The Royal Bank of Scotland (RBS) is to pay £3.5 billion into its main defined benefit (DB) pension scheme in order to prepare for ring-fencing legislation effective in January 2026.
The banking organisation has confirmed a memorandum of understanding agreement with the trustees of its RBS Group Pension Fund. This includes a pre-tax investment of £2 billion in the second half of 2018, as well as a further pre-tax contribution of up to £1.5 billion in aggregate from 1 January 2020 that is linked to dividend payments or share buybacks. The payments from 2020 will be delivered in equal distributions, capped at £500 million before tax, until the £1.5 billion investment has been reached.
The agreement is in part to equip RBS to align with the employing entity structure that is required under UK ring-fencing legislation, which will be effective from 1 January 2026. This defines that it will not be possible for RBS Group entities outside of the ring fence to participate in the same DB pension scheme as ring-fenced entities or their wholly-owned subsidiaries. RBS plans that by the end of March 2019, the current RBS, which will be renamed NatWest Markets, and The Royal Bank of Scotland International will not participate in the main DB scheme. Its liabilities will move to the National Westminster Bank. Employees within the affected employing entities will be transferred to new sections of the RBS Group Pension Fund that will sit outside of the ring-fence.
The investments are also planned to compensate the scheme’s trustees for the triennial valuation as of 31 December 2017, which has been accelerated from 31 December 2018.
RBS pension scheme trustees are additionally planning to change their investment strategy, moving to a lower risk, long-term investment approach that will gradually reduce exposure to quoted equity and increase exposure to assets that give a greater certainty over cash flows. This is to generate a lower, more stable return for pension scheme members in order to increase security for both employees and RBS.
Ewen Stevenson, chief financial officer at RBS, said: “We are pleased to have reached this [memorandum of understanding] 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 [quarter one] 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 [memorandum of understanding] represents a further important milestone towards the resumption of capital distributions.”
Richard Farr, managing director at Lincoln Pensions, added: “This is another pertinent example of pensions obligations taking their rightful priority in the allocation of employer cash resources. 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.”