Adjusting for inflation
Cost-of-living adjustments added to your pension can help preserve your buying power throughout your retirement.
Your future pension payments may increase from time to time thanks to cost-of-living adjustments (COLAs). A COLA is a small annual increase in pension payments designed to offset the effects of inflation. It is added to retired members' pensions to help keep pace with increases in the cost of living.
COLAs are not a guaranteed benefit, so you may not receive a COLA each year, and the amount may change from year to year. However, once you receive a COLA, it becomes part of your basic lifetime monthly pension. When approved, COLAs are also applied to the bridge benefit and temporary annuity portion of your pension, if applicable.
Each year, the College Pension Board of Trustees carefully considers various factors to decide whether to approve a COLA and, if so, its value.
To understand how this works, it helps to know that your pension is funded through two accounts: the basic account and the inflation adjustment account.
Member and employer contributions and investment returns fund the basic account. Your basic pension is paid each month from funds in the basic account.
Source: BCPC Finance 2017
Inflation adjustment account = funding for COLAs
The inflation adjustment account is separate from the basic account. Member and employer contributions and investment returns also fund this account. COLAs are not guaranteed; the board decides whether to approve a COLA based on the funds available in the inflation adjustment account.
After a COLA is approved, funds from the inflation adjustment account are transferred to the basic account so they can be applied to your basic pension, bridge benefit and temporary annuity, if applicable.
The board is dedicated to ensuring COLAs are sustainable over the long term. Each year, the board examines several factors to decide whether to grant a COLA. If the board grants a COLA, it takes effect the following January.
The board makes its decision based on:
- The annual change in the 12-month average Canadian consumer price index (CPI) from November to October
- The funds available in the plan's inflation adjustment account
- The COLA cap
The COLA cap is the maximum amount of COLA that can be granted each year, expressed as a percentage. Capping the annual COLA amount helps maintain the long-term sustainability of funds in the inflation adjustment account by making sure they are not used up faster than they can be replaced. That's why the plan rules and funding policy specify:
- The cost of providing COLA cannot exceed the funds in the inflation adjustment account
- The amount of COLA cannot exceed the lesser of:
- the increase in Canadian CPI
- the COLA cap
For 2017–2019, the COLA cap is 2.07 per cent. This means pensions may increase by a maximum of 2.07 per cent each year due to COLA. This cap will be in effect until at least January 1, 2019.
Source: Pension Life, winter 2017
If the year-over-year percentage change in average Canadian CPI for the 12-month period ending October 31 is lower than 2.07, retired members may receive a COLA equal to CPI. If the change in CPI is higher than 2.07 per cent, retired members may receive a 2.07 per cent adjustment – the maximum COLA allowed under current plan rules.
Every three years, the plan's independent actuary conducts a valuation of the plan, which includes assessing the COLA cap for the next three-year period. The board uses this information to set the COLA cap and ensure all COLAs remain sustainable over the long term.
COLAs add up over time. For example, if you started receiving an annual pension of $20,000 in 1997, your annual pension in 2017 would be $28,646 as a result of COLAs approved by the board.