Low discount rates are making it challenging for U.S. nonprofit hospitals to fund their defined benefit pension plans, Standard and Poor's Ratings Services said in a report released last week.
Pension plans use the discount rate to determine the amount of an organization's liability, says S&P credit analyst Liz Sweeney, one of the report's lead authors.
"A defined benefit pension plan is essentially a promise to pay future benefits to people. It's a stream of future cash flow… The lower the rate, the higher the liability," Sweeney says. "This is not unique to pensions, it is just finance math."
"Discount rates have been dropping pretty dramatically in the last several years so liabilities have been growing. Assets have been growing, too, but the liabilities have grown even faster than the assets… When the liability exceeds the assets, we call that being underfunded. Over time, when a plan is underfunded, you are going to have to put more contributions into the plan," she added.
Al Pierce, managing director for the advice team at SEI, a global investment outsourcing firm, says hospitals are going to take an enormous hit because of the low rates.