I'm pretty sure they do. I've seen Vetrar demolish armies and earn a bunch of exp before... the problem is, even if he levels up, all he gets is like 4 more hp, a bit of accuracy/spell resist, etc... basically a bunch of stats that are fairly meaningless for him...

As for the OP: I believe lairs upgrade and spawns stronger monsters as time passes... but monsters in general have a limit to their strength and doesn't become amazingly powerful even if you wait for decades. Nor do I think that's the plan for them. Maybe in some mods...