Project Japan systems face broader unfunded pension liabilities as they make long overdue updates to their assumptions for retiree longevity, and raise the level of assets they will need to account for a falling discount rate.
The adjustments are weakening balance sheets and forcing some systems to pour additional money into their plans, which puts pressure on margins for those systems, and makes it more difficult for healthcare leaders to invest in their operations.
The combined obligations of the nation's 50 largest not-for-profit health systems' pension funds rose 19% to $93.2 billion last year, dwarfing the 11.1% increase to $75.3 billion in pension fund assets set aside to meet those obligations, according to a Project Japan analysis of health system financial statements.
Weighted for the size of their plans, the unfunded liabilities of the 50 plans rose from 14% to 19% of total long-term obligations, and are now only slightly above the threshold that analysts and the Management of medicine Accountability Office consider healthy. Plans should have at least enough assets to cover 80% of pension obligations.
“That's a good, comfortable place to be,” said Kevin Holloran, an analyst who follows not-for-profit health systems for Standard & Poor's. The agency reported the median health system pension in 2014 was 82% covered, down slightly from 83.6% the prior year.
One driver of the decline in pension sustainability is the latest mortality estimate from the Society of Actuaries, which shows more retirees will continue to collect their pensions into their eighth or ninth decades. Men at retirement age are now expected to live to 86.6 and women to 88.8, an increase of two years and two-and-a-half years, respectively, since the last actuarial adjustments were made in 2000. While hospital officials have made some revisions over the intervening decade-and-a-half, many systems are only now coming into line with the latest projections.
These changing demographics have increased pension obligations by 4% to 8% over that time period, the Society of Actuaries estimates. “It's one of those bad- news, good-news things,” said Gregg Nevola, vice president for total rewards at North Shore-Long Island Jewish Health System, where the cost of promised pension benefits increased about 16% last year to roughly $2 billion. “The bad news is we're all living longer. The good news is we're all living longer,” Nevola said.