Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 123 Note 4.6 Transfer of financial assets Financial comments The Group has invested in mortgage bonds underlying its mortgage debt. The reason for investing in mortgage bonds is that the Group is able to achieve a lower interest rate than current market interest rates on mortgage debt by entering into a sale and repurchase agreement on the listed Danish mortgage bonds. The net interest rate payable, by raising financing through this kind of sale and repurchase agreement, is the interest rate inherent in the sale and repurchase agreement and the contribution to the mortgage institute. Due to the repurchase agreement, the risks and rewards arising from the ownership of transferred mortgage bonds have been retained by the Group. These mortgage bonds have been classified as available for sale with value adjustments recognised through other comprehensive income. The received proceeds create a repurchase obligation which has been recognised within short-term loans. Table 4.6 Transfer of financial assests (EURm) 2016 Mortgage bonds Repurchase liability Net position 2015 Mortgage bonds Repurchase liability Net position Carrying value 496 -496 - 501 -498 3 Notional amount 508 -507 1 513 -513 - Fair value 496 -496 - 501 -498 3 Note 4.7 Pension liabilities Lower interest rate causes higher pension deficit In 2016, responsibility for the Group’s defined benefit pension plans was centralised to the treasury department and is thereby managed as an integrated part of the Group’s external debt. Pension liability consists primarily of defined benefit plans in the UK and Sweden. The defined benefit plans provide pension disbursements to participating employees based on seniority and final salary. Net pension liabilities on 31 December 2016 were recognised at EUR 369 million, an increase of EUR 75 million compared to last year. The carrying value of defined benefit plans increased primarily in the UK due to actuarial losses related to lower discount rates. This was partly offset by payments to the schemes and currency translation effect. Pension plans in Sweden The defined benefit plan in Sweden does not currently require the Group to make cash contributions. The recognised net liability stood at EUR 185 million on 31 December 2016, the same level as last year. An actuarial loss of EUR 11 million, resulting from a decrease in the discount rate, was offset by a foreign exchange rate adjustment of EUR 9 million. These pension plans are contribution-based plans, guaranteeing defined benefit pension at retirement. Contributions are paid by the Group. The schemes do not provide any insured disability benefits. The plan assets are legally structured as a trust and the Group has control over the operation of the plans and their investments. The investment of the assets is based on the investment strategy defined by the board of the trust. These pension plans do not include a risk-sharing element between the Group and the plan participants. Pension plans in the UK The defined benefit plans in the UK are administered by independent pension funds that invest deposited amounts to cover pension liabilities. At 31 December 2016 the recognised net liability was EUR 150 million, representing an increase of EUR 73 million compared to last year. The value of the liability totalled EUR 1,425 million, an increase of EUR 61 million compared to last year. The increase in the net pension liability is primarily related to actuarial losses of EUR 119 million due to lower discount rates, partly offset by payments into the plans amounting to EUR 34 million, and a foreign exchange rate adjustment of EUR 14 million. These pension plans are defined benefit final salary schemes. The schemes are closed to both new entrants and future accrual. Employer contributions are determined with the advice of independent qualified actuaries on the basis of tri-annual valuations. The schemes do not provide any insured disability benefits. The schemes are legally structured as trust-based statutory sectionalised pension schemes. The Group has limited control over the operation of the plans and their investments. The trustees of the scheme set the investment strategy and have established a policy on asset allocation to best match the assets to the liabilities of the scheme. The trustees appoint an independent external advisor to the schemes who is responsible for advising on the investment strategy and investing the assets. The pension plans do not include a risk-sharing element between the Group and the plan participants.
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