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Rising Benefit Costs Challenge Employers to Balance Affordability With Attractive Programs

Karla Thorpe, Associate Director, Compensation and Industrial Relations
April 12, 2010

In 2009, employers focused on gaining tighter control of all expenses, including benefits, to cope with the challenges of last year. Yet benefit costs for both active employees and retirees escalated by 10 per cent year over year, according to the inaugural survey of employer-sponsored benefits by The Conference Board of Canada, Benefits Benchmarking 2009: Balancing Competitiveness and Cost.

If costs cannot be contained, the long-term sustainability of employer-sponsored benefit programs will be in jeopardy. So how are employers responding? Are they drastically cutting benefits?

The short answer is no. Instead, organizations are focusing on doing a better job of communicating the value of benefits to employees and enhancing employees’ understanding of the cost implications of their behaviour—perhaps causing employees to think twice before changing their glasses’ frames or heading for a massage.

Employers are trying to find the right balance between containing costs and ensuring that benefit programs help them attract and retain key talent.

Shopping Around

Employers are also taking a hard look at revising their relationships with insurance and employee assistance program providers to save costs. The recession has made vendors more open to renegotiating with clients, and employers have been bolder in requesting or shopping around for better deals. While employers may not be making deep cuts to benefit programs, they are looking to shift costs to employees through smaller adjustments, such as introducing or increasing deductibles and co-payments, or instituting coverage changes. 

Competitive Packages

With the economy slowly emerging from the recession, employers are trying to find the right balance between containing costs and ensuring that benefit programs help them attract and retain 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, which may happen as early as 2012 or 2013. It may be tempting for organizations to trim vacation time and other paid leave programs, given that these programs make up more than 40 per cent of all benefit spending. However, for employees seeking careers that provide a good work-life balance, time away from the job is an important consideration.

Long-Term Issues

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

So what changes can be expected over the next five years? Changes to retiree benefit 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 may not eliminate retiree benefits altogether, they may 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 benefit programs—including health-care spending accounts—are an effective strategy for organizations trying to eliminate the uncertainty of health spending.

Return on Investment

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

Karla Thorpe
Karla Thorpe
Associate Director
Compensation and Industrial Relations
613-526-3090 ext. 408
Benefits Benchmarking 2009: Balancing Competitiveness and Cost

Related Publication
Beyond Benefits: Creating a Culture of Health and Wellness in Canadian Organizations

Related Executive Networks
Compensation Research Centre
Council on Workplace Health and Wellness
Council of Human Resource Executives