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bod Department for
UK Government Business, Energy
'nvestments OFFICIAL-SENSITIVE: COMMERCIAL/ PERSONAL & Industral Strategy
Date: 10 August 2022
Director: Tom Cooper (UKGI) Carl Creswell (BEIS)
Lead Officiat Annie Carpe
Lead Official Telephone:;
Recipient To Note / Comment To Approve / Decide
Permanent Secretary xX
Minister Hunt x
Post Office Limited (POL): Quarterly update
Summary
1. This quarterly update is for your information.
Timing
2. Routine. Officials held the POL Quarterly Shareholder Meeting on Tuesday 5 July and this
update includes the most current position.
Overview
3. Litigation remains a key challenge, but good progresshas been made:
e The Historical Shortfall Scheme (HSS)has now issued 73% of offers and is on track to
meet the target of 80% of offers made by the end of August.
e Overturned Historical Convictions (OHC) on 29 July, POL received the outcome of the
Early Neutral Evaluation process (ENB) regarding non-pecuniary heads of loss. This set
clear financial precedents and we expect POL to make offers to the 10 claimantsshortly.
e Suspension pay compensation PIC is yet to make a final decision on this, nearly two
months after receiving the business case POL is increasingly frustrated at the delay
e Other PM Detriment: POL has identified additional areas of Postmaster Detriment where it
may have breached the Common Issues Judgment (ClJ). It is developing a plan to
address the potential liability which is expected shortly.
e Group Litigation Order (GLO): Interim payments totaling £19.5m were announced on 30
June and the first payments have now been made The GLO group will be informally
consulted on delivery optionsbefore we take the business case to PIClater this year.
4. Financial and governancematters have progressed well but cost pressures are increasing
e The Spending Review (SR) process concluded with the Funding Agreement and Working
Capital Facility now signed. The FY22/23 budget has now been approved, subject to
UKGI being satisfiedwith POL’s Investment Spend reporting. Discussions are ongoing.
e As at end June 2022, POL are ahead on trading profit with £14m vs £2.6m budget
Investment Spend is tracking c.£5.5m below budget for the same period.However, mails
revenues continue to underperform. A new 3 year plan is being prepared which is likely to
show POL will be under significant financial pressure through the rest of the ® period.
Postmasters are continuing to lobby for better remuneration as a result of cost pressures.
e Network performance remains above the policy target at 11,60Qranches.
e Recruitment of the newChair is being progressed with the preferred candidate with No 10
for approval. We are also consideringinterim chair options. Succession planning remains
a key risk at all levels across POL.
e POL's RemCo has approved the outturn for the Transformation Incentive Scheme but
other remuneration schemes remain outstanding. Executive pay at the company in
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FY21/22 may attract public comment and we have advised POL to consult the Permanent
Secretary.
e POL have continued to deliver their culture improvement programme and improvements
have been seen in their annual engagement surveybut overall it remains low
e POL are working through issues with the Horizon replacementprogramme which is
returning to BEIS PIC inSeptember (delayed from August)
Legal [Subject to Legal Privilege]
5. Historical Shortfall Scheme (HSS)
As of 8 August 2022, POL has made 1,758 offers to a value of £49m, representing 73% of
eligible claims, and met the end of July target. 1,378 offers paid (£24m). POL is on track to meet
the next major milestone of 80% of offers to be made bythe end of August 2022
POL, in consultation with UKGI and BEIS, has finalised its multi-stage Dispute Resolution
Process (DRP). The DRP has been operating effectively to date with only 7% of responses in
dispute. Should cases reach the latter stages of the DRP officials have agreed a test case
process with a view to delegating authority once BEIS is comfortable In line with comments
made at the recent Inquiry hearings,we are looking to agree additional legal and professionalfee
support to the claimants in the DRP, with a cap of £5k-£10k per claimant depending on thecase
complexity.
We expect POL to submit its proposed approach to dealing with late HSS applicants (c.200-500
potential cases) shortly. UKGI and BEIS officials are working with HMT to agree funding
arrangements and delivery principles, and will submit the proposal for Perm Sec / Ministerial
approval once it has completed governance Given the focus of the Inquiry on this issue POL
regards securing funding as a major priority and is likely to escalate this issue to you and/or
Ministers in the event it is delayed.
Working with their auditors, PwC, POL is preparing an update to the provisions for the March
2022 annual accounts which should besigned this month.
6. Overturned HistoricalConvictions (OHC) & compensation.
81 convictions have now been overturned. POL has received 76 interim payment applications,
71 offers have been madeand 70 offers accepted, worth £7.0m.
Substantial progress has been made with the first two'pilot cases with one claimant agreeing to
settle their pecuniary claim, and the other part settling their pecuniary claim and agree to
mediation for the outstanding Head of Loss. Payments have been made to both of these
claimants in relation to the settled elements of their claims.
To settle the non-pecuniary elements of the claims, POL and claimart agreed to an Early
Neutral Evaluation process (ENE) led by Lord Dyson, a retired High Court judge Lord Dyson has
reviewed 10 cases and provided his view on the appropriate range of each non-pecuniary Head
of Loss and suggested where each of the 10 claims sit on those ranges. Both POL andBEIS
officials are broadly happy with Lord Dysoris evaluation. POL is working to develop meaningful
offers ahead of a meeting between POL and the claimants representatives on 11 August. The
ENE process should also help set precedents to settlenon-pecuniary claims more quickly as
soon as claims are received and we intend to provide further substantive advice on next steps in
the coming weeks. We are pressing POL to make offers as soon as possible, including on
exemplary damages (where Lord Dyson said that each claimant should receive £75k).
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Investments OFFICIAL-SENSITIVE: COMMERCIAL/ PERSONAL & Industrial Strategy
POL has continued to make good progress on contacting potential further app#ants with the
support of the CCRC. Out of the 706 criminal convictions prosecuted by POLPOL has been
able to contact 665 individuals and are conducting extended tracing to contact the other 41. POL
has been supporting other prosecuting bodies in providing disclosure and facilitating engagement
to progress other potential appeals However, it is clear other prosecuting bodieshave not made
as much progress as POL. POL have also undertaken a pilot to better identify clear Horizon
cases and notify those individuals that it wouldrt stand in the way of their convictions being
overturned.
. Postmaster Detriment
The business case for the suspension pay issue went to PIC on 9 June. POL is frustrated that
the Committee did not give approval until 9 August because it requested further information on
some detailed PSED questions. HMG’s responsiveness is an area of vulnerability in relation to
the claimants affected, the media, and the Inquiry.
The preferred option in the business case costs up to c£98m and will require discussion with
HMT via a TAP process now that we have a final decision from PIC. You will receive advice on
this shortly. We have agreed with POL that they will procure independent assurance through
their internal audit function to meet BEIS assurance requirements. This assurance includes
project set up and the delivery of the compensation process including the live review of initial
cases and exceptional cases prior to approval.
POL has identified additional areas of Postmaster Detriment where it may have breached the
Common Issues Judgment (ClJ) These include 77 current Postmasters who are still paying off
debts from shortfalls (from the new version of Horizon) which POL did not investigate, contrary to
the ClJ. Officials have encouraged POL to find a way to deal_with the ining detriment __
issues, including Postmasters who are repaying balances.
le
We have asked POL to investigate the issue of the unpaid shortfalls with affected
Postmasters with the cover of their letter of comfort before requesting funding if needed.
. GLO.
In March 2022 the Chancellor announced further funding to deliver compensation to the GLO
group. HMT have made £80m from the Reserve available for this compensation subject to BEIS
first making underspends available In June 2022, Minister Scully announcedGovernment would
make an interim payment of compensation to eligiblePostmasters while the full scheme was
being developed, totalling £19.5m. Payments have now been made to the first batch of GLO
claimants.
BEIS have contracted with Freeths, the lawyerswho represented the Postmasters in the 2019
litigation, to gain access to their data and insights into the methodology they usedOfficials held
a very successful two-day workshop with Freeths and representatives from the Justice for Sub
Postmasters Alliance in July 2022to work up a delivery option for the full compensation scheme.
In September (subject to Ministerial views), BEIS will informally consult the GLO group on
options for delivering the scheme.We will talk to their lawyers this month. The options include
different approaches todelivery by POL or BEIS. We will use the feedback to inform work on the
business case, which we hope to take through PIC in October.
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Investments OFFICIAL-SENSITIVE: COMMERCIAL/ PERSONAL & Industrial Strategy
Financial and Operational Performance
9. Spending Review, budget & legal costs control.
During the last quarter the final elements of the Spending Review (SR) process and settlement
were concluded, with the updated Working Capital Facility(WCF) signed in early July, following
the late April execution of theFunding Agreement
POL provided a FY22/23 budget for review in May and, following scrutiny, this was conditionally
approved on 22 June. The conditionality relates to thelevel of information provided by POL in
their regular Investment Spend reporting— UKGI have been engaging with POL on the details of
this and progress is being made An update and confirmation of when a satisfactory position has
been reached will be provided in the next 2 months ahead of the next HMG funding to be paid to
POL.
The FY21/22 Annual Report and Accounts(ARA) are being finalised and expect to be signed by
mid-August 2022. They are expected to be laid in Parliament and published later in the year.
10. Trading update.
As at Period 3 (capturing to end June), POL are tracking ahead on trading profit, with a YTD total
of £14m vs £2.6m per budget. This largely reflects strong travel performance with particular
benefit to the Insurance and Travel Money business linesBanking continued to perform strongly
delivering c£60.1m YTD revenue vs c.£58.7m budget. Mails continues to lag behind budget on a
YTD basis (£79.1m actual vs £80.8m budget) with underperformance vs budgetin the Labels
and International lines continuing recent weakness in these areas, and suggesting some risks to
full year projections. More detail is inAnnex A.
POL received positive press coverage on 8 August for its latest data about cash usagewith
branches handling a record £801m in personal cash withdrawals in July, marking an increase of
nearly 8 per cent month on month Cash deposits have also been strong.
11. Investment spending.
Investment
budget of :'® largely due to delays and deferrals of key projects particularly within
Business Transformation Across the full year, material risks to investment spendingremain, with
a significant concentration of spend value amongHorizon replacement Belfast Exit and Historic
Matters legal costs — all of which have been subject to some levelcost escalation risk. The team
are monitoring the situation closely and— as noted in the conditionality around the 22/23 Budget
Approval — working with POL to ensure optimal monitoring information is receivedo aid early
identification and response to risks
3 forecast for Belfast Exitanticipates project spend to bei") above budget for the
i), driven by significant delays and technologyissues. An update presented at the
30ard projected lifetime costs of: cl ifor Belfast Exit as a result of these
issues, a substantial increase from the c.. I} forecast presented to the March POL
Board. A paper on proposed solutions with financial implications isexpected at the September
POL Board.
The latest three year plan forecast i:
plan of "} was outsidethe affordability envelope by:
above. POL is currently developing a 3 year business planto bring to the September POL Board
which is expected tooutline how this will be managed.
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a Department for
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Investments OFFICIAL-SENSITIVE: COMMERCIAL/ PERSONAL & Industrial Strategy
12. Network performanceand sustainability.
As at the end of June the Network stood at 11,600, which is 100 branches above the policy
target. More detail is inAnnex B.
Governance
13.POL Board strategy and policy review.
The POL Board met for a strategy day in Julyand the new Minister Jane Hunt, attended. The
Board discussed the objectives of the BEISpolicy review andPOL’s engagementstrategy. The
Board also considered POL’s Mails strategy, strategic commercial considerations the long-term
drivers of future network shape and plans to builda resilient network equipped for the decade
ahead. Key areas of consideration included the following
e POL is exploring opportunities toexpand its offering with other parcels carriers. It already
has relationships with Amazon and DPD
e POL also intends to digitise customer journeys to allow customers to buy services online
e POL is developing a target operating model and its views on the ideal shape of the
network. The size of the network could be reduced while still meeting geographical
targets. This could improve longer term profitability, however, closing branches costs
money in the short term. POL is still developing its plan to reach its target operating
model.
The BEIS policy team are pressing on with thePOL Policy review, on an internal basis.
14. Chair appointment and succession planning (SENSITIVE — PERSONAL).
UKGI successfully progressed the POL Chair recruitment despite initial delays obtaining
approvals impacting the timetable. The SoS's preferred candidate has been submitted toNo 10
for approval, and we are also progressing interim Chair options. UKGI is working with POL to
design a comprehensive induction programmefor the new Chair. An exit interview has been
organised for the current Chairwith the Perm Sec on 13 September.
The terms of two POL NEDs are due to expire in the next 8 months. POL submitted a request
seeking an extension to Zarin Patel's Genior Independent Director) term by 3 months and Lisa
Harrington's (RemCo Chair) term by 5 months to support continuity and the transition to the new
Chair. The extension requests were approved by Minister Scullyand the SoS. Approval to launch
the campaign for the replacements of Zarin, Lisa, @ well as Carla Stent (ARC Chair) who's
exceptional third term appointment will end in January 2024will be sought shortly once POL
finalises their recruitment campaign strategy
The immediate flight risk issues with the CEO and CFO have reduced However, there is an
ongoing need to develop succession plans at senior levels There are no immediate successors
for CEO and CFO in post, and the non-executive directors have continued to press for better
planning in this area
15. Remuneration.
POL's RemCo has approved the outturn for the Transformation Incentive Scheme (the proxy
replacement for STIP 20-21 which was withdrawn due to the pandemic) and LTIP 2019-22.
However, the outturn for STIP 21/22 still needs to be agreed. Performance outturn against
metrics for STIP 21/22 has now been approved,but POL wants to introduce a new individual
performance multiplia which would requiregovernance approvalsfrom RemCo, BEIS and HMT.
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RemCo approval of performance metrics for LTIP 2424, STIP 22/23 and LTIP 22-25 are still
outstanding. The main remaining issue is the way to set effective targets for trading profit and
Investment Spend.
The appointment of the new Chair will beach the current £400k Board pay cap in the Articles of
Association, as the current Chair waives his fees You will shortly receive a request toincrease
this.
16. Postmaster culture change.
The Second POL Annual Research survey shows an overall increase in Postmaster sentiment,
but it remains low at 28%. On two specific metrics improvements have been made by 8
percentage point uplift on describing relationship and 6 percentage point uplift on how supported
Postmasters feel. Whilst the level of Postmaster Satisfaction is disappointingly low, these
improvements are seen as a result of the work POL has been doing on the feedback from
previous surveys. It has updated the action plan quarterly to ensure all directorates are focused
on delivering key tangible actions to supportPostmasters, as a result of their feedback from the
survey. It has also successfully introduced WhatsApp groups to improve Area Manager
communications, and therehas been successful engagement through the Regional Forums and
the Voice of Postmasters to identify opportunities for continuous improvement.
Remuneration remains the biggestissue for Postmasters who are continuing to lobby for better
remuneration as a result of the cost pressures they are facing.POL are considering potential
options to address some aspects of remuneration issues. The introduction of the Horizon
replacement is seen as key risk forthe Postmaster relationship. Whilst Horizon has been the
source of problems historically, Postmasters are now familiar with it and there is anxiety over a
new system. Therefore, a pilot approach is being taken to increase confidence in the new system
and demonstrate its useability and robustness prior tavider roll-out.
Project delivery
17. Strategic Platform Modernisation Programme $PMP) / New Branch IT (NBIT).
POL have opened 10 Drop & Collect (D&C) branches that work without Horizon which is much
less than the planned 50Q although POL consider they have the potential for over 1,000 by
2025. POL has also extended their services to includeRoyal Mail Collections and Parcelforce
Returns/Collections products. Volumes are approaching 400 non-Horizon transactions weekly.
Any large expansion of the D&C format could be unpopular with existingPostmasters who fear
cannibalisation of their mails business. The pilots areexploring this issue.
The Full Counter Pilot planned for September has been scaledback following delays in the
operating system decision and the move from Android to WindowsRelease 1 in September will
now be focused on a more limited set of products There are three other main risks and issues
e The lack of clear path to leveraging existing Payzone capability for the development of
legacy pre-paid bill payment solutions, which drives a need to build a whole new solutian
e The delays by Ingenico/Worldpay in supporting the Payments stream of NBIT, which has
delayed POL’s ability to test end-to-end product journeys (i.e., including payment from the
customer).
e The ongoing discussion regarding whetherPOL should stop offering the National Lottery
and instead allowPostmasters to contract with Allwyn(the new Lottery provided directly.
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POL is working through these and will shortly have completed a revisechigh-level plan, with the
detailed version in September. The working assumption for the delay is 36 months, ora
delivery timetable towards the end of 2024 With this expected delay it is increasingly likely that
POL will have to extend Fujitsu servicesfrom March 2024 to March 2025, but this is a hard
deadline as Fujitsu have been clear that the contract wolt be extended again.
POL is preparing for PIC on 8 September, delayed from August because of keyholder feedback
This meeting will inform conversations on the appropriate timing for a gateway review which is
more focused on delivery and readiness for roll-out.We will work with POL to ensure they are
ready, and are working to engage with keyholdersahead of the meeting.
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ae
UK Government
Investments QFFICIAL-SENSITIVE: COMMERCIAL/ PERSONAL
Annex A: Financial performance
Financial performance forFY22/23 (Year to Date — until Period 3: End-June):
det
oS
BEIS0000983
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Department for
Business, Energy
& Industriz
Strategy
Budget % var to % var to
20/21
Total Revenue 212.1 206.8 3% T%
Cost of Sales (11.7) (10.9) (7%) (5%)
PM Remuneration (98.1) (97.0) (1%) 3%
Staff Costs (42.5) (42.5) 0% 1%
Non-Staff Costs (54.6) (56.9) 4% 25%
FRES 8.3 26 219% 429%
Other Income 0.6 0.4 50% 322%
Trading Profit/(Loss) 14.0 2.6 442% 213%
Latest outlook
Year to date performance has been positive, with upside in travel particularly helpful and a one off
profit share payment in Home Insurance(£2.6m vs £1.1m budgeted). Under-performance in Labels
and International within Mails balances some of this upside and creates risk across the full year
outlook because of how material Mails is to overalperformance — this will be monitored closely.
Revenue
Revenue exceeded the YTD budget (£148.4m vs £143.5m) driven primarily by the buoyant travel
market with Insurance and Travel Money segment contributing €2.4m and £1.2m revenue upside
respectively.
Costs
Staff costs and non-staff costs have tracked closely to budget in the year to date (within c.1%)while
Postmaster Remuneration has slightly exceeded budget, largely as a consequence of the
outperformance of revenue vs budgetdriving a correlate rise in PM remuneration.
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Department for
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Investments OFFICIAL-SENSITIVE: COMMERCIAL/ PERSONAL
Annex B: Network access criteria and branch numbers
Performance AgainstAccess Criteria at the end ofJune 2022
Postcode
Total Total Deprived Urban Rural Districts less
Criteria Number of Population Population Urban Populatio Population than 95%
branches within 3 within 1 Population nwithin 1 within 3 Population
miles mile within 1 mile mile miles within 6
miles
Target 11,500 99% 90% 99% 95% 95% 0
June 2022 11,600 99.6% 92.6% 99.4% 97.8% 98% 7
Branch numbers at the end ofJune 2022
Outreach Drop Total
and
Mains Traditional
Collect
Number 3,355 4,233 117 1,968 1,907 20 11,600
' The Postcode District (PCD) accessibility can be impacted by one or more branches not providing service at
the time of reporting. Since March 2020, this access criteria was affected by 7 Postcode Districts.
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