In-built adviser commissions in auto-enrolment pension schemes may not deliver best value for savers, says OFT

The regulator is currently conducting a market study into DC workplace pensions and has outlined some preliminary concerns based on what it has found to-date. The study began in January. The OFT will now discuss these concerns with the industry, the Government and regulators to consider what action, if any, might be appropriate to address them.

The OFT said that, from the evidence it has analysed, savers in some schemes where financial advisers are paid for making recommendations about pension investments through in-built commissions may not be receiving value for money from those arrangements.

"There are a number of schemes open for auto-enrolment that appear to have built-in adviser commissions and which may not represent the best value for money for those that could be enrolled into them," the OFT said.

Between five and eight million people will begin saving more towards their retirement or saving for the first time under the Government's automatic enrolment programme, which began for the largest employers in October last year. The vast majority of those savers will be enrolled into DC schemes, under which the benefits provided on retirement depend on the performance of the saver's investment. Around four million people in the UK are currently saving into one of these schemes, according to OFT estimates.

The OFT said, though, that some companies may have insufficient "governance over the performance of some schemes ... to ensure that scheme members are getting the best possible investment outcomes".

Other concerns it has raised include that some pension schemes may not be able to be scaled sufficiently to deliver value for members. The regulator also said that it is currently not easy to compare charges imposed by pension scheme providers because of the way those charges are presented.

The OFT said it is to hold talks with industry, the Government and regulators about its concerns.

"The purpose of these discussions will be to discuss the scope and scale of our concerns, and to consider what action, if any, might be appropriate to address them," it said. "Discussions of possible future actions will also consider the relevance of current or existing initiatives undertaken by regulators or the industry."

"The OFT is focusing on specifically on the DC workplace pension schemes because this is the area of greatest growth in the pensions market. Up to eight million more employees are expected to start saving into a workplace pension scheme as a result of automatic enrolment, the vast majority of which will be saving into defined contribution schemes. This section of the pensions market therefore is expected to be of increasing importance and an area of potential consumer harm," it added.

The OFT has the option, at the end of its study, to refer the DC workplace pension schemes market for further scrutiny by the Competition Commission, take enforcement action against companies it feels are acting in breach of competition rules or make recommendations to industry, or indeed Government, about what actions should be taken to resolve concerns about consumer detriment.