The word “inflation” has been front and centre for the last few years from a consumer perspective, but inflation has always been and continues to be a significant issue for employee benefits plans. It has fluctuated from year to year, but has generally averaged about six per cent per year over the past 25 years.
Over the past three years, annual inflation rates have been higher than this historical average, but there is also 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. 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.
Despite ongoing and persistent inflation for group benefits, businesses are under continuing pressure to not only maintain, but enhance 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 since the COVID-19 pandemic to levels not observed in almost 25 years. Employees indicate that they value their benefits plans more today than before the pandemic. As well, employees continue to feel entitled to receiving employee benefits as part of their employment offering.
Last year, ZLC Employee Benefits Solutions projected that the cost of employee benefits for 2024 would increase approximately seven per cent, as compared to eight per cent 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 a forecast for key components of 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 (a.k.a. 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, this positive impact is expected to continue.
ZLC expects life insurance benefits to increase by two to three per cent.
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.
Long term disability
In the same way as for life insurance benefits, the aging population has been driving disability rates, but ZLC Employee Benefits Solutions expects to see improvements. There has been added pressure over the past 15 years due to increasing incidences and the duration of mental health claims, but that appears to have levelled off in the last couple of years. Unfortunately, disability claims continue to be further complicated by a general reduction in the quality of healthcare in Canada with delayed surgeries and untreated conditions. However, it is important to note that most plans require employees to pay for the LTD premiums to ensure a non-taxable benefit, so inflationary pressures in this area are more often a burden to employees rather than plan sponsors.
ZLC Employee Benefits Solutions expects long term disability benefits to increase by five to seven per cent.
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 expect the reasonable and customary fees to rise again in 2025. The introduction of some new generic drugs for a couple of current high-cost drugs (i.e., Vyvanse, Victoza), will yield savings.
Again this year, the continued introduction of biosimilar drugs should also yield some financial savings to group benefits plan sponsors. Some claims reductions may result 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 the federal election.
ZLC Employee Benefits Solutions expects extended health benefits to increase by about six to eight per cent.
Dental
For the past decade, annual dental inflation has ranged from six to eight per cent 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, insurers largely ignored that and used much higher trend factors in their renewal calculations. ZLC Employee Benefits Solutions is unsure as to what the fee guide increases and insurer trend factors will be for 2025, but they expect them to be more consistent with historical norms.
ZLC Employee Benefits Solutions expects dental benefits to increase by about six to eight per cent.
From there, it is really just simple math – life insurance benefits account for about five to 10 per cent of total benefits plan costs, long term disability accounts for about 15 to 20 per cent, extended health accounts for about 40 to 50 per cent, dental accounts for about 20 to 30 per cent, and other benefits (i.e., employee assistance plan, spending accounts) account for up to another 10 per cent (running more at general inflation levels).
When putting it all together, the 2025 projected annual inflation will be approximately six per cent. That said, if the plan has additional cost drivers (i.e., older population, higher historical utilization, high employee turnover, etc.), the increases could be higher. ZLC Employee Benefits Solutions recommends using an inflation assumption within a range of five to eight per cent when doing any multi-year business planning.
