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23 November 2022 Lead Official: Annie Carpenter (UKGI)
Lead Official Telephone: GRO
Post Office Limited (POL): Quarterly update
Issue
1. This quarterly update onPOL highlights good progressin litigation and governance
matters. However, POL is facingan increasingy challenging financial environment driven
by responding to the Inquiry, a difficult market position, and the new IT system roll out
This is leading to a significant deterioration inits financial position beyondFY22/23.
Recommendation
2. For noting.
Background
3. As the sole shareholder in POL, BEIS supported by UKGheld the latest Quarterly
Shareholder Meeting on 31 Octoberfocused on current issues and next steps.
Considerations
4. POL should deliver against the FY22/23 budget (it is currently £16m ahead of budgeted
year to date Trading Profit, but the outlook is challenging. POL is facing a number of
significant risks:
e Financial position. POL’s forecast financial position has significantly deteriorated
since the Spending Review. This is mainly driven by a decline in the Mails business,
increased IT, Inquiry and Historical Matters costs as well as wider macro and
inflationary pressures. The company is revising its 3 Year Strategic Plan and
assessing potential options (andtheir associated risks) to address a likely funding gap
in its plan. POL has indicated it will requireadditional funding to help address any gap
/ finance longer-term cost reductions but the quantum and purpose of funding isto be
confirmed. Preliminary engagement has begun with HMT ahead of any additional
funding request. UKGI will scrutinise and challenge the revised 3 Year Plan once
finalised.
e Governance. Henry Staunton starts as the new POL Chair on 1 December. You will
shortly receive a letter to send to Henry setting out the shareholder priorities for the
rest of FY22/23. Executive succession planning remains a key risk. Recruitment for
three NEDs to replace those leaving was approved by Minister Hunt in early
September. POL is planning to complete interviews by mid-December and have a
recommendation for SoS approval shortly afterwards.
e Culture. POL has a plan to complete its response to the Fraser findings and embed
the improvements. A number of potentially significant gaps remain as outlined in Tim
Parker's letter to the Perm Sec dated 1 September. At management levels, the current
combination of pressures from the Inquiry and financial difficulties is placing
substantial demand on the team to deliver.
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e Remuneration. Levels of pay and aligning them to incentive mechanisms continues
to be a contentious issue. The POL Chair sent a letter to SoS asking to nearly double
the CEO’s pay (at stretch performance) We also need to resolve the issue of the
retrospective approval of the £30kincrease in the CEOs bonus.
e Horizon replacement POL has extended the Horizon contract by a year to March
2025 to help mitigate delivery risks. The POL Board is challenging the programme on
significant (c.30%) potential cost growth caused by high inflation and Inquiry
challenges. POL will revise its business case accordingly andtake to BEIS PIC in the
New Year after a government gateway review in January.
5. Litigation remains a key challenge, but good progress has been made:
e Historical Shortfall Scheme (HSS) As of 11 November, 90% of eligible applicants
have received an offer(£76m offered; £40m paid). POL aims to issue 96% of offers by
8 December (the date of the next compensation hearings at the Horizon Inquiry. The
remaining 4% of cases are the most complex, and many rely on third parties or further
information from claimantsbefore an offer can be issued. Therefore, these are unlikely
to be resolved until early next year. In addition, following the announcement of
government funding for late applications, POL ha written to 227 late applicants to
begin processing their cases. POLwill report separately onthese, with a target of 50
offers issued by March 2023, albeit this has been revised down from initial estimates
due to the delay in the receipt of fully completed application forms We will keep you
sighted on progress.
e Overturned Historical Convictions (OHC).As of 10 November, 83 convictions have
been overturned. Most of these have received an interim payment of £100kIn total,
claimants have received c.£10m to date (incl. interim payments) An Early Neutral
Evaluation (ENE) process took place over the summer for 10 claimants this set a
framework for non-pecuniary damagesand has sped up progress with claims, offers
and payments. We are now transitioning delegated authority to POL forthe majority of
non-pecuniary claims, whilst keeping oversight of exceptional cases. We are working
with POL to move away from a negotiation model to a remediation model with an
independent review function. This should increase compensation speednce it is up
and running. The POL Board will decide on the proposed delivery model on 5
December. We will provide advice to Ministes in advance.
e Group Litigation Order (GLO). A business case for the GLO compensation scheme
went to PIC on 22 November. We hope to get Treasury clearance in time to announce
it before the 8 December Williams hearing on compensation. The recent gateway
review scored the project as“amber-red”, largely on grounds of under-resourcing and
the consequences for PPM. We plan to recruit five additional posts. The Project
Assistance Team is providing us with help to upgrade our PPM. Our relationships with
stakeholders are excellent, but they are rightly worried about the timescale for this
project: our legal powers to pay compensation run out in August 2024.
e Postmaster Detriment In early December, POL is set to announce and start the new
compensation scheme for the first Detriment area(Suspension Pay), following HMT
approval in late October. BEIS is developing a submission and business case to
address a further tranche of the remaining known areas of potential detriment
(c.£16m).
e Inquiry and legal costs. POL’s Historical Matters Unit legal costs continue to put
financial pressure on the business despite efforts by officials to increase POL's cost
control and forecasting framework throughout 2022.POL has spent c.£80m with
Herbert Smith Freehills(HSF) alone to date to deliver a number of ongoing high-profile
2
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programmes (Inquiry, OHC, HSS). The POL CFO has set another £35m cost
challenge for the unit. Officials remain concerned about the efficiency and
effectiveness of POL's spending on legal costs.
Presentation and handling
6. No presentation or handling requirements.
Annex
Annex A: Financial performance FY22/23 - Year to Date until Period 6: EndSeptember
Period 6
Variance Forecast Variance YoY
Budget Yor %
(118)
Budget Variance YoY
Mails 60 (re) tt
Puo0
Retail/Lottery & Gift Cards
Government
Banking Services
ATMs 12
‘Transactional Financial Services ° 9 18%
Payment Services & Payzone 19 ° 4 18%
00 4) (59%)
os ° 4) (45%)
10 1 00 01 ax
610 620 oso om
35 6) 03 a)
6.1) 03 (0) o%
Postmasters Rem Fixed and Other Costs 48 (0.4) o% za
FRES ° 4 318% 04 62 143 210 3,390%
POCA income 00 00 ° 04 03 04 126%
Gross Margin 288 25 29 10% 2103 1975 128 290 16%
Staff Costs 50) 13 10% a 87 o8 (58) 7%
Non Staff Costs 168 3.4) 19 (12 8% 107.4) (112.6 43 (169) 19%
Total Overheads G13) 334) 32 (5) om (193.9) (199.0) 5a (227) 13%
‘Trading Profit (01) (49) 48 (58) 57 Ok 88K 165 (14) 17963 62%
Latest outlook
The 2022/23 budget forecast total revenues of £869m and a trading profit of £35m,
compared to actual revenues of £834m and trading profit of £39.5m generated in 2021/22.
At the half year point (P6) trading profit is substantially ahead of budget (£16.5m profit v
£1.4m budgeted loss). Outperformance driven by FRES and Insurance in particular.
However, both are strongly linked to travel and therefore consumer spending- POL is
already seeing reversion to lower levels and anticipate continuation of this trend with whole
year outlook still towards a £35m trading profit. Mails underperformance is a continued
known but problematic trend
Annex B: Network access criteria and branch numbersas at end October 2022
Performance AgainstAccess Criteria at the end ofOctober 2022
Postcode
Criteria
Number
of
branches
11,500
Total
Population
within 3
miles
Total
Population
within 1
mile
Deprived
Urban
Population
within 1
mile
Urban
Population
within 1
mile
Rural
Population
within 3
miles
Districts
less than
95%
Population
within 6
miles
Oct
11,684
99.6%
92.6%
99.3%
97.8%
98.1%
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[2022 I I I I I I ] J
Branch numbers at the end ofOctober 2022
Type Mains Local DMB Traditional utreach Total
Number 3,339 4,252 117 1,938 1,938 11,684