Pension schemes are poor value for money and may risk leaving millions short of cash when they retire, the Office of Fair Trading warned today.
The Watchdog's report into the £275 billion defined contribution (DC) pension market said that high charges and poor governance has left the risk of savers losing out in two parts of the market.
The OFT said £30 billion worth of savings in old and high-charging contract and bundled-trust schemes may not be getting value for money.
Meanwhile £10 billion worth of savings in smaller trust-based schemes are also at because of inadequate trustee engagement and capability.
Some five million people currently pay into DC schemes while auto-enrolment - the Government scheme launched last year to force companies to put workers into a pension - will boost that figure to nine million in the next few years.
Clive Maxwell, OFT chief, said: "We have found problems in relying on competition to drive value for money for savers in this market.
"Automatic enrolment has the potential to expand and change the market for pensions in the UK for the better. but it is vital that they are saving in schemes which deliver good value for money."
The Watchdog plans a shake-up of the system to ensure that savers get better outcomes. It has asked the Department of Work and Pensions (DWP) to give the Pensioners Regulator new enforcement powers to tackle the problem of small trust-based schemes.
It has told the Association of British Insurers to set up an immediate independent audit of high-charging contract and bundled-trust schemes.
Meanwhile the DWP will investigate ways to prevent schemes being used for auto-enrolment that contain "in-built adviser commissions" or that penalise members with higher charges when they stop contributing into their pension.
There are also a number of other measures proposed to solve the problem of poor-value pension schemes but has stopped short, so far, of introducing a cap on management charges.
However, Mr Maxwell told the BBC: "We're holding off on that for now, but it may be that a cap is the right thing to do."
Reaction to the proposals was mixed. Malcolm McLean, consultant at Barnett Waddingham said: "This is a damning report and is clearly looking to the pensions industry to put its house in order on charges with a view to pension savers getting much better value for money than they do at the moment."
But Joanne Segars, chief executive of the National Association of Pension Funds Chief Executive, said a proposal for schemes to have governance committees could lead to a conflict of interest.
"The report risks letting down pension savers who need someone solely on their side, with the independence and power to act in their interests," she said. "Employers should be prepared to provide governance themselves or use a master trust arrangement."
Tom McPhail, head of pensions research at Hargreaves Lansdown, also criticised the governance proposals. "The measures proposed are weak and the missing link is getting people engaged with their pension savings. In the long run where we need to get to is to use the efficiencies of setting up group pensions through the workplace and then put individuals in control of their own retirement savings."