PensionsJune 26, 2020

Nonprofit Hospitals’ Pension Funded Status Could Weaken After COVID Relief

The CARES Act has given many health care pension funds short-term relief, but that could result in lower funded ratios, says S&P.

Reported by Sarah Min

Funded ratios for nonprofit hospital pension funds ended the last fiscal year mostly unscathed. But leaders at the typically stable plans will have to worry about how much market volatility will add pressure and dampen future funded status.

The median funded status for nonprofit hospital pension plans dropped to 83% in fiscal year 2019, one percentage point off from the previous 84%, according to a Thursday report from S&P Global Ratings. A lower discount rate slightly increased liabilities.

But trouble is ahead. Added pressure from continued market volatility will drive many hospital providers to rely on the Coronavirus Aid, Relief, and Economic Security (CARES) Act for near-term liquidity. This measure allows single employer plans to have pension funding holidays during the 2020 calendar year. That could undermine the retirement systems.

“We note that many providers are taking advantage of this provision to achieve near operating and liquidity relief,” analysts wrote. “However, we expect this to result in weaker future funded ratios and will assess this impact on a case-by-case basis.”

Hospitals and other health systems are under great financial pressure due to the demands of treating COVID-19, according to a report by the American Hospital Association. The costs of caring for coronavirus patients, a number of them uninsured, plus spending for extra equipment, personal protective measures, and dealing with staff needs such as child care are mounting, the trade group noted. In addition, non-virus-related care has been postponed, reducing revenue.

After the last financial crisis, the funded status for not-for-profit systems tumbled to 70% through 2012, down 20 percentage points from 2009 despite healthy contributions, according to the report.

But nonprofit hospital systems are generally considered good managers of their pension funds. Among the highest-funded plans, Columbus Regional Healthcare System in North Carolina and El Camino Hospital in California, funded ratios are 129% and 119%, respectively.

Nonprofit hospitals typically plan for longer investment horizons, unliked for-profit systems that worry about generating quarterly returns for shareholders. The shorter investment horizon typically means for-profit systems include more fixed income in their portfolios.

Many hospital systems are slowly moving to de-risk plans, including converting them to defined contribution (DC) plans, though the current downturn will pose challenges for that.

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