I have tracked this down to the following pam rule being buggy on gdm

auth    [success=1 default=ignore]      pam_unix.so nullok_secure

Not quite worked out where the bug is, but nullok_secure is an Ubuntu
specific argument and fails on gdm, and possibly other !lightdm display
managers also.

** Also affects: pam (Ubuntu)
   Importance: Undecided
       Status: New

** Changed in: pam (Ubuntu)
       Status: New => Triaged

** Changed in: pam (Ubuntu)
   Importance: Undecided => Critical

** Changed in: ubuntu-gnome
   Importance: High => Critical

** Changed in: gdm3 (Ubuntu)
   Importance: High => Critical

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Touch seeded packages, which is subscribed to pam in Ubuntu.
https://bugs.launchpad.net/bugs/1561302

Title:
  gdm won't allow passwordless login

Status in gdm:
  Confirmed
Status in Ubuntu GNOME:
  Triaged
Status in casper package in Ubuntu:
  New
Status in gdm3 package in Ubuntu:
  Triaged
Status in gnome-shell package in Ubuntu:
  New
Status in pam package in Ubuntu:
  Triaged

Bug description:
  The Live session user does not have a password set, however gdm won't
  allow login in this case since the "Sign In" button is disabled.

  Normally this should be too much of an issue, since the login screen
  should only be hit on logout from the live session, some people are
  reporting hitting the gdm login screen on boot due to ubiquity-dm
  failing to boot.

  ProblemType: Bug
  DistroRelease: Ubuntu 16.04
  Package: gdm3 3.18.2-1ubuntu1
  ProcVersionSignature: Ubuntu 4.4.0-15.31-generic 4.4.6
  Uname: Linux 4.4.0-15-generic x86_64
  ApportVersion: 2.20-0ubuntu3
  Architecture: amd64
  CurrentDesktop: GNOME
  Date: Thu Mar 24 13:55:19 2016
  InstallationDate: Installed on 2016-03-23 (0 days ago)
  InstallationMedia: Ubuntu-GNOME 16.04 LTS "Xenial Xerus" - Beta amd64 
(20160323)
  SourcePackage: gdm3
  UpgradeStatus: No upgrade log present (probably fresh install)

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