For discussion EC(97-98)40
on 3 December 1997

ITEM FOR ESTABLISHMENT SUBCOMMITTEE OF FINANCE COMMITTEE

HEAD 188 - TREASURY
Subhead 003 Recoverable salaries and allowances

Members are invited to recommend to Finance Committee the creation of the following permanent post in the Treasury -

1 Chief Treasury Accountant
(D1) ($92,650 - $98,300)

PROBLEM

The existing structure and directorate support of the Provident Funds Branch of the Treasury is inadequate to cope with the increased volume and complexity of work in the management of the Grant Schools and Subsidized Schools Provident Funds (the Funds).

PROPOSAL

2. The Director of Accounting Services (DAS), with the support of the Secretary for the Treasury and the Boards of Control of the Funds, proposes to create a Chief Treasury Accountant (CTA) post at D1 level in the Provident Funds Branch of the Treasury to support the Assistant Director of Accounting Services heading the Branch in the management of the Funds.

JUSTIFICATION

3. The Grant Schools Provident Fund and the Subsidized Schools Provident Fund are two statutory provident fund schemes for teachers in aided schools. The administration and control of each Fund rest with a Board of Control, the membership of which comprises teacher representatives, the Director of Education and the DAS. The Investment Sub-committee under each Board of Control monitors the investments of the Fund. The Assistant Director of Accounting Services of the Provident Funds Branch (AD(PF)) of the Treasury is appointed by the DAS as the Treasurer of the two Funds.

4. As the treasurer, AD(PF) assumes overall responsibility for the management of the investment portfolios of the Funds and the supervision of the external investment managers employed to manage a part of the assets of each Fund. At present AD(PF) is underpinned by two Senior Treasury Accountants in the day-to-day management of the investment portfolios and by a Treasury Accountant in administrative duties. The existing organisation chart showing the division of responsibilities is at Enclosure 1.

5. This organisational structure and level of support, however, have become inadequate in view of the rapid expansion of the Funds and the need to cope with the fast moving financial markets. As at the end of October 1997, the Funds amounted to $22.5 billion, $16.7 billion of which is managed in-house by the Treasury and $5.8 billion by external investment managers. This represents an increase of 32% over the position at the end of February 1995 when the Funds were only $17 billion. We envisage that the Funds will further increase to $33 billion by 2000. During the same period, the number of financial markets covered by external investment management has increased from 31 to 43. With regard to in-house management, there is a need to extend the market coverage from the present 10 to 19. The growth in both the size of the Funds and the number of financial markets covered call for additional planning, analysis and research of a greater depth and breadth than before. The growing volatility and sophistication of today's financial markets also call for more proactive and strategic planning. To ensure that the Funds can continue to meet its objective of achieving a stable and reasonable rate of return, DAS considers that a permanent post of CTA should be created to underpin AD(PF).

6. The proposed CTA will assist the AD(PF) to keep a close overview of the financial markets at all times and review the investment strategy on a regular basis. In the day to day management of the Funds, he/she will assist AD(PF) in making quick investment decisions to adapt to the changing market condition. At present, settlement instructions, which have very strict and short deadlines, can only be authorized by AD(PF) as the head and the only directorate officer of the Provident Funds Branch. The proposed CTA can effectively deputize AD(PF) in giving out such instructions. The major tasks which the proposed CTA will undertake are described in detail below -

1. Exploration, examination and evaluation of new investment concepts and financial instruments

   The proposed CTA will be responsible for exploring, examining and evaluating new investment concepts and financial instruments available in the markets, and drawing up recommendations to the Financial Secretary (FS) for approval to incorporate suitable ones into the Investment Framework. The Framework governs the investments that may be made by the Funds. The proposed CTA will assist AD(PF) in pursuing new proposals being considered such as the use of more financial products for hedging purpose, securities lending arrangements for assets held by the global custodian, and the use of directed brokerage to economise in brokerage fees.

2. Review of asset allocation model

   Within the Investment Framework approved by the FS, the Boards of Control would approve an asset allocation model (i.e. the proportion of equity, bond and cash by region/market) as a guideline for investment. The existing asset allocation model, which is the first one of this sort, was determined in 1994. There is a need to critically examine its usefulness in the light of the prevailing economic and political environments. The proposed CTA will assist AD(PF) in reviewing the asset allocation model on a regular basis and recommending revisions, if necessary, to the Boards of Control, to ensure that the model can provide adequate guidelines in the ever-changing investment environment.

3. Adjustments in investment portfolios

   Within the upper and lower limits prescribed by the asset allocation model, the proposed CTA will assist AD(PF) to make tactical adjustments to the investment portfolios whenever necessary in reaction to day to day changes in the financial markets. With risk management becoming an increasingly important element in portfolio management, he/she will have to apply sensitivity analysis to assess the impact of different market developments (e.g. changes in interest rates). In particular, he/she has to assess the market values of the investment portfolios under different market scenarios with a view to recommending the most favourable asset mix at all times.

4. Active currency management

   With more than 20% (more than $3,500 million) of the Funds invested in non-HK$/US$ assets, active management of currency risk is important in view of the very volatile nature of the exchange rates. The proposed CTA will enhance the Branch's capability in this regard. He/she will be responsible for monitoring the currency market closely and recommending measures to minimise currency risk such as hedging non-HK$/US$ exposure when the US$ is likely to appreciate.

5. Improved reporting format on investment performance

   To keep the Investment Sub-committee of each of the two Funds well informed of the investment performance, the proposed CTA will help improve the quarterly investment reports to the Sub-committee by making it more comprehensive. The proposed CTA will be responsible for preparing detailed performance analysis with commentaries for inclusion in the quarterly report so that the Investment Sub-committee would be in a better position to evaluate the Treasurer's as well as the investment managers?performance.

7. The above tasks call for the strategic thinking and decision making power of a directorate officer at CTA level. The resultant organisation chart of the department and the job description of the proposed CTA post are at Enclosures 2 and 3 respectively. The proposed CTA post will require the support of a Personal Secretary II. We will offset this new post by the deletion of a Typist post. We will create and delete these support posts through the normal Departmental Establishment Committee machinery.

FINANCIAL IMPLICATIONS

8. The additional notional annual salary cost of the proposal at mid-point is -

9. The additional full annual average staff cost of the proposal, including salaries and on-cost, is $2,170,056. There will be no financial implications on the part of Government as the full cost of the proposal will be recovered from the Grants Schools Provident Fund and the Subsidized Schools Provident Fund, the Boards of Control of which have agreed to meet the expenditure. This also applies to the Personal Secretary II post.

CIVIL SERVICE BUREAU COMMENTS

10. The Civil Service Bureau considers the ranking and grading of the new post appropriate having regard to its duties and level of responsibilities.

ADVICE OF THE STANDING COMMITTEE ON DIRECTORATE SALARIES AND CONDITIONS OF SERVICE

11. The Standing Committee on Directorate Salaries and Conditions of Service has advised that the grading proposed for the post would be appropriate if the post were to be created.

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Enclosure 3 to EC(97-98)40

Main duties and responsibilities of the Chief Treasury Accountant (Provident Funds)

Rank : Chief Treasury Accountant (D1)
Accountable to : Assistant Director of Accounting Services (Provident Funds)

Responsibilities

1. To conduct regular and timely review of the asset structure of the investment portfolios of the Grant Schools and Subsidized Schools Provident Funds with a view to recommending appropriate strategic or tactical asset allocation decisions.

2. To prepare the quarterly investment performance reports on the Funds and on individual investment managers for consideration by the Investment Sub-committee of each Board of Control.

3. To review regularly the Investment Framework for the Funds and to propose changes where necessary.

4. To prepare the annual investment plan for approval by the Board of Control of each Fund.

5. To assist AD(PF) in the management of investment risk.

6. To undertake implementation of ad hoc initiatives and assignments from time to time.

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