Sir Tom McKillop has written to the Treasury Committee regarding evidence given by Lord Myners on the issue of Sir Fred Goodwin's pension. Sir Tom suggested that evidence given by Lord Myners (and that by the UKFI at a separate meeting) might benefit from clarification. In his response, Sir Tom states that Lord Myners knew far more than he disclosed to the Treasury Committee and had in fact misled the Committee. (see paragraphs 17 & 18 - full letter follows).

Based on Sr Tom's evidence it would appear that Lord Myners has no option other than to resign.

17. Mr Scott spoke to Lord Myners in the afternoon of Sunday 12 October 2008 and went through with Lord Myners the Remuneration Committee paper which set out the terms of the arrangement with Sir Fred. Mr Scott is certain that he discussed each element of the proposed terms of departure set out in the remuneration paper, including the pension. As well as referring to the undiscounted effect, and the consequence of early retirement and deemed service for the amount of the pension, Mr Scott also gave Lord Myners (in the conversation on 12 October 2008) a range of £15m to £20m as being Mr Scott's best estimate of what the pension liability might be.

18. It is not correct, as Lord Myners has suggested, that Mr Scott indicated that disclosure of Sir Fred's pension "could be spread over a couple of years to deflect adverse comment". The point made by Mr Scott was that accounting rules and the timing of arrangements with Sir Fred would determine in which financial year disclosure should properly be made. Mr Scott was aware that the pension arrangement would need to be properly disclosed and did not at any time suggest otherwise.

Response from Sir Tom McKillop to the Treasury Select Committee

Dear Mr McFall

Many thanks to you and your Committee colleagues for inviting me to make a written submission. As I hope was clear from my letter to you dated 17 March, I was concerned that the evidence of Mr Moreno, Mr Kingman and Lord Myners might benefit from clarification, particularly in relation to the pension arrangements between Sir Fred Goodwin and the Royal Bank of Scotland.

As I wrote on 17 March, I have remained silent since my resignation from RBS because of my profound regret at events there and a desire not to create controversy that might harm the bank or the public interest. I remain acutely aware of the unhappiness that has been caused to investors and employees at the Royal Bank of Scotland. I am also keenly aware and appreciative of the Government support for the RBS.

I have never sought to avoid accountability for my actions as chairman of RBS. I have apologised publicly both at the shareholder meeting and before your own Committee. Having said that, I must emphasise that there was no "elaborate ruse" by myself and Mr Scott to give Sir Fred any more than he was contractually entitled to and that we and, I believe, all the directors acted in what we judged to be the best interests of the shareholders, including the Government.

In that context the following points need to be made: 

1. Sir Fred Goodwin was recruited by RBS and appointed to the Board in 1998 and the principles of his contract of service (including his pension entitlement) were agreed prior to the arrival of any director who was on the RBS board in October 2008.

2. These principles included him being treated, not withstanding the pension cap, as if he was a member of the RBS pension fund for his full salary.

3. As part of these principles agreed by RBS in 1998, Sir Fred's benefits were calculated assuming a notional employment starting age of 20.

4. He also became subject to the RBS Fund rules which provided that employees leaving RBS early at the request of their employer received a pension as though they had attained age 60. The wording in the Annual Report is: “RBS Fund rules allow all members who retire early at the request of their employer to receive a pension based on accrued service with no discount applied for early retirement.”

5. The requirement to treat Sir Fred as if he was a member of the RBS pension fund meant that any lump sum taken at the time of the pension payment being settled would (like a lump sum paid to any other RBS pension fund member) be received tax free in respect of pension accrued up to April 2006. In February 2007, in light of the implementation of "A Day" (the simplification of the pensions tax regime which had occurred in April 2006), RBS confirmed the application of this principle taking into account the Pension Act changes.

6. Ahead of October 2008, the Board concluded that no bonuses would be paid to senior executives for 2008.

7. In the days ahead of the weekend of 10-12 October 2008, RBS executives took part in confidential talks with HM Government about rapidly deteriorating asset quality, liquidity and share price. Details of these talks were leaked, principally to the BBC, exacerbating a difficult situation.

8. On Friday 10 October 2008, the non-executives (excluding myself) met and decided that Sir Fred would have to stand down. It was discussed and agreed at that meeting that it was necessary that Sir Fred’s departure be managed carefully. Public confidence in RBS at that time was very low. Continuity and stability were very important.

9. The Nominations Committee, with the benefit of soundings from board members, determined that Stephen Hester, who had recently joined as a non-executive director, was the most appropriate successor. He was then the Chief Executive Officer of British Land plc and it would be necessary to obtain agreement that British Land plc would release him sooner than his notice period at that company. The timing was not clear but we thought it was more likely to be months rather than weeks before Mr Hester could fully take up the role. This reinforced our belief that Sir Fred’s departure needed to be carefully phased to ensure stability.

10. This was recognised in the Nominations Committee minute of the 10 October 2008 meeting: "The Committee discussed the process for selecting and appointing a new Group Chief Executive but recognised that this should take account of the need to ensure management stability and a smooth handover."

11. All of this meant that there would need to be a consensual departure of Sir Fred. He would be leaving at the request of the company with his full contractual entitlement to a pension and other items, as laid out in the Annual Report. As a result we secured continuity, stability and the continued cooperation of Sir Fred. That, in my judgement, was in the best interests of the shareholders of RBS.

12. On Friday 10 October, Sir Fred was advised of the Board decision. He accepted the decision and agreed to discuss his departure on a consensual basis.

13. On the evening of Saturday, 11 October 2008, Sir Fred, Bob Scott (the senior independent director) and I attended a meeting at the Treasury with Lord Myners, other Treasury officials and their advisors, including representatives from the Financial ServicesAuthority and the Bank of England. The meeting was to discuss the terms of the proposed Government investment in RBS.

14. At the conclusion of this meeting, Lord Myners asked Mr Scott and I to join him for a private meeting. At this meeting, he explained that the Government expected Sir Fred to stand down as part of the recapitalisation process. I explained to Lord Myners that the Board had already reached that conclusion and had communicated this to Sir Fred. Lord Myners was told at that meeting that Sir Fred's pension benefit would be the sensitive issue and that it would be "enormous".

15. Lord Myners stated on the Saturday evening that the Government was concerned to ensure that there was “no reward for failure.” We explained that the Board of RBS had already determined that there should be no bonuses for2008.

16. The size and complexity of the Government recapitalisation made it all the more important that Sir Fred was willing and available to help negotiate and finalise the Government package, to launch that on Monday 13 October 2008 and to help in the preparation of the prospectus, as well as dealing with the ongoing integration of ABN Amro and all the other duties of the CEO until Mr Hester was able to take those tasks over.

17. Mr Scott spoke to Lord Myners in the afternoon of Sunday 12 October 2008 and went through with Lord Myners the Remuneration Committee paper which set out the terms of the arrangement with Sir Fred. Mr Scott is certain that he discussed each element of the proposed terms of departure set out in the remuneration paper, including the pension. As well as referring to the undiscounted effect, and the consequence of early retirement and deemed service for the amount of the pension, Mr Scott also gave Lord Myners (in the conversation on 12 October 2008) a range of £15m to £20m as being Mr Scott's best estimate of what the pension liability might be.18. It is not correct, as Lord Myners has suggested, that Mr Scott indicated that disclosure of Sir Fred's pension "could be spread over a couple of years to deflect adverse comment". The point made by Mr Scott was that accounting rules and the timing of arrangements with Sir Fred would determine in which financial year disclosure should properly be made. Mr Scott was aware that the pension arrangement would need to be properly disclosed and did not at any time suggest otherwise.

19. In a discussion on Sunday 12 October 2008 with Mr Scott, Lord Myners made it plain that he considered it appropriate to ask Sir Fred to give up part of his contractual entitlement (the payment in lieu of notice). Sir Fred agreed to give this up in discussion with Mr Scott, after, I believe Sir Fred and Lord Myners had discussed this matter directly.

20. At no stage did Lord Myners or any other representative of the Government ask the RBS directors to attempt to alter any of the contractual terms relating to Sir Fred's pension. Nor did Lord Myners attempt to discuss the matter with Sir Fred, as he did with the payment in lieu of notice.

21. Subsequently, on 2 November, Lord Myners contacted Mr Scott and said that the Government wished Sir Fred to waive certain share related benefits to which Sir Fred was contractually entitled. Sir Fred agreed in discussions with Mr Scott to forego these entitlements, on the basis that all other elements of his package would be honoured and would remain unchanged. Mr Scott passed this information on to Lord Myners, with particular reference to the pension arrangements being part of that remaining package.

22. In summary, there was no question of any discretion to be exercised in relation to Sir Fred's pension and no discretion was exercised in this regard by any RBS director. RBS considered itself contractually bound to pay the pension benefits which had crystallised by virtue of its request to Sir Fred to leave the company –but not to pay any more than the proper contractual obligation. Mr Scott and I had been informed by Lord Myners on the Saturday evening that RBS should mitigate liabilities but not abrogate contractual requirements. We had put in place mitigation measures (for example in relation to the payment in lieu, before it was given up) but had not sought to deny Sir Fred's contractual entitlements.

23. By contrast, the Government (through the actions of Lord Myners) made it clear that they were willing to seek to encourage Sir Fred to forego contractual entitlements, and they did so in relation to the payment in lieu of notice and stock related benefits (successfully) but did not make any attempt to do so in relation to the pension.

24. It was clear to the Government (and indeed the public at large) that Sir Fred was departing on a consensual basis. The press release issued on 13 October 2008 expressly recognised that an agreement had been reached with Sir Fred. The release stated that Sir Fred would continue “for a short period” as chief executive to allow for a “smooth handover” with Stephen Hester. The contents of this and subsequent press releases were agreed with the Treasury after considerable scrutiny by them.

25. A subsequent press release agreed by the Treasury and issued on 17 October reinforced the agreed nature of Sir Fred's departure. It announced that Mr Hester would takeover as group chief executive on 21 November 2008, and spoke of the desirability of Sir Fred remaining at the RBS Group until 31 January to ensure an orderly departure. At no stage did Lord Myners or another Government representative suggest that Sir Fred should be dismissed.

26. It has been suggested that Watson Wyatt advised RBS at some stage over the weekend that the manner in which RBS dealt with Sir Fred's departure would have "adverse consequences" and that "shareholders would not approve". Neither Mr Scott nor I have any knowledge of any such advice, from Watson Wyatt or anyone else. Watson Wyatt could not in fact be contacted for most of the weekend.

The Committee will appreciate that I have not sought to avoid my fair share of accountability for the circumstances in which RBS finds itself - as I made clear during my appearance before the Committee. I make the points above because I believe the circumstances relating to Sir Fred's pension have not been accurately represented to the Committee. In addition, I and other RBS directors have been the subject of allegations which are unfair and unjustified. In particular:

(a) there was no "elaborate ruse" (as it has been alleged) to pay Sir Fred any amount other than was contractually required in the circumstances - with particular reference to the best interests of RBS shareholders at a very difficult time. The arrangements were put before RBS's Remuneration Committee and the non- executives meeting as the Chairman's Committee;

(b) full disclosure was made to the Government of the position, as was necessary at the time. There was no concealment of any relevant matter. Mr Scott and I were keen to disclose the terms upon which Sir Fred was to depart (and indeed the terms on which his replacement would assume office). This was particularly the case in relation to the pension which was obviously a large and sensitive item. All requests from the Government were responded to constructively; and

(c) the suggestion that I or other directors in some way failed in our duty is inconsistent with others (Lord Myners and other Government representatives) approaching the matter in exactly the same way on the basis of the same relevant information -which is itself entirely consistent with the context and particularly the need for RBS to maintain Sir Fred's cooperation in the best interests of RBS shareholders.

Please note that Mr Scott has reviewed a copy of this statement and confirms that its contents are correct from his point of view.

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