Marco Arment, creator of web page-saving service Instapaper, gives us another reason to encrypt our iPhone backups:
You should encrypt your backups, if not for security reasons, for a big convenience gain: encrypted backups will include your email and Mobile Me passwords so you never need to re-enter them after a restore. (emphasis added)
In case you don’t already know, you’ll find the checkbox option to encrypt the backup in the iTunes summary screen. Be sure you remember the encryption password!
iPhone keeps record of everywhere you go [Marco.org via Daring Fireball]
while I can see the benefit in this, when I encrypted my backups I ran into trouble.
If for any reason you don't want to extract something from your backup using a third party tool (eg. SMS database, Phonebook) to put onto your current or different iPhone than the third party tool won't be able to decrypt the backup.
Pretty rare occasion I admit, but I'd rather enter a password when I restore rather than get caught out needing a number or sms from a past backup.