Straight talk on retirement and pensions
December 11, 2017
Latest investment results and how inflation affects your pension
The plan’s 2017 Annual Report is now available. You can view a copy on this website. Your trustees take great pride in producing this report and I encourage you to review it online today – but only after you finish reading BOOM!
To whet your appetite, here are two important highlights from the annual report:
- Investments earned 12.8 per cent for the fiscal year 2016/17
- Total net assets grew to $29.2 billion, an increase of $3.0 billion
The latest investment results are great news for plan members and demonstrate how healthy and strong BC’s Public Service Pension Plan remains. I’ll talk more about the plan’s annual report in my next BOOM! post.
For the remainder of this post I’ll discuss how inflation affects your pension and how the plan helps maintain the value of that pension.
If you’ve been reading BOOM!, you already know that as a member of the plan, you and your spouse (if applicable) will enjoy a monthly pension for life once you retire – regardless of how long you live.
And I’m sure you know from experience that with each passing year, prices for goods and services almost always rise. The culprit is price inflation, and it’s of concern to all retirees on fixed income.
Inflation – also known as cost of living – is measured by monitoring how the prices for goods and services increase over time. It’s caused by factors too numerous to examine here. Suffice to say that the Bank of Canada is responsible for controlling inflation in Canada, and it generally does so by adjusting interest rates. Currently, it views a steady, low rate of inflation as a good thing, so it targets a low inflation rate (about two per cent per year) to keep the economy humming along.
Why does the Bank of Canada encourage inflation?
Because deflation – the opposite of inflation – is harder to control, and results in a stagnant economy. When deflation occurs, people defer purchases, believing products or services will become cheaper if they wait. This puts downward pressure on prices. Deflation may be good for shoppers, but it’s bad for businesses and workers because demand for goods and services slows down. In short, deflation generally hurts economic growth.
But here’s the real kicker about inflation: when costs go up, it doesn’t automatically follow that consumers’ paycheques or pensions go up too. Pay increases for working plan members are negotiated with their employers, and the pay increases they receive may or may not keep up with the cost of living.
But what happens when plan members retire? How does the plan help mitigate the effect of inflation on pensions?
Fortunately, from time to time the Public Service Pension Board of Trustees grants inflation adjustments to your pension. While not guaranteed, inflation adjustments (also known as indexing or cost-of-living adjustments) help maintain the purchasing power of your pension by increasing your monthly pension amount. Once granted, inflation adjustments become part of your basic pension.
How inflation adjustment amounts are determined
Inflation adjustments are determined exclusively by the board, based in part on changes to the Canadian consumer price index (CPI). Canadian CPI rates are published by Statistics Canada to show how the prices of goods and services have changed. When an inflation adjustment is granted, it is applied to your pension beginning in January the following year.
This bar graph illustrates how inflation adjustments maintain the value of a hypothetical $20,000 per year pension, using a sample 20-year period from 1997 to 2017. The inflation adjustments in this illustration are based on actual changes in the Canadian CPI for this time period.
Without inflation adjustments, cost of living would continue to rise but the purchasing power of this pension would fall – essentially eroded by inflation. Imagine if there were no inflation adjustments during retirement to help offset increases in the cost of living! Your pension would buy fewer and fewer goods and services with each passing year. This is a reality for many retirees without well-managed workplace pension plans, and it is very disturbing.
A list of the plan’s historical annual inflation adjustments is posted on this website. It shows the plan has granted inflation adjustments consistently for many years, with one exception: in 2009 there was no inflation - in fact there was deflation - so there was no inflation adjustment granted in 2010. This history represents a phenomenal record of inflation protection for plan members. Few pension plans in Canada can boast such robust protection.
How are inflation adjustments funded?
Watch for a future BOOM! post to learn more about the inflation adjustment account and how it’s used to fund inflation adjustments.