The government has released plans to radically change the way superannuation funds are governed, mandating that at least a third of all directors are independent.

Assistant Treasurer Josh Frydenberg released the draft legislation on Friday morning, after a year and a half of consultation.

• Worked overseas? Here’s how to bring your super home
• Say goodbye to double-digit super returns
• Super: the easy way to become a millionaire

As well as calling for one third independent directors, the legislation also mandates that the chair be independent.

Super funds will not be forced to include a majority of independent directors, as recommended in David Murray’s Financial System Inquiry. However, if they do not, they must justify their decision in their annual reports.

Explaining the decision, Mr Frydenberg said: “Given the size of the superannuation system, and its importance in funding the retirement of Australians, good governance is absolutely critical.

“With this in mind, the Government is committed to ensuring strong governance standards apply to superannuation trustee boards. Independent directors bring additional experience and expertise to boards making a valuable contribution to their decision making.”

If the draft legislation becomes law, it will apply to all super funds regulated by the Australian Prudential Regulation Authority (APRA) – including industry funds, public sector funds, and retail funds.

However, the rules will only really affect industry funds.

Currently industry funds operate on a ‘equal representation’ model. That is, the boards are made up equally of employer-appointed and employee-appointed directors, with the option of an independent chair.

In the majority of cases this means business groups like Australian Industry Group and the Master Builders Association appoint half of the directors; and the union(s) for the relevant industry appoint the other half.

This, in theory, means the workers (who receive super payments) and their employers (who make the payments) have equal input into how the super fund is run.

Under Mr Frydenberg’s plans, this equal representation model would remain, but the employers and employees would together only make up two thirds of the board. The remaining third would have no allegiance to either side.

Industry super funds have by and large opposed making any change to this system. Industry Super Australia deputy chief executive Robbie Campo was one of the first to respond to the announcement, saying on Friday that imposing “one size fits all governance arrangements” was unjustified.

“The watchful eyes and questioning minds of industry super fund directors have not only delivered the best performing funds, they have avoided the widespread consumer losses and scandals which have engulfed the major banks and wealth managers over recent years,” she said.