Determining the annual increase

Submitted by diane on Tue, 08/24/2010 - 12:18

Consumer Price Index

Inflation protection is calculated based on changes to the previous year’s Consumer Price Index (CPI). The CPI, calculated by Statistics Canada is considered a reliable measure of inflation, and indexation 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.

The average method

Inflation protection is calculated using a method called the “average method”. 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. The inflation protection increase paid by the Plan in January of each year is equal to 75% of the percentage change in the CPI during the year.

The years you earned your 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.

  • Your pension based  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.

  • Your pension earned between January 1, 1992 and December 31, 2007 has indexation as a permanent feature.

  • 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.

Maximum inflation protection increase

The maximum increase in a year is 8%. In years when inflation is high, any amount above the 8% “would be carried forward and applied to inflation protection 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 September CPI of a given year, there will be no increase to pensions in the following year.

Pensions that began less than 12 months before the January 1 increase date will receive a prorated increase. In subsequent years, the increase will apply to the full year.