The banker, who is determined not to give up any of the money, wrote to Lord Myners yesterday complaining about government attacks on the £693,000 annual pension he is receiving from RBS, saying that the Financial Services Secretary to the Treasury personally approved the deal during talks with the bank.
But last night, in a reply to Sir Fred's letter, Lord Myners disputed the banker's version of events and said the decision not to volunteer a cut in his pension was "unfortunate and unacceptable".
Sir Fred had said: "I am told that the topic of my pension was specifically raised with you by both the chairman of the group remuneration committee and the group chairman, and you indicated that you were aware of my entitlement and that no further "gestures" would be required." The accusation that Lord Myners, who is a close confidant of both the Chancellor Alistair Darling and the Prime Minister, signed off the pension package would be hugely damaging and last night he acted swiftly to challenge that claim.
The City minister said the Government only became aware of the deal last week and that UK Financial Investments was was looking at clawing back "some or all" of the pension. The payment of Sir Fred's pension, worth more than £13,300 a week, has required RBS to double the cost of funding his retirement in its accounts. Stephen Hester, the new RBS chief executive, said the bank now estimated the cost of Sir Fred's pension at £16.6m, almost twice the £8.37m listed in its most recent annual report.
Mr Brown threatened to take legal action to reclaim at least half of the payment, saying: "Failure should not be rewarded." The Government's embarrassment over the controversy has overshadowed its announcement of a second bailout for banks.
State-controlled RBS insisted that Sir Fred's package was not a special pay-off and was part of his contract, the terms of which allowed him to retire 10 years early, aged 50, on a full pension. But the bank faced protests over the revelation that Sir Fred, who led RBS as it accumulated a record £24.1bn loss, was receiving such a massive income. Mr Darling insisted the decision to approve the pension was taken by the former RBS board before the Government took control in December but RBS backed claims that ministers knew about the deal all along.
Mr Hester, who was a non-executive director of the bank at the time, said Sir Fred's pension payment was agreed during a frantic weekend of talks in October as RBS teetered on the edge of collapse. "All the terms of Fred's departure were the subject of discussions between the chairman [then Sir Tom McKillop], the senior independent director [then Bob Scott] and the Government over that weekend," he said.
He refused to say who in the Government was involved but RBS sources backed Sir Fred's claim that what he stood to receive was made clear. Sir Philip Hampton, the new RBS chairman, said: "I absolutely share the view that it would seem wrong that Fred could have left the business with such a large pension, despite events that subsequently unfolded at the bank."
The bank was considering its legal options, he said, adding that he asked Sir Fred last month to voluntarily give up some of his pension and told him he would otherwise make the deal public.
He did not have to do so because details of Sir Fred's pension leaked this week. In his letter to Lord Myners, who pleaded with the banker in a phone call on Tuesday to surrender at least part of his pension, Sir Fred dropped a hint that he believed the Treasury was responsible for the leak.
"It came as something of a surprise to find that both details of forthcoming 2008 financial statement disclosures relating to my pension and the substance of a telephone conversation had been placed in the public domain a few hours after we spoke," he said.
Sir Fred said much of his pension was transferred to RBS from previous employees when he joined the bank in 1998 and that he had already foregone other benefits. "I hope that you can understand my rationale for declining your request to voluntarily reduce my pension entitlement," he added.
His remarks infuriated critics of RBS, who said the bank was only still afloat because it had been bailed out by taxpayers. Ros Altmann, an independent pensions analyst, said: "If Sir Fred had worked for a private sector company that failed, his pension arrangements would be reduced to around £20,000 a year."
George Osborne, the shadow Chancellor, called for an inquiry. "Even though Alistair Darling said he wasn't told about Sir Fred Goodwin's obscene pension pay-off until last week, it now appears his City minister knew last autumn," he said. "We urgently need clarification of who knew what and when in the Government. If Gordon Brown and Alistair Darling allowed Sir Fred to walk off with £693,000 a year for life of taxpayers' money, it would be a disgrace." Vince Cable, the Liberal Democrat Treasury spokesman, agreed with Mr Osborne. He said the Government should halt Sir Fred's pension payments and challenge him to sue.
"The man who brought the bank to grief at enormous cost to taxpayer, while many employees lost their jobs, has just walked away with this personal fortune. If he has any sense of decency he will surrender it," he said.
Mr Brown said he had "demanded action" as soon as he became aware of the pension deal. "I am determined that we pursue, if necessary by legal action, cases where too much money has been taken out in cases where there is less justification that has been claimed for remuneration."
Mr Darling insisted: "This agreement was not negotiated by the Government, nor was it approved by the Government – nor would it have been, because the agreement in relation to the remuneration, the pension arrangements between employees of a bank, are a matter between that employee and the board of directors."
Lord Myners hits back
Dear Sir Fred,
I am replying to your letter of earlier today, in which you informed me of your decision not to volunteer a reduction in your pension. I consider this unfortunate and unacceptable. As I made clear yesterday in our phone call, I think such an act would be an appropriate recognition of the failings of RBS under your tenure and the subsequent support the Government has provided.
As I have already made clear, it was only last week that the Government became aware that the decision of the previous Board of RBS may have been a discretionary choice.
Once we became aware of this issue, UK Financial Investments (UKFI) has, on behalf of the Government, been vigorously pursuing with the new group chairman whether there is any scope for clawing back some or all of your pension and whether, at the point the board made their decision, it was made clear to the then remuneration committee and board that the scale of the pension payment was discretionary, as it now proves to be.
On the other points you raise in your letter, it is true that I expressed concerns over your 12-month notice period and certain share-related awards. I welcomed your decision then to waive both these amounts. That did not amount to approval of your pension arrangements given that, as I have outlined, I was unaware of any scope for discretion.
I do not agree with your rationale for declining my request that you voluntarily reduce your pension. And indeed I hope that on reflection you will now share my clear view that the losses reported today by the bank which you ran until October cannot justify such a huge award.
Lord Myners
Goodwin's deal: How the numbers add up
Sir Fred Goodwin's pension is paid under the terms of Royal Bank of Scotland's final salary pension scheme which guarantees members a certain proportion of their pay in retirement, depending on how long they have worked for the bank.
The scheme's terms allowed Sir Fred to take early retirement at age 50 on exactly the same pension he would have been entitled to had he stayed on until the bank's normal retirement age of 60, a highly generous and unusual arrangement.
RBS must account for the cost of executive pensions in its annual report, quantifying what it would cost were its directors to leave and were the bank to have to transfer their pension benefits to a new employer.
At the end of 2007, RBS put this "transfer value" at £8.37m for Sir Fred. Yesterday, the bank said this figure had now risen to £16.6m.
In fact, were the bank forced to pay an independent pension company to provide Sir Fred's annual pension, the figure would rise considerably. Experts said an insurance company asked to pay Sir Fred's £693,000 annual income would charge about £25m for such a contract.
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