The European Commission has attacked the Government's flagship Pension Protection Fund, claiming it is not generous enough to meet EU law.
Its independent inquiry found the PPF - a safety net for workers whose schemes collapsed after April 2005 - was "not sufficient" to comply with the European Insolvency Directive.
The directive requires all member states to protect the pension savings of workers whose companies have gone bust since 1983.
The move comes as the Government faces having to pay up to £15bn compensation to 85,000 pensioners after their schemes collapsed. They are unprotected by the PPF as their schemes failed before it came into effect.
A report by Ann Abraham, the Parliamentary Ombudsman, found the Government was guilty of maladministration for providing "inaccurate, incomplete, unclear and inconsistent" literature on the safety of occupational pension scheme benefits.
Lawyers saythe commission's attack increases the Government's chances of being successfully sued in the European Court of Justice. A case brought by trade unions Amicus and Community for failing to properly implement the directive is due to be heard in Luxembourg in 2007.
The commission has said it is not happy that the PPF would cut compensation to 90 per cent for those under a pension scheme's normal retirement age, subject to a cap of £25,000. It insisted that benefits should be repaid without restrictions.
Tim Cox, the chairman of the Association of Pensions Lawyers, agreed the PPF was in breach of the directive. "The PPF does not protect benefits or compensate for loss. Its main purposes seems to be to discourage private sector pension provision by taxing employers who provide pensions and to avoid a cost to the Treasury by providing non-pensioners with benefits that keep them above the social security benefit level."
This week's developments - and the Department for Work and Pensions' subsequent refusal to take responsibility for the problem - will give unions a "strong" chance of winning the case, he added.
Peter Shave, a partner at law firm Wragge & Co, agreed that unions should feel encouraged, saying that the Ombudsman's criticism undermined "key elements of the Government's case - that it has adequately protected pension rights as required by European law".
Ken Penton, a spokesman for the unions, said: "We are confident we will win our case."Reuse content