11. Pension and retirement plans

Pension Plan

The Company’s principal defined benefit plan is a noncontributory defined benefit pension plan covering substantially all U.S. Employees (the “Plan”). In connection with the Company’s acquisition of Premier Farnell (“PF”) in fiscal 2017, the Company assumed all of PF’s defined benefit obligations and related plan assets, including a closed noncontributory defined benefit pension plan in the U.S., which was merged with the Plan in January 2018.

The Company’s 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 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 following table outlines changes in benefit obligations, plan assets and the funded status of the Plan as of the end of fiscal 2018 and 2017:


	June 30,		July 1,
	2018		2017
	(Thousands)
Changes in benefit obligations:
Benefit obligations at beginning of year	$	772,068	$	588,511
Acquired benefit obligations		—		165,046
Service cost		15,834		29,623
Interest cost		23,732		19,323
Actuarial (gain) loss		(35,560)		15,686
Benefits paid		(23,499)		(46,121)
Settlements paid		(67,415)		—
Benefit obligations at end of year	$	685,160	$	772,068
Changes in plan assets:
Fair value of plan assets at beginning of year	$	699,365	$	516,089
Acquired plan assets		—		144,238
Actual return on plan assets		34,587		51,409
Benefits paid		(23,499)		(46,121)
Settlements paid		(67,415)		—
Contributions		16,000		33,750
Fair value of plan assets at end of year	$	659,038	$	699,365
Funded status of the plan recognized as a non-current liability	$	(26,122)	$	(72,703)

Amounts recognized in accumulated other comprehensive income:
Unrecognized net actuarial losses	$	182,633	$	234,863
Unamortized prior service cost (credit)		857		(691)
	$	183,490	$	234,172
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial (gain) loss	$	(15,461)	$	9,744
Amortization of net actuarial losses		(14,404)		(14,440)
Amortization of prior service credits		1,573		1,573
Settlement expenses		(22,365)		—
Curtailment recognition of prior service credit		—		614
	$	(50,657)	$	(2,509)

Included in accumulated other comprehensive (loss) income at June 30, 2018 is a before tax expense of $182.6 million of net actuarial losses that have not yet been recognized in net periodic pension cost, of which $10.0 million is expected to be recognized as a component of net periodic pension cost during fiscal 2019. Also included is a before tax net cost of $0.9 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 2019.

In connection with the sale of the TS business, a significant number of former employees became terminated vested employees under the Plan. During fiscal 2018, the aggregate amount of former employee withdrawals from the Plan exceeded the pension accounting settlement threshold for fiscal 2018, which required a settlement expense under ASC 715 pension accounting. As a result, the Company recognized a $22.4 million of pension settlement expenses before taxes and $14.9 million after taxes in fiscal 2018, respectively, classified within income (loss) from discontinued operations.

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


	2018		2017
Discount rate	4.2	%	3.8	%

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 June 30, 2018. The estimated discount rate in fiscal 2018 and fiscal 2017 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.

Assumptions used to determine net benefit costs are as follows:


	2018		2017
Discount rate	3.4	%	3.3	%
Expected return on plan assets	8.0	%	8.0	%

Components of net periodic pension cost from continuing and discontinued operations during the last three fiscal years are as follows:


	Years Ended
	June 30,		July 1,		July 2,
	2018		2017 (1)		2016 (1)
	(Thousands)
Service cost	$	15,834	$	29,623	$	39,740
Interest cost		23,732		19,323		21,310
Expected return on plan assets		(54,686)		(49,279)		(40,285)
Amortization of prior service credits		(1,573)		(1,573)		(1,573)
Recognized net actuarial loss		14,404		14,440		12,731
Curtailment recognition of prior service credit		—		(614)		—
Pension settlement charge		22,365		—		—
Net periodic pension cost	$	20,076	$	11,920	$	31,923

⁽¹⁾

Includes discontinued operations

The Company made $16.0 million and $33.8 million of contributions in fiscal 2018 and fiscal 2017, respectively, and expects to make approximately $16.0 million of contributions in fiscal 2019.

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):


2019	$	42,457
2020		37,292
2021		40,034
2022		44,000
2023		46,160
2024 through 2028		256,003

The Plan’s assets are held in trust and were allocated as follows as of the measurement date at the end of fiscal 2018 and 2017:


	2018		2017
Equity securities	60	%	50	%
Fixed income debt securities	39	%	50	%
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 the Plan’s assets is currently 8.0%, 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 June 30, 2018, the Company’s target allocation for the Plan’s investment portfolio is for equity securities, both domestic and international, to represent approximately 60% 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 June 30, 2018:


	Level 1		Level 2		Level 3		Total
	(Thousands)
Cash and cash equivalents	$	7,291	$	—	$	—	$	7,291
Equities:
U.S. common stocks		—		262,066		—		262,066
International common stocks		—		133,564		—		133,564
Fixed Income:
U.S. government agencies		—		96,414		—		96,414
U.S. and international corporate bonds		—		133,645		—		133,645
Other		—		26,058		—		26,058
Total	$	7,291	$	651,747	$	—	$	659,038

The following table sets forth the fair value of the Plan’s investments as of July 1, 2017:


	Level 1		Level 2		Level 3		Total
	(Thousands)
Cash and cash equivalents	$	1,481	$	—	$	—	$	1,481
Equities:
U.S. common stocks		—		221,003		—		221,003
International common stocks		—		117,392		—		117,392
Fixed Income:
U.S. government agencies		—		105,227		—		105,227
International government agencies		—		14,366		—		14,366
U.S. corporate bonds		—		214,024		—		214,024
Other		—		25,872		—		25,872
Total	$	1,481	$	697,884	$	—	$	699,365

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 June 30, 2018.