Director’s pension leads to potential section 175 conflict

Thomas Cook board authorises potential conflict of interest of director who is in receipt of Thomas Cook pension

Section 175 of the Companies Act 2006 requires a director to “avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”. An actual or potential conflict can be authorised by the Board (in the case of a public company, the articles of association must expressly allow the Board to give the authorisation).

Generally, a director being a member of the company’s defined benefit pension scheme will not be reasonably regarded as likely to give rise to a conflict of interest. The situation is different if the director is also a trustee of the pension scheme, and in that case the Board will need to consider and if thought fit authorise the director in relation to any potential conflict between his role as a director and his role as a pension scheme trustee.

What if a director is already in receipt of his pension from the company’s pension scheme? This will not often arise, but it did recently at Thomas Cook Group plc. Peter Middleton is a non-executive director of Thomas Cook and served as the company’s CEO from 1987 to 1992. Mr Middleton is in receipt of a pension of £60,523 a year from the Thomas Cook defined benefit pension scheme, which accrued whilst he was the company’s CEO.

The Thomas Cook Board took the view that the receipt of this pension by Mr Middleton gave rise to a potential conflict. The Board decided to authorise the potential conflict – but imposed a condition that Mr Middleton should not participate in any discussion or decision regarding any Group pension scheme. From the Thomas Cook 2011 Annual Report:

“The Board recognises that being in receipt of a pension from the Group’s pension scheme gives rise to a potential conflict, which it has authorised as permitted by the Company’s Articles of Association, subject to the condition that he [Mr Middleton] does not participate in any discussion or decision regarding any of the Group’s pension schemes.”

The Board also had to determine whether the receipt of the pension meant that Mr Middleton was not independent for the purposes of the UK Corporate Governance Code. The Board decided that the condition imposed as part of the authorisation of the potential conflict was sufficient to maintain Mr Middleton’s independence, given that he was independent in all other respects.

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