Pension and Other Post-Retirement Benefit Plans

The Company has pension and other post-retirement benefit plans in various countries. The Company’s principal pension plans are in Japan. All pension and other post-retirement benefit plans outside of the Company’s Japanese defined benefit pension plan (the “Japanese Plan”) are immaterial to the Consolidated Financial Statements.

Obligations and Funded Status

The following table presents the unfunded status of the benefit obligations for the Japanese Plan:



	2018			2017			2016
	(in millions)
Change in benefit obligation:
Benefit obligation at beginning of period	$	249		$	326		$	231
Service cost	6			8			8
Interest cost	2			1			3
Actuarial loss (gain)	9			(22		)	52
Benefits paid	(9		)	(30		)	(16		)
Settlement/Curtailment	—			(6		)	(1		)
Non-U.S. currency movement	3			(28		)	49
Benefit obligation at end of period	$	260		$	249		$	326
Change in plan assets:
Fair value of plan assets at beginning of period	$	189		$	212		$	185
Actual return on plan assets	8			15			(14		)
Employer contributions	10			10			20
Benefits paid	(9		)	(30		)	(16		)
Non-U.S. currency movement	2			(18		)	37
Fair value of plan assets at end of period	$	200		$	189		$	212
Unfunded status	$	60		$	60		$	114

The following table presents the unfunded amounts related to the Japanese Plan as recognized on the Company’s Consolidated Balance Sheets:



	June 29, 2018		June 30, 2017
	(in millions)
Current liabilities	$	1	$	1
Non-current liabilities	59		59
Net amount recognized	$	60	$	60

The accumulated benefit obligation for the Japanese defined benefit pension plans was $260 million at June 29, 2018. As of June 29, 2018, actuarial losses for the Japanese defined benefit pension plans of $21 million are included in Accumulated other comprehensive loss in the Consolidated Balance Sheet. There were no prior service credits for the defined benefit pension plans recognized in Accumulated other comprehensive loss in the Consolidated Balance Sheet as of June 29, 2018.

Assumptions

Weighted-Average Assumptions

The weighted-average actuarial assumptions used to determine benefit obligations for the Japanese defined benefit pension plans were as follows:



	2018		2017		2016
Discount rate	0.7	%	0.8	%	0.4	%
Rate of compensation increase	0.7	%	0.8	%	0.8	%

The weighted-average actuarial assumptions used to determine benefit costs for the Japanese defined benefit pension plans were as follows:



	2018		2017		2016
Discount rate	0.8	%	0.4	%	1.3	%
Expected long-term rate of return on plan assets	2.5	%	2.5	%	2.5	%
Rate of compensation increase	0.8	%	0.8	%	0.9	%

The Company develops a discount rate by calculating when the estimated benefit payments will be due. Management in Japan then matches the benefit payments to bond ratings that are “AA” or higher which match the timing of the expected benefit payments to determine the appropriate discount rate.

The Company develops the expected long-term rate of return on plan assets by analyzing rates of return in Japan as well as the investment portfolio applicable to the plan. The Company’s estimates of future rates of return on assets is based in large part on the projected rate of return from the respective investment managers using a long-term view of historical returns, as well as actuarial recommendations using the most current generational and mortality tables and rates.

The Company develops the rate of compensation increase assumptions using local compensation practices and historical rates of increases.

Plan Assets

Investment Policies and Strategies

The investment policy in Japan is to generate a stable return on investments over a long-term horizon in order to have adequate pension funds to meet the Company’s future obligations. In order to achieve this investment goal, a diversified portfolio with target asset allocation and expected rate of return is established by considering factors such as composition of participants, level of funded status, capacity to absorb risks and the current economic environment. The target asset allocation is 63% in debt securities, 34% in equity securities, and the remaining 3% in other assets. Risk management is accomplished through diversification, periodic review of plan asset performance and appropriate realignment of asset allocation. Assumptions regarding the expected long-term rate of return on plan assets are periodically reviewed and are based on the historical trend of returns, the risk and correlation of each asset and the latest economic environment.

The expected long-term rate of return is estimated based on many factors, including expected forecast for inflation, risk premiums for each asset class, expected asset allocation, current and future financial market conditions and diversification and rebalancing strategies. Historical return patterns and correlations, consensus return forecasts and other relevant financial factors are analyzed periodically by the investment advisor so as to ensure that the expected long-term rate of return is reasonable and appropriate.

Fair Value Measurements

The following tables present the Japanese defined benefit pension plans’ major asset categories and their associated fair values as of June 29, 2018 and June 30, 2017:



	June 29, 2018
	Level 1		Level 2		Level 3		Total
	(in millions)
Equity:
Equity commingled/mutual funds⁽¹⁾⁽²⁾	$	—	$	68	$	—	$	68
Fixed income:
Fixed income commingled/mutual funds⁽¹⁾⁽³⁾	—		125		—		125
Cash equivalents and short-term investments	3		4		—		7
Fair value of plan assets	$	3	$	197	$	—	$	200



	June 30, 2017
	Level 1		Level 2		Level 3		Total
	(in millions)
Equity:
Equity commingled/mutual funds⁽¹⁾⁽²⁾	$	—	$	67	$	—	$	67
Fixed income:
Fixed income commingled/mutual funds⁽¹⁾⁽³⁾	—		116		—		116
Cash equivalents and short-term investments	2		4		—		6
Fair value of plan assets	$	2	$	187	$	—	$	189


⁽¹⁾	Commingled funds represent pooled institutional investments.


⁽²⁾	Equity mutual funds invest primarily in equity securities.


⁽³⁾	Fixed income mutual funds invest primarily in fixed income securities.

Assets held in defined benefit plans in the Philippines, Taiwan and Thailand were immaterial and are not presented in the above tables.

There were no significant movements of assets between any level categories in 2018, 2017 or 2016.

Fair Value Valuation Techniques

Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. Equity commingled/mutual funds are typically valued using the net asset value (“NAV”) provided by the investment manager or administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as either Level 1 or Level 2, depending on availability of quoted market prices for identical or similar assets.

If available, fixed income securities are valued using the close price reported on the major market on which the individual securities are traded and are classified as Level 1. The fair value of other fixed income securities is typically estimated using pricing models and quoted prices of securities with similar characteristics, and is generally classified as Level 2.

Cash equivalents includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments represent securities with original maturities of one year or less. These assets are classified as either Level 1 or Level 2.

Cash Flows

The Company’s expected employer contributions for 2019 and annual benefit payments over the next 5 years for its Japanese defined benefit pension plans are not expected to be material.