RMG00000343
RMG00000343
Royal Mail Holdings plc
Annual Report
and Financial
boiz UMA
*ASIGMVOU"
USI
RMG00000343
RMG00000343
Contents
Royal Mat Group 2 Notes to the Group financial statements 57
Financial and business performance highughts 2 1 Authorisation of financial statements and statement.
HAI aGns Sonnet __of compliance with IFRSs 57
Chief Executives Review gf hee pee Lid
‘Jedernama Royal Ma 7 3 Segment mformation 67
Darpeone 9 _4 People information 68
Our customers aa _© Sporting woes Gd
Reguaton Fs _6 Auditors remuneration 0
community 75 _7 Operating exceptional tems 70
Our Transparency report a7 _© Netlinance costs a
Our businesses 39 _° Income tax La
Key Performance Indicators 27 __10 Property, plant and equipment LE
en 3g _11 Leasehold fand payment 7%
Risk Management and Control ee Cote Led
Royal Mail Holdings pic Board 3g _ 15 Intangible assets 76
Dreciors Papert Zo _14 Business combinations 7
Torporate Covermance 7a _25 Investments m joint ventures and associates 77 I
Diccior Remunecion Report a5 _16 Non-current assets held far sale 78 ;
Statement of Directors responsibilities in relation at Leeneras Lie
to the Group financiat statements 49 ~ 18 Current trade and other recewables 79
Independent Auditors Report to the members of 19 Cash and cash equivalents 719
Royal Mail Holdings ple 50 30 Financial babilties 80
SyNartaott ana eMoenaee 51. _21 Provsons for labiltves and charges 82
Consolidated statement of comprehensive mcome aiceiidainetelaaed ats. stenl i
for the year ended 27 March 2011 and 28 March 2010 52 _ 23 Non-current other payables 33
Consolidated statement of changes in equity for the 24 Financial risk management objectwes and policies 83
year ended 27 March 2011 and 28 March 2010 53 Se Franca mavuments 7
Consodted balance shet ak 27 March 2013 and se. 725 Erployee bones ~pensans =
Consolidated statement of cash flows for the year ended 27 Issued.share.capétal and reserves: #6
27 March 2011 and 28 March 2010 58 28 Commitments %6
29 Related party disclosures cr
30 Events after the balance sheet date 9
Group five-year summary (unaudited) 100
Parent Company financial statements 704
Statement of Directors responsibilities m relation
to the parent Company financial statements 101
independent Auditor's report to the members of the
Company Royal Mail Holdings ple 102
Parent Company balance sheet 108
Notes to the parent Company financial statements 105
Forward looking statements 107
Corporate mformation 107
RMG00000343
RMG00000343
1 rb ap ane Pranol Sxemers 2010-11
Fy
Royal Mail Group (‘the Group’) is unique in reaching
everyone in the UK through its mails, Post Office and
parcels businesses. The Group is a key component of the
UK’s economic and social infrastructure, providing services
to private individuals, companies and communities.
The Group is the sole provider of the UK’s Universal Service.
It does so for some of the lowest prices in Europe. Every
working day, the business processes and delivers around
62 million items to 28.8 million UK addresses.
Each year, our European and UK express parcels businesses
- General Logistics Systems (GLS) and Parcelforce
Worldwide - handle some 423 million parcels. In 11,820
Post Office branches, we serve around 20 million customers
every week.
The business is changing fast. The Group is modernising
its core letters business to make it more efficient, effective
and customer responsive. The Post Office is transforming
its branch network in response to changing customer needs
and the demands of a modern and dynamic business.
This process of change is about ensuring a sound, secure
and sustainable Royal Mail. The mails market is in
significant decline in the developed world. Royal Mail is no
different. It faces significant financial challenges which are
being urgently addressed. The Board has a clear plan. The
Postal Services Act is an important part of the process.
RMG00000343
RMG00000343
Financial and business performance highlights
Financial performance
During the year, the Group changed the structure of its internal
organisation which has resulted m a change to the composition of its
reportable segments As a result of this change corresponding
information for earlier periods has been restated
The Group's operating segments - UK Letters & Parcels and
International (UKLPI) Post Office Limited (POL), General Logistics
Systems {GLS) and our smaller other companies such as Romec
Limuted - are organised and managed separately according to the
nature of the products and services provided
We have also changed the way we report our performance
Performance of the Group 1s now reported after costs associated
with modernising the business This provides a better understanding
of our performance against our strategic ams.
Revenues
Balance sheet
‘+ Net liabilities of £3,107 million are lower than £6,281 million last
year primarily because of the reduction in the pension deficit
« The accounting pension deficit has decreased from £8 0 billion
tm 2010 to £4 5 billion in 2011 driven by an actuarial gain of
£34 billon Cash payments of around £300 million were made
im the year to fund the pension deficit
* The accounting pension deficit has reduced by £35 billion mainly
as a result of the announcement by Government to use CPI
rather than RPI as the inflation measure (CPI ts now the statutory
minimum indexation for pensions m deferment and in payment)
and an increase in asset values due to market conditions
Business performance
Modernisation
© Group revenues of £92 billion Inland addressed volumes down by
4% with UKLPI revenues falling by £121 million
GLS underlying revenues grew by around 4% at constant exchange
Tates
* Post Office Limited core volumes continue to decline Revenues
down £62 million
Profits and cash flow
* Operating profit after modernisation costs of £39 million** is,
£143 million lower than last year driven by the reported revenue
decine
‘* Improved free cash outflow of £213 million down from £545 million
as a result of lower modernisation costs and one-off disposals
proceeds this year
* Modernisation programme is delivering cost savings and efficiency
~ Reduction in hours of 2 4% to partually offset volume decline
~ 554 new/upgraded machines, walk sequencing rates of
nearly 34%
- 24 World Class Mail Centres
~ 117 delivery offices using new delivery methods
- Accidents down 25%*
Quality of service
* Retad First Class quality of service - 91 4% - this figure ts without any
adjustments After adjustments are made the Retail First Class quality
of service figure 1s 930% after account is taken of the extraordinary
combination of the severe winter weather and the unprecedented
closure of UK airspace because of Icelandic volcanic ash
* Post Office Limited customer satisfaction - 85%
Operating (loss)/profit
External revenue after modernisation costs”
2010-11 2009-10 2010-11 2009-10
Business unit £m £m £m £m
UKLPI* 6,857 6,978 (120) 20
Post Office Limited 776 838 21 33
General Logistics Systems 1,485 1,487 118 112
Other 38 46 20 15
Group 9,156 9,349 39 180
* UKLPI~ UK Letters & Parcels and International
** All references to aperating profit/loss) after modermsation costs are before other exceptional items The operating loss for 2010-11 was £49 million
(2010 prafit of £213 million) as shown on the consolidated income statement on page 51.
1. Uk frontine employees
RMG00000343
RMG00000343
3 Rhu apo snd na! Stemets 202032
Chairman's Statement
~ Donald Brydon
3 Chairman
The postal world is
changing rapidly; so too
are all communication
channels. The lives of
everyone in Royal Mail
Group are affected.
Work practices, structures and processes regulation product
offerings and customer needs are all changing Royal Mail Group
1s determined to succeed in this complex environment
2010-11 was a very challenging year much remaims to be done
to improve our financial and operational performance
In spite of the outstanding efforts of all our colleagues, the Board
was disappointed with our overall financial results Overall revenues
were 2 1% lower than last year Group operating profit, after
modernisation costs, was only £39 millon Tmy changes in revenue
have a major impact on profitability Our financial position is
challenging our core letters volumes are declining and we have
a large and disproportionate historic pension deficit
‘We have again reported negative free cash flow - of £213 mullion -
albeit significantly down from last years negative £545 million This
isnot sustanable The main cash outflow relates to payments to the
pension fund and the capital investment and voluntary redundancy
costs associated with modernisation The accounting pension fund
deficit is approximately £4 5 billion In 2010-11 we contributed
nearly £300 milion towards reducing it
Our transformation
We know that we are a business which with a different structure
and regulatory regime could be commercially successful on a
sustained basis Parts of our business like GLS and Parcelforce
Worldwide contmue to increase profits They show what we can.
do in an unregulated environment and with the same commercial
freedom as other companies
We are in a process of transformation. It is as radical as
any that has happened in the history of the UK’s postal
industry. It is a transformation that has been likened
to rebuilding the engine of a car while the vehicle is
still moving
Inland addressed mail volumes have traditionally tracked GDP A
buoyant economy meant more mail, recessions meant less The
internet has changed the paradigm Inland addressed mail volumes
im the UK peaked for the year 2005-06 at around 80 million items
of mail per day They have declined ever since During 2010-11,
Royal Mail delivered 62 million items of mail per day We can expect
further declines in the future of about 5% a year
Against this backdrop of significant and ongoing structural decline,
we need to ensure that our core letters business is cost effective and
we need to diversify our revenue streams
Modernisation of our processes is not optional Moya Greene
and her team are focused on successfully delivering the required
transformation The scale and depth of the changes that we have
made and will continue to make are set out in this report
The UK businesses are undergoing profound changes.
Every part of the organisation is affected We are making
real and tangible progress
Our significant progress
We have strengthened our focus on health and safety This ts a key
measure which we now closely review at every Board meeting Given
the scale of aur financial challenges we have also redoubled our
emphasis on managing our cash flows This discipline is now deeply
embedded across the Group
The Board and the sensor management team have also been part of
the profound change taking place The senior management team has
been rebuilt Following a comprehensive search Moya Greene
formerly CEO Canada Post was appointed as our Chief Executive m
July 2010 She has made significant progress in a very short time m
« Restructuring the business reducing costs at the centre in
the process
* Significantly sharpening our focus on the customer
= Beginning the pracess of putting our business on a more
sustainable financial footing
* Changing the focus of the debate around regulation
In light of the trading resutts, during the second half of the year the
strategic plan was reviewed and our view of future profitability and
cashflows showed a worsening position The Board has had to
review whether the Group (excluding Post Office Limited) can pay its
debts as they fall due over the foreseeable future This has involved
regular reviews of projected monthly cash headroom until March
2013 The deteriorating financial position and expected future
cashflows means that the value of ColteagueShares at the end of
March 2011 Is nil The final value of ColleagueShares will not be
known until the end of March 2012
The Postal Services Act 1s a key enabling framework which will prove
essential in the years ahead, particularly through dealing with the
Pension issues and in ensuring access to new capital We have more
work to do on the next steps and we are looking forward to
constructive engagement with a new regulator
We have had very significant support from the Government
including m particular, its work to promate the Postal Services Act
Government has also responded well to the needs of the Post Office
with a commutment to mvest £4 34 biltton These commitments to
the future of the Royal Mail and Post Office are most welcame
The Government has announced its intention subject to State Ald
approval to relieve the Company of tts legacy pension deficit with
effect from March 2012
RMG00000343
RMG00000343
a Mall Holdings pe
4 Aha prt snd Fano Sutemerts 2010-11
Chairman's Statement continued
Our Board
Three new executive directors and three new non executives have
joined the Board in the past 12 months Four are women Along
with Moya, Dave Smith joined the Board as the first Chief Customer
Officer Dave had previously been Managing Director of Parcelforce
Worldwide and of the Post Office The new Chief Fmance Officer
Matthew Lester joined from ICAP Paula Vennells who has
been with the Group since 2006 was appointed Managing Director
of the Post Office im October having previously been its
Chief Operating Officer
Three new non executive Directors with extensive customer
experience Cath Keers Orna Ni-Chionna and Nick Horler jomed
during the year Cath was Customer Director and Marketing
Director of 02 UK Orna sa former partner at McKinsey where she
specialised in retail and consumer clents, looking at the customer
experience from a strategic perspective She has been appointed
Senior Independent Director Nick Horler was until recently,
Chief Executive of Scottish Power He also brings regulated-
busmess experience
There were two retirements during the year Baroness Prosser
retired after six years’ service as did Richard Handover after eight
years He was latterly Senior Independent Director We will miss their
counsel I thank them for their excellent contributions to the Group.
Thank you
Moya and I both understand how much we are asking of everybody
at Roya! Mail The process of change Is stretching In an organisation
of our scale and reach, it 1s having an impact on the lives of tens of
thousands of people and their families I would like to offer my
sincere thanks to all of my colleagues on the great work they have
done over the past 12 months We now have a clear plan in place
I am confident we can - and will - successfully deliver it
Donald Brydon
Royal Mait’s operation involves road, rail, air, and in some
cases sea, to transport the mail around the country.
RMG00000343
RMG00000343
Royal wall Holdings
5 rho apr snd Pl Sateen 2010-11
Chief Executive's Review
Moya Greene
Chief Executive
We have a clear plan in place
to deal with our difficult
business environment. It will
be a stretch to achieve our
plan, but we are determined
to do so.
Introduction
Royal Mail Group is a vital part of the UKs economic and social
infrastructure Our service is comprehensive six-days-a-week
and with overnight delwery We delivered around 62 millon items
to almost 29 millon homes and businesses every working day last
year We collect mail from 115 271 post boxes - often more than
once a day - as well as from approximately 12,800 Post Offices and
more than 80 000 businesses Our Post Office network is bigger
than all of the UK high street banks combmed around 20 millon
customers visit per week
Our service 1s not only comprehenswve it's also good value for
money For collecting a First Class letter sorting it carrying it by
road, rail or air and delivering it by hand we charge 46p This
journey could be as much as 800 miles from collection to delivery
Our prices are among the lowest in Europe. Most
countries do not provide a six-day service, or enable
their customers to post as late in the day as we do.
Our standards for on-time performance are higher
than most countries.
We achieved our First Class quality target with a 93 0% performance
when account 1s taken of the impact of the extraordinary
combination of the worst winter weather in living memory and the
unprecedented closure of UK airspace because of Icelandic volcanic
ash Without any adjustment, the performance for the year would
be 914%
Royal Mail and Post Office are brands that enjoy considerable
public support People trust us We offer and provide services that
customers large and small, need At a time when many companies
do nat enjoy strong brand profiles, this 1s a major advantage for us
We know better than to be complacent We need to maintain
that trust
Moving forward
There is much more for me and my team to learn and most
importantly to deliver One of the things we need to do is to
communicate more and be more responsive We will I hope this
document is a good start If you have any feedback please do
write to me at moya greene@royalmail com
In this. my first Annuat Report as Chief Executwe I would like to use
this opportunity to set out our core strategic approach
We need to address the fact that we are losing money in our core
letters busmess As the availability of public capital is restricted, we
need access to private capital to vest and grow We need to
modernise our core letters business This involves not only our
investment in new equipment and processes but investment in
our people
We must develop new products and services Innovate to meet the
needs of our customers and generate additional revenues to offset
the decline in earnings from our core letters business In addition
continued change in the regulatory regime ts required
Modernising our business
The Groups operating profit after modernisation costs fell from
£180 million last year to £39 millon at the end of this financial year
The Group has been in significant financial difficulty for a number of
years reporting negative cash flow four years in a row Our challenge
1s to put the Group on a sound secure and sustainable footing
Royal Mail is honoured to collect and deliver the mail on behalf of
households and businesses across the UK But our industry is in
decline Few could have predicted the dramatic decline in the postal
market Letters now account for a very modest share of daily social
messaging The continued structural decline in the number of items
of mail in the UK ts well documented
Single piece mail volumes have declined by 40% in the past five
years We anticipate total mail volumes continuing to decline by
around 5% a year for the foreseeable future
Consumer mail sn decline In volume terms it now accounts for
around 12% of our total business The typical household spends less
than 40p a week on postage As volumes fall, our revenues decine
Revenues were down 2 1% (193m) last year Our costs are falling
But, they are not declining fast enough to offset the reduction
in revenue
Our current margin after modernisation charges at 0.4% 1s
down from 19% in 2009-10 and ts slim compared to other postal
operators We need a reasonable and sustamable margin to
maintain the comprehensive Unwersal Service our customers
enjoy and to invest in our Group
One of the key ways we are gomg to improve our financial
performance 1s to modernise our core letters business
Our modernisation ts one of the largest change management
programmes ever undertaken in the UK The peak period of change
1s under way - now The jobs of over 100.000 people are changing
I know that this change is hard for our people The section on
modernisation explains what we are doing m mare detail
Modernisation changes every process - collecting transporting,
sorting and delivering mail It affects everyone who works for the
organisation it will unfortunately continue to mean significant job
reductions There will be job losses These will be in addition to
almost 45.000 UK full-time equivalent employees who have left the
Royal Mail Group over the last decade
In some of our offices where we have revised delivery methods
we have cut operating hours by an average of 11% This is our best
in class performance It is not the case everywhere Our future
depends on our ability to achieve this level of improvement
everywhere We have a great deal stil! to do
RMG00000343
RMG00000343
Wal noigngs
6 al par tnd Fetsca Setemers 2010-1
Chief Executive's Review continued
Change needs to be continuous The automation of packets for
example has just begun The boom in onlme retailing means parcel
delivery requirements will mcrease This 1s growth that Royal Mail
needs to capture
The World Ctass Mail programme developed by Royal Mail itself, 1s
another key factor m our future success This programme 1s having a
Major impact - mn performance and attitudes In 2011 we will see the
programme rotled out to all mail centres and schemes established in
collection and delrvery offices ! was pleased in October when the
World Class Manufacturmg Association gave awards for operational
excellence to our mail centres in Cardiff, Gatwick and Belfast
Investing in our peopte
We are a people business Our greatest asset 1s our people In our
delivery network, our people are daily ambassadors for Royal Mail
Almost no other company has daily contact with customers in the
way that Royal Mail does
For many years, our employee engagement scores have been
disappointing Our colleagues justifiably take great pride in Royal
Mail itself and the valuable work they do in so many communities
across the country The turnover rate of our full-time frontline
workforce ts about half the UK average On the other hand, our
colleagues, given the difficult situation facing the Group and the scale
of the modernisation do not have confidence in our future It 1s
imperative that we change this
A major focus for me, personally, is to ensure that we are a much
more open and communicative company - starting first and foremost
~with each other We are committed to much more active
engagement by senior managers with the frontline Starting this
summer, around 150 of our senior managers will be taking part in
workplace visits around the country briefing our people
Royal Mail will be a much more efficient and effective
organisation. That is the best outcome for all our
stakeholders, and particularly our people.
Meeting the needs of our customers
‘Amore rigorous focus on who our customers are, what they want
and how they want mail delivered 1s absolutely critical
We need to ensure customers know we value their custom and that
we fix their problems quickly In the next 12 months we will seek to
simplify our products and processes accurately measure and track
customer perception, promptly respond to problems and drive up
‘our performance significantly in this crucial area
Our new organisational structure 1s designed to bring us much closer
to our customers m both the regulated and unregulated sectors In
the Post Office with significant financial support from the
Government, we are investing in transforming the network and
piloting new branch models including longer opening hours
We are now tracking on a regular basis what our busmess customers
think about Royal Mail through the Net Promoter Score methodology
More detail can be found in the Customer section in this report We
have a great deal to do to improve our customer proposition
At the moment, our customers see Royal Mail primarily as a delivery
and distribution company To remam relevant in the future, we must
innovate and re-establish ourselves as a market-leading
communications and distribution company
‘We will do this not yust by transforming our Universal Service
network and revitalising our parcel network We must diversify
our revenues to make up for declines in our core letters business
‘We aim to capture and sell more data and link with more
digital networks
We will establish more external partnerships to expand our
capabilities and commercial propositions that generate substantial
financial value for Royal Mail and its new partners There is no
certainty that all - or most - of these new ventures will succeed Our
Clear success with GLS and Parcelforce Worldwide demonstrates,
however that Royal Mail Group has a successful track record of
growing businesses
Changing our regulatory framework
The time is right to change the existing regulatory structure The
Postal Serves Act including the welcome provision for Ofcom to
become the regulator and a Government commitment to a new
regulatory approach constitutes a new framework for change Any
significant changes would not impact on the one-price-goes-
anywhere sx-days-a-week Universal Service That is now enshrined
in the Postal Services Act
The objective of the Postal Services Act 1s to safeguard the Universal
Service by ensuring that Royal Mail can attract external capital and
deliver a commercial rate of return A different approach to
regulation 1s essential We will work closely with Ofcom to achieve
the changes needed for the good of the Universal Service
Outlook
The next two years will be challenging We must put the Group and
‘our ability to deliver the Universal Service on a sound, secure and
‘sustainable footing We need to improve our efficiency to reduce
‘our costs faster than the decline in revenues from our core letters
business We must continue to modernise and to invest in the Group
and our people Just as importantly, we must sharpen our focus on
customers and put their needs at the heart of everything we do
We will also innovate and build new partnerships with respected
third parties
By any measure this tsa very significant change agenda I am very
grateful - as the Chairman has already articulated — for the
considerable support we have recewed from the Government
Secretary of State for Business, Innovation and Skills, Vince Cable
Parliamentary Under-Secretary of State for Postal Affairs, Edward
Davey and their officials { am particularly conscious of the
commitment of all my colleagues and their pride m Royal Mail Group
I would like to thank them I know! can count on them again as we
reshape and rebuild Royat Mail
Moya Greene
Chief Executive
RMG00000343
RMG00000343
Royal Mal Holdings pe
7 Artal Rept and FaeoatSitererts 2020-11
Modernising Royal Mail
Our modernisation
programme is one of the
biggest transformations
in UK industry.
A major programme
A major programme to modernise Royal Mail is under way ~ it
1s one of the biggest transformations m UK industry Significant
progress has been made over the last year but much remains
to be done
Before the current modernisation programme started in 2007
Royal Mail did not have the latest technology to sequence mail to
the order of a postman and womans walk Most of the mail was
stil hand sorted before being delivered Postmen and women carried
the full mail weight on their shoulders All this is changing - fast
The programme is led by Mark Higson Executive Director and
Managing Director Operations and Modernisation A dedicated team
1s warking to update every aspect of our operations - collections
processing, sorting and delivery
Around £400 million was invested by Royal Mail Group in
modernisation this year
Why ts modernisation important for customers and external
stakeholders?
Revenues are falling as the mait market contmues to decline Fewer
mail items are being handled every year and we have too much
Capacity given this smaller mail market.
Modernisation 1s about generating cost savings faster than the
decline in revenues It s at the heart of ensuring a sound, secure and
sustainable Unwersal Service for everybody m the UK It is as
fundamental as that
Modernisation 1s about a more innovative Royal Mail and a more
customer-responsive business While traditional ‘white letters’ have
seen a dramatic decline packet volumes are increasing following the
boom in online retailmg Modernisation enables us to provide new
customer solutions such as tracking to the doorstep that better
reflect the reality of a changed - and changing - mal market and
crucial to the competitiveness and commercial success of Royal Mail
The pace will mtensify
We are committed to fully engaging and mvolving our people as we
implement these changes which are affecting the working lives of
more than 100000 colleagues We are working closely with the
Communicatron Workers Union (CWU) under the Business
Transformation agreement reached in early 2010 As our Chief
Executive said “The peak period of change 1s under way - now”
Our postmen and women are our main asset and modernisation 1s
challenging for many of them They may need to work differently,
there are changes to their start and finish times more efficient
working methods and different delivery rounds We are also
significantly reducing the size of our workforce Since 2002 around
45 000 people have left Royal Mail Group as part of our ongoing
change programme
As part of the Group’s modernisation programme, 378 walk
sequencing machines have been installed at mail centres
across the UK to improve efficiencies in the sorting process.
The equipment automatically sorts the mail into the exact
sequence of a postman or woman’s walk.
We are committed to working with our people and the CWU to
Tanage operational job reductions on a voluntary basts
Many of the changes are improving the working lives of our
colleagues They include the mstallation of modern technology and
better equipment for our postmen and women including more
trolleys, shared vans to handle packets and parcels, and handheld
devices to record signatures when matt is delivered
Most importantly of all modernisation 1s about ensuring that our
core letters business is placed ona sound, secure and sustamable
footing That is the key to ensurmg a viable business and protecting
as many Jobs as possible
Our recent progress
In the 12 months since we signed the Business Transformation
agreement with the CWU, we have made significant progress A
significant number of delivery office revisions have been completed
and major changes have been made to our mail centre and transport
networks We have also reduced accidents in the workplace by 25%
in 2010-44 - a key and vital improvement - and met our licence
targets for First Class and Second Class mail quality of service after
force majeure adjustments for volcanic ash and extreme weather in
December and January
Nevertheless, the programme has taken longer to start fully
delivering results than we planned So much more needs to
be done
RMG00000343
RMG00000343
8 Royal Mail Holdings ple
‘AnnualReport and Fnraal Statements 2010-11
Modernising Royal Mail continued
Key examples of significant progress
* Installed 378 sequencing machines
+ Introduced 38 mtelligent Letter Sorting Machines which can sort
38 500 letters an hour nearly twice the speed of older machines
* Upgraded and extended 138 Integrated Mail Processing machimes
+ Sequencing 34% of the mail
* Closed 12 mail centres, and, following extensive consultations,
announced the closure of a further 16
Modernisation - the next phase
As we reported earlier the key phase in the modernisation
programme 1s now
We are introducing new delivery methods throughout our 1,371
delivery offices and in the next year will complete this delivery
transformation in more than 700 offices over 50%
This is a mayor and far-reaching exercise Traditional methods
involving postmen and women carrying the mail on foot or bicycle
are being replaced by the use of 5,000 high-capacity trolleys and
11,300 two-person vans Delivery rounds are bemg changed so that
they will be more effective and efficient
The pace of change in our mail centres will continue We expect
that around half of the mail centres could close by 2016-2017
We are focused on delivering all the benefits of the modernisation
programme as quickly and effectively as possible, working closely
with our people and with the CWU
Many postmen and women are now using new equipment
such as trolleys, replacing the need to carry mail by foot
ar bicycte.
World Class Mail
World Class Mail is revolutionising the way we work Developed
within Royal Mail, based on leading global practice and expert
advice World Class Mail 1s a unique and comprehensive system
for improving safety customer service quality and productivity
A key element is engagement with our people to ensure they are
fully involved in all aspects of our modernisation
World Class Mail is already in operation m 24 mail centres and
seven delivery sectors This year will see the approach introduced
in all our maif centres and an extension to many more delivery
offices and collection hubs
Root cause analysis of problem areas by employee teams 1s at the
heart of World Class Mail Safety is the first of its 10 improvement
‘pillars At Greenford mail centre the packet sorting conveyor
area was the scene of six accidents in the year before World Class
Mail was introduced and 50 working days were lost to mury
Since the programme was put m place the area has been
accident-free for 700 days ~ a remarkable achievement by the
local team
We were pleased when the World Class Manufacturing
Association recognised the progress and achievements of our
people last autumn in three mail centres - Gatwick Cardsff and
Beffast - by awarding them Bronze Awards at a ceremony in the
Greenwich Maritime Museum in London
Last October, teams at mail centres in Cardiff (pictured),
Gatwick and Northern Ireland were presented with
Awards by the World Class Manufacturing Association.
They were recognised for their efforts to create safer
and more productive places to work, in turn hetping to
improve quality of service.
RMG00000343
RMG00000343
9 til Rapa ord Proal Steers 2010-32
Our people
To modernise Royal Mail
successfully, our employees
need to be fully engaged
with the business and our
strategy. Our postmen and
women are both the medium
and the message: they drive
the brand experience for
many of our customers.
Our UK workforce 1s relatively mature and stable More than a
third have been with Royal Mail for over 20 years, 6% have less than
two years service The average age 1s 44 Many of our staff have
spent their entire careers at Royal Mail
Our profile
Royal Mail Group 1s one of the largest employers in the country We
currently have around 163,000 staff in the UK Employees currently
represent approximately 70% of our costs
Midlands mail centre.
Number of employees at the end of the financial year?
ma Ey
UKLPI ~~ -455,184 160292
Post Office Limited 7,782 8209
GLS 13,167 12885
Other 4,256 4217
Total 180,384 185 602
2. Source see ate & page 68
2 Sour Ryd Mal Have Your Say Survey 2007-2012
Our workforce 1s mainly represented by the Communication Workers
Union with around 120000 members In terms of diversity women
represent 18% of the workforce and we are seeking to increase this
Proportion Nine per cent of our employees are from black and
minority ethnic (BME) backgrounds m line with the proportion of
BME citizens in the UK population as a whole
In terms of diversity, women represent 18% of the
workforce and we are seeking to mcrease this proportion
Engaging with our colleagues
To modernise Royal Mail successfully our employees need to be fully
engaged with the business and our strategy We are a people
business
As outlined earlier, our colleagues are true ambassadors for the
Group They are our delivery network As our Chief Executive sad
they are the “daily ambassadors for Royal Mail” They are both the
medium and the message Almost no other company has daily
contact with its customers m the way that Royal Mail does
Our employee engagement scores are simply not where we want.
them to be We are taking action to improve this situation
Between 2007 and 2011 the picture has not changed significantly
Have Your Say survey trend?
%
80
55
22 25
Leadership
Eryoy my yob Feel valued Proud to work
0 2007 m 2011
Each month we carry out a Have Your Say (HYS) survey of
employee opinion This is a snapshot taken across the organisation
The HYS surveys show that our colleagues take great pride in Royal
Mail and the valuable work they do m so many communities across
the country The turnover rate for full-time frontline employees 1s
about half the UK average
On the other hand our colleagues given the difficult situation facing
the Group and the scale of modernisation do not have the confidence
we would like them to have in our future
During 2010, the numbers in respect of employee engagement
varied from a maximum of 34% in the summer to a low of 12% in the
snowbound Christmas rush The average was around 20% The
figures do vary across the business They are better in Parcelforce
Worldwide and m Post Office Limited
Our culture
Royat Mail is a communications business Yet our communications ~
particularly internally - require a significant overhaul
We are not always seen to be a responsive employer We have not.
always been good at listening
Focus group research carried out between January and March 2014
found that Royal Mail 1s felt to say too little too late, and that what 1s
said 1s often not believed
RMG00000343
RMG00000343
LO SRST ica statment 2010-1
Our people continued
The modernisation programme that Royal Mail has embarked on
requires the entire workforce to accept changes to how and
sometimes where they work Yet postmen and women can quite
understandably feel that thei job hasnt changed they are still
delivering to the same people they always were
There were positives too, including a feeling that the Group 1s now
Moving in the right direction
* People want to do a good job
* People on the frontline want to be listened to
* When people are asking questions they deserve answers
* People who have years of valuable experience want to feel
involved
Our future
We know what the issues are Now we have to solve them
In 2010 Royal Mail signed a Business Transformation agreement
with the Communication Workers Union This includes a commitment
an both sides to modernise Royal Mail, and change working practices
and working conditions
For more details about our modernisation programme see pages 7
and 8 One of the ‘pillars’ of our World Class Mail (WCM) programme
1s safety WCM ts transforming the efficiency of our operations and is
improving the safety performance At the Gatwick mail centre for
example, reportable accidents have fallen by 80% in the past three
years In Scotland accident rates were down 32% in 2010 alone
While we aim to deliver our modernisation programme
through effective engagement with our people, we will
also be continuing to engage with our unions.
Royal Mails industrial relations im the past have been difficult We
believe that having a positive relationship with our unions based on
epenness and honesty will help us through the challenges ahead
Alongside our focus on safety for all of our people, there will be an
mereased focus on {earning and development both in our operations
and across the Group In May 2011 (after the end of our financial
year) we started to implement the largest SAP Human Resources
and payroll system in Europe - our People System Programme This
completely modernises all of our HR systems and gives a single
source of people information across the Group as well as hetping to
drive performance improvements
We acknowledge that we have not done enough to communicate
with our people But starting in summer 2011 around 150
members of the senior leadership tearn will be going out to meet
employees in mail centres and delivery offices to explam where we
are going as a business Each will be on the road for at least one
week during 2011-12 They will be in the field to listen and learn and
to communicate to colleagues They will provide feedback on their
visits to our Chief Executive and the senior management team
‘The criteria used to assess bonus payments for senior managers are
being changed to reflect the financial and non-financial performance of
the business Employee engagement scores and safety performance
customer satisfaction and service delivery are all part of anew
balanced scorecard which will reward managers according to
© What customers think of us
* What the people we lead think of us
* How good a service we are providing
* How financially healthy we are making the business
The same measures will eventually be used to assess performance
bonuses across the Group
We value our people Without them our business would not be what
itis today
We will be relying on all of them to tackle head on the challenges we
face in the next two years The pride that they continue to show wilt
help us meet those challenges
We know we have work to do im engaging with our people to make
sure that they are more confident in what lies ahead We believe that
by bemg more open and transparent and having the right recognition
in place we will achieve our goals
Royal Mat! postmen and women play a valuable role. They .
‘go the extra mile’ by delivering the mail to customers in all
weathers.
Teams working at the Group’s 12 contact centres provide
telephone assistance to customers, fielding more than
10 miltion calls annually.
RMG00000343
RMG00000343
Royal Mal Holdings ple
Antu Repert and Fron Statements 2010-11
11
Our customers
Our customers want us to
keep our basic service
promises. Consistently
collect on time, deliver on
time and respond quickly
when needed.
Royal Mail Group has appointed Dave Smith as its first Chief
Customer Officer He 1s mtraducing a comprehensive programme to
significantly improve our customers’ experience
Our programme aims to cement Royal Mail as the most trusted
delivery brand m the UK Our objective is to do so through the
provision of consistent, high-quality and relevant services to all UK
customers individual consumers, small and medium-sized
businesses and large companies We will do so by acting on what our
customers are telling us, by effective and consistent engagement
with our people and by clear and regularly communicated standards
and measurements
The Post Office 1s also transforming the way it deals with its
customers It has more branches than all af the main UK banks.
combined and around 20 million customers visit per week
Currently, its piloting ways of operating Post Offices to increase
opening hours and to ensure more sustainable branches for
subpostmasters, who manage the vast majority of the network
Royal Mail’s unique position as Universal Service provider
means we deliver around 62 million letters and packets per
day to almost 29 million addresses across the UK, six days a
week. This comprehensive service is unrivalled by any other
mail provider,
1. Ofcom Repor Augest 2020
Our customers
Today over 104 billion? text messages are sent a year in the UK
As a result of the growth in email and social networking sites letters
now account for a very modest share of daily social messaging
There 1s also a significant decline in transactional communications
through the post like bank statements and bills,
Business customers represent most of our annual mail bag. while
mail from private individuals - or what we call consumer mail - now
represents a very small fraction of what we deliver every day
We are equally focused on detivering a consistent and excellent
customer experience to businesses, consumers and recipients who
use our services The level of service we provide to consumers
Temams profoundly important to us
As part of the Universal Service we are committed to delivering to
around 29 million addresses six-days-a-week Each address
Tepresents a customer who will have a view about Royal Mail and
the service it offers Many consumers also own or run businesses
Their decisions to use or not use Royal Mail at work
will be based in part on therr experience of how we deliver their
mail at home
Business customers want us to focus on being easy to
do business with, from the first point of contact, through
offering and setting up relevant and value-for-money
services, to receiving an invoice.
At the heart of our strategy will be a strong focus on the customer
and improving their experience of Royal Mall
In 2011-42 our Customer Experience Programme will focus on
what our customers tell us 1s most impartant by
Helping all of our people understand what customers are asking
us to do and why
Focusing on the vital few things that customers are telling us we
need to improve, whether these are products or processes and
delivering long-term fixes before moving on to other areas
Working to make us easier to do business with at each customer
touch point, starting with our contact centres
Introducmg new easy-to-understand measures, based on direct
customer feedback, that everyone will see frém top to bottom in
the organisation
Understandmg what our customers think of us
Arobust understanding of what our customers want and their
perception of the level of service beng provided 1s essential to
inform both our priorities for action and compelling communications
to all of our people Our overall net satisfaction score, for example
Tose from 30% to 34% between February and March 2011 We are
also introducing new measures such as the likelihood that our
customers will increase or decrease their purchase of Royal Mail
products and services both to track the impact of the changes we
make and to provide a forward looking indicator of customer activity
For the first time we have also started to measure what our
business customers think of our services and products through what
Is called a Net Promoter Score (NPS) This is a standard tracking
mechanism that assesses the extent to which customers are likely
RMG00000343
RMG00000343
12 Renid perce Feta Sutenens 20:01
Our customers continued
Businesses use Royal Mail for a range of high-quality
services, including our premium next day Speciat Detivery.
to recommend the service provided This wilt allow us to benchmark
other UK and Internationa! companies, set targets and to build these
customer measures into our corporate and functional scorecards
The year end Net Promoter Score for the Group was - 1
‘As an indicator of what this actwity can achieve three years
ago Parcelforce Worldwide introduced a Customer Experience
Programme and a year later began using an NPS measure
By focusing on service at all customer touch pomts it has seen
a continuous improvement in customer loyalty and enquiry
handlmg performance
Our customer service
Continuously improving customer service Is a priority. It
is the right thing to do for the customer. It is clearly right
for our brand. It also has the potential to cut our costs.
Because of the sheer scale of our operation even a small service
failure percentage can have expensive consequences For example
around one million items a week are not delivered first time - for
a myriad of valid reasons
Being unable to deliver first time causes disappointment and
inconvenience for customers and storage and retrieval issues for
Royal Mail It also generates millions of phone calls a year direct to
delivery offices and contact centres Delivering to neighbours, if the
customer 1s unavailable would improve the efficiency of our
operation and the customer experience The rules we operate under
do not allow for this to happen This is something we believe 1s
important and should be changed
More fundamentally, we need to continue to improve our core
customer service proposition We intend to make it easier and faster
for customers to use us
We will focus on appropriate first-time fixes and single points of
contact Our customer service staff and call centre procedures
must be focused on resolving callers’ enquines swiftly We need
to contmue to develop self-service solutions that customers want
This 1s what we are doing in 2011
How we deal with complaints
We have already been successful at reducing repeat and escalated
complamts, down 127% and 24 8% year on year respectively
We do not always resolve issues quickly Nor are we good at feeding
customer comments back to delivery office level so that m future we
can get it right first time - saving customers hassle and us money
This ts another priority area for us
The changing market and our products
In addition to our core letters market of First and Second Class
letters and bulk mail, Royal Mail also offers distribution services to
e-commerce companies traditional catalogue retailers and other
customers wishing to send packages domestically Services range
from stamped packets with no tracking or additional value-add to
Special Delivery a lunchtime next day guaranteed service and our
next day Tracked service offering full end-to-end tracking
In 2010-41, we began to rationalise and simplify our products and
to align them more closely to customers different needs Simplicity
in our offer will benefit customers enhance Royal Mails operationat
efficiency, and make customers want ta chaose us Further details on
our products are given in the UKLPI section later in this report
Around 11,800 UK Post Office branches have around
20 million customers visit per week. The greeting and
ticketing system in modern Crown branches helps us
to serve customers more efficiently.
RMG00000343
RMG00000343
13
Toya Mal Hons ple
Fal prt ane tol Staterreres 2020-11
Regulation
The time is right to change
the existing regulatory
structure. The Postal
Services Act, including
the provision for Ofcom
to become the regulator,
alongside the Government
commitment to a new
regulatory approach,
constitutes a new
framework for change.
Any significant changes
would not impact the
one-price-goes-anywhere,
six-days-a-week Universal
Service, which is enshrined
in the Postal Services Act.
Customers have mecreasing chaices as to how they receive
information and communications Today there are very few
communications that can only be done through prmted and mailed
matter It 1s appropriate therefore, that the regulation of post should
come within the remit of the regulator responsible for the
communications sector Ofcom
Royal Mail welcomes the Government’s commitment to a
new framework for postal services regulation through its
policy statements and letter to Ofcom. The debate ts
heading in the right direction.
The objective of the Postal Services Act is to safeguard the Universal
Service by ensuring that Royal Mat can attract external capital and
earn a commercial rate of return A different approach to regulation
is essential We will work closely with Ofcom to achieve the changes
needed for the good of the Universal Service
The time is right to review the existing regulatory structure
Broad consensus exists among stakeholders that the regulatory
framework needs to change
The current framework goes further than the requirements of
41 Eurmpean posal regulsn bear impementaton cf Thed EU Peal Services
Deecve
Source IPC Postal Regulatory Database Country Drectary 2010 Copenhagen Economics Man Development
‘the Postal Sectr (2008-2020)
European Union Directives in a number of ways In the UK the
Universal Service provider 1s required by regulation to process and
deliver its competitors’ mail and to provide a guaranteed price
advantage No other country has a regime which mandates access to
do this Royal Mail has unti{ very recently been making a loss on mail
It delivers for others It has also lost market share due to the
guaranteed price advantage it provides other players
Both Universal Service Obligation (USO) and non-USG services are
currently price controlled in the UK In most European states, only
USO services are subject to price cap regulation Price controls
currently apply to approximately 80% of Royal Mail revenues at a
time when they are dectining every year In the UK, prices for stamps
are at the low end compared with other countries
The postal market in the UK was opened up to competition ahead of
other countries and when the process of structural decline had
already begun The regulatory approach - mandated access and
headroom regulation - has actwely promoted private sector
investment in additional capacity when the market 1s contracting
rapidly At this time, Royal Mail must now invest to take out capacity
Postal service regulation across Europe in 2010*
Mandatory
access for compettors Poe contrat not
to azess USPS network, imntad to USO and
Fuby\berased and guaranteed reserved procs
mater price ahantage and servees
UK Yes Yes Yes
Denmark No No No
Germany Yes No Yes
Belgium No No No.
Netherlands Yes No No
Sweden Yes No No
France No No No
Austria No. No 7 No
Spain Yes No. No
Regulatory developments
During the last year, the focus with Postcomm has been on seeking
to secure a relaxation of the regulatory burdens mcluding price
control and the requirement to publish commercial proposals three
months in advance We have also worked with Postcomm to secure
a price rise to continue the modernisation programme
‘+ Postcarnm launched a set of consultations in May 2010 on a set
of changes for 2014 which resulted in a number of incremental
changes to narrow price controls
Rayal Mail made an application to enable the Group to generate up
to £100 mullon revenue above the regulatory limits to safeguard
the Universal Service and continue modernisation In addition
there were a number of applications and investigations
+ Royal Mail made an application to waive quality of service penalties
and compensation payments after mdustrial action in 2009-10
{ed to a reduction in the quality of service In September 2010
Postcomm accepted the case m full
Postcamm accepted m full Royal Mails force majeure case for bad
weather affecting quality of service nm 2009-10
RMG00000343
RMG00000343
Regulation continued
‘* Postcomm closed its investigation into allegations of predatory
pricing and margin squeeze on Mailsort® Light After extensive
responses from Royal Mail Postcomm decided to take no action
against the Group
Postcomm ctosed its investigation into undue restriction undue
preference and undue discrimination with regards to term
contracts The evidence did not support a finding of licence breach
Royal Mail developed a costing manual setting out the principles
of our costing system This was subsequently classed as fit for
purpose’ by the regulators economic consultants and published by
Royal Mail
Postcomm concluded its mvestigation into Royal Mails monitoring
of quality of service performance stating that Royal Matl had
failed parts of its licence condition relating to the quality of service
measurement system In light of the investigation’s findings and
Royal Mail’s comprehensive remedial actions, Postcomm did not
consider it appropriate to impose a financial penalty
During the last year, the cost of regulation has been a major burden
for the Universal Service provider Royal Mail s making a loss in its
core letters business Funding and servicing the regulatory regime
cost Royal Mail around £50 million last year including payments for
the regulator s running costs and Royal Mails costs to comply with
the licence and answer the regulators questions it also included the
cost of running a unit to manage access to our network as required
by the licence
Equivalent prices for domestic stamp postage in Europe*
2011 (0-209) 2041 (20-50g)
Denmark 65 Italy 120
Greece 55 ‘Sweden 89
Finland 54 Greece 78
Belgium 54 Germany m
Italy 51 France ie
Portugal “9 Netherlands rR
UK 46 Portugal n
Germany 45° Denmark 65
France 44 Austria 58
Luxembourg t 4h Finland 54
Sweden $46 Belgium 56
Austra $43 Spain “7
Ireland 1 42 UK 46
Netherlands i 36 Luxembourg 46
Spain $33 Ireland 42
+ Royal Ma Fst Class versus European next day debvery services or equvalent as at Ap 2013 (purchasng
ower panty
Conetusion
The time ts right to review and significantly change the regulatory
structure Solid progress has already been made
The postat market 1s at an inflection point Volumes continue to
decline very significantly The current regulatory regime 1s a burden
‘on the Unwersat Service provider and extends beyond the relevant
EU directives There ts growing evidence that Royal Mail, as the
‘Unwersal Service provider shauld he treated on the same basis
as any other postal player that 1s subject to market conditions and
competition law
Any significant change of the regulatory framework would not mean
changes to the Universal Service The one-price-goes-anywhere
six-days-a-week service Is enshrined in the Postal Services Act
Royal Mail is honoured to detrver to the 28 8 million addresses
throughout the country We are committed to doing so
RMG00000343
RMG00000343
Royal Mal Haldngs ple
Anta Report and Frail Statements 2020-14
45
Community
Corporate Responsibility
(CR) is a priority for us.
The Group fully integrates
CR into its everyday
working environment.
2010-11 represents the eighth year that we have published an
external Corporate Responsibility report It is also the third
successive year that we have reported on our activities using the
Business in The Community (BITC) four-fald classification framework
We also moved from a Silver award rating to a Gold award rating
in the BITC Corporate Responsibility Index The Graups score
moved eight percentage paints from 86% to 94% The BITC
Corporate Responsibility Index 1s a voluntary benchmark for UK
companies It provides a benchmark for organisations to evaluate
their management and impact within the key CR areas of
community environment marketplace and workplace We will
be working towards Platinum status in 2011-12 as this year we
missed Platinum status by only 08%
Barnardo's
Our flagship charity, chosen by our people 1s Barnardos To date
over £1 million has been raised for the children’s charity
Last summer, disabled ultra-distance athlete Chris Moon MBE
ran across the UK in the Post Office 1000 Challenge He completed
1000 miles in 30 days averaging 36 miles a day Chris met staff
in Post Office branches in many locations where they ran their
own fundraising campaigns raising cash for Barnardo's
£460 000 was also raised spectfically for the Children m Need
campaign by our colleagues and customers last November
A group of postmen and women in and around Lancashire somed
thousands of other people in the Ride the Lights bike ride along
Blackpoo! promenade to raise money for Barnardo's.
Community
We are a major part of the UKs economic and social infrastructure
That 1s why we play a role in so many communities across the UK
Our Post Office netwark for instance, Is a core part of many urban
and rural communities across the country Our position as one of the
largest full-time employers in the UK (having 163,000 staff) means
that we also make a significant economic contribution As a
Payroll Giving
We have one of the largest and longest established Payroll Giving
schemes in the UK The scheme makes it easy for our people to
donate some of their salary each month to their chosen charity
Since its launch in 1989, colleagues have donated more than
£43 million The biggest beneficiaries among the 850 charities
supported by the scheme include Barnardos County Air
Ambulance Trust. Help the Hospices Macmillan Cancer Support
and our own charity which supports our colleagues, the Rowland
Hill Benevolent Fund
Over the past year, the scheme has raised more than £25 million
We currently have 42 694 colleagues - one in four employees -
taking part Typically, companies have to work hard at promoting
their scheme to reach 10% of their people signing up to the
scheme to attain a Gold level National Payroll Giving Certificate
In the UK, 6% of all Payralt Grving donors work for Royal Mail Group
Tax relief encourages people to donate For example anyone who
pays tax at the basic rate of 20%, only has to contribute £8 from
their salary to give £10 to charity
predommantly UK-based company, we have a large procurement
programme that makes a major contribution through the purchase of
goods and services
Workplace
Our key focus in the workplace ss the health and safety of our people
Accidents across the UK businesses fell by 21% this year In 2010-11
the number of accidents across our business was 19 389 compared
with 24 479 the year before One of the reasons that the accident
rate has fallen is our investment in modern equipment such as
high-capacity trolleys as well as more efficient ways of working
Our sick absence rate for 2010-11 sits below our target and 1s
mm me with the Confederation of British Industry average absence
target The year end sick absence figure was 4 11%, which was lower
than our target of 4 4% Royal Mail Group works hard at reducing our
absence rate with its people We offer a wide range of support in this
area including health advice and mitiatives The bulk of our absences
continue to be caused by musculoskeletal problems or injuries
Marketplace
First and foremost our marketplace contribution 1s to provide
a high-quality service at reasonable prices As we have already
pointed out our prices are amongst the lowest in Europe Most
countries do not provide a six-day service, or enable their customers
to post as late in the day as we do Our standards for on-time
performance are higher than most countries
In our marketplace, the direct marketing industry is making
significant strides to reduce its environmental impact Royal Mail
ts helping in this More than three-quarters of direct marketing
material ts now recycled This ts ahead of the 2013 target set
in agreement between the mdustry and the Department of
Environment, Food and Rural Affairs Royal Mails Sustamable®
Mail service offers better-targeted sustainably produced and
easy-to-recycle mail campaigns
RMG00000343
RMG00000343
16 Bitte port snd tot steers 2030-21
Community continued
Environment
Royal Mail Group understands and monitors its environmental
impact We have been working hard to reduce it We have a number
of plans in place designed to reduce our consumption of fuel and
other energy use We continually seek ways to reduce waste
Our Carbon Trust Standard certification has been renewed after
we cut greenhouse gas emissions by 47 670 tonnes m two years
It means that we're stil the only UK postal services operator to
have achieved the prestigious accreditation Based on a rigorous
independent assessment, the standard - which has to be renewed
every two years - shows that weve measured and reduced our
carbon footprint across our business and are committed to cutting
itfurther each year
We are identifying opportunities to avoid and reduce transport
emissions Telemetry technology has been used to assist
improvements in vehicle use Over 1,000 vehicles were taken out
of our delivery operations through optimisation and ensuring our
Journeys take the most efficient routes This saved around 4,808
tonnes of CO,
We are also developing our future vehicle roadmap which will look
at opportunities for low-emission vehicles where commercially and
operationally viable
In 2010-11 we bought over 1,000 compact diesel vehicles Our
existing electric vehicles have been complemented by the purchase
of 10 diesel electric hybrids at our West Londan delivery office as
part of the Government's Low Carbon Vehicle Procurement
Programme
Removing mileage from our network trunking vehicles which
consume the largest proportion of our fuel, 1s a continued focus
This can be achieved through effective route planning and national
optimisation We continue to use double-deck trailers and have
purchased a further 50 double-deck trailers with further
enhancements to boost their mail-carrying capabilities by around
6% They are entering our operation during 2011
Key focus
Our Corporate Responsibility and community mvestment
programmes will be a key focus for the Group in the next 12
months Our strategy will be reviewed Our community mvestment
programmes will be refreshed A new Corporate Responsibility
report will be produced It will outline our clear strategy in this area,
alongside enhanced reparting
@ COLERAINE F.C.
ra =
Postmen and women in Northern Ireland helped collect
footbalt kit for children in Malawi.
RMG00000343
RMG00000343
17
‘Royal Mal Holdings ple
anual Report snd Prana Statements 2010-11
Our Transparency report
Royal Mail Group is
committed to being
more responsive, open
and transparent with
its stakeholders.
Royal Mail and Post Office are two of the most respected brands in
the UK This 1s a great advantage to the Group The strength of our
brands derives from how we serve our customers and our
interaction with other stakeholders
In this our first Transparency Report the Group 1s sharing a number
of key facts with all of its stakeholders We are doing so because of
‘our commitment to being more open to and more responsive with
our customers We also plan to publish a range of key statistics on
‘our website on a regular basis - monthly and quarterly
Royal Mait’s 115,271 post boxes are a familiar and much-
loved feature of the UK landscape.
A large-scale business
Royal Mail is a mail business serving 28 8 million addresses across
the UK six-days-a-week We deliver to 272 million residential
addresses and 1 6 million registered business addresses We collect
mail from 115,271 post boxes
With around 11 800 branches nationwide, the Post Office 1s the
largest retail and financial services chain in the UK The Post Office
has more branches than all of the UK high street banks combined
Over 99% of the UK population Ives within three miles of a post
office Around 20 million customers visit a post office per week
Freedom of Information requests
Royal Mail is a mayor brand which attracts interest from
a wide range of stakeholders. As a Government-owned
company, it is naturally the case that there 1s a great
deal of interest in our mission as the UK's Universal
Service provider, including the work of Post Office
Limited.
One of the ways this interest manifests itself during the year 1s
the number of Freedom of Information (FOI) requests we receive
These requests cover a wide range of issues We receive them
from a broad spectrum of people including members of the public,
the media and elected representatives
Some of these requests can be answered quickly but some need to
be considered carefully under the terms of the legislation In the last
year 590 requests were referred to our central FOI team Of those
267 requests were answered in full, and a further 116 requests
were answered in part There were 137 requests where the
information requested was not provided because, for example tt
would damage commercial mterests or breach principles of the Data
Protection Act In another 70 cases the formation requested was
not held by us
Returned letters
The overwhelming majority of alt items we handle are delivered
safely to the correct address Avery modest proportion of the items
we handle are undeliverable for a variety of different reasons outside
of our control
Items are not always able to be delivered sf addresses are
incomplete the recipient has moved, or there is no return address
In these circumstances, letters and packets are returned to the
National Return Letter Centre in Belfast
Royal Mail tries very hard to ascertain the correct address and
deliver the item If that is not possible we will seek to return It to
the sender free of charge Our National Return Letter Centre
‘employs 160 full-time people dedicated to trying to return items
The number of items processed m 2010-11 by the Centre was
196 million That should be set against the 15.9 billion of items
we delivered this year
‘The majority of tems are business mail Under the terms of trade
with our mayor business customers if the mail is not delivered then
it will be securely disposed of unless a return address is mcluded on
the envelope This has been the practice for many years The mail
which cannot be delivered or returned 1s stored for up to four
months If an item ts not claimed it is put out to auction All the
proceeds minus a market rate commission for the auction house
are used to partially pay the considerable cost involved in seeking
to reunite customers with their items
RMG00000343
RMG00000343
18 ‘a Report ane Foal Stents 2010-1,
Our Transparency report continued
The annual income from items sold at auction by the National There are cases where branches which are run by independent
Return Letter Centre for 2010-11 was £933 255 This income busmess people from their own premises close due to circumstances
represents a modest contribution to the annual cost of more than beyond our control When a branch closes m such circumstances we
£4 million of providing this free service communicate the situation to the local community and stakeholders
and our approach 1s to try to restore a sustainable post office service
when possible Our field teams work with local communities to try to
to At the time of the Exceptions Annual Review in October 2010 restore services and in many cases we are able to do this There are
cases where itis not possible even after considerable efforts Ifa
Teer 2 288 national Universal Service delvery exceptions In Doct office ss closed for whatever reason even f tis ust for a short
tume whilst work 1s undertaken to restore service it Is not included in
Every day, we deliver to 28 8 million addresses So this represents the numbers we use when reporting network size Our reported
0.01% of that total network size of 11,820 at the end of March 2011 shows the network
of open and trading post offices
Exceptions to our delivery and collection service
Royal Mait is not always able to deliver or collect maul as it would like
The exceptions are where our postmen and women have difficulty
gaming access or there is a long-term health and safety risk
Examples include where we cannot deliver to an address because
itis on an island and has timited ferry services There were also
414 short-term delivery exceptions which have been in place for
more than 12 months m October 2010 These are mainly due to
dangerous dogs in gardens
We are committed to being as open and as transparent
as possible We hope that our first annual Transparency
Report is helpful to our wide range of stakeholders. We
would welcome any feedback on this report
You can provide feedback by emailing Shane O'Riordain, Director of
Last year there were 2 180 long-term Universal Service collection I Communications at shane oriordain@royatmail com
exceptions across the UK There are currently 127 118 collection
points m the UK the majority of which we collect from on a daily
basis The small amount of collection exceptions represent 1 7% of
that total These exceptions can be caused by difficulties in accessing
post boxes There were also 155 short-term collection exceptions
of more than four months These were caused by road or building
works limiting access to post boxes All of these exceptions are
reported to Postcomm on a regular basis
Mail security
The security of mail is of the utmost importance to us Royal Matt
Group has robust security measures in place in all parts of its
operations
Any person found tampering or interfering with mail will be robustly
dealt with and prosecuted im England and Wales by Royal Mail Group
In Scotland, cases are handed over to the Pracurator Fiscal In
Northern Ireland they are passed to the Public Prosecution Service
Anyone attempting to steal from Post Office Limited 1s also liable to
be prosecuted
In 2010-11 312 former employees of Royal Mail Group were
prosecuted in the UK These prosecutions need to be set against
the fact that the Group employs around 263 000 people in the UK
The Post Office network
At the end of March 2011 there were 11 820 post offices open and
trading throughout the UK In March 2010, there were 11,905 post
offices open in the UK There has been a net reduction of 85 post
offices in the course of 2010-11 The current network ts made up
of 373 Crown post offices, and 11,447 agency post offices
Network turnover
The vast majority of post offices change hands - when a Agency post office branches account for 97% of the
subpostmaster decides to sell their business - without a break in network. They are run by independent business people
service or closure This is part of the normal market turnover of and the post office is usually part of a retail outlet.
businesses in the UK Around 97% of post offices are operated and
owned by local business people who have a contract to offer post
office services From April 2010 to March 2011, 800 post offices
changed hands The previous year around 1,000 changed hands
These successful transfers bring new energy and focus into
our network
RMG00000343
RMG00000343
19 teal eiprt re ncn Seerees 2010-11
Our businesses
The Group’s main busmesses
The Group is organised into three businesses which are covered in
the following pages
UK Letters & Parcels and International (UKLPI) processes and
delivers letters and packets in line with its unique Universal Service
Obligation (USO), through Royal Mail It 1s also a leading provider of
collection and delivery services for express packages and parcels
through Parcelforce Worldwide, providing both businesses and
consumers with a full range of timed delivery options UKLPI 1s
responsible for the design and production of the UKs stamps and
philatelic products It 1s also responsible for the processing of
international mail under reciprocal arrangements with other
overseas postal administrations Within this unit are
© Commercial Regulated
+ Commercial Non-Regulated
* Operations
* Wholesale
* Property
* Central functions
Post Office Limited has a national network of branches and is
represented in many communities across the country It provides a
trusted access point for everyday products, services and information
im pastal services financial services, travel, banking telephony bill
payments Government services retail and the secure transportation
of cash
General Logistics Systems BV (GLS) delivers high-quality parcel
services, logistics and express services throughout Europe GLS 1s
one of the biggest ground-based parcel service providers in Europe
today GLS provides a network coverage of 42 countries through
wholly owned and partner companies and ts globally connected via
contractual agreements
Royal Mail
Parcelforce Worldwide is the Group’s express parcels
business for business and consumers, delivering from
two hubs and 52 depots in the UK.
. GLS
Generat Logistics Systems
RMG00000343
RMG00000343
20
Mal Hlaings ple
Betas ape ard El Staterents 2010-32
UK Letters & Parcels and International
Royal Mail is the only
provider of the UK’s
Universal Service
for some of the lowest
prices in Europe.
UK Letters & Parcels and International comprises the activities of both
Royal Mail and Parcelforce Worldwide Royal Mail delivered 62 million
items every working day last year Parcelforce Worldwide handled
63 millon parcels In total, these businesses employ 155 181 people
inthe UK
Royal Mail is the only provider of the UK's Unwersal Service for some
of the lowest prices m Europe It provides a daly collection and
delivery service at uniform and affordable prices Royal Mail also
provides the social and economic glue m every single community with
its reach to 28 8 milion addresses
Royal Mail collects from around 115,000 post boxes and
11,820 post offices six-days-a-week. It works through
the night in a network of 59 mail centres Royal Mail uses
a fleet of 33,600 vehicles and employs 130,000 postmen
and women in 1,371 delivery offices, delivering around
62 million items of mail every single working day
We achieved our First Class quality target in 2010-11 with a 93 0%
performance when accaunt is taken of the extraordinary combination of
the harshest winter in 30 years? and the unprecedented closure of UK
airspace because of Icelandic volcanic ash Without any adjustment the
performance for the year would be 91 4%
Under the terms of its cence from Postcomm and in accordance
with standard practice Royal Mail s asking the regulator to apply
adjustments to the 2010-11 quality of service figures to recognise the
severity of the weather conditions and the disruption caused by the
volcanic ash cloud via an established procedure The Company believes
the exceptional conditions fully warrant adjustments as Royal Mail did
everything possible to cope with events beyond its control,
Royal Mails biggest challenge continues to be the digital age The
competition of technalogy - email phone, text and broadband - has
had a dramatic effect on the whole market It contributed to mait
volume decline of 4% this year
Parcelforce Worldwide provides express parcel services to both
businesses and consumers With global reach, it operates from two
hubs and 52 depots within the UK
Parcetforce Worldwide has had an exceptional year In a market
where competition 1s open and intense, it has increased both
revenues and profits
In the UK market, where there are more than a dozen mayor parcel
businesses Parcelforce Worldwies growth has outpaced all its
rivals
It achieved volume growth of 15%, partially offset by a changing
customer mix and market price pressures leading to another
year of record profits
Its Business to Business volumes also grew m 2010-11 in what
1s the most competitive sector of the market Its busmess strategy
rests firmly on one of the highest quality of service records in the
industry
Parcelforce Worldwide employs 4508 people The business has high
employee engagement - amongst the highest levels in the whole of
Royal Mail Group
Trading results
UK Letters & Parcels and International
yoieaa 2007-10
=m im
External revenue 6857 6.978
Operating {loss)/profit after
modernisation costs* (120) 20
before other operating exceptional terns
Revenue fell by £121 million as tariff increases were not enough
to offset a 4% volume decline in inland addressed mail. which was
primarily driven by losses to alternative digital communications
channels Singte-piece mail like stamped and metered declined by
11% This means that in five years thes type of mail has declined by
over 35% The decline m inland addressed volumes was lower than
last years at 7%, reflecting improvements in the economy and recent
signs that advertising mail is starting to reclaim some market share
The 4% decline in inland addressed mail was driven by letters 5%
large letters 4%, offset by a 3% crease in packets
Movement in operating profit after modernisation costs
Royal Mail has one of the largest vehicle fleets in the UK,
with over 33,000 vehictes which are used to transport mail
around the country.
1. Source Met fice
20 (21) (a2) a (20)
‘Modernisation 2030-21
costs
2009-10 ‘Revenue Costs
First Class retait quality of service was 911 4% against the background
of adverse weather and volcanic ash cloud conditions during 2010-11
The timing and severity of snow in November and December 2010
RMG00000343
RMG00000343
a Wah volings ple
21 sehtaletpr snd nana! Sxerees 2020-21
UK Letters & Parcels and International continued
when Christmas volumes were peaking was a real test of Royal Mail's
Unmversal Service credentials Even though it proved impossible to
deliver in some parts of the country, unlike others Royal Mat! did not
shut down tts network. It invested £20 million more to mamtain it
During the year a pay and modernisation agreement with the
Communxation Workers Union was reached, providing a platform to
continue to modernise Royal Mail's network However the delay in
‘signing this agreement resulted m lower cost savings than originally
anticipated This contributed to operating profit after modernisation
costs declining from £20 million to a loss of £120 million
Modernisation
2006-07 2007-08 2008-09 -2009-10 2010-11
%
fa
5)
10)
15)
20)
{25)
= T inland addressed volurne decine
— 1 FTE dectine
The challenge of managmg down costs - m a largely fixed costs/
people-based network - more quickly than the decline in revenues
1s even more critkal if the Universal Service ts to be profitable and
sustainable Since 2006-07 volumes have declined cumulatively
by over 20% whilst the gross cumulative reduction in hours is around
‘15% This ts why modernising the network ts a significant part of the
overall Group strategy When completed it will not only be one of the
largest transformations m the UK, but will also provide world-class
productivity safety and service quality It will enable mail to compete
successfully with other communications media
Since March 2006, £2 0 billion has been invested by Royal Mail in
new equipment in mail centres and delivery offices and voluntary
redundancy costs with some £400 million spent in 2010-11 In that
ume nearly 23,000 people have left the business
fm__ £20an
2,000 £16bn
1,500 £1 1bn
a _a —all _7
2006-07 2007-08 2008-09 «2009-30 ~—«2010-33
‘Annual voluntary redundancy
0 Annual project one-off costs re project
management ¢
‘Annual CapEx1e machines property
© Cumuiatve mvestment
(curnulatve £0 $n)
(cumulative £0 3hn)
(curmulatwve £1 2bn)
(€20nn)
Royal Mail charters 25 aircraft, I
average a day.
Centre handle:
the world.
ternational mail to and from the rest of
The challenging and changing market
In addition to our core letters market of First and Second Class
letters and bulk mail, Royal Mail offers distribution services to
e-commerce companies traditional catalogue retallers and other
customers wishing to send packages domestically Services range
from stamped packets with no tracking or additional value-add to
Special Delivery, a lunchtime next day guaranteed service and our
next day Tracked service offering full end-to-end tracking
In 2010-11, we began to rationalise and simplify our products and
to align them more closely to customers different needs Simptcity
In our offer will benefit customers enhance Royal Mails operational
efficiency, and make customers want to choose us
We have done a lot this year to improve our core products and to
innovate
RMG00000343
RMG00000343
22 RAST SCTE summers 2010-21
UK Letters & Parcels and International continued
Highlights included
* Continued strong growth for our Royal Mail Tracked services -
greater than 100% growth in volume and revenue for the third
year running Growth has been generated by the addition of
around 700 new customers and winning a major contract with
‘one of the UK s leading online retailers
The launch of our next day tracked service - Royal Mail Tracked
Next Day This responds to increasing customer demand for
faster services
Making it easier for customers to buy our services and receive
Teports on our performance through the launch of our online
ordering tool Despatch Manager Online
A successful trial of evening deliveries within the London area
This is now bemg expanded through Royal Mail Sameday
Keeping open around 600 enquiry offices up to two hours later
on a Wednesday and Saturday to provide customers with greater
flexibility
For advertisers Royat Mails Advertising Mail™ 1s a new product
designed as part of Royal Mails commitment to meet the specific
needs of advertisers Customers sending dedicated advertising
mail that meets direct marketing ‘best practice’ standards can
benefit from better prices helping them deliver stronger returns
‘on their marketing investment
For fulfitment companies Royal Mail has developed a simple-
to-use online tool to get the right packet delivery praducts and
‘options to meet specific customer needs in this highly competitive
area This ‘menu-based approach allows customers to choose
what works best for them
Royal Mail became the world s first postal company to help businesses
make their post interactive using digital watermarking technology
The advertising and communications market continues to change
This has had a direct impact on direct mail and transactional mail -
bills and statements Although high and low volume business maiters
and those sending statements will see an improved offer from us in
2011-12 The continued trend has been towards highly measurable
low cost media This has fuelled the growth m cheaper digital media
Combined with greater consumer access through broadband and
mobile channels, the majority of UK growth has been in the digital
space, with a direct impact on direct mail volumes,
While the number of corporate and SME companies mcluding mail
in their advertising mix has slightly increased, overall volumes have
declmed This is because of the substitution of digital communication
by customers Royal Mail has countered this by offering marketing
support including the Mail Media Centre (mmc co uk) - the home of
Insight and advice ~ and financial mcentives to encourage both first-
time users and existing users of direct marketing
Royal Mail 1s a strong player in the direct mail market, where there
Is solid evidence that well-targeted direct mail beats other ways of
advertismg We are developing strategies to be the marketing
partner of choice for direct mailers We are doing so by offering
expertise In data management campaign planning and consumer
targeting We are aiming at growth with both the largest companies
and small businesses
2010 saw our first ever Direct Marketing Sale stimulating significant
incremental business
More traditional transactional mail continues to decline as many of
the banks and utilities run proactive programmes to switch
consumers to digital alternatives while the customer remains keen
on receiving posted items Many businesses are reappraising the use
of direct maul and the advertising association WARC 1s forecasting a
3% growth m 2011-12
Key Facts and figures
* 62 million items processed and delivered every single working day
74% of mail is delivered to just 13% of the country
28 8 milton addresses - 1 6 million business addresses
91 4% First Class quality of service - but post force mayeure will
have hit target Target 1s 93%
115 271 post boxes
59 mail centres of which 24 are World Class Mail centres
1371 delivery offices
33,600 vehicles
155 181 people
UK stamp prices amongst lowest in Europe
RMG00000343
RMG00000343
23 Retualtport snc nal Sstrerts 2010-1
UK Letters & Parcels and International continued
Royal Mail Special Stamps programme
Royal Mail s first commemorative stamp was issued in 1924 to
mark the British Empire Exhibition In the 1960s the modern-
day Special Stamp programme was launched This now features
over a dozen issues every year
By 31 March 2011 over 450 issues of Special Stamps had been
produced Themes for 2010-11 varied from Britain Alone, a
tribute to people on the home front m the dark days of 1940
to UK mammats Winnie-the-Pooh and stage musicals
In August 2010 the Great British Railways issue saw the
launch of the world s first intelligent stamps When scanned
through a special smartphone app the stamps revealed
exclusive footage of Bernard Cribbs reciting the iconic Night
Mail poem This technology was also included in stamps
celebrating the 50th annwersary of environmental
organisation WWF in March 2011
In December Wallace and Gromit Christmas stamps proved
extremely popular FAB stamps got 2011 off to a flying start in
January with the UK's first motion stamps - lenticular printing
revealing the iconic 5~4-3-2-1 opening sequence of
Thunderbirds when the stamps are tilted back and forth
The year culminated in the announcement on 29 March of
stamps to commemorate the wedding of HRH Prince William
and Catherine Middleton The stamps made headlines across
the UK and around the globe reinforcing Royal Mail's reputation
as a world leader in stamp production and design
Christmas
with Wallace and Gromit
Wallace and Gromit stamps were extremely popular in
December for Christmas mail.
RMG00000343
RMG00000343
lM slange pc
24 Eri pean Prana Steen 2010-1
The Post Office
The Post Office is
part of everyday life in
communities throughout
the UK.
{t provides around 170 different services and products spanning
financial services including savings, insurance, loans, mortgages and
credit cards Post Office also offers Government services telephony
foreign currency travel msurance and mail services
Around 20 million customers visit the 11 820 Post Office branches
per week
Trading results
Post Office Limited
210-11 ——~2008-10
_ _ fm fm
External revenue 776 838
Operating profit after modernisation costs* 21 33
before other operating exceptional tems,
The Post Office is piloting new branch formats, which can
offer extended opening hours to customers. In Post Office
locals, the Post Office operation is fully integrated into the
retail outlet where it is located. This means Post Office
services are offered for tonger, matching retailers’ opening
hours and, in many cases, open on Sundays too.
Revenue declmed by £62 miltion to £776 million mamly in traditional
business This was caused by Post Office Card Account income falling
due to the full year impact of the October 2009 contract on the Card
Account (which yields a lower rate per account) and as customers
continued to migrate to bank accounts Revenues also declmed in
some areas of financial services and telephony Although revenues
declined in travel services due to economic factors market share
was maintained
This has resulted in a decline in profit after modernisation costs of
£12 million from £33 million to £21 million Some of the revenue
decline was mitigated by careful cost contrat which mcluded a 16%
reduction in the number of managers
There has been a focus on addressing customers’ concerns around
queue time in Crown Offices with the benefits of the 2009-10 Crown
Office refurbishment programme providing a platform to improve
our service into the future Complaints are down in the year but
there 1s further work to do A focus on customer service will continue
into 2011-42, to meet the rising expectations of consumers related
to staff helpfulness and speed of service through staff training and
further self-service in branches
Maintaming revenues
The chaltenge in the Post Office is similar to that of Royal Mail to find
new revenue streams and to manage costs efficiently as traditional
volumes decline
During the year the Post Office dentified growth in other areas
This is key in stabilising revenues as traditional volumes fall away
In Government services, new income has been generated following
the roll out m the first half of the year of biometric identity capture
equipment across 752 branches In mails, revenues in premium
services have increased by investing in branch specialists who offer
service and support to custorners Working with Royal Mail there
are further plans to grow our mails services to small businesses In
financial services online savings accounts have been very successful,
bringing m excess of £4 billion online balances in the seven-month
period since their launch in August 2010
—_—
it has committed to £1.34 billion in funding
over the next four years. This will cement the Post Office's
vital ptace in UK communities It will help to build a Post
Office network that is retevant for the 21st century.
RMG00000343
RMG00000343
25 Remi rd Peto semen 2010-1
The Post Office continued
Within the branch network by far the largest of its kind in the UK,
piloting of the new Post Office trading models 1s underway to extend
opening hours and to enable more sustamable and profitable
branches for operators m the future Feedback from customers
and operators about the pilots 1s positwe Research by MORI for
Consumer Focus shows that 97% of customers believe the
converuence of the location 1s better or on a par with other post
offices and 83% like the increased opening hours Research by aba
research for Post Office Limited reports that 94% of customers are
extremely or very satisfied with their overall experience Working
closely with the National Federation of Subpostmasters
developments will be reviewed and stakeholder views taken into
account as these models develop.
Securing the Post Office network in the digital age 2
Post Office Limited 1s now embarking on a five-year plan based on
the Government's policy statement ‘Securing the Post Office network
in the digital age, published m Novernber 2010 This confirmed
Government funding commitment of £1 34 billion over the next four
years which Is vital to ensure further innovation in the Post Office
network
a
Modern Crown Post Office branches feature an open plan
layout, with a separate area for financial services
conversations. The ticketing system helps to manage footfall.
This support from the Government shows a tremendous commitment
to the future of the Post Office network It reinforces its place in local
communities, its role as part of UK infrastructure and the social
value that its network provides to the country The package provides
the investment and confidence to build a Post Office that 1s relevant
for customers in the 21st century It will establish a sustamable
future for the Post Office It provides the foundation we need to build
a Post Office we can all be proud of
The plan reflects
« Astrong understanding of and commitment to the social and
ecanomic value af the Post Office for communities and busmesses
across the UK
Automated Post & Go machines enable customers to weigh
and pay for postage away from the counter.
Investing in and modernising to create a sustainable branch
network which offers longer opening hours to customers There
will be no programme of closures
Maintaining a strong commercial relationship with Royal Mailfor Facts and figures
the mutual benefit of both companies
* Around 11 800 branches including 373 Crown Offices
Establishing the Post Office as a genuine front office of
Government at both national and local level * Approximately 28,000 customer-facing positions
Expanding accessible and affordable personal financial services * Around 20 million customers vsit the post office per week
inctuding helping people access their current accounts through our UKs leading supplier of foreign currency exchange with a 25%
branches In the year ahead atmost 80% of all UK current accounts market share
will be accessible at post offices
* Complementing an increasingly online world to benefit customers
Providing access to online services through our branch network for
those who are digitally excluded and easy general access to those
digital processes that still need a physical element eg handling a
package, checking documents or confirming customers’ entities
Moving forward with important concepts withm the Postal
Services Act such as the opportunities for mutualisation that
would look at new ways for employees, subpostmasters and
communities to be involved in the ownership and running of the
Post Office
* Customer satisfaction levels at 85%
RMG00000343
RMG00000343
Rayal Mall Holdings ple
26 Betta Ripcesnd Pua! sumemens 2050-21
General Logistics Systems - GLS
GLS is one of the biggest
ground-based parcel
service providers in
Europe today.
GLS is a pan-European company providing reliable, Business to
Business high-quality parcel and express services as well as value-
added logistics solutions Founded in 1999 it has strong historical
roots in each European countrys domestic market
GLS 1s one of the biggest ground based parcel service
providers m Europe taday GLS provides a network
coverage of 42 countries through wholly owned and
partner companies and is globally connected via
contractual agreements
The GLS network comprises 38 central transhipment pomts in
Europe made up of 656 depots and 17,100 vehicles its 13,167
people deliver over 360 muilhon parcels annually for 220 000
customers throughout Europe
GLS 1s the European leader in quality providing market-leading
quality and margins
GLS pan-European network
‘= Abania » Andorra * Austria © Belguim Bosmia-Herzegowna
‘Bulgaria © Croatiae Cyprus * Czech Republic » Denmark * Estonia * Finland
‘+ France * Germany ® Greece * Hungary + Iceland + Iretand « Italy ® Latwaa * Liechtenstein
‘Lithuania * Luxemburg + Macedonia» Malta + Monaco Mantenegro + Netherlands
‘+ Norway Poland + Portugal » Romania + San Marino « Serbia # Slovakia # Slovenia
+ Spain # Sweden » Swatzertand « Turkey + United Kingdom « Vatican City
Trading results
General Logistics Systems
zeibaa 2009-20
fs ‘im
External revenue 1485 1,487
Operating profit after modernisation costs* 118 112
before other operating exceptional tems
Reported revenues are £2 million lower than last year at £1,485
million This 1s partly due to the strengthening of Sterling against the
Euro Underlying revenues were around 4% higher than the prior
year after adjusting for exchange rate movements This reflects the
improvements in the European economies as they move out of
recession This underlying improvernent was driven by volume
growth
Operating profit mcreased by £6 million (5 3%) to £118 millian
despite an adverse currency effect of £4 million After adjusting for
the currency impact, operating profits increased by 9%
Profitability improved from economies of scale as higher
parcel volumes were transported through the GLS
network as well as through continued focus on costs.
The operating margin after modernisation costs improved from 75%
to 80%
GLS underlying revenue
Em
2.000
1500
1.000
$00
2003 2004 2005 2006 2007 2008 2009 2010 2011
Up to 2008-09 GLS grew its revenues every year in line with growth
in the European economes and the expansion of its network Then
GLS like other parcel companies was impacted by the recessionary
environment which started in 2008 resulting m a modest decline
m volumes and revenues Despite the recession, GLS has continued
to generate healthy cash returns It continued to strengthen its
European network and focus on excellent service quality This leaves
GLS well placed as economies and markets improve
Facts and figures
* Parcel volume 2010-11 360 million
* Customers 220000
* Workforce 13167
* Hubs 38
* Locations 656
* Vehicles 17,100
RMG00000343
27 Bea ar toa suemens 2020-21
Key Performance Indicators
The Group’s Key Performance Indicators (KPIs)
Customers are at the centre of everything we do within the Group
Our main aim ts to be the most trusted delivery brand in the UK
which provides the Universal Service for our customers the tength
and breadth of the country We also want to be seen as the premier
European and UK express parcel businesses offering excellent
customer service
The Group also wants to sustain and grow the Post Office
commercially while maintaining its key role as part of the UK's social
and economic fabric
Qur key strategies and objectives will be communicated widely across
the Group, embedded into its day-to-day activities and measured on
a timely basis by appropriate KPls and performance measurements
They are monitored by the Royal Mail Holdings plc Board and its sub
committees, as highlighted below
Customer service
To win and keep customers we must provide a consistently high
quality of service, delrvering on time, collecting on time and
responding quickly when needed
That means
* delivering a high quality of service and mails mtegrity
© developing products that match the needs of our customers
* becoming easier to do business with
Our performance measures m this area are
er Enry 2010
Retail First Class quality of service 91.4% 879%
Number of complaints (miluons) 1.23 120
Post Office Limited - customer satisfaction 85% 89%
First Class quality of service continues to improve building on the
momentum achieved in the previous year Customer complaints rose
reflecting the challenges posed by the vokanic ash cloud and adverse
winter weather conditions
Parcelforce Worldwide continues to provide excellent customer service
with its PFWW 24 timed delivery product Quality of service remained
stable this year, despite the adverse winter weather conditions:
Post Office customers remain satisfied with the service they receive
in the 11 820 post office branches throughout the country A focus
on customer service will continue in 2011-12
Modernising Royal Mail
Our modernisation programme continues to drive wide-ranging
efficiency improvements across the business as well as delivering
cost savings Our World Class Mail programme has been launched m
24 mail centres and in 117 delwery offices this year Belfast Cardiff
and Gatwick mait centres have already received awards from the
World Class Manufacturmg Association
RMG00000343
Our performance measures in this area are
wi zou 2010
Gross hours reduction (%) 24% 59%
Sequenced mail exit rate 34% 8%
Handheld devices deployed (cumulatrve) 33,553 27000
As set out in the modernisation section we did not achieve the gross
hours reduction we had anticipated However, we have made
significant progress modernising our mail centres
Our people
Royal Mail Group believes that health and safety ts an important
element of every working day The Group treats this matter very
seriously and it ts discussed regularly at Board meetings Throughout
our businesses, we are committed to ensuring our employees and
customers are kept as safe as possible We also understand that we
can only move forward as a successful group of companies if we
tmvolve our people in making change happen This underpms our
commitment to employee engagement through our regular survey
which was established in 2003
Our performance measures in this area are
co) Ey 210
RIDDOR Accidents/4.000 20.8 278
(12 month rolling average)"
Engagement Index 26% *
Total Attendance 95.4% 950%
* carparae net walle de te Gurgem basa f mesures
* trontine employees
We have improved the accident rate materially but seek a further
positive change in 2011-12 Engaging our people will be a major
focus in the coming years as we have set out on pages 9 and 10
Profitability and cash flow
Funding from Government continues to be used to support the
capital investment programme which addresses the historic under-
investment in the core letters business Contmuing to develop more
efficent ways of working and well-targeted products and services
will help us to succeed m a highly competitive marketplace
Our performance measures in this area are
ry ant 2010
External revenue £9,156m £9,349m
Operating profit* £39m £180m
Margin* 04% 1%
Free cash flow £(213)m £(545)m
* after modermsanon costs before other operating exestonal tems
Details of our financial performance are included in the Financial
Review on pages 28 to 34
The current KPIs and performance measures are under review It 1s
our intention to share these with all of our stakeholders at our half-
yearly review in the Autumn The new range of KPIs will foltow
similar themes as detailed in this section where the services we give
to our customers will be at the centre of everything we do
RMG00000343
RMG00000343
28 Betta part sn lca Staemees 2010-12
Financial review
Profit and loss summary
am 2010 © Group external revenue fell by £193m from £9 349m in 2010 to
a £_ £9.156m in 2011 as core traditional volumes in Royal Mail and the
External revenue 9156 9349 Post Office continue to decline,
Operating costs (8,938) (8986) < Operating profit after modernisation casts of £39m 1s £141m
Modernisation exceptional costs (207) (224) tower than last year’s £180m mainly due to the decrease in
Share of profits from aint ventures revenues offset by lower operating and modernisation costs Other
Si assocates 28 41 ‘operating exceptional costs include impairments of £41m and a
£30m provision for potential industrial claims,
Operating profit after modernisation
costs* 39 480 © Non-operating exceptional profits of £109m comprise profits on
the sales of property and other assets of £65m {2010 €5m) and
Dither operating enpepieerl waits (se) (67) the profit on disposal of a 20% investment m Camelot of £44m
Non-operating exceptional profits 109 5 (2010 Enil)
Profit before financing and taxation 60 148 «Finance and pensions interest costs of £212m (2010 £380m)
Net finance costs and pensions interest (242) (380) __have reduced by £168m maml due to a £162m lower notional
Taxation charge (408) (53) _Pensions interest charge and
Loss for the financial year (258) (320) ° Taxation charges have increased mainly due to a deferred tax
charge increase of £34m
* before otber operating exceptional tems
Balance sheet summary
201 amo —* Net assets before the pension deficit of £1 4bn are £0 4bn lower
. = cl than last year’s £1 8bn, mainly due to property and other asset
Net assets before pension deficit 1,394 1760 disposals,
Pension deficit (4,501) (8041). The accounting pension deficit has decreased from £8 Obn n
Net trabilities (3,107) (6281) 2010 to £4 Sbn in 2011, reflecting the decrease i abilities
following the Government announcing its intention to change the
inflation measure from RPI to CPI and an increase in asset values
as a result of improved market conditions and
* Net abilities of £3 bn are lower than £6 3bn last year primarily
because of the reduction in the pension deficit
Cash flow summary
aos 2030+ EBITDA pre pension costs of £962m 1s lower than last years
= £1,082m mamly due to the decline m revenues of £193m offset
EBITDA, pre pension costs 962 = 1082 by a reduction in operating costs
Operating exceptional tems* (242) (243) J Operating exceptional tens of £242m mainly comprise cash
Working capital (49) (83) flows relating to modernisation such as voluntary redundancy and
Pension payments (71) __ (867) __ColleagueShare payments
Cash outflow from operations (100) (111) * Pension payments of £771m are £96m lower than last year’s
Copstabenereitur (376) (462) _-:£867m mami because of the reduction in angoing contributions
apkahexpenchure as a result of lower pensionable pay and a reduction in the
Disposal of assets 237 14 employer cash contributions rate
Other (dividends, tax, interest) 26 14 © Capital expenditure of £376m 5 £86m lower due to a reduction in
Free cash outflow (213) (545) capital expenditure on the modernisation pragramme,
excludes person payments relsing to redundancy
Disposal of assets of £237m comprises property sales of £164m
and the sale of a 20% investment in Camelot of £73m, and
Asa result, free cash outflow of £213m ts £332m lower than
last year of which some £400m {2010 £500m) relates to
modernisation,
RMG00000343
RMG00000343
Royal Mail ie
‘ad Reports rl States 2010-2,
29
Financial review continued
Background
Royal Mail Holdings plc (the Company) is a public limited cornpany
wholly owned by the UK Government It became a plc on 26 March
2001 The framework for change was the Postal Services Act 2000
that created a commercially focused company with a more strategic
relationship with the Government Royal Mail Holdings ptc together
with its subsidiaries, associates and yont ventures comprise ‘the
Group’ The Group operates within a regulatory framework
comprising an independent regulator, Postcomm and a statutory
consumer organisation Consumer Focus
Legal structure
Royal Mail Holdings plc 1s directly owned by the UK Government and
is the ultimate parent company of the Group The Group primarily
operates within the United Kingdom, having a number of subsidiaries:
joint ventures and associates but also has presence in most European
countries, mamly through General Logistics Systems BV Its basic legat
structure Is as fotlows
Royal Mail
Holdings plc
Royal Mail
Group Ltd?
Post Office
Limited
Royal Mail
Investments Limited
Royal Mail
Estates Limited
General Logisties
Systems B.V.
2. The UK Lets & Peres ad rratonal snes unt exuded n Roy Ma Group Lit ne a separate
teal enty
Further details on the principal subsidiaries are provided im note 29
to the financial statements
Operating units
The Group is organised into four operating units
UK Letters & Parcels and International (UKLPI) processes and
delivers letters and packets in line with its unique Universal Service
Obligation (USO) and 1s also a leading provider of collection and
delivery services for express packages and parcels providing both
business and private addresses with a full range of tmed delivery
options itis responsible for the design and production of the UKs
stamps and philatelic products and also the processing of
international mail under reciprocal arrangements with other
overseas postal administrations Within this unit are the Commercial
Regulated Commercial Non-Regulated Operations Wholesale
Property and Central functions which are aligned to products or
specific business areas and functions
General Logistics Systems BV (GLS) is one of the largest ground
based parcel service providers in Europe today GLS provides a
network coverage of 42 countries through wholly owned and partner
companies and 1s globally connected via contractual agreements
Post Office Limited has a national network of branches at the
heart of communities across the country They provide a trusted
access point for everyday products services and information in
postal services financial services travel, banking telephony, bill
payments, Government services retail and the secure transportation
of cash
Other comprises Romec Limited and NDC 2000 Limited, which
provide facilities management services and design consultancy
services respectively for both the Group and to external customers
PostCap Guernsey Limited which provides captive insurance services
for the Group Royal Mail Pension Trustees Limited which provides
trustee services to and manages the administration of the Groups
principal pension scheme, and the Groups mvestment im Quadrant
Catering Limited, which provides catering services across the Group
The following table highlights the segmental results of each unit
(Operating (ossNiprotk after
External even ‘ocermsation costs"
20 2010 Ere 2020
snes unt performance fn fm tm fm
UK Letters & Parcels
and International
(UKLPI) 6,857 6978 (120) 20
General Logistics
Systems {GLS} 1,485 = 1487 118 112
Post Office Limited 716 838 2 33
Other businesses 38 46 20 15
Group 9,256 9349 39 180
before other operating exceptional items
‘Segment performance ts discussed in the relevant preceding
sections
External revenue
The Groups external revenue fell by £193m from £9 349m to
£9156m
UKLPI revenue was £121m lower at £6 857m mainly due to a 4%
decline in core letter volurnes despite price increases The volume
decline ts driven by a change in the marketplace, with a move away
from core products to digital communications channels and
competitors as well as down-trading to other lower priced Royal
Mail products
Post Office Limited revenue declined by £62m to £776m mainly in
traditional Government business This was caused by Post Office
Card Account income falling due to the full year impact of the
October 2009 contract on the Card Account (which yields a lower
rate per account) and as customers continued to migrate to bank
accounts
GLS revenue was lower by £2m year on year at £1.485m with an
underlying revenue growth of around 4% being more than offset by
the adverse impact of foreign exchange when converting its Euro
results into Sterling
External revenue by business unit
£m
10,000.
14685 oa 186,
a I
Gis POL Other
business
Total
RMG00000343
RMG00000343
30
Raya! Mall Holdings ple
Final
‘Annual Report and Statements 2010-11
Financial review continued
Costs (includmg modernisation costs)
201 2010
fm fm
People costs (5,717) (5 746)
Distribution and conveyance costs (1,619) (1,579)
Other operating costs (4,602) _ (1664)
Operating costs before exceptional items (8,938) —_ (8.986)
Modernisation costs
{operating exceptional items) (207) (224)
Total operating costs of £8 938m have decreased from £8986m by
£48m whilst modernisation costs have decreased by £17m to £207m
People costs of £5,717m have decreased by £29m This decrease is
driven by the modernisation programme delivering efficiencies
contributing to a headcount reduction of around 5 200 for the Group,
but has almost been offset by higher pay rate and pensions costs
Distribution and conveyance operating costs of £1 619m have
increased by £40m. principally due to higher year-on-year
international export volumes differing country mix and higher
freight rates mto the USA and Australasia
Other operating costs (including sales and marketmg property,
communication IT and other functional costs) have decreased by
£59m to £1 602m driven by a focused cost and procurement
exercise across the UK businesses
Modernisation costs are £17m tower as a result of a £69m net
release of ColleagueShare costs (2010 £44m charge} offset in part
by £84m higher restructuring costs and £12m higher impairments
due to busmess transformation
Operating profit after modernisation costs - growth/(decline)
by business unit (£m)*
£m
200,
160
120
80
40
0 aaa
180
aay
POL
2009-10 -UKLPI «GL Other
Business
2010-41
Operating (loss)/profit after modernisation costs by
business unit (£m)*
£m
120
ao a 39
Tv p20 z = TT
-60
~120
Pa Oe Toul
Busnes
Operating profit after modernisation costs of £39m 1s £141m lower
than £180m last year UKLPI and Post Office Limited both returned
year-on-year profit declines due to falling revenues and competitve
and economic factors whilst GLS contmued to generate significant
profits and achieve good margins as European economies improve
Share of profits in joint ventures and associates
The Groups share of profits in joint ventures and associates of £28m
decreased by £13m from £41m mainly due to the sale of a 20%
investment in Camelot (£7m) and lower profit shares from both G3
Worldwide Mail NV (Spring) and the Bureau de Change jomt venture
Net exceptional items, including modernisation costs
Exceptional items ‘mam
Operating exceptional items
- Maderaisation costs (207) (224)
~ Other (88) (67)
(295) (291)
Non-operating exceptional items
~ Asset disposals 65 5
~ Camelot disposal Mh >
Net exceptional items (186) (286)
Modernisation costs are treated as operating exceptional items
because of their nature and size and have been explained above
Other operating exceptional costs of £88m comprise a £30m.
Provision for potential mdustriat claims, £41m of impairments and
£15m relating to costs associated with the State Aid application and
Postal Services Bill For further details see note 7 to the financial
statements
During the year there has been an mcrease mn property and ather
asset disposals and a one-off sale of the Groups 20% mvestment
in Camelot Together these generated a non-operating exceptional
profit of £109m {2010 £5m)
ColleagueShare scheme (retated credits and charges included
in modernisation costs)
The scheme has completed its fourth year and has one more year
in its five year life span during which notional shares have been
allocated to employees and stakeholder dividends paid based on the
achievement of certain targets The costs and credits of the scheme
continue to be treated as a modernisation cost with operating
exceptional items
Fully eligible employees continue to hold 711 notional shares each in
the Company following their issue in 2007 (408 shares} and 2008
(303 shares) The Board agreed during 2009-10 that the third and
final issue of notional shares was replaced by the payment of an
additional stakeholder dividend now deemed to be business
transformation payments as they are linked directly to the
achievernent of targets, including key modernisation milestones
RMG00000343
RMG00000343
31
ai Holm pe
Phu eer and Peto Suerets 20:04
Financial review continued
The value of ColleagueShares ts based on a share plan valuation
model The scheme provides employees with two opportunities to
sell ColleagueShares back to the Company, after valuation points at
March 2011 and March 2012 The valuation at March 2011 shows
no value to ColleagueShares The final value of ColteaqueShares will
not be known until after the end of the 2011-22 financial year but it
's expected that this valuation will similarly indicate no value The
value of ColleagueShares ts a result of the deteriorating financial
position of the Group which 1s reflected m the latest busmess plan
This has resulted in the provision at 27 March 2011 for the
redemption value at the end of the scheme being reduced to £nil and
a credit of £209m recognised in modernisation costs
The impact of the deterioration in the anticipated financial position of
Royal Mail Group Ltd ss also reflected in the individual parent
Company financial statements of Rayal Mail Holdings ple where its
carrying value has been written down by £3 8bn to Enil as set out
on page 106
The Group made the final stakeholder dividend payment relating to
2009-10 of £400 per eligible employee and continued to pay m the
year additional business transformation payments in recagnition of
achieving certain targets The total charge to the income statement
for these payments 1s £41m
Net finance and pensions interest costs
Net finance and pensions interest costs of £212m (2010 £380m)
comprise £167m (2010 £329m) net pensions interest costs and
£45m (2010 £51m) of finance costs relating to cash and debt Net
pensions terest costs are explamed m the pensions section below
Net finance costs of £45m (2010 £51m) comprise finance costs of
£114m (2010 £98m), offset by finance income of £69m (2010
£47m) The increase in finance costs of £16m 1s mainly due to higher
borrowing volumes and higher finance lease mterest payable partly
offset by lower charges due to unwinding of discounts and tower
commitment fees The increase in finance income of £22m ts mainly
due to higher investment yields on index-linked gilts within the
penston escrow investment portfolio higher investment volumes:
within the escrow investment portfolio and mterest receivable on
large VAT repayments
Taxation
The taxation charge of £106m (2010 £58m) comprises £17m
current tax credit (2010 £27m) with respect to UK operations, a
£35m (2010 £34m) current tax charge on overseas profits a UK
deferred tax charge of £79m (2010 £53m) and an overseas
deferred tax charge of £9m (2010 £1m)
Operating cash flow
EBITDA pre pension costs of £962m are £120m lower than last
years £1 082m mainly due to the decrease in revenues of £193m
offset by a reduction m operating costs of £48m Operating
exceptional items spend of £242m (excludmg pension payments
relating to redundancy) is in line with last year $ £243m due to an
increase of £23m in ColleagueShare dividend (relating to prior years.
performance) and transformation payments (relating to the pay and
modernisation agreement) being offset by £24m tower restructuring
spend
Pension payments of £771m are £96m lower than last year’s
£867m mainly because of the reduction in ongoing contributions as
a result of lower pensionable pay and a reduction in the employer
cash contribution rate further explamed below
Together, the above categories comprise cash outflows from
operations, which totalled an outfiow of £100m £11m lower than
last years £124m
Free cash flow
Capital expenditure comprises spend (property plant and equipment
and intangibles purchases) of £376m which is £86m lower than
last years £462m mainly due to the changing nature of the
modernisation programme in Royal Mail, which has moved from
significant mvestment in the mail processing centres to changing
work practices in delivery which requires lower property spend
This capital expenditure has been offset by disposals of property
and other assets in response to the requirement ta fund the
modernisation programme During the year £237m was generated
from the disposal of assets which includes £159m (2010 £8m) of
property-related disposals and £73m (2010 nil) relatmg to the
disposal of the Group's investment in Camelot The majority of
property disposal proceeds relate to the sale and operating
leaseback of marl centres and the London Old Street property
and in total contributed £134m in the year with other property
outright sales contributing £28m
‘Together with operating cash flow these and other cash flows of
£26m (2010 £14m) amounts comprise free cash autflaws of £213m
for the year, which are £332m lower than last years £545m The
reduction ts primarily due to almost flat operating cash outflows
benefitig from lower capital expenditure of £86m and higher asset
disposal proceeds of £223m
Balance sheet mcluding pensions, funding and treasury
Management overview
2010
corel
- fm in
Property, plant and equipment 1832. 1935
Inventory 38 38
Trade and other receivables 1,135 1,156
‘Trade and other payables (1,995) (2119)
Provisions (278) (276)
Net operating assets 732 734
Goodwal (mainly relates to GLS) 197——~—=«197
Intangible assets (mainly softwere) 126 99
Investrnents in yoint ventures and associates 205 147
Investment assets _ 428 443
Pension escrow mvestments diet 1.189
Other financial investments/derwatives 87 7
Cash and cash equivalents 1,101 937
Loans and borrowings (1,853) (1526)
Other financial abilities (261) (199)
Net financial assets 235 478
Other (tiatilitiesVassets (a) 105
Net assets befare pension deficit 1,394 1,760
Pension deficit (4,501) (8,041)
Net liabilities (3,107) (6281)
‘The Group ts balance sheet insolvent with net liabilities of £3,107m_
{2010 £6 281m) mainly due to an accounting pension deficit of
£4 501m {2010 £8,041m deficit)
RMG00000343
RMG00000343
32 Biatiprt ing etna sues 2020-21
Financial review continued
During the year there have been no material business acquisitions
and only one significant business disposal - the sale of the 20%
mvestment m Camelot The following represents a summary of the
Mmovernents in the main line items m the balance sheet
Property plant and equipment of £1,832m 1s £103m lower as the
result of depreciation charges asset write-offs and property disposals
being higher than new investment into property, plant and equipment
Trade and other receivables of £1,135m are £21m lower than last
year and there continues to be a good track record on recewables
Management
Trade and other payables of £1 995m are £124m lower than last
year almost entirely due to the payment of the ColleagueShare
dividend in June 2040 of £73m and a reduction in capital
expenditure payables of £58m due to the reduction in capital
expenditure
Provisions of £278m have increased by £2m and mamly comprise
amounts relating to restructuring
The increase in intangible assets of £27m to £126m ts due to £73m
of software additions - the largest project being the Peaple Systems
Programme - offset by amortisation and impairment charges The
decrease in investments m jot ventures and associates is manly
due to the disposal of the 20% mvestment im Camelot
The penston deficit liability 1s further explained below
Pensions
Schemes
Royal Mail Group Ltd 1s the sponsoring employer for the Royal Mail
Pension Plan (RMPP) and the Royal Mail Senior Executives’ Pension
Plan (bath defined benefit schemes), and for the Royal Mail Defined
Contribution Plan (defined contribution scheme) Based on assets
the Royal Mait Pension Plan is one of the largest pension schemes in
the UK The assets and liabilities of the defined benefit schemes, as
measured under accounting standards, are reported as a net
pension deficit in the Graup balance sheet The gross assets and
labuities and the net deficit are signsficantly larger than any of the
Groups other assets and liabilities This results in the Group being
one of the most exposed UK corporates to pension volatility.
particularly with respect to movernents in equity values and future
expectations of inflation and bond rates
Both defined benefit schemes are now closed to new members New
employees are offered membership of the Defined Contribution Plan
Pension charges in profit
Pension charges within profit im ch
Operating pension costs 458 444
Exceptional pension costs {relating
to redundancy) 47 42
Net pensions interest charge 167 329
Pension charges 672 812
The £17m increase in operating pension costs 1s principally as a
result of market conditions resulting in a pension charge that 1s 178%?
of pensionable pay compared to 16 8% last year offset by a reduction
inthe number of people employed The percentage applied to the
pensionable payroll is determmed at the beginning of the financial year
1. The cash contrbtion set once every te years based on along tarm vew of market condvons at that
[ume the proft and loss charge «updated each year relecng mare recent changes market assumptons
and 1s intended to represent the amount by which tiabilities will
increase due to employing active members for one more year
The net pensions interest charge reflects the unwinding of the
discount on the schemes’ liabilities less the long-term expected rate
of return on the schemes assets Net pensions interest charge of
£167m (2010 £329m) a non-cash item for the Group, has reduced
by £162m mainly due to an increase in the expected returns on Plan
assets as a result of the increase in fair value of Plan assets at
March 2010
Pension balance sheet amounts
The balance sheet pension deficit has reduced from £8,041m in
March 2010 to £4 501m this year end The reduction in the deficit
of £3 540m prinaipally relates to an actuarial gain of £3 424m.
The actuarial gain arose mamly due to a reduction in tiabilities
following the change in the inflation assumption fram RPI to CPI
where relevant, following the Government's announcement that it
was intending to change the inflation measure used to determme
statutory minimum indexation in deferment and in payment from
RPI to CPI m 2011, together with market conditions giving rise to
improved asset values
On 23 March 2007 the Group established £1bn of mvestments
In escrow as security to the Royal Mail Pension Plan in support
of the deficit recovery plan On 24 March 2011 an agreement
was implemented to substitute £102m pension escrow financial
Investments with mortgages agamst certam property assets
Pension cash payments
Pensions cash funding: Group
contributions o “in
Regular pension contributions - 442 526
Funding of pension deficit 299291
Payments relating to redundancy 30 50
Net cash payments 77-867
Regular pension contributions have reduced from £526m to £442m
in line with lower pensionable pay and a reduction in the regular rate
of employer contributions fer the Royal Mail Pension Plan from
20 0% of pensionable pay to 171% effective from April 2010 as
agreed with the Pension Trustee as part of the formal triennial
actuarial valuation The regular rate of employee contributions for
the Royal Mail Pension Plan remams unchanged at 6 0%
Deficit recovery payments by the Group have increased by £8m
(27%) from £291m to £299m and include £7m {2010 £5m) relating
to the Royal Mail Senior Executwes Pension Plan Deficit recovery
Payments are planned for the Royal Mail Pension Plan over the 38.
years from the date of the latest formal triennial actuartal valuation
There have been no employee deficit contributions
Fundmg
There are specific funding arrangements for Royal Mail Group Ltd
(which excludes Post Office Limited) and for Post Office Limited
However as a result of the pension deficit, the Group is balance sheet
msolvent (meanmg the accounting liabilities of the Group exceed its
assets) and has substantial future liabilities in connection with this
deficit The Directors keep the funding position of the Group under
RMG00000343
RMG00000343
33 eat perce Fra Seaemers 2010-11
Financial review continued
constant review to confirm that tt is a going concern Asummary of Covenants
their review 1s set out on pages 58 to 60 Loan covenants for Royal Mail Group Ltd are tested on a rolling fi
12-month basis in September and March Royal Mail Group Ltd and
the Government concluded discussions which reset a number of the
key loan covenants for the 12-month testing periods ending March
and September 2011 and March 2012 The revisions are considered
to be on a commercial basis with a consent fee and an increase in
the borrowing margin All loan covenants were met at September
2010 and March 2011
Treasury management overview
The Group operates a central Treasury function that manages
£1 2bn of financial asset vestments (substantially all of which are
now held in escrow in favour of the pension fund trustees) and
£1 1bn of cash and cash equivalent investments (including £704m
cash in the Past Office network funded partly by a Government loan
facility) m accordance with mvestment restrictions set by the
Government it also manages £2 ibn of financial liabilities (mamly
Government borrowings) and acts as internal banker for the Group's
business units The Group finances its operations targely through
cash generated from its operations borrowings and grants
Group Treasury derives its authority from the Royal Mail Holdings ple
Board and provides quarterly monitoring reports for the Boards
review It only has the authority to undertake financial transactions
relating to the management of the underlying business risks it does
not engage in speculative transactions and does not operate as a
profit centre All strategies are risk-averse, and the treasury policy
has remained substantially unchanged during the year The principal
financial instruments are Treasury bills Government gilt-edged
securities, deposits and long- and short-term borrowings
Facilities
The terms of the Government borrowing facility and the associated
Framework Agreement impose strict constraints on the separation
of cash funds within the Group and the purposes for which they can
be used
At the balance sheet date the Group is financed as follows
rate of loan
Borrower Reyal Mall Group Ltd raven down Fastity Facty Used Average loan
Purpose * end date Em &m maturity date
GLS funding 58 2021-2025 500 500 2023
Capital Expenditure and Restructuring 30 2014 600 600 2014
General Purpose/Working Capital x 2014 300 = :
General Purpose/Working Capital 12 . 377 377 hel
Borrower Post Office Limited
Purpese
Network cash 08 2012 1150 375 2011
Borrower GLS BV
Purpose
General Purpose/Working Capital 45 2012 1 1 -
‘otal facility/facilities utilised 2,928 1,853
* Loan facktes are resayable onthe liter of March 2026 and the release ofthe pension escrow investments The loan (ad faci) mcrease by £40 (2010 €37m) as aresuk of acrued wnterest aided tothe loan balance
“Ths Royal Mal Group Lid loans subordinate to a other rectors
RMG00000343
RMG00000343
34
ra al Wokings ple
Sol apt Pa Sterner 2010-12
Financial review continued
Financial risks and related hedging
The Group 1s exposed to currency and commodity price risk The
Group operates hedging policies which are described in the notes
to the accounts The gross exposures (before hedging) are set out
in the table below together with how much the 2011-12 operating
profit would differ from 2010-11 as a result of the changes to
27 March 2011 in commodity costs post the impact of our hedging
programmes
Impact of ne
impact on further change in
oneratmng profit of price on
‘TSX increase in 2012-12 operating
c in prof varsis
oi 2010-14 post
Exposure “Emtanuuh msl
Oleset and Jet (5) (21)
USS. (2) Nil
Euro (9) 1
It is anticipated that there will be a £21m adverse impact on profits
arising from the change in effective (post hedging impact) diesel
costs fron 33ppl in 2010-11 to an anticipated 45ppl m 2011-12
Without hedging this adverse variance would be £36m (based upon
closing fuel prices at 27 March 2011)
The Group manages its interest rate risk by maintaining a mix of
fixed and floating rate debt At the year end 59% of loans were at
fixed rate to maturity Consequently (and taking into account financial
assets held but excluding the pension escrow mvestments) an
increase of 100 basis points to interest rates at the year end would
Tesult in an annual reduction to profit of £3m The impact of such
a change in rates to the pension escrow investments would affect
equity and would offset to some degree the impact of the interest
rate change on the pension liabilities
Counterparty risk is managed by limiting aggregate exposure to any
individual counterparty based on their financial strength
Events after the balance sheet date f
On 30 March 2011 Romec Limited a 51% owned subsidiary of the
Group disposed of its 99% shareholding in its subsidiary Romec
Services Limited to Balfour Beatty ple which holds the 49% non-
controlling interest in Romec Limited As a result of this transaction
Balfour Beatty plc has been released from a contractual obligation
that it had in relation to the pension funding for Romec Limited
employees
On 9 June 2011 Government announced the passing of the Postal
Services Bilt This confirms the Governments intention to take on
the historic pension deficit with effect from March 2012, and the
intention to restructure the Group's balance sheet in due course
Matthew Lester
Chief Finance Officer
Royal Mail Group
13 June 2011
RMG00000343
RMG00000343
Risk Management and Control
Overview
The Board believes that effective risk management and a sound
control environment are fundamental to the Group
The system 1s designed to manage rather than eliminate the risk of
failure as taking on risk 1s inherent in undertaking the commercial
activities of the Group
There is an ongoing process for identifying, evaluating and managing
the significant risks faced by the Group im accordance with the
guidance detailed by the Turnbull Committee as part of the
Combined Code including financial operational, compliance risks and
risks to reputation The process incorporates both a top-down
element (which collates Executive management/Board view of key
risks) and a bottom-up elernent (which collates the views of the
business units and functions on risks in their area) Taken together
these two perspectives are combined to form the Group risk profile
The process has been in place throughout the year and up to the
date of approval of these financial statements
The responsibitity for jomt ventures and associates rests on the
whole, with the senior management of those operations The Group
monitors its investments and exerts influence through Board
representations
Risk Environment
Inthe mam the principal risks facing the Group have not changed
The Group has classified its principal risks into three main categories
~ Revenues and Costs, Government, Regulation and Legislation, and
Financial
Revenues and Costs risks comprise those inherent within most
postal operators, namely the ability or not for costs to be reduced as
core traditional letter volumes decline as customers find alternate
digital means to communicate and transact Royal Mail is currently
undergoing a large scale modernisation programme to improve
productivity safety quality and culture and as the independent
Hooper review confirmed, successful implementation 1s vital to
Royal Mails future viability For more information see pages 7 and 8
The majority of the Groups business 1s subject to regulation under
the Postal Services Commissions (Postcomm) Licence for Royal Mail
the Financial Service Authority (FSA) requirements for financial
services offered through the Post Office and the Office of
Communications (Ofcom) requirements for telecommunication
services offered through the Post Office The environment creates
two areas of nsk for Royal Mail and the Post Office firstly, Royal Mail
may not have the ability or flexibility to set prices at levels it
considers commercial, and its ability to change the scope of services
and range of products 1s restricted, secondly for both any non-
compliance with regulatory requirements may lead to financial
penalties or other sanctions
The Group's activities are wide with significant assets in the form of
property equipment and vehicles and a substantial workforce
Changes to legislation can have significant impacts on the busmess
and financial results Recent tegislation that has impacted Royal Mail
includes the implementation of VAT on postal services and European
work time directives
The Group is currently balance sheet insolvent, meaning its
accounting liabilities are more than its assets primarily due to
pension tlabilities Royal Mail 1s currently wholly owned by UK
Government which ts the sole source for lending for the Group
Any support given to the Group by Government in this area requires
State Aid approval from the European Commission Overall the
busmess ts subject to uncertamties around gomg concern and these
are fully discussed in note 2
Risk Framework
The Group-wide risk management framework includes risk
governance risk identification measurement and management, and
isk reporting
The Group's approach to control s based on the underlying principle
of ine management accountability for internal control and for risk
management The Group recognises and uses the principle of the
“Three Lines of Defence’ that ts
a) primary controls over the risks to the business are located m the
day to day operation
b) these are supported by internal monitoring and oversight
‘O/mdependent assessments by Internal Audit and others provide the
third line
The process far risk identification and management consists of
formal identification by management at each level of the Group of
the key risks to achieving their business objectives and the controls
in place to manage them The likelihood and potential impact of each
risk Is evaluated Risk management action plans are monitored at
executive tevel to ensure key risks are being mitigated
The process includes a ‘top down and ‘bottom up’ element which
means that the views of top management and also units/functions
are collated and brought together, in the Group risk profile to form
a comprehensive view of key risks in the organisation
The process also includes an annual certification by management
that they are responsible for managing the risks to their business.
objectives and that the internal controls are such that they provide
reasonable assurance that the risks are appropriately identified,
evaluated and managed
The system of risk management and internal control is embedded
into the operations of the Group, and the actions taken to mitigate
risk or address any weaknesses are monitored
Risk Governance and the Board
‘The Board has delegated responsibility for specific review of risk and
control processes to the Aucit & Risk Committee (ARC) and the ARC
in turn has set up a sub-committee the Corporate Risk Management
Committee (CRMC) to help discharge its duties The key responsibilities
for risk and control among the Board, ARC, and CRMC are as follows
Board
The Board ts accountable for the risks taken by the Group It ts
responsible for
* providing strategic direction on the appropriate balance between
risk and reward
+ setting the tone and culture for managing risk and embedding
risk management
* ensuring the most significant risks facing the organisation are
properly understood and managed
RMG00000343
RMG00000343
36 Het Rpare Pl Sarees 2020-15
Risk Management and Control continued
Audit & Risk Committee
The Committee reports to the Board and meets as a minimum on a
quarterly basis to
* Increased awareness of and sensitivity to green’ issues, including
use of paper may impact customer and receiver sentiment and
drive down usage of mail or mcrease switching to alternatives
monitor and review the effectiveness of the risk management
Processes and the control environment
* Government and traditional bill payments transactions are
declining in the Post Office
* review the scope of work authority and resources of the Internal
Audit & Risk Management function
regularly review the Group risk profile
Teview the scope and work of the external auditor to ensure that it
's appropriate and that the auditor is independent
review the Annual Report and Financial Statements and the
associated internal and external processes (including the above
work of the external auditor) to ensure that the whole document
presents an appropriate and balanced view of the business its
performance and tts risks
Corporate Risk Management Committee
The Committee acts as a sub-committee to the Audit & Risk
Committee and meets quarterly to
support the business i ensuring proactive management of risks
within the business.
promote the establishment communication and embedding of risk
management throughout the business.
Teceive and review analyses on specific key risks
Teview emerging risks
Principal Risks and Uncertamties
The Group uses a business-wide framework for the identification
assessment treatment monitoring and reporting of risk The
process helps support business objectives by linking into business
strategy identifying and reacting to emerging risks and developing
cost effective solutions for the management of risk This process has
been reviewed and refined and 1s now overseen by the Chief
Executive
The following Group level risks have been identified and are actively
being managed to support the long-term sustainability of the Group
Revenues and Costs
Royal Mail like other postal administrations faces an inherent risk of
core volume and revenue decline for a number of reasons
* Historically there has been a correlation between the state of
the UK economy and level of mail volumes Economic weakness
or uncertainty will have a direct impact on mail volumes and
consequently on Group revenues and profit
* The marketplace in which we operate continues to change, with
substitution from the traditional letter to e-mails text messaging
and other digital media
* Our business customers want to contmue to drive transactional
mail (statement, bills and application forms) online to provide
savings to their businesses
* Advertisers now have more and lower cost options than they used
to. for example the internet has taken a 30% share which reduces
direct mail volumes
Management has raised prices and 1s applying for further increases
and 1s actively working to simplify the product portfolio, enhance the
customer experience and develop new revenue streams
However responses to structural decline are limited because Royat
Mail's cost base comprises mainly people costs and 1s largely fixed in
nature The workforce 1s heavily untonised and Royal Mail's Universal
Service Obligation (USO) requires a national collection and delivery
network irrespective of volumes Similarty, both the USO and Post.
Office network are designed to provide social cohesion and economic
wealth and not maximisation of profit
Management agreed a 3 year pay and modernisation deal in 2010
with the postal union and its frontline workforce In the past year
around 5,000 people have left UK businesses Despite these
initiatives, overall costs have not decreased as fast as revenue
Royal Mait is undergomg a significant extenswe modernisation
programme including World Class Mail, and the success of business
strategy relies on successful extraction of benefits fram the
programme
The business needs to successfully manage the deployment of this
programme to drive modernisation and achieve sustamable benefits
including safety improvements cost reductions and delivery of
excellent quality of service to our customers Failure to do so may
lead to mcreased costs potential fines and impact on our reputation
and brand value
Government, Regulation and Legislation
The Group is subject to regulatory requirements on its operations
and the risk of penalties for non-compliance Royal Maits Licence
contains material restrictions on the operation of the busmess
These include
'* Obligations over the delivery and collection of mail including mail
integrity and quality of service
* Restrictions over the freedom to set prices and requirements
to share intellectual property such as new mnovations before
products are launched, and
* Obligations to give competitars access to the network
If Royal Mail breaches Licence conditions or other regulatory
requirements it may be subject to financial penalties
In addition Post Office Limited has to satisfy the FSAs requirements
as an appomted representative of The Governor and Company of the
Bank of Ireland who are regulated by the FSA in respect of
investment mortgage and insurance intermediation actwity m the
UK Itis also subject to anti-money laundering regulations issued
under the Proceeds of Crime Act 2002 and enforced by HM Revenue
and Customs Post Office Limited 's also licensed as a telephone
service provider by Ofcom, which requires service providers to issue
and adhere to Codes of Practice
RMG00000343
RMG00000343
Royal Malt Holdings ple
‘Areual Report and Fanaa Statements 2010-11
37
Risk Management and Control continued
Changes to European or domestic law can have a direct impact on
the Group, such as the European Working Time Directive
International Fmancial Reporting Standards (IFRS), speed restrictions
‘on the Group's vehicles and increased liberalisation of the market for
postal service providers
In response Royal Mail has sought to agree a regulatory regime
which allows the business to serve customers needs protect the
USO and build a sustamable business The change mn regulatory
regime is now enshrined in the Postal Services Act, with the move
of regulator from Pastcomm to Ofcom
Financial -
The Group 's facing a number of significant financial risks including
the requirement to fund a significant histarical pension deficit
volatility in the overall pension obligation and the ongoing need to
restructure the busmess with limited funding
Note 2 to the financial statements provides full disclosure on the
status of going concern in both Royal Mail Group Ltd and Post Office
Limited
Internat Control and Internal Audit
The Group operates a system of internal control mctuding
operational financral and compliance controls and risk management
systems to control the day-to-day operations of the Groups
activities The key processes and controls comprise
1 Key policies and documentation
* Royal Mail's activities are mandated by the Postal Services Act
and are further bound by a postal service Licence which covers
service standards complaint handling integrity of mail, access.
to postal facilities, accounting separation and process for postal
services
The Group's Code of Business Standards sets the principles of
professionalism and integrity for our people
Standard policies exist within each function mcluding
= Royal Mail GAAP based on IFRS covering all accounting policies
- HR policies covering people - recruitment sickness absence,
disciplinary procedures and leavers
~ Authority limits delegated into each business unit to control
day to day expenses combed with processes to procure,
requisition and approve spend
- Investment Appraisal policies to cover mvestment approvals
- Compliance and regulatory policies set by Group Regulation
- Standard operating procedures are followed at the frontline
2 Standard daily and monthly management accounting and payroll
processes through centralised shared services for the UK
businesses This includes expenditure requisition and order review
and approval by a list of appropriate approvers, generally under
the Finance function
3 A budget prepared reviewed and set once a year, providing annual
clarity on the short-term strategies for each part of the Group
This, along with the delegated authorities resets the levels of
delegated spend in each area on an annual basis
4 Performance management reviews include production of weekly
indicators and a pyramid of monthly balanced scorecards from
front line operations to Holdmgs Board level which underpin
quarterly reviews and the interim and year end results The focus
of these reviews 1s comparing actual in year results to budget
forecast and prior year
5 Five to ten year business plans are collated on a regular basts and
submitted to both the Shareholder and the regulator as part of
formal external processes such as regulatory framework reviews
and State Aid applications This provides regular opportunity for
executive management and the Board to re-appraise/re-confirm .
long-term strategies and objectives for the Group :
6 Self assessment of over 300 key processes
Arolling self assessment of approximately 300 key financial and
non-financial processes across all parts of the UK businesses
includmg commercial and operations and within each key function
7 Sign off by executives
Twice a year, Finance Directors provide a format confirmation
includmg
* business unit financial returns have been properly prepared and
fairly present the financial position
* Group accounting policies have been consistently followed
* a system of internal controls has been maintained and that no
significant defictencies have been identified
* that all events after the balance sheet date have been identified
In addition once a year executives confirm whether they are aware
of any material related party transactions
8 Specific and targeted Internal Audit work programme
The effectiveness of the internal control system is reviewed
regularly by Internal Audit & Risk Management (IASRM) the
Groups independent mternal audit function IA&RM reports to the
Audit & Risk Committee (ARC) and provides assurance to executive
management and the Board on the effectiveness of the mternal
control system
Internal Audit reports include an action plan where issues have
been identified and progress agamst action plans 1s regularly
tracked and reported
IA&RM establishes and agrees with the ARC an annual plan of
assignments and activities based on discussions with the Board
and management, and also taking into account known Issues in
the business and the postal industry
9 External audit and other reviews
There are a number of external audits and reviews that take place
during the year to provide management, the Board and the
regulator with assurance on specific matters including
+ The external auditor performs a statutory year end audit
* The external auditor performs an audit of the regulatory
accounts and m conjunction with economic consultants performs
a review of the price control submissions to the regulator as
part of Licence Conditions 15 and 21 requirements,
* The external auditor confirms that the statement to the
regulator on ‘necessary resources’ ts consistent with their audit
findings as part of Licence Condition 16 requirements
* End to end quality of service s reviewed by an dependent I
accounting firm as part of Licence Condition 4 requirements I
* The USO daily collections and deliveries reporting systems are
Teviewed by an independent accounting firm as part of Licence I
Condition 4 requirements
RMG00000343
RMG00000343
Royal Mul Holdings we
Petal Repo and Ponca Statrenes 2020-21
38
Royal Mail Holdings plc Board
I Chairman
I Donald Brydon CBE (66)
I Donald Brydon ts Chairman of the Royal Mail
I Group and Smiths Group plc He had a 20-
I year career with Barclays Group, during
I which te he was Chairman and Chief
I Executive of BZW Investment Management.
- and acting Chief Executive of BZW followed
by ten years with the AXA Group mcluding
holding the posts of Chairman and Chief
Executive of AXA Investment Managers and
Chairman of AXA Framtington He has also
recently been Chairman of the London Metal
Exchange Amersham plc, Taylor Nelson
Sofres plc and the ifs School of Finance and
a Director of Allied Domecq plc and Scottish
Power ple He is a past Chairman of
EveryChitd
“T Non-executive Directors
I Dawid Currie (64)
I Lord David Currie was appointed to the
} Board in January 2009 He was the founding
GRO
I Chairman of Ofcom (2002 - April 2009),
I Deputy Dean of London Business Schoal and
I Dean of Cass Business Schoo! City
Le aeeeneeeeeenernenenene 3 University He 1s Chairman of the
International Centre for Financial Regulation
and of Semperian PPP investment Partners
Holdings Ltd and sits on the boards of the
accountancy firm BDO the Dubat Financial
Services Authority, IG Group ple and the
London Philharmonic Orchestra Previous
appointments include positions with Nomura,
Terra Firma Unisys, T-Systems and on the
boards of Abbey National plc and Ofgem
‘Nick Horler (52)
{Nick Horler joined the Board in Aprif 2010
' He was previously Chief Executive Officer of
} Scottish Power and has held senior strategic
! roles in major companies both in the UK and
fabroad
+ Paul Murray (49)
} Paul Murray jomed the Board in August
{ 2009 and ts Chair of the Audit and Risk
I Committee Paul is also Audit Committee
I Chairman at Qmetiq plc and 1s a Trustee of
I Pilotlight He was previously Senior
I Independent Director of Taylor Nelson Sofres
plc and has also been Group Finance Director
of Carlton Communications ple and of
LASMO plc
— Les Owen (62)
i } Les Owen jomed the Board in January 2010
I Less a qualified actuary with 35 years
I experience m the financial services industry '
GRO
From 2000 to 2006 he was the Group Chief
Executive Officer of AXA Asia Pacific Holdings
Limited and responsible for AXAs Asian life
} insurance and wealth management
operations Prior to this he was Chief
Executive of AXA Sun Life ple He was a
member of the Global AXA Group Execute
Board Less currently non-executive
Chairman of Jelf Group plc and a non-
executive Director of Post Office Limited
Computershare CPP Ltd Just Retirement
Ltd and of Discovery Holdings a South
African listed health and life insurer
Orna Ni-Chionna (55)
I Orna Ni-Chronna was appointed to the Board !
im June 2010 She became Chair of the ‘i
} Remuneration Committee and Senior
Independent Director in April 2011 She isa
! former Partner at McKinsey & Company
where she specialised in serving retail and
consumer clients She is currently the Senior
Independent Director of HMV ple She was
until recently the Senior Independent
Director of Northern Foods plc and of BUPA
and was a non-executive Director of the
Bank of Ireland UK Holdings plc and Bristol &
West pic She 1s Chair of Trustees of the Soil
Association
Cath Keers (46)
: Cath Keers was appointed to the Board in
June 2010 as a non-executwe Director She
I 1S a non-executive Director of Telefonica
Europe, the msurance group LV= and The
I Childrens Mutual She was previously
Customer Director and Marketing Director of
I 02 UK
Directars who retired from the Board
Baroness Prosser OBE 311010
Richard Handover CBE 300311
RMG00000343
RMG00000343
39 Brabant and soa sutemers 2000-21
Royal Mail Holdings plc Board continued
I Executive Directors
Moya Greene (56)
Moya Greene was appomted Chref Executive
: G RO I Officer in July 2010, previously having been
H I President and Chief Executive Officer of
Canada Post Corporation since 2005 Whilst
there she led a wide-ranging transformation
programme to increase quality of service
and efficiency across the organisation Prior
to joining Canada Post she held senior roles
at companies including Bombardier Inc and
TD Bank
Paula Vennells (52)
Paula Vennells was appointed Managing
Director of Post Office Limited in October
2010, having been its Chief Operating Officer
I She joined in 2007 from Whitbread plc
I where she was Group Commercial Director
She has held Marketing Strategy & Sales
I Director roles with large retatlers Argos/GUS
™ Dixons Stores Group and started her career
with Unilever Paula ts also a non-executive
Director & Trustee for Hymns Ancient and
Modern Group
jark Higson (55)
lark Higson joined the Company in
!November 2007 He 1s the Managing
;Director, Operations and Modernisation and
a member of the Group Executive Team
lark was previously divisional Chief
-xecutive and Group Operations Director of
iBPB plc Prior to that he held senior
positions at Courtaulds plc, including CEO at_
its UK Coatings division He has also worked
at HJ Heinz and British Aerospace
} Matthew Lester (47)
Matthew Lester was appointed as Chief
Finance Officer nm November 2010 He was
previously Finance Director of ICAP pic for
four years Prior to this he worked for Diageo
pic in a number of senior finance roles
including Group Financial Controller He is a
non-executive Director of Man Group pic
I David Smith (46)
! David Smith was appointed to the Board in
} April 2010 He 1s Chief Customer Officer
I having been Managing Director of Post Office
I Limited and Managing Director of Parcelforce
+ Worldwide David jomed Royal Mail Group in
+ 2002 mutually as Finance Director of Royal
! Mail's Business Sales division before being
-} appointed as Finance Director of Parcelforce
Worldwide in January 2003 and then
Managing Director of Parcelforce Worldwide
He is a qualified chartered accountant and,
prior to 2002 held a number of financial and
commercial positions in the electronics
industry including Finance Oirector of RS
Components UK
GRO
Directors who left during the year
Adam Crozier 31 0310
lan Duncan 15 06 10
RMG00000343
RMG00000343
40
oval Mal Hedings ote
‘un Raposo Stamens 2010-11
Directors’ Report
The Directors present the Group financial statements for Royal Mail
Holdings plc These financial statements relate to the year ended
27 March 2011 (2010 year ended 28 March 2010)
Principal activities
The Group provides a natronwide and mternational distribution
service principally of mails and parcels The Group also provides
access to a wide range of financial and retail services through its
network of Post Office branches across the United Kingdom
Review of the business and future developments
Arreview of the Groups business and future developments 1s
presented in the Chairman's Statement and pages 5 to 34
Results and dividends
The loss before taxation amounted to £152m (2010 £262m loss)
After taxation, the loss was £258m (2010 £320m loss) Of the loss
after taxation £1m profit (2010 £1m profit) is attributable to non
controlling interest The Directors do not recommend a dividend
(2010 Enil dividend)
Directors
The names and biographies of the current Directors appear in the
Royal Mail Holdings plc Board section pages 38 to 39
Political and charitable contributions
During the year the Group made charitable contributions of £2m (2010
£2m) No political contributions were made in the year (2010 Enil)
Research and development
Research and development expenditure during the year amounted
to £mil (2010 Enil)
Policy on the payment of suppliers
The policy of the Company and its principal operating subsidiaries 1s
to use their purchasing power fairly Payment terms are agreed in
advance for all major contracts For lower value transactions, the
standard payment terms of the supplier apply It 1s the Companys
policy to abide with the agreed terms The Company and its principal
operatmg subsidiaries in the UK have sought to comply with the
Department for Business Innovation and Skills (BIS) Better Payment
Practice Code As the Company 1s a non-operatmg company the
creditor days are zero The creditor days of the operating
subsidiaries are set out in their financial statements
Land and buildings
The net book value of the Group's land and buildings based upon a
historic cost accounting policy and excluding fit-out 1s £690m (2010
£749m)} In the opinion of the Directors the aggregate market value
of the Group's land and buildings exceeds this net book value by
£480m (2010 £460m)}
Financial struments
Details of financial risk management objectives and policies and
financial mstruments are shown in note 24 and note 25 respectively
Directors and their interests
The Directors of the Company and details of changes during the year
are given on page 46 The Secretary of State appoints the Chairman
all other Directors are appointed by the Company with the Secretary
of States consent
UK Government 1s the Companys sole shareholder and accordingly
the Directors have no interest m shares of the Company
Audit information
The Directors confirm that, so far as they are aware there 1s no
relevant audit information of which the auditor ts 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 1s aware of that information
Qualifying third party indemnity provisions for Directors
A partial qualifying third party indemnity provision (as defined in
section 234 of the Companies Act 2006) was and remains m farce
for the benefit of ali the Oirectors of the Company and former
Directors who hetd office during the year The mdemnity ts granted
under article 129 of the Companys Articles of Association The
indemnity is partial in that it does not allow the Company to cover
the costs of an unsuccessful defence of a third party claim
People
The Group employs over 176,000 people (2010 approximately
181 000) in our wholly owned subsidiaries An analysis of the Group
headcount 1s shown in note 4 to the financial statements Our people
are our ambassadors, our brand and our service
The Groups policy is to encourage effective communication and
consultation between our people particularly on matters relating
‘to strategy financial and economic factors that may influence their
busmess units performance This is achieved through the use of an
extensive range of communication channels includmg our employee
opinion survey magazines briefings open forums, TV screens and
an intranet website Our people have various bonus schemes,
significant elements of which are based on business-related targets
We actively encourage continuous training and skill development for
all our people to ensure achievement of corporate and mdividuat
objectives Management development and trammg programmes
have been designed to attract and retain the best The Group has
worked with the unions to introduce several innovative working
Practices to improve efficiency
Corporate Responsibility
The Group 1s committed to carrying out its activities m a socially
responsible manner in respect of the environment employees
customers and local communities Details are provided on pages 15
to 16 The Group publishes an annual report of its activities Further
details of our CR governance structure and activities will be available
tn our 2011 CR Report when it 's published
Disabled employees
The Group's poticy 1s to give full consideration to applications for
employment fram disabled persons Employees who become
disabled whilst emplayed recerve full support through the provision
of training and special equipment to facilitate continued employment
where practicable The Group provides trammg career development
and promotion to disabled employees wherever appropriate
Going concern
After analysis of the financial resources available cash flow
projections and the material uncertainties facing the Group the
Owectors consider that it is appropriate to prepare the financial
statements on a going concern basis Further details are provided
under Funding in note 2 to the financial statements
Auditor
Aresolution to reappoint Ernst & Young LLP as auditor will be put
to the Annual General Meeting
By Order of the Board
Company Secretary
13 June 2011
RMG00000343
RMG00000343
Mal Hotangs pe
G1 RR eti chica samen 2010-12
Corporate Governance
Statement by the Directors on compliance with the
Combmed Code
The Board 1s committed to high standards of Corporate Governance
and supports the Combined Code on Corporate Governance {the
Code) published in July 2003 and revised in June 2008 The
Company has fully complied with the provisions set out in section 1
of the Code during the year in so far as they are appropriate to a
public company with a single shareholder The following statement 1s.
intended to explain our governance policies and practices in light of
the Code principles and provisions and to provide insight mto how the
Board and management run the business for the benefit of the
Shareholder
The Board
The Board is responsible for setting the objectives and strategy of
‘the Group and for monitoring performance At the end of the year
the Board comprised a Chairman, five executive Directors and seven
non-executive Directors The biographies of each of the Directors
setting out their current roles commitments and previous
experience are on pages 38 to 39 The Board met on ten occasions
during the course of the year under review
The Board has defined those matters that are reserved exclusively
for its consideration These include the approval of strategic plans
financial statements, acquisitions and disposals major contracts
projects and capital expenditure It delegates responsibilities to the
Board Committees detailed below For each scheduled meeting of
the Board, the Company Secretary on behalf of the Chairman
collates and circulates the papers aiming to allow sufficient time for
the Directors to review the information provided
The Board is confident that all its members have the knowledge
tatent and experience to perform the functions required of a Director
of the business Executive Directors have rolling 12-month contracts
and non-executwe Directors are generally appointed for three-year
terms The Board considers that each of the non-executive Directors
ts independent This means that in the view af the Board, they have
no links to the executive Directars and other managers and na
business or other relatonship with the Company that could interfere
with their judgement There is also a clear division of responsibilities
between the Chairman and the Chief Executwe
Performance evaluation of the Board its Committees and mdividual
Directors takes place on an annual basis with the support of the
Company Secretary This year's evaluation was conducted using a
combination of questionnaires and a full Board discussion A
performance evaluation of the Audit and Risk Committee has been
conducted by the Chairman of the Committee Other committees are
undertaking a review of their terms of reference
Directors may take independent professional advice in the furtherance
of their duties at the Group's expense Alt Directors have access to the
advice and services of the Compary Secretary the appointment and
removal of wham is a matter for the Board as a whole
All Directors appointed by the Board are required by the Companys
Articles of Association ta be elected by the Shareholder at the first
AGM after ther appointment All Directors will be standing for annual
re-election at this years Annual General Meetmg On appointment the
Directors take part in an induction programme in which they recewe
information about the Group the role of the Board and matters
reserved for its decision the role of the principal Board Committees
the Groups Corporate Governance arrangements and the latest
financial information about the Group This 1s supplemented by wisits to
key business locations The Group engages in two-way communication
with the Shareholder to discuss information on its strategy
performance and policies The Board receives feedback on these
meetings from the Directors attending them
‘dard Remuneration Nominatlon
Board _ Risk commitine mitee __Commattee
Number of meetings during the year* 20 5 Ss 1
Charman __ _
Donald Brydon 10(10) - 5(5) 10)
Executive
Moya Greene ate) - - -
Mark Higson 10(10) - - -
Matthew Lester 5(5) 7 - -
David Smith 10(10} - - -
Paula Vennells 506) - - :
Non-executive
David Currie 10(10) 5(5) 44) 14)
Richard Handover 9(10) 315) 5(5) ofa)
Nick Horler (10) 1(3) 3(4) 11)
Cath Keers 8(9) 3(3) 4(4) a(a)
Orna Ni-Chionna 819) 2(3) 4(4) 11)
Paul Murray 10(10) 5(5) 4(4) 144)
Les Owen 7420) 303) 1) 104)
Former Directors
fan Duncan 14a) - - -
Baroness Prosser 5(5) - 313) -
* Drng the year the Ovecarsatinded the flan number of mettngs of the Board and 4s man Commétees wth the maxmur umber that each auld have attended shown m brackets
RMG00000343
RMG00000343
42 ri Reno sn Pasa Statements 2020-12
Corporate Governance continued
Outside appointments.
The Board believes that there are significant benefits to both
the Group and the mdiidual from executive Directors accepting
non-executive Directorships of companies outside of the Group
The Board's policy is normally to limit executive Directors to one
non-executive Directorship for which the Director may retain the
fees (see the Directors Remuneration Report on pages 45 to 48
for details)
Board Committees
The following Commuttees deal with specific aspects of the
Group's governance The fult terms of reference for each of the
principal Committees are available on the Companys website
www royalmaigroup com or on written request from the Company
Secretary The details of Committee membership shown are as at
27 March 2011
Chief Executive’s Committee
Chair Moya Greene
Membership Stephen Agar (Director Regulated products) Rico Back (CEO GLS), Mark Higson (Managing Director.
Operations and Modernisation) Matthew Lester (Chief Finance Officer), Alex Smith (Director of Business
Development & Technolagy), David Smith (Chief Customer Officer)
Role The Committee 1s responsible for all the key areas of commercial actrvity within Royal Mail The Chief
Executives Committee (CEC) meets twice a month The role of the CEC s to manage the overall
framework of financial risk & business controls to meet shareholder, Regulatory and legal requirements
Group Executive Team
Chair Moya Greene
Membership ‘Stephen Agar (Director, Regulated products) Rico Back (CEO GLS) Paul Bates (Managing Director
Wholesale} Paul Budd (Director Internat Communications), John Duncan (Group HR Director} Derek
Foster (Internal Audit and Risk Management Director) Dale Haddon (Deputy Group HR Director) Kath
Harmeston (Director of Procurement) Mark Higson (Managing Director Operations and Modernisation),
Matthew Lester (Chief Finance Officer), Jon Millidge (Company Secretary) Shane 0 Riordain (Director of
Communications), Frank Schinella (Oeputy Chief Finance Officer} Alex Smith (Director of Business
Development & Technology) Dawid Smith (Chief Customer Officer) Dick Stead (Managing Director,
Parcelforce Warldwide) Jeff Triggs (Interim General Counsel), Paula Vennells (Managing Director Post
Office Limited), Sue Whalley (Director of Regulation and Government Affairs)
Role The Committee meets every three months and its responsibilities are to develop and monitor deployment
of the Groups strategy and consider overall performance of the Group
The Royal Mail Holdings plc Board has delegated authority to the Investment Committee of the Group
Executive Team to make investment decisions of up to £20m The Investment Committee meets monthly
RMG00000343
RMG00000343
43 aml taper snd nanos strres 2010-23
Corporate Governance continued
Audit and Risk Committee
Chair Paul Murray. I
Membership All non-executive Directors
The Board 1s confident that the collective experience of the Audit and Risk Committee members enables Hl
them as a group, to act as an effective Audit and Risk Committee The Committee also has access to the
financial expertise of the Group and its auditor and can seek further professional advice at the Groups
expense if required
Role The Committee which 1s assisted by the Corporate Risk Management Committee, provides a forum for
reporting by both internal and external auditors and ts responsible for a wide range of matters including
to monitor the integrity of the financial staternents of the Group,
to review the Groups internal financial contro! system and unless addressed by the Corporate Risk
Management Committee or by the Board itself internal control and risk management systems
to monitor and review the effectiveness of the Groups Internal Audit function
to recommend to the Board for shareholder approval the appointment of the external auditor, and to
approve Its remuneration and terms of engagement
to monitor and review the external auditor's independence, objectivity and the effectiveness of the audit
process
to develop and implement policy on the engagement of the external auditor to supply non-audit services and
where the Committee's monitoring and review activities reveal cause for concern or scope for improvement,
to make recommendations to the Board or management on action needed to address the issue
Audit & Risk Committee Report
‘See Risk Management and Control on pages 35 to 37
Non-audit services provided by the external auditor j
In some cases the nature of advice required makes it more timely
and cost effective to select the external auditor who already has
a good understanding of the Group In order to maintain the
objectivity and independence of the external auditor, the Committee
has determined what work can be provided by the external auditor
and the associated approval processes associated with the auditor i
The Committee monitors the level of non-audit fees paid to the I
external auditor I
RMG00000343
RMG00000343
44 Bekeal pen and Fal Serer 2010-12
Corporate Governance continued
Remuneration Committee
Chair Richard Handover
Membership Chairman and all non-executive Directors
Role The Committee's responsibilities inctude
* to determine and recommend for the Boards approval the framework for the remuneration of the
senior executives of the Group
‘* to determine the individual remuneration arrangements for the Chairman, the executive Directors
and the Company Secretary subject where necessary to the consent of the Secretary of State and
* to agree the targets for any performance-related incentive schemes applicable to senior executives
Remuneration Committee Report
See pages 45 to 48
Nomination Committee
Chair Donald Brydon _
Membership All non-executive Directors
Role The Committees responsibilittes include
© to lead a formal, rigorous and transparent process for appomtments to the Board of the Company
to the boards of subsidiaries and to other senior executive positions
* to advise the Board on succession planning for the positions of Chairman, Chief Executive and all
other Board appointments and other senior appointments and
to keep under review the balance of Board membership to ensure that t has the required mix of
skills knowledge and experience
Nomination Committee Report
The Committee met formally on one occasion during the year but
had met informally on many occasions during the course of the year
mm order to progress the appomtments of the executive members of
the Board The Committee's mai focus was on the selection and
recruitment of Directors and other senior executives The Committee
took external advice from executive search consultants and
considered internal candidates where appropriate All Board
appointments require the consent of the Shareholder
Pensions Committee
Chair Matthew Lester
Membership John Duncan (Group HR Director) Jon Millidge (Company Secretary) Les Owen (non-executive Director)
The Commuttee's responsibilities melude
* to review funding benefits, scheme structure and strategic developments impacting on the Groups
occupationat pension schemes and
# to represent the Group in discussions with the Trustees of the Groups occupational pension schemes
‘Statement by the dependent non-executive Directors
A number of structured processes exist throughout the Company to
support good governance All the non-executive Directors are
members of all the principal Board Committees Audit and Risk,
Nomination and Remuneration, which gives each of them insight into
a cross-section of important areas and informs Board discussions
The independent non-executive Directors are satisfied that the
Company s corporate governance controls have heen effective
throughout the financial year ended 27 March 2011.
GRO I
‘Orna Ni-Chionna
Senior Independent !
Director
RMG00000343
RMG00000343
45
Royal Mail Holdings ple
Annual Report ane Franoal Statements 2010-11
Directors’ Remuneration Report
The Companys remuneration policy and practices follow the UK
Corporate Governance Cade (farmerly known as the Combined
Code) This report explains the Committee's policy and gives details
of the current rernuneration practices in accordance with the
Directors Remuneration Report Regulations in so far as Royal Mail
as a non-listed company can comply with them In line with the
Regulations the following parts of the report have been audited
* Directors emoluments with respect to 2010-11
* Performance-related annual bonuses outturn for 2010-11 and
* Pensions
The Remuneration Committee
‘The Board has overall accountability for executwe remuneration and
the terms of the service contracts offered to all executive Directors
but these alsa require the consent of the Secretary of State for
Business Innovation and Skills The Secretary of State also gives
consent for the remuneration arrangements for non-executive
Directors
The Remuneration Committees role 1s to approve the remuneration
Policy for executive Directors and their immediate reports and to
apprave recommendations on their salary benefits bonuses and
ather terms and conditions of employment
The Remuneration Committee is made up of independent non-
executive Directors and the Chairman of the Board Membership of
the Committee is given on page 44 The Chief Executive and the
Group HR Director may attend Committee meetings by invitation
They are not present at the discussion of their own remuneration
Advice to the Remuneration Committee.
The Committee calls for information and advice from inside and
outside the Group It has taken advice from time to time from
independent professional organisations that are best able to assist it
on the particular topic under discussion
During 2010-11, information on the external marketplace was
obtained from Monks Partnership (a trading name of
PricewaterhouseCoopers), Deloitte LLP Hay Management
Consultants, Kepler Associates and Towers Watson Limited Internal
support is provided by the Group HR Director, John Duncan and the
Company Secretary, Jon Millidge Other advice and information has
been provided by specialists from the HR and Finance functions The
Chairman and the Chief Executive have given information to the
Committee on the performance of key executives
During the year Towers Watson Limited provided the Company with
advice on pensions and actuarial matters
Remuneration Policy
The Company's objectives on Directors’ remuneration are that
the overall remuneration package should be sufficiently competitive to
attract and retain executives with sufficient commercial experience to run
a large complex business in a highly challenging context
a significant proportion of the remuneration package should be dependent
on performance - both short and long-term and
Incentives should be designed so that they align the interests of senior
executives customers and the Sharehotder
The Committees policy for senior executes takes into account pay
and employment conditions elsewhere in the Group, including those
of frontline postmen and women
The Committee regularly reviews the benefits package offered to its
key executives The Committee aims to ensure that the package Is
reasonable in the circumstances and that tt follows accepted best
Practice It is mindful of public concerns about remuneration levels,
particularly in the current economic climate
The Main Components of Remuneration
The main components of remuneration for executive Directors for
2010-11 were basic salary an annual performance-related bonus
pension or pension allowance and other benefits such as a company
car and private medical insurance A Long-Term Incentive Plan was
also discussed with executive Orrectors but its duration and detail
have not yet been finalised with the Secretary of State
Base Salaries
The Committee believes that base salaries should be set at levels
that are enough to recruit and retain executives of proven ability to
manage a very large and complex company which faces many
challenges In making its judgement, the Committee considers
information from several sources so that a fair comparison can be
made with enterprises of a similar size and complexity to the
Company This data 1s provided by independent consultancies, usually
based on the published annual reports of ather organisations
Increases are recommended only where the Committee beleves that
itis necessary to reflect contribution, increased mdividual
Tesponstbilities and market levels The Secretary of States consent 1s
required for all material changes to Directors remuneration
in the light of the difficult economic circumstances no general
increases to base salary were awarded to Board members in respect
of the 2010-11 salary review No increases had been awarded in
2009-10 either In 2008 it had been agreed that the salartes of lan
Duncan and Alan Cook would increase to £350,000 and £300 000 a
year respectively These increases were to apply in two phases with
the second due on 1 July 2009 At the request of lan Duncan and
Alan Cook these second increases were postponed for
implementation on 1 July 2020 but in fact both individuals left the
Company before that date
Performance-related Annual Bonus
In 2010-11 the bonus potential for the Chief Executive was 100% of
base salary For the Chief Finance Officer it was 60% for on-target.
performance, rising to a maximum of 100% of salary in the event of
exceptional results In the case of the other executwe Directors the
figures were 48% and 80% respectvely
For all executive Directors the factors driving annual bonus were
profit cash quality of service and personal objectives agreed by the
Remuneration Committee The measures were changed at the
beginning of the year to include cash management in the light of the
Company's changing priorities As the Chtef Executive and Chief
Finance Officer jomed the Company during the financial year it was
agreed that their bonus plan should depend on the achievement of
Personal Objectives only
Adverse weather and the disruption to air transport caused by ash
from the Eyjafjallayokull volcano had an effect on quality of service
during the year as did the changes necessary to modernise working
practices
Executive Directors also participate in the ColleagueShare plan on
the same terms as all other eligible employees This 1s explained m
note 2 on page 61
Long-Term Incentive Plan
The Committee discussed a Long-Term Incentive Plan (LTIP) with
executive Directors but its duration and detail have not yet been
finalised with the Secretary of State
RMG00000343
RMG00000343
Teal ratings pe
46 Fehler snes 2010-22
Directors Remuneration Report continued
Full detatls of the previous LTIP were included in last year’s Annual Report The plan lasted for three years and combined annual awards
related to Return on Total Assets with a warver of a proportion of annual bonuses, all of which were subject to a final factor which refiected
cumulative Return on Total Assets over the three year performance period
Benefits
Benefits include the provision of a company car and health insurance or the cash equivalent of any benefits not taken The Chief Executive 1s
eligible for two return flights to Canada each year and financial advice Relocation expenses are paid where applicable
Fixed and Performance-related elements of executive Directors’ remuneration (excluding penstons)
For 2010-11, 46% of Directors potential annuat earnings related to fixed elements whilst 54% related to annualised performance elements
For the Group Chief Executwe and Chief Finance Officer 42% was fixed and 58% was variable The elements of remuneration at risk to
performance are those available through the Long-Term Incentive Plan and the performance-related annual bonus.
Otrectors’ emoluments in respect of 2010-11
The following table summarises the remuneration of Board members in respect of 2010-11
on me eal
saryfees —pacimyeer related bons Benefits bev of pension zona 201
£000 £000 £000 £000 £000 000 ‘000
Chairman
Donald Brydon 200 200 “ - - 200 200
Executive
Moya Greene? 498 350 142 1453 aad 637 -
Mark Higson 428 428 72 15 471 686 17335
Matthew Lester* 428 146 54 5 60 265 -
Dawid Smith’ 250 250 708 12 31 363 -
Paula Vennells? 225 99 33 4 11 147 w
Non-executive
Lord Currie 40 40 « - . 40 38
Richard Handover? 65 63 - - - 63 65
Nick Horler*? 40 37 ad = » 37 -
Cath Keers!? 40 31 eS = - 31 -
Paul Murray 50 51 - - - 51 34
Orna Ni-Chronna? 40 31 = - - 31 -
Owen . 40 37 = 7 7 37 6
‘mer Directors
Alan Cook™* 282 Ss = - 7 - 12525
Adam Crozier" 633 5 = . 2 7 2.4285
tan Duncan** 325 70 al 2 15 87 1,396°
Baroness Prosser?” 50 32 - - - 32 55
Total 2011 . . 3,634 1,870 371 183 304 2,714
Total 2010 2201 2132 554 69 574 7207
1 For execuve Orecors ts mcs LIP ad dered bonuses
2 Moya Greene was appared on 15 hy 2010,
3 The wekdes the coe of tert
4 Detaks of Moya Greenes pension on
5 Inchaies LTP payments respect of 2007-2010 Mark Higson £7 012 COX Alan Cock £768 000 Adam Craner £3 570.000 and lan Duncan £888 000
Mathew Lesier pe the Board on 24 Novernber 2020
77 and Seah was promoted ts the Board on 6 Ari 2030 ant et the Board on 13 dune 2022
8 Wialbe pax ata ater dae subpet to comphance wih the cndions stout by the Farzuneraton Commaire
9. Pada Vennels was promcted the Boar an 18 Ocaber 2010
20 Rachard Handover et the Boar en 31 March 2011
111 Nick Hover yaned the Boar # April 2010
12 Cath Keers ned the Board 1 Jere 2010
113 Orma Ni-Chronna janed the Board on 1 June 2010
16 flan Cook ef then Board on 25 March 2010
The figures m the table represent the qualifymg emoluments earned and receivable by anyone who has served as a Director at any time
during the financial year, whenever paid Such emoluments are normally paid in the same financial year with the exception of the annual
performance-related bonus, which 1s patd in the year following that in which it 1s earned
RMG00000343
RMG00000343
47 Fema prt snd Pet Stamens 2010-12
Directors’ Remuneration Report continued
Performance-related Annual Bonuses Outturn for 2010-11
Information on the annual bonus plan ts given on page 46 Bonus
payments are significantly below the on-target levels in the light of
the Group's performance
Executive Directors’ Gutside Appointments
The Board permits executive Directors to hatd outside appaintments
as non-executive Directors, subject in each case to Board approval
Directors may retain fees fram any such Directorships
The annual fees recerved by executive Directars as at 27 March
2011 in respect of their non-executive Directorships are shown i
the table below
20nd 2010
Drrectorshp £000 000
Adam Crozier Debenhams pic = 50
Moya Greene Tim Hortons 22* bd
* Staring equaelent of payments recente year
Contracts
The Committee's policy is that execute Directors appointed to the
Board are given notice periods af one year, and that they must give
sux months notice of departure The Committee has a defined policy
‘on compensation and mitigation to be applied in the event of a
Director s contract being prematurely terminated In such
circumstances steps would be taken to ensure that poor
performance 1s not rewarded
The rolling service contracts and letters of appontment of the
Directors include the following terms as at 27 March 2011
Eiry date
of current Unexpired
semptroant ‘erm
ate of contract contact (months)
Chairman
Donald Brydon 26 March 2009 25 March 2012 12
Executive
Directors
Moya Greene* 15 July 2010 = 12
Mark Higson 5 November 2007 - 12
Matthew
Lester 24 Novernber 2010 - 12
David Smith 6 April 2010 . 12
Paula Vennells_16 November 2010 = 12
* Moya Greenes contract proves that the Compary terminates her employment at any bme dung the fst
28 morths of her contrac she wl receve 18 months of base salary heu of nonce together wath one years
on-target annual bonus
The non-executive Directors have service contracts but do nat have
employment contracts The service contract dates for the non-
executive Directors who have served during the year are as follows
Expry date Uneored
ohare: =m
Dike of ovat serves contiat (monte)
Non-executive
Directors
Lord Currie 1 January 2009 31 December 2011 9
Baroness 1 November
Prosser* 2004 31 October 2010 -
Richard
Handover* 1 January 2003 31 March 2011 -
Nick Horler 1 April 2010 31 March 2013 24
Cath Keers ‘June 2010 31 May 2013 26
Paul Murray 1 August 2009 34 July 2012 16
OrnaNi-Chionna = 1 June 2040 31 May 2013 26
27 January
Les Owen 2010 26 January 2013 22
"Baroness Prosser left the Boaré on 31 October 2010
+ Rechard Handover lek the Bourdon 31 March 2011,
The Company 1s commuted to the service contracts for the
remaiming term of appomtments subject to annual review and
notice, for non-executive Directors including the Chairman
Non-executive Directors
The fees paid to the Chairman are determined by the Secretary of
State Fees for the non-executve Directors are determined by the
executive Directors and are submitted to the Secretary of State for
approval Independent market surveys are consulted in determining
them
Pensions
The Group has a liability to pay pensions in respect of Directors’
services and for some executive Directors makes contributions to
pension schemes for this purpose The Company pays a cash
supplement to Directors whose contributions to the Company
scheme are restricted by the scheme-specific earnings cap The
Company continues to apply the scheme-specific earnings cap
indexed by inflation each year as.a constraint on the amount of
salary that Is pensionable through the Company scheme
The Royal Mail Sentor Executives Pension Plan (RMSEPP} ts closed
to new members Existing members accrue service on a career
average basis on the basis of a retirement age of 65 Current
executive Directors wha are members of the plan are subject toa
cap on penstonable earnings which for 2010-11 was £123 600
Details of RMSEPP are set out in note 26 to the financial statements
The Plan 1s a funded, Inland Revenue-reaistered defined benefit
occupational pension scheme It provides for a pension on a final
salary basis for service up ta 31 March 2008 and for subsequent
service on a career salary basis The pension is payable from normal
retirement age (currently age 65) and 1s subject to the maximum.
pensionable service and the scheme-specific earnings cap Pensions
in payment are increased annually in line with the Retail Prices Index
(RPI) subject in some cases to a cap of 5% Pensions are also payable
to dependants on the death of the member and a lump sum 1s.
payable if death in service occurs
RMG00000343
RMG00000343
4B Seka pet an Feta saeets 2010-11
Directors Remuneration Report continued
For senior executives whose membership of the Plan (RMSEPP} is restricted by the earnings cap (£123,600 for 2010-11) pension
provision 1s made by a combination of the Company scheme and a cash pension supplement or its equivalent David Smith and Paula
Vennells receive a cash supplement of 25% of base pay above the earnings cap Mark Higson and Matthew Lester are not members of the
Plan and receive a cash supplement of 40% of base pay
For the Chief Executive the Company makes a contribution to a UK HMRC approved pension plan and promises to pay her after leaving the
Company a sum that accumulates monthly during employment as if it were invested in Government securities
The following table 1s designed to mdicate the mcrease in the value of Directors accrued benefits during the period The transfer value is
calculated on the basts of actuarial advice in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions
Increase Warsfer value
Accamiated Increase acruedbeneits of naease
scovedbenelt amvesberetts " gumgihe before aun
28Marth " curmgihe pera necol less Dretars
toe 2010 ered ‘nfton]—eantnbutore
New end £ G £ £
Executive Directors
David Smith 46 20937 2671 2,076 16,800
Paula Vennells 52 10,244 1,204 1072 11337
The following table is designed to assess the change in transfer values during the year, taking nto account movement in investment market
conditions Falls in market values may generate a negatwe movement m the transfer values
Tansler vive
x 28Mach Movement a
2010 or at date Plus Trundle value the pened less
Cfappontment —ansfers-mn ‘#27 Marth Orecors
Age at to Board liter recewed Sub totat 2011 conmmbutons
Year end £ £ £ £ €
Executive Directors
David Smith 46 304441 - 304441 347,629 36,388
Paula Vennells 52 184,843 - 184843 194384 6451
The transfer values disclosed represent a potential liabitity of the pension plan rather than any remuneration due to the mdividual and
cannot be meaningfully aggregated with annual remuneration as it ss not money the individual is entitled to recewe
Moya Greene has been provided with contributions of £20 000 to an HMRC approved defined contribution pension plan im respect of service
during the 2010-11 financial year For 2010-11 the Company has also made her an unfunded promise currently accrued at £120,611 to be
paid on her ceasing to be emplayed The value of this promise will fluctuate as #f it had been mvested m UK 5-year gilts
Tony McCarthy a former Director, 1s in receipt of an annual payment of £43 111 as a result of an unfunded unapproved pension pramise
made to him on when he joined the Company
-Chionna
Remuneration
Committee Chair
13 June 2011
RMG00000343
RMG00000343
49 Royal Mast Holdings ple
‘Aroual Report ard Franca Statements 2010-11
Statement of Directors’ responsibilities in relation to the Group financial statements
The Directors are responsible for preparing the Directors Report and the financial statements m accordance with applicable law and
Tegulations Company law requires the Directors to prepare financial statements for each financial year Under that law the directors have
elected to prepare the Group fmancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the 7
European Union Under company law the Directors must not approve the financial staternents unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period In preparing these financial statements
the Directors are required to
© select surtable accounting policies and then apply them consistently
* make judgements and accounting estimates that are reasonable and prudent
* state whether the applicable IFRSs as adopted by the European Union have been followed subject to any matenal departures
disclosed and explained by the financial statements and
* prepare the financial statements on the going concern basis unless it 1s inappropriate to presume that the company will continue in
business
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explam the Companys transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Compantes Act 2006 and as regards the Group financial statements Article 4 of the IAS Regulation They are also responsible
for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities
Moya Greene Matthew Lester
RMG00000343
RMG00000343
Royal Hall olting ple
50 anual end Fret Stements 20102
Independent Auditor's Report to the members of Royal Mail Holdings plc
We have audited the Group financial statements of Royal Mail Holdings plc for the year ended 27 March 2011 which comprise the Consolidated
Income statement the Consolidated statement of comprehensive income the Consolidated statement of changes in equity the Consolidated
balance sheet the Consolidated statement of cash flows and the related notes 1 to 30 The financial reporting framework that has been
applied in their preparation 1s applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union
This report 1s made solely to the Companys 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 Companys 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 assure responsilulity 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 Directars Responsibilities Statement set out on page 49 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 responsibility 1s to audit and express an 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 Groups circumstances and have been consistently applied and adequately disclosed the
reasonableness of significant accounting estimates made by the Directors and the overal presentation of the fmancial statements In addition
we read all the financiat and non-financial information in the Annual Report and Financial Statements 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
* gwe a true and fair view of the state of the Groups affairs as at 27 March 2011 and of its loss for the year then ended
* have been properly prepared in accordance with IFRSs as adopted by the European Union and
+ have been prepared m accordance with the requirements of the Companies Act 2006
Emphasis of matter - going concern
In forming our opinion which 1s not modified we have also considered the adequacy of the disclosures made in note 2 to the financial
statements concerning the Group s ability to continue as a going concern The conditions described in note 2 indicate the existence of material
uncertainties which may cast significant doubt about the Group ability to continue as a going concern The financial statements do not include
the adjustments that would result if the Group was unable to continue as a going concern
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 statements are prepared 1s
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 requires us to report to you ¢ in our opinion
© certain disclosures of Directors remuneration specified by law are not made or
© we have not recewed all the information and explanations we require for our audit
Other matter 1
We have reported separately on the parent company financial statements of Royal Mail Holdings plc for the year ended 27 March 2011 That
Teport includes an emphasis of matter
Lac! 1 posty LP?
Altson Duncan (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
13 June 2011
RMG00000343
RMG00000343
51 setalpar sn oc Sites 230-3
Consolidated income statement for the year ended 27 March 2011 and 28 March 2010
2011 2010
Notes &m £m
Continuing operations
Turnover 9,006 9199
Network Subsidy Payment 150 150
Revenue 9,156 9349
People costs excluding ColleagueShare and restructuring costs Ala) (5,717) (5 746)
Distribution and conveyance operating costs: ‘5tb) (1,619) (1579)
Other operating costs. 5(0 (1,602) {1.661)
Share of post tax profit from joint ventures and associates 15 28 41
Operating profit before exceptional items 246 404
Modernisation costs ~ operating exceptional items 7 (207) (224)
CalleagueShare - share scheme value 109 28
- dividend 1 (72)
~ business transformation (41) e
Restructuring costs (264) (180)
Impairments (12) =
Operating profit after modernisation costs before other operating exceptional
items 39 180
Other operating exceptional terns 7 (88) (67)
Operating (loss)/profit «s) 113
Profit on disposal of property plant and equipment 65 5
Profit on disposal of associate compan: 15 4b
Profit before financing and taxation 60 118
Finance costs 8 {114) (98)
Finance income 8 69 47
Net pensions interest 26{0) {167) (329)
Loss before taxation (152) (262)
Taxation charge 9 (106) (58)
Loss for the financial year from continuing operations: (258) (320)
(Loss)/profit attributable to
Equity holder of the parent company (259) (324)
Non-controlting interest a 1
RMG00000343
RMG00000343
Royal Mail Holdings ple
52 sal Report a Foal Statements 2000-21,
Consolidated statement of comprehensive income for the year ended 27 March 2011 and 28 March 2010
2011 2010
Notes £m £m
Loss for the financial year from continuing operations (258) (320)
Other comprehensive meome/(expense) for the period 3,432 (2.305) ‘
Translation differences on foreign currency net investments (14) (2a)
Actuarial gains/{losses) on defined benefit schemes 26 3426 (1312)
Gains/(losses) on cash flow hedges deferred into equity 25 24 (12)
(Gains\osses on cash flow hedges released from equity to income 25 re) 21
Gains on cash flow hedges released from equty to the carrying amount of non-financial assets 25 3) (4
Gains on fmancial assets deferred mto equity 20 42
Gains on financial assets released from equity to income 6) -
Taxation on items taken directly to equity 9 (9) (19)
Total comprehensive mcome/(expense) for the period 3,174 (2.625)
Total comprehenswve income/(expense) for the period attributable to
Equity holder of the parent company 3,173 (1626)
Non-controlling interest a 1
RMG00000343
RMG00000343
Royal Mall Holdings ple I
53 semper sd Fran Steers 2010-1
Consolidated statement of changes in equity for the year ended 27 March 2011 and 28 March 2010
Foresgn Equity
Financial Currency holder Non-
Share Retamed Assets Translation Other the controlling Total
premium earnings Reserve Reserve Reserve Reserves I parent interest I equity
£m £m £m £m £m £m £m £m fm
At 29 March 2010 430 (6,968) 55 136 12 47 I (6,288) 7_I (6.281)
{Loss)/profit for the period . (259) - od bd os (259) 1 (258)
Other comprehensive ncome/(expense) for
the period = 3424 9 (aa) 10 - I 3432 = I 3432
Translation differences on foreign currency
net investments - > = (aa) 7 = (23) = (ay)
Actuarial gains on defined benefit schemes - 3426 - - - >I 3424 - I 3426
Gains on cash flow hedges deferred into
equity - - - 24 - 24 - 24
Gains on cash flow hedges released from
equity to mcome ; ; - : 7) = ” : a”
Gams on cash flow hedges released from
equity to the carrying amount of non-
financial assets - ; - - (3) - 8) > @)
Gains on financial assets deferred into
equity - - 20 - - - 20 - 20
Gains on financial assets released from
equity to income . : 6) 7 - - ©) - ©)
Taxation on items taken directly to equity : : (5) = (4) 2 (9) 7 (9)
Total comprehenswe mcome/(expense) for
the period = 3,165 9 (a3) 10 =I 3,173 a I 3176
At 27 March 2014 430 (3,803) 64 125 22 47 I (3,415) 8 I (3,107)
Foreign Equity
Fmancial Currency holder Non-
Share Retamed Assets Translation Hedging Other I ofthe controling Totat
premium earnings Reserve Reserve Reserve Reserves I parent terest. I equity
£m £m £m £m £m £m &m £m ém
At 30 March 2009 430___ (6331) 23 157 12 47 I_ (4662) 6 I (4656)
(Loss\/proft for the period - (321) : - - -I Gat) 1 (320)
Other comprehensive (expense/income for
the period : (1. 316) 32 (24) * =~ I (1305) s (1 305)
Translation differences on foreign currency
net investments, " . - (21) . (21) - (21)
Actuarial losses on defined benefit schemes - (4312) - - - - I (2312) - I (322)
‘Loss on cash flow hedges deferred mto
equity - - - - (a2) - (22) ‘ (12)
Loss on cash flow hedges released from
‘equity to income - - - - a - 2 - 21
Gams on cash flow hedges released from
equity to the carrying amount of non-
financial assets - 7 . . (4) : (4) - (a)
Gains on financial assets deferred into
equity 7 7 42 - - 42 - 42
Taxation on items taken directly to equit 2 (4) 20) = (5) = 49) - {19}
Total comprehensive (expense)/ncome for
the period = (2 637) 32 (2a) z ~ I (1626) 1 (1.625)
‘At 28 March 2010 430___ (6.968) $5 136 32 47 I (6288) 7 _I (6281)
A description of the nature and application of the reserves in the above tables 1s included in note 27
RMG00000343
RMG00000343
Royal Mall Holdings ple
54 onal Repo an anal Sterns 2090-21
Consolidated balance sheet at 27 March 2011 and 28 March 2010
2011 2010
Notes £m £m.
Non-current assets i}
Property plant and equipment 10 1,832 1935 i
Leasehold tand payment 11 3 4 I
Goodwill 42 197 197 I
Intangible assets 13 126 99
Investments in jomt ventures and associates 15 105 147
Financial assets - pension escrow investments 28 1,161 1189 i
= investments 25 4b 49
~ dervatives 25 6 3
Other recewables - 1
Deferred tax assets 9 8 95
3,482 3719
Non-current assets held for sale 16 4 5
Current assets
Inventories 7 38 38
‘Trade and other recewables 18 1,135 1155
Income tax receivable - 14 I
Financial assets - investments 25 a a I
= derwatives 25 36 24 I
Cash and cash equivalents 19/25 1,101 937 ‘
2,31 2169
Total assets 5,797 5893
Current liabilities
Trade and other payables 22 (1,964) (2076)
Financial labiliues - interest bearing loans and borrowings 20/28 (375) (388)
~~ obligations under finance lease and hire purchase contracts 20/25 (65) (61)
~ derivatives 20/25 @) (47)
Income tax payable (6) (8)
Provisions 24 (181) (130)
(2,591) (2.680)
Non-current liabilities
Financial liabilities - interest bearing loans and borrowings 20/25 (1,478) (1138)
~ obligations under finance lease and hire purchase contracts 20/25 (193) (120)
- derivatives 20/25 - a
Provisions 21 (97) (146)
Retrement benefit obligation - pension deficit 26 (4,501) (8041)
Other payables 23 (34) (43)
Deferred tax abilities 9 (20) (5)
(6,343) (9494)
Total liabilities (8,904) (42174)
Net abilities (3,107) (6 281)
Equity '
Share capital 27 - - '
Share premium 430 430 '
Retained earnings (3,803) (6 968) '
Reserves 258 250
Equity attributable to equity holder of parent company (3,215) (6 288)
Non-controlling interest 8 7
Total equity (3,07) (6281)
Matthew Lester ~
RMG00000343
RMG00000343
Royal Mall Holdings ple
55 sroual Report an Franc Statemeres 2010-11
Consolidated statement of cash flows for the year ended 27 March 2011 and 28 March 2010
2014 2010
Notes £m £m
Cash ftow from operating activities
Operating profit before exceptional terns 246 404
Adjustment for
Depreciation and amortisation ste) 286 278
Share of post tax profit from joint ventures and associates 15 (28) (4a)
Working capital and other non-cash movements: (49) (83)
Increase in inventones - (6)
Decrease in recenabtes 1 26
Decrease in payables (44) (30)
Increase in client recerables 9) (14)
Increase/(decrease) im client payables 1 (63)
Net increase in derivative assets (12) 2)
Increase in non-exceptional provisions 1 13
Cash paid in respect of retirement benefit obligations in excess of that charged n operating profit (283) (376) ;
Cash payments in respect of operating exceptional items (see note (a) below) 4272) (293)
ColleagueShare/business transformation payments (102) (82)
Other (170) (21)
Cash outflow from operations (100) (aaa)
Income tax paid (22) (a6)
Net cash outflow from operating activities (222) G27
Cash flows from mvesting activities
Oradends received from yomt ventures and associates 15 39 35
Finance mcome recewed 69 47
Proceeds from sale of property plant and equipment 166 14
Proceeds from disposal of associate company 73 .
Purchase of property plant and equipment (292) (374)
Acquisition of businesses M4 (2) a)
Purchase of intangible assets (82) (80}
Payment of deferred consideration in respect of prior years acquisitions - u)
Net sale/(purchase} of financial assets investments (non-current} 42 (86)
Net proceeds from financial assets investments (current) : 6
Net cash inflow/outflow) from investing activities: 11 (446)
Net cash outflow before financing activities (111) (573)
Cash flows from financing activities
Finance costs paid (60) (52)
Payment of capital element of abligations under finance lease contracts (65) (22)
Cash recerved on sale and leasebacks 115 73
New loans 332 451
Repayment of borrowings (42) (2)
Net cash inflow from finanang actwities 280 448
Net ncrease/{decrease) in cash and cash equivatents 169 (125)
Effect of exchange rates on cash and cash equivalents {2) a)
Cash and cash equvatents at the beginning of the period 936 1060
Cash and cash equivatents at the end of the period 19/25 1,101. 934
RMG00000343
RMG00000343
56 emg acon Stores 2020-2
{a) Cash flows relating to operating exceptional items charged to the income statement in current and prior years
The net cash outflows relating to the above were as follows
2011 2010
Net cash outflow relating to £m £m
Current year operating exceptional items: 93 85
Prior years operating exceptional tems 179 208
Total 272 293
The net cash outflow of £272m (2010 £293m) comprises £131m (2010 £158m) relating to cash utilised to settle exceptional provisions
£73m (2010 £75m) relating to ColleagueShare dividends £25m (2010 Emil) for business transformation payments Enil (2010 £11m)
incurred for current year pension redundancy liabilities £30m {2010 £39m) relating to prior year pension redundancy liabilities and £13m,
(2010 £10m) in respect of other costs which were recorded within other payables
RMG00000343
RMG00000343
Royal Mall olin ple
57 final Repent and Parcel Sateen’ 2010-1
Notes to the Group financial statements.
1. Authorisation of financial statements and statement of compliance with IFRSs
The Group s financial statements for the year ended 27 March 2011 were authorised for issue by the Board on 13 June 2011 and the balance
sheet was signed on the Board s behalf by Moya Greene and Matthew Lester
The Group s financial statements have been prepared in accordance with International Financial Reporting Standards {IFRSs) as adopted by the
European Union and as they apply to the financial statements of the Group for the year ended 27 March 2011 The principal accounting
policies adapted by the Group are set out in note 2
2 Accounting policies
Basis of preparation and accounting
The Group comprises Royal Mail Holdings plc {the Company) - which 1s wholly owned by HM Government - and its subsidiaries The Company
's incorporated in the United Kingdom under the Companies Act 2006 (the Act) and the financial statements are produced im accordance with
the Act and applicable IFRSs The UK 1s the Group s country of domicile
‘The Group consolidated financial statements are presented in Sterling and ail values are rounded to the nearest £m except where otherwise
indicated These consolidated financial statements have been prepared on a historical cost basis except for derivative financial instruments and
available for sale financial assets which have been measured at fair vatue
Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the previous financial year except as follows
The Group has adopted the following revised and amended accounting standards as of 29 March 2010 The impact on the financial statements:
or performance of the Group is also described below
JERS 3 (revised) Busmess Combinations
The key features of the revised IFRS 3 mclude a requirement for acquisition-related costs to be expensed and not included in the purchase
price and for contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the
income statement and not as a change to goodwill) The standard also changes the treatment of non-controlling interest (formerly minonty
interest) with an option to recognise these at full fair value as at the acquisition date and for previously hele non-controlling interest to be fair
valued as at the date control 1s obtained with gains and losses recognised im the income statement The adoption of this revised standard has
not had a material impact on the financial position or performance of the Group
JAS 27 (amended) Consohdated and Separate Financial Statements
The amended standard no longer restricts the allocation to non-controlling interest of losses incurred by a subsidiary to the amount of the
non-contralling equity investment in the subsidiary A partial disposal of equity interest in a subsidiary that does not result m a loss of control 1s
accounted for as an equity transaction and has no impact on goodwill nor does «t gwe rise ta any gain or loss Where there 's loss of contral of
a subsidiary any retained interest will be re-measured to fair value which will impact the gain or loss recognised on disposal This amended
standard has net had a material impact on the financiat position or performance of the Group
Improvements to IFRSs (issued 2009)
In May 2009 the International Accounting Standards Board (IASB) issued its second omnibus of amendments to its standards primarily with a
view to removing inconsistencies and clarifying wording There are separate transitional provisions for each amendment The adoption of the
Improvements to IFRSs resulted mn changes to accounting policies but did not have a material impact on the fmancial position or performance
of the Group
Significant accounting yudgements, estimates and assumptions
‘The preparation of the Group s consolidated financial statements requires management to make judgements estimates and assumptions that
affect the reported amounts of assets and liabilities at the reporting date However uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amount of the asset or lability affected in future periods
‘The key sources of uncertamty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities
within the next financiai year retate to the measurement of the defined benefit pension obligations deferred tax ColleagueShare plan costs and
provisions
Defined benefit pension abligations
Measurement of the defined benefit obligations requires certain assumptions to be made meluding on le expectancy future changes in
salaries inflation and a suitable discount rate The size of these obligations and therefore the pension deficit 1s materially sensitwe to the
assumptions adopted The assumptions which have the most significant impact on the measurement of the defined benefit obligations are the
real discount rate and the mortality rates A 01 percentage paint change to the discount rate could change the liabilities by approximately
£690m An additional one year on the life expectancy could increase liabilites by approximately £840m The major assumptions and carrying
value of the obligatians are disclosed in note 26
Deferred tax
Assessment of the deferred tax asset requires an estimation of future profitability Such estimation 1s mherently uncertain na market subject
to various competitwe pressures Should estimates of future profitability change in future years the amount of deferred tax recognised will
also change accordingly The carrying values of the deferred tax assets and liabilities are included within note 9
RMG00000343
RMG00000343
fal Ma logs pc
58 real epee and Fae Sateens 2010-31
2 Accounting policies (continued)
ColleagueShare plan
The calculation of the ColteagueShare costs and liabilities 1s reliant on a number of judgements estimates and assumptions These include in
particular forecasts for the potential equity value of ColleagueShares forecasts of joiners and leavers throughout the life of the plan and
judgements on when participants are likely to exercise their rights for the Company to redeem the ColleagueShares that they hold The
magnitude of the costs involved 1s sensitwe to these forecasts and assumptions The carrying values of the ColleagueShare liabilities are
included within notes 21 and 22
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events it 1s probable that an
outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made Oue to the nature of
Provisions a significant part of their determination 1s based upon estimates and/or judgements concerning the future
Restructuring provisions including for redundancy and property costs are derived based upon the most recent business plan for direct
expenditure where plans are sufficiently detailed and appropriate communtcation to those affected has been undertaken This includes the
expected number of employees impacted rate of compensation per employee rental costs and expected period of properties remaining vacant
and dilaprdation costs
The potential mdustrial claims provision 1s based on the best information available as at the year end mcluding independent expert advice
Funding
Material Uncertainty in the Fimancing of Royal Mail Group excluding Post Office Limited (’RMG')
Background
The postal market im the UK 1s both open to full competition and in structural decline due to the emergence of alternatwe digital
communication media Over the past 5 years intand addressed postal volumes have declined by some 20% and are expected to continue to
decline by some 5% per annum over the next five years This has resulted in a significant erosion of profits and cash flows similar to other
postal operators around the world In addition the actuarial pension deficit agreed formally with the Pension Trustee m 2010 1s some £10bn
as at 31 March 2009 for Royal Mail Group excluding Post Office Limited (RMG) - to be repaid over a 38 year period - and RMG 1s required to.
make pension deficit repayments of £286m per annum rising to around £410m per annurn by 2016
Balance sheet and cash flow solvency
RMG 1s currently balance sheet insolvent with net liabilities of £2 bn (2010 £5 8bn) (Post Office Limited net liabibties £0 3bn (2010 £0 Sbn))
brought about by the recognition of the pension deficit on the balance sheet im March 2006 The pension deficit currently stands at £4 Sbn
(2010 £8 Obn) with the decrease this year mainly due to the Government requirement to use a CPI based inflation assumption for the majority
of schemes rather than RPI as in previous years
The pension deficit recognised in the RMG financial statements 1s calculated based on the requirements of IAS 19 and on different assumptions
to the actuarial deficit agreed periodically with the Pension Trustee and i is the latter that 1s used to determine the cash payments to repair
the deficit
At 27 March 2011 RMG has £553m of cash headroom (including cash on hand short term deposits and unutilised toan facilities) available
There are severe pressures and risks on RMGs cash flow and headroom position brought about by a number of factors including i
* recent and forecast declines in inland addressed postal volumes caused by the current economic climate and the emergence of alternative
digital communications media causing a matertal reduction in the proportion of communications carred out using the matt
«the significant mvestment required to modernise RMG so as to achieve the cost reductions necessary to keep pace with the reduction in
volumes and
‘+ the costs of meeting RMGs obligations to fund the pension scheme including both ongoing pension contributions and pension deficit
payments
As a resuk of this pressure on cash flow and the fact that RMG ts balance sheet insolvent the Board has been carefully monitoring on a I
regular basts whether RMG has sufficient cash flow to meet its liabilities as they fall due over the foreseeable future This has involved regular I
reviews of projected monthly cash headroom until March 2013 and includes a review of the strategic plan cash flows to March 2016
RMG has been taking 2 number of steps to preserve its financial flexibilty including property disposals the disposal of its 20% investment in !
Camelot sales and leasebacks cost-cutting supplier mitiatives and other measures to reduce expenditure and to release cash Nevertheless I
the Board has concluded that without Government support RMG may not be able to meet ts liabilities as they fall due including the next I
£286m pension deficit contribution payment due in March 2012 and the repayment of £900m Government toan facilities due in March 2014 I
Government Policy for Royal Mait p
In 2008 the Government commussioned a review of the postal sector and its findings in its report back - titled “Modernise or Decline and ks I
findings confirmed that the universal service ts part of our economic and social glue and that it delivers significant economic value to the t
nation and its citizens Royal Mail the letters business of RMG has been modernising its operations over the last five years and will continue to 4
make further significant investment to reduce its cost base
RMG00000343
RMG00000343
Royal Ma Hetings ple
5D esi Regan rd Finest Semen 2010-44
2 Accounting policies (continued)
The Government made the restructuring and privatisation of RMG one of its first poliaes and
© the Postal Services Bill - which provides a platform for the Government to relieve RMG of the mayorty of its historical pension assets and
abilities to change the regulatory regime for RMG and allow the introduction of private capital - has now been agreed by both Houses of
Parliament and received Royal Assent and
+ a formal State Aid application to the European Commission for restructuring aid (relieving RMG of the majority of its pension deficit and
‘estructuring the balance sheet) as required by European Law will be made by the Government in June 2041
Key Assumptions and Material Uncertamties for Gong Concern
The RMG strategic plan (the plan) projects a sustained return to profitability and cash generation as the benefits of modernisation are realised
The plan assumes that core letter volumes will continue to decline by 5% per annum and that a further £11bn will be invested mto
Modernising the Royal Mail letters network to improve profitability and cash flow generation im the next two years A key material assumption
1s that this modernisation programme will be successful in delivering World Class Mail and reducing costs in 2012-13 by £0 6bn in real terms
compared to the cost base of 2010-11
The plan also assumes that Government will relieve RMG of the majority of its pension deficit restructure the balance sheet reset covenants
from March 2042 onwards and that a more appropriate postal regulatory regime will be introduced
In forming their view regarding RMG s going concern status the Directors have identified two material uncertainties that cast significant doubt
upon RMG s ability ta continue as a going concern
First the relief of the majority of the vension deficit and the balance sheet restructure are conditional on the abtaining of State Aid approval
from the European Commission In particular State Ald approval will need to be obtained by March 2012 when the next pension deficit
payment would otherwise be due
The Government has announced that it will submit a formal State Aid notefication to the European Commission in June 2011 outlining its pian
to provide restructuring aid to RMG with the intention of returning the business to financial viability and that tt hopes that the process will be
completed by March 2012
However the Directors can not be certain that State Aid approval will be given for the full package of measures or that it will be given by
March 2012
The second material uncertainty is whether Government would provide alternative financing in the event of a delayed or rejected application
for restructuring aid on suttable terms as described above
The Directors believe that the Government would continue to provide adequate financing to RMG This 1s based on a number of factors
including the prior experience of financing Post Office Limited by the Government from 2006-7 onwards
Gomg Concern Basis m the Financial Statements
On this basis and after careful consideration of the cash flow and headroom projections the Directors consider it appropriate to prepare the
financial statements on a going concern basis which assumes that RMG will continue m operational existence for the foreseeable future
Should the State Aid application fail and Government not provide alternative debt financing arrangements to relieve the future pension deficit
obligations the going concern basis would be mvalid and adjustments would have to be made to reduce the value of the assets to their
realisable amount to provide for any further liabilities that might arise and to reclassify fixed assets and long-term liabilities as current assets
and current liabilities The facial statements presented for the year ending 27 March 2011 do not contain any adjustment that would be
required if st was concluded that RMG was unable to continue as @ gomg concern
Post Office Limited
Post Office Limited had net liabilities as at 27 March 2011 but has operated at a profit before exceptional items during 2010-11 for the third
year running
To become viable in the longer-term new business areas continue to be developed and grown im order to replace the lost contribution from
traditional income sources and significant cost reduction programmes continue to be implemented
Dunng the year Post Office Limited has contmued with the implementation of a number of programmes which are designed to improve the
profitability of the company The branch closure programme 1s completed and no further closures are planned but further work on efficiency
Improvements and improving the business model continues These programmes include
the development of new business and drive for sales growth
«bringing the Crown branch segment into profit and
* — aprogramme of fundamental cost reduction
On 24 March 2010 a funding agreement was agreed that provides up to £180m for compensation for losses sustained in parts of the network
1n 2011-12 as well as providing access to the working capital facility of £1 15bn to 31 March 2012 These arrangements receved State Aid
appraval on 23 March 2014
RMG00000343
RMG00000343
60 rihiRipecon Enron Stevens as02
2 Accounting policies (contimued)
A further 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 and
© extension of the existing working capital facility of £1 15bn up to 31 March 2016
All of the funding for 2012-13 to 2044-15 and extenston of the working capital facility 1s subject to State Aud approval
Whilst the Directors are satisfied with the progress that has been made it should be noted Post Office Limted continues to face a challenging
future
Notwithstanding these uncertainties the Directors recognise that significant progress has been made in delivering its 2005-111 plan and that a
plan for 2011-15 has been approved so after careful consideration continue to believe that Post Office Limited will be able to meet its
Vabilties 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 cn a going concern basis
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertakings The financial
statements of the mayor subsidiaries are prepared for the same reporting year as the Company using consistent accounting policies
All mtra-group balances and transactions including unrealised profits arismg from intra-group transactions have been eliminated in full
Transfer prices between business segments are set on a basis of charges reached through negotiation with the respective busmesses
Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consalidated from the date on which
control 1s no longer held by the Group Where the Group ceases to hold control of a subsidiary the consolidated financial statements include
the results for the part of the reporting year during which the Group held control
Non-controlling interest represents the portion of profit/loss gains/losses and net assets relating to subsidiaries that are not attributable to
members of the Company The non-controlting interest balance 15 presented within equity m the consolidated balance sheet separately from
parent shareholders equity
Investments i joint ventures and associates
The Groups investments in its joint ventures and associates are accounted for under the equity method of accounting Under the equity
method the investment is carried in the balance sheet at cost plus post-acquisition changes in the Groups share of the net assets of the joint
ventures/associates less any impairment in value The income statement reftects the Group s share of post tax profits from the jaint ventures/
associates
Any goodwill arising on acquisition of an associate representing the excess of the cost of the mvestment compared to the Group s share of the
net fair value of the identifiable assets liabilities and contingent liabilities acquired 1s included in the carryng amount and not amortised To
the extent that the net fair value of the associates identifiable assets liabilities and contingent liabilties 1s greater than the cost of the
Investment a gain Is recognised and added to the Groups share of the assoaates profit or lass in the period in which the investment Is
acquired
Revenue
Revenue reported in the income statement 1s net of value added tax and comprises Turnover and the Network Subsidy Payment Turnover
principally relates to the rendering of services as follows
UK Letters & Parcels and International
‘Account revenue 1s derived from specific contracts and recognised when the delivery of an item 1s complete Prepaid revenue manly relating to
stamp and meter income 1s recognised when the sale 1s made adjusted to reflect a value of stamp and meter credits held but not used by the
customer
Post Office Limted
Revenue is recognised at the time that Government financial mails and telephony services are provided
General Logistics Systems
Revenue 1s dered from speafic contracts and 1s recognised at the time of delivery
The Network Subsidy Payment 1s Government grant revenue recognised to match the related costs of providing the network of public post
offices that the Secretary of State for Business Innovation and Skills considers appropriate and which would otherwise not be provided
Orstribution and conveyance
Orstnibution and conveyance costs relate to third party costs mcurred in carrying mail These include conveyance by rail road sea and air
together with costs incurred by international mail carriers and Parcelforce Worldwide delivery operators These costs are disclosed separately
on the face of the mcome statement
Operating profit before exceptional items
Operating profit 1s the profit arising from the normal recurring operations of the business This incorporates revenue people costs (excluding
ColleagueShare and restructuring costs) distribution and conveyance operating costs other operating costs and the Groups post tax share of
profit from joint ventures and associates:
RMG00000343
RMG00000343
Royal Mail Holdmgs ple
61 seal Ropar and Fanaa! Sutxmets 2010-14
2 Accounting policies (continued)
Operating exceptional items
Operating exceptional items primarily modernisation costs are material 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 understanding of financial performance in the year in comparison to prior years
ColleagueShare plan
ColleagueShare 1s the name for the Groups employee share plan The plan introduced in 2007-08 15 a five-year plan spanning the
accounting years from April 2007 to March 2012 and comprises both a share scheme and a related stakeholder dividend worth up to £5 300
per person throughout the life of the plan The ColleagueShares represent up to a total of 14% of the projected equity value of the Group
The costs of the plan are included im the income statement as an exceptionat item throughout the life of the plan and are included within
payables or provisions as appropriate The Group will redeem all ColleagueShares by 2012
Operating profit
Operating profit 15 the profit arising from the normal recurring operations of the business and after charging operating exceptional items
defined above It excludes the non-operating exceptional items far profit or loss on disposal of businesses and profit or loss on disposal of
property plant and equipment These items are not part of the normal recurring operations of the business but are material so are presented
separately on the face of the income statement to allow a better understanding of financial performance in the year in comparison to prior
years
Goodwill
Business combinations on or after 29 March 2004 are accounted for under /FRS 3 Business Combinatons using the purchase method Any
excess of the cost of the business combination over the Group interest in the net fair value of the identifiable assets liabilities and contingent
thabilties at the date of acquisition 1s recognised in the balance sheet as goodwill and 1s not amortised
After initial recognition goodwill 1s stated at cost less any accumulated impairment losses Goodwill arsing from business combinations 1s
reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired
‘An impairment loss 1s recognised in the mcome statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount which 1s the higher of an asset s net realisable value and its value in use For the purpose of such impairment
reviews goodwall is allocated to the relevant cash generating units
Goodwill arising on the acquisition of equity accounted entities is included in the cost of those entities and therefore not reported in the balance
sheet as goodwill
Intangible assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the fair vatue can be measured reliably
‘on initial recognition Intangible assets acquired separately or development costs that meet the criteria to be capitalised are initially recognised
at cost and are assessed to have either a finite or indefinite useful life Those with a finite life are amortised over their useful life and those with
an indefinite life are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying
value may be impaired An impairment loss 1s recognised in the income statement for the amount by which the carrying value of the asset
exceeds its recoverable amount which 1s 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-lime basis as follows
Customer listings 1 to 4 years
Software 1 to 6 years
Research and development
Expenditure on research «5 written off in the year it 1s mcurred Development costs are capitalised where they meet the criteria required under
IFRSs If these criteria are not met then the costs are recognised in the income statement as they are mcurred
Property, plant and equipment
Property plant and equipment 1s recognised at cost including directly attributable costs in bringing the asset into working condition for Rs
intended use Depreciation of property plant and equipment 1s 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 useful ives and residual values are reviewed annually and
adjustments where applicable are made on a prospectwe basis The lives assigned to major categories of property plant and equipment are
Cand and buildings
Freehold tand 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 2-42 years
Fixtures and equipment 2-15 years
‘An indwidual property that the Group has identified as surplus 1s reclassified within non-current assets held for sale a separate category on
the balance sheet when a sale 1s highly probable This has been determined to be when authority to market the property has been given and
the property 1s vacant and therefore available for immediate sale and occupation by a third party Such properties are expected to generate
economic cash flow primarily by sale of the asset rather than by operational actwities and are expected generally to be disposed of within a
year
For a disposal group of properties or other assets and liabilities the requirements of /FRS 5 Non-current assets held for sale and discontinued
operations are applied to the specific circumstances of the disposal group
RMG00000343
RMG00000343
Ray! Mal Welding pe
62 ema Repr ae Fare Sates 2010-11
2 Accounting policies (continued)
Impairment reviews
Unless otherwise disclosed in these accounting policies assets are reviewed for impairment #f events or changes in circumstances indicate that
the carrying value may be wmpaired The Group assesses at each reporting date whether such indications exist Where appropriate an
impairment loss 1s recognised in the mcome statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount which 1s the higher of an asset s net realisable vatue 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 mception of the lease with @ corresponding liability recognised for the fair value of the leased item or if tower at the present
value of the minimum lease payments Lease payments are apportioned between the finance charges and capital element of the lease liability
to achreve a constant rate of interest on the remaining balance of the liability Caprtalised 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 fessor 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
expense over the lease term on a straight-line basis
A leasehold land payment ts an upfront payment to acquire a long-term leasehold interest in land This payment 1s stated at cost and 1s
amortised on a straight-line basis over the period of the lease
Inventories
Inventories are carried at the lower of cost and net realisabte value after adjusting for obsolete or slow-moving stack Cost includes all costs in
bringing each item to its present location and condition and comprises weighted average cost for supplies and materials and purchase cost for
merchandise
Trade receivables
Trade recewables 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 mstruments
Financial assets within the scope of /AS 39 Financial Instruments Recognition and Measurement are classified as financial assets at fair value
through the income statement (held for trading) held to maturity investments loans and recewables or available for sale financiat assets as
appropriate Financial liabilities within the scope of IAS 39 are classified as either financial liabilities at fair value through the income statement
or financial liabilities measured at amortised cost
The Group determines the classification of rts financial instruments at initial recognition and re-evaluates this designation at each financial year
end When financial instruments are recognised initially they are measured at fair value being the transaction price plus in the case of
financial instruments not at fair value through the income statement any directly attributable transactional costs
‘The subsequent measurement of financial instruments depends on their classification as follows
Financial assets at fair value through the income statement (held for tracing)
Financial assets are classified as held for trading if they are acquired for sale in the short term Derwatwes are also classified as held for
trading unless they are designated as hedging instruments Assets are carried in the balance sheet at fair value with gains or losses recognised
in the income statement
Held-to-maturity investments
Non-derwative fmancial assets with fixed or determinable payments and frxed maturity are classified as held to maturity when the Group has
the positive intention and ability to hold to maturity Held to maturty investments are carried at amortised cost using the effective interest rate
method Gains and losses are recognised in the income statement when the investments are derecognised or impaired as well as through the
amortisation process Investments intended to be held for an undefined period are not included in this classification
Loans and recewables
Non-derwative financial assets with fixed or determinable payments that are not quoted on an active market do not qualify as trading assets
and have not been designated as either fair value through the income statement’ or available for sale are carried at amortised cost using the
effective mterest rate method if the tune value of money is significant Gains and losses are recognised in the mcome statement when the loans
and recewables are derecognised or impaired as well as through the amortisation process
Available for sale financial assets
Available for sale financial assets are non-derivative financial assets that are designated as such or are not classified in any of the three
preceding categories After initial recognition interest is taken to the income statement using the effective interest rate method and the assets.
are measured at fair value with gains or losses being recognised as a separate component of equity until the investment 1s derecognised or :
until the mvestment 1s deemed to be impaired at which time the curnulative gain or {oss previously reported in equity 1s included m the income
statement.
Financial habuities at fair value through the mcome statement (held for trading)
Derwatives abilities are classified as held for trading unless they are designated as hedging instruments They are carried in the balance sheet
at fair value with gains or losses recognised m the income statement
RMG00000343
RMG00000343
Royal Mail Holdings ple
63 anal Repet rd Faroe Suter 2010-11
2 Accounting policies (continued)
Financial abilities measured at amortised cost
All non-derwative financial liabilities are classified as financial abilities measured at amortised cost Non-derwvative financial liabilities are
initially recognised at the fair value of the consideration received less directly attributable issue costs After inital recognition non-derivative
financial liabilities are subsequently measured at amortised cost using the effective interest method Gans and losses are recognised in the
Income statement when the liabilities are derecogmised or impaired as well as through the amortisation process
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 tess In addition the Group uses Money Market funds as a readily available source of cash which are bought
and sold on @ daily basis to meet the cash requirements of the business 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 fmancial mstruments .
Fimancial assets - pension escrow investments.
Financial assets - pension escrow investments comprise short-term deposits with banks conventional gilt edged securities index-linked gilt
edged securities and Treasury bills
Short-term deposits with banks (pension escrow investments) are classified as loans and receivables financal instruments
Conventional gilt edged securities index-linked gitt edged securities and Treasury bills are classified as available for sale fmancial instruments
‘on the basis that they are quoted investments that are not held far trading and may be disposed of prior to maturity
Financial assets - other investments
Financial assets ~ other investments comprise short-term deposits (other investments) with Government local government or banks with an
original maturity of three months or more Short-term deposits are classified as loans and recewables financial instruments
Financiat liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost,
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 development of a
qualifying asset in which case they are capitalised using the weighted average cost of borrowing for the period of construction/development
Derivative financial instruments
The Group uses derwative struments such as foreign currency contracts in order to manage the risk profile of any underlying risk exposure of
the Group i Ine with the Graup s treasury management policies Such derivative financial instruments are intially stated at fair value
For the purpose of hedge accounting hedges are classified as cash flow hedges where they hedge exposure to variability in cash flows that 1s
either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction
{mn relation to cash flow hedges to hedge the foreign exchange or commodity price risk of firm commitments that meet the conditions for hedge
accounting the portion of the gain or loss on the hedging instrument that 1s determined to relate to an effective hedge 1s recognised directly in
equity and the ineffective portion is recognised in the mcome statement
When the hedged firm commitment results in the recognition of a non-financial asset or non-financial lability then at the time the asset or
liability 1s recognised the associated gains or losses that had previously been recognised in equity are included in the initial measurement of
the acquisition cost or other carrying amount of the asset or liability For all other cash flow hedges the gans or losses that are recognised in
equity are transferred to the meome statement in the same year in which the hedged firm commitment affects the net proft/loss for example
when the future sale actually occurs
For derwatives that do not qualify for hedge accounting any gains or losses arising from changes in fair value are taken directly to the income
statement in the period
Hedge accounting 1s discontinued when the hedging instrument expires or 1s sold terminated or exercised or no longer qualifies for hedge
accounting At that pomt any cumulative gain or loss on the hedging instrument recognised in equity 1s kept in equity until the forecast
transaction accurs if a hedged transaction 1s no tonger expected to occur the net cumulative gain or loss recognised in equity is transferred to
the come statement for the year
Fair value measurement of financial instruments
The fair vatue of quoted investments (including conventional gilt edged securities index-linked gilt edged securities and Treasury bills) 1s
determined by reference to bi prices at the close of business on the batance sheet date Hence the conventional gilt edged securities index-
linked gilt edged securities and Treasury bills are within Level 1 of the fair value hierarchy as defined withn IFRS 7
Where there Is no active market fair value is determined using valuation techniques These include using recent arms length market
transactions reference to the current market value of another instrument which ts substantially the same and discounted cash flow analysis
and pricing models Specifically in the absence of quoted market prices derwatives are valued by using quoted forward prices for the
underlying commodity/currency and discounted using quoted terest rates (both as at the close of business on the balance sheet date) Hence
derwative assets and liabilities are within Level 2 of the fair value hierarchy as defined within IFRS 7
RMG00000343
RMG00000343
Royal Mal Had le
64 pemal Rese nd franca Sxterers 2010-12
2 Accounting policies (continued)
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 1s derecognised when the contract that gives rise to it Is settled sold cancelled or expires
Income tax and deferred tax
The charge for current taxation 1s based on the results for the year as adjusted for items that are non-assessable or disallowed It 1s calculated
using rates that have been enacted or substantively enacted at the balance sheet date
Deferred tax is provided using the liabilty method on all temporary differences at the balance sheet date between the tax bases of assets and
uabiities and their carrying amounts for financial reporting purposes
Deferred income tax liabilities are recognised for all taxable temporary differences except
* inital recognition of goodwill
. the initial recognition of an asset or liability in a transaction that 1s not a business combination and at the time of the transaction
affects neither the accounting profit nor taxable profit or loss and
. taxable temporary differences associated with investments in subsidiaries associates and interest in jomt ventures where the timing of
the reversal of the temporary differences can be controlled and it 1s probable that the temporary difference will not reverse in the
foreseeable future
Other than stated below deferred tax assets are recognised for all deductible temporary differences carry-forward of unused tax assets and
unused tax losses to the extent that it 1s probable that taxable profit will be available against which the deductible temporary differences
carry-forward of unused tax assets and unused tax losses can be utilised Deferred tax assets are not recognised in respect of
5 deductible temporary differences arising from the initial recognition of an asset or lability in a transaction that Is not a business
combination and at the time of the transaction affects neither the accounting profit nor the taxable profit or loss and
. deductible temporary differences associated with investments in subsidiaries associates and interests in joint ventures except to the
extent that it 1s probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against
which the temporary difference will be utilised
The carrying amount of deferred tax assets 1s reviewed at each balance sheet date and increased or reduced to the extent that it 1s probable
that sufficient taxable profit will be available to allow all or part of the deferred tax asset to 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 1s realised or the
liability 1s settled based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date Deferred tax
balances are not discounted
Current and deferred tax is charged or credited directly to equity if it relates to ems that are credited or charged directly to equity Otherwise
it 1s recognised in the income statement
Provisions
Pravisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event it is probable 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 1s material provisions are determined by discounting the expected future cash flows at an appropriate pre-tax rate
Pensions and other post-retirement benefits H
The pension plans assets for the defined benefit schemes are measured at fair value Liabilities are measured on an actuarial basis using the I
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 defmed benefit asset or liabilty 1s presented separately on the face of the balance sheet Full actuarial I
valuations are carried out at intervals not normally exceeding three years as determined by the Trustees and with appropriate updates and I
accounting adjustments at each balance sheet date form the basis of the deficit disclosed All members of defined benefit schemes are I
contracted out of the earnings-related part of the State pension scheme I
For defined benefit schemes the amounts charged to operating profit are the current service costs and any gains and losses arising from I
settlements curtatments and past service costs The net difference between the interest costs and the expected retum on plan assets 1s '
recognised as net pensions interest in the income statement Actuarial gains and losses are recognised immediately in the statement of I
comprehensive income Any deferred tax movement associated with the actuarial gas and losses 1s also recognised in the statement of
comprehenswe income I
For defined contribution schemes the Groups contributions are charged to operating profit within people costs in the pertod to which the :
contributions relate Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits !
RMG00000343
RMG00000343
Royal Ma Holdings ple
65 ‘enual Resor and Fano Statements 2030-22,
2 Accaunting policies (continued)
Foreign currencies
The functional and presentational currency of Royal Mail Hatdings pic 1s Sterling (£) The functional currency of the overseas subsidiaries in
Europe ts mamly the Euro (€)
The assets and tiabilities of foreign operations are translated at the rate of exchange ruling at the batance sheet date The trading results of
foreign operations are translated at the average rates of exchange for the reporting period being a reasonable approximation to the actual
transaction rate The exchange rate differences arising on the translation since the date of transition to IFRSs_ are taken directly to the Foreign
Currency Transtation Reserve in equity
Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the
transaction Monetary assets and liabilities denominated m foreign currencies are retranslated at the functional currency rate of exchange
Tuling at the balance sheet date Currently hedge accounting is not claimed for any monetary assets and liabilities Alt differences are therefore
taken to the income statement except for differences an monetary assets and liabilities that form part of the Groups net investment in a
foreign operation These are taken directly to equity until the disposal of the net mvestment occurs at which time they are recognised in profit
or loss
Non-monetary items that are measured i terms of historical cost in a foreign currency are translated using the exchange rates as at the dates '
of the initial transactions Non-monetary items measured at far value in foreign currency are translated using the exchange rates at the date
when the fair value is determined
Contingent liabilities and financial guarantee contracts
Financial guarantee contracts are intially measured at fair value and subsequently at the higher of amounts under /AS 37 Provisions
Contingent Liabiities and Contingent Assets or the amounts initially recognised less when appropriate cumulative amortisation recognised in
accordance with /AS 78 Revenue
Contingent liabilities are not disclosed if the possibility of losses occurring 1s considered to be remote
Government grants
Government grants of a revenue nature are credited to the mcome statement and are shown separately to the expenditure to which they
relate
Government grants relating to assets are recognised as deferred income that is amortised over the useful life of the relevant assets
Segment information
During the year the Group changed the structure of its internal organisation in a manner that resulted im a change to the composition of its
Teportable segments As a result of this change corresponding information for earher periods has been restated
The Groups operating segments are organised and managed separately according to the nature of the products and services provided with
each segment representing a business unit that offers different products and serves largely different markets Management monitors the
operating results of sts business units separately for the purpose of making decisions about resource allocation and performance assessment
‘Segment performance 1s evaluated based on operating profit/loss
There 1s no aggregation of operating segments The operating units that make up the four operating segments are detailed on page 29
The operating segments comprise operations m both the UX and other parts of Europe the latter being relevant to the GLS business segment '
The UK operations include the remaning two operating segments plus the Other segments
Segment revenues have been attributed to the respective countries based on the location of the customer
Transfer prices between the segments are set on a basis of charges reached through negotiation with the respective business units that form
art of the segments
There are no differences in the measurement of the respective segments profit/loss and the consolidated financial statements prepared under
IFRSs
Accounting standards issued but not yet applied
The International Accounting Standards Board (IASB) has issued accounting standards relevant to the Group with an effectve date for
accounting periods beginning after the commencement date of the period to which these financial statements relate The Group has considered
the impact of these below
international Accounting Standards (AS/ERSs) Etfectwe date
IAS 24 Related Party Disclosures (Amendment) 1 January 2011
IFRS 9 Financial Instruments Classification and Measurement 1 January 2013 ‘
IFRS10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013
(AS 26 Related Party Disclosures
This revised standard provides an exemption from disclosure requirements for transactions between entites controlled jomtly controlled or
significantly influenced by the same government and between such entities and the government itself unless they are indrdually or
collectively significant The standard also amends the definition of a related party to remove some inconsistencies This standard which will be
adopted with a commencement date of 28 March 2011 will not have any impact on the financial position or performance of the Group
RMG00000343
RMG00000343
Royal Mail Holdings ple
66 sealer od Fanaa Steers 2010-2
2 Accounting polices (continued)
JERS 9 Financial Instruments Classification and Measurement
IFRS 9 as issued reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of
financiat assets as defined m IAS 39 In subsequent phases the IASB will address classification and measurement of financial liabilities hedge
accounting and derecognition The completion of this project 1s expected in 2011 The adoption of the first phase of IFRS 9 mandatory for the
Group commencing 1 April 2013 will have an effect on the classification and measurement of the Groups financial assets The Group wal
quantify the effect in conjunction with the other phases when issued to present a comprehensive picture
JERS 10 Consolidated Financial Statements
IFRS 10 butlds on existing prinaples by dentiying the concept of control as the determining factor in whether an entity should be included
within the consolidated financial statements of the parent company The changes introduced by IFRS 10 will require management to exercise
‘significant judgement to determine which entities are controlled and therefore are required to be consolidated by a parent compared with the
requirements that were in IAS 27 The standard will be adopted with a commencement date of 1 Apri 2013 and will be reviewed to
understand any possible impact on the financial position of the Group
IRS 11 Jomt Arrangements
IFRS 11 replaces JAS 32 /nterests m Joint Ventures and provides for a more realistic reflection of jot arrangements by focusing on the rights
and obligations of the arrangement rather than its legal form (as 1s currently the case) The standard addresses inconsistencies m the
reporting of joint arrangements by requiring a single method to account for interests in jointly controtled entities The standard will be adopted
with a commencement date of 1 Apri! 2013 and will be reviewed to understand any possible impact on the financial position of the Group
IRS 12 Disclosures of Interests m Other Entities
IFRS 12 1s a new and comprehensive standard on disclosure requirements for all forms on interests in other entities including subsidiaries
joint arrangements and unconsolidated structured entities A number of new disclosures are required One of the most significant changes
introduced by IFRS 12 1s that an entity 1s now required to disclose the judgements made to determine whether it contro’s another entity The
standard will be adopted with a commencement date of 1 Apnl 2013 and will be reviewed to understand any possible impact on the financial
Position of the Group
JERS 13 Fair Value Measurement
IFRS 13 establishes a single framework for measuring fair value where that 1s requyed by other standards The standard applies to both
financial and non-financial items measured at fair value The standard will be adopted with a commencement date of 1 April 2013 and will be
reviewed to understand any possible impact on the financial position of the Group
Improvements to IFRSs not yet adopted
In April 2009 and May 2010 the IASB issued amendments to its standards primarily with a view to removing inconsistencies and clarifying
wording There are separate transitional provisions for each standard The Group has adopted the relevant 2009 amendments as detailed on
page 57
The Group has not yet adopted the following relevant 2010 amendments although they are not expected to impact on the financial position or
performance of the Group The improvements can be summarised as follows
JFRS 3 Busmess Combnations The measurement options for non-controlling interests resulting from a business combination have been
limted Further acquisition related costs are required to be expensed and not included in the purchase price and contingent consideration
should be recognised at fair value on the acquisition date
IFRS 7 Financial Instruments Disclosures The amendment cludes multiple clanfications related to the disclosure of fmancial instruments
JAS 27 Consoldated and Separate Financal Statements Any future partial disposal of an equity interest in a subsidiary that does not result in
a loss of contro! will be accounted for as an equity transaction and will have no impact on goodwill nor willit gve rise to any gain or loss
Where there 1s loss of controt of a subsidiary any retamed interest will have to be re-rmeasured to fair value which will impact the gain or loss
recagnised on disposal
RMG00000343
RMG00000343
Royal Mail Holdings ple
67 samustepr an Fanos Steers 2010-11
3 Segment information
The Group reports its segments in the way &t internally manages its business as follows
Other
European
27 Mareh 20:
aren 2043 UK operations operations
UK Letters & Post General
Parcels and Office Logistics
International Limited Other =Total ‘Systems Total
£m £m £m £m £m £m
External revenue 6,857 776 38° 7,674 1,485 9,156
Revenue between segments 28 345 442518 - 545
Total segment revenue 6,885 aa21__48o__8.186 1,485 9,674
Operating profit before exceptional tems R 36 20 128 18 266
Modernisation costs — operating exceptional terns (192) (a5) =__ (207) - (207)
Operating (lossWprofit after madernisation costs
before other operating exceptional items (220) a 20 (79) 118 39
Other operating exceptional tems {48) (40) S (88) = (88)
Operating (lossMprofit. (168) (a9), 20 (167) 18 (69)
Profit on disposal of property plant and equipment 60 5 - 65 - 65 1
Profit on disposal of associate company - - 46 6 - bh
{Loss)/profit before financing and taxation (108) (44) 64 (58) 118 60
1 The Other segments external revenue comprises £37m (2010 £45m) relating to the provision of facilities management services by Romec
‘mited and £4m (2010 £1m) for building engineering services provided by NDC 2000 Limited
Finance costs of £124m (2010 £98m) finance income of £69m (2010 £47m) and net penstons interest of £167m (2010 £329m) when added to
the profit before financing and taxation of £60m (2010 £118m) reconciles to the Group loss before taxatwn of £152m (2010 £262m)
There 1s no single customer for which revenues from transactions amount to 10% or more of the total revenues earned in the current period or
1m the prior period
Pages 19 to 26 confirm the actwities of the major business segments
28 March 2010 - Restated for internal organisation structure change in 2010-21.
Other '
European
UK operations operations
UK Letters & Post General
Parcels and Office Logistics
International Umited Other Total Systems Total
£m £m £m £m £m £m
External revenue 6978 838 4“ 7862 1487 9349
Revenue between segments. 29 343 145 547, = 517,
Total segment revenue 7007 1181 191 8379 1487 9 866
Operating profit before exceptional items 205 72 15 292 112 404
Exceptional tems - modernisation (285) (39) : (224) - (224)
Operating profet after moderrusation costs before
‘other operating exceptional items 20 33 15 68 112 180
Other operating exceptional tems 5 (72) = (67) = (67)
Operating profit/{loss) 25 (39) 15 a 112 113
Profit on disposal of property plant and equipment 2 3 - 5 : 5
Profit/(loss) before financing and taxation 27 (36) 15 6 112 118
RMG00000343
RMG00000343
Royat Mal Holdings ple
68 semstRepr and Franca Stamens 2010-1
3. Segment information (continued)
The following amounts are mcluded within operating profit before exceptional items
Other
27 March 2034 European
UK operations operations
UK Letters & Post. General
Parcets and Office Logistics.
International Limited Other Total Systems Total
£m gm £m_£m £m £m
Depreciation 223 - - 23 27 250
Amortisation of intangible assets 2 - - 2 7 36 ,
Share of post tax (loss)/profit from saint ventures and associates a) 25 4B a 28
Other
28 March 2010 European
UK operations operations
Uk Letters & Post General
Parcels and Office Logistics
international Limited Other Total Systems Total
£m fm__{m £m &m ém
Depreciation 217 - > 7 29 246
Amortisation 25 - - 25 7 32
Share of post tax profit from joint ventures and associates 3 27411 4a - 44
4 People information
(a) People costs excluding ColleagueShare and restructuring costs
2011 2010
£000 000
Wages and salaries 4,398 4439
Pensions 458 461
Social security 304 300
Subpostmasters 475 480
Temporary resource 82 8
5,717 5 746
(b) — Peopte numbers
The number of people employed calculated on a headcount basis were
Period end employees Average employees
2014 2010 2011 2010
UK Letters & Parcels and Internationat 155,181 160291 157,317 162 907
Post Office Limited 7,782 8209 8,066 8576
UK wholly owned subsidiaries 162,963 168500 165,383 174 483
UK partially owned subsidiaries 4,254 4217 42h 4199
General Logistics Systems 13,167 12.885 13,220 12.917
Group total 180,384 185 602 182,767 188 599
The number of subpostmasters employed at the period end were
2011 2010
Total 8,283 8468
RMG00000343
RMG00000343
69 hal apr a Peon Sens 205033
4, People information (conunued)
(c)_ Directors’ emoluments i
2011 2010
£000 £000
Orrectors emoluments 2,716 3035,
Amounts earned under Long-Term Incentive Plans : 2626
Number of Directors accruing benefits under defined benefit schemes. 2 2
The Directors Remuneration Report discloses full details of Directors’ emoluments and can be found on pages 45 to 48
5 Operating costs
Operating profit before exceptional items 1s stated after charging
2011 2010
Em £m :
fa) I
Pensions charge (note 26) 458 44d I
Cash 442 526 I
Non-cash 16 (85)
(b) I
Orstribution and conveyance operating costs 1,619 1579
Operating lease charges on vehicles 19 30
Other distribution and conveyance 1600 1549
()
Depreciation and amortisation 286 278
Depreciation of owned property plant and equipment 205 210
Depreciation of property plant and equipment under finance lease and hire purchase contracts 45 36
Total depreciation (note 40) 250 266
Amortisation of intangible assets (note 13) 36 32
Operating lease charges on property plant and equipment (excluding vehicles) 222 215
Minimum lease rentals payable 228 220
Lease rentals receivable (6) (5)
Property facilities and maintenance costs 297 308
Computers and telephones costs 262 247
Consultancy marketing and legal fees 116 178
Bureau de Change foreign currency exchange losses 1 :
Regulatory body costs 13 14
Postcomm 10 1
Consumer Focus 2 3
6 Auditor's remuneration
2011 2010
£000 £000
Audit of statutory financial statements, 597 597
Other fees to the auditor
Statutory audits for subsidiaries 1,398 1427
Other services supplied pursuant to such legislation. 462 329
Taxation services 55 121
Other services 29 46
Total 2,521 2520
The Group paid no additional amounts in 2011 in respect of the 2030 audit (£199 000 in 2010 in respect of the 2009 audit)
RMG00000343
RMG00000343
Royal Mail Holdings pte
70 Fenusl Repo an aca Sterner 2000-12
7 Operating exceptional items
The results for the year include a number of non-recurring or restructuring costs which fall outside of the Groups normal trading activity
These are items which in managements judgement need to be disclosed by virtue of their se or incidence in order to provide greater
wisibility of the underlying results of the business which the Board believes to he a more meaningful indication of ongoing operational
performance An analysis of the exceptional items included within the income statement 1s as follows.
2021 2010
£m £m £m £m
Modernisation costs
ColteagueShare - share scheme 109 28
- dividend ES (72) I
~ business transformation (42) = I
69 (44)
Restructuring costs
Provision for restructuring (note 21) (256) a7
Other restructuring costs (8) (3)
(264) (280)
Impairment of property plant and equipment (note 10) (22) :
Total modernisation costs (207) (224)
Other operating exceptional costs
Provision for potential industrial ctaims (30) -
Impairment of property plant and equipment (note 10) (29) (58)
Impairment of intangible assets (note 13) (12) (ag)
Impairment of investment in associate company (note 15} (2 -
Other exceptional items. (45) 9
(8) (67)
Total operating exceptional items (295) (291)
The £109m release (2010 £28m release) for the share scheme and the £1m release (2010 £72m charge) for the dividend reftects the
cecrease in estimated liability in respect of CoileagueShares as at the balance sheet date (note 21) The £41m charge {2010 £nil) relates to
ColleagueShare payments that are now linked to the achievement of key modernisation milestones as part of the pay deal with the Wu
Communication Workers Union
The £256m (2010 £178m) restructuring charge mn provisions 1s in respect of redundancy costs of £237m (2010 £167m) resulting mamly
from operational efficiency mitiatives im UKLPI and Post Office Limited Other Group restructuring exceptional charges of £19m (2010 £11m)
were incurred during the year These were mainly in respect of onerous property lease obligations
Other restructuring costs of £8mi (2010 £3m) refer to employees excess travel expenses associated with modernisation of the business
The £12m (2010 €nil) impairment included within modernisation costs relates to the derecognition of plant and equipment £10m and building ti
fit-out £2m as a result of busmess transformation
Material costs of litigation requiring separate disclosure due to size and meidence amounted to £30m A provision was raised to meet these
costs of potential industrial claims
Other impairments of £43m (2010 £76m) relate to Post Office Limited comprising £29m (2010 £57m) property plant and equipment and
£14m (2010 £15m) intangible assets iRed Partnerstup Limited (Red) comprising Enil (2010 £1m) property plant and equipment and £im
(2010 £3m) intangible assets and a further £2m charge (2010 Enil) im relation to impairment of the carrying value of the investment in an
associate company Due to ongoing losses the carrying values of asset purchases made by Post Office Limited and iRed during the year have
Deen impaired to their recoverable amount
Other exceptional items charged of £15m (2010 net £9m accrual release in respect of professional fees) were in respect of State Aid and
Postal Services Bill related costs
RMG00000343
RMG00000343
71 Royal Mal Holdings ole
‘Annual Regt and Fran Statements 2010-12
8 Net finance costs
The following analysis excludes net pensions interest
2011 2010
£m £m
Unwinding of discount relating to CotleagueShare scheme (7) 0)
Interest payable on financial liabilities carried at amortised cost (207) (89)
Fmance costs (414) (98)
Interest recerved on avarlable for sale financial assets. 60 42
Interest received on loans and receivables financial assets. 9 5
Finance income 69 47
Net finance costs (excluding net pensions interest) (45) (51)
The finance costs of £114m (2010 £98m) include £13m (2010 £7m) in respect of finance charges payable under finance lease and hire
Purchase contracts
The finance income of £69m (2010 £47m) includes gains of £6m (2010 Eni!) on available for sale financial assets which were released from
equity and recognised in the income statement for the year
9. Income tax
The major components of the income tax charge for the years ended 27 March 2011 and 28 March 2010 are
2011 2010
£m £m
Tax charged m the income statement
Current income tax
Current UK income tax credit (16) (24)
Foreign tax 35 31
Adjustments in respect of current income tax of previous years (a) 3)
18 4
Deferred income tax
Relating to origmation and reversal of temporary differences 88 54
Income tax charge reported in the income statement 106 58
Tax charged to equity
Income tax related to items charged or credited directly to equity
Deferred income tax charge related to actuarial movements in the pension deficit - 4
Deferred income tax charge related to movements in hedging reserve 4 5
Current income tax charge for fair value adjustments on financial assets mvestments 5 10
Income tax charge reported in equity 9 19
Total taxation charge
Current mcome tax charge 23 14
Deferred income tax charge 92 63
Total income tax charge reported 15 77
RMG00000343
RMG00000343
Royal Mail Holdings plc
72 ‘Arnual Repors ant Fnancal Statements 2010-21
9 Income tax (continued)
A reconciliation between the tax charges and the product of accounting loss multiplied by the UK rate of Corporation Tax for the years ended
27 March 2011 and 28 March 2010 1s as follows
2014 2010
£m £m
Loss before taxation (452) (262)
‘At UK standard rate of Corporation Tax of 28% {63} (73)
‘Overseas current tax rates Q) (2)
Tax over-provided in prior years (a) (3)
Non-taxable income (12) 6)
Non-deductibte expenses 15 16 '
Associates /joint ventures profit after tax charge included in Group pre-tax profit (8) (4a)
Net increase m tax charge resulting from derecognition of deferred tax assets 192 149
Profit from asset disposals eligible for relief (28) (2)
Other (6) (10)
Tax charge in the income statement 106 58
Effective income tax rate : :
Deferred tax relates to the following Batance sheet Income statement
2014 2010 2011 2010
£m ém £m £m
Lrabilities
Accelerated capital allowances (4) @ “ -
Goodwill qualifying for tax allowances (9) (4) (5) (4)
Gross deferred tax liabilities (20) (5)
Assets,
Deferred capital allowances 9 1 8 (103)
Provisions and other 1 30 (29) (6)
Pensions temporary differences - 2 (2) (2)
Losses available for offset agamst future taxable ncome 6 68 (62) 65
Hedging derivatives temporary differences (8) (6) 2 (a)
Goodwill qualifying for tax allowances - : - 3)
Gross deferred tax assets 8 95
Net deferred tax (liabilty)asset (2) 90 }
\
Consolidated income statement (88) (54)
The Group has unrecognised deferred tax assets of £2017m (2010 £2847m) comprising £1 218m (2010 £2 253m) relating to the '
retirement benefit obligation £452m (2010 £360m) relating mainly to fixed asset timing differences and £347m (2010 £234m) relating to
tax losses in subsidiaries that are available to offset against future taxable profits The Group has capital losses carried forward the tax effect
‘of which 1s £15m (2010 £24m) and temporary differences related to capital losses of £94m (2010 £107m) The Group has rolled over capital
gains of £64m (2010 £73m) no tax liability would be expected to crystallise should the assets into which the gains have been rolled be sold at
their residual vatue as it is anticipated that a capital loss would arise
Finance (No 2) Act 2010 reduced the mam rate of corporation tax to 27% with effect from 1 April 2011 The effect of this change on
unrecognised deferred tax \s included in these accounts and 1s detailed above In March 2011 the Chancellor of the Exchequer announced that
the main rate of corporation tax will be 26% for the year commencing 1 April 2011 and that there will be successive annual one percentage
point reductions until the rate reaches 23% with effect from 1 April 2014 However in accordance with accounting standards the effect of
these rate reductons on deferred tax balances has not been reflected m these accounts due to the relevant legislation not having been
substantively enacted at the balance sheet date A reduction to 23% would based on losses and temporary differences at 27 March 2011
reduce the Group s unrecognised deferred tax assets by £296m
RMG00000343
RMG00000343
Raya Mal Haldings ple
73 onal por and anoal ttre 2010-11
9. Income tax (continued)
The taxation of foreign profits rules were enacted in Finance Act 2009 Under the foreign profits rules a diidend exemption was introduced
which largely exempts dividends receved on or after 1 July 2009 from UK corporation tax The Group has applied this legislation in arriving at
its UK tax results for the accounting period ended 27 March 2011 and 28 March 2010
At 27 March 2011 there was no recognised or unrecognised deferred income tax liability (2010 Enil) for taxes that would be payable on the
unremitted earnings of certain of the Groups subsidiaries associates or joint ventures as the Group has no liability to additional taxation
should such amounts be remitted due to the availability of exemptions and other reliefs including the UX dividend exemption
10 Property, plant and equipment.
Lani uldings
Tong ‘Short Plant and Motor Fixtures and
Freehold leasehold leasehold machinery vehicles equipment Total
£m £m £m £m £m £m £m
Cost
At 29 March 2010 1719 267 601 1143 460 964 5154
Exchange rate movements (6) - - (2) a) iv) (9)
Reclassification (75) () 79 (2) 3 a) 7
Additions 1% 19 7 85 44 52 2
Disposals (aos) (5) ) (42) (G4) (6) (200)
Reclassification to non-current assets held for
sale {note 46) (a2) : E . - = (a2)
‘At 27 March 2011 1592 277 693 1182 472 2008 5,224
Depreciation and impairment
‘At 29 March 2010 891 166 387 682 233 860 3219
Exchange rate movements @ - - (2) - (a) (4)
Reclassification (40) 3) 42 - 1 - -
Depreciation (note 5) 44 7 38 % 53 34 250
Impairment (note 7) - - 7 10 1 23 41
Disposa's (a a a) (42) 30) ) (104)
Reciasssfication to non-current assets held for
sale (note 16) (a0) E Pe = = a (20)
‘At 27 March 2012 63 169 470 2 258 910 3,392
Net book vatue
‘At 27 March 2011 729 108 223 460 214 98 1,832
‘At 29 March 2010 828 101 214 461 227 106 1935
Depreciation rates are disclosed within accounting policies (note 2) No depreciation ts provided on freehold land which represents £190m
(2010 £205m) of the total cost of properties The net book value of the Groups property plant and equipment held under hire purchase
contracts and fmance leases amounts to £262m (2010 £176m) comprising €152m (2010 £157m) vehicles €88m (2010 £13m) plant and
machinery and £22m (2010 £6m) land and buildings The net book value of the Groups property plant and equipment includes £150m (2010
£197m) in respect of assets in the course of construction The net book value of the Groups land and buildings includes £383m (2010
£409m) in respect of buslding fit-out
The £291m (2010 £370m) additions do not include any borrowing costs capitalised in relation to specific qualifying assets (2010 Enil)
‘On 24 March 2011 an agreement was implemented to substitute £302m pension escrow financial investments with mortgages against certain
property assets The carrying value of these property assets of £33m is included wathin the £729m freehold land and buildings total above
The fair value of these property assets based on a residual cashflow analysis* exceeds them carrying value by £124m
*A residual cashflow analysis determines a price that could be pard for the property given the expected as sf complete value of the proposed
development and the total cost of the proposed development allowing for market level profit margins and having due regard to the known
characteristics of the property and the imherent risk involved n its development
RMG00000343
RMG00000343
Th Fetaltepr nd Four Sens 20:01
10 Property, plant and equipment (continued)
Land and buitdings
Long Short Plant and Motor Foxtures and
Freehold leasehold leasehold machinery vehicles equipment Total
£m £m £m £m £m £m &m
Cost
‘At 30 March 2009 1669 263 549 1106 390 947 4922
Exchange rate movements, (6) - - 6) @ @) 5)
Reclassification a2) 1 11 aay 13 (2 -
‘Additions 8 4 55 n 102 46 370
‘Acquistion of businesses 1 - - - - - 2
Disposals 8) a (14) (16 «a (24) (206)
Reclassification to non-current assets held for sale
(note 16) Ga) - - : - - (18)
‘At 28 March 2010 1ng9 267 601 1143 460 964 5.154
Depreciation and impairment
At 30 March 2009 851 158 338 642 205 842 3036
Exchange rate movements 2) - - @) @ 2) (3)
Reclassification - - - (3) 6 - -
Depreciation (nate 5) 52 ? 38 63 57 32 246
Impatrment (note 7) 1 2 28 1 5 1 58
Disposats ”) @ (14) (a5) er) (23) (99)
Reclassification to non-current assets held for sale
{note 16) (14) - = : - - (a4)
‘At 28 March 2010 En 166 387 682 233 860 3219
Net book vatue
At 28 March 2010 828 301 214 461 227 104 1935
‘At 30 March 2009 818 105 214 462 185 105 1886
14. Leasehold land payment
2011 2010
£m £m
Net book value
At 29 March 2010 and 30 March 2009 4 4
Amortisation (a) =
At 27 March 2011 and 28 March 2010 3 4
RMG00000343
RMG00000343
Royal Mail Holdings ple
75 Aenual Rept nd Fo! Steers 2020-93
12 Goodwill
2011 2010
£m £m
Cost
‘At 29 March 2010 and 30 March 2009 636 663
Exchange rate movements qa) (27)
Acquisition of businesses 3 -
‘At 27 March 2013 and 28 March 2010 628 636
Impairment
‘At 29 March 2010 and 30 March 2009 439 457
Exchange rate movements (8) (18)
‘At 27 March 2012 and 28 March 2010 431 439
Net book value 1
At 27 March 2034 and 28 March 2010 197 197
‘At 28 March 2010 and 29 March 2009 197 206
The carrying value of goodwill arising on business combinations of £197m (2010 £197m) at the balance sheet date includes £195m (2010
£195m) relating to the General Logistics Systems (GLS) business segment In line with the accounting policy (see note 2) this goodwill has
been reviewed for impairment An «mpairment loss 15 recognised for the amount by which the carrying value of an asset or cash generating
unit exceeds the recoverable amount The recoverable amount is the higher of net realisable value and value in use The carrying value of GLS
excluding interest bearing and tax related assets and liabilities 1s £450m (2010 £456m) at year end and the operating profit before
exceptional items is £118m (2010 £112m) for the year (note 3) The carrying value represents a multiple of 3 8 (2010 4 1) on operating profit
before exceptional items The net realisable value of GLS for the purposes of the impairment review (‘e the fair value less costs to sell) has
been assessed with reference to earnings multiples for quoted entities in a similar sector On this basis the net realisable value of GLS has
heen assessed to be in excess of the carrying value No reasonable possible change m the earnings multiples referenced would reduce the net
realisable value to below the carrying value
RMG00000343
RMG00000343
76 Aemeatheprt Pana! Stem 2030-1
13 Intangible assets
2011 2010
Master ~ Master
franchise Customer franchise Customer
licences listings Software ‘Total licences listings Software Total
£m £m £m___£m Em £m £m £m
Cost
At 29 March 2010 and 30 March 2009 24 27 325-376 25 28 255 308
Additions - - 73 3 - - 1 71
Disposals - ™ (16) (16) - 7 (a) (a)
Acquisition of businesses : 2 - 2 - - - -
Exchange rate movements : = - : () (a : (2)
At 27 March 2011 and 28 March 2010 24 29 382-435 24 27 325376
Amortisation and impairment
At 29 March 2010 and 30 March 2009 22 22 23300277 22 19 189 230
Impairment {note 7) - - 12 12 - - 18 18
Amortisation 2 3 31 36 1 4 27 32
Disposals - - (16) (16) : = @ (a)
Exchange rate movernents = = 7 - a) w 7 2)
At 27 March 2011 and 28 March 2010 26 25 260-309 22 22 233277
Net book value
At 27 March 2014 and 28 March 2010 : 4 122126 2 5 92 99
At 29 March 2010 and 30 March 2009 2 5 92. 99 3 9 66 78
The intangible assets recognised in the Groups balance sheet none of which have been internally generated have finite Ives and are being
written down on a straight-line basis
The amortisation charge of £36m (2010 £32m) relating to intangible assets 1s aggregated within other operating costs’ m the income
statement and disclosed in note 5 Details of the impairment are disclosed in note 7
The £73m (2010 £71) additions include £1m (2010 £0 2m) borrowing costs capitalised in relation to specific qualifying assets
14 Business combinations
The acquisitions during the current or prior years are not material and therefore the following disclosures are made on an aggregated basis
The table below sets out the identifiable assets and lrablities that were acquired at their fair values to the Group as at the date of acquisition
Faw value
Total
2011
=m
Tangible assets acquired -
Intangible assets recognised on acquisition 2
Goodwill recognised on acquisition 3
Total cost recognised. 5
Gross consideration 5
Less deferred consideration 43)
Net cash outflow 2
The General Logistics Systems (GLS) subsidiary acquired Reggio Emuita and North Tunn franchise area businesses in Italy on 1 September
2010 and 1 March 2011 respectwely If these combinations had taken place at the beginning of the financial year Group revenue from
continuing operations would have been £9 161m The goodwill of £2m and £m respectively arising on these acquisitions 1s indicative of the
relative quality of the acquired entities
Combined profits of the acquired entities since their respective acquisition dates and #f they had been accuired at the beginning of the financial
year are not material in the context of the Groups profit after tax
RMG00000343
RMG00000343
77 yal Mall Holdings ple
‘Aeoual Report and Francs Statements 2010-11
15 Investments in jomt ventures and associates
Jomt ventures
‘Durmg 2010-11 and 2009-10 the Groups only jomt venture investment was a 50% interest in First Rate Exchange Services Holdings Limited
whose prinapal activity 1s the provision of Bureau de Change
Associates
Oetails of the Groups 2010-11 and 2009-10 associate investments are provided in note 29 The reporting dates for these investments 1s
31 March 2011 except for Quadrant Catering Limited (30 September 2010) and G3 Worldwide Mail NV (Spring) (31 December 2010)
Estimates of the profits of Quadrant Catering Limked and G3 Worldwide Mail NV (Sprig) from ther reporting date te 27 March 2011 (and
28 March 2010 for the prior year) have been included to ensure that the reported share of profits of associates aligns with the Groups
financial year There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends
repayment of loans or advances
Share of post
At 29 tax pre At27
March dividend March
2010 profit impairment Disposal —-Owwidend 2011
£m £m £m £m £m Em
Jomt ventures
Share of net assets 7% 28 - - (30) 72
Goodwill 1 = - 2 - 4
Net nvestments 75 28 = < (30) 73
Associates
Share of net assets 61 - - (20) ) 32
Goodwill 1 : (2) (9) e -
Net investments: 72 = (2) (29) (9) 32
Total net investments in joint ventures/associates 1467 28 (2) (29) 39) 105
During the year the Group disposed of its 20% shareholding im Camelot Graup plc and Camelot Global Services Limited
The goodwill impairment relates to the Groups mvestment in the G3 Worldwide Mail NV (Spring) associate company
‘Share of post
Av30 tax pre AL 28
March dnidend March
2009 profit Reclassification Dividend 2010 I
£m £m £m £m £m I
Joint ventures
Share of net assets n 32 - (29) 7% :
Goodwill 1 : : : 1 ;
Net investments 72 32 - (29) 6 :
Associates
‘Share of net assets 60 9 (2) (6) 61
Goodwill 9 - 2 - 11 :
Net investments 69 9 : (6) 72
Total net investments in joint ventures/associates 141 44 - (35) 147 :
The reclassification above relates to the increased shareholding in G3 Worldwide Mail N V (Spring)
RMG00000343
RMG00000343
78 Sepattepon at arc Scenes 220-1
15 Investments in joint ventures and associates (continued)
2011 2030
Jomt Joint
ventures Associates Total ventures Associates Total
£m £m £m £m £m £m
Share of assets and liabilities
Current assets 150 49 199 172 123 295
Non-current assets 2 21 23 3 53 56
Share of gross assets 152 70 222 175 176 351
Current liabilities (80) (37) (447) (101) (112) (213)
Non-current liabilities : (a) (a) - (3) (3)
Share of gross habilities (80) (38)__(118) (101) (115) (216)
Share of net assets 72 32 04 2% 61 135 I
Share of revenue and profit
Revenue % 380 456 7 1206 1283
Profit after tax 28 : 28 32 9 44a
16 Non-current assets held for sale
Land and 9S
tong
Freehold leasehold Total
£m £m. £m
Net book amount
‘At 29 March 2030 5 . 5
Reclassification from property plant and equipment 4 - 4
Reclassification to property plant and equipment (2) - (2)
Disposals QB) = (3)
At 27 March 2011 4 - 4
The planned disposal of these property assets 1s as a result of the rationalisation of the Group portfolio
During the year a gain of £8m (2010 €2m) was recognised in the income statement in relation to the disposal of non-current assets held for
sale
Land and buildings
Long
Freehold leasehold Total
&m £m &m
Net book amount.
‘At 30 March 2009 2 1 3
Reclassification from property plant and equipment 5 - 5
Reclassification to property plant and equipment ts) = @)
Disposats (ay (1) (2)
At 28 March 2010 5 : 5
47 Inventories
2011 2010
£m £m
Supplies and materials (uniforms fuel printing and stationery mailbags engineering spares) 30 30
Merchandise (retail_tottery products and stamps) 8 8
Total 38 38
During the year no inventory items were writen off (2010 £1m) Engineering spares items are included net of a provision for impairment of
£5m (2010 £4m) The cost of inventories recognised as an expense in the income statement 1s £160m (2010 restated £142m)
RMG00000343
RMG00000343
79 ul tepor ant Femen Siteers 220-2
18 Current trade and other receivables
2011 2010
£m ém :
Trade receivables 853 855 F
Prepayments and accrued income 124 154
7 1006
Client recevabtes in the Post Office Limited network 158 149
Total 1,135 1155
Movements in the provision for bad and doubtful debts were as follows
2011 2010 ‘
£m £m
At 29 March 2010 and 30 March 2009 32 29
Foreign exchange rate adjustment - -
Recewables provided for during the year 11 17
Release of provision (6) 0)
Utiisation of provision, (44) @,
At 27 March 2011 and 28 March 2010 26 32 ,
The amount of trade recewables that were past due but not impaired are as follows
2011 2010
£m £m
Past due not more than one manth 64 90
Past due more than one month and not more than two months as ?
Past due more than two months 2 14
Total past due but not impaired 107 141
Provided for or not yet overdue 77 776
Provision for bad and doubtful debts (26) (32)
Total trade recewables 853 855 :
19 Cash and cash equivalents I
2011 2010
£m £m
Cash in the Post Office Limited network 704 708
Cash at bank and in hand 100 145
Total cash at bank in hand or in the Post Office Limited network 804 853
Cash equivalent investments Short-term deposits 297 84
Total cash and cash equivalents 1,401 937
Cash and cash equivalents comprise amounts held physically i cash hank balances available on demand and depostts for three months or less
dependent on the immediate cash requirements of the Groun Where interest 1s earned this 1s either at floating or short-term fixed rates
based upon bank deposit rates The fair value of cash and cash equivalent mvestments 1s not materially different from the carrying value of
£1 101m (2010 £937m)
RMG00000343
RMG00000343
Royat Mall Holdmgs ple
BO seus Roper ant area Stato mets 2010-2
20 Fimancial ltabiltties
2011
Finance
Loans tease/hure
and purchase Derivative
borrowings contracts abilities Total
£m £m £m £m
‘Amounts falling due in
One year or fess or on demand (current) 375 65 3 443
More than one year {non-current) 1,478 193 : 1,671
‘More than one year but not more than two ; 50 : 50
More than two years but not more than five 601 109 - 710
More than five years 877 34 : gat
Total 1,853 258 3 2416
2010
Finance
Loans leasefhire
and purchase Derwative
borrowings contracts tabilties Total
£m £m &m £m
Amounts falting due in
One year or less or on demand (current) 388 61 a? 466
More than one year (non-current) 1138 120 1 1259
More than one year but not more than two years, - 45 1 46
More than two years but not more than five years 301 73 - 37%
More than five years 837 2 : 839
Total 1526 181 18 1725
2011
‘Average
Average maturity
Loans Further interest rate date
and committed Total of loan of loan
borrowings facility facility drawn down drawn down
£m £m £m % year
BIS loans to Royal
Mail Group Ltd 1,477 300 4777 63 2017
BIS loans to Post
Office Limited 375 775 1,150 os 2011
Committed facilities 1,852 1,075 2,927
Miscellaneous toans
and borrowings in
subsidiaries 1 = a 45 2012
Total 1,853 1,075 2,928
2010
‘Average
Average maturity
Loans Further interest rate date
and committed Total of loan of loan
borrowings faulty faciity drawn down = drawn down
£m £m £m x year
BIS loans to Rayat Mail Group Ltd 1177 560 1737 66 2018
BIS loans to Post Office Limited 343 807 1.150 08 2010
Committed facilities 1520 1367 2887
Miscellaneous loans and borrowings in subsidiaries 6 : 6 22 2014
Total 1526 1367 2893
RMG00000343
RMG00000343
Royal Malt Holdings ple
81 ranualReartand Farol Susterers 2010-21
20 Financial liabilities (continued)
The miscellaneous loans and borrowings in subsidiaries are either unsecured or secured on various assets (mainly property) of the overseas
subsidiaries The loans are repayable in variable and fwed amounts over their maturity pertods
The obligations under finance teases and hire purchase contracts are either unsecured or secured on the leased assets These are repayable in
variable and fixed amounts over their maturity periods The average interest rate Is 5% (2010 5%) The average maturty date ts more than five
years {2010 within two to three years)
The undrawn committed facilities in respect of which all conditions precedent had been met at the balance sheet date expire as follows
2014 2010
£m £m
Expiring in one year or less - .
Expiring in more than one year but not more than two years 775 807
Expiring in more than two years 300 560
Total 1,075 1367
The following securities apply to the Group s committed facilities
2011-2010
ci &m Security
Royal Mail Group Ltd senior 900 900 Fixed charges over Royal Mail Holdings plc s shares in Royal Mail Group Ltd and Royal Mail
debt facilty Group Ltd s shares in Royal Mail Estates Limited Floating charges over all assets of Royal Mail
Holdings ple Royal Mail Group Ltd and Royal Mail Estates Limited excluding certain Group
properties over which mortgages are held as security to the Royal Mait Pension Plan
Royal Mail Group Ltd 377-337 None
shareholder toan facilty
Royat Mail Group Ltd other $00 500_Fixed charges over any Royal Mail Group Ltd loans to General Logistics Systems BV any Royal i
drawn down loans Mail Group Ltd loans to subsidiaries of General Logistics Systems B Vand Royal Mal
Investments Limited s shares in General Logistics Systems BV Floating charge over non- '
regulated assets of Royal Mail Group Ltd
4777-1737
Post Office Limited facility 1,150 1150 Floating charge over all assets of Post Office Limited and a negatwe pledge* over cash and near
cash tems
Totat 2927 2887
*The negative pledge is an agreement not to grant security over these assets or to set up a vehicle that has the same effect
The Royal Mail Group Ltd shareholder loan mcreased by £40m (2010 £37m) as a result of accrued interest added to the loan balance
The Post Office Limited faciity of £1 150m Is currently restricted to funding the cash and near cash items held within the Post Office Limited
network
The BIS loans to Post Office Limited under the facility are short dated on a programme of liquidity management and mature on average 1 day
after the year end (2010 1 day) On maturity it 1s expected that further loans will be drawn down under this facility which expires in 2012
The security im place in the previous year was as disclosed above - with the exception of the £102m mortgages over certain Group properties
which were completed in March 2011
The BIS loans to Royal Mai! Group Ltd and Post Office Limited become repayable immediately on the occurrence of an event of default under
the loan agreements These events of default include non-payment insolvency and breach of covenant relating to interest and total
indebtedness It is not anticipated that the Company 1s at risk of breaching any of these obligations except as discussed in note 2
RMG00000343
RMG00000343
82 Shea so ad naod Stren 2ou0t
21 Provisions for \iabilities and charges
Exceptional
Restructuring
and other
costs ColleagueShare Other Total
£m £m £m £m
At 28 March 2010 114 108 54 276
Arising during the year
- charged in aperating exceptional items 299 - - 299
~ charged in other operating costs - - 25 25
Unused amounts reversed (23) (109) (7) (129)
Utilised in the year (181) 4) a7) (202)
Discount rate adjustment 2 7 - 9
At 27 March 2011 221 2 55 278
Disclosed as
Current at 27 March 2011 141 2 38 181
Non-current at 27 March 2012 80 < v7 97
221 2 55 278
Current at 28 March 2010 88 - 42 130
Non-current at 28 March 2010 26 108 12 146
114 108 54 276
Restructuring and other exceptional costs
The provision for restructuring principally comprises redundancy schemes of £159m (2010 £97m) Unused amounts reversed of £13m
principally relate to the Heathrow Worldwide Distribution Centre (HWCC) project where a change in busmess strategy has resulted in it no
longer being probable that an outflow of resources will be required to settle the Group s obligations The HWDC strategy has been superseded
by the London Mail Centre Review a new strategy developed in the current year requiring a new provision to be raised for £34m
A further £32m relates to onerous property and commercial contracts associated with restructuring projects and £30m retating to the costs of
potential industrial claims
The timing of cash flows for such provisions Is by its nature uncertain and dependent upon the outcome of related events
ColleagueShare
Royal Mail operates a share scheme referred to as ColleagueShare This Is a five-year scheme running to March 2012 The provision at
27 March 2011 of £2m (2010 £108m) represents the potential liability for the financial years up to 2011-12
Other
Other provisions of £55m (2010 £54m) are thase recognised principally for the expected liabilities arising from property exits in the normal
Course of business These principally comprise onerous lease obligations and decommissionmg costs Other provision amounts arise from
estimated exposures resulting from legal clams incurred in the normal course of business Other’ provision amounts are expected to be
utilrsed in 2011-12 with the remainder within 2 to 3 years except £5m onerous property contracts expected to be utilised within 3 to 5 years
and a further £2m expected to he utilised over a period greater than 5 years
RMG00000343
RMG00000343
83 Royal Mail Holdings ple
‘Arcus Report and Fnancal Statements 2010-11
22 Current trade and other payables
2011 2010
£m £m
Trade payables and accruals 4,179 1179
Advance customer payments 307 299
Social security 95 95
1,581 1573
Deferred consideration on business combinations 2 -
Client payables in the Post Office Limited network 314 313
Amounts due to pension schemes relating to redundancies 12 6
Interest 2 2
Capital payables 50 108
ColleagueShare accrual = 1
Total 1,961 2076
The Group through Post Office Limited recewes and disburses cash on behalf of Government agencies and other clients to customers through
tts Post Office branch network Amounts owed to these parties are separately shown as chent payables atove The level of cash held and the
related payables can vary significantly at each balance sheet date
The change in the carrying value of the discounted element of the payable balance due to the passage of te is not maternal
Capital payables represent ltabilties outstanding in relation to the acquisition of property plant and equipment and intangible assets
23 Non-current other payables
2011 2010
£m Em
Lease incentwes 24 22
Other payables 9 21
Deferred consideration on business combinations 1 -
Total 34 43
26 Fmancial risk management objectives and policies
The Groups pnincipat financial instruments other than derwatives comprise short-term deposits money market liquidity investments
Government gilt edged securities loans finance leases and hire purchase contracts and cash The main purposes of these financial instruments
are to raise fmance and manage the liquidity needs of the business operations The Group has varicus other financial instruments such as
trade receivables and trade payables which arise directiy from operations
The Group enters into derwative transactions principally commodity swaps and forward currency contracts The purpose 1s to manage the
commodity and currency risks arising from the Group s operations
It ts and has been throughout the year under review the Groups policy that no speculatwe trading in financial instruments shall be
undertaken
The main risks arising from the Group s financial instruments are interest rate risk, liquidity risk foreign currency risk commodity price and
credit risk The Board reviews and agrees policies for managing each of these risks and they are summarised below
Interest rate risk
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 Royal Mail Group Ltd of £1477m (2010 £4177m) are a mix of £600m (2010 Eni) variable rate and £877m (2010
£1.177m) fixed mterest rate with a combined average matunity date of 2017 (2010 - average date of 2018) The BIS loans to Post Office
Limited of £375m (2010 £343m) are at short-dated fixed interest rates with average maturity 1 day (2010 average 1 day) The total interest
beanng financial assets of the group (excluding the non-current investments) of £397m (2010 £194m) are at short-dated fixed or variable
mterest rates with average matunty 5 days (2010 average 3 days) These short-dated financial instruments are maturity managed to obtain
the best value out of the mterest yield curve
The Group's policy 1s to manage its net interest expense using an appropriate mix of fixed and variable rate fmancial struments No external
hedging of interest rate risk is undertaken
The following table demonstrates the sensitivity to reasonably possible changes in interest rates with all other variables held constant of the
Group s profit before taxation and equity based upon the financial mstruments held at the batance sheet date
The effect from available for sale (whether floating or fixed rate) financial assets 1s calculated as the change in fair value at the balance sheet
date and impacts equity
RMG00000343
RMG00000343
84 Royal Mall Holdings ple
‘xoual Report and Fnanoal Statements 2010-51
24 Fimancial risk management objectives and policies (contmued)
The effect from other floating rate financial instruments 1s calculated as the balance of the instruments multiplied by the change in interest
rates and impacts profit before taxation
There 1s no effect on either profit before taxation or equity from other financial instruments
2011 2010
Effect on Effect on
profit profit
before Effect on before Effect on
taxation equity taxation equity
gains/(losses) gains/{losses} —_gains/Mlosses) gains/(losses)
£m £m ém &m
Effect of an increase in Sterling interest rates of 100 basis pomts (1%) (3) (143) a) (149)
Effect of a decrease in Sterling interest rates of $0 basis paints {0 5%) 2 8% 1 50
Foreign currency risk
The Group 1s exposed to foreign currency risk due to trading with overseas postal operators for carrying UK mail abroad and deivering foreign
origin maii m the UK the balances held to operate the Bureau de Change services with Post Office Limited and various purchase contracts
denominated in foreign currency These risks are mitigated by hedging programmes managed by Group Treasury Where possible exposures
are netted internally and any remaining exposure 1s hedged using a combination of external spot and forward contracts Hedging will not
normally be considered for exposures of less than £1m and hedging is normally confined to 80% of the forecast exposure where forecast cash
flows are highly probable
The Groups obligation to settle with overseas postal operators 1s denominated m Special Drawing Rights (SDRs) - a basket of currencies
comprised of US dollar (USS) Japanese Yen Sterling and Euro Group Treasury operates a rolling 18-month hedge programme which 1s
‘subsequently reviewed on a quarterly basis An external SDR hedge was put in place during 2010-11
For the Bureau de Change business balances of major currency holdings are hedged along with minor currencies showing a closely correlated
movernent
The Group s obligations to settle conveyance charges in USS has been hedged to April 2012
The Group has two actwe hedge programmes covering obligations to settle Euro mvoices on automation projects
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries However it does hedge the
transactional exposure created by inter-company loans with these subsidiaries
The table below demonstrates the sensitivity of the Group to its gross currency exposures (before hedging) together with how much the 2011~
12 operating profit before exceptional stems (operating profit) would differ from 2010-11 as a result of the changes to 27 March 2011 in
exchange rates post the impact of the Group s hedging programmes
The sensitivity analysis is the impact on the Groups operating profit that would result from a movement in exchange rates (excluding any
hedges in place) It 1s calculated as the difference between the operating profit that would have been reported based upon actual currency
transactions and actual exchange rates during the year (but excluding the impact of any hedges in place) and the operating profit that would
have been reported based upon actual currency transactions but with exchange rates with sterling 5% weaker
The impact on 2011-12 operating profit is calculated as the movement in operating profit (from actual 2010-11 operating profit) that would
arise on the actual currency transacttons in 2010-11 at the actual hedge rates for 2011-12 where hedges are in place and the closing
exchange rates for 2010-111 where no hedge exists
The analysis below excludes the impact of changes in USS/Sterting exchange on diesel and jet fuel prices as this analysis 1s included in the
commodity price risk note
The analysis is different from the analysis provided in last year s financial statements (which reported the sensitivity of the Groups financial
imstruments at the balance sheet date) as the new analysis 1s felt to more usefully «llustrate the exposures of the Group
2011 2010
Impact of no Impact of no
Impact on further change in Impact on further change in
operating profit exchange rate on ‘operating profit exchange rate cn
of a 2011-12 ofa 2010-11
Sk weakening —_ operating profit 5% weakening operating profit
of sterling versus 2010-11 of steriing versus 2009-10
(before hedging) (post hedging) (before hedging) (past hedging)
£m gain/(loss) £m gain/(loss) £m gain/(loss) £m gain/(loss)
USS (2) - 1 (4)
Euro (9) a (3) :
RMG00000343
RMG00000343
Royal Mail Holdings ple
85 Amal Report and acl Sateen 20101
24 Fimancat risk management objectives and policies (continued)
Commodity price risk
The Group 1s exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe which consumes over 130 milton
litres of fuel per year and a yet fuel price risk arising from the purchasing of air freight services The Groups fuel risk management strategy
aims to reduce uncertainty created by the movements in the ail and foreign currency markets The strategy uses over-the-counter derivative
products (in both USS commodity price and USS/Sterling exchange rate) to manage these exposures
In addition the Group is exposed to the commodity price risk of purchasing electricity and gas The Groups risk management strategy aims to
Teduce uncertainty created by the movements in the electricity and gas markets These exposures are managed by locking into fred rate price
contracts with suppliers and using over-the-counter derivative products to manage these exposures
The table below demonstrates the sensitnty of the Group to &ts gross commodity price exposures (before hedging) together with how much
the 2011-12 operating profit before exceptional items (operating profit) would differ from 2010-11 as a result of the changes to 27 March
2011 in commodity prices post the impact of the Group s hedging programmes
The sensitivity analysis 1s the impact on the Groups operating profit that would result from a movement i commodity prices (excluding any
hedges in place) It 1s calculated as the difference between the operating profit that would have been reported based upon actual commodity
transactions and actual commodity prices during the year (but excluding the impact of any hedges in place) and the operating profit that would
have been reported based upon actual commodity transactions but with commodity prices 5% higher
The impact on 2011-12 operating profit 1s calculated as the movement in operating profit (from actual 2010-11 operating profit} that would
arise on the actual commodity transactions in 2010-11 at the actual hedge prices for 2011-12 where hedges are in place and the closing
commodity prices for 2010-41 where no hedge exists
2011 2010
Impact of no Impact of no
Impact on —_ further change in impact on further change in
operating profit price on 2011-12 operating profit price on 2010-11
ofa operating profit ofa operating profit
S%imerease in price versus 2010-21 © 5% increase mm price versus 2009-10
(before hedging) {post hedging) (before hedging) {post hedging)
£m gain/ioss) £m gain/{loss) £m gairv(loss) £m gainv/{loss)
Diesel and Jet (5) (2a) (4) 23
Credit risk
Royal Mail operates a credit policy which provides a fair and equitable arrangement for all its account customers The level of credit granted 1s
based on a customer s risk profile assessed by an independent credit referencing agent The credit policy 1s applied rigidly within the regulated
products area so as to ensure that Royat Mail is not in breach of compliance legislation Assessment of credit for the non-regulated products is
based on commercial factors which are commensurate with the Group s appetite for risk
Royal Mail has a dedicated credit management team which sets and monitors credit limits and takes corrective action as and when
appropriate Credit controls in place have limited the level of bad debt incurred to around 0 1% (2010 0 11) of turnover
With respect to credit risk arising from other financial assets of the Group which comprise cash cash equvalent investments available for sale
financial assets held to maturty fmancial assets held for trading financial assets loans and recervables fmancial assets and certain dervatwe
instruments the Group invests/trades only with high quality financial institutions The Groups exposure to credit risk arises from default of the
counterparty with a maximum exposure equal to the carrying amount of these instruments
There are no significant concentrations of credit risk within the Group
Liquidity risk:
The Group s prumary objective is to ensure that the Group has sufficient funds available to meet its fmanaal obligations as they fall due This 1s
achieved by aligning short-term investments and borrowing facilities with forecast cash flows Typical short-term investments include money
market funds time deposits with approved counterparties UK Government gilts and Treasury bis Borrowing facilities are regularly reviewed
to ensure continuity of funding
The unused facilities for Royal Mail Group Ltd of £300m expire in 2014 (2010 £560m expiring in 2014) The unused facility for Post Office
Limited of £775m expires im 2012 (2010 £807m expiring in 2011) Additionally the Group has £200m (2010 £200m) of uncommitted lines of
credit which are reviewed annually
Capital management
Royal Mail Holdings plc 1s a public limited company whose shares are not traded and the Group regards its capital as share capital share
premium retained earnings and debt provided by the UK Government The sole sharehotder and the provider of the majorty of debt to the
Group 1s the UX Government The management of capital 1s closely linked to the Group s relationship with ts shareholder The Group maintains
its liquidity requirements by the management of its internal funds and by the drawing down of equity and debt from its shareholder as well as
drawing on limited external debt facilties The Groups debt to equity ratio Is determined by its shareholder
‘As explained in the going concern section in note 2 the loans and the funding structure of the Group may be subject to change
Financial assets - pension escrow investments
On 23 March 2007, Royal Mail Holdings plc and Royal Mail Group Ltd established £1bn of mvest ments m escrow These investments are held
as securty to the Royal Mail Pension Plan in support of the 38 year deficit recovery period from March 2009 At 27 March 2011 Royal Mail '
Holdings pic had £1 074m (2010 £1014) of financial assets in the pension escrow and Royal Mail Group Ltd had £87m (2010 £178m) of
fmancaal assets plus mortgages on certain Group properties Charges aver these assets have been registered Further details on the Royal Mail
Pension Plan including the fatest full actuarial valuation are contained in note 26
RMG00000343
RMG00000343
Royal Mal Hotings ple
86 Amal Repo and Franca Sterets 2020-1
25 Fmancial mstruments
Carrying amounts and fair values
Set out betow is a summary by category of the carrying amounts of all the Groups financial instruments Trade recewables payables I
prepayments accruals and cltent payables have been omitted from this analysis on the basis that carrying value is a reasonable approximation for
fair value Pension scheme assets and habilities are also excluded Fair values have been calculated using current market prices (forward
exchange rates/commodity prices) and discounted using appropriate discount rates There are no material differences between the fair value
(transaction price) of all financial mstruments at intial recognition and the fair value calculated using these valuation techniques The fair value of
the BIS loans to Royal Mail Group Ltd {non-current) ts £1 563m at 27 March 2011 (2010 £1197m) The fair vatue of Obligations under finance
leases and hire purchase contracts 1s £262m {2010 £184m) For all other financial instruments fair value 1s equal to the carrying amount
The tables below also set out the carrying amount of the currency of the Group s financial instruments
2011
Stering US$ Euro. “Other_—‘Total
Level Classification fm Em fm Em Em
Financial assets
Cash at bank in hand or in Post Office Limited network 659 13 103 29 804
Cash equwatent investments 296 a - - 297
+ Money market funds Loans and receivables 242 - - - 142
~ Short-term deposits - local government Loans and receivables 29 - - - 29
= Short-term deposits — bank Loans and recewables 125 1 - -__ 126
Cash and cash equivalents 955 14 103 29 1,101
Financiat assets - mvestments (current)
~ Short-term deposits - Government/tocal government Loans and recervabtes 1 - - - a
Financial assets - investments (non-current)
~ Bank deposits Loans and receivables - 46 : - 44
Financial assets - pension escrow mvestments (non-current) 1,161 : : - 1,164
~ Cash at bank 3 - - - 3
- Treasury bitis 1 Available for sale 242 - - - 242
~ Gilt edged secunties (conventional) 1 Available for sale 143 - - - 143
- Gilt edged securities (index linked) 1__Available for sale 773 - : = 773
Derivative assets - current 2 6 21 9 - 36
= non-current 2 Fa 5 - < 6
Total financial assets 2,126 Bo 412 29 2,349
Financial abilities
Financial abilities - loans and borrowings (current) (375) : - = (375)
= BIS loans to Post Office Limited Amortised cost, (375) - = = @75)I
Obligations under finance leases and hire purchase contracts
(current) Amortised cost (65) - - - (65)
Financial liabilities - loans and borrowings (non-current) (4,477) = (a) = _ (1,478)
~ BIS loans to Royal Mait Group Ltd Amortised cost (1.477) - - - (1477)
= Miscellaneous toans in subsianes (non-current) Amortised cost - (et) a)
Obligations under finance leases and hire purchase contracts
(non-current) Amortised cost (193) - - - (193)
Derivative liabilities ~ current. 2 - (2) (1) 7 (3)
Total fmancial liabilities (2,210) (2) (2) = _ (2,114)
Net total financial assets 16 82110 29 235
RMG00000343
RMG00000343
Royal Mall Holdings ple
87 eras Renn and Frou! Sere 2030-21
25. Financial instruments (continued)
There are no financial assets or abilities designated at fair value through the income statement on initial recognition
The criteria for codification of Level in the above table Is described in the accounting policy Fair value measurement of financial instruments,
on pages 63 and 64
The financial assets - investments (non-current) - bank deposits of £44m (2010 £49m) and £1m (2010 Enil) of the cash equivalent
investments are pledged as collateral to a counterparty bank which has provided a letter of credit in support of a lease payable obligation
Derwatwe assets £36m current £6m non-current (2010 £24m current £3m non-current) and liabilities £3m current Enil non-current (2010
£17m current £1m non-current) are valued at fair value Effectwe changes in the fair value of derwvatives which are part of a designated cash
flow hedge under IAS 39 are deferred mto equity All other changes in derivative fair value are taken straight to the income statement
None of the financial assets listed above are etther past due or considered to be impaired
The decrease in pension escrow investments of £28m (2010 increase of £83m) consists of €54m (2010 £44m) interest on the investments
plus £20m (2010 £42m) movement in fair value deferred ito the Financial Assets Reserve less £102m (2010 Enil) released from escrow
substituted by mortgages on certain Group properties
2010
Sterling US$ Euro. Other Total
Level Classification —m___£m fm fm em
Financial assets
Cash at bank in hand or in Post Office Limed network 700 4 116 2300 «853
Cash equivalent investments 84 - - : 84
+ Money market funds Loans and receivables 38 - - - 38
~ Short-term deposits - bank Loans and receivables 46 - - - 46
Cash and cash equivalents 784 14116 23 937
Frnancial assets - investments (current)
~ Short-term deposits - Government/local government Loans and recewvables 1 - - - 1
Financial assets - investments (nan-current)
~ Bank deposits Loans and receivables - 49 - ~ 49
Financial assets ~ pension escrow investments (non-current) 1189 a : = 1189
~ Cash at bank 2 - - - 2
~ Treasury bills 2 Available for sale 269 - - 269
- Gilt edged securtties (conventional) 4 Available for sale 137 - - - 137
- Gilt edged securities (index linked) 1__Available for sale 781 - - = 784
Denvative assets - current 2 : 45 9 - 24
= non-current 2 : 2 4 - 3
Total financial assets 1974 80126 23 2203
Financial habilties
Financial habilties — loans and borrowings (current) (383) - (5) = (388)
~ BIS loans to Royal Mail Group Ltd Amartised cost (40) - - - (40)
~ BIS loans to Post Office Limited Amortised cost (343) - - - (343)
- Miscellaneous loans in subsidiaries (current) Amortised cost : = (5) = (5)
Obligations under finance leases and hire purchase contracts
(current) Amortised cost (60) - q = (61)
Financial liabilities ~ loans and borrowings (non-current) (2137) : (a) =_ (1138)
~ BIS loans to Royal Mail Group Ltd Amortised cost (1437) - : - (1137)
~ Miscellaneous loans in subsidiaries (non-current) Amortised cost 5 : a) - @) ‘
Obligations under fmance leases and hire purchase contracts
{non-current) Amortised cost (420) - - - (20)
Derivative liabilities - current 2 7) a) (3) a (a7)
=non-current 2 (1) = = = ce})
Total financial abilities (4.708) 2] (20) = (1725)
Net total financial assets 266 73 116 23 478
RMG00000343
RMG00000343
opal Mai Heldngs le
BS senustepat ant Pact Suerte 2010-21
25 Fmancial instruments (continued)
Interest rate risk
Interest on financial mstruments classified as floating rate 1s repriced at intervals of less than one year Interest on financial instruments
classified as fixed rate 1s fxed until the maturity of the instrument
The tables below set aut the carrying amount by maturity of the Groups financial instruments that are exposed to interest rate nsk The
pension escrow investments mature between 1 day and 45 years but have been disclosed as maturing in greater than 5 years as the
investments have been provided as securty to the Royal Mail Pension Plan in support of the 38 year defict recovery period from March 2009
The floating rate BIS loans to Royal Mail Group Ltd mature in 2014 and mterest rates on these loans are set for periods between 7 days and
6 months as selected by the Group
Financial year ended 27 March 2011
Average More
effective Within 1-2 25 than
interest rate dyear years years 5 years Total
% £m £m £m £m £m
Fixed rate
Cash at bank 39 22 - - - 12
Cash equivalent investments
~ Short-term deposits local government 06 29 - - - 29
~ Short-term deposits - bank 08 92 - - - 92
Financial assets - mvestments {current)
~ Short-term deposits - Government/local government 77 1 - - - 1
Financial assets ~ investments (non-current)
~ Bank deposits 04 - 5 24 15 4h
Financial assets - pension escrow investments (non-
current)
~ Gilt edged securities (conventional) 48 - - - 143 143
BIS loans to Post Office Limited os (375) 2 - (375)
BIS loans to Royal Mail Group Ltd 84 - - - (877) (877)
Obligations under finance lease and hire purchase
contracts 46 (65) (50) (209) (34) (258)
Miscellaneous loans in subsidiaries 45 = 7 (1) =. (a)
Total (306) 45) (86) __(753)_(4,190)
Floating rate
Cash at bank os 87 - - - 87
Cash equwvalent investments
~ Money market funds 07 162 - - - 162
~ Short-term deposits ~ bank os 34 - - - 34
Financial assets ~ pension escrow mvestments (nan-
current)
~ Cash at bank 04 - - - 3 3
~ Treasury bills 05 - - - 242 242
~ Gilt edged securities (index linked) 47 - - - 7723 773
BIS loans to Royal Mail Group Ltd 30 - - (600) : (600)
263 = {s00) __1,018 681
Non-interest bearing
Cash at bank, in hand or in Post Office Limited network 705 - - - 705
Derwative assets 36 6 - - 42
Derwatwe liabilities 3) : - - (3)
Total 738 6 : : Jhb
Net total financial assets/{labibties) 695, (39) (686) 265 235
RMG00000343
RMG00000343
8 Roma ant Franca Sates 20101
25. Fimancial instruments (continued)
Financial year ended 28 March 2010
Average More
effective Wehin 1-2 2-5 than
interest rate year years years 5 years Total
2 £m £m £m £m £m
Fixed rate
Cash at bank 32 5 - - - 5
Financial assets - investments (current)
~ Short-term deposits - Governmentllocal government 77 1 - - - 1
Financial assets ~ investments (non-current)
~ Bank deposits a1 - - 49 - 49
Financial assets ~ pension escrow investments (non-
current)
~ Gilt edged securities (conventional) 48 - - - 137 137
BIS loans to Post Office Limited 08 (343) - - - (343)
BIS loans to Royal Matt Group Ltd 80 (40) - - (837) (877)
Obligations under fmance lease and hire purchase
contracts 48 (61) (45) (73) (2) (181)
Miscellaneous loans in subsidiaries 45 (a) ; (a) = {2)
Total (439) (45) (25) (702) (4.211)
Floating rate
Cash at bank 04 104 - - - 101
Cash equivalent investments
~ Money market funds 04 38 - - - 38
~ Short-term deposits ~ bank os 46 - - - 46
Financial assets - pension escrow investments {non-
current)
= Cash at bank 04 - - - 2 2
= Treasury bills 04 - - - 269 269
~ Gilt edged securities (index inked) 49 - - - 781 781
BIS loans to Royal Mail Group Ltd 23 - - (300) - (300)
Miscellaneous toans in subsidiaries 15 {4) = 7 - (4)
Total 181 - (300)___1052 933
Non-interest bearing
Cash at bank in hand or in Post Office Limited network 147 - - - 747 !
Derivative assets 24 3 - - 27 i
Derwatwe tabilites (7) (ay : : (a8) i
Total 754 2 : : 756
Net total financial assets/(liabitities) 496 (43) (325) 350 478
RMG00000343
RMG00000343
Royal Mail Holdings ple
90 aru Repet nd Fras! Steet 201051
25. Fmancial mstruments (continued)
Contractual maturity anatysis for gross financial liabilities
The tables below set out the gross (undiscounted) contractual cash flows of the Groups financial abilities For overdrafts loans and finance
leases/hire purchase contracts these cash flows represent the undiscounted total amounts payable including interest For derivatives which are
settled gross these cash flows represent the undiscounted gross payment due and do not reflect the accompanying mftow For derivatives
which are settled net these cash flows represent the undiscounted forecast outflow
2014
Gross Gross finance Gross Gross
loans and lease/hire payments on payments on
borrowings purchase derivatives derivatives
commitments mstalments Sub-total settled gross settled net. Total
£m £m £m £m £m £m
‘Amounts falling due in
One year or less or on demand (current) 424 16 500 379 2 881
More than one year (non-current) 2,146 308 2,452 3 = 2.455
More than one year but not more than twa years 51 58 109 3 - 112
More than two years but not more than five years, 717 119 836 - 836
More than five years 1376 131 1507 5 : 1507
Total 2,568 386 2,952 382 2 3.336
2010
Gross Gross finance Gross Gross
loans and lease/hire Payments on payments on
borrowings purchase derivatives derwatives
commitments instalments Sub-total settled gross. settled net Total
£m £m £m £m £m. £m
Amounts falling due in
One year or less or on demand (current) 424 68 492 345 10 847
More than one year (non-current) 1860 129 1989 3 11993
More than one year but not more than two years: 38 49 87 3 91
More than two years but not more than five years 416 16 492 - - 492
More than five years 1.406 4 1410 - = 1410
Total 2 284 197 2481 348 11 2840
Hedging Activities
The Group had the following designated cash flow hedge programmes during the current and previous financial year
The diesel fuel hedge programme uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure
arising from commodity price and USS/Sterling exchange rates for forecast diesel fuel purchases
i) The air conveyance hedge programme uses US$ forward currency purchase contracts to hedge the exposure arising from US$/Sterling
and Sterling/Euro exchange rates for forecast air conveyance purchases
w) Three capital programmes using Euro forward currency purchase contracts to hedge the exposure arising from Sterling/Euro exchange
rates for contracted capital expenditure on automation projects
wv) The electricity hedge programme uses forward commodity price swaps to hedge the exposure arising from electncity prices
v) The gas hedge programme uses forward commodity price swaps to hedge the exposure arising from gas prices
RMG00000343
RMG00000343
1 Royal Mall Holdings pte
‘Arnal Report and Fnancal Satements 2030-23
25 Financial instruments (continued)
The following table shows the movements on the hedging reserve for each of these hedge programmes
Gains released from equity to
the carrying value of non-
Gamns/{losses) deferred into __(Gains)/losses released from financial
equity during year — equity to income during year assets during year
£m £m £m
2041
Dieset fuel 18 (10) - :
Air conveyance = (2) 7
Captal programmes 43) - @)
Electricity ‘ ‘ -
Gas 5 Fy :
Total 24 m (3)
2010
Diesel fuet 3 2a -
Air conveyance (2) (4) .
Capital programmes @) e (4)
Electret (3) 4 -
Gas (4) - -
Total (12) 21 (4)
The £7m gains released from equity to income during year (2010 £21m losses) are included within the distribution and conveyance
operating costs in the mcome statement
There 15 no material ineffectiveness recognised in the income statement relating to cash flow hedges
For all the above cash flow hedge programmes the underlying cash flows being hedged are expected to occur at the same dates as the
hedge instruments (derivatives) mature For the non-capital programmes (diesel electricity and air conveyance) the profit or loss will be
taken on maturity For capital programmes the impact on the income statement will be through the depreciation charge over the life of the
asset being hedged
‘The following table shows the derwvatives outstanding at the year end
Derwatwe Derivative ——Derwatve Derivatwe
Average asset asset Leabstity Liability
contracted nen-current current non-current current
Commodity? Nommal commodity price? fair value fair value fair value fair value
currency __amount_Maturity date _exchange rate £m £m fm £m
2011 '
Diesel fuel Diesel fuet 148k tonnes Aprii-Jan 13 —_USS795/tonne ‘ 17 - -
Ovese! fuel USS $428m Apr 14-Jan 13 ussa s7/£ - - - cy
Air conveyance uss $25m Mar 41-Apr-12 ussa 63/e - - - -
Capital programmes Euro €67m Mar 41-Apr 412 £0 as/e - 2 - -
Electricity Electricity 378KMWH Apr 12-Jan 13 sew a 3 - -
Gas Gas_24m therms Apr 12-Apr 12 £0 Séftherm - a - :
Cash flow hedges 5 2 - Cy)
Other derwatwes a 34 x 42)
Total 6 36 = 43)
2010
Diesel fuel Deselfuel 141ktonnes Apr10-Jan22 _US$703/tonne 1 2 - 2)
Dresel fuet uss, 599m Apr 40 Jan 22 ssa 75/6 1 8 - -
‘Ar conveyance uss $18m Apr 30-Apr 21 us$1 96/E : 3 - -
Capital programmes Euro €82m Apr 10- Apr 11 £0 BOVE a 8 - : ;
Electrcty Electrcty 448k MWH Apr 10 ~ Feb 12 EATIMWH - - a) @
Gas Gas _20m therms May 10 - Jan 12 £0 SS/therm - - - @)
Cash flow hedges 2 a a C)
Other derwatves - 3 = 43)
Total 3 24 a 7
RMG00000343
RMG00000343
Royal Mall Holdings ple
92 fal Report and Pano Statements 2010-8
25 Financial instruments (continued)
Other derivatives represent hedges by the Group of other foreign exchange and commodity price exposures which are not designated as
hedges under IAS 39 (including the hedge of jet fuel costs arising from the purchasing of air freight services the hedge of the Bureau de
Change currency holdings within Post Office Limited the hedge of the USS bank deposits and the hedge of intercompany loans with overseas
subsidiaries)
‘The Group had outstanding forward transactions te hedge foreign currency and fuel purchases at contracted rates as follows
In currency Sterling equivalents
{miltions) (mitlions)
2011 2010 2011 2010
Maturing within one year
Euro 336 293 287 258
USS 232 206 146 12a
Australian dollars (AUS) 3 4 2 2
Japanese Yen (PY) 1,028 - 8 -
Diesel and yet fuel (USS) 8 88 63 48
Electricity and gas (Sterling) - - 20 23
Maturing after one year
Euro - 4 - 3
uss 50 37 32 23
Diesel and jet fuel (USS) 46 36 2 22
Electricity and gas (Sterling) : - a 9
The Group s fuet hedges which fix the Sterling cost of purchasing fuel consist of two elements which may be hedged jointly or separately
+ a commodity forward transaction fixing the cost in USS of purchasing fuel and
+ acurrency forward transaction fixing the Sterling cost of these USS
The table above contains both of these transactions The commodity forward transactions are shown under the heading Diesel and jet fuel
(US$) - US$98m (2010 USS88m) maturing within one year and USS46m (2010 USS36m) maturing after one year The retated currency
forward transactions are contained within the total of USS - USS232m (2010 USS206m) maturing within one year and US$50m {2010
USS37m} maturing after one year
26 Employee benefits - pensions
The Group operates pension schemes as detailed below
Scheme Eligibility Type
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executes Defined benefit
Royal Mail Defined Contribution Plan (RMDCP} UK employees Defined contribution
Various other small-scale schemes operated by overseas subsidiaries Overseas subsidiary employees __Defined contribution
Defined Contribution
‘A charge for the defined contribution schemes of £10m (2010 £5m) was recognised in operating proftt before exceptional items within the
income statement The Company contributions to these schemes was £10m (2010 £5m) A new defined contribution plan (RMDCP) was
launched in April 2009 New recruits joing 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
valuations of both schemes have been 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 A series of changes to RMPP and RMSEPP began to
take effect on 1 April 2008
The changes encompass
. the Plan closed to new members from 31 March 2008
. all pensions and benefits earned before 1 April 2008 are still inked to final salary at the tue 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 the pension on reaching 60 but the normal retirement age will increase to 65 for benefits earned
from 1 April 2010 and
. from 1 April 2010 it will be possible to draw pension earned before the change to normal retirement age at 60 and continue
working while still contributing to the Pension Plan until the maximum level of benefits has been reached
RMG00000343
RMG00000343
93 Royal Mall Holdings ple
Arua Report ard Franca Statements 2010-11
26 Employee benefits - pensions (continued)
Payment of £432m (2010 £521m) was made during the year in respect of regular future service contributions with £428m {2010 £516m)
relating to RMPP The regular future service contributions charge for RMPP expressed as a percentage of pensionable pay has changed to
171% (2010 200%) effectwe from Apri 2010 This rate 1s not expected to change materially during 2011-12 For RMSEPP these
contnibutions have changed to 35 9% (2010 48 2%) effective from April 2010
Payment of £299m (2010 £291m) was made during the year to fund the deficit in the schemes wrth £292m {2010 £286m) relating to
RMPP Deficit recovery payments are planned for RMPP over the 38 years from the date of the latest full actuarial valuation These payments
will be made before each 31 March and may therefore span across the Groups year end (the last Sunday in March) Over the 37 years from
1 Apnil 2010, planned deficit payments are £282m per annum increasing in line with RPI {base year ts 2009-10) For RMSEPP defrit
recovery payments will be £11m per annum less regular future service contributions from 4 April 2010 to 31 January 2024
Qn 23 March 2007 the Group established £1bn of investments in escrow as security to the Royal Mail Pension Plan in support of the deficit
recavery plan On 24 March 2011 an agreement was implemented to substitute £102m pension escrow financial mvestments with mortgages
agamst certain property assets
A current liability of £12m (2010 £6m) has been recognised for payments to the pension schemes relating to redundancy (note 22) During
the year payments of £30m (2010 £50m) relating to redundancy were made
A liability of €£1m (2010 €1m) has been recognised for future payment of pension benefits to a past Director (see page 48 Directors
Remuneration Report)
The foltowing disclosures relate to the gains/losses and deficit in the schemes recognised for the RMPP and RMSEPP defined benefit plans in
the financial statements of the Group
a) Mayor long-term assumptions
The size of the pension deficit which is large in the context of the Group and its finances 1s materially sensitive to the assumptions adopted
Small changes in these assumptions could have a signifrcant impact on the deficit and overall mcome statement charge The major
assumptions were
‘At 27 March 2012 At 28 March 2010
%pa pa
Rate of increase in salaries* 45 46
Rate of pension increases - RMPP Sections A/B 28 36
Rate of pension increases ~ RMPP Section C a5 36
Rate of pension increases - RMSEPP all members as 36
Rate of imcrease for deferred pensions - RMSEPP members not :
transferred from Section A or B of RMPP 35 36
Rate of increase for deferred penswons - all other members 28 36
Discount rate 55 56
Inflation assumption 3.5 36
Expected average rate of return on assets 65 67
*The rate of increase m salaries for 2011-12 and 2012-13 reflects the Busmess Transformation 2010 and Beyond agreement From
2013-14 the rate of ncrease in salaries assumption ts RP!+ 1%
During 2010 the Government announced that it was intending to change the inflation measure used to determine statutory minimum
indexation in deferment and m payment from RPI to CP! during 2011 Where relevant the mflation 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 assets which 1s
computed for the combined assets of the plans The expected average rate of return on assets 1s a weighted average of the long-term
expected rate of retum of each principal asset class (see section b} The expected average rate of return ts computed at each batance sheet
date based on the market values and long-term rate of return of each principal asset class as at that date
Mortality
The mortality assumptions for the larger scheme are based on the latest self administered pension scheme (SAPS) mortality tables (S1PMA for
male pensioners and S1DFA for female pensioners) with appropriate scaling factors (106% for male pensioners and 101% far female
pensioners) allowing for medium cohort projections with a 125% floor These are detailed below
Average expected life expectancy from age 60. 2011 2010
For a current 60 year old male RMPP member 26 years 26 years
For a current 60 year old female RMPP member 29 years 29 years
For a current 40 year old mate RMPP member 29 years 28 years
For a current 40 year ald female RMPP member 32 years 31 years
RMG00000343
RMG00000343
Feel Mal Hong pe
QA sera Repr ard Franca Semen 2010-5
26. Employee benefits ~ pensions (continued)
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return were
Market value
Long-term expected rate of return
2044 2010 2011 2010
Em, £m ipa Xpa
Equttes 4,268 5.999 82 84 I
Bonds 21,409 17652 62 62 :
Property 1,590 1677 6s 66 i
Other assets 438 486 42 46 I
Fair value of plans’ assets 27,685 25814
Present value of plans tabities (32,186) (33.855)
Deficit in schemes (4,501) (8.041)
There ts no element of the above present value of liabilities that arises from plans that are wholly unfunded
Certain of the above investments relate to properties occupied by the Group but the contribution of these properties to the fair value of
plans assets is not material The pension plans have not snvested in any other assets used by the Group or in the Groups own financiat
instruments
c) Recognised charges
An analysis of the separate components of the amounts recognised in the income statement and statement of comprehensive income Is as
follows
2014 2010
£m £m :
Analysis of amounts recognised in the income statement: ‘
Analysis of amounts charged to operaung profit hefore exceptional items.
- Current service cost 448 436
Total charge to operating profit before exceptional items 448 436
Analysis of amounts charged to operating exceptional items
~ Loss due to curtalments (within provision for restructuring charge ~ note 21) 47 42
Total charge to operating profit 495 478
Analysis of amounts charged/(credited) to financing
= Interest on plans abilties 1,881 1704
~ Expected return on plans assets (1,714) (1372)
Total net charge to fmancing 167 329
Net charge to come statement before deduction for tax 662 807
Analysis of amounts recognised in the statement of comprehensive income
~ Actual return an plans assets 2,486 5861 I
~ Less expected return on plans assets (1,714) (2372)
Actuarial gains on assets (all experience adjustments) 470 4469 :
~ Experience adjustments on labitties (8) 673
- Effects of changes mn actuarial assumption on lablities 2,962 (6454)
Actuarial gans/(losses) on liabitives 2,956 (5781)
Total actuarial gamns/{tosses) recognised in the statement of comprehensive
income before deduction for tax
3,426 (1312)
RMG00000343
RMG00000343
95 aly a ean Sateen 2010-1
26 Employee benefits - pensions (conunued)
d) Movement in plans’ assets and liabilities
Changes mn the present value of the defined benefit pension obligations are analysed as follows
2011 2010
£m £m
Plans liabilities at beginning of period (33,855) (26 847)
Current service cost (448) (436)
Curtailment costs* (36) (48)
Finance cost (1,881) (1.701)
Employee contributions (152) (158)
Actuarial gains/(losses) (recognised in statement of comprehensive income) 2,956 {5 781)
Benefits paid 1,232 1116
Plans liabilities at end of period (32,186) (33 855)
*The curtatlment costs in the income statement 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 recagnition of costs in the income statement
Changes in the fair value of the plans assets are analysed as follows
2011 2010
£m £m
Plans assets at beginning of period 25,814 20071 !
Company contributions paid 764 862 !
Movement in company contributions accrued 6 ir) '
Employee contributions: 152 158
Finance income 1,746 1372
Actuanal gains (recognised in statement of comprehensive income) 470 4469
Benefits paid (4,232) (1116)
Plans assets at end of penod 27,685 25814
e) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of
comprehensive income 1s £1082m toss (2010 £4 506m loss) The Directors are unable to determine how much of the pension scheme
defict recognised in transition to IFRSs is attributable to actuarial gains and losses since inception of the pension schemes Consequently the
Qrrectors are unable to determine the cumulative amount of actuarial gains and losses that would have heen recognised in the statement of
comprehensive mcome between inception of the pension schemes and transition to IFRSs
2011 2010 2009 2008 2007
£m £m £m £m £m
Fair value of assets 27,685 25814 20071 23923 23578
Present vatue of abilities (32,186) (33855) (26 847) (26 846) (28563)
Deficit in schemes (4,504) (8.041) (6776) (2923) (4985)
2011 2010 2009 2008 2007
£m £m £m £m £m
Experience adjustment on assets 470 4469 (5.484) (1327) 172
Experience adjustment on liabilities (8) 673 (10) (169) {122)
RMG00000343
RMG00000343
96 rattan Frnt Sateen 201031
27. Issued share capital and reserves
Authorised share capital 2011 2010
£ £
Ordinary shares of £4 each 100,000 100000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 4
Total 200,003 100 004
Issued and called up share capital 2012 2010
£ £
Ordinary shares of £1 each 50,005 50005
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 50,006 50.006
The Special Share can be redeemed at any time by its holder (the Secretary of State for Business Innovation and Skills) subject to such
redemption being compliant with the Companies Act 2006 The Company cannot redeem the Special Share without the prior consent of its
hotder No premium 1s payable on redemption
On distribution in a winding up of the Company the holder of the Special Share 1s entitled to repayment of the capital paid up on the Special
Share in priority to any repayment of capital to any other member The Special Share does not carry any nghts to vote
Under section 63(7) of the Postal Services Act 2000 for the purposes of the Companies Act 2006 certain shares issued shall be treated as if ‘
their nominal value had been fully paid up
Under sections 72 and 74 of the Postal Services Act 2000 the Secretary of State for Business Innovation and Skills may issue directions to
the Company which depending on the direction issued could result in the recognition of a distribution
Reserves identified in the consolidated statement of changes in equity
Financial Assets Reserve
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets
Foregn Currency Translation Reserve
The Foreign Currency Translation Reserve 1s used to record the gains and losses arising from 29 March 2004 on translation of assets and
lrabiittes of subsidiaries denominated in currencies other than the reporting currency
Hedging Reserve
The Hedging Reserve 1s used to record gains and losses arising from cash flow hedges since 28 March 2005
Other Reserves
Other Reserves of £47m (2010 £47m) comprise £2m {2010 £2m) unrealised gain on First Rate Exchange Services Holdings Limited a jomt
venture entity and £45m (2010 £45m) relating to unrealised gains on Midasgrange Limited an associate company
28 Commitments:
Operating lease commitments - Group as lessee
The Group 1s commutted to the following future minimum lease payments under non-cancellable operating leases as at 27 March 2011 and !
28 March 2010
Vehicles
Land and buildings and equipment IT equipment. Total
2031 2010 2011 2010 2011 2010 2013 2010
£m fm £m Em £m £m £m £m
‘Within one year 166 138 Fey 20 36 32 193 190 '
Between one and five years 456 436 a3 18 19 33 488 487 !
Beyond five years $21 602 - 1 - : 52a 603 !
Total 14231176 24 39 55 65 a2o2 1280
Existing leases for UK land and buildings have an average term of 13 years and any new leases entered into generally have a 15-year term
with a 10-year break clause Existing land and buildings leased overseas by the GLS subsidiary have an average lease term of 9 years Vehicle
leases generally have a term of between 1 and 7 years depending on the asset class with the average term being 4 years The existing leases '
have an average term remaining of 1 year There 1s one IT contract with a lease term of 10 years with 2 years remaining at the balance sheet
date
Subleases
The Group sublets space in certain properties The future minimum sublease payments expected to be received under non-cancellable
sublease agreements at 27 March 2011 1s £8m (28 March 2010 £6m)
RMG00000343
RMG00000343
97 Royal Mal Holdings ple
‘Arousal Report and Financ! Statemerts 2010-11
28 Commitments (continued)
Operating tease commitments - Group as lessor
The Group has entered into lease agreements for unutilised space in the UK estate These non-cancetlable leases have remaining terms of
between one and 995 years
Future minimum rentals recervable under non-cancellable operating teases at 27 March 2011 and 28 March 2010 are as follows
2011 2010
£m £m
Within one year 5 5
Between one and five years 23 a4
Beyond five years 5 5
Totai minimum lease receipts 23 21
Finance tease and hire purchase commitments
2011 2010
Present value Present value
Minimum of minimum: Minimum of minimum
lease payments lease payments lease payments lease payments
£m Em =m £m
Within one year 76 65 68 61
Between one and five years 177 158 125 118
Beyond five years 131 35 4 2
Total minimum lease payments 384 258 197 181
Less amounts representing finance charges (126) = (46) =
Present value of minimum lease payments. 258 258 184 181
The Group has finance lease contracts for vehicies tand and buildings and plant and equipment The leases have no terms of renewal
purchase options or escalation clauses and there are no restrictions concerning dividends borrowings or additional leases Vehicle leases have
a term of between 2 and 7 years depending on the class of vehicle with the average term bemg 3 years Property leases have a term of
between 12 and 108 years with the average term being 69 years The term of the plant and equipment leases range fram 5 to 8 years with
the average being 6 years
Capital commitments
The Group has commitments of £159m at 27 March 2041 (28 March 2010 £129m) which are contracted for but not provided for in the
financial statements
RMG00000343
RMG00000343
opal Mal lings pl
G8 ——_erelReprt wd Foon Statements 2040-1
29 Related party disclosures
The ultimate parent (the Company) and principal subsidiaries
Royal Mail Holdings plc 1s the ultimate parent company of the Group The consolidated financial statements include the financial statements of
Royal Mail Holdings pic and the principal subsidiaries listed below
Company Principal acuties Country of incorporation % equity interest
2011 2030
Royal Mail Group Ltd Mails and parcels services Untted Kingdom 100 100
Post Office Limited Counter retail and financial services United Kingdom 100 100
Royal Mail Investments Limited Holding company Unted Kingdom 100 100
General Logistics Systems BV Parcel services Netherlands 100 100
Royal Mail Estates Limited Property holdings United Kingdom 100 100 !
Romec Limited Facilities management United Kingdom 54 54 ;
Red Partnership Limited Oocument management services Unrted Kingéom 100 100 ‘
Royal Mail Holdings plc 1s the immediate parent company of the Royal Mat Group Ltd subsidiary company The remaming subsidiary companies.
listed above have Royal Mail Group Ltd as their immediate parent company
Joint ventures
The Group s 50% interest in First Rate Exchange Services Holdings Limited a company registered in the United Kingdom 1s held by Post Office
Limted The company's principal activity 1s the provision of Bureau de Change
Associates
The following companies are the principal associates of the Group
Company Principat activities Country of mcorporation % Ownership
2011 2010
Quadrant Catering Limited Catering services United Kingdom 54 54
63 Worldwide Mail NV (Spring) Mail services Netherlands 32.45 3245
Midasgrange Limited Financial services United Kingdom 50 50
During the year the Group disposed of its 20% shareholding in Camelot Group ple (note 15)
The majority of Board membership and voting power in Quadrant Catering Limited 1s held by the Groups business partner hence it 1s not a
subsidiary
Management control lies with the Bank of Ireland business partner in the operation of the Midasgrange Lamted company and therefore the
company Is not a joint venture
The mvestment im Quadrant Catering Limited 1s held by Royal Mail Group Ltd the investment in G3 Worldwide Mail NV (Spring) 1s held by
Royal Mail Investments Limited and the investment in Midasgrange Limited 1s held by Post Office Lirnited
Related party transactions
During the year the Group entered into transactions with related parties The transactions were in the ordiary course of business and included
admunistration and investment services recharged to the Groups pension plan by Royal Mail Pension Trustees Limited The transactions
entered into and the balances outstanding at the financial year end were as follows
Amounts Amounts
Purchases/ owed from related owed to related
Sales/recharges to recharges from party including Party mcluding
related party related party outstanding loans_-——outstanding loans
2011 2010 «2041 2020 2011 2010 2014 2010
£m £m £m £m £m £m £m £m
Royal Mail Pension Plan 9 10 - - - - - -
Quadrant Catering Limited - “ 34 35 - 3 3
Camelot Group ple 10 37 - - - - - -
G3 Worldwide Mail NV (Spring) fad « 6 7 3 3 a 1
Midasgrange Limited 30 33 3 1 10 10 - -
Frist Rate Exchange Services Holdings
Limted Group 30 30 132-134 9 14 a 2
With the exception of Camelot Group plc the mvestment in which was disposed of during the year and the Royal Mail Pension Plan the
companies listed above are yoint ventures and associates of the Group
RMG00000343
RMG00000343
Roya Mat Wetting le
99 Annual Report and Fea Starnes 2010-3
29 Related party disclosures (continued)
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
The Group trades with numerous Government bodies on an arms 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 faciltres with Government (note 20) and
. the Group has received the Network Subsidy Payment fram Government (note 2)
Key management compensation
2011 2010
£000 £000
Short-term employee benefits 2,744 3035
Post-employment benefits a 307
Other long-term benefits : 2626
Total compensation earned by key management 2,757 5968
Key management comprises executive and non-executive Directors of the Royal Mail Holdings ple Board
HM Government is the Companys sole shareholder and accordingly the Directors have no interest in the shares of the Company
30 Events after the balance sheet date
On 30 March 2011 Romec Limited a 51% owned subsidiary of the Group disposed of its 99% shareholding in its subsidiary Romec Services
Umited to Balfour Beatty plc which holds the 49% non-controlling interest in Ramec Limited As a result of this transaction Balfour Beatty pic
has been released from a contractual obligation that rt had in relation to the pension funding for Romec Lmted employees
On 9 June 2011 Government announced the passing of the Postal Services Bill This confirms the Governments intention to take on the
histori¢ pension deficit with effect fram March 2012 and the intention to restructure RMG s balance sheet in due course
RMG00000343
RMG00000343
LOO alse ron Samer 2010-3
Group five-year summary (unaudited)
2011 2010 «2009 ~—«2008 2007
Income statement £m £m £m £m £m
Revenue 9,456 93499560 «93889179
Operating profit before exceptional tems 246 404 321 162 233
Operating exceptional items - modernisation costs (207) (224) * * is
Operating profit after modernisation costs before ather operating exceptional items 39 180 - - -
Operating exceptional items - other (88) (67) (149) (443)* (243)*
Operating (lossY/prafit «9 113 172 (279) 0)
Non-operating exceptional items 109 5 14 58 118
Profit/{loss) before financing and taxation 60 118 183 (221) 108
Finance mcome and costs including net pensions (242) (380)___(434)_ 144 205
(Loss)/profit before tax (152) (262) 49 a) 313
Taxation (206) (58) (278)__2a2 (27)
(Loss)/profit after tax (258) G20) (229)_135 286
2011 2010 2009 2008 2007
Statement of cash flaws £m £m &m £m £m
Net (decrease)/increase in cash {4a)e* 26 (255) 224 a.
Net increase/(decrease) in cash equivalents 213 (49) ag) 5) 34
Net increase/(decrease) in cash and cash equivalents 169 (25) _(373)___-209 35
2012 2010-2009 ~—« 2008 2007
Balance sheet £m £m £m £m £m
Goodwill and intangible assets 323 296 284 240 207
Property plant and equrament 1,832 1935 1886 1671 = 1619
Other non-current assets including those classified as held for sale 1,331 1493 1431-1824 = 1528
Net current liabiities (280) (511) (385) (300) (60)
Non-current abilities (6,313) (9.494) __ (7.872) _(3676)__(5 558)
Net lrabilties (3,207) (6281) (4656) (241) (2 264)
*A new measure of profitabiity after modernisation costs impacting the presentation of operating exceptional items has been restated for 2010 anly
**The 2011 net decrease in cash of £44m
. Includes the repayment of a £3m overdrawn bank balance relating ta the General Logistics Systems (GLS} subsidiary which was included in the
2010 net current abilities balance of £511m
. excludes £2rm relating to the empact of foreign exchange rates on cash
RMG00000343
RMG00000343
101 riltepor and Pein Suerrts 200-2
Parent Company financial statements
Statement of Directors’ responsibilities in relation to the parent Company financial statements
The Directors are responsible for preparing the Directors Report and the financial statements in accordance with applicable law and
regulations
Company law requires the Directors to prepare financial statements for each financiat year Under that law the Directors have elected to
prepare the fmancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
‘Standards and applicable law) Under company law the Directors must not approve the financial statements unless they are satisfied that they
gre a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period In preparing these
financial statements the Directors are required to
+ select suitable accounting policies and then apply them consistently
© make judgements and accounting estumates that are reasonable and prudent
* state whether applicable UK Accounting Standards have been followed subject to any material departures disclosed and explained in the
financial statements and
= 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 that are sufficient to show and explain the Company's transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006 They are also responsible for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities
The Directors are not required under UK law to prepare a Remuneration Committee Report but in accordance with the principles of good
corporate governance as outlined in the Combined Code have chosen to do sa This Report has been prepared by the Remuneration
Committee as if the Company was required to comply with both Schedule 8 to The Large and Medium-swed Companies and Groups (Accounts
and Reports) Regulations 2008 of the United Kmgdom and relevant Listing Rules of the Financial Services Authority and has been approved by
the Board The only exception is that a performance graph has not been included since the Company is not quoted
Moya Greene Matthew Lester '
RMG00000343
RMG00000343
102 Arete seteeen sumone 2010-0
Independent Auditor’s report to the members of the Company, Royal Mail Holdings plc
We have audited the parent Company financial statements of Royal Mail Holdings plc for the year ended 27 March 2011 which comprise
balance sheet and the related notes 1 to 10 The financial reporting framework that has been applied in their preparation 1s applicable law and
United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice)
This report 1s made solely to the Companys 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 Companys members those matters we are required to state to them m 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 Companys members as a body for our audit work for this report or for the opmions we have formed
Respective responsibilities of directors and auditors i
As explained more fully in the Oirectors Responsibilities Statement set out on page 401 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 The Directors are also responsible for the
preparation of the Directors Remuneration Report which they have chosen to prepare as if the Company was required to comply wih relevant
requirements of both the UK Companies Act 2006 (and Regulations thereunder) and the Listing Rules of the Fmancial Services Authority The
only exception 1 that a performance graph has not been included since the Company 1s not quoted Our responsibility 1s to audit and express
an opinion on the parent Company financial statements m 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 In addition the Company has
also instructed us to review whether the section of the Directors Remuneration Report that has been described as audited has been properly
prepared in accordance with the basis of the preparation described therein
Scope of the audit of the financial statements
‘An audit invotves 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 Companys 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-fmancial information in the Annual Report and Financial Statements to dentify 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
Opimion on financial statements
In our opmion the parent Company financial statements
* give a true and fair view of the state of the Company s affairs as at 27 March 2011
* 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
Emphasis of matter - going concern
In forming our opmion which Is not modified we have also considered the adequacy of the disclosures made in note 1 to the financial
statements concerning the Company's ability to continue as a going concern The conditions described in note 1 indicate the existence of
‘material uncertainties which may cast significant doubt about the Company's ability to continue as a going concern The financial statements do
not include the adjustments that would result f the Company was unable to continue as a going concern
Opinion on other matters prescribed by the Compantes Act 2006
In our opinion
* the part of the Directors Remuneration Report that has been described as audited has been properly prepared in accordance with the
basis of preparation as described therein and
* the information given im the Directors Report for the financial year for which the financial staternents 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 recewved from
branches not visited by us or
‘+ the parent Company financial statements and the part of the Directors Remuneration Report to be audited 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 recevved all the information and explanations we require for our audit
RMG00000343
RMG00000343
103 sialon Fear Sutrmets 2020-31
Independent Auditor’s report to the members of the Company, Royal Mail Holdings plc (continued)
Other matter
We have reported separately on the Group financial statements of Royal Mail Holdings plc for the year ended 27 March 2011 That report
Includes an emphasis of matter
vest de owt 4L/?
Alison Duncan (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
13 June 2011
RMG00000343
RMG00000343
104 — Setittepo sa noon Sutenes 203031
Parent Company balance sheet at 27 March 2011 and 28 March 2010
2011 2010
Notes £m £m
Fixed assets
Investments in subsidiaries 4 - 3784
Investments in pension escrow 5 1,076 1014
Total net assets 1,074 4795
Capital and reserves
Share capital 8 - -
Share premium 9 430 430
Reserves 9 56 4b
Profit and loss account 9 588 4324
Shareholder’s funds 1,074 4795
The financial statements on pages 104 to 106 were approved by the Board of Directors on 13 June 2011 and signed on its behalf by
RMG00000343
RMG00000343
LO5 Etta and Fenn! setae 220-1
Notes to the parent Company financial statements
1 Parent Company accounting policies
The fallawing accounting policies apply
Financial year
The financial year ends on the last Sunday in March and accordingly these financial statements are made up to the year ended 27 March
2011 (2010 year ended 28 March)
Basis of preparation
The financial statements of the parent Company Royal Mail Holdings pic (the Company) were authorised for issue by the Board on 13 June
2011
The financial statements on pages 104 to 106 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
In making an assessment on the Company s ability to continue as a going concern the Directors have considered the respective going concern
assessments made by the Directors of the Royal Mail Group Ltd and Post Office Limited subsidiary companies {see note 2 on pages 58 to 60)
In reviewing these assessments the Directors have also taken account of the fact that the Cornpany acts as guarantor for the Royal Mail Group
Ltd £900m senior debt facility and £500m other toans facility (see notes 20 and 25 of the Group financaal statements for further details) After
careful consideration of all available information the Directors are of the view that it 1s appropriate that these financial statements have been
Prepared on a going concern basis
The Company has not presented its own profit and lass account as permitted by section 408 of the Companies Act 2006 However the results
of the Company for the year are disclosed in notes 6 and 9 to the financial statements
The Company has taken advantage of paragraph 20 of FRS 29 (IFRS 7) Financial Instruments Disclosures and has not disclosed information
required by that standard as the Group s consolidated financial statements in which the Company is included provide equivatent disclosures for
the Group under IFRS 7
No new UK Accounting Standards which affect the presentation of these fmancial statements have been issued
Impairment reviews
Unless otherwise disclosed in these accounting policies fixed assets are reviewed for «pairment 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 1s recognised m 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 1s the higher of an assets net realisable value and its value in use
Investments in subsidiaries
Investments in subsidiaries within the Company s financial statements are stated at cost less any accumulated impairment losses The opening
and closing carrying value relates solely to the Companys investment in Royal Mail Group Ltd a 100% subsidiary of the Company Royal Mail
Group Ltd is the only direct shareholding of the Company
Investments in pension escrow
Investments in pension escrow are financial assets within the scope of FS 26 Financial Instruments Recognition and Measurement
The investments are a combination of short-term deposits and long-term investments which mature between 1 day and 45 years but have
been included within fixed assets as the investments have been provided as security to the Royat Mail Pension Plan in support of the 38 year I
deficit recovery period from March 2009
‘The investments comprise bank balances Treasury bills and gilt edged securities I
Treasury bills index-linked gilt edged securities and conventional gilt edged securities are classified as available for sale financial struments I
‘on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity The investments are
initially recognised at fair value being the purchase price After instral recognition interest Is included in the reported profit/(loss) for the year
using the effective interest rate method and the assets are measured at fair value with gains or losses being recognised in the Financial Assets I
Reserve until the investment 1s derecognised
Contingent liabilities I
Contingent liabilties are not disclosed if the possibilty of losses occurring 1s considered to be remote
2 Directors’ emoluments
The Directors of the Company are not paid fees by the Company for their services as Directors of the Company The Directors of the Company
are paid fees by other companies of the Group These emoluments are disclosed in the Group Annual Report and Financial Statements
3. Auditor's remuneration
The audstor of the Company 1s not paid fees by the Company The auditor of the Company 1s paid fees by the other companies of the Group
This remuneration 1s disclosed in the Group Annual Report and Financial Statements.
RMG00000343
RMG00000343
Mal Heng pc
106 Rrusttepr su froa! Suumers 2010-21
4 Investments in subsidiaries
Cost Impairment 2013 2010 I
£m £m £m £m 1
At 29 March 2010 and 30 March 2009 4160 (376) 3784 3784
Impairment charge. - (3 784) (3784) :
At 27 March 2011 and 28 March 2010 4,460 (4,260) : 3784
In accordance with FRS 11 impairment of Fixed Assets and Goodwill the carrying value of the Company's investment in Royal Mail Group Ltd
has been compared to its recoverable amount represented by its value in use to the Company The value in use has been derived from
discounted cash flow projections using the Companys pre-tax Weighted Average Cost of Capital (WACC) The accounting standard prevents
benefits from future restructuring being included in the cash flow projections Therefore the cash flow projections have not been adjusted to
reflect any of the potential actions considered by the Directors in concluding on the going concern basis of preparation of the Group financial
‘statements Detarls of these considerations are given in the funding section of note 2 of the Group financial statements The comparison of the
carrying value of the Companys mvestment in Royal Mail Group Ltd to its recoverable amount has resulted in an impairment charge of
£3 784m reflecting the continued decline in revenues and the costs of the modernisation programme
5 Investments in pension escrow
2011 2010
Average Average
effective effective
rate 2011 rate 2010
x £m x Em
Cash at bank 04 3 04 1
Treasury bills 05 242 04 229
Gilt edged securities (index inked) 47 707 49 664
Gilt edged securities (conventional) 4B 122 48 117
Investments in pension escrow 1,074 1011
6 Profit and loss account
The Company 1s a non-trading company The loss for the period relates to an impairment of the carrying value of the investment in Royal Mail
Group Ltd of £3 784m (2010 fnil) income from the investments in pension escrow of £46m (2010 £35m) and a tax credit of £5m (2010
£10m)
7. Taxation
A tax charge of £5m (2010 £10m) has been taken to the Financial Assets Reserve reflecting the tax liability on the fair value changes on
available for sale financial assets A tax credit of £5m (2010 £10m) has been taken to the profit and loss account reflecting the sheltering of
that tax liability by losses of other Group companies
8 Share capital
Details of the share capital are disclosed in the Group Annual Report and Financial Statements in note 27
9 Shareholder’s funds
Profit and Financial
Share loss Assets 2011 2010
premium account Reserve Totat Total
£m £m £m £m £m
At 29 March 2010 and 30 March 2009 430 4321 46 4795 4726
Loss for the year : (3.733) - (3733) 45
Taxation on items taken directly to reserves - - (5) (5) (10)
Gains on financial asset investments, : = 17 17 36
At 27 March 2011 and 28 March 2010 430 588 56 1,074 4795
Financial Assets Reserve
The Financial Assets Reserve 1s used to record fair value changes on available for sale financial assets
10 Charges
Details of charges registered aver the assets of the Company are contained in the Group financial statements m notes 20 and 25,
RMG00000343
RMG00000343
107 harap Sixers 200-1
Forward tooking statements
This document contains statements concerning the Groups buses financial condition results of operations and certain of the Group s plans
‘objectives assumptions projections expectations or beliefs with respect to these items
The Company cautions that any forward looking statements in this document may and often do vary from actual results and the differences
between these statements and actual results can be material Accordingly readers are cautioned not to place undue reliance on forward
looking statements The Company undertakes no obligation to release publicly the result of any revisions to these forward looking statements,
that may be made to reflect events or circumstances after the date of this document including without limitation changes in the Groups
strategy or to reflect the occurrence of unanticipated events
By their nature forward looking statements involve risk and uncertamty because they relate to events and depend on cwcumistances that will
‘occur 1m the future Such forward looking statements should therefore be considered m light of various important factors that could cause
actual results and developments to differ materially from those expressed or implied by these forward looking statements These factors
include among other things the impact of competitive products and pricing the occurrence of major operational problems the loss of mayor
customers limitations imposed by the Groups indebtedness undertakings and guarantees relating to pension funds contingent Wwabilities risks
of litigation and risks associated with the Group s overseas operations
Corporate information
Registered Office and Group Head Office
Royal Mail Holdings plc
100 Victoria Embankment
LONDON
EC4Y OHO
Tetephone 020 7250 2888
Registered No 4074919
Royal Mail the Cruaform the colour red Parcelforce Worldwide and the Parcelforce Worldwide logo are registered trademarks of Royal Mail
Group Ltd Post Office and the Post Office symbol are registered trademarks of Post Office Limited Group Annual Report and Financial
Statements 2011 © Royal Mail Group Ltd 2011 All Rights Reserved
Corporate website
Additional corporate and other information can be accessed on the following website www royatmallaroup com Information made available on
the website 15 not intended to be and should not be regarded as being part of the financial statements
The maintenance and integrity of the Groups websites 1s the responsibilty of the Directors the work carried out by the auditor does not
involve consideration of these matters and accordingly the auditor accepts no responsibility for any changes that may have occurred to the
financial statements since they were initially presented on the website
Auditor Actuary
Ernst & Young LLP Towers Watson Limited
1 More London Place Watson House
LONDON London Road
SE1 2AF REIGATE
Surrey
RH2 9PQ
Solicitor Consumer Body
Slaughter and May Consumer Focus
1 Bunhill Row 4° Floor
LONDON Artillery House
ECIY 8YY Artillery Row
London
SW1P 1RT
Regulator (Postcomm)
Postal Services Commission
Hercules House
6 Hercules Road
LONDON
‘SE1 708