FSNA - London and District Branch

The Treasury Board has announced that the increase in indexing to be applied, on January 1, 2011, to public service, Canadian Forces, RCMP, and federally appointed judges’ pensions will be 1.4%.

Is my pension protected from inflation?

Yes. Your pension will be protected from inflation for the rest of your life. It is indexed on January 1 of each year to take into account increases in the Consumer Price Index. The method used to calculate indexing is set out in the Public Service Superannuation Act and the Supplementary Retirement Benefits Act.

Indexing is an adjustment of your benefits based on increases in the consumer price index (CPI). The CPI is a measure of the degree of change in the price of goods and services purchased by Canadian consumers and is determined monthly by Statistics Canada. The CPI is used by many pension plans in Canada, including the various federal plans.

The indexing applies not only to your retirement annuity (immediate annuity, deferred annuity or annual allowance) but also to your disability pension, survivor benefit and child allowance.

Your pension plan includes an automatic pension indexing clause based on the increases in the CPI. This means that your pension is 100 percent protected from inflation. In comparison, some plans provide for adjustments based on partial recognition of the change in the CPI, that means that the adjustments are calculated based on a percentage of the CPI increase (see the table below in question 2). 

Why is the indexing of benefits an important benefit of your pension plan?

Indexing is an important benefit because it protects your buying power over time. The table below compares a monthly pension of $1,000 under different inflation rates, over periods of 10, 15 and 20 years, and in three different ways:

• without benefit adjustments
• with an adjustment based on a partial change in CPI (75%)
• with an adjustment based on the full change in CPI (100%)
  
  

For example, assume you have built a retirement budget based on a monthly pension of $2,000. You have a planned amount for fixed expenses (housing, heating, food, etc) of $1,500 and an amount of $500 for other costs (social activities, travel, renovations, etc.). In 10 years, if the average annual rate of inflation is 3%, your indexed pension will allow you to cover your fixed expenses, which will now be around $2016 instead of $1,500 (depending on the cost of goods and services purchased) and to maintain the same proportion of other costs, that is, around $672 instead of $500. However, if your pension was not indexed, your basic pension of $2,000 would no longer be enough to pay your fixed expenses. Even with a low rate of inflation, it can eat into your buying power appreciably.

How is the indexing of your pension calculated?

The pension indexing formula is based on the CPI average (determined by Statistics Canada) for a 12 month period ending in September. The average for a year is compared with the CPI average for the 12 month period ending in September of the previous year. The year 1992 is the year of reference (1992=100) for the CPI .

You will find an example below identifying the data used to calculate the 2004 pension indexing rate.

2004 pension indexing rate (using the CPI 12 month average):

This method of comparing the current year average over the previous year average is used to mitigate the effects of short term changes in the CPI.

In January of the first year after retirement, the indexing is proportional to the number of full months since the date of your retirement. For example, if you retired on June 17, 2003 you would have received six-twelfths of the increase authorized for January 1, 2004 (the year following your retirement). Subsequent increases will be payable every January 1 and will correspond to the full increase authorized for each subsequent year (same calculation method applies for the survivor benefit).

NOTE: For employees of Correctional Service Canada whose pension benefits are based on operational service, benefits are indexed when the combination of the plan member's age and number of years of service equals 85. Indexing will not be received before age 55 but will not be delayed past age 60. For further information on special benefits related to operational service, consult the Operational Service – Benefits at a Glance.

Why is there a difference between the annual inflation rate determined by Statistics Canada and the pension indexing rate?

The methods used to calculate the annual rate of inflation as published by Statistics Canada and the pension indexing rate are different. We have already explained in the response to question 3 the way in which the indexing is calculated for the pensions of retired federal employees. Briefly, this calculation consists of comparing the average consumer price index (CPI) of the current year with the average CPI of the previous year. For example:

Pension Indexing rate for 2004

Statistics Canada calculates the annual rate of inflation by comparing the CPI of the month of the current year with the same month of the previous year. For example:

Inflation rate for December 2003

This means that in December 2003 Canadian consumers paid 2% more than they did in December 2002 for the goods and services that make up the CPI basket.