The Royal Bank of Scotland (RBS) is going to pay £3.5bn in the next few years to plug the deficit of its main defined benefit (DB) pension scheme.
The bank announced yesterday (17 April) that it has entered into a memorandum of understanding with the trustee of RBS Group Pension Fund, which had a deficit of £5.8bn in December 2015, the date of the last triennial valuation of the plan.
RBS has committed to make a £2bn contribution to the scheme in the second half of this year, with further contributions of up to £1.5bn tied to any dividend payments or share buybacks after 2020.
These payments follow a £4.2bn contribution made in 2016 to the scheme, which currently has more than 213,000 members.
Subject to normal market conditions, the trustee and RBS expect that no further deficit contributions to the scheme will be required.
These payments are an “important milestone” on the road for the bank to eventually pay a dividend for the first time in 11 years.
According to Ewen Stevenson, RBS’s chief financial officer, these proposed payments, together with the one-off contribution into the scheme in 2016, mean that the bank “will have substantially addressed the historical funding weakness that existed in the fund and brought clarity to future funding arrangements”.
He added: “For our shareholders, this memorandum of understanding represents a further important milestone towards the resumption of capital distributions.”
According to Richard Farr, managing director at Lincoln Pensions, “this is another pertinent example of pensions obligations taking their rightful priority in the allocation of employer cash resources”.
He said: “The key question will be how appropriate is the payment to the actual deficit and risk the scheme is running compared to the dividend yield being demanded by the market.”
The contributions to the scheme were agreed alongside structural changes to align the company’s pension plans with new ringfencing regulations.
According to the new rules, which were brought in to strengthen the financial system following the financial crisis, banks will need to ring-fence their retail business, separating it from more riskier activities, such as investment banking.
UK banks with core deposits of more than £25bn have until 2019 to ring fence their retail and investment arms and until 2026 to ensure their pension schemes are placed in one of these divisions.
The RBS Group Pension fund has two sections, which will be split between the retail and investment business of the bank.
The AA Section, which is the legacy ABN Amro UK pension scheme, an investment bank, will be outside the ring-fence.
The majority of DB members, belonging to the main section, will be in the retail arm.
These plans have been discussed with The Pensions Regulator.