Weaknesses within the defined contribution (DC) market have already created a risk of savers losing out, and the problem is likely to increase as auto-enrolment is rolled out if measures are not "implemented rapidly", the Office of Fair Trading (OFT) has found.

In particular, the OFT said that old and high charging contract and bundled-trust schemes, containing around £30bn of savings, may not be delivering value for money, and smaller trust-based schemes, containing £10bn of savings, are at risk of delivering poor value for money due to low levels of trustee engagement and capability.

Individual savers and employers are finding it difficult to make the right decisions about pension products as they are complex, the OFT said, and as such many employers may often lack the capability or incentive to assess value for money.

In light of its findings, the OFT has worked together with the Department for Work and Pensions (DWP), The Pensions Regulator (TPR) the Financial Conduct Authority and industry groups, such as the Association of British Insurers (ABI) to agree to a set of measures to improve the situation.

The OFT's report has been widely welcomed by the industry, however some have argued that the body's proposal do not go far enough.

Clive Maxwell, OFT chief executive, said: "Auto-enrolment has the potential to expand and change the market for pensions in the UK for the better. Whether people are starting pension-saving for the first time through automatic enrolment, or have already been saving for years, it is vital that they 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 auto-enrolment is already under way, that these measures are implemented rapidly."

Around five million people are saving into DC schemes, and this is expected to increase by up to nine million savers over the next five years following the Government's introduction of auto-enrolment.

However, the problem has the potential to grow during auto-enrolment as smaller employers, with limited resources, are at risk of delivering poor value for money due to low levels of trustee engagement and capability.

The OFT said that the scrutiny of pension schemes needs to be improved.

To tackle the OFT's concerns about small trust-based schemes, TPR has agreed to take rapid action to assess which smaller trust schemes are not delivering value for money and the DWP has agreed to consider if TPR needs new enforcement powers to tackle the problem.

With regards to old and high charging contract and bundled trust schemes, the ABI and its members have agreed to an immediate audit of these schemes to give a full understanding of the charges and any benefits associated with the schemes.

The ABI has also agreed that its members will establish independent governance committees to strengthen the scrutiny of pension schemes on behalf of employees.

The OFT also recommended that the DWP consults on improving transparency and information about the cost and quality of the schemes to help employers' initial choice of scheme easier.

The body also said that the DWP should consult on preventing schemes being used for auto-enrolment that contain in-built adviser commissions or that penalise members with higher charges when they stop contributing their pensions.

Joanne Segars, the National Association of Pension Funds (NAPF) chief executive, said that the organisation has welcomed this "very much needed" report by the OFT.

However, she said that "the devil is in the detail" and added that the organisation wants to be assured that the proposed audit of legacy contract-based schemes will be properly independent and that the OFT had "gone further" and recommended consolidation and the creation of super trusts.

Segars said: "The report has set the future course with the right long term principles to secure good outcomes for pension savers. But we feel that action is urgently needed now. With automatic enrolment underway we need to get things right now, not further down the line."

Kevin LeGrand, Buck Consultants head of pensions policy, said that the OFT's report will help to address the "advice vacuum" that currently exists, but said that the report misses out on other key issues, such as measuring what exactly "good value" is, addressing the issue of scale of schemes and incorporating the recommendations on multiple governance levels.

Ian Bell, Baker Tilly head of pensions, said: "The OFT is effectively acknowledging that the current system of oversight by regulators and trustees is not fit for purpose and cannot guarantee good outcomes for pension scheme members. It's scandalous that these issues were not adequately addressed prior to the introduction of auto enrolment, but the attention to the problem now is welcome, if a little late.

"There is now an urgent need to improve the standards of governance in the defined contribution pensions market, and we particularly welcome the ABI's agreement that its members will establish independent governance committees to better monitor and challenge providers."

First published 19.09.2013

monique_simpson@wilmigton.co.uk