A lot’s being written and said on the airwaves this week about how lawyers are supposedly crawling over Sir Fred Goodwin’s exceedingly generous pension from RBS. Well, I’ll leave it to the pensions experts to speculate about whether his pension was discretionary and whether any attempt to stop his money under existing law could succeed. What I’m more interested in is whether the government could open its big clunking fist and grab his wad by legislation. The government doesn’t buy my opinion any more, but Harriet Harman would like what I’m going to say: I think legislation could do the trick.
What I’m suggesting is a Bill that gives the government power to reduce pension payments made after it comes into force pursuant to contracts with banks now majority-owned by government. The power would be exercisable in relation to anyone (not just Sir Fred) who a special expert body thought shared management responsibility for the failures that led to the need for government support, and the amount of the reduction would be in accordance with a formula that would reflect the person’s responsibility. The reductions would also however be for the purpose of saving public money, so bigger amounts would come from the biggest pensions – the expert body would not have to respect the proportionate differentials the contracts created in the first place. The formula would be applied by the expert body, a sort of Financial Crisis Management Contribution Commission, who would be tasked with reducing payments straight away, using a very rough yardstick (say, a 90% reduction in the case of very big pensions) on the basis of initial summary findings, with balancing adjustments and repayments to follow later if the person could show their responsibility was less after full consideration. The body would look at the biggest pension payouts first. The amounts saved would be paid as contributions into a special fund to support the banks, relieving the public purse.
It might be objected that this is in effect “retrospective” legislation: Sir Fred has already had his pension, and now you’re changing things after the fact. Well, I’m not sure this proposal is retrospective (I prefer the term retroactive, actually). It does not try to alter the fact that Sir Fred has his pension; nor does it affect his pension in any way before it comes into force, or try to claw back sums already paid to him. I think people are far too ready to see retroactivity in legislation which is not, properly analysed, retroactive at all. Here, my proposal would in no way change the legal position prior to its coming into force: that is the true test of retroactivity. We don’t call tax increases retrospective when they affect income earned under contracts signed years before; I don’t think my proposal is any more retoactive than that.
In any event, there’s no reason why Parliament can’t legislate retroactively. There’s a legal presumption that legislation isn’t retrospective, but that’s simply a rule of statutory interpretation. A clearly worded Act can get round that.
Nor does the Human Rights Act prevent it. Yes, the article 7 Convention right prevents punishment without law:
No one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national or international law at the time when it was committed
but obviously this only applies to retroactive criminality: it would not get in the way of my proposal.
Both Tom Winsor and Afua Hirsch have mentioned the right to protection of property under article 1 of Protocol 1: I agree this is the most serious legal obstacle to legislation. But I don’t agree with Tom Winsor that it is insurmountable.
Article 1 of Protocol 1 says
Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.
The case law shows that any interference with property – and accrued pension rights certainly are property – is only permitted if it strikes a “fair balance” between the public interest and the private rights of the owner, in this case Sir Fred.
In a case involving an absolute deprivation of property, that normally requires compensation. But even cases of outright deprivation don’t always require compensation: it depends on all the circumstances. Here, monetary compensation for the reduction of pension payments makes no sense. Either full compensation is needed (which means the very act of reduction, even by one penny, would be a breach: that seems to me an extreme and self-defeating analysis, since a 1% reduction could hardly be called an outright deprivation) or else partial compensation is sufficient, which is simply another way of saying a lesser, uncompensated reduction is permitted. It makes no sense in this context to talk about the need for compensation, and I doubt the courts would do so.
In any event, this is not a deprivation case. My proposal would not totally extinguish Sir Fred’s pension: it would divert it to other purposes in line with public policy. It would in other words be a control of his property in the general interest – in a case like that, compensation usually isn’t required. You might even argue that my proposal involves securing the payment of contributions, which the courts take an even more relaxed attitude to.
What matters in article 1 Protocol 1 terms is whether the reductions served a proper policy purpose – I think they would since it is clearly legitimate for the state to stop the money it’s had to put up to rescue banks being siphoned off into payments to those whose failures created the crisis – and whether the amount of reduction is fair. By creating a transparent formula involving expert assessment, and giving Sir Fred the right to argue his case fully, to appeal and so on, a system of reductions could be made fair: I think the courts might well uphold it.
Vince Cable may think my idea is “absolutely potty”, but I think Harriet should introduce a Bill now. I even think she could make a section 19(1)(a) statement of compatibility – but if she feels doubtful about my view she can always use section 19(1)(b) and ask the House to take the legal risk. This pension need not stand.
My gut feeling is that this wouldn’t run for a minute in practice (and nor do I think it will ever arise): I read through the leading Strasbourg cases on the First Protocol again last night and I just don’t buy it. I think your depiction of it as “control in the general interest” as opposed to extinguishment would fail: the point is, he wouldn’t be getting it and the distinction seems to lack any difference. (Total extinguishment would obviously be ludicrous, he had substantial accrued rights in any event and only the loonies and the ignorant and, err, Vince Cable seem to be arguing that far: I don’t take us to be arguing about that but about the difference between what he might have got on the standard deduction for early retirement and that deduction being waived, as the scheme rules seem to provide generally in these circumstances.) Nor do I think it amounts to a “proper policy purpose”: the state put up money so that the banks could meet their contractual obligations, whatever those obligations were. It isn’t for the state to decide which contractual obligations should be met (particularly not if they are going to de-privilege pensions). This doesn’t seem “clearly legitimate” at all to me.
On a side point, you say “We don’t call tax increases retrospective when they affect income earned under contracts signed years before; I don’t think my proposal is any more retroactive than that”
I disagree. Unlike the potential income to which you refer, Goodwin already, now, has a defined beneficial interest in the relevant property, the pension fund, not a potential right to income in the future for continuing to work under an ongoing contract of employment. Those payments you propose reducing relate to an accrued right, as opposed to a potential right coming to fruition. Reducing his pension payments deprives him of that beneficial interest. Your hypothetical counter example of changing tax on income earned doesn’t to me seem to work: actually, we do if the income accrued in a tax year before the change, and tax changes tend not to apply to such income. It’s only income that hasn’t yet accrued that tends to be affected. Well, Goodwin’s pension rights have accrued and your proposal seems to me far more truly retroactive than something that deals with income as yet unearned.
There already is a power (in the Pensions Act 95) to forfeit pensions if there’s (in broad and overgeneral terms) a counterclaim based on negligence. I doubt that would run evidentially. (And, as a pensions lawyer, I find it difficult to see how it could otherwise be clawed back short of special legislation, though it’s impossible to be certain without spending serious chargeable time considering it).
Cable’s argument seems even more bonkers to me. The government should (how?) force the pension trustees to act in breach of trust? Assuming they haven’t alrerady let him cash it in and/or buy an annuity, or whatever.
I might add that interfering with pensions is arguably interfering with the rights of the pension beneficiaries generally, at least unless done carefully.
Secondly, the pension trust is separate from the company, and the state has not bought the trust or a controlling interest in the trust.
Third of all, any action by way of legislation that would amount to an unfair prejudice under company law if procured through the voting of shares might (and I say this without an analysis of the case law) be argued to be an interference with the property rights under Article 1, if an Act purported to be justified with reference to the the state’s ownership of a shareholding in a company – it would merely be a different way of accomplishing the same aim. I suspect that something more might be required by way of justification.
I don’t think unfair prejudice comes into it: that would only be material to how it affects Goodwin qua shareholder, assuming he is a shareholder (as he probably is), and I don’t see it does at all.
Thanks for your comments, Liadnan, Marcin: it’s good to have a juicy legal argument. I think you’re both doing the wood and trees thing here in A1P1 terms; I stand by my advice to Harriet.
Liadnan, you mentioned the difference between standard deduction and waiver: that seems to me of little or no importance. What I’m proposing I think cuts entirely through pensions, employment and contract law, and I don’t think any detail of any of the existing rules in those areas represents an obstacle to it. I think a bill can ignore all that and just reduce Sir Fred’s pension to what’s fair in all the circumstances. It comes down to that.
I do think, Liadnan, that a reduction scheme (or scheme applying his pension to other purposes) would serve a legitimate policy purpose. The government did not step in to guarantee all and any of RBS’s contractual obligations; it put up funds to save RBS from total collapse. It’s put about £45 billion of our money into RBS, and although £700k a year is a very small slice of that, the taxpayer is basically funding RBS now and this pension represents a “leak” of funds out of it. I don’t see how you can think it illegitimate for the government to want to stop that leak if Sir Fred bears some of the responsibility for what’s happening to our taxes. To say that’s illegitimate strikes me as analogous to saying that the polluter shouldn’t pay, and that the child support system is illegitimate and the state should simply support all single parents.
Marcin, I don’t think the fact that the pension scheme is a separate trust makes any difference. Wood and trees again, it seems to me. Sir Fred gets the pension because he worked for RBS. As is often said in EU law equal pay cases, pension rights are a form of deferred pay.
Looking at the big picture on A1P1, I think both of you are arguing at least implictly that accrued pension rights are simply untouchable under A1P1. I don’t think that can be right. The Court of Appeal didn’t think so in Dennison v Krasner, which was about insolvency legislation vesting pension benefits in the trustee in bankruptcy. The court in that case said compliance with A1P1 boiled down to whether assigning the pension to the trustee was in the public interest: I agree, and I think my proposal does something analogous. I think on both of your views that case must be wrongly decided.
I’ve left retroactivity till the end because I think it’s relatively unimportant. Liadnan, you say grabbing pension payments as they arise is unlike my analogy of grabbing earned income, because pensions derive from an already-accrued asset or right. Fair enough, good point. But I have another analogy for you. If the council tax goes up on our house that we bought decades ago – or if a new system of wealth tax is introduced, like the council tax itself in the 1990s – we don’t say, “Oh, no, that’s retrospective! I bought my house in 1973 so I should continue to pay rates under the legislation applicable in 1973!”. A house you buy is property that vests in you when you buy it; subsequent tax legislation that requires prospective payments in respect of that property is not retroactive. My proposal is the same as that. And anyway, as I said, there’s no law against retroactive legislation outside the criminal sphere.
Go, Harriet, go!
OK, just to warn you all, I know nothing about the legalities of all this stuff although I think I’ve got my head around what you’re saying.
This legislation is being thought about because of one man and his astronomical pension payments.
While I think that it’s a good idea to try and claw some of it back I’m also worried about the precedent it will set and how it will be applied in the future for nefarious ends.
What if you’re a public servant who’s involved in setting up a Crapita system for your Government department and that department ends up screwed because of the whole project. It’s not specifically your fault and it didn’t exactly bring down the country but it sent some pretty big shockwaves through. You then retire on full pension. What’s to stop the Government wanting to punish you by using this legislation?
Nobody died but millions were lost. But money gets pissed up the wall by all sorts of Gvt departments on one project or another (patient records all being produced electronically for one. How long has that been going on and how much over budget and overdue is it?). How do you differentiate between them all?
Claire, my proposal is for legislation applying only to banks majority-owned by government and to former managers who experts conclude share some of the responsibility for the need for government support – so it wouldn’t apply to any civil servant, or anyone who hadn’t worked in the senior management of a bailed-out bank.
But yes, if I’m right then then Parliament could equally pass legislation to “get” civil servants in the circumstances you set out. I don’t think it should: most civil servants get very modest pay and pensions indeed by Sir Fred’s standards, and they’re not actually in charge like Sir Fred was, but doing what politicians tell them to – it’s the politicians who should carry the can.
But that doesn’t alter the fact that it could pass the legislation. Ultimately, Parliament can pass what law it likes – the classic example is that it can make it an offence to smoke on the streets of Paris. That’s what you get if you don’t have a written constitution (and I think we’re better off without). But assuming Parliament doesn’t want to repeal the Human Rights Act and denounce the ECHR, that sets the limit to what it can do here – I don’t think there’s any relevant EU law.
My argument is that my proposal is defensible in human rights terms, ultimately simply because it’s fair – it balances the public interest against Sir Fred’s, and tries hard with various safeguards to get that balance right.
I think whether your suggestion re: civil servants would fly depends, similarly, on whether in the circumstances it’d strike that fair balance. If not, then human rights would stop it.
Due to pressure of time I’m only going to come back on one point: I don’t think Dennison does assist you. There is every difference between depriving someone of property, including property in the special category of pension rights, specifically in order to meet the free-standing duly owing debts of proving creditors, in accordance with a full code which clearly amounts to “conditions provided for by law” as mentioned n para 72 of the judgment; and doing so -by passing an act carrying out such deprivation- precisely because you concede you can *not* establish a duly owing debt enforceable at law independent of your act of deprivation. The creditors of Messrs Dennison and Lesser had a legal right to money from them, the question was whether they -strictly the TiB- could satisfy that right by enforcing against pension benefits. In this case (on the working assumption that there is nothing short of legislation that can be done) RBS/HM Treasury do not have a free standing right to the money, the right would only arise from the act of deprivation itself.
I don’t think Dennison was wrongly decided, at least on the material point. (A close friend of mine does, but then he was one of the unsuccessful counsel in the case.)
Oh: on the leaking point: I place far more significance than you do on the fact the pension fund and RBS are not the same thing (but then, I’m a chancery barrister, we’re known for caring about stuff like that). RBS have already paid or agreed to pay the money to the pension trustees, as I understand it. The leak has been and gone. But I suspect our views on that are never going to meet.
With that, I’m off to do some chargeable work and I’ll leave this one where it lies, at least until there’s some new twist in the story.
Shame you have to do that pesky work, Liadnan. Chancery, too! You have my sympathy. I’d find that terminally dull; but some people like it, and it’s better paid than blawging. Oh, well.
Dennison, now. I don’t see why confiscating all of someone’s pension rights to in aid of a pre-existing (as you say, “free standing”) ascertainable debt is any more justifiable than confiscating part of them in aid of an as yet unquantified debt to the public that my legislation would create. So what if there is no right for anyone to get at the property except that which arises out of my “depriving” legislation itself? I don’t see why that makes any difference.
In the James case, it was Parliament’s leasehold reform legislation itself which created tenants’ right to buy the freehold to their property and thereby interfered with the Duke of Westminister’s property, making it subject to compulsory purchase – there was no “free standing” or pre-existing right. That wasn’t a breach. And in the N&P case it was emergency legislation, in that case retrospective legislation, that extinguished the buidling society’s claims (which the ECtHR saw as property) – that wasn’t a breach either.
You emphasise the BRS/pension scheme trustees split – but how exactly does this make a difference to the A1P1 analysis? I don’t see that it does. If Sir Fred has any human rights claim at all, that’s because it’s his property: he has no one to hide behind. And if it’s his, and it’s fair to control it (or deprive him of it, if you’re right) then it makes no difference in whose actual possession it is now. I’m not suggesting taking it from them (not that I think that’d make any difference to my view); only intercepting and “docking” any sums paid to him.
All this, interesting as it is, will be very unlikely to happen. A dangerous game is being played by the government here as it seeks to deflect criticism from itself. Taking away lawful rights is hardly likely to encourage any further investors to come to UK. Also, Fred Goodwin is not the only one – there are numerous others (in all sorts of businesses) who have been amply rewarded for failure. Many politicians also!!
I would fully support any legislation to limit all banker remuneration for the future to that which is reasonable as a result of measurable success.
Legal theory of course permits any form of retrospective/retroactive legislation (as Burmah Oil discovered) and nothing in the Human Rights Act 1998 prevents Parliament legislating contrary to the Convention. The consequences of doing so for the UK are political within the Council of Europe. Whatever the legal theory however, one should remember that it does not always march hand in hand with political reality.
I don’t even think it’d be contrary to the Convention, Peter! It’s a matter of political will, this. If they have the will, this could very much be a reality.
It has all the potential for fantastic litigation but I remain highly doubtful that any of this is ever going to be tested. Which from our narrow point of view is something of a shame…
good discussion … moral issues again that don’t always run parallel to the law.
Hi Carl … 1st time comment … I’ll be back soon
Ah! In which case it all sounds good.
But I fear that Liadnan is right in that it’s not going to get very far and that is a shame on so many levels.
Perfectly happy to be proved wrong though.
Great debate! Nice to hear legal minds talk about the actual workings of an idea rather than baseless blustering from the press.
Head of Legal – I don’t know whether there is a lack of political will or not but I think that wiser heads would caution against trying a “take back” however it is done. We cannot be sure of the consequences which might accrue. However, millions our here would like to see the government acting to prevent recurrence of this obscene remuneration.
Good Grief! One can hear the Clerks’ calculators clicking even now. All this will cost how much?
Why bother with legislation? Once again the legal/moral dichotomy appears. Let’s never confuse the two.
The fact is that this was a botched exercise by the Government – Myners in particular. If, heaven forbid, there is a next time then no doubt the Government will be obliged to be more diligent. And if there is a next time maybe their scruples can be voiced before they are forced into another charade of declaring that they had somehow been ‘misled’.
Let us also remember the discussions which took place last November and the Goverment’s loudly stated position and intentions at that time.
Harman’s present intention is to legislate to rectify the effects of their (her own) incompetence. Given the levels of incompetence we are witnessing we can expect a bumper crop of retrospective legislation shortly.
I wish I had time to devote to reading this in full and thinking about the issues fully, as you have done, but I’m so busy at the moment my online activity is becoming horrendously low.
Initial gut feelings are that the principle might be sound, but the labels and words of it are a bit, well, weaselly.
How can ‘diverting to other purposes’ be different to confiscation? If the Highways Agency want to build a motorway along the bottom of my garden then the land is still there, but being used for other purposes to the public good. They could even leave me as the registered proprietor, it wouldn’t make any difference once they’d built their motorway on it. No-one can dispute either their right to confiscate or use my land, nor my compensation.
So reducing his payouts is surely taking it from him – whether it’s taken from him in a legal title sense or simply the payouts diverted to other functions, in meaningful terms he simply doesn’t have the benefit or control of it. It’s still appropriation.
What’s more, it’s surely not enough to say that since full compensation is impossible without invalidating the act then the logical conclusion is that compensation isn’t necessary. If anything that outcome goes to the balance of public good versus the appropriation without compensation required by the ECHR. That balance must surely be extraordinarily high for a modern society to tip in favour of compensation-free appropriation. So is it in fact a balancing act? I just think that the amount of money is too inconsequential to the banks/government in comparison to the pensioner to find that balance here to satisfy Article One to the First Protocol.
However, I’ve always thought that taking the pension bore most similarity to the windfall tax levied on the privatised utilities after Labour came to power – and wasn’t that held lawful?
Sorry Carl – this isn’t a very detailed view and was cooked up in twenty minutes on the sofa. But when you shoot it down I’ll feel like I’ve been educated!