I my opinion the rear sight set screw is just a failsafe, more for show. To answer your question, however, yes it is to help secure the rear sight in place. I have removed five sets of Novaks from five different 3rd Gen guns and each rear sight was ridiculously tight in the dovetail. If you search this forum, you will find other threads about this subject. Once you fire the gun to see if the point of aim and point of impact are the same or not, and you want to move the rear sight, I would try one or two things before drilling. You can find "easy out" bits that small. I would try that after soaking the set screw for a few days in "Break Free" (gun propped in the upright position). If you cannot find an easy out that small, I have used a torx bit in the past to remove stripped allen screws. Same principal as your oversized allen wrench. Find the size that fits in there super tight, give it a few taps, then give it a slow steady twist with downward pressure at the same time. Once you have the set screw out, try to tap the sight to where you want it. I think you will find that most of them are really wedged in the tapered dovetail. Usually a stiff brass punch and a 12 - 16 oz hammer is required, unless you try a sight tool. I think you will find that a new set screw is going to be more for plugging the hole back up than actually securing the rear sight. If, however, the rear sight does move easily, then you definitely need a new set screw. Remember, your ejector depressor and firing pin saftey springs are under the rear sight. Be careful if you take the rear sight off completely. You do not want to lose or damage those springs. Good luck.
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