The issue of inflation continues to be significant for employee benefits, as there continues to be pressure on businesses to maintain these plans. Employees continue to place a high value on benefits plans when choosing an employer and when choosing to stay with an employer, and employees also often feel entitled to receiving them.
Last year, we projected that the cost of employee benefits would increase approximately 7% for 2021, and for the prior year our projection was 6% for 2020. Actual historical inflation levels have usually been very close to our projections but actual inflation for 2021 appears to be running a bit higher than our 7% projection due primarily to the impact of the COVID-19 pandemic. Unfortunately, these costs will continue to increase for the foreseeable future, likely at a higher level for 2021, and notably still higher than general inflation (CPI).
- LIFE – For the majority of Canadian companies, annual renewal adjustments are driven by changes in the insurers’ broader block of business (i.e., manual rates). In general, the Canadian working population continues to age and that is not expected to ease for another decade until most of the Baby Boomers exit the workforce. For Life insurance, we are not anticipating any material impact due to the pandemic. As such, we are expecting annual Life benefit increases to be about 3% to 5%.
- LONG TERM DISABILITY – In much the same way as for the Life benefit, the ageing population will continue to drive rates, but we have seen additional pressure over the past decade due to the increasing incidence and duration of mental health claims. The trend of increasing disability claims related to mental health was already underway prior to 2021 but this trend became compounded by the pandemic. As well, disability claims have been further complicated during the pandemic as required surgeries may have been delayed due to hospital capacity constraints, and return-to-work arrangements were more difficult as workplaces changed their operations to adapt to the pandemic. As a result, we have seen the majority of insurers start to incorporate an additional trend factor into their disability rating methodology. We are expecting annual Long Term Disability benefit increases to be about 8% to 12%.
- EXTENDED HEALTH – We continue to see the “perfect storm” for Extended Health benefits – more employees are using their plan, they are using it more often and for more services, and the average cost for each use continues to rise. Going forward, we will continue to see the introduction of biosimilar drugs which should yield some level of financial savings to private plan sponsors. With respect to the COVID-19 pandemic, as more of the population becomes fully vaccinated, we are expecting higher utilization of paramedical services as people become more comfortable with in-person treatments. As well, the broader insurance industry has yet to confirm the Reasonable and Customary fee guidelines for paramedical practitioners for 2021 given the complexities of the pandemic, but we expect these fees to rise higher than historical norms in 2022. As such, we believe that overall inflation for Extended Health Care will be higher than normal in the coming year at about 6% to 10%.
- DENTAL – For the past decade (or more), dental inflation has ranged from 6% to 8% each year. During the pandemic, many members may have delayed or missed their routine cleaning/maintenance appointments in 2020 and early 2021 and, when members are returning to the dentist, now they are receiving services for more serious and expensive treatments. Although the BC Dental Association fee guide increased, on average, by approximately 4% in 2021, we expect that the types of services that members will be using in 2022 will be weighted more heavily to the more expensive major categories. As such, we are also expecting higher than normal 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 the total benefits cost, Long Term Disability accounts for about 15-20%, Extended Health accounts for about 40-45% and Dental accounts for about 30-35%. When you put it all together, you are looking at a weighted average of approximately 8% projected annual inflation for 2022. If your plan has other additional cost drivers (i.e., older population, higher utilization, high turnover, etc.), you could be looking at higher increases. We recommend using an inflation assumption within a range of 6% to 11% if you are doing any multi-year business planning.
It continues to be difficult to say what the long-term effects of the COVID-19 pandemic will be on employee benefits plans but it has certainly resulted in higher plan costs for 2021 and likely for 2022, and the pandemic continues to put more uncertainty into the industry. As such, it makes it more difficult to project inflation for 2022 but we believe it is still prudent to use our 8% inflation estimate and, if necessary, adjust accordingly as the year unfolds.
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 Financial is one of the fastest growing advisors for employee benefits 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.