It was another good day for share prices today, but how did BT manage to gain a full 12%? It was because the company didn't stumble into any new catastrophe. It merely did what chief executive Ian Livingston said it would – slash costs and get a grip on its global services division, where big mistakes in managing major IT contracts led inevitably to big write-offs last year. In other words, expectations for BT had been set very low.

Let's not be churlish. It was clearly important, after last year's horrors, that Livingston made his "line in the sand" message credible. In global services, the City was impressed. Ignoring currency movements, the cost base rose by only 1%. Next quarter, it should fall. Meanwhile, BT's ability to attract new IT contracts appears healthy, with some £1.4bn of new orders rolling in during the quarter. We still haven't learned whether BT can make serious returns from these orders, but Livingston has restored hope that it might.

In the rest of the business, all is calm. Retail and wholesale have been reliable performers for several years – the right balance between reducing costs and delivering a satisfactory service has been struck.

So should BT's investors relax? Not at all. The reappearance of stability is encouraging, but the story is still about the pension deficit. The figure was £8bn at a gross level at the end of June, almost equivalent to the company's market value. It is perfectly true, as BT says, that the delights of IAS 19 pension accounting mean the deficit calculation can move by a £1bn in the space of a week or two. But take a step back: the size of the deficit has been trending higher for about a decade.

BT's additional contribution to the pension fund has been capped (it hopes) at £525m for the next three years. That allows room to pay an annual dividend – at a lower level than last year – costing in the neighbourhood of £300m as long as BT hits its target of generating £1bn-plus in cash a year. But, golly, the numbers look tight for a business that has £10.5bn of debt.

The position for shareholders is unenviable. If BT is successful in the next three years, the pension fund trustees are probably obliged to try and grab more of the spoils at the next review.

In the meantime, investors receive a dividend yield of 5.4% at the current share price. It's not much compensation for the risk that BT, despite Livingston's promising start, might revert to its accident-prone ways.

Promising Sky

The company was today terribly proud of the fact that operating profits rose 4% to £780m in the year to June. But look what it achieved in 2006 and 2007 – £877m and £815m.

The explanation is the one you would expect – Sky has been spending heavily on investment, taking chunky up-front costs from its adventures into broadband and high-definition telly. That's the way it has always operated, right back to the early days of digital. The complaint from investors is also familiar: when will the heavy spending convert into a big leap forward in profits?

Sky had a stab at providing an answer. Broadband, it said, will get to a break-even point on a standalone basis in 2010/11. If that happens, there will be a quick £120m leg-up to profits. So, with a following wind, you can see how the £1bn could come into view.

There are two main dangers. First, yet another investment splurge might be deemed necessary – 3D television is on the way. Second, Ofcom is threatening to regulate the prices at which Sky sells its movie and sports rights to competitors. The latter has the potential to become far more serious than past threats. We'll see. But, barring a nasty regulatory outcome, Sky looks perfectly positioned for the other side of recession. Its investors should finally get their pay day.

Safe as houses?

On the basis of the evidence, that's a fair statement. But homeowners should not get excited. Downturns in house prices tend to last half a decade, not two years. Unemployment, the lack of wage inflation and the rising price of fixed-rate mortgages suggest house prices could bump along the bottom for a very long time – and that's being optimistic.

nils.pratley@guardian.co.uk

Select committee says complexity of means-testing discourages millions of retired people from claiming state entitlements

Means-tested benefits have failed to lift more than two million pensioners out of poverty, according to a group of MPs who are calling on the government to make a bigger effort to increase the incomes of poor people in retirement.

A further one million pensioners live on less than 50% of average incomes, the report found, highlighting the increasing divide between those over-65s without private savings and workers in generous final salary pensions who can enjoy incomes equal to 80% to 90% of their pre-retirement salary when state benefits are included.

The report by the work and pensions parliamentary select committee comes as a survey by insurer Prudential suggests that a growing proportion of workers intend to rely on the state pension and their savings when they reach retirement age.

The Pru found that almost one in every six workers had stopped contributing to a pension or cut their monthly contributions over the past five years. The survey of more than 1,000 workers by the insurer concurred with previous studies that show belt-tightening by millions of Britons has put a halt to pension savings.

A spokeswoman for the Pru said the decision by some to stop paying into a pension could mean a rise in pensioner poverty and a greater reliance on means-tested benefits.

She said the number of people who expect to rely on state pensions and their own savings was set to rise to 27% over the next 10 years compared with 22% of those retiring this year.

"It's worrying that many people who have been working for years and saving for retirement seem to have given up hope and stopped paying into their pension. It's also really worrying that many people either planning to retire imminently or within the next decade still believe the state will support them when we know that, for many people, this just won't be the case," she said.

MPs on the select committee said it was already the case that two million pensioners were missing out on means-tested benefits, mainly because they were complicated and government agencies were failing to advertise them.

MPs said that while the level of pensioner poverty had declined markedly since 1997, the low incomes of many pensioners was "unacceptable".

The report said: "The committee welcomes assurances that the government has the same commitment to tackling pensioner poverty as it does to tackling child poverty. However it believes that this should be made more explicit and calls on the government to commit to eradicating pensioner poverty."

Committee chairman Terry Rooney said: "The government has done a lot to help pensioners, but there is a lot still to do. The government has committed to eradicating child poverty, now they need to commit to eradicating pensioner poverty."

Unlike some groups that have called for means-tested benefits to be scrapped in favour of a more generous state pension, Rooney said the committee wanted the government to work harder at getting pensioners to make a claim. He said: "The report recommends that DWP should look to working more with [voluntary] organisations and trialling more innovative techniques to ensure that it is reaching as many vulnerable pensioners as possible."

Government urged to do more as new statistics show that 30% of over-65s in the UK are living on incomes far below the national average

Reform of the pensions and benefits system is urgently needed to tackle pensioner poverty in the UK, which is among the worst in Europe, campaigners said today.

The call for action came after European commission statistics showed that 30% of over-65s in the UK were living on incomes far below the national average. That was the fourth highest level in Europe, according to the figures, with pensioners in Romania, where 19% fell below the poverty threshold, among those faring better than in the UK.

Only pensioners in Cyprus (51%), Latvia (33%), and Estonia (33%) came out worse. The EU average was 19%.

The figures came ahead of the work and pensions committee's review of government efforts to tackle pensioner poverty, which is due to be published on Thursday.

Michelle Mitchell, charity director for Age Concern and Help the Aged, said the report demonstrated that even in the years of growth before the recession, many older people were being left behind.

"In a country where the richest have incomes five times higher than the poorest, older people are disproportionately bearing the burden of this inequality," she said.

"To lift millions of pensioners out of poverty and prevent this situation from getting worse in the future, this government and the next must find a more effective system to ensure benefits reach those who need them and meet the existing commitment to reform the pension system by 2012."

Recent research by the charity showed that one in five people aged 60 and over were skipping meals to save money on food, while two-fifths were struggling to afford essential items.

The EU study found pensioners in the Czech Republic were least likely to be living in poverty, with 5% below the threshold of an income of 60% of the national median.

A Department for Work and Pensions spokesman said: "It's absolute nonsense to suggest this government is not committed to pensioners.

"Measures such as pension credit and winter fuel payments mean that even the poorest pensioners in the UK are still better off than the poorest pensioners in other countries.

"In 1997 our pensioners' income was well below the European average. Today their income is nearly 10% higher than the EU average.

"Even the poorest pensioners in the UK are better off than the poorest pensioners in France or Germany."

It's no myth that rewards in the public sector have left those in the private sector behind – but what should we do about it?

Polly Toynbee has again used her column to attack the argument that public sector staff are better paid than those in the private sector. She works hard to try to refute the simple result produced by the Office for National Statistics' (ONS) annual survey of hours and earnings (ASHE). That survey finds that the median public sector worker is paid £412.70 per week against £382.50 in the private sector.

Her response is to argue that for comparable jobs pay in the private sector is better. Unfortunately, the comparisons she cites are far more misleading than the aggregate statistics. There is no private sector equivalent of a "grade 5 deputy director" in the civil service as there is no private sector equivalent of ministerial responsibility, which means ministers are supposed to face the music when civil servants mess up. ITV may be near-bankrupt but that's because their management don't enjoy a guaranteed income from the licence fee; BBC directors aren't responsible for ensuring their organisation doesn't go bankrupt.

Toynbee argues that the public sector's higher average pay is due to the private sector including a large number of unskilled workers at the bottom of the income scale, as public sector organisations have generally contracted out jobs such as cleaning. While that might initially seem plausible, it implies that the gap between the two sectors should be largest at the bottom of the income distribution, with the private sector then steadily catching up. However, the ASHE breaks its results down by income decile and there isn't a particularly pronounced gap at the bottom. Instead, the gap remains roughly the same size until the private sector catches up at the top of the income distribution.

Some of the statistics that Toynbee uses have been chosen very carefully. A summary of the Labour Force Survey statistics that she cites was produced for the Economic and Labour Market Review in 2007. While it did show just 10.3% of the private sector in professional occupations against 22.5% in the public sector, 17.1% of private sector staff were managers and senior officials against just 8% in the public sector. Beyond that, just 2.2% of the public sector works in skilled trades against 13.6% of the private sector. Many skilled tradesmen have skills that are just as valuable as those held by a middle manager. That is why a plumber, for example, can earn just as much.

The evidence for Toynbee's argument that the gap between average public and private sector pay is down to a great mass of menial workers having been outsourced to the private sector appears extremely dubious. Her case relies upon misleading comparisons between very different jobs and an, at times, extremely selective reading of the evidence.

The true gap in remuneration between the public and private sectors may be even larger than the ONS statistics suggest. The Institute for Fiscal Studies estimate that "relatively generous public sector pensions mean that a public sector worker is on average around 12% better off than a private sector worker on the same basic salary."

There are a number of factors that have contributed to rewards in the public sector leaving those in the private sector behind. Public sector staff are more heavily unionised, public sector organisations are run by politicians who aren't spending their own money, as many private sector managers are. Shareholders, who can take their money elsewhere, are better able to exert control than taxpayers, who sometimes aren't even able to find out how much the most senior staff are paid. Quite how the gap in remuneration between the public and private sectors arose and how it might be tackled is open to question. What is clear though is that the gap is far from a myth.

Group wants to force the government to follow ombudsman's proposals and set aside its 'mean' payment scheme

The government is not entitled to evade the reality that it fell "very seriously below acceptable standards" in the way ­Equitable Life was regulated, and that people are entitled to compensation as a result, a barrister representing policyholders told the high court today.

Dinah Rose QC also accused the government of "blinkered single-mindedness" in the way it has fought calls for full compensation to be paid to victims of the Equitable debacle. The Equitable Members Action Group (Emag) has gone to court to challenge the Treasury's rejection of a number of findings of maladministration made by the parliamentary ombudsman.

Last year it looked as if the government would have to pay billions of pounds to a million investors after the ombudsman, Ann Abraham, found evidence of "serial regulatory failure".

The Treasury apologised for the "maladministration" that led to the insurer's near collapse at the start of the decade, but rejected recommendations that it should compensate all Equitable members. Instead, a retired judge, Sir John Chadwick, was appointed to work out which policyholders had been hardest hit and what proportion of their losses could be attributed to maladministration.

Government lawyers are expected to argue it did not act unlawfully in rejecting the ombudsman's recommendations, and that the attack on its scheme is premature as it has not yet been formulated.

Rose, appearing for Emag, asked two judges to rule the Treasury's response unlawful, "incomprehensible" and "irrational". She said the regulators that failed to sound the alert included the Treasury, the then Department of Trade and Industry and the Financial Services Authority.

Emag claims ministers acted unlawfully in rejecting most of the recommendations made by the parliamentary ombudsman, who probed the scandal. Emag raised several hundred thousand pounds from its policyholder members to finance the judicial review, which is likely to last four days.

Paul Braithwaite, general secretary of Emag, said: "We are asking the court to force the government back to the drawing board to establish the independent compensation scheme the ombudsman proposed. This would set aside the government's plan for a mean ex-gratia payment scheme, estimated to pay out rather less than 10% of what's due."

Emag claimed the government "has unlawfully rejected most of the ombudsman's findings of injustice stemming from regulatory failure throughout the 1990s", in that it failed to provide the "cogent reasons" required by law.

The judicial review will be heard by two judges, with a judgment expected in the autumn. If the government loses, it will be forced to reconsider making payouts to all policyholders.

Meanwhile, more than 320 MPs have signed Liberal Democrat Treasury spokesman Vince Cable's early day motion stating that "the government should accept the recommendations of the ombudsman on compensating policyholders who have suffered loss".

US census bureau report highlights shift in global population that may bring social and economic changes worldwide

The world is about to cross a demographic landmark of huge social and economic importance, with the proportion of the global population 65 and over set to outnumber children under five for the first time.

A new report by the US census bureau highlights a huge shift towards not just an ageing but an old population, with formidable consequences for rich and poor nations alike. The transformation carries with it challenges for families and policymakers, ranging from how to care for older people living alone to how to pay for unprecedented numbers of pensioners – more than 1 billion of them by 2040.

The report, An Ageing World: 2008, shows that within 10 years older people will outnumber children for the first time. It forecasts that over the next 30 years the number of over-65s is expected to almost double, from 506 million in 2008 to 1.3 billion – a leap from 7% of the world's population to 14%. Already, the number of people in the world 65 and over is increasing at an average of 870,000 each month.

The rate of growth will shoot up in the next couple of years, with both overall numbers and proportions of older people rising rapidly.

The shift is due to a combination of the time-delayed impact of high fertility levels after the second world war and more recent improvements in health that are bringing down death rates at older ages. Separate UN forecasts predict that the global population will top 9 billion by 2050.

The US census bureau has led the way in sounding the alarm over the changes. This is its ninth report drawing together data from around the globe since it first focused on the trend in 1987.

Its latest projections warn governments and international bodies the tipping point will present widespread challenges at every level of human organisation, starting with the structure of the family, which will be transformed as people live longer.

That will in turn bring new burdens on carers and social services providers, while patterns of work and retirement will similarly have huge implications for health services and pensions systems.

"People are living longer, and in some parts of the world, healthier lives," the authors conclude. "This represents one of the crowning achievements of the last century but also a significant challenge as proportions of older people increase in most countries."

Europe is the greyest continent, with 23 of the world's 25 oldest countries. Such dominance of the regional league table will continue. By 2040, more than one in four Europeans are expected to be at least 65, and one in seven at least 75.

The UK comes in at number 19 in the list of the world's oldest countries. Top of the pile is Japan, which recently supplanted Italy as the world's oldest big country. Its life expectancy at birth – 82 years – is matched only by Singapore, though in western Europe, France, Sweden and Italy all have life expectancies of more than 80 years (in the UK it is 78.8).

The contrast in life expectancy between rich and poor nations remains glaring. The report shows that a person born in a developed country can expect to outlive his or her counterpart in the developing world by 14 years. Zimbabwe holds the unfortunate record for the lowest life expectancy, which has been cut to 40 through a combination of Aids, famine and dictatorship.

But an important finding of the report is that the wave of ageing that has until recently been considered a phenomenon of the developed world is fast encroaching on poorer countries too. More than 80% of the increase in older people in the year up to July 2008 was seen in developing countries.

By 2040, the poor world is projected to be home to more than 1 billion people aged 65 and over – fully 76% of the world total.

Ageing will put pressure on societies at all levels. One way of measuring that is to look at the older dependency ratio, or ODR, which acts as an indicator of the balance between working-age people and the older population that must be supported by them.

The ODR is the number of people aged 65 and over for every 100 people aged 20 to 64. It varies widely, from just six in Kenya and seven in Bangladesh, to 33 in Italy and also Japan. The UK has an ODR of 26, and the US has 21.

From that ratio, a number of profound challenges flow. Countries with a high ODR are already creaking under the burden of funding prolonged retirement for their older population. Life expectancy after retirement has already reached 21 years for French men and 26 years for French women.

Though retirement ages have begun to rise in developed countries, partly through inducements from governments to continue working, this still puts an extreme burden on public pensions funds.

Socially, too, there are intense pressures on individuals and families.

With women living on average seven years longer than men, more older women are living alone. Around half of all women 65 and over in Germany, Denmark and Slovakia are on their own, with all the consequent issues of loneliness and access to care that ensue.

In every country of the world, the demographic timebomb is ticking away. Yet in Britain, the countdown is surprisingly slow. And when it goes off, it may not be quite the explosion we feared.

Yesterday's report by the US Census Bureau is full of terrifying numbers. If you're Italian, look away now: your country's population will in the space of just 30 years shrivel dramatically while the number of elderly women will outstrip any other society on earth. By 2040, there will be 96 female pensioners in Italy for every 100 women aged between 20 and 64.

Quite who is going look after them, let alone pay their pensions? It's not a question that a gerontocracy led by Silvio Berlusconi appears capable of answering.

But it's not just Italy, Spain and Japan that face eye-watering increases in their elderly populations. China is the world's growth engine – yet it is also one of the fastest-ageing countries in the world, as its fertility rate has been below replacement level since 1991. Within a decade, its labour force will begin to shrink, a geopolitical change which the US authors of this report note will start reducing China's basic advantage in the global economy – cheap labour.

In Britain, the most striking fact to emerge from this report is how relatively benign the pace of change will be. Indeed, the report suggests that our "total dependency ratio" – which adds together children and pensioners – will actually fall between now and 2020 to the lowest of any big European nation.

It will accelerate rapidly after that, but will still remain markedly below our (ageing) continental cousins. It's partly because in Britain, longevity lags behind that of France and Italy.

But it's also factors such as high net immigration and relatively high fertility. Britain's population will continue to rise through to 2040, approaching 65 million, while Germany declines from 82 million to 77 million, and Italy from 58 million to 53 million.

Britain also saves more, a puzzling statistic given our propensity to splurge on debt as well. We hold private pension balances equal to more than two-thirds of our GDP, second only to the US. We also have one of the least generous welfare systems for the elderly – with pensioners retiring on incomes under half the level they had in employment, compared with 89% in Italy.

Yes, we will have many more elderly people, but the cost in terms of GDP will be less marked.

The pensions industry constantly exhorts people to save more, and from 2012 we will have to whether we like it or not, with the introduction of "personal accounts" where every worker will be automatically enrolled.

But this report, more thoughtful than the pension-industry manufactured scares, shows that it's not all about savings or GDP dependency ratios.

After decades in which "participation rates" of 50-64 year olds fell across the western world, in the mid-1990s they began to rise. There are signs that what the report calls "intergenerational co-residence" (living with your elderly parents) may also return, although it never went away in most developing nations.

And before everyone assumes that older people are a financial burden that will destroy welfare systems, the report notes that not only are the elderly in many cases big taxpayers, and major providers of childcare, in many countries older people are more likely to provide financial support than receive it.

Mother's pension was stopped in the UK after she had received it for 20 years Down Under

My 85-year-old mother has just returned to the UK from Australia where she lived for 20 years. She received the UK state pension there but obviously did not receive any increases. The problem is that the pensions people have now stopped paying her pension altogether. JH, Leeds

This sounds like an administrative error and I am pleased to hear that your mother has managed to sort it out herself. Now she is back in the UK her pension will jump to the same level as everyone else's and she will start getting the annual increases again, although she will not be paid any arrears.

• Email Margaret Dibben at your.problems@observer.co.uk or write to Margaret Dibben, Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU and include a telephone number. Do not enclose SAEs or original documents. Letters are selected for publication and we cannot give personal replies. The newspaper accepts no legal responsibility for advice.

The news about BA has revealed some unpleasant truths about company pension schemes and how retirement benefits divide Britain

If the British Airways pension scheme were a plane, it wouldn't pass a safety inspection. Neither would the schemes of scores of top British companies, after it emerged that many have plugged gaping deficits with paper-thin guarantees that will have trouble surviving severe turbulence.

Today's £330m raid on the BA scheme will have puzzled its members. They might have thought that their retirement fund was made up of cash contributions from themselves and their employer, albeit invested in a stockmarket that has failed to deliver. Now they learn that the "assets" of the scheme were not always hard cash, but things such as bank guarantees. And they have learned that these assets can evaporate in an instant.

It turns out that over the past five years, leading British companies, abetted by pension consultants, have avoided paying in real money to close their looming deficits, and instead used what are known in the trade as "contingent assets". These may be in the form of guarantees from parent companies, letters of credit or escrow accounts. These are fine while a company remains afloat, but if it crashes then the assets may turn out to be less than thought. If nothing else, the collapse of Enron taught us that it's never right for pension scheme assets to be invested back into the same employer. When Enron went under, its staff lost everything.

British pension schemes' first line of defence is the trustees. They now enjoy increased powers and responsibilities. Many are employee-nominated, often by a democratic vote. In theory, they can even block a merger or acquisition. But if there's a casting vote among divided trustees, it will always be that of a company-appointed trustee, and that's usually the finance director.

Trustees often find themselves under intense pressure from management. And the threats are real; should a trustee hold the line, if the risk is that it pushes the company into receivership? The Pensions Regulator, tasked with ensuring schemes are solvent in the post-Maxwell era, faces the same dilemma.

Critics say trustees of final-salary style schemes are, in any case, defending the indefensible. The accrued rights within a "defined benefit" scheme are, legally, inviolable. But do they make any sense given huge improvements in longevity and big falls in annuity rates? Many pension experts, even left-leaning ones, now reckon that a 10% cut in final salary scheme benefits is essential if UK plc is not to face bankruptcy.

Younger workers in "defined contribution" schemes must envy the shenanigans that go into propping up the remaining final salary schemes. They have few legal guarantees and almost no defence from cuts, as 6,000 employees at Amex discovered this week. The card company said it would stop matching employee pension contributions for 18 months. Given how few employees understand how pensions work, it is a course of action that many cost-cutting employers are likely to consider.

What is emerging is that Britain is increasingly divided into pension-haves – the public sector and the remaining final salary schemes – and have-nots – virtually everyone below baby-boomer age. A reckoning is coming.