The Royal Bank of Scotland Group (RBS) has agreed to pay £3.5bn into the RBS Group Pension Fund’s main scheme, as it prepares for new ring-fencing legislation.

The tax-payer owned bank has signed a memorandum of understanding (MoU) with the scheme's trustee, committing to a £2bn payment in H2 2018 and a further £1.5bn in 2020, as it attempts to compensate for the loss of certain RBS entities following the ring-fencing legislation.

In addition, the group said that the payments will allow them to facilitate future dividend payments, or share buy-backs for shareholders, but has not said when these will resume.

RBS chief financial officer, Ewen Stevenson, said: “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."

The new legislation, set to be introduced in 2026, was created to avoid a financial crisis on the scale of the 2008-09 crisis, and requires banks to separate core banking functions from investment banking.

It means that RBS Group entities will not be able participate in the same defined benefit scheme as other wholly-owned subsidiaries.

The settlement brings forward the amount required from the triennial valuation of 31 December 2017, which had been expected to be paid by 31 December 2018.

In a statement RBS also said that the main scheme trustee will adopt a “lower risk long-term investment strategy” and increase its exposure to assets which will improve its cash flow.

It said: “The outcome will be an investment portfolio that targets a lower, more stable return, increasing security for members and posing less risk to the RBS Group.”

Commenting on the move, Lincoln Pensions managing director, Richard Farr, said: “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.“

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