Auto-enrolment into workplace pension schemes with complex, high and outdated charging structures will spark an "unprecedented" mis-selling scandal, a report has warned.
It added the way pension providers, consultants and advisers operate in the pensions market is "dysfunctional" and can lead to severe member detriment.
Academics at the Pensions Institute said members of smaller workplace pension schemes were especially at risk of paying high charges, especially if they leave the pension fund.
It said: "High charges are disguised by massive complexity, but also by the Financial Services Authority (FSA) projection rates, which are unrealistically optimistic relative to performance post-2000 and are likely to remain so even when revised.
"Unless older high-charging schemes are abolished, their use for auto-enrolment - when up to ten million low to median workers often with lose financial literacy join DC schemes - will leave to the UK pensions market facing a mis-selling scandal on an unprecedented scale."
The paper said data on workplace defined contribution (DC) schemes was unreliable because providers recategorise scheme leaves as retail customers making it "impossible to analyse what happened to deferred member charges".
It added thousands of employees pay six times the annual charge that is available from more modern multi-employer schemes. Is explained some members were paying 3% per annum or more, compared to 0.5% or less for newer schemes.
"The extend of vested interest as well as the embedded behaviour or conduct of market participants suggests that the market will not reform itself in relation to older contract-based fund charges."
It added charges were not regulated by the FSA or The Pensions Regulator (TPR) and do not appear to form part of the qualifying scheme compliance programme.
"Advice to employers is not regulated by the FSA ad TPR. This is a massive oversight on the part of the regulatory system." the report concluded.
The Association of British Insurers (ABI) said the average charge was 0.77% and it was working with regulators to ensure charges and costs were disclosed consistently to employees across all schemes "in order to achieve greater transparency for workers who are automatically enrolled".
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