The German regulator has piled further pressure on the European Central Bank over its low interest rate policy, which experts believe is wreaking havoc on pension schemes and savers in Europe’s largest economy.

BaFin, Germany’s financial services watchdog, said that pension schemes in Germany might soon be forced to cut benefits for retirees as a result of the low interest rate environment.

Alfred Gohdes, chief actuary in the Frankfurt office of Willis Towers Watson, the world’s largest adviser to institutional investors, described Bafin’s intervention as “unusual”.

He said: “In Germany only one pension fund has cut benefits previously. This happened more than 10 years ago. Now there is a strong possibility of benefits being cut in Germany if low rates continue. It is a slow poisoning [of the pension system].”

Bafin’s comments come just two weeks after the head of France’s largest public pension fund warned many retirement funds in Europe will “implode” if the ECB’s low interest rate policy continues.

ABP, Europe’s largest retirement fund, which provides pensions for one-sixth of the Dutch population, also said last month there is a “distinct possibility” of benefits being cut in 2017 due to declining interest rates.

Mario Draghi, president of the ECB, defended the central bank’s decision in April to keep its benchmark interest rate at zero. The deposit rate on lenders’ reserves held at the central bank have also been kept at -0.4 per cent.

At a press conference at the end of April he said: “It’s pretty evident that pension funds and insurance companies are significantly affected by the low level of interest rates.

“I would urge all actors in this sector to resist the temptation to blame low interest rates as the cause of everything that went wrong and [has] been going wrong for years with this sector. As I said before, if we want to return to higher interest rates, [first] we have to return to higher growth and higher inflation.” (…)

Last year, economists in Switzerland warned that the Swiss National Bank’s decision to cut the rate on deposits to -0.75 per cent, coupled with negative bond yields and increased currency volatility, could push domestic pension funds into bankruptcy. They added that Swiss voters were unlikely to accept the retirement age being raised.

The situation is no better in the US, where the public retirement system has developed an estimated $3.4tn funding hole that is expected to pile pressure on states to cut spending or raise taxes to avoid bankruptcy. Academics have blamed a combination of factors, including low interest rates and the ageing population.

  Financial Times / Bafin Pressemitteilung