Pension advance companies rip off retirees, GAO report says

They offer a lump sum in exchange for pension income and engage in other questionable practices.

So-called pension advance companies are taking advantage of retirees by offering lump-sum payments in return for a piece, or all, of their monthly pension income, according to a Government Accountability Office report.

Through undercover investigations, the GAO found 38 companies that participate in questionable business practices, such as targeting those with debt or bad credit with enticing offers like quick and easy lump-sum payments, known as pension advances.

“People need to understand that these are not always a good deal,” said Steve Lord, managing director of forensic audits and investigative services at GAO.

From August 2013 to June 2014, the GAO conducted undercover phone calls or asked for quotes, posing as federal, military or private-sector retirees receiving a pension, in an attempt to solicit information. Investigators then compared these pension advances with similar financial products, such as loans or lump-sum payment options made available directly from a pension plan.

Along with questionable techniques, the report found that 21 of the 38 companies are affiliated with one another — unapparent to consumers — making it hard for the pensioner to know who is responsible for the company and where to make a complaint if they are dissatisfied with the service.

“You think you’re dealing with 38 separate companies when you could be dealing with a few,” Mr. Lord said. By being undercover, “we were limited in being able to tell who these guys were.”

In the pension advance process, companies offer pensioners lump-sum payments in exchange for monthly pension incomes. At the same time, they are soliciting investors to buy the pensioners’ income stream. That is used to fund the lump-sum payments and pay the pension advance company. The GAO identified questionable disclosures of rates or fees and unfavorable terms of agreements.

One problem may be with consumers’ ability to understand and assess these companies and their objectives. In its recommendations, the report suggests consumers be provided with additional education on these transactions.

“It’s difficult for consumers to avoid marketing scams from unscrupulous providers,” said Birny Birnbaum, executive director at the Center for Economic Justice. “The whole business models of these pension advance companies is to identify and target those consumers who are vulnerable and have an asset to exploit.”

The GAO report also recommends that the Consumer Financial Protection Bureau review pension advance practices and exercise oversight where appropriate. According to the report, while the CFPB and Federal Trade Commission already exercise oversight, a pension advance company may be able to operate as they do because of certain regulations.

“What we find is how our financial regulatory system has so many different agencies that unscrupulous financial providers can always find a way to find the gaps between regulatory agencies,” Mr. Birnbaum said.
“I think with the CFPB in place there should be a good chance abuses associated with products like these will be stopped,” he said