Pension charges under the microscope in OFT investigation

The Office of Fair Trading (OFT) today launched a market study into the sector, which has been welcomed by commentators.

At present, around four million people save into a 'defined contribution' pension scheme provided by an employer.

Pensions Minister Steve Webb said last year he would be "watching pension charges like a hawk".

He added: "I am concerned about charges in legacy schemes and have challenged the industry to bring these into line with new business. I have the power to cap charges and will do so to protect consumers if I need to."

The probe will focus on:

• How pension providers compete.

• Whether there is sufficient pressure to keep charges low, and whether charges are made clear.

• Whether smaller firms face difficulties in making pension decisions in their employees' interests.

• Whether smaller firms receive appropriate help and advice in setting up and maintaining workplace pensions.

• Barriers to switching between schemes and a potential lack of ongoing employer engagement in setting up and managing pensions.

The investigation, expected to last until the summer, is focusing on defined contribution pensions. In these, workers build up a pot of retirement cash via both their own contributions and those from employers. This pot is often traded for an annuity on retirement, which provides a regular income until death.

These are different to final salary schemes, where retirement income is dependent on how long you work for an organisation together with your salary.

Tom McPhail, from pension specialist Hargreaves Lansdown, says: "We know pension charges have come down significantly in recent years and new workplace pensions are generally offering good value for money.

"The principal problems exist with legacy schemes and smaller arrangements."

The pensions market is set for a massive shake-up over the coming years as millions will be automatically enrolled into a pension. 'Auto-enrolment' began in October last year when all employees in the country's largest firms were placed into a workplace pension, although they have the choice to opt out.

The OFT expects £11 billion more will be contributed to workplace pensions by 2018.

Mary Starks, from the OFT, says: "It is important these savers get a good deal.

"We want to take a look at the market now to ensure that providers are competing to offer the best possible deals, and that the choices made by employers mean that employees are saving into good pension schemes for their retirement."