In its deliberations over Sir Fred Goodwin’s pension, the Government is slowly coming to terms with the realisation that a pension is for life, not just for Christmas.
In general, pension legislation protects people’s rights to a pension they have already accrued, and restricts narrowly the circumstances in which they can be required to give that pension up (essentially in situations of fraud, criminal acts or negligence, and I have not seen any of these being alleged in this case).
In normal circumstances, it seems right that employers should not be able to lean on employees to get them to give up a pension they have earned during their employment. But are these normal circumstances? And if they are not, do they really demand a different legal regime?
What we seem to have here, and in the case of other top banking executives who have lost their positions in the course of the credit crunch, is people who at the top of their profession were able to command a high price from the organisations they were working for. What this boils down to is probably no more than the age old question of whether remuneration committees and shareholders are doing their jobs well in setting and approving the right benefit packages to attract, and retain, good people, but without giving them a windfall when they leave the job.
The ethos of light touch regulation may have been embraced too enthusiastically by remuneration committees, as well as the boards running the businesses.
So it seems that it is the size of Sir Fred’s pension and the problems that have engulfed Royal Bank of Scoland that have thrown this into sharp focus and caused the Government, and the media, to question whether there is in his case a claim for clawing some of the pension back.
As things stand currently, it looks like the Government’s chances of doing this are fairly slim. Some of this will turn on whether Sir Fred had a right to take an enhanced pension in particular circumstances, or whether instead there was an option for the pension to be paid at a particular level, with the bank and/or the pension scheme trustees making a decision on whether the higher pension should be paid.
In the second case, it may be possible for the Government to argue that the decision was not taken in the correct way, and that relevant factors were not taken into account when deciding to award a particular level of pension to Sir Fred. However, it is not easy to overturn such a decision in practice.
Another possibility that has been aired is whether the Government might legislate to allow the pension to be reduced. However, this route would also seem to be beset with potential legal difficulties. In this case, wouldn’t Sir Fred be justified in arguing that his human rights would be infringed if his property rights are taken away from him retrospectively?
Even if the Government concludes that Sir Fred is entitled to all of his pension, this case must serve as a reminder to boards of public companies to give serious consideration to the remuneration packages of their directors; both while the director is still on the board, and on leaving.
Faith Dickson is a partner at Sacker & Partners
infuriating
i understand what you’re saying Faith, but it’s just so so so so infuriating. Can’t we please bend the rules just this once? No? I didn’t think so. Lucky Fred.
Not confidence inspiring
There are lots of reasonable doubts about the government’s commercial acumen – and it having just signed away an enormous pension to an outgoing exec who was a total failure is not an encouraging sign.
More worryingly, however, is its willingness to try to use retrospective legislation to overrule a legally binding contract that it itself signed. What country is this, Italy?!
Rem committees
The underlying problem is the notice periods that executives can command. If Freddie could have been dismissed with a very short period of notice his payment on termination would have been lower, and the upfront cost would also have been lower. Freddie also wouldn’t have been able to trade off foregoing a payment for failing to give notice .for an enhanced pension.
It is time that rem committees and investor bodies wake up to this problem and shorten notice period for board directors to, say, a month.
The directors that approved the arrangement also need to consider whether they have fulfilled their fiduciary duties, and doubtless lawyers acting will consider whether there has been a breach of company law in agreeing a termination enhancement in pension in this manner.
Too early to count chickens
Retrospective legislation is not necessary as a change in the tax treatment is all that is necessary to cover future payments to the man ,so that most of the pension would go to the government.As no one or very few people have Freds entitlement it is difficult to see who is going to complain
Can those who approved Sir Fred’s pension be sued by shareholders?
The note from “Frustrated Inverstor” says “The directors that approved the arrangement also need to consider whether they have fulfilled their fiduciary duties ….”. This could be a productive line to follow. Even the threat of action against them as individuals would be likely to worry members of remuneration committees. That might have a more beneficial effect than any amount of well intentioned but toothless government warnings.