Royal Bank of Scotland Group PLC (LON:RBS) is set to make a £3.5bn contribution to its pension scheme as part of an agreement with trustees of the fund.
The UK state-owned bank has signed a memorandum of understanding with the pension fund’s trustees for changes that need to be made to the scheme to align its structure with the requirements of the UK ring-fencing legislation.
The legislation requires the UK’s largest banks to separate core banking from investment banking operations to avoid another financial crisis like the one in 2008-09.
Under the agreement with the trustees, RBS expects to make a pre-tax payment of just over £2bn in the second half of 2018, followed by a further £1.5bn from 2020.
Payments from 2020 are limited to an annual cap of £500mln and are linked to future distributions to RBS shareholders, including dividends and share buybacks.
RBS said the payments will compensate for the loss of backing from certain entities after 2026 due to ring-fencing legislation.
The payments will also settle the framework for the pension fund's triennial valuation as of December 31, 2017.
“With these proposed payments ... we will have substantially addressed the historical funding weaknesses that existed in the fund and brought clarity to future funding arrangements,” said Ewen Stevenson, RBS chief financial officer.
He added that the agreement with pension trustees “represents a further important milestone towards the resumption of capital distributions”.
The contribution in the second half will impact its common equity tier ratio 1 – a measure of capital strength – by 80 basis points after tax. It will also reduce its tangible net asset value per share by 12p.
The impact will be recognised in the lender’s second quarter results.