Inflation Adjustments

Last revised: November 2007
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What is an Inflation Adjustment?

In January of each year, pensions are adjusted for the increase in the cost of living. The cost of living is determined by the Consumer Price Index (CPI) as reported by Statistics Canada. The CPI used by the OPSEU Pension Plan reflects the cost of a weighted basket of over 600 goods and services that are typically purchased by Canadian consumers each month. These weights ensure that a 10% price increase in rent, for example, would have a greater impact on the index than a 10% increase in the price of milk.

How is the Inflation Adjustment calculated?

The adjustment is calculated by dividing the CPI index average for the two 12-month periods ending in the preceding September. Using an average over 12 months better reflects the changes in the past year, as opposed to some other plans that use the monthly CPI index. Below is an illustration of the formula used to calculate the 2008 inflation adjustment.

The maximum adjustment increase in any one year is 8%. Any increase above 8% is carried forward to be used in the next year that the inflation adjustment is less than 8%. When a member terminates employment or retires partway through a year, the inflation adjustment will be pro-rated during the first year the pension is paid.

Inflation adjustments are also applied to deferred pensions. Plan members who terminate employment before they are eligible for an immediate pension can choose to receive their pension at a later date. In order to maintain the value of their pension, an annual inflation adjustment is applied each January after the termination date, and while they are receiving a pension.

Why Have Inflation Adjustments?

The main reason for having inflation adjustments to pensions is simply to protect the financial stability of pensioners and to prevent pensions from declining in purchasing power. Cumulative annual inflation adjustments topensions payable under the Plan from 1996 to 2008 total 29.2%. This means that without inflation adjustments, a pension of$30,000 per year payable in 1995 would now be worth $23,219 in 1995 dollars.

Why Make Inflation Adjustments Mandatory?

Without mandatory inflation protection, pensionersbear the entire impact of the costs of inflation by seeing the value of their pension decline over time.Mandatory inflation protection ensures that the cost of inflation is shared by all pension plan stakeholders:members and employers pay for it through theircontributions; pensioners have paid for it while they were active members, and sponsors experience someconstraint with respect to any benefit improvementsor contribution holidays.

Why Use CPI as the Index for Inflation Adjustments?

CPI is generally regarded as the best option for measuring inflation adjustments. Using a Canada-wide CPI index reflects the fact that our pensioners do not live only in Ontario and makes inflation adjustments fair for all pensioners in the Plan. By increasing pensions according to this index, pensioners’ benefits from the Plan maintain the same absolute value as they had when the pension was first paid.

The CPI, unlike the other indices shown, directly or indirectly affects nearly all Canadians. It is used to determine increases in payments from the Canada Pension Plan and Old Age Security. The CPI also affects wage increases, labour contracts, rental agreements, spousal support agreements and real return bonds.

Not all pension plans provide pensioners with inflation adjustments. However many Ontario public sector pension plans do. The calculation and application of inflation adjustments do vary. For example, some provide temporary adjustments when the plan has the necessary money to pay for inflation adjustments. Others may pay only a portion of the calculated CPI for example – 75% of the CPI. Your pension along with the Public Service Pension Plan and the Ontario Teachers’ Pension Plan use the same prescribed CPI calculation formula. As such pensioners from the respective plans receive the same pension adjustment each January.

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