Note 13. Pensions and Other Post-retirement Benefit Plans

The Company has pension and other post-retirement benefit plans in various countries. The Company’s principal plans are in Japan. All pension and other post-retirement benefit plans outside of the Company’s Japanese plans were immaterial to the Company’s consolidated financial statements.

Obligations and Funded Status

The changes in the benefit obligations and plan assets for the Japanese defined benefit pension plans were as follows for 2013 and 2012 (in millions):


	2013			2012
Change in benefit obligation:
Benefit obligation at beginning of period	$	286		$	279
Service cost		11			4
Interest cost		5			2
Actuarial gain		(4	)		—
Benefits paid		(6	)		(2	)
Non-U.S. currency movement		(58	)		3

Benefit obligation at end of period		234			286

Change in plan assets:
Fair value of plan assets at beginning of period		167			162
Actual return on plan assets		29			(1	)
Employer contributions		15			6
Benefits paid		(6	)		(2	)
Non-U.S. currency movement		(38	)		2

Fair value of plan assets at end of period		167			167

Unfunded status at end of year	$	67		$	119

The following table presents the unfunded amounts as recognized on the Company’s consolidated balance sheets as of June 28, 2013 and June 29, 2012 (in millions):


	2013		2012
Current liabilities	$	1	$	3
Non-current liabilities		66		116

Net amount recognized	$	67	$	119

The accumulated benefit obligation for the Japanese defined benefit pension plans was $233 million at June 28, 2013. Net actuarial gains for the defined benefit pension plans of $14 million are recognized in accumulated other comprehensive loss in the consolidated balance sheet as of June 28, 2013. 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 28, 2013. The amount expected to be amortized into net periodic benefit cost in fiscal 2014 is immaterial to the consolidated financial statements.

Assumptions

Weighted-Average Assumptions

The weighted-average actuarial assumptions used to determine benefit obligations for the Japanese defined benefit pension plans were as follows for 2013 and 2012:


	2013			2012
Discount rate		1.6	%		1.8	%
Rate of compensation increase		0.9	%		1.4	%

The weighted-average actuarial assumptions used to determine benefit costs for the Japanese defined benefit pension plans were as follows for 2013 and 2012:


	2013			2012
Discount rate		1.8	%		1.9	%
Expected long-term rate of return on plan assets		3.5	%		3.5	%
Rate of compensation increase		1.2	%		1.4	%

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 AA or higher bond ratings that 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. Management’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 35% in equity securities, 62% in debt 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 table presents the Japanese defined benefit pension plans’ major asset categories and their associated fair values as of June 28, 2013 (in millions):


	Level 1		Level 2		Level 3		Total
Equity:
Equity commingled/mutual funds ⁽²⁾⁽³⁾	$	—	$	60	$	—	$	60
Fixed income:
Fixed income commingled/mutual funds ⁽²⁾⁽⁵⁾		—		101		—		101
Cash and short-term investments ⁽²⁾		4		2		—		6

Fair value of plan assets	$	4	$	163	$	—	$	167

The following table presents the Japanese defined benefit pension plans’ major asset categories and their associated fair values as of June 29, 2012 (in millions):


	Level 1		Level 2		Level 3		Total
Equity:
Equity securities ⁽¹⁾	$	4	$	—	$	—	$	4
Equity commingled/mutual funds ⁽²⁾⁽³⁾		—		45		—		45
Fixed income:
Government and related ⁽⁴⁾		1		12		—		13
Fixed income commingled/mutual funds ⁽²⁾⁽⁵⁾		—		77		—		77
Other securities ⁽⁶⁾		—		9		—		9
Cash and short-term investments ⁽²⁾		8		4		—		12
Alternative investments:
Other ⁽⁷⁾		—		—		7		7

Fair value of plan assets	$	13	$	147	$	7	$	167

⁽¹⁾	Includes direct investments in equity of domestic and foreign companies, including those in developing countries.

⁽²⁾	Commingled funds represent pooled institutional investments.

⁽³⁾	Equity mutual funds invest primarily in equity securities.

⁽⁴⁾	Includes debt issued by national, state or local governments and related agencies.

⁽⁵⁾	Fixed income mutual funds invest primarily in fixed income securities.

⁽⁶⁾	Other securities include corporate bonds, insurance contracts and mortgage-backed securities.

⁽⁷⁾	Includes investments in hedge funds, venture capital funds, limited partnerships, private real estate, bank capital and collateral debt obligations such as private placement real estate funds.

Assets held in defined benefit plans in the Philippines, Taiwan and Thailand were less than $1 million and are not presented in the above table. There were no significant movements of assets between any level categories in 2013 or 2012.

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 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.

Alternative investment valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of the underlying assets. These assets are valued based on individual fund manager valuation models utilizing available and relevant market data. These investments are classified as Level 3.

Cash Flows

Contributions

The Company’s expected employer contributions for 2014 are $13 million for its Japanese defined benefit pension plans.

Estimated Future Benefits Payments

Annual benefit payments from the Japanese defined benefit pension plans are estimated to range from $6 million to $10 million annually over the next five years.