The Government is to create a small pensions pot consolidator as part of its Pension Schemes Bill.

The Bill is set to be introduced in Parliament this spring.

There are currently 13m small pension pots, holding £1,000 or less, with the number increasing by around 1m a year.

The small pots consolidator will automatically bring each individual small pension pot (£1,000 or less) into one pension scheme per individual in a move that the Department for Work and Pensions (DWP) claims will boost retirement savings for the average worker by around £1,000 as well as saving businesses £225m a year in administration costs.

Savers will be able to opt out of consolidation.

Torsten Bell, Minister for Pensions, said: “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.”

A Small Pots Data Platform will be established to identify and source the pension pots to be consolidated.

The consolidator schemes will be chosen from existing pension scheme providers. Workplace and personal pension scheme providers will need to apply to become a consolidator scheme.

The DWP’s Small Pots Delivery Group will set out a framework of rules a scheme would need to follow to become a consolidator scheme. These rules will include already being an Automatic Enrolment qualifying scheme, having a specified level of scale to manage expansion, providing good value for money for their members and providing additional protection for members from flat fee charges.

Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association said it is pleased to see the Government tackling the problem of small pot accumulation in the Pension Schemes Bill.

She said: “The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike. The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the Government.”

Financial Planning Today Analysis: Many in the pensions and advice sectors will see today's announcement as a logical step to streamline pensions and tackle the problem of a multitude of 'lost' small pension pots which are costly to administer and provide little benefit to pension savers. The scheme will, however, need safeguards and checks to ensure the smaller pension pot holders are not disadvantaged or forced to consolidate when they do not want to. The scheme should fit in well with the Pensions Dashboard initiative when it finally gets off the ground.