Rising benefit costs challenge employers

As the economy emerges from the recession, employers are looking to find the right balance between containing costs and ensuring that benefit programs are competitive

By Karla Thorpe

*This is an expanded version of a summary that appeared in the June/July 2010 issue of CAmagazine.

Last year was a challenge for many organizations, as they struggled to gain a tighter control on expenses, including benefits. Yet benefit costs for both active employees and retirees escalated by 10% year over year, according to an inaugural survey of employer-sponsored benefits by the Conference Board of Canada.

The report, Benefits Benchmarking 2009: Balancing Competitiveness and Cost, notes that if costs cannot be contained, the long-term sustainability of employer-sponsored benefit programs will be in jeopardy. But it also says organizations are not making drastic cuts to benefits Instead, they are focusing on better communicating the value of benefits to employees and enhancing employees’ understanding of the cost implications of their actions — perhaps causing them to think twice before changing the frames on their glasses or heading for a massage.

Employers are also taking a hard look at their relationships with insurance and EAP providers to see if they can make any cost savings. The recession has made vendors more amenable to renegotiating with clients and employers have been bolder about looking for a better deal. While employers might not be making deep cuts to benefit programs, they are also looking to shift costs to employees through smaller adjustments such as introducing or increasing deductibles and co-payments, or instituting coverage changes.

Competitive packages
As the economy emerges from the recession, employers are looking to find the right balance between containing costs and ensuring that benefit programs are competitive in attracting and retaining key talent. Organizations that pare back their benefit programs too much may find themselves on the short end of the stick in competing for scarce talent as labour markets tighten up toward 2012 or 2013.

It might be tempting for organizations to trim vacation time and other paid leave programs, given that these programs make up just over 40% of all benefit spending. For employees seeking careers that provide a good work-life balance, however, time away from the job is an important consideration.

Longer-term issues
In addition to making short-term adjustments, there are a number of long-term realities that will increase benefit costs for employers. The aging population is leading to greater overall benefit utilization rates. Expensive new drugs and treatments—including biologics—are entering the market. The 2009 recession and subsequent stimulus spending have led to soaring public sector deficits. These will place a greater burden on employers as governments shift costs in an attempt to manage mounting public health care costs.

What can be expected over the next five years? Changes to retiree benefits plans are likely on the way. Short-term cost containment is not the only reason; employers are also struggling to find a sustainable way forward. While organizations might not eliminate retiree benefits altogether, they might look to reduce coverage and move toward models with greater employee cost-sharing.

Flexible packages
Movement toward flexible benefit plans can be expected to continue as employers accommodate an increasingly diverse labour force. Flexible benefits programs—including health-care spending accounts—are an effective way to eliminate the uncertainty of health spending, and can also help employers meet the needs of a changing workforce.

Conducting rigorous return on investment (ROI) analysis will become increasingly important as senior leaders demand sound evidence that spending on benefits can be justified. The Conference Board expects employers to become increasingly sophisticated in using ROI metrics to take a hard look at plan design and program offerings.

Another wild card for employers as they budget for benefits down the road is what might happen to CPP premiums if the supplemental CPP program becomes a reality. Legally required benefit payments make up a third of all organizational spending on benefit programs. This includes CPP/QPP, employment insurance premiums, workers’ compensation, and other mandatory payments such as the Employer Health Tax in Ontario.

Karla Thorpe is an associate director with the Conference Board of Canada’s leadership and human resources research division.

This article is based on a recently released report, Benefits Benchmarking 2009: Balancing Competitiveness and Cost.

This report is part of a series that contains data collected from The Conference Board of Canada’s survey on employer-sponsored benefit programs. Additional information on wellness programs can be found in a recently released report entitled Beyond Benefits: Creating a Culture of Health and Wellness in Canadian Organizations. The third report in this series focuses on the subject of disability plans and managing casual absences.