11. Pension and retirement plans

Pension Plan

The Company’s noncontributory defined benefit pension plan (the “Plan”) covers substantially all U.S. employees excluding U.S. employees of the acquired PF business. The Plan meets the definition of a defined benefit plan and as a result, the Company must apply ASC 715 pension accounting to the Plan. The Plan itself, however, is a cash balance plan that is similar in nature to a defined contribution plan in that a participant’s benefit is defined in terms of a stated account balance. A cash balance plan provides the Company with the benefit of applying any earnings on the Plan’s investments beyond the fixed return provided to participants, toward the Company’s future cash funding obligations. Employees are eligible to participate in the Plan following the first year of service during which they worked at least 1,000 hours.

The Plan provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit based upon a percentage of current salary, which varies with age, and interest credits. The Company uses its fiscal year end as the measurement date for determining pension expense and benefit obligations for each fiscal year.

The Company also acquired a closed noncontributory defined benefit pension plan in the U.S. in connection with the PF acquisition (the “PF Plan”). The disclosures below include the Plan and the PF Plan from the date of acquisition (collectively, the “Plans”), but do not include the pension plans of certain non-U.S. subsidiaries and other defined benefit plans, which are not considered material.

The following table outlines changes in benefit obligations, plan assets and the funded status of the Plans as of the end of fiscal 2017 and 2016:


	July 1,		July 2,
	2017		2016
	(Thousands)
Changes in benefit obligations:
Benefit obligations at beginning of year	$	588,511	$	513,406
Acquired benefit obligations		165,046		—
Service cost		29,623		39,740
Interest cost		19,323		21,310
Actuarial loss		15,686		41,799
Benefits paid		(46,121)		(27,744)
Benefit obligations at end of year	$	772,068	$	588,511
Changes in plan assets:
Fair value of plan assets at beginning of year	$	516,089	$	484,408
Acquired plan assets		144,238		—
Actual return on plan assets		51,409		19,425
Benefits paid		(46,121)		(27,744)
Contributions		33,750		40,000
Fair value of plan assets at end of year	$	699,365	$	516,089
Funded status of the plan recognized as a non-current liability	$	(72,703)	$	(72,422)

Amounts recognized in accumulated other comprehensive income:
Unrecognized net actuarial losses	$	234,863	$	235,747
Unamortized prior service credits		(691)		(2,903)
	$	234,172	$	232,844
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial gain	$	9,744	$	62,659
Amortization of net actuarial losses		(14,440)		(12,731)
Amortization of prior service credits		1,573		1,573
Curtailment recognition of prior service credit		614		—
	$	(2,509)	$	51,501

Included in accumulated other comprehensive income at July 1, 2017, is a before tax expense of $234.9 million of net actuarial losses that have not yet been recognized in net periodic pension cost, of which $15.0 million is expected to be recognized as a component of net periodic pension cost during fiscal 2018. Also included is a before tax net benefit of $0.7 million of prior service credits that have not yet been recognized in net periodic pension costs, of which $1.6 million is expected to be recognized as a component of net periodic pension costs during fiscal 2018. In connection with the sale of the TS Business, a significant number of former employees became terminated vested employees under the Plan. If the aggregate amount of former employee withdrawals from their Plan balances reach a certain threshold during a fiscal year, then a settlement charge would be required under ASC 715 pension accounting in the period that such aggregate withdrawals exceed the threshold.

Assumptions used to calculate actuarial present values of benefit obligations are as follows:


	2017		2016
Discount rate	3.8	%	3.4	%

The discount rate selected by the Company for the Plan reflects the current rate at which the underlying liability could be settled at the measurement date as of July 1, 2017. The estimated discount rate in fiscal 2017 and fiscal 2016 was based on the spot yield curve approach, which applies the individual spot rates from a highly rated bond yield curve to each future year’s estimated cash flows.

Assumptions used to determine net benefit costs are as follows:


	2017		2016
Discount rate	3.3	%	4.3	%
Expected return on plan assets	8.0	%	8.3	%

Components of net periodic pension cost from continuing and discontinued operations during the last three fiscal years are as follows:


	Years Ended
	July 1,		July 2,		June 27,
	2017		2016		2015
	(Thousands)
Service cost	$	29,623	$	39,740	$	39,492
Interest cost		19,323		21,310		17,797
Expected return on plan assets		(49,279)		(40,285)		(36,221)
Amortization of prior service credits		(1,573)		(1,573)		(1,573)
Recognized net actuarial loss		14,440		12,731		13,007
Curtailment recognition of prior service credit		(614)		—		—
Net periodic pension cost	$	11,920	$	31,923	$	32,502

The Company made $33.8 million and $40.0 million of contributions in fiscal 2017 and fiscal 2016, respectively and expects to make approximately $16.0 million of contributions in fiscal 2018.

Benefit payments are expected to be paid to Plan participants as follows for the next five fiscal years and the aggregate for the five years thereafter (in thousands):


2018	$	59,643
2019		63,666
2020		39,692
2021		41,288
2022		45,886
2023 through 2027		262,946

The Plan’s assets are held in trust and were allocated as follows as of the measurement date at the end of fiscal 2017 and 2016:


	2017		2016
Equity securities	50	%	60	%
Fixed income debt securities	50	%	40	%
Cash and cash equivalents	—	%	—	%

The general investment objectives of the Plan are to maximize returns through a diversified investment portfolio in order to earn annualized returns that meet the long-term cost of funding the Plans pension obligations while maintaining reasonable and prudent levels of risk. The target rate of return on the Plans assets is currently 8.0%, which represents the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation based upon the targeted investment allocations. This assumption has been determined by combining expectations regarding future rates of return for the investment portfolio along with the historical and expected distribution of investments by asset class and the historical rates of return for each of those asset classes. The mix of equity securities is typically diversified to obtain a blend of domestic and international investments covering multiple industries. The Plan’s assets do not include any material investments in Avnet common stock. The Plans investments in debt securities are also diversified across both public and private fixed income securities with varying maturities. As of July 1, 2017, the Company’s target allocation for the Plans investment portfolio is for equity securities, both domestic and international, to represent approximately 60% of the portfolio. The majority of the remaining portfolio of investments is to be invested in fixed income debt securities with various maturities.

The following table sets forth the fair value of the Plans investments as of July 1, 2017:


	Level 1		Level 2		Level 3		Total
	(Thousands)
Cash and cash equivalents	$	1,481	$	—	$	—	$	1,481
Equities:
U.S. common stocks		—		221,003		—		221,003
International common stocks		—		117,392		—		117,392
Fixed Income:
U.S. government agencies		—		105,227		—		105,227
International government agencies		—		14,366		—		14,366
U.S. and international corporate bonds		—		214,024		—		214,024
Other		—		25,872		—		25,872
Total	$	1,481	$	697,884	$	—	$	699,365

The following table sets forth the fair value of the Plan’s investments as of July 2, 2016:


	Level 1		Level 2		Level 3		Total
	(Thousands)
Cash and cash equivalents	$	497	$	—	$	—	$	497
Equities:
U.S. common stocks		—		204,125		—		204,125
International common stocks		—		102,193		—		102,193
Fixed Income:
U.S. government agencies		—		76,991		—		76,991
U.S. corporate bonds		—		112,262		—		112,262
Other		—		20,021		—		20,021
Total	$	497	$	515,592	$	—	$	516,089

The fair value of the Plan’s investments in equity and fixed income investments are stated at unit value, or the equivalent of net asset value, which is a practical expedient for estimating the fair values of those investments. Each of these investments may be redeemed daily without notice and there were no material unfunded commitments as of July 1, 2017.

The fixed income investments provide a steady return with medium volatility and assist with capital preservation and income generation. The equity investments have higher expected volatility and return than the fixed income investments.