Are Pension Advance Companies Too Slick?
Advance funding companies, or “factoring” companies, are now arm-twisting military veterans, teachers, firefighters, police officers and other retirees to sell their future pension benefits. Retirees receive cash in exchange for selling their structured settlement payments at deep discounts.
Abuses by advance funding companies in their treatment of accident victims led to the eventual passage of structured settlement protection acts in 47 states. Undeterred, the factoring companies have moved on to people with sizable retirement savings.
By targeting retirees, factoring companies have potentially placed themselves into an even more unpopular position. Pensions are traditionally viewed as sacrosanct – the financial bedrock of the American worker. A pension represent years of retirement security a worker receives after giving his or her working life to an organization.
The realization that pensioners can lose trillions of dollars by contracting with advance funding companies has industry watchdogs and lawmakers very concerned. Both the Securities and Exchange Commission (SEC) and the Financial Industry Regulation Authority (FINRA) have issued investor alerts.
Benjamin Lawsky, superintendent of New York’s Department of Financial Services, believes advance funding companies have gone too far with regard to wooing pensioners. He recently launched a probe into pension advances, labeling them as payday loans in sheep’s clothing.
Factoring companies spend vast sums of money to convince structured settlement payees to sell their future payments. This is because the annuity contracts are extremely valuable. Structured settlements offer long-term guarantees and potentially hefty returns – features few, if any, other investment products do.
Investment portfolios are handled by skilled bond traders in the investment departments of the top insurance companies in the U.S. Retirement earnings get favorable tax treatment plus cost efficiencies due to the lack of ongoing investment management expenses.
Structured settlements outperform many other investment vehicles. According to Bankrate.com, the national average rate paid on a five-year certificate of deposit is 0.78%. However, structured settlements can return about 4%, depending on payment horizons. With the addition of tax-free status and zero investment management expenses, effective returns can reach 6 to 7%.
While Structured Settlement Protection Acts are in place in 47 states, it is not yet clear if the added scrutiny by judges will, in fact, protect accident victims. But greater awareness of just how devastating future funding transactions can be may lead to more resistance by the bench to grant approvals.
Source: “In Your Interest,” online publication of Ringler Associates, Inc.