In the months before Labour’s landslide election victory in May 1997, a
shadowy group of politicos gathered for clandestine meetings in one of
London’s smartest hotels. What they were hatching would profoundly affect
millions of British companies, investors and workers over the next decade.
The “hotel group” – so called because it met in a suite of the Grosvenor House
hotel, overlooking Park Lane – was headed by Geoffrey Robinson, the Coventry
MP and multimillionaire businessman. At the time, Robinson was the right
hand man and chief cheerleader for Gordon Brown, the then shadow chancellor.
His team included Ed Balls, Brown’s main adviser, and other top aides.
Occasionally it included Brown himself.
The group was preparing the ground for Brown’s guerrilla raid on the Treasury
immediately after Labour’s expected victory.
With the help of Arthur Andersen, the accountancy firm, three of Brown’s most
controversial policies – to be announced in his first budget in July 1997 –
were put through the wringer. Robinson, who became paymaster-general after
the 1997 victory, presided over every detail of the discussions.
The first of the secret plans was the decision to make the Bank of England
independent. The second was the windfall tax on the privatised utilities
which raised £5 billion in Brown’s first few months as chancellor. And the
third – and most controversial – was a £5 billion annual raid on Britain’s
pension funds.
The aim of the tax raid on pension funds was simple: to raise a lot of money.
“The corporate sector would have to bear the brunt of the inescapable
necessity to raise taxes,” Robinson recalled after he stood down as a
minister. “That was our starting point and we set a target of increasing
revenues by £5 billion per annum.”
For years Brown has denied that basic fact. He has insisted that Britain’s
pension woes had nothing to do with his policies. Yet the system of company
pensions that he inherited was the envy of Europe.
Now it is in crisis and Brown has been forced to release documents showing
that he was warned by his own officials about the damaging consequences of
his policies.
“It bears out what we’ve been saying all along,” said Thomas Waugh, 67, from
Tamworth in Staffordshire, who worked at F H Burgess, the agricultural
machinery firm, and had his pension cut dramatically although the company
remained solvent.
“The actions of the chancellor when he imposed taxes on pension funds played a
major, major part in weakening the pension schemes. I feel angry because to
me it seems so cynical that this action was taken although they realised
what the effects would be.”
Late on Friday afternoon, with Brown thousands of miles away in Afghanistan,
the Treasury posted some documents, without fanfare, on its website. The
publication of the Treasury’s official advice on the 1997 pension tax raid
followed a two-year campaign by The Times and its lawyers, who ran up
against determined Whitehall obstruction.
The Treasury first claimed that the documents should remain secret under a
clause in the freedom of information legislation which means that policy
advice does not have to be disclosed. When the information commissioner
ruled against this defence last summer, saying that the release of the
documents was in the public interest, the Treasury still prevaricated.
A new hearing was due to take place in a month’s time. Ironically, the
decision to publish on Friday may have been because the Treasury was
intending to use Lord Turnbull, its former permanent secretary, as a
witness. Last month he hit the headlines by attacking Brown’s “Stalinist”
approach.
Even when the decision was taken to release the documents, the hope in Brown’s
inner circle was that they would not generate much coverage because of the
timing of their release. Such hopes were misplaced. Several newspapers led
their front pages yesterday with the news that the chancellor had been
warned of the consequences of his tax raid.
Those warnings took several forms. Officials said the stock market could fall
by between 6% and 20% as a result of the change; that the value of pension
funds could drop by £50 billion; that pension schemes would need an extra £3
billion to £4 billion a year to meet their commitments; that future pension
benefits would suffer; and that it would accelerate the closure of final
salary schemes, in which pensioners receive a fixed proportion of their
salary at retirement.
Brown was also warned by the Inland Revenue, taking advice from the
government’s own actuaries, that the change would “make a big hole in
pension scheme finances”, causing a shortfall of up to £75 billion and
hitting hard 8m of the self-employed and others in noncompany private
pensions. It would also pose problems for local authority finances, the
official advice said, requiring councils to find extra funds to top up their
pension schemes.
“The government was warned but they seemed more concerned that people in the
industry would complain,” said Mike Warburton of Grant Thornton, the
accountants, one of the expert witnesses in the legal battle to get the
documents released.
“This was a tightly made decision by a tight cluster of people, without proper
regard for the huge number of people in this country saving for their
retirement. In financial terms, there is nothing more important than saving
for retirement. To introduce such a measure without proper debate is
extraordinary and totally unacceptable. All they were worried about was
being able to announce the budget and get away with it.”
What is not clear from the documents is whether officials advised that the
policy should be scrapped. Precise policy recommendations at the time have
been kept secret, although one piece of advice, that the change should have
been phased in, was published. That advice was ignored.
Most of the consequences warned of by the Treasury and Inland Revenue
officials came about. The stock market did not immediately fall but when
global stock markets plunged in 2000, the folly of raiding pension funds was
exposed.
Meanwhile, as officials had warned, firms were forced to cough up billions
more to top up their pension schemes; the closure of final salary schemes, a
trickle in 1997, turned into a flood; and millions of people were left with
much less generous pensions than they had been banking on.
Balls, now a junior Treasury minister, insisted that the tax change was not to
blame for subsequent pension woes.
“The reason why subsequently we had more pressure in pensions has been because
of the £250 billion fall in the stock markets, plus the evidence that people
are living longer, plus the evidence that at that time in 1997 companies
were not making the kind of provision which they needed to make, given those
pressures,” he said yesterday.
Such claims carry little weight with Brown’s critics. Ros Altmann, a former
pensions adviser to Tony Blair, insisted that Brown’s tax changes had
started the rot from which Britain’s pensions have never recovered.
“This chancellor will go down in history as the one who destroyed our pensions
system,” she said. “He just ignores what he doesn’t want to hear, then tries
to cover up the consequences and hide it from everybody. I think Blair will
be furious. But at least people are finally starting to rumble Gordon Brown
and it serves him right.
“He clearly decided pension funds were a ripe target, but this was completely
irresponsible government. It put final salary schemes at risk. They were
warned this would happen and the predictions have come true. Brown knowingly
destroyed what was once one of the great pension systems in the world and he
did it deliberately.”
Derek Scott, Blair’s Downing Street economic adviser up until three years ago,
said the prime minister should have challenged Brown on the tax raid but did
not. The chancellor, as was customary, kept his cards close to his chest and
did not reveal the advice of his own officials.
“I doubt very much he was given the full picture or warnings,” he said.
“It was a hell of a job to get anything out of the Treasury even at that
time. It was presented to No 10 as a way of removing a tax distortion and
the effects wouldn’t matter as the stock market was pretty buoyant. But it
was a mad thing to do. There was a half-hour discussion about it at the time
but Blair was clearly not prepared to take it on.”
For Brown, two years of delaying the release of the documents means his secret
is out at the worst possible time. After the Tories labelled last month’s
budget “a con”, the Treasury documents show that in Brown’s desperation to
raise cash he was willing to jeopardise people’s pensions.
“All the problems with pensions are Gordon Brown’s,” said Andrew Parr of
Minster, Kent, who was a steelworker for Allied Steel and Wire at Sheerness
for 20 years before being made redundant in December 2002. He was expecting
a pension of £15,500; instead he received £7,000.
“He took a pension scheme that was the envy of the world and in 10 years
turned it into a basket case. Actually, he didn’t take 10 years, he took
about a month, but it’s taken 10 years to spot what he’s done. Even the
timing is cynical. He waited for parliament to be in recess and he’s in
Afghanistan. He’s never here on a bad news day. He’s an incredibly cynical
chancellor. He ignored the advice of his own people.”
On the eve of what was supposed to bea seamless transfer of power from Blair
to Brown, things are going badly for the chancellor. Voters see him as a
politician who has taxed them hard to pump billions of pounds into public
services to achieve scant improvements. Increasingly, in the light of the
latest revelations, they must also regard him as devious and cunning. Having
raided pensions so transparently, that is the last thing he can afford.
The warnings Brown ignored
Warning There will be a “big hole” in pension finances. Result
The pensions black hole of Britain’s top 100 companies now stands at £32
billion.
Warning Employers may have to “fork out” additional contributions. Result
Leading companies are now paying at least £5 billion a year extra to cut
pension deficits.
Warning The shift away from final salary pensions “might accelerate”. Result
In 1997, 90% of company pension schemes were final salary. Two-thirds of
such schemes are now closed to new members.
Warning The local government pensions scheme, with 1.3m members, will
require extra contributions. Result More than a quarter of council
tax bills now go towards pension payments.
Warning The change will lead to “a reduction in pension benefits for
the lower paid”. Result The government has been forced to
increase the pension credit for those on low incomes.
