Last week, the government said all businesses will have to offer staff a pension or enrol them in the government-owned National Employment Savings Trust scheme.
The Forum of Private Business (FPB) said the move is likely to lead to a drop in the number of permanent jobs being provided by SME's and an increase in the use of temporary staff.
It predicted that it will also create extra costs when small business can least afford it.
The decision, along with the removal of the Default Retirement Age as of October 2011, will "deal a double blow to smaller employers", according to the FPB.
Spokesman Phil McCabe said: "The government has stated repeatedly that it wants the private sector to pull the UK out of the economic doldrums by driving job creation.
"Yet by abolishing the DRA and forcing even the smallest of businesses to provide pensions for their staff, it is creating a huge incentive for firms to avoid providing proper, permanent jobs due to the risks and costs involved."
BAPC chairman Sidney Bobb agreed that the new rules would cause problems for business and that companies would potentially think twice about employing more people.
He said: "There's also talk about SME's being concerned about the formality of the procedure."
He added that with the removal of the compulsory retirement age, the issue becomes even more complex.
"The generation of baby boomers are now due to retire, but many don't want to and if they don't that doesn't leave room for an influx of people," he said.
Michael Moradian owner of London-based Print Express, agreed that imposing the burden of increased pension provision would be unhelpful to small businesses.
He said it would act as a direct counterpoint to what the government needs – for small businesses to be the engine of the recovery in the private sector over the next five years.
"I guess this is why today the government has announced the appointment of Lord Young as the enterprise tsar – to look at cutting red tape," he said.
"As I understand it – his priority will be to look at those policies in the pipeline, I guess this is one, and to scrap or delay their introduction."
However, he added that the thorny issue of the UK's pension problem would likely prove unavoidable.
"We have a pensions time-bomb to deal with – whoever is in power," he said. "But this is not the right policy for the immediate future when small businesses must be given every encouragement to help us trade out of the economic mire."
