Insurers Standard Life and Resolution are most at risk from a regulatory probe into whether retirees who buy annuities - investment policies that provide a regular income until death - get a fair deal, analysts said.
The investigation by the Financial Services Authority will focus on whether people who buy an annuity directly from their pension provider pay more than they would if they shopped around, the watchdog said on Thursday.
The regulator will also look into whether insurers hinder their customers from shopping around. The industry is obliged under FSA rules to inform pension savers that they have a right to compare annuity rates across the market.
"We want to understand the level of the potential detriment for consumers if they do not shop around, to see if there are ways to make this market work better for customers," said FSA head of life insurance Nick Poyntz-Wright.
If it finds that consumers who buy annuities from their own pension provider are paying over the odds, the FSA will take "steps to ensure fairer pricing", a spokeswoman said.
Resolution and Edinburgh-based Standard Life sell annuities mainly to their own pension customers, and therefore potentially have the most to lose from the probe, analysts said.
"A successful FSA investigation would logically impact on those companies primarily selling only to their in-house customers," Deutsche Bank's Oliver Steel wrote in a note to clients. "There is a risk that in-house annuity providers such as Standard Life and Resolution lose out."
There is an income gap of up to 16.2 percent between the most and least competitive annuities currently available for 65 year-old retirees, financial data firm Moneyfacts said.
The FSA inquiry comes amid a prolonged decline in average annuity incomes as insurers pass on a drop in the returns they make on their investments in government bonds.
The average annuity payout fell 11.5 percent last year alone, and has dropped by 56 percent for male annuitants since 1994, according to Moneyfacts.
Shares in Standard Life and Resolution were down 0.6 percent and 0.5 percent by 11:45 a.m., in line with the FTSE 100 share index.
(Reporting by Myles Neligan; Editing by Tom Pfeiffer)