Active & Passive Management

There are broadly two different ways in which your pension savings can be managed.  These two investment approaches are known as active and passive management.  Within your pension scheme you may be able to choose between these different types, so you should check in your Scheme Booklet or with your employer to see if this is the case.

Active management

The aim of an actively managed fund is to achieve returns that, over the long term, are better than those of a specified benchmark.  The benchmark may be an index – reflecting the performance of a particular investment market – or the average return of similar funds.

Active managers seek to outperform the benchmarks of their funds by dedicating substantial resources to researching economies, industries and companies.

The attraction of active management is the potential for achieving investment returns that are higher than those of the fund's benchmark.

Passive management

The aim of a passively managed fund is to achieve a return as close as possible to a particular benchmark. Passive management is often also known as index tracking, since the benchmark followed is typically an index. For example, one measure of the performance of the UK equity market is the return of the FTSE All-Share Index, which is based on the share prices of over 700 UK companies.  So, passive funds would invest in the same shares as the FTSE All-Share Index and in the same proportions, or would use analytical techniques to create the same effect with a more limited selection of shares in order to achieve this more economically.

The attractions of passive management are that the fees tend to be lower than those for active management, and investment returns will broadly reflect those of the market.  However, there is also no opportunity to benefit from active investment returns which could be higher than the index.