Fears have been raised that small firms will be hit the hardest by a hike in auto-enrolment contributions which came into effect last week.

However, pensions experts say the rise in costs should be seen as an investment for businesses and a weapon in the arsenal as they battle to recruit new talent.

From April 6, the contribution employees and employers make to auto-enrolment pension schemes has increased from 2% to 5% of salary – workers' contributions rose from 1% to 3%, and employers' from 1% to 2%.

It is part of efforts by the government to shift some of the pensions burden on to individuals and businesses as people live longer into retirement. But businesses, particularly small ones, have warned they will feel the pinch.

David Howell, the Federation of Small Businesses' East Anglia lead, said SMEs in 'labour-intensive industries' such as retail, construction and childcare would feel the rise most acutely, compounding the effects of high inflation.

'The doubling of auto-enrolment employer contributions hits the very smallest firms and start-ups the hardest,' he said.

'Small business owners want to see employees save, but more needs to be done to help firms absorb high labour costs. At the same time, new incentives need to be put in place to encourage the self-employed, who miss out on auto-enrolment, to save for the future.'

There are currently 9.3 million people in the UK on auto-enrolment schemes, which affect virtually every employer, according to Norwich-based finance giant Aviva.

Meanwhile figures from the Pensions Regulator show around 181,000 workers in Norfolk and Suffolk have been auto-enrolled.

Alistair McQueen, head of saving and retirement at Aviva, said pension provisions would be a 'strong battleground' in the competition for talent.

'Most employers get the fact that this should not be see as a brutal cost but as an investment in their workforce,' he said.

'A sensible business will be preparing and budgeting. There are a range of providers of workplace pensions and everyone will have different services and prices. Employers would be well advised to shop around.

'As it is a legal requirement to put this in place, employers should make sure their employees know about it and appreciate, which could make them feel more loyal to you, especially if you're going beyond the minimum.'

Jo Nockels of Norwich-based accountants TaxAssist, which deals primarily with SMEs, said auto-enrolment could help smaller businesses retain staff by offering the same as larger employers, but that small companies and start-ups 'whose main resource is staff' would be hardest hit.

Are people putting enough in their pension pot?

While the amount people are saving towards their retirement has increased with the introduction of auto-enrolment schemes, research suggests people are still not saving enough.

Moneyfacts, which provides finance product data, claims to have found a 'shortfall' in consumers' expectations when anticipating their retirement income.

In a survey of its users the Norwich-based organisation said more than half (56%) knew how much was in their pension pot, but 31% had only a rough idea and 5% had not started saving.

Those polled hoped their pension income would be 63% of their current annual income, but realistically expected to only have 52%.

Moneyfacts finance expert Rachel Springall said consumers should 'make every effort to prioritise their retirement provisions'.

Fellow Norwich firm Aviva feels most people are not yet saving enough into a pension pot to achieve 'the type of retirement they would like', and would like to see the auto-enrolment contribution rate rise to 12.5% by 2028.

How does auto-enrolment work?

According to legislation introduced gradually from 2012, all UK companies with at least one employee must offer a workplace pension scheme.

Anyone aged over 22 who earns more than £10,000 a year has to be made a member of a workplace pension by their employer (auto-enrolled).

This month the mandatory contribution into auto-enrolment schemes rose from 2% (typically 1% from employer and 1% from worker) to 5% (now 2% from employer and 3% from worker). This is expected to rise to 8% (3% from employer and 5% from worker) in April 2019.