Royal Bank of Scotland said it will make total payments of up to £3.5 billion into its pension scheme in the coming years, clearing one of the hurdles still blocking the company’s return to dividends.

The payments are required due to changes to the pension scheme caused by ring-fencing legislation, under which banks must separate their retail banking operations from riskier businesses.

RBS chief financial officer Ewen Stevenson said: “We are pleased to have reached this Memorandum of Understanding (MoU) with the Trustee of the Main Scheme of the RBS Group Pension Fund.

“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.”

RBS said a pre-tax payment of £2 billion will be made in the second half of 2018.

RBS said that from January 1, 2020, further pre-tax contributions of up to £1.5 billion will be made “linked to the making of future distributions to RBS shareholders including ordinary and special dividends and/or share buy backs.” 

RBS added: “Under UK ring-fencing legislation, from 1 January 2026 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.  

“RBS intends that by the end of March 2019, current The Royal Bank of Scotland plc (to be renamed NatWest Markets plc) and The Royal Bank of Scotland International Limited will have ceased to be participating employers in the Main Scheme and their liabilities will have been apportioned to National Westminster Bank Plc.

“Employees within these entities will be transferred to new sections of the RBS Group Pension Fund that will sit outside of the ring-fence.”