Powers of attorney - key steps for SIPP and SSAS providers to mitigate the risks

What is a lasting power of attorney (LPA)?

A power of attorney is a legal document by which an individual gives another person (the attorney) power to act on their behalf.  

An LPA is used by an individual to appoint an attorney to act on their behalf in the event of loss of mental capacity to make decisions.  

An LPA for Property and Financial Affairs authorises the attorney to make decisions about anything relating to the individual's property and financial affairs, including their pension savings.  We focus on this type of LPA in this update.

Why are LPAs an issue for SIPP and SSAS providers?

There has been a six-fold increase in the number of LPAs registered in England and Wales in the last ten years.

With technical pensions decisions being made later in life, particularly given the growth in income drawdown, more and more SIPP and SSAS members are entering into an LPA.

The member-directed nature of a SIPP or SSAS means the attorney will have significant decisions to make on behalf of the member and the provider may be required to take instructions from an attorney on a regular basis.

The provider needs to be certain that an attorney appointed under an LPA has authority to act on the member's behalf.  A member may have substantial assets in their SIPP or SSAS.  This makes them potentially vulnerable to financial abuse by an attorney when they lose mental capacity.

What are the main risks and how can you mitigate them? 

Due diligence checks on an LPA

SIPP or SSAS providers should carry out due diligence checks on the LPA.  These checks protect the vulnerable member and reduce the risk of claims from aggrieved family members that the provider failed to comply with its legal duties, resulting in a financial loss for the member and beneficiaries.
A three-step 'VIP approach' reduces the risks:

Step 1:  Valid?

• Is it the correct type of LPA?
• Is the LPA in the required legal form?
• Has the LPA been registered with the Office of the Public Guardian (in England and Wales)?
• Has the identity of the attorney been verified?

Step 2:  In force?

• Has an event occurred which may automatically terminate the LPA, for example bankruptcy or death of the member or attorney?
• Has the LPA been terminated by the member or the attorney?

Step 3:  Power?

• Is what the attorney is purporting to do within the scope of his or her powers?
• Is the attorney's authority limited by any instructions specified in the LPA?
• Is the attorney delegating investment management decisions to a discretionary investment manager?  Specific wording is required.
• Is the attorney purporting to deal with assets outside England and Wales?  Check that the attorney has power to do so.

If the LPA fails one of the early steps, there is no need to consider the later others. 

Act now to be prepared

SIPP and SSAS providers need to be prepared to deal with LPAs. 

1. Policy

Put in place a policy and procedure for staff to follow, including a due diligence checklist on an LPA.  This will ensure a smoother customer experience and safeguard vulnerable members from exploitation.

2. Escalate complex cases

Include a process in the policy for the escalation of complex LPA cases, setting out the criteria that defines a complex case eg  where there are specific instructions in the LPA.

3. Training

Train staff on LPAs so that they are aware of the potential issues and are familiar with your policy and procedures.

4. Office of the Public Guardian (OPG)

The OPG is responsible for LPAs (in England and Wales).  Make staff aware of the OPG helpline to assist with complex cases.  Any suspicions that an attorney is acting fraudulently should be reported to the OPG for investigation.

5. Member guidance

Provide clarity to members on the approach that you will take to verify the attorney's authority under an LPA.  This will manage expectations and help members to better engage with you.

6. SIPP and SSAS governing documents

Review your trust deeds and rules to check what they say about powers of attorney.  Include in member-facing documents, such as scheme guides, an explanatory section in relation to LPAs.

Member trustees who lack capacity

There are separate considerations where a member who loses mental capacity is also a trustee of their SIPP or SSAS:

Trustee power of attorney

A trustee power of attorney (a different type of power of attorney from an LPA) is required for an attorney to act on behalf of a member in their capacity as a trustee.  It must comply with statutory requirements under the Trustee Act 1925 and be permitted under the trust deed and rules governing the scheme.  It has a maximum 12 months duration, which limits its usefulness in cases of mental incapacity.

Loss of SSAS exemptions

If a member trustee loses mental capacity, they do not automatically cease to act as a trustee.  In these circumstances, it is usually advisable for the trustee to be replaced rather than rely on a trustee power of attorney.  

Where a member is removed as a trustee of a SSAS, it will no longer benefit from a number of exemptions from legal requirements.  Some are more significant than others.  The SSAS will, for example, become subject to the limit on employer-related investments that applies to larger occupational pension schemes.  If the SSAS has employer-related investments (for example a lease-back of property to the employer or holding shares in the employer), the trustees may be exposed to civil and criminal penalties if this limit is breached.  Other requirements, such as the requirement for audited accounts, may be less significant.

If you would like assistance with the above or any other SIPP or SSAS issues, please contact Damien Garrould