NatWest, the UK high street and investment bank, will pay £471m of pension contributions into a new trust structure this year instead of the pension fund directly, changing a 2018 memorandum of understanding with the trustees.  

 

“We have agreed to create a trust structure to hold those assets and that gives the pension fund rights to assets in the value of £471m in the event a future funding requirement arises based on pre-agreed triggers,” the bank said in its annual report.  

 

Set up in February 2023, the new reservoir trust will meet potential future contributions required by the main section of the group pension fund based on funding level triggers, including a future transfer of £471m once the final dividend for 2022 has been approved by shareholders and paid. The next annual general meeting is due to take place on 25 April. 

 

The main section had a technical provisions funding level of 112% at the end of December 2022. A year earlier, its funding level was 108%, giving it nearly £4bn in surplus. Three much smaller defined benefit sections showed funding levels of between 110% and 113% in 2021. 

 

If the funding level of the main section remains strong and therefore not all the money in the external trust is needed to secure members’ benefits, the remainder can be returned from the reservoir trust to the bank. 

 

A NatWest Group spokesperson said: “The Group Pension Fund is now ahead of the funding plan set out in 2018, and it’s likely to have more than enough money to pay for the pensions that current and former members have built up. Given this surplus, instead of making the contribution of up to £471m that would have been due in 2023, we’ve agreed with the trustee to ring-fence the money.” 

 

The spokesperson added: “While we don’t expect the £471m to be needed in the pension fund itself, the money will be held in a separate trust so it’s ready should it be needed in the future. This makes sure members’ pensions remain safe and secure, even if things don’t turn out as expected.” 

  

The funding level of the roughly £35bn main section has improved faster than expected since 2018 because of sponsor contributions and favourable investment performance. 

 

The bank said the rules of the pension scheme give the trustee unilateral power to award discretionary increases to some members but not others. As a result, the existing surplus on an IAS 19 basis is restricted to nil on the bank’s balance sheet. The bank adds that “other NatWest Group schemes that this applies to include the Ulster Bank Pension Scheme (NI) and the NatWest Markets section”. 

 

The decision to pay contributions into a separate vehicle marks a departure from a previous agreement with the trustees whereby NatWest was obliged to contribute an amount equal to £1.5bn of shareholder distributions, up to £500m a year. The NatWest scheme has already received £1.029bn of this, £500m each in 2021 and 2022, when the Treasury sold part of a large stake taxpayers have held since bailing out the former Royal Bank of Scotland during the 2008 financial crisis. A further £29m has also been paid by NatWest, leaving £471m still due under the agreement. 

 

Diverting pension contributions to a separate account when a pension fund becomes fully funded is not unusual, as not every scheme’s rules provide for contributions to be returned to the employer. This has become relevant as, after years of underfunding, DB schemes have seen funding levels improve as gilt yields started to rise in 2022 and accelerated their increase in the autumn, although they fell back in March. The latest Pension Protection Fund data shows the aggregate funding level of defined benefit schemes rose to 137% at the end of February, with 4,459 schemes in surplus and just 672 schemes in deficit. 

   

   

   

Are more DB sponsors setting up escrow accounts in the context of high scheme funding and an uncertain economic outlook?

*This article has been updated to reflect some numbers and the augmentation cap more accurately