Friday, 27 February 2009

A very political pension

It is hard to understand how we reached the current position of Sir Fred Goodwin and his unfeasibly large pension. For anyone who doesn't know the background, Sir Fred was the head of the Royal Bank of Scotland until late last year. Under his stewardship a successful bank was reduced to a pile of steaming debt, posting losses of £24.1billion in the latest financial year. His bank was at risk of folding in 2008 until the government stepped in with vast sums of money and propped up its sagging cadaver. As part of the rescue package it was thought best for Sir Fred to concentrate on mastering crochet and flower-arranging, so his exit from the bank was negotiated. As with all negotiations, his departure came only when both he and the government were satisfied with the terms agreed. He did not insist on being paid in lieu of notice and he gave up certain other entitlements, including his key to the executive lavatory, in return the government thanked him and asked him to close the door on his way out.

The government had two other options. One was to let the bank fold, a course which would have terminated Sir Fred's contract of employment and restricted the amount of money he could get out of the company in the future, but that was thought unacceptable. The other was to sack him and let him sue if he didn't like it. There is only one good reason for not sacking someone who has overseen the total collapse of a previously successful business, and that is that you cannot prove he broke the terms of his contract of employment. Sir Fred was sought out by the bank to be it's big cheese. One consequence of being head-hunted for a major position is that you are very much in the driving seat when it comes to the terms of your employment. It would not be at all surprising if his contract of employment was drafted in terms very favourable to him. Indeed it might well be that his only concrete obligation was to receive his salary and bonuses. Various other obligations would be implied by law even if not expressly included, but each of them would be a difficult basis on which to justify dismissal even for the man responsible for snapping the bank's spine in two.

All this should have been looked into when the government took a majority shareholding in the bank and had to decide what to do about Sir Fred. In fact, even from this most incompetent of governments, it is inconceivable that it was not looked into. A deal was done and that was that. Sir Fred visited the yarn shop and started the crocheted blanket of his dreams. Now news has broken that his pension entitlement is no less than £693,000 a year for life, he is currently fifty years old, and the government is embarrassed. I have to say, I would be embarrassed if I had negotiated the removal from office of someone who had done so much damage and had managed to leave him with a pension pot valued at some £16million. I would ask how I could have been so incompetent.

An exchange of letters has now taken place between Sir Fred Goodwin and Lord Myners, the minister responsible for the negotiation. Sir Fred pointed out that he gave up the equivalent of more than a year's fat salary, that the pension was all recorded on the books and that the minister agreed to him keeping it. In reply the minister said he had believed the pension to be a legal entitlement whereas it now appears it was only discretionary. With the level of skill enjoyed by only this government in the western world, a minister's excuse makes him appear even more incompetent.

When the negotiation was taking place Sir Fred had a legal entitlement to a year's notice yet he agreed to forgo that entitlement, he had a legal entitlement to other benefits and agreed to forgo them, so why would the fact that the minister believed his National Lottery sized pension to be a legal entitlement mean it was not up for negotiation? It makes no sense.

But that's not the worst bit. The worst bit is that the minister did not know the legal status of the pension arrangement. These things are not written in hieroglyphics, they are contracts in pretty standard English legal jargon. They include a chunk setting out the terms on which the pension is payable. If you want to know what it means, the conventional technique is to read it.

None of this is to say that Sir Fred cannot be deprived of his ginormous pension, although it is very unlikely. Poor Gordon, at his most monocular and moronic, has started shouting about seeking ways to prevent at least part of it being paid. Even the grossly over-pensioned John Prescott has weighed-in, calling for Sir Fred to be summarily deprived of the money and putting the onus on him to sue for it. Not for him the rule of law or the law of contract, the idiot Prescott has votes to win so he wants to make the law up as he goes along if he thinks it will result in little crosses against the names of Labour Party candidates come election day.

It's all just political posturing, of course. If the government is to have any chance of undoing the arrangement within the law they face an enormous obstacle in their agreement to the severance package negotiated last year. Obviously we cannot tell exactly what happened. Maybe Sir Fred was given a generous pay-off because of his years of loyal service to the furtherance of poor Gordon's grand economic plan, and this little spat is the price he has to pay for his future income. Maybe he felt he had given up enough by waiving his notice period and other benefits and would never have agreed to cede his pension without a legal battle he felt confident of winning. Maybe the whole negotiation was just conducted utterly incompetently by a government that was in full headless chicken mode at the time. Whatever the true position, one simple fact remains - a deal was done.

And that is where the really important lesson comes from this farce. If it had been Barclays Bank or HSBC that took over RBS rather than the government, there would be no row about Sir Fred's pension arrangements. They would have been part of a the whole takeover package and lost in the small print while the real business of trying to rebuild a once thriving bank would be the only concern. Instead the state of the bank has been relegated to secondary importance behind an issue of no real consequence to anything. That is what happens when governments take over businesses. Headlines and opinion polls are more important to them than the substance of the thing. OK, so his pension pot is worth £16million, a huge amount of money for an individual, but what is it in relation to RBS as a whole? Its losses for the year were £24.1billion and his pension entitlement grew over several years, but let's treat it as a single part of the £24.1billion loss in that single year. £16million is 0.067% of £24.1billion. Heap all the vitriol you want on the man, he had to go, he had presided over ruination, get rid of him. Pay him 0.067% of the losses the bank incurred in his final year and send him on his way, it will be money well spent. Just start running the bloody thing properly.

Yet they will not run it properly. They will run it for political gain. They think there is political capital - by which I mean potential votes - in shouting about how much the failed former boss of the bank is being paid. They might be right, but it's got nothing to do with anything. If they were really concerned about it as a matter of high principle they could have written clauses into his severance contract ensuring he did not receive that money. The issue has cropped up now as a matter of pure political convenience. Just as poor Gordon is getting flak from national and international figures about the way he bankrupted the country he has found a subject to divert attention. It won't divert it for long and in a few weeks or months there will be another scapegoat put up to receive public fury, anything to prevent the government that bankrupted the country being identified as the cause of our bankruptcy.

We saw earlier in the week how Northern Rock is now to be used to make home-purchase loans for political reasons (here). Today the effective nationalisation of RBS is the excuse for trying to win some votes by bashing a man with money. Tomorrow it will be something else. There are endless ways in which attaching government to business allows politicians to engage in populist rants by picking a random example of how the business works, taking it out of context and flogging it for all it's worth.

Oh, and lest you might believe that I approve of Sir Fred's pension arrangements, I don't. But I would rather see contractual arrangements upheld than arbitrary rule according to the temporary direction of the political wind. Maybe we have laws to hold reckless incompetents like Sir Fred Goodwin to account for the vast damage they do, maybe we don't. Maybe that will never be tested. But I would rather he got away with scamming £16million under a freely negotiated contract than we have rule by populist diktat.

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