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Inflation is the tendency of items to increase in price as time passes. Some pension plans are designed to limit the negative impact of inflation by providing inflation protection, also known as indexation. Inflation protection - periodic increases to the amount of a pension payment - reduces the erosion of the buying power of your pension that inflation causes.
Your pension includes some inflation protection. The amount of inflation protection is calculated based on changes to the previous year’s Consumer Price Index (CPI) and is designed to help protect the value of pensions from eroding due to inflation.
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.
Indexation is cumulative
Inflation protection, when it is granted, is added to your pension on January 1. This new amount becomes your new lifetime pension. So each year new inflation protection is paid on your previous inflation protection as well as your pension.
Your years of service are a factor
The years in which you earned your pensionable service are the main factor in calculating the size of any inflation protection increase for which you may qualify. There are 3 time periods in which pensionable service is treated in different ways.
Pension earned up to December 31, 1991
Your pension earned up to December 31, 1991, has “ad hoc” inflation protection payments. As a result of past surpluses, it has indexation funded until December 31, 2014. Continuation after that date will depend on the Plan’s funded position. Since it was not part of the original Plan design, it would require an amendment to the Plan text. It is one of a number of options in the Plan's Funding Policy.
Pension earned between January 1, 1992 and December 31, 2007
Your pension earned between January 1, 1992 and December 31, 2007 has indexation as a permanent feature.
Pension earned from January 1, 2008 onwards
Your pension earned from January 1, 2008 onwards has “conditional” inflation protection payments. It will have indexation paid if the Plan can afford it. This is determined annually by the Board of Trustees. Due to past surpluses, pensions earned in 2008, 2009 and 2010 have also been granted inflation protection. Future granting of inflation protection on this service would depend on the Plan’s funding position.
Pensions that began less than 12 months before the January 1 increase date will receive a prorated increase. In subsequent years, a full increase will apply.
The maximum increase in a year is 8%. In years when inflation is high, any amount above the 8% is carried forward and applied to indexation in following years. This carry forward is referred to as “banking.” In recent years, when inflation has been low, the increase has rarely risen above 2%. If there is no increase in the CPI of a given year, there will be no increase to pensions in the following year.
Each year in December, retired members are sent a letter detailing the increase to their pensions from the guaranteed portion of service and ad hoc inflation protection (if any) for the upcoming year. The letter will show the amount of the inflation protection increase, and your gross pension payments after any indexing increases have been applied, any adjustment for income tax, and the net payment you can expect as of January 1 in the following year.