Pensions and other retirement benefit plans
Claims and provisions
For a full discussion of our accounting treatment of
non-current assets, see Notes 3 and 14 through 17 to our
consolidated financial statements included in this annual
report.
We sponsor several defined benefit plans and defined
contribution plans for employees, primarily in the U.S. and
the Netherlands. 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
supplemental 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.
These are generally accounted for as defined contribution
plans. The terms of the applicable collective bargaining
agreements define the amounts that we must contribute
to each such plan and when we must make these
contributions.
Recognized pensions and other 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
retirement benefit plans is a critical accounting estimate
because changes in it can materially affect the projected
benefit obligations and net periodic pension costs.
We use actuarial calculations when accounting for defined
benefit plans. These calculations contain key assumptions,
which include discount rate, the expected long-term rate of
return on plan assets and the rates of increase in
compensation and health care costs, employee turnover,
mortality and retirement ages and claim rates under medical
plans. We apply the corridor approach in recognizing
differences between actual results and those expected based
on the assumptions (i.e. actuarial gains and losses). If, for a
specific plan, the net unrecognized actuarial gains and
losses at the balance sheet date exceed the greater of 10%
of the fair value of the plan assets and 10% of the defined
benefit obligation, the excess is taken into account in
determining net periodic expense for the subsequent period.
The amount then expensed in the subsequent period is the
excess divided by the expected remaining average working
lives of employees covered by that plan. 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 plan
obligations and net periodic pension cost. The pension plan
obligations are determined at December 31. The discount
rate is based on interest rates of high-quality corporate
bonds denominated in the currency in which the benefits
will be paid, and that have an average duration consistent
with the expected duration of the related pension liabilities.
The following table shows the effect on our pension
obligations and on net periodic benefit cost as a result of a
0.1% change in the discount rate. Dutch pension plans and
U.S. pension plans are shown in the aggregate:
Euros in millions
Dutch
pension plans
U.S.
pension plans
0.1% increase
Pension benefit obligations at
year-end 2005
(40)
(21)
Net periodic benefit cost 2005
(2.5)
(2.5)
Net periodic benefit cost 2006
(1.7)
(1.9)
0.1% decrease
Pension benefit obligations at
year-end 2005
40
21
Net periodic benefit cost 2005
2.6
2.5
Net periodic benefit cost 2006
1.7
2.8
For a full discussion of our accounting treatment of pensions
and other retirement benefit plans, see Notes 3 and 24 to
our consolidated financial statements included in this
annual report.
We are party to a number of legal proceedings arising out of
our business operations. Such legal proceedings are subject
to inherent uncertainties. Management, where appropriate
supported by internal and external legal counsels,
determines whether it is more likely than not that an outflow
of resources will be required to settle an obligation. If this is
the case, the amount of the outflow of resources has to be
estimated and a provision is recognized for the best estimate
of the expenditure required to settle the obligation. Material
obligations for which an outflow of resources is reasonably
possible, but not more likely than not, or of which no
reliable estimate can be made, are disclosed a contingent
liabilities but no provision is made.
Furthermore, we are self-insured for certain potential losses
that may arise in our U.S. operating companies for losses
related mainly to general liability, commercial vehicle
liability and workers' compensation. We have stop-loss
coverage to limit the exposure arising from these claims.
It is our policy to recognize our self-insurance program
liabilities based on claims filed, along with an estimate of
AHOLD ANNUAL REPORT 2005 81
