Inflation should be a concern for Canadian private sector workers and retirees.

The good news is that all retirees in Canada can expect to receive inflation protected benefits directly through the Canada Pension Plan (CPP) and Old Age Security (OAS). CPP is adjusted annually to reflect inflation, while the OAS is adjusted quarterly to partially reflect inflation.

The bad news is that this is not sufficient inflation protection for most Canadian retirees.

Within the public sector, most employees participate in defined benefit (DB) pension plans, where retiree benefits are either fully or partially protected against rising inflation. That is, pension payments increase annually for increases in inflation under public service pension plans. This ensures the buying power of each public service pensioner is maintained for their lifetime.

Unfortunately, millions of Canadian workers within the private sector do not have this inflation protection. Many participate in defined contribution (DC) arrangements: registered defined contribution pension plans or group RRSPs. Many more have no retirement savings arrangement at all.

These workers must manage inflation risk on their own. At the individual level, they are responsible for managing and investing their retirement assets to ensure adequate investment returns are achieved to mitigate inflation. This is while also maintaining a retirement asset draw down strategy that ensures adequate current income is available to maintain their standard of living. Finally, they must ensure sufficient funds remain for their entire lifetime. All of this is a significant burden placed on the individual.

Under the current system, prudent pensioners in DC arrangements seek professional personal financial advice to assist with the required investment, cash flow and asset allocation decisions. These necessary and vital services are paid for by the pensioner either directly, or through higher investment management fees paid from their retirement assets.

Pensioners who do not seek out professional advice  may be leaving their retirement fate up to chance. Public sector pensioners simply cash their monthly cheques.

The ICPP was created to remedy these highly problematic shortcomings within the Canadian retirement system. Regarding inflation specifically, the ICPP has built-in features to manage the risk.

First, the ICPP maintains very low fees. Our members can continue to participate in the plan during retirement and enjoy a low fee environment. This ensures greater available retirement income than if they were managing and investing their funds on their own.

But the real power in protecting retirees from the rising cost of living is through the innovative design of the benefits payable from the ICPP, namely the Ideal Benefit and Ideal Benefit – Plus.

The Ideal Benefit is the primary benefit payable from the ICPP and must be funded first before any other benefits are payable from the ICPP.  It is payable through a Variable Payment Life Annuity (VPLA), which ensures lifetime retirement income.  That is, a retiree of the ICPP cannot outlive their savings.  A brief summary of the ICPP’s VPLA can be found here.

Aside from the ability to provide greater retirement income, the use of the VPLA allows for regular expected increases in pensions from year to year. This is accomplished by adopting pensions based on an expected asset return assumption (the “hurdle rate”) that is lower than the best estimate  return of the assets backing the VPLA. Actual returns of the VPLA asset pool are expected to be  higher than the adopted hurdle rate with the excess return passed along to the VPLA pensioners through pension increases.

Pension adjustments each year are based on actual investment experience over the previous five years. Based on the terms of the ICPP, pensions are scheduled to increase 3.01% effective January 1, 2022.  Further increases are scheduled to be reflected on each January 1^st from 2023 to 2026 based on investment experience to date. These future increases will be augmented based on future asset performance.

The Ideal Benefit – Plus is a secondary benefit payable from the ICPP and is payable in the same manner as a Life Income Fund (LIF).  That is, amounts may be withdrawn from the retiree’s LIF account within legislated minimums and maximums. Each year, the pensioner selects how much they wish to withdraw between the minimum and maximum.

The ICPP administrator assists with this decision. The default and recommended payments under the Ideal Benefit – Plus are determined by the ICPP administrator to provide the same investment adjustments as under the VPLA supporting the ICPP Benefit program.  The ICPP Benefit – Plus pensioners can therefore receive the same inflation protections as under the Ideal Benefit, but at their personal discretion.

With these two benefits, a pensioner under the ICPP has lifetime income with inflation protection that is being managed on their behalf.  These ICPP design features provide peace of mind to ICPP pensioners, even when inflation rises.