ROYAL Bank of Scotland has agreed to pay an additional £3.5 billion into its main pension scheme, hailing the move as an important milestone in its quest to resume dividend payments to investors.
Alongside an accelerated contribution of £4.2bn last year, the state-backed institution said the injection would “substantially address” the historic weakness of the fund.
The fresh funding is part of a Memorandum of Understanding (MoU) the Edinburgh-based bank has agreed with the trustees of its largest defined benefit pension scheme, which it said will ensure the scheme is aligned with ring-fencing rules which come into effect on January 1, 2019.
The rules, which were devised in the wake of the financial crisis to ensure retail banking is separated from riskier investment banking operations, have led the major UK banks to restructure their organisations. Royal Bank’s new structure is due to go live on April 30.
Under the MoU, Royal Bank said it will make a £2bn payment to its main pension fund before the end of 2019. It noted that the payment would not affect profits, though it said it would cut its common equity tier 1 capital ratio by 0.8 percentage points, based on its CET1 ratio of 15.9% at the end of 2017.
Further pre-tax payments of up to £1.5bn, linked to future capital distributions to shareholders, will be made from January 1, 2020, the bank said. These contributions will be capped at £500 million per year.
The bank said the vast majority of its staff, some 17,000, who are members of the main scheme will stay with it and inside the ring-fence. Around 400 employees, who will come under Royal Bank of Scotland International (RBSI) and NatWest Markets divisions after the restructure, will transfer from the main scheme to a section of the group fund which will sit outside the ring-fence.
The bank said that both the lender and the trustee do not expect further deficit contributions to the main scheme to be needed in light of the new payments, subject to normal market conditions.
Chief financial officer Ewen Stevenson held out the prospect of the bank resuming dividends for the first time since its £45 billion at the height of the financial crisis of 2008 and 2009.
Mr Stevenson noted: “We are pleased to have reached this MoU with the Trustee of the Main Scheme of the RBS Group Pension Fund.
“With these proposed payments, together with the one?off contribution into the fund in Q1 2016 we will have substantially addressed the historical funding weakness that existed in the fund and brought clarity to future funding arrangements.
“For our shareholders, this MoU represents a further important milestone towards the resumption of capital distributions.”
Royal Bank chief executive Ross McEwan told a Morgan Stanley conference in March that reaching a settlement in the US with the Department of Justice over its role in the sale of residential mortgage-backed securities before the financial crash was the last legacy issue the institution had to overcome before it could resume dividends and return capital to shareholders via a share buyback.
Shares closed up 2.9% , or 5.5p, at 268.4p.
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