A solid majority of non-profit hospitals in the United States offer defined benefit pension plans to their employees, and those pension liabilities are creating huge financial hurdles for hospital executive teams to manage, according to a new report from Moody's Investors Service.
DB pensions, in which an organization is responsible for both contributing and investing funds, are a dying breed among many companies today. Many have switched to defined contribution plans, which put more of the investment and funding onus on the employee. However, Moody's said 72 percent of its 460 non-profit hospitals it rates offer DB pension plans.
As pension obligations have mounted, hospitals have turned to several strategies to mitigate those pension risks. Moody's analysts outlined seven particular strategies that non-profit hospitals are engaging most right now.
1. Freeze the DB pension plan, and transition employees to a DC plan. Moving to a DC plan minimizes expenses and liabilities, and it also frees up hospital capital for other investments. However, Moody's analysts said this strategy may negatively impact employee satisfaction and result in higher turnover.
2. Increase voluntary employer cash contributions to the plan. Injecting more cash helps maintain a hospital's pension plan funding level and could be more feasible today, as many hospitals have higher-than-normal amounts of cash on hand. However, bigger pension cash contributions come at the expense of lower liquidity.
3. Offer a hybrid retirement plan. Cash balance plans, which have elements of both DB and DC plans, have been utilized in many hospitals and health systems and reduce the volatility associated with investments.
4. Introduce structural modifications to an active plan. Some hospitals have made changes to their DB plan formulas by increasing the number of years of pay, raising the age when employees are eligible to retire or reducing overtime and bonus pay.
5. Change investment allocation of pension assets. Some hospitals and health systems are hedging against interest rate risk by using alternative investment strategies, such as a liability-driven investment.
6. Issue pension funding bonds or private placement borrowing to fund the plan. States and local governments commonly issue debt to fund their pension liabilities, but when it comes to the healthcare sector, usually this option is reserved for larger health systems with positive credit ratings. Rochester, Minn.-based Mayo Clinic and Boston-based Partners HealthCare, for example, have implemented this strategy in the past few years.
7. Terminate the DB plan. This strategy is usually a last resort, as closing a DB plan requires all benefits to be paid out. It can be costly, and according to the report, "terminating a plan can also create a contentious labor environment, particularly for unionized employees, making it a very difficult strategy to implement."
DB pensions, in which an organization is responsible for both contributing and investing funds, are a dying breed among many companies today. Many have switched to defined contribution plans, which put more of the investment and funding onus on the employee. However, Moody's said 72 percent of its 460 non-profit hospitals it rates offer DB pension plans.As pension obligations have mounted, hospitals have turned to several strategies to mitigate those pension risks. Moody's analysts outlined seven particular strategies that non-profit hospitals are engaging most right now.
1. Freeze the DB pension plan, and transition employees to a DC plan. Moving to a DC plan minimizes expenses and liabilities, and it also frees up hospital capital for other investments. However, Moody's analysts said this strategy may negatively impact employee satisfaction and result in higher turnover.
2. Increase voluntary employer cash contributions to the plan. Injecting more cash helps maintain a hospital's pension plan funding level and could be more feasible today, as many hospitals have higher-than-normal amounts of cash on hand. However, bigger pension cash contributions come at the expense of lower liquidity.
3. Offer a hybrid retirement plan. Cash balance plans, which have elements of both DB and DC plans, have been utilized in many hospitals and health systems and reduce the volatility associated with investments.
4. Introduce structural modifications to an active plan. Some hospitals have made changes to their DB plan formulas by increasing the number of years of pay, raising the age when employees are eligible to retire or reducing overtime and bonus pay.
5. Change investment allocation of pension assets. Some hospitals and health systems are hedging against interest rate risk by using alternative investment strategies, such as a liability-driven investment.
6. Issue pension funding bonds or private placement borrowing to fund the plan. States and local governments commonly issue debt to fund their pension liabilities, but when it comes to the healthcare sector, usually this option is reserved for larger health systems with positive credit ratings. Rochester, Minn.-based Mayo Clinic and Boston-based Partners HealthCare, for example, have implemented this strategy in the past few years.
7. Terminate the DB plan. This strategy is usually a last resort, as closing a DB plan requires all benefits to be paid out. It can be costly, and according to the report, "terminating a plan can also create a contentious labor environment, particularly for unionized employees, making it a very difficult strategy to implement."
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