'A ticking time bomb': Erlanger board tackles hospital's unfunded pension plan

Staff photo by C.B. Schmelter / Erlanger Baroness is seen from Missionary Ridge on Friday, March 27, 2020 in Chattanooga, Tenn.
Staff photo by C.B. Schmelter / Erlanger Baroness is seen from Missionary Ridge on Friday, March 27, 2020 in Chattanooga, Tenn.

The Erlanger Health System Board of Trustees voted Thursday to suspend lump sum payments from the hospital's pension plan in an effort to strengthen the plan, which was about 36% funded - or $83.5 million underfunded - as of June 30.

Trustees passed a resolution that will immediately suspend the option for retired employees to receive their pension benefits in an up-front lump sum, which is the most popular option for receiving those benefits, upon retirement until the plan is 80% funded.

Instead, participants in the pension plan who retire before funding reaches the 80% mark must receive their benefits in monthly payments.

The change affects approximately 1,300 current employees and 1,400 former employees who are vested in the plan but not yet retired.

It does not affect Erlanger employees who were hired after June 30, 2009, when the health system stopped offering a traditional pension in favor of a defined contribution plan, akin to a 401(k) program. The newer plans for those hired after June 30, 2009, (approximately 5,300 Erlanger employees) are unchanged.

Thursday's resolution also ends the option for participants who continue to work past age 65 to receive an actuarially adjusted benefit upon retirement as well as changes the death benefit payable to the beneficiary of an active participant to 50% of the participant's accrued benefit.

"Any benefits accrued by participants working beyond age 65 prior to this change will remain in effect. In the future, a participant must weigh the benefits of continuing to work beyond age 65, receiving salary and benefits, including the defined contribution benefits offered by Erlanger or retiring at age 65," according to a statement from Erlanger officials.

"The second change will align the pension fund with most similarly situated defined benefit plans," the statement says. "This change is consistent with the current benefit payable to the beneficiary of a retiree receiving monthly payments."

Together, those two changes will reduce Erlanger's pension liability by $9.7 million, officials said.

The board's decision represents a significant step toward addressing a longstanding issue for trustees, several of whom said the pension has been a "ticking time bomb."

"What we're trying to accomplish here tonight is to actually get this plan on more solid footing so everyone can sleep at night and feel comfortable that the funding is there," Trustee Vicky Gregg said before board members cast their votes during the hospital's regularly scheduled public meeting Thursday evening.

The board's effort to address the pension funding has been in the works for about six months and was not driven by the COVID-19 pandemic, Erlanger's current financial situation or a private equity firm's offer to buy the public hospital, trustees said.

Instead, Erlanger officials said in a statement that the resolution was "the culmination of approximately six months of comprehensive research, analyses and consultation with hospital management, the actuarial team, the financial advisers and legal advisors."

Trustees Jim Coleman, chairman of the board's budget and finance committee, and Ken Conner, a former chief financial officer at Erlanger, spearheaded the effort. They spent the better part of Thursday's two-hour meeting explaining their process and rationale before presenting the resolution for a vote.

"This is the best solution - in fact, the only solution," Conner said. "As we looked at everything, nothing else made any real impact on the plan's health. We believe the only way to really get a handle on it is to be able to suspend temporarily those lump sums."

Conner said market conditions made the pension fund no longer sustainable through increased contributions from Erlanger or relying on investments.

For several years, Erlanger has made higher than required contributions to its pension in an attempt to avoid a crisis and to try to catch up with the increasing demand for benefit payments.

In fiscal year 2020, which ended in June, Erlanger contributed $9.8 million to the plan and had to pay out $10.4 million in benefits. This year, Erlanger budgeted $11.5 million for its pension contribution and expects to pay out $21 million in benefits, leaving a $9.6 million shortfall, according to a report presented to trustees.

"The lump sum was originally based on interest rates remaining relatively close to the investment expectations, and interest rates have been consistently lower for the last 20 years and have recently hit a very low period," Conner told the Times Free Press after the meeting, adding that those low interest rates show no sign of increasing any time soon.

Coleman said the resolution brings much-needed stability to Erlanger's pension plan.

"What we're recommending is reasonable, and we think it's necessary to preserve and maintain the health of the fund. Without these adjustments in the administration of the fund, I think it's got an uncertain future," said Coleman, who made it a priority to take a deep dive into Erlanger's pension situation when he joined the board last November.

Chairwoman Linda Moss Mines said she was unsure how the board would have reached a solution without the commitment and expertise of Coleman and Conner, who both bring decades of experience in hospital finances and management to the 11-member volunteer board.

"I don't want anyone to think that it has been an easy process for the two of you, nor is it an easy decision for the board," Mines said. "We have to think about the viability of the plan for all participants in the plan, and it's just a difficult situation."

Conner didn't want to predict when the plan will reach 80% funding, but he said there's a good chance that the option to take the lump sum will be restored for people who plan to retire seven to 10 years down the road.

Participants who want to learn more about the changes to their benefits can call 877-778-2100 or visit www.ErlangerPension.org.

Contact Elizabeth Fite at efite@timesfreepress.com or follow her on Twitter @ecfite.

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