Pension and retirement plan

12 Months Ended

Jul. 03, 2021

Pension and retirement plan

Pension and retirement plans

11. Pension and retirement plans

Pension Plan

The Company has a noncontributory defined benefit pension plan that covers substantially all current or former U.S. Employees (the “Plan”).

The Plan meets the definition of a defined benefit plan and, as a result, the Company applies ASC 715 pension accounting to the Plan. The Plan 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 stated account balances. The Plan allows the Company to apply 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 following table outlines changes in benefit obligations, plan assets, and the funded status of the Plan as of the end of fiscal 2021 and 2020:

	July 3,		June 27,
	2021		2020
	(Thousands)
Changes in benefit obligations:
Benefit obligations at beginning of year	$	790,179	$	731,695
Service cost		15,751		15,145
Interest cost		15,904		22,552
Actuarial (gain) loss		(12,397)		72,144
Benefits paid		(46,729)		(51,357)
Benefit obligations at end of year	$	762,708	$	790,179
Changes in plan assets:
Fair value of plan assets at beginning of year	$	707,800	$	664,063
Actual return on plan assets		95,208		87,094
Benefits paid		(46,729)		(51,357)
Contributions		16,000		8,000
Fair value of plan assets at end of year	$	772,279	$	707,800
Funded status of the plan recognized as a non-current asset (non-current liability)	$	9,571	$	(82,379)
Amounts recognized in accumulated other comprehensive loss:
Unrecognized net actuarial losses	$	177,949	$	256,477
Unamortized prior service cost		31		332
	$	177,980	$	256,809
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial (gain) loss	$	(57,924)	$	35,721
Amortization of net actuarial losses		(20,604)		(14,629)
Amortization of prior service costs		(301)		(2,137)
	$	(78,829)	$	18,955

Included in accumulated other comprehensive loss at July 3, 2021, is an expense of $177.9 million of net actuarial losses that have not yet been recognized in net periodic pension cost, of which $16.3 million is expected to be recognized as a component of net periodic pension cost during fiscal 2022.

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

	2021		2020
Discount rate	2.8	%	2.7	%

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 3, 2021. The estimated discount rate in fiscal 2021 and fiscal 2020 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.

The weighted-average assumptions used to determine net benefit costs are as follows:

	2021		2020
Discount rate	2.4	%	3.3	%
Expected return on plan assets	7.4	%	7.7	%
Rate of compensation increase	3.5	%	3.5	%
Interest crediting rate	4.0	%	4.0	%

Components of net periodic pension cost for the Plan during the last three fiscal years are as follows:

	Years Ended
	July 3,		June 27,		June 29,
	2021		2020		2019
	(Thousands)
Service cost	$	15,751	$	15,145	$	14,631
Total net periodic pension cost within selling, general and administrative expenses		15,751		15,145		14,631
Interest cost		15,904		22,552		26,354
Expected return on plan assets		(49,681)		(50,671)		(53,518)
Amortization of prior service cost (credits)		301		2,137		(1,571)
Recognized net actuarial loss		20,604		14,629		9,251
Total net periodic pension benefit within other (expense) income, net		(12,872)		(11,353)		(19,484)
Net periodic pension cost (benefit)	$	2,879	$	3,792	$	(4,853)

The Company made $16.0 million and $8.0 million of contributions in fiscal 2021 and fiscal 2020, respectively, and expects to make approximately $16.0 million of contributions in fiscal 2022.

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):

2022	$	53,511
2023		42,750
2024		45,728
2025		47,737
2026		47,987
2027 through 2031		253,355

The Plan’s assets are held in trust and were allocated as follows as of the measurement date at the end of fiscal 2021 and 2020:

	2021		2020
Equity securities	69	%	62	%
Fixed income debt securities	29	%	36	%
Cash and cash equivalents	2	%	2	%

The general investment objectives of the Plan are to maximize returns through a diversified investment portfolio to earn annualized returns that exceed the long-term cost of funding the Plan’s pension obligations while maintaining reasonable and prudent levels of risk. The expected return on the Plan’s assets in fiscal 2022 is currently 7.0%, which is 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. In making this assumption, the Company evaluated 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 return seeking and fixed income investments is typically diversified. The Plan’s assets do not include any investments in Avnet common stock. As of July 3, 2021, the Company’s target allocation for the Plan’s investment portfolio is for return seeking investments to represent approximately 65% of the investment portfolio. The majority of the remaining investment portfolio is invested in fixed income investments, which typically have lower risks, but also lower returns.

The following table sets forth the fair value of the Plan’s investments as of July 3, 2021:

	Level 1		Level 2		Level 3		Net Asset Value		Total
	(Thousands)
Cash and cash equivalents	$	16,655	$	—	$	—	$	—	$	16,655
Return Seeking Investments:
Common stocks		—		—		—		290,347		290,347
Real estate		—		—		—		124,363		124,363
High yield credit and bonds		—		—		—		117,722		117,722
Fixed Income Investments:
U.S. government		—		—		—		186,279		186,279
Corporate		—		—		—		36,913		36,913
Total	$	16,655	$	—	$	—	$	755,624	$	772,279

Certain investments included in the table above are measured at fair value using the net asset value per share (or its equivalent) practical expedient and are not included in the three levels of the fair value hierarchy.

The following table sets forth the fair value of the Plan’s investments as of June 27, 2020:

	Level 1		Level 2		Level 3		Net Asset Value		Total
	(Thousands)
Cash and cash equivalents	$	13,243	$	—	$	—	$	—	$	13,243
Return Seeking Investments:
Common stocks		—		—		—		254,917		254,917
Real estate		—		—		—		81,817		81,817
High yield credit and bonds		—		—		—		103,925		103,925
Fixed Income Investments:
U.S. government		—		—		—		218,573		218,573
Corporate		—		—		—		35,325		35,325
Total	$	13,243	$	—	$	—	$	694,557	$	707,800

Each of these investments may be redeemed without restrictions in the normal course of business and there were no material unfunded commitments as of July 3, 2021.