intended to ensure that an pension attracts increases no less than those on an equivalent UK pension. The method used to calculate the payments takes account of any increase in the sterling value of the pension due to exchange rate movements, but does not do the same if the value decreases. The Foreign Secretary has argued that the present arrangements are not equitable, and has proposed an amendment to the SPOS Regulations which would cost up to
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