By Dan Eisner, Employee Benefits Advisor
Inflation has always been and always will be a significant business issue. In particular, how increases in business costs, including employee benefits, might exceed the ability of the company to grow its revenue. The issue of inflation has been even more significant for group benefits.
There continues to be pressure on businesses to maintain their employee benefits plans. This is due to the tight labour market and given that employees continue to place a high value on benefits plans when choosing an employer, as well as often feel entitled to receiving them.
In 2019, we projected that the cost of employee benefits would increase approximately 7%. In 2018, our projection was 8%. Both of those projections were consistent with others that were released in the market. The actual results have historically been consistent with our projections but actual inflation for 2019 appears to be running a bit lower than our 7% projection due primarily to the benefits of further reduced generic drug pricing. Unfortunately, these costs will continue to increase for the foreseeable future, albeit at a slightly lower level for 2020, but still higher than general (CPI) inflation.
- 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. 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 be driving rates, but we have seen additional pressure over the past decade due to the increasing incidence and duration of mental health claims. Thankfully, there continues to be growing awareness around mental health and the stigma has eased. As well, we may be seeing the first signs of a flattening in annual increases of LTD claims incidence but we need more data to confirm this trend. We are expecting annual Long Term Disability benefit increases to be about 3% to 7%.
- 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 costly specialty drugs ($15,000 to $50,000 per year, on average) but in 2019 we saw some offsetting relief from further decreases in the cost of a broader array of generic drugs. We expect some of this relief to continue from 2019 into 2020. As well, we are hopeful that the first signs of mandatory biosimilar policies with provincial governments will yield financial savings that would work their way down to private plan sponsors. As such, we are expecting annual Extended Health benefit increases to be about 6% to 10%.
- DENTAL – For the past decade (or more), dental inflation has ranged from 6% to 8% annually even though the fee guides on which dental services are based have only increased by about 2.5%. Dentists continue to be great marketers, introducing and promoting new services which add to benefit plan inflation, well above the cost increases of the underlying services. As such, we are expecting Dental benefit increases to again be about 6% to 8%.
From there, it is really just simple math – Life accounts for about 10-15% 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 25-30%. When you put it all together, you are looking at a weighted average of approximately 6% annual inflation for 2020, and that would be in a relatively normal plan. 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 4% to 9% 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 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 over 300 years of experience within our team of 16 employee benefits specialists. We have been working with businesses ranging from 3 to over 70,000 plan members for over 30 years.
By Dan Eisner
This information is designed to educate and inform you of strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a qualified advisor.