Members > Newsletters > Fall 2009

Inflation protection - a new calculation

Inflation protection

Member FAQ - Indexing

Member Handbook - Indexing

Inflation protection, also known as "indexation" is among the many benefits of belonging to this Defined Benefit pension plan. We've adopted the term "inflation protection" as it better reflects the purpose of this provision - it can help mitigate the effects of rising inflation on pension income. Most inflation protection increases are based on the Consumer Price Index (CPI) which is widely accepted as a reasonable indicator of inflation.

Starting January 1, 2010, all CAAT Plan pensions will increase by the inflation protection rate of 0.4%.

Changing the calculation

This increase was calculated using a new formula that was first announced in last year's Fall Newsletter. Rather than implementing the new calculation immediately, the Plan's governors chose to start using it in a year in which it would produce a higher increase than the old calculation. To that end, both the old "Year- Over- Year method" and the new "Average method" were used to calculate the 2010 increase. The Year- Over- Year method resulted in a negative amount, which would have meant no increase. The new method resulted in an increase of 0.4%. Therefore this is the year that we are starting to use this method. Now that the Average method has been implemented, it will be the only method used in the future.

Making a comparison

The CPI is the basis for the inflation protection calculation. Statistics Canada tracks the cost of a fixed "basket" of consumer goods and services (food, housing, etc.) and calculates the average change in prices. Each month, the CPI for the previous month is produced and used to measure the behaviour of inflation in Canada.

Until this year, the Plan's inflation protection increase was calculated by taking the CPI for September of the current year, and comparing it to the CPI for September of the previous year. This Year-Over-Year "snapshot" showed the difference in inflation in those two specific months. The inflation protection increase for the following year was equal to 75% of the percentage change in the CPI for these two months.

The Average method is just that - the average CPI for the 12 month period ending in September of the current year is compared to the average of the 12 month period ending in September of the previous year. This provides a more accurate reflection of the change in inflation over the course of a year. The inflation protection increase for the following year continues to be equal to 75% of the percentage change in the CPI during the year.

Crunching the numbers

Year-Over-Year Method, September 2009:

114.7 / 115.7 x 100 - 100 = - 0.86
- 0.86 x 75% = - 0.645%

A decrease in the year-over-year CPI results in a 0% inflation protection factor.

Average Method, September 2009:

114.2 / 113.6 x 100 - 100 = 0.5281
0.5281 x 75% = 0.3961 = 0.40%

The CPI can vary considerably from one month to the next, and a sharp dip in inflation in the month of September would result in a low rate of inflation protection for the following year using the old method. The new Average method on the other hand, will help eliminate some of this volatility by smoothing out short-term fluctuations in inflation.

Going forward

This change does not affect any other aspects of the inflation protection provision - inflation protection for service earned in the Plan after 2007 continues to be dependent on the Plan having enough money to fund it. The Plan governors determined that funding was adequate, and approved the inflation protection increase for service earned in 2009.

December 2009