The Treasury has said that banker Sir Fred Goodwin's refusal to give up his £693,000-a-year pension is "unfortunate and unacceptable".
Ex-banker Sir Fred Goodwin's refusal to hand back his £16m pension has been condemned by the Treasury as "unfortunate and unacceptable".
Chancellor Alistair Darling had asked him to hand back his £16m pension pot amid anger about rewards for failure.
Sir Fred says ministers knew about the £693,000 a year deal for months and that it was approved by Lord Myners.
But the ex-RBS boss rejected this in a letter to the Treasury in which he says ministers agreed to the pension deal.
Lord Myners denies this and has said such a "huge reward" cannot be justified given the bank's losses.
In response, city minister Lord Myners said he was not aware at that time that this deal could later be altered.
RBS announced a record corporate loss of £24.1bn on Thursday and received a second taxpayer bail-out of £13bn.
The BBC's Political Editor Nick Robinson said any failure to persuade Sir Fred Goodwin to alter the terms of his pension payout would be politically damaging given the government pledge to crack down on City excesses.
Sir Fred's pension pot doubled to £16m last October when the 50-year-old agreed to take early retirement.
'Gestures made'
The Treasury, which pumped £20bn into the crippled bank, was anxious to get new management in place.
The pension row intensified after RBS revealed it had made a £24bn loss last year, the single largest in British corporate history, and would receive a further £13bn from the government.
'Clawing back'
Mr Darling has asked Sir Fred, who has been widely blamed for helping to drive the bank to the brink of ruin and who stepped down as chief executive in November, to hand back some of the pension money.
But it now says it was misled by RBS's board at the time, which "gave the impression" that Sir Fred's pension was legally binding.
But in a letter to Lord Myners, Sir Fred rejects the chancellor's plea, saying: "I hope that you understand my rationale for declining your request to voluntarily reduce my pension entitlement".
Chancellor Alistair Darling said he discovered a week ago that the package was "discretionary" and could have been blocked.
Sir Fred says he agreed to a series of "gestures" in October, when he was negotiating his departure from the bank, such as foregoing the equivalent of 15 months salary.
He said the government was now investigating ways of "clawing back" some of the money, amid mounting cross-party anger about rewards for failure.
But when it came to the issue of his pension "you indicated that you were aware of my entitlement and that no further 'gestures' would be required", writes Sir Fred.
But its appeal to Sir Fred to hand it back voluntarily was angrily rejected by the former banker, who claimed it had been approved by Treasury Minister Lord Myners.
At the time he stood down Mr Darling had hailed the fact Sir Fred had waived his contractual entitlement and decided "to do the right thing".
Sir Fred said he had already given up a significant part of his salary as a "gesture" when he was negotiating his departure from the bank.
There was no mention of the size of pension he was going to receive.
In a letter to Lord Myners, he said: "I am told that the topic of my pension was specifically raised with you and you indicated that you were aware of my entitlement and that no further 'gestures' would be required".
Mr Darling, who had asked Lord Myners to speak to Sir Fred about giving up his pension, said that the government had been under the impression in October that the pension deal was contractually binding.
'Synthetic anger'
But in the past week it had realised that that was not the case and certain elements of it were discretionary and could later be altered by the RBS board.
In a letter to Sir Fred, released by the government, Lord Myners said the discussions he had with the former banker about the financial arrangements of his departure from RBS "did not amount to approval" of his pension payment.
In a letter to Sir Fred, released by the government, Lord Myners said the discussions he had with the banker about the financial arrangements of his departure from RBS "did not amount to approval" of his pension payment.
I believe basically take it off him and let him sue in the courts John Prescott, former deputy prime minister
He added: "I do not agree with your rationale for declining my request that you voluntarily reduce your pension."
He added: "I do not agree with your rationale for declining my request that you voluntarily reduce your pension."
"And indeed I hope that on reflection you will now share my clear view that the losses reported today by the bank which you ran until October cannot justify such a huge reward."
"And indeed I hope that on reflection you will now share my clear view that the losses reported today (Thursday) by the bank which you ran until October cannot justify such a huge reward."
Mr Darling has said the government is investigating the possibility of "clawing back" some of the money, if necessary through legal action.
But shadow chancellor George Osborne, for the Conservatives, said the government's anger at the former bank chief's pension was "synthetic" because they knew about the package.
'Obscene'
He said: "The problem for the government, and for Lord Myners who's a government minister, is that they knew all along about this pension so all this synthetic anger now is just long after the horse has bolted."
Earlier Prime Minister Gordon Brown "demanded action" on the issue, saying pension payments on such a scale could not be justified when the company was losing so much money and cutting thousands of jobs.
'Utterly grotesque'
Shadow chancellor George Osborne described the pension agreement as "obscene" and said it would be "wrong" for Sir Fred to take the money.
The shadow chancellor added: "It seems to me they're on the hook either way. They knew and they didn't stop it and that's what Fred Goodwin's saying."
He also called on ministers to explain when they had known of his pension arrangement and why they had not acted earlier to do something about it.
He said the pension payout was "very symbolic" of what had gone wrong in the City and there was little chance of recovering the money in the courts, if the government decided to sue.
I think it will be very hard to put this right unless Sir Fred does the decent thing Michael Fallon, Tory MP
"I don't think the government's got much of a leg to stand on in the courts if they're going to take legal action. Let's hope they succeed, but it's doubtful."
Lib Dem Treasury spokesman Vince Cable said Sir Fred should be asked to "renounce" the entitlement and, if he refused, ministers should move to block it.
Mr Osborne's assessment was echoed by Lib Dem Treasury spokesman Vince Cable, who said: "It's clearly utterly grotesque that somebody should be paid this enormous sum of money."
But the BBC's Business Editor Robert Peston said there was very little that ministers could do, beyond asking Sir Fred to give up the arrangement, to recover the money.
Former deputy prime minister John Prescott said it had been an "extraordinary" decision to award Sir Fred the pension and called for the use of "all legal means" to claw it back.
He said it would be extremely difficult to prove that Sir Fred had stepped over the line in terms of acceptable behaviour while he was running the bank.
He told BBC Radio 4's Today programme: "The taxpayer has rescued them, there is billions of pounds involved, he's not entitled to this kind of pension, whether who knew about it or not, you can investigate that later.
Tory MP Michael Fallon, deputy chairman of the Treasury select committee, said the episode demonstrated the government's "sheer incompetence".
"I believe basically take it off him and let him sue in the courts."
"I think it will be very hard to put this right unless Sir Fred does the decent thing," he told BBC News.
He blamed the former board of RBS for the "extraordinary" decision to award the "obscene" level of Sir Fred's pension.
Former Cabinet minister Peter Hain said on the BBC's Question Time programme that the "vastly inflated" pension payment was "completely unacceptable".
In October, Alistair Darling hailed the fact Sir Fred had waived his contractual entitlements and decided "to do the right thing".
"I find it completely astonishing that this could have happened."
There was no mention of the size of pension he was going to receive.
The Treasury has declined to be drawn on the future of existing members of the RBS board who approved Sir Fred's pension award in October.
New RBS chairman Sir Philip Hampton, appointed earlier this month, said he had asked Sir Fred two weeks ago to voluntarily reduce the pension but had yet to receive an answer.
The latest government cash injection will give the taxpayer an 84% economic stake in the bank.
