The Work and Pensions Committee said a ban on transfers in and out of the flagship Nest scheme must be scrapped "as a matter of urgency".
Workers are in danger of being shut out of the best value pensions unless the Government lifts restrictions around a scheme which is key to its landmark retirement reforms, a committee of MPs warned today.
The Work and Pensions Committee said that caps on annual contributions into Nest - National Employment Savings Trust - and a ban on transfers in and out of the scheme must be scrapped "as a matter of urgency".
It warned that the current rules will force employers to plump for alternatives to Nest which are more flexible but do not have the same obligations placed on them to keep costs low.
Nest (National Employment Savings Trust) was set up as a not-for-profit option to fill gaps in the existing market as the Government rolls out its automatic enrolment programme which will eventually see up to 10 million people placed into workplace pensions.
But there have been widespread calls for the rules around Nest to be relaxed amid concerns that many employers will be unable to use Nest as a single pension for their whole workforce.
The current rules, which are due to be reviewed in 2017, also prevent workers from maximising their savings by piling up larger amounts of cash in their pension as they approach retirement, it has been argued.
Committee chairwoman Dame Anne Begg said: "Some employers are dismissing the Nest option and choosing a private pension provider who can offer a scheme for all their employees.
"Nest is required to be a low-cost scheme and to offer good value. Other pension providers don't have this same obligation.
"There is therefore a risk that the restrictions will mean some employees are prevented from having access to the best value pension scheme available."
Auto-enrolment began last autumn with larger companies in a phasing-in process. The committee said that the Government must act now to give smaller firms which are being enrolled from next year time to prepare.
The Lifting the Restrictions on Nest report comes after groups including the TUC, Age UK and the Federation of Small Businesses (FSB) wrote to Pensions Minister Steve Webb last month, urging him to lift the barriers around Nest as soon as possible.
Nest has to be available to all firms which need the scheme to meet their auto-enrolment requirements, including businesses that other pension providers may consider loss-making or not commercially viable.
The annual contribution limit is £4,400 and someone would need to be earning more than around £60,000 to exceed this, affecting around 6% of private sector workers.
The report said: "This still means that a number of employers who have employees on a range of earnings are not currently able to use Nest as a single pension provider."
The Government launched a consultation in November (Xetra: A0Z24E - news) to find out if restrictions on the scheme are getting in the way of good outcomes for consumers and the report is the committee's contribution to this.
Ros Altmann, director-general of Saga, said: "It is absolutely vital that these restrictions are removed as soon as possible.
"The aim of the restrictions was supposedly to ensure Nest focused on its remit to ensure lower paid workers would always be served, even if they are unprofitable to existing providers, but the emphasis on this remit has resulted in Nest being locked out of other profitable business that it obviously needs if it is to be viable."
TUC general secretary Frances O'Grady said the report puts even more pressure on the Government to lift the "unjustified" restrictions.
Steve Gay, director of life savings and protection at the Association of British Insurers (ABI), said that any removal of the restrictions should only be considered if there is evidence to show that they are an obstacle.
He said: "If no evidence emerges to suggest this, the ABI believes the most appropriate time to remove the restrictions would be following the review in 2017.
"Nest is integral to the success of auto-enrolment and the ABI has fully supported its intention to target smaller employers."
A Department for Work and Pensions spokeswoman said: "We welcome the contribution of the select committee to this issue.
"The department published a call for evidence on the impact of the Nest constraints in November 2012 and will be issuing our response in the spring."