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Payback time for culture of greed

March 1, 2009

Led by Sir Fred Goodwin, bankers are in the firing line over their enormous payoffs and pensions. Is the government being tough enough, or is it using them as a diversion?

Sir Fred Goodwin was adamant. He was not budging on his pension. That was a step too far.

The pugnacious chief executive of the Royal Bank of Scotland had already given up his contractual right to a payoff of a year’s salary – worth £1.29m – and share options that would have netted him about £300,000 as he negotiated his departure from the bank that he had brought to the edge of disaster last October. He was not going any further.

“His view was: I have given up everything,” said a friend last week. “My reputation has been trashed so what else have I got to lose?”

Others warned him about the problems he was storing up for himself. Sir Tom McKillop, then the bank’s chairman, and Bob Scott, then the head of its remuneration committee, told him repeatedly that the £693,000 he was set to pocket every year for the rest of his life would come back to haunt him when the details emerged in public. He took no notice.

Little did the men know that four months later it would also throw up a mighty storm for the government and Lord Myners, its point man in the negotiations.

Last week the details of those negotiations were being pored over as the antibanker mood became even stronger. That old Labour tub-thumper John Prescott for once appeared to catch the mood of the nation when he said that RBS should unilaterally withhold Goodwin’s pension – “and let him sue us”.

The pension has become a symbol of the excesses of bankers and the government’s apparent tolerance of it – until the public clamour became too great.

Gordon Brown may insist there will be “no rewards for failure”, but how can he explain away his government’s approval of a pension that is almost beyond the imagination of normal taxpayers for the man responsible for the biggest collapse of them all?

Paul Myners had been a minister for just four days when he was sucked into a maelstrom from which the government and the banking system has yet to emerge.

In early October last year, Royal Bank of Scotland and HBOS, two of the biggest names in British finance, were teetering on the brink of collapse. Only a huge injection of cash from the taxpayer could save them and the entire financial system.

Myners, 60, a journalist turned banker turned serial director in City firms, was the man given the task of sorting out the mess as the Treasury’s new minister for financial services. While he drew up the bailout plan at his new Whitehall office, subsisting on takeaway curries, a series of issues emerged.

One of them was Goodwin, also known as Fred the Shred for his savage cost cutting. He had driven the company almost to destruction with overpriced acquisitions at the top of the market and reckless loans. He would have to go. The challenge was to remove him with the minimum fuss and negative publicity.

He had once been close to Brown. In 1999, he had chaired a Treasury taskforce looking at credit unions and then acted as an informal adviser to the then chancellor. Five years later he was knighted and then was appointed to Brown’s International Business Advisory Council.

The crunch day was October 7. Myners summoned Goodwin and McKillop to the Treasury and said they would have to give up their jobs. Goodwin, the son of an engineer from Paisley who is not normally given to self-pity, said of the encounter: “This isn’t a negotiation, it’s a drive-by shooting.”

Myners’s attitude stung the two men. Returning to RBS headquarters, McKillop was heard to mutter than the minister was “behaving like a child” and “loving every minute of it”.

Perhaps Myners was indeed enjoying himself. “It’s no secret that Paul Myners and Fred Goodwin hate one another,” according to one City insider.

The bad blood went back to when Myners was a director of NatWest, the venerable English bank taken over by RBS in 2000. Myners left as soon as the deal was sealed.

In the days following the initial meeting last October, a “compromise” deal was struck on Goodwin’s departure.

According to a source close to the negotiations, they were three-pronged with Myners making endless phone calls to McKillop and Scott over the weekend of October 11-12.

Gradually concessions were made. First Goodwin gave up his right to a one-year payoff, then to his share options.

As this was going on the RBS board met and, remarkably, agreed that it could not sack Goodwin. The advice from lawyers was that he had done nothing that merited dismissal, despite leading the bank to ruin.

So if they could not sack him, RBS would have to let him retire early with his pension intact. Not only that but the RBS pension fund was allowed to compensate people who retired before the age of 60 because they would have stopped paying into their pot and would likely face extra years of retirement, in Goodwin’s case, assuming he remains in good health, at least 10 more as he became 50 in August last year.

This would require Goodwin’s pension pot to be doubled, by RBS’s calculations, to £16.6m, although pensions’ experts this weekend said that the actual cost of providing £693,000 a year was more like £32.7m.

The deal was finalised at a meeting of Myners, McKillop and Scott at the Treasury at 9pm on Saturday, October 11. This is when the £16m cost of the pension was raised, according to sources familiar with the negotiations.

What exactly was said at the meeting is the subject of dispute. Myners insists he was told by the directors that this was a “contractual obligation” – that the bank had no option but to give Goodwin the full retirement package and start paying out now.

Banking sources have expressed scepticism that Myners could have been “misled”, as Treasury sources have been spinning it, in this way. At best, say his critics, Myners showed an extraordinary level of credulity.

He is no naive newcomer when it comes to the world of large executive pensions, so £16m might not have seemed that excessive to him. The NatWest annual report of 1999 shows that, shortly before he left the bank, Myners had also built up an impressive pension pot. The report stated that he stood to receive £98,000 a year when he turned 60, which he did last year. He also receives a pension from Rothschilds, his first City employer.

Myners knew his way round company boardrooms. He had been a director of blue chip companies such as Marks & Spencer, Powergen, Land Securities and Orange. He was a career fund manager who had headed a Treasury review of the private pensions industry. Could he really have misconstrued the small print of Goodwin’s pension deal?

One source close to the bailout talks said: “The idea that Paul Myners, one of the world’s best-known pension fund managers, didn’t understand what he was agreeing to by offering Fred early retirement, and that he didn’t know the implications that would have, is quite frankly ludicrous.”

In an interview with The Sunday Times last year, Myners boasted about his attention to detail. “I have a reputation for care,” he said.

His allies insist that such details were easy to miss in the context of last October. “You have got to remember that this was an extraordinary few days,” said a senior Treasury source. “The entire banking system was close to collapse. Goodwin’s pension was a small sum compared the billions of taxpayers money that were being committed that weekend.”

Maybe so, but for most people, £693,000 a year for life for a failed banker is much easier figure to grasp than the telephone number sums involved in the banking bailouts.

It was 10 days ago that the alarm bells began to ring in government over the Goodwin pension pot. Officials in UK Financial Investments (UKFI), the arm of the Treasury charged with managing the new state-backed banks, were poring over the accounting car crash that are the RBS figures, when one of them spotted how much Goodwin was being paid. More than that, it appeared pension payments were not a “contractual obligation”. The RBS board could have voted not to top up Goodwin’s pot.

Alistair Darling, the chancellor, was informed immediately. He recognised it was a political timebomb. The pension details would have to be disclosed in the RBS annual report due to be published later this month. A cover-up was out of the question. Darling told the prime minister – one can only speculate how uncomfortable that conversation must have been – and UKFI began to look at whether some of the money could be clawed back.

On Wednesday Myners telephoned Goodwin and asked him to make a “gesture of good-will” towards the taxpayer by forgoing some of his huge pension. According to sources close to Goodwin, it was made clear that if he didn’t hand back some of the money then “things would get very nasty indeed”.

Then that evening, the night before RBS was due to announce £24.1 billion losses, the biggest in British corporate history, and ask for the taxpayer to guarantee £325 billion of its toxic assets, the BBC’s business editor Robert Peston found out about Goodwin’s retirement deal and announced it on the 10 O’Clock News.

Darling’s aides deny they briefed Peston. However, if it was a government-inspired leak, it was one which back-fired terribly.

While the public may have been distracted from RBS’s current woes, and Thursday’s announcement of similar terrible results by the Lloyds Banking Group, a hue and cry had started around “Pensiongate”. How could Goodwin be paid so much? How did the government let this happen?

Goodwin added fuel to the fire by releasing a letter he had written to Myners which revealed for the first time that the minister had known about the pension deal all along.

He also effectively accused the Treasury of leaking the story in a bid to apply pressure on him. Recalling their Wednesday telephone conversation, Goodwin said: “You highlighted that the absences of a such a gesture would give rise to significant adverse media comment.”

Goodwin, the hard-boiled negotiator to the end, concluded by saying he did not intend to hand back a penny: “The amount which I am due to receive as a pension continued to be calculated in a manner consistent with prior years.”

The prior years of bumper profits have, of course, now morphed into the period of bank-breaking losses and the government is desperate to claw back money from Goodwin. Brown bullishly announced on Thursday that the government would recoup a “substantial amount” of the pension. By yesterday this had become “examine all legal action necessary”.

The legal options are few, however. “There are only very limited circumstances where the employer can forfeit a former employee’s pension,” said Jonathan Hilliard, a barrister who specialises in pensions litigation at Wilberforce Chambers in London. “The government faces an uphill battle. I cannot recall such a claim ever succeeding.”

Section 91 of the 1995 Pensions Act allows an employer to reduce or refuse to pay a pension if it can prove the person committed a “criminal, negligent or fraudulent act” which damaged the company financially. There is no suggestion that Goodwin has committed fraud or a criminal act, but after leading RBS to a point where it is 95% taxpayer-owned, “negligent” seems a plausible line for the government’s learned friends to pursue.

Sources suggest that the legal firm Slaughter and May, appointed by the government to look into the case, will also investigate RBS’s internal procedures for awarding the enhanced pension, focusing on whether the full board approved it.

Previous attempts at clawbacks from pensions, notably against Lord Simpson, the ousted head of Marconi, the electronics firm, who ran up huge losses, have failed.

However, there is one case of a chief executive returning pension money. In 2002 Percy Barnevik, the Swedish boss of the engineering firm ABB, returned half of his £88.5m pension pot after leading the group to devastating losses.

Downing Street will be hoping that Goodwin might follow this example, but friends of the banker suggest that this is highly unlikely and to do something out of a sense of shame would be completely out of character.

The government is consequently prepared for a long campaign to recover the money. UKFI and Slaughter & May have been told to scrutinise all aspects of Goodwin’s tenure, according to government sources. Particular attention will be paid to Goodwin’s use of the company jet and the large sums spent on sports sponsorship, revealed in The Sunday Times last month.

The call for a nonfinancial penalty for Goodwin is growing in political circles. One member of the government admitted that the prospect of revoking Goodwin’s knighthood, bestowed in 2004 for “services to banking”, has being openly talked about at the Treasury.

“All options are being looked at and that’s one of them,” the minister said.

Again, such a prospect is fraught with difficulties. Hon-ours are a gift of the Queen and thus can be removed only with her approval, having jumped through the hoops of the civil service’s forfeiture committee. This can take years. THE government war on Goodwin’s pension will act as a useful lightning rod, distracting attention from the worsening economic environment and continued worries about the stability of the banking system.

However, scrutiny is also falling on other senior executives from the bailed-out banks, which may provide further embarrassment. This weekend, details have emerged of other enormous pension deals.

Peter Cummings, the former head of corporate lending at HBOS, is under most scrutiny, with the UKFI asking Lloyds, which bought the stricken bank, to examine his arrangements.

Cummings has taken early retirement after 36 years with the bank and is already collecting £260,000 a year from his £5.9m pension.

Known as banker to the superstars after lending to entrepreneurs such as Sir Philip Green, the owner of Top-shop, he has been accused of betting the bank on ill-fated investments in housebuilding and property just as the market crashed – leaving it saddled with a £6.8 billion loss from his division alone in 2008.

Colin Matthew, 58, who flushed away £3.6 billion in duff investments while running HBOS’s treasury division, has a £7.79m pension pot, which entitles him an estimated £397,000 a year.

Larry Fish, who ran the US commercial bank Citizens, which RBS bought in 1988, takes home a pension of £1ma year.

Adam Applegarth, the former Northern Rock boss, who oversaw the first run ona UK bank in more than 100 years in September 2007, has a £2.5m pension pot, which will earn him more than £304,000 a year when he turns 55.

The problem with focusing attention on these men is that they will know the details of how much the government knew about their businesses in the run-up to their collapse. Embarrassing leaks could be forthcoming.

In another, quieter week, the claims made by Lord Turner, the head of the Financial Services Authority, that ministers were to blame for the failure of the old style “light touch” City regulation, might have dominated the political agenda.

He told the Commons Treasury Committee on Tuesday that the FSA had been under political pressure not to be “heavy and intrusive” with banks.

Mervyn King, the governor of the Bank of England, later told the same MPs that he feared Britain had entered the recession with public borrowing too high, the implication being that Brown and Darling should take the blame for failing to balance the books during the good times.

The prime minister was lucky last week. The spotlight was where he wanted it: on the arrogant bankers who failed, and not the failures of his own past economic policies. In the coming weeks he may not be so fortunate.

REPORTING TEAM
Jonathan Oliver, Robert Watts, John Waples, Jenny Davey, Iain Dey

Many top executives match or exceed Sir Fred Goodwin’s pension in terms of annual entitlements:
Larry Fish, former director of Royal Bank of Scotland running its US operations: £1.03m.

Todd Stitzer, chief executive, Cadbury Schweppes: £882,000.

Jeroen van der Veer, chief executive, Shell: £829,000.

Patrick Cescau, former chief executive, Unilever: £755,000.

Sir Terry Leahy, chief executive, Tesco: £705,000.

Jean-Pierre Garnier, former chief executive, GlaxoSmithKline: £679,000.

John Varley,chief executive, Barclays £489,000.

Average transfer value of pension pots accumulated by top directors: £3m.

Politicians don’t do badly either…
Gordon Brown, prime minister, will receive £87,000 year. John Prescott, the former deputy prime minister who was so vocal on the subject of Goodwin’s award, will get £60,000.

The public-private divide
Most private sector workers saving for retirement now do so through “defined contribution” pension schemes. They or their employer, or both, contribute to an investment fund, and the eventual pension depends on how much they put in and the investment performance.

Senior executives in private companies and many public sector workers tend to enjoy “defined benefit” pensions. The level of their pensions are calculated on their pay, rather than investment contributions.

The more they are paid and the longer they serve, the bigger their pension entitlement – even though they may have contributed nothing to their pension fund.

Royal Bank of Scotland, for example, provided its directors with a “noncontributory” pension fund.

A recent study of pensions by the Trades Union Congress concluded: “Workers in the UK are experiencing a trend towards riskier and less generous pensions. Despite this, many directors continue to receive substantial retirement benefits . . . and the majority are in final-salary schemes.”

KEY FACTS

Public sector
Typical value of pension in public sector: 21% of salary.

Estimated number of public sector workers who have already retired with pension pots worth more than £1m: 17,150 (including 10,500 doctors and other NHS workers).

Estimated cost taxpayers will have to pay for public sector pensions accrued to date: £650 billion to £1 trillion.

Private sector
Typical value of employer contributions: 7% of salary.

Average pension pot: £25,000.

State pension

£90.70 per week.

Current age you can receive state pension: 65 for men and 60 for women.

THE BRITISH BAILOUT

The mind-boggling total is £1.17 trillion

Last week the government agreed to:

? Insure £325 billion of dodgy assets held by Royal Bank of Scotland

? Inject £13 billion more capital into the bank

It is in negotiations to: Insure some £250 billion of dodgy assets held by Lloyds Banking Group

SUNDAY TIMES ARTICLE

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