Your Pension May Be Gambling On Human Life, Profiting From COVID Deaths

Whether you know it or not, your pension may be gambling on highly-speculative life settlement funds which profit when people die prematurely from COVID. Life settlement funds are controversial for a host of obvious and not-so-obvious reasons. These investments in a pension ensuring the retirement security of workers is doubly problematic.

Many public and private pensions are gambling on highly speculative funds that invest in so-called “longevity-contingent assets,” such as life insurance policies insuring the lives of individuals who are generally at least 70 years old.  The insured individual must have a life expectancy ranging from, say, not less than two years to not more than 15 years. A given fund may have exposure to hundreds of lives in the portfolio with an average insured age of over 80 years old.

The sooner the terminally ill and other elderly insured individuals die, the better—as far as your pension is concerned.

With more than 80% of COVID deaths in the United States occurring in people aged 65 and older, this should be the best of times for gambling on these controversial funds which often promise annualized returns ranging from 8-12%. (Actual net returns are likely to be less than half those promised.)

If so, would it comfort you to know your pension was profiting from the misery of others?

Do you know whether your pension invests in life settlements? Have any such investments been clearly disclosed to you? Do the people managing your pension even know?

Believe it or not, they may not.

Today many alternative investment funds provide that they may withhold disclosure of underlying investments from pensions and participants, including stinky stuff like payday loans and life settlements.

Life settlement funds are controversial for a host of obvious and not-so-obvious reasons. Gambling on these highly speculative investments in a pension ensuring the retirement security of workers is doubly problematic.

Many regulators, lawmakers and other governmental authorities, as well as many insurance companies and insurance industry organizations, oppose the selling and buying of longevity-contingent assets. The industry and some of its participants have long been in legal and regulatory hot water. Opponents of the industry argue that these life insurance transactions are contrary to public policy by promoting financial speculation on human life and all-too-often involve elements of fraud and other wrongdoing.    

Ask yourself: Why would an elderly, sickly or terminally ill insured person sell his or her life insurance policy? Because he or she needs cash to cover rising medical costs and living expenses? What are the chances the sale of that individual’s life insurance policy may have been coerced or induced by fraud? It’s no surprise that thoughtful regulators and lawmakers would be highly concerned.

The limited regulatory oversight of these funds is another major red flag. Many funds take the position that whole life settlements do not constitute “securities” under the federal securities laws and do not register as investment companies under the Investment Company Act of 1940. Compliance with other federal and state securities laws is also a concern. The SEC has long had difficulty reigning in industry abuses since unless “securities” are involved the agency generally lacks jurisdiction.

Worst of all, since the portfolio investments of these funds do not currently have a readily available market for valuation purposes, the likelihood that portfolio values, as well as investment returns may be inflated by the managers is high. This is particularly troublesome for open-ended investment funds, where new investors may be buying into a fund at an already inflated Net Asset Value (NAV). The life settlement asset class has had a troubled past with respect to inflated NAVs caused by funds underestimating life expectancies.

In other words, fund managers, are so hopeful that the old and sick insureds will die sooner rather than later, they assume the life expectancies will be shorter.

In Europe, a number of open-end funds (so-called “sickened death bond funds”) have “gated,” trapping investors. After waiting several years for the funds to liquidate, investors have recovered only pennies on the dollar.

In my opinion, additional regulatory action regarding overvaluations of the portfolios of these funds is almost certainly coming. If so, your pension—your retirement security—may be at risk.

In 2016, the Office of the Virgin Islands Inspector General issued a scathing report finding that the Virgin Islands General Employees Retirement System had entered into an extremely risky and questionable life settlement investment that jeopardized about $42 million of its investment portfolio. “This was done without performing the necessary due diligence and obtaining the necessary expert advice, before exposing the pension fund to this high-risk investment. As a result, GERS has already written-off 20% or $8.4 million of the remaining value. In addition, GERS also granted a $10 million line of credit to the same partnership that is handling the viatical. The majority of the proceeds were to pay past due and near term premiums for the policies.”

An advisor to the pension noted, “There is uncertainty on the use of viaticals as an investment by a defined benefit plan.” Also, “The nature of the investment in viaticals, that is an investment seeking profits off death, raises issues of social responsibility.”

To be sure, in my opinion, life settlement funds are the antithesis of socially responsible investing.

Should your retirement savings be in “longevity-contingent assets” supporting speculation on human life which often involve elements of fraud and other wrongdoing? First, find out whether your pension is invested in these funds, then let your voice be heard. Best case scenario—your pension is profiting from the misery of others. Far more likely—it’s losing money playing in this nasty sandbox.

For more on how to protect your pension, see my book Who Stole My Pension?