The government can lift the restrictions on the National Employment Savings Trust (NEST) without "offending" European Union (EU) state aid rules, the shadow pensions minister has claimed.
The Department for Work and Pensions (DWP) announced a call for evidence last week on removing the £4,400 contribution cap and ban on transfers in and out of NEST.
But a major stumbling block could be the rules governing EU state aid which prohibits aid from the state which could distort or threaten competition. NEST has so far received £120m in state loans.
A legal analysis by Gregg McClymont's senior parliamentary assistant Dr Andy Tarrant argues removing the £4,400 contribution cap and ban on transfers in and out of NEST would not "infringe" EU state aid rules.
Tarrant, who is also an EU competition lawyer, said the government does not have to prove lifting the restrictions is necessary beyond any reasonable doubt, but only that it is a reasonable step in light of current information.
The analysis argues the evidence is that the restrictions are impeding NEST's ability to "act as a service of general and economic interest" and waiting until the end of auto-enrolment could leave many employees in schemes that are not in their best interests.
McClymont said the restrictions should be removed as soon as possible and argued the government now has a "wide discretion".
He said: "Today my office has released a legal analysis of the situation with respect to EU state aid rules and NEST. It concludes that the government now has a wide discretion which will allow it to lift the restrictions.
"Ministers should take this on board and Labour will be working to ensure that the government moves to effective action."
NEST received state aid to fund start-up costs and the government has previously argued that lifting the restrictions could be "unlawful" because it would boost business into NEST.
But in the call for evidence, the government stated: "We anticipate that the commission will want to re-assure themselves that any change to the policy framework for NEST is consistent with the provision of state aid.
"However, the annual contribution limit and restrictions on transfers do not directly lead to the additional costs upon which the approved case is based. Additionally, it has always been the case that the legislation provides for these two constraints to be reviewed in 2017 potentially leading to their removal from that point."
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