CHANCELLOR BROWN'S REPUTATION FOR FINANCIAL

C O N F I D E N T I A L SECTION 01 OF 02 LONDON 001265

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/02/2012
TAGS: ECON PGOV UK
SUBJECT: CHANCELLOR BROWN'S REPUTATION FOR FINANCIAL
STEWARDSHIP AND PROBITY SHAKEN BY PENSIONS ROW


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Classified By: Economic Minister Mark Tokola for reasons 1.4 (b) and (d
).


1. (C) Summary: Gordon Brown's expected procession from 11
to 10 Downing Street hit a pothole over the weekend. "The
Times" newspaper won a long Freedom of Information battle and
published documents showing Brown had been warned by Treasury
staff against removing tax breaks favorable to pension funds
when he published his first budget in 1997. The tax changes
are blamed, along with other factors, for a growing liquidity
crisis in UK pension funds, and a decline in the generous
defined-benefits packages. Compounding the problem, Brown
lieutenant Ed Balls said the decade-old decision was backed
at the time by the main employers association, the
Confederation of British Industry (CBI). The CBI's current
and then-directors have flatly denied the assertion, and have
documentary evidence to back them up. Brown, in Afghanistan
when this "slow news day" story broke, will now return to
embarrassing Parliamentary hearings, and a possible Labour
leadership battle because of it. He reportedly plans to cut
short his IMF meetings in Washington to prepare for a
Parliamentary statement. End Summary.

Revisiting a Decade-Old Decision


2. (U) Soon after the 'Freedom of Information' Act came into
force in the UK, in January 2005, "The Times" newspaper
requested the official Treasury advice given to Chancellor
Gordon Brown back in 1997, prior to the first Budget he ever
delivered in June of that year. In that budget, Brown made
the controversial decision to abolish the tax relief given to
occupational pension funds, at an immediate cost to the
industry of GBP 5 billion per year. Dire long-term
consequences were also predicted by industry and by the City.
Ten years on, critics say that they have been proved right:
that the UK pensions industry is in crisis and that much of
this can be traced back to the Chancellor's decision.


3. (U) What "The Times" wanted to know was whether Brown's
own advisers warned him at the time of the likely damage this
would do to the UK pensions industry. For two years - from
2005 until last weekend - the Treasury battled to have that
advice kept secret. A tribunal hearing was set to decide the
matter next month, on May 3 or 4 -- an inconvenient date for
the Government as it coincides with this year's local
government, Scottish Parliament, and Welsh Assembly
elections. The Labour Party is expected to sustain heavy
losses in all three. However, last Friday April 30 at
3.30pm, with Parliament in recess, MPs out of London, and
much of the UK already on its Easter break, the Treasury
unexpectedly decided to release the papers, leading to
accusations that the Chancellor has been attempting to bury
bad news.


4. (U) According to "The Times", the released papers show
that Brown was indeed warned of the substantial risks of
going ahead with the scrapping of tax relief on pension
funds. Reportedly, the Financial Institutions Division of
the Treasury warned the Chancellor that, despite healthy
surpluses, pension funds might not be able to absorb the "big
hole" caused by the scrapping of tax relief. The Division
went on to say that future benefits could be also be reduced,
with employers having to contribute between GBP 3 and GBP 10
billion pounds a year more to make up the shortfall, that
pensioners might lose some of their income, and that some
pension schemes might fold.


5. (U) Ten years later, there is no doubt that confidence has
been eroded in the UK's pensions system (although arguably
other factors are just as much to blame, such as an ageing
population, the dotcom bust, and market decline).
Nevertheless, Brown's decision is estimated to have cost the
UK pensions industry between GBP 50 and GBP 100 million, and
is cited as being directly responsible for the decision by
many firms to scrap the more lucrative 'final salary' pension
schemes (i.e., full pay, inflation adjusted) that used to be
offered to employees.

Political Fallout


6. (U) Brown has yet to comment. He was in Afghanistan the
day the story broke. Instead, his chief advisor at the time
(now a Government Minister),Ed Balls, defended the decision
publicly saying, "senior Confederation of British Industry
members pressed us on this issue in 1996, including at a
meeting of the CBI president's committee." But Balls'
comments have only escalated the row, with the CBI accusing
the government of "spin," and current CBI Director General
Richard Lambert saying "there is no record of any kind that
we lobbied for this and there is no record because we

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objected strenuously to the policy." His predecessor, Lord
Turner, also refuted Balls' claim and produced a formal
Budget submission from the time, documenting their
opposition.


7. (C) Comment. The row has fuelled speculation that
Brown's misstep will impel other would-be candidates within
his party to challenge his succession to Tony Blair. And he
also faces the possibility of an embarrassing Commons debate
on the issue, launched by the Conservatives. We have heard
from the Chancellor's staff that he plans to cut short his
visit to Washington for the annual IMF meetings in order to
prepare a Parliamentary statement to be delivered Monday or
Tuesday April 16-17. Brown's enemies - both inside and
outside his Party - hope that this will damage his so-far
impeccable reputation for sound financial management of the
economy, and will do their best to ensure that it dogs him
over the coming months.

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