The Government is prepared to change the law to strip former banking chief Sir Fred Goodwin of his £650,000-a-year pension, Commons Leader Harriet Harman hinted today.

The Government is prepared to change the law to strip former banking chief Sir Fred Goodwin of his £650,000-a-year pension, Commons Leader Harriet Harman hinted today.

Ms Harman said the payout was "money for nothing" and vowed that the ex-Royal Bank of Scotland chief executive would not end up with the cash even if his retirement deal proved legally watertight.

Sir Fred, blamed for leading RBS to near collapse and a taxpayer bail-out, has resisted demands that he give up the lucrative package which he insists was approved by ministers.

But Ms Harman, Labour's deputy leader, said that all necessary steps would be taken if the 50 year old would not do the "honourable" thing.

"Sir Fred should not be counting on being £650,000 a year better off as a result of this because it is not going to happen," she told BBC1's Andrew Marr show.

"The Prime Minister has said it is not acceptable and therefore it will not be accepted. It might be enforceable in a court of law this contract but it's not enforceable in the court of public opinion and that's where the Government steps in."

Ms Harman declined to say exactly what action could be taken but reports this week have suggested a special Act of Parliament was being considered by Downing Street as a last resort.

"The Prime Minister has asked him to forego it and obviously we want him to do that - that's the most straightforward and honourable way to do it.

"It is being crawled over by the lawyers to see whether it is actually an enforceable legal contract.

"So I don't want to jump ahead of it but I do want to be clear that the Prime Minister has been quite emphatic about this that he regards it as unacceptable."

She said the payout was a reward for failure.

"I can't see how it is a pension because he is not retired. It is money for nothing, it is a severance payment, and to get a severance payment when you have led a bank to the brink of collapse with record losses and thousands of people fearing for their jobs and requiring the public to step in with loans to back up the bank, that is a matter of public interest."

RBS, which is now more than 70% owned by the taxpayer, posted annual losses of £24.1 billion this week, a UK corporate record.

Gordon Brown yesterday renewed his demands for Sir Fred to give up the payout voluntarily and said the Government was exploring "all the legal action necessary" to force the issue.

"The boards have gone, the executives have left, the severance payments have been dealt with. There is the outstanding question of the pension," he said.

"I hope that even now Sir Fred will realise that when you record the biggest losses of any company in British history, there should be some recognition of that in the pension fund.

"Of course we are considering all the legal action necessary."

The renewed focus on Sir Fred's pension came as the Treasury faced demands to explain an alleged secret dossier at the heart of the Lloyds takeover of Halifax Bank of Scotland.

Liberal Democrat deputy leader Vince Cable has tabled a parliamentary question asking if the dossier still exists, and if its contents can now be revealed.

The Treasury document was submitted in evidence during the unsuccessful legal challenge in December and January by opponents of the merger.

The Merger Action Group (MAG) fighting the decision to waive competition law to allow the merger to go through took its case to a two-day hearing in London of the Competition Appeal Tribunal, but lost.

HBOS slumped to annual losses of £10.8 billion this week and Lloyds Banking Group - the UK "super-bank" created by the merger - expects the enlarged group to post a loss as bad debts soar in 2009.

Lloyds is now 43% owned by the taxpayer after the Treasury pumped £17 billion into the two banks last year.

MAG believes the Treasury document, which was not made public, set out why Mr Brown and Chancellor Alistair Darling thought the takeover was the only option.

The group also believes that copies of the document have been destroyed.

Mr Cable's parliamentary question asks if the original still exists, and if so whether Mr Darling will now reveal its contents.

He said today: "Now that the takeover has gone through and we know the extent of HBOS's losses there would seem to be no longer any need for secrecy and that is why I am asking for this document, which was a key element of the Government's case, now to be made public."

Mr Cable's question also asks what advice was given to Business Secretary Lord Mandelson by the Financial Services Authority about the merger and what alternatives his department considered.

A spokeswoman for the Department for Business, Enterprise and Regulatory Reform said: "We've kept all the records that informed the Secretary of State's decision."

Commenting on the alleged secret document at the heart of the Lloyds takeover of Halifax Bank of Scotland, SNP MP Stewart Hosie said: "The UK Government's involvement in the Lloyds takeover has long aroused concern.

"For the dossiers used to convince the courts to be kept secret only adds to the suspicion that Gordon Brown and Alistair Darling have something to hide.

"That questions have been raised about the documents still even existing is equally concerning."

Liberal Democrat Treasury spokesman Vince Cable said the Government should present Sir Fred with an ultimatum: accept £27,000 a year or sue for the rest.

"Nobody disputes that Sir Fred Goodwin should be deprived of his pension. The only issue is what is practical," he said.

"We need to be careful about the suggestion that new legislation should be brought in to apply to an individual and to apply retrospectively.

"The Government has had effective control over RBS and other banks for several months but is simply unwilling or unable to exercise that control in the interest of the public.

"It should do so immediately, making sure that Government directors on the boards of RBS and Lloyds sort out not just remuneration scandals but tax avoidance and other murky activities that have been swept under the carpet.

"In the case of Sir Fred Goodwin, it seems to me the Government would be on strong ground to tell him he is entitled to pension payments available to employees of bankrupt companies under the Pension Protection Fund, which have a maximum of £27,000 a year.

"If he feels that's inadequate he can sue."

Housing minister Margaret Beckett said the Government had not been made fully aware of the pension enhancements being given to Sir Fred.

"What seems to be the position is that perhaps Sir Fred has previous pension entitlement that he built up, maybe in other jobs," she told Sunday Live on Sky News.

"But what also seems to be clear is that, without anybody making it really clear when the Government had to step into RBS, the board, on a discretionary basis, substantially enhanced his pension because he was taking early retirement."

She cautioned against "reading too much into what Harriet said.

"I think what she is saying is that we were told, we given the impression that this was a legally-watertight, legally-enforceable deal; people are now looking to see what really is the position."

Mrs Beckett denied that ministers were deliberately using the pension controversy to deflect attention from the wider recession and the problems with the banks.

The story had emerged on a day when Chancellor Alistair Darling would have been happier with attention on his latest multi-billion taxpayer-funded move to boost bank lending.

"We are perfectly happy for people to look at the position of Fred Goodwin but we don't want that overshadowing the real help the Government is giving to people in difficulty."

Shadow chancellor George Osborne demanded a full explanation of the role of City minister Lord Myners in agreeing the deal - and said if he could not provide one he should resign.

Lord Myners, who was recruited from the City days before the state rescue of RBS in October, insists that he was under the impression at the time that it was an unavoidable legal commitment.

It was only in recent weeks that he became aware the then RBS board may have exercised discretion in effectively doubling the pension pot from £8 million to £16 million.

He told BBC1's Politics Show: "It is no good now trying to distract everyone's attention with this synthetic anger. They had their chance to stop it and they incompetently failed to do so.

"Lord Myners should be given a chance now to explain exactly who knew what when, why his account of events differs from Fred Goodwin's account.

"But if he can't give a satisfactory explanation of why he signed off on a £650,000-odd pension for Fred Goodwin then I can't see how he can remain a Government minister.

"His career is hanging by a thread."

Asked if he would back a law change to force the issue. Mr Osborne said: "I will support any legal measure to try to get this pension back."

But he went on: "I'm not sure I know what Harriet Harman is talking about at all. She is herself a lawyer and the fact is that the Government signed off on Fred Goodwin's pension deal.

"They had the chance to stop it but that was back in October. Of course they should look at all the legal avenues that exist to try and make sure not all of this £700,000 is paid to Fred Goodwin but this is a bit like trying to bolt the stable door after the horse has itself bolted."