Sir Fred Goodwin’s pension arrangements were at the centre of a war of words on Thursday as the former chief executive of Royal Bank of Scotland traded allegations over the terms of his departure from the ailing bank with Lord Myners, the City minister.

The two men exchanged terse letters in public after it emerged that Sir Fred, who was forced out of RBS last October without a payoff, had started collecting a £693,000-a-year pension.

Gordon Brown, the prime minister, on Thursday demanded action on the issue, arguing that the pension payment for Sir Fred could not be justified. However, in a letter to Lord Myners, Sir Fred said he was not giving up the pension and alleged that the minister had been involved in discussions with members of the RBS board about his pension arrangements when he was negotiating his departure.

Last night Lord Myners fired back. In a letter to Sir Fred he described the decision as ”unfortunate and unacceptable”. He also claimed to have only recently become aware that the decision to allow Sir Fred to claim a pension was discretionary rather than a contractual arrangement. ”It was only last week that the Government became aware that the decision of the previous Board of RBS may have been a discretionary choice,” he wrote.

The row comes against the backdrop of the government’s decision to insure £325bn of RBS assets in an effort to stabilise the ailing bank and kick-start lending to the economy.

The dispute centres on negotiations between Sir Fred, the RBS board and the government last October, when the government injected £20bn in fresh capital into the bank. At the time Sir Tom McKillop, then chairman of RBS, and Bob Scott, the director who was chairman of the board’s remuneration committee, led negotiations with Sir Fred over the terms of his departure. According to people familiar with the matter, Mr Scott had regular conversations with Lord Myners to keep him informed about the discussions.

The result of the negotiations was that Sir Fred agreed to give up his contractual entitlement to a year’s salary, worth around £1.3m, and – following further pressure from the government – also gave up the right to share options worth another three months’ salary. However, he insisted on holding on to his pension, which would allow him to start drawing an annual payment almost immediately. ”I believed that these ‘gestures’ were appropriate in the circumstances, and sufficient, and revisiting the position today, I believe that they remain so,” Sir Fred wrote.

Sir Fred’s early departure effectively doubled the value of his total pension from around £8m to more than £16m. According to people involved in the talks, Mr Scott told Lord Myners that he estimated Sir Fred’s pension pot had increased in value.

On Thursday it emerged that the RBS board could have denied Sir Fred his early pension if it had dismissed him as chief executive rather than allowing him to depart as a so-called ”good leaver”. However, people with knowledge of the matter said such a move would have been likely to have triggered a legal challenge by Sir Fred, opening the bank to greater liabilities.

Gordon Brown, prime minister, and Alistair Darling, chancellor, insisted they only became aware of Sir Fred’s £693,000 annual pension settlement in the past few days. Lord Myners’ letter last night says the government only learned last week that the pension deal with RBS was discretionary.

Mr Brown had said earlier he would explore all legal avenues to try to claw some of the pension back. And in his letter Lord Myners goes on to say: “UK Financial Investments [the state’s bank holding company] has, on behalf of the Government, been vigorously pursuing with the new Group Chairman whether there is any scope for clawing back some or all of your pension and whether, at the point the Board made their decision, it was made clear to the then remuneration committee and Board that the scale of the pension payment was discretionary, as it now proves to be.

Mr Darling’s call came amid increasing political pressure on ministers over the “eye-watering” pension that Sir Fred, aged 50, is now drawing from the bank that he ran until it needed a multibillion-pound taxpayer bailout.

“You cannot justify these excesses,” Mr Darling stated earlier in the day. The chancellor said he had asked Lord Myners, the City minister, to speak to Sir Fred on Wednesday and “put it to him quite simply – ‘look, in the circumstances in which this bank is now in, do you not think it right that you should forgo this?’.”

“I am very clear that we will do whatever we can. That’s why we have the lawyers looking at this,” Mr Darling told the BBC. “But I do think that, on a voluntary basis, Sir Fred could resolve this problem and he could do it quite quickly.”

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