Trustees of Ireland’s defined benefit (DB) pension funds should be required to assess the strength of their employer covenant regularly, allowing them to better gauge future financial risks, the Pensions Authority has been told.

The regulator was also urged to ensure the chair of each trustee board is independent from the sponsoring company as it published industry responses to its consultation on guidelines for the financial management of DB funds.

Brendan Kennedy, head of the Authority, said it would consider all the points raised during the consultation before it finalised the new guidelines.

According to the summary of responses, the regulator found that there was “broad agreement” on the need for the proposed practical guide but reflected industry concern that funds were not underfunded due to bad management practices.

“While acknowledging that the reasons put forward in the guidelines certainly contributed to some schemes failing to meet the funding standard, it was commented that the legislative requirements and the introduction of the pensions levy were also contributing factors to the problems that arose,” the consultation added.

“It was suggested that the guidelines, while useful, cannot fully protect schemes from extreme conditions.”

The Irish government in 2011 introduced the 0.6%, four-year pensions levy and added a second, two-year stamp duty of 0.15% last year, effectively increasing it to 0.75% for one year.

However, in the most recent Budget, minister for finance Michael Noonan confirmed that the new charge would end next year.

The consultation responses also noted that many trustees were already exceeding the minimum financial management standards set out by the regulator, and said it should be made clear that the new framework is a risk-management tool rather than a means of increasing paperwork for trustees.

Asked which areas should be added to the proposed framework, the Authority was told trustees needed to improve their communications with members, but also suggested a more regular assessment of sponsoring companies.

“Trustees should be required to carry out a formal assessment of the sponsoring employer covenant, to allow the trustees to ascertain how willing and able the employer is to maintain/increase the contribution rate needed to pay the benefit, and to gauge the implications for the future financial risks in the scheme,” the consultation said. 

Arguably, such an assessment is important in a country such as Ireland, which does not have any debt-upon-the-employer legislation and can see sponsors wind up schemes in deficit.