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* Pension deal essential for separation of bank, insurance arms
* Paves way for listing of insurance business
* Group has been divesting assets to repay state
By Sara Webb and Anthony Deutsch
AMSTERDAM, Jan 9 ING Group NV said it will make its defined-benefit pension fund financially independent, resulting in an after-tax charge of about 1.2 billion euros ($1.6 billion) and paving the way for a stock market listing of its insurance business.
The charge will be booked as a special item in the first quarter of 2014, of which 800 million euros will be attributed to ING Bank and 400 million to ING Insurance.
The Dutch banking and insurance group required a 10 billion euro bailout during the 2008 financial crisis. It was forced to separate its banking and insurance operations and has since been divesting assets in order to repay the state.
Cutting free of the state is seen as an important step for ING, removing a European ban on acquisitions and giving it greater pricing flexibility so it can better compete.
The ring-fencing of the pension fund is an essential part of the disentangling of its banking and insurance arms. The divestment of its European/Asian insurance unit is expected this year, either via an initial public offering (IPO), spin-off, trade sale or some combination.
"To put the (1.2 billion euro) charge in perspective, ING makes a quarterly profit of nearly one billion euros, while its European insurance company has (shareholders') equity of about 16 billion euros," said Nico van Geest, analyst at Keijser Capital.
In November, ING reported a third-quarter underlying profit before tax of 1.22 billion euros, and said it should complete its restructuring two years ahead of schedule, which would mean it was one of the first euro zone casualties of the 2008 crisis to emerge from a state rescue.
ING said the pension fund agreement with various parties, including labour unions and the fund, would separate the obligations ahead of the planned IPO, releasing ING from future financial obligations under the Dutch defined-benefit pension plan.
"This agreement represents a significant milestone in the separation of bank and insurance as we prepare for the base case IPO of ING Insurance planned for this year," said ING Chief Executive Ralph Hamers in a statement.
"The agreement will greatly reduce the current volatility in our equity and will further simplify the group."
The 1.2 billion euro one-off charge is made up of a 400 million euro payment to the pension fund, plus 800 million euros to remove the pension assets from ING's balance sheet.
Cor Kluis, analyst at Rabobank, said that while the agreement was costly in the short term, longer term it would eliminate hundreds of millions of euros in annual supplementary pension charges.
"Of course it's a large sum of money ... but on the positive side it will remove the need for future pension premium payments and reduce volatility and risk exposure."
In a research note published on Thursday following ING's announcement, Rabobank's Kluis forecast full-year net income for the group of 4.13 billion euros.
ING's shares were up 0.9 percent at 10.66 euros, after briefly hitting 10.67 euros - their highest level since the 2008 crisis - while the broader index was up 0.16 percent.
By late last year, ING had raised about 25 billion euros as it shed a host of insurance, investment management and other assets around the world through disposals or listings, and cut thousands of jobs to raise funds with which to repay aid and bolster its capital.
So far, it has repaid 11.3 billion euros, including premiums and interest, to the state, leaving another 2.25 billion euros in principal and interest still to be repaid in two tranches in March 2014 and May 2015.
ING's European/Asian insurance business had shareholders' equity - total assets minus total liabilities - of 16 billion at the end of September 2013, while ING Bank had 35 billion euros. ($1 = 0.7353 euros) (Editing by David Holmes and Pravin Char)