By Ed Mendel
Monday, October 199, 2012

The CalPERS board may make it more costly for struggling local governments to close their pension plans.

A pending change is driven in part by unusually low interest rates and the fear of an unlikely, but now not inconceivable, collapse of a large employer like the bankrupt city of San Bernardino.

The cost of closing a pension fund jumped last year when the CalPERS board lowered the earnings forecast for closed funds to 3.8 percent, well below the 7.5 percent used for most CalPERS funds.

The board continued work last week on a new investment allocation for closed funds that could drop the earnings forecast to less than 2 percent, which would push the closing cost for employers even higher.

Closed fund investments would be switched to some of the lowest-risk bonds with very low yields. The higher 7.5 percent earnings forecast for most funds (which critics contend is overly optimistic) is based on stocks and other riskier investments.

As the board of the California Public Employees Retirement System moves to ensure that closed funds do not run out of money, employers have to pay more to close a pension plan.

High exit costs helped stall a Pacific Grove move to leave CalPERS. An estimate of the high cost of closing current state worker plans was an argument used against Gov. Brown’s proposal for a switch to a “hybrid” plan.

When a pension fund is closed, the annual employer-employee contributions that can be adjusted to keep an active pension afloat stop. The contributions cannot be restarted again if money runs short.

So, a closed pension fund must get a lump sum from the departing employer that is large enough to invest and pay promised lifetime pensions, often for well beyond 30 years after the closure.

And the key factor in determining the cost of closing a pension fund is the estimate of what investments earn in the future. Earnings often are expected to provide two-thirds of pension revenue.

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