As of 2013-05-05 the Mining Codex describes what most pools are actually doing. The pools are starting to experiment, though:
BTC Guild started setting up a new server this morning running modified block rules. Currently trying out a 500,000 byte maxblocksize. The problem is with larger blocks, you increase the chance of orphans since it will take at least twice as long to propagate, if not more. I've modified the fee settings to prefer fee based transactions when increasing the block size past 50 KB, so hopefully the increase in fees per block offset the orphan rate increase.
What do you mean you have modified the fee settings? Were you not doing what the Bitcoin client has always been doing? In other words: 27kB for storing high-priority transactions (regardless of the fee), and the remainder of the block always preferring fee-based transactions.
The old settings were default, with the 250,000 byte limit, 27k for high-priority (regardless of fee). The new settings we're trying (subject to change, and not on all servers yet) is 500kB block max size, no reserved space for no-fee transactions with high priority, and a minimum size set to 50 kB to grab high priority/no-fee transactions if there aren't that many unconfirmed paid transactions.
