City minister Lord Myners was taken to task by MPs over his handling of former Royal Bank of Scotland boss Sir Fred Goodwin's controversial £703,000 pension.

The Treasury Select Committee's report on bank pay said Lord Myners should have given “a clearer, stronger direction” to RBS that there should be no rewards for failure at the bank, which is now 70% owned by the taxpayer after a £20 billion rescue.

Sir Fred's pension was boosted by the RBS board's decision to treat him as having retired, making no reductions to the pension for early retirement.

Lord Myners said he had no knowledge of the discretion used by RBS in its treatment of Sir Fred, who MPs described as a “highly visible emblem of bankers damaging the economy without themselves being penalised”.

The committee said that the bank should not have been allowed to handle the pension negotiations on its own.

“We suspect that Lord Myners' City background, and naivete as to the public perception of these matters, may have led him to place too much trust in the RBS board,” the report said.

MPs added they believed it would have been open to Lord Myners “to insist that Sir Fred should be dismissed”.

That would have led to a much smaller pension entitlement of £416,000 a year from the age of 60.