Will staff automatic pensions lead to mis-selling scandal?

The Pensions Institute warned this week that the auto-enrolment process could cause widespread mis-selling for millions.

Under the scheme, which began at the start of this month, up to nine million workers will be automatically recruited into company pension schemes in the next few years. But the institute warned that anyone joining an existing defined-contribution scheme, could be hit by high charges and poor returns.

In a report entitled Caveat Venditor, the academics said: "Charges for default funds in large new auto-enrolment schemes generally represent good value, but tens of thousands of employees currently are trapped in the funds of older schemes with high and disguised charges.

"There is 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."

Tom McPhail of Hargreaves Lansdown agreed that there are potential problems. "There is a risk of regulatory failure leading to poor member outcomes," he said. But he criticised the report for overstating the risk of workers ending up in high-charging legacy pensions.

"Instead, the report should have addressed the importance of employers providing their employees with an effective shopping-around process at the point of retirement," said Mr McPhail.

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