The UK’s pensions regulator has launched a consultation on its oversight of the defined benefit (DB) market to better account for the current low interest rate environment and growing maturity of many funds.

The consultation on the new code of practice, open until early February, will also seek to incorporate the Pensions Regulator’s (TPR) new statutory objective requiring it to have a “regard for the growth prospects of companies”.

TPR noted that its current code had not been amended since the regulator was launched in 2005, and said it now possessed a better understanding of the DB market and how best to regulate it.

“Difficult economic conditions – for example, low interest rates and volatile markets – as well as continuing increases in longevity in recent years, have also challenged schemes’ funding positions further and putting pressure on their employers,” the regulator said in its introduction.

It emphasised that risk management would be a “guiding principle” in the revised code, “as it is key to schemes achieving good funding outcomes”, and said it would like to define a balanced funding outcome (BFO) for schemes to use as a key indicator of risk during assessments.

The regulator also said the way it approaches DB deficits would be reviewed on an annual basis in future “to reflect the prevailing economic circumstances”.

“Whilst the broad principles underpinning the approach and the factors we take into consideration are contained in the funding policy, the actual setting of risk indicators (including the BFO) and risk bar for intervention will be discussed on an annual basis and published in our annual funding statement,” it said.

TPR first issued a funding statement in 2012, allowing DB funds undergoing triennial valuations during the financial year to better understand its approach.

Helen Forrest, head of policy and research at the National Association of Pension Funds, welcomed the consultation, noting the more integrated approach being proposed by TPR.

She added: “We are pleased to see the Pensions Regulator recognises collaboration between employers and trustees is crucial in establishing viable, long-term funding plans for DB schemes.”

Aon Hewitt partner Aidan O’Mahony also said the consultation marked a “positive” step and welcomed the proposal for the guiding principle based around the sponsor covenant, investment returns and scheme funding.

“It is also good that the regulator is being more transparent by providing information on how it ranks employer covenants,” he added, noting the four risk categories of Strong, Tending to Strong, Tending to Weak and Weak.

However, Malcolm Rochowski, corporate consultant at Barnett Waddingham, had one concern on how the new statutory objective would be implemented.

“There is one sting in the tail of the new objective – an expectation that planned investments used to negotiate down scheme contributions, but which are not actually invested later, should be made available to the scheme,” he said.

“Employers must, therefore, be careful in claims made about their plans for capital investment.”

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