S&P Implies Hospital Pensions Are Not a Problem -- I'll Be the Judge

I read two excellent articles on the same topic recently. Both Rebecca Moore for Plan Sponsor and Jack O'Brien for Health Leaders Media wrote about an S&P study that implied that pensions are not a problem for not-for-profit hospitals in the US. I found the different perspectives interesting as Rebecca is a retirement plan journalist who was covering a hospital retirement issue while Jack is a hospital journalist who was covering a retirement issue with regard to hospitals.

In summary, here is what I learned:

• The U.S. not-for-profit health care sector has benefited from an increase in the median funded status of its pension plans in fiscal 2018—increasing from 80.6% to 85%, according to S&P Global Ratings;
• S&P measures the underlying pension liabilities using a "conservative municipal bond rate;"
• S&P applauded that many hospitals have focused on de-risking liabilities;
• S&P views the following as positive with respect to hospital pensions:
• Full funded status;
• Any sort of de-risking; and 
• No pension plan at all.

I'm not going to spend a lot of time dissecting what S&P thinks is good. As a firm, they employ many excellent economists while my formal economic training is quite sparse. But, I'd be remiss if I did not comment on the use of municipal bond rates. While they are not far from the measures typically used for corporate pension plans, I'm not sure how movement in yields on municipal bonds should affect the measurement of obligations in hospital pensions.

Let's return to the initial premise that being that hospital pensions are well-managed (I said not a problem in my title, but the words that were actually used were well-managed). Are they? Is 85% a good funded status? Are the hospitals managing frictional overhead costs? Is de-risking the right approach for a plan that is 85% funded? If so, which type(s) of de-risking should they be using?

While it's not the case for all of them, the majority of hospital pension plans are either [hard] frozen or they are soft frozen (no new entrants). This implies that the goal is to eventually terminate those plans. A plan that is 85% funded cannot be terminated. In fact, generally speaking, a plan that is 100% funded on the basis that S&P uses cannot be terminated (annuities have some level of built-in costs as compared to a traditional actuarial measurement of pension obligations). 

Getting from 85% funded to just a bit more than 100% funded is a tall task. There are a number of ways to make progress on this, some passive and some active. They include watching discount rates increase, investing more aggressively (and hoping that produces better returns), contributing more money to the plan, and cutting the overhead costs of the plan.

Let's attack those in order.

Unless a hospital has more control over the economy than I think it does, it cannot affect the yields on municipal bonds.

Investing more aggressively works well when it works well meaning that if you can beat your bogie, you improve your funded status and get closer to being able to terminate the plan.

Contributing more money to a plan is an easy concept. All it requires is having money to contribute. In 2019, hospitals, generally speaking, don't seem to have that kind of money laying around. On the other hand, hospitals do have lots of assets many of them not pulling as much weight as they might were they re-deployed into the hospital pension plan. I have some ideas in this vein, and would be happy to tell you about them.

Finally, for the last three years, October Three has published a report on PBGC premiums. The report has found that hospitals, compared to any other industry, are consistently paying more in needless PBGC premiums than any other industry. In other words, there are techniques available to them to lower those premiums that as a group, they are not using.

So, with all due respect to S&P, the judge has ruled. Hospital pension are a problem and generally speaking, hospitals are not managing those pensions well. The judge thinks those hospitals should contact him.