Recently, the word “inflation” has been front and center from a consumer perspective, and it continues to be a significant issue for employee benefits plans, averaging about 6% per year over the past 25 years. Over the past three years we saw annual inflation rates higher than this historical average, but we also saw a decreasing trend. The good news for 2025 is that these decreases have continued, but the bad news is that employee benefits inflation is still above general market inflation. As well, the “perfect storm” continues to drive inflation for group benefits: more employees are using the plans, using them more often, and using them for more expensive items.
In spite of ongoing and persistent inflation for group benefits, businesses are under continuing pressure to not only maintain but also enhance their employee benefits plans. Employees always place a high value on group benefits plans when choosing to join or stay with an employer. Employees’ perceptions around the quality of these benefits plans have risen over the past few years during the pandemic, to levels not observed in almost 25 years. Employees indicate that they value their benefits plans more today than before COVID. As well, employees continue to feel entitled to receiving employee benefits as part of their employment offering.
The 2025 forecast for benefit plans
Last year, we projected that the cost of employee benefits for 2024 would increase approximately 7%, as compared to 8% for 2023. Note that actual inflation levels each year have generally been very close to the projections prepared by ZLC Employee Benefits Solutions. Unfortunately, employee benefits plan costs will continue to increase in the near future at levels still higher than general market inflation. Below is our 2025 forecast for key components of your benefits plans:
Life insurance
For the majority of Canadian companies, annual renewal adjustments for life insurance benefits are driven primarily by changes in the insurers’ broader block of business (aka, manual rates). However, even though the Canadian working population continues to age, recent data suggests that the strong flow of immigrants to Canada is adding a younger demographic of workers, which is offsetting the pressures of the aging population. In spite of recent announcements around reduced immigration levels, we expect this positive impact to continue. We expect life insurance benefit increases to be about 2% to 3%.
Long term disability
Canada’s aging population has also been driving disability rates, but we expect to see improvements. We have seen added pressure over the past 15 years due to the increasing incidence and duration of mental health claims but that appears to have leveled off in the last couple of years. Unfortunately, disability claims continue to be further complicated by a general reduction in the quality of health care in Canada with delayed surgeries and untreated conditions. However, it is important to note that most plans require employees to pay for the long term disability premiums to ensure a non-taxable benefit, so inflationary pressures in this area are more often a burden to employees rather than plan sponsors. We are expecting long term disability benefit increases to be about 5% to 7%.
Extended health
The perfect storm for employee benefits plans is felt the most in the extended health area. General market inflation, including pressure on wages, has been increasing the operating costs for most medical supplies and paramedical service providers, so we expect the reasonable and customary fees to rise again in 2025. We are expecting the introduction of some new generic drugs for a couple of current high-cost drugs (i.e., Vyvanse, Victoza), which will yield savings. Again, this year, the continued introduction of biosimilar drugs should also yield some financial savings to group benefits plan sponsors. We could see some claims reductions resulting from the national PharmaCare announcement and B.C.’s subsequent announcement to participate in this program, but the timing of the impact from this program is uncertain and the broader launch and adoption by other provinces could be impacted by any federal election. We are expecting extended health benefit increases to be about 6% to 8%.
Dental
For the past decade and longer, annual dental inflation has ranged from 6% to 8% each year but it jumped significantly in 2022 and 2023, primarily driven by dental fee guide increases that were much higher than historical norms. While the fee guide increases normalized to some degree in 2024, we saw insurers largely ignoring that and using much higher trend factors in their renewal calculations. We are unsure as to what the fee guide increases and insurer trend factors will be for 2025, but we expect them to be more consistent with historical norms. We are expecting dental benefit increases to be about 6% to 8%.
From there, it is really just simple math – life insurance 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 plans, spending accounts) account for up to another 10% (running more at general inflation levels). When you put it all together, we are looking at approximately 6% projected annual inflation for 2025. That said, if your plan has additional cost drivers (i.e., older population, higher historical utilization, high employee turnover, etc.), you could be looking at higher increases. We recommend using an inflation assumption within a range of 5% to 8% if you are doing any multi-year business planning.
Dan Eisner is an employee benefits advisor for ZLC Employee Benefits Solutions.
Originally published by ZLC Employee Benefits Solutions.
