The latest in a long line of recent banking scandals exploded last week after it was revealed that the former chief of the Royal Bank of Scotland (RBS), Sir Fred Goodwin, has begun collecting a pension worth £693,000 a year from his former employers. Sir Fred is just 50 years old meaning that he is set to receive over £17 million by the age of 75.
The timing could not have been worse. That same week RBS produced its annual figures, revealing a £24 billion loss for the year, the highest annual deficit ever recorded by a British company. The deficit includes £7.8bn of trading losses and £16.8bn of writedowns caused by the fall in value of transactions made by the bank when the market was at its peak, notably RBS's disastrous acquisition of Dutch bank ABN Amro as part of a consortium in October 2007. RBS has been 70% nationalised after the government stepped in to save it from failing last October. Following the news of the bank's results, the government announced that it will insure £325bn worth of assets currently held by the bank, effectively raising the government's stake to 75%. As part of the arrangement, RBS has agreed to issue £50bn in loans to British businesses over the next two years in an effort to kick-start the economy. Given the difficulties the bank is experiencing, however, there is now a strong possibility that the government will be forced to invest further public funds in the ailing institution. RBS's new chief executive, Stephen Hester, revealed that the government's share in the firm could rise to 95% "depending on how things work out".
The revelation of Sir Fred Goodwin's pension entitlements sparked a well-publicised government outcry. Prime Minister, Gordon Brown, labelled the payout as "unacceptable" and stated that he was "considering every legal means at our disposal" to claw the amount back after Goodwin refused to succumb to pressure to pay some of the amount back and forgo future payouts. Meanwhile, chancellor, Alistair Darling, went one further: "You cannot justify these excesses," he stated. The chancellor said he had requested that Lord Myners, the City minister, address the former RBS chief and put pressure on him to relinquish the pension agreement: "put it to him quite simply - 'look, in the circumstances in which this bank is now in, do you not think it right that you should forgo this?'".
The legal issue is far from clear-cut, however. In a letter to Lord Myners, which was made public last week, Goodwin maintained that he is acting in good faith in continuing to accept the pension which he claims was part of an amicable arrangement formed between himself and the bank. The £700,000 per year payout was reputedly the result of a discretionary agreement between Sir Fred and his former employers rather than being part of a pre-standing contractual agreement. However, the agreement, which doubled the value of Goodwin's pension allowance, was revealed to have come about as the result of Goodwin agreeing not to accept a redundancy payment of £1.3 million - equivalent to a year's salary - that he was legally entitled to on leaving the bank. Goodwin also pointed to the fact that his entitlement to a "pension pot" had been agreed when he first joined the bank in 1998 and as such he felt that for him to now pay back part of this amount was "not warranted".
Significantly, the letter also revealed that Lord Myners was made aware of the pension agreement when it was arranged back in October of last year though had been told that it was "a contractual obligation". There have since been suggestions that the government was also made aware of it at the time. The BBC's business editor, Robert Peston, made the following comments on his online blog:
"Stephen Hester, the new chief executive [of RBS], told me this morning that the Government approved the pension settlement with Sir Fred - which is potentially very embarrassing for the Chancellor and the Prime Minister."
With Brown looking into legal avenues for having the pension entitlement rescinded it appears that it will be some time before the matter is resolved.