IAS 19 US multi-employer defined benefit plans treated as defined contribution because of insufficient information

Koninklijke Ahold Delhaize N.V. – Annual report – 31 December 2019

Industry: retail

24 Pensions and other post-employment benefits (extract)

Multi-employer plans

A significant number of union employees in the United States are covered by multi-employer plans based on obligations arising from collective bargaining agreements. These plans provide retirement and other benefits to participants generally based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions and they are typically responsible for oversight of the investment of the assets and administration of the plan. Contribution rates and, in some instances, benefit levels are generally determined through the collective bargaining process between the participating employers and unions. With the exception of the Mid-Atlantic UFCW & Participating Employers Pension Fund as explained below, none of the Company’s collective bargaining agreements require an increase in the Company’s total pension contributions to meet minimum funding requirements.

Most of these plans are defined contribution plans. All plans that are defined benefit plans, on the basis of the terms of the benefits provided, are accounted for as defined contribution plans because, among other things, there is insufficient information available to account for these plans as defined benefit plans. These plans are generally flat dollar benefit plans. Ahold Delhaize is generally one of several employers participating in most of these plans and, in the event that Ahold Delhaize withdraws from a plan, its allocable share of the plan’s obligations (with certain exceptions) would be based upon unfunded vested benefits in the plan at the time of such withdrawal. Ahold Delhaize’s obligation to pay for its allocable share of a plan’s unfunded vested benefits is called a withdrawal liability. The withdrawal liability payable by Ahold Delhaize at such time as it experiences a withdrawal from a plan is based upon the applicable statutory formula, plan computation methods and actuarial assumptions, and the amount of the plan’s unfunded benefits. Ahold Delhaize does not have sufficient information to accurately determine its ratable share of plan obligations and assets following defined benefit accounting principles and the financial statements of the multi-employer plans are drawn up on the basis of other accounting policies than those applied by Ahold Delhaize. Consequently, these multi-employer plans are not included in the Company’s balance sheet.

The risks of participating in multi-employer plans are different from the risks of single employer plans. Ahold Delhaize’s contributions are pooled with the contributions of other contributing employers, and are therefore used to provide benefits to employees of these other participating employers. If other participating employers cease to participate in the plan without paying their allocable portion of the plan’s unfunded obligations, this could result in increases in the amount of the plan’s unfunded benefits and, thus, Ahold Delhaize’s future contributions. Similarly, if a number of employers cease to have employees participating in the plan, Ahold Delhaize could be responsible for an increased share of the plan’s deficit. If Ahold Delhaize seeks to withdraw from a multi-employer plan, it generally must obtain the agreement of the applicable unions and will likely be required to pay withdrawal liability in connection with this. If a multi-employer plan in which Ahold Delhaize participates becomes insolvent, Ahold Delhaize may be required to increase its contributions, in certain circumstances, to fund the payment of benefits by the multi-employer plan.

Defined benefit plans

Ahold Delhaize participates in 11 multi-employer pension plans that are defined benefit plans on the basis of the terms of the benefits provided. The Company’s participation in these multi-employer plans is outlined in the following tables.

Ahold Delhaize’s participation percentage is an indication based on the relevant amount of its contributions during the year in relation to the total amount of contributions made to the plan.

The estimate of the Company’s net proportionate share of the plans’ deficits is based on the latest available information received from these plans, such as the plans’ measurement of plan assets and the use of discount rates between 6.5% and 8.5%. The estimate does not represent Ahold Delhaize’s direct obligation. While it is our best estimate, based upon information available to us, it is imprecise and a reliable estimate of the amount of the obligation cannot be made.

The EIN / Pension Plan Number column provides the Employer Identification Number (EIN) and the three-digit pension plan number. As with all pension plans, multi-employer pension plans in the U.S. are regulated by the Employee Retirement Income Security Act of 1974 (ERISA), as amended; the Pension Protection Act of 2006 (PPA); and the Multi-employer Pension Reform Act of 2014 (MPRA), among other legislation.

Under the PPA, plans are categorized as “endangered” (Yellow Zone), “seriously endangered” (Orange Zone), “critical” (Red Zone), or neither endangered nor critical (Green Zone). This categorization is primarily based on three measures: the plan’s funded percentage, the number of years before the plan is projected to have a minimum funding deficiency under ERISA and the number of years before the plan is projected to become insolvent.

A plan is in the “Yellow Zone” if the funded percentage is less than 80% or a minimum funding deficiency is projected within seven years. If both of these triggers are reached, the plan is in the “Orange Zone.” Generally, a plan is in the “Red Zone” if a funding deficiency is projected at any time in the next four years (or five years if the funded percentage is less than 65%). Plans with a funding ratio above 80% are generally designated as being in the “Green Zone.” A plan in the “Red Zone” may be further categorized as “critical and declining” if the plan is projected to become insolvent within the current year or within either the next 14 years or the next 19 years, depending on the plan’s ratio of inactive participants to active participants and the plan’s specific funding percentage. Multi-employer plans in endangered or critical status are required by U.S. law to develop either a funding improvement plan (FIP) or a rehabilitation plan (RP) to enhance funding through reductions in benefits, increases in contributions, or both.

The FIP / RP Status Pending / Implemented column in the table below indicates plans for which an FIP or an RP is pending or has been implemented. Additional information regarding the multi-employer plans listed in the following tables can be found on the website of the U.S. Department of Labor (www.efast.dol.gov).

1 Form 5500 is part of ERISA’s overall reporting and disclosure framework and includes the financial statements of a multi‑employer plan.

2 The deficit / (surplus) of the plans is heavily influenced by the discount rate applied by the plans, which ranges between 6.5% and 8.5%. Multi-employer plans discount the liabilities at the plan’s expected rate of return on assets. As a plan nearing insolvency reduces liquidity risk and expected volatility, its expected rate of return on assets declines and, as such, the discount rate will decline, resulting in an increase of the deficit within the plan.

3 Ahold Delhaize’s proportionate share of deficit (surplus) is calculated by multiplying the deficit / (surplus) of each plan that the Company participates in by Ahold Delhaize’s participation percentage in that plan. This proportional share of deficit / (surplus) is an indication of our share of deficit / (surplus) based on the best available information. The deficit is calculated in accordance with the accounting policies and funding assumptions applied by the relevant plan and does not represent any obligation or liability Ahold Delhaize may have in respect of the plan, which would be accounted for and measured in accordance with Ahold Delhaize’s accounting policies.

4 The current collective bargaining agreements were scheduled to expire on October 26, 2019. However, Giant Food and the local unions have agreed to indefinitely extend the existing collective agreements, provided that either side may cancel the extension at any time upon 72 hours’ advance notice. The negotiations on a new collective bargaining agreement are ongoing.

If the underfunded liabilities of the multi-employer pension plans are not reduced, either by improved market conditions, reductions in benefits and / or collective bargaining changes, increased future payments by the Company and the other participating employers may result. However, all future increases generally will be subject to the collective bargaining process. In 2020, the Company expects its contributions to increase to €94 million, which includes rehabilitation plan contribution increases where applicable. Ahold Delhaize has a risk of increased contributions and withdrawal liability (upon a withdrawal) if any of the participating employers in an underfunded multi-employer plan withdraw from the plan or become insolvent and are no longer able to meet their contribution requirements or if the multi-employer plan itself no longer has sufficient assets available to fund its short-term obligations to the participants in the plan. If and when a withdrawal liability is assessed, it may be substantially higher than the proportionate share disclosed above. Any adjustment for a withdrawal liability will be recorded when it is probable that a liability exists and the amount can be reliably estimated. Ahold Delhaize does not have a contractual agreement with any multi-employer plan that determines how a deficit will be funded. No withdrawal payments were incurred or included in the 2019 and 2018 contributions disclosed above.

In 2012, a restructuring took place regarding the FELRA & UFCW Pension Fund (“FELRA”). Under the restructuring, the Mid-Atlantic UFCW & Participating Employers Pension Fund (“MAP”) was created for future service accruals of Giant Food (a controlled subsidiary of Ahold Delhaize) employees and one other participating employer. Giant Food is currently the largest contributing employer in the FELRA plan, followed by one other large contributing employer and a small contributing employer affiliated with the other employer. MAP is funded by Giant Food and one other large participating employer. The MAP and the current collective bargaining agreements include a provision (“benefit backstop provision”) that will become effective, for all participating employers in MAP, if and when FELRA becomes insolvent and benefits are reduced in accordance with the rules established by the Pension Benefit Guaranty Corporation (PBGC). Under normal circumstances, when a multi-employer plan reaches insolvency it must reduce all accrued benefits to the maximum level guaranteed by the PBGC. The PBGC will continue to fund these minimum guaranteed benefits for the participants. FELRA and all other similar funds paid annual insurance premiums to the PBGC for such benefit insurance. Upon the insolvency of FELRA, the collective bargaining agreements to which Giant Food is a party may require Giant Food to pay certain supplemental contributions to FELRA and / or MAP that are attributable to certain of the benefits reduced by FELRA as a result of its insolvency. The specific amount of any such contributions remains subject to a number of variables, including the actions of third parties, and cannot be precisely estimated at this time. In addition, as noted below, this supplemental contribution obligation may be modified through the collective bargaining process.

FELRA reported in its 2018 Form 5500 that it projects it will become insolvent in approximately the first quarter of 2021 and reported in its Form 5500 a year-end funding ratio of 20.8%. Its Board of Trustees adopted an ERISA “all reasonable measures” rehabilitation plan intended to forestall insolvency. This specific ERISA rehabilitation plan allows FELRA to satisfy the applicable minimum funding standards. The current collective bargaining agreements were scheduled to expire on October 26, 2019. However, Giant Food and the union locals have agreed to indefinitely extend the existing collective agreements, provided that either side may cancel the extension at any time upon 72 hours’ advance notice. The negotiations on a new collective bargaining agreement are ongoing. Retirement benefits and funding are just one aspect of these negotiations, which concern all of the terms and conditions of employment for the relevant bargaining units. If FELRA becomes insolvent before new collective bargaining agreements are negotiated, Ahold Delhaize may be required to increase its contributions or, in certain circumstances to fund the payment of benefits that go unpaid by FELRA. A wide variety of potential scenarios could unfold, all of which are conditional and dependent on uncertain future events, and the outcome of which cannot be reasonably predicted but which could have a material impact on Ahold Delhaize’s financial position and results.

Defined contribution plans

Ahold Delhaize also participates in 39 multi-employer plans that are defined contribution plans on the basis of the terms of the benefits provided. The majority of these plans provide health and welfare benefits. The Company contributed €299 million and €280 million to multi-employer defined contribution plans during 2019 and 2018, respectively. These contributions are recognized as an expense in the consolidated income statement and related entirely to continuing operations in 2019 and 2018. These plans vary significantly in size, with contributions to the three largest plans representing 50% of total contributions