New, drastic powers for the Pensions Regulator announced yesterday could put a further dampener on corporate activity and investment in an already difficult financial climate, the private equity industry has warned.

The government has moved to beef up the regulator's powers in response to the activities of companies such as Pension Corporation, which have bought firms to profit from their well-funded pension schemes - often selling on parts of the trading businesses.

Pension Corporation has notably bought Telent, the owner of the £2.5bn pension fund of former industrial giant GEC. After a long wrangle with the regulator, Pension Corporation has just agreed to dilute its representation on the pension scheme's trustee board after standing accused of a serious conflict of interest over potential access to a £514m surplus.

The regulator this week issued a statement insisting that reports of such firms being "unregulated" were erroneous.

However, unlike other buy-out specialists such as Paternoster, Pension Corporation is "uninsured" and not subject to the strict regulatory capital requirements of the Financial Services Authority (FSA).

Pensions Minister Mike O'Brien said there was a need to "guard against pension schemes simply being treated as a commodity to be bought or sold".

Previously, the regulator could only force a company to put funds into its pension scheme if it could demonstrate an actual intent to avoid its obligations.

Now it will be able to use its powers if any action - such as an asset disposal - undermines a company's ability to fund the scheme. A firm's defence of acting in "good faith" is swept away.

The Department for Work and Pensions says the change is not aimed at traditional pensions buy-out companies, which are backed by insurance arrangements, and which have to meet the FSA's capital requirements.

The failure of a major scheme could have a significant impact on the Pension Protection Fund, which currently has £1.3bn in the pot and aims to collect £675m in levies this year from 7800 schemes.

The regulator's chief executive, Tony Hobman, said: "There have been some business models which have caused concern and have highlighted the need to update the regulator's powers."

However, Simon Walker, chief executive of the British Venture Capital Association, said: "We're concerned at the unintended impact these proposals will have on a wide range of corporate activity, including private equity."

He went on: "Given the current economic difficulties, there will undoubtedly be many industrial companies, some with defined benefit pension schemes, which will be badly in need of investment. Their prospects would be damaged by these proposals."

Walker added: "It is not enough to say the regulator will act responsibly. If he has the legal capacity to abort corporate decisions, that will be sufficient to stop deals happening."