Pensions lobby on index rules

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A group of institutional investors has backed calls by the UK’s National Association of Pension Funds for companies to allow at least half of their shares to be traded freely in order to be eligible to enter the UK’s flagship equity indices.

Last week FTSE Group raised the minimum free float threshold for entry to its UK indices from 15 to 25 per cent, prompting the NAPF to go further and urge FTSE to double this limit to 50 per cent.

Now an alliance of investors, including the Universities Superannuation Scheme, the UK’s second-largest pension fund, Railpen, Royal London Asset Management, and Aerion Fund Management, has backed the NAPF, arguing that entry to a FTSE index should be seen as a privilege that provides access to a “huge” pool of equity capital.

Ben Levenstein, head of UK equities at USS, said: “Investor capital must not be taken for granted. In return for offering our capital, we must know our interests are protected. A higher free float will help provide that protection. Unless these concerns are addressed, risks to investors will rise and capital will naturally become more expensive.”

The campaign coincides with data suggesting companies in which founders and related parties own the bulk of the equity tend to have lower standards of governance.

Research by Grant Thornton, a professional services firm, found that just 17 per cent of FTSE 350 companies with a free float of less than 50 per cent complied with the UK Code on Corporate Governance.

In contrast, 59 per cent of companies with free floats above 90 per cent were in compliance.

Companies with lower free floats were also less likely to ensure half of their board consisted of independent non-executive directors, disclose the potential maximum remuneration of directors or release detailed disclosures of their board evaluations.

“There is a definite correlation between companies’ attitudes to governance and the amount of shares in free float,” said Simon Lowe, a partner at Grant Thornton. Investors in companies with a low free float had to be “on guard”, he said.

“It’s a warning sign. There is a chance that the board may feel less answerable to [minority] shareholders,” said Mr Lowe.

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