Missouri bars pension advances for public workers

Show Me State's action follows heightened regulatory scrutiny

Jul 9, 2014 @ 12:01 pm

By Darla Mercado

Missouri's governor Jay Nixon on Tuesday signed a law that made it the first state to bar pension advances — a practice wherein retirees are offered a lump sum in exchange for signing over all or part of their income stream — for public workers.

“This practice is bad for consumers. It preys on a vulnerable population, and it's bad for retirement security in general,” Missouri's Treasurer Clint Zweifel, who championed House Bill 1217, said in an interview.

Indeed, the Government Accountability Office on Monday released a study that found that exploitative business practices abound in the world of pension advance transactions. The GAO identified at least 38 companies — at least 21 of which are related to each other in ways that aren't apparent to consumers — that operate in this space, noting that “some targeted financially vulnerable consumers with poor or bad credit nationwide.”

The GAO received pension advance offers from six out of 19 pension advance companies, and the deals were unfavorable compared to other financial products, including loans and lump-sum options through a pension plan. For instance, the investigation revealed that the effective interest rate on pension advances ranged from 27% to 46% — two to three times higher than the legal usury rates set by states.

At the same time, investors who were snapping up the pension streams were earning attractive yields that were as high as 7% — which is still beating most fixed-income investments that are on the market these days.

Mr. Zweifel called for an outright ban of the pension advance business for public employees after observing that some of these companies were trying to do business in Missouri. Effectively, there was an underworld of pension advance firms that were advertising their services on Craigslist in the state, he said.

“They were operating under the radar in many ways,” Mr. Zweifel said. “[The pension advances] weren't loans, but they weren't a security. State securities regulators couldn't regulate them, and at the same time they're not regulated by the banking laws.”

Though the Show Me State is the first to outright bar these pension advances, Vermont was the first to regulate the practice, enacting a law in April that will treat these advances in a way that's similar to lending.

Last year, federal legislators placed a sharp focus on pension advances following a series of reports that involved retirees selling off portions of future pension income for lump sums. The Senate Committee on Health, Education, Labor and Pensions in May 2013 pushed state attorneys general to turn up information on these practices.

Further, last year the Securities and Exchange Commission warned retirees of the consequences of selling either their pension or a structured settlement to an investor in exchange for a lump sum.

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