Ministers say the move will make it easier for pension savers to stay on top of their savings and reduce costs.
The consolidation model will be known as the Small Pots Data Platform and should be in place by 2030.
Automatically combining pension pots aims to tackle the growing problem of small, forgotten pension pots that many people accumulate as they move between employers over their working lives.
According to Government figures, there are now 13 million of these small pots, holding £1,000 or less, with the number increasing by around one million per year.
Having multiple pension pots can stop savers getting a good return on their savings if they have to pay multiple charges. Overseeing all these small pots also costs the pensions industry around £225m in unnecessary admin.
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Under the reforms, each individual’s small pots will be brought together into one pension scheme that is certified as delivering good value to savers. However, individuals will retain the right to opt out.
‘Could prove to be a real game-changer’
Torsten Bell, minister for pensions, said: “It’s great news that more people are saving for their retirement. But I want to make pension saving as simple and rewarding as possible.
“There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings. It also costs the pensions industry hundreds of millions of pounds every year.
“We will automatically bring together people’s small pots into one high-performing pension, reducing costs as well as hassle for savers. In time, this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Auto-enrolment has played an enormous part in getting more people saving, but along the way it’s caused a big problem with small pots. There’s an estimated 13m pensions worth less than £1,000 washing around the system and this causes problems for people’s retirement planning.
“Moves to implement a multiple default consolidator model – now known as the Small Pots Data Platform – could prove to be a real game-changer. In scooping up these pots, the platform can reduce costs for providers and significantly improve outcomes for members.
“It’s easy to lose track of these small pots, but over time they can grow and make a big impact on your overall retirement saving. Letting members know these small pots have been allocated to one provider reminds people about the existence of these important savings [and] gives them a better understanding of what they have, and this can massively boost engagement.”
