NatWest scheme gets first chunk in £1.5bn deal with sponsor

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The NatWest Group Pension Fund’s £51.3bn main section had a £500m windfall last month thanks to an agreement with its sponsor that the fund will receive an amount equal to £1.5bn of shareholder distributions, up to £500m a year. 
The Pensions Regulator has for some time made it clear that it wants to see equitable treatment of shareholders and deficit repair contributions made to the pension schemes by a sponsor. Although an acceptable ratio between repair contributions and dividends has never been defined by TPR, the ratio is one of its bugbears, and some in the industry have said the regulator is in favour of a literal approach to equitable treatment.  

NatWest buyback triggers scheme payment

On 19 March this year, NatWest announced that it had completed a £1.1bn off-market purchase of shares from the Treasury, a so-called ‘directed share buyback'.  
The buyback triggered a £500m payment to the scheme’s main section, which is entitled to additional contributions of up to £1.5bn based on the fund receiving an amount equal to any shareholder distributions, such as dividends, capped at £500m in any one year. The scheme’s annual report shows that the payment was made by the end of March, reducing the outstanding sum under the agreement from to £1bn. The main section had a £19.5bn shortfall in 2017, being 70% funded, up from just 51% in 2015.

Treasury sells shares at loss to taxpayer

The NatWest scheme’s sponsor is a special case when it comes to shareholding, as owner Royal Bank of Scotland, now NatWest Group, was bailed out to the tune of £45.5bn during the last financial crisis. In 2018, the government still held 62% of the bank’s shares, which had lost 87% of their value.  
The government had started selling RBS shares at a loss back in 2015, crystallising the losses for the taxpayer, and in 2018 still intended to continue selling around £3bn worth of shares every year until 2022-23. The last RBS shares, under this plan, would be sold in 2025.  

NatWest is also recommencing dividend payments to shareholders in 2021. RBS had paid its first dividend since the bailout in 2018, but the Covid-19 pandemic meant it did not pay any quarterly or interim dividends to shareholders in 2020 and cancelled its 2019 final dividend, in line with a request by the Prudential Regulatory Authority. 

The 2021 shareholder distributions will however not trigger any additional payments to the scheme in that year, as it has already maxed out its entitlement of £500m per year. 

What agreements do pension schemes have with sponsors on shareholder distributions?