233/em
HKA 233
.8.0 1993
Hard coins
expacted
Reference
From:
D TROTTER (Ext.3444)
Date: 4 November 1993
CC: Mr Freeman
273
Mr John Morris
FCO, Hong Kong Dept
HONG KONG HMOCS STERLING SAFEGUARD
I recognise that the arguments surrounding sterling safeguards for Hong Kong pensioners have been well aired previously. But coming to the subject afresh, I wonder whether we have lost sight of some of the baselines.
2. Treasury Counsel's opinion is that HMOCS have a reasonable expectation of a sterling safeguard, but that there is wide scope to define its terms as long as it can be defended as being fair.
3. As a starting point, HMOCS could be expected to argue that such a system should protect their (contingent) pensions at the current rate of exchange ($11.5: £1) though existing pensioners might prefer to start from the exchange rate at their retirement which is already used for SPOS purposes and which would be even more favourable to most of them (average about $9.5:£1). On the other hand, Treasury's opening stance is for an exchange rate which, after taking account of differences in pension earning rates, would guarantee average pensions of a similar value to those of equivalent UK pensioners. We have been seeking a
sensible solution between these extremes.
4.
Treasury was understandably concerned that the potential cost/value of any safeguard would continue to drift upwards because of high Hong Kong salary increases between 1992 and 1997. We have therefore agreed that any safeguard should be based on 1992 salaries index-linked in line with UK inflation. Because of salary increases since 1992, this concession has already moved the argument some 15% from HMOCS' starting position, and is likely to move it much further by 1997.
5. The attached graph shows (vertical axis) the cost to HMG - in other words the overall value to HMOCS - of a sterling safeguard at various exchange rates (horizontal axis). This is based on 1992 salaries and is entirely consistent with the figures presented previously by GAD. You will see that the graph is a curve rather than a straight line as tends to have been presumed; a small movement in exchange rates at the lower end of the scale (eg from $11:£1 to $12:£1)
to $12:£1) is worth considerably more than a similar movement at the other end (eg from $26: £1 to $25:£1).
6. You will also see that a rate of $16:£1 is almost exactly mid- point in cost/value terms between the extreme positions of HMOCS and the Treasury. Thus, the compromise we (the FCO) have being pressing, and which the Governor has agreed to support, already splits the difference (if only coincidentally).
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