The Office of Fair Trading has launched an investigation to find out whether defined contribution workplace pension schemes are set up to deliver the best value for money for savers.
The competition watchdog said its market study had been prompted by the introduction of auto-enrolment, which is expected to see an additional six to nine million workers enrolled in a workplace pension scheme by 2018.
It is exploring whether competition in the market will work in the best interests of new savers to deliver low cost, high quality pension schemes, with a focus on value for money and the size of the pension savers end up with when they retire.
Mary Starks, senior director in the OFT's services, infrastructure and public markets group, said: '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. 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.'
In particular, the OFT will look at how pension providers compete with each other and how the DC market might develop over time, as well as whether there is enough pressure on pension providers to keep charges low and how information on charges is made available to savers.
It will also explore whether smaller firms face difficulties in making pension decisions in the interests of their employees and whether they get enough help and advice in setting up and maintaining their workplace pension schemes.
Barriers to switching between schemes and potential lack of ongoing employer engagement in setting up and managing pensions are also under the remit of the study, which the OFT plans to complete by August 2013.
It will be working closely with the Department of Work and Pensions, The Pensions Regulator, the Financial Services Authority and other key players in the industry such as the National Association of Pension Funds, Association of British Insurers and other trade bodies.
Potential outcomes from OFT market studies can include enforcement action, a market being referred to the Competition Commission, recommendations for changes in relevant laws and regulations and campaigns to promote consumer education and awareness. Alternatively, the department can give markets a clean bill of health.
Morten Nilsson, chief executive of pension provider NOW: Pensions, said he hoped the OFT study would address 'serious concerns' over the continued use of older schemes for auto-enrolment.
'There are about 205,000 DC schemes in the private sector and there is currently a very real danger that smaller employers will use these older schemes for auto-enrolment, potentially bringing millions of new pension investors into poor value default funds,' he explained.
'We hope that the OFT study will help employers select an appropriate scheme for their employers, which will enable employees to save a pension pot which provides adequately for their retirement.'
Otto Thoresen, director general of the ABI, welcomed the 'timely' launch of the study. '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,' he said.
'People rightly need confidence in a system that delivers value for money pensions and works well for employees and employers. ABI members recognise this and are raising standards to meet customer expectations. Pension charges have fallen to their lowest level, and industry initiatives are set to ensure charges and costs are disclosed clearly in a consistent format, and that people nearing retirement get more help to get the best pension deal,' he added.
