Sir Fred Goodwin’s refusal to dilute his £693,000 annual pension has been branded “unacceptable” by the Treasury.

It follows chancellor Alistair Darling’s call in the Commons yesterday on Sir Fred to give up his early retirement pension which – at the age of 50 – he has already begun claiming.

Replying to Sir Fred’s defiant letter outlining his refusal, City minister Lord Myners wrote last night: “I consider [your decision not to volunteer a reduction in your pension] unfortunate and unacceptable.

“As I made clear yesterday in our phone call, I think such an act would be appropriate recognition of the failing of RBS under your tenure.”

The government-controlled bank reported a £24.1 billion loss yesterday, the worst annual results in British corporate history.

Lord Myners concluded: “I do not agree with your rationale for declining my request… 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 award.”

The government is examining its legal options as to whether it can force Sir Fred to accept a reduction.

But some, including former deputy prime minister John Prescott, believe Sir Fred’s pension should be stopped even if no legal basis is established.

“The taxpayer has rescued [RBS], there’s billions of pounds involved, he’s not entitled to this form of pension. I believe basically – take it off him – and let him sue in the courts,” Mr Prescott said on the Today programme this morning.

“It’s just the sheer arrogance of it,” he added. “If there was discretion, was he entitled to this pension? I don’t think so.”