OFT to examine whether defined contribution pension schemes provide value for money

The Office of Fair Trading (OFT) will consider whether there is sufficient competition in the sector, barriers to switching and whether providers make enough information about charges available to savers. It will also look at the difficulties faced by smaller firms setting up and maintaining a workplace pension scheme. Its market study will focus on value for money and the size of pension pot savers end up with when they retire.

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 defined contribution (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 UK workplace pensions market is set for rapid growth and change over the next six years, in particular with the introduction of automatic enrolment," the OFT's Mary Starks said. "It is important that 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."

Under the Enterprise Act, the OFT has the power to obtain information and conduct research on both competition and consumer issues. Possible outcomes of market studies can include enforcement action, recommendations for changes in the law, consumer awareness campaigns or a referral of the relevant market to the Competition Commission.

The OFT said it would work closely with the Department of Work and Pensions (DWP) and regulatory bodies during the course of its study, as well as seeking input from industry bodies, pension providers and representatives of employers and employees. It plans to report back by August 2013.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the OFT's investigation would consider the impact of recently-announced measures on regulation and 'hidden' scheme charges "in the context of market forces and the ability of employers to make the right choices".

"The Government wants auto-enrolment to succeed," he said. "The Pensions Regulator is pulling out all the stops to ensure that employers, trustees and providers do their bit to ensure that the DC pension schemes used are suitable. The level of pension scheme charges, and how well schemes are governed, will be key."

"Separate initiatives from the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI) have focused on charges; while last week the Pensions Regulator published a package of documents focused on governance. But is this enough?" he said.

Industry bodies published a code of practice on pension charging last November following concerns about the fees levied by some older workplace schemes, including from Pensions Minister Steve Webb. The code specifies that charges should be set out in a standard template, summarising to employers the fees charged and corresponding services. Typical fees may include annual charges on both employers and pension scheme members as well as less obvious 'transaction costs' when the funds in a pension pot are used to buy or sell shares.

"Pension charges have fallen to their lowest level, and industry initiatives are set to ensure that charges and costs are disclosed clearly in a consistent format, and that people nearing retirement get more help to get the best pension deal," the ABI's Otto Thoresen said. "We look forward to working with the OFT to ensure that their study is complete and well-informed."