The Pensions Regulator (TPR) has launched a consultation on defined benefit (DB) regulation to set out how it can balance its new objective to minimise the impact on employers' sustainable growth with its existing DB funding objectives.

TPR's new objective is contained in the Pensions Bill 2013, which is currently before Parliament, and the regulator said that striking a balance between sponsoring employers' pension funding and their ability to invest in sustainable business growth is at the "heart" of the consultation.

The consultation also reflects how the regulator's approach to DB funding has evolved over the last eight years, TPR said.

Stephen Soper, TPR interim chief executive, said: "Investing in sustainable business growth is central to being able to provide a long-term future for any business and its pension plan. The best support for a DB pension is a strong employer and effective trustees working together to manage and balance the risks to their business and scheme.

"Our revised code of practice emphasises the importance of pension trustees and employers working collaboratively to establish viable, long-term funding plans. We place a strong focus on education and enablement to help schemes to achieve appropriate outcomes. The needs of employers and schemes can be reconciled in the vast majority of cases through good working relationships without the need for our involvement."

The consultation includes:

- A draft funding code of practice that provides practical guidance to help pension trustees to meet the requirements of scheme funding legislation.

- A draft regulatory strategy setting out at a high-level the regulator's risk-based approach to tackling issues in DB pension schemes.

- A draft funding policy describing in more detail the regulator's intended approach to regulating DB funding issues.

TPR said that it expects trustees to understand and manage risk rather than requiring them to eliminate it from their scheme.

The regulator added that if trustees can manage the key areas of employer covenant, investment and funding, as well as good scheme governance, then they are "less likely to be the focus of regulatory intervention".

The National Association of Pension Funds (NAPF) head of policy and research Helen Forrest said: "We are pleased to see that The Pensions Regulator recognises that collaboration between employers and trustees is crucial in establishing viable, long-term funding plans for DB schemes.

"We also note the Regulator's focus on a more integrated approach outlined in the draft code. These are both areas that the NAPF has made clear required more flexibility."

Towers Watson senior consultant Graham McLean said: "While the regulator has been given a new objective to minimise any adverse impact on the sustainable growth of an employer, trustees have not – they are told only to avoid 'unreasonably' affecting the employer's growth prospects while looking at how the scheme could benefit from the employer's investment plans.

"Just listing growth as one of the factors for trustees to consider when determining how quickly the deficit can be paid off does not point to a paradigm shift in the employer's favour.

"Indeed, there are suggestions as to how trustees could toughen up their negotiation position – they are reminded that there may be 'untapped affordability' from the last valuation, that assurances given to banks can be modified, and that if other companies in the group benefit from the scheme sponsor, the trustees can ask for something in return. Trustees are also reminded that allowing for more investment outperformance in the recovery plan can unpick some of the prudence in the funding target. However, what the regulator says will matter less than how it acts when push comes to shove."

The consultation period closes on Friday 7 February, and it is anticipated that the new code will be in force by July 2014 and will apply to schemes undertaking valuations from that time.

First published 02.12.2013

monique_simpson@wilmington.co.uk