May 22—As defined pension liabilities and their funding requirements become a substantial financial challenge, not-for-profit hospitals have been pursuing various strategies for mitigating credit risk, according to a report from Moody’s Investors Service. Strategies range from freezing a defined benefit pension plan and moving to a defined contribution plan to terminating a pension plan entirely.

About 72 percent of the 460 not-for-profit hospitals that Moody’s rates offer defined benefit pension plans to their employees, according to the report Top Seven Not-for-Profit Hospital Risk Mitigation Strategies for Rising Pension Burdens. Pensions remain an important benefit for hospitals in attracting and retaining staff, especially in competitive markets, and many hospitals are implementing risk-reduction steps gradually over time, Moody’s says. A hospital's ability to plan and execute a long-term strategy that mitigates fiscal risk is a credit positive.

The most common strategy of mitigating credit risk—switching to a defined contribution plan—curtails expenses and liabilities, but is done at the risk of increasing employee dissatisfaction and turnover, Moody’s says. Other strategies include increasing voluntary employer cash contributions to a plan, offering a hybrid retirement plan, introducing structural modifications to an active plan, or changing the investment allocation of pension assets. More dramatic steps have included issuing pension funding bonds or private placement borrowing, or terminating the plans entirely, according to the report.

Publication Date: Wednesday, May 22, 2013