By Dan Eisner, Employee Benefits Advisor
Inflation has always been, and always will be, a significant business issue. In particular, it is important to better understand how increases in business costs, including employee benefits, might exceed the ability of the company to grow its revenue base. The issue of inflation has been even more 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 also often feel entitled to receiving them.
In 2020, we projected that the cost of employee benefits would increase approximately 6%, and in 2019, our projection was 7%. The actual results have historically been consistent with our projections but actual inflation for 2020 appears to be running a bit lower than our 6% projection due primarily to the impact of the COVID-19 pandemic. Unfortunately, these costs will continue to increase for the foreseeable future, albeit at a slightly lower level for 2021, but 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. 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 but the claims experience continues to rise. We are expecting annual Long Term Disability benefit increases to be about 7% to 10%.
- 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 and 2020 we saw some offsetting relief from further decreases in the cost of a broader array of generic drugs. We are hopeful that mandatory biosimilar policies with provincial governments will gain further traction and 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 7% annual inflation for 2021. 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 5% to 10% if you are doing any multi-year business planning.
HOWEVER, what about COVID-19? Our projected 7% inflation rate for 2021 applies to what we would expect in the absence of a global pandemic. However, the expectation is that COVID-19 will continue through much of 2021, so it needs to be factored into the equation.
- We have generally not seen any impact to group life insurance rates due to COVID-19 as the pandemic-related deaths have mainly been in seniors.
- For disability insurance we are starting to see an increase in mental health claims as the economic and personal stresses of the pandemic take their toll on employees. The length and severity of these disability claims will likely be dependent on the severity and duration of the broader pandemic.
- During the period of March through June 2020 many benefits plan sponsors benefitted from reductions in claims or insurer premium credits related to Extended Health and Dental plans as paramedical and dental practitioners closed down their operations. However, since then those types of claims have largely, but not totally, returned to levels prior to the pandemic but we are seeing lots of volatility in claims from month to month which we expect to continue.
- We are unsure where dental fee guides may go in 2021 and beyond. Dental practitioners have had to increase their business costs around Personal Protective Equipment (“PPE”) and those costs have generally not been covered by benefits plans. Future fee guides may reflect dentists’ increased business costs and these fee guides generally drive reasonable and customary maximums within our plans.
- With respect to any potential COVID-19 vaccine, we expect that the federal and provincial governments will pick up the cost, based on current information.
It is difficult to say, at this time, what the long-term effects of the COVID-19 pandemic will be on employee benefits plans but it has certainly put more uncertainty into the industry. As such, it makes it more difficult to project inflation for 2021 but we believe it is still prudent to use our 7% 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 350 years of experience within our team of 18 employee benefits specialists. We have been working with businesses ranging from 3 to over 74,000 plan members for over 35 years.
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.