Inflation protection for pension credit earned after 2009 is conditional on the financial health of the pension plan. After you retire, inflation increases for this portion of your pension credit will range from 50% to 100% of the change in the Consumer Price Index (CPI). Conditional inflation protection does not affect pension benefits earned before 2010.

Providing 100% inflation protection remains the goal; however, the Ontario Teachers’ Federation (OTF) and the Ontario government can invoke conditional inflation protection to offset future shortfalls.

Conditional inflation protection was introduced as a safety valve to help deal with funding challenges and paved the way for the elimination of a preliminary $12.7 billion funding shortfall reported on Jan. 1, 2008.

The OTF and government can invoke conditional inflation protection for credit earned after 2009. However, the OTF and government do not intend to make any changes in contribution rates or benefit levels before the next funding valuation is filed with the provincial pension regulator. The next valuation is due by 2012, although the plan sponsors could choose to file earlier.

Members who retired before 2010

You will continue to receive 100% inflation protection. The change in the cost-of-living provision will not apply to members who retired before 2010. It affects only members who accrue credit after 2009.

Members who retire after 2009

Annual cost-of-living increases will be based on two components:

1. The portion of your pension credit earned until the end of 2009 will still be 100% protected against changes in the cost of living.
2. The portion of your pension credit earned after 2009 will be 100% protected against cost-of-living increases as long as the plan has sufficient assets. If the plan has insufficient assets, cost-of-living increases for pension credit earned after 2009 will be from 50% to 100% of the change in the CPI, depending on how much the plan can pay.

Government

The Ontario government and designated employers will continue to share pension costs by making extra contributions equal to any cost-of-living increases members forgo due to a funding deficiency.

The combined effect of members receiving smaller cost-of-living increases and the government contributing matching funds will mitigate future funding deficiencies.

Here’s how the cost-of-living change could affect three fictitious members – one retired, one nearing retirement and one young teacher.

Jacques – retired before 2010
The change does not affect Jacques because he began to collect his pension before conditional inflation protection went into effect Jan. 1, 2010.

Jacques' pension will continue to keep pace with changes in the cost of living, as measured by the CPI.

Mary – near retirement
Mary had 20 years of pension credit when the new cost-of-living provision went into effect on Jan. 1, 2010. She will work for five more years and then retire with an annual pension of $40,000.

Full (100%) inflation protection will be:

• guaranteed for 80% of her pension (20 of 25 years of credit)
• dependent on the plan's financial status for 20% of her pension (5 of her 25 years of credit)

Here's how a 2% inflation increase could affect Mary's $40,000 annual pension if the plan paid 100%, 75% or the minimum 50% of the cost-of-living increase on pension credit earned after 2009.

 

	Cost-of-living increase
	100%	75%	50%
Credit earned up to Dec. 31, 2009	$640	$640	$640
Credit earned after Dec. 31, 2009	$160	$120	$80
Total annual pension increase	$800	$760	$720

In this example, the 75% or 50% CPI increase would remain in effect until the plan has sufficient funds to provide full inflation protection again. If there is enough surplus, inflation protection at the 100% level could be restored on a go-forward basis. 

Aarti – new teacher
Aarti had five years of pension credit when the cost-of-living change was introduced. Assuming Aarti retires with 25 years of credit, full inflation protection will be:

• guaranteed for 20% of her pension (5 of 25 years of credit)
• dependent on the plan's financial status for 80% of her pension (20 of her
  25 years of credit)

Here's how a 2% inflation increase could affect Aarti's $40,000 annual pension if the plan paid 100%, 75%, or the minimum 50% of the cost-of-living for credit earned after 2009.

 

	Cost-of-living increase
	100%	75%	50%
Credit earned up to Dec. 31, 2009	$160	$160	$160
Credit earned after Dec. 31, 2009	$640	$480	$320
Total annual pension increase	$800	$640	$480

In this example, the 75% or 50% CPI increase would remain in effect until the plan has sufficient funds to provide full inflation protection again.  If there is enough surplus, inflation protection at the 100% level could be restored on a go-forward basis. 

Don’t rush into retirement because of fears of losing inflation protection. The intention will always be to pay 100% inflation protection. The change in the cost-of-living provision will affect only that portion of your pension earned after 2009. It will not apply to any pension credit earned before 2010.

For example, let’s say you have 20 years of pension credit on Jan. 1, 2010, and you retire five years later. Guaranteed 100% inflation protection will apply to 80% of your pension (20 of 25 years) and 50% to 100% inflation protection will apply to the remainder (5 of 25 years).

The OTF and the Ontario government, in co-operation with pension plan management, conducted extensive research on the assumptions used to value the plan, the safeguards put in place by other Canadian pension plans of a similar size and maturity, and the preferences of working members.

Based on this due diligence, the OTF and the government determined that further contribution increases would not be a sustainable way to address the plan’s funding challenges in the long term and that, of the benefit changes possible, the most palatable option among working members was to change the way cost-of-living increases are determined when there is a funding shortfall.

Basing the level of inflation protection on the plan’s funding status will help pension plan administrators manage funding challenges stemming from plan maturity.

Over time, both working teachers and pensioners will share the risks, rewards and responsibility of funding the pension promise.