Nonprofit hospitals and health systems were able to improve the funded status of their pension plans last year, as providers slowly work their way back to pre-recession levels, according to a report from Standard & Poor's Ratings Services.
S&P looked at pension data for 172 hospitals and health systems in its rated portfolio, most of which had their fiscal years end last September or June. The agency found the median pension funded status in 2013 was 80 percent — meaning for the average health system, its pension plan's assets were able to cover 80 percent of the benefits earned by its employees. Companies obviously strive to have their pensions fully funded, or at 100 percent.
The 80 percent figure was significantly higher than 2012, when the pension funded status at nonprofit hospitals was only 69.2 percent. The measure was still down from 2007, before the financial collapse, when hospitals had 90 percent of their pension plans funded.
S&P analysts said hospitals and health systems were able to improve their defined benefit plans mostly due to "higher discount rates and stronger asset values." The discount rate in 2013 was 4.9 percent, compared with 4.2 percent in 2012 and 6.3 percent in 2007. High discount rates equate to lower pension liabilities for companies.
However, S&P does not view the improved pension funded statuses as an opportunity for health systems to become carefree.
"Despite the rebound in funding levels and the longer-term implications for lower cash contributions to the plans, many hospitals are not ready to exhale yet," S&P credit analyst Liz Sweeney said in the report. "That's because pension plan valuations remain volatile and subject to numerous actuarial assumptions and market fluctuations that sponsors have limited control over."
Defined benefit pension plans are also becoming a thing of the past in many companies, especially hospitals. Most are freezing DB plans, or have already frozen them, and are shifting to defined contribution plans, which puts the investment risk on the employee.
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