The UK government's move to abolish rebates that are paid to people in money purchase pension schemes who have opted out of the state second pension will cost the insurance industry GBP3 billion according to a report.

The government wants to simplify pension delivery and has identified the rebate as a cost saving area. The payout could be scrapped by 2012.

However, the article in the online personal finances magazine said that although the rebates will be scrapped for those in money purchase schemes, final salary schemes will not be affected.

The white paper on pensions published by the government also includes a proposal that suggests the government wants to protect final salary pensions.

Standard Life’s John Lawson told This is Money: There’s a line suggesting they might remove the mandatory indexation – or link to inflation – of final salary pensions in payment. Doing that could reduce the costs of the schemes by 40% – which would breathe new life into these pensions.