The Office of Fair Trading is to launch an investigation into whether employees are being unfairly hit with high charges on workplace pension schemes.
The regulator wants to ensure savers in workplace pension schemes are getting the best value for money, given the avalanche of money it expects to rush into these scheme over the next few years.
The decision follows a campaign by the Telegraph to expose the high level of fees charged by the financial services industry on funds.
With the introduction of auto-enrolment, there will be an increase in the value of annual pension contributions of £11bn by 2018.
Currently four million people save into "defined contribution" (DC) pension schemes, where savers' money is invested and the final pot is dependent on returns after charges.
The Government wants to dramatically increase this figure to plug a colossal gap in the amount being saved for retirement compared with what will be needed to provide a decent standard of living.
The mass closure of final salary schemes, where companies carry the risk of investment performance, has exacerbated the problem.
The number of "active" pension savers in the UK fell from 12.2 million at the peak in 1967 to 8.2 million in 2011, according to the Office for National Statistics.
Auto-enrolment has been hailed as the answer, with backed calling it the biggest pensions revolution since David Lloyd George ushered in state pensions more than a century ago. The scheme, where employees are automatically included but have to ask to opt-up, began in October for companies with 120,000 or more workers, with smaller firms gradually being enrolled over six years.
The Office of Fair Trading (OFT) is concerned that with the vast increase in volumes being saved into pensions that these new savers would benefit from low cost, high quality pension schemes.
The market report will investigate competition between pension providers, whether there is sufficient pressure on pension providers to keep charges low, and how transparent these charges are to savers.
As auto-enrolment will in time effect smaller companies too, the study will also look at whether small firms are properly equipped to offer fair and successful pension schemes. The OFT said it would be working closely with the Department of Work and Pensions, the Pensions Regulator and the Financial Services Authority and during the investigation.
How active private pension scheme membership has fallen
The decline of final salary schemes (defined benefit) has undermined pension saving overall
Mary Starks, a senior director at the OFT, 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."
The financial services industry admitted that Britons are "often very suspicious of pensions", a view it wants to shift.
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: “People are often very suspicious of pensions, but that perception needs to change if our society is to save enough for its old age. Millions of people will get a new workplace pension under the much-needed auto-enrolment reforms, and they need to have more confidence in the product. There is no point bringing them into a pension that they do not trust.
“The OFT study is a useful initiative and part of a growing focus questioning whether pensions can offer more value to savers. Charges and annuities are a particular concern, and we hope the OFT sheds some light on these issues, which can make a huge difference to a pensioner’s income. The market is changing and charges have fallen over the years, but there is still further to go to ensure people get the best possible value from a pension."
The industry has made attempts to try and deflect criticism. Last week, the UK's largest pension providers promised to disclose the full costs to employees in workplace pension schemes. The members of the Association of British Insurers (ABI), including Aviva (LSE: AV.L - news) , Prudential (LSE: PRU.L - news) and Standard Life (LSE: SL.L - news) have pledged to clearly and consistently reveal the pension charges to savers in the future.
The ABI, which represents most of the major pension companies, said it was looking forward to working with the OFT "to ensure that their study is complete and well-informed”.
ABI director general Otto Thoresen said: "The pensions environment is changing dramatically and with auto-enrolment set to bring millions of workers into pension savings the OFT's market study into workplace pensions is timely.
"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."
Tom McPhail, head of pensions research at Hargreaves Lansdown (LSE: HL.L - news) , a private pensions provider, said he was concerned that the OFT investigation may focus only on price, without looking at important aspects of pensions such as quality of administration, stability and crucially, "member engagement" - getting people to save in the first place.
"Without good member engagement it is unrealistic to expect good outcomes from DC pensions; any investigation which looks only at price without considering whether the services provided actually deliver good outcomes will only be looking at half the equation," he said.
Steven Cameron, head of regulatory strategy at Aegon (Amsterdam: AGN.AS - news) , welcomed the investigation's focus on smaller firms. "We're pleased to see OFT will also examine if smaller firms receive help and advice. Advisers play a key role and we have concerns regulation is making it harder for them to help such employers. Advisers also encourage greater employer engagement which is particularly key as we progress with auto enrolment," he said.
The investigation is expected to take six months. The OFT will then decide whether to recommend an investigation by the Competition Commission.