Page last updated at 11:28 GMT, Wednesday, 18 March 2009

Sir Fred's fantastic expanding pension

BY Ian Pollock
Personal finance reporter, BBC News

News photographers outside Sir Fred's Edinburgh house
Sir Fred's pension is still the subject of intense scrutiny

Just how does anyone manage to accrue a pension of £703,000 a year?

The monumental row about Sir Fred Goodwin's pension from the RBS group rumbles on.

But more details have been supplied that explain how he earned such a large pension in just 10 years. It could enable him, conceivably, to do nothing at all for the rest of his life.

More letters from his employer, the Royal Bank of Scotland (RBS), to John McFall MP, chairman of the Treasury Committee, have revealed the bank's sensationally generous treatment of its now departed chief executive.

That generosity did not start with the controversial decision last October that he could retire at 50, on the full pension he had earned to date.

In fact, it started at least five years earlier in 2003.

And the letters make it clear that Sir Fred's pension arrangements were not a side issue, but had long been a closely negotiated part of his overall deal with the bank.

The letters

A letter to Sir Fred from the bank's group director of human resources, Neil Roden, dated 24 March 2003, outlines the chief executive's pension arrangements.

In particular this means that if you remain with the group until age 60 your pension will be two thirds of your full basic salary

RBS letter to Sir Fred, 2003

"The benefits set out in this letter... are a contractual entitlement and, to the extent they are not met from the Group fund or a FURBS, the Group has a legal obligation to pay these benefits to you," he wrote. (FURBS stands for "funded unapproved retirements benefits scheme"; more on that later).

The aim was to ensure that Sir Fred could eventually retire with a maximum pension worth two-thirds of his final salary.

However, he had only joined RBS on 1 August 1998, aged 40.

So to give effect to this plan, the bank decided to treat Sir Fred as if he had been a member of its final salary pension scheme since the age of 20.

This granted him a notional extra 20 years membership of the bank's ordinary, non-contributory, staff pension scheme.

In addition, it decided that for the years of his actual employment with the bank, he would accrue pension at twice the rate of ordinary members, at 2/60ths of his pensionable earnings per year, rather than just the normal one 60th.

That suggests he might in fact have run up his full entitlement - 40/60ths of final salary - by the age of 50.


The bank's 2003 annual report shows that in that particular year Sir Fred was paid a basic pensionable salary of £898,000, plus bonuses and profit sharing which took his total salary to £1,916,000.

That basic salary meant the pension he had now become entitled to was already £334,000 a year.

However, his actual service since 1998, plus pensionable service transferred in from previous employment with the National Australia Group, only added up to a potential pension of £24,400 a year.

In addition the bank estimated that his other private pension policies might generate a further £35,000 on retirement at age 60.


How to bridge the gap between that £59,400 and the £334,000 a year it already wanted to pay him?

Lord Myners
Lord Myners continues to demand that Sir Fred "repay" part of his pension.

At the time, Inland Revenue rules stipulated that pensionable salary for the purposes of a tax-approved pension scheme could not be more than £97,200 a year.

That would, on the face if it, have limited Sir Fred's pension to two-thirds of that sum, about £64,800 a year.

So the bank decided it would get around both this potential restriction and the apparent underfunding of its pension promise to him, and quite legally too.

"Benefits will be calculated ignoring the effect of the earnings cap (currently £97,200 a year)," Mr Roden wrote.

"Benefits will be calculated assuming a notional start date of your 20th birthday.

"In particular this means that if you remain with the group until age 60 your pension will be two thirds of your full basic salary," he added.

To achieve this the bank simply agreed to pay any difference directly from its own funds, or via a pension scheme common at the time for highly paid executives, called a funded unapproved retirements benefits scheme, or FURBS.

A FURBS can be seen simply as a glorified piggy bank.

The bank's 2003 letter does not state if these arrangement were new, or had been in place since 1998.

But it seems they had always been envisaged, as the 1998 RBS annual report says that extra pension arrangements would be set up for Sir Fred, in addition to his membership of the main staff scheme.

Tax bill

On 26 April 2004, the bank wrote again to Sir Fred.

If these arrangements prove inadequate the Group will still be responsible for providing the full entitlements
RBS letter to Sir Fred, 2004

It appears at least some of the earlier proposed arrangements had not yet been put in place.

However, a FURBS would now be set up once a change to the tax regime for all pension schemes (known as A-Day) came into effect in April 2006, or earlier if Sir Fred left the bank for any reason.

The bank stressed that "if these arrangements prove inadequate the Group will still be responsible for providing the full entitlements".

A further letter from Mr Roden, dated more than three years later on 21 December 2007, improved Sir Fred's position further.

It considered the position if he decided to take a maximum 25% of his total pension pot as a lump sum, in exchange for a lower annual pension - a very common arrangement in pension schemes.

Any lump sum taken from his RBS pension fund would be free of income tax.

But it would be taxed at 40% if the cash came either from the funds in his FURBS or directly from the bank.

So RBS agreed to pay Sir Fred extra to cover any such tax bill.

Doing the maths

Who will now pay the tax bill that has been triggered, even if Sir Fred reverses his decision to take a chunk of his pension pot as immediate cash, is the latest element in the continuing controversy.

Some example calculations showed Sir Fred that back in 2007 he could have expected a pension of £82,500 a year from the RBS scheme, plus a lump sum of £550,000.

In addition, the money in his FURBS, or paid directly from RBS, would provide a pension of £1,008,465, plus a further lump sum of £3,158,422.

To pay the 40% tax on that lump sum, RBS said it would increase its payment to him to £5,264,037.

At the end of 2008 Sir Fred's pension pot had more or less doubled in a year to £16.6m, to provide him with a pension of £693,000 a year at the age of 50 rather than 60.

As a result of working one month extra in January 2009 that pension then rose to £703,000 a year.

If Sir Fred Goodwin is singing all the way to the bank, surely there can be no better tune on his lips than one particular Beatles song, from Sgt Pepper's Lonely Hearts Club Band.

"I've got to admit it's getting better, a little better all the time."

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