Some systems freeze/cut back pensions because of recession: analysis
Some hospitals, systems freeze defined-benefit plans
Pension plans, a retirement benefit on the decline for decades, are growing even less common at hospitals and health systems since the recession began. More healthcare employers have moved to scale back or freeze pensions that promise workers an income upon retirement—known as defined-benefit plans—after volatile markets sharply drained cash reserves to fund the benefits during the sharp economic slide of late 2008 and early 2009, according to ratings agencies and industry executives.
The shift, though not widespread, underscores the rising scrutiny on retirement benefits and pension investment portfolios after defined-benefit plans compounded stress hospital and health system balance sheets experienced from shaky credit markets and the economic downturn, said healthcare finance and benefit experts.
“We’re hearing more hospitals talking about plan design changes than we did before the credit crisis,” said Liz Sweeney, director of healthcare ratings for Standard & Poor’s, but added that fewer than 10% of hospitals and health systems rated by Standard & Poor’s have no defined benefit pension plan.
Nonetheless, more are moving to discontinue such benefits.
One of the nation’s largest Catholic health systems, Catholic Health East will freeze the benefit in 2011 and instead offer newly hired workers a cash payment toward retirement, said Moody’s Investors Service. Another system, MedStar Health, which owns eight hospitals in the District of Columbia and Maryland, froze its pension in January for nonunion employees, Standard & Poor’s reported.
A survey of 23 hospitals and health systems by Standard & Poor’s, published earlier this month, found seven made “significant modifications” to plans in 2009 from the prior year and the median pension fund shortfall skyrocketed to $210 million from $57 million during the same period.
Catholic Health East’s decision to freeze its defined benefit plan was one factor that helped the 23-hospital system hold onto its A1 credit rating on $1.2 billion in March despite continued operating losses, Moody’s Investors Service said.
“Larger-than-anticipated” pension costs were one factor that led the Newtown Square, Pa.-based system to end its fiscal year—Dec. 31—with a $17 million operating loss rather than a projected $30 million gain, according to Moody’s.
Catholic Health East, which did not respond to requests for comment, poured $76 million into its pension fund last year, more than double its $32 million contribution in 2008, the ratings agency said.
MedStar Health cut its projected pension costs by $31.7 million when it froze its pension for nonunion employees in January, S&P noted in its report earlier this month. The system declined to comment.
Hospitals and health systems will likely put more cash into pensions in coming years to offset losses during the market plunge, S&P’s analysts said. The median pension finished fiscal 2009 with enough assets to meet 68.6% of projected pension obligations compared with 82.9% the prior fiscal year, according to the ratings agency analysis of available financial statements for 111 and 252 not-for-profit hospitals and health systems in 2009 and 2008, respectively (See chart, this page).
Analysts also reported more healthcare employers with pensions will likely “curtail benefits, shut out new entrants or undergo other types of benefit restructuring.”
In Maumee, Ohio, St. Luke’s Hospital froze its defined benefit plan and replaced it with yearly retirement contributions in January after the markets’ dive left the pension fund short $51 million by the end of its fiscal year on Dec. 31, 2008.
“It just crashed,” said Daniel Wakeman, president and CEO of the 198-bed hospital. One year before, the pension had enough
Fry, left, says Sutter Health moved $505 million from cash reserves to its pension fund. St. Luke’s Wakeman, says its pension “just crashed.”