Pension increases effective May 1, 2025
Summary (all most pensioners need to know)
As most retirees will know, our pensions are indexed to inflation and increase each year. Inflation indexing for pensions changed on January 1, 2014, so the inflation adjustment is computed separately for pension earned before that point and pension earned later. For this May 1, for most pensioners, pension earned before January 1, 2014 will increase by 3.28% and pension earned later will increase by 1.89%. For an explanation of the way these percentages were computed and for special considerations affecting those who retired in the last three years, please read on.
History
Normally, pension indexing is determined by computing inflation according to the formula in the pension plan, then applying that to pension earned before January 1, 2014 and applying 75% of it to pension earned later. The increase, however, is automatic only for inflation up to 5%. In 2022, inflation was 6.8%, which has created complications that are still not fully worked out. P&B needed to decide whether to apply any indexing beyond the guaranteed amount. The committee felt that pension indexed at 75% of inflation was more of a concern and so treated the two segments differently. Pension earned prior to January 1, 2014 was indexed at only the required 5%, but pension earned later was also indexed at 5%. For pension earned prior to January 1, 2014, that was a significant reduction from the full formula amount (6.8%), but was almost full indexing for pension earned later (75% of 6.8% is 5.1%).
When less than the full formula indexing is provided, there is an obligation to make up the “missing” indexing in later years. In 2024, P&B felt the state of the pension fund did not allow making up any of the “missing” indexing, so it was carried forward to this year. The pension fund is in much better shape this year, so P&B decided to make up some of the missing indexing. It was an easy decision to make up the very small amount (0.1%) of indexing missing from pension earned January 1, 2014 and later. For pension earned earlier, it was considered imprudent to make up the entire missing 1.8% in a single year. The plan is to make it up over two years, so an increase of 0.9% was applied to pension earned before January 1, 2014. (Note that while the plan is to provide the remaining 0.9% next year, P&B will need to make a decision based on the health of the plan at that point.)
Pension increases, in detail
According to the formula in the pension plan, inflation in 2024 was 2.38%. Thus, the basic situation is that pension earned prior to January 1, 2014 will increase by 2.38% and pension earned later will increase by 1.79% (75% of 2.38%).
For those who retired after May 1, 2024, the increases of 2.38% and 1.79% are pro-rated according to the number of months pension has been received.
For those who retired May 1, 2023 through May 1, 2024, the basic situation applies (2.38% and 1.79%).
For those who retired June 1, 2022 through April 1, 2023, the increases of 2.38% and 1.79% will apply, plus a portion of the catch-up. Since these people received a pro-rated increase on May 1, 2023, the catch-up this year will be pro-rated in the same proportion.
For those who retired May 1, 2022 or earlier, pension earned prior to January 1, 2014 will be increased by 3.28% (2.38% plus 0.9% catch-up) and pension earned later will be increased by 1.89% (1.79% plus 0.1% catch-up).
David Taylor,
Professor Emeritus,
David R. Cheriton School of Computer Science,
University of Waterloo.