10. Pension and retirement plans

Pension Plan

The Company’s noncontributory defined benefit pension plan (the “Plan”) covers substantially all U.S. employees. 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 disclosures below 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 Plan as of the end of fiscal 2016 and 2015:


	July 2,		June 27,
	2016		2015
	(Thousands)
Changes in benefit obligations:
Benefit obligations at beginning of year	$	513,406	$	457,167
Service cost		39,740		39,492
Interest cost		21,310		17,797
Actuarial loss		41,799		21,796
Benefits paid		(27,744)		(22,846)
Benefit obligations at end of year	$	588,511	$	513,406
Changes in plan assets:
Fair value of plan assets at beginning of year	$	484,408	$	449,960
Actual return on plan assets		19,425		17,294
Benefits paid		(27,744)		(22,846)
Contributions		40,000		40,000
Fair value of plan assets at end of year	$	516,089	$	484,408
Funded status of the plan recognized as a non-current liability	$	(72,422)	$	(28,998)

Amounts recognized in accumulated other comprehensive income:
Unrecognized net actuarial losses	$	235,747	$	185,819
Unamortized prior service credits		(2,903)		(4,476)
	$	232,844	$	181,343
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial gain	$	62,659	$	40,723
Amortization of net actuarial losses		(12,731)		(13,007)
Amortization of prior service credits		1,573		1,573
	$	51,501	$	29,289

Included in accumulated other comprehensive income at July 2, 2016 is a before tax expense of $235.7 million of net actuarial losses which have not yet been recognized in net periodic pension cost, of which $15.4 million is expected to be recognized as a component of net periodic pension cost during fiscal 2017. Also included is a before tax benefit of $2.9 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 2017.

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


	2016		2015
Discount rate	3.4	%	4.3	%

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 2, 2016. In fiscal 2016, the Company changed the method used to estimate the discount rate for the Plan as described further below. The change does not affect the measurement of our pension obligation and was applied prospectively as a change in estimate. The estimated discount rate in 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. The estimated discount rate in fiscal 2015 was based primarily upon an average rate determined by matching the expected cash outflows of the Plan to a yield curve constructed from a portfolio of highly rated (minimum AA rating) fixed-income debt instruments with maturities consistent with the expected cash outflows. The effect of the change in estimate using the spot yield curve approach was not material.

Assumptions used to determine net benefit costs are as follows:


	2016		2015
Discount rate	4.3	%	4.0	%
Expected return on plan assets	8.3	%	8.5	%

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


	Years Ended
	July 2,		June 27,		June 28,
	2016		2015		2014
	(Thousands)
Service cost	$	39,740	$	39,492	$	36,733
Interest cost		21,310		17,797		17,155
Expected return on plan assets		(40,285)		(36,221)		(30,908)
Recognized net actuarial loss		12,731		13,007		12,686
Amortization of prior service credits		(1,573)		(1,573)		(1,573)
Net periodic pension cost	$	31,923	$	32,502	$	34,093

The Company made $40.0 million of contributions in fiscal 2016 and fiscal 2015 and expects to make approximately $40.0 million of contributions in fiscal 2017.

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):


2017	$	39,519
2018		30,771
2019		34,711
2020		39,973
2021		45,057
2022 through 2026		305,721

The Plan’s assets are held in trust and were allocated as follows as of the measurement date at the end of fiscal 2016 and 2015:


	2016		2015
Equity securities	60	%	76	%
Fixed income debt securities	40	%	23	%
Cash and cash equivalents	—	%	1	%

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 Plan’s pension obligations while maintaining reasonable and prudent levels of risk. The target rate of return on Plan assets is currently 8.3%, 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 Plan’s investments in debt securities are also diversified across both public and private fixed income securities with varying maturities. As of July 2, 2016, the Company’s target allocation for the investment portfolio is for equity securities, both domestic and international, to represent approximately 65% 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 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 following table sets forth the fair value of the Plan’s investments as of June 27, 2015:


	Level 1		Level 2		Level 3		Total
	(Thousands)
Cash and cash equivalents	$	2,111	$	—	$	—	$	2,111
Equities:
U.S. common stocks		—		287,495		—		287,495
International common stocks		—		79,704		—		79,704
Fixed Income:
U.S. government agencies		—		8,912		—		8,912
U.S. corporate bonds		—		106,186		—		106,186
Total	$	2,111	$	482,297	$	—	$	484,408

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 2, 2016.

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.