Though government and public alike have thrown their hands up in disgust at Sir Fred Goodwin’s pension payoff, future agreements may be more closely scrutinised as a result, says Charlie Kirby

“The Harriet Harman line about Goodwin losing in the court of public opinion, ‘so let us take back his cash’, was populist political nonsense.”

It’s not often that pensions lawyers speak so passionately about the government, but then, it’s not often that the issue of executive pensions is played out so farcically in the public arena.

The fiasco surrounding the Royal Bank of Scotland (RBS) and Fred Goodwin’s pension changed by the hour last week. Initial claims that the former chief executive was to receive £693,000 annually were dwarfed by a subsequent £703,000, with the total market value being pitched anywhere between £25m and £33m.

Then there was the political fallout. Labour deputy Harriet Harman threatened to steal away Goodwin’s pension, then was forced to admit she couldn’t; Gordon Brown roared that the situation was unacceptable, then made meek noises about investigating all circumstances surrounding Goodwin’s contract.

And then London mayor Boris Johnson waded in for measure with his usual politicallyincorrect style: “Sir Fred has become the epitome of the bankers who collectively occupy a place in public opinion significantly lower than cannibalistic paedophile global-warming deniers.”

For those in the pensions industry however, the scale of Goodwin’s pension wasn’t the real issue. Banking fat cats have been receiving extortionate payoffs for years, and while RBS’ current fiscal situation has caused some to raise their eyebrows at the vast size of the benefit, watching the debate on whether anyone can step in and over-rule trustees’ decisions, discretionary or otherwise, has been fascinating.

On February 27, pensionsweek.com website revealed that several law firms believed any legal attempt to claw back Goodwin’s pension would be fruitless. David Hosford, partner at law firm Pitmans, said there was very little that could be done retrospectively to limit his pension benefits and that the decision to waive a reduction for early retirement benefits was probably a hangover from when banks offered unpenalised early retirement pensions as part of a redundancy agreement in the 1990s.

Adam Bushby, partner at LG, said he suspected Goodwin was the beneficiary of a sort of ‘top hat’ arrangement away from the occupational scheme. “Top-up benefits tend to be unfunded unapproved retirement benefits, and I suspect he’ll have a letter somewhere confirming this,” he added.

Both lawyers believed at the time that the spotlight would shift away from Goodwin and onto those who agreed the pension arrangement, with the remuneration committee likely to come under pressure to ensure other top level employees aren’t granted the early retirement waivers.

Fast-forward a week and the national newspapers have caught up. Harman is publicly humiliated for not understanding pensions law and most commentators accept that if there is to be any clawing back, it will be through suing the board members who granted the generous pension package, rather than Goodwin himself.

“The area I think will be looked at will be whether the decision to enhance his pension was made properly; did the people who made the decision have authority to do it?” says Edward Banister, partner at Wedlake Bell.

If the decision-makers were those in a position of authority, one would have to question whether they were fulfilling their corporate governance duties by allowing Goodwin to walk away relatively unscathed. Faith Dickson, partner at Sackers, comments: “It may be the case that the remuneration committees were operating some light touch regulation of their own.”

Claire Rankin, partner at Clarke Willmott, agrees: “If an early retirement deal was done by the directors in Goodwin’s case, in circumstances where a cheaper dismissal was an option, was this the best way of promoting the interests of RBS at the time? Arguably not.

“The directors might be exposed on this basis. Someone on the corporate governance side should also have realised that the government bailout impacted on previous practice within RBS.”

Given the wealth of public opinion, you’d be forgiven for thinking those in charge of chief executive pensions would be going out of their way to limit similar payouts becoming available in the future. Our legal commentators however, remain cynical.

Most believe that although the media spotlight of scrutiny hovers over remuneration committees this month, the next newsworthy item is just around the corner.

Wedlake Bell’s Banister predicts: “The cosy club of remuneration committees for those on boards will get some scrutiny but interest may pass.” Sackers’ Dickson is in a similar frame of mind when she says: “While the banks were making money, star players were presumably commanding top level transfer fees, and will do so again in the future.”

Others are more hopeful that good governance may yet rise out of the tainted ashes of executive pensions. Clarke Willmott’s Rankin says she believes company boards will take steps to avoid censure from shareholders.

She also predicts that far more emphasis will be applied to the reasons for the termination of employment and the entirety of the executive’s contractual, statutory and pension entitlements. “Past practice does not necessarily give rise to contractual rights in future cases and directors must be reminded that they have a fiduciary duty to act in the best interests of shareholders by promoting the interests of the company,” she says.

The public’s outrage at executive pension payoffs is likely to continue for some time, particularly given the paltry sums most employees will be forced to retire on in defined contribution arrangements. But as unpalatable as it may be, we should be thanking Fred Goodwin for showing trust law to be robust, even when put under pressure from her Majesty’s government.

Key points

  • Early retirement benefits are usually arranged separately with directors and senior management as ‘top hat’ agreements
  • Retrospective attempts to reduce or limit such agreements are unlikely to succeed as documentation will be airtight
  • Company board members and trustees are largely responsible for signing off huge payouts and may experience higher levels of scrutiny as a result of the Goodwin case

Published in Pensions Week, 9 March 2009