Longer lives, fall­ing rates put pres­sure on hos­pi­tal pen­sion plans

Modern Healthcare - - NEWS - By Me­lanie Evans

Healthcare sys­tems face broader un­funded pen­sion li­a­bil­i­ties as they make long over­due up­dates to their as­sump­tions for re­tiree longevity, and raise the level of as­sets they will need to ac­count for a fall­ing dis­count rate.

The ad­just­ments are weak­en­ing bal­ance sheets and forc­ing some sys­tems to pour ad­di­tional money into their plans, which puts pres­sure on mar­gins for those sys­tems, and makes it more dif­fi­cult for healthcare lead­ers to in­vest in their oper­a­tions.

The com­bined obli­ga­tions of the na­tion’s 50 largest not­for-profit health sys­tems’ pen­sion funds rose 19% to $93.2 bil­lion last year, dwarf­ing the 11.1% in­crease to $75.3 bil­lion in pen­sion fund as­sets set aside to meet those obli­ga­tions, ac­cord­ing to a Mod­ern Healthcare anal­y­sis of health sys­tem fi­nan­cial state­ments.

Weighted for the size of their plans, the un­funded li­a­bil­i­ties of the 50 plans rose from 14% to 19% of to­tal long-term obli­ga­tions, and are now only slightly above the thresh­old that an­a­lysts and the Gov­ern­ment Ac­count­abil­ity Of­fice con­sider healthy. Plans should have at least enough as­sets to cover 80% of pen­sion obli­ga­tions.

“That’s a good, com­fort­able place to be,” said Kevin Hol­lo­ran, an an­a­lyst who fol­lows not-for-profit health sys­tems for Stan­dard & Poor’s. The agency re­ported the me­dian health sys­tem pen­sion in 2014 was 82% cov­ered, down slightly from 83.6% the prior year.

One driver of the de­cline in pen­sion sus­tain­abil­ity is the latest mor­tal­ity es­ti­mate from the So­ci­ety of Ac­tu­ar­ies, which shows more re­tirees will con­tinue to col­lect their pen­sions into their eighth or ninth decades. Men at re­tire­ment age are now ex­pected to live to 86.6 and women to 88.8, an in­crease of two years and two-and-a-half years, re­spec­tively, since the last ac­tu­ar­ial ad­just­ments were made in 2000. While hos­pi­tal of­fi­cials have made some re­vi­sions over the in­ter­ven­ing decade-and-a-half, many sys­tems are only now com­ing into line with the latest pro­jec­tions.

These chang­ing de­mo­graph­ics have in­creased pen­sion obli­ga­tions by 4% to 8% over that time pe­riod, the So­ci­ety of Ac­tu­ar­ies es­ti­mates. “It’s one of those bad­news, good-news things,” said Gregg Nevola, vice pres­i­dent for to­tal re­wards at North Shore-Long Is­land Jewish Health Sys­tem, where the cost of promised pen­sion ben­e­fits in­creased about 16% last year to roughly $2 bil­lion. “The bad news is we’re all liv­ing longer. The good news is we’re all liv­ing longer,” Nevola said.

The up­date was over­due and ex­pected, but still sur­pris­ing since the in­creased longevity was larger than an­tic­i­pated. “That’s what’s tak­ing the whole world by sur­prise,” said Lisa Schilling, a fel­low of the So­ci­ety of Ac­tu­ar­ies.

The other ma­jor prob­lem for pen­sion plans is the per­sis­tent low in­ter­est rate en­vi­ron­ment cre­ated by the Fed­eral Re­serve, which is low­er­ing the dis­count rates that plans use to de­ter­mine what they must have in­vested now to cover fu­ture costs. Last year, the dis­count rates used for pen­sion cal­cu­la­tions dropped sharply to about 4% from about 5%, ac­cord­ing to health sys­tem fi­nan­cial state­ments. Such a drop can boost pen­sion li­a­bil­i­ties by up to 15%, ac­cord­ing to ac­tu­ar­ies.

Those low rates, com­bined with se­niors who are liv­ing longer, have con­trib­uted to the de­te­ri­o­ra­tion in pen­sion-plan fund­ing. The me­dian health sys­tem pen­sion had enough as­sets

Some largest of and the best- na­tion’s funded sys­tems are pour­ing more money into their plans as they watch their once fully funded pen­sion funds dip into the red.

in 2014 to cover 84% of promised ben­e­fits, com­pared with 88% the prior year, ac­cord­ing to Mod­ern Healthcare’s anal­y­sis of the 50 largest not-for-profit health sys­tems’ pen­sion plans.

Those with the steep­est rate drops had mixed re­sponses to draw­ing on cash to fund pen­sions. Fed­eral law re­quires pri­vate-em­ployer pen­sion plans to make an­nual pay­ments to ad­dress pen­sion short­falls, but gives plans sev­eral years to ad­just. Plans af­fil­i­ated with re­li­gious or­ga­ni­za­tions are ex­empt.

Some of the na­tion’s largest and best-funded sys­tems are pour­ing more money into their plans as they watch their once fully funded pen­sion plans dip into the red. Sut­ter Health, based in Sacra­mento, Calif., ended last year short $128 mil­lion—about 96% of what it needed—even af­ter putting another $240 mil­lion into its plan.

The year be­fore, the pen­sion plan had $71 mil­lion more than nec­es­sary, or 118% of the amount promised un­der its pen­sions. New mor­tal­ity es­ti­mates were “def­i­nitely a fac­tor” in the latest cash in­fu­sion, said Bill Glee­son, a Sut­ter Health’s spokesman.

The Mayo Clinic poured $410 mil­lion into the Rochester, Minn.-based sys­tem’s $7.4 bil­lion pen­sion plan, but ended the year with 89% of the cash needed to meet that obli­ga­tion. The clinic froze en­try into the pen­sion plan this year.

Last year’s $797 mil­lion short­fall oc­curred in part be­cause of the new mor­tal­ity ta­bles. It is a set­back af­ter Mayo over­funded the plan in 2013 by $342 mil­lion. Mayo Clinic has strug­gled to fund its pen­sion in re­cent years, even us­ing debt to fi­nance the plan.

An­a­lysts see Mayo’s pen­sion plan as a pos­si­ble risk to its fi­nan­cial strength. Mayo has bor­rowed $1.2 bil­lion since 2010, in part to fund its pen­sion, ac­cord­ing to Moody’s In­vestors Ser­vice. Mayo’s pen­sion port­fo­lio re­turned $427 mil­lion last year, a de­cline of 45% from $771 mil­lion the pre­vi­ous year.

North Shore-LIJ ended 2014 with 72% of promised pen­sion pay­outs cov­ered by pen­sion sav­ings, af­ter clos­ing the previ- ous year at 86%. Nevola said the sys­tem of­fered em­ploy­ees the op­por­tu­nity to exit pen­sion plans for a lump sum last year to re­duce its pen­sion li­a­bil­ity, in part be­cause of the new mor­tal­ity es­ti­mates, as well as low in­ter­est rates and in­creas­ingly ex­pen­sive premi­ums paid to the Pen­sion Ben­e­fit Guar­an­tee Corp., which in­sures most pri­vate em­ploy­ers’ pen­sion plans.

The sys­tem in­vested $63 mil­lion in its pen­sion last year, com­pared with $160 mil­lion the prior year. It’s too soon to say how that will change for 2015. “It’s ob­vi­ously very dif­fi­cult and chal­leng­ing to know what the fund­ing is go­ing to be year to year,” Nevola said. That changes with reg­u­la­tions, in­ter­est rates and de­mo­graph­ics.

Kaiser Per­ma­nente, which has the largest not-for-profit health sys­tem pen­sion, has the most poorly funded pen­sion plan, ac­cord­ing to the Mod­ern Healthcare anal­y­sis, and suf­fered one of the steep­est drops year over year. The sys­tem ended last year able to cover only 57% of its $16.4 bil­lion in long-term pen­sion obli­ga­tions.

Kaiser of­fi­cials cited the sys­tem’s large work­force and its will­ing­ness to con­tinue of­fer­ing pen­sions to new em­ploy­ees. “The un­funded per­cent­age is in line with other open and ac­tive plans,” said spokesman Ted Carr. “As with other pen­sion plans across Amer­ica, our fu­ture obli­ga­tions con­tinue to grow, and we are work­ing hard to man­age those.”

The com­ing year should see even more health sys­tems grap­pling with higher pen­sion obli­ga­tions, be­cause some waited to change their longevity es­ti­mates. Some have fis­cal years that end in June and were un­able to make the switch, said Lisa Martin, a Moody’s In­vestors Ser­vice an­a­lyst who cov­ers the not-for-profit hos­pi­tal sec­tor. The new stress could strain health sys­tems’ abil­ity to bor­row and their mar­gins. Sys­tems that have larger li­a­bil­i­ties from un­funded pen­sions need more cash to catch up, Moody’s said ear­lier this year.

In Wis­con­sin, Aurora Health Care ended the year with a big­ger gap be­tween its pen­sion as­sets and the pro­jected cost of promised pen­sion ben­e­fits, thanks to the lower in­ter­est rates and the ac­tu­ar­ies’ new mor­tal­ity as­sump­tions. The sys­tem’s pen­sion plan at the end of the year was funded to cover 88% of pen­sion obli­ga­tions, down from 92% the prior year.

Aurora Health Care has moved to ad­just its pen­sion in­vest­ment strat­egy to bet­ter hedge against in­ter­est rate volatil­ity, though the move will re­quire it to in­vest more cash up­front to fund the pen­sion plan, said Steve Huser, se­nior vice pres­i­dent of trea­sury ser­vice for the sys­tem. Aurora low­ered its es­ti­mated long-term rate of re­turn to 6.25% from 7.5%.

Only 16 of the 50 large sys­tems in the Mod­ern Healthcare sur­vey have low­ered their long-term pro­jected rates of re­turn, which also raises the re­quired as­set lev­els needed to meet long-term obli­ga­tions. As a group, when ad­justed for plan as­sets, the long-term pro­jec­tions were un­changed.

Aurora is low­er­ing its ex­pec­ta­tions in an­tic­i­pa­tion of in­vest­ments not per­form­ing as well as they have his­tor­i­cally in com­ing years. “The mar­ket is what it is, and ac­tive man­agers have a dif­fi­cult time,” Huser said. “It’s a very dif­fi­cult time to be in­vest­ing.”

Pen­sion prob­lems

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