Pension Plans Spell Trouble for Nonprofit Hospitals
"Corporate America has been getting out of the defined benefit plan space ever since the tech crash when there was a drop in interest rates and a drop in asset value in the early 2000s. Corporate America did not want to be in a structure where they didn't know what their contribution would be every year. So they froze DB plans and moved to a 401(k) structure… The difference is they know the employee is bearing the risk in the 401(k), not them."
"I think for the most part, hospitals didn't move away from DB plans in 2001 and 2002 when Corporate America did because their business models were not impacted… What I would say is that probably the biggest thing causing the move away from DB plans is the combination of the uncertainty around the cost of the plans and the uncertainty of the business model moving forward," Pierce says.
Hospital executives are smart to examine their options for altering their defined benefit pension plans. While having an underfunded plan is not necessarily a nail in the coffin for a hospital's credit rating, it can potentially have a negative credit impact and leaves an organization vulnerable to the volatile nature of discount rates.
Finding a strategy to restructure a DB plan to make it a more predictable expense can help hospitals and health systems avoid future budgetary shortfalls.
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