We all know that the financial crisis of the past three plus years has caused many people to need to sell assets that they would be better off keeping. What many of us probably have not contemplated is the fact that many people living on fixed income, such as passive and portfolio income, are getting squeezed by the dearth of investment options offering safety and any type of reasonable return.
With an extremely volatile stock market that has essentially moved sideways for more than the past decade, Treasury bond yields near there all time lows, and CD and money market funds paying next to nothing, investors are searching high and low for safe investments that offer a decent return on investment. In recent years, more and more investors have chosen to purchase strangers’ life insurance policies in what is known as the life settlement market. Additionally, the secondary market to purchase an injured victim’s structured settlements has likewise grown. In fact, recently several deals in excess of $100,000,000 have been securitized and packaged to Wall Street.
Well, now we are seeing the growth in a new investment. The prospect may make conservative investors leery, but the market for buying pensions is growing. Faced with this economic crisis, more and more retired civic workers, military veterans and others are selling their future pension payments for a lump sum now. We all can agree that the individuals selling their future pension payments would be smart to avoid this temptation. It would seem that the hungry pack of investors would likewise be smart to steer clear of this investment opportunity.
A recent Wall Street Journal article on the topic said investors can yield a return of 6%-7% per year. Sellers typically give up 15%-20% of the value of their future pension payments in exchange for the cash now. The transaction becomes risky because it requires the seller to sign a contract, and honor it, agreeing to hand over the payments every month. This differs from the much more secure secondary market for structured settlements, wherein a court order is entered transferring the future payments to the investor. Moreover, federal law exists that discourages the transfer of future pension payments, and a current lawsuit on the validity of the practice is pending.
In this current economic climate, investors who don’t trust the stock market are thinking outside the box for investments. Whether you consider buying pensions a win-win for investor and seller, or a violation among our distinguished retirees, is up for debate.
Jay Fisher is co-founder of Vantage Capital Consultants, a purchaser of structured settlements and annuities.