Steel baron Andrew Carnegie pioneered pension funding

To most, Andrew Carnegie was known as a steel baron and philanthropist. As the century ends, however, Pensions & Investments recognizes Mr. Carnegie as the seminal figure in pension fund history.

He joins Harry Markowitz as P&I's choices for the people of the century.

Among his contributions:

* He established an investment fund to pay pensions, which became the prototype used by every defined benefit plan.

* His initial funding began what have become the U.S. Steel & Carnegie Pension Fund and the Teachers Insurance and Annuity Association-College Retirement Equities Fund.

The two funds, formed in the early years of the 20th century, will enter the 21st century with $12 billion and $279 billion, respectively.

They are thriving legacies of Mr. Carnegie's wealth, goodwill and foresight in providing a financial mechanism to secure pensions for aging workers.

Mr. Carnegie's significance isn't in creating the first pension plans.

"He was copying the Baltimore & Ohio and Pennsylvania railroads' retirement systems," said Gary A. Glynn, president of the U.S. Steel & Carnegie fund, New York.

Funding issues

These plans, and a few others that then existed, weren't funded.

But Mr. Carnegie changed that. He provided the first funding for the steel and college plans. He made the initial contributions and laid out the pioneering regimen for investing assets and using the investment earnings to pay retirement benefits. That rudimentary approach became the model followed in this country by private pension plans, albeit applied with increasing sophistication.

In 1901 -- in his first major show of wealth upon retiring from business -- he started the Carnegie Relief Fund with a contribution of $4 million in Carnegie Co. bonds, according to a letter from Mr. Carnegie to the managers of Carnegie Co. that was furnished by Mr. Glynn. He designated the income from the bonds to provide for all employees of Carnegie Co. injured at work and for dependents of employees who were killed.

In addition, Mr. Carnegie stipulated the income from the bonds was "to provide small pensions or aids to such employees as, after long and creditable service, through exceptional circumstances, need such help in their old age and who make good use of it."

"It was a defined benefit plan, but it didn't have a defined benefit," Mr. Glynn said.

Morgan Bank eventually became the custodian and manager.

Mr. Carnegie's letter specified "a report to be made each year, giving an account of the fund and its distribution," published in two Pittsburgh newspapers, and copies posted at steel mills "so employees may know what's being done," Mr. Glynn said.

That same year, 1901, J.P. Morgan formed U.S. Steel Corp., acquiring an array of steel-related companies, including Carnegie's company. Carnegie Co. of Pittsburgh, the biggest component of Big Steel, continued to operate under its own name.

In 1911, U.S. Steel joined the Carnegie fund for all its other employees and contributed $8 million to the pension fund.

In 1914, the pension fund was incorporated as the U.S. Steel & Carnegie Pension Fund.

"The pensions became defined after 1914, but the obligations were limited to the assets of the trust until 1950, when it became part of the collective bargaining agreement," Mr. Glynn said.

In his letter, Mr. Carnegie said the new pension fund was "an acknowledgement of the deep debt which I owe to the workers who have contributed so greatly to my success."

Inspirational meeting

TIAA-CREF was inspired by a meeting around the turn of the century between Mr. Carnegie and Henry S. Pritchett, president, Massachusetts Institute of Technology. They discussed "ways to improve the economic standing of college professors and the provisions for their financial security in old age," according to a TIAA-CREF publication.

In 1905, Mr. Carnegie donated $10 million to establish the Carnegie Foundation for the Advancement of Teaching to provide free pensions to professors at private universities, colleges and technical schools, according to the TIAA-CREF publication. He later gave an additional $5 million to include professors of state universities in the pension fund.

CFAT, which was incorporated by Congress, ultimately included in its program 95 public and private universities in 26 states and Canada.

By 1915, it became apparent that no possible gift would be sufficient to provide all U.S. college teachers with free pensions. So the pension program was closed to new entrants, while 6,300 faculty retirees and spouses continued to receive lifetime benefit payments.

CFAT leaders sought a replacement for its free pensions and "began a search for a practical and durable retirement system," according to the TIAA-CREF publication.

It concluded, among other attributes, that to secure annuities "there must be set aside, year by year, enough funds to build up a reserve adequate to meet the ultimate benefit payments."

The recommendations led to the establishment of TIAA in 1918 as a non-profit corporation with an initial grant of $1 million from Carnegie Corp., one of the organizations established with Mr. Carnegie's fortune.