Sir Fred Goodwin's millions

SIR Philip Hampton leaned forward into the microphone and interrupted the flow of questions from the floor to admit that there had been an error in the reporting of former Royal Bank of Scotland chief executive Sir Fred Goodwin's pension. "Sorry, but the payment is actually £693,000," the chairman said.

An audible gasp of exasperation swept through the room full of press and television journalists attending the bank's results presentation. They were already demanding answers as to how Goodwin could justify that morning's headline figure of £650,000. Now it turned out to be even higher.

With the whole nation in a state of furious indignation, Hampton had already admitted to a huddle of journalists before the presentation began that he had called Goodwin "about three weeks ago" to ask him to forfeit some of his pension. In his opening remarks to the press conference he went further: "I told Fred there could be reputational damage. He said he was thinking about it. He is still thinking about it."

But Hampton's appeal went unheeded. Within 24 hours senior politicians and commentators across the political and financial spectrum were in full cry, demanding Goodwin hand back the money or else be stripped of the payments and forced to sue the Government in the courts.

Despite the weight of criticism, Goodwin stood firm, writing to Lord Myners, the Treasury minister with whom he agreed his final departure from the bank, saying that he had no intention of relinquishing a penny of his entitlement. Myners was immediately cast as the villain of the piece, accused of badly handling Goodwin's final severance package.

Myners was party to the talks on Goodwin's departure over the weekend of October 10 to 12 when the Government was deep in negotiations over the £20bn bail-out of the bank. Myners was keen to avoid any "reward for failure" and he discussed the terms of Goodwin's severance with RBS chairman Sir Tom McKillop.

It is not clear at what point Bob Scott, the chairman of the remuneration committee, got involved, but attention seemed to focus on Goodwin's pay-off rather than his pension.

Scott duly informed the board that Goodwin's pension pot would significantly increase, but Myners has been in denial about the discretionary element and the chancellor, Alistair Darling, claimed he knew only about it in recent weeks. Critics say Treasury ministers and their officials were guilty of bungling the talks.

Sources now say that a simpler route would have been for the RBS board to sack Goodwin, in which case his claim would have diminished significantly. But one source close to the bank said: "They didn't want to sack him. They actually thought he was a good CEO."

With Goodwin putting two fingers up to the Government and the public, it was left to ministers and opposition MPs to argue over who was to blame and whether there was any realistic chance of forcing his hand.

Gordon Brown, the Prime Minister, began moves to claw back half of Goodwin's £16m pension pot amid a wider review of the rewards paid to departing senior executives. Lawyers, however, claimed Brown's chances of success were slim. Andrew Simmonds QC, a pensions lawyer, said it would be extremely difficult for the Government to win a case against the former banker. Others agreed.

Whether politicians like it or not, most experts say that Sir Fred Goodwin is entitled to his £693,000 pension under the rules of the Royal Bank of Scotland pension fund, in the same way any other employee in his position would be, as long as the bank remains solvent. The report and accounts clearly spell out that all UK directors with one exception are members of the Royal Bank of Scotland Group Pension Fund, and that the rules of the scheme "allow all members who retire early at the request of the employer to receive a pension based on accrued service with no discount for early retirement".

This then would have been a condition of his employment from the day he joined the company in 1998. Every member of staff accrued a pension equivalent to a 60th of their final salary for each year of work.

Goodwin brought service with him from previous banks which meant his 30-year working life allowed him to qualify for a pension based on half his final salary of £1.49m. There were some non-pensionable deductions, so his pension was calculated using a figure of £1.38m, giving £693,000.

There is no denying the RBS scheme is unusually generous, as most firms deduct 5% each year from what they are prepared to pay someone retiring early. Given Sir Fred retired a decade early, this would have slashed his pension to nearer £350,000.

And it is not clear to what extent the £18bn fund, said to be in surplus at the last valuation, allowed for the fact that potentially large numbers might retire early on generous terms.

For example, in the last report and accounts, Sir Fred's pension was valued at £8m. But this figure made no allowance for the possibility he might leave in a hurry. The next valuation of his pension due in the pending accounts is expected to be between £15m and £20m.

Similarly, though the fund had a surplus £476m when it was last valued, the expectation is it will now have sunk into the red at the next valuation. Furthermore, this row may force the trustees to examine whether the fund is being prudently valued in any case.

It might have been different if the bank had collapsed, with the fund in shortfall, like Lehman Brothers or Woolworths. Sir Fred's pension would indeed have been shredded to £21,000, the most that can be paid out at 50 by the Pension Protection Fund. And he wouldn't receive it until he was 60.

Given the bank was bust had it not been for taxpayer support, it is understandable that the public and politicians are outraged at this reward for failure, when thousands are losing their pension because their employers were allowed to fail and not bailed out.

But it is not clear what can be done about it. In theory every pension is paid at the discretion of the pension fund trustees. But the law has been tightened up over the years, and where an employee is made a promise about the kind of pension he can expect to receive, such pledges are legally binding.

The only get-out would be if any evidence emerged of professional negligence or misconduct that could be pursued through the courts. But such cases are notoriously lengthy and prone to fail, and in this case there is no evidence of such failings.

Alternatively the Government could legislate to over-ride pensions agreements for firms bailed out by taxpayers. Meanwhile, Philip Hampton has pledged that RBS will re-write its pension rules for future appointments to the board. None of this, however, will relieve Sir Fred of his pay-out.