Health-care 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 pension funds, which puts pressure on margins for those systems, and makes it more difficult for health-care leaders to invest in their operations.
The combined obligations of the nation's 50 largest not-for-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 pension plans, the unfunded liabilities of the 50 plans rose to 19% from 14% 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 fund 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 2½ years, respectively, since the last actuarial adjustments were made in 2000. While hospital officials have made some revisions over the intervening 15 years, 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 bad news, 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,” Mr. 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 funds is the persistent low-interest-rate environment created by the Federal Reserve, which is lowering the discount rates that pension 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 senior citizens who are living longer, have contributed to the deterioration in pension plan funding. The median health system pension fund had enough assets 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 funds.
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 pension fund.
The Mayo Clinic poured $410 million into the Rochester, Minn.-based system's $7.4 billion pension fund, but ended the year with 89% of the cash needed to meet that obligation. The clinic froze entry into the pension fund 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 pension plan in 2013 by $342 million. Mayo Clinic has struggled to fund its pension plan in recent years, even using debt to finance the plan.
Analysts see Mayo's pension fund as a possible risk to its financial strength. Mayo has borrowed $1.2 billion since 2010, in part to fund its pension plan, 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 previous year at 86%. Mr. 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 Guaranty Corp., which insures most private employers' pension funds.
The system invested $63 million in its pension fund 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,” Mr. Nevola said. That changes with regulations, interest rates and demographics.
Kaiser Permanente, which has the largest not-for-profit health system pension fund, 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 pension obligations need more cash to catch up, Moody's said earlier this year.