Inflation is the tendency of items to increase in price as time passes. Pension plans can help offset 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.
In the CAAT Plan, when members retire, their initial pension payment is called the "lifetime pension." Inflation protection, when it is granted, is added to the lifetime pension each year that the CPI has increased, and the new amount is the new lifetime pension. In other words, inflation protection is cumulative. Once inflation protection has been paid, it is a permanent addition to your retirement income.
An example of inflation protection
Let’s review an example of how inflation protection applies to a pension.
Meet Sonia. Sonia retired in 2003 at age 65.
She earned 24 years of service in two inflation protection periods –12 years before 1992, and 12 years after 1992.
Sonia’s initial pension was $1,861 dollars a month.
This is how her pension grew over the last 12 years due to inflation protection increases.
By 2016, Sonia earns a monthly pension of over $2,100 dollars.
Remember, inflation protection is cumulative.
So, once an increase is added to a pension, it becomes a permanent part of your lifetime pension.
Sonia has heard that ad hoc inflation protection increases have stopped.
This means inflation protection increases for service earned before 1992 were paid up to 2014, but will no longer be paid after 2014.
However, Sonia knows her pension won’t decrease because of this.
Let’s look at what will happen to her pension.
Now, in 2017, the inflation protection rate is 1.01%.
At this rate, Sonia receives an extra 11 dollars a month on the service she earned from 1992 to 2007.
She no longer earns inflation protection on her service before 1992, but the portion of her pension earned at that time will never go down.
The second portion of service will continue to earn guaranteed inflation protection.
Each year, Sonia checks her Retired Member Annual Statement to see how inflation protection applies to her pension.
Your statement is mailed early each year.
Check out your statement and our website for more information on inflation protection.
The CAAT Plan inflation protection rate for 2018 is 1.17%.
If you were a retired member of the ROM Pension Plan on December 31, 2015, the provisions that apply to your pension may be different than those outlined on this page. Visit the ROM retired members page for details.
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. Two periods of service are used in the calculation, and each is treated differently:
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 most recent valuation guaranteed funding until at least January 1, 2020.
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. If you earned service prior to 1992, your pension will not decrease as a result of the end of ad hoc pre-1992 inflation. Prior increases will remain a permanent part of your pension.
Quick Facts about your pension
Your pension does not decrease
It’s important to remember that your lifetime pension does not decrease: inflation protection increases applied to the lifetime pension in the past become a permanent part of the pension. (The additional temporary bridge benefit and inflation protection applied to it stop at age 65.) Your pension is paid for the rest of your life.
Your Retired Member Statement provides details
Your next Retired Member Annual Statement, which will be delivered in the spring includes a chart which shows your current pension, broken down into the service periods for inflation protection, and the increase that applies to each portion.
Each year in December, retired members are sent a letter detailing the increase to their pensions (if any) for the upcoming year. The letter will show the amount of the inflation protection increase, the gross pension payments after any inflation protection increases have been applied, any adjustment for income tax, and the net payment as of January 1 in the following year. Your Retired Member Annual Statement, mailed to you in the spring, details each portion of your service, showing the change in your pension in the new year.
How the annual increase is determined
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.
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.