Pension savers could be forced into single funds that only buy “ethical” investments under drastic changes that will see brokers pick where their customers invest.

The City watchdog said savers should not always be trusted to choose their own investments and proposed pension firms shoehorn them into one-size-fits-all portfolios. Billions of pounds should be funnelled into green and ethical investments, the Financial Conduct Authority said.

Sipp providers will have to promote their own “default investment strategies” for all new customers, many of whom may “lack the skills or expertise to make appropriate choices”, according to the watchdog. It said it was concerned about savers’ ability to choose the right investments as more than 125,000 savers open up a Sipp every year without any advice. 

However, investors will be goaded into funds that exclude investments deemed unethical or non-environmentally friendly – many of which charge higher fees. The FCA said the new funds must be “appropriately diversified” and “take account of climate change and other environmental, social and governance risks”.

Tom McPhail of the Lang Cat, a consultancy, said ethical investing was becoming hardwired across pensions because it was Government policy to take climate change into account. 

Brokers were less sanguine on the new diktat. Tom Selby, of AJ Bell, said: “There is an interesting question around the extent to which regulators should be dictating investment strategies to savers.” 

Mr McPhail also warned the proposals could lead to investors paying more as stockbrokers would simply use the rules to push investors into expensive funds and boost their profits. The FCA should introduce a charge cap to prevent this, he added.

“It would make it simpler if the FCA introduced a cap from the start. Brokers will use their own funds because they make more money on them.”

The watchdog said it would only introduce a cap if the funds offered poor value once created, meanings savers risk paying more in the meantime.

The initiative has also been designed to reduce the amount of cash savers hold, which risks being eroded by rising inflation. Under the proposals, Sipp providers will also have to warn customers holding lots of cash of the risk of not investing it and prompt them to consider investing. The aim is to ensure pension savers have as big a pension pot as possible at retirement.

Becky O’Connor of Interactive Investor, a stockbroker and Sipp provider, said: “You don’t have to be an investment whizz to use a Sipp. We already offer a range of six ‘quick start’ funds that are ready made investment portfolios based on different risk levels.”

The watchdog’s concerns about investors holding too much cash were unfounded, as it makes up 12pc of Sipps on average, Ms O’Connor said. “Generally speaking, Sipp investors do not hoard cash. They can hold cash for a variety of reasons, for example, taking opportunities in the market,” she said.

Mr Selby warned that competent investors could wrongly fall into these standardised options. He said: “Care will need to be taken in ensuring engaged investors are not encouraged to instead simply go for the ‘easy option’ of investing everything in a single default fund that might be less appropriate.”

Sarah Pritchard, of the FCA, said: “These proposals will ensure that customers who don’t take financial advice can benefit from a professionally designed investment strategy, and reduce the risk of their retirement income being eroded by inflation.”

New investors will not automatically be signed up to a default fund however, providers have been ordered to make them a prominent option. More than £470bn is invested in 13 million pension accounts, according to official figures.