January 2008 Pension Increase for the Salaried Pension Plan
Contributed by Les Robb
MURA representative on the Pension Trust Committee
Your Current Year Increase
You
should have received a letter from Retirement Support Services letting
you know that the pension increase for the current year (starting
payment on January 2008) will be 1.72%. This note explains the
calculation of this increase. The note following explains how there
will also be a supplementary increase as well in January
The
current year pension increase calculation is based on the difference
between the 5 year average rate of return (net of investment costs) and
4.5%. The calculation for the 2007 increase is as follows:
Calculation of Five Year Average (for 01/01/08 increase) %
2007 Rate of Return (ending June 30, 2007 ) 14.45
2006 Rate of Return (ending June 30, 2006 ) 5.93
2005 Rate of Return (ending June 30, 2005 ) 10.00
2004 Rate of Return (ending June 30, 2004 ) 14.84
2003 Rate of Return (ending June 30, 2003 ) (2.57)
Total Return for Last Five Years 42.65
Five Year Annual Average Return (Total Return / 5) = 8.53%
(A) Rate of Return in Excess of 4.5% (4.69% - 4.5%) = 4.03%
(B) Average Consumer Price Index to June 30, 2006 = 1.72%
Increase to Pensions (the lesser of A and B) = 1.72%
As
I anticipated in a recent article in the Fall 2007 MURA News there is
excess return that is not needed to provide the current year increase -
in particular the difference between 4.03% and 1.72%. This difference
amounts to 2.271% (not the simple arithmetic difference between 4.03
and 1.72 which would be 2.31%). The reason it is not the simple
arithmetic difference is because of compound interest. The 1.72% is
applied first and then the 2.271% is applied to this new level of
pension and this leads to an overall increase of 4.03% (1.0172 *
1.02271 = 1.0403).
Your Supplementary Increase
So,
there is an additional 2.271% available to be applied against past
losses. Who gets this increase? Well, it depends on how much you were
'shortchanged' in recent years.
Let me start with a
table that shows the increases that can be expected on January 1 for
those who retired on July 1 (the so-called "normal" retirement date in
our Plan). .
Retirement Date
|
Increase for the current year |
Supplementary
Increase |
July 1, 2004 * |
1.72% |
2.271% |
July 1, 2005 |
1.72% |
1.596% |
July 1, 2006 |
1.72% |
0.000% |
* applies to all dates before July 1, 2004 also.
This
table shows that those who retired on July 1, 2004 or earlier will
receive the full 2.271% that is available. Those retiring the following
July 1 will get a smaller 'catch up' because this is all they would
have been eligible for had they received full indexing in the past.
Those who retired on July 1, 2006 will get no supplementary increase as
they are not deemed to have missed out on any indexing to which they
were entitled. And, of course, those retiring on July 1, 2007 or later
are not eligible for any increase until January 1, 2009 .
What
about those who retired on dates other than July 1? Well, pension rules
only allow one to 'catch up' for what was deemed to be lost, so someone
retiring on, say, Jan 1 of a year is eligible for half of the increase
for the year in question that was received by those retiring the
previous July 1. To be more exact, those retiring before March 2005 are
deemed to have lost at least 2.271% over the past three years (the time
frame we look at for this calculation) and are thus eligible for the
full 2.271% supplementary increase. Those retiring between that date
and July 1, 2006 will receive a 'catch up' that reflects how much they
are deemed to have lost. This catch up declines to 1.596% by July 1,
2005 and by 1/12 th of 1.596 (or 0.133%) each month that retirement was
delayed after that date.
In the following
article you will find a more complete table of the exact percentages
that can be expected for each retirement date and a more complete
explanation of the increase calculation.
Detailed Explanation of Supplementary Increase
Les Robb
In
the January issue of the MURA News and in the article immediately above
I reported on the increases to pensions in pay this year. In this
article I go into a bit more detail for those who are interested in
exactly how this all works and for those who can't get enough of
compound interest.
Let me start with a recap of
changes in CPI, changes to our pensions (increases received) over the
past 3 years (and the current year) and the indexing shortfall. Three
years is the period for which individuals can receive 'catch up' if
there has been an indexing shortfall (as has been the case for the last
3 years).
Period Ending |
CPI for 12 months |
Increase received for 12 months - effective the following Jan 1 |
Indexing shortfall for the period |
June 30, 2004 |
1.73% |
0.00% |
1.730% |
June 30, 2005 |
2.08% |
0.19% |
1.886% |
June 30, 2006 |
2.50% |
0.89% |
1.596% |
June 30, 2007 |
1.72% |
1.72% |
0.000% |
First,
the second and third columns in the above table are the data we start
with for the supplementary calculation. The fourth column ('shortfall')
is the difference between columns 2 and 3 - though it is the geometric
difference rather than simply the subtraction of column 3 from column 2
because of compound interest. The explanation of this whole 'catch up'
issue requires repeated applications of 'compound interest' so I will
elaborate a bit on it here. Consider the second row of the table above.
We received .19% as our increase. If we get another increase of 1.886%
on top of this, we would then have received a 2.08% increase which is
what is needed to restore the purchasing power of our pensions for that
year (1.0019 X 1.01886 = 1.0208, for those of you checking the
calculation).
Now, looking at the last row of the
table above, we can see that everyone so entitled will receive full
indexing this January. Eligible individuals are those who started
retirement on or before July 1, 2006 . Note that each row of the table
applies to those who retired a year before the 'ending period' so that
the first row of the table applies to individuals who retired on or
before July 1, 2003 , the second row to individuals retiring on or
before July1, 2004, etc.
Next, looking at the
second last row of the table, those individuals who started retirement
on or before July 1, 2005 lost out on 1.596% indexing to which they
were entitled for that year (if returns had permitted), those retiring
on July 1, 2004 lost out on both the 1.596% last year and 1.886% the
previous year and those retiring on July 1, 2003, or any date before
that) lost in all three years (1.596% , 1.886% and 1.730%). The total
shortfall for those retiring at various dates involves compounding the
losses and is shown in the cumulative indexing shortfall of the
following table which shows the supplementary increases for 'normal'
(ie. July 1) retirements.
Retirement Date |
CPI for 12 months
Ending the
Next June 30 |
Increase for 12 months corresponding to the period at left |
Indexing shortfall for the period |
Cumulative Indexing shortfall |
Supplementary
Increase |
On or before July 1, 2003 |
1.73% |
0.00% |
1.730% |
5.303% |
2.271%
|
July 1,
2004 |
2.08% |
0.19% |
1.886% |
3.512% |
2.271% |
July 1,
2005 |
2.50% |
0.89% |
1.596% |
1.596% |
1.596% |
July 1,
2006 |
1.72% |
1.72% |
0.000% |
0.000% |
0.00% |
The
cumulative loss of 5.303% is calculated by applying sequentially
1.730%, 1.886% and 1.596% (1.0173*1.01886*1.01596 = 1.05303). Similar
calculations apply to the other cumulative losses/shortfalls.
Now,
the actual supplementary increase is calculated as the minimum of the
cumulative loss and the amount available for the supplementary increase
(2.271%). The result is shown in the last column.
So,
that covers retirees with a July 1 retirement date. What about
individuals who retired at a date other than July 1? Individuals
retiring at a date other than July 1 are treated differently in their initial year of indexing ( this
is true for 'current year indexing' as well as for any 'catch up'). So,
for example, somebody who retired between July 1, 2003 and July 1, 2004
would have been eligible for only partial indexing
of the 1.73% CPI increase that would have been applied (had the fund
earned sufficient interest). This is a regulatory requirement and not
just something in the McMaster Plan. Individuals are only eligible to
catch up what is deemed to have been lost and if you are only retired
for part of the year you are deemed to have lost only part of the
indexing (in spite of the fact that our salaries only have a general
increase once a year). Someone retiring half way through the year, for
example, would have been eligible for half the indexing for that year,
or .865%. They would then, of course, be eligible for the full 1.886%
catch up the next year, and so on.
Below I provide
a table (taken from the Human Resources presentation at the Pension
Trust Committee) that shows what should be expected for each retirement
date from July 1, 2003 to June 1, 2006 .
McMaster Salaried Pension Plan - Supplementary Increase Calculated for 2006/2007 Plan Year |
|
|
|
|
|
|
Date of |
CPI Increase to |
Actual Increase |
Potential |
Increase |
|
Retirement |
June 30, 2006 |
In last 3 years |
Supp. Incr. |
Payable |
|
|
A |
B |
C |
D |
|
1-Jul-03 |
6.442% |
1.082% |
5.303% |
2.271% |
|
1-Aug-03 |
6.291% |
1.082% |
5.154% |
2.271% |
|
1-Sep-03 |
6.140% |
1.082% |
5.005% |
2.271% |
|
1-Oct-03 |
5.990% |
1.082% |
4.855% |
2.271% |
|
1-Nov-03 |
5.839% |
1.082% |
4.706% |
2.271% |
|
1-Dec-03 |
5.688% |
1.082% |
4.557% |
2.271% |
|
1-Jan-04 |
5.537% |
1.082% |
4.408% |
2.271% |
|
1-Feb-04 |
5.386% |
1.082% |
4.258% |
2.271% |
|
1-Mar-04 |
5.235% |
1.082% |
4.109% |
2.271% |
|
1-Apr-04 |
5.085% |
1.082% |
3.960% |
2.271% |
|
1-May-04 |
4.934% |
1.082% |
3.811% |
2.271% |
|
1-Jun-04 |
4.783% |
1.082% |
3.662% |
2.271% |
|
1-Jul-04 |
4.632% |
1.082% |
3.512% |
2.271% |
|
1-Aug-04 |
4.454% |
1.066% |
3.353% |
2.271% |
|
1-Sep-04 |
4.277% |
1.050% |
3.193% |
2.271% |
|
1-Oct-04 |
4.099% |
1.034% |
3.034% |
2.271% |
|
1-Nov-04 |
3.921% |
1.018% |
2.874% |
2.271% |
|
1-Dec-04 |
3.744% |
1.002% |
2.715% |
2.271% |
|
1-Jan-05 |
3.566% |
0.986% |
2.555% |
2.271% |
|
1-Feb-05 |
3.388% |
0.970% |
2.395% |
2.271% |
|
1-Mar-05 |
3.211% |
0.954% |
2.235% |
2.235% |
|
1-Apr-05 |
3.033% |
0.938% |
2.076% |
2.076% |
|
1-May-05 |
2.855% |
0.922% |
1.916% |
1.916% |
|
1-Jun-05 |
2.678% |
0.906% |
1.756% |
1.756% |
|
1-Jul-05 |
2.500% |
0.890% |
1.596% |
1.596% |
|
1-Aug-05 |
2.292% |
0.816% |
1.464% |
1.464% |
|
1-Sep-05 |
2.083% |
0.742% |
1.332% |
1.332% |
|
1-Oct-05 |
1.875% |
0.667% |
1.199% |
1.199% |
|
1-Nov-05 |
1.667% |
0.593% |
1.067% |
1.067% |
|
1-Dec-05 |
1.458% |
0.519% |
0.934% |
0.934% |
|
1-Jan-06 |
1.250% |
0.445% |
0.801% |
0.801% |
|
1-Feb-06 |
1.042% |
0.371% |
0.668% |
0.668% |
|
1-Mar-06 |
0.833% |
0.297% |
0.535% |
0.535% |
|
1-Apr-06 |
0.625% |
0.222% |
0.402% |
0.402% |
|
1-May-06 |
0.417% |
0.148% |
0.268% |
0.268% |
|
1-Jun-06 |
0.208% |
0.074% |
0.134% |
0.134% |
|
|
