A rising stock market seems to be lifting all, or most, boats when it comes to healthcare system pension funds. Many not-for-profit health systems markedly improved the status of their employee retirement funds last year due to rising investment returns and a shift toward defined-contribution plans, according to Standard & Poor's Ratings Services' annual report on healthcare pension plan medians.
The average funded status of health systems' defined-benefit pension plans rose dramatically to 80% in 2013 — meaning an organization on average had 80% of what is needed to cover future retirement payouts to employees. This compared with 69.2% in 2012. S&P looked at pension data for 172 health systems that ended their fiscal years Sept. 30, 2013.
An adequately funded pension plan, according to ratings agencies and other pension experts, hovers around 80%, but the American Academy of Actuaries has said that figure should not be seen as a hard and fast rule, since most funded ratios are a “point-in-time measurement,” meaning they vary day-to-day.
Ken Gacka, a director within S&P's not-for-profit healthcare group, said 2013 offered a sigh of relief for providers, but their pensions are still underfunded compared with prerecession levels. In 2007, health-system pensions were funded at 90% on average. In addition, healthcare providers were behind the U.S. defined-benefit funded rate of the 100 largest publicly traded corporations, 93.5% in 2013.
“This was the first meaningful uptick we've had in the past several years,” Mr. Gacka said. “But the current funded status is still well below historical highs. While there's been improvement, there's still a considerable liability that organizations are dealing with in a number ways.”
One of the primary ways health systems have coped with the rising expense of pensions has been a shift away from defined-benefit plans and toward defined-contribution plans. Defined-benefit plans are those in which a provider guarantees a certain retirement payout to employees. Defined-contribution plans — such as a 401(k) or a 403(b) — limit a provider's liabilities and costs.
Such a shift has been used at Norton Healthcare, a five-hospital system based in Louisville, Ky. In 2012, Norton had one of S&P's 10 highest-funded plans at 110%; it held relatively steady at 108% in 2013. John Hammond, Norton's system director of benefits and compensation, said going into 2010, executives decided to do a hard freeze on their DB plan. This meant all new employees were placed in a DC plan instead of the DB plan. However, the DB plan still exists to pay benefits to those who earned them — Norton doles out $3 million in defined benefit payments in any given month.
This move immunized the organization more from swings in the investment market, Mr. Hammond said, and gave the system some fiscal stability going forward. “We didn't have to worry about keeping up with future accruals,” he said. “We only try to work to maintain the duration of the benefit.”
Catholic Health System, a three-hospital system in Buffalo, N.Y., has been at the opposite end of the spectrum. According to S&P's report, it had one of the 10 lowest-funded plans in 2012 at a meager 43.6%. Last year, however, the not-for-profit system improved the status to about 60%.
Jim Dunlop, executive vice president and CFO of Catholic Health System, said despite the lower-than-average funded status, executives and board members are optimistic about the financial position of the system's pension because they have worked closely with their actuaries to monitor investments. Catholic Health System maintains a defined-benefit plan with a cash balance feature — this allows an employee's retirement benefits to be viewed and taken as a lump sum instead of a yearly annuity. Leaders expect the plan, which covers its 8,000 employees, will be 75% funded by 2018 and 94% by 2022 if investment earnings continue to grow.
“We think we found a nice balance in terms of both affordability but also making sure associates — and particularly those associates who are at the lower end of the pay scale — are covered and taken care of in terms of future retirement,” Mr. Dunlop said.
Health systems can't have knee-jerk reactions to the whims of the markets, he said. In 2008 and 2009, pension funds across the country were hammered as the recession unfolded. This year, the markets are trading at all-time highs.
“You cannot be impacted or react too much to what may happen year over year as it relates to … equity performance,” Mr. Dunlop said. “We spend a lot of time with our investment manager to make sure our asset allocation lines up with the long-term goals of the plan. The last thing you want to do with a pension plan is change your strategy based on the market year over year.”
S&P's Mr. Gacka said health system management teams are aware of high pension costs, but an underfunded pension alone is unlikely to lead to an immediate credit rating change — especially as systems grapple with the more immediate reimbursement declines and shifting payment models.
Bob Herman writes for Modern Healthcare, a sister publication of Business Insurance.