A recent article in the Wall Street Journal revealed another secondary marketplace- that of secondary pension re-sales.
This is a relatively new but growing industry that seems to be skating a fine line of laws. It's our understanding that ERISA- the laws that govern pensions- prohibit this sort of transaction. We're not experienced in this marketplace and of course would recommend any reader to proceed with caution. Please let us know your experience and we welcome any comments or discussion below.
A U.S. Senate committee is considering tackling a burgeoning and controversial business in which veterans and other retirees sell some of their future pension income to investors, with an array of middlemen profiting from the transactions.
"The sale of pensions to investors in secondary markets is a worrisome new practice that deserves careful scrutiny," said Sen. Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee. "In tough economic times, hard-working people are often forced to make difficult choices between immediate economic needs and their future retirement security.
"However, it is critically important that people forced to make these tough decisions have the information they need to make wise choices, and don't fall victim to unscrupulous or illegal practices."
Mr. Harkin, a Democrat from Iowa, said he plans "to take a closer look at these issues in the coming months to ensure that our laws are respected and pension participants are not abused." A committee spokeswoman said it is early in the process, and the senator declined to elaborate on possible courses of action.
As The Wall Street Journal detailed in a story earlier this month, financial middlemen have helped to set up websites with names such as BuyYourPension.com and pension4cash.com to connect pension recipients.
The pensioners need immediate cash; the investors are lured by promises of higher returns.
The market plays off several current trends: With tougher credit standards, many people who ordinarily might borrow from credit cards are willing to pledge future pension checks for cash now, even if the terms are highly unfavorable to them.
Many people who never previously considered unconventional investments are attracted to them with bonds paying ultralow yields and stock markets a highly risky bet.
The financial middlemen bundle information obtained by the websites into spreadsheets that are supplied to financial advisers for their clients. The investor pays an agreed-upon lump sum to the retiree, who signs a contract pledging to hand over all or part of each month's check for a set number of years. The deals typically are priced to yield investors 6% to 7% or so a year, as their money is returned over a period of several years to 10 years.
Meanwhile, an array of middlemen collect fees: They are spread among the website operators, firms that do the heavy lifting of pulling together transactions, distributors and the financial advisers who land individual investors.
No one keeps track of how many pensions are traded for instance cash, and the number for now is believed to be small. But in recent months, websites have proliferated, and middlemen far from Wall Street have ramped up efforts to win over financial advisers to the concept.
These firms have their eye on the hundreds of thousands of military veterans, police officers and firefighters who can start receiving pension checks while they are still in their 40s, many of whom have moved on to other jobs and wouldn't be put in desperate financial straits if they pledge some of their future pension income for a wad of cash.
The deals attempt to thread the needle of federal pension law and federal statutes governing military pay, which prohibit the "assignment" of qualified pensions. The transactions attempt to make the distinction that the pension itself isn't being assigned but that the retiree is promising to fulfill a contract and will use money he or she has received from a pension check.
But that makes the transactions risky to investors because the retiree could breach the contract or file for bankruptcy, putting investors in a line of creditors seeking to be repaid.
Pension-income-stream transactions arranged by a California firm that has been in the business since the 1990s have been enforced by some courts but rejected by others, including a U.S. bankruptcy court, filings show.