The Office of Fair Trading (OFT) has made a string of recommendations to reform the workplace pensions market after finding some savers do not get value for money.
The watchdog has been carrying out a study into the £275 billion defined contribution (DC) pensions market to see if there is enough pressure on providers to keep their charges low and what size of pension pot savers are likely to end up with at retirement.
It said that the UK government should consult on improving the transparency and comparability of pension schemes to make it easier for employers to choose a scheme for their workers.
At present, employers “may often lack the capability or the incentive to assess value for money”, the OFT said.
About five million people save into DC pension schemes, but this is expected to rise by up to nine million over the next five years, following last year’s introduction of auto-enrolment, which compels employers to provide pensions for their staff.
The OFT also said savers locked into £30bn worth of “old and high-charging” contracts schemes may be losing out, while smaller trust-based schemes, containing around £10bn, “are at risk of delivering poor value for money due to low levels of trustee engagement and capability”.
The watchdog said annual management charges (AMCs) for schemes set up before 2001 are, on average, 26 per cent higher than those set up later, and are likely to feature extra costs.
Paul Matthews, UK chief executive of Standard Life, said: “Too many people find themselves in old-style workplace pensions schemes which need updating. Auto-enrolment gives all employers the opportunity to review their existing workplace pension arrangements.
“As far back as 2001 we re-priced over one million pension customers’ plans to a single AMC of less than 1 per cent, with many paying less than 0.5 per cent. We continue to focus on delivering value for money to our customers.”
Angela Seymour Jackson, head of workplace solutions at Aegon UK, said the Edinburgh-based pensions provider agreed that some older schemes would benefit from modernisation.
She added: “Some have valuable features, but not all may meet today’s value-for-money standards. Others would benefit from technological advances.
“A detailed audit is the right next step to developing industry-wide value-for-money principles allowing for different features and charging approaches.”
Former Aegon UK chief executive Otto Thoresen, who is now director general of the Association of British Insurers, said the impact of new technology has helped drive down pension charges over the past decade, but said the industry will audit all old schemes “to ensure any problems can be sorted out”.
He added: “The schemes principally identified by the OFT as potentially having charges not representing good value for money account for around 10 per cent of the nearly £300bn assets managed by the industry, including closed schemes and schemes that will not be used for automatic enrolment.
“But we agree with the OFT that it is important to review charges to ensure they represent good value for money for today’s employers and savers.”
Pensions minister Steve Webb said: “This report outlines further important ways to help consumers, and we will act on its recommendations.
“In particular, we need to ensure those already in pension schemes are getting good value for money, and will be actively involved in the audit of pension schemes sold prior to 2001.”