WASHINGTON, May 21 (Reuters) - The pension gap at U.S. not-for-profit hospitals is growing, according to a Moody’s Investors Service report released on Tuesday that found the low interest rate environment is contributing to the shortfall.
Moody’s said that in aggregate, the 331 not-for-profit hospitals it rates with pension plans projected $103 billion of future benefit obligations and had only $80 billion in plan assets in fiscal 2011. Data is not available yet for fiscal 2012, which ended for many places last summer.
“Prior to the 2008 financial crisis, and the ensuing period of volatile equity returns, many hospital pension plans were relatively well-funded,” Moody’s found. “Despite better investment returns in recent years, persistently low interest rates have increased the present value of future pension obligations for plans.”
For many not-for-profit hospitals, which serve low-income communities, poor retirement funding is colliding with other troubles. As more patients rely on the hospitals as a result of the 2007-09 recession, the federal government is changing how they are reimbursed under the new healthcare law. The financial squeeze could make it hard for the hospitals to fulfill retirement promises made to employees while also paying operational costs.
Pensions use “discount rates” to value their future liabilities, and the rates reflect the investment returns the plans anticipate in coming years. As a pension plan’s discount rate shrinks, its liability swells. In turn, the amount of money the hospital must contribute annually to the plan also rises.
Accounting rules require that hospital pensions base their discount rates on high-quality corporate bond yields, which have generally been low of late.
For fiscal 2012, the median discount rate likely fell to 4 percent from 5.2 percent the previous year, Moody’s said. The median unfunded liability - how much the pension is short - then likely grew by nearly $10 million to around $65 million.
Pensions are supported by three revenue sources: investment returns, employer contributions and employee contributions. Because investment returns provide the largest amount of funding, the financial crisis is usually blamed for public pension problems.
Recently, some hospitals have taken steps such as freezing pension plans, putting more cash into the retirement system, borrowing, or changing pension investments to address gaps - all strategies that pose some risk, Moody’s said. A few have terminated their plans and paid out all benefits to employees in lump sums or annuities.
Of the hospital pensions it rates, Moody’s said Duke University Health System had the best-funded ratio - the projected future obligations less the value of plan assets - at 115 percent of the funded ratio. Northwestern Memorial Hospital in Illinois followed with a pension that was 110 percent. The lowest-funded pension was at St. Mary’s Hospital in Connecticut, at 41 percent, followed by the Catholic Health System in New York, at 45 percent.