Inflation protection: a primer

News Bulletin

The inflation protection increase on all service for January 1, 2011 is 1.05%.

Inflation protection – periodic increases to pensions in pay that help offset increases in the cost of living – are a great asset in a pension plan. They are a common additional benefit in larger public sector or jointly sponsored plans – less so in private sector plans. In the CAAT Plan, inflation protection is paid at 75% of the annual year over year increase in the Consumer Price Index on eligible service.

Originally intended to be paid on an ad hoc basis – in years when the Plan had enough money to do so – over time some periods of service have been pre-funded or “guaranteed.” There are now three separate periods in which a member’s years of service qualify for inflation protection.

Inflation protection for pre-1992 service continues to be funded on an ad hoc basis. Past Plan surpluses allowed the sponsors to fund inflation protection on this service to 2014. It is not funded beyond that date.

Inflation protection for service from 1992 to 2007 is guaranteed and pre-funded.

Inflation protection for service for years after 2007 is reviewed periodically. Guaranteeing inflation protection for this service is based on a review of each filed actuarial valuation, typically every three years. Based on past funding levels, inflation protection has been paid on 2008, 2009 and 2010 service. Future inflation protection on service for years after 2007 will be subject to available funding in the Plan’s future filed actuarial valuations.

A bit of history

All inflation protection in the Plan was originally proposed to be ad hoc: evaluated annually and paid when adequate funding was available.

In 1992, a number of amendments were made to the Plan. Among the changes: inflation protection for years after 1991 was standardized to 75% of the annual change in the Consumer Price Index (CPI), and funded. Pre-1992 service was formalized to 100% of the change in CPI, and funded until 1996.

In 1995, pre-1992 service was brought in line with the post-1991 service at 75% of the change in CPI. Over the following years, payment on pre-1992 service was extended – in 1996, 1998, 1999, and 2000 – bringing the funded period up to 2014.

In 2006, the Plan instituted a Funding Policy, which lays out the various priorities the Plan must follow in its efforts to be fair to each group of members – older active members, younger active members and retired members. As part of the Policy, a third service period was introduced for inflation protection coverage: post-2007 service became conditional on the Plan’s funded position.

A number of retirees have expressed some concerns about the possible upcoming ending after 2014 of an annual pension increase for pre-92 service. While there is no doubt that this will have an impact on some members over the course of time, it’s also important to look at the quality of the benefit already received, and to remember that past increases will remain in place going forward.

Added value

Although inflation protection increases for pre-92 service were never a promised benefit in the Plan, there has been an increase granted for pre-1992 service in every year except 1976. This has lead to a significant increase in the pension payment over time.

The graph below illustrates this impact. A pension which began at $20,000 in 1993 has reached approximately $25,000 by 2010 – a 25% increase. The period from 2010 to 2014 shows modest increases, as we might expect to see in a low inflation environment. It is assumed for the purposes of the graph that future ad hoc increases will cease after 2014 due to funding challenges.

It’s also important to remember, as the graph shows, that the inflation protection increases are cumulative. New annual amounts are based on the original pension plus inflation protection adjustments from past years. The amounts which have accrued from past increases will stay in place, regardless of whether or not there are further increases to come.

Making some changes

During 2010, a Funding Task Force established by Plan officials has been reviewing the 2006 Funding Policy, the Plan’s current financial situation, and possible changes that could be made to alleviate the deficit that is expected to exist as of January 1, 2011.

Plan officials on the Board of Trustees have a legal responsibility to treat each generation of Plan members equitably, although this does not mean that everyone will be treated the same. Any changes to the Plan that result from the Task Force review will be communicated to all members as soon as they are finalized, likely early in 2011.

All changes and items of interest are regularly communicated to members in newsletters and on our website (www.caatpension.on.ca). We have been making regular mention of the funding for pre-1992 inflation protection, and will continue to do so. This will help retired members plan their finances with all available information.