As many as nine million workers will be automatically enrolled into workplace pension schemes in the next five years under Government plans to tackle the pension savings crisis.
The Office of Fair Trading (OFT) yesterday launched a probe to help ensure the pensions people are being placed in will offer savers the best value for money.
The value of annual contributions into pension schemes is expected to soar by around £11 billion by 2018.
But concerns have been raised that many people will have little previous experience of pensions and there is a danger smaller employers in particular could bring millions of new investors into older schemes offering poor value.
Joanne Segars, chief executive of the National Association of Pension Funds, said people are often very suspicious about pensions, but this needs to change in order to get more saving for their old age.
She said: "Millions of people will get a new workplace pension under the much-needed auto-enrolment reforms and they need to have more confidence in the product. There is no point bringing them into a pension they do not trust."
The watchdog's market study into defined contribution (DC) pension schemes will look at whether competition between providers is tough enough to work in savers' best interests.
The OFT will consider the size of the pension pot people are likely to end up with, whether there is enough pressure on providers to keep costs down and how clear their charges are.
The watchdog also wants to discover whether smaller firms are being given enough help in establishing pension schemes.
With DC schemes employers and workers contribute to a pot of money. Then, when the staff member retires, the money is used to buy an income.
Mary Starks, senior director in the OFT's services, infrastructure and public markets group, said: "It is important these savers get a good deal. We want to take a look at the market now to ensure providers are competing to offer the best possible deals, and the choices made by employers mean employees are saving into good pension schemes for their retirement."
Last week, major pension providers pledged to show their charges and costs more clearly and consistently to people in workplace pensions.
The members of the Association of British Insurers (ABI) – including Prudential, Standard Life, Zurich, Aviva and Legal & General – plan to put the agreement into action in the next 18 months.
ABI director-general Otto Thoresen said: "The pensions environment is changing dramatically and, with auto-enrolment set to bring millions of workers into pension savings, the OFT's market study into workplace pensions is timely.
"Rising life expectancy makes the need to reduce the UK's savings gap more important than ever, and the success of auto-enrolment is crucial to this."
The OFT will work with the Government, other regulators and pension bodies during its study, which is set for completion by August.
Tom McPhail, head of pensions research at financial services firm Hargreaves Lansdown, said it is vital the OFT considers how much contact workers have with schemes.
He said: "Without good member engagement it is unrealistic to expect good outcomes from DC pensions.
"Any investigation that looks only at price without considering whether the services provided actually deliver good outcomes will only be looking at half the equation."
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