Employers yet to 'stage' auto-enrolment have not fully considered key issues that need resolving ahead of implementation, the report found.
In the study of more than 250 small UK employers, almost 60% has not budgeted for the additional costs that can be incurred as a result of auto-enrolment, while nearly 40% of respondents said their payroll system was not compliant.
The report also showed six out of 10 employers have not checked the pensions provisions contained within their staff contracts and assessed how they affected plans for auto-enrolment.
Tom Flanagan, partner and national head of Irwin Mitchell's Employment and Pensions group, said the report conatined some uncomfortable revelations with many employers unprepared for auto-enrolment.
"There are many pitfalls to watch out for, including changes to employment contracts and pension scheme rules, restructuring employee benefits along with reviewing and replacing HR and payroll systems," he said.
"Choosing the wrong option could involve committing time and resources in the wrong areas, or with an unsuitable solution."
The report also found only a third of employers plan to introduce a salary sacrifice arrangement to offset any of the costs of auto-enrolment. And a quarter have not thought about instructing external advisers to assist with auto-enrolment.
Flanagan warned those companies, that fail to deal with auto enrolment compliance adequately, the Pensions Regulator can enforce fines of up to £10,000 a day.
"What we need is a more streamlined and cost-effective tool to help smaller businesses manage the transition, particularly in light of the recent Government statements about requiring the employer to meet the cost of advisors and consultants without being able to pass them on to the scheme or the employees," he said.
Over this summer, businesses employing between 4,000 and 2,000 people will need to comply. From April 2014, businesses with between 250 and 160 employees will need to be ready.
Head to HRTV to watch a video from Tom Flanagan discussing the report.
