The National Association of Pension Funds (NAPF) has proposed a nationalised brokerage system to help retirees get the best annuity rate and reform the current "toxic system".
It said the government should monitor the success of the open market option (OMO) more closely, as the "unfair" way most annuities are currently sold is wiping up to £1bn off retirees' future income.
The NAPF said if take-up of the OMO does not improve, the government should intervene with a national system.
With auto-enrolment due to begin this year, the number of people receiving sub-standard annuities could triple, the NAPF warned.
The organisation blamed the OMO failure on a lack of financial advice for small pot holders, a lack of financial literacy amongst retirees, and a lack of support from employers for staff.
It also accused insurers of "murky" pricing structures and failing to signpost the OMO properly.
The NAPF proposed that shopping around should be compulsory and automatic on retirement.
It said the government, the Financial Services Authority (FSA) and the Association of British Insurers (ABI) should drive transparency in annuity pricing, commission and retention business through better disclosure.
Joanne Segars, chief executive of the NAPF, said: "The annuity market desperately needs to be straightened out.
"People are saving throughout their working lives only to end up short-changed by a toxic system."
In December, the ABI launched a consultation on creating a new code of conduct for insurers to reform the way in which it presents the OMO to retirees.
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Group income protection