CalPERS: Hybrid Plan May not Significantly Reduce Costs for State

February 15, 2012 ( - The California Public Employees’ Retirement System (CalPERS) released an actuarial staff analysis that outlines the costs associated with creating a hybrid pension plan for all new hires.
Overall, the staff analysis found the hybrid plan that was analyzed will lower retirement benefits for new employees and shift the risk from employers to employees. It also may not significantly reduce costs for the state, but will result in savings for school employees and local public agency employers.

The cost analysis was prepared at the request of the Legislative Conference Committee on Public Employee Pensions and is consistent with one of the goals outlined in Governor Jerry Brown’s 12-Point Pension Reform Plan (see Calif. Governor Submits 12-Point Pension Reform Plan).

The analysis outlines a number of assumptions and details provided by the legislative committee to complete the report that were absent in the Brown’s plan, including actuarial cost methods, retirement rates, plan design, mortality rates and other economic assumptions.

Key findings of the staff analysis include: 

  • More than 6% of salary for miscellaneous members and 11% for safety classifications will be required in a defined contribution plan to replace 25% of a member’s salary at the time of retirement. 
  • The normal cost in a defined benefit plan for miscellaneous members will be up to 4% to replace 25% of a member’s salary in retirement and up to 16% to replace 50% of a safety member’s salary in retirement. 
  • The proposed hybrid plan is expected to result in a shifting of risk from the employer to members. The employer will see reduced risk in the form of a smaller, less volatile defined benefit plan. The member is expected to see an increase in risk given the defined contribution portion of their benefit is not guaranteed and exposed to investment volatility. 
  • Total retirement benefits for most members will be lower under the hybrid plan. 
  • Expected savings for the state will not be significant and in some cases, cost increases for some plans may offset cost savings. For school employers, cost savings are expected to be 2% of payroll, while local public agencies will vary but are expected to be greater than the state overall. 

CalPERS staff analysis of the Brown’s proposed hybrid plan did not include additional costs associated with the administration of a hybrid plan or the costs related to possibly closing the current defined benefit plan. A similar analysis released in March of last year entitled “The Impacts of Closing the Defined Benefit Plan at CalPERS” considers some of those impacts. A full copy of both studies can be found at