All posts by John Ralfe

I am a UK based independent pension consultant www.Johnralfe.com

“A thought experiment worth repeating” FT letter from Professor zvi bodie and john ralfe november 2016

https://www.ft.com/content/caed1ddc-a515-11e6-8898-79a99e2a4de6

Sir, John Authers’ comment that “in the long run, stock market investing is very similar to taking continuous flips with a coin loaded slightly in your favour” is the bedrock of personal investment advice — encouraging long- term pension savers to hold equities (“What the toss of a coin reveals about investment decisions”, The Long View, October 29 ). After all, don’t we have 100 years of market data showing that equities outperform over any 20-year period, and that the probability they will underperform decreases in the long run?

https://www.ft.com/content/7cd9b6c8-9cd7-11e6-8324-be63473ce146

The Nobel laureate Paul Samuelson famously suggested a thought experiment on possible outcomes of future equity returns.

Write down on 1,200 pieces of paper the percentage monthly equity returns for the last 100 years and put them in a (big) hat. Pull out of the hat at random 240 pieces of paper, representing possible outcomes over a 20-year investment period. But, crucially, after each draw put the piece of paper back in the hat, so that it can be drawn again, if it randomly comes up. For most 20-year outcomes, equities will certainly beat boring bonds, but there are many where they will lose, and some where they will lose big time.

The higher expected return of equities versus the risk-free bond rate is just the reward for the risk of holding equities, not a “free lunch” or a “loyalty bonus” for long-term investors. If holding equities for the long run really is flipping a coin loaded in your favour, why don’t investment funds provide guaranteed equity outperformance, charging a modest fee reflecting the (supposedly) modest risk?

Zvi Bodie Emeritus Professor, Questrom School of Business, Boston University, MA, US

John Ralfe John Ralfe Consulting, Nottingham, UK

A tribute to John Shuttleworth April 18th 2005 St Giles Cripplegate

John Shuttleworth and I were direct contemporaries at Oxford in the mid-1970s, but our paths didn’t cross – we were at different colleges and reading different subjects. 

We first met at the beginning of 2000 when John was speaking at a Conference.  My first impression of John was that he seemed very large, which I put down to being on the podium. But as got down from the podium to meet people, including me, he seemed even larger.

I had a long meeting with John in the Autumn of 2001, shortly before Boots announced its pension move.  I spilled all the beans over coffee and biscuits in John’s office with the aim of making sure he knew all about things so he could reinforce the Boots announcement.  By that stage I was clear that John’s independence of thought and stature made him a crucial ally. 

John didn’t disappoint and wrote a brilliant piece, which was ready to go to the printers as soon as the news hit the press.  This was very important in those first early days. 

As many of you know John was a huge supporter of what Boots did and spent a lot of time talking to journalists, both initially and over the following months.  What you won’t know is that the day after the news was in the Mail on Sunday and Sunday Times John phoned the Boots’ Finance Director, who was very nervous, to offer his support.  This was very important to me.

This is a real example of John’s generosity, which only comes from a great moral sense.  Over the last 5 years I met John, spoke to him or emailed him at least one a month, sometimes to ask a specific technical question, sometimes to ask for his advice or sometimes just to compare notes.

I didn’t always follow the advice,  but I always listened to what John had to say. I will miss being able to pick up the phone for his wise counsel.

John gave the impression of being detached, not in an aloof way, but in a self contained way.  He was not a great joiner of official bodies – he was not a Committee Man and anyway it would have blunted his influence. 

I don’t know how many of us read the piece on John by Norma Cohen in the Financial Times (not many people get an obituary in the FT), which especially commented on John’s writing.

John wrote like no one else in the pensions world and few people outside it.  I am not sure if the PwC bulletin can continue without him – everyone who read it knew it was the John Shuttleworth bulletin. He wore the breath of his understanding and erudition very lightly, with many historical, literary and philosophical references. I did, however, point out to him on one occasion that alluding to Hegel, Kant and Wittgenstein in the same piece was a bit much, even for him!

In February 2004 John did something which he had previously said he would never do, which is be interviewed by the Financial Times.  As well as talking about the virtues of inflation linked gilts, the importance of considering extreme if rare events, and investing through tracker funds he made sure that the article referred to his copy of Machiavelli’s “The Prince”.  The article concludes, rather disarmingly, that “I normally talk about literature at parties and deny what I do for a living.”

I commented to John that the accompanying Financial Times photograph made him look like a Methodist preacher.

There is a real community of pension enthusiasts, many here today, but I specifically want to mention Zvi Bodie and Jeremy Gold in the US, both of whom had the highest regard for John, with Zvi sharing a platform with him at a recent World Bank Conference in Washington.

Let me quote one of John’s comments on a round robin which had originated with Jeremy Gold and added to by Tim Gordon, Andrew Smith, Charles Cowing and Jon Exley which is typical

“This connects with a book on Freud that I've just finished.  Much of his theory is now accepted to be scientific hogwash.  So why has Freud been so influential and for so long?  Answers:  he wrote beautifully (elegant, accessible metaphors); he purported to explain the most intriguing aspects of our inner lives; and, of course, sex is always titillating to read about.  For my part, I think it's just intellectual laziness.”  
No one could possibly accuse John of intellectual laziness.

John and I did not spent much time talking about death, other than in the context of investment or longevity assumptions.

However, a couple of years ago I saw John shortly after spending the day in Oxford at the Commemoration for Christopher Hill, the historian who was Master of Balliol when I was there.  John being John, of course, knew of Christopher Hill and had read at least one of his books.  The current Master summed up Christopher Hill’s approach as “sceptical, tolerant and a bit bloody-minded”.  John and I agreed this was not a bad epitaph.  Can I repeat this today?  “John Shuttleworth – sceptical, tolerant and a bit bloody-minded.”  Not a bad epitaph.

John Ralfe

“We need tougher new laws to protect pension scheme members” Times Business Comment December 14th 2020

https://www.thetimes.co.uk/edition/business/we-need-tougher-new-laws-to-properly-protect-pension-scheme-members-nvf9rvqk3

Athough the retail group Arcadia, owned by Sir Philip Green’s family, has gone bust, there is good news for its 10,000 pension scheme members. They will go into the Pension Protection Fund lifeboat and receive, on average, about three-quarters of their full promised pension. A handful of very highly paid members will lose more, as the fund payout is capped.

The PPF has taken on 1,000 schemes, with 275,000 members, and has reserves of £5 billion to pay for future bust companies.

To plug the Arcadia deficit, which I estimate is £350 million on a “buy-out” basis, the pension schemes may get some money from second mortgages over the flagship Oxford Circus store in London and a smaller store on Tottenham Court Road but with falling retail property values, how much will be left after meeting the first mortgages?

Sir Philip’s wife, Lady Green, is paying £50 million, agreed as part of a restructuring last year. She also gave a £25 million charge over a loan note, secured on a new distribution centre, but it is unclear how much this is really worth.

The sale price of Arcadia brands, including Topshop, is also unclear and the proceeds will be spread among all unsecured creditors, so pensions will only get a share.

Sir Philip could eventually be strong-armed into writing a big cheque to the pension schemes as politicians are demanding. But he has no legal obligation.

What does Arcadia tell us about the state of pension regulation?

The Pensions Act 2004, defining scheme funding, is deliberately weak. Instead of measuring deficits against a clear and consistent funding standard, and requiring companies to plug them over a set time, it has a DIY funding standard different for each scheme.

The regulator has also made serious errors. In 2013, after political pressure, it dropped its key guidelines, which could trigger an investigation, and also bent its own rules to keep three large schemes going as “zombies” with no company sponsors: Trafalgar House, Polestar and Kodak.

Last year Kodak finally entered the Pension Protection Fund, with an eye-watering £1.5 billion hit, the fund’s largest by a country mile. According to the fund’s figures if the normal rules had been followed in 2013, the hit would have been £900 million, so £600 million, paid by companies through fund levies, is self-inflicted.

Trafalgar House, with a £250 million fund deficit, is now the last zombie scheme standing, but with no sponsoring company making deficit contributions, it is just betting on investment “outperformance” in high-risk assets. The regulator should end this immediately and force it to wind up.

The regulator has just closed a consultation on strengthening pension scheme funding. It wants all schemes to have a “long-term objective” of “self-sufficiency”, so they are not relying on the sponsor for cash payments. These sensible and realistic plans have prompted howls of protests from vested interests in the pensions industry.

A new pensions bill is working its way through parliament, giving the regulator stronger powers, at the margin, to be “clearer, quicker and tougher”. It also makes “wilful or grossly reckless behaviour” towards a pension scheme a criminal offence with a prison sentence of up to seven years, but this is just grandstanding.

We need tough and transparent new laws to properly protect pension scheme members. Pension liabilities and deficits should be measured against market bond yields, and all companies should have to reach 100 per cent funding within a set number of years, with shorter periods to reach 80 per cent and 90 per cent.

Most importantly, government must be prepared to back the regulator to the hilt when it makes “unpopular” decisions, as opposed to the current shilly-shallying.

“The pensions prophets 10 years on” by Barry Riley FT April 23rd 2007 (“Exley, Mehta & Smith”)

FT REPORT – FT FUND MANAGEMENT: April 23rd 2007

The pensions prophets 10 years on

By Barry Riley

The so-called “EMS” paper presented to the Institute of Actuaries in London 10 years ago, on April 28 1997, blew the gaffe on a whole era of actuarial practice in relation to corporate pension funds in the UK. A decade later it can clearly be seen as truly revolutionary.

The paper, The Financial Theory of Defined Benefit Pension Schemes, was put together by experts with the eponymous three letters starting their names: one, Jon Exley, was a practising pension consultant; Shyam Mehta was at that time a corporate financier at Merrill Lynch; and the third was a more general actuary, Andrew Smith.

Using rigorous analysis they prised open the confined world of pensions actuaries. But the about-to-be-appointed chancellor of the exchequer, Gordon Brown, was plotting to tax dividends received by pension funds. Just over two months later he pounced.

In the course of the long equity bull market (which at that stage had been running for 15 years) actuarial valuation methodology, which was based primarily on equity income growth, had generated enormous “surpluses”.

Half of corporate sponsors had either reduced the level of contributions into their schemes or had cut them out altogether because adding to surpluses was regarded by the Inland Revenue as tax avoidance. Pension schemes had carelessly disobeyed the unwritten law of pension funding: never declare a surplus. But even though the bull market in equities was still in full swing in 1997, the EMS trio demolished the British actuaries’ obsession with the merits of the equity asset class as a painless way of funding pensions. They showed there was no reliable historical correlation between dividends and employee earnings – the latter being the key determinant of final salary-linked liabilities.

Investment strategy, they said, should ideally be based on index-linked and fixed coupon British government securities, with only a small role for equities. And a scheme’s investments should be marked to market, not valued according to an artificial long-term formula.

At the time all this defied the consensus. Behavioural dynamics are powerful. Equities accounted for about 75 per cent of pension fund portfolios, and pension consultants and the asset management industry were entrenched in their views.

It took several years for the old system to begin to unravel. The equity boom rolled on for a while (but simultaneously bond yields tumbled with ominous, but ill-understood, implications for pension scheme solvency). In the end, there was a spectacular flip of the consensus.

The well-known first mover was the Boots scheme, with a 100 per cent switch to bonds in 2001, influenced by John Ralfe, then the company’s in-house corporate finance adviser. He points out that like the EMS authors he was focusing on the combined interests of the pension scheme and its sponsor, rather than on the scheme in isolation. The current fashion for liability-driven solutions is rather different, being fund-centred, although it also leads from equities to bonds. At any rate, last year UK pension funds and life companies were net sellers of £29bn of UK equities and net buyers of more than £70bn of fixed income securities.

Actuarial historians will no doubt debate the reasons for the profession’s errors. They may conclude that it was unfortunate that pension actuaries sought to protect defined benefit schemes by hiding the true costs and risks from sponsors and trustees.

Ironically, the three authors claimed in their paper that it was their ambition to rescue UK defined benefit pension schemes from the consequences of sponsoring companies becoming unexpectedly aware of their true risks – including the extra regulatory burdens then recently introduced under the Pensions Act 1995. Unfortunately, this aim failed. Within a few years of 1997 most defined benefit schemes had been shuttered to new members. Today more and more are being closed to the accrual of benefits by existing members and specialist buy-out companies are clustering to offer sponsors a final exit.

Could more defined benefit schemes have been saved? Last week Jon Exley, now at Barclays Capital, said that sponsors and trustees had not moved fast enough.

I concluded my column 10 years ago with the comment that if an incoming Labour government were to attack dividends the actuarial profession would find itself in urgent need of new valuation methodology.

But what has actually transpired has been even worse for the profession: the new techniques have subsequently been imposed from the outside by accountants and regulators.

 

“Make public sector pensions fairer and save taxpayers money” Times Money Comment May 30th 2020

https://www.thetimes.co.uk/edition/money/make-pensions-fairer-and-save-taxpayers-money-tw6vqt6qf

 How will we pay the huge bill for easing the impact of the COVID-19 pandemic?  More borrowing, higher taxes and lower public spending look inevitable.

The chancellor could save big money by making public sector defined benefit (DB) pensions less generous – and this would narrow the gulf between public and private sector pensions.

Private sector DB pensions, inflation-linked pensions for life based on salary and the number of years worked, are all but dead. They have been closed to new employees for many years. Marks & Spencer, Tesco, Royal Mail and even John Lewis have replaced DB pensions with much less generous defined contribution (DC) pensions, a glorified savings scheme, leaving all the investment and longevity risk with employees.

Public sector DB pensions, meanwhile, are flourishing with more than six million employee members and all schemes — NHS, teachers, civil service, armed forces,  and local government — open to new members.

Although the coalition government changed public sector pensions in 2015, this did nothing to reduce the annual cost to taxpayers. The changes raised the normal retirement age in most schemes to match the rising state pension age, as well as basing the pension on a person’s “career average” earnings, not their final salary. But these savings were wiped out by the higher pension earned each year. The government added insult to injury by claiming the changes should last for 25 years.

How much do new public sector DB pension promises cost taxpayers each year?

The annual cost of a DB pension depends on the level of long-term interest rates – if interest rates go down, pension costs go up, if interest rates go up, pensions costs go down. Annual costs for private sector DB pensions, based on long-term corporate bond interest rates, have been included in company accounts for many years. Public sector pension scheme accounts also include annual costs, albeit buried in footnotes.

Taking the NHS as an example, for 2015/16 – the first year of the new pension terms – the total cost of new pension promises was 36 per cent of salary, a cost to taxpayers of 26.5 per cent of salary, after 9.5 per cent member contributions. Four years later in 2019/2020 the total cost has gone up to around 50 per cent of salary – because of lower interest rates – costing taxpayers 40.5 per cent of salary, after  member contributions.

The annual cost to taxpayers has ballooned from 26.5 per cent to 40.5 per cent of salary, £11.2 billion to £18.9 billion.

In the four-years from 2015/16 to 2019/20 the total cost for all public sector pensions – NHS, teachers, civil service, armed forces and local government – has gone up from around £51 billion to £71 billion.  After member contributions, the cost to taxpayers has gone up from about £40 billion to £60 billion.

These costs are there if you know where to find them – they are included in individual public sector pension scheme accounts, and the totals are in another Treasury document. But they are ignored by the Treasury and Office for National Statistics; successive governments have conveniently fiddled real pension costs for the last 20 years.

It means that this generation of taxpayers are not paying the full costs of the public services they use, but passing them on to their children and grandchildren. The government should make annual pension costs crystal clear to taxpayers and use the real costings for all decision-making.

So how should the government make savings on public sector pensions, while protecting the lower-paid? My suggestion is that it should reduce  the annual value of all public sector DB pensions to an 80th of the salary, with increases at inflation. This would be on the first £30,000 of salary  — protecting the-lower-paid — with DC pensions on any pay above this. Member contributions would remain unchanged. Even with these changes public sector pensions would still be much more generous than most private sector DC pensions.

MPs, who get a pension costing around £32,000, taking their salary and pension to more than £114,000, should move entirely to DC. It would help them to live in the real world of DC pensions, not a gold-plated DB pension guaranteed by taxpayers, enabling them to understand their constituents’ pension worries.

These changes would save around £20 billion a year, reducing the annual cost to taxpayers from £60 billion to £40 billion. They would also begin to bring public sector DB pensions more in line with private sector DC schemes. And make public sector pensions more sustainable – if we do not make controlled changes today, DB pensions may end up being scrapped altogether.

 John Ralfe is an independent pension consultant

 

 

 

 

 

My principles for regulating UK DB pensions May 2020

My principles for UK DB pension regulation are very simple:

1 The “Technical Provisions” liabilities should be calculated using a AA corporate bond rate, with tPR posting the required AA  yield curve to 30 years plus, each month.

2 To protect the PPF, there should be an underpin, so the TP liabilities can be no less than the  PPF S179 liabilities.

3 All companies must agree to deficit contributions over no more than 10 years, which have a PV of the deficit, and with no backloading.

4 Any company which wants more than 10 years – very strong or very weak sponsors- should have to justify this on a case-by-case basis with tPR.

FT letter April 6th 2020 “Companies are right to batten down the hatches”

https://www.ft.com/content/b66d0924-759d-11ea-ad98-044200cb277f

Instead of being cross that companies are stopping dividends, retail shareholders should be pleased they are battening down the hatches in these extraordinary times. If retail shareholders need cash, then just sell some shares, which should be worth more with no dividend (“cum dividend” and “ex dividend”).

Sadly, the whole investment industry peddles the dishonest idea that shares held for the “long run” are like “magic bonds” — paying an (increasing) annual cash dividend, and can then be sold at more than the original cost. Perhaps stopping dividends will force retail investors to realise the risk of holding equities versus bonds — dividends may be cut and the capital value may fall. Investors should also ask their fund managers exactly what they are doing to earn their generous fees.

And anyone who still thinks equities always outperform bonds “in the long run” should look at Japan, where the Nikkei index is less than half its peak value over 30 years ago.

“It’s time MPs joined the real world of pensions” Times Business Comment March 12th 2020

https://www.thetimes.co.uk/edition/business/mps-pension-scheme-is-in-huge-deficit-it-s-time-they-join-the-real-world-kh2wn7jrf

The Independent Parliamentary Standards Authority  has just awarded MPs an annual pay rise, boosting their headline salary to £82,000.  The prime minister, the leader of the opposition, ministers and some others are paid more.

Many people think that this isn’t enough and many more think that it’s far too much. But in thinking about MPs’ pay, don’t forget their generous inflation-linked defined benefit pensions.

The latest published accounts for the MPs’ pension scheme — March 2018 — show an official cost to taxpayers of 12.9 per cent of salary, after 10.6 per cent contributions from MPs. This means that their new pay and pension is £92,500 — £82,000 salary and £10,500 pension.

But the small print in the accounts shows the true cost to taxpayers, using the IAS19 AA corporate bond rate, required for all private sector pensions.

Surprise, surprise, the annual cost is not 12.9 per cent of salary but a whopping 39.4 per cent, so MPs’ new pay and pension is really £114,300 — £82,000 salary and £32,300 pension —  much, much higher than the official amount.

Most public sector pensions, including for the NHS, teachers, civil servants and the armed forces, are unfunded, with pensions paid from annual taxation. But the MPs’ pension scheme is funded, like private sector schemes, with £671 million of assets at March 2018, including, astonishingly, £80 million  of junk bonds.

Is there a deficit in the scheme?

The latest valuation by the government actuary, in April 2017, shows £598 million  of liabilities against £665 million  of assets — a healthy £67 million  surplus. Not only is there no need for any deficit contributions but the surplus is being used to reduce annual cash contributions. But footnotes in the scheme accounts show £941 million  IAS19 liabilities at April 2017 —  a £276 million  deficit, not a £67 million  surplus.

The actuarial value of MPs’ pension liabilities is entirely made up and manages to magically shrink the IAS19 liabilities by more than a third. This is not a small technical difference of opinion but a grotesque order of magnitude. If this was a private sector scheme, subject to the Pension Regulator’s authority, the regulator would have refused to approve the valuation point blank.

To plug the £276 million  deficit over seven  years — the average recovery period for private sector schemes — means taxpayers putting in £40 million a year. Paying this, plus the real annual cost of new pension promises, would lead to a public demand to close the scheme.

The Cabinet Office, IPSA, the government actuary and the scheme trustees are all to blame for understating annual costs, the deficit and the annual cash contributions needed. But it is certainly convenient for MPs and ministers, who continue to get generous defined benefit pensions without voters even really noticing, let alone objecting.

As long ago as 2013 the Tory  MP Harriett Baldwin, a former minister, argued that MPs should move from defined benefit to defined contribution pensions, and she is spot on.  Despite turkeys and Christmas, MPs should vote to close their defined benefit pension scheme and move to a defined contribution pension. Taxpayers would still be on the hook to pay the huge deficit.

As well as making pension costs crystal clear, living in the real world of a defined contribution  pension — not a gold-plated defined benefit  pension guaranteed by taxpayers — would help MPs to understand their constituents’ pension worries.

Perhaps the new leader of the Labour Party, whoever that may be,  will champion this reform?

 

 

 

 

“Flat-rate tax relief would encourage pension saving” (FT letter February 29th 2020)

https://www.ft.com/content/70cbe572-0a02-11ea-bb52-34c8d9dc6d84

Hats-off to Merryn Somerset Webb for reminding us that the purpose of pension tax relief is to encourage people to save enough for a half-decent retirement, not to provide a (generous) subsidy to high earners who can look after themselves (“Pensions tax relief on a slippery slope”, February 22  https://www.ft.com/content/e8eba21d-234c-4fad-874d-92b4f31acf48)

The best way of doing this is to move to a flat rate of tax relief, at say 30 per cent, on all annual pension savings. This is efficient, encouraging the lower-paid, including part-time workers, to save for their pensions, and also helps close the “gender pension gap”. It is also fundamentally fair. The current system is biased in favour of the minority paying 40 or 45 per cent income tax — for each pound saved they get a much bigger end-to-end tax benefit than people paying 20 per cent basic rate tax. Implementing flat-rate for both defined contribution and defined benefit is simple: individual tax codes would be moved up or down to give the correct top-up.

It also cuts through the Gordian knot of the current complex pension tax rules. The “annual allowance” and the “taper”, affecting very high earners with generous defined benefit pensions — especially National Health Service consultants — would be scrapped, along with the “lifetime allowance” for future pension savings.

 

 

Times Money column “Why, and how, to move to flat-rate pension tax top-up” January 25th 2020

“Flat-rate tax top-up for pensions is fundamentally fair, efficient and means many of the existing rules can be scrapped”

In the run-up to his first Budget, many people are hoping that Sajid Javid will sort out the mess of tax rules on pension savings.

At a technical level, the tangle can be easily untangled – simply move to a flat-rate of tax top-up, for all pension savings, both defined contribution and defined benefit. The rate would be set to be neutral for the Chancellor – say 30 per cent – and would apply to total employee and employer pension savings.

A flat-rate system is fundamentally fair, because every taxpayer gets the same percentage tax top-up for each pension pound saved. It is also efficient, encouraging the lower paid, including part-time workers, to save for their retirement and helps close the “gender pension gap”.

It also cuts right through the Gordian knot of tax rules for the top 1 or 2 per cent of very high earners – especially NHS consultants – which we have heard so much about recently.

 But flat-rate has winners – the 80 per cent of people earning less than £50,000, paying 20 per cent basic rate income tax, who could get a bigger top-up, and losers – the 20 per cent earning over £50,000, paying 40 per cent higher rate income tax, who would get a smaller top-up.

At the moment, people receive a tax top-up on pension savings at their marginal tax rate, with tax free investment returns. At retirement, a quarter of the pension can be taken tax free, with the other three-quarters taxed at the marginal rate.

But this system is heavily biased in favour of higher rate 40 cent taxpayers – for each pension pound saved they get a much bigger end-to-end tax benefit than basic rate 20 per cent taxpayers, and is inefficient, encouraging pension savings by the higher, not the lower paid.

The rules limiting pension tax relief are complex for the top 1 or 2 per cent of earners – those with incomes, including pensions, over £150,000 a year. Some hospital consultants are refusing to do extra shifts over their contracted hours and the doctors’ trade union, the British Medical Association, has been furiously lobbying for these rules to be scrapped.

Someone now earning £30,000, saving 15 per cent of salary into a defined contribution pension – say 5 per cent their own contribution and 10 per cent employer contribution – is saving £4,500, so currently gets a 20 per cent tax top-up of £900. With flat-rate they would get a 30 per cent tax top-up of £1,350, or £450 more.

The mechanism to do this is very simple, their £12,500 personal allowance – how much they can earn tax free – is just moved up by £2,250 to £14,750, reducing tax payable by £450.

Someone earning £60,000, also saving 15 per cent of salary in their pension, is saving £9,000 and now gets a 40 per cent tax top of £3,600. For each pension pound saved they get double the top-up of the 20 per cent taxpayer.

With flat-rate they would get a 30 per cent tax top-up, £2,700, or £900 less. Their personal allowance is moved down by £4,500 to £8,000, increasing their tax by £1,800. This effectively pays the higher tax top-up for two people each earning £30,000.

The same flat-rate mechanism of adjusting the personal tax allowance would apply to defined benefit pensions – based on salary and years worked— rare as hens’ teeth in the private sector, but standard in the public sector.

Public sector defined benefit pensions are much more generous than private sector defined contribution, so the annual pension saving – the employee and employer contribution – is much higher – around 30 per cent of salary, and the impact of 30 per cent flat-rate top is also much higher.

With flat-rate, the “annual allowance” and “taper”, affecting very high earners with generous defined benefit pensions – especially NHS consultants – would be scrapped, along with the “life time allowance” for future pension savings.

Tax free investment returns, income tax on pensions and 25 per cent tax free would be unchanged.

People could choose how much to save in their pension. Some highly paid public sector workers, especially NHS consultants,     who expect to pay 40 per cent tax in retirement, won’t want to save into a pension, even taking tax free returns and 25 per cent tax free into account.

To give them flexibility, public sector pension scheme rules should be changed to allow people to opt out and receive higher pay instead, and pay income tax and national insurance.

Moving the highest public sector earners away from defined benefit pensions also starts to close the (unsustainable) gulf with private sector defined contribution, and reduces the bill we are passing on to our children and grandchildren.