A heated debate is developing over a draft recommendation from the Productivity Commission (PC) that would allow employers to opt out of using the default funds listed under modern awards.

In its draft report on the selection of default super funds in modern awards, the PC argued in recommendation 8.2 that employers who wished to choose a fund not listed in an award should be able to do so provided they could demonstrate their employees were made no worse off than if a listed fund had been chosen.

This recommendation has been interpreted by some super fund providers, including Suncorp, as a way out of the selection process and away from Fair Work Australia's scrutiny.

The recommendation is now increasingly attracting criticism from within the industry as submissions to the draft report are being filed.

"It . makes no sense to AIST (Australian Institute of Superannuation Trustees) to review and upgrade the selection of default funds and then to allow employers to opt out of the system," the AIST said in its submission to the PC earlier this month.

"Choice of fund has been in operation since 2005 and allows individuals to select a fund outside the default system."

AustralianSuper also rejected the ability for employers to opt out of the award, as it would not provide adequate protection for members' best interest.

"AustralianSuper is opposed to this recommendation," AustralianSuper chief executive Ian Silk said in a submission filed yesterday.

"This proposal would undermine the award process and does not allow for member representation in the decision-making process.

"As an alternative, enterprise agreements already provide effective arrangements for alternative fund choice in a manner that directly incorporates the views of members affected."

But the Financial Services Council did not see the opt-out clause as providing any opportunities to its retail members.

"The commission's suggestion to apply a test for employers choosing a non-listed fund will not materially improve contestability," FSC chief executive John Brogden told Investor Weekly.

"Rather it will confuse employers who may not exercise choice of default fund, thereby defeating the inquiry's purpose," Brogden said.

The FSC believes employers must be permitted to select any approved MySuper product rather than have limitations imposed.

The Association of Superannuation Funds of Australia (ASFA) said in its submission that the whole debate about the role of MySuper in the selection process was somewhat premature, including the debate about whether an independent body should be established to help Fair Work Australia in its selection process.

"We are concerned that it is too early to make assumptions about MySuper offerings and as such setting firm policy on selection processes is not appropriate at this time," ASFA director of research Ross Clare said.