Opponents of a looming shake-up of the default superannuation rules warn it could hit the liquidity of affected funds, leading to an exodus of capital from the infrastructure sector and lower returns to members.

Meanwhile advocates for the proposed changes, that could strip unions of their role in how employers can decide what super fund is named as the default for their workers, argue more competition would lead to economies of scale and boost infrastructure investment.

The Turnbull government has tasked the Productivity Commission with conducting major review of the rules governing how employers can decide what super fund manages their workers’ compulsory retirement savings.

The industry funds, that benefit most from the status quo, want it maintained. The bank-owned and other retail funds want it overhauled to give them more access to the burgeoning default market.

There are billions of reasons to accuse both sides of being motivated by self-interest.

Roughly $9 billion a year flows into the almost $500 billion default sector. Those numbers are only set to increase. Deloitte has forecast the nation’s $2.1 trillion super pool to swell to $9.5 trillion by 2035, as the population grows and the super guarantee rate rises from 9.5 per cent to 12 per cent.

At present, employers are limited to choosing from a shortlist of between two to 15 funds, named in the relevant union-negotiated modern award. This process is arbitrated by industrial watchdog the Fair Work Commission, although its powers have been in limbo for two years following a successful legal injunction by retail super lobby the Financial Services Council.

Since 2013, only products that are licensed by the Australian Prudential and Regulation Authority (APRA) as MySuper providers can be registered as a default fund. The MySuper licensing regime was introduced to ensure those workers who did not, or could not, choose their own fund were placed in an appropriate no-frills option.

The Productivity Commission is considering a range of alternatives to the current industry-based default selection process. Options include a tender-style system, allowing employers to choose any MySuper product, or even stripping businesses of their responsibility to name a default fund altogether.

Rice Warner head of actuarial research Nathan Bonarius said that although any changes to the default rules are still at least three years away, and it remains unclear what those changes will be, funds should already be thinking about what the shake-up could mean for them.

“We don’t know what the final legislation will look … but it is clear that, given the sorts of options being considered, this could be an absolutely massive change for the sector,” Bonarius said.

The threat of losing default flows is not only a worry for the operational team, but could also have big implications for the investment team.

APRA requires all super funds to regularly model what changes to patterns in member inflows and outflows means for its liquidity risk profile.

If there is more money flowing out of a fund than into it then the investment team need to ensure they have enough flexibility to sell assets to free up cash. This means unlisted illiquid assets like infrastructure, property, and private equity become less desirable.

Industry funds typically have higher allocations to infrastructure than their retail rivals. The industry fund sector has also historically produced stronger net returns.

Tasplan chair Naomi Edwards is staunchly opposed to a restructure of the default rules.

The current system has “provided enormous stability” to the industry super fund sector, enabling it to become a major player in Australian and global infrastructure, she said.

This was tipped to be particularly important in the coming decade, as investment chiefs turn to infrastructure and other unlisted asset classes to help boost returns amid lacklustre outlook for stocks, bonds, and cash.

The current default system helped protect individuals and small employers with poor financial literacy making “bad choices”, she said.

Regardless of what super trustees and executives think should happen to the default rules, they have a fiduciary duty to be prepared for change.

AustralianSuper chief executive Ian Silk said earlier this year the fund had been readying for the demise of the default system “for a decade”. AustralianSuper is the country’s largest industry fund, with $100 billion under management, and is named in 82 awards – more than any other provider.

Of the 10 super trustees with funds named as a default option in the most modern awards, nine are industry funds. SunSuper is named in 56 awards, CareSuper in 52, and Tasplan in 45. Statewide Super gets a nod in 27 awards, LUCRF in 17, and Hostplus in 15.

AMP is the only retail superannuation provider to feature prominently in the default system, being named in 15 modern awards. Rounding out the top 10 list of funds named in the most modern awards are Austsafe and HESTA, featuring in 15 and 13 awards respectively.

There are also dozens of smaller funds that may only be featured on a handful of awards, but are almost entirely reliant on default mandates for inflows.

“A lot of industry funds in a very privileged position at the moment,” JANA executive director John Coombe said.

Coombe thinks it is a furphy to argue an overhaul of the default system would force funds to take a more short-term approach to investing. He predicted that even if employers were allowed to pick a default fund unhindered by union negotiations, few would want the burden.

“If you’re MacDonald’s and every kid who starts work is automatically signed up to a default account with REST Industry Super then that is a fantastic outcome for the business,” Coombe said.

The industry super lobby has argued letting bank-owned super funds compete more freely for defaults would lead to employers signing workers up to inferior products so the business could get a better deal on other services from the bank.

Coombe thinks such fears are overblown.

“Given the banks are on the nose I am not so certain they would get away with it. Imagine the headlines.”

JANA is part of National Australia Bank’s wealth management division.

The potential hit to a fund’s operating and investment model from the loss of a default mandate really depends on how big the employer is, Coombe said.

“If Woolworths decided to direct all of their new employees into a different fund that would clearly have a big impact on REST, but if the milkbar on the corner changes default funds, who cares?”

REST chief executive Damian Hill declined to comment on his fund’s forward strategic planning, but flagged a loss of default status would likely lead to a worsening in its liquidity risk profile and ultimately a reduction in allocations to less liquid asset classes such as infrastructure.

Hill said a move to a market-based model of default fund selection would be a mistake and likely lead to a heavier reliance on passive investment strategies across the industry.

Industry Super Australia spokesman Matt Linden said the architecture of the default system was pivotal to the ability of industry funds to “maintain optimal asset allocations” to maximise risk-adjusted returns.

Financial Services Council chief executive Sally Loane lambasted this and predicted increased competition in the default sector would actually lead to more super savings flowing into infrastructure.

“Protectionist industrial frameworks deliver what Cbus chairman Steve Bracks described recently as a ‘secure funding model’ to a privileged few funds,” Loane said.

Forcing funds to be more competitive to win default mandates would likely lead to a wave of fund mergers leaving fewer players with the scale to invest more in infrastructure assets, she said.