NatWest Group has paid £427mn into its pension scheme as the result of an off-market purchase of ordinary shares from HM Treasury, which saw the government’s stake in the banking group drop beneath 50 per cent for the first time since the 2008 financial crash.
The sale, worth some £1.2bn, was hailed as a “landmark” by the Treasury in the process of returning the bank to private ownership. It is the fifth such sale to have taken place, reducing the government’s stake from 50.6 per cent to 48.1 per cent.
Some 549,851,147 ordinary shares were sold, representing 4.9 per cent of NatWest’s share capital (excluding Treasury shares), at a price of 220.5 per share. The off-market purchase is expected to settle on March 30.
Payments on track
This sale means that the government is no longer the majority owner of NatWest Group and is therefore an important landmark in our plan to return the bank to the private sector. We will continue to prioritise delivering value for money for the taxpayer as we take forward this plan
John Glen, HM Treasury
The transfer of funds into the pensions scheme is in accordance with a memorandum of understanding signed between the Royal Bank of Scotland Group – as the NatWest Group was then known – and the group’s main pension scheme in 2018.
Designed to facilitate changes to the NatWest Group Pension Fund to bring it into line with the government’s ringfencing legislation, and to accelerate the settlement framework for the scheme’s 2017 valuation, the memorandum also set out the arrangements for additional funding contributions to the pension scheme.
The bank made a pre-tax payment of £2bn in the second half of 2018, while from January 1 2020, the memorandum provided for additional pre-tax contributions of up to £1.5bn in aggregate, “linked to the making of future distributions to RBS shareholders including ordinary and special dividends and/or share buy backs”.
“RBS intends to pay to the main scheme an amount equal to each such distribution (subject to an annual cap on contributions of £500mn before tax) until aggregate pre-tax contributions of up to £1.5bn have been made,” the memorandum stated.
It was designed, in part, to compensate the scheme’s trustee for any damage to the employer covenant incurred by the company restructuring in line with ringfencing legislation, and the trustee in turn agreed to adopt a lower-risk long-term investment strategy.
The NatWest Group made a contribution of £500m in March last year following another share buy-back, and a further such sale – and so another payment to the scheme – is expected in 2023.
The main section of the scheme had a funding level of 104 per cent as of its December 2020 actuarial valuation. It had assets worth £51.38mn and liabilities of £49.2mn, making for a surplus of £2.1mn.
The other three sections of the scheme had funding levels of between 108 per cent and 111 per cent.
NatWest pension fund invests in later-living housing
The £53.1bn NatWest Group Pension Fund, which comprises the £46.5bn Main Section, £1.1bn AA Section, £199.5mn NWM Section and £73.6mm RBSI Section, entered – in August 2021– into a joint venture partnership with Legal & General to invest £500m in net-zero-carbon ‘later-living’ housing.
UK banks are subject to common equity tier 1 requirements, which allow regulators to assess their core financial strength. They were introduced in 2014 as a means of avoiding future financial crises, and require that banks meet a minimum CET1 ratio of 4.9 per cent.
The £427mn payment to the main section of the scheme will not have an impact on NatWest Group’s CET1 ratio, as the charge was accrued as part of 2021’s financial results.
Commenting on the sale, John Glen, economic secretary to the Treasury, said: “This sale means that the government is no longer the majority owner of NatWest Group and is therefore an important landmark in our plan to return the bank to the private sector. We will continue to prioritise delivering value for money for the taxpayer as we take forward this plan.”
