Workplace pensions face shake-up - with a crackdown on duff schemes

The shake-up is aimed at making sure millions of new savers don't sink their money into rip-off schemes (see our Pension need-to-knows guide for top saving tips).

It says pension schemes are so complex, it's difficult for both savers and employers to pick the best ones.

In particular, it says employers often don't have the incentive or the knowledge to pick the best scheme for their staff. This problem could grow due to auto-enrolment, as smaller employers, with limited resources, will have to provide schemes for their employees.

Up to £40 billion of defined contribution pension savings could already be in schemes which are delivering poor value or are at risk of doing so, the OFT warns.

The warning follows a study of the market, worth £275 billion in total, which was launched in January (see the Pension charges under the microscope MSE News story).

What has the OFT proposed?

The OFT has agreed the following reforms:

• The Pensions Regulator will take "rapid action" to look at whether some smaller schemes are failing savers. The Government says it'll look into giving the regulators new powers to clamp down on duff schemes.

• The Association of British Insurers (ABI) will carry out an audit of old and high-charging schemes, which the OFT says may not be delivering value for money. For example, people with schemes sold before 2001 may be paying more in management charges than those sold their schemes at a later date.

• The ABI's members will set up independent committees to scrutinise schemes on savers' behalf. These committees will be able to alert regulators if they fear savers are at risk of getting a bad deal.

In addition, the OFT wants the Government to:

• Consult on making information about pension schemes more transparent and easier to compare. It says this will make choosing a pension easier for employers.

• Consult on stopping schemes being used for auto-enrolment which contain in-built commission for advisers, or ones which penalise members with higher charges when they stop contributing into their pensions.

What are defined contribution pensions?

A defined contribution pension is where workers build up a retirement fund made up of personal contributions and contributions from their employers. When you retire, this pot of cash is often traded for an annuity, which provides a regular income until you die.

These are different to final salary schemes, where your retirement income depends on two factors: your salary and how long you work for an organisation.

There are currently five million people saving into defined contribution schemes. This figure is expected to increase to nine million over the next five years, following the Government's introduction of auto-enrolment last October.

What is auto-enrolment?

Workers aged between 22 and the state pension age who are not members of a workplace pension are being signed up to one over the next five years.

This is part of the Government's plans to head off what it fears is a looming retirement savings crisis, as people live longer but fail to put enough money away for their old age.

Auto-enrolment started last October with larger firms, and will continue until 2018. Early indications show the scheme is successful, with nine out of 10 people who have been put into a pension scheme so far staying in.

But fears have been raised that many people have little previous experience of pensions, and smaller employers in particular could bring investors into schemes which do not represent a good deal. The OFT aims to help solve these issues with its reforms.

'It's vital you get value for money'

OFT chief executive Clive Maxwell says: "Automatic enrolment has the potential to expand and change the market for pensions in the UK for the better. It is vital people are saving in schemes which deliver good value for money.

"We have found problems in relying on competition to drive value for money for savers in this market. We've therefore worked closely with the Government, regulators and industry to agree a set of measures that we believe are an important step in helping to ensure that savers get better outcomes.

"It is important, particularly given that automatic enrolment is already under way, that these measures are implemented rapidly."

Pensions Minister Steve Webb says: "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.

"We will consult shortly on the full range of options to protect consumers, including minimum scheme standards, and further action on charges and charge transparency."

Additional reporting by the Press Association.