Advisor, ZLC Employee Benefits Solutions
Inflation has always been and continues to be a significant issue for employee benefits plans. Annual inflation in this area has fluctuated significantly each year over the past 20 years but has generally averaged about 6% per year. However, the issue of inflation is even more topical these days as consumer inflation has jumped to levels not seen in 40 years. The “perfect storm” continues to impact the costs group benefits; more employees are using the plans, using them more often, and using them for more expensive items.
Despite these ongoing and persistent financial factors, businesses continue to be under pressure to maintain their employee benefits plans. Employees always place a high value on group benefits plans when choosing to join an employer and when choosing to stay with an employer. Employees’ perceptions around the quality of these benefits plans have risen over the past couple of years to levels not observed in almost 25 years. As well, employees also often feel entitled to receiving employee benefits as part of their employment offering.
For 2022, we initially projected that the cost of employee benefits would increase approximately 8% as compared to 7% for 2021. However, we needed to update our 2022 projection early in the year when the dental fee guide increases were announced at much higher levels than expected, and our updated projection was 9% for 2022. Note that actual historical inflation levels have generally been very close to the projections prepared by ZLC Employee Benefits Solutions. Unfortunately, employee benefits plan costs will continue to increase for the near future, likely at levels still higher than general inflation (CPI).
LIFE – For the majority of Canadian companies, annual renewal adjustments are driven primarily by changes in the insurers’ broader block of business (aka, manual rates). In general, the Canadian working population continues to age and that is not expected to ease for another decade until most Baby Boomers and Gen-Xers exit the workforce. For Life insurance, we are not expecting any material impact due to factors beyond general ageing. We are expecting annual Life benefit increases to be about 3% to 5%.
LONG TERM DISABILITY – In the same way as for the Life benefit, the aging population will continue to drive disability rates. We have seen added pressure over the past 15 years due to the increasing incidence and duration of mental health claims. This trend has been compounded by the COVID-19 pandemic and now additionally by the pressure employees are experiencing related to the risks of a recession, consumer inflation, and global uncertainty. As well, disability claims have been further complicated by a general reduction in the quality of health care in Canada with significant increases in delayed surgeries and untreated conditions. On a slightly more positive note, higher interest rates will eventually help reduce disability rates from an actuarial perspective, but we typically see the impact lagging over a couple of years. Lastly, most plans require employees to pay for the LTD premiums to ensure a non-taxable benefit, so inflationary pressures in this area are ultimately borne more often by employees rather than the company. We are expecting annual Long Term Disability benefit increases to be about 6% to 10%.
EXTENDED HEALTH – As noted above, we continue to see the “perfect storm” for employee benefits plans but the impact of this phenomena is felt the most in the Extended Health area. We have already observed that as more of the population became fully vaccinated and grew more accepting of in-person treatments, we saw higher utilization of paramedical services. Subsequently, that surge in paramedical claims should have levelled off now. We expect the Reasonable and Customary fees around paramedical claims to rise higher than historical norms in 2023. Finally, on a positive note, we will continue to see the introduction of biosimilar drugs which should yield some level of financial savings to group benefits plan sponsors. We believe that overall inflation for Extended Health Care will be about 6% to 10% in the coming year.
DENTAL – For the past decade (or more), annual dental inflation ranged from 6% to 8% each year but it jumped significantly in 2022, primarily driven by dental fee guide increases being higher than historical norms. Like we have observed for Extended Health, as more of the population became fully vaccinated and became more comfortable with in-person treatments, we saw higher utilization of dental services. This is another surge of claims that should have levelled off now. We are unsure as to what the fee guide increases will be for 2023 but hopefully, they will return to levels more consistent with historical norms. We are expecting inflation for Dental care this year at about 7% to 10%.
From there, it is really just simple math – Life accounts for about 5-10% of total benefits plan costs, Long Term Disability accounts for about 15-20%, Extended Health accounts for about 40-50%, Dental accounts for about 20-30%, and other benefits (i.e., Employee Assistance Plan, spending accounts) account for up to another 10% (running at more typical inflation levels). When you put it all together, you are looking at a weighted average of approximately 8% projected annual inflation for 2023. If your plan has additional cost drivers (i.e., older population, higher historical utilization, high turnover, etc.), you could be looking at higher increases. We recommend using an inflation assumption within a range of 5% to 11% if you are doing any multi-year business planning.
We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits and retirement programs. Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.
ZLC Employee Benefits Solutions is one of the fastest growing advisors for employee benefits and group retirement programs in Vancouver and we are fortunate to have the best people, resources, and clients. We provide value to you by leveraging one of the most skilled benefits teams – collectively almost 400 years of experience within our team of 19 employee benefits specialists. We have been working with businesses ranging from 3 to over 75,000 plan members for over 35 years.