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.
Inflation protection 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 applied to your previous inflation protection as well as your pension.
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.
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.
Service earned between 1992-2007 receives Guaranteed inflation protection
This period is a guaranteed feature of the Plan and was specifically funded through a contribution rate increase.
Service earned after 2007 receives Conditional inflation protection
Inflation protection for this period of service is conditional on affordability – the Plan’s funded status must be at level 2 and above on the Funding Policy. This is the first priority for surplus funds, as contribution rates continue to reflect the cost, where it is only paid if the Plan can afford it. The last valuation guaranteed funding until at least January 1, 2020.
Service earned prior to 1992 received Ad hoc inflation protection
For service earned in the CAAT Pension Plan before 1992, no inflation protection increases are applicable. The last scheduled “ad hoc” inflation protection increase was January 1, 2014.
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.