14. COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS

Sysco has company-sponsored defined benefit and defined contribution retirement plans for its employees. Also, the company provides certain health care benefits to eligible retirees and their dependents.

Defined Contribution Plans

In December 2012, the company amended its defined contribution 401(k) Plan to be a Safe Harbor plan, a plan that treats all employees’ benefits equally within the plan, under Sections 401(k) and 401(m) of the Internal Revenue Code with respect to non-union employees and those union employees whose unions adopted the Safe Harbor Plan provisions. Effective January 1, 2013, the new Safe Harbor Plan provides that the company will make a non-elective contribution each pay period equal to 3% of a participant’s compensation. Additionally, the company will make matching contributions of 50% of a participant’s pre-tax contribution on the first 5% of the participant’s compensation contributed by the participant. Certain employees are also eligible for a transition contribution, and the company may also make discretionary contributions. For union employees who are members of unions that did not adopt the Safe Harbor Plan provisions, the plan provides that under certain circumstances the company may make matching contributions of up to 50% of the first 6% of a participant’s compensation.

Prior to the adoption of the Safe Harbor Plan in January 2013, the company’s defined contribution 401(k) plan provided that, under certain circumstances, the company may make matching contributions of up to 50% of the first 6% of a participant’s compensation.

The company also has a nonqualified, unfunded Management Savings Plan (MSP) available to key management personnel who are participants in the Management Incentive Plan. Participants may defer up to 50% of their annual salary and up to 100% of their annual bonus. The company will make a non-elective contribution each pay period equal to 3% of a participant’s compensation. Additionally, the company will make matching contributions of 50% of a participant’s pre-tax contribution on the first 5% of the participant’s eligible compensation that is deferred. Certain employees are also eligible for a transition contribution, and the company may also make discretionary contributions. All company contributions to the MSP are limited by the amounts contributed by the company to the participant’s 401(k) account.

Sysco’s expense related to its defined contribution plans was $118.6 million in fiscal 2014, $65.3 million in fiscal 2013, and $17.2 million in fiscal 2012.

Defined Benefit Plans

Sysco maintains a qualified pension plan (Retirement Plan) that pays benefits to employees at retirement, using formulas based on a participant’s years of service and compensation. At the end of fiscal 2012, Sysco approved a plan to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for all U.S.-based salaried and non-union hourly employees. Effective January 1, 2013, these employees were eligible for additional contributions under the company’s defined contribution 401(k) plan.

In addition to receiving benefits upon retirement under the company’s Retirement Plan, key management personnel who are participants in the Management Incentive Plan will receive benefits under a Supplemental Executive Retirement Plan (SERP). This plan is a nonqualified, unfunded supplementary retirement plan. In November 2012, Sysco approved a plan to restructure its executive nonqualified retirement program including the SERP. Future benefit accruals have been frozen under this plan as of June 29, 2013, for all participants.

Also, the company provides certain health care benefits to eligible retirees and their dependents.

Funded Status

Accumulated pension assets measured against the obligation for pension benefits represents the funded status of a given plan. The funded status of Sysco’s company-sponsored defined benefit plans is presented in the table below. The caption “Pension Benefits” in the tables below includes both the Retirement Plan and the SERP.



	Pension Benefits				Other Postretirement Plans
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	3,089,022	$	3,164,974	$	14,248	$	12,954
Service cost		9,657		70,166		546		541
Interest cost		160,436		148,561		748		614
Amendments		(347)		53,902		-		-
Curtailments		-		(72,967)		-		-
Actuarial (gain) loss, net		492,720		(201,517)		(3,280)		188
Total disbursements		(79,780)		(74,097)		349		(49)
Benefit obligation at end of year		3,671,708		3,089,022		12,611		14,248
Change in plan assets:
Fair value of plan assets at beginning of year		2,518,009		2,234,869		-		-
Actual return on plan assets		474,538		263,675		-		-
Employer contribution		24,752		93,562		(349)		49
Total disbursements		(79,780)		(74,097)		349		(49)
Fair value of plan assets at end of year		2,937,519		2,518,009		-		-
Funded status at end of year	$	(734,189)	$	(571,013)	$	(12,611)	$	(14,248)

As a result of the SERP freeze discussed above in November 2012, the liabilities of this plan were remeasured using a discount rate of 3.96%. A curtailment gain of $73.0 million was recognized as a component of actuarial losses (net of tax) within other comprehensive income with an offsetting reduction to benefits obligations to accumulated benefits. Further, an $8.3 million loss was recognized in the income statement arising from the write-off of prior service costs. In addition to the plan freeze, participants will be fully vested in their frozen benefits on their date of freeze. This resulted in an increase in the benefit obligation of $48.6 million which was reflected as unrecognized prior service cost in other comprehensive income. This amount will amortize into pension expense over the next seven years. The SERP benefit obligation resulting after these changes on the date of the approved plan was $486.6 million.

In order to meet a portion of its obligations under the SERP, Sysco has contributed to a rabbi trust COLI policies on the lives of participants and corporate-owned real estate assets. These assets are not included as plan assets or in the funded status amounts in the tables above and below. As they are held in a rabbi trust, these assets are available to satisfy the claims of the company’s creditors in the event of bankruptcy or insolvency of the company. The life insurance policies on the lives of the participants had carrying values of $96.5 million as of June 28, 2014 and $95.0 million as of June 29, 2013. Sysco is the sole owner and beneficiary of such policies.

The amounts recognized on Sysco’s consolidated balance sheets related to its company-sponsored defined benefit plans are as follows:



	Pension Benefits				Other Postretirement Plans
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
	(In thousands)
Current accrued benefit liability (Accrued expenses)	$	(25,712)	$	(25,181)	$	(313)	$	(380)
Non-current accrued benefit liability (Other long-term liabilities)		(708,477)		(545,832)		(12,298)		(13,868)
Net amount recognized	$	(734,189)	$	(571,013)	$	(12,611)	$	(14,248)

Accumulated other comprehensive loss (income) as of June 28, 2014 consists of the following amounts that had not, as of that date, been recognized in net benefit cost:



	Pension Benefits		Other Postretirement Plans		Total
	(In thousands)
Prior service cost	$	60,306	$	898	$	61,204
Actuarial losses (gains)		1,058,651		(6,287)		1,052,364
Total	$	1,118,957	$	(5,389)	$	1,113,568

Accumulated other comprehensive loss (income) as of June 29, 2013 consists of the following amounts that had not, as of that date, been recognized in net benefit cost:



	Pension Benefits		Other Postretirement Plans		Total
	(In thousands)
Prior service cost	$	71,798	$	1,067	$	72,865
Actuarial losses (gains)		864,000		(3,151)		860,849
Total	$	935,798	$	(2,084)	$	933,714

The accumulated benefit obligation, which does not consider any salary increases for the remaining active union employees in the Retirement Plan, for the company-sponsored defined benefit pension plans was $3,660.2 million and $3,079.1 million as of June 28, 2014 and June 29, 2013, respectively.

Information for plans with accumulated benefit obligation/aggregate benefit obligation in excess of fair value of plan assets is as follows:



	Pension Benefits				Other Postretirement Plans
	June 28, 2014 (1)		June 29, 2013 (1)		June 28, 2014		June 29, 2013
	(In thousands)
Accumulated benefit obligation/aggregate benefit obligation	$	3,660,227	$	3,079,068	$	12,611	$	14,248
Fair value of plan assets at end of year		2,937,519		2,518,009		-		-

(1) Information under Pension Benefits as of June 28, 2014 and June 29, 2013 includes both the Retirement Plan and the SERP.

Components of Net Benefit Costs and Other Comprehensive Income

The components of net company-sponsored pension costs for each fiscal year are as follows:



	Pension Benefits
	2014		2013		2012
	(In thousands)
Service cost	$	9,657	$	70,166	$	108,223
Interest cost		160,436		148,561		147,512
Expected return on plan assets		(192,795)		(171,201)		(161,605)
Amortization of prior service cost		11,145		9,899		4,806
Amortization of actuarial loss		16,327		72,624		60,166
Curtailment loss		-		8,293		-
Net pension costs	$	4,770	$	138,342	$	159,102

The components of other postretirement benefit costs for each fiscal year are as follows:



	Other Postretirement Plans
	2014		2013		2012
	(In thousands)
Service cost	$	546	$	541	$	457
Interest cost		748		614		632
Amortization of prior service cost		168		168		215
Amortization of actuarial gain		(143)		(203)		(331)
Amortization of transition obligation		-		141		153
Net other postretirement benefit costs	$	1,319	$	1,261	$	1,126

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) related to company-sponsored pension plans for each fiscal year are as follows:



	Pension Benefits
	2014		2013		2012
	(In thousands)
Amortization of prior service cost	$	11,145	$	18,192	$	4,806
Amortization of actuarial loss		16,327		72,624		60,166
Prior service cost arising in current year		347		(53,902)		(8,706)
Actuarial (loss) gain arising in current year		(210,978)		366,957		(579,366)
Net pension costs	$	(183,159)	$	403,871	$	(523,100)

Other changes in benefit obligations recognized in other comprehensive (loss) income related to other postretirement plans for each fiscal year are as follows:



	Other Postretirement Plans
	2014		2013		2012
	(In thousands)
Amortization of prior service cost	$	168	$	168	$	215
Amortization of actuarial gain		(143)		(203)		(331)
Amortization of transition obligation		-		141		153
Actuarial (loss) gain arising in current year		3,280		(188)		(925)
Net pension costs	$	3,305	$	(82)	$	(888)

Amounts included in accumulated other comprehensive loss (income) as of June 28, 2014 that are expected to be recognized as components of net company-sponsored benefit cost during fiscal 2015 are:



	Pension Benefits		Other Postretirement Plans		Total
	(In thousands)
Amortization of prior service cost	$	11,111	$	169	$	11,280
Amortization of actuarial losses (gains)		19,871		(435)		19,436
Total	$	30,982	$	(266)	$	30,716

Employer Contributions

The company made cash contributions to its company-sponsored pension plans of $24.8 million and $93.6 million in fiscal years 2014 and 2013, respectively. There were no required contributions to the Retirement Plan to meet ERISA minimum funding requirements in fiscal 2014. The $70.0 million contribution to the Retirement Plan in fiscal 2013 was voluntary, as there were no required contributions to meet ERISA minimum funding requirements in fiscal 2013. There are no required contributions to the Retirement Plan to meet ERISA minimum funding requirements in fiscal 2015. The company’s contributions to the SERP and other post-retirement plans are made in the amounts needed to fund current year benefit payments. The estimated fiscal 2015 contributions to fund benefit payments for the SERP and other postretirement plans are $26.3 million and $0.3 million, respectively.

Estimated Future Benefit Payments

Estimated future benefit payments for vested participants, based on actuarial assumptions, are as follows:



	Pension Benefits		Other Postretirement Plans
	(In thousands)
2015	$	94,616	$	313
2016		104,096		516
2017		114,891		780
2018		125,671		984
2019		136,345		1,151
Subsequent five years		844,181		6,377

Assumptions

Weighted-average assumptions used to determine benefit obligations as of year-end were:



	June 28, 2014		June 29, 2013
Discount rate — Retirement Plan	4.74	%	5.32	%
Discount rate — SERP	4.59		4.94
Discount rate — Other Postretirement Plans	4.74		5.32
Rate of compensation increase — Retirement Plan	3.89		3.89

As benefit accruals under the SERP were frozen as of June 29, 2013, due to the plan freeze discussed above, future pay is not projected in the determination of the benefit obligation as of June 28, 2014 or June 29, 2013.

Weighted-average assumptions used to determine net company-sponsored pension costs and other postretirement benefit costs for each fiscal year were:



	2014		2013		2012
Discount rate — Retirement Plan	5.32	%	4.81	%	5.94	%
Discount rate — SERP	4.94		3.96	(1)	5.93
Discount rate — Other Postretirement Plans	5.32		4.81		5.94
Expected rate of return — Retirement Plan	7.75		7.75		7.75
Rate of compensation increase — Retirement Plan	3.89		5.30		5.30

(1) The SERP was remeasured in November 2012 as a result of the plan freeze discussed above. The rate in the table above reflects the discount rate as of this remeasurement.

As benefit accruals under the SERP were frozen as of June 29, 2013, due to the plan freeze discussed above, future pay is not projected in the determination of net pension costs related to the SERP for fiscal 2014. For determining the net pension costs related to the SERP for fiscal 2013 and 2012, the SERP calculations utilized an age-graded salary growth assumption.

A healthcare cost trend rate is not used in the calculations of postretirement benefit obligations because Sysco subsidizes the cost of postretirement medical coverage by a fixed dollar amount, with the retiree responsible for the cost of coverage in excess of the subsidy, including all future cost increases.

For guidance in determining the discount rate, Sysco calculates the implied rate of return on a hypothetical portfolio of high-quality fixed-income investments for which the timing and amount of cash outflows approximates the estimated payouts of the company-sponsored pension plans. The discount rate assumption is reviewed annually and revised as deemed appropriate. The discount rate to be used for the calculation of fiscal 2015 net company-sponsored benefit costs for the Retirement Plan is 4.74%. The discount rate to be used for the calculation of fiscal 2015 net company-sponsored benefit costs for the SERP is 4.59%. The discount rate to be used for the calculation of fiscal 2015 net company-sponsored benefit costs for the Other Postretirement Plans is 4.74%.

The expected long-term rate of return on plan assets assumption is net return on assets assumption, representing gross return on assets less plan expenses. The expected return is derived from a mathematical asset model that incorporates assumptions as to the various asset class returns, reflecting a combination of rigorous historical performance analysis and the forward-looking views of the financial markets regarding the yield on bonds, the historical returns of the major stock markets and returns on alternative investments. The rate of return assumption is reviewed annually and revised as deemed appropriate. The expected long-term rate of return to be used in the calculation of fiscal 2015 net company-sponsored benefit costs for the Retirement Plan is 7.75%.

Plan Assets

Investment Strategy

The company’s overall strategic investment objectives for the Retirement Plan are to preserve capital for future benefit payments and to balance risk and return commensurate with ongoing changes in the valuation of plan liabilities. Over time, the company intends to decrease the risk of the Retirement Plan’s investments in order to preserve the Retirement Plan’s funded status. In order to accomplish these objectives, the company oversees the Retirement Plan’s investment objectives and policy design, decides proper plan asset class strategies and structures, monitors the performance of plan investment managers and investment funds and determines the proper investment allocation of pension plan contributions and withdrawals. The company has created an investment structure for the Retirement Plan that takes into account the nature of the Retirement Plan’s liabilities. This structure ensures the Retirement Plan’s investments are diversified within each asset class, in addition to being diversified across asset classes with the intent to build asset class portfolios that are structured without strategic bias for or against any subcategories within each asset class. The company has also created a set of investment guidelines for the Retirement Plan’s investment managers to specify prohibited transactions, including borrowing of money except for real estate, private equity or hedge fund portfolios where leverage is a key component of the investment strategy and permitted in the investments’ governing documents, the purchase of securities on margin unless fully collateralized by cash or cash equivalents or short sales, pledging, mortgaging or hypothecating of any securities, except for loans of securities that are fully collateralized, market timing transactions and the direct purchase of the securities of Sysco or the investment manager. The purchase or sale of derivatives for speculation or leverage is also prohibited; however, investment managers are allowed to use derivative securities so long as they do not increase the risk profile or leverage of the manager’s portfolio.

The company’s target and actual investment allocation as of June 28, 2014 is as follows:



	Target Asset Allocation		Actual Asset Allocation
U.S. equity	29	%	39	%
International equity	29		25
Long duration fixed income	27		26
High yield fixed income	5		4
Alternative investments	10		6
			100	%

Sysco’s investment strategy is implemented through a combination of balanced and specialist investment managers, passive investment funds and actively-managed investment funds. U.S. equity consists of both large-cap and small-to-mid-cap securities. Long duration fixed income investments include U.S. government and agency securities, corporate bonds from diversified industries, asset-backed securities, mortgage-backed securities, other debt securities and derivative securities. High yield fixed income consists of below investment grade corporate debt securities and may include derivative securities. Alternative investments may include private equity, private real estate, hedge funds, timberland, and commodities investments. Investment funds are selected based on each fund’s stated investment strategy to align with Sysco’s overall target mix of investments. Actual asset allocation is regularly reviewed and periodically rebalanced to the target allocation when considered appropriate. As of June 28, 2014, actual asset allocation varied from the stated target in certain categories, as the company had not yet completed rebalancing of the portfolio to the current target asset allocation, particularly in the alternative investments category. Until the rebalancing is complete, the company has chosen to invest these amounts in U.S. and international equities.

As discussed above, the Retirement Plan’s investments in equity, fixed income and alternative investments provide a range of returns and also expose the plan to investment risk. However, the investment policies put in place by the company require diversification of plan assets across issuers, industries and countries. As such, the Retirement Plan does not have significant concentrations of risk in plan assets.

Fair Value of Plan Assets

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). See Note 5, “Fair Value Measurements,” for a description of the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

Cash and cash equivalents: Valued at amortized cost, which approximates fair value. Cash and cash equivalents is included as a Level 2 measurement in the table below.

Equity securities: Valued at the closing price reported on the exchange market. If a stock is not listed on a public exchange, such as an American Depository Receipt or some preferred stocks, the stock is valued using an evaluated bid price based on a compilation of observable market information. Inputs used include yields, the underlying security “best price”, adjustments for corporate actions and exchange prices of underlying and common stock of the same issuer. Equity securities valued at the closing price reported on the exchange market are classified as a Level 1 measurement in the table below; all other equity securities are included as a Level 2 measurement.

Fixed income securities: Valued using evaluated bid prices based on a compilation of observable market information or a broker quote in a non-active market. Inputs used vary by type of security, but include spreads, yields, rate benchmarks, rate of prepayment, cash flows, rating changes and collateral performance and type. All fixed income securities are included as a Level 2 measurement in the table below.

Investment funds: Funds holding debt, equity and exchange-traded real estate securities are valued at the net asset value (NAV) provided by the manager of each fund. The NAV is calculated as the underlying net assets owned by the fund, divided by the number of shares outstanding. The NAV is based on the fair value of the underlying securities within the fund. Non-exchange traded real estate funds are valued based on the proportionate interest held by the Retirement Plan, which is based on the valuations of the underlying real estate investments held by each fund. Each real estate investment is valued on the basis of a discounted cash flow approach. Inputs used include future rental receipts, expenses and residual values from a market participant view of the highest and best use of the real estate as rental property. The private equity funds are valued based on the proportionate interest held by the Retirement Plan, which is based on the valuations of the underlying private equity investments held by each fund. Indirectly-held investments are valued utilizing the latest financial reports supplied by the fund’s portfolio investments. Directly-held investments are valued initially based on transaction price and are adjusted utilizing available market data and investment-specific factors, such as estimates of liquidation value, prices of recent transactions in the same or similar issuer, current operating performance and future expectations of the particular investment, changes in market outlook and the financing environment. Investment funds holding debt, equity and exchange traded real-estate securities are included as a Level 2 measurement in the table below. The non-exchange traded real estate funds and private equity funds are included as Level 3 measurements.

Derivatives: Valuation method varies by type of derivative security.

Credit default and interest rate swaps: Valued using evaluated bid prices based on a compilation of observable market information. Inputs used for credit default swaps include spread curves and trade data about the credit quality of the counterparty. Inputs used for interest rate swaps include benchmark yields, swap curves, cash flow analysis, and interdealer broker rates. Credit default and interest rate swaps are included as a Level 2 measurement in the table below.

Foreign currency contracts: Valued using a standardized interpolation model that utilizes the quoted prices for standard-length forward foreign currency contracts and adjusts to the remaining term outstanding on the contract being valued. Foreign currency contracts are included as a Level 2 measurement in the table below.

Futures and option contracts: Valued at the closing price reported on the exchange market for exchange-traded futures and options. Over-the-counter options are valued using pricing models that are based on observable market information. Exchange-traded futures and options are included as a Level 1 measurement in the table below; over-the-counter options are included as a Level 2 measurement.

The following table presents the fair value of the Retirement Plan’s assets by major asset category as of June 28, 2014:



	Assets Measured at Fair Value as of June 28, 2014
	Level 1		Level 2		Level 3		Total
	(In thousands)
Cash and cash equivalents	$	-	$	51,066	$	-	$	51,066
U.S. equity:
U.S. large-cap 1		218,165		777,627		-		995,792
U.S. small-cap		135,781		-		-		135,781
International equity 2		-		717,022		-		717,022
Long duration fixed income:
Corporate bonds		-		568,419		-		568,419
U.S. government and agency securities		-		171,617		-		171,617
Other		-		4,907		-		4,907
Derivatives, net 3		(127)		352		-		225
High yield fixed income 2		-		102,041		-		102,041
Alternative investments:
Real estate 2		-		114,250		35,403		149,653
Private equity 2		-		-		31,204		31,204
Total investments at fair value	$	353,819	$	2,507,301	$	66,607	$	2,927,727
Other 4								9,792
Fair value of plan assets at end of year							$	2,937,519

1 Include direct investments and investment funds.

2 Include investments in investment funds only.

3 Include credit default swaps, interest rate swaps and futures. The fair value of asset positions totaled $0.8 million; the fair value of liability positions totaled $0.6 million.

4 Include primarily plan receivables and payables, net.

The following table presents the fair value of the Retirement Plan’s assets by major asset category as of June 29, 2013:



	Assets Measured at Fair Value as of June 29, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Cash and cash equivalents 1	$	-	$	88,812	$	-	$	88,812
U.S. equity:
U.S. large-cap 1		189,548		531,667		-		721,215
U.S. small-to-mid-cap 1		99,518		-		-		99,518
International equity 2		-		745,262		-		745,262
Long duration fixed income:
Diversified fixed income 2		-		264,139		-		264,139
U.S. government and agency securities		-		123,253		-		123,253
Corporate bonds		-		117,565		-		117,565
Mortgage-backed securities		-		8,316		-		8,316
Municipal bonds		-		23,840		-		23,840
Sovereign debt		-		16,744		-		16,744
Other 1		-		13,277		-		13,277
Derivatives, net 3		(249)		(687)		-		(936)
High yield fixed income 2		-		226,955		-		226,955
Alternative investments:
Real estate 2		-		-		64,845		64,845
Private equity 2		-		-		14,375		14,375
Total investments at fair value	$	288,817	$	2,159,143	$	79,220	$	2,527,180
Other 4								(9,171)
Fair value of plan assets at end of year							$	2,518,009

1 Include direct investments and investment funds.

2 Include investments in investment funds only.

3 Include credit default swaps, interest rate swaps, foreign currency contracts, futures and options. The fair value of asset positions totaled $0.4 million; the fair value of liability positions totaled $1.3 million.

4 Include primarily plan receivables and payables, net.

The following table sets forth a summary of changes in the fair value of the Retirement Plan’s Level 3 assets for each fiscal year:



	Real Estate Funds		Private Equity Funds		Total Level 3 Measurements
	(In thousands)
Balance, June 30, 2012	$	51,097	$	5,295	$	56,392
Actual return on plan assets:
Relating to assets still held at the reporting date		6,696		1,327		8,023
Relating to assets sold during the period		-		-		-
Purchases and sales, net		7,052		7,753		14,805
Transfers in and/or out of Level 3		-		-		-
Balance, June 29, 2013	$	64,845	$	14,375	$	79,220
Actual return on plan assets:
Relating to assets still held at the reporting date		3,044		1,931		4,975
Relating to assets sold during the period		3,307		1,767		5,074
Purchases and sales, net		(35,793)		13,131		(22,662)
Transfers in and/or out of Level 3		-		-		-
Balance, June 28, 2014	$	35,403	$	31,204	$	66,607