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 basic pension increase for the current year (starting payment on January 2009) will be the same as the reference rate of inflation, 2.18%. This note explains the calculation of this increase. The note following explains how there will also be a supplementary increase as well in January. If you have been reading my regular reports, you know that these increases are based on performance of the investment fund for the 5 years prior to last July 1. Needless to say, with the recent disastrous performance of stock markets (and hence our investment fund), these are likely to be the last increases we receive for some time.
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 2008 increase is as follows:
| Calculation of Five Year Average (for 01/01/09 increase) |
% |
| 2008 Rate of Return (ending June 30, 2008) |
(3.98) |
| 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 |
| |
|
| Total Return for Last Five Years |
41.24% |
|
|
| Five Year Annual Average Return (Total Return / 5) |
= 8.25% |
(A) Rate of Return in Excess of 4.5% (8.25% - 4.5%)
|
= 3.75% |
(B) Average Consumer Price Index to June 30, 2008
|
= 2.18% |
Increase to Pensions (the lesser of A and B)
|
= 2.18% |
Supplementary Increase
3.75% is available for indexing but only 2.18% is needed to provide the increase to cover inflation. That leaves another 1.537% for indexing to cover shortfalls in indexing over the last three years for those eligible for the increases. (Note that the 1.537% compounded with the 2.18% yields 3.75%.) Although there were no shortfalls in last year’s increase, there were shortfalls in the two years before that of about 3½ %. A member retiring on or before July 1, 2005 will be eligible for the 1.537% catch up, bringing the total increase to 3.75% for such individuals. Those retiring between July 1, 2005 and June 1, 2007 will be eligible for a partial catch up. Retirees on or after July 1, 2007 have not had a shortfall as there was full CPI indexing last year. And, of course, those retiring on July 1, 2008 or later are not eligible for any pension increase until January 1, 2010.
