Ahold Annual Report 2003
Operating and Financial Review and Prospects
43
increase in our estimated discounted future net cash
flows would have reduced the recorded impairment
charge by approximately EUR 9 million. A 10%
decrease in our estimated discounted future net cash
flows would have increased the impairment charge by
approximately EUR 13 million.
Pensions and other post-retirement benefit plans
We sponsor several defined benefit plans and defined
contribution plans for employees. Defined contribution
plans are maintained throughout all of our operating
companies; defined benefit plans are primarily
maintained at operating companies in the U.S. and
The Netherlands. Effective in 2002, we adopted SFAS
No. 87, Employers' Accounting for Pensions ("SFAS
No. 87"), and related accounting standards of the
FASB for our Dutch GAAP financial statements prepared
under Dutch GAAP.
The defined benefit pension plans pay benefits to
employees at retirement using formulas based on
participants' years of service and compensation.
Supplemental plans are maintained for officers and
executives of our U.S. operating companies. We fund
these plans as claims are incurred. We provide life
insurance and healthcare benefits for certain retired
employees meeting age and service requirements
at our U.S. subsidiaries. These plans are also funded
as claims are incurred. We also contribute to various
multi-employer pension plans in the U.S. that are
administered by unions. The amount that we are
obligated to contribute to each such plan and the timing
of our contributions is determined under the terms of
the applicable collective bargaining agreements.
Recorded pensions and other post-retirement
benefit liabilities reflect our best estimate of the future
cost of honoring our obligations under these benefit
plans. We believe the accounting estimate relating to
costs for pensions and other post-retirement benefit
plans is a critical accounting estimate because changes
in it can materially affect the projected benefit
obligations and net periodic pension costs.
In accounting for defined benefit plans, actuarial
calculations are made. These calculations contain key
assumptions, which include: employee turnover,
mortality and retirement ages, discount rates, expected
returns on assets, future salary and benefit levels, claim
rates under medical plans and future medical costs. The
assumptions for the calculations are highly uncertain
and require a large degree of judgment. Each year we
review the key assumptions used in the determination of
the pension obligation plan assets and net periodic
pension cost as prescribed by SFAS No. 87. The
estimate for pension and other post-retirement benefit
plans is a critical accounting estimate for our operations
in the U.S. and Europe.
In accordance with US GAAP, the net periodic
benefit cost is determined at the beginning of the year
based on applicable assumptions at that time. For 2003,
the net periodic benefit cost was EUR 92 million for our
U.S. pension plans, EUR 79 million for our European
pension plans and EUR 8 million for other benefit plans
in the U.S.
The pension obligations are determined at
measurement date of the plans. The measurement date
for the U.S. pension plans is September 30, for the
European pension plans December 31. The discount
rate is based on the yield curve of government bonds in
the applicable region adjusted with a credit spread of
one of the two highest ratings given by a recognized
ratings agency. Future cash outflows of the pension plan
are then related with the yield curve. The average is the
discount rate.
The following table shows the effect of a 0.1%
change in the discount rate:
(in EUR millions)
U.S.
pension
plans
European
pension
plans
Increase by 0.1%
Pension benefit obligations at year-end 2003
9.0
29.9
Net periodic benefit cost 2003
(0.7)
(0.8)
Net periodic benefit cost 2004
(2.7)
(1.6)
Decrease by 0.1%
Pension benefit obligations at year-end 2003
(7.8)
(31.0)
Net periodic benefit cost 2003
0.6
0.8
Net periodic benefit cost 2004
3.1
1.7
The following table shows the effect of a 0.1% change in
the return rates:
U.S.
European
pension
pension
(in EUR millions)
plans
plans
Net periodic benefit cost 2003
0.5
1.2
Net periodic benefit cost 2004
0.5
1.6
Self-insurance program
The captive insurance company, The Molly Anna
Company ("Molly Anna"), fully insures our operating
companies for the losses within the self-insurance layer.
The premium paid to Molly Anna for the expected
ultimate cost of these self-insured claims is estimated
based upon actuarial analysis of historical data and
actuarial assumptions.
Actuarial assumptions include estimated changes
in claim reporting patterns, claim settlement patterns,
judicial decisions, legislation and economic conditions.
In estimating ultimate losses, future loss payments are
projected. The premium is calculated on these actuarial
assumptions and currently discounted at a rate of 5%.
Because of the uncertainty related to inflation rates,
discount rates, litigation trends, legal interpretations,
benefit level changes and claim settlement patterns, we
believe that the calculation of reserves at Molly Anna for
future loss payments is a critical accounting policy.
