ZAGREB – Fledgling Croatian pension funds are proving so successful they will soon have more money than they are allowed to invest. Croatian pensions have been praised as a rare success story of financial reforms in the former Yugoslav republic-turned EU candidate country. But fund managers now want looser restrictions on where they can invest their growing coffers. «Without major changes in the liquidity of the Croatian capital market, pension funds will, in the coming years, face a problem of where to invest their money,» Damir Grbavac, head of the best-yielding Raiffeisenbank pension fund, told Reuters. Croatia launched mandatory pension funds in 2002. By the end of March this year, the four funds had net assets worth 8.5 billion Croatian kuna ($1.5 billion), about one-10th of private savings at commercial banks and roughly 4 percent of GDP. But a thin Croatian capital market, slow privatization and few eligible shares on the local bourses have squeezed investment options. Fund managers have to invest at least 50 percent of their portfolio in Croatian state debt and are banned from investing more than 15 percent abroad. They can also only invest in the shares of a few top-tier companies. «Investment structure was adequately regulated when the pension reform started three years ago, but some changes seem necessary now,» Grbavac said. Dinko Novoselec who manages A-Z, Croatia’s largest fund, said it was wise to invest at home before venturing into foreign markets, but the limit on overseas investment cannot be maintained as Croatia heads toward EU membership. Zagreb hopes to join the bloc by 2009. «Croatia is a transitional economy which we expect to rise faster than the economies of developed countries. It should consequently bring higher yields to our members,» Novoselec said. Fund managers and state pension fund regulator Hagena agree the capital market could develop faster if funds were allowed to take part in privatizing state assets. Hagena proposed an amendment to the pension funds bill to allow funds to invest in more equities, including dozens of companies listed in the less transparent public companies tier of the bourse. «If privatization through a strategic partner secures higher revenues that’s fair enough, but pension funds are eager to step in if part of the sale goes through the local bourses,» said Dragan Kovacevic, head of Hagena. Croatia has already begun privatizing some of its big industries, like oil firm INA and state telecom operator T-HT, through direct sale to a strategic partner. The government has decided to sell another 15 percent of INA in the coming months, which would take the stake sold off to 40 percent – a move likely to please fund managers. But it is not just mandatory funds that are gaining weight. Voluntary pension funds have also launched in Croatia, albeit with fewer assets at their disposal – 110 million kuna at the end of March. «They are still establishing themselves,» Grbavac said. «A key issue here would be to create such a tax deduction policy that would motivate employers to pay… into voluntary funds.» But Kovacevic said that before such voluntary schemes can thrive, Croatia will need to look at wider ways to stimulate its economy. «Only in a wealthy society can people put their money aside and invest in their future through such a scheme,» he said.