Funding Conundrum

Ramsey says funding problems are not the sole reason the hospital closed its defined benefit plan. Younger employees, he says, just aren't as interested in pension plans. "The generation that we are hiring now wants something that is portable." Our Lady of the Lake Regional Medical Center's pension plan is projected to live on until approximately 2054. But Ramsey says the hospital's investment committee has not changed the pension plan's asset allocation model despite the upheaval in the market. "We evaluated it. So far, we have not really changed our asset allocation model because it was set up for 30 or 40 years from now."

Liability linkages
Investment experts concede that hospitals must start evaluating their pension needs in the context of the organization's entire financial picture. "Prior to the last couple years, most sponsors and consultants just looked at the investments in a vacuum," says Carabell. The biggest mistake a hospital can make is evaluating the pension assets on a total return basis without understanding the linkages to liabilities and the financials, he adds.

Along these lines, a new concept that has come into play is liability-driven investing. LDI was introduced to address the volatility in a pension plan portfolio, says William M. Courson, president of Lancaster Pollard Investment Advisory Group in Columbus, OH. More CFOs are asking questions about how to mitigate risk, he says. "They are now looking at each investment pool as being unique, knowing full well they could tolerate a little bit more volatility in a foundation or a hospital portfolio; but with the pension side, they want to begin to find ways to mitigate volatility within the portfolio."

Carabell says LDI involves designing investment programs to better match the cash flow of the liabilities. This is done through the fixed income investment portfolio, he says. Still, he isn't seeing a mass wave of plan closures or freezes as one could expect. For now, he observes, the percentage of closings and freezings is lower in the nonprofit healthcare space.

—Michelle Ponte

The Pension Protection Act of 2006, along with FAS 158 and the poor investment returns last year, has many hospitals looking for ways to reduce the liabilities associated with their pension plans. Freezing a plan, which means it stops accruing, is one way to do this. Here are three steps organizations should consider as they freeze their pension plan.

Evaluate goals: Prior to freezing, the goal of most plans is to maximize returns. Priorities typically change after a plan is frozen, and so should investment strategy.

Understand the liability and other key pension metrics: While accounting and regulatory changes have made it easier to accurately measure pension plan costs, remember that there are still numerous methods in determining a plan's funded position.

Use asset/liability modeling to identify an optimal investment strategy: This involves a look at the plan's total returns versus its liabilities.

Source: "A Road Map for Effectively Managing a Frozen Pension Plan," Bank of America.