I congratulate Mr. Cox on securing the debate on such an important subject. He made his case very powerfully. As he said, the matter has been discussed by the UK branch of the Commonwealth Parliamentary Association; I know of the association's value as a point of contact between parliamentarians in this and other Commonwealth countries as I was a member of the CPA executive before I was given my present job by the Prime Minister.

My hon. Friend may be surprised that I am replying to the debate; I was asked to do so by my right hon. Friend the Minister of State, who is in Committee considering the Social Security Fraud Bill.

As my hon. Friend knows, the issue has been discussed for many years. He has tabled several parliamentary questions on the matter and it was the subject of a short debate in January in the House of Lords. I am aware of the strength of feeling of many British pensioners overseas who have raised the issue over the years.

Pensioners overseas have paid national insurance contributions; however, the money that an individual pays to the national insurance fund is not earmarked for that person and never has been. The national insurance system works on a pay-as-you-go basis and has done so ever since it was established. Contributions paid into the scheme in the past were paid out long ago to people who were entitled to pensions and benefits at that time.

The contribution rate paid in the past took account of the range of benefits payable at the time which, of course, did not generally include the uprating of pensions in all foreign countries. If the scheme had uprated pensions in all countries, the cost would have been higher and would not have been covered by the contributions.

Paying contributions has never given an automatic entitlement to benefits. The national insurance scheme is different from a commercial insurance scheme in which premiums are linked to expected benefits. Although national insurance contributions provide a foundation for calculating personal future benefit entitlement, the contributions do not actually pay for those benefits.

The agreement between the individual and the state is that the payment of contributions gives entitlement to a package of benefits subject to certain conditions. One condition is that retirement pension upratings are generally not payable abroad. That comes from the 1955 legislation, which provided for pensions to be paid abroad, but not for uprating.

The rate of national insurance contributions has never included an element for the indexation of pensions payable abroad, because the social security scheme is designed primarily for those living in the United Kingdom, and any uprating in the pension is designed to meet the cost of living here. Overseas pensions are annually uprated only if the pensioner lives in the European Economic Area or if we have a reciprocal agreement with another country that specifically provides for upratings. Over time, we have concluded agreements that allow for annual upratings with more than 30 countries. Bilateral social security agreements can be the means of providing for the uprating of UK pensions, but their function is mainly to provide co-ordination between social security schemes, so that workers moving between the UK and another country obtain a degree of cover for contributory benefits from one country to another. The costs of making such agreements are an important factor, as I am sure that my hon. Friend the Member for Tooting will recognise.

UK pensions are payable anywhere in the world. We pay about 900,000 pensioners in more than 200 countries, but only about half of them receive annual cost of living increases. Elsewhere, retired people continue to receive their pensions at the rate that was payable when they left this country. Those who left the UK when they were younger receive a pension payable at the rate in force when they claim their state retirement pension.

My hon. Friend compared the situation in America with that in Canada and asked why different arrangements operate in respect of our retired pensioners in those countries. There is a historical explanation. In 1969, the UK made a social security agreement with the USA, which provided for future increases in UK state pensions and widows benefits to be received by UK pensioners living in the USA and for the USA to pay its retirement pension to American citizens living in the UK. It also pays upratings to those pensioners living in the UK.

Between 1969 and 1972, discussions about a reciprocal agreement took place between officials from the then Department of Health and Social Security and the Canadian authorities--on the DHSS's initiative. The UK proposed a comprehensive agreement with Canada and tried to persuade it to export its old-age security pension under such an agreement, but the Canadian Government were unable to agree. It seems that Canadian legislation precluded the inclusion of its old-age security pension in reciprocal agreements.

In 1977, Canadian legislation was amended to allow the making of reciprocal agreements involving the export of the Canadian old-age security pension, and Canada indicated its willingness to resume negotiations. At that time, however, UK Ministers decided that insufficient resources were available for increasing the rates of UK pension payable in Canada. There are, therefore, reasons why differences occur in social security agreements, for instance, the different histories of negotiations on an agreement with the USA and with Canada. More than 90 per cent. of those pensioners who do not receive upratings live in Australia, Canada, New Zealand and South Africa. Although we have social security agreements with Australia, Canada and New Zealand, they do not provide for upratings.

My hon. Friend asked about the effects on UK citizens of Australia's decision unilaterally to revoke its social security agreement with us. The agreement helped people who went from this country to live in Australia to satisfy the 10-year residence test for the Australian retirement pension, which is called an age pension. An age pension is means-tested, so a person receives it only if his or her income is below a certain level. It is not like our basic state pension, which is a universal pension. Therefore, the amount of age pension that a Briton retiring in Australia receives depends on his or her financial circumstances. As a result of Australia's termination of the agreement, people who go to Australia after the end of the agreement will, because of its 10-year residence rule, have to wait 10 years before they can get any Australian pension. The Australian Government have estimated that in the first year around 850 people living in Australia will be affected by the termination of the agreement. Those who benefited from it before its termination will continue to do so. However, people who leave Australia to live in the UK before reaching pension age cannot get Australia's age pension because, unlike our pension, it is based on a residence requirement.

The British Government are protecting people in the UK who lived in Australia when the agreement was in force by continuing to allow residence in Australia to count towards a basic pension. To unfreeze pensions entirely in all four Commonwealth countries would cost about £310 million in 2001-02, an increase of more than 20 per cent. on current expenditure on overseas pensions. To pay future cost of living increases in those countries alone would cost around £30 million in the current year, rising each year until all pensioners in those countries were paid the full UK rates and eventually reaching a similar cost of more than £300 million a year. The principal difficulty in extending the payment of pension uprating abroad is the cost of doing so. This year the Government will spend about £1,410 million on payments to pensioners living abroad and if, from this month, all pensioners living abroad were paid at the same level as pensioners in this country, the figure would rise to around £1,740 million, an increase of more than 20 per cent. or around £330 million.

There are huge demands on the UK social security budget and there are many unmet needs. The Government have to make choices about priorities. Our priority is to spend any available resources on pensioners in this country, concentrating on the poorest. We have made a start, but there is still much to do to relieve pensioner poverty. It is sometimes argued that the cost of pensions uprating should be offset by the saving to public services here, in particular the national health service, which pensioners overseas do not use. However, we do not know what calls such pensioners might make on the national health service; many of them went abroad long before reaching retirement age and so for many years did not contribute towards health service costs. To pay them uprated pensions would still constitute a major cost.

As I said earlier, the issue of pension uprating has periodically been bought to the Government's attention, as it was brought to the previous Government's--as my hon. Friend the Member for Tooting acknowledged. However, successive Governments have followed the same policy since the regulations were introduced in 1955. I understand and have sympathy with the arguments in favour of a change in policy, but we cannot disregard the huge cost involved. Therefore, I cannot hold out any prospect of adding to social security expenditure by increasing our spending on pensions overseas. As I said, our priority must remain to spending available resources on pensioners in this country, particularly the poorest.