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which had the effect of continuously increasing the surpluses and of throwing on the Government a larger burden than was reasonable or necessary. On the other hand if there were at any time a deficit, the fund system would tend to increase that deficit, since the Government contribution would then be calculated on a balance smaller than that needed to meet the future liabilities of the fund, and the Government contribution would therefore be less than the amount required to maintain an equilibrium between the assets and liabilities. Thus the normal condition of the fund must be one of more or less unstable equilibrium, and this unsatisfactory condition would be intensified through the small size of the Hongkong Fund.

12. Besides those indicated above, the policy recommended has other advantages. The necessity for periodic costly and troublesome valuations is avoided. Moreover the experience of other colonies has shown that where distinct funds with separate accounts exist it is difficult to satisfy the members, who when the assets of the Fund have reached a consider- able figure are apt to think that the pensions can be considerably increased or the contribu- tions reduced. On this question of the necessity of the income of a fund in its early years- largely exceeding its outgoings if it is to remain solvent, I do not think that I can do better than refer you to the enclosed copy of a memorandum on the subject by Messrs. T. E. Young and G. H. RYAN, the actuaries to the Ceylon Fund. If on the other hand the Fund should on valuation show a deficit, as has occurred in some colonies, hardship and dissatisfaction are liable to be caused by the reduction of pensions which would necessarily follow. It is therefore much more satisfactory for all parties that the Government should take the responsibility and guarantee pensions which will not be liable to either increase or decrease, and there is I think sufficient reason for being satisfied that the pensions which the new Ceylon Tables will provide will on the one hand be fair, to the contributors and recipients, and on the other hand not throw an unreasonable burden on the Government.

13. If this course is adopted any surplus which may be disclosed by the valuation which would be made would be devoted wholly to the benefit of members of the fund in the shape of increases to the prospective pensions of the widows and orphans of the contributors to the fund at the date of the valuation, and of former contributors who had ceased to contribute- on attaining the age of 65 or on leaving the service, as well as of increases to the existing pensions of the widows and orphans of those who have died since the 31st of December 1900- the date of the last valuation--in such shares and proportions as shall be recommended by the Actuary. Whether the members of the Fund have any legal claim under the original ordinance to participate in the whole or indeed in any part of such surplus may be a matter of argument. It was however recognised that if the Government took over the Fund it was desirable that the contributors should not feel that they had a grievance in being deprived of the surplus (if any) and my predecessor agreed that the whole of it should be assigned to them, so the question as to their legal rights is somewhat academic. I would however point out that, if the Fund is not taken over, it is practically certain that the actuary will advise that it would not be prudent to distribute the whole of the surplus which a valuation might. disclose, but a substantial portion---such as one quarter, as in the case of Ceylon, would have to be retained, in order to form a reserve against possible adverse fluctuations in the future.

14. For the reasons which I have given above I must ask that this matter may be reconsidered, and that Hongkong may be brought into line with the neighbouring administra- tions of the Straits Settlements and Federated Malay States. In order to leave the field clear for further consideration of the matter and because without a further Report from the Actuary I am unable to sanction the adoption of the Tables attached to the Ordinance while the fund is continued, I have felt it necessary to advise His Majesty to exercise his powers of disallowance in respect of Ordinance No. 17 of 1906 and it is disallowed accordingly. I informed you of the disallowance in my telegram of the 12th instant.

Governor

SIR M. NATHAN, K.C.M.G.,

&c.,

&c.,

&c.

I have, &c.,

(Signed) ELGIN