Note 17. Employee Pension and Other Benefit Plans

Employee 401(k) Plans

The Company sponsors the Viavi Solutions 401(k) Plan (the “401(k) Plan”), a Defined Contribution Plan under ERISA, which provides retirement benefits for its eligible employees through tax deferred salary deductions. The 401(k) Plan allows employees to contribute up to 50% of their annual compensation, with contributions limited to $18,500 in calendar year 2018 as set by the Internal Revenue Service.

For all eligible employees the Company offers a 401(k) Plan that provides a 100% match of employees’ contributions up to the first 3% of annual compensation and 50% match on the next 2% of compensation. All matching contributions are made in cash and vest immediately. The Company’s matching contributions to the 401(k) Plan were $4.2 million and $4.1 million $4.7 million in fiscal 2018, 2017 and 2016, respectively.

Deferred Compensation Plan

The Company also provides for the benefit of certain eligible employees in the U.S. a non-qualified retirement plan. This plan is designed to permit employee deferral of a portion of salaries in excess of certain tax limits and deferral of bonuses. This plan’s assets are designated as trading securities on the Company’s Consolidated Balance Sheets. Refer to “Note 9. Investments, Forward Contracts and Fair Value Measurements” for more information. Effective January 1, 2011, the Company suspended all employee contributions into the plan.

Employee Defined Benefit Plans

The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany including the plan assumed from AW acquisition. The Company also is responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition.

Most of the plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition during fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service. As of June 30, 2018, the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the post-retirement benefits when due. Future estimated benefit payments are summarized below. No other required contributions are expected in fiscal 2019, but the Company, at its discretion, can make contributions to one or more of the defined benefit plans.

The Company accounts for its obligations under these pension plans in accordance with the authoritative guidance which requires the Company to record its obligation to the participants, as well as the corresponding net periodic cost. The Company determines its obligation to the participants and its net periodic cost principally using actuarial valuations provided by third-party actuaries. The obligation the Company records on its Consolidated Balance Sheets is reflective of the total PBO and the fair value of plan assets.

The following table presents the components of the net periodic benefit cost for the pension and benefits plans (in millions):



	Years Ended
	2018			2017			2016
Service cost	$	0.2		$	0.3		$	0.2
Interest cost	2.7			2.1			3.0
Expected return on plan assets	(1.5		)	(1.1		)	(1.5		)
Recognized net actuarial losses	1.5			1.9			0.7
Provision for legal proceeding	—			—			8.4
Net periodic cost	$	2.9		$	3.2		$	10.8

The Company’s accumulated other comprehensive income includes unrealized net actuarial (gains)/losses. The amount expected to be recognized in net periodic benefit cost during fiscal 2019 is $1.9 million. Refer to “Note 18. Commitments and Contingencies” for further information on the provision for legal proceeding.

The changes in the benefit obligations and plan assets of the pension and benefits plans were (in millions):



	Pension Benefit Plans
	2018			2017
Change in benefit obligation
Benefit obligation at beginning of year	$	133.4		$	134.6
Service cost	0.2			0.3
Interest cost	2.7			2.1
Actuarial (gains) losses	1.8			(1.2		)
Benefits paid	(5.9		)	(4.2		)
Assumed benefit obligation from acquisition	2.0			—
Foreign exchange impact	2.5			1.8
Benefit obligation at end of year	$	136.7		$	133.4
Change in plan assets
Fair value of plan assets at beginning of year	$	28.3		$	27.2
Actual return on plan assets	0.9			2.0
Employer contributions	6.1			4.0
Benefits paid	(5.9		)	(4.2		)
Assumed plan asset from acquisition	0.2			—
Foreign exchange impact	0.4			(0.7		)
Fair value of plan assets at end of year	$	30.0		$	28.3
Funded status	$	(106.7	)	$	(105.1	)
Accumulated benefit obligation	$	136.4		$	133.0



	Pension Benefit Plans
	2018			2017
Amount recognized in the Consolidated Balance Sheets at end of year:
Current liabilities	$	7.1		$	6.8
Non-current liabilities	99.6			98.3
Net amount recognized at end of year	$	106.7		$	105.1
Amount recognized in accumulated other comprehensive (loss) income at end of year:
Actuarial losses, net of tax	$	(23.0	)	$	(21.8	)
Net amount recognized at end of year	$	(23.0	)	$	(21.8	)
Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income:
Net actuarial gain (loss)	$	(2.8	)	$	0.7
Amortization of accumulated net actuarial losses	1.5			1.9
Total recognized in other comprehensive (loss) income	$	(1.3	)	$	2.6

As of June 30, 2018 and July 1, 2017, the liability balances related to the post retirement benefit plan were $0.4 million and $1.1 million respectively. The liability balances were included in other non-current liabilities on the Consolidated Balance Sheets.

During fiscal 2018, the Company (amounts represented as £ and $ denote GBP and USD, respectively) contributed £0.8 million or approximately $1.0 million, while in fiscal 2017, the Company contributed £0.5 million or approximately $0.6 million to its U.K. pension plan. These contributions allowed the Company to comply with regulatory funding requirements.

Assumptions

Underlying both the calculation of the PBO and net periodic cost are actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.

The discount rate reflects the estimated rate at which the pension benefits could be effectively settled. In developing the discount rate, the Company considered the yield available on an appropriate AA corporate bond index, adjusted to reflect the term of the scheme’s liabilities as well as a yield curve model developed by the Company’s actuaries.

The expected return on assets was estimated by using the weighted average of the real expected long-term return (net of inflation) on the relevant classes of assets based on the target asset mix and adding the chosen inflation assumption.

The following table summarizes the weighted average assumptions used to determine net periodic cost and benefit obligation for the Company’s U.K. and German pension plans:



	Pension Benefit Plans
	2018		2017		2016
Used to determine net period cost at end of year:
Discount rate	1.9	%	2.1	%	2.1	%
Expected long-term return on plan assets	5.7		4.8		5.3
Rate of pension increase	2.3		2.2		2.3

Used to determine benefit obligation at end of year:
Discount rate	1.9	%	2.0	%	1.7	%
Rate of pension increase	2.3		2.3		2.1

Investment Policies and Strategies

The Company’s investment objectives for its funded pension plan are to ensure that there are sufficient assets available to pay out members’ benefits as and when they arise and that, should the plan be discontinued at any point in time, there would be sufficient assets to meet the discontinuance liabilities.

To achieve these objectives, the trustees of the U.K. pension plan are responsible for regularly monitoring the funding position and managing the risk by investing in assets expected to outperform the increase in value of the liabilities in the long term and by investing in a diversified portfolio of assets in order to minimize volatility in the funding position. The trustees invest in a range of frequently traded funds (“pooled funds”) rather than direct holdings in individual securities to maintain liquidity, achieve diversification and reduce the potential for risk concentration. The funded plan assets are managed by professional third-party investment managers.

Fair Value Measurement of Plan Assets

The following table sets forth the plan assets at fair value and the percentage of assets allocations as of June 30, 2018 (in millions, except percentage data):



							Fair value measurement as of
							June 30, 2018
	Target Allocation		Total		Percentage of Plan Assets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Global equity	40	%	$	12.0	40.0	%	$	—	$	12.0
Fixed income	40	%	11.1		37.0	%	—		11.1
Other	20	%	6.8		22.7	%	—		6.8
Cash			0.1		0.3	%	0.1		—
Total assets			$	30.0	100.0	%	$	0.1	$	29.9

The following table sets forth the plan’s assets at fair value and the percentage of assets allocations as of July 1, 2017 (in millions, except percentage data).



							Fair value measurement as of
							July 1, 2017
	Target Allocation		Total		Percentage of Plan Assets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Global equity	40	%	$	11.7	41.3	%	$	—	$	11.7
Fixed income	40	%	10.7		37.8	%	—		10.7
Other	20	%	5.8		20.5	%	—		5.8
Cash			0.1		0.4	%	0.1		—
Total assets			$	28.3	100.0	%	$	0.1	$	28.2

The Company’s pension assets consist of multiple institutional funds (“pension funds”) of which the fair values are based on the quoted prices of the underlying funds. Pension funds are classified as Level 2 assets since such funds are not directly traded in active markets.

Global equity consists of several index funds that invest primarily in U.K. equities and other overseas equities.

Fixed income consists of several funds that invest primarily in index-linked Gilts (over 5 year), sterling-denominated investment grade corporate bonds, and overseas government bonds.

Other consists of several funds that primarily invest in global equities, bonds, private equity, global real estate and infrastructure funds.

Future Benefit Payments

The following table reflects the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the Company’s PBO at year end and include benefits attributable to estimated future compensation increases (in millions).



	Pension Benefit Plans
2019	$	8.1
2020	5.8
2021	5.9
2022	6.2
2023	7.0
2024 - 2028	31.1
Thereafter	42.6
Total	$	106.7

Timing of the payment relating to the legal proceeding, which is included in the above table under “Thereafter,” is not yet determined. Refer to “Note 18. Commitments and Contingencies” for further information.