What is the formula to adjust a pension interest rate for inflation?

The correct formula for adjusting a pension interest rate for inflation accounts for the relationship between nominal interest rates and the rate of inflation to yield the real interest rate. The formula is structured as follows: you take the nominal interest rate (in this case, the pension rate), add 1, and then divide it by the sum of 1 and the inflation rate. This calculation essentially provides the real purchasing power of the pension after adjusting for inflation, which is crucial for understanding the true value of pension benefits over time.

This formula is derived from the Fisher equation, which explains how nominal interest rates, real interest rates, and inflation interact. By subtracting 1 from the outcome of the division and then multiplying by 100, you convert the result into a percentage, which is a common requirement when reporting financial figures in a more understandable format.

When examining other options, they either misrepresent the relationship between the rates or incorrectly apply the formula, failing to yield the correct adjustment for inflation within the context of pension benefits. Thus, the formula that involves summing up both the pension rate and the inflation rate in the denominator accurately reflects the necessary adjustment to determine the real return after inflation is considered.