Brown ignored insurers' warning on pension grab

Gordon Brown was warned days after the 1997 election that his planned £5 billion-a-year pension tax raid could damage funds and increase the volatility of the stock market.

In a confidential note seen by the Daily Mail, the Association of British Insurers told the new Chancellor such a measure would lead to a 'drop in income' of at least £2billion a year for pension funds.

A defiant Mr Brown yesterday insisted he would repeat the scrapping of tax breaks for pension funds despite continuing attacks from all sides.

He broke his silence after five days of controversy to insist he would "take the same decision again" no matter how "inconvenient or difficult" it proved.

He said the removal of the tax break had allowed companies to invest more in their businesses and had been right for the economy.

"It was a decision I made after listening to different people and taking advice from different people in the Treasury.

"It was in line with the best advice that I had," he said.

Mr Brown was speaking at the launch of Labour's bid to defend its English council and Scottish Parliament seats, where the decision was also backed by Tony Blair.

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"It was the right decision then - and it is the right decision now," the Prime Minister said.

The tax change in Mr Brown's first Budget developed into a damaging row after Whitehall documents showed Treasury officials had warned that the move would leave a "big hole" in pension funds.

Treasury Minister Ed Balls then claimed the CBI had lobbied for the change, a claim promptly dismissed as "completely untrue" by business chiefs.

The documents seen by the Daily Mail show the Chancellor was also warned of the impact by the ABI, which manages more than £1,300 billion worth of investments on behalf of policyholders and pension funds and represents companies that employ up to 300,000 in financial services.

On May 7, 1997, just days after Labour's landslide victory, it said the change would affect charities and Personal Equity Plans, the forerunner of Individual Savings Accounts.

It also cautioned that a change in the tax credits "will lower stock market valuations and probably lead to greater volatility".

The ABI told Mr Brown: "Any change to the tax credit system has important implications for pensions, PEPs and charities with consequent political implications.

"This would be unfortunate at a time when it is accepted that there is a need both to encourage business and to encourage pension provision among the workforce."

The Tories also claimed Mr Brown ignored a warning that council tax rises would be an effect of the pensions raid.

They said the small print of advice from Treasury officials suggested the raid could cost town halls £500 million a year in maintaining funds for millions of council staff.

But separate documents suggest Labour was determined to press ahead irrespective of the impact on savings and the stock market months before it came to power.

They show that in March 2007, representatives of Mr Brown's tax team discussed the plans with the nation's biggest insurer, the Prudential.

A note of its meeting with accountants Arthur Andersen, who were working for the Chancellor, says that if the tax relief "were abolished altogether it could cost £4 billion and conversely benefit the Treasury by £4 billion".

The Prudential's experts feared that axing the tax credit would cut the income of pension funds by 20pc. Worse, it "could impact upon solvency" thus damaging the ability of some funds to operate.

Since the change, many pensions have wound up - leaving at least 125,000 workers without proper retirement provision.

The imposition of the tax is widely seen in the City as Brown's biggest mistake, contributing to the retreat from final-salary pensions - once the gold standard of the industry.