Sweeney adds that an uptick in the discount rate will not provide immediate relief to organizations with underfunded pension plans. "If the discount factor trends up, it will immediately improve the measure that we call funded status. … However, the required contributions to a pension plan are based on a set of calculations that includes a number of smoothing mechanisms for both the discount rate and the assets, so there may not be an immediate reduction in funding requirements for pension plans, even if the discount rate starts to rise."
Defined benefit plans
One of the largest healthcare institutions with a defined benefit plan is Johns Hopkins Medicine in Baltimore, a $6.7 billion integrated global health enterprise that includes the six-hospital Johns Hopkins Health System.
"Every five years we've done an analysis to see if we should stay in the defined benefit plan," says Pamela Paulk, senior vice president for human resources at Johns Hopkins Health System and Johns Hopkins Medicine.
The institution's leaders have based their periodic plan review on market activity, their competitors' retirement offerings, and what is best in terms of recruitment and retention, Paulk says. So far, Johns Hopkins has stayed with the defined benefit plan, despite the precariousness of the markets and the low discount rate because the organization is large enough to generally withstand the financial pressure.
"The negative is the volatility with funding that might change from year to year because it's driven by the discount rate," she says. "We make sizable contributions to our plan every year anyway, but we've had to make higher contributions than we expected, than we budgeted for, to make up for the discount rate. It's the discount rate that really kills you. But we've been able to absorb it, and our plans are well funded."
Johns Hopkins is again in the process of reviewing its benefit plan structure, and Paulk is not sure which way the decision will go this time. Most healthcare organizations in its market have moved to defined contribution plans, she says, and the traditional defined benefit pension is not as important for recruiting new staff as it once was. However, making the cultural shift required to let go of the current plan is not easy.