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."

Independent Partners: 10 top tips for retirement. Get your free guide here

Suggested Topics
Life and Style
Powdered colors are displayed for sale at a market ahead of the Holi festival in Bhopal, India
techHere's what you need to know about the riotous occasion
Arts and Entertainment
Larry David and Rosie Perez in ‘Fish in the Dark’
theatreReview: Had Fish in the Dark been penned by a civilian it would have barely got a reading, let alone £10m advance sales
News
Details of the self-cleaning coating were published last night in the journal Science
science
News
Approved Food sell products past their sell-by dates at discounted prices
i100
News
Life-changing: Simone de Beauvoir in 1947, two years before she wrote 'The Second Sex', credited as the starting point of second wave feminism
peopleHer seminal feminist polemic, The Second Sex, has been published in short-form to mark International Women's Day
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Evening Administrator

    £8 per hour: Recruitment Genius: This Pension Specialist was established early...

    Guru Careers: Executive Assistant / PA

    £30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

    Ashdown Group: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Day In a Page

    Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

    Homeless Veterans campaign

    Donations hit record-breaking £1m target after huge gift from Lloyds Bank
    Flight MH370 a year on: Lost without a trace – but the search goes on

    Lost without a trace

    But, a year on, the search continues for Flight MH370
    Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

    Germany's spy HQ springs a leak

    Thieves break into new €1.5bn complex... to steal taps
    International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

    Whirlwind wit of Simone de Beauvoir

    Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
    Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

    Confessions of a planespotter

    With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
    Russia's gulag museum 'makes no mention' of Stalin's atrocities

    Russia's gulag museum

    Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
    The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

    The big fresh food con

    Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
    Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

    Virginia Ironside was my landlady

    Tim Willis reveals what it's like to live with an agony aunt on call 24/7
    Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

    Paris Fashion Week 2015

    The wit and wisdom of Manish Arora's exercise in high camp
    8 best workout DVDs

    8 best workout DVDs

    If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
    Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

    Paul Scholes column

    I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
    Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

    From the Azteca to Vicarage Road with a million followers

    Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
    Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

    Khan ready to meet winner of Mayweather v Pacquiao

    The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable