| Dan Eisner, Advisor, ZLC Employee Benefits Solutions
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I am proud of my working relationship with the Chartered Professional Accountants of British Columbia (“CPABC”). A couple of years ago, I was asked to share my advice on the topic of “Understanding the Financial Risks of Employee Benefits” and I wrote an article that was published in CPABC’s In Focus magazine. That article shed light on why business costs related to employee benefits plans are growing and where they were going.
I am also proud to have been working with CPABC for the past eight years around their Professional Development program, where I have developed and taught an in-depth 3-1/2 course on this same topic. This course helps participants better understand the current reality related to employee benefits programs, recognize that a “financial storm” is already here around the costs and risks related to these programs, and develop strategies that are best suited to their own unique needs. This year’s edition of the course is being finalized and is part of CPABC’s Spring/Summer PD program on June 15, 2023.
More recently I have been asked by clients to address this issue around the financial risks for employee benefits programs in a different way, given that there is a double-edge sword when it comes to managing them. These plans still have some significant financial risks, but these plans are also needed, more than ever, at a critical time for the majority of organizations.
On the one hand, the business costs related to employee benefits plans are significant and they continue to grow, generally faster than even the current elevated broader market inflation. There is no relief in sight in the foreseeable future and organizations often have a very limited strategy built around these programs.
According to research from the Conference Board of Canada, the average annual cost for an employee benefits plan in Canada was approximately $4,400 per employee in 2018, the last time they completed their benchmarking survey. Their data showed that the average annual per capita cost for employee benefits increased by approximately 6% per year between their last two surveys in 2015 and 2018. Based on ZLC Employee Benefits Solutions’ benchmarking data, we estimate that the average annual per capita cost is now close to $5,500. It is hard to believe that there once was a time when we referred to this area as “fringe benefits” whereas now it is often a top-5 corporate expenditure.
Since 2018 we have seen annual inflation rates for employee benefits programs range from 6% to 9% per year, much higher than inflation rates for other business costs, even when considering the unusually high inflation we have seen over the last couple of years. Unfortunately, there is no relief in sight as we expect there will be continuing financial pressures on employee benefits, as there is a perfect storm brewing that is driving these financial risks.
Firstly, based on our experience, more than 90% of employees are now using their benefits plans, and this correlates to an aging workforce and an increasingly unhealthy population in Canada. Secondly, employees are using their benefits plans more often and for a broader array of services. In particular, the use of paramedical services, particularly massage therapy and mental health care, has increased significantly. Lastly, employees are using their benefits plans for higher cost services. For example, while benefits plans benefited significantly from lower-priced generic drugs over the last 20 years, those savings have essentially been exhausted and, going forward, there is little motivation for the pharmaceutical industry to develop more low-cost drugs. Instead, we are seeing many new specialty drugs that cost $15,000 to $50,000, or more, per year.
The financial risks related to employee benefits programs are real but, on the other hand, these employee benefits programs are vital for attracting, retaining and engaging the key talent needed to run the businesses. It is hard to believe that the labour market is still incredibly tight with unemployment levels staying near historical lows, in spite of the economic risks related to inflation and the potential for a recession. As a result, organizations need to continue to provide employee benefits programs in order to be competitive in the market.
Employees continue to place a high value on an employee benefits program when joining or staying with an organization. In fact, the majority of employees now simply believe they are entitled to them. That said, the COVID-19 pandemic really helped increase the perceived value that employees place on their benefits plans, which is not surprising given the security that these plans provide as compared to all the uncertainty in the world. However, employees also now are expecting more from these benefits plans and want employers to address their broader and more diversified needs.
So that gives us this double-edged sword. While employee benefits programs are a large and growing financial cost and have significant financial risks, we have never needed them more to run the business. That is why organizations should take a longer-term view and develop a more formalized strategy to manage these plans. However, you cannot effectively manage something unless you truly understand how it works. Organizations need to assess how employee benefits fit within their broader people and business strategies. They should determine whether they want to be reactive and simply keep pace with the rest of the market or be proactive and lead with an innovative plan design. Organizations also need to assess the needs and desires of a multi-generational workforce with varying needs and desires. Most importantly, organizations need to determine how the costs of employee benefits plans fit into their long-term business plans and/or whether there are specific financial targets or constraints they will need to achieve each year.
Where do you go from here? One possibility is to attend the upcoming CPABC Professional Development seminar, Understanding the Financial Risks of Employee Benefits, on June 15, 2023. This seminar has been developed to help participants better understand the current reality related to employee benefits, recognize that a “financial storm” is already here around their costs and risks, and develop strategies that are best suited to their own unique needs. Through a combination of lectures and interactive surveys and discussions, this seminar will help participants better understand the area of employee benefits, the key cost drivers and future trends impacting benefits, and strategies to better manage them.
