The pensions offer that's nothing more than hot air

'Cash option' deals may sound tempting, writes Sam Dunn, but they could be a nail in the coffin of company schemes

Would you trade your company pension for a higher salary or a bigger bonus? It's a difficult question, one for which you may soon need to weigh up your options.

Would you trade your company pension for a higher salary or a bigger bonus? It's a difficult question, one for which you may soon need to weigh up your options.

Nearly a quarter of companies are already considering such an approach - or are prepared to do so - to curb pension costs, according to a report by pensions consultant Towers Perrin.

The danger is that employees offered a deal like this might pocket the extra cash and fail to make any alternative pension provision. If this happens, the £27bn gap between what Britons should be saving for a comfortable retirement and what they actually do save is likely to get even bigger.

"This is a real danger for the Government, especially with the state trying to cut back on benefits," says Peter Routledge, a partner at Towers Perrin. "People need to be aware they may be getting cash now but they are sacrificing their pensions."

The so-called "cash option" for retirement funding has already been introduced by a handful of small businesses keen to pass the risk - and the responsibility - to their employees.

The Towers Perrin report highlights the decline of company pensions, which began in earnest two years ago with the closure to new employees of the most generous final salary schemes. Barely a quarter of all companies now offer this type of pension to new staff, compared with 58 per cent in 2002.

In most cases, cheaper "defined contribution" (DC) schemes are now offered instead. These shift the onus for pensions saving on to the employee, who is expected to make contributions to the scheme, in addition to contributions from the employer. The money is then invested by fund managers with the aim of building up a pension pot that, on retirement, will buy an annuity - a guaranteed income for the rest of the individual's life.

While the move from final salary to DC schemes saves employers money, it fails to address the problem of the heavy cost to companies of old-fashioned final salary schemes already in place for their former and current staff. This is why employers are looking at ways of encouraging employees to freeze their final salary schemes, keep them capped at that level until retirement, and make further payments into a DC plan instead.

So far, flexible "benefits" packages with extra holiday entitlement, for example, have been offered as a sweetener.

Mr Routledge warns that the rise of the cash option represents the "final stage" of a march towards the death of company pensions, with individuals having to take full responsibility for their retirement planning.

This is where the real worry lies, says John Turton, a pensions specialist at independent financial adviser Bestinvest. "Imagine somebody earning, for example, £30,000 a year getting an extra 15 per cent in their salary [instead of pension contributions]," he says. "They will pay more in tax and national insurance contributions - which the Chancellor will be thankful for - and what will they do with the extra money? Go on holiday or buy a new car. They won't put it in a pension - not without some form of compulsion."

Our failure to save enough for old age has become a thorn in the Government's side. The "jam today" consumer culture, propelled by low interest rates and a willingness to live on cheap credit, has fuelled a pensions crisis that has provoked strike action and street protests.

Thousands marched in London last month on a rally organised by the TUC to protest at inadequate pension funding and to call for higher benefits, in particular, a restoration of the "earnings link" between rises in the state pension and average earnings.

Among them were workers who, after years of service, have seen their company fold and, with it, their company pension fund. The £400m that the Government has set aside to provide emergency compensation for some 60,000 workers in this situation has already been condemned for being too little and for excluding those whose pension funds were wound up while their employer was still solvent.

An announcement is also due shortly on plans to allow people to carry on working with full employment rights beyond the age of 65. Meanwhile, calls from industry and consumer bodies for people to be forced to save for their own retirement have grown louder. The proposal remains political dynamite for the Government, since it would in effect be asking us to vote for lower salaries.

Nearly half of businesses questioned for the Towers Perrin report said they expected to make "significant" changes to staff pensions during the next two years. The biggest of these is likely to be offering a pension as one part of a general benefits package, a de facto relegation to the status of gym membership.

Moves such as these will mean that more of us have to sit up and take notice of exactly what we are being offered as a retirement package.

"Financial education, sponsored by the employer in the company, is key," Mr Routledge adds. "The problem is that people value cash more than a pension; that is the danger."