After realizing a profit for the first time in 10 years, the £738.1 billion ($1.05 trillion) Royal Bank of Scotland plans to contribute $5 billion to its pension fund over the coming years. The proposed payment is an attempt to address the “historical funding weakness.”
Under the memorandum, which the bank entered Tuesday, the payments will begin with a pre-tax contribution of £2 billion in the second half of 2018. To match dividends, additional contributions of up to £1.5 billion will continue from 2020 on. The money for both payments will come from the bank’s core capital reserves.
“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,” Ewen Stevenson, the bank’s CFO, said in a statement, calling the move an “important milestone.”
In February, the bank’s 2017 annual report revealed its first profit in a decade. The payments will settle the bank’s issue of not paying a dividend over that timeframe due its inability to produce gains.
Due to poor investment returns resulting in funding issues, 71% of the bank is currently owned by the state after 2008’s £50 billion government bailout.
In addition, a ring-fencing law will split RBS’s investment banking unit from its UK-focused retail banking business, resulting in the creation of two pension plans—one inside the ring-fence, the other out. Reuters reports that the outside scheme could be exposed to higher risks, as well as companies outside of the fence being unable to participate in the same defined benefit plans as fenced-in entities.
Ring-fencing is a protection-based transfer of assets typically done via offshore accounting. The purpose of a ring fence is to protect assets from inclusion in an investor’s net worth or to lower tax repercussions.
Starting in 2019, Royal Bank of Scotland’s investment bank will be renamed NatWest Markets. From 2019 on, NatWest and the bank’s international business will no longer participate in the RBS’s main pension scheme. Instead, the two entities will be transferred to the outer ring plan. The same will apply for outer-ring entities of the bank’s main pension scheme in 2026.
Tags: Pension, Royal Bank of Scotland, UK