Investor Alert: Pitfalls of Pension Advance Schemes

Apr 5

If you are receiving regular payments from your pension, keep an eye out for sales pitches that ask you to trade the stability of those payments for the opportunity to make a quick buck.

The come-on will probably be as subtle as a used-car ad: Are you earning a pension from your former employer and need quick cash NOW?  Are you an investor looking for new ways to grow your investment dollars? Your return is guaranteed!

A pension advance transaction (also known as a stream-of-income investment) depends on two main players: Investors who provide funds to make cash advances, and pensioners who are willing to turn over future pension payments in exchange for an immediate lump sum cash payment.

There are significant risks for both parties.

For example, laws may prohibit the assignment of the stream of income and benefits. The seller typically maintains the legal right to redirect the payment, and if the seller does redirect the payment, the investor may be left with an unenforceable contract right.

In addition, the benefits are contingent on the life of the seller. Life insurance policies on the seller’s life could be cancelled, however.

Veterans and disabled persons are among those who sell their benefits. These individuals may be solicited when they are in financial distress and convinced to sell much needed future benefit payments at a significant reduction in their value.

Stream-of-income investments are one of the Texas State Securities Board’s Top Investor Threats.

Before entering into a pension advance transaction, an investor should:

  • Do a regulatory check on the background of the principal officers of the company offering the investment.  Regulatory information on broker-dealers and investment advisers is available from the Texas State Securities Board.
  • Check the legality of the transaction. Some pension rights cannot be transferred. Federal law prohibits the assignment of U.S. government pensions and disability benefits. Check out the source of the pension funds in which you will be investing.
  • Know if the investment will be tied up for a period of time. Many of these investments are illiquid and you may not have immediate access to your money.

Before selling the rights to their pension payments, pension holders should:

  • Assess the financial security of the company offering to buy your entitlement and check to see if the company is registered to offer the product.
  • Learn how the company makes its money. The company typically takes commissions and other fees that may result in the cash payout being lower than the future benefits you are assigning. Consider these costs when considering taking a lump-sum payment.
  • Determine what restrictions, if any, apply to your ability to assign your pension benefits. Check with your pension administrator to determine what restrictions apply. The transaction could be illegal and therefore void.
  • Check if the company requires you to purchase life insurance naming it as the beneficiary, If so, you should consider this increased cost when considering whether the payout is worth it.
Pension Advance Enforcement Cases

In Texas, Securities Commissioner John Morgan in February 2016 entered an Emergency Cease and Desist Order against a firm selling investments that supposedly earn returns from the payout of pension benefits it said it acquires from federal government employees, members of the military, and certain corporations.

The cease and desist order required Andrew Gamber of Jonesboro, Ark., and the company he incorporated, Jackson, Miss.-based SoBell Corp., to stop selling its "Pension Income Stream Program"in Texas. SoBell and Gamber failed to disclose sanctions imposed from 2013-2104 by state securities regulators in Arkansas, Pennsylvania, California, and New Mexico.  Gamber and SoBell sold unregistered securities, engaged in fraud by failing to disclose the sanctions, and made other misleading and deceiving statements to investors.

The order became final in March.

In another case, a California company named Structured Investments Co. LLC raised money by selling securities in the form of membership interests in the company. Investors were promised an 8% percent return on their investment, with monthly payments that would be generated from U.S. military service pensions. The payments stopped unexpectedly in 2009.

The firm used the money raised from investors to offer lump sum cash payouts to pensioners in exchange for assigning their future pension payments. The company advertised to pensioners that they could “put their pension money to work now by receiving quick cash.”

The pensioners filed a class action lawsuit against Structured Investments. In 2011, a state court in California found that the assignment of government pensions is prohibited by federal law and ordered the company to pay back the pensioners.

 From the North American Securities Administrators Association and the Texas State Securities Board 

If you are receiving regular payments from your pension, keep an eye out for sales pitches that ask you to trade the stability of those payments for the opportunity to make a quick buck.

The come-on will probably be as subtle as a used-car ad: Are you earning a pension from your former employer 

Pensions Explained

A pension is known as a defined benefit plan because it pays a specific benefit to retired employees. The annuity is typically based on the employee’s age, years on the job, and highest average salary over final years of employment. Some pensions allow partial lump-sum withdrawals at the time of retirement, but this option generally results in a lower annuity payment.

Retirement savings vehicles like Individual Retirement Accounts and workplace 401(k), 457, and 403(b) plans are defined contribution plans. Your retirement income depends on how much is contributed to the plan, your choice of investments, and the return on investment.