08.30
08.55
09.10
09.15
09.25
Post Office Limited
POST OFFICE LIMITED
(Company Number 2154540)
Meeting of the AUDIT, RISK AND COMPLIANCE SUB-COMMITTEE
to be held at 08.30 on Tuesday 21 May 2013
at 148 Old Street, London, EC1V 9HQ in
the Board Room
Presentation of draft Annual Report and
Financial Statements for the 53 weeks
ended 31 March 2013
e Draft Annual Report and Financial
Statements
* Briefing Book
Audit results report
Any other business
(a) Update on various Financial Services
matters, including Bank of Ireland (UK) plc
capital & liquidity
POL executives will then leave the meeting
Opportunity for auditor comments
Date of Next Meeting
Chris Day
Annex A
Annex B
E&Y report
Nick Kennett
Wednesday 5 June
2013 14.00-16.00
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Action
Requested
Approve
Note
Note
Note
PRESENT: Alasdair Marnoch (Chairman)
Susannah Storey (Non-executive director)
Neil McCausland (Non-executive director)
Tim Franklin (Non-executive director)
SECRETARY: Alwen Lyons (Company Secretary)
IN ATTENDANCE: Alice Perkins (Company Chairman)
APOLOGIES FOR
Chris Day (CFO)
Sarah Hall (Head of Financial Control and Compliance)
Malcolm Zack (Head of Internal Audit)
Angus Grant (Ernst & Young)
Jeremy Midkiff (Ernst & Young)
ABSENCE:
Susan Crichton (HR & Corporate Services Director)
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Strictly Confidential
POST OFFICE LIMITED AUDIT, RISK & COMPLIANCE SUB-COMMITTEE
Annual Report and Financial Statements for 2012-13
1.
Purpose
The purpose of this paper is to:
14
Invite the Post Office Limited Board Audit Risk and Compliance Sub-
Committee to review the Post Office Limited Annual Report and Financial
statements for the 2012-13 financial year and to recommend their approval to
the Post Office Limited Board.
Background
24
2.2
The ARC agreed a number of changes to the process for the production of the
Post Office Limited Annual Report and Financial Statements at its meeting in
November 2012. For the first time the Post Office has opted not take
advantage of exemptions available to it as a wholly owned subsidiary of Royal
Mail Holdings plc. The Annual Report and Financial Statements have been
produced as if Post Office Limited was a standalone group and follow the
content and style of a listed plc where that approach can be taken.
The following documents are attached to this paper:
Plan of the Annual Report contents;
Draft Annual Report;
Draft Financial Statements;
Initial design concepts;
ARC briefing book to aid understanding of the financial statements.
Annual Report and Financial Statements approach and plan
3.1
3.2
3.3
The Annual Report and Financial Statements are planned for publication in
the first week of July against the backdrop of tight budgetary control within the
company, a difficult external economic environment which is putting pressure
on margins and discussions with Government around future strategy and
post-2015 funding positions.
We have developed the messages and content by working very closely with a
comprehensive range of stakeholders and contributors from across the
business to ensure it accurately reflects the progress we have made. ExCo
directors and their teams have been closely involved in the process. Please
note that the report will be copy edited for style and consistency.
The approach follows the overall positioning set out to the ARC in February:
- solid progress on fundamentals creating confidence for the journey ahead
(with a sense that in key areas, such as Network and Crown
Transformation, the turnaround has started, albeit in difficult
circumstances);
- excitement at the innovation and change capabilities of this newly
independent company to deliver commercial and social value: the spirit of
a start-up;
Annual Report and Accounts Chris Day Page 1 of 3
May 2013
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Strictly Confidential
- realism as to the task ahead, and empathy with subpostmasters and
colleagues as we work together in challenging circumstances.
3.4. The Financial Statements have been prepared by Finance and the Ernst &
Young audit work is largely complete. The Annual Report is still subject to
audit review. For the first time the Post Office has prepared consolidated
Financial Statements under International Financial Reporting Standards
(IFRS), which is in line with a majority of listed pics. Post Office Limited still
has a statutory obligation to produce company accounts and these have been
prepared in accordance with the Companies Act 2006 and UK Generally
Accepted Accounting Practice (UK GAAP), consistent with prior years. A full
ARC briefing book it attached. This provides a more detailed analysis of the
results to aid understanding of the financial statements.
3.5 We have a project plan which is being led by the Communications team
working closely with Finance. The current timeline is:
+ 15 May- ARC and Board receive report in Word format
* 20 May - Initial feedback from Board
+ 21 May —- ARC meeting reviews Annual Report together with the Financial
Statements and will be asked to recommend that the Board approves the
Annual Report and Financial Statements.
* 21 May - Board reviews the Annual Report together with the Financial
Statements and will be asked to approve it and delegate authority to a
Sub-Committee to approve final changes and sign on a later date
* 22 May - Further amendments made following Board feedback
* 21-29 May — share draft of Annual Report and Financial Statements with
Royal Mail and Shareholder Executive for review and comment
* 6 June - PDFs of designed pages for proofing and sign off
+ June - date to be confirmed - Board Sub-Committee approves final
version and signs. Ernst & Young sign the audit report.
+ 7 June to beginning of July — building online version and printing hard copy
* w/e 1 July - launch
4. Proposal
4.1. We have appointed Merchant Cantos, an agency which specialises in
producing annual reports for leading public and private organisations. They
have been working closely with the Communications team to produce the
report.
4.2 Traditional paper copies of the report will be produced alongside an interactive
digital version which will be accessible via postoffice.co.uk. This will feature a
fresh and modern look and feel, including video interviews from the Chairman,
Chief Executive, members of staff, customers and subpostmasters.
4.3 The content includes an introduction from the Chairman and an executive
summary from the Chief Executive. In order to ensure that the Post Office
surprises with its approach, space had also been set aside for comments and
reflections from members of staff, customers and subpostmasters. A full
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May 2013
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Strictly Confidential
Corporate Governance section, Financial Review and Directors’
Remuneration Report are all included for the first time.
4.4 Weare commissioning new photography and video content for the report and
have engaged an agency to support this. The project is funded from the
communications budget.
4.5 A full PR, stakeholder and colleague engagement plan, including defensive
Q&A is being developed around the report, including a launch event which
includes key stakeholders, suppliers, journalists and colleagues/
subpostmasters.
4.6 A number of options are being considered for using the Annual Report as a
platform for positive PR. These include our commitments to support digital
inclusion, our role in High Street renewal and the "public purpose"
engagement campaign, which is due to start in July. We propose taking a
tactical approach to this element of the report, making a final decision closer
to publication.
4.7 The structure of the report is designed to flow from the headline statements
from the Chairman and CEO through operational reviews and on to the
financial report, led by the CFO's review.
4.8 The design of the report will be such that the operational section will be
introduced with a "business at a glance" section which gives an overview of
each business area before going into more detail. This is important to
consider when reading the document. There may be elements which feel
repetitive but this will be considered in the layout and designs.
4.9 The design process will also allow opportunities for use of graphics such as
pie charts.
5. Recommendation
5.1. The Post Office Limited Board Audit Risk and Compliance Sub-Committee is
asked to:
« Review the Annual Report and Financial Statements and provide individual
comments to Chris Day and Mark R Davies by 9am on Monday 20 May;
¢ Recommend to the Post Office Board
i. That the Annual Report and Financial Statements should be approved;
and
ii. That authority is delegated for reviewing final amendments and
completing the Annual Report and Financial Statements on behalf of
Post Office Limited to a Sub-Committee, the quorum for which to
comprise any three of Alice Perkins, Paula Vennells, Chris Day and
Alasdair Marnoch.
« Note that the Chairman of the Audit Risk and Compliance Sub-Committee will
be asked to provide a verbal update of this meeting to the Board.
Annual Report and Accounts Chris Day Page 3 of 3
May 2013
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Post Office Limited Annual Report and Financial Statements 2012-13
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Section: Overview
Title: Who we are
At the Post Office our aim is to provide customers with the things that are important to them -
from mail to their broadband package, car insurance to their savings account. Whether customers
come into branch, are on the move, or shop online, we will ensure they can trust us to always
deliver a great experience. That's the Post Office promise.
Heading: The Post Office in numbers
e The largest retail network in the UK
e 11,780 branches
e 99.7% of the population within three miles of a branch
e Number one travel money provider
e Fast-growing UK financial services provider
e Biggest accepter of contactless payments in Europe
e 18 million customers a week, including half of the UK’s small businesses
e 15 billion inland addressed items handled every year
e 95% of all UK debit card accounts accessible through our branches
e The sixth largest telecoms provider in the UK
¢ 87% customer satisfaction across our branches
¢ One of the most trusted brands in the UK
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Section: Overview
Chairman's foreword
It is with great pleasure and pride that I write the foreword to the first Annual Report and Financial
Statements for the Post Office as an independent business.
The Report describes the way in which the Post Office has embarked on a remarkable turnaround
to reverse the trend of years of declining revenues, sustained branch closures and a reputation for
inconvenience and queues.
Thanks to our Shareholder, the government, we are investing millions of pounds into our
network over the three years up to April 2015. There is no longer a programme of Post Office
branch closures. Instead, we are modernising the network, increasing our opening hours, offering
new services, developing new methods of interacting with our customers, working with our key
partners in new ways, cutting costs and increasing our revenues.
All of this puts the Post Office on the path to securing financial sustainability for the long term,
reducing our dependence on the taxpayer to the minimum, and changing our culture so that we
are always on the front foot, responding to changes in the world around us in partnership with the
key people on whom we depend for the delivery of our services. If we are successful in achieving
these changes, in particular financial sustainability, the conditions for the successful mutualisation
of the Post Office could be in place - a prospect which could help to secure the kind of self-
sustaining Post Office we all want to see in the future.
A series of important changes has already happened and many more are in the pipeline.
We ceased to be a subsidiary of Royal Mail Group Limited in April 2012 and began operating
independently. Since then, I have completed the formation of my Board and we are now operating
Board governance in keeping with best practice in the corporate world. Full details of the Board
members and our Board committees are on pxx. I am delighted to have been able to appoint such
able people with varied backgrounds who are all committed to supporting and challenging the Post
Office as it pursues the changes which must be made if we are to secure its future.
We achieved a number of notable successes last year. For the second year running, our revenues
are up on the previous year despite the difficult economic environment. We are on the road to
reducing our reliance on the Network Subsidy Payment received from the government. We have
made great headway in our plan to modernise the network of branches run by our agents. 1.450
have signed up to be converted into new operating models which give much better service to
customers, resulting in higher footfall and turnover. And we have made real improvements to the
running of our Crown branches where the operating loss has reduced this year from £xx million to
£37 million.
We have won a number of new government contracts under which we are providing some
completely new services and enabling central and local government to realise significant
administrative savings. We are also offering new financial services, maintaining our appeal to
customers who come to us for the reliability and transparency of our financial offers. Our mails
business, meanwhile, remains the market leader and is increasingly innovative.
We are clear about the way forward for the Post Office and about the changes which need to take
place to build on the successes set out in this Report. We are equally clear, that there are
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significant challenges ahead; the going is not easy. This turnaround, like any other, requires people
throughout the organisation and their partners to work in new ways. We need to win new business
on proper commercial terms - something which is difficult in current economic circumstances. And
we need to reduce our high fixed costs while at the same time finding the resources to operate on
our own two feet and to modernise and innovate - catching up after years of under-investment.
I would like to thank the Post Office Chief Executive, Paula Vennells, her team and all the people
who work to support the Post Office business, and have brought about the remarkable changes we
have already seen and will see in the coming months and years. I would like also to thank all those
stakeholders and partners with whom we work so closely.
The Post Office has a long and honourable 370-year history. We need to retain the essence of
what has made it great and made it loved, while at the same time making it fit for the future. It is
in that context that this Annual Report and Financial Statements should be seen. They report on
the first steps of progress into the future - a future which blends the trust, integrity and
accessibility, for which the Post Office is renowned, with the contemporary relevance, innovation
and professionalism of a financially sound 21st century business.
Alice Perkins
Chairman
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Section: Overview
Title: Chief Executive's review
The Post Office is committed to a strategy which will grow and modernise our business business
and customer excellence is always at its core. It is heartening, therefore, to be able to report good
progress in these endeavours during the 2012-13 financial year. In essence, the evidence on the
pages which follow shows that we have started to turn the business around, remaining at the
heart of communities while becoming increasingly commercial and entrepreneurial.
In a challenging economic climate, and with particular pressures on the high street, we can report
strong progress in attracting the revenue so important to underpinning the business and
sustaining the network. Revenue has grown in three of our four pillars during 2012-13, with
turnover increasing by £44 million to £1.02 billion. Mails and Retail revenue has grown by 4.3%,
Financial Services by 6.4%, and Telecoms by 7.5%, while Government Services revenue remained
flat in the context of the very tight fiscal environment resulting in reducing volumes and margins.
This is an encouraging performance. It demonstrates our increasing appetite for innovation, the
power of the Post Office brand and the continued attractiveness to customers of accessibility
through a branch network of 11,780 outlets, and our inherent principles of trust, transparency and
fairness.
This solid progress means we are able to report an increase of £33 million to £94 million in
operating profit before exceptional items. This includes £210 million received from the government
in 2012-13 as a subsidy to support the branch network. This enabled the provision of key general
and economic services to citizens nationwide, including the most remote as well as the most
deprived areas of the country. We are proud as a commercial business with a public purpose to
fulfill this critically important task, and we are committed to maintaining the network.
The subsidy payment constituted 17 % of revenue in 2012-13 and will decline by £10 million in
the coming year and by a further £40 million in 2014-15. Future extension of this payment will
depend on government-spending decisions beyond 2015. To achieve our ambition of reducing
dependency on the subsidy and achieving commercial sustainability, it is critical to continue
modernising and innovating, growing revenue and continuing to focus on our customers while
keeping a strong control on costs.
The significant practical progress which has been made in strategy implementation is therefore
very welcome. In 2010 the government pledged £1.34 billion of funding for the Post Office up to
2015. While half of this related to the network subsidy the remainder was pledged to support the
modernisation of the Post Office.
The activity undertaken in 2012/13, in pursuit of this goal, has been unprecedented in our history.
A major transformation programme to modernise the branch network began, with hundreds of
branches converting to new, more customer-friendly, formats and building the momentum to
convert many more.
There is no more visible indicator of a Post Office that is changing for the better than the changes
customers see in their cities, towns and villages. And the evidence is that these changes are
meeting with approval: customer satisfaction with the new ‘main’ and ‘local’ branch models runs at
95%") while queue times in the ‘local’ model have fallen below a minute and customers are using
new opening hours stretching from early morning to late evening. Subpostmasters switching to the
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new models, meanwhile, are able to increase their retail businesses. Moreover, the physical
network that is so central to our business is now being complemented by online and telephone
channels, further enhancing the convenience of our service to customers.
Naturally, a programme such as this involves challenge. The Post Office has made significant
progress, for instance, in reducing the losses in the network of Crown branches directly managed
by the business. There remains a long way to go to reach the point where this part of the network
breaks even, and that is why we are holding firm in relation to our position on pay and franchising
in the Crown network. There will be other challenges ahead, but as our Chairman has noted in her
foreword, we are determined to complete a transformation which underpins the future of the Post
Office and brings more benefits to our millions of customers.
If our financial and practical progress has been encouraging in 2012-13, so has our pursuit of new
ways of running the business. In 2012 we set up a stakeholder forum to begin a process which is a
key step in our journey toward potential future mutualisation, that of defining the public purpose of
the Post Office. In 2013-14 we will complete this work and over the summer ahead we will
engage the public on this work, with a view to embedding this public purpose in our business
planning and processes.
It is a process in tune with our ambitions to be more proactive in delivering our public purpose.
The Post Office is a long-standing part of UK high streets and will work hard to support their
revival in challenging economic times, joining with others to lead and develop solutions which help
high streets and other communities to survive and thrive. We will step up our work in supporting
the growth of small business by ensuring that we develop more of the products and services they
need to grow. We are also working with the Business in the Community high street task force,
supporting the work of ‘town teams’ in Sydenham, Stockton-on-Tees and Brighton, work which
complements our membership of the High Street Forum co-chaired by the Department for
Communities and Local Government and Alliance Boots.
The Post Office will also work ever more closely with those seeking to close the digital skills gap,
work which is so important to a thriving economy. As a founder member of Go On UK, the charity
set up to make the UK the most digitally skilled nation in the world, the business will focus on
building the online skills of our people. We will also work with our partners to develop solutions
which will enable the 16 million people in the UK, who still do not have basic online skills, to access
and enjoy the benefits of being online.
As Chief Executive of this great business, I would like to thank all those who have worked so hard
for it over the past year, whether they are members of our staff or those whose businesses deliver
our services.
I am particularly grateful to Alice Perkins and to the Board for their guidance throughout the year.
They have strengthened our strategic oversight in relation to the markets in which we operate -
Mails and Retail, Financial Services, Government Services and Telecoms - and brought a level of
focus and challenge to decision making at the Post Office which has helped both revitalise the
company and energise its commercial focus.
The Post Office changed significantly over the course of 2013-13, and for the better. We have no
illusions about the hard work ahead, but our determination to deliver the business transformation
of the decade remains undimmed.
Paula Vennells Chief Executive
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Section: Overview
Title: Strategy
Boxout: [THE STRATEGY WILL BE DEPICTED THROUGH GRAPHICS SETTING OUT OVERALL
OBJECTIVES AND EVIDENCE OF PROGRES DURING THE FINANCIAL YEAR 12/13]
Key objectives
The Post Office strategy is based on being commercially successful and growing as a business,
while maintaining the key role that Post Office branches play in supporting communities across the
UK.* Our people are fundamental to the way we do business; they are at the core of everything we
do and are therefore critical to the success of the Post Office strategy.
Growth
Objective: A key part of our strategy to 2015 is to grow income by introducing new products and
services across our portfolio to offset declining income from traditional product areas.
Evidence from 2012-13: Introduced new products such as Post Office mortgages while also
attracting and retaining clients - RBS and HSBC signed up to partner banking - and winning new
contracts such as the DVLA licensing contract.
Modernisation
Objective: To modernise the Post Office and the network through the Network Transformation
programme, Crown Transformation programme (to break even by 2015) and investment in
technology to improve customer-facing systems
Evidence from 2012-13: To date, a total of 1,450 branches have either been converted or
subpostmasters have signed contracts to have their branches modernised in 2012-13. 507 local
and main branch conversions have resulted in 17,500 additional opening hours. Crown
transformation: progress to reduce losses - financial performance improved by £9 million;
successfully introduced new ways of working including increased automation and longer opening
hours in pilot branches.
This year has seen the completion of the rollout of new PIN Pad payment devices, making the Post
Office the largest contactless payment network in Europe.
Customer excellence
Objective: To put customers at the heart of everything we do, transform our technology to offer
more responsive and customer-focused systems.
Evidence from 2012-13: Improvement in online capabilities, including a full website redesign. Our
website now receives four million customer views per month, with unique visitors 30% up year on
year. In 2012-13, overall customer satisfaction across 1,000 of our largest branches was 3874
'] Quadrangle Brand and Customer Insight Programme 2011-12 & 2012-13 (1,000 largest branches)
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* This strategic approach is fully consistent with the government's policy document on the Post
Office Network ‘Securing the future of the Post Office Network in the Digital Age’.*
* This strategic approach is fully consistent with the government's policy document on the Post Office Network
“Securing the future of the Post Office Network in the Digital Age’.
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Section: Operational review
Title: Branch network
Modernising the Post Office branch network
The Post Office has an unrivalled network, with a branch within three miles of 99% of the
population. No other retailer can match the reach which puts the Post Office at the heart of
communities across the UK.
The business is committed to maintaining its branch network of more than 11,700 outlets,
ensuring services are readily accessible to communities across the UK. The physical network,
increasingly enhanced by digital and telephone services, lies at the core of the business. 97% of the
Post Office branches in the network are run in conjunction with retail partners on an agency and
franchise basis.
Underpinning the commitment to the network is an unprecedented branch modernisation
programme - the largest investment in the history of the Post Office - which is creating modern,
commercially sustainable branches that are improving customer experience.
This modernisation programme involves transforming those branches that are operated by other
businesses or independent subpostmasters on behalf of the Post Office, and the 370 (offering
public access) Crown branches directly owned and managed by the Post Office.
Network Transformation programme
Dependent on size, independent operators of Post Office branches are able to convert to one of
two new models - a main branch or a local branch.
Main branches, of which there are now 178, continue to offer a dedicated Post Office counter,
often open plan, in a brighter more modern environment. In addition, the majority of services will
continue to be available outside traditional hours - for as long as the host business is open - from
the retail counter.
The local model, for smaller branches (329 (NB need to use the figures as of March 31)), fully
integrates the Post Office with the host business, offering services from the retail position rather
than a dedicated Post Office counter. This often means services are available for much longer than
before - in many cases from early morning until late at night, seven days a week.
With more than 507 new-style main and local Post Office branches already established during
2012-13, subpostmasters and customers across the UK are benefiting from a new modern
approach to offering Post Office services. Customers are responding positively to longer opening
hours, brighter environments and open plan counters. Independent research shows customer
satisfaction scores at both these modernised main and local branches are consistently around 95%.
Subpostmasters are also benefiting from more efficient ways of working as well as increases in
both their Post Office revenue and accompanying retail business.
Interest in the new models remains strong, with subpostmasters at a further 943 branches already
signed up to convert during 2013-14.
Box out
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Postal Affairs Minister, Jo Swinson, joined us at the Bishop's Hull local Post Office in Somerset to
celebrate the opening of more than 500 new model branches in the network. She said: “The Post
Office is the cornerstone of many residents and businesses. With more than 11,700 branches, it
provides unparalleled reach into communities up and down the country. The government
recognises this value which is why we have made a clear commitment to its future.”
Graphic: insert px of Jo Swinson
Boxout: Breakdown of the Post Office network to be inserted on these pages once numbers have
been cross-referenced with other figures
10
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Section: Operational review
Title: Network transformation case studies
Greenwich main Post Office, London
Sandeep and Damandeep Sandhu have enjoyed a smooth transition of their branch. They believe
the modernisation programme will give the Post Office a much more competitive edge on the high
street.
Sandeep said: “The refurbishment of branches is essential. It means our branches are improving
the aesthetics such as flooring and lighting to really compete and look professional. The Post Office
has sustained its trusted status and now looks modern as well.”
Note to design: px available
Dingwall main Post Office, The Highlands
Alicen Lawrie’s branch is open from 7am to 9pm on weekdays allowing many customers working
in nearby Inverness to visit at either end of the day. She said: “The new open plan counters fit very
well in the surroundings of my convenience store. It helps our staff have more comfortable
conversations with our customers.”
Note to design: px available
Steve Roper, Sowerby Bridge main Post Office, West Yorkshire
“Staff prefer the open plan counters. The branch is a much friendlier environment and it’s easier to
have quality conversations with customers. We also have a private conversation area at the other
side of the branch where we can speak to customers about financial services, telecoms products,
savings and life insurance offers because people feel more at ease in privacy.”
Note to design: px available
Drumaness local Post Office, County Down
Johnny Kimber and his customers have welcomed the new open-plan format and longer opening
hours in the busy branch. He said: “Our Post Office services are now available an extra 69 hours
every week, and this has already brought in new customers. We're a much more realistic option for
everyone now and the Post Office is a far more convenient high street proposition.”
Note to design: px available
Medway Parade local Post Office, West London
11
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Chitty Thavachelvam is winning new business every day after converting to a local model. She said
“I've been able to extend my retail counter, and have noticed new customers coming through the
door, who are now able to take advantage of Post Office services until 10.30pm on Sunday nights.”
Note to design: px available
12
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Section: Operational review
Title: Network transformation in numbers
507
New branches
We now have 507 new main and local branches open across the UK
1450
Contracts signed
507 branches have already been converted while a further 943 subpostmasters are already signed
up to be converted to the new models in 2012-13, making a total of 1,450
87%
Increase in opening hours
Across our main and local estate there has been an average increase in opening hours of 87%
following conversion to the new model (34% increase for mains and 117% increase for locals on
average)
71%
Subpostmaster satisfaction
Subpostmaster satisfaction in transformed branches is also high with an average score of 71%
10% Increase in retail sales
An average retail sales increase of 10% is being reported across mains and locals
Customer reaction
95%
Satisfied customers
Customers are continuing to demonstrate high levels of satisfaction with the models, with
satisfaction levels at 95% for both mains and locals
13
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55
Seconds
Average waiting times in branches are 55 seconds in local branches two minutes in main branches
20% (locals) and 8% (mains)
Visiting branches outside traditional opening hours
Customers are delighted with the extension of opening hours and the added convenience. On
average, 20% of customers are visiting local branches outside of core hours and 8% in mains
14
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Section: Operational review
Crown Transformation programme
At a time when other high street brands are disappearing, the Post Office is investing in 294 of our
Crown branches. These are usually larger branches in towns or city centres, are those directly
managed by the Post Office.
Crown branches are fundamental to the future of the Post Office, and real progress has been
made towards the target of turning around the current losses to achieve breakeven by March
2015. Over the last year, the losses for this part of the network have reduced from £46 million to
£37 million. The on-going transformation builds upon this progress and is based on increasing
income, improving the customer experience and controlling costs.
Customers will benefit from brighter, more modern branches with improved layouts. Many will give
customers the option to use self-serve Post & Go machines, private consultation areas for financial
services, and the benefit of longer opening hours. More open plan counters will be introduced and
we will have more team members on the shop floor greeting and guiding customers. This new
approach has been trialled with notable success across both customer and financial measures at a
range of branches.
In six locations we will take the opportunity of merging branches in close proximity to create larger
branches with improved facilities for customers. For a further 70 we are looking for retail partners
to operate branches on our behalf. This approach will ensure we maintain a high standard of
service in an area while putting the branch on a stronger commercial footing for the future.
Case study: Nottingham Post Office transformed November 2012
(images available of this branch)
What changed?
¢ Redesign of the branch with new customer zones
« New ways of working with more colleagues on the shop floor
¢ Financial Services consultation area with two private rooms
¢ Earlier opening on Mondays and Tuesdays
« New signage throughout the branch
° Four extra Post & Go machines with staff on hand to offer help
What's the feedback?
* Waiting times have reduced, with 63% of customers being served within five minutes
compared with 49% before transformation and 36% during the same period in the previous
year
¢ Increase in income by 9% year on year
* Twice as many customers choosing to use the self-serve Post & Go
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Case study: New Malden Post Office transformed February 2013
(images available of this branch)
What changed?
¢ Redesign of the branch to improve customer flow
« Retail area repositioned to drive income
* New mails zone with one extra Post & Go and staff on hand to offer help
¢ Private consultation room for Financial Services
What's the feedback?
¢ Waiting times have almost halved to an average of 2.37mins
«Increase in revenue by 6% year on year
«Three times as many customers choosing to use the self-serve Post & Go machines
Case study: Birmingham Post Office transformed November 2011
(images available of this branch)
What changed?
¢ Redesign of the branch to improve customer flow
¢ Extra Post & Go machines with staff on hand to offer help
* Extended opening hours
« Added two internal ATM machines
What's the feedback?
¢ Increase in income by 44% year on year
* Government Services revenue has risen by 43% year on year
* Mails and Retail sales are up 7% year on year
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Case study: Derby
(image available of this branch)
A brand new centrally located Post Office branch opened in Derby city centre in May 2013. The
new branch, offering longer opening hours, 10 counter positions, self-serve mails zone and private
consultation areas, replaces two branches that were located on the fringes of the city. The move to
the newly refurbished premises will secure the long-term future of the Post Office in Derby city
centre and follows a 12-week public consultation.
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Operational review: Branch network.
Title: Supporting our network
Boxout: Technology (to be checked by IT)
The Post Office is continuing to invest in technology to ensure the continued provision of high-
quality, reliable services which improve customer service. There has been significant investment in
the key systems that underpin our service to customers.
Drop & Go
Launch of Drop & Go self-service machines for small businesses - A pre-paid card lets business
customers drop off their mail and parcels and pay quickly and have them processed without
waiting
Post & Go
Rolled out Post & Go self-service machines - These enable customers to save time by posting mail
and parcels without the need for a branch colleague
Pin Pad payment devices
e Completion of the rollout of 30,000 new Pin Pad payment devices, making the Post Office
the largest contactless payment network in Europe. Contactless payments allow customers
to make purchases of £20 or less simply by tapping their contactless enabled card or
mobile over electronic readers, saving time and improving the overall customer experience
in branch.
Horizon point-of-sale system
e Provides a secure and reliable service to 33,000 counter positions. At peak times, it
handles around 1,000 transactions per second. (INCLUDE ANY ENHACEMENTS MADE TO.
HORIZON IN 2012-13?)
Extending helpdesk availability
e IT has extended the helpdesk opening hours to support the increase in opening hours in
branches. With longer opening hours, customers can access postal services at a time
convenient to them while branch colleagues can use the helpdesk for longer so that they
can respond to customer queries quickly.
New customer relationship management system
Copy to be added
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Boxout: Supply chain
The Post Office customer base contains some of the most financially dependent members of the
UK population. Therefore, a key driver for the business is providing reliable access to cash.
e The Supply Chain, part of the business, collected and delivered more than £42 billion of
cash, coin, foreign exchange, secure stock, (stamps, postal orders etc.) and transactional
stock, (government forms and leaflets). Included 754,000 Cash and Valuables in Transit
(CViT) visits to and from these branches
e £3 billion of customers monies are processed and banked on the day after collection
e CViT operation is the third largest in the UK after G4S and Loomis
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Section: Operational review
Title: Business at a glance
Mails and Retail
Mails and Retail is the largest product area in the Post Office, generating up to 40% of the
business’ total turnover. Our long-term partnership with Royal Mail Group and diverse customer
base is central to retaining our position as the UK’s number one mails and parcels retailer.
The Post Office offers an unparalleled range of Royal Mail Group mails and parcels products and
services. These include everything from next-day guaranteed courier services to home shopping
returns and collections.
In the Post Office mails and parcels business, small businesses are critical and account for up to
one third of our income and include many online sellers and small local enterprises.
The business’ relationship with Camelot means that the Post Office is one of the main lottery
distributors in the UK, offering a range of Camelot national lottery products including scratch cards
and EuroMillions in more than 6,000 outlets. The Post Office also works with Vow Retail Ltd to
offer customers high-quality stationery, office supplies and collectible product ranges through
selected branches and online.
Boxout: Mails and Retail revenue grew from £392 million in 2011-12 to £409 million in 2012-13,
an increase of 4.3%
Financial Services
Our Financial Services business is a fast-growing UK financial services provider, aiming to challenge
the traditional banks by offering simple, transparent and value-for-money products, supported by
an unrivalled network.
The portfolio includes a broad range of products tomeet the needs of a large and diverse customer
base, which we offer through strong partnerships with third-party providers, of which Bank of
Ireland (UK) plc is one. The Post Office and Bank of Ireland (UK) plc have built a successful business
since 2003, providing financial services across the Post Office network in the UK.
The Financial Services business includes the Post Office-branded personal financial services
products, foreign currency, payments services (such as bill payment), personal and bushess partner
banking and ATMs.
Our personal Financial Services products include a comprehensive range o insurance products such
as car, home and travel; savings products such as Growth Bond, Online Saver, and Cash ISA; and
lending products such as mortgages and credit cards.
The Financial Services business is a key focus for the Post Office as the organisation continues to
build a commercially sustainable business.
Boxout: Financial Services revenue grew from £264 million in 2011-12 to £281 million in 2012-
13, an increase of 6.4%
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Government Services
The Government Services business offers a range of essential services in our branches on behalf of
a number of government departments. These services are used by a variety of customers including
pensioners collecting their state pension, customers who want to renew their passport, drivers
buying their car tax or renewing their driving licence using state-of-the-art technology.
The Post Office partners with the Department for Work and Pensions for the Post Office card
account, which allows customers to collect their state pension or benefits in cash, either in a Post
Office branch or from a Post Office ATM. We also issue car tax discs on behalf of the DVLA and
capture digital photographs for the renewal of driving licence photo counterparts. The Post Office
uses ground-breaking Application Enrolment and Identity technology which offers a paperless
process for our customers in 754 Post Office branches nationwide. One example is our contract
with UK Border Agency where foreign nationals can enrol for an identity card. In addition, the
Passport Check & Send service for customers applying for a passport, helps ensures their
applications are error free and processed quickly.
Boxout: Government Services revenue remained flat year on year at £164 million
Telecoms
The Telecoms business incorporates three main product areas: HomePhone and Broadband,
Mobile Top-up and International Phone cards.
HomePhone and Broadband offers a competitive fixed line phone and broadband services to just
under 500,000 residential customers, making us the sixth largest telecoms provider in the UK.
Customers are attracted by our low-cost services, UK-based call centre and ability to pay bills in
cash at any of our branches. This service will be migrating to a managed service provided by
Fujitsu in the summer of 2013,
Mobile Top-up allows customers to top-up their pre-pay mobile phone for all the main UK mobile
networks at any of our branches. The Post Office has the UK's largest estate of top-up enabled
terminals in the UK. This is run through an agreement with E-Pay.
International Phonecards, a service run through an agreement with Econet Mobile, are pre-paid
products enabling customers to make low-cost international phone calls so that they can stay in
touch with friends and family overseas.
Box-out: Telecoms revenue grew from £120 million in 2011-12 to £129 million in 2012-13, an
increase of 7.5%
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Section: Operational Review
Title: Mails and Retail
Mails and Retail is core to the Post Office’s offering to individual customers and small businesses in
the UK. The Mails and Retail business generated revenue of £409 million in 2012-13,
representing growth of £17 million compared to the previous year.
Extremely strong commercial performance across the product portfolio, activity relating to the
Olympics and Paralympics and our best Christmas mails and parcels sales ever has made this the
single most successful year for the Mails and Retail part of the business.
The Post Office gives customers access to an unrivalled mails and retail product range combined
with unparalleled expertise and professionalism from its frontline teams. Revenue grew across all
four main categories of the product portfolio (Mails, Parcels, Retail and Lottery) in 2012-13. This
was delivered by:
Creating and enhancing Royal Mail services
The Post Office Mails team enhanced services with Royal Mail to maximise opportunities from
online shopping collection and returns. The launch of our new Drop & Go priority service for small
business customers has helped us retain and grow our Mails business. Small businesses and eBay
customers can sign up for a pre-paid card to enable them to drop off their mail and have it
processed in their absence. The Post Office now has more than 2,300 small businesses signed up
to the service with further enhancements planned for the year ahead.
General parcels market growth
We have achieved an 8% growth in parcels revenue through a combination of a boom in online
shopping and eBay customers and continued improvements in frontline training and sales
capability.
Launching online retail shop
The new online shop was launched in July 2012 and has seen steady growth ever since. The shop
offers an extensive range of mailing solutions, collectibles and office supplies.
Expanding our network of Lottery terminals
The rollout of an additional 1,850 Camelot Lottery terminals has helped the Post Office deliver a
5.2% growth in Lottery sales over the course of 2012-13; this has been further facilitated by
strong Lottery marketing.
Overall, the Post Office consolidated its position as the number one distributor of mails and parcel
products in the UK. The strength, quality and convenience of the Lottery and retail product ranges
added further value to Post Office customers.
Looking ahead, the Post Office will continue to develop small business propositions to increase
value and convenience for this critical customer group. We will maximise opportunities to grow the
services we provide in this sector, in partnership with Royal Mail, particularly in the fast-growing
online shopping market.
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Boxout: Key highlights
e 30% growth in Retail revenue
e 8% increase in Parcels revenue
e 5.2% growth in Lottery sales
e 3.5% growth in Mails revenue
Boxout: Key launches
e Drop & Go launch - A prepaid card lets small businesses drop off parcels and pay quickly
without queuing - by the end of 2012-13, 2,300 small business customers had signed up
e New online retail shop offering mailing solutions, collectibles and office supplies
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Section: Operational Review
Title: Financial Services
The Financial Services business is placing the Post Office as a challenger in the sectorand giving
customers a real mainstream alternative. The Post Office aims to offer simple, relevant and value-
for-money products, supported by excellent customer service andan unrivalled network.
The comprehensive range of financial products and services covers savings, credit cards, mortgages
insurance, foreign currency, payments services (such as bill payments), personal and business
partner banking and ATMs.
In 2012-13 we continued to build an award-winning financial services business*, challenging the
market with simple, value-for-money and transparent products. In achieving this, the Post Office
delivered £281 million in revenue - an increase of 6.5% on last year - which was driven
predominantly by growth in savings and lending.
Financial Services works with a range of partners and suppliers and a key development in the last
year has been the renegotiation and reconfirmation of the arrangements with Bank of Ireland (UK)
ple. The strong partnership with Bank of Ireland (UK) plc, which dates back to2003, delivered
significant growth in 2012-13, particularly in the Personal Financial Services area - Growth Bonds,
Online Saver and Reward Saver. We also extended our award-winning mortgage range, offering
competitive rates that featured regularly in Best Buy tables. The Financial Services business
continues to improve accessibility of its products to customers, including making mortgages
available in branch.
The Post Office maintained its position as the market leader in foreign exchange against a backdrop
of a challenging travel market. The public also voted the Post Office the Best Foreign Exchange
retailer and Best Travel Insurance Provider at the 2012 British Travel Awards, for the sixth and
seventh year respectively.
Our Financial Services team won and retained key contracts in the bill payment market, ensuring
that customers can continue to use their local, convenient Post Offce branches throughout the UK
to pay bills.
Contactless payment terminals were installed across 30,000 counter positions in our extensive
network across the UK. This move makes the Post Office the biggest user of contactless acceptance
technology in Europe, allowing customers to pay for transactions of up to £20 using contactless
cards and Near Field Communication (NFC) enabled mobile phones.
We continued to work on our personal banking offering, and increased access of UK bank accounts
in our network by signing new agreements with HSBC and First Direct. 95% of all UK debit card
holders can now access their accounts from a Post Office branch.
The Financial Services business is a key focus for the Post Office as the organisation continues to
build a commercially sustainable business. In 2013-14 the Post Office is announcing a current
account, the next step in our strategy of growing an already well-established financial services
portfolio
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Extensive research into the current account market tells us that customers want simplicity,
transparency and good value for money. With more branches than all the UK banks combined, the
Post Office is very excited at the prospect of offering a current account through the most accessible
retail network in the UK. The currentaccount has already launched in a small number of Post Office
branches during spring 2013 with a wider rollout planned for later in the financial year.
Growth will help the Post Office achieve the goals of providing customers with the option to service
all their financial needs under one roof andallowing the Post Office to become the leading financial
services challenger brand in the UK.
Boxout: Highlights
e Best Travel Insurance Provider at the 2012 British Travel Awards, as voted by the public,
for the seventh successive year
e Best Foreign Exchange / Travel Money Retailer at the 2012 British Travel Awards, as voted
by the public, for the sixth successive year
e Agreement with HSBC and First Direct for their customers to have free access to their
accounts at all of our Post Office branches from spring 2013
e The Post Office became the biggest accepter of contactless payments in Europe
e What Mortgage Awards 2012: Best Online Lender, Best Fixed Rated Mortgage Provider
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Section: Operational Review
Title: Government Services
The Post Office is, and will remain, the front office for government delivering services on behalf of
government departments through the Post Office branch network and online channels. In 2012-
13 we grew our passport Check & Send business by 12.5% and increased our revenue from
capturing customers’ biometrics on behalf of the United Kingdom Border Agency (UKBA) by 284%.
The main priority in 2012-13 was to retain the contract for Front Office Counter Services provided
on behalf of the Driver Vehicle Licensing Agency (DVLA). This framework contract will allow other
government departments to contract with the Post Office without having to run a further
procurement process. The contract is for seven years with an option to renew for a further three
years.
In November the Post Office was successful in retaining the DVLA framework contract for Front
Office Counter Services. In addition, the Post Office also won a place on the Department for Work
and Pensions (DWP) Identity Assurance Framework contract which is now being managed by the
Cabinet Office, Government Procurement Service. It was particularly pleasing to be awarded a
place on the Identity Assurance Framework and to retain the DVLA Front Office Counter Services
contract against strong competition.
As well as these significant contract wins, our new world-leading Application Enrolment and
Identity business generated more than £12 million of revenue and now accounts for more than 9%
of our total Government Services revenue. This service, available in 104 Post Office branches,
captures digital finger prints, photographs and electronic signatures for the UKBA and photographs
for customers renewing their driving licences. It also allows the Post Office to extend the services
offered and includes increased security features such as the ability to record transactions in
branch.
Nearly 90% of Government Services revenue is still generated by the traditional motoring, benefits
and passport services. We saw significant growth in our passport and existing Identity business,
which helped to offset the decline in benefits payment. Income from the Post Office card account
declined as customers continue to migrate to bank accounts. Income from motoring, primarily the
issuing of tax discs in our branches, was broadly flat compared to 2011-12.
In 2013-14 the Post Office expects to complete the rollout of new services with the DVLA and
continue to grow the passport business. The year will also see the Post Office laying the
foundations for future growth in the Government Services market as we seek to support the
rollout of Universal Credit and the government's Digital by Default agenda.
Boxout: Key highlights
e Won the DVLA framework contract for the provision of Front Office Counter Services
e Growth in the Passport Check & Send service with an increased market share
e Awarded a place on the DWP Identity Assurance framework contract
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Section: Operational review
Title: Telecoms
The Post Office Telecoms business consists of HomePhone and Broadband, Mobile Top-up and
International Phonecards. 2012-13 was a very positive year for the business as it achieved an 8%
increase in revenue from £120 million to £129 million. The HomePhone and Broadband business
performed particularly well, offsetting weakening performance in our Mobile Top-up business. The
Post Office was also able to increase profitability of the portfolio.
At the beginning of the year, the Post Office signed an agreement with Fujitsu Services to provide
the HomePhone and Broadband services from the summer of 2013. This is a strategically
important agreement as it provides us with a platform from which we will be able to develop and
grow our business in an agile and cost-effective way. The new platform will make it easier for
customers to sign up to our services through branches and online. It will also reduce our cost base
and provide improved and flexible back office IT systems. The customer experience will be
enhanced with improved online account management tools and access to higher speed broadband
services over the TalkTalk network. The agreement with Fujitsu Services will also enable the
development of bespoke services for the SME market.
Over the course of the year, the Post Office boosted revenue generated by the HomePhone and
Broadband business increasing from £112 million to £122 million, an increase of just under 10%.
This achievement has been driven by two key factors: first, the customer base is very stable, driven
by solid customer acquisition across all channels, and a reduction in customer churn, particularly in
high-value segments. Second, a number of changes to our service offering were implemented
which has made it more attractive to higher value customers, while improving customer retention.
The Post Office has seen a reduction in the volume of mobile top-up transactions in our branches
as mobile networks actively look to migrate customers from post-pay to pre-pay packages and
customers top-up less frequently. However, we still achieved 15 million transactions and remain
the largest estate of top-up enabled retail outlets in the UK.
The International Phonecard business has been in decline for a number of years and continues to
be impacted as customers move to solutions such as Skype.
The Post Office will continue to grow the Telecoms business in 2013-14, both in terms of revenue
and customers, but it will be a transitional year as we migrate our services to our new supplier.
This transition will provide the platform to enable our Telecoms business to grow rapidly in the
future. The Post Office is also looking at opportunities to enter the mobile market during the
coming financial year so that we are able to offer our customers the full suite of telecoms
products.
Boxout: Highlights
e¢ £9 million increase in revenue
e New contract signed with Fujitsu Services
e Mobile launch planned for 2013-14
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Section: Performance Review
Title: Our people
The Post Office is proud of its heritage and equally proud of the unique role our colleagues play at
the heart of communities, serving a public purpose, while becoming increasingly commercial and
entrepreneurial. The Post Office also recognises the important role our support teams play in
delivering the business strategy. We strive to nurture our people, ensuring they feel valued, trusted
and committed to putting the customer first. The Post Office is ambitious about the future and
confident of the key role our people will play in achieving that vision.
This year saw the introduction of our core values - Care, Challenge and Commit. These three
values sit at the centre of everything we do and are intrinsic to how the Post Office interacts with
customers and colleagues. Our values underpin our employee proposition and help to deliver the
best possible customer experience, while at the same time giving everyone within the business the
chance to fulfil their potential.
The Post Office is particularly proud of the progress made in relation to talent, diversity, people
development and engagement.
Engaging with our people
We value the opinions and ideas of our colleagues. Our employee engagement survey, which was
conducted in 2012, is managed by independent research company Ipsos MORI. The survey helps
the Post Office understand how colleagues are feeling about the business, what is going well and
where we can improve.
The survey saw many positive results, especially compared to similar companies:
e An impressive response rate of 76%
e An increase in the Engagement Index score from 62% to 68% from the previous year
© 84% of employees would recommend Post Office services to friends and family (retail
norm 71%)
« 76% of employees feel proud to work for the Post Office (retail norm 49%)
While the survey demonstrated a number of positive results, we are keen to continue with this
progress and ensure we listen to our colleagues and build on this success for next year and
beyond.
Learning and development
The Post Office continues to support the development of people right across the organisation.
Our people have undertaken a broad range of development activities this year including:
e Introduction of ‘Discovery Days’ for new managers, ensuring they have the tools to
succeed in their new roles
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e Supporting the development of a Post Office procurement function, utilising internal
expertise, external training and professional qualifications
Introduction of the Certificate of Professional Business Practice in the Information
Services team in partnership with Sheffield Hallam University - sharing skills, knowledge
and best practice across the organisation
e Building the capability and commercial skills of our managers through the development
of the Crown Leadership Excellence programme which will launch in spring 2013.
Talent and diversity
Becoming an organisation working independently of Royal Mail Group has required an increase in
capability and expertise across a range of areas. New-found corporate responsibilities have been
taken on across the breadth of the professional functions. Coupled with the goal of ensuring a
high-performing sustainable business, we have put in place a robust assessment and
development approach, looking at both performance and future potential of our senior leaders
with the overall aim of raising the capability of our people.
Raising our leadership capability and performance standards will continue to be an important
focus which the Post Office will deliver through its Leadership Development programme.
At this stage of our development, building talent and diversity merits special attention. The Board
has, therefore, delegated authority to the Nominations Committee to monitor the development of
a talent management programme for senior levels of the organisation.
As part of this, we have introduced a range of initiatives to promote an inclusive workforce. These
include establishing a diversity forum; recruiting young people under 24 on the Paid Work
Experience programme and launching our Trainee Manager scheme.
The Post Office is also proud of the progress made in gender equality. Our Chairman and CEO are
women. The Board has equal numbers of male and female directors and women make up half of
the Executive Committee. To ensure we maintain this focus, we have pledged our support to the
government's Think, Act, Report initiative which is aimed at improving gender equality in the
workplace.
Our general policy will be to recruit for talent, using a range of tools, including encouraging open
applications through our attraction website, engaging specialist recruitment consultancies and
operating specific talent attraction campaigns.
Challenges remain, but we are confident our commitment to building a culture of inclusion will
continue to make the Post Office relevant to its increasingly diverse customer base.
We view our approach to diversity as an integral part of talent management. This year we have
developed two programmes, taking positive action on both fronts.
Paid Work Experience programme
Over the last 12 months, the government and media have both highlighted the problem with high
unemployment in inner city areas, especially among young people. The Paid Work Experience
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programme aims to provide a period of paid employment during the Christmas period for young
people and those furthest from the labour market. The Post Office employed 61 individuals in the
lead up to Christmas in some of the busiest Crown branches across London and Greater
Manchester. The initiative led to 39 individuals being offered further employment. Due to the
success of the scheme, in 2013-14 the Post Office intends to extend the programme within the
branch network.
Trainee Manager scheme
The scheme was designed to take positive action to attract young people to consider a career with
the Post Office, working with our colleagues and customers in our Crown branches. We employed
eight individuals under the age of 24 to work in the London area. The trainees have subsequently
undertaken a development programme including a foundation degree, senior manager mentoring
and regular learning sessions. The scheme has already seen positive results with three progressing
to other managerial roles in the business. The trainees continue to progress and have provided a
welcome injection of new ideas and enthusiasm.
Accelerated development scheme for senior leaders
We have started to inject talent into different levels of the organisation and are currently piloting a
high-potential development programme for new entrants at the senior leadership level. This
focuses on accelerated career progression across a range of roles within the business, alongside
targeted personal development in which individuals draw upon a range of available activity
including coaching, mentoring and behavioural workshops.
Safety, health and wellbeing
The safety and wellbeing of our people is of paramount important to the Post Office. This year we
have embarked on an extensive programme of health checks that will allow all our employees to
understand how healthy they are, and learn about what they can do to reduce the risk of illness
and improve their wellbeing.
The Post Office aims to fulfil its business mission without compromising the safety of customers,
employees, suppliers and all those affected by our activities. We want to make healthy and safe
working a way of life.
To this end, the business ensures:
® ~we comply fully with the relevant legislation
e that the health and safety responsibilities of our employees are clearly defined, allocated
and understood
we encourage and help all our people to carry out their responsibilities through effective
health and safety management systems, with safe premises, equipment and processes
we improve our employees’ capability to manage and work safely, through instruction and
training
we support and encourage our people to get involved in the health and safety performance
of our business and pursue a healthy and safe lifestyle and
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we monitor and review how well we put our health and safety policies into practice.
Looking ahead
The Post Office wants people who are capable of delivering a turnaround strategy. Therefore, we
aim to continue building people capability; to foster a culture of continuous learning; to increase
our people's understanding of our business in a commercial context along with our social purpose;
to develop a proactive talent and career management process that recognises the value in
diversity; and to continue to nurture a culture where people are actively encouraged and valued as
role models of Care, Challenge and Commit.
Boxout 1
Post Office Engagement Survey - Highlights
90
80
70
o 60+
iJ
2 50
8 40
2 4 @PO Ltd 2012
20 @PO Ltd 2011
10 G Industry norm
0 5
Bed
Question
Boxout 2
Our people vision
Great performance through great leadership
The Post Office will attract and develop great people who have pride in and a passion for delivering
value for customers and reflect the diverse communities we serve. Everyone will have a strong
sense of ownership for their work, demonstrating initiative and flexibility, working well together to
adapt to the rapidly changing needs of our markets. We will have an environment where our
people work in partnership with all those who contribute to the success of our business. The Post
Office will be a place where people are valued and respected, are encouraged and supported to
fulfil their potential and rise to the commercial challenge.
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Section: Performance review
Title: Our people
Case studies
James Reid - Property Lead, Network Transformation programme
Picture required
James joined the Post Office from Royal Mail a year ago on the Network Transformation
programme as a Field Change Advisor in South Wales.
James saw the role as a great opportunity to develop and support the change across the network.
“The role was really rewarding and I really enjoyed working with the subpostmasters.
“I then saw the Property Lead role advertised and went for it. It did mean moving down to London,
but I have been made to feel really welcome. I feel really proud that my managers saw potential in
me and have helped me settle in to a new role and a new city.
“I think I have achieved a lot this year and feel I am making a real difference. Seeing converted
branches opening and knowing you have helped to do that, feels great. I am here for a career and
see my long-term future with the Post Office.”
Ashley Hall - Change Analyst, Finance
Picture required
Ashley joined the Post Office 13 years ago. A year ago, Ashley was an administrator in the
Information Services team when he became one of the successful applicants for the Certificate in
Professional Business Practice introduced by the Post Office with Sheffield Hallam University.
“The course was a great opportunity to develop in my current role. I couldn't have imagined the
difference it has made to me in just 12 months. I've been actively encouraged by my managers to
improve my skills and make a positive contribution to the business.”
Ashley has since moved to his new role in the Finance team.
“I've now had the opportunity to work in another part of the business and continue with my
qualification. It’s really broadened my horizons. Personally, I feel more valued and understand the
contribution I make to the wider business.”
Bushra Ali - Trainee Manager, Network
Picture required
Bushra joined the Post Office a year ago through the Trainee Manager scheme.
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“I hadn't ever considered a career with the Post Office, but after meeting the people at the
interview and seeing their passion, I couldn't wait to join.”
In the last 12 months, Bushra has worked in five different branches and was part of the Post Office
team working in the Olympic village during London 2012. She is also undertaking a foundation
degree in Retail Management.
“It's challenging doing my degree alongside work, but it’s given me so many practical skills I can
apply to work. I've gained confidence and learned so much about our products and services, as well
as developing my leadership skills. I'm really grateful for the support I’ve received from my
managers and mentor. I’m still really enjoying myself and I'm really keen to become a Branch
Manager.”
Shahidul Islam - Paid Work Experience
Picture required
Shahidul joined the business in November, through the Paid Work Experience scheme. He was our
youngest candidate at 16. He currently works in Houndsditch.
“I left school in the summer and started looking for work. I had tried a number of companies but
with no luck. I was really pleased when I got my role with the Post Office.
“Everyone has been really supportive and my managers have helped me a lot and are always there
for me. I learnt a lot of new skills and met different people from different walks of life. I think my
main achievement has been developing my communication skills.
“I've changed a lot in the time I have been here, I've started to really believe in myself and feel like I
have a future here.”
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Section: Performance Review
Title: Our customers
It is essential to our growth strategy that our customers feel they get a first-class experience every
time. So, we are rigorously focused on putting them at the heart of the business. In 2012-13 we
carried out extensive research to better understand our diverse customer base and their needs.
Research has shown what we do well and where we need to improve. Customers value the Post
Office and rate our customer service highly, but tell us they want the Post Office to be easier to do
business with and that we should offer them a greater choice of ways to interact with the Post
Office.
Using this feedback will help shape the ongoing development of a multi-channel strategy for the
future that optimises convenience, choice and relevance for Post Office customers.
Customer satisfaction
The Post Office has made some significant progress over the past year with the relationships we
have with our many customers. 18 million customers visit our branches every week, half the small
businesses (SMEs) in the UK use our services each week, 34 million visit our website each year and
nearly eight million customers talk to our 34 UK and Republic of Ireland contact centres each year.
In 2012-13 the Post Office experienced impressive customer satisfaction rates with 87% of
customers saying they were happy with the service they received, consistent with 2011-12"
Underlying these high customer satisfaction ratings, there has been a reduction in wait times. The
average wait time in 2012-13 was three minutes, which is 12 seconds quicker than 2011-12 and
one minute and eight seconds quicker than 2010-11"!
Our research also told us that we needed to re-engage customers with the overall Post Office
brand in order to achieve future growth. We, therefore, launched a brand campaign in October
inviting customers to consider the Post Office in a different way.
The Post Office understands how important customer service is during the lead up to Christmas.
As a result, we put extra effort into making Christmas easier for our customers. This formed a
business-wide project during November and December which contributed to improved sales
performance and customer perception. Christmas Makers (Post Office management and support
staff working in branches), longer opening hours, online help, pop-up Post Office branches and
discounted stamp arrangements were highlighted to customers by press, outdoor and digital
advertising and PR. This helped to demonstrate how we were making strides to be easier to deal
with. All of this delivered our best ever Christmas performance, with our core Mails product range
exceeding last year by 3.8%, with 86% of customers saying they were satisfied with their experience
in branch”).
'2] Quadrangle Brand and Customer Insight Programme 2011-12 & 2012-13 (1,000 largest branches)
3] Empathica Voice of Customer Programme: December 2012
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There was also a positive impact on wait times in December with an average wait time of three
minutes and 47 seconds - 80 seconds quicker than last year and three minutes and 27 seconds
quicker than 2011!
Voice of Customer programme
The Post Office is constantly looking at ways to improve customer satisfaction and offer more
convenient channels for customers to provide feedback. Our new Voice of Customer programme to
‘tell us - how we did today’ was piloted in 150 branches this year. It uses pre-printed till receipts,
cards and a QR code to invite customers to give feedback online, via mobile or by telephone.
At the end of March 2013, we had feedback from 36,500 customer visits. This feedback helps the
Post Office address customer issues at branch level quickly (such as plans for dealing with busy
times and reducing queue times), as well as helping to develop an overall strategy to address
common themes across the network.
Customers also have the opportunity to praise service where it is ‘above and beyond’ and more
than 700 individual ‘wows’ are received weekly!)
Voice of Customer is in place in more than 2,000 of our largest branches and will be rolled out to
all newly transformed branches in 2013-14.
A key focus in 2013-14 will be to make the Post Office an easier organisation to do business
with. The modernisation of the network and Crown branches, coupled with our multi-channel
strategy, and offering more transparent and relevant products and services will be essential in
ensuring this happens and that the customer view remains at the heart of the Post Office’s
strategy.
°] 4Ba Mystery Shopping Programme 2012-13
'") Empathica Voice of Customer Programme 2012-13
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Section: Performance review
Title: Our customers
Boxout
Transformed branches
Customers in transformed network branches are already enjoying even higher levels of satisfaction
than the rest of the network:
In both main and local branches, 95% of customers were satisfied'®!
e Average wait time in transformed network branches was one minute and one second”!
«© 71% of subpostmasters were satisfied with their new Post Office branch!
Case study:
In line with the high street, the Post Office has introduced automated self-service kiosks which help
customers save time. The Post & Go kiosks help customers post letters and parcels and buy
stamps and packaging. One customer commented: “Michael (Post Office) was very welcoming when
I came into branch. He asked if I needed help with anything while I was posting a parcel. He asked
if there was anything important inside and if I needed to get it there for the next day which neither
applied to me. Michael then helped me to process it through the Post & Go machines near the
door; it was so easy.”
Durham Crown branch"!
Case study: Small businesses
It is estimated that up to half of the UK’s small businesses will visit a Post Office at least once a
week. This is often for mail services - with Post Office branches providing a convenient access point
to the onward postal distribution system. In an increasingly digital age, this means that these
businesses are able to transact beyond their immediate geographical environment, taking orders
by post, phone and internet and being able to fulfil them throughout the country and the
world. The Post Office network acts as a critical part of the infrastructure supporting the growth of
small businesses throughout the UK.
'! Brass Network Transformation Programmeresearch: August 2012-March 2013
SI Brass Network Transformation Programme research: August 2012-March 2013
Sl Brass Network Transformation Programme research: August 2012-March 2013
5) Empathica Voice of Customer Programme 2012/13
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This Post Office infrastructure also provides a wider suite of services that can conveniently meet
the needs of local small businesses - including banking and cash services as well as insurance,
travel and Government services. The strong local relationships with small businesses are
strengthened by the empathy and understanding of their needs from subpostmasters who are
typically running the Post Office in a small business themselves.
This is an area of development for Post Office. Service enhancements have been developed to
meet small business needs, such as ‘Drop and Go’ whereby local businesses can drop off packages
at their local office and the Post Office will apply the postage and billing afterwards. This is an
approach that will continue to develop strongly over the next few years as the Post Office plays its
role in promoting growth in a sector that is so critical for growth and employment prospects across
the UK.
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Section: Performance Review
Title: Corporate responsibility
Environment
The Post Office recognises its environmental responsibilities and is committed to minimising our
adverse environmental impact by means of a continuous improvement process.
We embrace environmental considerations in the business management process and decision
making throughout the organisation.
We set ourselves some challenging goals for 2012-13:
e 5% reduction in building energy use
« 5% reduction in CO2 from vehicle fuel
« 5% reduction in water use
e 55% of all waste generated to be recycled.
Year-end performance against these goals was encouraging in that we achieved or exceeded three
out of four goals. Our performance in reducing building energy use was significantly affected by the
unusually severe weather conditions during the winter of 2012-13.
Activities
Change control
All business projects and supplier contracts are reviewed for environmental impacts and
recommendations made to positively influence them so that they make use, whenever possible, of
sustainable raw materials and examine responsible end-of-life considerations.
Buildings
A large percentage of Post Office buildings now have low-energy lighting, low-water usage utilities,
and all fixtures and fittings are now obtained, wherever possible, fron sustainable sources or from
materials that can easily be reused or recycled.
Vehicles
The Post Office is continually looking at technological advances and new materials to reduce the
weight of our vehicles so they use less fuel. A new concept vehicle will go on trial in the second
financial quarter of 2013-14. This vehicle will also utilise telemetry systems, which will enable us
to improve overall fuel efficiency. Our aim is that this vehicle will become our flagship for the
future, further supporting our environmental aspirations.
By autumn 2013 three quarters of our operational fleet of 420 vehicles will also meet the current
Euro 5 emissions standard, and 50% of the fleet will have been adapted to accommodate exhaust
gas reduction systems and deliver improved performance.
Waste
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Most of our buildings are now participating in the Dry Mixed Recycling scheme where everything
that can be recycled is now segregated into separate bins or bags. This is a key initiative to reduce
dependence of the Post Office on sending waste to landfill, something that is both expensive and
environmentally unsustainable. In addition to this, 100% of all our confidential waste is now
shredded, pulped and sent to manufacture recycled paper.
The Post Office measures and looks to reduce the amount of packaging that is produced and the
quantity of electrical and electronic equipment that will end up in waste streams once they have
reached the end of their useful life. To assist the Post Office in meeting these obligations, we have
arrangements with Biffa, our prime waste contractor and Valpak, who specialise in the treatment
of electrical waste.
Sustainable operations
We actively look for opportunities to ensure that all of the paper we use is from sources accredited
by the Forest Stewardship Council and aim to advertise this fact by including the FSC logo on all of
our point-of-sale literature. Currently, some 90% of all the paper we buy is from FSC accredited
“mixed” sources. This means that the pulp used has come from either well managed forests,
controlled sources or from recycled wood or fibres. In addition, we have also reduced the amount
of packaging associated with our retail sales by some 44%.
Disability and accessibility
The Post Office strives to be one of the most accessible organisations in the UK by ensuring
colleagues with disability needs are provided with all of the support they need and disabled
customers receive an excellent customer experience.
In 2012-13 the Post Office achieved the following:
e Following separation from Royal Mail, the Post Office Disability Helpline was launched to
provide solutions and specialist equipment to help employees with disability or accessibility
issues
e Provided grants to agent branches to upgrade their outlets to make them more accessible
e Ensured accessibility was an integral part of the Network Transformation programme. We also
developed a new Post Office Accessibility Guide and incorporated disability training as a core
part of Network Transformation training
« The Post Office created and meet a panel of accessibility experts from disability organisations
ona regular basis. Their role is to advise on accessibility issues facing disabled people, new and
best industry practise, and changes and developments within the Post Office that may impact
on disabled customers and our people.
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Section: Performance review
Title: Corporate responsibility
Charity Giving
The Post Office has a rich history of charity giving with our people and customers supporting a
wide variety of causes. We have been major supporters of BBC Children in Need for several years.
In 2012, the branch network increased its impact by playing a leading role in Children in Need’s
BearFaced initiative. This gave extra impetus to our fundraising, helping engage customers and
branches to have fun and get involved. Our fund raising activities helped raise more than £1m for
Children in Need, a record amount for the Post Office.
We have also developed Your Charity this year, an exciting new approach to our fundraising
activity. Your Charity empowers branches and teams to choose their own charity to support. The
rollout has already started and will continue throughout 2013.
Digital inclusion
As a founder partner of Go ON UK, the Post Office is committed to helping the 16 million people in
the UK who have either never used, or rarely use the internet develop the necessary digital skills to
enjoy the benefits of being online.
The internet has become an integral part of everyday life so we want to ensure our own people
have the necessary digital skills to get the most out of being online.
We are committed to providing the basic digital skills training and support to all our permanent
Post Office colleagues and we will be progressing this initiative during the next financial year.
To help customers become digitally literate, we plan to launch the Online Centre Locator in all of
our 11,780 branches in June 2013, which for the first time will signpost customers across the UK
to their nearest digital training location. We are working with a number of partners to deliver this
database which covers 1000s of learning centres across the UK.
We also participated in a number of digital inclusion campaigns in 2012-13, including Go on Give
an Hour which encouraged those online to help a friend, family member or neighbour to get
online.
Business in the community scheme
In 2012/13 the Post Office became a standalone member of the Business in the Community (BITC)
scheme, working to develop our support for both BITC and a wider community role in line with our
public purpose.
Our work with the BITC-led high street task force is offering the Post Office an opportunity to work
with three of the 27 government-backed Town Teams to help redefine and regenerate their high
streets. The Post Office is now working with the Sydenham, Stockton on Tees and Brighton teams
and the local communities to help regenerate interest, activity and ultimately provide a long- term
future for these areas so that they can survive and thrive. As a part of every community across the
UK, the Post Office is proud to be playing its part in this pilot work protecting the sustainability of
these local amenities and retail hubs.
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The Post Office also supports the BITC Rural Action Group in its work to help communities in
villages and rural areas across the UK where often the Post Office plays an important social and
economic role providing services to those who otherwise may feel isolated.
The Post Office takes pride in being a responsible business and looks forward to developing its
relationship and support further in the coming year.
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Section: Performance review
Title: Financial review
Chris Day [Insert picture]
Chief Financial Officer
Summary results.
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The Post Office has delivered a sound performance in its first year operating as an independent
business. Turnover has increased by 4.5% with strong performance in three of the four core product
pillars. This has enabled investment in building the Post Office brand and driving future revenue
growth. Whilst the scale of transformational change required to reach the goal of commercial
sustainability remains significant our performance in 2012-13 was a significant step in the right
direction.
Key Financial Performance Indicators
2013 2012
Variance Variance
£m £m &m x
Turnover - - 1,024 980 44 45
Operating profit before exceptional items 94 61 33 54.1
Operating loss before exceptional items and 25
Network Subsidy Payment (216) (249) 3
Operating cashflow 151 38 113 >100%
Operating profit before exceptional items was £94 million (2012 - £61 million), and there was a
cash inflow of £151 million (2012 - £38 million)
Profit and Loss Summary
2013 2012*
Variance Variance
£m £m &m ¥
Turnover 1,024 980 44 45
Network Subsidy Payment 210 180 30 16.7
Revenue 1,234 1,160 74 6.4
People costs (259) (254) (5) (2.0)
Subpostmasters’ costs (478) (483) 5 1.0
Other operating costs (435) (393) (42) (10.7)
Share of profit from joint ventures and associates 32 31 1 3.2
Operating profit before exceptional items 94 61 33 54.1
* Note that Royal Mail Holdings plc Annual Report and Financial Statements 2011-12 reported
operating profit after modernisation costs but before other exceptional items of £59 million. The
prior year result has been presented to exclude modernisation costs consistent with 2013 where
results are reported before all exceptional items.
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Revenue
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The Post Office's revenue increased by £74 million (6.4%) to £1,234 million including an increase of
£30 million in the Network Subsidy Payment from the government. The Post Office segments
income into four pillars; Mails & Retail, Financial Services, Government Services and Telecoms. The
pillars and their performance are analysed below.
2013 2012
&m &m Variance Variance
£m %
Mails & Retail 409 392 17 43
Financial Services 7 281 264 17 6.4
Government Services . 164 164 0 -
Telecoms 129 120 9 75
Other income 41 40 1 25
Turnover 1,024 980 44 45
Network Subsidy Payment 210 180 30 16.7
Revenue 1,234 1,160 74 64
r
Revenue - Prior Year to Current Year
30
1
os aa
17 1,234
tm v _, Sea
Rates
2012 Mails & — Financial Government Telecoms Other Network 2013
Revenue Retail Services _—_ Services Income Subsidy Revenue
Payment
X
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Mails & Retail
The Mails and Retail pillar includes all the services provided for Royal Mail and Parcelforce. It also
includes Lottery and retail services such as sales of collectibles as well as packaging and stationery.
Mails and Retail revenue of £409 million increased by £17 million (2012: £392 million). Of this,
tumover in relation to Royal Mail products increased by £13 million, driven primarily by strong parcel
and premium product volumes and the impact of the stamp price rise introduced on 30 April 2012 In
addition, retail turnover increased by £2 million due to the collectibles relating to the Diamond Jubilee
and the Olympics memorabilia. The rollout of 1,850 additional terminals contributed to an increase of
£2 million in income from sales of lottery tickets.
Financial Services
The Financial Services pillar includes Post Office branded personal financial services products, ATMs
and travel services as well as traditional services such as bill payment and over-the-counter banking
transactions.
Financial Services revenue in 2013 increased by £17 million to £281 million (2012: £264 million)
During the year the Post Office sold its 49.9% share in its financial services associate, Midasgrange
Limited, to the majority shareholder and long-term banking partner, Bank of Ireland (UK) plc. This
was part of a wider agreement to restructure this long-term relationship, aligning the partners to
build a significant long-term financial services business. Through this agreement, the Post Office will
offer an increasing range of transparent and valie-for-money financial products and services,
providing value to customers, subpostmasters and the Post Office.
Personal Finance Services income rose by £24 million driven by strong growth in savings products
(particularly Growth Bonds, Online Saver and Reward Saver) and the introduction of new mortgage
products. The value of savings held in Post Office branded accounts increased by £2 billion to almost
£18 billion. Revenue from traditional financial services products including bill payment services and
Postal Orders declined. This was due to the increasing provision of electronic alternatives to paper
based products and the increasing use of alternative payment methods. Revenues were impacted by
the wind down of the Department of Work and Pensions contract for Cash Cheques (Green Giros) and
the decision by NS&l to provide most of their products through their own direct channel
Government Services
The Government Services pillar covers services provided under contract to government
departments. This includes services in relation to the work of the Department for Work and
Pensions (DWP), the Driver and Vehicle Licensing Agency (DVLA) and the Identity and Passport
Service (IPS).
Government Services revenue of £164 million remained flat (2012 - £164 million), though income
from the Passport Check & Send service increased by £3 million due to higher volumes from growth
in both our market share and the overall market. Conversely, the anticipated growth in income from
identity-related services has been disappointing. Revenue from the payment of benefits through the
Post Office Card Account was £4 million lower impacted by customers continuing to migrate to
receiving benefits through bank accounts.
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Telecoms
The Telecoms pillar includes the Post Office HomePhone and Broadband services as well as e-top
up services and phonecards.
Telecoms revenue of £129 million (2012 - £120 million) increased by £9 million. Income from
HomePhone and Broadband rose by £10 million primarily due to increased customer numbers
following the introduction in May 2012 of more competitive service packages. Income from e-top
ups was £1 million below prior year as more customers migrated away from pre-pay and mobile
networks reduced their transaction fees. Despite this reduction in income,the Post Office is still a
significant provider in the top-up market and its share of the retail market has been maintained at
approximately 5%.
Other income
Other income is generated primarily from the Supply Chain business which manages and distribute
cash for Post Offices and for third parties. It also offers warehousing services, mainly to Royal Mail.
Other income increased marginally to £41 million (2012: £40 million) reflecting the growth in cash
in transit income from third parties.
Network Subsidy Payment
The Network Subsidy Payment is government grant revenue towards the costs of maintaining the
Post Office network. The payment increased by £30 million in the year to £210 million; this will
begin to reduce with effect from 2013-14 as set out in the current funding agreement with the
government.
Costs
Total costs rose by £42 million to £1,172 million (2012: £1,130 million).
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Costs - Prior Year to Current Year
(42)
5 (1,172)
2012 People Costs Subpostmasters’ Other operating 2013
costs costs
People costs.
People costs of £259 million (2012 - £254 million) have increased by £5 million reflecting the
associated costs of bringing a number of functions in-house, following separation from Royal Mail, and
historical pay agreements. These are partially offset by efficiency savings in the Crown network.
Subpostmasters’ costs
Subpostmasters’ costs of £478 million are £5 million lower than last year (2012 - £483 million). This
includes decreases in fixed costs arising from the introduction of the new network models.
Other operating costs
Other operating costs have increased by £42 million to £435 million (2012- £393 million), driven
largely by additional programmed nvestment spend. This one-off investment spend was £50 million
(2012 - £26 million) and included an increase in media spend to raise customer awareness of Post
Office services in addition to focused campaigns on travel-related services and mortgages together
with development of new and improved services. There were also increases in the cost of sales,
reflecting greater sales volumes, and in property related costs.
Joint venture and associate
Share of operating profit from the joint ventures (First Rate Exchange Services Limited) and associate
(Midasgrange Ltd until its sale on 1 September 2012) was £32 million (2012- £31 million). First
Rate Exchange Services Limited results improved despite lower retail sales due to market conditions.
This has been achieved mainly through driving efficiencies in operating costs. Post Office Limited's
interest in the associate company, Midasgrange Ltd was sold during the year and made a loss on
disposal of £30 million.
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Exceptional Items
2013 2012
Exceptional items £m £m
Operating exceptional items:
Restructuring costs including subpostmasters’ (79) (2)
compensation
Impairment of investment, property, plant and equipment (66) (36)
Government grant 98
Subtotal operating exceptional items (47) (38)
Non-operating exceptional items:
Profit on disposal of property, plant and equipment 2 1
Loss on sale of associate (30)
Net exceptional items (75) (37)
Restructuring costs
Restructuring costs include the costs of delivery of major change. Network transformation resulted in
costs of £12 million for subpostmasters’ compensation and £40 million programme costs. Costs of
£10 million relate to IT transformation which will create the IT infrastructure appropriate for a
business with ambitious growth plans. Redundancy costs of £11 million were incurred during the
year and mainly related to the Crown network. Business transformation payments of £4 million
(2012 - £3 million) are payments that are sometimes made to staff as an incentive in order to
secure agreement for significant changes in working practices to improve business efficiency.
Government Grant
In addition to the Network Subsidy Payment to support the network, the Post Office also receives
government grant funding towards the transformation programme. Government grant funding of
£200 million was received in the year. The additional government grant funding is included within
operating exceptional items to match the associated costs. £98 million of this government grant
funding has been allocated in accordance with the designation letter, dated 2 April 2012, from the
Department of Business, Innovation and Skills, to cover £66 million capital expenditure, £12 million
network transformation related subpostmasters’ compensation and £20 million network
transformation programme costs.
Treasury
Following the transfer of Post Office Limited from the ownership of Royal Mail Group Ltd to Royal
Mail Holdings plc on 1 April 2012, Post Office Limited has operated an independent Treasury
function and manages its own financial assets (including network cash) and financial liabilities (mainly
government loans).
The Treasury function derives its authority from the Board and provides regular reports for Board
review. It has the authority to undertake financial transactions relating to the management of the
underlying business risks, however, it does not engage in speculative transactions and does not
operate as a profit centre. The principal financial instruments utilised are deposits and borrowings.
The cash position of the business remains strong with cash and cash equivalents of £971 million
(2012 £820 million) and a net cash inflow during the year of £151 million.
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Net debt (excluding cash in the Post Office network) decreased by £119 million year on year as
shown in the table below:
2013
£m
Net debt brought forward at 25 March 2012 (325)
Net cash inflow before financing activities (see page XX) 244
Deduct: Increase in cash in the network included in net cash inflow (121)
Finance costs paid (4)
Total net debt carried forward at 31 March 2013 (206)
Post Office Limited’s borrowing facility from the government and the associated Framework
Agreement imposes constraints on the purposes for which the facility can be used and the availability
of external borrowing. Post Office Limited’s treasury policy is to minimise the amount drawn down
on the loan in order to reduce the interest charge. The facility is limited to a maximum of £1.15
billion or the amount of security available (mainly network cash), whichever is the lower. The
maximum drawn down under the facility during the year was £499 million on 30 March 2012. The
facility is available at two days’ notice.
At 31 March 2013 the company was financed as follows:
Borrower: Post Office Limited Average
Interest Loan
Purpose rate* Facility Facility Utilised maturity
% end date £m £m date
Network Cash 1.0 2016 1,150 291 2013
* Average interest rate of loan drawn down
Pensions
Post Office Limited is a participating employer within the Post Office Section of the Royal Mail
Pension Plan (RMPP) and is a participating employer within the Royal Mail Defined Contribution Plan
(RMDCP). Royal Mail Group Ltd is the principal employer of the Royal Mail Senior Executives’ Pension
Plan (RMSEPP) and Post Office Limited is a participating employer within RMSEPP. RMPP and
RMSEPP are both defined benefit plans on a career average basis.
On 1 April 2012 - after the granting of state aid by the European Commission on 21 March 2012 -
almost all of the pension liabilities and pension assets of the Royal Mail Pension Plan (RMPP), built
up until 31 March 2012, were transferred to HM Government. On this date, the RMPP was also
sectionalised, with Royal Mail Group Ltd and Post Office Limited each responsible for their own
sections in future. This arrangement left the RMPP fully funded on an actuarial basis in respect of
historic liabilities at this date.
The balance sheet pension position moved from a deficit of £206 million at March 2012 to an asset
of £97 million at March 2013. The improvement in position is primarily due to the transfer to
government noted above.
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Both defined benefit plans are now closed to new members. RMSEPP closed on 31 December 2012
and has no active members. New employees are offered membership of the defined contribution
plan.
Pension cash payments for all plans
The future funding of ongoing pension contributions into RMPP and deficit payments into RMSEPP is
being discussed with the respective pension trustees. The payments for 2013 disclosed in the table
below were based on the arrangements that were in place for the 2012 financial year.
2013 2012
£m £m
Regular pension contributions (24) (24)
Funding of the pension deficit - RMSEPP (2)
Payments relating to redundancy (2) (3)
Net cash payments (28) (27)
The regular future service contributions cash rate for RMPP expressed as a percentage of
pensionable pay remained at 17.1% (2012 - 17.1%). The regular rate of employee contributions for
the RMPP remains unchanged at 6%.
Events after the reporting period
In accordance with the funding agreement with government announced on 27 October 2010, for
which state aid approval was received on 28 March 2012, Post Office Limited received £415 million
of funding on 2 April 2013.
Chris Day
Chief Financial Officer
Post Office Limited
XX June 2013
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Section: Performance review
Title: Business Risk
Ref required to Corporate Governance section
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The information below details the key business risks, their impact and how the Post Office
manages these risks.
Key Risk
Impact
Mitigation
1. Changes in customer
preferences
There is decline in the
traditional Post Office income
streams as customer
preferences change.
The revenue growth plans in
personal financial services,
mails, government and
telecoms are ambitious. New
income streams may fail to
grow sufficiently to exceed the
losses from traditional products
in decline.
Projected reduction in
government subsidy is not
delivered.
We have introduced new
services in growth areas and
continue to refine and
develop these product
offerings. There are detailed
plans in place to deliver the
growth trajectory and
progress against these plans
is monitored rigorously.
2. Funding
As set out in note xx, Post
Office Limited has a funding
agreement with government
until 31 March 2015 with a
working capital facility until 31
March 2016. There is a risk
that funding beyond these
dates cannot be negotiated or
that state aid approval is not
granted in time.
Funding is required beyond
2015 in order to complete the
business modernisation and
sustain the non-profitable
elements of the network. The
working capital facility is
required to fund the cash in the
network.
Planning is well underway
for the future period beyond
2015 and discussions will
commence shortly with
Government.
3. Business transformation
programmes
We are managing a significant
number of change programmes
Failure to implement the
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to modernise the Post Office
and enable its processes to
operate independently from
those of Royal Mail Group.
These include the network,
Crown and IT transformation
programmes. The success of
the Post Office strategic plan
depends upon the successful
realisation of the benefits from
these programmes.
modernisation will leave the
Post Office with an
unsustainable cost base and a
continued reliance on
significant government subsidy.
We have detailed plans in
place to manage the
transformation and ensure
it is delivered within budget
and on time. Delivery is
tracked monthly by a
Transformation Board made
up of Executive Committee
members which provides
direction and oversight over
the programmes’ delivery.
4.Engagement risk
The support and active
engagement with our people
and subpostmasters during this
significant time of change is key
to the successful delivery of our
strategy. Withdrawal or lack of
support from our employees or
subpostmasters in the network
could cause delays in the Post
Office transformation
programmes and limit our
ability to meet business
objectives.
Lack of support from our
people and subpostmasters will
jeopardise our ability to meet
our strategic goals of growth,
profitability and reduced
reliance on government
subsidy.
We maintain a fluid and
comprehensive engagement
programme with unions,
staff and subpostmasters.
These include regular
meetings with the National
Federation of
subpostmasters (NFSP).
Communication Workers
Union (CWU) and Unite,
senior management
briefings to staff and
subpostmasters, as well as
events to engage our people
in our vision and strategy.
We have a people plan
aimed at addressing staff
motivation and skill needs.
This includes development
of new leadership and
reward frameworks and
increased focus on
recruitment and training.
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5. Regulatory & compliance
There is a risk of non-
compliance with the changing
regulatory environment. We
operate under an extensive
regulatory environment
including areas such as
financial and postal services,
procurement, competition law
and data security regulations.
Failure to meet regulatory
requirements could result in
fines, negative impacts on our
reputation, as well as costs of
investigation and resolution.
Our legal and compliance
team works closely with the
relevant business owners in
identifying new
requirements and
monitoring compliance
against existing ones.
The Risk and Compliance
Committee monitors key
risks and actions to mitigate
them.
6.Business continuity
The Post office has particular
operational risks around
disruption of its services.
This includes adverse weather
conditions, industrial action,
systems breakdown or failure
of a critical supplier.
Breakdowns in the network
would reduce quality of service,
increase costs and/or damage
our reputation.
Disaster recovery and
business continuity plans
are under continuous
development and review in
line with business change.
This includes contingency
planning and training in the
event of disruption such as
industrial action or IT
failure.
Key suppliers’ ability to
continue to meet Post
Office's requirements is
closely monitored.
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Section: Governance
Board biographies
Board:
Post Office Limited's Board of Directors is chaired by Alice Perkins CB. As Non-Executive Chairman
she is independent both of the executive management of Post Office Limited and of its special
shareholder. The Board comprises the Chairman, five other Non-Executive Directors and two
Executive Directors.
Board responsibilities
The responsibilities of the Board include setting the company’s strategic aims, providing the
leadership to put them into effect, supervising the management of the business and reporting to
the shareholder.
There are a number of Board committees which deal with specific topics requiring independent
oversight including audit, risk and compliance, nominations of the Board, pensions and senior
remuneration.
Each committee is chaired by a Non-Executive Director and operates within its own agreed,
documented Terms of Reference.
Alice Perkins CB - Post Office Limited Chairman (Chairman of Nominations Sub-Committee)
Alice had a wide-ranging career in the civil service, which included policy and operational roles in
health, social security and public spending in the HM Treasury. Alice was also the Civil Service's
Group HR Director in the Cabinet Office between 2001 and 2005. Before joining the Post Office as
Chairman in September 2011, she served as Non-Executive Director on the boards of Littlewoods,
BAA and TNS, where she also chaired the Remuneration Committee, Alice is an external member
of the Oxford University Council, a business coach at the JCA Group, and a member of the faculty
at Meyler Campbell where she teaches senior executives how to coach.
Neil McCausland - Senior Independent Director (Chairman of Remuneration Sub-Committee)
Neil has had a portfolio of non-executive roles over the last 10 years. He is currently Chairman of
three companies. Snow and Rock, a retail chain selling skiing and outdoor brands, bikes and
running gear; Dwell, a multi-channel contemporary furniture retailer; and Skin, a chain of skin
treatment clinics specialising in laser hair removal. Until recently he was Chairman of footwear
company Kurt Geiger, and a Governor of Nuffield Health, which operates hospitals and health
clubs. Neil began his career at Marks &Spencer, before becoming Managing Director of C&A and
Chief Executive of NAAFI (an MOD agency).
Alasdair Mamoch - Non-Executive Director (Chairman of Audit, Risk and Compliance Sub-
Committee) - being updated
Alasdair Marnoch joined the Board of the Post Office as a Non-Executive Director on 23 May
2012. A Chartered Accountant, he chairs the Board’s Audit, Risk and Compliance Sub-Committee
which reviews the statutory accounts and financial controls. Alasdair has had wide experience as
Finance Director of a number of FMCG and service businesses, including listed companies. Most
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recently, he served as CFO of the Equiniti Group, a leading provider of complex administration and
processing services to the public and private sectors.
Tim Franklin - Non-Executive Director
Tim Franklin joined the Board as a Non-Executive Director on 19 September 2012. Tim was Chief
Operating Officer of the Co-operative Banking Group until the end of 2011, having previously
served as Managing Director of the Britannia Building Society. Prior to that, he was Director of
Customer Programmes and Loyalty and Managing Director of Savings at Barclays. Tim’s
experience extends across the private and public sectors. He is also a Non-Executive Director of
HM Land Registry and was previously on the Boards of Reclaim Fund Limited, Mutual Plus Limited
and the Link Cash Machines Network.
Virginia Holmes - Non-Executive Director (Chairman of Pensions Sub-Committee)
Virginia brings to the Board extensive knowledge of the financial services industry including both
investment management and banking. Her experience includes serving as Chief Executive of AXA
Investment Managers UK and more than a decade with the Barclays Bank Group where she
ultimately served as Managing Director of Barclays Bank Trust Company. Virginia currently serves
on the boards and chairs the investment committees of both the Alberta Investment Management
Corporation in Canada and the Universities Superannuation Scheme in the UK. She also serves on
the boards of Standard Life Investments Ltd and JPMorgan Claverhouse Investment Trust plc.
Susannah Storey - Non-Executive Director
Susannah Storey is the representative of the Department for Business, Innovation and Skills on
the Post Office Board. She has recently been appointed as Director of Corporate Strategy and
Change at the Department of Energy and Climate Change. Susannah has been a civil servant since
2006, working at the Shareholder Executive until 2013 in a number of roles including Head of the
Royal Mail and Postal Services team and Chief Operating Officer. Prior to the Shareholder
Executive, Susannah worked in investment banking at Citigroup and Schroders, specialising in UK
Corporate Finance.
Paula Vennells - Chief Executive
Paula has worked for the Post Office since 2007 in a number of senior roles including Managing
Director. She became Chief Executive on 1 April 2012. Previously, Paula spent five years with
Whitbread plc as Group Commercial Director. She began her career with Unilever and L'Oreal and
held directorships in sales and marketing with a number of major retailers including Dixons Stores
Group and Argos. She is currently a Non-Executive Director and Trustee for Hymns Ancient and
Modern Group.
Chris Day - Chief Financial Officer
Chris joined the Post Office in August 2011 from the BBC where he had been Group Financial
Controller since 2005. Prior to that, Chris spent 14 years in FMCG with Grand Metropolitan/Diageo
in a succession of Treasury/Corporate Finance roles in the UK, and as Finance Director in the
Netherlands and subsequently Germany/Austria. Earlier in his career Chris worked as a financial
management consultant at KPMG having started his career with Beecham Group.
Alwen Lyons - Company Secretary
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Alwen Lyons joined the Post Office in 1984 as a graduate and has worked at a senior level in
several directorates including network, finance and marketing. She became the Company Secretary
in July 2011, after leading the project to separate Post Office Limited from Royal Mail Group.
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Section: Governance
Title: Corporate governance
Corporate governance statement
The shares in Post Office Limited (the “Post Office”) were transferred from Royal Mail Group Ltd to
Royal Mail Holdings plc on 1 April 2012 and the Post Office has operated independently since that
date.
Corporate governance principles
As the Post Office is not a company whose shares are listed and traded on a public exchange, it is
not formally required to report on its compliance with the UK Corporate Governance Code (the
“Code”). Nonetheless, the Board of the Post Office believes this is an appropriate benchmark for
reporting on corporate governance.
During the year, the Post Office has further established a full Board and Committee structure and
has set principles for good governance which follow the provisions of the Code, so far as they can
apply to a Government-owned entity which has no private or institutional external shareholders.
Legal ownership structure
The Post Office is a wholly owned subsidiary of Royal Mail Holdings plc. The Secretary of State for
Business, Innovation and Skills (BIS) holds a special share in Post Office Limited. The Special
Shareholder's rights are set out in the Post Office Limited Articles of the Association. These include
a requirement for Post Office Limited to obtain the Special Shareholders consent for Directors’
remuneration arrangements.
A strong link remains between Royal Mail and the Post Office - the Post Office has a long-term
agreement in place to continue to supply Royal Mail products and services through its network.
That link is currently reinforced in the corporate structure by a common group holding company
(Royal Mail Holdings plc) which holds shares in both Post Office Limited and Royal Mail Group Ltd.
Neither Royal Mail Holdings plc nor BIS, through its Shareholder Executive (ShEx), have any day-
to-day involvement in the operations of the Post Office or the management of its branch network
and staff.
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The Board
Alice Perkins was appointed as Chairman of the Board in July 2011, marking the first step on the
road to building an independent Board for the Post Office. Neil McCausland joined in September
2011 as the Senior Independent Director and, in the year under review, a further four Non-
Executive directors have been appointed, each bringing particular skills and experience relevant to
the business targets of growth, modernisation, customer focus and business efficiency.
The Board is unusual in having a female Chairman and Chief Executive and being equally
balanced between men and women. The Board, comprises two Executive Directors and six
independent Non-Executive Directors, including the Chairman. This provides a strong level of
independent challenge to decision-making and enables the Post Office to call upon a wide range
of experience and opinion. Short biographies of all members of the Board appear on page X of
this Annual Report.
The Remuneration Committee liaises with ShEx in BIS to obtain Special Shareholder’s consent for
all Directors’ appointments and the terms under which they serve, including Non-Executive
Directors’ fees and any changes in the total remuneration for each Executive Director. The
Executive Directors’ contracts provide for six months’ notice of termination to be given by the
director and 12 months’ notice to be given by the organisation.
Non-Executive Directors are not employees of the Post Office but provide services under the
terms of an individual Letter of Appointment, signed at the commencement of their directorship.
All Non-Executive Directors are entirely independent of the Post Office, having no other
connection or financial interest, other than as customers and taxpayers.
Non-Executive Directors’ Terms of Office
Director Date of appointment Term of Unexpired term Committee
office at 31 March memberships
2013
Alice Perkins 21 July 2011 Rolling 12 I N/A Nominations
month (Chair)
contract
Remuneration
Tim Franklin 19 September 2012 4 years 3 years 172 days ARC
Virginia Holmes 4 April 2012 3 years 2 years 4 days Pensions (Chair)
Nominations
Remuneration
Neil McCausland 22 September 2011 4 years 2 years 175 days Remuneration
(Chair)
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ARC
Nominations
Alasdair Marnoch 18 May 2012 3 years 2 years 48 days ARC (Chair)
Susannah Storey 18 April 2012 3 years 2 years 18 days ARC
Pensions
Board meetings
The Board meets at least eight times a year, with an additional strategy away day, and has a
formal schedule of matters reserved to it.
The Board's responsibilities include setting the Post Office's strategic aims, providing the leadership
to put them into effect, supervising the management of the business and reporting to the
shareholder. During the year to 31 March 2013 the Board has focused on financial performance,
network transformation, and the people and capability of the business Over the last six months the
Board's primary focus was on setting the strategic direction for the business, in preparation for
completion during 2013-14 of the Strategic Plan and Funding Agreement with Government for the
period 2015-20.
During the year under review, the Board established sub-committees which met regularly to
undertake more detailed reviews in specialist areas, as recommended by the Code. Such focus
areas included accounting policy and practices, risk and controls, pensions, executive remuneration,
the processes for evaluation of performance, and the nomination and appointment of new directors
or the removal of directors from the Board.
The full Terms of References for the Board sub-committees can be found on the Post Office
website
The following shows the attendance of the directors at meetings of the Board and its principle
committees during the year:
Board I ARC Mutualisation I Nominations I Pension Remuneration
Committee Committee Committee Committee
Alice Perkins 8/8 3/47 3/3 2/2 is 4/4
Chris Day 8/8 4/4* I 3/3 - i =
Tim Franklin® 5/5 2/3 2/2 - - -
Virginia Holmes 8/8 = 2/3 2/2 77 4/4
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Neil McCausland 8/8 4/4 3/3 2/2 S 4/4
Alasdair 17 4/4 3/3 - - -
Marnoch*
Susannah 8/8 3/3 2/3 = 6/6 -
Storey*
Paula Vennells 8/8 = 3/3 = = 2/2"
*from date of appointment
tin attendance, by invitation
Board sub-committees
Audit, Risk and Compliance Committee
The Audit, Risk and Compliance Committee (“ARC”) is made up of five Non-Executive Directors and
is chaired by Alasdair Marnoch. The ARC considers Post Office Limited's financial reporting,
including accounting policies and internal financial controls. It looks at the levels of risk which exist
within the Post Office and the steps taken to mitigate those risks.
During the year the Post Office has been building its own risk management, internal control and
internal audit procedures and this will be an area for further development during the coming year.
One of the ARC's primary responsibilities during the period was to review both the half-year
trading statement and the full-year accounts, to assess the validity of assumptions made and the
accounting policies used and to consider the ways in which the Post Office should present its
financial performance.
A second major responsibility has been to promote the development of a risk management
framework suited to the complex nature of the Post Office business. This will take some time and is
a key focus area for the coming year. The development of risk management and control
procedures and the establishment of a full internal audit programme are areas of high priority.
In this period, a new Head of Internal Audit was appointed and the transition from using the Royal
Mail internal audit function to building a new internal team had begun.
The ARC works with both the internal audit team and Ernst & Young, the external auditor.
Remuneration Committee
The Remuneration Committee is made up of three Non-Executive Directors and is chaired by Neil
McCausland, the Senior Independent Director. The committee is responsible for making
recommendations to the shareholder on the remuneration of the Executive Directors in accordance
with the articles of association. In doing so, it also reviews the remuneration policy and packages of
the most senior leadership team, being the roles which report directly to the Chief Executive. It also
obtains information on salary levels across the business and within external organisations of
comparable size in order to set remuneration levels within an appropriate context.
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The Chief Executive may attend meetings, at the invitation of the Chairman, to discuss matters
relating to the remuneration of the Chief Financial Officer and members of the Executive
Committee, but the committee upholds the principle that no individual may be involved in
discussions concerning their own remuneration.
The committee is able to consult on remuneration matters with the Human Resources & Corporate
Services Director, other members of the Human Resources team and with external consultants.
In the year under review, advice was primarily obtained from New Bridge Street on market practice
and benchmark development. New Bridge Street consultants have no other links with the Post
Office which could compromise their independence.
No material changes can be made to directors’ base salaries, benefits or incentives without Special
Shareholder consent. Further details of the schemes now in place, and a table setting out the
remuneration paid to all directors in the year to 31 March 2013, are provided in the Directors’
Remuneration Report on page X.
Nominations Committee
The Nominations Committee is made up of three Non-Executive Directors and is chaired by Alice
Perkins, the Chairman. It met for the first time in December 2012. with director appointments up
to that time having been made according to specific criteria, following discussions with the
shareholder.
The primary role of this committee is to recommend to the Board any changes in Board
membership and manage the process for recruiting and replacing directors. The Board is complete
and no immediate changes are expected. The committee will keep under review the balance of
skills, experience and diversity available within the Board and each of the Board sub-committees.
The Nominations Committee will also oversee the process for Board and committee performance
evaluation, and monitor talent and diversity (see pxx). The Chief Executive may attend meetings, at
the invitation of the Chairman, to discuss matters relating to the talent and diversity policies.
Pension Committee
The Pensions Committee is made up of two Non-Executive Directors and one Executive Director
and is chaired by Virginia Holmes.
The Pensions Solution, adopted in April 2012, saw a substantial transfer of assets from the Royal
Mail Pension Plan (RMPP) to the government, in return for the government assuming the
obligations for past service liabilities. The transfer was made possible following European Union
approval for UK government state aid
As part of the solution, the pension fund was sectionalised, with the Post Office assuming
responsibility for that part of the pension fund that relates to Post Office employees and
pensioners.
The Board has delegated authority to the Pension Sub-Committee to appoint professional advisers,
to enter into negotiations with the trustees of the RMPP on the forthcoming valuation of the funds,
to agree the investment strategy for the Post Office sections and to monitor funding levels and
investment performance. The committee reports back to the full Board so that its work can
dovetail with executive recommendations and union negotiations on pay and benefits.
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In August 2012 the committee recommended to the Board the appointment of AON Hewitt as its
investment advisers. Working with AON Hewitt and with Towers Watson, its Actuarial advisers, the
committee has satisfied itself as to the fair value of assets transferred into the Post Office section
at 1 April 2012 and agreed a revised investment strategy with the trustees of the RMPP with the
aim of maintaining the long term sustainability of the Scheme and protecting against an
unmanageable increase in liabilities for the Post Office in the future.
Mutualisation Sub-Committee
The Mutualisation Sub-Committee is chaired by Alice Perkins, the Chairman of the Post Office and
its membership is the same as that of the full Board. It met for the first time on 4 July 2012, the
week in which the government published the response to its consultation ‘Building a Mutual Post
Office’. The committee is responsible for ensuring that the work to develop proposals for the
mutualisation of Post Office Limited is provided with strategic direction, involves the appropriate
level of stakeholder involvement and has adequate support.
The focus of the committee has been to consider the financial, cultural and business implications of
mutualisation to ensure that progress on mutualisation supports and enables the successful delivery
of the Post Office's transformation programme and the delivery of its future commercial strategy,
which is an essential perquisite of any change in governance.
Performance evaluation
The Board intends to carry out an annual evaluation of the effectiveness of the Board and of the
Board sub-committees. The initial performance evaluation will take the form of an assessment by
the Chairman. Following this internal review, external evaluations will be completed every three
years.
Executive Committee
Below main Board level, the Executive Committee (ExCo) is the most senior management body and
is made up of the Chief Executive and each of her direct reports, supported by some business unit
heads who report to members of the Executive Committee. The committee works within the
delegated authorities established by the Board.
The ExCo implements the strategy agreed by the Board and monitors business performance and
development at a day-to-day level. It meets formally at least once a month to discuss proposals for
new business development, receive financial and other performance reports, and address urgent
issues which have arisen within the business requiring senior level resolution. Twice yearly, it
reviews the results of personal performance assessments undertaken throughout the organisation.
The Chief Executive, Chief Financial Officer and the Company Secretary attend both Board and
ExCo meetings which facilitates and strengthens the communication channels between the senior
leadership team and the Board and its committees.
The Terms of Reference of the ExCo have been set out in writing and are available to download
from the Post Office website.
Risk management
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The Post Office has adopted the requirements of the FRC Guide to Corporate Governance and
established an approach to the management of risk, tailored to meet the demands of a new
business with ambitious plans for expansion in its chosen markets.
The Board takes ownership of risk management through its Audit, Risk and Compliance Committee
(ARC). The Business’ Risk & Compliance Committee reports into the ARC and is responsible for:
The Board takes ownership of risk management and has asked its Audit and Risk Committee to co-
ordinate a proposed approach in this area for:
e review and challenge of risk management
© approval and endorsement of policies to mitigate risk and
e development of the risk management framework.
This committee is chaired by the Director of HR & Corporate Services and reports to the Post Office
Executive Committee. The committee comprises members of the executive committee and other
senior managers.
During the year the Post Office set up its own Internal Audit department as part of the ‘three lines of
defence’ model (see below). Internal Audit provides independent assurance and advice on the risk
management framework, its future strategy and evolution, and reports directly to the ARC.
The business also governs financial and related regulatory risk with its partner, the Bank of Ireland
(UK) plc through established joint regulatory risk committees.
Risk management framework
The Post Office has set out the components of risk management in its risk framework. This
framework is described at high level in the diagram below.
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Programme risk
Strategic objectives yritigation
Running the business
ssurance measures &
Risk management
Internal
controls
framework
Identification
Assessment
Management
Reporting
Ss
ie
A
Business continuity management
<1" ine functions ———————> 24 line 3" line
The framework utilises a ‘three lines of defence’ model to establish accountability and responsibility
for the effective operation of this framework.
es ae
eee pet eee
ees “Independentasurnce,
1 line of defence - is responsible for managing risk in day-to-day business operations
2™ line of defence - comprises central functions which oversee regulatory compliance and provide
advice on the operation of the framework
3" line of defence - provides independent assurance in respect of the Post Office’s regulatory risk
management
The risk framework is supported by the Risk & Compliance team, with dedicated resource in place to
administer the tools and committees in use to manage risk.
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Progress
Over the past 12 months, each directorate has gone through a process of identifying and assessing
the risks associated with achievement of its respective objectives. These risks are recorded on a
software tool to enable aggregation, comparison and risk reporting. In addition, the key strategic
programmes of the business capture their own risks.
The top 12 risks from each of these sources, together with the respective mitigation plans, are
reviewed by the Risk & Compliance Committee to assess the robustness of risk assessment and
management.
The above assessment will be supplemented in the first quarter of the new financial year with a top
down assessment of the company’s risks by the Post Office Executive Committee.
Risk appetite
Over the next 12 months the Post Office will be fully developing its risk appetite statements for each
of the key risks, with a view to establishing where additional risk may be taken to generate new
opportunities and/or where further treatment of existing risks is required.
Business continuity
As part of the development of risk management, the Post Office is bringing together a wide range of
business continuity arrangements throughout the business under one central policy and governance
framework to ensure that the Post Office is capable of withstanding any significant threat to its
ongoing operations.
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Directors’ report
The directors present the Group Annual Report and Financial Statements for Post Office Limited.
These financial statements relate to the 53 weeks ended 31 March 2013.
Principal activities
The Group's principal activities are the provision of access to a wide range of mails, government,
financial, travel and retail services through its network of Post Office branches and other channels across
the United Kingdom (UK).
Review of the business and expected future developments
Information contained within the Chief Executive's Review (pxx) and the Financial Review (pxx)
constitutes the business review required by the Companies Act 2006 and is incorporated into this
directors’ report by reference.
Results and dividends
The profit after taxation for the year was £38 million (2012 - £30 million). The directors do not
recommend the payment of a dividend (2012 £nil dividend).
Pensions
As explained in note 19 on 1 April 2012, almost all of the pension assets and liabilities of the Royal Mail
Pension Plan were transferred to HM Government. On this date the Royal Mail Pension Plan was also
sectionalised with Royal Mail Group Ltd and Post Office Limited responsible for their own sections. All
employees were transferred to be directly employed by Post Office Limited on the same date.
Royal Mail Group Ltd is the principal employer in the Royal Mail Senior Executive Pension Plan and for
the Royal Mail Defined Contribution Plan. Post Office Limited became a participating employer for both
of these plans with effect from 1 April 2012. Post Office Limited continues to account for approximately
7% of the Royal Mail Senior Executive Pension Plan scheme as it has done previously. Both defined
benefit schemes were closed to new members in 2008 and the Royal Mail Senior Executive Plan closed
on 31 December 2012. New employees are offered membership of the Royal Mail Defined Contribution
Plan
The balance sheet pension surplus of £97m (2012 - £206m deficit) has arisen principally due to the
transfer of pension assets and liabilities to HM Government.
Prior to 1 April 2012, Royal Mail Group Ltd had the legal relationship with the trustees of both defined
benefit plans and, as such, the trustees held Royal Mail Group liable for the actuarial deficit in the
scheme. All employees were employed by Royal Mail Group Ltd and seconded to Post Office Limited
under an agreement between Post Office Limited and Royal Mail Group Ltd. Post Office Limited met the
full costs of employment and was responsible for the funding of the pension deficit attributable to these
employees. Consequently, Post Office Limited recognised a balance sheet deficit based on employee
numbers over 12 years and represented approximately 7% of the total balance sheet deficit at that time.
The net pension interest, deficit recovery payments and actuarial gains or losses were also allocated on
this basis, giving Post Office Limited approximately 7% of the total balance sheet deficit at the balance
sheet date. The current service cost, regular future service contributions and curtailments were
computed separately for Royal Mail Group Ltd and Post Office Limited based on common factors/rates.
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Political and charitable contributions
During the year charitable contributions of £989,702 (2012 - £320,108) were made. No political
contributions were made in the year (2012 £nil)
Research and development
Research and development expenditure during the year amounted to £nil (2011 £nil).
Policy on the payment of suppliers
The Post Office policy is to use its purchasing power fairly. Payment terms are agreed in advance for all
major contracts. For lower value transactions, the standard payment terms printed on the purchase
order apply. It is policy to abide by the agreed terms. The business has sought to comply with the
Department for Business, Innovation and Skills (BIS) Better Practice Code. The number of days’
purchases in creditors at the balance sheet date was 24 days (2012 - 33 days).
Land and buildings
The net book value of land and buildings, based upon a historic cost accounting policy and excluding fit-
out, is £11 million (2012 - £11 million). In the opinion of the Directors, the aggregate market value of
Post Office’s land and buildings at the year end exceeded their net book value by £73 million (2012 -
£45 million).
Directors and their interests
The following served as directors of Post Office Limited during the year ended 31 March 2013 and
remain in post as at the date of approval of these financial statements.
A Perkins CB
N W McCausland
V A Holmes (appointed 4 April 2012)
S J Storey (appointed 18 April 2012)
A Marnoch (appointed 23 May 2012)
T A Franklin (appointed 19 September 2012)
P A Vennells *
CM Day *
*Executive Directors
No director has a beneficial interest in the share capital of Post Office Limited. All the Non-Executive
Directors are considered to be independent, having no financial connection with Post Office Limited
other than by virtue of the fees paid for their services as a director. The emoluments of directors are set
out in the Directors’ Remuneration Report (pxx).
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Insurance and qualifying third-party indemnity provisions for directors
Post Office Limited maintains directors’ and officers’ liability insurance for the benefit of all directors and
officers of Post Office Limited.
A partial qualifying third-party indemnity provision (as defined in section 234 of the Companies Act
2006) was and remains in force for the benefit of all the directors of Post Office Limited and former
directors who held office during the year. The indemnity is granted under article 129 of Articles of
Association or Royal Mail Holdings plc, the ultimate parent company. The indemnity is partial in that it
does not allow Post Office Limited to cover the costs of an unsuccessful defence of a third-party claim.
People
Our goal is to ensure that all employees are engaged and involved in the business and are aligned and
equipped to meet business objectives. As part of our commitment to drive better service for customers.
we continue to focus on improving the quality of our leadership, professionalising key roles, recognise
the importance of diversity and achieving greater employee involvement in decision making.
Training and development programmes have been put in place to support our ambition to create a
high-performance customer-oriented sales culture. This ambition is further supported by a range of
bonus schemes which are based on the achievement of business targets.
Underpinning all of this is a need for dignity at work, where everybody feels valued, is treated fairly and
equally with everyone playing a full part in helping the business to achieve its goals.
Regular employee engagement surveys are conducted to allow employees an opportunity to express
their views and opinions on important issues. This two-way communication encourages all employees to
contribute towards making business improvements.
Corporate responsibility
Post Office Limited is committed to carrying out its activities in a socially responsible manner in respect
of the environment, employees, customers and local communities. Further information can be found in
on page X.
Disabled employees
The Post Office's policy is to give full consideration to applications for employment from disabled people.
Employees who become disabled while employed receive full support through the provision of training
and special equipment to facilitate continued employment where practicable. The business provides
training, career development and promotion to disabled employees wherever appropriate.
Post balance sheet events
[To be confirmed post year end.]
Going concern
After analysis of the financial resources available and cash flow projections for Post Office Limited, the
directors have concluded it is appropriate to prepare the financial statements on a going concern basis.
Further details are provided in accordance with the fundamental accounting concept in note 1 of the
financial statements.
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Audit information
The directors confirm that, so far as they are aware, there is no relevant audit information of which the
auditor is unaware and that each director has taken all reasonable steps to make themselves aware of
any relevant audit information and to establish that the auditor is aware of that information.
Auditor
The auditor, Ernst & Young LLP, is deemed to be reappointed under section 487(2) of the Companies
Act 2006.
By order of the Board
Alwen Lyons
Secretary
Post Office Limited (company number 2154540)
148 Old Street, London EC1V 9HQ
=
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Section: Governance
Title: Directors’ remuneration report
Statement by the Chair of the Remuneration Committee
I welcome this opportunity to outline our progress on executive remuneration during the year.
Remuneration is a highly sensitive issue in the challenging economic environment in which we operate
and, as a publicly funded business with a commercial and public purpose, we embrace the
transparency and accountability required to establish a responsible approach to remuneration.
Once the Post Office Board appointment process was complete in September 2012, a Remuneration
Committee was set up to take responsibility for executive remuneration. The members of the
committee are independent Non-Executive Directors (NEDs) and no individual participates in
discussions about their own remuneration. We have used the recommended governance principles and
proposed legislative changes on the disclosure of executive remuneration to prepare this report and to
aid the development of the remuneration strategy.
The committee recommends the strategy and policy for Executive Directors’ remuneration to the Post
Office Board for their approval taking into account their potential impact across the organisation.
Prior written consent of the Special Shareholder is required in respect of any variation or amendment
to the remuneration of the Executive Directors. During this first year I have held regular dialogues with
officials and ministers in the Department for Business Innovation & Skills to build working relationships
and a common understanding of the issues.
The Post Office has begun the journey to turnaround the business to become a sustainable
organisation, characterised by sound cost control in a performance culture and active stakeholder
participation and engagement. We are planning the future of the business for the next 10 years so the
longer term remuneration policy becomes very important. We have deliberately made no changes to
the remuneration policy for the Executive Directors during this first year as we build a track record of
solid achievements against challenging targets.
The framework for the Executive Directors’ remuneration was inherited, with neither the Board nor
the Remuneration Committee involved in its creation. The Remuneration Committee faces a difficult
situation in which it needs to incentivise senior leaders during the transition to turn the business
around while working within a constrained framework and challenging circumstances. There is limited
scope to flex the remuneration framework and reward mechanism to suit the circumstances and
reward appropriately.
The Chief Executive, Paula Vennells, and the Chief Financial Officer, Chris Day, were appointed to their
roles prior to 1 April 2012, the date the Post Office commenced operating independently from Royal
Mail Group. While the responsibilities of the Chief Executive and Chief Financial Officer have increased
significantly, their remuneration remains unchanged.
An extensive remuneration benchmarking exercise was undertaken during the year and data from
similar-sized organisations from three distinct sectors was considered. The organisations used for
the benchmarking activity came from the mutual, government owned and PLC sectors. The results
of the benchmarking showed the levels of Post Office executive reward for both fixed and total
remuneration are substantially below the market median. The Remuneration Committee agreed
that whilst it would not recommend any immediate remedial action, the relative market position of
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the Executive Directors would be kept under review. Any recommended future change in
remuneration for Executive Directors would be subject to Special Shareholder approval.
For the financial year ended 31 March 2013, the committee was satisfied that there had been a clear
link between performance of the business and payments under the two incentive plans, the Short
Term Incentive Plan (STIP) and the Long Term Incentive Plan (LTIP). Details of STIP and LTIP targets
and the results achieved are shown in the Implementation section of the Remuneration Report.
The remuneration policy will remain largely unaltered for 2013-14 and the Remuneration Committee
is in discussion with the Special Shareholder on the future remuneration framework for Executive
Directors. The Post Office is undergoing a fundamental transformation and we anticipate that each
year progressively more demanding targets will be set for the STIP and LTIP in order to achieve our
goal of financial sustainability.
The Remuneration Committee is comfortable that the current policy provides a strong link between
reward and performance and I commend this report to our stakeholders.
Neil McCausland
Chair, Remuneration Committee
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The remuneration report
This report has been prepared in accordance with the provisions of the Companies Act 2006 to the
extent that they are applicable for an unlisted company. The committee has also, where
practicable, adopted early the proposed legislative requirements for disclosure of directors’ pay
being put forward for UK listed companies. Accordingly. the remuneration report has been split into
two sections: a policy report and an implementation report. The policy report sets out the policy for
the remuneration of directors and its link to the business strategy. The implementation report sets
out how this policy was applied during the year under review and the remuneration received by
directors. Both sections of the report have been approved by the Remuneration Committee and the
Board.
Remuneration policy report
The committee is responsible for setting the remuneration packages for the Chief Executive and
Chief Financial Officer and determining the overall remuneration policy for the Chief Executive's
direct reports and the Company Secretary.
The committee's intention is that the remuneration policy should align with the business strategy
and risk profile so that individuals are motivated to deliver the Post Office's objectives and protect
its brand value. The Post Office remuneration strategy is based on the following:
e Attracting and retaining the right people within an agreed policy to lead and deliver the
strategic plan
e Using incentives appropriately to reward the achievement of the turnaround strategy and
promote the long-term viability of the organisation
e Reinforcing an emerging culture of co-ownership and partnership
e Providing a transparent approach to the disclosure of pay
Remuneration policy summary
The table [overleaf] describes the remuneration policy for the year ended 30 March 2014 and the
breakdown of the packages for the Executive Directors, which comprise of fixed pay (base salary,
benefits and cash in lieu of pension contributions) and pay at risk (STIP and LTIP).
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Remuneration policy table
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Element] Link to strategy Operation Performance I Maximum values
period
Base Determined by reference to the skills and Directors’ salaries are reviewed annually. The next review is - The current salaries for the Executive
salary responsibilities of the individual. scheduled for July 2014. Directors, as at 1 April 2013, are:
Consideration is given to pay and Chief Executive: £250,000
employment conditions elsewhere in the
Post Office when determining base salary Chief Financial Officer: £215,000
increases and to market data on
comparable roles.
Benefits I Participation in life and health assurance The value of the benefits package is monitored by the - Car allowance of £7,700 per annum plus
schemes, company car and private medical I Remuneration Committee and benchmarked against comparator value of other benefits as appropriate.
schemes are part of Post Office-wide organisations.
benefit programmes to retain talented staff
and encourage greater health and
wellbeing.
Pension I Pension provision is provided by the Post __I A salary contribution in lieu of pension is paid as a cash - 25% of salary
Office and is available to all employees to _I supplement to the Chief Executive and Chief Financial Officer.
help them meet their retirement needs and
provide a competitive remuneration
package. Executive Directors receive a
salary supplement in lieu of pension
scheme membership.
Short- The STIP drives and rewards performance I The metrics and target ranges are agreed annually with the One year The maximum STIP opportunity is 80% of
term against a set of key financial and Board and the Special Shareholder as part of the annual salary (with 48% of salary being payable
Incentive I operational targets taken from the balanced I business and budget planning cycle. for on-target performance)
Plan scorecard, set each year according to the
(STIP) current priorities for the business. The STIP metrics are a mixture of financial (45%), customer The maximum STIP opportunity for the
STIP awards are also linked to the
achievement of personal performance
(20%) modernisation (25%), employee engagement (10%)
measures which link directly to the overall strategy.
80% of the STIP award is based on the balanced scorecard and
Chief Financial Officer is 67% if salary (40%
of salary for on-target performance)
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objectives
20% is based on individual performance objectives which are
agreed with the Board and will require approval by the Special
Shareholder.
Cong-
Term
Incentive
Plan
(LTIP)
The LTIP is designed to reward and retain
key executives and senior managers and to
incentivise the achievement of longer term
performance goals.
The payout of the award is based on the
achievement of strategic targets linked to
the longer term development growth of a
sustainable business.
Performance measures for the LTIP are drawn from the Post
Office Funding Agreement agreed with the Special Shareholder.
The intention is to award an LTIP subject to Special Shareholder
agreement. The proposed awards follow a three-year cycle.
Awards for 2013 will be based on access criteria and EBITDAS
targets.
Three
financial
years
70% of salary for the Chief Executive and
35% of salary for the Chief Financial
Officer is payable at target performance.
Up to 98% of salary for the Chief Executive
and up to 49% of salary for the Chief
Financial Officer is payable at maximum
performance.
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Performance scenarios 2013/2014
The charts below show the quantum and composition of the current remuneration policy for
the Executive Directors under three performance scenarios. These are scenarios showing
potential remuneration assuming there is no STIP or LTIP payout, (i.e. fixed pay only), on-
target performance (i.e. STIP and LTIP paying out at a target level) and maximum
performance (full payout of STIP and LTIP).
£800,000 £767,500
LTIP
£700,000 : : =STIP
£617,500 .
£600,000 " = Fixed pay (salary, benefits
: gi
£500,000
SALES £440,000
26% :
£400,000 20% fo ;
£322,500
£300,000 £278,750 20%
£200,000
9 94 0,
100% 52% 42% 100% 63%
£100,000
£0 7 1
Minimum I On-Target Maximum Minimum I On-Target
Paula Vennells Chris Day
Chief Executive Officer Chief Financial Officer
On-target performance assumes an award of 48% of salary under the STIP and 70% of salary
under the LTIP for the Chief Executive (40%* and 35% of salary respectively for the Chief
Financial Officer).
Maximum performance assumes an award of 80% of salary under the STIP and 98% of salary
under the LTIP for the Chief Executive (67%* and 49% of salary respectively for the Chief
Financial Officer).
*subject to Special Shareholder approval
Statement of pay considerations elsewhere in the Post Office
The committee takes into account the pay and employment conditions of employees elsewhere
in the Post Office when setting the remuneration policy for the Executive Directors. For
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& pension)
528,150
Maximum
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example, when determining salary increases for the Executive Directors, consideration is given
to the policy and budget applied elsewhere to other employees. The balanced scorecard used
for the STIP for Executive Directors is also used to assess performance in the STIP for Post
Office managers, providing alignment between performance reward for all employees at
manager level and above.
Contracts and loss of office payment policy
Each of the Executive Directors has a signed contract with the Post Office.
Key terms of the contract
Notice period 12 months to be given by the Post Office and six months by
the director.
Remuneration-related Salary and benefits including health cover, a company car or
provisions car allowance, life and health insurance and cash allowance
in lieu of pension equivalent to 25% of base salary.
Clawback provision
Executive Directors have clawback clauses in their contracts, as well as the STIP and LTIP
rules, which provide for the return of any over-payments in the event of mis-statement of the
accounts, error or gross misconduct on the part of an executive.
Non-Executive Directors
The fees paid to the Chairman are approved by the Special Shareholder. Fees for the Non-
Executive Directors are determined by the Executive Directors and are submitted to the Special
Shareholder for approval taking into account time commitment and responsibilities.
The fees paid to the Chairman and Non-Executive Directors are not pensionable and they receive
no other benefits.
Non-Executive Directors’ Letters of Appointment are described in the Corporate Governance
statement (pxx).
Statement of consideration of shareholder's views
The Chairman of the Committee communicates regularly with the Shareholder Executive on behalf
of the Special Shareholder on all matters concerning executive remuneration and the Special
Shareholder approves all aspects of Executive Director Remuneration.
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Implementation report
Remuneration for each director (audited)
Name Annual Actual salary/ Benefits Cash in STIP LTIP Total
fees fees lieu of
2012-2013 pension
Non-Executive Directors
Tim Franklin £35,000 £18,603 - - - - £18,603
Virginia Holmes £35,000 £34,712 - - - - £34,712
Alasdair Marnoch £45,000 £38,589 - - - - £38,589
Neil McCausland £50,000 £50,000 - - - - £50,000
Alice Perkins £100,000 £100,000 - - - - £100,000
Susannah Storey (Note 1) £0 - - - - £0
Executive Directors (Note 2)
Paula Vennells £250,000 £250,000 £9,779 £62,500 £157,936 I £217,508 I £697,723
Chris Day £215,000 £215,000 £9,779 £53,750 £129,053 I - £407,582
£706,904 £19,558 £116,250 I £286,989 I £217,508 I £1,347,208
Note 1: Susannah Storey is an employee of the Shareholder Executive of the Department for
Business, Innovation and Skills and therefore receives no director's fee.
Note 2: The salaries for Paula Vennells and Chris Day remain unchanged. There is no planned
increase for the review in July 2013.
[Benefits comprise a company car (or cash equivalent), participation in life and health assurance
schemes and private medical provision.]
Pay at risk paid to Executive Directors in 2012-13 (audited)
a) Short Term Incentive Plan 2012-13
The Short Term Incentive Plan is based on the Post Office balance scorecard for 2012-13. Six
measures from the scorecard were identified for use in the STIP. These relate to financial
performance (50%), the customer experience (25%) and achievement of specific objectives related
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to the modernisation program (25%). Financial performance was assessed through the use of
stretching revenue and operating profit targets. Strong growth in the business during the year
delivered revenue of [(£1.02bn)] which was between target and stretch performance. Tight cost
control meant that operating profit [(£94.2m)] was in excess of the stretch hurdle. Significant
improvements were made in our interaction with customers, with reductions in queue times and
call centre targets being achieved. Overall, performance exceeded the on-target level across all the
six measures and was in excess of the stretch hurdle for two measures.
Chief Executive
The STIP payable to the Chief Executive is based on the balanced scorecard (80%) and personal
performance (20%). The balanced scorecard element paid out at 144.2% leading to a bonus of
55.5% of salary. For the personal element, following a review of the achievements of the personal
objectives by the Chairman, the Remuneration Committee judged that the Chief Executive had
achieved 80% of her individual objectives, leading to a bonus of 7.7% of salary.
Taking account of both the financial and personal elements the total STIP for 2012-13 of 63% of
salary was awarded.
Chief Financial Officer
The STIP payable to the Chief Financial for 2012-13 was based on the balanced scorecard with a
multiplier applied based on personal performance with the plan year. His bonus based on the
balanced scorecard was 40% of salary. The multiplier applied resulted in an increase by a factor of
1.5.
Taking account of both financial and personal elements, the total STIP awarded to the Chief
Financial Officer for 2012-13 was 60% of salary.
As shown in the policy section the STIP structure for 2013/14 the intention is to harmonise the
STIP design for the Chief Financial Officer with that of the Chief Executive and lose the multiplier.
These changes will be subject to Special Shareholder approval.
b) Long Term Incentive Plan awards 2010-2013
The LTIP award to pay out this year is based on the three-year performance period ended 31
March 2013. The award value for the Chief Executive was 70% of salary with a maximum stretch
value of 1.4 times the target award (98% of salary). There was no award made to the Chief
Financial Officer as he had not commenced employment with the Post Office on the award date.
The primary performance condition for the 2010 award was operating profit (sliding scale of
targets).
Operating profit for the year-ended 31 March 2013 (£94.2 million) was between the target and
stretch level. The resulting payout under the 2010 LTIP was 124.3% of the maximum (87% of
salary for the Chief Executive). Other Post Office employees also participated in this scheme,
receiving awards of between 25% and 43% of salary.
Outstanding Long-Term Incentive awards
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Under the remuneration policy, LTIP awards are granted annually. The Chief Executive Officer and
Chief Financial Officer have the following outstanding awards:
Target award Stretch award Performance period
Paula Vennells - Chief Executive Officer
2011 LTIP £175,000 £245,000 Three years to 31 March 2014
2012 LTIP £175,000 £245,000 Three years to 31 March 2015
Chris Day - Chief Financial Officer
2011 LTIP £50,167* £70,234 Three years to 31 March 2014
2012 LTIP £73,500 £102,900 Three years to 31 March 2015
*LTIP award pro-rated as commenced employment 1 August 2011
Both the 2011 and 2012 LTIP awards are subject to challenging financial and strategic
performance conditions.
Total pension entitlements (audited)
Paula Vennells and Chris Day each receive a cash supplement of 25% base pay in lieu of
pension scheme membersI
hip.
Paula Vennells accrued benefits under the Royal Mail Senior Executives Pension Plan (an HMRC
approved defined benefit occupational pension scheme) until 5 April 2012 when she left the
scheme.
Age at Year end Accrued benefit at 25 Accrued benefit at 31 Increase in accrued Transfer value of increase
March 2012 or date March 2013 or date of _ benefits during the before inflation less Directors’
of appointment to leaving if earlier period (net of inflation) contributions
the Board if later
54
£pa £ pa £ pa £ pa
Paula Vennells 14,721 15,225 180 3,340
Age at Year end Transfer value at 25 March Transfer value at Transfers in Member's Movements in the
2012 or at date of 31 March 2013 received contributions in period less
appointment to Board if during the the period Directors’
later period contributions
54 £ £ £
£
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Paula Vennells 283,759 314,926 204 30,963
Relative importance of the spend on pay (audited)
Total people costs at Post Office Limited (excluding exceptionals) for the year ended 31 March
2013 were £259 million, of which £1.4 million related to Directors’ pay. This compares to total
revenues of £1.02 billion.
Outside directorships
Subject to Board approval, the Executive Directors are permitted to take on Non-Executive
positions with other companies and are allowed to retain the fees received in respect of such
positions. Paula Vennells is a Director of Hymns Ancient and Modern and a fee of £xx in respect of
the year ended 31 March 2013.
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Post Office Limited
Registered Number 2154540
Post Office Limited
Financial Statements
2012-2013
DRAFT 12
Note: Disclosures highlighted are to be confirmed.
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Post Office Limited
Statement of directors’ responsibilities
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the financial position of the
Group and of the Company and the financial performance and cash flows of the Group and of the Company for that period. Under that law the
Directors have elected to prepare the Group consolidated financial statements in accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union and have elected to prepare the Company financial statements in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law.) In preparing those financial statements, the Directors are
required to:
© Select suitable accounting policies and apply them consistently
© Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandatie
information;
* Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
© State that applicable accounting standards have been followed, subject to any material departures disclosed and explained inthe
financial statements;
* Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
The Directors are responsible for keeping adequate accounting records, which disclose, with reasonable accuracy at any time, the financial position of
the Group and of the Company to enable them to ensure that the Group consolidated financial statements comply with the Companies Act 2006 and
Article 4 of the IAS Regulation and the Company financial staternents comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
The Directors confirm that to the best of their knowledge:
© The Group consolidated financial statements, prepared in accordance with IFRS as adopted by the EU and in accordance with the
provisions of the Companies Act 2006 give a true and fair view of the assets, liabilities, financial position and profit of the Group:
© The Company financial statements prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a
true and fair view of the assets, liabilities, financial position and profit of the Company; and
© The management report contained in this report includes a fair view of the development and performance of the business and the
position of the Group as a whole and of the Company, together with a description of the principal risks and uncertainties they face.
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Post Office Limited
Independent auditor’s report to the members of Post Office Limited
We have audited the consolidated financial statements of Post Office Limited for the 53-week period ended 31 March 2013 which comprise the
Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated statement of cash flows, the Consolidated
balance sheet, the Consolidated statement of changes in equity and the related notes 1 to 25. The financial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and
the company’s members as a body, for our audit work, for this report, or for the opinions we have formed
Respective responsibilities of directors and auditors
‘As explained more fully in the Directors’ Responsibilities Statement set out on pagel the directors are responsible for the preparation of the group
financial statements and for being satisfied that they give a true and fair view. Our responsibilty is to audit and expressan opinion on the group
financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial statements
‘An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-
financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
{In our opinion the group financial statements:
© give true and fair view of the state of the group's affairs as at 31 March 2013 and of its profit for the 53-week period then
ended:
© have been properly prepared in accordance with IFRSs as adopted by the European Union; and
© have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the group financial staternents are prepared is consistent
with the group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requiresus to report to you if, in our opinion:
© certain disclosures of directors’ remuneration specified by law are not made; or
© we have not received all the information and explanations we require for our audit
Other matter
We have reported separately on the parent company financial statements of Post Office Limited for the 53 week period ended 31 March 2013.
Ernst & Young LLP
Angus Grant (Senior statutory auditor)
for and on behalf of Ernst &Young LLP, Statutory Auditor
London
Notes:
1. The maintenance and integrity of the Post Office Limited's web site is the responsibility of the directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the
financial statements since they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legslation in other
jurisdictions.
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Post Office Limited
Consolidated income statement
for the 53 weeks ended 31 March 2013 and the 52 weeks ended 25 March 2012
2013 2012
Notes £m £m
Continuing operations
Turnover 1,024 980
Network Subsidy Payment 210 180
Revenue 1,234 1,160
People costs excluding restructuring costs 3 (259) (254)
Subpostmasters costs (478) (483)
Other operating costs (435) (393)
Share of post tax profit from joint ventures and associates a4 32 31
Operating profit before exceptional items 4 94 61
Operating exceptional items 5 (47) (38)
- government grant 98 -
~ restructuring costs (79) (2)
- other (66) (36)
Operating profit 47 23
Profit on disposal of property, plant and equipment 2 4
Loss on sale of associate ___ 0) -
Profit before financing and taxation a9 24
Finance costs 7 (4) (7)
Finance income 7 1 1
Net pensions interest 19 2 2
Profit before taxation 18 20
Profit for the financial year from continuing operations 49 30
Note that the Royal Mail Holdings plc financial statements for the year ended 25 March 2012 reported operating profit after modernisation costs but
before other exceptional items of £59m for Post Office Limited. In the income statement above the prior year result has been presented to exclude
modernisation costs consistent with 2013 where results are reported before all exceptional items
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Post Office Limited
Consolidated statement of comprehensive income
for the 53 weeks ended 31 March 2013 and the 52 weeks ended 25 March 2012
2013 2012
Notes £m £m
Profit for the financial year from continuing operations 49 30
Other comprehensive income:
Actuarial gains on defined benefit pension schemes 19 14 108
Taxation on items taken directly to equity 8 (21) =
Total comprehensive income for the year 42 138
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Post Office Limited
Consolidated statement of cash flows
for the 53 weeks ended 31 March 2013 and the 52 weeks ended 25 March 2012
2013 2012
Notes £m £m
Cash flows from operating activities
Operating profit before exceptional items 4 61
Adjustment for:
Depreciation and amortisation 4 - 1
Share of profit from joint ventures and associates a (32) (31)
Pension operating costs 25 24
Working capital movements: 71 24
Increase)/Decrease in trade and other receivables (138) a4
increase in trade and other payables 207 15
Increase) in inventories (2) -
Increase/(Decrease) in non-exceptional provisions 4 (2)
Pension operating costs paid (26) (27)
Cash payments in respect of operating exceptional items: 133 (27)
Business transformation (44) (22)
Government grant 200 -
Restructuring costs (11) (15)
ther (15) -
Net cash inflow from operating activities 265 25
Income tax recovered 11 12
Cash flows from investing activities
Investment in associate (11) -
Dividends received from joint ventures and associates i 40 38
Finance income received 1 -
Proceeds from sale of property, plant and equipment 2 2
Proceeds from disposal of associate 2 -
Purchase of property, plant and equipment (66) (33)
Net cash (outflow)/inflow from investing activities (32) 7
Net cash inflow before financing activities 244 44
Cash flows from financing activities
Finance costs paid (3) (4)
Payments to finance lease creditors (3) (3)
(Repayment)/proceeds from bank borrowings (86) 2
Net cash (outflow) from financing activities (92) (5)
Net increase in cash and cash equivalents 152 39
Effect of exchange rates on cash and cash equivalents (1) (a)
Cash and cash equivalents at the beginning of the year 13 820 782
Cash and cash equivalents at the end of the year 13 971 820
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Post Office Limited
Consolidated balance sheet
at 31 March 2013, 25 March 2012 and 28 March 2011
2013 2012 2011
Notes £m £m £m
Non-current assets
Intangible assets 9 - - -
Property, plant and equipment 10 a4 a 12
Investments in joint ventures and associates 11 60 89 96
Retirement benefit surplus 19 97 - -
Total non-current assets 168 100 108
Current assets
Inventories 8 6 5
Trade and other receivables 12 362 226 241
Cash and cash equivalents 13 971 820 782
Financial assets - derivatives 17/18 1 - -
Total current assets 1,342 1,052 1,028
Total assets 1,510 1,152 1,136
Current liabilities
Trade and other payables 14 (898) (583) (579)
Financial liabilities - interest bearing loans and borrowings 45 (291) (377) (375)
~ obligations under finance leases 22 (3) (4) (4)
Provisions 16 (a9) - a
Total current li (4,211) (964) (958)
Non-current li ies
Financial liabilities - obligations under finance leases 22 (4) (6) (9)
Other payables 14 - (2) (5)
Provisions 16 (7) (14) (26)
Retirement benefit obligation 19 : (206) (316)
Total non- current li (44) (228) (356)
Net assets/(liabilities) 288 (40) (278)
Equity
Share capital 20 - - -
Share premium 465 465 465
Retained earnings (179) (552) (690)
Other Reserves 2 47 47
Total equity/(deficit) 288 (40) (178)
The financial statements on pages KX to XX were approved by the Board of Directors on XXX 2013 and signed on its behalf by:
P A Vennells CM Day
Chief Executive Chief Financial Officer
Post Office Limited
Consolidated statement of changes in equity
for the 53 weeks ended 31 March 2013 and the 52 weeks ended 25 March 2012
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Retained
Share earnings Other Total
premium £m reserves equity
Notes £m £m &m
‘At 26 March 2012 465 (552) 47 (40)
Profit for the year - 49 - 49
Actuarial gain on defined benefit schemes 49 - 14 - 14
Transfer of pension deficit to government 19 - 286 - 286
Sale of interest in associate - 45 (45) -
Taxation of items taken directly to equity 8 - (21) - (21)
At 34 March 2013 465 (479) 2 288
Opening other reserves of £47m comprised £2m relating to First Rate Exchange Services Holding Limited, the joint venture entity,
and £45m that was recognised on the formation of Midasgrange Limited, the associate entity. In Sept
ember 2012 the Group
disposed of its interest in the associate and therefore £45m included in other reserves relating to Midasgrange Limited was
transferred to retained earnings.
Retained
Share earnings Other Total
premium £m reserves equity
Notes £m £m £m
‘At 28 March 2011 465 (690) 47 (178)
Profit for the year - 30 - 30
Actuarial gain on defined benefit pension
schemes 19 - 108 - 108
‘At 25 March 2012 465 (552) 47 (40)
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Notes to the financial statements
4. Accounting Policies
Financial year
The financial year ends on the last Sunday in March and for this reason these financial statements are made up to the 53 weeks ended
341 March 2013 (2012 - 52 weeks ended 25 March 2012).
Basis of preparation
The financial statements on pages &X to XX have been prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Unless
otherwise stated in the accounting policies below, the financial statements have been prepared under the historic cost accounting
convention.
For all periods up to and including the year ended 25 March 2012, the Group (comprising the Company and its subsidiary undertaking)
prepared its financial statements in accordance with United Kingdom Generally Accepted Accounting Practice. These financial statements
for the year ended 31 March 2013 are the first the Group has prepared in accordance with IFRS as adopted by the European Union.
Accordingly the Group has prepared financial statements which comply with IFRS as adopted by the European Union applicable for
periods ending on or after 31 March 2013, together with comparative period data as at and for the year ended 25 March 2012. In
preparing these financial statements, the Group's opening statement of financial position was prepared as at 28 March 2021, the Group's
date of transition to IFRS as adopted by the European Union.
The Company is incorporated and domiciled in the United Kingdom. The Group consolidated financial statements are presented in Sterling
and all values are rounded to the nearest £m except where otherwise indicated.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertaking. Subsidiaries are
consolidated from the date of acquisition, being the date on which the Group obtains control. and continue to be consolidated until the
date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent
company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-
group transactions are eliminated in full.
Changes in accounting policy and disclosures
The changes to accounting policies and disclosures which have been necessary as part of the transition to reporting under IFRS as
adopted by the European Union have had no effect on the income statement or net asset position.
Accounting standards issued but not yet applied
The following new and revised accounting standards are relevant to the Group and are in issue but were not effective (and in some
instances have not yet been adopted by the EU) at the balance sheet date:
. Annual improvements to IFRS 2009-2011 Cycle
¢ IFRS 9 Financial Instruments: Classification and Measurement
© IFRS 10 Consolidated Financial Statements
© IFRS 14 Joint Arrangements
© IFRS 12 Disclosures of Interests in Other Entities
© IFRS 13 Fair Value Measurement [impact on derivative assets]
* IAS 4 (amended) Presentation of Items of Other Comprehensive Income
* IAS 12 ~(amended) Deferred Taxation: Recovery of Underlying Assets [impact being assessed by Group Tax]
* IAS 19 (revised) Employee Benefits
. IAS 27 (revised) Separate Financial Statements.
. IAS 28 (revised) Investments in Associates and Joint Ventures
. IAS 32 (amended) Offsetting Financial Assets and Liabilities impact being assessed by Group Treasury]
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of
the Group in future periods.
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Fundamental accounting concept - going concern
The Group has net assets at 31 March 2013 and has operated at a profit before exceptional items during 2012-13 for the fifth year
running.
A funding agreement with Government was announced on 27 October 2010 which provided for:
Funding of £410m for 2012-13
Funding of £415m for 2013-14
Funding of £330m for 2014-15
Extension of the existing working capital facility with the Department for Business, Innovation & Skills (BIS) of
£1.15bn up to 31 March 2016
eee
State Aid approval for the funding for 2012-13 to 2014-15 was received on 28 March 2012 and it was also recognised that the working
capital facility was no longer deemed State Aid. £410m was received on 2 April 2012
This investment will take the form of a Government Grant and enable the Group to modernise the branch network and the continuation
of the Network Subsidy Payment recognises the major social value that Post Offices provide to communities. New main and local
branches are currently being rolled out across the United Kingdom. Customers are beginning to benefit from a much better retail
experience including extended opening hours. This programme is designed to make the Post Office network more self-sustaining and,
over time, less dependant on direct subsidy. This programme will not involve branch closures.
The Directors are satisfied with the progress made towards modernisation during 2012-13 and that the plans in place and the
substantial investment secured will enable the Group to continue to modernise and to secure its future. However, they note that the
scale of change required remains significant so not without risk.
After careful consideration of the plans for the coming years, the Directors continue to believe that Post Office Limited will be able to meet
its liabilities as they fall due in the foreseeable future. Accordingly, on that basis, the Directors consider that it is appropriate that these
financial statements have been prepared on a going concern basis.
Critical accounting estimates and judgements in applying accounting policies
The Group makes certain estimates and assumptions regarding the future. Estimates and assumptions are continually evaluated based on
historical experience and other factors. In the future, actual experience may differ from these estimates and assumptions. In addition the
Group has to make judgements in applying its accounting policies which affect the amounts recognised in the accounts. The most
significant areas where judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Group are determined using methods relying on actuarial estimates and
assumptions. These pension figures are particularly sensitive to changes in assumptions for discount rates, mortality and inflation rates.
Details of the key assumptions are set out in Note 19.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate equivalent to the
current rate of return on a high quality corporate bond of equivalent currency and term. Judgement has been applied in determining that
for these purposes a high quality corporate bond constitutes AA rated or equivalent status bonds.
Provisions
The Group has recognised provisions where a present legal or constructive obligation exists as a result of a past event, where it is
probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made.
Provisions are detailed in Note 16. Due to the nature of provisions the future amount settled may be different from the amount that has
been provided.
Revenue
Turnover from Government, financial, mails and telephony services comprises the value of services provided. Turnover from all other
products comprises the commission received excluding VAT, from the Group's principal activities in providing access to a wide range of
financial and retail services through its network of post office branches across the UK and other channels. Turnover relating to line rental
for telephony services is recognised evenly over the period to which the charges relate and revenue from calls is recognised at the time
the call is made. Turnover from all other transactions is recognised when the trans action is completed. All turnover is derived wholly from
within the United Kingdom.
The Network Subsidy Payment is Government grant revenue recognised to match the related costs of making available the network of
public Post Offices that the Secretary of State for Business, Innovation and Skills considers appropriate.
Net revenue
Net revenue is calculated using revenue less cost of sales, which consists of directly attributable costs of delivering the service or product.
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Operating exceptional items
Operating exceptional items are items of income and expenditure arising from the operations of the business which, due to the nature of
the events giving rise to them, require separate presentation on the face of the income statement to allow a better understan ding of
financial performance in the year, in comparison to prior years.
Intangible assets
Intangible assets acquired separately or generated internally are initially recognised at cost and are reviewed for impairment. An
impairment loss is recognised in the income statement for the amount by which the carrying value of the asset exceeds its recoverable
amount, which is the higher of an asset's net realisable value and its value in use.
Amortisation of intangible assets with finite lives is charged annually to the income statement on a straight-line basis as follows.
Software 1 to 6 years
Property, plant and equipment
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into working condition for its
intended use.
Depreciation of tangible fixed assets is provided on a straight-line basis by reference to cost and to the remaining useful economic lives of
assets and their estimated residual values. The lives assigned to major categories of tangible fixed assets are:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining useful life
Plant and Machinery 3-15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2-15 years
Impairment reviews
Unless otherwise disclosed in these accounting policies, assets are reviewed for impairment if events or changes in circumstances indicate
that the carrying value may be impaired. The Group assesses at each reporting date whether such indications exist. Where appropriate,
an impairment loss is recognised in the income statement for the arnount by which the carrying value of the asset (or cash generating
unit) exceeds its recoverable amount, which is the higher of an asset's net realisable value and its value in use.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have passed to the Group are
capitalised at the inception of the lease with a corresponding liability recognise d for the fair value of the leased item or, if lower, at the
present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease
liability so as to achieve a constant rate of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases
and rentals are charged to the income statement over the lease term. The aggregate benefit of incentives are recognised as a reduction
of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures and associates
Investments in joint ventures and associates within the Group’s financial statements are accounted for under the equity method of
accounting. Under this method the investment is carried in the balance sheet at cost plus post -acquisition changes in the Group's share of
the net assets of the joint venture/associates less any impairment in value. The income statement reflects the Group's share of post tax
profits from the joint venture/associates.
Inventories
Inventories include printing and stationery, retail and lottery products, is carried at the lower of cost and net realisable value after
adjusting for obsolete or slow-moving stock.
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Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed or are disallowed. It is
calculated using tax rates in legislation that has been enacted or substantively enacted by the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and unused tax assets and
losses except:
~ initial recognition of goodwill
~ the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit and loss.
- taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of
the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the
foreseeable future and
~ deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which they can be
utilised,
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or
the liability is settled, based on tax rates that have been substantively enacted at the balance sheet date. Deferred tax balances are not
discounted.
Current and deferred tax is recognised in the income statements, except to the extent that it relates to items recognised in other
comprehensive income or directly to equity. In this case, the tax is also recognised in other comprehensive income or directly in equity,
respectively. Further details on deferred tax can be found in note 8 to the financial statements.
Pensions and other post-retirement benefits
People working for the Company were employed by Royal Mail Group Limited and seconded to the Company until 31 March 2012. On 1
April 2012 they were transferred to be directly employed by the Company. Membership of occupational pension schemes is open to most
permanent UK employees of the Company. All members of defined benefit schemes are contracted out of the earnings -related part of the
State pension scheme
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an actuarial basis using the
projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of
equivalent currency and term. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet. Full
actuarial funding valuations are carried out at intervals not normally exceeding three years as determined by the Trustees and, actuarial
valuations are carried out at each balance sheet date and form the basis of the surplus or deficit disclosed.
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service costs and any gains
and losses arising from settlements, curtailments and past service costs. The net difference between the interest costs and the expected
return on plan assets is recognised as net pensions interest in the income statement. Actuarial gains and losses are recognised
immediately in the statement of comprehensive income. Any deferred tax movement associated with the actuarial gains and losses is also
recognised in the staternent of comprehensive income.
For defined contribution schemes, the Group's contributions are charged to operating profit, as part of staff costs, in the period to which
the contributions relate.
Foreign currencies
The functional and presentational currency of the Group is sterling (£).
Transactions in foreign currencies are recorded at the spot exchange rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the functional rate of exchange ruling at the balance sheet date. Currently
hedge accounting is not applied to any monetary assets and liabilities. All differences are therefore taken to the income statement.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable amounts. An estimate
for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified
Borrowing costs
Borrowing costs in relation to the working capital loan facility are recognised as an expense when incurred unless they are directly
attributable to the construction or development of a qualifying asset, in which case they are capitalised using the weighted average cost of
borrowing for the period of construction/development.
Government grants
Government grants are shown separately in the income statement to match the expenditure to which they relate.
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Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probably that an
outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the
effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at an appropriate
pre-tax rate.
Financial instruments
The classification of financial instruments included on the balance sheet is set out below:
Financial assets
Financial assets are classified into the following categories: at fair value through the income statement, loans and receivab les, and available
for sale as appropriate based on the purpose for which they were required. Financial liabilities are classified as either fair value through the
income statement or as financial liabilities measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at amortised cost.
Derivative financial instruments
The Group uses derivative financial instruments to manage its exposure to fluctuations in foreign exchange rates. Such derivative financial
instruments are initially stated at fair value. Hedge accounting has not been claimed for foreign exchange derivative instruments.
Fair value measurement of financial instruments.
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent arm’s length market
transactions; reference to the current market value of another instrument which is substantially the same; and discounted cas h flow
analysis and pricing models. Specifically, in the absence of quoted market prices, derivatives are valued by using quoted forward prices for
the underlying currency and discounted using quoted interest rates. Hence derivative as sets and liabilities are within Level 2 of the fair
value hierarchy as defined within IFRS 7.
For the purposes of disclosing the fair value of investments held at amortised cost in the balance sheet, in the absence of quoted market
prices, fair values are calculated by discounting the future cash flows of the financial instrument using quoted equivalent interest rates as
at close of business on the balance sheet date.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash equivalents) with an
original maturity date of three months or less. In addition the Group uses Money Market funds as a readily available source of cash, and
these funds are also categorised as cash equivalents.
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of
bank overdrafts. Cash equivalents are classified as loans and receivables financial instruments.
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2. Segmental reporting
In accordance with IFRS 8 ‘Operating segments,’ an operating segment is defined as a business activity whose operating results are
reviewed by the chief operating decision maker (‘(CODM) and for which discrete information is available. The Group's CODM is the
Executive Committee as defined in the [Bi jortl on Page KR.
The CODM has determined the operating segments based in the information reviewed by them for the purposes of allocating resources
and assessing performance. Operating segments have not been aggregated in order to present reportable segments. All segmental
activities are located wholly within the United Kingdom.
The CODM assesses the performance of the operating segments based on net revenue. This is calculated using segmental revenue less
segmental cost of sales, which consists of directly attributable costs of delivering the service or product. The net revenue measure
excludes the effect of indirect costs and the effects of non-recurring expenditure such as redundancy costs and asset impairment. Interest
income and expenditure is not allocated to segments as this type of activity is driven by the central treasury function.
Assets and liabilities as recognised on the Group balance sheet are not considered to be segmental assets or liabilities but rather are
managed by the Group's central functions. The information reviewed by the CODM does not include assets or liabilities split by segment. A
description of the activities of the business segments is included on Page XX within the financial commentary to the financial statements.
Revenue from a major customer represents approximately 27% of the Group's total revenue in 2013. This revenue was reported within
the Mails & Retail segment.
2013
Cost of Net
Revenue Sales Revenue
£m £m £m
Mails & Retail 409 (5) 404
Financial Services 281 (1) 280
Government Services 164 (30) 134
Telephony 129 (85) 4b
Other 4a : 41
Sub total 1,024 (a2a) 903
Network Subsidy Payment 210 : 210
Total 1,234 (424) 1,113
2012
Cost of Net
Revenue Sales Revenue
£m £m £m.
Mails & Retail 392 (4) 388
Financial Services 264 (3) 261
Government Services 164 (28) 136
Telephony 120 (79) 44
Other 40 : 40
Sub- total 980 (114) 866
Network Subsidy Payment 180 - 180
Total 1,160 (a14) 1,046
A reconciliation between underlying segment net revenue and profit before taxation is provided below:
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2013 2012
£m £m
Underlying segment net revenue 1,113 1,046
Indirect costs (2,054) (1.016)
Share of post tax profit from joint ventures and associates 32 a1
Operating profit before exceptional items 9 61
Operating exceptional items (58) (38)
Operating profit 36 23
Profit on disposal of property, plant and equipment 2 4
Loss on sale of associate (30) -
Profit before financing and taxation 8 24
Finance costs (4) (7)
Finance income a 1
Net pensions interest 2 2
Profit before taxation 7 20
3. Staff costs and numbers
Employment and related costs were as follows:
2013 2012
People costs excluding restructuring costs: £m &m
Wages and salaries 215 213
Social security costs 19 7
Pension costs (note 19) 25 24
Total 259 254
Period end employees Average employees
2013 2012 2013 2012
Total employees 7,886 7.198 7,842 1734
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4. Operating profit from continuing operations before exceptional items
Operating profit from continuing operations before exceptional items is stated after charging:
2013 2012
£m £m
Bureau de Change foreign currency exchange losses 1 1
Depreciation - 1
Operating lease charges - Land and buildings 20 25
- Vehicles and equipment 62 62
Fees payable to the group's auditors for audit and other services: £000 £000
~ parent company and group audit 331 195
-taxation services - -
-other non-audit services 105 108
5. Operating exceptional items
2013 2012
£m £m
Government grant 98 -
Business transformation (4) (3)
Network transformation including subpostmasters compensation (52) -
Restructuring - severance (14) 1
~ other (42) -
Impairment of intangible assets (note 9) (25) (17)
Impairment of property, plant and equipment (note 10) (41) (19)
Total operating exceptional items (47) (38)
The £4m charge in respect of business transformation represents a provision for staff payments linked to changed working practices
(2012 £3m).
Due to ongoing operational losses (excluding Network Subsidy Payment) the carrying value of all property plant and equipment other
than freehold and long leasehold property has been impaired to the recoverable amount.
6. Directors’ emoluments
The Directors received the following emoluments:
2013 2012
— _ £000 £000_
Emoluments, excluding pension contributions and LTIP* 1,129 904
Contributions to pension schemes 1 58
Amounts receivable under Long-Term Incentive Plans 218 :
*Figures include any cash supplements received in lieu of pension.
Directors accruing pension entitlements during the period under: 2013 2012
Number Number
Defined benefit schemes 0 2
d contribution schemes
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The highest paid Director received the following emoluments:
2013 2012
£000 £000
Emoluments and LTIP, excluding pension contributions* 698 463
Company contributions to pension schemes 1 47
Transfer value of accrued pension benefits 315 284
* Figures include any cash supplements received in lieu of pensions.
7. Net finance costs
2013 2012
£m £m
Interest receivable 1 1
Interest charge, unwinding discount on provisions. (4) (a)
Interest payable on loans (3) (6)
Total (3) (6)
8. Taxation
(a) Taxation gains recognised in the year
2013 2012
£m £m
Corporation tax credit for year (10) (a4)
Tax under provided in previous years - a
Current tax (40) (10)
Deferred tax relating to pension surplus taken to equity (24) -
Income tax credit reported in the consolidated income statement. (31) (10)
(b) Factors affecting current tax credit on loss on ordinary activities
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 24% (2012 26%).
explained below:
The differences are
2013 2012
£m £m
Profit on ordinary activities before tax 18 20
Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 24%
(2012 26%) 4 5
Net decrease in tax charge resulting from recognition of deferred tax assets (35) (a5)
Expenditure disallowable for tax 1 2
Adjustment in respect of prior period - 4
Losses from disposals ineligible for relief 7 -
Effect of group relief surrenders to other companies - 5
Associates/joint venture profit after tax included in Group pre-tax profit (8) (8)
Total current tax (see above) (34) (10)
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(c) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £190m (2012 £337m), comprising £0m (2012 £52m) relating to the retirement
benefit obligation, £133m (2012 £157m) relating mainly to fixed asset timing differences, and £57m (2012 £128m) relating to tax losses
that are available to offset against future taxable profits. The Group has rolled over capital gains of £3m (2012 £3m); no tax liability
would be expected to crystallise should the assets into which the gains have been rolled be sold at their residual value, as it is a nticipated
that a capital loss would arise.
Finance Act 2012 reduced the main rate of corporation tax to 23% with effect from 1 Ap ril 2013. The effect of this change on deferred
tax balances is included in these financial statements and is detailed above. In the 2012 Autumn Statement, the Chancellor of the
Exchequer announced that the main rate of corporation tax will be 21% for the year commencing 1 April 2014 and in the March 2013
Budget he announced that the rate will be further reduced to 20% with effect from 1 April 2015. In accordance with accounting standards
the effect of these rate reductions on deferred tax balances has not been reflected in these accounts due to the relevant legislation not
having been substantively enacted at the balance sheet date. A reduction to 20% would, based on losses and temporary differences at 31
March 2013, reduce the Group's unrecognised deferred tax assets by £25m
Under the Postal Services Act 2011, trading losses which arose due to pension contributions and which are unused at 31 March 2013 will
be extinguished. The estimated gross value of the losses extinguished is £175m. The unrecognised losses carried forward disclosed above
are stated net of this amount.
(d) Tax effect of exceptional items
There is a tax credit on exceptional items of £nil (2012 £nil). This is calculated on a “with and without" basis assuming that losses are
surrendered firstly to joint ventures and secondarily to companies in the Royal Mail Group.
9. Intangible assets
2013 2012 2011
Cost £m £m Em
At 26 March 2012, 28 March 2011, 29 March 2010 183 166 155
Additions 25 17 12
Disposals : - (a)
At 31 March 2013, 25 March 2012, 27 March 2011 208 183 166
Amortisation and impairment
At 26 March 2012, 28 March 2011, 29 March 2010 183 166 155
Impairment (see note 5) 25 17 14
At 34 March 2013, 25 March 2012, 27 March 2011 208 183 166
Net book value
At 34 March 2013, 25 March 2012, 27 March 2011 : - -
The above intangible assets relate to software.
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10. Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold vehicles. += machinery — equipment Total
£m £m £m £m £m £m £m
Cost
At 28 March 2011 78 17 113 34 1 696 939
Additions 4 - - 1 - 13 18
Disposals - external (4) - - (a) - - (5)
Transfers from Royal Mail
Group Ltd 1 - 1 - - - 2
At 25 March 2012 79 17 114 34 1 709 954
Reclassification - 1 a) - - - -
Additions 9 - 1 9 - 22 44
Disposals - external (a) : : (a) - (12) (44)
At 34 March 2013 87 18 114 42 a 719 981
Depreciation
At 28 March 2011 67 16 113 34 1 69% 927
Depreciation 1 - - - - - 1
Impairment (see note 5) 4 - 1 1 - 13 19
Disposals - external (3) - : @ - = (4)
At 25 March 2012 69 16 114 34 1 709 943
Depreciation - - - - - - -
Impairment (see note 5) 9 1 - 9 - 22 44
Disposals - external (a) a = (a) = (12) (14)
At 34 March 2013 77 Fu 114 42 Fa 719 970
Net book value
At 34 March 2013 10 1 : : : : 141
At 25 March 2012 10 1 - - - - 11
At 28 March 2011 11 1 - - - - 12
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land, which represents £3m
(2012 £3m) of the total cost of properties.
During the year the legal ownership of a number of properties were transferred from Royal Mail Group Limited to Post Office Limited for
no consideration.
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11. Investments in joint ventures and associates
The following entities have been included in the consolidated financial statements using the equity method:
Joint ventures
During 2012-13 and 2011-12, the Group's only joint venture investment was a 50% interest (1,000 £1 ordinary A shares) in First Rate
Exchange Services Holdings Limited, whose principal activity is the provision of Bureau de Change. First Rate Exchange Services Holdings
Limited is a company registered in the United Kingdom.
Associates
During 2011-12, the Group's only associate investment was a 49.99% interest (4.999 £0.01 ordinary A shares) in Midasgrange Limited,
whose principal activity is the provision of personal financial products. This investment was disposed of during the year ended 31 March
2013. At the date of disposal the carrying value of the Group's investment was £32m. Proceeds of £2m were received giving a loss on
disposal of £30m which has been recognised in the consolidated income statement.
Joint venture Associate Total
£m £m £m _
Share of net assets
Total net investment at 26 March 2012 67 22 89
Share of post tax pre dividend profit/(loss) 33 @ 32
Investment in associate - 1 1
Disposal - (32) (32)
Dividend (40) - (40)
Total net investment at 31 March 2013 60 = 60
Joint venture Associate Total
£m £m £m
Share of net assets
Total net investment at 28 March 2011 73 23 %
Share of post tax pre dividend profit/ (loss) 32 () 34
Dividend (38) - (38)
Total net investment at 25 March 2012 67 22 89
2013 2012 2011
Joint Total Joint Associate Total Joint Associate Total
venture venture venture
Share of assets and liabilities: £m £m £m £m £m £m £m £m
Current assets 184 184 180 38 218 151 25 176
Non-current assets 3 3 3 18 24 2 17 19
Share of gross assets 187 187 183 56 239 153 42 195
Current liabilities (127) (127) (116) (34) (450) (80) (a9) (99)
Share of net assets 60 60 67 22 89 2B 23 %
Share of revenue and profit:
Revenue 75 75 75 49 124 74 39 113
Profit after tax 32 32 32 (4) 31 29 (4) 25
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12. Trade and other receivables
2013 2012 2011
Current: £m £m £m
Trade receivables 32 39 45
Prepayments and accrued income 81 39 27
Client receivables 240 138 158
Other receivables 9 10 11
Total 362 226 241
The Group receives and disburses cash on behalf of Government agencies and other clients to customers through its branch network.
Amounts owed from/to Government agencies and other clients are disclosed separately as client receivables (as above) and client
payables (see note 14.)
‘As at 31 March 2013 trade and other receivables of £1m (2012 £1m) were impaired and fully provided for. All movements on the
provision during the year have been less than £1m. Trade and other receivables of £8m (2012 £7m) were past due but not impaired.
The aging analysis of the past due amounts are as follows:
2013 2012
£m £m
Provided for or not yet overdue 24 32
Past due not more than one month 7 3
Past due more than one month and not more than two months 1 3
Past due more than two months - 1
Total 32 39
The fair value of trade and other receivables is not materially different from the carrying value.
13. Cash and cash equivalents
2013 2012 2011
£m £m £m
Cash in the Post Office Limited network 879 758 704
Short-term bank deposits 6 19 34
Money market fund investments 86 43 bh
Total cash and cash equivalents 971 820 782
Cash and cash equivalents comprise amounts held physically in cash, cash deposits available on demand or for three months or less.
Where interest is earned it is at a floating or short term fixed rate. The fair value of cash and cash equivalents is not materially different
from the carrying value.
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14. Trade and other payables
2013 2012 2011
£m £m £m
Current:
Trade payables 43 32 36
Accruals and deferred income 134 140 121
Advance customer payments 50 48 67
Social security 10 9 10
Client payables 528 332 314
Amounts due to pension schemes relating to redundancies - - 3
Amount due to other companies within the Royal Mail Holdings
Group 6 9 12
Capital payables 18 10 6
Business transformation 7 3 10
Government Grant deferred income 102 - -
Total 898 583 579
Non-current:
Other payables : 2 5
Total 898 585 584
Of the £200m Government Grant received £98m has been allocated against income statement expenditure in accordance with the terms
and conditions of the Grant. The remaining £102m has been deferred into the balance sheet as disclosed above. The fair value of trade
and other payables is not materially different from the carrying value.
15. Borrowings
2013 2012 2011
£m £m £m
BIS loans drawn down. 291 377 375
The loans under the facility are short dated on a programme of liquidity management and mature on average 1 day after the year end
(2012 1 day). The fair value of borrowings is not materially different from the carrying value. On maturity it is expected that further loans
will be drawn down under this facility, which expires in 2016. The undrawn committed facility, in respect of which all conditions precedent
had been met at the balance sheet date is £859m (2012 £773m.) The average interest rate on the drawn down loans is 1.0% (2012
0.8%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited network.
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and a negative pledge over
cash and near cash items. The negative pledge is an agreement not to grant security over the assets or to set up a vehicle that has the
same effect.
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16. Provisions
Crown
Conversions Network
Project Transformation Other Total
£m £m £m £m
At 26 March 2012 9 - 5 1s
Charged in operating exceptional items - 10 12 22
Charged in operating costs - 6 6
Charged in financing costs 1 7 - 1
Utilisation (3) - (14) (47)
At 34 March 2013 7 10 9 26
Disclosed as:
Current 4 8 7 19
Non - current 3 2 2 7
7 10 9 26
Other provisions of £9m (2012 £5m) include property contracts, comprising amounts from onerous lease obligations and personal injury
claims.
Amounts charged in financing costs relate to the unwinding of discounted long-term provisions.
The Crown Conversions project relates to past franchising of Crown offices and onerous property lease provisions are expected to be
utilised within 5 years.
17. Financial assets and liabilities
The Group's financial assets and liabilities are shown in the table below:
2013 2012 2011
Current Non Total Current Non Total Current Non Total
current current current
£m £m £m £m £m £m £m
Cash and cash equivalents 9714 - 971 820 - 820 782 - 782
Derivative assets 1 - 1 - - - - - -
BIS loan (294) - (294) (377) - (377) (375) - (375)
Finance leases obligations (3) (4) (7) (4) (6) (20) (4) (9) (43)
Total financial assets/
(liabilities) 678 (4) 674 439 (6) 433 403 (9) 394
The Group's principal financial assets and liabilities comprise cash, money market liquidity investments, loans and finance leases. The
Group has various other financial instruments such as trade receivables and trade payables, which arise directly from operations are
disclosed further in Notes 12 and 14.
The Group enters into derivative transactions, which create derivative assets and liabilities, principally forward currency contracts. The
purpose is to manage the commodity and currency risks arising from the Group's operations.
The main risks arising from the Group's financial assets and liabilities are interest rate risk, liquidity risk, foreign currency risk and credit
risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below:
24
Interest rate risk
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The Group's exposure to market risk for changes in interest rates relates to the Group's debt obligations and interest bearing financial
assets. The BIS loans to Post Office Limited of £291m (2012 £377m) are at short-dated fixed interest rates - average maturity 1 day
(2012 average 1 day). On maturity it is expected that further loans will be drawn down under this facility which expires in 2 016. The total
interest bearing financial assets of the Group of £92m (2012 £62m) are at short-dated fixed or variable interest rates.
The table below sets out the carrying amount by maturity of the Group's financial instruments that are exposed to interest rate risk.
Financial year ended 31 March 2013
Average Within 1-2 2-5 More than Total
Effective oneyear years. years 5 years £m
interest £m £m £m £m
rate
Fixed rate
Short-term bank deposits 05 6 - - - 6
BIS loan 1.0 (291) - - - (291)
Obligations under finance leases 9.0 (3) (4) = = (7)
Total (288) (4) - - (292)
Floating rate
Money market fund investments 05 86 : = = 86
Non-interest bearing
Cash in Post Office network - 879 - - - 879
Derivative assets - 1 - - - 1
Total 880 : - = 880
Net total financial assets/(liabilities) 678 (4) = = 674
Financial year ended 25 March 2012
Average Within 1-2 2-5 More than Total
Effective oneyear —_years years 5 years £m
interest rate £m £m £m £m
Fixed rate
Short-term bank deposits 07 19 - - - 19
BIS loan 08 (377) - - - (377)
Obligations under finance leases 9.0 (4) (3) (3) a (20)
Floating rate
Money market fund investments 08 43 - : : 43
Non-interest bearing
Cash in Post Office network - 758 - - - 758
Net total financial assets/(liabilities) 439 (3) (3) = 433
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Foreign currency risk
The Group is exposed to foreign currency risk resulting from balances held to operate Bureau de Change services. The Group's foreign
currency risk management objective is to minimise the impact on the Income Statement of fluctuations in the excha nge rates. The Group
aims to hedge 90% of significant forecast future currency balances (principally but not restricted to US dollar and Euro) to match the
anticipated holding period of the currency. The Group hedges its foreign currency risk principally through external forward foreign
currency contracts with First Rate Exchange Services Holdings Limited.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Financial
credit risk arises from cash balances (including bank deposits and cash and cash equivalents) held by the Group and business credit risk
arises from exposures to customers. Business risk includes commissions receivable and client related settlements for amounts paid out of
the Post Office network on their behalf.
The Group aims to minimise its financial credit risk through the application of risk management policies approved by the Board.
Counterparties are limited to major banks and financial institutions. The policy restricts the exposure to any one counterparty by setting
appropriate credit limits
Business credit risk is monitored centrally. The individual relationships and the contracts attached to them are managed by dedicated
teams and procedures are place to monitor any concentrations of credit risk. The level of bad debt incurred for the Group is less than 1%
(2012 less than 1%) of turnover.
Capital management
The Group's objectives when managing capital (defined as the net of borrowings and amounts due under finance leases and cash and
cash equivalents excluding cash in the Post Office Network) are to safeguard its ability to continue as a going concern and to maintain an
optimal capital structure in order to support the business and maximise stakeholder value. In managing the Groups capital levels the
Board and the Executive Committee regularly monitor the level of debt in the Group. the working capital requirements and the forecast
cash flows. The Board and Executive Committee plan accordingly following this review process in order to meet the Groups capital
management objectives.
Liquidity risk
The Group's primary objective is to ensure that the Group has sufficient funds available to meet its financial obligations as they fall due.
This is achieved by aligning short-term investments and borrowing facilities with forecast cash flows. Typical short-term investments
include money market funds and short term bank deposits with approved counterparties. Borrowing facilities are regularly reviewed to
ensure continuity of funding. The unused facility for the Group of £859m (2012 £773m) expires in 2016.
Sensitivity
As a result of the mix of fixed and variable rate financial instruments and the currency hedge programmes in place, the group has no
material exposure to risk from interest rate or exchange rate prices.
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The tables below set out the gross (undiscounted) contractual cash flows of the Group's financial liabilities, For loans and finance leases,
these cash flows represent the undiscounted total amounts payable including interest.
2013
BIS Loan Finance Lease Total
Amounts falling due in: £m £m £m
One year or less 291 3 294
More than 1 year but not more than 2 years - 4 4
More than 2 years but not more than 5 years - - -
More than 5 years - - -
Total 291 7 298
2012
BIS Loan Finance Lease Total
Amounts falling due in: £m £m £m
One year or less 377 4 381
More than 4 year but not more than 2 years - 4 4
More than 2 years but not more than 5 years - 4 4
More than 5 years - - -
Total 377 12 389
2011
BIS Loan Finance Lease Total
Amounts falling due in: £m £m £m
One year or less 375 4 379
More than 4 year but not more than 2 years - 4 4
More than 2 years but not more than 5 years - 8 8
More than 5 years - - -
Total 375 16 391
18. Hedging programmes
Details of the Group's derivative financial instruments, used to manage the risks identified above are as follows:
Fair value of derivative financial instruments:
2012
Assets.
£m
Currency hedges
Total
Currency hedges
The Group mitigates its foreign currency risk exposure principally through external foreign currency forward contracts with First Rate
Exchange Services Holdings Limited. At the year end the gain on unmatured currency hedges was £1m and taken to the income
statement as hedge accounting is not claimed. The hedges mature in April 2013.
Derivative values
At any point in time, the derivative in programmes above are either ‘in the money’ which means the hedged rates are better than the
current market rates or ‘out of the money’ which means that the hedged rates are worse than the current market rates. The resulting
gains and losses as at the balance sheet date are recognised in the income statement. An associated financial asset or liability is created
in the balance sheet (as detailed above.) The financial asset or liability is released when the derivative matures. The Groups hedging
transactions are settled net.
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19. Pensions
On 4 April 2012, almost all of the pension assets and liabilities of the Royal Mail Pension Plan (RMPP) were transferred to HM
Government. On this date the RMPP was also sectionalised with Royal Mail Group Limited and Post Office Limited responsible for their
own sections. All employees were transferred to be directly employed by Post Office Limited on the same date.
Royal Mail Group Limited is the principal employer in Royal Mail Senior Executive Pension Plan (RMSEPP) and Post Office Limited became
a participating employer with effect from 1 April 2012. Post Office Limited continues to account for approximately 7% of the RMSEPP
scheme as it has done previously.
Prior to 4 April 2012, Royal Mail Group Limited had the legal relationship with the Trustees of both RMPP and RMSEPP and, as such, the
Trustees held Royal Mail Group liable for the actuarial deficit in the scheme. All employees were employed by Royal Mail Group Limited
and seconded to Post Office Limited under an agreement between Post Office Limited and Royal Mail Group Limited. Post Office Limited
met the full costs of employment and was responsible for the funding of the pension deficit attributable to these employees. Consequently
Post Office Limited recognised a balance sheet deficit based on employee numbers over 12 years and represented approximately 7% of
the total balance sheet deficit at that time. The net pensions interest, deficit recovery payments and actuarial gains or losses were also
allocated on this basis, giving the Post Office Limited approximately 7% of the total balance sheet deficit at the balance sheet date. The
current service cost, regular future service contributions and curtailments were computed separately for Royal Mail Group Limited and
Post Office Limited based on common factors/rates.
The disclosures in this note relating to the year ended 31 March 2013 reflect the Post Office Limited sectionalised RMPP scheme which is
independently operated by the Group and the approximate 7% share of the RMSEPP scheme. The comparative figures for the year ended
25 March 2012 and the opening position at 28 March 2011 represent approximately 7% of the previous combined RMPP and RMSEPP
plans.
The disclosures in this note relate to the year ending 31 March 2013 and show how the value of the assets and liabilities have been
calculated at the balance sheet date.
The Group participates in pension schemes as detailed below.
Name Eligibility
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
Defined Contribution
The charge in the profit and loss account for the defined contribution schemes and the Group contributions to these schemes was £1m.
(2012 £1m) during the year. A new defined contribution plan (RMDCP) was launched in April 2009. New recruits joining from 34 March
2008 are able to begin paying contributions to the new plan after they have worked for the Group for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The latest full actuarial
funding valuation of both schemes was carried out as at 31 March 2009 using the projected unit method. For RMPP, this valuation was
concluded at £10.3bn deficit. For RMSEPP, the valuation was concluded at £100m deficit. RMPP includes sections A, B and C each with
different terms and conditions:
.
Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
Section B is for members (or beneficiaries of members) who joined after 1 December 1971 and before 1 April 1987 or to
members of Section A who chose to receive Section B benefits;
Section C is for members (or beneficiaries of members) who joined after 1 April 1987 and before 4 April 2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008.
The changes encompass:
.
.
the Plans closed to new members from 34 March 2008;
all pensions and benefits earned before 1 April 2008 are still linked to final salary at the time of retirement;
from 1 April 2008, defined benefits building up for employee members of the Plan are eared on a career salary basis;
employees can continue to take their pension on reaching 60 but the normal retirement age increased to 65 for benefits
earned from 1 April 2010; and
from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age at 55, and continue
working while still contributing to the Pension Plan until the maximum level of benefits has been reached.
on 31 December 2012 RMSEPP was closed.
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Payment of £24m (2012 £23m) was made by the Group during the year in respect of regular future service contributions, nearly all
relating to RMPP. The regular future service contributions for RMPP, expressed as a percentage of pensionable pay, has remained at
17.1% (2012 17.1%), effective from April 2010. This rate is not expected to change materially during 2013-14. For RMSEPP, these
contributions have remained at 35.9% (2012 35.9%) until its closure.
The Group pays 7% of the total deficit payment required to fund the deficit in RMSEPP and a payment of £2m (2012 less than £1m) was
made by the Group during the year. Following the State Aid clearance granted on 21 March 2012 and the subsequent transfer of the
historical pension deficit to HM Government on 1 April 2012 no RMPP deficit payment was made during 2011-12 or 2012-13. For
RMSEPP, deficit recovery payments will be £1m per annum, from 1 April 2010 to 31 January 2024.
A current liability of £nil (2012 nil) has been recognised for payments to the pension schemes relating to redundancy. During the year,
payments of £2m (2012 £3m) relating to redundancy were made.
The following disclosures relate to the gains/losses and surplus/deficit in the scheme recognised for RMPP and RMSEPP defined benefit
plans in the financial statements of the Group:
a) Major long-term assumptions
The size of the RMPP pension surplus, which is large in the context of the Group and its finances, is materially sensitive to the
assumptions adopted. Small changes in these assumptions could have a significant impact on the surplus and overall income statement
charge. The major long-term assumptions were:
At 31 March 2013) = At 25 March 2012 At 28 March 2011
hpa %pa %pa
Rate of increase in salaries 43 43 45
Rate of pension increases - RMPP sections A/B 2.3 23 28
Rate of pension increases - RMPP section C 3.2 33 35
Rate of pension increases - RMSEPP all members 3.3 33 35
Rate of increase for deferred pensions - RMSEPP members
transferred from Section A or B of RMPP 33 33 35
Rate of increase for deferred pensions 2.3 23 28
Discount rate 48 5.4 5.5
Inflation assumption (RPI) 3.3 33 35
Inflation assumption (CPI) 2.3 23 28
Expected average rate of return on assets n/a 5.9 65
In June 2010, the Government announced that it was intending to change the inflation measure used to determine statutory mini mum
indexation in deferment and in payment from RPI to CPI from April 2011. Where relevant, the inflation assumption has changed from RPI
to CPI
The above assumptions relate to both defined benefit plans with the exception of the expected average rate of return on asset s which was
computed for the combined assets of the plans. The expected average rate of return on assets was a weighted average of the long-term
expected rate of return of each principal asset class (see section b). The expected average rate of return was computed at each balance
sheet date based on the market values and long-term rate of return of each principal asset class as at that date. The change in IAS 19
that will be implemented with effect from 1 April 2013 means that the expected average rate of return on assets is no longer required.
The following table shows the potential impact on the RMPP assets and pension surplus of changes in key assumptions:
£m
Changes in RPI and CPI inflation of +0.1% pa (4)
Changes in discount rate of +0.1%pa 4
Changes in real salary growth of +0.1% pa (6)
Changes in CPI assumptions of +0.1% pa (a)
An additional 4 year life expectancy (4)
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Mortality
The mortality assumptions for the RMPP sectionalised scheme are based on the latest self administered pension scheme (SAPS) mortality
tables with appropriate scaling factors (106% for male pensioners and 101% for female pensioners). For future improvements the
assumptions allow for ‘medium cohort’ projections with a 1.25% floor. These are detailed below:
‘Average expected life expectancy from age 60: 2013 2012 2011
For a current 60 year old male RMPP member 26 years 26 years 26 years
For a current 60 year old female RMPP member 29 years 29 years 29 years
For a current 40 year old male RMPP member 29 years 29 years 29 years
For a current 40 year old female RMPP member 32 years 32 years 32 years
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return for the Group were:
Market value 2013 Long-term expected rate
Sectionalised RMPP £m of return 2013 % pa
Equities 29 n/a
Bonds 205 nia
Property - nla
Other assets 9 nia
Fair value of RMPP assets 243
Present value of RMPP liabilities (444)
Surplus in plan 99
Market value 2013 Long term expected
Share of RMSEPP £m__rate of return 2013 % pa
Equities 146 nia
Bonds 193 nia
Property 19 n/a
Other assets 3 nla
Fair value of plan assets for RMSEPP 361
Present value of plan liabilities for RMSEPP (347)
Surplus in plan for RMSEPP 14
Surplus in plan for the POL share
(at approximately 7%) of RMSEPP a
A retirement benefit surplus of £97m is disclosed on the balance sheet, representing the surplus in plans of £99m and €1m for RMPP
and RMSEPP respectively, and net of tax of £3m at a rate of 35% on the element of the surplus which is recoverable through a refund
from the plans.
Market value Market value Long term expected Long term expected
2012 2011 rate of return 2012 rate of return 2011
Combined plans £m £m %pa %pa
Equities 3,385 4,268 77 82
Bonds 25,610 21,409 57 6.2
Property 1,417 1.590 68 65
Other assets _ _ 333 418 34 42
Fair value of plans’ assets for the combined plans 30,745 27,685
Present value of plans’ liabilities for the
combined plans (33,667) (32,186)
Deficit in schemes for the combined plans (2.922) (4,501)
Deficit in schemes for_~— share
(at approximately 7%) of combined plans (206) (316)
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded,
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c) Movement in plans’ assets and liabilities
Changes in the fair value of the plans’ assets are analysed as follows
Assets Sectionalised
RMPP 2013 £m
Assets in sectionalised RMPP at beginning of period 2,108
Transfer of pension assets to government (1,953)
Contributions paid 25
Employee contributions paid 8
Finance income (expected rate of return) 11
Actuarial gains (additional increases in market values) 43
Benefits paid to members (2)
Assets in sectionalised RMPP at end of period 240
Assets Share of
RMSEPP 2013
£m
Share of assets in RMSEPP at beginning of period 24
Contributions paid 2
Movement in contributions accrued -
Employee contributions paid -
Finance income (expected rate of return) 1
Actuarial gains (additional increases in market values) a
Benefits paid to members -
Share of assets in RMSEPP at end of period 25
Assets combined plans 2012 2011
£m £m
Share of assets in combined plans at beginning of period 1,923 1,797
Contributions paid 26 46
Movement in contributions accrued (3) 2
Employee contributions paid 10 11
Finance income (expected rate of return) 124 120
Actuarial gains (additional increases in market values) 131 33
Benefits paid to members (82) (86)
Share of assets in combined plans at end of period 2,129 1,923
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabilities Sectionalised
RMPP 2013
£m
Liabilities in sectionalised RMPP at beginning of period (2,313)
Transfer of pension liabilities to government 2,239
Current service cost (24)
Curtailment costs* (2)
Finance cost (9)
Employee contributions (8)
Actuarial loss (recognised in statement of comprehensive income) (29)
Benefits paid 2
Liabilities in sectionalised RMPP at end of period (144)
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Liabilities Share of
RMSEPP 2013
£m
Share of liabilities in RMSEPP plans at beginning of period (22)
Current service cost -
Curtailment costs* -
Finance cost (a)
Employee contributions -
Actuarial gain/(loss) (recognised in statement of comprehensive income) (4)
Benefits paid -
Share of liabilities in RMSEPP at end of period (24)
Liabilities combined plans 2012 2011
£m £m
Share of liabilities in combined plans at beginning of period (2,239) (2,364)
Current service cost (23) (25)
Curtailment costs* - (3)
Finance cost (122) (132)
Employee contributions (20) (14)
Actuarial gain/(loss) (recognised in statement of comprehensive income) (23) 207
Benefits paid 82 86
Share of liabilities in combined plans at end of period (2,335) (2,239)
*The curtailment costs in the profit and loss account are recognised on a consistent basis with the associated compensation costs
Estimates of both are included, for example, in any redundancy provisions raised. The curtailment costs above represent the costs
associated with those people paid compensation in respect of redundancy during the accounting period. Such payments may occur in an
accounting period subsequent to the recognition of costs in the income statement.
d) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRS as adopted by the European Union at 26 March
2012 in the consolidated statement of comprehensive income is a gain of £14m.
Sectionalised Share of
RMPP RMSEPP 7% share of combined plans
2013 2013 2012 2011 2010 2009
£m £m £m £m £m £m
Fair value of assets 243 25 2,168 1944 1,811 1,407
Present value of liabilities (144) (24) (2,374) (2,260) __ (2,375) (4,882)
Surplus/(Deficit) in schemes 99 1 (206) (316) (564) (475)
Experience adjustment on assets 46 a 131 33 313 (384)
Experience adjustment on liabilities (20) : : (a) 47 (y)
2013 2013 2012 2011 2010 2009
% % % % % %
Experience adjustment on assets as a % of
scheme assets 18.9 55 64 17 174 (27.3)
Experience adjustment on liabilities as a % of
scheme liabilities (13.9) 14 0.0 0.0 (2.0) 01
Deficit in the scheme as a % of scheme
liabilities, - - 88 141 23.9 25.3
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An analysis of the separate components of the amounts recognised in the performance statements of the Group is as follows:
2013 sectionalised
RMPP £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost
24
Total charge to operating profit before exceptional items
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision - note 16)
Total charge to operating profit ee
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities
Expected return on plan assets
26
(11)
Net pensions credit to financing
(2)
Net charge to the income statement before deduction for tax
24
Analysis of amounts recognised in the statement of comprehensive income
Transfer of pension liabilities to government
Transfer of pension assets to government
2,239
(1,953)
Gain on transfer to government
286
Actual return on plan assets
Less: expected return on plan assets
Less: taxation on surplus recoverable through plan refunds
57
(11)
(3)
Actuarial gains on assets (all experience adjustments)
43
Experience adjustments on liabilities
Effects of changes in actuarial assumptions on liabilities
(20)
(9)
Actuarial losses on liabilities
(29)
Total actuarial gains recognised in the statement of comprehensive income
300
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2013 share of
RMSEPP £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost 1
Total charge to operating profit before exceptional items
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision for organisational review - note 16) -
Total charge to operating profit 4
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 16
Expected return on plan assets — ___(18)__
Net pensions interest (2)
Share of net pensions interest (at approximately 7%) -
Net charge to the income statement before deduction for tax :
Analysis of amounts recognised in the statement of comprehensive income in the Royal
Mail Holdings Group financial statements
Actual return on plan 38
Less: expected return on plan (18)
Actuarial gains on assets (all experience adjustments) 20
Experience adjustments on liabilities 5
Effects of changes in actuarial assumptions on liabilities (23)
Actuarial losses on liabilities (18)
Total actuarial gains recognised in statement of comprehensive income in the Royal Mail
Holdings Group financial statements 2
Share of actuarial gains/(losses) recognised in statement of comprehensive income (at
approximately 7%)
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Combined plans 2012 2011
£m £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost 23 25
Total charge to operating profit before exceptional items 23 25
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision for organisational review - note 16) - 2
Total charge to operating profit 23 27
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plans’ liabilities for the combined plans 1,749 1,881
Expected return on plans’ assets for the combined plans ee (1.775) (4,714)
Net pensions interest for the combined plans (26) 167
Share of net pensions interest (at approximately 7%) (2) 12
Net charge to the income statement before deduction for tax 21 39
Analysis of amounts recognised in the statement of comprehensive income in the
Royal Mail Holdings Group financial statements
Actual return on plans’ assets for the combined plans 3.644 2184
Less: expected return on plans’ assets for the combined plans (1,775) (1.714)
Actuarial gains on assets for the combined plans (all experience adjustments) 1,869 470
Experience adjustments on liabilities for the combined plans (5) (8)
Effects of changes in actuarial assumptions on liabilities for the combined plans (320) 2,962
Actuarial (losses)/ gains on liabilities for the combined plans (325) 2.954
Total actuarial gains recognised in statement of comprehensive income in the Royal
Mail Holdings Group financial statements 1544 3,424
Share of actuarial gains/(losses) recognised in statement of comprehensive
income (at approximately 7%) 108 240
20. Called up share capital
2013 2012 2011
£ £ £
Authorised
Ordinary shares of £1 each 51,000 51,000 51,000
Total 51,000 51,000 51,000
Allotted and issued
Ordinary shares of £1 each 50,003 50,003 50,003
Total 50,003 50,003 50,003
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21. Commitments
Capital commitments contracted for but not provided in the financial statements amount to £48m (2012 £15m).
The Group is committed to the following minimum lease payments under non-cancellable operating leases:
Land and buildings IT equipment
2013 2012 2011 2013 2012 2011
£m £m £m £m £m £m
Within one year 16 16 16 15 16 16
Between one and five years 42 44 43 - - -
Beyond five years 38 43 45 : - -
Total 96 103 104 15 16 16
22. Finance lease liabilities
2013 2012 2011
Present value Present value Present value
of minimum of minimum of minimum
Minimum lease Minimum lease Minimum lease
payments payments payments payments payments payments
£m £m £m £m £m £m
Within one year 4 3 4 4 4 4
Between one and five years 4 4 8 6 12 9
Beyond five years : - - : : -
Total minimum lease
payments 8 7 12 10 16 13
Less amounts _ representing
finance charges (a) - (2) = (3) :
Present value of minimum
lease payments 7 7 10 10 13 43
Of which:
Current 3 3 4 4 4 4
Non-current 4 4 6 6 9 9
The aggregate finance charges allocated for the period in respect of finance leases was £738,859 (2012 £1,011,232). The fair value of
finance lease liabilities is not materially different from the carrying value.
The Group has finance lease contracts for equipment. The leases have no terms for renewal, purchase options or escalation clauses and
there are no restrictions concerning dividends, borrowings or additional leases. The leases have an average term of six years.
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Post Office Limited
23. Related party disclosures
Joint venture
The following company is a joint venture of the Group:
POL00144637
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Company Country of incorporation % Holding Principal activities
First Rate Exchange Services
Holdings Limited United Kingdom 50 Bureau de Change
Associates
The following company was an associate of Post Office Limited during the year: The Group's interest was disposed of in September 2012.
% Holding
Company Country of incorporation
Principal acti
ities
Midasgrange Limited United Kingdom
50
Financial services
All shareholdings are equity shares.
Related party transactions
During the year the Group entered into transactions with the following related parties. The transactions were in the ordinary course of
business. The transactions entered into and the balances outstanding at the financial year end were as follows:
Amounts
Amounts
Sales/recharges Purchases/ owed from related owed to related
to recharges from party including party including
related party related party outstanding loans outstanding loans
2013 «2012, 2011. Ss 2013) 2012) 2011S 2013-2012 20112013) «2012 2011
£m £m £m £m £m £m £m £m £m £m £m £m
Royal Mail Group Limited 3714 359 346 37 33 35 - - - 4 8 iu
Camelot Group plc - - 10 - - - - - - -
Romec Limited - - - 8 8 8 - - - 2 1 1
Midasgrange Limited 35 41 30 1 1 3 - 14 10 - 1 -
First Rate Exchange
Services Holdings
Limited 27 31 30 125 128 132 7 3 9 11 8 a
The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the year end are unsecured,
interest free and settlement is made by cash. Royal Mail Group Limited is a subsidiary company of the Group's parent company, Royal
Mail Holdings plc. Camelot Group plc was an associate within the Royal Mail Holdings Group but was disposed of in 2010-11. Romec
Limited is a subsidiary of Royal Mail Group Limited. Midasgrange Limited was an associate of the Group until September 2012 and First.
Rate Exchange Services Holdings Limited is a joint venture of the Group.
The Group trades with numerous Government bodies on an arm's length basis. Transactions with these entities are not disclosed owing to
the significant volume of transactions that are conducted
Separately:
the Group has certain loan facilities with Government (note 15);
and £102m of which is deferred income within trade and other payables (note 14); and
the Group has received the Network Subsidy Payment from Government (note 1).
almost all of the pension assets and liabilities of the Royal Mail Pension Plan to Government (note 19);
the Group has received a Government Grant of £200m, £98m of which was recognised through the income statement (note 5)
Key management comprises Executive and Non-Executive Directors of the Post Office Limited Board and the members of the Executive
Committee at 31 March 2013. The aggregate remuneration of the key management personnel of the Post Office Group is set out below:
2013 2012
£000 £000
Short-term employee benefits 3,568 3,077
Post-employment benefits 119 232
Other long-term benefits 651 -
Termination benefits : :
Total 4,338 3,309
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24. Post balance sheet events
In accordance with the funding agreement with Government announced on 27 October 2010, for which State Aid approval was received
on 28 March 2012, Post Office Limited received £415m of funding on 2 April 2013.
25. Immediate and ultimate parent company
At 31 March 2013, the Directors regarded Royal Mail Holdings plc as the immediate and ultimate parent company. The largest group to
consolidate the results of the company is Royal Mail Group Holdings plc, a company registered in the United Kingdom. Royal Mail Group
Holdings plc financial statements can be obtained from the company website, www.royalmailgroup.com
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Post Office Limited
Parent Company Financial Statements
2012-2013
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Independent auditor’s report to the members of Post Office Limited
We have audited the parent company financial statements of Post Office Limited for the 53-week period ended 31March 2013 which
comprise the company balance sheet, the company staternent of total recognised gains and losses, the company reconciliation of movernents
in shareholder's and the related notes 1 to 14. The financial reporting framework that has been applied in their preparation is appicable law
and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice)
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the company’s members those matters we are required to state to themin an
auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
‘As explained more fully in the Directors’ Responsibilities Statement set out on page the directors are responsible for the preparation of the
parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an
opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
whether the accounting policies are appropriate to the parent company's circumstances and have been consistently applied and adequately
disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of thefinancial
statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with
the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications
for our report.
Opinion on financial statements
In our opinion the parent company financial statements:
© give true and fair view of the state of the company's affairs as at 31 March 2013;
© have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
© have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial period for which the financial statements are prepared is,
consistent with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
* adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
© the parent company financial statements are not in agreement with the accounting records and returns; or
* certain disclosures of directors’ remuneration specified by law are not made; or
© we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the consolidated financial statements of Post Office Limited for the 53-week period ended 31 March 2013.
Ernst & Young LLP
Angus Grant (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
1. The maintenance and integrity of the Post Office Limited's web site is the responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have
occurred to the financial statements since they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legslation in other
jurisdictions,
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Balance sheet of the company
at 31 March 2013 and 25 March 2012
2013 2012
Notes £m £m
Intangible assets 2 - -
Tangible assets 3 11 11
Investments in joint ventures and associates 4 1 5
Retirement benefit surplus 12 97 -
Total fixed asset: a 16
Current assets
Stocks 8 6
Debtors - receivable within one year 5 362 226
Financial assets - investments 6 92 62
Financial assets - derivatives 1 -
Cash at bank and in hand 7 879 758
1,342 1052
Current liabilities
Creditors - amounts falling due within one year 8 (901) (587)
Financial liabilities - interest bearing loans and borrowings 9 (291) (377)
Net current assets 450 88
Total assets less current liabilities 259 104
Creditors - amounts falling due after more than one year 10 (4) (8)
Provisions for liabilities 11 (26) (14)
Retirement benefit obligation 12 - (206)
Net assets/(liabilities) 229 (124)
Capital and reserves
Called up share capital 13 - -
Share premium 4 465 465
Profit and loss account 14 (236) (589)
Shareholder’s surplus/(deficit) 229 (124)
The financial statements on pages XX to XX were approved by the Board of Directors on XXX 2013 and signed on its behalf by:
P A Vennells CM Day
Chief Executive Chief Financial Officer
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Statement of total recognised gains and losses
for the 53 weeks ended 31 March 2013 and the 52 weeks ended 25 March 2012
2013 2012
Notes £m £m
Profit for the financial year 14 74 37
Actuarial gains on defined benefit pension schemes 12 14 108
Taxation on items taken directly to equity (24) -
Total recognised gains for the financial year 14 67 145
There is no statement of historical cost profits and losses as the financial statements are produced under the historic cost
accounting convention.
Reconciliation of movements in shareholder's funds
for the year ended 31 March 2013 and 25 March 2012
2013 2012
Notes £m £m
Opening shareholder's deficit 4 (124) (269)
Total recognised gains for the financial year (see above) 67 145
Transfer of pension deficit to government 286 -
Closing shareholder’s surplus/ (deficit) 229 (124)
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Notes to the financial statements
1. Accounting Policies
The following accounting policies apply throughout Post Office Limited (the Company):
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are made up to the 53 weeks ended 31
March 2013 (2012 52 weeks ended 25 March 2012).
Basis of preparation
The financial statements on pages & to KK have been prepared in accordance with applicable UK Accounting Standards and law,
including the requirements of the Companies Act 2006. Unless otherwise stated in the accounting policies below, the financial statements
have been prepared under the historic cost accounting convention.
As permitted by Section 408 of the Companies Act 2006 Post Office Limited has not presented its own profit and loss account. The result
dealt with in the accounts of the company amounted to £74m profit (2012 £37m profit).
No cash flow statement has been presented as the Company is part of the Post Office Limited Group which has presented a consolidated
cash flow statement within its Group financial statements.
The company has taken advantage of the exemption conferred by FRS 29 not to disclose financial instrument information as the
Company is part of the Post Office Limited Group which has presented such disclosures in its Group financial statements.
Changes in accounting policy
The accounting policies are consistent with those of the previous year.
Intangible fixed assets
Intangible assets acquired separately or generated internally are initially recognised at cost and are reviewed for impairment. An
impairment loss is recognised in the profit and loss account for the amount by which the carrying value of the asset exceeds its
recoverable amount, which is the higher of an asset's net realisable value and its value in use.
Amortisation of intangible assets with finite lives is charged annually to the income statement on a straight-line basis as follows.
Software 1 to 6 years
Tangible fixed assets
Tangible fixed assets are recognised at cost, including attributable costs in bringing the asset into working condition for its intended use.
Depreciation of tangible fixed assets is provided on a straight-line basis by reference to net book value and to the remaining useful
economic lives of assets and their estimated residual values. The lives assigned to major categories of tangible fixed assets are:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining useful life
Plant and Machinery 3-15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2-15 years
Impairment reviews
Unless otherwise disclosed in these accounting policies, fixed assets are reviewed for impairment if events or changes in circumstances
indicate that the carrying value may be impaired. The Company assesses at each reporting date whether such indications exist. Where
appropriate, an impairment loss is recognised in the profit and loss account for the amount by which the carrying value of the asset (or
cash generating unit) exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have passed to the Company are
capitalised at the inception of the lease with a corresponding liability recognised for the fair value of the leased item or, if lower, at the
present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease
liability so as to achieve a constant rate of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases
and rentals are charged to the profit and loss account over the lease term. The aggregate benefit of incentives are recognise d as a
reduction of rental expenses over the lease term on a straight-line basis
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Investments in joint ventures and associates
Investments in joint ventures and associates within the Company's financial statements are stated at cost less any accumulate d
impairment losses.
Investments in subsidiaries
Investments in subsidiaries within the Company's financial statements are stated at cost less any accumulated impairment losses. The
carrying value relates solely to the Company's investment in Post Office Management Services Limited, a 100% subsidiary of the Company
and is less than £1m.
Stocks
Stocks, which include printing and stationery, retail and lottery products, are carried at the lower of cost and net realisable value after
adjusting for obsolete or slow-moving stock
Deferred tax
Deferred tax is generally provided in full on timing differences at the balance sheet date, at rates expected to apply when the tax liability
(or asset) crystallises based on substantively enacted tax rates and law. Timing differences arise from the inclusion of item s of income and
expenditure in taxation computations in periods different from those in which they are included in the financial statements
Deferred tax is not recognised in the following instances:
~ on gains on disposal of fixed assets where, on the basis of available evidence, it is more likely than not that the taxable gain will be
rolled over into replacement assets and charged to tax only when there is a commitment to dispose of those replacement assets;
- on unremitted earnings of subsidiaries and associates where there is no commitment to remit those earnings; and
- deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
Deferred tax assets and liabilities are not discounted. Deferred tax is charged or credited directly to reserves if it relates to items that are
credited or charged directly to reserves. Otherwise it is recognised in the profit and loss account.
Pensions and other post-retirement benefits
People working for the Company were employed by Royal Mail Group Limited and seconded to the Company until 31 March 2012. On 1
April 2012 they were transferred to be directly employed by the Company. Membership of occupational pension schemes is open to most
permanent UK employees of the Company. All members of defined benefit schemes are contracted out of the earnings -related part of the
State pension scheme
The pension plans’ assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an actuarial basis using
the projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of
equivalent currency and term. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet, net
of any associated deferred tax balance. Full actuarial valuations are carried out at intervals not normally exceeding three years as
determined by the Trustees and, with appropriate updates and accounting adjustments at each balance sheet date, form the basis of the
deficit disclosed.
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service costs and any gains
and losses arising from settlements, curtailments and past service costs.
The net difference between the interest costs and the expected return on plan assets is recognised as net pensions interest in the profit
and loss account. Actuarial gains and losses are recognised immediately in the statement of total recognised gains and losses (STRGL).
Any deferred tax movement associated with the actuarial gains and losses is also recognised in the STRGL.
For defined contribution schemes, the Company's contributions are charged to operating profit, as part of staff costs, in the period to
which the contributions relate.
Foreign currencies
The functional and presentational currency of the Company is sterling (£).
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction (or at the contracted rate if the
transaction is covered by a forward foreign currency contract). Monetary assets and liabilities denominated in foreign currencies are
retranslated at the rate of exchange ruling at the balance sheet date (or the appropriate forward contract rate). All differences are taken
to the profit and loss account.
Debtors
Debtors are recognised and carried at original invoice amount less an allowance for any non-collectable amounts. An estimate for
doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified
Financial assets - investments (current assets)
Financial assets - investments in the balance sheet comprise short-term deposits and money market funds. All financial assets -
investments are classified as loans and receivables and are measured at amortised cost using the effective interest rate meth od. Gains
and losses are recognised in the profit and loss account when the investments are derecognised or impaired, as well as through the
amortisation process.
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4. Accounting Policies (continued)
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost. Borrowing costs are recognised as an expense
when incurred
Financial liabilities - obligations under finance lease and hire purchase contracts
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at amortised cost.
Borrowing costs
Borrowing costs are recognised as an expense when incurred unless they are directly attributable to the construction or devel opment of a
qualifying asset, in which case they are capitalised using the weighted average cost of borrowing for the period of
construction/development.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet d ate. Where
there is no active market, fair value is determined using valuation techniques. These include using recent arm's length market
transactions; reference to the current market value of another instrument which is substantially the same; and discounted cas h flow
analysis and pricing models.
For the purposes of disclosing the fair value of investments held at amortised cost in the balance sheet, in the absence of quoted market
prices, fair values are calculated by discounting the future cash flows of the finan cial instrument using quoted equivalent interest rates as
at close of business on the balance sheet date.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.
Government grants
Government grants of a revenue nature are recognised to match costs in relation to the performance of certain specified activ ities.
2. Intangible assets
2013 2012
Cost £m £m
At 26 March 2012 and 28 March 2011 183 166
Additions 25 17
Disposals : :
At 34 March 2043 and 25 March 2042 208 183
Amortisation and impairment
At 26 March 2012 and 28 March 2011 183 166
Impairment 25 7
At 31 March 2013 and 25 March 2042 208 183
Net book value
At 34 March 2013 and 25 March 2012 : -
The above intangible assets relate to software.
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3. Tangible fixed assets
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold —_ leasehold vehicles machinery equipment Total
£m £m £m £m £m £m £m
Cost
At 26 March 2012 79 v7 114 34 1 709 954
Reclassification - 1 (1) - - - -
Additions 9 - 1 9 - 22 41
Disposals - external (a) - - (1) - (22) (24)
At 31 March 2013 87 18 144 42 1 719 981
Depreciation
At 26 March 2012 69 16 114 34 1 709 943
Depreciation - - - - - - -
Impairment (see note 5) 9 1 - 9 - 22 41
Disposals - external (a) : : (a) - (12) (14)
At 34 March 2013 LU 17 144 42 Fa 719 970
Net book value
At 31 March 2013 10 Fa - - - - 11
At 26 March 2012 10 1 - - - - 11
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land, which represents £3m
(2012 £3m) of the total cost of properties.
4. Investments in joint ventures and associates
2013 2012
£m £m
Investment in joint ventures and associates a 5
Joint ventures
During 2012-13 and 2011-12, the Company's only joint venture investment was a 50% interest (1,000 £1 ordinary A shares) in First
Rate Exchange Services Holdings Limited with a carrying value of £0.6m (2012 £0.6m), whose principal activity is the provision of Bureau
de Change. First Rate Exchange Services Holdings Limited is a company registered in the United Kingdom.
Associates
During 2011-12, the Company's only associate investment was a 49.99% interest (4.999 £0.01 ordinary A shares) in Midasgrange
Limited with a carrying value of £4.6m (2011 £4.6m), whose principal activity is the provision of personal financial products. This
investment was disposed of during the year ended 31 March 2013
5. Debtors - receivable within one year
2013 2012
£m £m
Trade debtors 32 39
Prepayments and accrued income 81 39
Client debtors 240 138
Other receivables 9 10
Total 362 226
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6. Current financial assets - investments
2013 2012
£m £m
Money market funds 86 43
Short-term deposits - bank 6 19
Total 92 62
7. Cash at bank and in hand
2013 2012
£m £m
Cash in the Post Office Limited network 879 758
8. Creditors - amounts falling due within one year
2013 2012
£m £m
Trade creditors and accruals 178 172
Advance customer payments 50 48
Social security 10 9
Client creditors 528 332
Obligations under finance lease and hire purchase contracts 3 4
Amount due to other group companies 5 9
Capital creditors 18 10
Business transformation payments 7 3
Government Grant 102 0
Total 901 587
9. Financial liabilities - interest bearing loans and borrowings
Analysis of loans and committed facilities:
2013 2012
£m £m
Loans drawn down 291 377
Total facility 4,150 1,150
The loans under the facility are short dated on a programme of liquidity management and mature on average 1 day after the year end
(2012 1 day). On maturity it is expected that further loans will be drawn down under this facility, which expires in 201 6. The undrawn
committed facility, in respect of which all conditions precedent had been met at the balance sheet date is £859m (2012 £773m.) The
average interest rate on the drawn down loans is 1.0% (2012 0.8%)
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited network.
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and a negative pledge over
cash and near cash items. The negative pledge is an agreement not to grant security over the assets or to set up a vehicle that has the
same effect.
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10. Creditors - amounts falling due after more than one year
2013 2012
£m £m
Obligations under finance lease and hire purchase contracts 4 6
Other payables - 2
Total 4 8
11. Provisions for liabilities
Crown
Conversions Network
Project Transformation Other Total
£m £m £m £m
At 26 March 2012 9 - 5 14
Charged in operating exceptional items - 10 12 22
Charged in operating costs - 6 6
Charged in financing costs 1 ~ - 1
Utilisation (3) - (a4) (47)
At 34 March 2013 7 10 9 26
Other provisions of £9m (2012 £5m) include property contracts, comprising amounts from onerous lease obligations and personal injury
claims.
Amounts charged in financing costs relate to the unwinding of discounted long-term provisions.
The Crown Conversions project relates to past franchising of Crown offices and onerous property lease provisions are expected to be
utilised within 5 years.
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12. Pensions
On 4 April 2012, almost all of the pension assets and liabilities of the Royal Mail Pension Plan (RMPP) were transferred to HM
Government. On this date the RMPP was also sectionalised with Royal Mail Group Limited and Post Office Limited responsible for their
own sections. All employees were transferred to be directly employed by Post Office Limited on the same date
Royal Mail Group Limited is the principal employer in Royal Mail Senior Executive Pension Plan (RMSEPP) and Post Office Limited became
a participating employer with effect from 1 April 2012. Post Office Limited continues to account for approximately 7% of the RMSEPP
scheme as it has done previously.
Prior to 4 April 2012, Royal Mail Group Limited had the legal relationship with the Trustees of both RMPP and RMSEPP and, as such, the
Trustees held Royal Mail Group liable for the actuarial deficit in the scheme. All employees were employed by Royal Mail Group Limited
and seconded to Post Office Limited under an agreement between Post Office Limited and Royal Mail Group Limited. Post Office Limited
met the full costs of employment and was responsible for the funding of the pension deficit attributable to these employees. Consequently
Post Office Limited recognised a balance sheet deficit based on employee numbers over 12 years and represented approximately 7% of
the total balance sheet deficit at that time. The net pensions interest, deficit recovery payments and actuarial gains or losses were also
allocated on this basis, giving the Post Office Limited approximately 7% of the total balance sheet deficit at the balance sheet date. The
current service cost, regular future service contributions and curtailments were computed separately for Royal Mail Group Limited and
Post Office Limited based on common factors/rates.
The disclosures in this note relating to the year ended 31 March 2013 reflect the Post Office Limited sectionalised RMPP scheme which is
independently operated by Post Office Limited and the approximate 7% share of the RMSEPP scheme. The comparative figures for the
year ended 25 March 2012 and the opening position at 28 March 2011 represent approximately 7% of the previous combined RMPP and
RMSEPP plans.
The disclosures in this note relate to the year ending 31 March 2013 and show how the value of the assets and liabilities have been
calculated at the balance sheet date.
The Company participates in pension schemes as detailed below.
Name Eligibility
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
Defined Contribution
The charge in the profit and loss account for the defined contribution schemes and the Company contributions to these schemes was
£1m (2012 £1m) during the year. A new defined contribution plan (RMDCP) was launched in April 2009. New recruits joining from 31
March 2008 are able to begin paying contributions to the new plan after they have worked for the Company for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The latest full actuarial
funding valuation of both schemes was carried out as at 31 March 2009 using the projected unit method. For RMPP, this valuation was
concluded at £10.3bn deficit. For RMSEPP, the valuation was concluded at £100m deficit. RMPP includes sections A, B and C each with
different terms and conditions:
Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
* Section B is for members (or beneficiaries of members) who joined after 1 December 1971 and before 1 April 1987 or to
members of Section A who chose to receive Section B benefits;
© — Section C is for members (or beneficiaries of members) who joined after 1 April 1987 and before 1 April 2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008.
The changes encompass:
* the Plans closed to new members from 34 March 2008;
* all pensions and benefits earned before 1 April 2008 are still linked to final salary at the time of retirement:
© from 1 April 2008, defined benefits building up for employee members of the Plan are earned on a career salary basis;
* employees can continue to take their pension on reaching 60 but the normal retirement age increased to 65 for benefits
earned from 1 April 2010; and
© from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age at 55, and continue
working while still contributing to the Pension Plan until the maximum level of benefits has been reached.
* on 31 December 2012 RMSEPP was closed.
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Payment of £24m (2012 £23m) was made by the Company during the year in respect of regular future service contributions, nearly all
relating to RMPP. The regular future service contributions for RMPP, expressed as a percentage of pensionable pay, has remained at
17.1% (2012 17.1%), effective from April 2010. This rate is not expected to change materially during 2013-14. For RMSEPP, these
contributions have remained at 35.9% (2012 35.9%) until its closure.
The Company pays 7% of the total deficit payment required to fund the deficit in RMSEPP and a payment of €2m (2012 less than £1m)
was made by the Company during the year. Following the State Aid clearance granted on 21 March 2012 and the subsequent transfer of
the historical pension deficit to HM Government on 1 April 2012 no RMPP deficit payment was made during 2011-12 or 2012-13. For
RMSEPP, deficit recovery payments will be £1m per annum, from 1 April 2010 to 31 January 2024.
A current liability of £nil (2012 £nil) has been recognised for payments to the pension schemes relating to redundancy. During the year,
payments of £2m (2012 £3m) relating to redundancy were made.
The following disclosures relate to the gains/losses and surplus/deficit in the scheme recognised for RMPP and RMSEPP defined benefit
plans in the financial statements of the Company:
b) Major long-term assumptions
The size of the RMPP pension surplus, which is large in the context of the Company and its finances, is materially sensitive to the
assumptions adopted. Small changes in these assumptions could have a significant impact on the surplus and overall income statement
charge. The major long-term assumptions were:
At 31 March 2013 = At 25 March 2012 At 28 March 2011
hpa %pa %pa
Rate of increase in salaries 43 43 45
Rate of pension increases - RMPP sections A/B 2.3 23 28
Rate of pension increases - RMPP section C 3.2 33 35
Rate of pension increases - RMSEPP all members 3.3 33 35
Rate of increase for deferred pensions - RMSEPP members
transferred from Section A or B of RMPP 33 33 35
Rate of increase for deferred pensions 2.3 23 28
Discount rate 48 5.4 5.5
Inflation assumption (RPI) 3.3 33 35
Inflation assumption (CPI) 2.3 23 28
Expected average rate of return on assets n/a 5.9 65
In June 2010, the Government announced that it was intending to change the inflation measure used to determine statutory mini mum
indexation in deferment and in payment from RPI to CPI from April 2011. Where relevant, the inflation assumption has changed from RPI
to CPI
The above assumptions relate to both defined benefit plans with the exception of the expected average rate of return on asset s which was
computed for the combined assets of the plans. The expected average rate of return on assets was a weighted average of the long-term
expected rate of return of each principal asset class (see section b). The expected average rate of return was computed at each balance
sheet date based on the market values and long-term rate of return of each principal asset class as at that date. The change in IAS 19
that will be implemented with effect from 1 April 2013 means that the expected average rate of return on assets is no longer required.
The following table shows the potential impact on the RMPP assets and pension surplus of changes in key assumptions:
£m
Changes in RPI and CPI inflation of +0.1% pa (4)
Changes in discount rate of +0.1%pa 4
Changes in real salary growth of +0.1% pa (6)
Changes in CPI assumptions of +0.1% pa (a)
An additional 4 year life expectancy (4)
50
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Mortality
The mortality assumptions for the RMPP sectionalised scheme are based on the latest self administered pension scheme (SAPS) mortality
tables with appropriate scaling factors (106% for male pensioners and 101% for female pensioners). For future improvements the
assumptions allow for ‘medium cohort’ projections with a 1.25% floor. These are detailed below:
Average expected life expectancy from age 60: 2013 2012 2011
For a current 60 year old male RMPP member 26 years 26 years 26 years
For a current 60 year old female RMPP member 29 years 29 years 29 years
For a current 40 year old male RMPP member 29 years 29 years 29 years
For a current 40 year old female RMPP member 32 years 32 years 32 years
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return for the Company were:
Market value 2013 Long-term expected rate
Sectionalised RMPP £m of return 2013 % pa
Equities 29 n/a
Bonds 205 nia
Property - nla
Other assets 9 nia
Fair value of RMPP assets 243
Present value of RMPP liabilities (444)
Surplus in plan 9
Market value 2013 Long term expected
Share of RMSEPP £m__rate of return 2013 % pa
Equities 146 nia
Bonds 193 nia
Property 19 n/a
Other assets 3 nla
Fair value of plan assets for RMSEPP 361
Present value of plan liabilities for RMSEPP (347)
Surplus in plan for RMSEPP 14
Surplus in plan for the POL share
(at approximately 7%) of RMSEPP a
A retirement benefit surplus of £97m is disclosed on the balance sheet, representing the surplus in plans of £99m and £1m for RMPP
and RMSEPP respectively, and net of tax of £3m at a rate of 35% on the element of the surplus which is recoverable through a refund
from the plans.
Market value Market value Long term expected Long term expected
2012 2011 rate of return 2012 rate of return 2011
Combined plans £m £m %pa %pa
Equities 3,385 4,268 77 82
Bonds 25,610 21,409 57 6.2
Property 1,417 1.590 68 65
Other assets _ _ 333 418 34 42
Fair value of plans’ assets for the combined plans 30,745 27,685
Present value of plans’ liabilities for the
combined plans (33,667) (32,186)
Deficit in schemes for the combined plans (2.922) (4,501)
Deficit in schemes for_— share
(at approximately 7%) of combined plans (206) (316)
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded,
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c) Movement in plans’ assets and liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Assets Sectionalised
RMPP 2013 £m
Assets in sectionalised RMPP at beginning of period 2,108
Transfer of pension assets to government (1,953)
Contributions paid 25
Employee contributions paid 8
Finance income (expected rate of return) 11
Actuarial gains (additional increases in market values) 43
Benefits paid to members (2)
Assets in sectionalised RMPP at end of period 240
Assets Share of
RMSEPP 2013
£m
Share of assets in RMSEPP at beginning of period 21
Contributions paid 2
Movement in contributions accrued -
Employee contributions paid -
Finance income (expected rate of return) 1
Actuarial gains (additional increases in market values) a
Benefits paid to members -
Share of assets in RMSEPP at end of period 25
Assets combined plans 2012 2011
£m £m
Share of assets in combined plans at beginning of period 1,923 1,797
Contributions paid 26 46
Movement in contributions accrued (3) 2
Employee contributions paid 10 11
Finance income (expected rate of return) 124 120
Actuarial gains (additional increases in market values) 131 33
Benefits paid to members (82) (86)
Share of assets in combined plans at end of period 2,129 1,923
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabilities Sectionalised
RMPP 2013
£m
Liabilities in sectionalised RMPP at beginning of period (2,313)
Transfer of pension liabilities to government 2,239
Current service cost (24)
Curtailment costs* (2)
Finance cost (9)
Employee contributions (8)
Actuarial loss (recognised in statement of comprehensive income) (29)
Benefits paid 2
Liabilities in sectionalised RMPP at end of period (144)
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Liabilities Share of
RMSEPP 2013
£m
Share of liabilities in RMSEPP plans at beginning of period (22)
Current service cost -
Curtailment costs* -
Finance cost (a)
Employee contributions -
Actuarial gain/(loss) (recognised in statement of comprehensive income) (4)
Benefits paid -
Share of liabilities in RMSEPP at end of period (24)
Liabilities combined plans 2012 2011
£m £m
Share of liabilities in combined plans at beginning of period (2,239) (2,364)
Current service cost (23) (25)
Curtailment costs* - (3)
Finance cost (122) (132)
Employee contributions (10) (14)
Actuarial gain/(loss) (recognised in statement of comprehensive income) (23) 207
Benefits paid 82 86
Share of liabilities in combined plans at end of period (2,335) (2,239)
*The curtailment costs in the profit and loss account are recognised on a consistent basis with the associated compensation costs.
Estimates of both are included, for example, in any redundancy provisions raised. The curtailment costs above represent the costs
associated with those people paid compensation in respect of redundancy during the accounting period. Such payments may occur in an
accounting period subsequent to the recognition of costs in the income statement.
d) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRS as adopted by the European Union at 26 March
2012 in the consolidated statement of comprehensive income is a gain of £14m.
Sectionalised Share of
RMPP RMSEPP 7% share of combined plans
2013 2013 2012 2011 2010 2009
£m £m £m £m £m £m
Fair value of assets 243 25 2,168 1944 1,811 1,407
Present value of liabilities (144) (24) (2,374) (2,260) __ (2,375) (4,882)
Surplus/(Deficit) in schemes 99 1 (206) (316) (564) (475)
Experience adjustment on assets 46 a 131 33 313 (384)
Experience adjustment on liabilities (20) : : (a) 47 (y)
2013 2013 2012 2011 2010 2009
% % % % % %
Experience adjustment on assets as a % of
scheme assets 18.9 55 64 17 174 (27.3)
Experience adjustment on liabilities as a % of
scheme liabilities (13.9) 14 0.0 0.0 (2.0) 01
Deficit in the scheme as a % of scheme
liabilities, - - 88 141 23.9 25.3
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e) Recognised charges
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An analysis of the separate components of the amounts recognised in the performance statements of the Company is as follows:
2013 sectionalised
RMPP £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost
24
Total charge to operating profit before exceptional items
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision - note 11)
Total charge to operating profit ee
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities
Expected return on plan assets
26
(11)
Net pensions credit to financing
(2)
Net charge to the income statement before deduction for tax
24
Analysis of amounts recognised in the statement of comprehensive income
Transfer of pension liabilities to government
Transfer of pension assets to government
2,239
(1,953)
Gain on transfer to government
286
Actual return on plan assets
Less: expected return on plan assets
Less: taxation on surplus recoverable through plan refunds
57
(11)
(3)
Actuarial gains on assets (all experience adjustments)
43
Experience adjustments on liabilities
Effects of changes in actuarial assumptions on liabilities
(20)
(9)
Actuarial losses on liabilities
(29)
Total actuarial gains recognised in the statement of comprehensive income
300
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2013 share of
RMSEPP £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost 1
Total charge to operating profit before exceptional items
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision for organisational review - note 11) -
Total charge to operating profit 4
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 16
Expected return on plan assets — ___(18)__
Net pensions interest (2)
Share of net pensions interest (at approximately 7%) -
Net charge to the income statement before deduction for tax :
Analysis of amounts recognised in the statement of comprehensive income in the Royal
Mail Holdings Group financial statements
Actual return on plan 38
Less: expected return on plan (18)
Actuarial gains on assets (all experience adjustments) 20
Experience adjustments on liabilities 5
Effects of changes in actuarial assumptions on liabilities (23)
Actuarial losses on liabilities (18)
Total actuarial gains recognised in statement of comprehensive income in the Royal Mail
Holdings Group financial statements 2
Share of actuarial gains/(losses) recognised in statement of comprehensive income (at
approximately 7%)
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Combined plans 2012 2011
£m £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items:
Current service cost 23 25
Total charge to operating profit before exceptional items 23 25
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments (within provision for organisational review - note 11) - 2
Total charge to operating profit 23 27
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plans’ liabilities for the combined plans 1,749 1,881
Expected return on plans’ assets for the combined plans ee (1.775) (4,714)
Net pensions interest for the combined plans (26) 167
Share of net pensions interest (at approximately 7%) (2) 12
Net charge to the income statement before deduction for tax 21 39
Analysis of amounts recognised in the statement of comprehensive income in the
Royal Mail Holdings Group financial statements
Actual return on plans’ assets for the combined plans 3,644 2.184
Less: expected return on plans’ assets for the combined plans (1,775) (1.714)
Actuarial gains on assets for the combined plans (all experience adjustments) 1,869 470
Experience adjustments on liabilities for the combined plans (5) (8)
Effects of changes in actuarial assumptions on liabilities for the combined plans (320) 2,962
Actuarial (losses)/ gains on liabilities for the combined plans (325) 2.954
Total actuarial gains recognised in statement of comprehensive income in the Royal
Mail Holdings Group financial statements 1544 3,424
Share of actuarial gains/(losses) recognised in statement of comprehensive
income (at approximately 7%) 108 240
13. Called up share capital
2013 2012
£ £
Authorised
Ordinary shares of £1 each 51,000 51,000
Total 51,000 51,000
Allotted and issued
Ordinary shares of £1 each 50,003 50,003
Total 50,003 50,003
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Post Office Limited
14. Reserves
Share Retained 2013
premium earnings _Total
£m £m £m
Balance at 26 March 2012 465 (589) (124)
Profit for the financial year - 74 mh
‘Actuarial gains on defined benefit pension schemes - 14 14
Taxation on items taken directly to equity - (21) (24)
Transfer of pension deficit to government - 286 286
At 34 March 2013 465 (236) 229
57
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Corporate information
Registered Office
Post Office Limited
148 Old Street
LONDON
EC1V 9HQ
Auditor
Ernst & Young LLP
1 More London Place
LONDON
SE1 2AF
Solicitor
Linklaters LLP.
One Silk Street
LONDON
EC2Y 8HO
Post Office Limited
Actuary
Towers Watson Limited
Watson House
London Road
REIGATE
Surrey
RH2 9PQ
Consumer Body
Consumer Focus
4th Floor
Artillery House
Artillery Row
London
SW1P 1RT
58
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The fabric
of our society
Annual Report and Accounts 2013
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Post Office Annual Report 2 Operations I Performance I Governance I Financials
Al
+ Revenue increased in 2012/13 by £xx million to
fernal Revenues - m) £1,xxx million, with growth in our Mails, Retail and
Financial Services businesses
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For more information visit
our online annual report at
www.postoffice/ar2013.com
Post Office Ann
2
Who we are
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3 million
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si sitiumendae sequi nN
utecus et volor si rehent. e
The amount of social value we
have delivered to businesses and
the public according to an
independent study
93.1%
The percentage of people in
the UK living within a mile of
a Post Office
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[XEaZaeH Operations I Performance I Governance I Financials
9,000
ye number of branches to be
ansformed in the next three years.
20 million
The number of people
who visit a Post Office
every week
90
The percentage of our d
customers who say they are a
satisfied with our services
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Post Office Anrwal Re
4
Operations I Performance I Governance I Financials
5
Chairman’s statement
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A year of significant progress
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Outlook
Heading
Alice Perkins
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Post Office Arnal Re Operations I Performance I Governance I Financials
6 7
Chief Executive’s review
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Overview Haram‘ Financial Services
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Post Office network i
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Post Office Annual Re
10
Operations I Performance I Governance I Financials
11
Business at a glance
Government services Mails and retail ancial services > elephony
98
421%
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1.2 million 3 million
2012: 2.1 million
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Overview Overview Overview
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To read more about Government
Services go to page xx
To read more about Government
To read more about Government To read more about Government
Services go to page xx
Services go to page xx Services go to page xx
Post Office Anal Re
24
ae
erformance
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Overview I Operations AiQMMuEUE Governance I Financials
25
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Post Office Annual Report 201 Overview I Operations Sigageuueuey Governance I Financials
26
Our people
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The Post Office Apprenticeship scheme
Improving career management fuga. Ga 1
The apprenticeship is a good
way of entering the engineering
environment. I’m looking
forward to working myiwaystp.
Alexandra Allsop
Programme participant
Safety: an enduring priority
Developing skills for a changing business
Post Office Ar
34
‘Board of Directorp ¥
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Overview I Operations I Performance MeMeauEAEE Financials
35
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Post Office Annual Report 2 Overview I Operations I Performance I Governance
56 57
Consolidated income statement oup balance sheet
Group statement of "
3
total recognised gains and losses 2s
409.2 4409
Note 012 £m 2011 Em rent liabilities
15 650 953
Non-current assets 30 99
nu 582 697 97 14
12 1328 1240 4s 42
508 455 58 153
5 284 878 1364
B 30 bilities 7970 577.0
25
229 ets _ _ __ __ 2620 2313
10
3280
Current asset: bd
Ey 835 08
2858 33.0
35 1908
et attributable to owners of the parent company 2268
4h
4469 4803 72 65
otal 59.0 8083
puity 2620 2313
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merchantcantos P : t :
Thanks to.. Post Office 1
Limited Gieat Project
‘Annual Report Post Office Limited Annual Report 2013
2013 —— — —
Job no. Date
Strapline 25 April 2013
introducing the
theme
oBc Fe
Corporate Contents Overview Overview Overview: Overview: Overview: Overview: Overview: I Overview:
statement Chairman's Chairman's Chief Chief Chief Chief
statement statement ‘executive's executive's I executive's
Highlights (key Who we are- I What we do- review review review review
stats) Care, key stats in
Challenge, numbers
- Financial Commit
- Operational
[
[
IFC 1 2 3 4 5 6 7 8 9
Overview: Overview: Operational Operational Operational Operational Operational Operational Operational Operational
Strategy Strategy review review review review review review review: review:
Branch network I Branch network I _ I Branch network] Branch network Branch network] Include Business ata I Business ata
-Network and I Transformation Transformation I Transformation Transformation I customer base glance glance
Crown trans - Network and - small
Crown businesses, Mails and Govt services,
supply chain Retail, Telephony
and normal Financial
customers? services
10 1 12 13 14 15 16 7 i 19
Operational Operational Operational Operational Performance _I Performance Performance I Performance Performance —_I Performance
review review review review review review review review Review Review
Mails & Retail ancial Govt Services I Telephony Our People —_I Our People: Our People: —_I Our People:
services case study case study Our customers: I Our customers:
case study
20 Fa] 2 23 24 25 26 Ea 28 29
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merchantcantos P ° t °
2
Client Project
Post Office Limited Annual Report 2013
Job no. Date
25 April 2013
Performance I Performance Performance I Performance Performance I Performance Performance I Performance Performance Governance
Review Review Review Review review review review review review
Financial Financial Financial Financial Business risk I Business risk Business risk Contents
CSR csR overview overview overview overview
30 Fa 32 33 34 35 36 37 38 39
Governance I Governance Governance _I Governance Governance _I Governance Governance _I Governance Governance —_I Governance
Board of pxs Board of Pxs Directors’ Corporate Corporate Corporate Corporate Corporate Corporate Directors’
‘and blogs ‘and biogs report Governance Governance —_I Governance Governance _I Governance Governance _I remuneration
9 9s report p43-xx
Alwen Alwen Alwen Alwen Alwen Alwen Alwen Alwen Alwen Karen Hamer
40 a 42 43 44 45 46 47 48 49
Governance _I Governance Governance _I Governance Governance —_I Governance Governance —_I Governance Financials
Directors’ Directors’ Directors’ Directors’ Directors’ Directors’ Directors’ Directors’ Contents
remuneration I remuneration remuneration _ I remuneration remuneration I remuneration remuneration I remuneration Pg56-xx
report p43-xx I report p43-xx report p43-xx I report p43-xx report p43-xx I report p43-xx report p43-xx I report p43-xx
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50 51 62 53 54 65 56-96 96 IBc
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3
Client Project
Client Project
Job no. Date
Job no. Date
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Post Office Limited
Audit, Risk and Compliance Board Sub-Committee
Briefing Book
Full Year ended 31 March 2013
Section
1. Glossary
2. Introduction
3. Accounting Policies
4. Primary Statements
5. Operating profit
6. Revenue
7. Costs and people
8. Quality of earnings
9. Pensions
10. Exceptional items and provisions
11. Interest, cash, debt, funding and hedging
12. Going Concern
13. Property, plant and equipment and non-current assets held for sale
14. — Goodwill. Investments and intangibles
15. Working Capital
16. Provisions
17. Litigation and claims- potential claims regarding Horizon
18. — Taxation
Page
10
14
19
20
26
28
30
33
34
35
40
41
42
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1
Glossary review
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Below is a listing of key abbreviations used throughout this document with the full meaning
given:
Abbreviation Meaning
ATM Automated teller machine
BIS Department for Business Innovation & Skills
CWU Communications Workers Union
DVLA Driver & Vehicle Licensing Authority
DWP. Department of Work & Pensions
Eagle Deal in August 2012 to sell POFS to the Bank of Ireland,
restructure commission rates for personal financial
services and extend the contract to 2023
FOoG Front Office of Government
FRES First Rate Exchange Services
Gamma A contract variation made in 2007 with POFS generating
£100m cash and income over a number of years in
return for a series of commitments through to 2020
Horizon Horizon Next Generation- Counter system
JV Joint venture
LTIP Long Term Incentive Programme
NBV Net Book Value
NS&l National Savings & Investments
NSP Network Subsidy Payment
NTP Network Transformation Programme
POCA Post Office Card Account
PFS Personal Finance Services
POFS Post Office Financial Services
POOc Project One Off Costs
RMPP Royal Mail Pension Plan
RMSEPP Royal Mail Senior Executive Pension Plan
RMDCP Royal Mail Defined Contribution Plan
SGEI Services of General Economic Interest
UKBA United Kingdom Borders Agency
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Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for the year
ended 31 March 2013. It is a summary of the key data, trends and analyses to be read in
conjunction with the Annual Report & Financial Statements, which readers may find useful to
further their own understanding of the results for 2012-13. Post Office Limited has opted not
to take advantage of the Companies Act exemption from the preparation of consolidated
accounts as it is a wholly owned subsidiary within the Royal Mail Holdings plc group which
prepares group accounts. The Annual Report & Financial Statements therefore report
consolidated results.
Most of the analyses are based on the comparison of this year’s actual results to prior year.
This year consists of 53 weeks (2012 was 52 weeks).
Comparison against budget is discussed in the Monthly Performance Report presented to the
Post Office Limited Board on a monthly basis.
Accounting policies
This is the first year that Post Office Limited has reported its results since operating
independently and it has been decided to report under International Financial Reporting
Standards (IFRS). The changes to accounting policies and disclosures, which have been
necessary as part of the transition to reporting under IFRS as adopted by the European
Union, have had no effect on the income statement or net asset position.
4
441
Primary Statements
Post Office Limited Consolidated Income Statement.
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Post Office Limited Consolidated income Statement for the year ended 31 March 2013 and 25 March 2012
2012-13 2011-12
Section £m £m
Continuing operations
Turnover 1,024 980
Network Subsidy Payment 210 180
Revenue 6 1,234 1,160
People Costs 72 (259) (254)
Subpostmasters costs 7.2.4 (478) (483)
Other operating costs 73 (435) (393)
Share of post tax profit from joint venture and associates 32 31
Operating profit before operating exceptional items 5 94 61
Operating exceptional items 10 (47) (38)
Operating profit 47 23
Profit on disposal of fixed assets 10 2 1
Loss on sale of associate 10 (30)
Profit before financing and taxation 19 24
Net interest payable 11.1 (4) (7)
Finance income 1 1
Net pensions interest 2 2
Profit before taxation 18 20
Taxation credit 31 10
Profit for the financial year from continuing operations 49 30
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4.2 Post Office Limited Consolidated Cashflow Statement
Post Office Limited consolidated cashflow statement for the full year to 31 March 2013
2013 2012
Notes £m £m
Cash flows from operating activities
Operating profit before exceptional items oh 61
Adjustment for:
Depreciation and amortisation - a
Share of profit from joint ventures and associates 143 (32) (31)
Pension operating costs 25 24
Working capital movements 71 24
(Increase)/Decrease in trade and other receivables (138) 11
Increase in trade and other payables 207 15
(Increase) in inventories (2) -
Increase/(Decrease) in non-exceptional provisions 4 (2)
Pension operating costs paid (26) (27)
Cash payments in respect of operating exceptional items: 133 (27)
Business transformation (44) (12)
Government grant 200 -
Restructuring costs (14) (15)
Other (42) :
Net cash inflow from operating activities 265 25
Income tax recovered 44 42
Cash flows from investing activities
Investment in associate (14) -
Dividends received from joint ventures and associates 143 40 38
Finance income received 1 -
Proceeds from sale of property, plant and equipment 2 2
Proceeds from disposal of associate 2 -
Purchase of property, plant and equipment (66) (33)
Net cash (outflow)/inflow from investing activities (32) 7
Net cash inflow before financing activities ohh 44
Cash flows from financing activities
Finance costs paid (3) (4)
Payments to finance lease creditors (3) (3)
(Repayment)/proceeds from bank borrowings. (86) 2
Net cash (outflow) from financing activities (92) (5)
Net increase in cash and cash equivalents 152 39
Effect of exchange rates on cash and cash equivalents (4) (1)
Cash and cash equivalents at the beginning of the year 820 782
Cash and cash equivalents at the end of the year 11.2 974 820
4.3 Post Office Limited Consolidated Balance Sheet
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Post Office Limited consolidated balance sheet at 31 March 2013 and 25 March 2012 and 28 March 2011
2013 2012 2011
Notes £m £m, £m
Non-current assets
Intangible assets - - -
Property, plant and equipment 13 a4 cal 12
Investments in joint ventures and associates 141 60 89 96
Retirement benefit surplus 97 : -
Total non-current assets 168 100 108
Current assets
Inventories 151 8 6 5
Trade and other receivables 15.2 362 226 244
Cash and cash equivalents 112 971 820 782
Financial assets - derivatives 4 : -
Total current assets 1,342 1,052 1,028
Total assets 1,510 1,152 1,136
Current liabilities
Trade and other payables 153 (898) (583) (579)
Financial liabilities - interest bearing loans and borrowings 11.2 (291) (377) (375)
- obligations under finance leases 11.2 (3) (4) (4)
Provisions 16 (49) = =
Total current liabilities (4,211) (964) (958)
Non-current liabilities
Financial liabilities - obligations under finance leases 112 (4) (6) (9)
Other payables - (2) (5)
Provisions 16 (7) (24) (26)
Retirement benefit obligation : (206) (316)
Total non- current liabilities (41) (228) (356)
Net assets/(liabilities) 288 (40) (178)
Equity
Share capital - - -
Share premium 465 465 465
Retained earnings (179) (552) (690)
Other Reserves 2 47 47
Total equity/(deficit) 288 (40) (178)
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Operating profit
Operating profit bridge analysis
74 5
ES A
(5)
(44)
2012 Revenue People Costs Subpostmasters’ Non People 2013
Costs Costs/Other
Explanations for key movements are as follows:
e Revenue explanation is in section 6.
e The £5.4m increase in People costs was mainly due to:
o Higher wages and salaries and NI costs of £5.2m due to pay awards, increased use
of people, both temporary and permanent such as FOoG and the new
Communications Directorate and the impact of the 53” week,
o Higher pension costs of £1.4m due to the higher IAS19 rate,
o Higher temporary resource costs of £2.1m driven by modernisation and separation
programmes, and higher agency labour in Network prior to change implementation.
Year on year the headcount figure has increased by 88, primarily due to the NTP
programme,
o This was offset by lower productivity & bonus costs of £3.8m, largely due to long
term incentive scheme costs over accrued in the prior year by £1.9m and corrected
in 2012-13.
e Subpostmasters’ costs were £4.8m lower than last year, this includes decreases in
fixed costs arising from the introduction of new network models.
e Non people costs/other (including project one off costs) were higher by £40.5m mainly
due to:
o £26.3m higher project one off costs (POOC), (see section 7.3.15),
o Last year’s compensation costs included a £2.4m release relating to WHS TUPE
transfers,
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£3.5m increase in marketing and legal fees (after offsetting the £10m skills group
costs within the People and Agent Related line) due to marketing costs of £2.2m
relating to brand development, and legal costs of £1.3m relating to primarily to
separation and modernisation programmes,
£4.3m increase in property facilities and maintenance costs, due work transferred in
post separation and increased rates relating to a higher number of ATM machines,
£6.9m higher cost of sales was mainly driven by increased Telephony bandwidth
costs and higher UKBA volumes as a result of rolling out more ID Services terminals,
and also due to higher Retail costs due to the Olympic and Jubilee collectables,
This was offset by £5.0m lower Group overheads costs as a result of separation.
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6. Revenue
2012-13 2011-12 Variance
£m £m £m
External Revenue 862 801 61
Internal Revenue 372 359 13
Total Revenue 1,234 1,160 74
61 Post Office Limited - External revenue analysis
Post Office Limited External Revenue Bridge £m +)
862
30
17
801 0 4 4 E a
2012 Government Other Retail & Lottery Telephony Financial Network 2013
Services Services Subsidy
Payment
The increase in year on year external revenue of £61m (7%) to £862m (2011 £801m) is
driven by the £30m increase in the Network Subsidy Payment, and an increase of £31m in
like for like income.
The following commentary gives further detail on the external revenue variances by
category:
6.1.1 Financial Services
Financial Services income has increased by £16.5m (6.2%) year on year. This continues the
trend of increases in new products offsetting the decline of traditional products. The main
variances are:
* a £23.7m increase in PFS savings products (Online Saver, Growth Bonds, Reward
Saver and Instant Saver- £6.5m, £6.4m, £4.5m and £3.0m favourable respectively).
10
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This includes the benefit of the renegotiated commission rates following the ‘Eagle’
deal, and
« a £0.9m increase in ATM revenue, driven by increased volumes as machines reach
maturity and the rollout of new machines.
This was offset by
« a £3.3m decline in NS&l revenues as NS&I look to provide most of their products,
particularly savings, through their own direct channel,
« a £1.6m net decrease in Banking revenue from:
o a £4.0m fall from the DWP. Volumes continue to fall as the Government is
migrating customers to other payment methods, offset by
o a £0.2m increase in business banking revenues due to rate reduction from
renegotiated contract, and
o an increase of £2.2m in personal banking driven by the new RBS contract and
adjustment in the prior year.
« A£2.1m decrease from Payment Services due to:
o a £1.0m decline from bill payments, as utilities and other bill payment clients
continue to migrate customers to other payment methods such as direct debit and
online, and
o a £2.7m decrease in Postal Order income (including write back of uncashed Postal
Orders over 2 years old).
6.1.2 Telephony
The Telephony Services pillar includes the Post Office Homephone and Broadband services,
as well as mobile top-up services and phonecards.
Telephony Services revenue of £129m (2012: £120m) has increased by £9m. Income from
the Post Office Homephone and Broadband product rose by £10m, primarily due to higher
customer numbers, following the introduction in May 2012 of more competitive service
packages to attract and retain customers. Income from mobile top-ups was £2m below prior
year, as transaction volumes declined due to the mobile networks actively migrating
customers away from pre-pay, and also reducing their transaction fees. Despite this
reduction in income, Post Office is still a significant player in the top-up market. Our share of
the retail market has been maintained as we have seen a slower decline in volumes than
many retailers.
6.1.3 Retail & Lottery
Retail and Lottery revenues have increased by £4.4m (9.5%):
« Lottery is £2.0m higher than last year, driven by the large amount of rollovers, new
draws (Euromillions twice a week) and more terminals,
« Retail up £2.4m benefiting from collectibles for the Olympic and Paralympic games, as
well as the Diamond Jubilee.
41
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6.1.4 Government Services
Government Services revenue is flat year on year but included the following movements:
* £2.6m higher Passport income due to both higher price and higher volumes,
« — £5.5m higher AE! UKBA income as this is a new product,
This was offset by
« £4.1m adverse variance from AEI DVLA, due to last year having a one off payment of
£3.0m relating to service levels
« £4.2m adverse from falling numbers of POCA accounts, through natural attrition,
migration of customers to bank accounts and lower commissions linked to lower
LIBOR.
6.1.5 Other
Year on year increase of £0.6m was primarily due to:
« Increased revenues from External Cash in transit services and the remainder from
Gamma income.
12
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6.2 Post Office Limited - Internal Revenue Analysis
Post Office Limited Internal Revenue Bridge £m
2012 Mails 2013
6.2.1 Mails
The £13.0m (3.8%) increase in Mails Revenue is driven by strong volumes and the price
increase in May 2012.
« Approximately £8.8m was driven by price, and £4.2m by volume increases.
« The new Mails Distribution Agreement resulted in a reduction in fixed fee of £30.3m,
which is more than offset by increases in variable commissions across the product range.
Mails Income is analysed in the table below:
2012-13 2011-12 Variance Volume Price
£m £m £m £m £m
Special Delivery 53.2 53.3 (0.1) 07 (0.8)
Parcelforce 24/48 8.3 6.5 17 2.5 (0.7)
Labels 100.2 83.9 16.3 28 13.5
Stamps 35.2 31.8 3.4 (1.7) 5.2
Royal Mail Parcels 6.2 75 (1.3) (0.4) (1.0)
International Express & Non Express 34.9 29.9 5.0 (0.8) 5.8
Other Parcelforce 84 8.2 (0.1) 04 (0.5)
Other Royal Mail 37.8 19.4 18.4 07 17.7
Total Variable Income 283.9 240.6 43.3 42 39.0
Fixed Fee TAA 104.7 (30.3) = (30.3)
Total Mails 358.3 345.3 13.0 42 88
13
7. Costs and People
This section discusses expenditure, excluding exceptionals.
7.1 Total Costs Analysis (excluding exceptionals)
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The following provides a breakdown of costs for the year ending 31 March 2013 compared to
the year ending 25 March 2012
Section 2012-13 2011-12 Variance
£m £m £m
Expenditure - (pre- exceptional)
Wages & Salaries 182 179 (3) (2%)
Overtime 9 8 (1) (15%)
Productivity/Bonus 15 19 4 20%
Employers NI 19 17 (2) (12%)
Pensions 25 24 (1) (6%)
Projects (temp people resource) 2 3 1 28%
Temporary Resource 7 5 (2) (45%)
PEOPLE COSTS 7.24 259 254 (5) (2%)
Subpostmasters' costs 7.24 478 483 5 1%
Collection, Delivery & Conveyance Charges 73.1 1 1 (0) (12%)
Compensation 73.2 1 (2) (3) 127%
Property Facilities 7.3.3 8 6 (2) (39%)
Property Maintenance 734 6 4 (2) (48%)
Vehicles 73.5 2 2 (0) (10%)
Computers & Telephones 73.6 79 79 0) 0%
Consultancy, Marketing & Legal Fees 73.7 27 13 (14) (103%)
Staff & Agent Related Costs & Consumables 7.3.8 2 12 10 86%
Finance 73.9 16 16 0 0%
Cost of Sales 7.3.10 121 114 (7) (6%)
Other Operating Costs 7.3.41 21 18 (3) (16%)
Depreciation 7.3.12 0 0 0 6%
Interbusiness Expenditure 7.3.13 85 85 0 0%
Group Overheads 7.3.14 15 20 5 24%
Projects (excluding temporary people resource & IB) 7.3.15 50 24 (26) (110%)
Total Other Operating Costs 73 435 393 (42) (11%)
TOTAL EXPENDITURE (Pre Exceptionals) 1172 1130 (42) (4%)
14
7.2
7.21
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People Costs (2013 £259m vs 2012 £254m)
People costs (2013 £259m vs 2012 £254m)
People costs have increased in total by £5.4m (2.1%) to £259.3m, representing 22.1% (2012
22.5%) of the cost base. The number of people employed increased by 88 to 7,886 at 31
March 2013 (2012 7,798), primarily due to the Network Transformation Programme. NTP
people costs are included within exceptional costs.
The people cost movement comprises:
7.2.2
7.2.3
A total increase of £3.1m (2%) in Wages and Salaries an increase reflecting the impact of
the agreed pay awards and the 53 week.
Overtime has increased by £1.2m (15%).
Employers NI has increased by £2.1m (24).
Pension costs have increased by £1.4m (6%), as a result of a change in the IAS 19 rate for
the RMPP service cost to 18.2% (2012 17.1%), driven by market conditions at 25 March
2012.
Productivity costs have decreased by £3.8m (20%), largely due to long term incentive
scheme costs over accrued in the prior year by £1.9m and corrected in 2012-13.
Temporary resource costs have increased by £2.1m (45%), driven by recruitment to support
various projects and higher agency labour in Network. This has been offset by a decrease in
other project resource of £0.7m.
People Numbers
The following analysis shows the movements in the number of people employed during the
year.
The People numbers were as follows:
Period end employees Average employees
34 March 2013 25 March 2012 2013 2012
Total employees 7,886 7.798 7,842 7.734
Average Cost Per Employee
The 2013 average number of employees for the year ending 31 March 2013 was 7,842
(2012 7,734). The average annual cost per employee (excluding exceptional costs and
exceptional heads) based on these averages has increased by £1,415 (4.3%) to £34,000
(2012 £32,585) due to pay awards and recruitment.
15
7.2.4
73
7.31
7.3.3
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Subpostmasters costs (2012 £478m vs 2011 £483m)
Total subpostmasters costs decreased by £4.7m (1%) due to the one off payment made in
2012 of £400 to all subpostmasters and this has offset the increase of £4.2m reflecting
the increase in stamps tariff and increase sales.
There have been savings of £2.0m in fixed pay arising from the introduction of new local
models and savings in VAT/NI of £2.6m largely due to the improved VAT recoverable rate.
The average annual cost per subpostmaster branch (excluding VAT and NI) is £43,727
(2011 £43,568). This is a 0.4% increase on the prior year.
2012-13 2011-12
MAIN 178 25
LOCAL 329 177
Franchise 367 409
MSPO 580 603
SPSO 8,882 9,209
Locally Funded 14 12
Total Subpostmaster Branches 10,347 10,435
Outreach 939 888
Satellite 121 123
Crown 373 373
Total Branches 11,780 11,819
Other Operating Costs (2012 £435m vs 2011 £393m)
Collection, Delivery & Conveyance charges have generally remained flat year on year.
Compensation costs have increased by £3.0m, mainly due to a one off provision release
relating to the CWU TUPE claim for the WHS transfers in 2011-12 of £2m.
Property Facilities costs have increased by £2.3m, due to a provision for ATM business rates
£1.7m (see section 16) and electricity charges.
Property Maintenance costs have increased by £2.0m, due to the increased number of Post
& Go machines requiring annual maintenance.
Vehicles costs have remained flat.
Computers and Telephones costs have decreased by £0.4m year on year. £1.5m is due to
cheque processing now classified as other operating costs, therefore the underlying variance
is an increase of £1.0m which is due to increased Prism charge.
Consultancy, Marketing & Legal Fees have increased by £13.8m. £10m of this is offset with
the line staff and agent related costs below for Skills group off charges for the greater
16
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project activity. The remainder relates to increased marketing costs and increased legal costs
relating primarily to separation.
7.3.8 Staff & Agent Related Costs & Consumables have decreased by £10.3m. This needs to
offset with the line above as £10m is due to Skills group off charging to projects. Other
variances in this section were reduced training and printing costs.
7.3.9 Finance costs have remained flat.
7.3.10 Cost of Sales has increased by £6.9m (6%), driven by bandwidth payments of £5.4m for
Telephony customers and £2.0m due to new UKBA volumes as a result of rolling out more
ID Services terminals. The main reasons are detailed below:
Cost of Sales
2013 2012 Variance
£m £m £m Comments
Home Phone 85 Po) 6) (78) Increase bandwith charges of £5m partly
lue to higher customers
Increase sales due to collectable
Retail 5 4 (a) (24%) products for the Jubilee and the
Olympics
Financial Services 4 3 2 52% Decrease in Travel Insurance sales
Increase due to higher UKBA volumes as
AEI UKBA 30 28 (2) (7%) a result of rolling out more ID Services
terminals
Total 124 114 (7) (6%)
7.3.11 Other Operating costs have increased by £3.0m (16%) primarily due to reclassification of
cheque processing costs. (see 7.3.6).
7.3.12 Depreciation costs have remained flat.
7.3.13 Interbusiness expenditure has remained flat and is detailed below:
Interbusiness 2012-13 2011-12 Variance
£m £m £m
Official Mail 16 14 (2)
Call Centres 5 4 (1)
Facilities Management 15 17 2
Vehicle Services 6 6 0
Romec 10 (2)
Property 32 35 3
Other 1 1 0
Total Interbusiness 85 85 0
7.3.14 Group overhead expenditure has decreased by £4.8m due to separation as work transfers
over to the Post Office.
17
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7.3.15 Project expenditure (excluding temporary people resource and IB) has increased by
£26.3m to £50.0m due to the acceleration of work towards full implementation of major
transformation programmes. This includes Brand Marketing, IT Delivery, Finance Roadmap
and Front Office of Government as well as the costs of separation from Royal Mail.
The £50m spent on projects is analysed below:
2012-13 Project Expenditure £m
I Customer Engagement (Brand & Mortgage Campaign) 18
I Financial Services (Eagle -Sales Capability & Current Account)
I FO0G (DVLA Tender & Home Office Development)
I Telephony (Fixed Line Tender, Contract negotiations and Migration)
I Independence (Legal & Consultancy)
I Mails (Collections & Returns, Drop & Go Rollout, and Online Retail Shop)
6
5
4
3
3
I Finance (Road Map) 2
I HR & Compliance (Recruitment & Training) 2
2
2
1
a
1
I IT Delivery (Saleforce Licences & Horizon Evolution)
I Property ( Across Network & 148 Old Street Re-design Project)
I Communications
I London Games Programme
I Supply Chain (ATM Replenishment & Joining the Scottish Notes Circulation Scheme)
I Grand Total 50
18
8.1
8.2
8.3
8.4
8.5
8.6
87
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Quality of Earnings
2012-13 2011-12 Growth
Post Office Limited (consolidated) £m £m £m %
Reported profit before other exceptional items 94 61 33 54%
Network Subsidy Payment (210) (180) (30) (17%)
Project one off costs (including temporary resource & interbusiness) 53 26 27 (104%)
Reported profit before project one off costs, exceptional items and NSP (63) (93) 30 32%
Litigation re 2007-08 (2)
Release of savings stamps provision (1)
VAT/NI recovered re prior year Subpostmasters' fees (1) 0
VAT recovery re earlier years (2) 2
LTIP over -accrued in 2011-12 (2) 2
Total adjustments (5) 1
Total (68) (92) 24 26%
This table shows underlying operating profit performance adjusted for one off items and items
relating to previous years. Each item in the table is explained further below:
NSP has increased from £180m in 2011-12 to £210m in 2012-13 and has been accounted
for as a government grant in both years.
Project one off costs. Project one off costs are non exceptional costs of project activity in the
year. They increased in 2012-13 as work increased, particularly to build the brand and drive
future revenue growth. These costs do not form part of the underlying ongoing performance
of the company.
Litigation relating to 2007-08. This cost relates to a provision for litigation relating to the
CWU challenge regarding the transfer of people to WH Smith during 2007-08. £6m was
raised in 2008-09 and £4m of it released in 2009-10 when the CWU lost their initial
challenge. All routes of challenge were exhausted during 2011-12 and the remaining £2m
was released.
Release of savings stamps provision. Post Office Savings Stamps were found to be vulnerable
to fraud and a provision was raised for potential fraudulent encashments made. They were
withdrawn from sale in May 2010 and holders of savings stamps were encouraged to cash
them. The level of encashment was less than anticipated and the provision was reduced
substantially in 2010-11. Savings stamps continue to be cashed but the levels are low and
the provision was further reduced during 2011-12.
VAT/NI recovered relating to Subpostmasters’ fees is a correction of the VAT rate. VAT and NI
claims are often completed a year or more after the year to which they relate. During 2012-
13 £1.8m of VAT was recovered relating to 2011-12 following a rate change. £0.8m of NI
was recovered relating to Subpostmasters’ fees of which most related to 2011-12. During
2011-12 £1m of NI was recovered relating to 2010-11 and earlier.
VAT recovery re earlier years reflects the refund received following a correction of the
recovery rate for 2011-12 during 2012-13.
Long term incentive scheme costs (LTIP) over accrued in the prior year by £1.9m and
corrected in 2012-13.
19
94
9.2
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Pensions
Background
The UK pension plans were sponsored by Royal Mail Group Limited until 1 April 2012 and are
set out below. On 1 April 2012 almost all of the assets and liabilities of the Royal Mail Pension
Plan (RMPP) were transferred to HM Government. On this date the RMPP was also
sectionalised with Royal Mail Group Limited and Post Office Limited responsible for their own
sections. Deferred pensioner members and pensioner members were transferred to the
Government's new Royal Mail Statutory Pension Scheme. Royal Mail Group Limited is the
principal employer in the Royal Mail Senior Executive Pension Plan (RMSEPP) and the Royal
Mail Defined Contribution Plan (RMDCP). Post Office Limited became a participating employer
in both with effect from 1 April 2012.
Royal Mail Pensions Trustees Limited manages the main defined benefit scheme Royal Mail
Pension Plan (RMPP) which has around 5,200 Post Office active members.
Scheme Eligibility Type
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) I UK senior executives (closed) I Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
A series of changes to RMPP began to take effect on 1 April 2008 as follows:
e the plan closed to new members from 31 March 2008;
e all pensions and benefits earned before 1 April 2008 are still linked to final salary at the
time of retirement;
e from 1 April 2008, defined benefits building up for employee members of the plan are
earned on a career salary basis;
e employees can continue to take their pension on reaching 60 but the normal retirement age
increased to 65 for benefits earned from 1 April 2010; and
e since 1 April 2010 it has been possible to draw pension earned before the change to normal
retirement at 60, and continue working while still contributing to the pension plan until the
maximum level of benefits has been achieved.
A new defined contribution plan (RMDCP) was launched in April 2009. New recruits joining
from 31 March 2008 are able to begin paying contributions to the new plan after they have
worked for the Post Office for a year.
RMSEPP closed on 31 December 2012.
Pension Accounting within Post Office Limited
Since 1 April 2012, Post Office Limited employees are in a separate section of RMPP and the
assets and liabilities are assessed independently. The Post Office Limited Directors are
responsible for the selection of the pension assumptions for the Post Office section for the
2012-13 year. Details of these are in Section 9.3 below. The Post Office continues to account
for a 7% share of RMSEPP in the same way as previously and as explained below.
20
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Prior to 1 April 2012, the assets and liabilities of both of the defined benefit schemes, as
measured under accounting standards, were reported as a net pension deficit in the
consolidated balance sheet of Royal Mail Holdings plc, the ultimate parent company. The gross
assets and liabilities and Post Office Limited’s share of the net deficit were significant assets
and liabilities. The Directors of Royal Mail Holdings plc were responsible for the selection of the
pension assumptions for the 2011-12 year.
Before 1 April 2012 Royal Mail Group Limited had the legal relationship with the Trustees of
the defined benefit schemes and, as such, the Trustees held Royal Mail Group Limited liable for
the actuarial deficit in the schemes. However, under an agreement between Post Office Limited
and Royal Mail Group Limited, Royal Mail Group Limited provided employees engaged in the
business of Post Office Limited. Post Office Limited met the full costs of employment, and was
responsible for the funding of the pension deficit attributable to these employees.
Consequently, Post Office Limited recognised a balance sheet deficit on full adoption of FRS 17
and its international equivalent, IAS 19. This was based on employee numbers over 12 years
and represented approximately 7% of the total balance sheet deficit (pre deferred tax) at that
time. The net pensions interest, deficit recovery payments and actuarial gains or losses were
also allocated on this basis, giving the Post Office approximately 7% of the total balance sheet
deficit (pre deferred tax) at the balance sheet date. The current service cost, regular future
service contributions and curtailments were computed separately for Royal Mail Group Limited
and Post Office Limited, based on common factors/rates.
9.3 Assumptions
IAS 19 requires a number of assumptions. The choice of assumptions used for the calculations
is the responsibility of the Directors, based upon advice given by an independent actuary. The
assumptions cover price inflation, discount rate, salary increases and increases to pensions in
deferment and payment. The key assumptions based on market conditions at 31 March 2013
are set out in the table below. The assumptions for the year ended 25 March 2012 and earlier
years, were made by the Directors of Royal Mail Holdings plc with the advice of the actuarial
advisors to the Group.
Towers Watson has confirmed that the assumptions have been determined in a manner
consistent with those used for the disclosures at 25 March 2012, and previous reporting dates
with two adjustments overlaid. In previous years, no allowance has been made for the impact
of maximum and minimum pension increases, or to lower the retail prices index price inflation
assumption to reflect a price inflation risk premium. These are included for this financial year
as many other schemes apply these adjustments and they are appropriate to make. The table
below also shows a column excluding these adjustments for comparison.
Conversations with Royal Mail management indicate that it is their intention to adopt the
assumptions as set out below, although this will not be formally agreed until their Board
meeting in May.
Royal Mail Group Limited will set the assumptions for the RMSEPP. Post Office Limited will be
allocated a 7% share of gains and losses consistent with previous years. These assumptions will
be consistent with those used for RMPP.
21
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March March March March March March
2013 2013 2012 2011 2010 2009
1 pa Nominal comps)
Inflation (RPI) 3.3 3.6 3.3 3.5 3.6 3.2
Inflation (CPI) 2.3 2.6 23 28 3.6 3.2
Rate of increase in pensions RPI“? 3.3 3.6 33 35 3.6 3.2
Rate of increase in pensions RPI (capped) 3.2 36 33 35 36 32
Rate of increase in pensions cpl?) 2.3 2.6 23 28 3.6 3.2
Rate of increase in salaries 4.3 46 43 45 46 42
Expected average rate of return nla nia 59 65 67 69
Discount rate (i.e. bond rate) 4.8 48 51 5.5 5.6 64
®) Pension increases in accordance with RPI are applicable to pensions in payment for RMPP Section C and all RMSEPP members, and
RMSEPP deferred pensions for members not transferred from Section A/B of RMPP. The RMPP Section C increases are capped at 5%
resulting in a lower assumption of increases by 10 basis points
Pension increases in accordance with CPI are applicable to RMPP Section A/B pensions in payment and all other deferred pensions not
mentioned above.
©) The rate of increases in salaries is set at RPI + 1%.
“The expected rate of return is not required due to changes in IAS 19.
Demographic assumptions, for example mortality, remain unchanged from those made in
March 2012. It is normal practice for these to be updated following the conclusion of a funding
valuation and, given the ongoing discussions with the RMPP Trustee, it would be anticipated
that the demographic assumptions will be reviewed for the 2014 financial year end.
Income Statement
Post Office Limited recognised pension costs of £25m (2012 £24m) in operating profit before
exceptional items. Of this charge, £1m (2011 £1m) related to the defined contribution scheme.
The amount charged to the loss before taxation for the defined benefit schemes is analysed
below.
RMPP & RMSEPP: Amounts recognised within profit 2012-13 2011-12 Variance I
before taxation £m £m Em I
Current service cost 24 23 I
Net pension charge to operating profit before 24 23 I
exceptionals I
Loss due to curtailments (exceptional charge included within 2 0 I
provision for restructuring charge) I
Net pension charge to operating profit 26 23 (3) I
Net interest (credit)/charge to financing (2) (2) =
Net pension charge to income statement before taxation 24 21 (3)
Overall, the net pension charge to income statement before taxation has increased by £3m
(14%). The impact on the income statement is a £1m (4%) increase in the charge to operating
profit before exceptionals (£3m after exceptionals).
The current service cost is intended to represent the amount by which the liabilities will
increase due to employing active members for one more year. The current service cost,
expressed as a percentage of pensionable pay, has increased to 18.2% for RMPP (2012 17.1%)
and 37.6% for RMSEPP (2012 34.9%), as a result of market conditions at 25 March 2012.
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The curtailment cost of £2m (2012 fnil) is the cost within the net exceptional redundancy
provisions charge that relates to the receipt of early pensions. The timing of exit and hence the
crystallisation of the liability to the scheme may occur in an accounting period subsequent to
the recognition of costs in the income statement i.e. in a different period to which the
redundancy provision was charged. This liability is matched by payments from the Post Office
and is within the short-term pension redundancy payable recognised on the balance sheet.
These curtailments therefore do not appear in the analysis of the movement in the pension
deficit. (see section 9.7 below).
The net interest credit of £2m (2012 £2m), a non-cash item, is reported under finance income
and reassessed annually. It consists of two components:
e a7% share of the Royal Mail Group expected return on plan assets of £158m for the year
(2012 £1,775m). Assessed by applying the expected average rate of return on assets as at
the prior year end, to the expected average fair value of scheme assets for the year; and
¢ a 7% share of the Royal Mail Group interest on plan liabilities of £123m for the year (2012
£1,749m). Assessed by applying the discount rate as at the prior year end to the expected
average scheme liabilities for the year.
For 2013-14 this will be calculated on the Post Office section of RMPP and will continue to
include a 7% share of RMSEPP. IAS 19 has changed for the coming year so that the expected
average rate of return applied to the assets will be the discount rate.
Cashflow
The following cash flows exclude payments made by employees:
2012-13 2011-12 Variance
£m £m £m
Defined Benefit Schemes (RMPP & RMSEPP):
Regular pension contributions 23 23 -
Funding of pension deficit 2 0 (2)
Payments relating to redundancy 2 3 1
27 26 (1)
Defined Contribution Schemes: Regular pension 1 1 7
contributions
28 27 (a)
Regular contributions of £23m have remained flat. The regular rate of employer contributions
for the RMPP remained at 17.1% of pensionable pay (2012 17.1%), effective from April 2010.
The regular rate of employee contributions for the RMPP remains unchanged at 6%. The
regular future service contributions for RMSEPP remained unchanged at 35.9% of pensionable
pay (2011 35.9%) from April 2010 until the scheme closed on 31 December 2012.
These contribution rates, at 17.1% for RMPP and 35.9% for RMSEPP, are likely to be different
to the current service cost charged to operating profit of 18.2% and 37.6% respectively during
the period (see above). However, the rates are not directly comparable. For example, the cash
rate is adjusted for expected returns on past investments, but this is excluded from the income
statement rate - hence the separate income statement interest charge.
There was no RMPP deficit payment (2012 £nil) as a result of State Aid clearance granted on
21 March 2012 and the subsequent transfer of the historical pension deficit to HM
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Government on 11 April 2012. RMSEPP deficit payments of £2m (2012 <£1m) have been made
during the year. There have been no employee deficit contributions.
9.6 Balance Sheet
The following amounts in the balance sheet relate to pensions:
31 March 25 March
2013 2012
RMPP & RMSEPP: Amounts recognised in the balance sheet £m £m
Pension deficit (non current “retirement benefit obligation”) 97 (206)
Pension redundancy payable (within current “provisions") nil nil
9.7 Pension Surplus/(Deficit)
Scheme assets are assessed at fair value at the balance sheet date. For example, quoted
equities are valued at the latest ‘bid’ price. Scheme liabilities are discounted using a high quality
corporate bond rate. The IAS 19 surplus/deficit is usually therefore different to the cash
funding surplus/deficit (the “actuarial” valuation) assessed by the Trustees, for which the
scheme liabilities are discounted using the expected returns available on scheme assets.
The IAS 19 pension valuation has changed from a deficit of £206m at 25 March 2012 to a
surplus of £97m at 31 March 2013. The improvement of £303m principally relates to the
transfer of historic liabilities to Government. The movements in the pension position during the
year were as follows:
RMPP & RMSEPP: Pension deficit £m £m
Pension deficit at beginning of year (206) I
Pre { Company's pension costs (current & past service cost) (24) I
Exceptionals Company's pension payments (regular & deficit contributions) 25
Operating pension payments excess over pension costs by a 1
Net interest credit 2 I
Transfer to Government 286 I
Actuarial gain (net of withholding tax of £3m) 14 I
Pension surplus at end of year 97
The actuarial gain includes the difference between the long-term expected rate of return on
plan assets and the actual return during the period, and the impact of changes in assumptions.
Actuarial gains and losses are recorded directly in the statement of total recognised gains and
losses (and not the profit and loss account). The actuarial gain of £14m during the year arose
primarily due to a greater than expected increase in assets as a result of changes in market
conditions, partly offset by an increase in liabilities due to changes in long term assumptions.
9.8 Pension Redundancy Payable
The pension redundancy payable of nil (2012 £nil) relates to the additional “top up” payments
made to the pension schemes for members that have exited the business on redundancy and
will be paid an early pension, and is partly based on estimates. All amounts had been settled at
the year end.
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9.9 Assessment of recoverability of surplus under IFRIC 14
In order to recognise a surplus it is necessary to prove that the Post Office could recover the
surplus either through lower future contributions or through a refund. Royal Mail took legal
advice both before and after sectionalisation. This confirmed that Post Office Limited and Royal
Mail Group Limited have absolute rights to the assets left over in their individual sections after
benefits have been secured if the RMPP terminates. There is no trigger for termination in the
Trust Deed but that does not mean that the RMPP cannot terminate. It would be wound up by
the courts, or the Regulator, or when the last beneficiary dies. Towers Watson has calculated
that Post Office Limited would be able to recover £91 million of the £99 million surplus in
RMPP through lower contributions and the remaining £8 million could therefore be recovered
through a refund. For the RMSEPP scheme, Royal Mail has advised that the £1m surplus could
be covered through a refund. The element of surplus that is recoverable through a refund
would be subject to a 35% withholding tax and therefore the overall surplus on the balance
sheet has been reduced by £3 million to £97 million. The element that is recoverable through
lower contributions has resulted in a deferred tax liability of £21m (see section 18.2).
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10.
10.1
10.2
10.3
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Exceptional Items and Provisions
This section discusses the exceptional items on the income statement together with
movements in the related balance sheet provisions/payables.
Exceptional items summary
The following exceptional items were recognised in the consolidated income statement for the
years ended 31 March 2013 and 25 March 2012
2012-13 2011-12
Exceptional items Section £m £m
Operating Exceptionals:
Government Grant 10.2 98 -
Restructuring costs including Subpostmasters compensation 10.3 (79) (2)
Impairments 10.4 (66) (36)
Total operating exceptionals (47) (38)
Non operating exceptionals:
Profit on disposal of property 2 1
Loss on sale of associate 10.5 (30) =
Net Exceptional costs (86) (37)
Government Grant - In April 2012 the Post Office received grants totalling £200m from the
Government, primarily to fund capital projects and subpostmasters’ compensation. £98m of
this sum has been utilised during the year, the remainder is brought forward into 2013-14 and
is included as deferred income in the March 2013 financial statements.
Restructuring costs - include the costs of delivery of a major change in the network. Network
Transformation introduces new style agency offices and seeks to improve fundamentally the
profitability of the Crown network. IT Transformation will create the IT infrastructure
appropriate for an independent group with ambitious growth plans.
Network Transformation resulted in costs of £12m for Subpostmasters’ compensation and
£40m programme costs. Redundancy costs of £11m mainly related to the Crown network,
costs of £10m related to transforming our IT infrastructure and there was £2m related to the
professional fees associated with the sale of Midasgrange Limited.
The £40m spent on Network Transformation is analysed below:
inal
[eo] na] no} oo] 00] 5
Network Transformation
Branch Fit Out (Inc. Signage /Scales etc)
Horizon Implementation
Legal-New Operating Model Contracts
Management Consultancy
Marketing __
CTP Pilot design/scoping
Professional Fees -Site Survey
Staff
Skills Group Internal Consultancy Resource
Project Management (Roll Out)
BR
BleIBlele
i
iS
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10.4
10.5
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Impairments (2013 £66m vs 2012 £36m)
Other impairments charged in exceptional items comprise:
2012-13 2011-12
Impairment Section £m £m
Property, plant and equipment 13.3 41 19
Intangible assets 13.3 25 17
Total impairments 66 36
Section 13.3 identifies the impaired capital expenditure as summarised above.
Loss on sale of associate (2013 £30m vs 2012 £0m)
During the year the investment in Midasgrange Limited was sold for proceeds of £2m. At the
date of sale the investment had a carrying value of £32m giving a loss on disposal of £30m.
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11.
Interest, Cash, Debt, Funding and Hedging
11.1 Net finance costs (interest) (2013 £3m vs 2012 £6m)
The Post Office incurred net finance costs of £3m in the year to 31 March 2013 (2012 £6m).
11.2
2012-13 2011-12
Finance costs & investment income £m £m
Interest received on investments - UK 1 1
Total finance income 1 1
Interest charged on Government borrowings (1) (3)
Interest payable on finance leases (1) (1)
Unwinding of discounts (4) (4)
Other finance costs (4) (2)
Total finance costs (4) (7)
Net finance cost (3) (6)
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Interest payable on the BIS Loan reduced during 2012-13 as the average borrowing volume
significantly decreased from the previous year. This arose through the receipt of £200m
government grants, of which £102m was not utilised during the year, plus an increase of
£30m in the NSP.
The discount unwind relates to the provision in respect of the WH Smith onerous contract.
Other finance costs include commitment fees to BIS for the Post Office credit facility, and
charges to RBS for their note sorting facility.
Cash, cash equivalents and debt within the balance sheet
The following table highlights the movements in cash, cash equivalents, debt and investments
during the year:
31 March 25 March
2013 2012
Net cash/debt analysis Section £m £m
Cash in the Post Office Limited network 113 870 759
Other cash at bank 9 (1)
Cash equivalent investments 92 62
Total cash and cash equivalents 971 820
Loans, repayable on demand or less than 1 year 114 (291) (377)
Obligations under finance leases (current) 11.5 (3) (4)
Total current financial liabilities (294) (381)
Obligations under finance leases (non-current) 11.5 (4) (6)
Total 673 433
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11.3 Cash within the Post Office Limited network (2013 £870m vs 2012 £759m)
The £111m (15%) increase in Post Office network cash year on year is mainly due to the year
end coinciding with Easter which necessitated increased branch and cash centre holdings to
respond to customer behaviour.
11.4 Loans and borrowings (2013 £291m vs 2012 £377m)
The table below details the breakdown and movement on the loans and borrowings year on
year:
31 March 25 March Net
2013 2012 (repayment)
Loans and Borrowings £m £m £m
Working Capital loan 291 377 (86)
11.5 Obligations under finance leases (current & non-current) (2013 £7m vs 2012 £10m)
11.6
11.7
The obligations under finance leases have decreased by £3m during the year attributable to
lease repayments in 2012-13. Lease types are shown in section 13.2.
Loan facilities
At year end the Post Office had no external (non Government) borrowing facilities in place.
Derivative assets
A derivative asset of £1m has been recognised on the balance sheet representing the gain on
open foreign exchange forward contracts that were in place at the year end.
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12.
121
12.2
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Going concern
Post Office Limited has net cash and cash equivalents of £971m (section 11.2) and a
borrowing facility of £1,150m of which £291m (section 11.4) was drawn down at 31 March
2013.
Background
On 24 March 2010 a funding agreement was agreed that provided up to £180m for
compensation for losses sustained in parts of the network in 2011-12, as well as providing
access to the working capital facility to 31 March 2016. These arrangements received State
Aid approval on 23 March 2011 through the working capital facility was limited until 31
March 2012.
A further funding agreement with Government was announced on 27 October 2010 which
provided for:
¢ Funding of £410m for 2012-13 (received 2 April 2012)
e Funding of £415m for 2013-14 (received 2 April 2013)
e Funding of £330m for 2014-15
e Extension of the existing working capital facility with BIS of £1.15bn up to 31
March 2016
State Aid approval for the funding for 2012-13 to 2014-15 was received on 28 March 2012.
It was also recognised that the working capital facility was no longer deemed State Aid
However, no drawing under the Facility may extend past the Final Maturity Date (341 March
2016).
The going concern analysis is based on the latest draft 2020 strategic plan financials
presented to the Post Office Board on 27 February 2013. The Post Office Board approved the
2013-14 budget on 20 March 2013 but the cash flow budget has since changed, reflecting
the reversal of the significant inflow in 2012-13 in excess of forecast. The cumulative position
across the two years is unchanged.
Assessment for the Post Office
Post Office has finished implementing its 2005-11 strategic plan and has completed its
closure programme. It posted an operating profit before exceptional items for the first time
for a number of years in 2008-09 and has continued to do so, but still operates with a cash
outflow with the exception of 2012-13. The 2011-15 plan is intended to reverse the trend of
an increasing Network Subsidy Payment (NSP) with the draft strategic plan beyond 2014-15
continuing that reducing trend.
The 2011-15 strategic plan updated for latest views has been shown in Table 1 of this
section, and shows that Post Office has sufficient cash headroom to continue to trade. The
available facility has been defined to include network cash, ATM cash, ATM debtor, POCA
debtor and SGEI cheques.
The one year funding deal for 2011-12 added the ability to borrow up to £50m from other
sources, as well as the up to £50m in finance leases previously allowed, which would improve
the headroom capacity shown if required.
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12.3. Summary conclusion
Based on the analysis there is available borrowing headroom until March 2016. Royal Mail
Group Limited is a key trading partner with Post Office Limited and, in arriving at the
conclusion that Post Office Limited is a going concern, the assumption is made that Royal Mail
Group Limited is a going concern or that an alternative mails provider would work similarly
with Post Office Limited providing a similar level of income.
It is believed that Post Office Limited will be able to meet its liabilities as they fall due in the
foreseeable future. It is therefore expected that the directors will consider it appropriate to
prepare the accounts on a going concern basis.
Post Office Limited Funding Analysis
Table 1 March 2013
£m (cumulative apart from free cash flow) 2011-12 2012-13 2013-14 2014-15 2015-16
Opening Funds (321) (336) (204) (222) (279)
Borrowing facilities 1,150 1,150 1,150 1,150 1,150
Restriction due to level of network cash (326) (98) (350) (350) (350)
Borrowing from other sources - finance leases, bank overdraft 1 14 9 4
Latest plan free cashflow before assumed non NSP grant (as) #68) **(233) (227) (231)
injection
Non NSP grant injection per October 2010 plan *200 **215, 170
Closing Funds Headroom 509 862 587 525 290
Downside impact of no NSP beyond March 2015 (130)
Adjusted Headroom pre risk 509 862 587 525 160
In year total cash flow:
€m Q3 FYF and board Outturn and latest
approved budget budget
2012-13 (28) *132
2013-14 140 **(18)
Cumulative 112 114
*/** See breakdown in table 1 above
Table 2: Risks, with management actions
£m (cumulative) 2011-12 2012-13. 2013-14 2014-15 = 2015-16
Headroom pre risk (as above) 509 862 587 525 160
Risks
Financial Services growth slower than plan (3) (8) (18)
Network Transformation benefits are not fully delivered (2) (6) (9)
Crown Transformation benefits are not fully delivered (5) (10) (15)
Pension contribution rates increase (4) (8) (12)
Headroom post risks 509 862 573 493 106
Notes:
2011-12 shows the year end outturn and last years are the latest view of the strategic plan.
Available facilities are defined as network cash, ATM cash, ATM debtor, POCA debtor and SGEI
cheques.
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Table 1
This table shows the October 2010 strategic plan cashflow updated for the 2013-14 budget,
and the initial 2020 strategic plan projections for 2014-15 and beyond. It demonstrates
positive headroom throughout the plan period.
Table 2
This table sets out the impact of theoretical downside scenarios if the plan does not generate
the income streams anticipated, the network programmes fail to deliver the benefits and if the
pension scheme costs increase.
Clearly mitigating management actions could be initiated but there remains sufficient
headroom, even if they are not taken. There are a range of management actions including
implementing non-people cost saving initiatives and closing non NSP offices without
compensation, and the overriding principle is that management will take whatever action is
required to mitigate any risk that materialises.
There are further actions that could be taken but are not required. These include the sale of
property and/ or tax losses.
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13. Property, plant and equipment and non-current assets held for sale
13.1 Net Book Values
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The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed assets
was £11m (2012 £11m). The movements in the year were as follows:
Land and Vehicles, plant
Intangible fixed
buildings and fixtures assets Total
Movement in NBV £m £m £m £m
NBV at 26 March 2012 14 - - 14
Add capital expenditure 10 31 25 66
Less disposals - - - -
Less depreciation - - - -
Less impairment (10) (31) (25) (66)
NBV at 34 March 2013 11 : : 11
13.2 Assets held under finance leases
The value of equipment held under finance leases is Enil (2011: £nil) having been impaired in
the years in which it was acquired. The two finance leases held are:
e Counter printers, capitalised and impaired in 2006-7 with an asset value of £10m, expires
2014-15;
e Identity equipment in branches, capitalised and impaired in 2010-11, with an asset value
of £8m, expires 2014-15.
The finance lease for Supply Chain cash boxes expired during 2012-13.
13.3 Capital expenditure
The following table summarises capital expenditure to 31 March 2013:
Vehicles,
Land & plant &
buildings fixtures Intangibles Total
Capital expenditure analysis £m £m £m £m
Technology Roadmap - - 14 14
Network Transformation 2 14 2 18
Pinpads - 4 - 4
Telephony - 1 - 1
Finance Roadmap - - 2 2
FO0G Front Office of Govt - - 2 2
Mails, Retail - - 2 2
Vehicles - 9 - 9
Property 8 - - 8
Other (items <£1m) - 3 3 6
Total 10 31 25 66
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14.
141
14.2
14.3
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Goodwill, investments and intangibles
Investments in joint ventures and associates
2012-13 2011-12
£m £m
Investment in joint ventures and associates 60 89
Joint ventures
During 2012-13 and 2011-12, Post Office Limited’s only joint venture investment was a 50%
interest) in First Rate Exchange Services Holdings Limited, whose principal activity is the provision
of Bureau de Change.
Associates
During 2011-12 Post Office Limited’s only associate investment was a 49.99% interest in
Midasgrange Limited whose principal activity is the provision of personal financial products. This
investment was disposed of to the Bank of Ireland during 2012-13.
Movements in investments in JV and associate
Joint venture Associate Total
£m £m £m
Share of net assets
Total net investment at 26 March 2012 67 22 89
Share of post tax pre dividend profit/(loss) 33 @ 32
Investment in associate - 11 11
Disposal - (32) (32)
Dividend (40) - (40)
Total net investment at 31 March 2013 60 - 60
Joint venture and associate
The table below contains details of the share of post tax profits and dividend payments.
Consolidated (Share of Profit) Company (Dividend)
2011-
2012-13 12 2012-13 2011-12
Share of — Share of
post tax post tax Dividends Dividends
Joint ventures and profit profit Variance Received Received Variance
associates £m £m £m £m £m £m
First Rate (FRES) 33 32 1 40 38 2
Midasgrange a ) - . - -
Limited(POFS)
The share of post tax profit from FRES has remained consistent year on year.
34
15 Working capital
15.1 Inventories (2013 £8m vs 2012 £6m)
31 March 25 March
2013 2012
£m £m
Scratchcards 5 4
Retail 3
Total 8
The movement in inventory is immaterial year on year.
15.1.1 Cost of Sales, Retail
Cost of sales in 2012-13 was £5.1m (2011-12: £4.1m).
15.1.2 Inventory written off
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The provision for stock write downs and discrepancies has increased to £0.5m in 2013 from
£0.2m in 2012. Shrinkage and obsolete stock written off in 2012-13 was £0.4m (2011-12
£0.4m).
15.2 Trade receivables
Receivables are tabulated below, followed by a detailed explanation of the various balances.
Receivables
31 March 2013
25 March 2012
Trade receivables 32 39
Client receivables 240 138
Prepayments and accrued income 81 39
Other receivables 9 10
Total 362 226
15.2.1 Trade receivables: Current (due within one year)
Trade receivables
31 March 2013
25 March 2012
Sales ledger 18 22
Doubtful debt provision (a) (1)
Homephone debtors 14 12
Homephone provision (6) (5)
Subpostmasters debt 14 16
Subpostmasters debtors provision (9) (9)
POFS, FRES cost recovery 2 5
Total 32 39
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The decrease in invoiced debt year on year is largely explained by the £nil debtor at March
2013 for DWP card account income (March 2012 DWP debtor: £5m). Mainly the DWP adhere
to agreed terms and pay the month following invoice receipt though there are instances when
the DWP settle in-month, including March 2013.
Other variances largely net off, however note that the Bank of Ireland March 2013 balance
includes £6m of cost recovery and £5m transactional debt. (March 2012 £2m and £2m).
Transactional invoices are larger following the sale of Midasgrange. The process for cost
recovery has also changed following the sale, with invoicing in advance such that the Bank of
Ireland is in a creditor position. However delays in settling these invoices explain why a debtor
continues to exist.
Receivable balances remaining in relation to former subpostmasters of £9m have been
provided for in full in line with previous years. This is due to the difficulty in recovering these
amounts. The remaining £5m of subpostmaster debt which is unprovided against relates to
current subpostmasters debt which are usually settled through a deduction from
remuneration. The balances are provided for when they reach 60 days old for single
subpostmasters or 90 days for multiples.
A profile of the trade receivables is as follows:
Trade receivables
34 March 2013 25 March 2012
DWP - 5
Bank of Ireland (2012: POFS) 1 4
FRES - 3
Partner banks - 2
Bank of Ireland (ATM commission) 2 2
Bill payment partners 1 1
Subpostmasters 1 1
Others 3 4
Total 18 22
Ageing of trade receivables:
Debtors over 60 days overdue: March 2013 £0.4m (March 2012: £0.4m).
The Post Office does not have a general risk in relation to bad debts due to the agency nature
of our client base. Among those ageing at March 2013 are £0.5m RBS, £0.5m Bank of
lreland and £0.1m Lloyds.
Debts written off during the year did not originate from the trade debtor base. Write-offs
included £1.5m for Homephone debtors which are provided for in full when the debt is over
60 days old.
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15.2.2 Client receivables
Analysis of the significant client balances at year end is as follows:
Client receivables
34 March 2013 25 March 2012
ATM (Bank of Ireland) 123 7
Card Account (JP Morgan) 76 34
Partner banks 29 18
Others 12 12
Total 240 138
The reason for the significant increase in Client levels over March 2012 due to the coinciding
of the March 2013 year end with Easter, which has increased transactional activity and also
temporarily extended settlement feel into 2013-14 because of the bank holiday.
The trend for the ATM debtor to increase year on year as more ATMs are installed and also
through increased usage of the existing estate continues. Additionally partner bank debtors
have increased through increased transaction activity, and also HSBC joining as a trading
partner during 2012-13.
15.2.3 Prepayments and accrued income 2013 £81m (2012 £39m)
15.3
Accrued income represents the majority of this amount (March 2013: £34m, March 2012:
£35m), and year on year the product components are similar. The larger accruals at March
2013 are: DWP card account income for March £7m, Homephone £6m and Bank of Ireland
commissions £8m.
Additionally there are prepayments of £47m of on the balance sheet at March 2013 (March
2012 £3m). There are two main elements: a £28m advance payment to Fujitsu in respect of
the 2013-14 managed service, and £13m - also to Fujitsu - for set-up costs for their take-on
of the Telephony contract, this latter prepayment will be amortised over the life of that
contract.
Payables: amounts due within one year
A summary of payables categories is:
Section 31 March 2013 25 March 2012
Trade payables 15.34 43 32
Accruals and deferred income 15.3.1 134 140
Client payables 15.3.2 528 332
Advance customer payments 15.33 50 48
Capital payables 15.3.4 18 10
Social security 10
Business transformation 7 3
Amounts due to group companies 6
Government grant deferred
income 10.2 102 -
Total 898 583
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15.3.1 Trade payables and accruals
Trade payables and accruals
31 March 2013
25 March 2012
Trade payables 43 32
Accruals, GRNI 57 50
Agent, employee pay balances 24 61
Productivity, bonus schemes 16 17
Deferred income (Gamma) 31 -
Others 6 12
Total 177 172
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The increase in purchase ledger and GRNI accruals is driven by the current significant levels
of project activity.
Agent and employee pay balances represents March salaries and remuneration which were
paid in March 2013 (2012: paid following year end).
During the year POFS and the Bank of Ireland paid a total of £40m of contractual Gamma
payments of which £31m remains to be amortised at March 2013.
15.3.2 Client payables
31 March 2013
25 March 2012
Santander 183 139
NS&l 28 15
DVLA 107 18
Utility companies 24 15
Bank of Ireland 8 13
BACS 59 33
Others 119 99
Total 528 332
All balances are impacted by the Easter bank holiday coinciding with the Post Office’s year
end, having the effect of increasing the settlement timescale temporarily. Additionally the
DVLA balance relates to car tax renewals and was most affected by the coinciding of year end
with calendar month end.
38
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15.3.3 Client advances
This category also includes specific, non-client, creditors as follows:
Client advances
31 March 2013 25 March 2012
Client advances, deferred income 23 20
Postal order liability 17 18
Homephone line rental advance
payments 10 10
Total 50 48
15.3.4 Capital payables
The increase over 2011-12 reflects the increased pace of capital project activity in Q4,
particularly Network Transformation and Technology roadmap.
15.4 Payables: amounts due after one year
Payables due after one year
31 March 2013 25 March 2012
Amounts due under finance
leases 4 6
Bank of Ireland deferred brand
income -
Total 4 8
The 10 year brand income contract with Bank of Ireland becomes fully amortised during
2013-14, the remaining one year’s amortisation is included within accruals and deferred
income.
39
16.
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Provisions
Provisions (2013 £26m vs 2012 £14m)
Crown
Conversions Network
Project Transformation Other Total
£m £m £m £m
At 26 March 2012 9 - 5 14
Charged in operating exceptional 10
items - 12 22
Charged in operating costs ~ 6 6
Charged in financing costs 1 ~ - 1
Utilisation (3) - (14) (17)
At 31 March 2013 7 10 9 26
Included within current liabilities 19
Included within non current liabilities 7
The network transformation provision relates to compensation payments due to
subpostmasters who have signed up to the new contract terms at March 2013.
Other provisions include property contracts, being amounts from onerous lease obligations,
and personal injury claims. Additionally at March 2013 the provisions balance includes £2.1m
for sales capability investment arising from the revised contract with Bank of Ireland (Eagle
provision) and £1.7m following a recent court case in Scotland in which it was decided that
external ATMs were subject to business rates. The Ratings Agency intends to seek application
of this judgement to the rest of the UK and therefore a provision has been made for rates
backdated to 2010.
40
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17. Litigation and Claims- Potential Claims regarding Horizon
17.1 Post Office Limited has received notification of five potential claims from former
subpostmasters. Each of these subpostmasters had their appointments terminated following
the discovery at audit of significant cash losses at their respective branches. Two of the
subpostmasters were subsequently prosecuted and pleaded guilty to false accounting
17.2. Each has claimed wrongful termination of contract on the basis that the losses are alleged to
have arisen due to the unfairness of the system devised by Post Office Limited and/or have
been generated by a computer error in the Horizon system. More specifically, it is alleged
that (a) the accounting procedures in place are unfair in that they do not permit
subpostmasters to properly verify losses which are alleged to have been incurred, (b) the
Horizon system itself contains inherent defects and/or (c) the training and support for
subpostmasters using the system is inadequate,
17.3. Each subpostmaster is claiming circa £150,000 by way of damages.
17.4 Four of the claims have not progressed beyond the pre-action stage (i.e. there are no live
court proceedings). Post Office Limited has strongly denied liability and rebutted the
allegations made. The fifth claim was struck out by the Court and cannot be pursued further.
17.5. The last correspondence received on these matters was in December 2011. Post Office
Limited is not aware of any further substantive steps having been taken to advance these
claims through the Courts since that date.
17.6 Post Office Limited continues to receive challenges to the integrity of the Horizon system
and it is possible that further claims may be received. Reports in the press have previously
suggested that solicitors Shoosmiths may have consulted on between 85 and 150 potential
cases in total.
17.7 Subpostmasters have also made complaints about Horizon to Members of Parliament, and
through the “Justice for Subpostmasters Alliance”, an organisation “established to raise
awareness of the issues within the Post Office Horizon system”.
17.8 Post Office Limited has commissioned an independent third party, Second Sight Support
Services Limited, to investigate these cases, which investigation is ongoing.
17.9 On the basis of the evidence to date, no provision has been made and it is not considered
appropriate to make any disclosure on this matter. This position is being actively monitored.
41
18.
18.1
18.2
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Taxation
Income statement - taxation credit 2013 £(17)m (2012 £(10)m)
A breakdown of the tax credit is shown in the table below:
2012-13 2014-12
£m £m
Corporation tax credit for year (10) (11)
Tax over provided in previous years - 1
Current tax (10) (20)
Deferred tax (21) -
Taxation credit in the consolidated income statement (34) (10)
Factors affecting tax credits
A deferred tax credit of £21m has been recognised in relation to the retirement benefit
surplus on the balance sheet. During 2012-13 the pension deficit was transferred to
government and consequently the defined benefit pension scheme is now in surplus. A
proportion of this surplus is considered to be recoverable through future contributions and
therefore creates a deferred tax liability which is taken through Group reserves. The
equivalent amount of deferred tax asset has been recognised through the income statement
as the credit detailed above.
The Group has significant tax losses of £57m (2012 £128m) that are available for offset
against future taxable profits. It also has £133m (£157m) of unrecognised deferred tax
assets relating to fixed asset timing differences. These tax losses/deferred tax assets could
be recognised in the future should suitable taxable profits arise. The tax
losses/unrecognised deferred tax assets means that the Group should not incur any tax
charges for the foreseeable future.
42
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Post Office Limited
Report to the Audit and Risk Committee
2012-13 Audit Results Report
14 May 2013
El) ERNST & YOUNG
Quality In Everything We Do
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Ta I
iw —
London SE1 2AF
ey.com/uk
Private and confidential 14 May 2013
Audit and Risk Committee
Post Office Limited
148 Old Street
London
EC1V 9HQ
Dear Members of the Audit and Risk Committee
Audit results report
We are pleased to attach our audit results board report for the forthcoming meeting of the Audit Committee.
This report summarises our preliminary audit conclusion in relation to Post Office Limited's financial position
and results of operations for the 53 week period ended 31 March 2013 (the period). We plan to issue our
final conclusion following the Audit Committee scheduled for 21 May 2013.
Our audit is designed to express an opinion on the Group and Company financial statements for the period
ended 31 March 2013 and address current statutory and regulatory requirements. This report contains our
findings related to the areas of audit emphasis, our views on the group and company’s accounting policies and
judgements and material internal control findings.
This report also contains our final summary of audit differences, communications regarding our
independence, a summary of communications we are required to make to you and a draft management
representation letter.
This report is intended solely for the information and use of the Board of Directors and Management. It is not
intended to be and should not be used by anyone other than these specified parties.
We welcome the opportunity to discuss the contents of this report with you at the meeting on 21 May2013.
Yours faithfully
Angus Grant
Engagement Partner
For and on behalf of Ernst & Young LLP
The UK firm Ernst & Young LLP isa limited lability partnership registered
as Wales with registered n and is a member firm of Ernst & ¥%
jz Limit
London SE
vailable for inspection at 1 More London Pl
principal place of business and registered office
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Contents
Page
Section 1 Executive summary 3
Section 2 Key areas of audit emphasis 8
Section 3 Control themes and observations 21
Section 4 Looking forward: considerations for the coming year 25
Section 5 Summary of audit differences 27
Appendices
Appendix A Independence update 31
Appendix B Management representation letter for statutory reporting 33
Appendix C Required communications with the Audit and Risk Committee 36
The contents of this report are subject to the terms and conditions of our appointment as set out in our
engagement letter of 25 February 2013.
This report is made solely to the Audit Committee, Board of Directors and management of Post Office
Limited in accordance with our engagement letter. Our work has been undertaken so that we might state
to the Audit Committee, Board of Directors and management of Post Office Limited those matters we are
required to state to them in this report and for no other purpose. To the fullest extent permitted by law we
do not accept or assume responsibility to anyone other than the Audit Committee, Board of Directors and
management of Post Office Limited for this report or for the opinions we have formed. It should not be
provided to any third party without our prior written consent,
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Executive summary
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Executive summary
Overview
Following Post Office Limited's (POL) official separation from Royal Mail Group (RMG), significant change
is underway throughout the business. Within the network, POL has started their network transformation
programme by converting 1,450 branches by the end of this year. This year has also seen POL prepare
their first consolidated financial statements under IFRS, and begin to articulate its own identity in the eyes
of its stakeholders.
Despite the challenges faced by the finance team as a result of separatiomrelated matters and its first time
in preparing standalone Group and Company financial statements, the annual results close process of POL
was well executed. We did not perceive any adverse impact on the quality or timeliness of the information
provided for audit.
We have received full co-operation from both management and the teams with whom we work and, subject
to a few routine outstanding matters, as noted at the end of this section, we have received all information
necessary to enable us to complete our audit.
We have carried out our audit in accordance with the plan presented to the Audit Committee in November,
with no changes made to our scoping. On the basis of our work performed to date, we expect to issue
unqualified audit reports for both the Group and Company financial statements.
The year ahead poses additional challenges and opportunities with further separatiomrelated activity and
the continuation of network transformation projects across the business.
In the following pages, we provide you with a summary of our audit scope and status, our areas of focus
around significant audit and accounting issues, findings from our controls testing, our required
independence communications and a draft management representation letter for your review.
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Executive summary (cont'd)
Significant Accounting and Audit Issues
Refer to section two ‘Areas of Audit Emphasis’ for a detailed discussion of significant accounting and
audit issues
We have concluded on the following accounting and audit issues with management following discussions
with management at the planning and year-end audit stages:
Significant Risks (as identified in our Audit Planning Report)
» Revenue Recognition across diverse range of revenue streams: We tested controls on a sample of
POL's revenue lines to ascertain whether controls over revenue recognition were effective over the
period. We have also carried out substantive testing of revenue, which included cutoff testing at period
end over accrued income and deferred income balances andconcur with management's revenue
recognition accounting.
» Counterparty Credit Risk: Management continues to be proactive in its assessment of counterparty risk.
We noted that all significant counterparty receivables have been recovered postyear end, and note that
management continues to manage and monitor its credit risk on an ongoing basis.
> Pensions valuation and accounting: Following the pension solution on 1 April 2012 and annual
accounting valuation by Towers Watson at period end, Post Office Limited has recognised a gross
pension asset for its RMPP scheme of £99 million on its balance sheet at 31 March 2013. We have
independently assessed the key actuarial assumptions underpinning the £99m asset and concluded they
lie within acceptable ranges.
Other accounting and audit matters
>» Exceptional costs & classification: POL's policy of reporting exceptional items allows management to
highlight those items incurred during the year that are both material and fall outside the definition of
‘business as usual’ activity. In the body of this report, we present our view on each of the key areas of
judgement and concur with management's treatment and presentation.
» Higher inherent risk of transitioned accounts impacted by POL separation: The POL finance team now
has direct responsibility for the vast majority of its finance functions for the first time, some of which
were previously operated by Royal Mail Group. Overall, we did not note any issues with the accounting of
the ‘transitioned’ finance functions.
» State Aid Funding (Government Grants): We are satisfied that POL’s government grants have been
appropriately recognised in the P&L in accordance with the contract from the Department of Business,
Innovation & Skills and IAS 20, Accounting for Government Grants and Disclosure of Government
Assistance, and that the related deferred income balances at year end are appropriately stated.
Additionally, in light of POL's receipt of State Aid funding up to 2014/15, extension of its working capital
facility until 31 March 2016 and review of management's forecasts underlying its going concern
assessment, we concur with management's assessment that POL can continue as a going concern.
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Executive summary (cont'd)
Control themes and observations
Refer to section three ‘Control themes and observations’
The key internal control findings arising from our audit work are:
» Key controls tested around revenue and payroll were deemed to be operating effectively.
» No significant findings were noted in the ISAE 3402 report commissioned by Fujitsu, and we have
therefore been able to rely upon it for our IT audit. We were also able to place reliance on the
effectiveness of automated controls within HNGX and POLSAP for financial statement audit purposes.
>» We noted that for the RMG-provided HRSAP system, our team identified logical access-related issues
which have required us to modify our audit approach by testing and placing more reliance on the manual
business process controls. Given the changed nature of POL's relationship with RMG and impending
separation, we believe POL should take a proactive approach in resolving the issue with RMG.
» In light of the continued separation of POL from Royal Mail, with POL taking on more activities which
Royal Mail had previously carried out on their behalf (including the consolidated financial statement
preparation process), the finance team was resilient and well prepared for the year end. We noted no
adverse impact on the quality of information produced.
Detailed control observations and recommendations are currently being discussed with management and
will be reported in our forthcoming management letter.
Summary of audit differences
Refer to section five
» We report two unrecorded reclassification audit differences totalling £9.9m which we believe should be
reclassified from accruals to provisions. These relate to £6.7m with regards to a commitment to Crown
branch staff for business transformation payments, and £3.2m which relates to DVLA remuneration
payments to subpostmasters. We note these two adjustments have no profit and loss impact.
We also report a turnaround adjustment to decrease profit before tax by £1.9m with regards to the LTIP.
bonus scheme as it was over-accrued and unadjusted for in the prior year.
The impact of the current year unadjusted audit differences would be to decrease profit after tax by
£1.4m, which is solely due to the turnaround adjustment described above.
v
v
v
We have internally consulted on the unadjusted reclassification differences and await conclusion of this
consultation at the time writing this report.
Our opinions and confirmations
> We anticipate issuing an unqualified audit opinion on the POL Group and Company financial statements for
the period ended 31 March 2013.
» We confirm that our fees for non-audit services during 2012/13 have been reviewed in order to make
sure that they do not compromise our independence as your external auditor.
>» Weconfirm our independence as your external auditor in this report in Appendix A.
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Executive summary (cont'd)
(6. Status of the audit
Our audit work in respect of the opinion on Post Office's consolidated financial statements is substantially
complete. The following items relating to the completion of our audit procedures were outstanding at the
date of drafting this report.
Letter of To be signed/ dated contemporaneouswith our audit opinion on Management
representation the Group and Company financial statements, which is Audit Committee
anticipated to be in June 2013.
Subsequent To be completed through the date of our auditopinion on the Management
events Group and Company financial statements (matters to be updated Ernst & Young
procedures include: management enquiries, review of latest management
accounts, unrecorded liabilities testingand board minute review to
date of signing).
Confirmations Awaiting receipt of allbank, derivative and pensionasset Management
confirmations, anticipated to be received by24 May 2013.
Annual report > Review of ‘front end’ statements including audit ofspects of Management
and accounts the Directors’ Remuneration Report, Chairman's and CEO's Ernst & Young
statements and completion of EY technical review thereon;
» Review of directors’ emoluments disclosures once final bonus
outturns confirmed
» Post balance sheet events review;
> Finalisation of Ernst & Young review comments on disclosure
notes; and
> Financial statements to be approved by management and audit
report to be signed by Ernst &Young.
Tax The review is in process and no adjustments have been noted to Management
date. Ernst & Young
Interoffice » Final signed deliverables from PwCFRES team Management
reporting Ernst & Youn
deliverables 9
Office Limited 7
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Areas of audit emphasis
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Areas of audit emphasis
Control themes & Looking forward Summary of audit
observations differences
The following table summarises the significant accounting matters outlined in this report. It seeks to
provide the Audit Committee with an overview of the areas of audit emphasis, as identified in our audit
planning report, and our assessment of management's accounting treatment.
Significant risk - Revenue ri inition across diverse rant f revenue i
ignificant risk - Revenue recognition across diverse range of revenui Reteeto ection 2.1
streams
Significant risk - Counterparty Risk Refer to section 2.2
Significant risk - Pension valuation and accounting Refer to section 2.3
Valuation of provisions including Network Transformation provisions and
Classification of exceptional costs Refer to section 2.4
Higher inherent risk of transitioned accounts impacted by POL
separation Refer to section 2.5
Risk of fraud/burglary arising from the logistics network and the branch
Refer to section 2.6
network
Project Eagle/Gamma Accounting Refer to section 2.7
Exceptional Charge: Fixed assets impairment Refer to section 2.8
State Aid Funding (Government Grant) Refer to section 2.9
Consolidation Considerations - First Rate Exchange Services Refer to section 2.10
Tax Refer to section 2.11
ay
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Areas of audit emphasis (cont'd)
2.1 Significant risk - Revenue recognition across diverse range of revenue
streams
The Company continues to sell a large variety of products/services across a number of revenue streams.
Total revenues for POL (excluding the network subsidy payment, which is also included in total revenue and
is discussed in Section 2.9) continued to grow during FY2013, increasing by 4.4% to £1,024m (FY2012:
£980m).
As noted in our planning report, most of POL's revenues are not overly complex in their calculation. The
main risk associated with the diverse range of streams is in the correct contractual terms being applied. We
performed controls testing on revenue as part of our interim procedures, where a sample of revenue lines
was tested to ascertain whether the controls over revenue recognition were effective throughout the period.
No exceptions were noted in our testing. Further, we were able to obtain comfort over the contractual rates
and volumes used in the revenue calculations and that an adjustment for actual income is made where
estimates are used.
We also performed detailed analytical reviews of each major revenue stream, considering and evaluating the
movements in the key revenue lines across the business. We did not note any unusual results or variances.
We also considered the accounting treatment for significant new products or revenue streams where
applicable, noting no exceptions with management's application of its revenue recognition policy.
In addition to the above, we performed cut-off testing procedures to give further comfort that revenue has
been recorded in the correct period. We also carried out substantive testing of accrued and deferred income
that included investigating any estimates made and comparing this to the actual amounts received
subsequent to year-end for any material differences, and noted none as part of our year end review.
Based on the procedures performed, we conclude that revenue, accrued income and deferred income
balances at year end are appropriately stated.
e Limited )
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Areas of audit emphasis (cont'd)
2.2 Significant Risk - Counterparty Credit Risk
In light of the current economic environment, POL undertakes a review of all counterparties to assess their
level of exposure and relative risks. In particular, given the concentration of risk associated with the Bank of
Ireland (BOI), POL has performed a more detailed assessment to determine if steps should be taken to
mitigate any risk exposure perceived excessive. As part of their assessment, the appropriate detailed
contingency plans have been put in place, in particular focusing on Instant Saver and general banking
areas.
Given the concentration of risk associated with the Bank of Ireland, POL performs a more detailed
assessment. This plan was prepared in October 2010 at the height of the banking crisis and management
continues to believe it to be relevant in the current year. Management noted that the first stages of the
contingency plan were deployed successfully when the Irish banking crisis was widely reported in the media
in previous years. This plan takes into account all similar types of banking and how they would cope with
customer related issues (e.g. all deposits taken in one day) and/or counterparty related issues such as
liquidation of a third party.
Bank of Ireland 123: ATM Debtor
JP Morgan 76 Processing benefit settlements
HSBC 56 Card payments in network
Top three counterparty receivables for POL as at 31 March 2013
We tested the recoverability of the material counterparty receivables due to POL, which included vouching
the most significant counterparty debtors to bank receipts received post yearend.
We have also held meetings with the Head of Corporate Finance to discuss how POL manage and mitigate
counterparty risk. We noted that POL mitigates trading counterparty credit risk by imposing the
recommended credit terms and credit limits as advised by a credit agency (Experian) and monitors
amounts overdue from key counterparties via circulating weekly reports to the Corporate Finance
department.
Based on the procedures performed, we conclude that the counterparty credit risk is monitored and
managed and that all counterparty receivables have been recovered post year end.
Post Office Limited
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Areas of audit emphasis (cont'd)
2.3 Significant Risk - Pension Valuation and Accounting
Post Office Limited has recognised a pension asset of £97m, representing the surplus in plans of £99m and
£1m for RMPP and RMSEPP respectively, net of withholding tax of £3m at a rate of 35% on the element of
the surplus which is recoverable through a refund from the plans. This has been recorded in accordance
with IAS 19 Employee Benefits and IFRIC 14 The Limit on a Defined Benefit Asset.
RMPP Scheme
Post Office Limited has recognised a net pension asset for its RMPP scheme of £99 million on its balance
sheet at 31 March 2013 (March 2012: £205 million liability). This amount comprises £243 million of
scheme assets offset by £144 million of defined benefit pension obligation.
The change in the Post Office Limited position from net pension liability position to net pension asset
position is primarily due to the implementation of the pension solution, which meant that POL was fully
funded (and therefore at a £nil net pension position) at the start of the current period. The change to
surplus position in the current period was principally driven by the pension solution and favourable
performance of the scheme assets during the period.
Pension Assumptions
We have reviewed the key financial assumptions underpinning the measurement of the defined benefit
obligation, with input from EY pension specialists where appropriate. We have also discussed and reviewed
the methodology used in preparing the assumptions with Post Office's actuaries. In our opinion, Post Office
has used reasonable assumptions in valuing their pension obligation in accordance with the measurement
criteria set out in IAS 19.
A summary of the main assumptions used to calculate the defined benefit obligation were as follows:
March 2013 March 2012 Change
Discount rate 4,80 5.10 -0.30
Inflation rate (RPI) 3.30 3.30 0.00
Inflation rate (CPI) 2.30 2.30 0.00
Return on assets nla 7.70 nia
Expected rate of non promotional salary ao ao aoe
increases
The critical assumptions and our view on Management's choice of assumptions are set out below:
Discount rates
Continued volatility in financial markets has meant that AA corporate bond yields continued to decline in
2012-13, resulting in a decrease in discount rates for the RMPP scheme. We acknowledge that there is no
single correct approach to deriving the discount rate and the assumption is highly subjective. The
methodology used by Towers Watson to calculate this rate is appropriate and takes into account the
duration of the scheme's liabilities and market conditions as at 31 March 2013.
Post Office Limited
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Areas of audit emphasis (cont'd)
2.3 Significant Risk - Pension Valuation and Accounting (cont'd)
Inflation rates
Consistent with the prior year approach taken by RMG, POL continues to use a combination of RPI and CPI
as its basis for measuring the inflation rate. There is subjectivity in the CPI assumption given limited market
data with derivation based on the reduction of the RPI rate by 1.00%. Based on our experience we note that
the differentials as adopted by Post Office are mid-point of what we consider to be an acceptable range.
Asset returns
Towers Watson has not provided expected rates of return on assets at 31 March 2013 as these will not
affect next year’s income statement given the changes to IAS19. Under the revised IAS 19, which comes
into effect for accounting periods beginning on and after 1 January 2013, the expected return on assets
will be replaced by the net interest cost, which will be the discount rate applied to the net balance sheet
asset or liability as at the beginning of the period.
Demographic assumptions
We have reviewed the demographic assumptions related to salary increases and mortality. These are in line
with the POL's latest experience and are consistent with those agreed between the Trustees and POL. We
note that the mortality assumptions are consistent with prior year, and are based on an investigation of
scheme experience that was performed for the full actuarial valuations as at 31 March 2009. We
understand that the 31 March 2012 valuation is still in progress.
The basis applied for the current year IAS 19 valuation is considered appropriate for the current year. We
do however note that mortality assumptions should be reviewed on a regular basis so that they take
account of new research and scheme experience, where observable.
RMSEPP Scheme
The Royal Mail Senior Executive Pension Plan (RMSEPP) was not impacted by the pension solution and
continues to be centrally accounted for by Royal Mail Group, with the appropriate POL section of the
scheme allocated to it by the Royal Mail Group finance team. As a result, the Royal Mail Group team have
separately audited the RMSEPP scheme, and reported back to our team that there were no issues to note.
We note that POL recognised a pension surplus of £1m (2012: deficit of £1m) relating to the RMSEPP.
scheme.
IAS19 (Revised) Considerations
The Group is subject to the requirements of IAS 19 (Revised) effective 1 January 2013.
Changes expected as a result of the adoption of the revised standard that POL will need to consider for the
following year's financial statements will include:
>» Removal of the concept of separate expected return on assets and interest costs on liabilities and
replaced by ‘Net financing (income) /expense relating to pensions’ described below;
> Net financing pension (income) /expense calculated as the net surplus or deficit multiplied by the
discount rate applicable to the Scheme at the beginning of the financial year. Differences between this
computed figure and the actual amount will be reported in other comprehensive income. The effect on
adoption of IAS 19 Revised is not expected to be material to POL’s financial statements.
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Areas of audit emphasis (cont'd)
2.4 Exceptional Items & Classification
As anticipated in our planning report, POL's Network Transformation programme during the current period led
to a significant increase in exceptional costs which was partially offset by a £200m government grant from
the Department of Business, Innovation & Skills (BIS). Management's disclosure of the exceptional costs on
their financial statements is set out below. We consider each of these classifications below:
Transformation and restructuring costs (79) @
Other (See section 2.8 for further consideration) (66) (36)
Government Grants (see Section 2.9 for further consideration) 98
Total exceptional costs (47) (38)
We note that ‘other exceptional costs’ consist entirely of the immediate full impairment charge on all fixed
asset additions, which is consistent with prior year. Management's accounting treatment is discussed in
detail in Section 2.9 of this report. We also agree with management's disclosure of government grants
within the exceptionals disclosure on the income statement. See Section 2.9 for further discussion.
Restructuring costs & business transformation costs
Restructuring and business transformation exceptional items largely related to the costs of carrying out the
network transformation programme.
Management note that the costs of network transformation are exceptional in nature given that a branch
modernisation programme of this scale has not been carried out before. As such, management believe this
would require separate presentation on the face of the income statement to allow a better understanding of
financial performance in the year.
We noted no exceptions within our detailed testing, and concluded that the classification of these costs as
exceptional was reasonable. The breakdown of restructuring and business transformation costs is given
below and a summary of our considerations on the classification of each of these costs follows.
Network & Crown Transformation costs (40)
‘Agents Compensation (a2)
Redundancy (di)
IT Transformation Costs do)
Business Transformation costs (4)
Other (2)
Total transformation & restructuring costs (79)
ae owt
e Limited 14
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Areas of audit emphasis (cont'd)
2.4 Exceptional Items & Classification (cont'd)
Network & Crown Transformation costs (FY2012-13: £40m)
The Network Transformation & Crown Transformation costs are attributable to the modernisation of POL's
existing branches as part of their transformation programme. In keeping with the one off nature of the
programme to modernise Post Office’s network, management have classified these costs as exceptional.
IT Transformation costs (FY2012-13: £10m)
The current IT transformation was one of POL's key programmes to deliver the commitments made in 2010
in the Government funding and Strategic Plan. Management treats this specific transformation project as an
exceptional cost given the project results in a fundamental change to the entire POL IT model. We
understand from our discussions with management that this will go hand-in-hand with the Network
Transformation project and act as a key enabler to the project as a whole. Management noted that the
changes in the network transformation project would not be achievable without the IT transformation
project - thus following that both, which are one-off non-recurring costs once these projects are completed
at the same time in 2017/18, should be regarded as exceptional. We also note that management is not
including standard IT maintenance or upgrades to its systems within these costs.
Redundancy costs (FY2012-13: £11m)
POL provided for redundancy costs of £11m during the current year the majority of which were paid leaving
a £1m balance to be paid at period end. Management noted these were specific redundancy costs largely
related to the Crown transformation programme and as such were treated as exceptional items.
Agents Compensation Costs (FY2012-13: £12m)
In the current year agents have been incentivised and compensated for ensuring their branches take part in
the Network Transformation programme. Agents have been offered four different compensation schemes
totalling £12m, and we agree with management's assessment that these should be included within
exceptional items.
Business Transformation Costs (FY2012-13: £4m)
During the current year, management made an offer of 'business transformation’ payments to staff working
in their crown branches as part of their transformation programme, which included £3.3m of exceptional
costs in the current year (rounded to £4m for presentation in the accounts and treated as an exceptional
item) and an accrual of £3.4m from the prior year. We agree with management's treatment to treat this as
an exceptional cost, and note this is consistent with the practice in prior year.
We also note that whilst we agree with management to treat the above as an exceptional, we have proposed
an audit reclassification adjustment for business transformation costs, which we believe should be classified
in provisions in accordance with IAS 37 - Provisions, as opposed to accruals. We have discussed this in
greater detail within our ‘Summary of Audit Differences’ section.
The remaining £2m of ‘other’ costs consisted of one-off professional fees associated with the sale of
Midasgrange during the period.
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Areas of audit emphasis (cont'd)
2.5 Separation Considerations
As a consequence of POL's separation from Royal Mail Group during the current year, the POL finance team
has been directly responsible for nearly all of its finance functions for the first time, some of which were
previously operated and accounted for at Royal Mail Group (with the exception of some minor accounting
areas including the RMSEPP pension scheme). POL has also taken ownership of the accounting of the RMPP
pension scheme (discussed in previous section). Overall, we did not note any issues with the accounting of
the ‘transitioned’ finance functions. The key separatiorrelated highlights which have not been discussed
elsewhere in the report are mentioned below:
Treasury
One of the consequences of the POL/RMG separation has been the development and independence of POL’s
own treasury function. We discussed the treasury process with the Treasury and Corporate finance
department and performed walkthrough procedures to gain an understanding of POL's treasury process.
We noted that POL mitigates its foreign currency risk exposure through external foreign currency forward
contracts with First Rate Exchange Services Holdings Limited, and also participates in the Royal Mail Group
commodity hedging programme, to mitigate its exposure to the price risk of purchasing fuel, electricity and
gas. At year-end, POL's net derivative assets on its balance sheet amounted to £1m, relating primarily to
the forward purchase of foreign currencies. We obtained supporting documentation for the derivatives and
recalculated the measurement of these assets in accordance with IFRS, noting no issues with management's
treatment.
Property Transfer from Royal Mail
During the current year, Royal Mail transferred a portion of its freehold properties and long leaseholds to
Post Office Limited, which had an original net book value to Royal Mail of £12m with a market value of
£30m (as per an external valuation). As per IAS16 Property, Plant and Equipment, POL had two options to
account for the transfer of land and buildings from Royal Mail; they could either account for these
transferred assets at Enil or at fair value. As POL made a minimal contribution for these assets (of £1
each), they have elected to record these assets into their accounts at £nil cost. We understand that the
market value of these assets will be disclosed in the directors’ report to the accounts. At year end, we noted
that these properties have been appropriately transferred to POL and that they have been recorded in
accordance with IAS 16 Property, Plant and Equipment.
Limited 6
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Areas of audit emphasis (cont'd)
2.6 Risk of Fraud/Burglary arising from the logistics process
POL holds large quantities of cash within its retail centres, cash centres and in transit (£759m as at 31
March 2013), which is potentially subject to misappropriation or under the threat of burglary attempts by
organised crime. As noted in our planning report, management has strong controls to prevent and detect
any risk of fraud and attempted burglary, and we note that they continue to reassess whether they need to
increase their security measures.
We visited both a cash centre and a Post Office branch to observe cash counts performed by internal audit,
and observe security controls around cash management. We noted that management continue to have
strong security controls in place to deter risk of fraud and burglary. Additionally, we held a meeting with the
head of security at cash centres to gain insight into their assessment of risks and events of fraud in the
logistics process and branch networks, and note no issues to report.
As part of our audit procedures, we have also performed detailed substantive tests on cash and bank
reconciliations at year end, as well as testing cash cut-off. We noted no issues from our testing.
2.7 Project Eagle/Gamma accounting
As noted in our half-year review to the Committee, the BOI sells a number of financial services products
through the POL branch network in the UK. Historically, the services were operated through Midasgrange
Limited, which traded as Post Office Financial Services (POFS), an associate between POL and the Bank of
Ireland (BOI).
During the year, POL sold its investments in POFS to the BOI for proceeds of approximately £2.7m (Project
Eagle). This resulted in a loss on disposal of £30m. We have reviewed the accounting treatment for Project
Eagle and agree with management's accounting for the transaction. We also concur with management's
treatment of the future revenue profile for Gamma and the Project Eagle disposal accounting.
At year-end, we noted the new arrangement between POL and BOI to replace the previous POFS
arrangement was ‘commissions based’, whereby POL would directly receive a contractual commission for
each BOI product that it sells to customers through its branches. We noted no exceptions in the accounting
related to the new deal.
2.8 Fixed Asset Impairment
POL continue to adopt a policy of fully impairing all fixed asset additions made during the year in which they
are purchased, except for freehold land & buildings and building shells. Management's justification for
adopting this policy is mainly due to the fact that POL has historically been, and continues to be, a loss
making entity absent the Network Subsidy Payment it receives from the Government.
As an additional factor in the decision to impair, POL has been working on a major programme of network
change costing £500m between the current year and FY201415, which is included within the current State
Aid funding package. Investment of this scale will lead to significant cash outflows for the immediate years.
The degree of transformational change and the impact on cash flows would impact the future profits of the
Company and accordingly management believes that POL will continue to be a loss making entity in near to
medium term.
We continue to agree that POL's accounting policy for impairment and disclosure of the charge as an
exceptional item is reasonable, and in line with IAS 36, /mpairment of Assets.
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Areas of audit emphasis (cont'd)
2.9 Government Grants
On 28 March 2012, POL received confirmation that its application for State Aid funding for 2012/13 to
2014/15 had been approved, which included an extension to its existing working capital facility of £1.15bn up
to March 2016. In addition, POL received approval to obtain the following funding from the Department of
Business, Innovation & Skills (BIS) by way of grants: FY2012/13- £410m, FY2013/14 - £415m, FY2014/15
- £330m.
Of the amounts above, £210m (2012/13), £200m (2013/14) and £160m (2014/15) were agreed to be
made by way of a network subsidy payment, which has been regularly paid by the government to POL over the
last few years, enabling the company to keep branches open that would otherwise not be viable. We note that
the network subsidy payments do not prescribe how these funds should be utilised. Management elected to
use the ‘Income Approach’ relating to this grant since FY2006/07 when it was first received with the amounts
recognised as part of revenue in the year in which they are received. We note this is in line with IAS20
Accounting for Government Grants and Disclosure of Government Assistance, the agreement with the
government and consistent with prior years.
For the remaining £200m grant, whilst management has also elected to use the ‘income approach’, in line
with the terms set out by BIS in their designation letter, management have matched the grant directly to the
expense incurred, and have appropriately offset the government grant against expenses in the P&L. We have
reviewed the accounting treatment for this and noted this is allowable by IAS20.
At year end, £98.2m of the funds have been utilised, with £65.8m spent on capital expenditure, £12.4m on
agent’s compensation and £20m on other expenses relating to the network transformation. This has left a
£101.8m deferred government grant creditor at the year end. Based on our procedures performed, we
conclude that the government grant has been appropriately recognised in the income statement in
accordance with the contract from BIS and that deferred income balances at year end are appropriately
stated.
Finally, as above, in light of POL's receipt of State Aid funding up to 2014/15, extension of its working capital
facility until 31 March 2016 and review of management's forecasts underlying its going concern assessment,
we concur with management's assessment that POL can continue as a going concern.
2.10 Consolidation Considerations - First Rate Exchange Services Joint Venture
This year saw POL financial statements prepared for the first time on a consolidated basis. When performing
audit procedures on consolidated financial statements, we were required to set audit scopes for each
reporting unit, based on size and risk factors, which when taken together, enable us to form an opinion on the
POL group accounts as a whole.
POL's consolidation is made up of two reporting units; the Post Office Limited parent entity (which contains
the majority of transactions) and the POL joint venture with the Bank of Ireland, known as First Rate
Exchange Services (FRES), which is accounted for using the ‘equity’ method. The audit of FRES is performed
by PricewaterhouseCoopers (PwC).
The PwC team reported to us on their planning and year-end audit procedures, which were undertaken
according to our communicated scopes, materiality and instructions. The FRES team have sent us their
preliminary conclusion with noted no issues, and we are awaiting their final reporting We did not note any
issues of Group audit importance.
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Areas of audit emphasis (cont'd)
2.11 Corporate Tax Considerations
The Group's tax charge for the period is as follows:
Profit before tax £18m £20m
Tax credit - income statement £(31)m £(10)m
Tax charge - items taken directly to equity £21m £0m
Net total tax credit recognised in year £(10)m £(10)m
The total tax credit for the year of £10m arises from the surrender of tax losses to joint ventures and
associates for payment at the statutory rate of 24%.
Deferred tax assets and liabilities
At 31 March 2013, the Group has a net deferred tax balance of Enil on the balance sheet. A deferred tax
liability of £21m in respect of the pension surplus has been recorded through OCI. This is offset by the
recognition of an equal deferred tax asset in respect of tax losses carried forward at 31 March 2013
which has been recorded in the Income Statement.
The deferred tax liability referred to above relates to the pension surplus of £100m (before withholding
tax) recognised for accounting purposes. We understand that it is management's expectation that £91m
of the pension surplus will be recovered solely through a reduction in future pension contributions over
the life of the scheme. The reduction in future pension contributions will increase the future current tax
liabilities of POL and therefore, a taxable temporary difference arises in respect of which a deferred tax
liability should be recognised.
It is management's intention that the remaining element of the surplus of £9m will be recovered through
refunds from the scheme. Accordingly, the surplus has been shown on the face of the balance sheet net
of a 35% withholding tax of £3m. We agree this treatment is appropriate and in line with Ernst & Young's
interpretation of IFRIC 14.
Consistent with prior years, no deferred tax assets have been recognised in respect of losses and other
temporary differences for the year ended 31 March 2013, due to uncertainty around the availability of
future taxable profits.
Other tax matters
1) Postal Services Act 2011
On 1 April 2012, almost all of the UK Group's pension liabilities and assets were transferred to Her
Majesty's Government. The Postal Services Act 2011 (the Act) provides that the transfer of the net
pension deficit out of the UK Group should not have any UK tax consequences in itself. However, under
the Act, certain trading losses of POL are extinguished with effect from 1 April 2013.
As these losses have not historically been recognised as a deferred tax asset, there is no impact on POL's
balance sheet from this loss extinguishment. Under the terms of the Act, losses extinguished as at 1 April
2013 are currently estimated to be £175m. Losses of approximately £340m have been carried forward
and are available for use in future periods.
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Areas of audit emphasis (cont'd)
2.11 Corporate Tax Considerations (cont'd)
2) Government Grants
During the year, POL received £410m in grants from HM Government. Of this amount;
a) £243m has been treated as taxable in 2012/13 (and is covered by current year losses and capital
allowances claims).
b) £67m has been allocated to capital expenditure. Of this amount, £52m relates to assets which qualify
for capital allowances for tax purposes. Whilst this amount has been treated as nomtaxable in the
current year (as agreed with HMRC on the basis it relates to capital expenditure), no capital allowances
will be claimed on these assets going forward. The remaining £15m relates to building and property
additions on which no capital allowances are available for tax purposes. This is also nor-taxable in the
current year as it relates to capital expenditure. Upon disposal of the building and property assets in
future periods, this amount taken into account when calculating any chargeable gain/loss.
c) £100m has not yet been spent and is currently recorded as a creditor on the balance sheet. This may
represent future taxable income to POL depending on how the grant is allocated in future periods. The
grant is not subject to tax until realised in the Income Statement. In addition, whether or not this amount
would represent taxable income in the future will depend on how the grant is allocated in future periods.
If the remaining grant were to be fully taxable, there are sufficient taxable losses available to offset this
amount in full. However, as there is uncertainty as to how the grant will be allocated and therefore
uncertainty as to whether this will in fact constitute taxable income, no deferred tax asset in respect to
the future loss utilisation has been recognised.
3) VAT
Consistent with prior periods, POL is a member of a broader Royal Mail VAT group with Royal Mail Group
Limited (RMG) being the representative member to HMRC and the entity responsible to HMRC for any
VAT liabilities.
In respect of the FY 13/14 audit, the VAT implications associated with the separation of POL from the
RMG should be reviewed next year. In particular, the VAT treatment of the recharges between POL and
RMG, and the proposed ‘stamp solution’ to deal with it should be reviewed.
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Control themes & observations
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Control themes & observations
Gaining assurance through the control environment
Summary of audit
Areas of audit emphasis differences
Looking forward
As part of our audit of the financial statements, we obtained an understanding of internal control sufficient to
plan our audit and determine the nature, timing and extent of testing performed. Although our audit was not
designed to express an opinion on the effectiveness of internal of internal control we are required to
communicate to you any significant deficiencies in internal control.
We can confirm that on the basis of our audit work performed, we did not identify any significant deficiencies
in internal controls other than the control deficiencies reported below. However, we anticipate providing a
detailed letter incorporating certain recommendations for process improvements noted by us in the
performance of our procedures at the conclusion of this year’s audit cycle.
The following pages will detail our considerations.
Observations on the IT Environment
Background
Over the last two years the IT element of our audit identified significant control weaknesses, highlighting the
need for improvement of Fujitsu's control environment and a change in POL's approach in terms of the
governance, risk and control framework over its business critical systems. POL has implemented formal
controls to address the control weaknesses and improve the overall IT control environment over the key
applications in our audit scope, HNGX and POLSAP. POL also followed a formal risk acceptance process for
areas where management has decided to accept certain risks highlighted by the audit process. In addition,
Fujitsu commissioned an independent service organisation control report (ISAE 3402) in relation to controls
operated by Fujitsu.
In light of these developments, our approach was to rely on the ISAE 3402 and report and perform
independent testing of POL-operated controls.
Result of the IT audit
» No significant findings were noted in the ISAE 3402 report, and we have therefore been able to rely upon
it.
» In addition, we have not identified significant exceptions in our independent testing of POL-operated
controls.
» We have, however, identified a small number of improvement opportunities to enhance the effectiveness
of recently implemented controls and further improve some of POLSAP's security settings.
» It should be noted that these control enhancements did not have an adverse impact on our ability to place
reliance on the effectiveness of automated controls within HNGX and POLSAP for financial statement audit
purposes.
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Control themes & observations (cont'd)
Gaining assurance through the control environment (cont'd)
Observations on the IT Environment (cont'd)
RMG provided systems- Separation Considerations
» Other key considerations for the IT audit this year are POL's separation from Royal Mail Group and the
related IT. There are two key systems managed by RMG (where the support services have been
outsourced to CSC, a third party service provider) that support POL's financially significant processes.
These systems are SAP ESFS supporting the processing of branch, fixed assets, purchasing and general
ledger transactions, and HRSAP supporting the payroll for POL employees. SAP ESFS is a common
platform used by both RMG and POL whereas HRSAP is used by POL users only. As these systems are
managed by RMG, the IT audit work is performed as part of the RMG audit procedures but the outcome of
the work also impacts POL.
> For ESFS, the RMG IT audit team identified some control exceptions; however, the RMG team performed
additional procedures to obtain evidence and information in mitigation of these issues, and as a result, the
POL audit team is able to place reliance on ESFS for audit purposes.
» For HRSAP, the RMG IT audit team identified a key issue whereby a significant number of users have been
granted inappropriate access to make changes directly to the production environment and these direct
changes are not logged by the system. This creates a risk that these users may inadvertently make
changes to critical payroll-related tables which would have an impact on the payroll run, such as
employees’ being paid incorrect amounts. This issue has required the POL financial audit team to modify
its audit approach, by testing and placing more reliance on the manual business process controls.
» We recognise that POL has no direct contractual relationship with CSC which provides support services for
the HRSAP system on behalf of RMG. However, given the changed nature of POL's relationship with RMG
and impending separation, we believe POL should take a proactive approach in resolving the issue with
RMG. We understand that POL has already taken steps to engage with RMG and CSC in order to address
this concern.
>» We also understand POL plans to implement a separate SAP system by April 2014 which will replace SAP
ESFS. As POL progresses its plans on separation, it should consider the impact of these control
weaknesses and how these will be addressed in a separated POL IT environment.
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Control themes & observations (cont'd)
Gaining assurance through the control environment (cont'd)
Non-IT control environment observations
We continue to utilise a controls based approach in respect of the identified significant processes of revenue,
purchasing, cash settlements and payroll. Our controls testing approach focuses on the controls implemented
across the entire POL business, including the London head office, Bolton (payroll), Chesterfield (shared
services), branches, cash centres and test controls in London, Bolton and Chesterfield annually.
Financial statement close process
» Management continues to employ a robust system of internal controls around its financial reporting and
financial statement close process. We note that there continues to be appropriate rigour over both the
P11 hard close and P12 year-end processes, with all key balances reconciled in a timely manner and
supported by appropriate documentation.
Payroll process
» The POL payroll process is independent of the payroll process and systems that support the rest of Royal
Mail Group Ltd. It covers approximately 16,000 employees and agents, which primarily include front line
workers and agents working at Post Offices around the country. The system supporting this process is the
HRSAP system provided by RMG.
> As highlighted in our IT observations on the previous page, logical accessrelated issues in the RMG-
provided HRSAP system meant that we had to modify our audit approach, by testing and placing more
reliance on the manual business process controls and carry out top-up procedures. Aside from this, our
work on the manual business process controls for payroll was completed with no significant findings
identified, and we were ultimately able to rely on controls in this area.
Transactional, branch and cash centre process and controls
» For the revenue, purchasing and cash settlements processes, we note that the controls framework remains
consistent with the prior year with no significant findings from our testing. We have completed our
walkthroughs and the results of our testing indicate that we will continue to be able to rely on controls.
» Additionally, our controls testing in respect of branches and cash centres was completed with no findings
to communicate to you.
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Looking forward
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Looking forward
Considerations for the coming year
Control themes
and observations
Summary of audit
Areas of audit emphasis differences
We highlighted in our communications to you last year on our thoughts on how the ‘look and feel’ of the
audit would change as a result of the separation of Royal Mail Group and Post Office. Going forward, as
Royal Mail Group continue to seek various options to be privatised, including a potential public offering,
and Post Office continues its efforts to improve its business model and commerciality, we continue to see
separation and network transformation dominating the agenda in the upcoming years.
These two factors are expected to have the following audit and IT implications, which is not meant to be
exhaustive but is provided the indicate how the audit will continue to evolve as POL continues its journey
in a post-separation world.
Impact on substantive and non-IT related testing
» Assessment of tax implications of carveout for POL once Royal Mail Group Ltd is not part of same
group due to reasons such as a possible public offering; for example, use of tax losses and implications
for charging VAT on transactions with Royal Mail Group Ltd;
» Consideration of completely separate tax and VAT teams for POL and need to acquire knowledge in
these specialist areas;
>» Development of accounting facilities for accounts payable and fixed assets function, for which some
elements are still done by Royal Mail Group;
» Development of pension accounting facilities at POL level for RMSEPP scheme, and appointment of
actuary to value the RMSEPP defined benefit plan;
> Consideration of IAS19 (revised) Employee Benefits accounting standards on RMPP and RMSEPP.
pension accounting;
>» Continued development of strategy with regards to treasury function, to make fully independent of
Royal Mail Group;
>» Continue to monitor the risk of new financial services revenue line offerings and any audit regulatory
related implications (such as FSA regulations);
» Management should continue to monitor classification of exceptional costs, especially those arising
from Network Transformation to ensure such costs are not ‘business as usual’ and do not recur
following the completion of the Network Transformation programme in the next five years.
Impact on IT
» Implementation of the IT Transformation programme. Due to size and nature of the transformation,
management should ensure that robust governance framework has been built into the model to
address the inherent risks of the new IT model. .
» Implementation of separate SAP system by October 2014 which will replace SAP ESFS. We plan to
engage early with management to help ensure we get sufficient assurances throughout the key stages
of the implementation to enable us to place reliance on the new system once it goes live.
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Summary of audit differences
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Summary of audit differences
Control themes
and observations Pooking forward
Areas of audit emphasis
In the normal course of any audit, we identify misstatements between amounts we believe should be
recorded in the financial statements and amounts actually recorded. These differences are classified as
‘known’ or ‘judgemental’. Known differences represent items that can be accurately quantified and relate
to a definite set of facts or circumstances. Judgemental differences generally involve estimation and
relate to facts or circumstances that are uncertain or open to interpretation.
We highlight the following misstatements which have not been corrected by management (all amounts in
£ millions):
1 - Reclassification misstatement - Business Transformation Payments (£6.7m)
In the prior year, POL had made a commitment to its Crown branch staff for making £3.4m of 'business
transformation’ payments. POL had accrued for this as a 'creditor' in the yearend accounts since the
CWU indicated they were positive towards the offer, and management was highly confident that these
payments would be agreed and paid post year-end. However, during the current year the programme did
not progress as expected and this accrual remains unutilised.
During the current year, management has made a new offer of 'business transformation’ payments
totalling £6.7m (which includes the £3.4m which has already been accrued for last year) and these will
be paid by POL in return for staff agreeing to the plan to make significant transformational changes to
their working practices over the next 2 years. Management have written an accounting paper on their
treatment, and we are satisfied that their profit and loss accounting treatment complies with IAS 37 and
satisfy the definition of provisions.
POL has recorded this business transformation payment as an accrual rather than a provision. From our
review, we believe that these payments are by nature a provision and not an accrual in accordance with
1AS37, due to the element of uncertainty of whether the CWU will accept or reject POL's offer.
Accordingly, we have proposed that the amount of £6.7m be reclassified from accruals to provisions.
2- Reclassification misstatement - DVLA Remuneration Accrual (£3.2m)
During the year, Management also made an offer of ‘DVLA’ remuneration payments totalling £3.2m,
payable to Post Office’s sub-postmaster agents (who work in Post Office branches) in order to partially
compensate them for the reduced rates to be paid in relation to the DVLA road tax products. Thepayout
of the DVLA payment offer is subject to acceptance of this offer by the National Federation of
Subpostmasters (NFSP), who represent Post Office subpostmaster agents).
POL has recorded these DVLA payments as an accrual rather than a provision. However, similar to the
business transformation payments discussed above, from our review of management's underlying work,
we believe this accrual is also by nature a provision and not an accrual, as the NFSP could accept or reject
this offer, which means that these payments have an element of uncertainty into whether the payout will
actually be made.
Accordingly, we have proposed that the amount of £3.2m be reclassified to from accruals to provisions.
Summary of audit differences
3 - Turnaround adjustment - LTIP Bonus Accrual (£1.9m)
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The LTIP Bonus creditor was overstated by £1.9m at the prior year-end as management accrued for the
full LTIP expense of the 2010/11 award and 2011/12 award by the end of the prior year. This was
assessed by EY to be not in compliance with IAS19 Employee Benefits which requires that the award for
such benefits be spread evenly over the lifetime of the bonus award until vested/paid. This was not
adjusted for in the prior year accounts.
Management corrected the LTIP bonus creditor in the current period to ensure the closing 201213
accrual position is fairly stated as per IAS19. This has resulted in a turnaround adjustment impacting
current year and prior year comparative profit before tax, where current year profit before tax is
overstated by £1.9m, and prior year comparative profit before tax is understated by £1.9m.
Our summary of unadjusted audit differences is as follows:
Assets
Uncorrected misstatements current
Errors:
» 1) Business Transformation Payments
Reclassification Misstatement
Dr. Accruals
Cr. Provisions
» 2) DVLA Remuneration Accrual
Reclassification Misstatement
Dr. Accruals
Cr, Provisions
» 3) LTIP Bonus Accrual Turnaround
Adjustment
Dr. Current Year P&L
Cr. Prior Year P&L
Income statement total
Balance sheet totals
Income effect of uncorrected misstatements.
(before tax)
Less: tax effect at current year marginal rate
Cumulative effect of uncorrected misstatements
before turnaround effect
Turnaround effect
Cumulative effect of uncorrected misstatements,
after turnaround effect
Assets I Liabil
current
current I (£m)
Debit/
(Credit)
Debit/ Debit / Debit/ Debit/ Current
(Credit) (Credit) (Credit) (Credit) _ period
6.7
(6.7)
3.2
(3.2)
19
(49)
1,342 168 zip a1)
19
0.5
1.4
aay
st Office Limited
s I Li ies
non: income/
current I expenses I _Equity
Debit/
(Credit)
(1.9)
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Appendices
Appendix A - Independence report
Appendix B - Draft letter of representation
Appendix C - Required communications with the Audit and Risk Committee
Appendix A
Independence update
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We confirm there are no changes in our assessment of independence since our confirmation in our planning
board report. We complied with the APB Ethical Standards and in our professional judgement the firm is
independent and the objectivity of the audit engagement partner and audit staff has not been compromised
within the meaning of regulatory and professional requirements.
We consider that our independence in this context is a matter that should be reviewed by both you and
ourselves. It is therefore important that you and your Audit Committee consider the facts of which you are
aware and come to a view. If you wish to discuss any matters concerning our independence, we will be pleased
to do so at the forthcoming meeting of the Audit Committee on 21 May 2013.
Relationships, services and related safeguards
We highlight the following significant facts and matters that may be reasonably considered to bear upon our
objectivity and independence, including the principal threats, if any. We have adopted the safeguards noted
below to mitigate these threats along with the reasons why they are considered to be effective.
Service 1: Fujitsu ISAE 3402 report-ISAE3402 April 2012 to February 2013
report for the Fujitsu services supporting the
POL account. This report will provide an
assessment of the Fujitsu controls supporting
POL business critical systems. The intention is to
place reliance on the ISAE3402 as part of the
2012-13 financial statement audit.
Service 2: ISAE 3000 report on POL Note
Circulation Scheme related services to the
Bank of England for the FY2012-13 period and
to be performed in May 2013.
Performed on continued annual basis
Service 3: Agreed-upon procedures performed
which relate to testing of covenants relating to
the loan from the Department of Business,
Innovation and Skills (BIS). This is a standard
Agreed-Upon Procedures service which has
been performed for the past five years and is in
the process of being performed in May2013.
Performed on continued annual basis
Service 4: Agreed-upon procedures performed
to ensure that the amount which is collected by
Post Office Limited on behalf of the DVLA for
road tax is subsequently paid over to the DVLA.
This is a standard agreed-upon procedures
service which has been performed for the past
six years, and is in the process of being
performed in May 2013.
Performed on continued annual basis
Not a prohibited service
A separate team from the POL IT team has
been engaged for the review of the
ISAE3402 report, and standard ring
fencing applied between two teams.
Went through review exercise to ensure in
line with Ernst & Young independence
rules
Not a prohibited service
These are standard agreed-upon-
procedures, where management
instructs us on exactly the procedures to
be performed and we conclude by issuing
a factual findings report only.
Not a prohibited service
These are standard agreed-upon:
procedures, where management
instructs us on exactly the procedures to
be performed and we conclude by issuing
a factual findings report only.
Not a prohibited service
These are standard agreed-upon:
procedures, where management
instructs us on exactly the procedures to
be performed and we conclude by issuing
a factual findings report only.
Overall, we consider that the safeguards that have been adopted appropriately mitigate the principal
threats identified and we therefore confirm that Ernst & Young is independent and the objectivity and
independence of the audit engagement partner and the audit engagement team have not been
compromised.
Post Office Limitec
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Appendix A
Independence update (cont'd)
Fees update
As part of our reporting on our independence, we set out below a summary of fees for the year ended 31
March 2013.
- Post Office Limited audit fee* 330.6
Total audit fees 330.6
- Note Circulation Scheme ISAE 3000 Report* 78.0
- BIS Agreed Upon Procedures Report*/** 12.0
- DVLA Agreed Upon Procedures Report*/** Aa 5
Total non-audit services 103.5
Total 434.1
“Excludes out of pocket expenses incurred
** Fees to be finalised
Confirmations
Ernst & Young LLP (EY) has policies and procedures that instil professional values as part of firm culture
and ensure that the highest standards of objectivity, independence and integrity are maintained.
Details of the key policies and processes in place within EY for maintaining objectivity and independence
can be found in our annual Ernst & Young LLP Transparency Report which the Firm is required to publish
by law. The most recent version of this Report is for the year ended 30 June 2012 and can be found
here: [ww
We are not aware of any inconsistencies between the company’s policy for the supply of non audit
services and APB Ethical Standards. We are not aware of any apparent breach of that policy.
We confirm that in our professional judgment, the firm is independent.
We confirm that the engagement team and others within the firm, the firm and network firms have
complied with relevant ethical requirements regarding independence.
a .
st Office Limited 32
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Appendix B
Management representation letter for
statutory reporting
xx June 2013
Ernst & Young
1 More London Place
London SE1 2AF
Dear Sirs,
This representation letter is provided in connection with your audit of the consolidated and parent company
financial statements of Post Office Limited (the Group and Company) for the 53 weeks ended 31 March
2013 (the period). We recognise that obtaining representations from us concerning the information
contained in this letter is a significant procedure in enabling you to form an opinion as to whether the
consolidated and parent company financial statements give a true and fair view of the financial position of the
Group and Company financial position of Post Office Limited as of 31 March 2013 and of its results of
operations and its cash flows for the period then ended in accordance with IFRS and UK GAAP respectively.
We understand that the purpose of your audit of our consolidated and parent company financial statements is
to express an opinion thereon and that your audit was conducted in accordance with International Standards
on Auditing (UK and Ireland), which involves an examination of the accounting system, internal control and
related data to the extent you considered necessary in the circumstances, and is not designed to identify - nor
necessarily be expected to disclose - all fraud, shortages, errors and other irregularities, should any exist.
Accordingly, we make the following representations, which are true to the best of our knowledge and belief,
having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves:
A. Financial Statements and Financial Records
We have fulfilled our responsibilities, as set out in the terms of the audit engagement letter dated 25 February
2013, for the preparation of the consolidated financial statements in accordance with IFRS and the
standalone company financial statements in accordance with UK GAAP.
We acknowledge, as members of management of the Group and Company, our responsibility for the fair
presentation of the financial statements. We believe the financial statements referred to above give a true
and fair view of (or ‘present fairly, in all material respects’) the financial position, results of operations and
cash flows of the Group and Company in accordance with IFRS and UK GAAP respectively, and are free of
material misstatements, including omissions. We have approved the consolidated and parent company
financial statements.
The significant accounting policies adopted in the preparation of the financial statements are appropriately
described in the financial statements.
As members of management of the Group and Company, we believe that the Group and Company have a
system of internal controls adequate to enable the preparation of accurate Group financial statements in
accordance with IFRS and the Company financial statements in accordance with UK GAAPthat are free from
material misstatement, whether due to fraud or error.
We believe that the effects of any unadjusted audit differences, summarised in the accompanying schedule,
accumulated by you during the current audit and pertaining to the latest period presented are immaterial,
both individually and in the aggregate, to the Group and Company financial statements taken as a whole. We
have not corrected these differences identified by and brought to the attention from the auditor because we
do not believe that they are material to the reader's understanding of the Group and Company financial
statements.
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Appendix B
Management representation letter for
statutory reporting (cont'd)
B. Fraud
We acknowledge that we are responsible for the design, implementation and maintenance of internal controls
to prevent and detect fraud.
We have disclosed to you the results of our assessment of the risk that the Group and Company financial
statements may be materially misstated as a result of fraud.
We have disclosed to you all significant facts relating to any frauds, suspected frauds or allegations of fraud
known to us that may have affected the Group and Company (regardless of the source or form and including,
without limitation, allegations by ‘whistle-blowers’), whether involving management or employees who have
significant roles in internal control. Similarly, we have disclosed to you our knowledge of frauds or suspected
frauds affecting the entity involving others where the fraud could have a material effect on the Group and
Company financial statements. We have also disclosed to you all information in relation to any allegations of
fraud or suspected fraud communicated by employees, former employees, analysts, regulators or others, that
could affect the Group and Company financial statements.
C. Compliance with Laws and Regulations
We have disclosed to you all known actual or suspected noncompliance with laws and regulations whose
effects should be considered when preparing the Group and Company financial statements.
D. Information Provided and Completeness of Information and Transactions
We have provided you with:
Access to all information of which we are aware that is relevant to the preparation of the Group and Company
financial statements such as records, documentation and other matters as agreed in terms of the audit
engagement.
Additional information that you have requested from us for the purpose of the audit and
Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit
evidence.
All material transactions have been recorded in the accounting records and are reflected in the Group and
Company financial statements.
We have made available to you all minutes of the meetings of shareholders, directors and committees of
directors (or summaries of actions of recent meetings for which minutes have not yet been prepared) held
through to the most recent meeting on xx May 2013.
We confirm the completeness of information provided regarding the identification of related parties. We have
disclosed to you the identity of the Group's related parties and all related party relationships and transactions
of which we are aware, including sales, purchases, loans, transfers of assets, liabilities and services, leasing
arrangements, guarantees, non-monetary transactions and transactions for no consideration for the period
ended, as well as related balances due to or from such parties at the year end. These transactions have been
appropriately accounted for and disclosed in the consolidated financial statements.
We have disclosed to you, and the Group and Company has complied with, all aspects of contractual
agreements that could have a material effect on the Group and Company financial statements in the event of
non-compliance, including all covenants, conditions or other requirements of all outstanding debt.
E. Liabilities and Contingencies
All liabilities and contingencies, including those associated with guarantees, whether written or oral, have
been disclosed to you and are appropriately reflected in the Group and Company financial statements.
We have informed you of all outstanding and possible litigation and claims, whether or not they have been
discussed with legal counsel.
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Appendix B
Management representation letter for
statutory reporting (cont'd)
We have recorded and/or disclosed, as appropriate, all liabilities related litigation and claims, both actual and
contingent, and have disclosed in the Group and Company financial statements all guarantees that we have
given to third parties.
F. Subsequent Events
Other than those disclosed, there have been no events subsequent to period end which require adjustment of
or disclosure in the Group and Company financial statements or notes thereto.
G. Accounting Estimates
We believe that the significant assumptions we used in making accounting estimates, including those
measured at fair value, are reasonable.
Accounting estimates recognized or disclosed in the Group and Company financial statements:
+ We believe the measurement processes, including related assumptions and models, we used in determining
accounting estimates is appropriate and the application of these processes is consistent.
+ The disclosures relating to accounting estimates are complete and appropriate in accordance with the
applicable financial reporting framework.
+ The assumptions we used in making accounting estimates appropriately reflects our intent and ability to
carry out specific courses of action on behalf of the entity, where relevant to the accounting estimates and
disclosures.
+ No subsequent event requires an adjustment to the accounting estimates and disclosures included in the
Group and Company financial statements.
H. Going Concern
Note 1 to the Group and Company financial statements discloses all of the matters of which we are aware that
are relevant to the Company's ability to continue as a going concern, including significant conditions and
events, our plans for future action, and the feasibility of those plans.
I. Contingent Liabilities
We are unaware of any violations or possible violations of laws or regulations the effects of which should be
considered for disclosure in the Group and Company financial statements or as the basis of recording a
contingent loss (other than those disclosed or accrued in the Group and Company financial statements).
We are unaware of any known or probable instances of norcompliance with the requirements of regulatory or
governmental authorities, including their financial reporting requirements, and there have been no
communications from regulatory agencies or government representatives concerning investigations or
allegations of non-compliance.
Yours Faithfully,
Chief Financial Officer
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Appendix C
Required communications with the Audit
and Risk Committee
There are certain communications that we must provide to the Audit and Risk Committees. We have detailed
these here together with a reference of where and when they were covered:
Communications required on all audits
Overview of planned scope and timing of the audit
Major issues discussed with management in connection with
initial or recurring retention
Other information in documents containing audited financial
statements
Significant audit adjustments
Unrecorded misstatements considered by management to be
immaterial
Expected modifications to the audit report
Our judgements/views about qualitative aspects of the
Company's accounting practices and financial reporting
Disagreements with management
Consultations with other accountants
Serious difficulties encountered in dealing with management
when performing the audit
The adoption of, or a change in, an accounting policy
Refer to our 2012-13 Audit Planning
Report dated 12 November 2013.
Refer to our 2012-13 Audit Planning
Report dated 12 November 2013.
Discussed within this report.
Discussed within this report.
Discussed within this report.
Not applicable, we do not anticipate any
modifications to our audit report.
Discussed within this report.
Discussed within this report.
Not applicable, no such instance noted
during our audit.
Not applicable, no such instance noted
during our audit.
We note that POL has adopted IFRS in
its consolidated accounts, which will be
prepared for the first time this year.
This has also been discussed in this
report as well as during the Planning
Audit Committee meeting on 12
November 2012.
Office Limited
Appendix C
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Required communications with the Audit
and Risk Committee (cont'd)
Communications required on all audits (cont'd)
Methods of accounting for significant unusual transactions
and for controversial or emerging areas
Events or conditions that cause us to conclude that there is
substantial doubt about the entity's ability to continue as a
going concern
Sensitive accounting estimates
Consideration of laws and regulations
Fraud and illegal acts involving senior management and fraud
and illegal acts that cause a material misstatement of the
financial statements
Significant matters arising during the audit in connection with
the entity's related parties
Management's refusal for us to request external
confirmations or our inability to obtain relevant and reliable
audit evidence from other procedures
Representations that the auditor is requesting from
management
Significant deficiencies and material weaknesses in internal
control over financial reporting
Group audits
> An overview of the type of work to be performed on the
financial information of the components
» Anoverview of the nature of the Group audit team's
planned involvement in the work to be performed by the
component auditors on the financial information of
significant components
» Instances where the Group audit team's evaluation of the
work of a component auditor gave rise to a concern about
the quality of that auditor's work
Any limitations on the Group audit, for example, where the
Group engagement team's access to information may have
been restricted
Fraud or suspected fraud involving Group management,
component management, employees who have significant
roles in Group-wide controls or others where the fraud
resulted in a material misstatement of the Group financial,
statements.
Discussed within this report.
Not applicable - no such events and
conditions to communicate to the
committee.
Discussed within this report.
Discussed within this report.
No such instances of fraud to
communicate.
Not applicable - no such matters to
communicate to the committee.
No such instances to communicate.
We have attached management letters
of representation in our appendix as
part of this report.
This will be included, as necessary,
within our Controls, Themes and
Observations Report which will be
shared with you after the conclusion of
our audit.
Discussed within this report.
No such instances of fraud to
communicate.
Office Limited
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Appendix C
Required communications with the Audit
and Risk Committee (cont'd)
Audit and Risk Committee pre-approval of services, including v Discussed within this report.
specific pre-approval of internal control-related services and
non-prohibited tax services
Critical accounting policies and practices. ISA 260 (UK and v Discussed within this report.
Ireland) requires the auditor to communicate the auditor's
views on the qualitative aspects of the Company's accounting
practices and financial reporting
All material alternative accounting treatments discussed with v Discussed within this report.
Management
Fees v Discussed in our planning report dated
12 November 2013 and in this report.
Other material written communications with management v Discussed within this report.
Communication of independence matters v Discussed within this report.
Other findings or issues regarding the oversight of the v Discussed within this report.
financial reporting process
Post Office Limited 38
Ernst & Young LLP
Assurance I Tax I Transactions I Advisory
www.ey.com/uk
a LLP, 1 More Lo:
LLP 2013, Published in the UK
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Strictly Confidential
POST OFFICE AUDIT, RISK AND COMPLIANCE COMMITTEE
Update on various Financial Services matters, including
Bank of Ireland (UK) plc capital & liquidity
1. Purpose
The purpose of this paper is to:
14 update the Committee on the Bank of Ireland (UK) plc's (“Bol”) capital and
liquidity position against its regulatory and Eagle contract requirements;
1.2 provide an update on the implementation of the Capital Requirements Directive
IV (CRD IV) and its potential impact on the capital requirements on Bol;
1.3 update the Committee on Project Polo; and
1.4. update the Committee on the current Co-operative Bank plc situation and any
potential impact on the Post Office.
2. Bank of Ireland (UK) - Capital and Liquidity position
2.1. Acondition of the Financial Services Joint Venture Agreement (“FSJVA’”) is that
Bol must attest bi-annually that it is meeting the capital and liquidity thresholds
set out in the agreement.
2.2 The Bank's capital and liquidity reports are part of the early warning system that
would enable the Post Office to take action in accordance with the termination
provisions of the agreement, should this become necessary.
2.3 Bol has certified as at 31°‘ December 2012 (Bol’s year-end) that:
e Bol’s Core Tier 1 Capital Ratio exceeded the amount required under the
FSJVA;
* Bol was holding a surplus over its regulatory liquidity requirements;
¢ Bol is meeting the Capital Planning Buffer as set by the regulator.
2.4 Bol also confirmed that at no stage in the six months to 31 December 2012 did it
breach any of the termination thresholds.
2.5 On 30" January 2013 Post Office executives met with the tripartite regulators
(Bank of England, HM Treasury and Financial Services Authority) to confirm the
status of the Post Office’s relationship with Bol and the termination structure and
processes. No material issues were raised by any party.
2.6 Post Office is of the view that Bol remains well capitalised with surplus liquidity.
The position has not deteriorated since the signing of Eagle.
ARC Bank of Ireland (UK) plc Capital & Liquidity Nicholas Kennett Page 1 of 3
13" May 2013
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Strictly Confidential
3. CRD IV Update
3.1. The European Parliament passed CRD IV on 16" April 2013 and it is now in legal
drafting review ahead of formal adoption. The UK's Prudential Regulation
Authority (“PRA”) will seek to implement the requirements from 1°‘ January 2014.
e In order to achieve this, the PRA intends to carry out two consultations on
the changes. It is expected that the majority of existing capital requirement
rules will be replaced by the new rules. The main consultation will begin in
mid-2013.
3.2 Following implementation, the FSJVA requires Bol to certify to the Post Office
that it is meeting the new standards.
4. POLO update
41 On 13” May 2013 Post Office and Bol launched the Polo current account in 29
branches in East Anglia.
4.2 To enable the launch the Parties concluded the first operational Product Note’.
43 Under Eagle all contracts in place at the time of signing were included in specific
conditions relating to the sharing of any contract liability between the parties.
4.4 As part of the finalisation of the Polo Product Note, Bol requested that its contract
with Affinion International Limited? should be included in these conditions. Bol’s
request was that, although the contract was not signed at the time of Eagle, Post
Office was closely involved in the selection of Affinion, took part in the on-site
operational reviews and made comments on the early draft of the contract. The
potential liability risks potentially resulting from this contract are seen as slight.
4.5 To avoid a delay to the launch of Polo, Post Office agreed to Bol’s request.
4.6 Post Office is working with Bol to establish a monitoring framework for this
contract.
5. Co-operative Bank pic update
5.1 On 9" May Moody's downgraded the Co-operative Bank’s credit rating from Baat
to B1 (“junk” status), and continues to hold it on negative watch. Moody’s has
assessed that Co-Operative Bank has significantly lower levels of capital than its
peers and is currently, by its own assessment below the Basle Ill CET 1 ratio of
7.0% at 6.7% (in January 2013).
5.2 The bank is in discussions with the PRA about improving its capital position,
which could include selling its insurance business and potentially seeking more
capital from the parent group.
5.3. The Post Office is monitoring the situation for the commercial opportunities this
may present as well as any exposure we have to Co-operative Bank through our
The Product Note is the structure, established under Eagle, which establishes the product and
distribution strategy, roles and responsibilities of each party, commission payments, withdrawal
arrangements and other relevant matters and must be agreed prior to the launch of any product.
The 3rd party that manages elements of the Package account.
ARC Bank of Ireland (UK) plc Capital & Liquidity Nicholas Kennett Page 2 of 3
13" May 2013
2
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Strictly Confidential
personal banking and bill payment business. Currently our overnight exposure to
Co-operative Bank is very low (c£1 million owing from the bank and c£10m due
from the Post Office).
6. Recommendations
The Committee is asked to:
6.1 note the update.
Nicholas Kennett
Director, Financial Services
21 May 2013
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13" May 2013