A controversial San Diego ballot initiative that moved new city employees from a pension system to a 401(k)-style retirement plan won’t be invalidated, but the city must pay workers extra benefits while the issue heads to the bargaining table.

A California appeals court March 25 gave a limited win to the San Diego mayor’s office by narrowing the remedies ordered by the state’s Public Employment Relations Board.

The city still must confer with labor unions over the change and pay...