DEFINED BENEFIT PLANS

As a result of the Rofin acquisition, we have assumed all assets and liabilities of Rofin’s defined benefit plans for the Rofin-Sinar Laser, GmbH ("RSL") and Rofin-Sinar Inc. ("RS Inc.") employees. The U.S. plan began in fiscal year 1995 and is partially funded. Any new employees hired after January 1, 2007, are not eligible for the RS Inc. pension plan. As is the customary practice with German companies, the German pension plan is unfunded. Any new employees hired after 2000 are not eligible for the RSL pension plan. The measurement date of these pension plans is September 30. For these pension plans, actuarial gains and losses are deferred into OCI and amortized over future periods.

Effective January 1, 2012, the RS Inc. defined benefit plan was amended to exclude highly compensated employees, as defined by the Internal Revenue Service, from receiving future years of service under the RS Inc. defined benefit plan. A non-qualified defined benefit plan was created to replace the benefits lost by the employees that were otherwise excluded from the qualified defined benefit plan.

In addition, we have defined benefit plans in South Korea, Japan, Spain and Italy, covering all full-time employees with at least one year of service, and a defined benefit plan in Germany covering two individuals. As is the customary practice with European and Asian companies, the plans are unfunded. We have elected to recognize all actuarial gains and losses on these plans immediately, as incurred. The measurement date of these defined benefit plans is September 30.

For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions including a discount rate for plan obligations, an assumed rate of return on pension assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions were based upon management's judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of our defined benefit plans.

Components of net periodic cost are as follows for the years ended September 30, 2017 and October 1, 2016 (in thousands):



	Fiscal
	2017			2016
Service cost	$	2,077		$	872
Interest cost	1,086			97
Expected return on plan assets	(736		)	—
Recognized net actuarial (gain) loss	(236		)	993
Foreign exchange impacts	(6		)	127
Net periodic pension cost	$	2,185		$	2,089

The changes in projected benefit obligations and plan assets, as well as the ending balance sheet amounts for our defined benefit plans, are as follows (in thousands):



	Fiscal 2017
Change in benefit obligation:
Projected benefit obligation at beginning of year (1)	$	8,621
Business combinations and acquisitions	46,361
Service cost	2,077
Interest cost	1,086
Actuarial gains	(141		)
Assumption change	(3,597		)
Experience gain	(1,502		)
Foreign exchange rate impacts	1,685
Benefits paid - total	(2,043		)
Projected benefit obligation at end of year	$	52,547

Projected benefit obligation at end of year:
U.S. plans	$	17,543
Foreign plans	35,004
Projected benefit obligation at end of year	$	52,547

Change in plan assets:
Fair value of plan assets at beginning of year	$	—
Business combinations and acquisitions	11,121
Actual return on plan assets	1,092
Employer contributions	—
Benefits paid - funded plan	(357		)
Fair value of plan assets at end of year	$	11,856

Fair value of plan assets at end of year:
U.S. plans	$	11,856
Foreign plans	—
Fair value of plan assets at end of year	11,856
Unfunded status at end of year	$	(40,691	)

Amounts recognized in the consolidated balance sheet:
Accrued benefit liability - current	$	(1,238	)
Accrued benefit liability - non current	(39,454		)
Accumulated other comprehensive gain (pre-tax)	(5,360		)

(1) The beginning of the year balances relate to plans held in South Korea, Japan, Italy and Germany. These were not disclosed in prior years as the net liability was not material.

The information for plans with an accumulated benefit obligation in excess of plan assets is as follows (in thousands):



	Fiscal year-end
	2017
Projected benefit obligation	$	52,547
Accumulated benefit obligation	47,798
Fair value of plan assets	11,856

The weighted-average rates used to determine the net periodic benefit costs are as follows:



	Fiscal 2017
Discount rate:
U.S.	3.6	%
Foreign	1.7	%
Expected return on plan assets:
U.S.	6.6	%
Foreign	—	%
Rate of compensation increase
U.S.	3.0	%
Foreign	2.0	%

We recognize the over (under) funded status of the defined benefit plans in our consolidated balance sheets. We also recognize, in other comprehensive income (loss), certain gains and losses that arise for the period but are deferred under current pension accounting rules. A one percent change in the discount rate or the expected rate of return on plan assets would not have a material impact on the projected benefit obligation or the net periodic benefit cost.

Expected benefit payments for each of the next five fiscal years and the five years aggregated thereafter is as follows (in thousands):



	Amount
2018	$	1,708
2019	1,593
2020	1,755
2021	2,296
2022	3,319
2023-2027	14,220
Total	$	24,891

Our pension plan asset allocations at September 30, 2017 by asset category are as follows:



			Fiscal 2017
	Target Allocation		Allocation
Equity securities	50	%	56	%
Debt securities	50	%	44	%
Total plan assets	100	%	100	%

We employ a total return investment approach whereby a mix of equity, debt securities and government securities are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by maximizing investment returns within that prudent level of risk. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks as well as growth, value and small and large capitalizations. Additionally, cash balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through semi-annual investment portfolio reviews.

Investments in our defined benefit plan are stated at fair value. Level 1 assets are valued using quoted market prices that represent the asset value of the shares held by the trusts. The level 2 assets are investments in pooled funds, which are valued using a model to reflect the valuation of their underlying assets that are publicly traded with observable values. The fair value of level 3 pension plan assets are measured by compiling the portfolio holdings and independently valuing the securities in those portfolios.

The fair values of our pension plan assets, by level within the fair value hierarchy, at September 30, 2017 are as follows:



Asset categories	Level 1		Level 2		Level 3		Total
Equity securities
Small cap	$	—	$	304	$	—	$	304
Mid cap	—		621		—		621
Large cap	—		2,382		—		2,382
Total market stock	—		1,106		—		1,106
International	—		1,897		—		1,897
Emerging markets	—		342		—		342
Debt securities							—
Bonds and mortgages	—		4,031		—		4,031
Inflation protected	—		555		—		555
High yield	—		618		—		618
Money market	—		—		—		—
Total plan assets	$	—	$	11,856	$	—	$	11,856