Gordon Brown has become embroiled in an unprecedented row with business
leaders who effectively accused the Government yesterday of trying to lie
its way out of the pensions furore.
As the Chancellor maintained his silence on the issue, the Confederation of
British Industry went on the offensive, saying it was “completely untrue”
that it had ever supported the hugely controversial £5 bil-lion-a-year tax
raid on pensions in Labour’s first Budget in 1997. The extraordinary row is
a blow to the Chancellor’s long-fought-for reputation as a friend of
business.
Ed Balls, the Treasury Minister and close ally of Mr Brown, had to issue a
statement retracting claims that he made on Saturday that the CBI fully
supported the move to cut tax relief on dividends paid to pensions. The
Treasury then became embroiled in a second spin row after it changed its
story on why it released highly damaging reports about the tax move late on
Friday while Parliament was in recess.
Treasury officials denied trying to bury bad news and told journalists that
they had to issue the papers before an Information Commission tribunal
yesterday. When it was pointed out that there was never going to be a
tribunal yesterday, they claimed that the papers were issued at the first
opportunity.
The Treasury published the advice that Mr Brown was given by officials about
the potentially disastrous consequences for pensioners of the tax increase
after a two-year freedom of information battle by The Times. A new
analysis by the accountants Grant Thornton shows that the tax rise has so
far cost Britons with private pensions £60 billion, or £3,000 each. The
analysis predicts that it will have cost pensioners £200 billion by 2017, or
£10,000 per person.
In a further twist last night it emerged that the Prime Minister had doubts
about the policy but allowed it to go through to avoid a confrontation.
Derek Scott, a former economic adviser to Tony Blair, told The Daily
Telegraph: “We knew that some people in the Treasury were very nervous
about it . . . and I personally was opposed to it as well.”
The source of the original idea remained unclear, with Lord Burns, the
Permanent Secretary to the Treasury at the time, saying that it came from
outside, although the Treasury was not against it.
Mr Brown let Mr Balls defend the move on BBC Radio on Saturday, when he
claimed: “In 1996 the CBI said to us you haven’t gone far enough, you have
to act in a decisive way in the long-term interests of British companies and
British investors.”
The claim brought a furious coordinated response from Richard Lambert, the CBI
Director-General, and Lord Turner of Ecchinswell, who held the post in 1997.
Mr Lambert told journalists: “This is a convenient bit of spin by the
Treasury.” His press officers sent out their policy documents at the time,
showing their opposition to the move.
Lord Turner, who is also head of the Low Pay Commission, interrupted a holiday
in France to speak to the BBC. “As the CBI has already made clear, at no
time whatsoever did the CBI support the policy of removing the dividend tax
credit,” he said. “And when the change was introduced in the 1997 Budget, I
wrote to the Chancellor expressing our disagreement.”
Mr Balls then changed tack, issuing a statement saying that senior members of
the CBI had asked for the change, but conspicuously not claiming it was CBI
policy. “Senior CBI members pressed us on this issue in 1996, including at a
meeting of the CBI president’s committee,” he said.
Lord Turner insisted: “It should be clear to the Treasury that there is a
distinction between an individual person who happens to be a member of the
CBI saying something and CBI policy. The CBI has never argued for that
policy exchange.”
George Osborne, the Shadow Chancellor, said: “Ed Balls and Gordon Brown have
been caught red-handed trying to claim support for one of the worst
decisions ever made by a British chancellor . . . This is desperate
bully-boy tactics.”
Mr Brown, who was holding meetings in the Treasury yesterday, will face
journalists for the first time since the row broke at the launch of the
Scottish and local election campaign today.
Mr Blair’s official spokesman said that he fully backed the original decision.
The £5 billion raid: are you out of pocket?
— There are more than 14 million people with company and personal pensions in
Britain
— The tax raid means that the funds of money-purchase pension investors are,
on average, each worth between £3,500 and £4,000 less
— Employers who run final-salary schemes have had to pay this much more over
the past ten years for each employee
— Fred Smith A civil engineer, aged 64 in 1997
He converted his pension fund into an annuity when he retired a year later.
The feared fall in fund values on the back of the announcement failed to
materialise as the stock market stayed robust throughout 1997 and 1998. He
was one of the lucky ones and did not feel the full effect of the scrapping
of tax relief on dividends paid into pension funds
Effect Marginally worse off
— David Green A banker, aged 60 in 1997
He had a money-purchase pension fund worth £200,000. This was 60 per cent
invested in UK equities. He started taking income drawdown from his fund in
July 1997, rather than buying an annuity. The loss of the tax credit cost
his pension fund £980 in investment growth. He has been drawing out 5 per
cent of his original investment in the form of drawdown income. An income
drawdown pension is a type of flexible pension. At retirement, it allows the
pension holder to leave their fund invested and take withdrawals from it
instead of buying an annuity
Effect His pension fund is now worth £11,000 less than it
would have been without the tax change
— Samantha Jones Aged 45, she is a legal secretary
Her contribution rate to her final-salary scheme has stayed the same at 6 per
cent of earnings. However, the scheme has now closed to new entrants and her
employer has had to increase the contribution rate into the scheme by 0.5
per cent, just to offset the loss of the tax credit
Effect Mrs Jones and her colleagues have all suffered lower pay rises
in recent years
— William Lloyd Aged 40, he is an estate agent
He puts money into a self-invested personal pension and has amassed a fund of
£78,000. His pot of money is worth about £5,000 less than it would have been
without the tax change
Effect Mr Lloyd has to increase his pension contributions by about 10
per cent to compensate for the loss
— Reka Shah Aged 25, she is a secretary
She is about to begin contributing to her company’s pension scheme and has
never made pension provision before. It is a money-purchase scheme with a 3
per cent employer contribution. She will be invested 100 per cent in
equities, 50 per cent UK and 50 per cent overseas. After the tax changes,
her pension will grow by about 0.5 per cent per year less than would
otherwise have been the case. Her required contribution rate to provide a
pension of around 50 per cent of earnings at retirement would have been 11
per cent
Effect The tax change means Miss Shah should instead contribute around
13 per cent of her earnings
Source: Hargreaves Lansdown The case studies are fictional and intended
only to be examples of different scenarios
