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Inflation protection and your retirement

October 02, 2018

Cost-of-living increases, inflation protection, adjustments for inflation, whichever term you use, these annual increases to your pension will help you to maintain your purchasing power throughout retirement. But, they’re also an important tool to help maintain the pension plan’s long term strength.

Common questions about inflation protection

Inflation protection won’t affect you until you retire, but it’s worth taking the time to understand the role it’ll play in your retirement now. Every year we see some of the same questions being asked on this topic. We’re going to answer them to help clear up some of the confusion that might exist.

Question: Will the part of my pension earned after 2009 be protected against inflation?

Answer: Any pension credit you earned before 2010 will receive the full inflation adjustment. But how much of that increase you’ll get for the portion of your pension you earn after 2009 will depend on the plan’s funding status during your retirement.

Here’s the breakdown:

  • The portion of your pension earned before 2010 will keep pace with the annual increases in the Consumer Price Index (CPI).
  • The portion of your pension earned during 2010-2013 will receive at least 50% and up to 100% of the annual increase in CPI.
  • The portion of your pension earned after 2013 will receive from zero to 100% of the annual increase, depending on the plan’s funding status.
  • If you retire(d) in 2018, your first pension increase will be prorated from your last day of credit in 2017.

Question: Is conditional inflation protection the same as deindexing my pension?

Answer: No. Deindexing means that your pension would never receive a cost-of-living increase.

Conditional inflation protection, which is the mechanism we use, means the amount of inflation protection we provide on the portion of your pension you earned after 2009 will vary depending on the plan’s funding status during your retirement.

Question: Does inflation protection get banked for future years?  As an example, the inflation increase retirees received on January 1, 2018 was 100%.  Does that mean the service I earned in 2018 will always receive the full inflation adjustment during my retirement?

Answer: No, inflation protection does not get banked. On a regular basis we check our financial health to ensure we can pay pensions for your lifetime and beyond. Some years will be better than others. Our plan sponsors, Ontario Teachers Federation and the Ontario government, adjust inflation protection in times of funding surpluses and shortfalls.  Changes in inflation protection levels can only be made when valuation reports are filed with the regulators.  

The sponsors have also used surpluses to “boost” pensions for retirees who may have had a year where they  received an adjustment less than 100% of the Consumer Price Index (CPI) to the level they would have been at had full inflation protection been provided. In a nutshell, income tax laws prohibits us from repaying you the difference, but with the boost your next cost-of-living increase is calculated on a higher base pension.

Question: Why is the inflation adjustment rate we calculate sometimes different than what’s reported in the media?

Answer: Sometimes the rate we use will be higher and sometimes it’ll be lower than the inflation rates reported in the media. That’s because the media compares the CPI for the current month to the same month a year earlier. We compare the average monthly CPI for the 12-month period ending in September to the 12-month average a year earlier, effectively smoothing the adjustment from year to year.