The Government’s decision to delay introducing auto-enrolment for small and medium sized businesses is likely to be a mixed blessing for the sector, according to a leading law firm.

Pensions experts at Ward Hadaway say that while delaying the introduction of auto-enrolment for SMEs with fewer than 50 employees means these employers will avoid compulsory pension contributions for another year, the decision could cause more long-term problems than it solves.

Auto-enrolment is the Government policy designed to ensure that all workers are automatically enrolled in a workplace pension scheme and benefit from a minimum amount of employer contributions, unless they decide to opt out.

Auto-enrolment will apply to all employers from October 2012, in stages starting with the largest organisations.

The Government has confirmed that the policy will go ahead as planned for these largest employers, but for those with between 2,999 and 50 employees there will be minor delays in the date on which auto-enrolment applies to them (their “Staging Date”) with new Staging Dates to be specified in the New Year.

More importantly, the Government has delayed the Staging Dates for businesses with fewer than 50 employees until after the next election in 2015, citing the difficult economic climate.

Tristan Mander, Associate and Head of Pensions at Ward Hadaway, said: “Whilst this delay may be welcome for SMEs who already have their hands full dealing with the challenging trading conditions, it will add further uncertainty to an already uncertain economic climate.

“Small businesses need to be able to plan for the future with some degree of certainty. The fact that they now do not know when such potentially huge calls on their cash flow will occur makes planning that bit more difficult.

“There is also a concern that the significant delay in Staging Dates could be a disincentive on small businesses expanding beyond 49 workers in order to avoid triggering a requirement to make pensions contributions.

“At a time when we really need every incentive for small businesses to grow, this is not a helpful move.

“The delay in Staging Dates will also remove an estimated 7.5 million people from the potential client base of the pension providers who have set up auto-enrolment products, such as the National Employment Savings Trust or NEST.

“These providers will have to revise their business plans accordingly, and this may result in higher costs and charges for all persons who join.

“This may in fact incentivise them to opt-out as a result, which may put the success of auto-enrolment as a whole in jeopardy.”

In a further move that will affect all employers, the Government has delayed the planned increase in employer contributions from a minimum of 1% of relevant pay to a minimum of 2%.

This was due to take place in October 2016 but the rise has been put on hold until all employers have reached their new Staging Dates, presumably at the end of 2017.

Tristan Mander said: “Again, on the surface, this looks like good news for employers who will have at least an additional year to find the additional funds required by the contribution rise.

“However, since the rise is dependent on Staging Dates that are yet to be announced, this will again make financial planning more difficult.

“There is also a concern that keeping contribution rates so low for so long will cause the auto-enrolment policy to fail to reach its aims.

“The announced delays may result in an estimated £5 billion of pension savings not being made, with future pensioner poverty the most likely result, as well as increasing the likelihood of employees opting out of something that could be seen as little more than an expensive nuisance.

“Employers may also be tempted to speed up the so-called ‘race to the bottom’ and close all other pension schemes providing more than the statutory minimum.”