Royal Bank of Scotland has reached a settlement to fund its pension scheme that the bank said could pave the way for it to restart paying dividends to shareholders.

RBS said it would pay up to £3.5bn into its main pension scheme on top of the £4.2bn paid in 2016. Under normal market conditions, the payments will deal with the weakness of the fund, which will move to a lower-risk investment strategy.

The lender's first £2bn payment will be made before the end of 2019. It will have no significant impact on profit and will trim the bank's core capital ratio by about 80 basis points from 15.9% at the end of 2017, the bank said.

From January 2020, RBS will pay in up to £1.5bn more into the main scheme with payments linked to future capital distributions to shareholders. The payments will be capped at £500m a year.

Ewen Stevenson, RBS's chief financial officer, 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 memorandum of understanding represents a further important milestone towards the resumption of capital distributions.”

Reports have said RBS wants to pay a small dividend in the second half of this year to make it easier for the government to start selling its 71% stake in the bank, having forgone any payouts for taxpayers since it was rescued from collapse in 2008.

RBS reached the pension settlement as part of arrangements to ring-fence its retail banking business from riskier corporate and investment banking under government rules. Most of the 17,000 employees who are members of the main scheme will remain with it inside the ring-fence.

About 400 employees will be transferred from the main scheme to sit outside the ring-fence.