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Shareholder
Executive
HM Government
Agenda for Shareholder Executive Board Meeting
Wednesday 11 July 2012 (15.00 — 18.00)
Item ta Agenda Item Papers
Timing 9 P
Apologies for absence, Chairman’s welcome and
1. 10 mins introduction, minutes from last meeting, -
declarations
2. 40 mins Chief Executive’s Report (12)16
3. 30 mins Cabinet Office / Commercial Models (12)17
4. 30 mins Green Investment Bank (12)18
5. 30 mins Royal Mail and Post Office Ltd (12)19
6. 10 mins _ Any other business
- Close
[2h 30mins total]
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@ Shareholder
Executive
HM Government Commercial - In Confidence
Minutes of Shareholder Executive Board
Wednesday 11 July 2012 at 15.00
Members Patrick O’Sullivan (Chair) (PO’S) Attendees: Roger Lowe (Item 6) (RL)
present: Claudia Arney (CA)
Lord Carter (LC)
Gerry Grimstone (GG)
Jeremy Pocklington (JP)
Tony Watson (TW) Secretary: Peter Batten
Stephen Lovegrove (SL)
Anthony Odgers (AO)
1. Apologies for absence, Chair’s welcome and introduction, minutes
from last meeting, declarations of interest
1.1. The minutes of the previous meeting were discussed. PO’S noted an
additional action from the previous meeting, TW observed that the
Board NEDs had met following the May Board meeting, and that there
were no matters arising.
1.2. There was a brief discussion about the impact of the recent Libor rate-
fixing scandal. It was felt that there may be an expectation for ShEx to
become more involved. SL noted that ShEx resource, particularly
those with corporate finance expertise, could be reallocated in a
supportive capacity to HMT if required.
1.3. JP and TW voiced concern over the impact that low growth could have
on ShEx businesses. However, GG suggested that the market may
be prepared to pay a premium for low volatility assets, such as ShEx
businesses.
2. Chief Executive’s Report
2.1.SL presented the Chief Executive’s report. On resourcing, it was noted
that interviews for the IE Director were due to start imminently. SL
noted that once appointed, the new Director would join the Board. An
outstanding action awaits their arrival.
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IRRELEVANT
2.3:
‘IRRELEVANT
~ IRRELEVANT
~ IRRELEVANT
IRRELEVANT
. Government Lead NEDs Annual Report
3.1.GG (declaring an interest as lead NED at MoD) commented that the
lead NEDs had been effective, but success was dependant on the
level of support and quality of Chairmanship offered by a department's
SoS. Citing experience from MoD, GG noted that the MoD Board
meets monthly.
3.2. TW suggested that ShEx could engage lead NEDs to facilitate
cooperation with other government departments. GG agreed and
noted that [action] SL or the BIS SoS should seek to address a NED
conference. SL noted his support for this suggestion.
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3.3. Turning to the report, PO’S noted the importance for ShEx to ensure
compliance with the five pillars (Strategic Clarity, Commercial Sense,
Talented People, Results Focus and Management Information)
identified in Lord Browne’s review. SL observed that he is meeting Sir
Bob Kerslake in the near future to understand how ShEx is placed in
relation to Kerslake’s Civil Service Reform Plans. [action] SL also
agreed to speak to Lord Browne.
IRRELEVANT.
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IRRELEVANT
. Royal Mail
6.1.RL joined the meeting, noting key developments including end year
results that showed the business had performed ahead of budget. RL
explained that this was largely due to a slower decline in volume levels
than forecast. RL also noted that the business had largely completed
the modernisation of its sorting offices, with efficiencies being
achieved through greater automation.
6.2.RL noted that ShEx had received the company’s revised business plan
and was seeking clarity over the figures and whether the plan was
stretching enough, particularly in meeting targets to modernise the
delivery office network. Discussing pensions, RL noted that the
transition and subsequent asset realisation had been executed very
professionally.
6.3. The Board noted that the Royal Mail Chairman had recently been
appointed Chairman of Sage. [action] The Board expressed its desire
for SL to discuss the importance of taking the business through its
continued modernisation, and preparations for a sale with the
Chairman, and to rationalise his Chair portfolio.
. Any other business
7.1. Board members noted the Chairman’s recent letter to SoS on ShEx
businesses remuneration processes, commenting on its sensible
purpose but questioning whether it would be politically palatable. SL
explained that the purpose was to secure a mandate to further explore
options.
8. Actions
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Completed actions
Agend I Action point Action Due Status
a Item officer date
Update on BNFL Peter Sept I Oral update at
Batten 2012 I Board
3.3 SL to contact to Lord Browne I Stephen Sept I Completed
Lovegrove I 2012
5.5 L i Anthony Sept I Oral report at
H IRRE LEVANT II Odgers 2012 I Board
Outstanding actions
Agend I Action point Action Due Status
a Item officer date
Director of Information Peter Nov Pending (see
Economy, (when appointed) Batten 2012 I paper (12)16)
to discuss strategy.
3.2 SL/SoS to address Stephen Late Pending
Government NED conference I Lovegrove I 2012
4.2 Paper detailing GIB Anthony Sept I Oral report at
governance and Odgers 2012 I Board, paper in
accountability Nov following
agreement with
GIB CEO
6.3 SL to speak to Donald Brydon I Stephen Sept I Pending (see
regarding his Chair portfolio Lovegrove I 2012 I paper (12)19)
ShEx Board Secretary
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Shareholder
Executive
HM Government Commercial - In Confidence
Chief Executive’s Report - ShEx Board 11 July 2012 (12)16
Board action: To note
This paper updates the Board on current key areas of work in ShEx. There are
separate papers updating the Board on the Cabinet Office Commercial Models,
Green Investment Bank, and Royal Mail and Post Office Ltd.
IRRELEVANT)
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2 Plans for ShEx Chairs’ event
Organising the second Chairs’ event for ShEx businesses
2.1 The first ShEx Chairs’ event, held on Tuesday 17 April, chaired by Lord
Green and attended by the Chairs of 17 ShEx businesses was a success.
We are in the process of organising a second event in the autumn, and are
proposing to hold a roundtable discussion and drinks reception, hosted by the
Secretary of State, ata Westminster location on 7 November.
2.2 The format will be similar to the first event, albeit with a slightly longer (90
minutes) and more structured discussion. We envisage that the Secretary of
State will open the discussion with a topical business policy area and may
comment on remuneration in light of the letter sent to the Secretary of State
by Patrick O'Sullivan with input from the Chairs.
2.3 We are contacting the Chairs in the first week of September to inform them of
the date of the event and to ask for suggested agenda items for the
roundtable discussion in order to make it as useful and informative as
possible. Once we have received feedback we will confirm the agenda and
send out formal invitations, including, this time, to members of the ShEx
Board.
2.4 We are expecting the Chairs to be interested in the Government's plans for
industrial policy. Items on the agenda may also include a response on
remuneration policy and current thinking on how to rebuild public trust in
markets through ethical business and improved corporate governance.
2.5
3
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Other feedback from the first event included appreciation of the opportunity
for Chairs to get together and discuss potential areas for collaboration. The
main points discussed at the first event concerned growth strategies of ShEx
businesses and issues around remuneration policy. This resulted in a letter
being sent by Patrick O’Sullivan (with input from all Chairs) to the Secretary of
State setting out proposed changes to the Government's policy on
remuneration.
Information Economy and Cyber Event
The Information Economy Directorate became part of ShEx on 8 May.
Consisting of 23 posts (and growing), the responsibilities of IE can be divided
into three areas: Cyber Security; Resilience and International; and supporting
the Digital Sector. We have identified an exceptionally well qualified Grade 3
(Ken McCallum) to lead the work, and the recent Cyber Protection launch -
basically organised by ShEx — was deemed a great success.
Cyber Security
3.1
3.2
3.3
The 2011 Cyber Security Strategy sets out how the UK will support economic
prosperity, protect national security and safeguard the public’s way of life by
building a more trusted and resilient digital environment. BIS, working closely
with the Cabinet Office, Intelligence Agencies and OGDs, leads on the
following three work strands:
= Making it safer to do business in cyberspace where our objective is to
make the UK one of the most secure places in the world to do business.
= Extending Knowledge - building a coherent cross-sector research agenda
= Enhancing Skills - building a culture that understands the risks and
enables people to use cyberspace and improving cyber security skills at
all levels.
IE played a major role in the recent publication of Cyber Security Guidance
for Business, aimed at senior representatives of FTSE 100 companies, and
launched on 5 September. The guidance offers advice to business on
measures to increase theircyber security. IE has also reached out to specific
sectors such as ISPs, retail, professional business services and universities
to help raise awareness of the risks and explore mitigation measures. IE has
also been implementing policies to boost cyber security capability within the
post-grad, PHD and general research community.
IE has developed a strategy to address the barriers to growth of the UK’s
cyber security supply sector — including the formation of a cyber security
cluster along the ‘M5 corridor’ — an approach we plan to adopt in other
regions. We are also involved in discussions concerning supply chain issues
relating to China.
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Resilience and International
3.4 Work is underway to review and refresh the key risks to the UK telecoms
sector. This work will inform policy options that BIS will take forward to
improve security and resilience in the telecoms sector. As part of IE’s lead for
BIS in cross-Government civil contingency, resilience and counter-terrorism
activities, work was also undertaken to ensure that BIS was effectively
plugged into HMG’s Olympics emergency response arrangements.
3.5 Internationally, there are currently two key work streams: the World
Conference on International Telecommunications in December will see the
renegotiation of the International Telecommunications Regulations. DCMS
lead but BIS has a strong interest in several of the issues, principally
amendments in the cyber security area and we are working to protect BIS
interest; and the European Commission are proposing a regulation on
network security which is likely to include measures such as introducing
mandatory security breach disclosures for businesses — to which we are
opposed. We are developing a robust negotiating strategy to influence this.
Supporting the Digital Sector
3.6 The Digital Sector team supports future and emerging technologies and the
online economy as drivers for UK growth. IE are the sector experts in HMG
on Software & IT services, digital communications equipment and the online
economy and maintain the necessary strategic relationships with key
companies.
3.7 The Information Economy sector is a ‘horizontal’ sector in the department's
Industrial Strategy. SoS wishes to highlight the need for growth in this sector
as an essential driver for wealth and job creation across the economy. Work
to establish a Technology Council is also underway. The Council — if adopted
by Ministers - will be chaired by the SOS and an industry representative and
will shape HMG's strategy to towards the digital sector. IE were also
instrumental in the successful delivery of Creative Industry Council (joint BIS/
DCMS SoS Chaired) with policy options emerging aimed at improving access
to finance, skills and growth for the sector. Forward look and challenges
Forward look and challenges
Cyber Security
= Agreeing and delivering a programme of work on standards;
= Developing policies on benchmarking cyber capability;
« Implementing a measurable behaviour change campaign; and
= Implementing the sector growth strategy.
Resilience and International
= Limiting the extent of proposed EU regulation in the cyber security area;
and
= Ensuring a successful outcome of WCIT.
Supporting the Digital Sector
= Development of a sector specific growth strategy for the Digital Sector
which will set out how the UK's digital economy can contribute to growth
using the productivity of UK's technology base, ICT skills and R&D base.
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4 Private Rental Taskforce proposal
4.1 There has recently been an approach by Peter Schofield, now DG for
Housing at D/CLG, and Adrian Montague, for ShEx to incubate a small
‘taskforce’ to kick start the connections between investors, developers, and
local government to allow for the construction of more rental housing. The
need for such a taskforce has been identified by Adrian in his, as yet
unpublished, review of the private rented sector. We are proceeding with
caution.
5 BNFL
5.1 Verbal update to be provided at the meeting.
6 Ministerial Reshuffle
6.1 Key points from the reshuffle are as follow:
= The expected new ShEx Minister is Michael Fallon.
= Our portfolio is split as follows:
i. Royal Mail and PDG assets — Michael Fallon
ii. Post Office Ltd - Jo Swinson
= Lord Marland, previously in charge of Urenco at DECC, is now a BIS
Minister. He aims to keep oversight of Urenco at BIS, whether he is
successful remains to be seen.
7 Other
7.1 We continue to be approached to undertake more work around Whitehall.
The two potentially most significant projects are:
= DfT — Roads
= BIS — Creation of an industry bank
7.2 It is unclear whether either of these will actually materialise meaningfully.
However, if they do, there will be real resource challenges.
END
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Shareholder
Executive
HM Government Commercial - In Confidence
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Cabinet Office Commercial Models — ShEx Board 11 July 2012 (12)17
Action for Board: To note
Summary
« Anew Commercial Models team has been created in ERG (Cabinet
Office) with a mandate to examine ownership models across all central
Government Departments.
¢ Driven initially by the mutualisation agenda the team is now keen to
consider the full range of operating and ownership models for
government activities, from outsourcing through GoCos, GovCos to full
sale.
« There is some potential for confusion with the ShEx role and mandate.
e While currently not causing any major concerns, ShEx will need to
monitor the evolution of this activity carefully, particularly if the addition
of strong political backing provides it with real momentum.
Background
1.
The ERG unit within Cabinet Office now has a team focusing specifically on
challenging existing models of service delivery and examining whether alternative
models would more effectively drive improvements in the delivery of public
services. This unit is one of six major directorates in ERG (the others being
Procurement, Major Projects, Digital Delivery, ICT Futures and Strategy). It is
viewed by Cabinet Office as a key part of Civil Service reform, and was a
significant feature in the CS Reform Plan launched in July.
The new team defines its role as follows:
= Identifying where a change to a commercial model will best deliver the
reform objectives of reducing costs, improving delivery and stimulating
growth; and
= Providing commercial expertise to implement any selected change to the
commercial model.
The team is led by a newly-appointed ex-Rothschilds banker, Ed Welsh. It is still
thinly resourced, with a combination of ERG’s former OGC civil servants and a
number of externally recruited, but part time ‘Crown Commercial Leads’.
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-
Although initially focused on the Mutuals agenda, the remit of the Commercial
Models team has expanded to look at the full range of different ownership models
(outsourcing, JV, GoCos, GovCos, etc). The team has a mandate from MCO for
identification, execution and ongoing shareholder oversight. As such there is the
potential for considerable overlap and/or confusion with the ShEx mandate. This
confusion has already been evident with several departments, notably MoD and
DfT.
5. The pipeline of opportunities is currently quite short (see Appendix for the position
as at July). Of the current pipeline, the only situation relating directly to ShEx is
POL, where the ERG team has met the ShEx POL team, but acknowledged they
have no direct involvement. The majority of other situations under consideration
remain small and are unlikely to be assets with which we would normally want to
be involved. However, following a series of high level bilateral meetings between
MCO and all major Departmental Secretaries of State it is possible that the
pipeline will be significantly boosted. All departments have been tasked with
providing two major prospects to the CM team by October.
6. Following the significant difficulties experienced by Cabinet Office in securing
HMT approval to the ground-breaking MyCSP ‘mutual JV’ transaction (in which
ShEx played a delicate, behind-the-scenes role) and subsequent meetings
between senior CO and HMT officials, a new group has been established to
ensure effective and collaborative working on new commercial model proposals.
ShEx has been invited to join this group, turning it into a tripartite body. It has met
once so far, to agree an operational framework and to review an early activity
pipeline. The next meeting is scheduled for 18th September.
7. The NAO wrote to Cabinet Office following the My CSP difficulties setting out its
concerns about the way ‘mutualisations’ are appraised. Their concerns will be
equally valid in the consideration of other forms of new commercial models.
Implications for ShEx
8. As well as ensuring that the opportunity for confusion with the ShEx role is
limited, ShEx needs to continue to monitor the evolution of this activity. While our
direct assistance may be needed to execute larger transactions that are identified
we also need to guard against the development of a ‘shadow ShEx’ unit within
ERG, armed with the same portfolio and corporate finance capabilities. The
likelihood of this is considered remote at this stage.
9. The situation also offers us an opportunity to strengthen our relationship with
HMT in the way that we were able to do on My CSP. HMT have been keen to use
ShEx as a means of reinforcing messages around options appraisal and vfm.
10. At present, ShEx is reasonably well-sighted on the emerging thinking and plans
of the new commercial models team, both informally though good working
relationships and formally through PEX(A) and our membership of the new
tripartite body with HMT and CO.
Key Next Steps
11. We will maintain a close watching brief, through involvement in the tripartite body,
on this activity and report back with any significant developments.
Mark Boyle
June 2012
Project Dashboard (1)
Mec — See “Dent ieads
‘Transactions
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September 2012
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Shareholder
Executive
HM Government Commercial - In Confidence
Royal Mail and Post Office Ltd update — ShEx Board 11 July 2012 (12)19
Board action: To note
This note provides an update to the Board on the Royal Mail and Post Office and a
number of items, particularly regarding governance for discussion.
Summary
¢ The primary remaining success factors in achieving our strategy are
Management’s delivery of a robust business plan (from which we can
commence a sale process) and successful resolution of regulatory
risks.
e¢ Key developments since the last update are:
o Ongoing diligence of the draft refreshed business plan. Our
provisional ShEx view is that there is limited scope to change the plan
and that it is broadly acceptable in delivering the margin and cash
progression necessary to support a transaction. However, we are
seeking additional analysis from Management on alternative
performance scenarios (including outperformance and downsides),
such that we can assess sale options across a range of credible
outcomes.
o Continuing threat from End to End competition. We are pushing Royal
Mail to provide Ofcom with a robust evidence base of risks to the
Universal Service ahead of anticipated public guidance from the
regulator, expected in October. We are also considering options for
further Ministerial engagement.
o Management are currently preparing for a range of key discussions
with unions which will cover a pay deal (term to be decided upon),
modernisation and also possible reforms to the ongoing Royal Mail
pension plan (to reduce the ongoing risk to RM). The outcome of
these discussions will be a critical step on the way towards a
transaction and so we are monitoring progress closely.
o Issues regarding governance discussed at the last Board have been
complicated by the Chairman undergoing a serious operation, which
has delayed an ability to address the concerns raised then.
« Progress on POL matters has continued:
o Full year results (11/12) show an improvement in revenues and
profits. This FY has continued in the same vein, with benefits flowing
from stamp price rises and revised commission rates from Bol.
o The Network Transformation programme will ramp up this autumn with
POL targeting 1,200 conversions by end March 2013.
o Success in current DVLA and DWP tender processes will be crucial if
POL is to achieve its Front Office for Government ambitions.
o The Government's mutualisation consultation response was published
on 4 July and the next step is the formation of a stakeholder forum to
agree on a shared public benefit purpose for POL, the first meeting of
which is planned for October.
24
Royal Mail
Business Plan/ Performance/ Transaction Outlook: The business is performing
ahead of budget at Period 4 (July). Ongoing ShEx diligence of the draft
refreshed business plan suggests that it is broadly acceptable as a base case
to support a transaction; any deal in late 2013 might be a private transaction
with an IPO less likely until 2014. We require further analysis of how Royal Mail
would react to any unexpected shortfall vs plan (e.g. weaker volumes, falling
behind on modern
performance scenarios.
ion etc) to develop a range of up- and down-side
Period 4 results (to July 2012) show outperformance against budget, almost
entirely driven by revenues. Cashflow is even more significantly ahead.
= Operating profit of £177m (+£49m to budget, +£66m from PY) is largely
driven by £41m of higher revenues to budget (most notably from stronger
packets volumes).
= People costs are on budget; some modest outperformance of non-staff
costs of £8m.
= Free cashflow of £246m (+£155m to budget, +£133m from PY), driven by
improved profitability, improved working capital, slower modernisation
spend and CAPEX under-spend.
2. We are, with our advisors UBS and Deloitte, undertaking a detailed review of
Management's draft refreshed business plan. However:
= Our emerging (provisional) view is that there is limited scope to challenge
the plan which is broadly acceptable in delivering the margin and cash
progression necessary to support a transaction.
= Our advisors have stressed the emphasis of the plan on revenue growth
(with lower reliance on cost reduction). A key implication of this is that the
plan is more sensitive to external factors such as GDP and the pace e-
substitution.
= Given this, we need additional analysis (and assurances) from
Management on the range of potential performance scenarios (including
both outperformance and downsides). This work will support: i) an
assessment of transaction options across a range of credible outcomes
and ii) a review of the credible levers available to management to mitigate
against any external shocks, which will be important for investor
confidence.
= Additionally, we have identified a need for greater transparency in
reporting on delivery of the key elements of the plan (especially
modernisation progress), ahead of commencing key decisions on a
transaction.
Modernisation: Remains a key risk to our strategy. RM has commissioned a
detailed external review of modernisation ambitions and resultant productivity
improvement potential
3. The draft refreshed business plan projects a lower pace of hours reduction in the
core UK business than previously forecast. The Board’s more conservative view
reflects a combination of:
= Slower letters volume decline and stronger packets growth (driving higher
workload)
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= Delays to rollout of modernisation to Delivery Offices (now focused on
quality rather than speed of implementation)
= Lower and less consistent savings from those Offices undergoing revision
(i.e. fewer hours coming out after changes).
4. Latest (period 4) performance data supports this cautious assessment, with hours
reduction behind budget.
5. We have been clear to the business that they must present a credible and
ambitious efficiency programme. This is essential to support investor confidence
in future margin progression and dividend sustainability. It is also crucial to
securing continued regulatory freedom.
6. Management has commissioned a detailed analysis by PwC of the pace and
drivers of the modernisation of the Delivery Offices. This will be critical in
validating the rate of modernisation in the latest business plan. Initial findings are
due later in September.
Regulation: Awaiting publication of more detailed guidance on ‘End-to-End’
from Ofcom in October.
7. Ofcom published a “holding” report on end to end in July. This flagged that there
was no evidence currently to justify intervention on end to end (specifically TNTs
stated expansion of its direct delivery trials). Whilst Ofcom were careful to stress
that they would intervene if new evidence emerged, this is clearly less clear than
we would prefer.
8. Ofcom intend to issue more detailed guidance in October on how they are
assessing the potential risks to the Universal Service from end to end; and how
they will consider options to mitigate this (including both “self help” by Royal Mail
and regulatory intervention).
9. We are pushing Royal Mail to provide Ofcom with a robust evidence base of risks
to the Universal Service, ahead of the regulator preparing this guidance.
Specifically we have asked that they further validate the potential detriment to the
Universal Service; and evidence the limited ability of the business to “self help”
(through further cost savings or commercial responses).
10. We will engage with Ofcom at the end of September, following RM’s submission
of this evidence. We are considering how to deploy Ministers ahead of the Ofcom
Board's review of the guidance.
State Aid: Reporting to Commission commencing, contingency planning for a
challenge.
11. We will be submitting the first report to the Commission on Royal Mail's progress
in implementing the Restructuring Plan this month. The March Decision required
annual reports on progress, with the first being requested by the Commission this
September. We expect this to be a formality from the Commission's perspective,
but we are working with Royal Mail to ensure that variances from the
Restructuring Plan are adequately explained.
12. We have learnt that PostNL (TNT Post) will likely not be challenging the
Commission's Decision (although the official two month challenge period will not
start until the Decision has been published in the Official Journal, despite it being
available already on the DG Comp website). Nevertheless, we are undertaking
contingency planning in anticipation of a challenge from other interested parties,
which contemplates possible lines of attack, our defence, the level of work
involved, and timescales (and how these might impact a transaction).
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Pensions: Smooth operation of newly created Govt pension scheme; good
progress on asset realisation.
13. The new Government pension plan which started operation in April is working
well. This scheme pays out in the region of £100m per month to c180,000
pensioners. We are currently conducting a review into whether the management
of this plan can be transferred to the team in Cabinet Office who manage the
Principal Civil Service Pension Scheme. In any event line management
responsibility is scheduled to transfer from ShEx to BIS Finance on 1 November.
Given the scheme is now up and running this is considered a better home within
BIS for the team running it.
14. The project to sell down the c£27bn of assets which transferred to Govt is
progressing well. By the end of the year we expect only perhaps £4bn of assets
to remain. This will mostly consist of less liquid assets which will likely be held for
a longer period (ie private equity, property and high yield). All of the liquid assets
and the significant derivative positions have now been realised / wound down.
15. We have continued to focus on ‘crossing opportunities’ ie private trading with
counterparties (and so saving the spreads that would otherwise be payable in
open market transactions). Approx £3.4bn of the liquid assets (mainly bonds)
have been crossed to date (approx 30% of the assets which have been sold) with
estimated savings to date of around £65m.
16. The pension project will conclude with a final transfer of assets from the Royal
Mail pension plan to Government once actuarial calculations are complete. This
will be in the order of £800m (mostly cash) and will likely transfer in early
October.
17. Royal Mail themselves are currently considering their options to manage the risk
associated with their ongoing pension scheme. This will be a key lead item in
terms of preparing the business for a transaction.
Industrial Relations: Remain stable; key forward negotiations due to
commence imminently
18. 1R at Royal Mail remains stable with no imminent strike threats.
19. Management expect to commence the detailed negotiations for a new pay and
(further) modernisation agreement over the coming weeks. This is an acutely
sensitive area covering pay, redundancy, pensions and changes to working
practices. It is also crucial to supporting the business plan and providing cost
flexibility to cope with any downsides. Management have committed to keeping
us fully informed as these discussions progress.
Board and Management & Remuneration: Generally good relations, with some
give from Remco on 2012 bonuses and sensitive handling of pay disclosure
20. Relations with Board and Management remain relatively good.
21. The Chairman underwent a reasonably serious operation in July and is still
recovering. The Chairman’s other roles discussed at the previous Board meeting
is still an important issue. This has been further highlighted by the retirement of
Lord Currie from the RM Board and we need to consider how best to handle his
replacement. We expect to be able to re-engage with the Chairman soon.
27
Post Office Limited
POL is focusing on implementing its strategic plan — key elements of which are
Network Transformation and growing new revenues.
1. Board: POL has identified a final NED (Tim Franklin) for the POL Board, and
ShEx officials have recommended his appointment. The decision is currently with
Ministers. Tim has expertise in financial services, having been CEO of Britannia
and then COO of Co-operative Bank. He also already sits on the Land Registry
Board. In late August, POL’s HR director left the business (for performance
reasons). Her role will be restructured and split between the Network Director and
the General Counsel.
2. CST approval for technical changes to Paula Vennells’ 10/11 and 11/12 LTIP
were approved over recess, and ShEx officials are now finalising STIP and LTIP.
proposals for FY12/13 for the CEO and FD.
3. Performance: Performance (unaudited) continues to be strong, with YTD (four
months to July) operating profit of £38.3m (£1.8m above budget). This is largely
due to strong mails performance, and lower costs, partially offset by revenue
underperformance in Financial Services due to the delay in signing the
renegotiated contract with Bank of Ireland. This is now signed, and Financial
Services performance is expected to improve during the rest of the year.
4. Year to date net revenue is £306.1m (£5.3m favourable to budget and £11.2m
favourable to prior year) with the revenue uplift driven by strong mails and retail
which is £8.4m favourable to budget YTD (e.g. due to higher stamp sales in
anticipation of the stamp price increases in April, and strong retail and collectibles
performance). This stronger divisional P1-P4 sales performance is however
expected to unwind during the latter part of the year as customers reduce stamp
"stockpiles" accumulated ahead of the price increase.
5. Network transformation: POL’s pilot of the new Local and Main operating
models continues in over 230 branches. Following agreement with Consumer
Focus and the National Federation of SubPostmasters, national rollout is
scheduled to begin on 1*' October. The new models operate on a wholly variable
pay basis and offer significant customer service benefits including longer opening
hours. Customer and operator research shows the new models are generally well
received. POL is committed to 1,200 branches operating the new models by
March 2013, and around 6,000 by March 2015.
6. Key revenue opportunities: POL is currently bidding for a DVLA ‘front office’
contract for a suite of services, which could be worth approximately £20m pa in
additional income for POL (based on estimate from the procurement ITT). POL is
now in the competitive dialogue phase, with a decision now expected in mid
October — although timings may slip due to the reshuffle. POL is also bidding in a
DWP procurement for the provision of Identity Assurance services for DWP in
relation to Universal Credit. POL has recently signed a new contract with Bank of
Ireland for its financial services business, which will deliver better commission
rates and greater potential for sales growth.
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7. Mutualisation: The Government's mutualisation consultation response was
published on 4 July, and has been positively received by stakeholders. It seeks
to foster a mutual culture within the business as a pre-requisite to any ultimate
transfer of ownership along with the commercial sustainability of the business.
The first step will be convening a stakeholder forum to agree the shared public
benefit purpose of POL. Its first meeting is scheduled for 16 October. ShEx is
working closely with POL in setting up the forum, which officials will attend.
Royal Mail and Post Office Network Teams
September 2012
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