How we manage risk
31 www.ahold.com/reports2008
Governance
AHOLD ANNUAL REPORT 2008 I 28
Contingent liabilities associated with lease guarantees
Following the divestment of subsidiary businesses, such as
BI-LO, Bruno's and Tops, or the closure of facilities, Ahold has
outstanding contingent liabilities to third parties in the form
of lease guarantees it issued in relation to the obligations and
commitments of these entities. For additional information, see
Note 33 to the consolidated financial statements. If BI-LO,
Bruno's, Tops or a significant number of other such third parties
fail to meet their obligations under assigned leases subject to
outstanding Ahold guarantees, whether due to the impact of
current macroeconomic conditions on their businesses or
otherwise, Ahold may be required to satisfy such guarantees.
This could have a material adverse effect on Ahold's financial
position, results of operations and liquidity.
Ahold faces risks related to pension and health care funding
requirements. Decreasing interest rates, poor performance of the
stock markets and the rising cost of health care benefits may
cause Ahold to record significant charges related to its pension
and benefit plans
Ahold has a number of defined benefit pension plans, covering
a substantial number of its employees in the Netherlands and
in the United States. Falling stock and bond market values
negatively affect the assets of Ahold's pension funds. Lower
interest rates result in higher pension obligations, which may
lead to higher pension charges, pension premiums and
contributions payable. Some of Ahold's employees in the United
States are covered by multi-employer plans, which have a total
unfunded liability of EUR 4.2 billion as of December 31, 2007
(the latest date for which information is available). We estimate
our proportionate share of the total unfunded liability of these
plans at EUR 375 million. This estimate does not reflect the
expected negative 2008 returns on plan assets, which could
significantly increase the deficit. These unfunded liabilities
are not recognized in Ahold's consolidated balance sheet.
The unfunded liabilities of these plans may result in increased
future payments by Ahold and the other participating employers.
Furthermore, our proportionate share of unfunded liabilities may
increase if any of the participating employers in an underfunded
multi-employer plan withdraws from the plan due to insolvency
and is not able to contribute enough to fund the unfunded
liabilities associated with its plan participants.
If Ahold is unable to meet any required funding obligations for
certain of its U.S. pension plans, or if the Pension Benefit
Guaranty Corporation (the PBGC), as the insurer of some U.S.
plan benefits, concludes that its risk may increase unreasonably
if the plans continue, the PBGC could terminate the plans and
place liens on material amounts of the Company's assets, under
the U.S. Employee Retirement Income Security Act of 1974
(ERISA). The pension plans covering our Dutch operations are
regulated by the Dutch Central Bank (De Nederlandsche Bank
or DNB). Ahold has entered into a financial agreement covering
these Dutch pension plans under which we may be required to
make additional contributions to our pension plans in order to
meet the minimum DNB funding requirements. In addition,
U.S. health care costs have risen significantly in recent years -
a trend which is expected to continue. Ahold may be required
to pay significantly higher amounts to fund U.S. employee
health care plans in the future. Significant increases in pension
and health care funding requirements could have a material
adverse effect on the Company's financial position, results
of operations and liquidity. For additional information, see
Note 22 to the consolidated financial statements included
in this Annual Report.
Compliance and regulatory risks
Ahold may face unforeseen tax liabilities in the future, including
as a result of audits of the Company's tax returns
Because Ahold operates in a number of countries, its income is
subject to taxation in differing jurisdictions with a range of tax
rates. Therefore, Ahold needs to apply significant judgment to
determine its consolidated income tax position. We seek to
organize our affairs in a tax-efficient and balanced manner,
taking into account the applicable regulations of the
jurisdictions in which we operate. As a result of our multi-
jurisdictional operations, we are exposed to a number of
different tax risks including, but not limited to, changes in tax
laws or interpretations of these tax laws. The tax authorities in
the jurisdictions where we operate may audit Ahold's tax returns
and may disagree with the positions taken in those returns.
An adverse outcome resulting from any settlement or future
examination of Ahold's tax returns may result in additional tax
liabilities and may adversely affect our effective tax rate, which
could have a material adverse effect on Ahold's financial
position, results of operations and liquidity. In addition, any
examination by the tax authorities could cause us to incur
significant legal expenses and divert management's attention
from the operation of our business.
