Investment consultants advise pension funds on their investment strategy and asset allocation. The regulator, the Financial Conduct Authority (FCA) said that pension funds had “limited ability to assess the quality of their advice or compare services”, meaning that switching rates were low. The largest firms in the sector – Aon Hewitt, Mercer and Willis Towers Watson – hold a 50-80% market share and there are barriers to new, smaller consultants joining the industry.

The industry had hoped to avoid a full investigation by the anti-trust body. The CMA has wide-reaching powers to force an increase in competition, including forcing the break-up of large firms. The CMA will conclude the investigation by March 2019.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “It is a significant step for us to make this recommendation. We have serious concerns about this market and believe that the CMA is best placed to undertake this work.

“Investment consultancy services play a significant role advising pension fund trustees when they are procuring asset management services. It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants.”

Caroline Escott, policy lead: investment and defined benefits at the Pensions and Lifetime Savings Association (PLSA), said: “We welcome the decision of the FCA to make a market investigation reference to the CMA. Workplace pension schemes have £1.9trn of assets under management in the UK and pension schemes represent 57% of all institutional investments. Both defined benefit and defined contribution schemes are important users of the services provided by investment consultants, including fiduciary management.

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“Investment consultants can play a positive role in the institutional investment chain, and many PLSA members have told us they are happy with the services offered by their investment consultants. Nonetheless others have expressed concerns about the potential misalignment of incentives in the sector and the FCA’s studies have highlighted competition issues on both the demand and the supply side.