For a moment it looked like there was a breaking of the ranks.

AustralianSuper was said to support an overhaul of the existing selection process of a default superannuation fund under the modern awards system.

AustralianSuper chief executive Ian Silk was quoted in the Australian Financial Review that the fund did not say the status quo should be retained, but that the system could be opened up to a wider range of funds.

It was only a moment, because closer scrutiny revealed that both camps in the modern awards debate - retail and industry super funds - are still sticking firmly to their opposing views in the matter.

Retail funds want an end to the monopoly of industry funds to be named as default funds, potentially through opening up the system by making all MySuper-compliant funds eligible for inclusion.

Industry funds want to have a strict set of additional criteria in place, with Fair Work Australia as the supreme umpire.

"AustralianSuper's position is that we don't see any compelling need for change," AustralianSuper general manager of growth and new opportunities Paul Schroder tells Investor Weekly.

"We see most of the energy in this discussion as coming from institutions that want to increase their market share.

"That is a legitimate concern for them to have, but we see no energy from members that says 'we want a different fund from our award' and we see none from employers, who are the other key participant here."

Yet, with the current Productivity Commission review of default superannuation funds in modern awards under way, the sector realises the current selection process is inadequate.

"When modern awards were being constructed, super was only one small part of that pie," Schroder says.

"Awards are all about the terms and conditions in the workplace. It is all about what is happening between employers and employee and superannuation is only one small part of that.

"It is possible to say: should the process be improved? Of course, the process should be improved and we have made some recommendations on how that can be done relying on APRA (Australian Prudential Regulation Authority) data."

Looking for a better process

Recognising that the current selection process does not stand-up to post-global financial crisis scrutiny, the industry fund sector has proposed a more defined selection process through Industry Super Network (ISN), proposals which Schroder said AustralianSuper supports.

In a submission to the commission, ISN proposes a process that consists of three main elements, including compliance with the MySuper regime, a strong long-term track record of APRA certified investment returns and a robust compliance framework.

ISN recommends that Fair Work Australia remains involved, but should be assisted in its selection process by a panel of recognised superannuation experts, which can be made up of any representative of a regulated superannuation entity operating an APRA authorised MySuper product.

However, ISN adds: "Only those funds that have demonstrated their ability to provide relevant services to the industries and occupations serviced by the modern award should be named in the award."

For example, a fund's insurance products should be relevant to its member base, it says.

"Industries with specific insurance or other needs should have named in their modern awards default funds that can offer relevant insurance services," the organisation says.

"Insurance is a significant cost associated with superannuation."

If this last criterion were to be adopted, it would arguably result in a continuation of the status quo.

Open to all

The Financial Services Council (FSC), in which retail super funds have a strong voice, argues on the other hand that all MySuper-compliant funds should be eligible for inclusion.

"The FSC believes an important outcome of the reforms is that an employer may select any APRA-regulated MySuper superannuation fund as a default fund for commencement on 1 July 2013," the FSC says.

"The existing superannuation provisions undermine consumer protection, limit competition and impose compulsory superannuation funds on employers.

"MySuper . introduces safeguards for members and simplicity for employers."

The importance of the default option

The question about the default fund in modern awards goes to the heart of the reforms proposed in the Cooper review.

MySuper is an attempt to define a proper default fund under a mandatory system.

In this thinking, the Cooper panel seems to closely follow the thinking of Don Ezra, Bob Collie and Matthew X Smith in their 2009 book, The Retirement Plan Solution: The Reinvention of Defined Contribution.

In this book, the authors trace the global trend of moving pension funds from a defined benefit system to a defined contribution system.

Originally, defined contribution models relied on the individual member to make their own investment decision, but this has historically led to much wasted return due to the inexperience of the members.

Efforts to educate members have proved to be hopeless, the authors argue.

"We believe strongly that it is impossible to make the average plan participant an investment expert. It is not only futile to attempt to do so; it is actually counterproductive, and encourages behaviour that results in huge amounts of waste in the system," they say.

The key to making the defined contribution system work, the authors argue, is establishing a good default option.

"We believe the best solution lies in creating the right type of default option," they say.

"That means moving away from the emphasis on choice and on offering education to participants, and focusing instead on building pre-packaged solutions based on the best practices of institutional investment.

"If expertise is built into the default and a participant accepts the default, the participant's own inexpertise is side-stepped."

After all, they say, investing is a profession, not a hobby.

The big question

In this light, the debate around fund selection in modern awards centres on the question of whether MySuper is good enough as a default fund.

Ezra, who was in Australia last week, would rather not say whether MySuper was the right approach to building a robust default option.

"Australia is not my expertise," he says.

But the commission will have to answer that question, and it is well aware of the gravity of its task.

"In designing criteria for the selection and ongoing assessment of superannuation funds eligible for nomination as default funds in modern awards, the commission will consider whether to allow all MySuper products to be eligible for nomination in modern awards, or whether there is a net benefit to designing criteria over and above those for MySuper," the commission says in its issue paper of February this year.

"If additional criteria are required, consideration would need to be given to how those criteria would be implemented."

Any decision to make changes to the modern awards system, therefore, could result in more than just tinkering at the margins; it could affect the success of the entire defined contribution system in Australia.