Navigating Rates
The value of active strategies in old-age provision
The end of artificially low interest rates, and a greater focus on “value for money”, support the case for active over passive strategies in unit-linked and pension products.
Key takeaways
- The choice between active and passive strategies should not be reduced to a binary decision, eg, based solely on fees.
- Instead, it should reflect the investor’s unique goals, the product framework (eg, unitlinked or pension plans) and the market environment.
- In the context of old-age provision, we question the suitability of passive strategies. In a competitive market situation, with greater volatility and structural shifts, we think active approaches with selective decisions have greater potential to outperform and protect wealth.
The health benefits of staying physically active in retirement are well known. But what about the benefits to financial health of investing in active strategies?
Passive strategies, such as exchangetraded funds (ETFs), are often favoured for their simplicity and cost efficiency. Yet these strategies gained popularity during a decade dominated by a single global factor: artificially low interest rates. This environment created consistent growth and low volatility across asset classes, which worked to the advantage of static, indextracking funds.
Today, we believe that advantage has eroded. The post-low-yield era presents a more challenging environment characterised by divergent growth risks, inflation pressures and structural shifts across regions and sectors. In our opinion, these dynamics demand a more active and flexible approach.
In this article, we look at the pros and cons of active and passive strategies as they relate to retirement, particularly in unit-linked and pension products. We conclude that, in our view, active strategies are well positioned to deliver financial security and stability in old age.
The landscape of retirement planning is evolving
The world is undergoing a profound demographic transformation. Life expectancy has risen from 45 years in 1950 to over 73 years today, and is projected to reach 77 by 2050.1 At the same time, the number of retirees is set to double from 806 million in 2023 to 1.6 billion by mid-century.2 This shift places huge pressure on pension systems, which are struggling to meet the needs of ageing populations. As a result, individuals must take on greater responsibility for planning and securing their retirement income.
This demographic change is happening alongside a fundamental shift in the economic environment. Previously, artificially low interest rates tended to boost asset classes such as equities. This contributed to lower volatility and arguably minimised the need for active management. But in the post-lowyield era, global markets face an array of divergent growth risks.
Higher interest rates, inflationary pressures and geopolitical tensions have created a complex environment in which, we believe, static, index-tracking strategies may be increasingly vulnerable. In our view, investors today require solutions that can adapt dynamically to structural shifts while actively managing risks in a more fragmented global economy.
Investment products for retirees may offer better value for money than ever
In parallel with these changes, regulators and supervisors such as the European Insurance and Occupational Pensions Authority have introduced the concept of “value for money” as a benchmark for evaluating financial products. While cost efficiency is important, “value for money” expands the focus to include the overall benefits delivered to retail investors.3
According to the authority, financial products that offer “value for money” should: deliver appropriate returns for the level of risk taken; navigate market volatility and structural shifts over time; incorporate environmental, social and governance (ESG) factors to align investments with societal expectations; and safeguard against downside risks, particularly for longterm retirement objectives.
For unit-linked and pension products, a focus on value for money is particularly beneficial; it means investors can potentially access tailored retirement solutions with institutional-grade funds and pricing.
Benefits of active strategies in retirement
To make the selection between active and passive strategies in retirement, it is important to understand the benefits and drawbacks of each strategy as they relate to old-age provision. First, let’s examine actively managed strategies.
1. Potentially higher returns:
Active fund managers aim to outperform the general market or a benchmark index.
2. Flexibility:
Fund managers can adapt their investment strategy to changing market conditions and invest in opportunities they deem promising. Markets experience volatility over time, which can impact old-age provision.
3. Ability to control risk:
Active fund managers have the flexibility to change the composition of the portfolio with the aim of reducing risk and improving the return-risk balance. (This is particularly relevant if targetdriven active strategies are used, which give the investor an “autopilot” function where the fund manager works to a pre-determined risk tolerance.)
4. Sustainability and active security selection:
Active fund managers can dynamically adapt to sustainability standards and select individual securities to meet the needs and preferences of investors based on their judgment, whereas passive funds, such as ESG ETFs, may be less responsive due to their reliance on static, exclusion-based indices.
Drawbacks of active strategies in retirement
1. Higher costs:
Active management requires more resources and therefore typically incurs higher management costs, which can reduce the fund’s overall return. (However, new unit-linked tariffs and defined contribution-type pension plans often use institutional share classes with significant discounts compared with the standard retail offering.)
2. Potentially worse performance:
Studies have shown that many active funds fail to outperform the market over the long term, which can lead to disappointing returns for investors. However, most of these analyses consider retail share classes, which include advisory fee components for distribution partners, which are not relevant within standard old-age provision contracts today.4
3. Tax consequences:
Active funds may be rotated more frequently, which may result in higher tax charges when capital gains are realised. But these tax challenges are typically not relevant in unit-linked structures.
4. Potential focus on short-term trends:
In retail portfolios, shorter-term trend portfolios may have a higher share of allocations. (However, old-age provision structures are mostly linked to long-term investment ideas, or make use of dedicated asset allocation models suitable for special investment targets and horizon, such as lifecycle strategies within target-date portfolios.)
Benefits of passive strategies in retirement
It is now time to examine passive strategies to understand how they compare with active in terms of old-age provision. First, the benefits.
1. Lower costs:
Passive funds typically have lower management and transaction costs because there is no active management or frequent turnover of assets. This leaves more return potential for investors.
2. Broad diversification:
Passive funds usually track a specific index consisting of a variety of securities. This reduces risk through broad diversification across different assets and sectors (though active funds can also be linked to broadly diversified reference markets).
3. Transparency:
The investment strategy of a passive fund is clearly defined as it simply tracks the underlying index. Investors know exactly which assets the fund is invested in. But for many retail investors, the exact composition of underlying indices is not widely understood. These underlying indices are complex, for example, indices like the S&P 500 or Nasdaq 100 include hundreds of stocks, each with different weightings. Understanding the exact composition and the methodology behind these indices requires a deep dive into financial data and index construction rules.
4. Easy to invest:
Passive funds are considered relatively easy to understand and buy. Investors can gain access to a wide range of assets by purchasing a passive fund without having to select individual stocks or bonds.
Drawbacks of passive strategies in retirement
1. Limited return prospects:
Because passive funds only track the market, they usually have little or no potential to outperform the market. The fund performance is therefore dependent on the index, and if it performs poorly, the fund will match that poor performance.
2. No active risk management:
Passive funds do not adapt to changing market conditions, which means they may not perform as well during volatile market periods as active funds, which can adjust their portfolios.
3. Cluster risk:
In passive funds, certain companies or sectors can grow to become overrepresented in the underlying index, creating potential “cluster risk”. Poor performance by these companies or sectors can have a disproportionately negative impact on the performance of the index and the passive funds tracking it.
4. Limited control over sustainability aspects:
ESG ETFs often differ in their approach, which means it may be challenging for investors to select funds to reflect their sustainability goals and preferences.
Active managers are arguably better positioned to address sustainability
There are further differences when it comes to sustainability. Passive strategies, such as socially responsible ETFs, face inherent limitations due to their reliance on static, exclusionbased indices. These funds may be slower to adapt to evolving ESG data or controversies, which may mean they continue to hold companies with emerging environmental or social issues longer than actively managed sustainable funds. The rapid growth of ESG-labelled ETFs has also raised greenwashing concerns, as many rely on broad ratings rather than rigorous analysis.5 This standardised approach often misses companies transitioning toward sustainability, which may reduce the effectiveness of passive ESG strategies.6
In contrast, active managers can integrate ESG factors throughout the investment process, using in-depth research and direct engagement to identify risks and seize sustainability opportunities. Unlike passive strategies that may rely on exclusions, they can divest from companies with poor ESG practices or engage with management to push for improvement. This flexibility is particularly valuable under evolving regulations such as the Sustainable Finance Disclosure Regulation in Europe, because it enables active managers to update criteria and reallocate to companies making ESG progress, thereby aligning portfolios with investor expectations for meaningful impact. This adaptability aligns with investor expectations for genuine, impact-driven ESG integration.7
Another difference is that active managers can engage directly with companies by using dialogue to drive change in areas such as transparency, climate action and social responsibility. This stewardship advantage aligns investments more closely with investor values and regulatory goals. In contrast, passive funds are constrained by index-tracking mandates, which may limit their ability to advocate for meaningful ESG improvements.
Sustainability is also relevant to regulators’ focus on “value for money”, because the concept extends to evaluating overall utility, including risk-adjusted returns, financial protection and sustainable wealth growth. This regulatory direction has a vital role in safeguarding longterm investor interests.
Securing the future for long-term success
Selecting between active and passive investment strategies is often seen as a balancing act. While passive strategies are favoured for their perceived simplicity and lower fees, this narrative often fails to account for the complexities and demands of a forward-looking market environment. We believe the evolving financial landscape, marked by increased market volatility, structural shifts and heightened sustainability goals, calls for solutions that can adapt dynamically and manage risks proactively. Active strategies aim to deliver on these needs by offering tailored risk management, dynamic asset allocation, unique access to institutional-grade underlying funds, and sustainability integration.
In the context of retirement, it’s important to note that the cost narrative that once supported passive strategies diminishes within the context of unit-linked products. Institutional share classes may narrow the fee gap significantly, while we would argue that active strategies justify their higher costs by delivering enhanced value through potentially better risk-adjusted returns and proactive stewardship.
In the end, success in retirement planning hinges on careful preparation, regular review and a commitment to long-term objectives. We believe active strategies offer not just a method, but a philosophy – one that prioritises adaptability, foresight, value and alignment with the unique needs of retirement-focused investors.
1 United Nations, World Population Ageing 2023: Challenges and opportunities of population ageing in the least developed countries
2 Ibid
3 EIOPA methodology on value-for-money benchmark 2024
4 In most markets, publicly traded insurance companies often hold legal ownership of fund shares within unit-linked contracts, thus using institutional share classes.
5 Financial Times, April 2023 Investors warned of ‘greenwashing’ risk as ESG-labelled funds double
6 MorningStar research 2023, 2024
7 Bloomberg 2024 ESG data as the key differentiator between active and passive strategies
