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OFT concerned about workers' pension deals

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A number of concerns about the way the workplace pensions market operates have been identified by watchdog the Office of Fair Trading (OFT).

The OFT said a high number of employees may be in danger of being pushed into poor value pension schemes unless action is taken.

Up to 8 million people will be automatically placed into defined contribution (DC) pension schemes by their employer over the next five years.

Under a DC scheme, workers pay a set amount into their pension fund each month, which is sometimes added to by employers contributions.

Since January 2013, the OFT has been carrying out a study into DC schemes to make sure employers and their employees get a good deal and charges are not too high as the market for this type of scheme grows.

It will also consider whether competition between providers is set up to work in the best interests of savers to deliver low cost, high quality pensions.

OFT concerns

In a progress report published today, the OFT said it has concerns about the way certain parts of the sector function.

Among those are two-tier charging structures, where members who have stopped making contributions pay a higher annual management charge percentage.

The OFT expressed concerns 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 scheme members.

It also criticised the way some providers present their charges, making like-for-like comparisons difficult.

Many schemes sold before 2001 have charges "that may not represent the best value for money".

The OFT said there may be some schemes – primarily but not exclusively those sold prior to 2001 – that have charges that may not represent the best value for money or that may not reflect current standards of scheme design.

A call for transparency

The National Association of Pensions Funds chief executive Joanne Segars said with major changes happening to pensions people need to have a high level of trust in the scheme.

"Suspicion about fees and charges could undermine much-needed reforms to automatically bring all workers into a pension. It is pointless to put people into a pension that eats their savings away through high or opaque charges," she said.

"The industry needs to be as transparent as possible so that people understand what they are being charged and why. The situation has got better, but we could do a lot more to improve the way we communicate with savers.

"We need to see a radical reshaping of the pension market to create a smaller number of much larger pension schemes."

Over the next month, the OFT will be holding discussions about these concerns with the pensions industry, Government and regulators. A full report is expected in September.