Managing Portfolio Drift under the Future Pensions Act (Wtp)

The implementation of the Future Pensions Act (Wtp) introduces a new reality. Monthly allocation of returns, continuously shifting lifecycles and a collective portfolio that moves dynamically with financial markets are now central features of the system. In theory, this framework appears logical and manageable. In practice, however, a structural delay emerges: the Implementation Gap. This is the period between the moment a pension fund knows how the portfolio should be positioned and the moment that portfolio is actually adjusted. During these intervening weeks, markets continue to move, resulting in deviations between intended and realised returns. In a system where excess return feeds directly into individual pension capital, this risk becomes both concrete and material.

Because pension administrators typically deliver updated valuations and actuarial adjustments only weeks after month-end, LDI managers and asset managers are forced to operate with outdated steering information. The reality is that a fund gains visibility into the appropriate composition of the protection and return portfolios for the new month only at a late stage. Meanwhile, interest rates may shift materially and equity markets may rise or fall, causing the actual portfolio to deviate structurally from the target portfolio. As a result, the dispersion between intended and realised returns increases. This effect is particularly pronounced for younger cohorts, as all mismatches are absorbed by the excess return. In this way, an invisible risk is created that may only become apparent months later in individual pension capital outcomes.

The impact of this delay is far from trivial. Simulation analysis shows that even a delay of just a few weeks can lead to meaningful differences in outcomes. A mismatch of 0.2 percent per month may appear modest, but it equates to more than 2.4 percent on an annual basis. When compounded over multiple years, this can significantly affect the eventual pension outcome. For cohorts with higher exposure to equities and excess return, such as younger participants, the associated risk is substantial. At the same time, the size and composition of the fund play an important role. In more mature funds with a large proportion of older participants, deviations are transmitted even more strongly to younger cohorts.

For this reason, the middle function becomes critical under the Wtp framework. By providing daily insight into the target portfolio, protection returns, cash flows and risk exposures, the Implementation Gap can be effectively closed. This enables pension fund boards to rebalance in a timely manner, identify deviations at an early stage and maintain transparency over risks for both governance bodies and participants. While many funds still operate on the basis of monthly figures today, daily steering information is becoming the new standard under the solidarity-based defined contribution scheme. The question is not whether this transition is necessary, but when it will become unavoidable.