Inflation protection: Enhancing an already valuable benefit

Your pension includes a valuable ancillary benefit called inflation protection. It is designed to help offset the rising cost of living over time.

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A pension with added value

With the CAAT Pension Plan you’ll receive valuable lifetime pension benefits.

You’ll enjoy:

• A pension based on the yearly average of your best 60 consecutive months of  pensionable earnings
• A pension paid for life
• A survivor benefit for your eligible spouse of 60% of your pension
• Flexible retirement dates with the opportunity to retire as early as 50 (with at least 20 years of service) or as late as age 71
• Early retirement features that combine your age and service to earn an unreduced pension at various milestones

In addition to these provisions, the CAAT Pension Plan offers a valuable ancillary benefit called inflation protection.

Inflation protection calculation

The CAAT Plan calculates inflation protection at a rate of 75% of the average annual increase in the Consumer Price Index (CPI). When granted, inflation protection is paid on pensions and bridge benefits in payment, and on deferred pensions.

To calculate the amount of inflation protection each year, the Plan compares the average CPI for the 12-month period ending in September of the current year to the average of the 12-month period ending in September of the previous year and calculates 75% of the change.

This means that if the CPI increased by 2% the previous year, the inflation protection increase is 1.5%.

Over time, inflation protection increases result in valuable, cumulative increases to pensions. For example, a $20,000 annual pension that started in 1993 became a $25,000 pension by 2011 – that’s a 25% increase, all due to inflation protection.

Once inflation protection increases are granted, they form a permanent part of your pension.

Inflation protection relates to your years of service

The conditions determining inflation protection payments relate to the calendar years in which your service was earned; at different times throughout the Plan’s history, funding for inflation protection was treated differently. The method of determining priorities reflects this funding. The three periods are explained below.

1. Ad hoc inflation protection (pre-1992)
When the Plan started in 1967, inflation protection was granted on an ad hoc basis – the Sponsors evaluated the financial situation of the Plan annually and authorized an inflation protection increase if the Plan could afford to do so. The contribution rate during this period did not account for the cost of providing on-going future inflation protection.

In the past, the Plan had enough funding surplus available to provide inflation protection on service earned before 1992. Ad hoc inflation protection has been paid in every year but one, and will be paid up to 2014.

2. Guaranteed inflation protection (1992 to 2007)
In 1992, as part of a number of amendments to the Plan, inflation protection was accounted for in contributions, and this benefit was made a guaranteed feature of the Plan. For service earned during this period, inflation protection was specifically funded through contributions, and is guaranteed.

The funding of guaranteed inflation protection was formally recognized at that time with a contribution rate increase of 1.6% for members and employers.

 3. Conditional inflation protection (post-2007)
In 2006 the Plan’s Sponsors instituted a Funding Policy to help articulate the Plan’s goals and funding priorities. The Policy lays out the various steps the Plan must follow to balance the goals of intergenerational equity, security of benefits and contribution stability. These are the priorities the Sponsors consider when allocating surpluses or managing deficits. The Funding Policy is designed so each group of members – older active members, younger active members and retired members – is treated equitably.

As part of the Funding Policy and in keeping with the funding challenges of the day, the Plan introduced a third service period of inflation protection coverage. The granting of inflation protection increases on post-2007 service ceased to be guaranteed and became conditional on affordability, based on the funding status of the Plan. 

2011 Funding Policy

In 2011 the Board reviewed its Funding Policy. No changes were made to inflation protection provisions, but the Board reaffirmed its commitment to the goals of upholding intergenerational equity and minimizing contribution rate volatility.

Regular reviews

Each actuarial valuation includes a review of granting conditional inflation protection increases on post-2007 service. In both 2008 and 2011 (the last two filed valuations) the Plan Sponsors reviewed the funded position and concluded that there was sufficient surplus to provide inflation protection for the next three years on pensions with service after 2007. This resulted in inflation protection increases on all conditional service from 2008 to 2014. The next valuation is due no later than 2014.

When the Board makes the decisions to pay inflation protection on post-2007 service, it applies to pensions currently in payment, not to service being earned by active members.

For example, current retirees with post-2007 service will receive inflation protection increases on that service up to January 1, 2014. The decision to make inflation protection increases on post-2007 service for retirees after 2014 will be made based on the funding position of the Plan in the following actuarial valuation.

Intergenerational equity

Plan Sponsors have an obligation to treat each generation of Plan members equitably – from the newest active member to the oldest retiree. Intergenerational equity means everyone is treated fairly and not that everyone is treated the same.

In the difficult financial times of the past few years, the Plan has worked to provide an inflation protection structure which is fair to the active members who today are paying higher contributions than in the past, while bearing the risk that conditional inflation protection increases may not be made. The higher priority placed on post-2007 reflects these principles. This is how the Plan works to ensure that what members have paid for is linked to what they receive.

How does it apply to my pension?

You can roughly determine how inflation protection will affect your pension if you think about the years in which your pension was earned.

Example

Cynthia has 30 years of service in the Plan starting in 1981 and ending in 2011.

• The first 10 years of her membership were before 1992, meaning that one third of her pension receives ad hoc inflation protection.
• She has 16 years of service between 1992 and 2007, so just over half of her pension has guaranteed inflation protection.
• Her final 4 years of service occurred after 2007, meaning roughly one sixth of her pension will receive conditional inflation protection.

Remember, since inflation protection is cumulative, once an increase is added to a pension, any subsequent inflation protection increases are added to the total pension, which includes increases from previous years.

Any inflation protection is valuable

Inflation protection increases become a permanent part of your lifetime pension, helping to protect your purchasing power.

We suggest you seek independent financial and legal advice as part of your overall estate planning process.