Pensions minister Steve Webb says there is a risk “loss-leading” providers who sell schemes at artificially low prices to win auto-enrolment business will seek to recoup costs by hiking charges in the future.
Automatic enrolment started for the UK’s largest firms in October.
The reform programme is being staged depending on firm size, with the smallest employers due to beginenrolling employees into a workplace scheme in 2018.
During a work and pensions select committee meeting last week, Webb was asked whether pension providers could offer a scheme with a low charge to secure auto-enrolment business, only to steadily increase charges once a company has signed up.
He said: “It is a risk because the transaction costs of changing your auto-enrolment provider are pretty big.
“If a provider drifted its charges up quietly, it would be a big decision for some employers to change because there are a lot of frictional costs involved.
“The key is for the employers to make it quite clear what the terms are when they sign up. I think allowing the provider to softly waft up prices is not a good contract to sign.
“We need to be sure when these contracts are signed that employers are not just aware of the rate they are getting on day one but that that is guaranteed for a period. That has to be kept a close eye on.”
Hargreaves Lansdown head of advice Danny Cox says: “I would be surprised if this is a big risk with modern pension schemes but employers do still need to make sure they check the small print of any contract they sign to make sure the charging structure works in the interests of their employees.”