Key funding considerations:
The design and implementation of an innovative funding risk mitigant, conditional inflation protection (CIP), adds flexibility to the plan and promotes intergenerational equity. It recognizes and virtually neutralizes the impact of the changing ratio of active to retired plan members on the plan's funded status.
The plan sponsors prudently and proactively introduced CIP in 2008, recognizing that if significant investment losses or a funding shortfall occurred, an increase in contribution rates alone was unlikely to be sufficient, and increases would be borne solely by active plan members.
CIP allows ﬂexibility in the amount of inﬂation increase provided to pensioners for beneﬁts earned after 2009. The level of increase is a sponsor decision and is conditional based on the funded status of the plan. Pension credit that members earned before 2010 remains fully indexed to inflation.
While promoting intergenerational equity, CIP is also an effective lever for mitigating funding risks. Over time, as the proportion of service that members have earned after 2009 continues to grow, the risk of significant investment losses or a funding shortfall is distributed more broadly among the membership – that is, risk is shared by more retired members.
As CIP applies to more pension beneficiaries, it will be able to absorb a greater loss, making it a more effective risk management tool.