SMALL businesses say they expect to be hit hard by a new pension system which is due to come into force next year.

From 2012, all businesses with employees earning over the income tax personal allowance will legally be required to enrol those staff into a pension scheme and pay a 3% contribution on their behalf.

The Institute of Directors (IoD), which has surveyed firms about the regulations, said that around 95% of those businesses that do not have any pension arrangements for employees into which the employer contributes are SMEs.

They will be forced to set up and fund auto-enrolment to the scheme, without the back-up of the specialist human resources departments found in big companies.

IoD director general Miles Templeman said: “The Government shouldn’t underestimate the cost burden that auto-enrolment is going to place on small firms.

“Bigger businesses will mostly have pension arrangements for employees set up. Of course we need to improve retirement provision in the UK, but yet again it’s the small entrepreneur who is hit.

“Since the Government isn’t prepared to change course on what’s essentially a major piece of employment regulation, it needs to compensate for this burden with equally significant deregulation elsewhere.

“Phasing in auto-enrolment buys us some time, but the private sector can’t be expected to bounce back and create new jobs in the longer run if the Government keeps dropping new cost burdens on firms.”

The IoD also revealed around 20% of employers were not aware that the legislation is being introduced.