Baroness Jeannie Drake has suggested employer contributions will need to increase but acknowledged businesses may need time to adjust. The Pensions Commission’s report due next year will also be looking at a growing trend to access pension savings before state pension age.

Speaking at the Pensions UK Annual Conference in Liverpool on Tuesday, the peer said pensions adequacy is a system challenge and made it clear that contribution levels need to go up – for employers in particular.  

“Our recommendations will recognise the need to manage implementation and allow for time to adjust, but there is a real choice we face together. If employer contributions do not go up, how will we prevent millions from failing to save towards adequate retirement, and avoid increasing reliance on means-tested benefits in old age by millions of people, with all the tax implications that brings? It serves everyone to have workers saving adequately towards their retirement,” Drake told the audience.  

She rejected the notion that investment performance and economic growth alone can improve pension outcomes without the need for higher contributions, saying higher savings, a firm state foundation and investments must act together to improve outcomes. The government has to date insisted that adequacy needs to start with better investment returns, claiming these would come from exposure to UK private market assets.  

Employers have said they would compensate for any increases in mandatory pension contributions with slower salary progression, having already been hit with a rise in national insurance contributions and a higher minimum wage. 

However, Drake appears unfazed by such dire warnings. Having been part of the 2004 Turner Commission that recommended auto-enrolment, she said a compulsory employer contribution was considered unpalatable and economically unaffordable back then, yet a consensus emerged.  

The Labour peer also had little time for member engagement to get people to increase contributions voluntarily, suggesting that such efforts have led to nothing.  

“We know individuals do not necessarily save on their own, but we know an inertia-based default is working, and we have to continue to build on it,” she said. 

Where savings are higher than the auto-enrolment minimum, this is usually driven by employer behaviour, she noted. 

“The solution rests in more saving, and it is clear the best route to delivering this is through the automatic enrolment minimum contribution rate,” she said. 

As well as contributions and the lower earnings threshold, the commission is looking at retirement income targets, exploring hybrid metrics that combine replacement rates for middle earners with basic living standards, Drake said. 

Commissioners are also considering the role of housing, as well as ways the pensions system can help reduce the gender pensions gap. 

However, this Pensions Commission is unlikely to stop at the savings phase when it makes its recommendations next year, as Drake said millions of savers need to be supported in rebuilding the link between pension savings and securing pension income in retirement, warning of a trend to begin using up pension savings before state pension age.