Brown's pension dilemma

Labour's party conference has been dogged by pensioners protests

By the BBC's personal finance reporter Andrew Verity

The Chancellor's rejection of demands to increase the basic state pension in line with earnings is justified by the Treasury on grounds of cost.

According to government figures, the extra cost of an increase in line with earnings for the next two years would be £4.4bn a year, rising to £7.5bn a year by 2010.

Instead, Mr Brown wants government policy to target help on the poorest pensioners.

He argues this is more effectively achieved through measures such as the Minimum Income Guarantee, the means-tested top-up designed to lift the incomes of the poorest.

He also confirmed that the level of minimum income would rise from £78 a week to £90 a week for a single pensioner.

Most pensioners' have reacted with grim faces to the government's pensions proposals

This measure, together with winter fuel payments and free TV licences, means the Treasury is already spending an extra £6.5 bn a year on pensioners.

The government claims that money would not be available if it went on increasing the basic state pension for every pensioner.

Affordable

The National Pensioners Convention, which together with trades unions defeated the government on the issue at the Labour party conference, says an increase in line with earnings is easily affordable.

The NPC's outgoing president Sir Jack Jones is urging the pensions minister Jeff Rooker to publish figures from the Government Actuary on the cost of a link to earnings.

He says these will show that the National Insurance Fund, has a big surplus, enough to allow pensions to rise with earnings for the next five years.

The cross-party social security select committee of MPs has also recommended that the state pension be re-linked to earnings, and immediately raised from £67.50 to £90 for a single pensioner.

European comparisons

State-funded pensions are less generous in the UK than in most other European countries.

The closest comparison is Ireland, where a single pensioner can collect 90 Irish punts a week in the current financial year, or £71.

But in Germany, the first country to found a state pension system under the original "Iron Chancellor" Otto von Bismarck, single pensioners receive 40% of the salary they earned just before retirement. This can then be supplemented through additional occupational pension schemes.

Translated into British money, a German state pension would pay out more than £8,000 a year, or about £160 a week, to someone who retired on the average wage.

In France, single pensioners get half their average salary - and that average is taken from their best 25 years of employment. At an absolute minimum they get the equivalent of £78.30 a week.

In Italy, pensioners get an amount based on a third of their salary at retirement, which is boosted if they put off retirement into their sixties.

In the Netherlands, the minimum state pension is the equivalent of £115 a week for a single pensioner. That income is then supplemented by industry schemes.

Pension Schemes

However, comparisons between the UK and European countries can be misleading because many British workers take out additional private pension coverage.

Most European schemes are organised either through the state or through industry-wide federations such as engineers or civil servants.

What they have in common is that they are all paid for out of current income: there is no fund set aside to invest and pay for future pensions.

Britain has more than £700bn of investment, more than the country's entire gross domestic product, set aside for pensions.

Employers' pension funds hold a third of the shares listed on the London stock exchange, while insurance companies, also heavily involved in pension saving, hold a further third.

Because few European countries operate privately funded pensions, the amount of funded pension saving in the UK - through employer's schemes and personal pensions - is more than the rest of Europe put together.

That has led to fears that the UK may end up paying twice for its pensions.

As Europe's population ages, there will be more pensioners for every taxpayer than there are now, forcing governments to raise taxes to pay pensions.

Eurosceptics have used this argument against joining the Euro. If the single currency is followed by harmonised taxes, British taxes will also have to rise.

However, those in favour of the Euro point out that no-one can predict exactly how European pensions will be arranged 20 years from today.