A proposed compensation plan for those who lost money with the Equitable Life has been rejected by the Parliamentary Ombudsman, Ann Abraham.
Ms Abraham said the suggested plan limiting payouts to between £400m and £500m was "unsafe and unsound".
The Ombudsman's views were made in a letter to all MPs.
The government has said it may use the proposals, set out by former Appeal Court judge Sir John Chadwick, when deciding the amount to be paid out.
But Ms Abraham said it should not rely on the methodology used by Sir John, and nor should the coalition government use his figures to decide the final scope of compensation.
"It seems to me that those proposals, if acted upon, would not in any sense enable fair and transparent compensation to be delivered," Ms Abraham said.
"In studying the Chadwick report I have noted that it misinterprets central parts of the conclusions outlined in my July 2008 report and has ignored others.
"I find these flaws particularly concerning, providing as they do the basis for some of the central and more controversial proposals within the Chadwick report," Ms Abraham said.
Last week, the government said it would set up an independent commission to decide how compensation should be distributed to the 1.5 million Equitable savers.
They were the people who saw the value of their private pension policies slashed after the Equitable closed and came near to collapse in 2000.
Compensation payments should start to be made in the middle of next year, the government announced last week.
But the total sum on offer is likely to be far less than the £5bn that campaigners have been demanding.
The amount will be decided this autumn, in the light of the government's desire to rein in public spending and cut the government's budget deficit.
Ms Abraham suggested that a figure of between £4bn and £4.8bn - the initial starting point for Sir John's own calculations - would be a "firm foundation" for deciding how much the Equitable members had suffered.
It was in 2008 that the ball was finally set rolling for a full compensation scheme when Ms Abraham published her second report on the Equitable saga.
She decided that the near-collapse of the company and the losses suffered by its customers were largely the government's fault, because various departments and agencies had failed to regulate the Equitable properly.
She recommended that a full compensation scheme be set up. The Labour government eventually agreed to set up a very limited scheme that would compensate only those who had lost the most - those who had been "disproportionately affected".
Sir John Chadwick was asked last year to devise a plan with that in mind.
Although the coalition had pledged itself to a much more comprehensive scheme, campaigners fear that in reality it will adopt much of Sir John's thinking and recommendations when working out how much should actually be paid.