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 LONDON 00001265 001.2 OF 002 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 LONDON 00001265 002.2 OF 002 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. Visit London's Classified Website: http://www.state.sgov.gov/p/eur/london/index. cfm Tuttle