The Royal Bank of Scotland Group PLC will make a £2 billion ($2.8 billion) contribution to its £45.3 billion pension fund in the second half of the year, the U.K. financial services firm said in a news release Tuesday.
In addition, it will also make other contributions of up to £1.5 billion to the main section of the RBS Group Pension Fund, Edinburgh, in efforts to cover the loss of employer covenant resulting from employees of certain RBS subsidiaries becoming unable to participate in the main defined benefit fund under a U.K. ring-fencing rule that goes into effect Jan. 1, 2026.
"Under U.K. ring-fencing legislation ... it will not be possible for RBS Group entities outside of the ring fence to participate in the same defined benefit scheme as ring-fenced entities or their wholly owned subsidiaries," the release said.
RBS intends to transfer all employees within certain subsidiaries to new sections of the RBS Group Pension Fund that will sit outside of the main plan by the end of March 2019.
The plan is 84% funded and the unfunded liabilities total £5.9 billion.
The main plan will subsequently adopt a lower risk long-term investment strategy by gradually reducing the allocation to listed equity and increasing its exposure to cash-flow-driven strategies. It will also introduce interest rate and inflation hedging.
The additional up to £1.5 billion in contributions will be linked to future distributions to RBS shareholders, including ordinary and special dividends or share buybacks, starting Jan. 1, 2020.
"With these proposed payments, together with the one-off contribution (of £4.2 billion) into the fund in the first quarter of 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 (agreement) represents a further important milestone toward the resumption of capital distributions," said Ewen Stevenson, chief financial officer, in a news release.