Further pension reforms could see small firms raise prices, cut jobs, or slash profits, the Federation of Small Businesses (FSB) has warned, urging the government to explicitly examine how workplace pension changes impact small employers.

The report, Backing the Future, examined how existing auto-enrolment rules contribute to rising costs and administrative burdens for small employers, warning that further changes in the pensions review’s second phase, which is set to look at pensions adequacy, may intensify these pressures, especially alongside increases in wage bills and National Insurance contributions (NICs).

The report showed that 53 per cent of employers said that decoding pension rules is a "headache", while 24 per cent pay over £500 a year for advice – even before any changes have been introduced.

It also highlighted that 79 per cent of small employers are concerned about the rising cost of employment, with FSB arguing that reforms must reflect this pressure.

In particular, it found that if employer pension contributions were to double to 6 per cent, 92 per cent of small employers would have to make a negative change to their business to cope.

In particular, the report revealed that 52 per cent would raise prices, 38 per cent would recruit fewer workers, 34 per cent would cut profits or absorb costs, and 14 per cent would reduce the number of employees.

The report also raised concerns around calls to have pension contributions applied from the very first pound earned, instead of the current £6,240, warning that this would "negatively affect" 82 per cent of small employers, with 36 per cent raising prices, 32 per cent cutting their profits or limiting their earnings, and 28 per cent recruiting fewer workers.

Meanwhile, 19 per cent said they would reduce pensions to a minimum of three per cent, while 19 per cent said they would cancel or scale down plans for investing in the business.

Given this, the FSB is calling for phase two of the pensions review to explicitly examine how workplace pension changes impact small employers and learn from how auto-enrolment has been rolled out.

The federation stressed that the pensions review must "closely" examine the financial and administrative burden on small businesses, including the cost of advice, running payroll, and figuring out the rules before introducing any new proposals.

The report showed that 53 per cent of small employers said that one of the most challenging aspects of auto-enrolment is understanding the rules and what they need to do.

The FSB also encouraged ministers to commission a full cross-cutting economic assessment before any changing the pension rules.

The federation said this assessment should include the impact of recent rises in National Insurance and the National Living Wage and ensure small firms are not “hit with unaffordable costs or forced into tough choices” such as raising prices or cutting jobs.

It pointed out that last November, the Labour government said it would only make changes to auto-enrolment if the impact on businesses were fully considered.

In addition to the assessment, the federation called for no changes to be made to the earnings threshold, no increase to employer contributions and no lowering of the age limit before the economic assessment is complete.

It also recommended that the government convene regulators, including The Pensions Regulator and the Financial Conduct Authority, and industry stakeholders, to simplify pension rules.

It suggested that this would provide clearer guidance for small employers and reduce complexity and unnecessary admin, calling it a “pro-growth, pro-employment move”.

When considering pension adequacy, the FSB suggested that the government should look beyond just increasing contributions and consider scheme performance, investment returns and the real-world impact on small employers and employees.

It said that "poor" fund performance leading to lower pensions later in life should not be "masked by simplistic debates on contribution levels”.

FSB policy chair, Tina McKenzie, said: “Small business owners want to do the right thing. Entrepreneurs have taken on auto-enrolment, absorbed the costs, navigated the jargon, and kept paying into their staff’s pensions even when their own margins have fallen.

However, McKenzie said that “goodwill has limits” and that the more “complex and expensive” the system becomes, the more it risks “pushing employers from willing participants into reluctant bystanders”.

Given this, she argued that if the government wants pensions policy to succeed, it must prioritise clarity over complexity and provide the right support.

“This is not about resistance to pension reform, it’s about the cumulative burden of regulation and the rising cost of employment,” McKenzie emphasised.

“Small firms are already feeling the pinch – NICs and wage increases are really taking their toll – and any new reforms could push many to breaking point.”

McKenzie warned that “this is no time to add new burdens” urging ministers to “pause, take stock, and think carefully before stacking more costs on firms already under strain”.

“As phase two of the pensions review gets underway, the government must ensure the real pressures facing small businesses are front and centre – no further changes should go ahead without proper protections in place,” she stated.

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