A series of factors are creating a perfect storm that has caused inflation to rise to record levels.
With headlines across the world announcing surging inflation that is expected to remain, as BMO chief economist Douglas Porter put it, “uncomfortably high” in 2022, it has many asking questions about their own purchasing power and wondering if their pension will keep up with inflation.
Inflation is a measure of the increase of the price of goods and services in general terms. In Canada, we use the Consumer Price Index (CPI) to measure it. Statistics Canada measures the price of a fixed list of items, referred to as a “basket.” This basket is based on consumer spending surveys — it represents what items Canadians are purchasing.
Beginning in early 2020, the CPI has increased at a tremendous pace, related to supply and demand. There are serious supply chain issues — large backups at ports and labour issues, to name just two. Further, shortages are increasing the cost of production. For example, a computer chip shortage has slowed down production in many industries — from electronics manufacturers to automakers. Finally, there’s an increase in demand in many markets. Those factors are creating a perfect storm that has caused inflation to rise to record levels. Prices in November 2021 were 4.7 per cent higher in Canada than they were the year before, according to CPI numbers. It was the highest increase since 1991, and BMO is forecasting another increase of 3.5 per cent.
The main defence that pensions have against rising inflation is indexation or cost-of-living increases. Full indexation, based on CPI increases, has ensured many plans have kept pace with inflation.
The Old Age Security (OAS) and Canada Pension Plan (CPP) include indexation measures that recognize the impact of inflation, though they vary slightly. The CPP increase is based on the average monthly CPI for the period from November of the preceding year to October of the current year. OAS benefits use a similar method, but increase quarterly.
Some pension plans use a similar method to calculate indexation. For example, the federal Public Service Pension Plan and OPTrust (the Ontario Public Service employees’ pension plan) and the Ontario Teachers’ Pension Plan include indexation based on the average monthly CPI for the period from October of the preceding year to September of the current year.
There are many variations on indexation. Some plans are indexed to a portion of CPI, but not the full amount. For example, the Public Service Pension Plan of Alberta and the Alberta Teachers’ Retirement Fund have a cost-of-living increase based on 60 per cent of Alberta CPI and the Civil Service Superannuation Board of Manitoba has an increase of two-thirds of CPI.
The Government and Public Employees Retirement Plan in Quebec has complex calculations based on which years the service was accrued and different Pension Index formulas. Other plans have provisional CPI, which is granted only if the plan is adequately funded. This is the case for the B.C. Public Service Pension Plan, B.C. Municipal Pension Plan, B.C. Teachers’ Pension Plan, B.C. College Pension Plan, Manitoba Employees Benefit Program and the New Brunswick Public Service Pension Plan. In 2014, the Newfoundland Public Service Plan froze indexing on past service at a maximum annual increase of 1.2 per cent and indexing on service since 2014 has been suspended based on plan performance.
While provisions that include indexation are common for defined benefit plans, especially in the public sector, those who rely on defined contribution plans, registered retirement pension plans (RRSPs) or personal savings have no cost of living adjustments at all.