11. Pension and retirement plans

Pension Plan

The Company has a noncontributory defined benefit pension plan that covers substantially all U.S. Employees, which has been combined with an acquired closed noncontributory defined benefit pension plan covering certain current or former Farnell U.S. employees (the “Plan”).

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 2019 and 2018:


	June 29,		June 30,
	2019		2018
	(Thousands)
Changes in benefit obligations:
Benefit obligations at beginning of year	$	685,160	$	772,068
Service cost		14,631		15,834
Interest cost		26,354		23,732
Actuarial loss (gain)		55,118		(35,560)
Benefits paid		(49,610)		(23,499)
Plan amendments		42		—
Settlements paid		—		(67,415)
Benefit obligations at end of year	$	731,695	$	685,160
Changes in plan assets:
Fair value of plan assets at beginning of year	$	659,038	$	699,365
Actual return on plan assets		46,635		34,587
Benefits paid		(49,610)		(23,499)
Settlements paid		—		(67,415)
Contributions		8,000		16,000
Fair value of plan assets at end of year	$	664,063	$	659,038
Funded status of the plan recognized as a non-current liability	$	(67,632)	$	(26,122)

Amounts recognized in accumulated other comprehensive income:
Unrecognized net actuarial losses	$	235,384	$	182,633
Unamortized prior service cost		2,470		857
	$	237,854	$	183,490
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss (gain)	$	62,002	$	(15,461)
Net prior service cost		42		—
Amortization of net actuarial losses		(9,251)		(14,404)
Amortization of prior service credits		1,571		1,573
Settlement expenses		—		(22,365)
	$	54,364	$	(50,657)

Included in accumulated other comprehensive loss at June 29, 2019 is a before tax expense of $235.4 million of net actuarial losses that have not yet been recognized in net periodic pension cost, of which $14.6 million is expected to be recognized as a component of net periodic pension cost during fiscal 2020. Also included is a before tax net cost of $2.5 million of prior service costs that have not yet been recognized in net periodic pension costs, of which $2.1 million is expected to be recognized as a component of net periodic pension costs during fiscal 2020.

In connection with the sale of the TS business, a significant number of former TS business 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:


	2019		2018
Discount rate	3.5	%	4.2	%

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 29, 2019. The estimated discount rate in fiscal 2019 and fiscal 2018 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:


	2019		2018
Discount rate	4.1	%	3.4	%
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, which reflect the adoption of ASU 2017-07 as discussed further in Note 1:


	Years Ended
	June 29,		June 30,		July 1,
	2019		2018		2017 (1)
	(Thousands)
Service cost	$	14,631	$	15,834	$	29,623
Total net periodic pension cost within selling, general and administrative expenses		14,631		15,834		29,623

Interest cost		26,354		23,732		19,323
Expected return on plan assets		(53,518)		(54,686)		(49,279)
Amortization of prior service credits		(1,571)		(1,573)		(1,573)
Recognized net actuarial loss		9,251		14,404		14,440
Curtailment recognition of prior service credit		—		—		(614)
Total net periodic pension benefit within other income, net		(19,484)		(18,123)		(17,703)

Net periodic pension (benefit) cost	$	(4,853)	$	(2,289)	$	11,920

⁽¹⁾

Includes discontinued operations

The Company made $8.0 million and $16.0 million of contributions in fiscal 2019 and fiscal 2018, respectively, and expects to make approximately $16.0 million of contributions in fiscal 2020.

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):


2020	$	45,965
2021		38,416
2022		43,216
2023		45,784
2024		47,488
2025 through 2029		263,663

The Plan’s assets are held in trust and were allocated as follows as of the measurement date at the end of fiscal 2019 and 2018:


	2019		2018
Equity securities	58	%	60	%
Fixed income debt securities	42	%	39	%
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 in fiscal 2020 is currently 7.7%, 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 29, 2019, the Company’s target allocation for the Plan’s 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 June 29, 2019:


	Level 1		Level 2		Level 3		Total
	(Thousands)
Cash and cash equivalents	$	2,441	$	—	$	—	$	2,441
Equities:
U.S. common stocks		—		254,139		—		254,139
International common stocks		—		131,847		—		131,847
Fixed Income:
U.S. government agencies		—		97,015		—		97,015
U.S. and international corporate bonds		—		153,891		—		153,891
Other		—		24,730		—		24,730
Total	$	2,441	$	661,622	$	—	$	664,063

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 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 29, 2019.