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Would You Sell Your Future Pension For a Lump Sum of Cash? These Businesses Are Banking On It

You’ve heard of payday advances. But pension advances?

Believe it or not, businesses are popping up that allow retirees to do just that: “sell” a portion (or all) of their future retirement income in exchange for a lump sum of cash today.

The owners of these businesses admit that their service isn’t for everyone. But if you need to pay bills now, they say, then why not sell a portion of your pension for cash? More from Today:

Their pitch, aimed at military and government retirees with generous pension benefits and those with bad credit, is mighty appealing: cash now to pay today’s bills.

Of course, to get tomorrow’s money today, you have to sign over your future pension payments for a specified number of years.

Mark Corbett runs the website Buy Your Pension, which helps facilitate pension sales. He told TODAY that a pension advance is not for everyone, but he believes it can be beneficial for some people.

“You should not sell your pension unless it saves you money,” he said. “For example, you are using it to pay off bills.”

Four years ago, Corbett got an advance on his private pension — selling a $237,000 nest egg for $89,000 — to pay off his mounting bills. He called it “a godsend” that reduced his stress and probably added years to his life.

But critics say pension advance services are dangerous and financially unwise. The Federal Trade Commission, Financial Industry Regulatory Authority and other consumer protection agencies are already cautioning people to be know the implications of selling your pension. Today writes:

“There are serious financial consequences down the road for taking the money in a lump sum now,” said Gerri Walsh, FINRA’s senior vice president of investor education. “You are getting less money than if you waited and got those monthly pension payments.”

Unlike a traditional loan, you can’t get out of the deal early. If you signed up for a six-year payout, the company gets your pension for a full six years.

“A pension advance is unlike any other type of financing, because you’re required to sign over part of your future income stream,” said Leah Frazier, an attorney for the FTC.

“You could find yourself in a situation down the road where you need money for your basic expenses, but you don’t have it because you took it as an advance.”

And remember: Getting a lump sum pension payment is likely to have some serious tax implications.

“It could push you into a higher tax bracket,” said Lisa Greene-Lewis, lead CPA at TurboTax. “I could see people doing this and getting shocked by the additional taxes they now have to pay.”

The Government Accountability Office (GOA) recently did some secret shopping at nearly 40 pension advance businesses. Based on their experiences, they released a report indicating that they’d found numerous “questionable business practices”.

Last month, Missouri banned pension advances for public employees. They are the only state thus far to do so.

Photo by: www.SeniorLiving.Org

New Jersey Bill Would Make Corrupt Politicians Pay For Court Costs—From Their Pensions

In 2013, New York paid $600,000 in pension benefits to politicians who were occupying jail cells instead of offices.

That’s because New York’s constitution makes it nearly impossible to take away a person’s pension benefits—even if that person is a corrupt politician who was booted from office and sent to jail.

The same is true around the country, as at least six states protect pension benefits under their constitutions. It’s a well-meaning provision, but in the case of corrupt politicians it often has unintended consequences.

New Jersey has been paying attention to New York’s conundrum, and it wants no part of that game.

Three state legislatures (Sen. Christopher J. Connors, Assemblyman Brian E. Rumpf and Assemblywoman DiAnne C. Gove) recently proposed two initiatives that would shield taxpayers from the expenses that come with corrupt politicians—and force those politicians to pay for their court costs, among other things, by garnishing their pensions. From The Sand Paper:

The delegation’s first reform measure would make public officers or employees convicted of crimes affecting their office or found at fault in certain civil actions liable for the cost of prosecution and legal representation if received through the expense of public funds. Under the legislation, convicted persons would be subject to pension garnishment to satisfy the liability.

The second measure would allow a public employer to levy a judgment for restitution of illegally obtained funds against a convicted public employee’s retirement allowance. Provisions of the legislation would apply to any official’s or employee’s pension contribution to principal state-administered retirement systems.

One interesting segment from the lawmakers’ joint statement on the initiatives:

“When holding public office, you are answerable to the people whose tax dollars fund the operations of government,” the statement said. “Therefore, it would be appropriate to garnish the public pension of convicted politicians as a means of recovering the cost of their prosecution and legal defense as well as funds illegally obtained through the use of their government position. To do so would mitigate the cost of corruption on taxpayers, whose interests should be put first as the victims of such crimes.”

Illinois, Kentucky Pension Funds Benefit From $17 Billion Bank of America Settlement

A handful of pension funds will be receiving large chunks of change after Bank of America agreed today to pay $17 billion to end a Justice Department probe into the bank’s sale of toxic mortgage securities.

The Justice Department alleged that Bank of America violated federal law when it marketed and sold investment vehicles tied to shoddy home loans and misled investors about the quality of the investments.

Many pension funds were major investors in such investment vehicles and sustained major losses on those investments during the financial crisis.

But some funds will be getting a chunk of that money back, including numerous Illinois funds and the Kentucky Retirement System. From Red Eye Chicago:

For Illinois, the $16.65 billion national settlement means a cash payment of $200 million for the state’s pension system, making it whole for losses sustained as a result of the risky investments.

…

The Illinois pension entities that will receive the payments under Thursday’s deal are the Illinois Teachers Retirement System, the State Universities Retirement System and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges.

Kentucky’s payout is substantially smaller than that of Illinois, but the KRS will still see some relief. From the Lexington Herald-Leader:

Kentucky Retirement Systems will get $23 million from Bank of America’s $16.65 billion national settlement with the federal government over accusations that the bank improperly dumped “toxic” mortgage-backed securities on the market, helping fuel the economic recession of 2008.

This isn’t the first major settlement stemming from toxic investments that have benefited pension funds. Earlier this year, CalPERS and CalSTRS received over $100 million combined when CitiGroup agreed to a $7 billion settlement.

Illinois was a beneficiary of the CitiGroup settlement as well, as three Illinois funds received a combined $45 million as reparations for their investment losses.

Photo by Mike Mozart via Flickr CC License

California Governor Calls Out CalPERS On Pension Tweak

Today CalPERS approved 99 types of “special pay”, or additional income that can be included in calculating a worker’s pension.

California Governor Jerry Brown was receptive to most of the “special pay” items—except for one. But it was enough to compel him to send a letter to CalPERS urging the board not to approve the pending changes.

At issue is a section of the CalPERS proposal that allows pension benefits to be increased based on temporary pay increases and ad hoc payments.

That contradicts a section of Jerry Brown’s 2012 reform law which states that pension benefits can only be based on “normal monthly pay”, and not “short-term” pay increases. From Reuters:

Although Calpers approved 99 types of extra pay that can be factored in to a worker’s income when calculating their pension, Brown only objected to one of those: allowing temporary upgrade pay to be counted as permanent, pensionable income.

Brown, a Democrat, sent a letter to Calpers last week asking them not to allow temporary upgrade pay to count toward pensions.

On Wednesday, the Calpers board rejected Brown’s opposition and voted to pass all 99 pay provisions, including that temporary pay hikes can be factored into a final pension.

“Today Calpers got it wrong,” Brown said in a statement. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

Read the full letter below, courtesy of the Sacramento Bee:

[A quick PSA, in case you don’t live in California: Edmund is the legal first name of Gov. Jerry Brown.]

Troubled Dallas Fund Returns 4.4 Percent For 2013

The Dallas Police and Fire Pension Fund (DPFPF) knew 2013 wasn’t going to be a great year for investment returns. They knew this because 2012 wasn’t a great year, and neither were the five years prior.

Even as numerous funds across the country have struggled with maintaining strong investment returns over that period, the DPFPF was performing worse than most.

Bad investment results are what led to the June firing of top administrator Richard Tettamant. Still, the fund had hoped a 13 percent return was in the cards for 2013—not an overly impressive number, given the S&P 500 had returned around 25 percent over the same period.

But that didn’t come to fruition. DPFPF’s return data was released this month, and the fund posted a grim 4.4 percent return for 2013, failing to meet its lofty 8.5 percent assumed rate of return.

What makes DPFPF different from other funds? For one, asset allocation.

According to the Center for Retirement Research, the average public pension fund allocates around 49 percent of its investments to equities, 7 percent to real estate and 27 percent to fixed-income strategies.

The DPFPF, on the other hand, invests significantly less in equities and bonds and significantly more in real estate. Its real estate investments did not do well.

Nor did its private equity investments. The fund says 45 percent of its private equity allocation is placed in two investments: Huff Energy and Red Consolidated Holdings.

Red Consolidated Holdings was flat on the year. But Huff Energy returned a negative 29.7 percent for 2013, which brought down the entire private equity portfolio.

This year isn’t an anomaly for the DPFPF. The fund has consistently under-performed its peers. From Dallas News:

Over the past five years, it has earned an annual return of 8.6 percent, according to preliminary figures from its consultant. That placed it 97th among about 100 similar-size funds, the consultant reported. The median annual return during that period was 12.2 percent.

In 2012, the fund earned 11.4 percent on its investments. The median annual return for similar funds was 12.2 percent.

The fund’s investment staff received big bonuses in 2013 nonetheless. That’s because the bonuses aren’t determined by how the fund performs relative to its peers. Instead, staff receive bonuses if investment performance beats the assumed rate of return.

Since the assumed rate of return for the DPFPF sits at 8.5 percent, the 2012 investment performance (11.4%) triggered the bonuses even though the fund under-performed relative to its peers.

Tettamant’s base salary in 2012 was $270,000, and he received over $100,000 in bonuses between 2012 and 2013.

Photo by Taylor Bennett via Flickr CC License

Auditors Asking Questions About “Illegal” Pension Benefits at Pennsylvania Fund

Pennsylvania’s top auditor claims that the city of Carbondale boosted pension benefits for certain top cops close to retirement, an action that–due to the nature of the benefit increases–violated state law.

In Pennsylvania, pension benefits can only equal up to 50 percent of a worker’s final year salary. But the city offered to sweeten benefits for four city police officers, who are now earning benefits equal to 65 percent of their final salary.

The auditor says those benefits are a clear breach of state law, but the city says it avoided breaking the law by using a loophole of sorts. From the Times-Tribune:

Last year, Mayor Justin Taylor and city solicitor Frank Ruggiero said the higher benefits were legal because the 15 percent extra for the three officers and 10 percent additional for the disabled officer come from the city’s annual budget rather than the police pension fund. Mr. Taylor said the city would save almost $550,000 during the next four years by replacing the officers with lower-paid full- and part-time officers.

The additional benefits are costing the city an extra $2,326 a month, the auditor general says, or $27,912 a year.

Mr. Taylor said city officials still think they’re right and don’t plan to stop making the payments. The city is weighing its options and might appeal the findings because of a fundamental disagreement over the nature of the payments, which are retirement incentives not pension payments, the mayor said.

“We’ve been disagreeing from day one,” he said.

Auditors informed the city of their concerns back in February. The auditors say the city told them they would respond in 10 days. But the city never called them back.

Now, auditors are threatening punishment. Specifically, they are prepared to withhold all state contributions to the pension fund.

Susan Woods, a spokeswoman for the auditor general, said it may not come to that, but auditors are prepared to take action.

“It hasn’t risen to that level,” she told the Time-Tribune. “If they continue to do this, we do have the ability to withhold.”

Auditors took issue with other areas of the city’s handling of pensions, as well. From the Times-Tribune:

The auditor general also criticized other areas in the city’s pension funds:

The city’s provision of cost-of-living increases in pension benefits for firefighters who retired as of Jan. 1, 1993. These firefighters receive a 2.5 percent raise in benefits on the third anniversary of their retirement and every year after that, but the auditor general says the maximum pension should be only 50 percent of the highest salary of an active firefighter.

This criticism was actually a repeat of criticism in an earlier audit.

City officials told auditors they were unable to change the provision through bargaining with the firefighters’ union.

The city’s failure to calculate and contribute the interest on its late 2011 minimum pension payments and did not pay its 2012 and 2013 payments. In response to the criticism, the city contributed more than $666,000 to cover the payments and interest.

The Pennsylvania Commonwealth Court ruled in 2001 that cities must abide by the benefit limits imposed by state law.

Fixed-Income ETFs Gain Traction With Canadian Funds

Exchange-traded funds are becoming an increasingly popular investment vehicle for institutional investors around the world, but that trend is especially true among Canadian pension funds, according to a new study.

One type of ETF was particularly popular: fixed-income.

The study, which interviewed public and corporate pension funds as well as foundations and endowments, found that 57 percent of institutional asset managers are using fix-income ETFs in 2014. In 2013, that number was 45 percent.

The report, produced by Greenwich Associates, offered some reasons for the growing popularity of bond ETFs. From the Financial Post:

“Increasingly, institutional funds and asset managers are viewing ETFs not simply as useful tools for making tactical adjustments to portfolios, but rather as efficient methods for implementing new investment strategies.”

“In particular, ETFs appear to be steadily gaining traction in fixed income — a trend that could reflect investors’ search for better and more efficient approaches to the asset class in a shifting interest-rate environment.”

“Institutions’ heavy usage of passive strategies is helping to drive the growth of ETFs in fixed income,” the study said. “Virtually all the institutional funds and asset managers employ passive strategies in fixed income, and nearly a quarter invest more than half of fixed-income assets in index strategies.”

Interestingly, this is a relatively recent phenomenon. Of the Canadian institutions holding fixed-income ETFs, more than 20 percent said they had started using the vehicles less than two years ago.

Even more popular than fixed-income are equity ETFs, which are employed by the vast majority of Canadian institutional investors. From FP:

Despite this growing penchant for bond funds, equity-related issues remain the most popular ETF investment among institutions, with nearly 80% using the funds in their domestic stock portfolios and 85% employing them to gain U.S. equity exposure.

ETFs are primed to continue their upward trend. According to the study, 40 percent of institutions are planning to increase their allocation to ETFs next year. Only 2 percent of respondents said they plan to reduce allocations.

As Some Pension Funds Phase Out Hedge Funds, Others Phase Them In

There were big headlines earlier this month when CalPERS announced its decision to chop its hedge fund allocation by 40 percent. The news was big not just because it was CalPERS, but because the decision followed in the wake of similar decisions made by smaller funds around the country.

The Los Angeles Fire & Police Pension System might not be a mammoth like CalPERS, but it was still a big deal when the $18 billion fund decided to phase out hedge funds entirely. The fund says it will save around $13 million in fees annually as a result of the decision, which re-allocated $550 million from hedge funds into other asset classes.

“We need to show that we are willing to walk away from managers that are charging us exorbitant fees,” Emanuel Pleitez said in a video interview with Pensions & Investments.

But it’s not just fees. Past experiences inform future investments, so when the Louisiana Firefighters Pension Fund drastically chopped its hedge fund allocation, it was hard to blame them.

That’s because the Firefighters Fund in 2008 had made a $15 million investment in Fletcher International Ltd, a Cayman Islands-based hedge fund.

Sometime in 2012, Fletcher stopped picking up their phone. The Firefighters later found out that was because Fletcher had gone bankrupt. Just like that, they’d lost 100 percent of their $15 million investment.

As a result, the Firefighters Fund reduced its hedge fund investments by nearly 90 percent. Now, only 0.6 percent of the fund’s assets are dedicated to hedge funds, according to Pensions & Investments.

Anecdotal evidence aside, there’s very little indication the movement away from hedge funds is a larger trend.

In fact, if there is a trend, it may be moving towards more hedge fund investments, not fewer. Sticking with anecdotes for a moment, Pensions & Investments reports that a handful full of pension funds are looking to make their first foray into hedge funds:

Among recent first-time hedge fund investors and searchers:

-Illinois State Universities Retirement System, Champaign, will soon begin a search for either hedge fund or fund-of-funds managers for a new 5% allocation for the $16.9 billion defined benefit plan it oversees;

-The $5.1 billion City of Milwaukee Employes’ Retirement System hired Allianz Global Investors to manage $62.5 million in an absolute-return strategy in July;

-The $1.1 billion St. Paul (Minn.) Teachers’ Retirement Fund Association hired EnTrust Capital Management LP to manage $55 million in a customized hedge fund-of-funds separate account in May.

A recent survey revealed that institutional investors are planning on increasing their alternative allocations by 5 percent annually, as opposed to 1 or 2 percent for traditional investments.

McKinsey, the firm behind the survey, said the prevailing sentiment among respondents was that the bull market won’t last forever. But pension funds’ assumed annual rates of return—which usually sit between 7 and 8 percent—won’t change anytime soon.

It’s for precisely that reason that institutional investors are turning to hedge funds, writes McKinsey & Co:

“With many defined-benefit pension plans assuming, for actuarial and financial reporting purposes, rates of return in the range of 7 to 8% — well above actual return expectations for a typical portfolio of traditional equity and fixed-income assets — plan sponsors are being forced to place their faith in higher-yielding alternatives.”

That doesn’t necessarily translate to investing with hedge funds. But often, it does.

And it’s not just about chasing high returns, the report said:

“Gone are the days when the primary attraction of hedge funds was the prospect of high-octane performance, often achieved through concentrated, high-stakes investments. Shaken by the global financial crisis and the extended period of market volatility and macroeconomic uncertainty that followed, investors are now seeking consistent, risk-adjusted returns that are uncorrelated to the market.”

Only time, and piles of financial reports, will reveal which direction the trend ultimately goes.

Christie Vetoes Early Retirement Incentives for Teachers

Chris Christie used his conditional veto power to reject one portion of a broader bill that would make it easier for privately run schools to operate in New Jersey.

The portion of the bill vetoed by Christie would have given certain teachers–specifically, those likely to face layoffs in the near future–a range of perks to retire early. From NJ.com:

Gov. Chris Christie has rejected changes to the Urban Hope Act, specifically taking exception to language that would allow Camden public school teachers to retire early.

The change, he wrote in his conditional veto Monday, would put too much of a strain on an already floundering state pension system.

“The bill … authorizes early retirement incentives to certain school district employees, and may exacerbate the solvency of the pension system,” Christie wrote.

Christie asked the Legislature to reconsider the bill without the retirement incentives.

Specifically, the vetoed portion would have offered early retirement incentives to school employees in Camden, New Jersey.

The Urban Hope Act, if passed, would open the door for charter schools to operate in Camden. But the city has already had to lay off nearly 250 public school employees, and more layoffs are likely on the way.

That’s why public teacher’s unions negotiated the line item in the bill giving teachers a chance to retire early as opposed to being laid off. From NJ Spotlight:

The bill had included an expansive early retirement package that had irked some on both the Democratic and Republican sides.

Assemblyman Troy Singleton, D-Camden, had said the package was only fair in the face of expected layoffs and other cuts in Camden. The New Jersey Education Association supported the early retirement piece, but nonetheless opposed the bill overall.

But Christie called the early retirement package hypocritical at a time when the state is grappling with a pension liability crisis.

The bill now goes back to the Senate. If the legislature approves Christie’s changes, the bill will go back to Christie. He is expected to pass the bill if it stays intact.

CalPERS Responds To Criticism Of Plan To Boost Pensions

CalPERS is holding a hearing today seeking public comment on a set of potential rules that would open the door for many workers to increase their pensions.

The rules would introduce 98 new forms of “pensionable compensation”, or income that is counted when calculating a worker’s ultimate pension benefit.

But many interested parties didn’t wait until the hearing to voice their opinions. California Gov. Jerry Brown was among the first to voice his displeasure at the potential rules, as they contradict certain sections of the reform law he passed in 2012.

“This disregards the rule that pensions will be based on normal monthly pay and not on short-term, ad hoc pay increases,” Brown wrote in a letter to the CalPERS board. “I urge the board to vote against these regulations and instead request a new draft that excludes temporary pay upgrades from employee pension calculations.”

Other big players weighed in as well. Jon Ortiz writes:

Public pension-change advocates, including Democratic San Jose Mayor Chuck Reed, say the proposal is another sign that the union-dominated CalPERS board “is doing what they can to resist reforms. … They’re in favor of anything that expands benefits.”

Elk Grove City Manager Laura Gill said including temporary upgrade pay “really does invite spiking” and threatens to erode savings from pension changes the Sacramento suburb has enacted the past couple of years, such as city employees paying their share of pension costs.

If such practices became standard, “it would put us backward from all the work we’ve done to have a sustainable and sound pension system,” Gill said.

Unions responded as well, but they were receptive to CalPERS’ plan. From the Sacramento Bee:

Mike Durant, president of the union-backed Peace Officers Research Association of California, dismissed those kinds of concerns. If a city or the state needs pension relief, he said, “they can bargain it.”

Instead, he said, government employers expect CalPERS to save them from themselves.

“They want to put it on the backs of someone else to make those decisions rather than making it themselves,” he said.

You can bet CalPERS is listening to all this. And the pension fund responded to the criticisms in a statement sent out to numerous newspapers, including the Daily Bulletin:

CalPERS has approached this issue with full transparency and sought stakeholder input along the way, including employee and employer feedback. The purpose of the public hearing is to seek even greater input on what compensation should and should not be counted toward pensions.

While reasonable people may disagree about what aspects of a public servant’s compensation should count toward a pension, an editorial should stick to the facts and not try to inflame readers with inaccurate terms like pension spiking. Pay for a service is still compensation at the end of the day. Our staff made a recommendation based on a good-faith interpretation of the law. If changes need to be made, we welcome the public’s input.

CalPERS is holding a hearing today to gather the public’s comments on the proposed rules. Once the hearing is wrapped up, the full CalPERS board will vote on the rules, likely on Wednesday.

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