What is a system whereby students are grouped together by ability so they can be taught with each other?

It is called Tracking or Ability grouping

Ability grouping especially in the UK is practice founded upon the idea that students need to be taught accordingly since they have fixed levels of ability. Basically, it groups children according to the talents in class. Some may agree that Ability grouping is an effective way to handle differences in students' abilities while will some strongly disagree. Those who agree say it increases students' achievements by allowing instructors to adjust to the pace of students’ needs while those who disagree say it is an unfair procedure.