The Government's plan for compulsory pensions at work is threatened by a new mis-selling spectre, with employees at risk of seeing a significant proportion of their contributions disappearing in adviser charges.
The Financial Services Authority has approved "consultancy charging" for corporate pensions, on the same model as the new "adviser charging" for individual investments. This allows potentially large deductions from pension pots yet has no mechanism to regulate the advisers.
Alasdair Buchanan at Scottish Life said: "In the individual market advisers are fully regulated. The corporate side of the market is treated as if advisers are dealing with people in companies who know what they are doing, which is not true of small and medium-sized companies. One of the suggestions we have made is that should change, and the standards of advice should be the same."
Automatic enrolment of employees into a pension scheme, with a minimum total 8% contribution, came into force last October for the very biggest firms but will take another five years for smaller firms to reach their "staging date".
Almost one million of the 1.3 million firms facing auto-enrolment have ten or fewer employees, and need outside help.
Steven Cameron, head of regulatory strategy at Aegon (formerly Scottish Equitable), said the FSA had ruled that after a firm's staging date, consultancy charging could only be used when the employer was voluntarily paying above the 8% level, to maintain minimum contributions.
Peter Glancy at Scottish Widows said that meant for a firm making 10% of salary contributions, the maximum first-year deduction for advice would be 20% of an auto-enrolled employee's contributions.
But Chris Donald, of corporate pension specialist Innovate Financial Services, said some insurers currently endorsed advisers taking 50% of the first year's premiums.
He said: "That is a massive number, and what we are seeing is an average of about 25%."
Innovate charges a fee per employee enrolled, Mr Donald said. "If they are not charging per man then I would expect the figure should be 10% to 15%."
Tom McPhail, of brokers Hargreaves Lansdown, says: "We have seen cases where the insurance company is saying in principle we will allow you to take 100% of the first year's contributions."
That was, in principle, allowed by the regulator, he said.
Mr Donald said big upfront deductions from personal pensions, to pay for commissions, had been driven out in the industry clean-up over the past decade, but were effectively reappearing with consultancy charging.
"They are allowed to spread the charge by taking it out of premiums over the first year or beyond, so you could have a situation where the adviser's costs are taking a significant amount of money out of the individual's pension pot.
"The risk is that people will sell group pensions on the 'never never' – the employer doesn't pay any fees, the employee pays it all out of contributions – and it is going back to where we were 20 years ago."
Mr Glancy said: "If consultancy charging goes, a large part of the advice market will go because a large proportion of employers won't pay fees or can't afford to.
"So, with 800,000 firms set up to enrol for the first time, there is a good chance employers will end up with a high-charging scheme and poor returns.
"If we get the advisers out, who's going to help them? The rules are not sufficiently robust. At the moment you are permitted to take a percentage of the fund, a percentage of the premium or pounds and pence, and that could be quite a disproportionately large amount."
The debate over advice charges has so far been confined to the industry media, with political concern focusing on the issue of annual management charges.
Mr McPhail says: "The Department for Work and Pensions says employers should not have to pay fees, and is identifying ways of simplifying compliance with auto-enrolment.
"In the meantime, the FSA has said consultancy charging is OK and advisers can still charge fees – but no-one has quite worked out what it is appropriate to charge [scheme] members for.
"The crucial thing is to make sure people get what they pay for."
Industry expert Steve Bee of Paradigm Pensions said employees would question what they were being charged for.
He said: "If all they are doing is being put into a tracker fund, they might think it's not good value. One way round it is price-capping."
A price cap is one option thought to be under consideration by Pensions Minister Steve Webb, widely seen as better informed than any of his 14 Labour predecessors in 13 years. He has promised to respond to the concerns in April.
Morten Nilsson, chief executive of Now:Pensions, the Danish group offering a low-cost scheme to UK firms, commented: "For me the problem with consultancy charging is it is more transparent than commission but it works a bit the same way.
"If it is something that has an ongoing structure, then you need to get an ongoing benefit out of it also.
"The fee levels have to be appropriate to the benefits being delivered."