The man who stole your old age: How Gordon Brown secretly imposed a ruinous tax that has wrecked the retirements of millions



Gordon Brown's trusted lieutenants gathered round their leader in the plush penthouse suite of the Grosvenor House Hotel on London's Park Lane.



Room service was kept busy and the alcohol flowed as the select handful of politicians and advisers surrounding the then Shadow Chancellor met regularly in the crucial weeks leading up to the General Election of May 1997 to plot the economic future of Britain.



One of the gang, the wealthy Labour MP and businessman Geoffrey Robinson, was picking up the tab but it was Brown who was calling the shots. Meetings like this reflected how he liked to work - in absolute privacy and with the total loyalty of a tightly-knit group of like-minded associates.



Stand and deliver: Gordon Brown is the man who destroyed what was once the world's best pension system



With the likes of the ambitious Ed Balls and the abrasive spin-doctor Charlie Whelan, these were 'blokey' occasions, but between the political gossip and the talk about football, the serious issues they decided on would profoundly affect millions of British companies, investors and workers for years, even generations, to come.



The Brown cabal needed to find ways to raise extra tax revenues for the wide-ranging programme of reforms New Labour planned.



So, on one fateful night in that suite overlooking Hyde Park, they decided that, once in power, they would launch a massive multi-billion-pound raid on a gold-plated, copper-bottomed sector of the British economy - its pension funds.



Up until this point, company pension funds had enjoyed an important tax break on the financial investments they made in order to build up the capital from which employees could be paid when they retired. By long tradition, the funds paid no tax on the dividends they received from those investments.



The view of Brown and his penthouse cronies was that this concession had to stop.



The tens of millions of people who paid into such corporate pension schemes - where employee contributions were, by and large, matched by their employer - were over-privileged, they argued.



Moreover, almost all company pension funds were in surplus - so much so that many employers had cut their contributions - and could easily take the hit of around £5 billion a year.



And, anyway, a buoyant stock market - at the time rising by an average of 15 per cent a year - would mitigate any potential loss.



It sounds like a dull technicality they were planning, one of those impenetrable Budget footnotes that pass most people by and for which the nit-picking, number- crunching Brown would become notorious over the coming years.



But the harsh reality of that decision over pizza and beer 13 years ago is that a generation of hard-working people, who had paid into pension schemes over many years and thought they had secured their futures, face an impoverished and uncertain old age.



Ed Balls (left) and Charlie Whelan (right) were also Brown's trusted lieutenants



Worse still, the decision the Grosvenor gang made that night was kept secret. Those meeting in the penthouse knew that what they proposed was an ideological bombshell.



New Labour had been assiduously reaching out to business and seeking to increase its electoral appeal to the middle class. Abolishing tax credits flew right in the face of this. Brown's inner sanctum therefore resolved to keep their plan strictly to themselves.



The document detailing it was locked away in Robinson's safe.



What Brown and co then implemented was nothing short of highway robbery. It would betray the retirement dreams of millions of ordinary British people.



Back at the start of the 20th century, Britain led the world in pension arrangements, with the first state-run pension scheme to sustain people in their old age after their working lives were over.



But, in parallel, successive governments also recognised the importance of people being self-reliant, too, and offered tax relief to encourage employers to set up private occupational pension schemes and their employees to join them.



Here was one of the greatest social welfare developments of the century, a win-win situation for all involved.



For employers, these company pensions were a way of engendering loyalty among the workforce. For employees, who paid a percentage of their wages into the pot, they were both a form of deferred salary earned through long service and a guarantee for the future.



For governments, the stronger the occupational schemes, the less funding they had to commit directly to state pensions. From an economic point of view, the tens of billions of pounds saved within pension funds could be used as an investment tool to finance the requirements of industry.



There were inevitably wrinkles in the system and things that needed fixing, but, generally speaking, the state of British pensions in the lead-up to the 1997 General Election was healthy. The occupational side was pretty much the envy of the world.



Tory Chancellor Norman Lamont marginally reduced the tax credit the pension funds claimed on dividend payments



Through the good years of rising company profits and rising share prices, the pension funds had prospered, thanks in part to the tax breaks they enjoyed. Inevitably, covetous eyes were cast on this gold mine, first by a Tory chancellor, Norman Lamont.



Desperate to raise revenue in 1993, he marginally reduced the tax credit the pension funds claimed on dividend payments. At the time the measure was little noticed and produced only a mild reaction from the pensions industry. Company pension funds continued in robust health.



But Lamont's mini-raid left the door guarding pension funds slightly ajar - for Brown to come charging through four years later like a bull in a china shop.



The fact is that tinkering with pension calculations is a dangerous activity. The future stability or otherwise of any fund depends on extremely complicated sums about the life expectancy of the scheme's participants. If these turn out to be even slightly out-of-kilter, then there is a danger that the scheme will run out of cash.



But in late 20th-century Britain, a fundamental shift was happening in those basic sums because more and more people were living longer. What's more, that longevity was going up by leaps and bounds rather than in small, slow increments, and there seemed no end to it. A demographic time bomb was ticking away under all pension calculations.



Back in the Fifties, an employee retiring at 65 lived, on average, only another three or four years to draw his or her pension. Now, that period of retirement is more likely to be 20 years or more, and rising indefinitely as scientists - and the pensions industry - realise that there is no notional biological 'maximum age' beyond which the human race cannot go.



In tandem with this soaring life expectancy has been a fall in the birth rate. One hundred years ago, when state pensions were introduced, there were 22 people working for every retired person. By the end of this decade, the ratio will be 2:1. By 2025, the number of over-60s in Britain will pass the number of under-25s for the first time. All this has huge implications for pensions.



No policymaker has a crystal ball but it was obvious in the lead-up to the 1997 general election that pensions were going to be a critical issue in the years ahead. Keeping the sector healthy would be a major challenge.



Occupational pensions, in particular, would have to be an ever more important component of the nation's welfare system for old age, in order to ease the burden on the state.



Those New Labour economic planners in the hotel penthouse must have known all this, and they had a chance to fix it. Inheriting a booming economy that would allow them to put ambitious plans into action, they were in an excellent position to make pensions fit for purpose in the new millennium.



But what followed was a shambles. Arriving at the Treasury as Chancellor of the Exchequer the day after the election, a triumphant Brown took from the box of tricks he and his cabal had concocted his secret plan to rob the pension funds of their tax allowance.



He felt justified in doing so because, as he pointed out, Lamont and the Conservatives had already trimmed the relief in 1993.



Just as importantly, he argued, most company pension funds were hugely in surplus and could well afford to surrender the concession. He flourished a report from a private firm of accountants - commissioned and paid for by the wealthy Robinson out of his own pocket during those Grosvenor House days - which concluded the downside would be minimal.



Civil Service economists urgently set to work to establish if this was true. But as they road-tested the plan and its consequences, they quickly found major holes in it. Four separate papers by the best brains in the Treasury and the Inland Revenue disagreed with Brown's judgment that the raid on the pension funds would cause little or no long-term harm.



All four papers were in no doubt that the value of pension funds would fall. One predicted a drop of up to £75 billion in the overall private pension pot and resultant hardship for the eight million people in such schemes. If the shortfall was to be made up, employers and employees would need to contribute an extra £10 billion a year for the next ten to 15 years.



In the end, those who would suffer most would be those not in a position to top up their pension contributions - namely, the lower-paid. For Labour's core voters, their chances of a comfortable retirement without money worries would be wrecked.



It is not clear whether officials actually advised that the policy be scrapped entirely or just shelved for further investigation, but there is absolutely no doubt that they told Brown he was playing roulette with Britain's world-renowned system of occupational and private pensions.



He ignored them. More than that, he went out of his way to conceal their doubts from public gaze. It would be ten years before the documents were released showing Civil Service objections to the raid on pension dividends - and then only after a two-year campaign under Labour's own Freedom of Information Act forced them out into the open.



But, at the time, all Brown and his gang were concerned about was 'being able to get away with it without anyone complaining', as one observer put it.



They were hooked on the idea that occupational pensions were too generous to corporate Britain. They refused to recognise the obvious truth that if the system was weakened, the burden of pensions would fall back on the state.



It's perhaps not surprising that Brown's plans were hatched and tested in extraordinary secrecy. It's how he works. But what is astonishing is that Blair was among those kept in the dark.



Even when the new prime minister was finally made aware of the pensions proposal, he seems not to have been told the full extent of officials' doubts. Then, when a civil servant warned him that the costs of Brown's plans could be 'enormous' and the consequences 'unsolvable', he took no action.



It was an early sign of the dangers caused by their fractured relationship - of Brown's stubborn determination to do his own thing regardless of Number 10 and of Blair's unwillingness to confront him, even when the livelihoods of millions of people were put at risk.



In his first Budget speech two months after the election, Brown sold the raid on the pension funds as part of a dynamic package to modernise and streamline the corporate tax system and encourage companies to invest in growth.



In reality, it was no such thing. The primary motive - as Robinson, who had been in on those penthouse discussions, was later to confirm in his memoirs - was nothing to do with stimulating the economy. It was to raise extra revenue of £5billion a year for the incoming government to spend without being seen to be raising taxes, pure and simple.



It was a stealth tax. But so clever was the deception that few immediately grasped the significance.



Conservative critics were silenced by the argument that their party had been the first down this particular road - though there was a big difference between reducing tax credits on dividends, as Lamont had done, and abolishing them entirely.



The City and investment community were muted in their response, in part because the implications took a while to absorb, in part because they were unwilling to make an enemy of a new and obviously powerful chancellor.



Robert Maxwell embezzled £400m from the Mirror pension fund



The Press, right and left, was too enthralled with the reforming zeal of the new regime after 18 years of Conservative rule to make a serious issue of such a recherche matter as retirement provision, which was difficult to understand and explain.



Specialists, however, quickly grasped what was going on. The National Association of Pension Funds was horrified and estimated the cost to employers of keeping their pension funds topped up would be at least £50 billion over the next decade.



'Even Robert Maxwell [the tycoon who embezzled the Mirror pension fund] took only £400 million,' it declared sarcastically.



There was an inherent flaw in Brown's strategy - it was predicated on the dangerous belief that the economy would continue to improve and the stock market continue to grow in value.



It made no allowance for the economy hitting choppy waters, let alone a credit crunch, a recession and a collapse in share prices not unlike the Great Crash of 1929.



The insane belief that share prices always rise (because they had in the recent past) contributed to Brown and his sidekicks ignoring Treasury advice in 1997. It was an appalling misjudgment.



Had it not been for that fateful decision in Brown's first Budget, pension funds might well have been able to weather these storms. But the reality was that they were not equipped to absorb the loss of between £5 billion and £6 billion a year in tax-free dividend income.



Nor was this just a straight loss each year but one with serious knock- on effects. In 2005, one leading industry expert I spoke to calculated the cumulative cost over that first Labour decade to the pensions industry at a staggering £100 billion - which would have been sufficient to meet all the challenges of longer life expectancy and a weak stock market.



Well, he would say that, you might think. But, far from being an exaggeration, his figures turned out to be an under-estimate. In January 2009, the Office of National Statistics calculated that the black hole in Britain's occupational schemes had reached an astonishing £194.5 billion.



The thoroughly spurious claims by Brown and those around him that corporate funds were rich enough to take the punishment proved complacent in the extreme. In a mere ten years, New Labour reduced almost a century of secure retirement to rubble.



The 1997 dividend tax-heist turned the nation's previously wealthy private-sector occupational pensions system into a basket case and a headache for almost every company in Britain, including the richest and most profitable, such as oil giant BP.



But worse, by making shares less attractive for pension funds to hold, it also did irreparable damage to the stock market. It tore the underpinnings from investment in shares, diminished returns and decimated the nation's savings.



Brown's ill-conceived policy - implemented against the best advice and without proper consultation - proved a disaster.



It was a far more important factor in the ruination of the nation's pension system than changes in mortality assumptions. Had the dividend tax credit remained intact, the retirement crisis which Britain now faces would never have happened.



That crisis has far-reaching implications and impacts on many fronts, even causing potholes in our roads to be left unfilled and dustbins un-emptied.



Because of shortfalls, masses more cash has had to be pumped into local authority pension schemes. Unlike most public sector pension funds - which are directly paid for by the taxpayer - local authority schemes generally operate on the same basis as private sector plans with the employers and employees making contributions.



They too have been badly hurt by the pensions tax raid and its impact on investment returns.



A quarter of the council tax we pay now goes on pension payments rather than ensuring that the roads are repaired and the rubbish collected.



That crisis also meant that the amount paid out in social security benefits shot up. The collapse in occupational pensions for those on low incomes means the Government is having to shell out more in hardship payments to the elderly through the Pension Credit system.



But the biggest impact is being felt by those who were in final-salary defined-benefit pension schemes in the private sector. These were once the commonest form of pension and the safest, guaranteeing an employee a fixed proportion of his or her final salary at retirement depending on years of service.



The black hole in these schemes is now so large that most companies can no longer afford them.



One by one, these final salary schemes were to be closed - even in Britain's greatest companies. More and more firms are opting for 'money purchase' schemes where an individual builds up a pension pot, the income from which is subject to the vagaries of the stock market.



The depressing statistics speak for themselves. In 1995, before the pensions tax credit was removed, nearly five million people were in open final-salary pension schemes.



By 2000, this number had fallen to just over four million and by the end of 2008 to less than a million. In 1997, 90 per cent of private-sector occupational pensions were final salary. A decade later, two-thirds of these had been closed to new members.



Because pensions seem so technical, it can be difficult to appreciate what a switch from one type to another actually means in practical terms. In fact, everything changes if you are moved from a final-salary, or defined-benefit, scheme to a defined contribution one.



The guarantee of a pension based on a fixed percentage of your salary disappears. In essence, the element of risk passes from the employer to the employee. A robust pensions system is replaced by one that is far less durable because payouts largely depend on the performance of the trustees and their advisers as managers of investment funds.



The result is that, however much they have saved for their old age and however responsible they have been, those people unlucky enough to retire during a downturn in financial markets will see their expected pensions substantially reduced.



Back in 1997, Brown was warned unequivocally by Treasury officials that this would happen - that his pensions' raid would encourage firms to end final salary schemes.



But he went ahead regardless-Five years later, the leading audit firm Ernst & Young informed the 2,000 members of its £410 million final-salary pension scheme that it was being closed and they would be transferred into a money-purchase scheme.



This was a first. Until then, there had been lots of cases of final-salary schemes being closed to new members but never for existing ones. Now the Rubicon was crossed. Shortly afterwards the struggling food retailer Iceland revealed similar plans.



I criticised this development in my Daily Mail column, but the trend was unmistakable and unstoppable. In 2005, Rentokil Initial became the first FTSE 100 company to shut its final salary scheme to existing employees.



The next year, Harrods did the same, followed by Debenhams.



By 2008, final-salary schemes were nearly dead as one after another closed. The following year, Barclays bank brought its to an end for its 18,000 members. Staff were told the scheme had moved from a surplus of £200 million to a deficit of £2.2 billion in a year.



BP, the nation's richest company, had boasted one of the UK's best occupational pension plans with a largely non-contributory final-salary plan covering more than 69,000 people.



In June 2009 it revealed that new employees would pay between 5 per cent and 15 per cent of their salaries into a new money-purchase scheme.



In January 2010, Alliance Boots, owners of Boots the Chemist, closed its final-salary pension scheme to some 15,000 employees who had been paying into the plan for decades.



This was despite the fact that the Boots scheme had been one of the first to take defensive action after the Brown tax raid, by reinvesting its portfolio in government stocks to protect itself from future stock-market unpredictability.



The worry about stock-market turbulence, it need hardly be repeated, was one of the main reasons why Brown was counselled against abolishing the dividend tax credit.



For some companies, problematic pension funds became the tail wagging the dog.



Among those struggling with vast legacy deficits were British Airways, British Telecom and the government- owned Royal Mail.



In each of these cases, the pension fund deficit has overshadowed almost everything else these companies do. The £3bn black hole at BA came close to derailing its recent merger with Spain's national carrier Iberia, which insisted that it be hived off into a separate entity where it could not contaminate the merged airline.



The stellar performance of BT, in the new digital age, is constantly overshadowed by the £10bn-plus black hole in its pension fund.



The never-ending rise in postal charges and the constant deterioration of service can partly be attributed to the management's struggle to keep the company's pensions promises.



Far from improving the financial situation of British industry and encouraging new investment, as Brown and his colleagues claimed would happen, plugging the holes in occupational pensions was starting to take priority over all else.



The Grosvenor House gang continued to deny responsibility for this state of affairs.



They maintained that the pressure on pensions was down to the fall in the stock markets and the fact that people were living longer. They also claimed companies were at fault for under-funding their pension schemes.



Everything and everyone was to blame, in other words, except New Labour policy.

But others have no doubt who was the architect of this disaster.

'Irresponsible government', declared economist Ros Altmann, by a man who 'just ignores what he doesn't want to hear, then tries to cover up the consequences and hide it from everybody'.



Gordon Brown decided pension funds were a ripe target and knowingly destroyed what was once one of the great pension systems in the world. Eleven million people with company pensions and a further seven million with personal pensions were affected by the sleight of hand dreamt up in that posh Park Lane penthouse.



Not everyone would suffer, however. Because - as we will see in the next installment - when it came to pensions, the Labour government made sure that one favoured sector of society would be feather-bedded against the downturn, whatever the cost to the rest of us.



• Abridged extract from The Great Pensions Robbery by Alex Brummer, published by Random House Business Books on April 8 at £12.99. Alex Brummer 2010. To order a copy at £11.70 (p&p free), call 0845 155 0720.











