Thousands of workers are being offered cash incentives to trade in their gold-plated pension schemes.

Accountancy giants KMPG have released a report that shows 90,000 people have been offered cash incentives to leave lucrative pension schemes.  Currently one in four employees are accepting these less than generous terms for a cash pay-out and numbers are expected to increase to 750,000 over the next five years.

Pensions Minister, Steve Webb, has warned that these offers are often being mis-sold to employees and demanded that the bad practices be highlighted so that the Pensions Regulator can put plans into place to ensure that they weeded out.

Companies are keen to get rid of ‘gold-plated’ pension final salary pension schemes, which offer employees pensions that are based on earnings and length of service.  Newer and more affordable schemes, called defined contribution schemes, are being sold to workers that are based purely on the stock market and therefore much more risky to the customer.

Because these types of pensions invest all of the pension fund into the stock market, no guarantees of retirement income can be made, furthermore a lot of these schemes will not be inflation-proof or provide a widow’s/widower’s pension should they need to. These benefits would need to be bought with an annuity which could prove costly.

Steve Webb is worried that people aren’t looking further than the immediate cash incentive that they are being offered to trade in their much better pensions, fearing that in the current financial crisis people will accept some money up front to help ease their money worries but come to regret it later.

The Pensions Regulator is keen for people to realise that such transfers are rarely a good idea and that they would be much better staying with their final salary pensions.

Often employers are found guilty of giving out incorrect information regarding the newer pension schemes and not fully explaining the risks attached.  A lot of employees don’t seek out independent advice and they are given little time to come to a decision by being told that any incentives are only available for a limited time period.

Chief Executive of the Pensions Regulator, Bill Galvin, remarked: Pension transfers are an extremely difficult financial equation – most members find it impossible to understand their options unaided. The offer might look attractive, particularly with cash as an incentive. But poorly informed decisions are likely to be regretted years later.

“We believe such offers won’t be in most members’ best interests, and have pointed out that employers run significant risks in offering incentives to members to transfer out of these [final salary] schemes.”

Different firms are offering different incentives to get employees to opt into the new schemes.  For example: Hotel chain, InterContinental, recently offered former employees a 25% cash sum to transfer from their final salary pension scheme to a defined contribution one.  ITV offered its employees a one-off increase to pension payments if they agreed to release any future inflation-linked rises.

PricewaterhouseCoopers (PwC) ran a recent survey which revealed that more than 33% of pension schemes were considering offering its customers incentives to switch, a huge increase from 5% a year ago.

The defined contribution schemes do suit some people though, employees in poor health, the unmarried and those who are concerned about the future value of their current pension scheme may benefit from switching their pension plans, although they should always seek out independent advice before making their decision.