Dealing with the costs and operation of hospital pensions


Many hospitals have pension plans one variety or another however managing. Pensions can become a complex financial task. That many hospitals are not equipped to address internally joining me today. John lull a partner actuary at october three consulting and an expert in benefit and compensation issues with a particular focus on retirement benefits. John is here to help us understand more about how to deal with the costs and operation of hospital. Pensions john. welcome to the show. Thanks very much mike. I'm really happy to be here. I know this problem. We seems like an unusual topic for you and your listeners. But i think we're gonna make the connection for them quite well. Yes is sort of the other side of the house when it comes to ospital finance. It's not necessarily the revenue side. But just as important. So i'm really looking forward to the discussion. John let me start off. Many hospitals still have pension plans. And they come in two varieties as you explained it to me ongoing plans and frozen plans first. Let's talk about hospitals that have an ongoing plan as these are more rare these days What benefits would they get from continuing to maintain a plan. And how can they afford to run them. Mike what you say is absolutely true. They'll probably at this point only about two to three hundred remaining ongoing hospital pension plans left. That said those hospitals have them for the most part doing well financially and they're fully committed to continuing them if they were going to freeze them or completely get rid of them by now They would have done that already. So the ones that are left really have made a commitment to continue them. why. I think what we've learned. Is they see them. As a competitive advantage particularly from a human resources perspective it gives them somewhat of an edge in recruiting talent and in retaining talent and may simply view the cost of those plans as part of their total labor costs so some of them might choose to reduce labor costs in ways to compensate but a number of them have looked at this issue fairly carefully and they say that by decreasing unwanted turnover more than make up for the costs of the pensions and when they design them carefully. He's plans give them an opportunity to have what. A few of our clients are calling supercharged for a one ks. So let me explain that. With an example if for example you are recruiting a new head of. Let's say orthopedic surgery and you tell that person they can have something like their current 401k. But with the deferral women which right now is around twenty thousand dollars that might be five times as large or even ten times as large as it is. Currently that has a lot of value to them so put differently rather than being able to save twenty thousand dollars on a tax favored basis. They can save two hundred thousand dollars a year on a tax basis. That really does have a lot of value would add value to them that they just can't get in other places another issue that's bothered hostile. Finance cheats about pension plans is the cost volatility. But frankly that can be controlled and in fact by the twenty twenties it should be controlled through plan design. That's great so let's talk about the other scenario Which are plans to their frozen. What are some of the issues. Hospitals run into and plans remain frozen and could handle better. Mikey right Lot of frozen pensions out there to pick yearly at hospitals and there's a reason that they exist hostile more than perhaps at any other industry or maybe there are several reasons but the genesis. This goes back many many years. Certainly to the one thousand nine hundred seventy in one thousand nine hundred eighty s. There just aren't a lot of hospitals out there that are truly new organizations. They might be reformed organizations but at some point the actual ospital facility the hospital inc. Even if it's been reformed from a business standpoint probably in most cases goes back to the eighties the seventies or even earlier and what we in in the employee benefits business know about the nineteen seventies in one thousand nine hundred. Eighty s is virtually all employers gave their employees pensions. It was what you did back. Then it was an expectation the The sort of calculus between an employer and an employee in nineteen eighty-four example. Was you come to work for me and if you come when you're late twenties early thirties. You're going to make this year career. This is where you're going to spend your working lifetime and return for that if you're willing to spend your working lifetime with me. I'm going to give you this lifetime income. It's going to be related to the number of years she spent with me and how much i paid you but when you retire you are going to get this pension and it's going to pay you benefit for the rest of your life over time. The trend in the united states change. There are a lot of reasons for it that are for A different time in a different day to discuss but the fact is that organizations did begin to freeze these pensions So over time just as it happened in broad our industry more of these hospitals than not froze those plans the difference is and it seems to be very particular based on our research to hospitals. Once these plans were frozen hospitals. Treated them as if they were gone. In other words to use a kind of bad and use term from late night infomercials they went into set it and forget it mode. The problem that that causes is these frozen. Plans are not at all inexpensive to maintain and frankly the less attention that you do pay to them. More they cost. I guess that makes sense but that more so to speak is usually far more than the cost of having someone on staff to manage them. Once an organization does free a plan. It's goal should eat to terminate it in other words make it exists no more. So what the difference that we have here is if you have a plan that is frozen but not yet terminated. You are still required to administer. That plan contribute to that plan. Hey benefits from that plan and all those things cost money once you terminate it. You have given up all responsibility for the plan. You've taken all the benefits and either cash them out or sent them to insurance company and from your standpoint votes from a cash flow standpoint and from a financial accounting scam point. That plan is gone. It's almost like it never existed so that should be a hospital goal once. They've decided they're not going to provide these benefits anymore. Their goal should be to basically eliminate the existence of that plan eliminate the costs associated with the plan. Women ate what they probably view as the misery associated with a plan and to do that their plan should be two fold. It should be to get the to that destination faster and to get to their destination at less cost

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