Post Office Board Agenda
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Present
In Attendance
Apologies
25!" July 2017 Tim Parker (Chairman) Alwen Lyons + Virginia Holmes
aan Binchare Richard Callard (excluding item 1) Martin Edwards (Item 1 & 8)
Arle nS TUENBE Tim Franklin Nick Kennett (Items 5, 6 & 7)
09.30hrs 13.30hrs Ken McCall Rob Houghton (Item 8)
Carla Stent Tom Wechsler (item 10)
Location Paula Vennells
Room 1.19 Wakefield Allsda Catreron
Action Needed Purpose Timing
1. Funding Update (without Richard) For discussion To discuss the possible scenarios for different Martin Edwards / CFOO 09.30 — 09.48
levels of funding.
2. Welcome and Conflicts of Interest 09.48 — 09.50
3. Minutes of previous Board and Decision Minutes formally agreed. Alwen Lyons 09.50 — 09.52
Committee meetings including
Status Report
4. CEO Report CEO report noted CEO to update the Board on the report. CEO 09.52 — 10.10
5. Financial Report CFOO report noted CFO to update the Board on the report. CFOO 10.10 — 10.30
6. FS Portfolio review For discussion Assessment of FS&T portfolio to confirm sectors Nick Kennett 10.30 - 11.00
of greatest value and opportunity to POL.
7. Peregrine For discussion Update on Peregrine negotiations and options for Nick Kennett 11.00 — 11.20
POL.
BREAK 11.20 — 11.30
8. Emerging Technology and For information To demonstrate Emerging Technology that we Rob Houghton / 11.30 - 12.15
Innovation are reviewing with many providers. Intent is to Jeff Smyth /
give 3 to 4 tech demos on technology that could Martin Edwards
be impactful over a longer time horizon.
9. Retail Product Arrangement for For decision and To endorse the recommended approach and Kevin Gilliland 12.15 — 12.35
DMBs delegation delegate authority to the CEO and CFOO to sign
a contract.
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Post Office Board Agenda
10. I POca For approval To provide an update on the status of ongoing Kevin Gilliland / 12.35 — 12.55
POca procurement and seek delegated authority Tom Wechsler
to sign up to a new MSA with DXC / JPM.
11. I Company Secretary Resignation & For noting and To note the resignation of Alwen Lyons as 12.55 — 13.00
Appointment Decision approval Company Secretary and approve the appointment
of Jane MacLeod as Company Secretary.
12. I Items for noting 13.00 — 13.05
12.1 Pensions Plan For noting To make Board aware of the Trustee proposal.
12.2 Sealings For noting Board aware of the affixing of the seal.
12.3 Health & Safety For noting To update Board.
12.4 Meeting dates and For noting For Board to note.
forward agendas
13. I AOB 13.05 — 13.10
Close and Lunch 13.10
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POLB 17(4"")
POLB 17/34 — 17/50
Present:
Tim Parker
Richard Callard
Tim Franklin
Virginia Holmes
Ken McCall
Carla Stent
Paula Vennells
Alisdair Cameron
In Attendance:
Alwen Lyons
Martin Edwards
Nick Kennett
Kevin Gilliland
Mark Siviter
Rob Houghton
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Strictly Confidential
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the BOARD
held at 10.30am on Thursday 25" May 2017
at 20 Finsbury Street, London EC2Y 9AQ.
Chairman (TP)
Non-Executive Director (RC)
Non-Executive Director (TF)
Non-Executive Director (VH)
Senior Independent Director (KM)
Non-Executive Director (CS)
Group Chief Executive (CEO) (Except Minute POLB 17/45)
Chief Financial and Operations Officer (CFOO) (Except Minute
POLB 17/45)
Company Secretary (CoSec)
Group Strategy Director (ME) (Minute POLB 17/37)
Chief Executive Financial Services and Telecommunications (NK)
(Minutes POLB 17/38 and 17/39)
Chief Executive Retail (KG) (Minutes POLB 17/38 to POLB 17/40
inclusive)
Managing Director, Mails and Retail (MS) (Minute POLB 17/40)
Group Chief Information Officer (RH) (Minutes POLB 17/41 and
17/42)
Apologies for Absence: None
POLB 17/34
POLB 17/35
POLB, 25 May 2017
INTRODUCTION
(a)
A quorum being present, the Chairman opened the meeting.
The Directors declared that they had no conflicts of interest in
the matters to be considered at the meeting in accordance with
the requirements of section 177 of the Companies Act 2006 and
the Company's Articles of Association.
MINUTES OF THE PREVIOUS BOARD MEETING INCLUDING
STATUS REPORT
(a)
Richard Callard asked that minute (POL17/22(f)) from the
previous meeting be clarified. The 2017/18 EBITDAS target
would remain at £28m with any possible relief to be discussed
at the end of the year.
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(b)
(c)
Strictly Confidential
The minutes of the Board meeting held on 28" March 2017 were
approved and the Chairman was authorised to sign them as a
true record.
The actions status report was noted as accurate.
POLB 17/36 CEO REPORT
(a)
(b)
(d)
ACTION: Kevin
Gilliland/ Ken
McCall
(e)
(f)
(9)
(h)
POLB, 25 May 2017
The CEO introduced her report, focussing on the following key
points:
Joint Strategy Project with Royal Mail Group.
The CEO reported the departure from RMG of two key people
involved in the joint strategy project, but assured the Board that
the new lead was known to Post Office and although he was not
a direct report to the RMG CEO, it was believed he would work
positively with the Post Office team.
The CFOO reported that RMG had appointed an internal
candidate as their new CFO.
Identity Services
The CEO explained the enhanced Verify product which would
be launched in June and was likely to include a digital driving
licence product. The new product would be helpful for
vehicle rental companies and Ken McCall offered advice in
accessing this market. Post Office as the Verify market leader
had been chosen to launch this new service in advance of other
suppliers and this would help cement the position in the market.
L300 Event
The CEO thanked the Chairman for speaking at the L300 event
where the senior leadership discussed the priorities for 2017/18
and the behaviours required to drive the next stage of
transformation
NSFP Conference
The CEO had attended the NFSP annual conference and was
pleased to report a more commercial focus than in past years,
with an alignment to the National Convenience Show giving the
retail agenda more prominence. The Executive took the
opportunity to discuss the simplification work and there was still
an anxiety about the effect of cutting postmasters’
remuneration.
The Board discussed the funding of the NFSP and asked for an
update on what they have provided for the investment. The CEO
explained that the NFSP were working with the business on
simplification and continued to support the Network
Transformation programme. Richard Callard reported that the
NFSP continued to lobby UKGI against the changes being
implemented but it was acknowledged that they continued
support the business in the public domain.
Industrial Relations
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The CEO reported that the Company were still in dispute with
the CWU and UNITE unions although the UNITE dispute was
closer to resolution. The Board discussed the reduction in
number of CWU reps paid for by the Business which had
reduced from nineteen to six
The Board challenged the practice of paying for any union
reps and asked the CEO to check why the union were not
paying for their reps.
IT Security and Stability
The Board noted that the ClO would provide an update later in
the meeting.
The Board noted the report from the CEO.
POLB 17/37 FUNDING PLAN
(a)
(b)
(c)
(d)
(e)
POLB, 25 May 2017
The Chairman welcomed Martin Edwards, Group Strategy
Director, to the meeting.
The CFOO introduced the paper which set out the current
position with the funding documentation. The General Election
had made any decision in May implausible and consequently a
meeting had been arranged with the Permanent Secretary at
BEIS to reassess timelines.
The funding document set out that Post Office was requesting
additional support over the plan period of £420m, reducing to
£290m by 2021.
This was split into three parts:
e Firstly, a further £250m of direct funding: £200m of
Government grant together with confirmation of the final
year of Network Subsidy Payment of £50m in 2020/21.
e Secondly, an additional borrowing in recognition of the
fact that the changes the Post Office needed to fund
were urgent and pressing. Post Office would start
repaying this in 2019-20, so the initial commitment of
£170m would reduce to a projected net commitment by
the end of the plan period of £40m. At no point would the
borrowing facilities reach the limit set for 2012-15.
e Thirdly, the Post Office would ask for BEIS’ security over
the Revolving Credit Facility to be extended, but
disconnected from the level of branch cash held,
incentivising Post Office to use its cash efficiently.
Richard Callard explained the background to the funding
discussion and thanked ME and the CFOO for their input to
date. He recognised his person conflict of interest and explained
the process and expectation from the Minister that his
department would carry out due diligence and challenge to the
funding proposal before it was submitted.
The Board discussed the funding proposal and the Board duty
to deliver value for the shareholder through a long term
sustainable business. The Government funding constraints
were acknowledged but the Board recognised that the many
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ACTION: Richard —(h)
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Chairman
ACTION: (i)
Martin Edwards
()
(k)
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Strictly Confidential
iteration to the plan had diluted the initial strategy agreed by the
Board.
The Board asked if the Company would be given freedom to
raise money from other sources if the funding received form the
Government was inadequate. Richard Callard explained that
the Government would not allow Post Office to raise equity in
the market at the Group level, as by law it had to remain a wholly
owned Government entity, and to raise debt, although not
illegal, was also difficult to achieve. The Board asked if the
document could stress the need for access to alternative
finance if the adequate funding was not forthcoming.
Richard Callard acknowledged the Board’s frustration with the
process. He explained that the Secretary of State and
Permanent Secretary were concerned about the uncertainty of
the renegotiation with RMG and Bank of Ireland, and the digital
capability and its investment, particularly in financial services.
Richard Callard welcomed the revised document which gave a
greater degree of granularity on the proposals, which was what
Government was looking for.
Richard Callard also set out that the shareholder had
affordability constraints to consider, and this would impact the
key decision in Government as to whether it wished to invest
now to achieve full commercial sustainability, or whether it was
more affordable to invest a lower amount and accept longer
term subsidy requirements.
The Chairman stressed that the contract negotiation risk was
unavoidable but delaying or reducing the investment would
increase rather than negate the risk. The IT project delivery risk
understandable but the Board had put people in place to deliver
the strategy in the way it had delivered the pension scheme
closure and supply chain changes. POMS business was
delivered entirely digitally.
The Chairman stressed the need for support for the funding
and suggested that he meet with Mark Russell, CEO UKGI
to explain the funding requirement, and the Board’s
reasons for the investment.
The Board asked the Executive to be more strident in the
Executive Summary setting out, why the Board had made
the decisions in the paper, and the consequences of the not
investing in the options.
The Board asked how the report was presented to the Minister
and the Chief Secretary of the Treasury. Richard Callard
explained the process, and the Board asked for assurance that
the UKGI paper accurately represented the Board’s views.
Richard Callard stressed that the UKGI paper was a factual
document setting out the revenue projections and why Post
Office needed the investment at this time.
The Chairman thanked Richard Callard for the work he is doing
and recognised the frustration in the Board with the process.
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Callard
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(n)
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The Chairman asked Richard Callard to ensure that UKGI,
the Permanent Secretary, and the new SoS all understood
that the Board was wholeheartedly behind the strategy as
presented, and if a meeting was required to emphasise this,
the Chairman and the CEO would be pleased to attend.
After careful consideration and with the amendments proposed,
the Board:
41. agreed the Funding document and accompanying slides for
presentation to UKGI and BEIS;
2. noted the revised timetable for agreeing the Funding
documents;
3. approved the plans for 2018-21 subject to the funding
received; and
4. approved the request for further funding as set out in the
Funding document
Richard Callard left the meeting.
The Board received a paper from Martin Edwards which set out
the options available to the Business if the necessary funding
was not received from the Government. The Board recognised
that the options presented were suboptimal but needed to be
discussed. The options proposed were set out in three blocks
and the paper showed the effect on EBITDAS and cash
headroom for each proposal.
The Board debated the paper and supported the options being
proposed.
ME left the meeting.
Richard Callard re-joined the meeting.
CHIEF EXECUTIVE FINANCIAL SERVICES AND TELECOMS
PERFORMANCE REPORT
(a)
(b)
(c)
(d)
Nick Kennett, Chief Executive FS&T, and Kevin Gilliland Chief
Executive Retail, joined the meeting.
NK presented his April 2017 report to the Board and focused on
the following key points:
NK reported that after P1 results FS&T was holding to budget,
and although there were some challenges in the Telco area
plans were in place to ameliorate the position.
Mortgage sales were at the highest point for two years after the
introduction of a more effective sales process. Post Office and
Bol have been working closely to develop a new approach to
mortgage products. Bol has confirmed its intent that Post Office
will be their exclusive brand in the aggregator space (excluding
specialist build funding). There would be a deep dive on
mortgages at the next Board meeting
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The CFOO explained the advantages and challenges of the
mixed product portfolio within the FS&T portfolio and the
choices this enables the Executive to make. NK stressed the
opportunities for POMS products which are under the Group’s
control, and could deliver strong growth opportunities, including
through acquisitions - this debate would be part of the June
away day.
NK reported that the PSD2 open banking regulation would be
an opportunity for Post Office, but at present Bol did not have a
product in this area, if the Bank did not deliver this product then
Post Office could consider a Fin Tech solution.
The new Travel Money card has delivered a 55% sales
increase, with over 63,000 in sales, the majority of sales taking
place in branch with subsequent digital top ups. There had been
some issues with the migration of existing cards but full
migration should take place over the next 6 months.
NK was pleased that POMS was on track in period 1, with the
new customer management platform (Zeus) operational
enabling changes to pricing and more effective introduction of
new products. Car insurance remained a challenge with
changes to the Ogdens discount rates driving up premiums by
up to 10% premium. Home and Travel insurance were both
performing well.
Telco would deliver the New Call customers by September and
the Telco strategy would be considered at the Board away day.
The Board asked if Telco needed more advertising investment
to improve customer recognition, NK explained that the present
focus was to get more out of the existing book and he did not
think advertising within the budgets available would be an
efficient use of a limited resource.
NK reported that Lloyds Bank had signed up to the banking
framework for its business banking customers. The CFOO
explained that the effect on supply chain was being monitored.
NK also noted that discussions were continuing with banks to
expand the services under the Framework, including identity
and to support their basic bank accounts.
The management of regulation and risk remained a key focus
for the Executive, with HMRC increasing its regulation on
bureau de Change transactions. The level at which a customer's
data would need to be recorded was likely to reduce from
£2,000 to £850. Which would result in an additional 350,000
data records being captured in branches
NK updated the Board on the Bank of Ireland negotiations with
good progress on business as usual changes and an indication
of more focus on Peregrine.
The Board noted the report.
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POLB 17/39 CHIEF EXECUTIVE RETAIL PERFORMANCE REPORT
(a)
(b)
(d)
(e)
(f)
(g)
(h)
(i)
POLB, 25 May 2017
KG introduced the retail commercial performance report for
period 1 and focussed on the following key points.
Retail had finished the year with strong trading and this has
continued in P1. KG reported that the decline in branch footfall
which had been running at 3% had slowed with the last 10
period to show a decline of 1%. KG explained how footfall was
measured and that a piece of work was being undertaken to
understand footfall and its effect on cashflows and who is
benefiting from the footfall.
KG reminded the Board that 60% of branch customers were
undertaking mails products, 1*' Class products were in decline
as customers moved to 2™ class which were growing. Home
shopping returns continued to increase although the rate of
growth had slowed. RMG had introduced a new free tracking
service which might reduce the sales of the SignedFor product
but there was no evidence of that to date.
Government services had seen a strong start to the year as the
Passport Office’s new digital passport service had not seen the
growth expected with Post Office retaining the in branch sales.
A new Post Office digital service is being developed which will
need Passport Office agreement but could be ready in Q4.
KG reported that following the update to the Board at the last
meeting positive progress had been made on Post Office Card
account (POca) procurement. Following a hard line approach
DXC (formerly HPE) had submitted a revised proposal removing
some of their transfer of costs and risks. We are now working
through this and it appears that this has halved the gap. We will
now use negotiations and other levers to attempt to fully close
the gap and get the contract to break-even
KG explained the importance of payments as a footfall driver for
the Business and the current bid for the BBC contract. The
migration from Paypoint to Post Office may be an issue for the
BBC and the BBC announcement was now two months late.
The Legal team were ready to make a challenge if it became
evident that the due Ojeu process had not been followed.
KG updated the Board on the mails competitor environment and
his meetings with retailers to ensure they understood the effect
on their basket spend of footfall driven by RMG products.
Discussion were also underway with Payzone to understand
whether there is a potential partnership in the bill payments
market. Once the opportunity is explored and a possible
business case developed this would return to the Board for
further debate.
KG was pleased with the progress on Network development
with 7200 branches delivered and 350 still to transform.
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Conversions of Directly Managed Branches were taking longer
to deliver but 30 would be delivered in the year.
KG explained the progress with the ‘no queues at Christmas’
initiative and the focus on moving customers who post more
than 5 parcels onto the Drop & Go (D&G) service, enabling their
transaction to be completed in the back office. This work could
then be completed by casuals at a lower pay rate than a counter
clerk.
The Board asked more could be done to enable customers to
drop parcels outside core hours. KG explained that D&G
customers were given advice on the best time to drop parcels
although they usually wanted to meet the RMG last collection
time.
The Board asked if the Business measured waiting times, KG
explained that in the larger branches with queue management
systems the wait time was measured but in other branches it
was based on analysis of capacity and transactions. Ongoing
research is also used to provide waiting times.
The Board asked the Executive to consider an adequate
sample of large branches measuring queue times to give
more rigour to measurement of initiatives.
The Board asked for assurance that the casual labour used over
Christmas and for D&G would not be on zero contracts. KG
explained that these were not zero based contracts but were
flexible which often suited the Post Office and the employee.
KG was asked to present the work on whitespace branches
at the June away day.
The Board noted the report.
NK left the meeting.
POLB 17/40 MAILS STRATEGY UPDATE
(a)
(b)
(c)
(d)
POLB, 25 May 2017
Mark Siviter, Managing Director, Mails and Retail, joined the
meeting and together with KG, presented the report.
KG explained the approach to the negotiations and the areas of
the MDA which need to be addressed, but stressed that this was
being positioned as a low key negotiation not opening up the
whole MDA.
The Board asked if the negotiation mandate gave the Executive
enough flexibility. KG assured the Board that he was happy with
the approach and the red lines set out in the mandate.
The Board asked if there was a risk of energy dissipating with
the change of people in RMG. MS accepted that this was always
a danger but assured the Board that Post Office and RMG now
shared a common view of the market and the risk and
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(e)
(f)
(9)
(h)
Strictly Confidential
opportunities which was driving the urgency to negotiate. MS
now felt more confident but recognised that the dialogue had yet
to start.
The Board asked KG and MS to continue to develop the
next best alternative work in parallel with an emphasis on
the technical integration, and to return to the Board with a
view on how quickly they could be implemented if the
negotiation do not deliver what is needed.
The Board asked the CEO to ensure she had the strongest
negotiation team possible.
The Board delegated authority to the Mails Strategy SteerCo to
oversee the remainder of the Mid Term Review preparation prior
to proposals returning to Board for consideration in November
2017 and approved the red line topics for the Mid Term Review.
KG and MS left the meeting.
BACK OFFICE TRANSFORMATION (BOT)
(a)
(b)
(c)
(d)
Rob Houghton, ClO joined the meeting and introduced the
report.
RH explained the HRSAP and POLSAP migration to CFS and
the ongoing risks of running POLSAP on old hardware. RH
accepted that the hardware was likely to fail at some point but
believed that there was enough resilience in place to continue
without triggering the additional cost of early POLSAP
infrastructure migration at this point. He would continue to
monitor the situation and return to the Board in September at
which point the decision could be taken on POLSAP migration.
The CFOO supported the approach and explained that a fully
updated business case with costs and benefits would be
presented at the September Board.
The Board noted the update provided and approved the £7.16m
of additional funding drawdown, taking the cumulative
investment to £8.91m to progress the programme to
September.
CYBER ATTACK & HORIZON OUTAGE
(a)
(b)
(c)
RH appraised the Board of the action taken following the recent
cyber-attack which had notably affecting NHS systems. He
reported that the Post Office was in a strong position and that
likelihood of a breach had been very low.
The Board thanked RH and his team for their vigilance.
RH updated the Board on Horizon outage and explained that the
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(d)
(f)
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root cause had now been identified as engineer failure in Fujitsu.
FJ did not believe it was in any way malicious but have put
additional controls in place.
The Board noted the update.
RH left the meeting.
FINANCIAL REPORT
(a)
(b)
(d)
The CFOO presented the financial performance report for period
April 2017/18.
The CFOO reported that the Group Executive had been
allocated budgets for the year and these included many
challenges with £13m yet to be grounded in plans.
Period 1 had produced a strong scorecard, with branch numbers
being the only area of slight concern. The numbers had slipped
back slightly since year end but KG was confident that with
momentum in the white space plan and the whole estate deals
with the multiples, albeit towards the end of the year, the
numbers would be achieved.
The Board noted the financial performance report for April
2017/18.
ANNUAL REPORT AND ACCOUNTS (ARA)
(a)
(b)
(c)
(d)
(e)
The CFOO introduced the paper and explained the delay in
signing the ARA because of the lack of clarity about funding.
Work was continuing to be ready for a July signing but if this was
not possible then it would be likely to be November.
The Board debated the stakeholder response to a delay in
signing the ARA, but agreed that it could not be signed without
funding being in place.
Carla Stent, the Chair of the ARC explained that the ARC were
comfortable with the Going Concern statement even if the ARA
could not be signed until November, although the delay did not
help with the net liabilities position as it had no impact on the
balance sheet. The only part of the audit which EY had
challenged was the discount rate used for the pensions’
calculation, which they considered to be too prudent, but which
the ARC were happy to support.
The CFOO explained that the EY would undertake a subsequent
events review and update which would be more complicated
with a November signing.
The Financial Statements were presented with a change to the
treatment of fixed assets moving to an impairment basis.
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The Chair of Audit was pleased to report that EY had recognised
the improvement in the Financial Controls which they believed
had moved a long way in a year, while recognising the
challenges and risks imposed by old systems
The Chair of Audit explained that the front half of the ARA had
not been written as the narrative would depend on the funding
agreement.
The Board noted the draft financial statements and POL Briefing
Book for the year ended March 2017.
POLB 17/45 APPROVAL OF STIP AND LTIP AS RECOMMENDED BY THE
REMMUNERATION COMMITTEE
(a)
(b)
(c)
(d)
(e)
(f)
(9)
POLB, 25 May 2017
The CEO and CFOO left the meeting.
KM advised the Board that the Remuneration Committee
(RemCo) had met earlier in the day to review the proposals. The
CFOO had presented a paper to the RemCo on the performance
for 2016/17 and the reliefs to be taken into account when
assessing the STIP and LTIP results.
STIP
The RemCo had considered the approach suggested by the
CFOO and the results for the year. After due diligence and
debate the Committee had decided to recommend to the Board
the approval of the EBITDAS result of £5m for the STIP
payment.
The Chair of the RemCo reported the performance reviews
against personal objectives for the CEO, carried out by the
Board Chairman, and the CFOO and GE members carried out
by the CEO.
LTIP
The RemCo had discussed the LTIP target which was set in
2014, when the Business was pursuing a growth strategy
predicated by plans including growth in Government services
income. It was acknowledged that the plan had changed over
the last three years to one of right sizing the cost base. The
RemCo had considered the changes and the delivery of some
challenging issues.
The RemCo Chairman stressed the need to reward the excellent
performance and recommended to the Board the EBITDAS
result of £13m which would trigger an LTIP payment of 86.4% of
bonus.
Richard Callard challenged the change since January when the
LTIP did not look as if it would be triggered. The Chairman of
RemCo assured Richard Callard that the Committee had
undertaken all due diligence in reaching a recommendation, and
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that improved trading along with other factors had been
considered. The accounts have been audited by EY who were
comfortable with the accounting treatment, and the ARC had
discussed and agreed the discontinued business status which
EY had supported.
Richard Callard asked for information on the rules
regarding the pro-rated LTIP for the CFOO.
The Board supported the EBITDAS outturn of £13m and
recognised that this improvement gave the Business an
excellent start for 2017/18 and challenged whether the existing
target of £28 with possible relief of £9m for the STIP was a
stretching enough target. The Board discussed changing the
£28m target but agreed to retain this but without the relief which
had been proposed.
The Chair of RemCo was asked to inform the CEO and
CFOO that the STIP target for 2017/18 would be £28m
without any reliefs.
The Board asked Richard Callard for an update on the letter sent
to the Minister on the 17" March regarding the Executive
Directors’ remuneration and STIP target. Richard Callard
reported that the Minister had raised some questions regarding
the STIP targets which had delayed the letter.
The Chair of RemCo explained that the letter had been a follow
up to the meeting with Lord Prior where the principles for an
increase in pay had been agreed. The Chair of RemCo was
disappointed that he had received no personal feedback on the
status of the letter. Richard Callard apologies for the lack of
feedback but explained that the calling of the election had further
delayed the progress.
The Board Chairman stressed that the delay in progress was
unacceptable and asked Richard Callard to expedite the issue
as soon as the new Minister was in place.
The Board unanimously approved the 2016/17 LTIP and STIP
payments to GE members as recommended by the
Remuneration Committee and set out in the respective reports.
BOARD COMMITTEE CHAIR VERBAL UPDATES
(a)
(b)
The CEO and CFOO re-joined the meeting.
Audit, Risk and Compliance Committee
The ARC Chair provided an update on the business of the ARC
which had met a week before the Board. Four points were noted:
1. The Tax Strategy would come back to ARC in the autumn
including the treatment of R & D credits as the Business
moves into profit
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(d)
(e)
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2. The IT audit report had revealed a lack of ownership and
control for joiners, movers and leavers.
3. Asmall amendment had been made to the Modern Slavery
Statement which would be publish on the Post Office
website. The ARC had challenged the Executive to be more
proactive where possible especially with postmaster
assistants
The CEO assured the Board that she now had a detailed plan to
mitigate the risk highlighted by the IT audit. The CFOO
acknowledged that the position was not good enough but
reported that of the 1000 people who had left the Business
through OSOP a very few had been left on the system for a short
period of time, 4-5 days. A small overpayment of £23k gross and
£12k nett had been made through payroll which was being
recovered.
The problem had arisen because line managers had not
completed the correct leavers’ procedure but additional plans
were now being out in place for all joiners, movers and leavers.
Remuneration Committee
KM provided an update on the Remuneration Committee which
had met earlier in the morning.
Nominations Committee
TP provided an update on the Nominations Committee which
had met earlier in the morning
CONTRACT APPROVALS
(a)
(b)
High Speed Note Counter
The CFOO introduced the paper regarding high speed note
counters, which explained the proposal to make a direct award
to G&D under Regulation 32(2)(b) of the PCR 2015.
The Board delegated authority to the CEO and the CFOO to
contract with Giesecke and Devrient (G&D) for all services
associated with the provision and running of the M5 high speed
note counting machines for 5 years with the option of 5 two year
extensions.
RATIFICATIONS OF DECISIONS MADE BY CORRESPONDENCE
(a)
Global Payments Contract
The Board ratified the decision it had made by email
correspondence on 5" May 2017, in accordance with Article 92
of the Company's Articles of Association, to extend the contract
with Global Payments for 12 months with delegated authority
given to the CEO to extend for a further 12 months if necessary.
ITEMS FOR NOTING
(a)
Project Iris Review — Simplifying Supply Chain
The Board noted the report. The Board thanked the CFOO and
his team for the excellent delivery of IRIS and for producing the
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paper to enable the Board to review.
(b) Register of Sealings
The Directors resolved that the affixing of the Common Seal of
the Company to documents numbered 1502 to 1521 inclusive in
the seal register was confirmed.
(c) Health and Safety
The Board noted the health and safety performance, risks and
mitigating activity within the Health and Safety report and
thanked the CEO for the good progress.
(d) I Meeting Dates and Forward Agenda for June 2017 Away Day
The Board noted the future meeting dates and proposed forward
agenda.
ANY OTHER BUSINESS
(a) There being no further business the Chairman closed the
meeting.
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Status Report as at:
Post Office Limited Board
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REFERENCE IACTION Action Owner (GE [Due Date STATUS [Open/Closed
Member)
31 January 2017 [Board Effectiveness Review Ken McCall October 2017 Open
POLB 17/11 (d) IReconsider the proposal for an independent advisor to Board
the Board after the IT strategy presentation at the July
Board meeting.
28 March 2017 _IFS Growth - Falcon Nick Kennett September 2017IAction moved to September. Open
POLB 17/25 (g)_IA number of Fintech providers were being considered Board
land due diligence was being completed. NK would return
Ito the Board with a concept for consideration in July
2017.
28 March 2017 _IFS Growth - POMS Nick Kennett TBC Open
POLB 17/25 (j) As part of the long term financial services strategy, a
potential future move into underwriting activities would
be brought to the Board for further discussion at the
appropriate time.
28 March 2017 ri = Fl Martin Kirke [September 2017/On September Remuneration Committee agenda. Closed
POLB 17/30 (b) IThe Board agreed that the HR Director would be asked to Remuneration
review the inclusion of cars as a benefit as part of the Committee
loverall review of the remuneration strategy.
28 March 2017 _IItems for Noting - Health and Safety Jane MacLeod (GC) July 2017 Board [Appendix 1 to this actions list is a briefing paper. Closed
POLB 17/32 (e) IThe Chairman requested that Directors be provided with
ja short briefing paper to clarify their personal liabilities in
all areas.
25 May 2017 __ICEO Report - Identity Services Kevin Gilliland / Ken ISeptember 2017I Open
POLB 17/36 (d)
The CEO explained the enhanced Verify product which
Would be launched in June and was likely to include a
digital driving licence product. The new product would be
helpful for vehicle rental companies and Ken McCall
loffered advice in accessing this market. Post Office as
ithe Verify market leader had been chosen to launch this
new service in advance of other suppliers and this would
help cement the position in the market.
McCall
Board
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ACTION
[Action Owner (GE
Member)
[Due Date
STATUS
[Open/Closed
25 May 2017
POLB 17/36 (h)
CEO Report - Industrial Relations
The CEO reported that the Company was still in dispute
with the CWU and UNITE unions although the UNITE
dispute was closer to resolution. The Board discussed the
reduction in number of CWU reps paid for by the
Business which had reduced from nineteen to six. The
Board challenged the practice of paying for any union
reps and asked the CEO to check why the union were not
paying for their reps.
Martin Kirke
September 2017
Board
Open
25 May 2017
POLB 17/37 (F)
Funding Plan
The Board asked if the Company would be given freedom
to raise money from other sources if the funding received
form the Government was inadequate. Richard Callard
lexplained that the Government would not allow Post
lOffice to raise equity in the market at the Group level, as.
by law it had to remain a wholly owned Government
lentity, and to raise debt, although not illegal, was also
difficult to achieve. The Board asked if the funding
document could stress the need for access to alternative
finance if the adequate funding was not forthcoming.
Martin Edwards
July 2017 Board
[Covered in funding document and ongoing discussions
with Government.
Closed
[25 May 2017
POLB 17/37 (h)
Funding Plan
The Chairman stressed the need for support for the
funding and suggested that he meet with Mark Russell,
ICEO UKGI to explain the funding requirement, and the
Board's reasons for the investment.
Richard Callard / Tim
Parker
July 2017 Board
rTim met with Mark Russell in early July.
Closed
25 May 2017
POLB 17/37 (i)
Funding Plan
The Board asked the Executive to be more strident in the
Executive Summary setting out, why the Board had
made the decisions in the paper, and the consequences
lof the not investing in the options.
Martin Edwards
July 2017 Board
(Covered in funding documents.
Closed
25 May 2017
POLB 17/37 (k)
Funding Plan
The Chairman asked Richard Callard to ensure that
UKGI, the Permanent Secretary, and the new SoS all
understood that the Board was wholeheartedly behind
the strategy as presented, and if a meeting was required
Ito emphasise this, the Chairman and the CEO would be
pleased to attend.
Richard Callard
July 2017 Board
Richard has relayed Post Office's perspective to
Ministers.
Closed
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Member)
25 May 2017 Chief Executive Retail Performance Report Kevin Gi ind [September 2017 Open
IPOLB 17/39 (I) IThe Board asked the Executive to consider an adequate Board
sample of large branches measuring queue times to give
more rigour to measurement of initiatives.
25 May 2017 __IMails Strateay Update [September 2017I Open
POLB 17/40 (e)
(A)
The Board asked KG and MS to continue to develop the
next best alternative work in parallel with an emphasis
lon the technical integration, and to return to the Board
with a view on how quickly they could be implemented if
ithe negotiation do not deliver what is needed. The Board
asked the CEO to ensure she had the strongest
negotiation team possible.
Board
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BOARD NOTING PAPER
Directors Duties - Health and Safety
Author: Jean Reynolds Sponsor: Jane MacLeod Meeting date: 25 July 2017
Executive Summary
Context
At their meeting on 28 March 2017, the Board requested a summary of their duties in
relation to health and safety matters. Health and Safety as an area of Board oversight
is gaining increased focus driven in part by the increasing activity and higher penalties
from the regulator, but also the recognition that that care of employees through the
health and safety agenda is a key contributor to an engaged and effective workforce.
Questions addressed in this report
e What are the Board’s duties in relation to Health and Safety matters?
e What assurance does the Board have that health and safety is managed properly
at Post Office?
Conclusion
1. The relevant legislation is the Health and Safety at Work Act 1974 (as amended)
which sets out the requirements for employers. In the case of corporate
employers, the Board of the employer is required to exercise “best governance”.
This is defined by the Health and Safety Executive and Institute of Directors
Guidance “Leading Health and Safety at Work” (HSE & IOD Guidance) to include
the following:
. Provision of strong and active leadership from the top;
. Involvement of workers;
. Undertaking assessments and reviews of health and safety risks;
. Monitoring, reporting and reviewing the employer’s performance in relation
to health and safety matters.
2. The Health and Safety Executive is taking a more robust view of corporate failures
in relation to health and safety. While they have powers to prosecute and fine
individual directors, this has only been used in the most egregious cases.
Accordingly, it is important that Boards understand their duties and are able to
demonstrate that they have actively sought to understand the risks posed by the
business’ operating model and have required regular assurance from management
to demonstrate that the company has implemented safe systems of work.
Input Sought
The Board is requested to note the advice sought.
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The Report
What are the Board’s duties in relation to Health and Safety matters?
3. The relevant legislation is the Health and Safety at Work Act 1974 (as amended)
which sets out the requirements for employers. The general duties state:
“It shall be the duty of every employer to ensure, so far as is reasonably
practicable, the health, safety and welfare at work of all [his] employees.” (section
2(1))"
“It shall be the duty of every employer to conduct his undertaking in such a way
as to ensure, so far as is reasonably practicable, that persons not in his
employment who may be affected thereby are not thereby exposed to risks to their
health or safety.” (section 3(1))”
There is then significant amount of detail as to how these duties are to be applied
to different types of employer, risks and situations.
4. The Act then prescribes that it shall be an offence for a person ‘to fail to discharge
a duty to which he is subject by virtue of (among others) the above sections.
5. Guidance in relation to these duties is provided to boards by HSE & IOD Guidance
‘Leading Health and Safety at Work’. Copies of this report are available on request.
In particular, employers must:
. appropriately assess risks to employees, customers, partners and any other
people who could be affected by their activities;
. ensure the effective planning, organisation, control, monitoring and review of
preventative and protective measures including near misses and incidents;
. have a written health and safety policy if they have five or more employees;
. ensure the company has access to competent health and safety advice, and
. consult employees about their risks at work and current preventative and
protective measures.
6. ‘Best governance’ principles are set out in the guidance as follows:
Strong and active leadership from the top
v Visible, active commitment from the board
v_ Establishing effective ‘downward’ communication systems and management
structures;
v Integration of good health and safety management with business decisions.
Worker involvement
v Engaging the workforce in the promotion and achievement of safe and
healthy conditions;
v_ Effective ‘upward’ communication;
v_ Providing high quality training
Assessment and review
vY Identifying and managing health and safety risks;
v Accessing (and following) competent advice;
v¥ Monitoring, reporting and reviewing performance
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7. The HSE and IoD Guidance states that the Board should ‘own’ and understand the
key issues involved and decide how best to communicate, promote and champion
health and safety as being of strategic importance. It suggests naming one board
director as a ‘health and safety champion’ with a non-executive director acting as
scrutineer, and adopting a formal procedure for auditing, monitoring and reporting
health and safety performance. The board should have unrestricted access to both
external and internal auditors, keeping their cost effectiveness, independence and
objectivity under review.
8. For a very large company (such as the Post Office) with a turnover exceeding £50
million per annum, fines for non-compliance resulting in death or serious injury
may be unlimited, and orders to publicise the conviction can be made. Material
failure to comply with their duties may lead to prosecution. Directors have both a
collective (Board) and individual responsibility for health and safety. Conviction
could involve fines, custodial sentences (suspended or immediate) and
disqualification as a director
What assurance does the Board have that health and safety is managed properly at
Post Office?
9. The CFOO is the executive with ultimate responsibility for health and safety, and
the Health & Safety Manager has a reporting line through to the CFOO.
10. Post Office has a Health and Safety policy approved by the Group Executive which
is available through the intranet (most recently reviewed in April 2016).
11. Health and safety matters are considered quarterly at Group Executive level
through the Health & Safety Committee!, and the terms of reference of that
committee cover all identified activities that could give rise to safety issues for
staff and customers including supply chain, branch operation, building compliance
issues, driving, use of mobile phones while driving, remote working and sole
worker issues, physical security etc.
12. A Health & Safety report is produced monthly for the Group Executive and for each
Board meeting. This report compares actual performance with industry
comparable benchmarks. Regular discussions are held with Post Office’s insurers
to understand developing trends and ensure that Post Office is able to adopt and
embed developing best practices promptly. Deep dives are undertaken by the
Health & Safety committee on specific risk areas, and in-depth Health & Safety
briefings are provided to both the Group Executive and the Board at least once a
year. At its most recent meeting, the Health & Safety Committee requested that
an external audit be commissioned of the effectiveness of Post Office’s health and
safety framework. It is anticipated that the audit report will be finalised and
available for review by December.
13. Health and safety initiatives are discussed and disseminated across Post Office
through team briefings; there is a health and safety calendar to ensure that regular
training and updates are provided throughout the year, and there are dedicated
Members are the CFOO (chairman), HR Director, General Counsel and Chief Executive, Retail
Attendees include the Network Operations Director, People and Change Director, Supply Ch
Director, and Head of Health & Safety
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pages on the Post Office intranet with resources addressing issues such as
sickness, attendance, heath, safety and well-being.
14. In addition, HR manages an ongoing wellness programme which is reported
through these fora, and which covers sickness and absences, emerging themes
recorded through the various call centres and helplines, as well as more targeted
wellness programmes.
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POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: 25 July 2017
Executive Summary
Context
Our target for 2017/18 is to achieve EBITDAS of £28m. Our 3 year goals are to:
~ Accelerate the transformation of the Post Office.
+ Secure commercial sustainability for the long term.
+ Establish a business that can ultimately fund investments and the social
purpose from profits rather than subsidy.
In summary, our strategy is to secure our position as the UK’s number one
parcels and letters retailer, grow in financial services and protect our network
and social purpose - all supported by a much leaner central organisation.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Conclusion
1. While the headline figures suggest that we are ahead of budget, underlying
EBITDAS was around £1.8m behind target at the end of Q1.
2. We understand that BEIS have made good progress in explaining both the
necessity and urgency of our funding request to Treasury Ministers.
However, it will not be resolved before summer recess and at this stage no
clear indications have been provided around the likely timing or quantum of
the final funding deal.
3. In the meantime we are focusing on the delivery of our existing
transformation plan for 2017/18. With a range of critical projects underway
across technology, network and other areas, it is clear that this programme
is at least as complex and challenging as any we have faced over the past
five years.
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
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The Report
Looking Back
WHAT HAS GONE WELL?
Financial Performance — P3
— We closed the first quarter with EBITDAS of £1.5m, £1.2m ahead of budget
and £11.7m ahead of the same point last year. However, favourable timing
differences worth £3m over the year to date (YTD) mean that in reality we
have performed worse than budget by £1.8m.
— In trading we are £2.4m ahead of budget YTD, with net income less agents’
pay standing at £111.1m by the end of P3. Mails and government services in
particular are performing strongly relative to budget, with financial services
behind target at this point in the year.
— Operating expenditure was £0.9m adverse to budget by the end of P3, with
agents’ debt of £(2.2)m the biggest single contributor of this overspend. We
are tackling this issue through the cash management project discussed with
the Board in June together with a re-design of our debt collections processes.
Awards and external recognition
— Citizen’s Advice published two very favourable reports on 14 July about the
impact of the Network Transformation Programme (NTP) and the value of the
Post Office to consumers and small businesses. Amongst other findings, the
research revealed that almost 9 in 10 customers say they expect to be using
the Post Office just as much or even more in two years’ time - including
amongst 16-30 year olds.
— Given the critical stance that Citizen’s Advice has tended to take in previous
reports on the Post Office, their endorsement of NTP was particular welcome,
as was their call to the Government to continue funding the business
adequately over the next three years.
— Iam delighted to report that the business have received the following awards
which reinforce the breadth of the progress we are making:
— Our Social Media team won a Regional Star Award for “Best Customer
Experience Support through Social Media” and our Head of Social Media,
Darren Jones, won “Social Media Leader of the Year”.
— Our Legal Team won a silver award for “Best Banking & Financial
Services Legal team” in the UK at The Lawyer Awards.
— The Post Office has been shortlisted for the Franchise Group of the Year
category in the Retail Industry Awards.
— In honour of Alwen’s enormous contribution to the Post Office over 33 years
of service, and her particular leadership and passion for inclusion, we will be
launching the ‘Alwen Lyons Award’ later this year. The award will recognise
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colleagues who have made an outstanding contribution to drive the diversity
and inclusion agenda for the Post Office and their teams.
WHAT HAS NOT GONE WELL?
« BBC
— We were informed by the BBC on 4 July that our tender application for over-
the-counter licence fee payments had been unsuccessful and that they
intended to award the contract to Paypoint.
— Consequently, we appointed Herbert Smith Freehills LLP to examine the
tender material and subsequent feedback to examine the potential to
challenge the decision.
~ We have analysed the contents of the decision letter and feedback received in
a subsequent meeting with the BBC to understand their decision. We are
clear that we submitted a highly competitive bid and we have been told that
our price was lower than Paypoint’s.
— Following Herbert Smith Freehills’ advice, we wrote to the BBC requesting
further information and an extension to the “standstill” period. This was
granted last week with the BBC offering an extension of a minimum of 3
working days on receipt of their substantive response. This is still awaited.
— We will examine their substantive response very carefully but as it stands we
are advised that we have insufficient grounds on which to base a challenge,
mostly because the BBC’s process allowed for a degree of subjectivity in the
quality component of the tender albeit within PCR compliance.
— The BBC's decision is, of course, very disappointing. However, there was
positive feedback on how competitive our bid was. We will seek to build on
that competitive approach as we implement the payments strategy discussed
at last month’s Board away days.
¢ Branch numbers
— Branch numbers are currently trending downwards, standing at 11,592 at the
end of P3 following 58 unplanned closures this year. In 36 of these cases we
have closed the branches as a result of losses identified as part of increased
audit checks.
—> Further work is underway to improve our analysis of those branches which
pose a risk of incurring losses, alongside the other actions noted above to
improve network cash management and debt recovery.
— We are also progressing work to open new ‘whitespace’ branches in areas of
growing customer demand, which we expect to gain momentum in Q3 and Q4
of offset the recent drop in numbers.
e Branch technology transformation
— The early pilots to rollout new branch kit encountered a number of challenges
such as problems with printers, resulting in longer installation times than
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anticipated. We have used the ‘soft launch’ period to resolve these and
minimise disruption to agents and customers. We are now able to upgrade the
router and multiple counters while still allowing the branch to trade for all but
c45 mins (the time it takes to install the router that connects the entire
branch).
— At time of writing we have transitioned c180 agency and directly managed
branches to the new Verizon IT network. 29 of these have also been upgraded
to the new branch kit.
— The kit and Horizon upgrade are performing as expected, with postmasters
enthusiastic about the faster operating times and brighter/bigger screens.
Looking Ahead
FUTURE FOCUS
Funding discussions
— Political engagement has been progressing between BEIS and Treasury over
the past fortnight, including through a meeting between Margot James and Liz
Truss (the Chief Secretary to the Treasury) on 12th July, which we
understand went positively.
— As Parliament goes into recess on 20" July we do not expect any
announcement to be made until after the summer, although clearly we will
continue to engage with officials in the intervening months. We will provide an
update on the latest position at the Board.
Royal Mail negotiations
— Our current focus with Royal Mail is on building the relationship with Nick
Landon, Group MD for Parcels, who has taken over as our main senior contact
following the departure of Mike Newnham (who left as part of a wider
restructuring of their senior leadership population).
— Initial engagement with Nick has been positive, although the additional time
required to get him up to speed on the conclusions of the joint strategy
review mean that we are now envisaging a later start to the Mid Term Review
negotiations, most likely towards the back end of Q2.
— The combination of trading challenges and the threat of industrial action have
continued to weigh on RMG‘s share price, which is now down around 20%
compared with a year earlier. Based on current market capitalisation they
face the prospect of relegation from the FTSE100 at the next index review in
August.
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e Other major partner negotiations
— We will provide an update on the latest position in our negotiation with Fujitsu
at the Board, taking into account the outcomes of the scheduled meetings
over the next week.
— An update on our negotiations with Bank of Ireland is provided in the separate
paper from Nick Kennett.
« Belfast DR Deferral
— We are reviewing all disaster recovery plans across the business and testing
our Business Continuity plans. We are deferring our Annual Disaster
Recovery (DR) Exercise on Fujitsu’s Data Centre from August until the spring
of 2018. This exercise has not been performed since 2013 due to issues with
the fragility of the current legacy estate and the possible service risk
implications.
¢ Confirmation of HMRC pre-penalty notice
—> HMRC have now issued their pre-penalty notification letter in relation to the
branch registration issues. The proposed penalty totals £796,500 and the
letter includes the methodology for the calculation. We have 30 days to
respond to the letter, and are currently reviewing whether there are grounds
to argue the underlying facts or the calculation of the quantum.
— We have had further meetings with HMRC regarding compliance around the
Bureau de Change product. We have proposed a remediation plan which has
been accepted in principle, although HMRC have asked for further detail
around certain aspects of this. HMRC have flagged that they are considering a
further penalty in relation to historic compliance issues. The amount of any
penalty will depend on the methodology used, but could be in the range of
£0.3m to £1m. We are continuing to work with HMRC to support the view of
our supervisor that the methodology supports a lower level of penalty.
— A further update will be provided to the September meeting of the ARC.
« ICO audit of Telecoms
— We have been invited by the Information Commissioners Office (ICO) to
participate in an audit under the Privacy and Electronic Communications (EC
Directive) (Amendment) Regulations 2011 (PECR). An internal working
project group has been set up to fulfil this request. A fuller update will be
provided at September ARC.
RISKS OR CONCERNS?
¢ Industrial Relations & staff terms
— On 10" July we informed CWU that as reaching agreement had not proved
possible over 2017-2018 for CWU represented grades, we would be imposing
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a 2% uplift to basic pay in August, backdated to April. Pay talks with Unite
over 2017-18 pay for middle-managers are ongoing.
— We have recently commenced consultation with CWU on our proposal to
introduce a new national Collective Engagement Framework, which will reduce
the number of CWU union reps on full-time paid release broadly in line with
our existing arrangements with Unite. This would increase the level of ad hoc
release for CWU reps in line with industry norms, reducing cost and
engendering a more ‘inclusive’ approach to engagement and joint problem
solving at local level.
~ Internally we have initiated a project to review our employment policies and
collective agreements to ensure they are aligned to our commercial ambitions
and imperatives. This will incorporate a full review of the MtSF and
redundancy compensation arrangements. We will provide an update on our
recommendations in the autumn.
« Postmaster Litigation
— Post Office’s defence in the litigation was filed on 18" July, and we expect the
Claimants will respond to Post Office's Defence in a formal document called a
Reply which must be served on Post Office and filed with the Court not later
than 20 September 2017. Thereafter, the next key date is the Case
Management Conference which will take place on 19 October 2017.
— The window for applicants to apply to join the litigation closes on 26 July, and
we expect to receive details of the total number and names of applicants
shortly thereafter. Present indications suggest that the total number of
claimants in the proceedings will be 400-500. To date the level of information
we have received regarding the claims of the c200 applicants who were party
to the original Claim has been very light. We have still not been provided
with details of the total claim.
— At the Case Management Conference in October, Post Office and the
Claimants will have the opportunity to agree further steps leading up to trial,
including the selection of those postmasters' cases which the parties wish to
put forward as Lead Cases; disclosure of documents; witness evidence and
expert evidence. Once selected, the Lead Cases will be examined in greater
detail by the Court at mini-trials with the aim of using those cases as ‘test
cases’ to determine points of principle or fact that apply broadly to many
cases. To be able to do this, the parties will need to set out their positions in
relation to these Lead Cases in further, case-specific, Particulars of Claim,
Defences and Replies. We do not expect that the substantive hearings for
any lead case would be heard for at least another 12 months.
— We will provide a more detailed update to the Board following the Case
Management Conference. This update will include an assessment of the
range of possible outcomes, based on the issues to be considered through the
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Lead Cases, as well as the potential impact on Post Office and its business
and operations from these possible outcomes.
e POCA procurement
— The POca procurement is reaching its final stages. We are close to reaching
provisional commercial agreement with DXC and JP Morgan.
— Weare aiming to complete detailed commercial and legal negotiations in July
and August, in particular reaching agreement with JP Morgan on how SYSC8
regulations are covered in the new contract.
— The existing POca contract was extended by one month to the end of August
to provide time to complete the procurement.
— If negotiations are successful, we will bring a recommendation to the Board
for approval. If they are not successful we retain the backup option to return
to the old contract and extend indefinitely.
In Conclusion
We face a challenging transformation We will use the Board meetings in the
agenda over the next 9 months, with autumn to review where we are in our
complex interdependencies related to IT, transformation plans and how we are
network and external partners. The prioritising resources. We will also be
backdrop of continued funding
uncertainty adds to the challenges,
although we are increasingly confident
we will get to the right result by the
autumn.
providing a full update on the strategy
topics discussed at last month’s
awayday.
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June 2017
Financial Performance
Al Cameron
25 July 2017
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We are slightly behind YTD EBITDAS on an underlying
basis
Context
. YTD P2 EBITDAS performance was £0.5m favourable to budget.
. At end of FY16/17, cash in Network was £666m and balance sheet headroom was £189m.
. P3 budget EBITDAS was £(0.7)m
Questions
. How is our scorecard performance in P3?
. What is the financial performance of the business in P3?
. Are we appropriately funded?
Assumptions
. For the purposes of this pack we have assumed a reversal of our impairment policy and depreciation charges have been
applied. Should we not reverse the impairment net liabilities would be £(84)m.
Conclusions
. Reporting favourable EBITDAS in P3 (£0.7m) and YTD (£1.2m). However favourable timing differences of P3 £1.9m and
YTD £3.0m mean that we are behind budget by £1.2m in P3, £1.8m YTD.
. Trading performance is ahead of budget by £0.8m P3 and £2.4m YTD, with Retail stronger than FS&T. We are investigating
agents’ pay variances which are not intuitive.
. Most significant underlying adverse cost YTD is Agent Losses (£2.2m)
. Balance sheet headroom fell to £116m due to increases in unprocessed inward remittances at cash centres Half of the
increase has now been reversed with the remainder expected in July.
. Branch numbers have fallen with pressure from audits/losses.
Input Sought
The Board is asked to note the financial performance.
(>>
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Branch numbers fall in P3 resulting from increased audits
f di P3 YTD Full Year
Key Performance Indicators Act Target var. I Act Target Var. Target
Growth
Total Gross Income (excl NSP) £m 73.1 72.2 231.0 229.2
EBITDAS £m (0.0) (0.7) 1.5 0.2
Headroom £m (vs Board minimum limit) __ 316 > 200
Digital Net Income £m (digital team) _ IRRELEVANT __
Net profit £m + TBC
Customer
Customer Effort 77% 76% 75% 76% 76%
Net Promoter score Financial Services 25 25 24 25 25
Acceptable Wait Time % 93% 95% 93% 95% 95%
Branch Compliance - Financial Services - basket of 11 measures 4 70 <=50 23 <=50 <=50
People
Line Manager Engagement Index % (Once a year May) * TBC TBC TBC
Representation (Senior Managers) - Gender 39% 37% 39% 37% 37%
Attendance 96.8% 96.7% 96.8% 96.7% 96.7%
IT Lost Time (Number of Sev1/Sev2 IT incidents) 6 13 16 39 <156
Safety LTIFR 0.493 0.180 0.36 0.180 0.180
Modernisation
Number of branches (one month in arrears) Same as YTD 11,592, 11,635 >=11,700
NT and ND Branches Transformed in Year 31 30 137’ 100 400
IT Transformation (% of IT controls implemented) 50% 55% 50% 55% All high risk
gaps closed
1. Accounting estimate for impairment currently under review as part of FY 2016-17 year end process.
2. Measured annually in May.
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Branch compliance, Safety, Number of branches and IT
transformation are adverse in P3
* Branch compliance result driven by:
+ Mystery shopping performance - Customer Relationship Manager (CRM) performance is now included in
the measure. The reason for the change is the increasing number of CRMs under Project Finch. CRM
population is expanding and initial mystery shopping performance is lower. We continue to work with the
CRMs to improve performance.
+ Savings cancellations within the cooling off period have also increased, on the watch list.
* Safety LTIFR adverse due to:
. DMB - 3 accidents relating to slips and trips with hazards. Hazards now removed and guidance provided,
2 of these incidents led to lost time.
+ — Network Operations — 1 accident leading to lost time, due to a fall during a branch visit.
+ Supply Chain — 5 incidents, investigation has been carried out and no underlying trends of any concern.
These accidents did not lead to lost time.
+ Above incidents are not considered to be trends but we are reinforcing ‘take care’ advice.
+ Number of Branches higher closure volumes due to increased audit activity. Of the 58 unplanned closures year
to date, 36 are due to losses identified at audit.
¢ IT Transformation all high risk gaps identified and remediation plans are underway.
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Actual EBITDAS is favourable to budget. Potential timing
variances suggest an underlying adverse trading position
Variance to
Budget
Variance to
budget
Timing Underlying Timing Underlying
£m
Directly attributable cost of sales 11 0.0 11
0.0
Agents Pay (1.2) (1.2)
Staff costs (0.7) (0.7)
Non-staff costs t* (1.7) (0.5)
(0.6) (0.6)
+ Gross income — see slides 7-9 for commentary. P3 timing variance relates to Banking Framework phasing.
. Agents pay — adverse in P3 and YTD due to favourable income variances in Mails and Lottery, in depth challenge
and analysis of agents pay is underway.
. Staff costs — adverse YTD trend driven by:
° Delivery of OSOP, although we expect to track broadly in line for the full year and unbudgeted cost accruals.
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Underlying non-staff costs are adverse to budget driven by
agents debt
. Non - staff costs YTD timing variances:
. YTD Marketing underspend principally driven by:
. £1.0m phasing of retail campaigns expected to reverse in Q3.
. £0.6m phasing of budget for Summer Travel campaign which will reverse in P4.
. Legal underspend due to timing of agents litigation costs.
. HR underspend driven by timing of training and vetting costs.
. Non-staff costs YTD are adverse on an underlying trading basis driven by £(2.2)m agents debt slide 11, and
partially offset by a number of smaller variances.
2s FRES is £(0.6)m adverse in P3 (YTD: £0.3m) resulting from performance of wholesale cash business. P3 reflects
true up of May and June performance.
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P3 YTD
Period V#t8nce yTD Variance Full Year
hear Prior year
Budget Actual toBudget Budget
Gross Income (£m)
Mails
Retail & Lottery
Government Services
Payment Services
Total Retail
Financial Services i '
Telecoms i I i
Total Financial Services & Telecoms i
Other
TOTAL GROSS INCOME
Directly attributable cost of sales
Net Income
. Mails £0.8m favourable driven by RM Signed For, International delivery and Parcelforce.
. Government Services £1.0m favourable:
. £0.7m Passports due to higher volumes which have not been impacted by HMPO digital initiative as much as
anticipated.
. £0.5m POCA from unbudgeted interest income and slightly higher than budgeted active accounts.
. £(0.3)m UKVI and ID. While Verify is ahead of target YTD, over the past two months the volumes from
government have fallen behind the projected uplift. Ongoing dialogue with GDS and other departments
underway alongside wider review of identity services strategy over the summer.
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P3 Telecoms gross income adverse but timing of New Call
balances through net income
P3 Homephone &
Dual New Call
Other Total
£m variance to
budget:
IRRELEVANT I
Gross income
Directly attributable
costs
Net income
Gross income adverse driven by delay in New Call
acquisition, offset by higher than budgeted HP & Dual
customer base.
Directly attributable costs £0.8m favourable variance:
. £(0.5)m HP & Dual driven by higher customer base
. £1.1m delay to New Call acquisition
. £0.2m fewer fibre customers giving lower connection
charges
Period
Actual Budget Prior year
Customer Numbers
Homephone/Dual/Fibre
New Call
IRRELEVANT.
ARPU*
*Including New Call £22.77
. Customer numbers base opened the year
favourable to budget, churn in line with
expectations.
. ARPU marginally below budget, lower call
volumes and product mix with fewer customers
taking Fibre than forecast.
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Financial Services income is £(0.2)m adverse in the period
. Financial Services £(0.2)m adverse within which:
IRRELEVANT I
verse. Overall. valumes in P3 wer the previous year, versus a budget of
IRRELEVANT __
. Mortgages & Transactions £(0. 2)m adverse continuing the. recent. trend. “Mergaae income is 65% up on
the P1 comparative as completions flow though
. Insurance £(0.2)m adverse due to lower income from home renewals (£0.2m) partially offset by lower
COS to generate an adverse net income of (£0.1m).
. Banking £0.4m favourable, driven by the re-phasing of Banking Framework fee (which has no overall
effect YTD) and volumes.
fo
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In P3 Gross Profit margin is slightly adverse to budget, however
on target YTD
P3 YTD
Retail Retail FS&T FsaT Other Retail Retell FS&T FoaT,
Gross income
Directly attributable costs
Supply Chain
=~ IRRELEVANT
GROSS PROFIT
ACTUAL GROSS MARGIN
BUDGET GROSS MARGIN
. Gross profit margin is on budget YTD at 36%, in P3 Retail gross margin is slightly adverse driven by agents
pay.
. Supply Chain costs adverse to budget due to delay in implementation of high speed note counters and bedding
down of IRIS.
. Other income relates to Supply Chain and Gamma.
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Agents debt driving underlying adverse non-staff costs
£k PB vID
Agents debt (17) (02) (1.5) (22) (03) (1.9) (14) (24)
Robbery, Burglary &Fraud (0.1) (0.1) (0.0) (06) (0.3) (03) (11) (29)
Total (18) (03) (15) (28) (06) (22) (25) (4)
* The budget assumed c.£2m of provision releases.
+ Agents debt higher than forecast and creates risk of c.£3m over and above that.
+ Significant agents losses in P3 include Crwys £443k, Newington £228k and Desborough £111k. Subsequent recovery
of c£300k of the Newington and Desborough losses.
* These cases are being analysed and tracked, with results being taken to the next Losses Fraud & Crime Forum.
+ Further actions which are taking place to mitigate this risk are:
+ Deep dive to be conducted and results presented to CRG.
* Cash management project to reduce cash in the network, increase auditing and improve fraud risk analysis of
agent population.
+ Re-design of debt collection process and timelines.
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Capital & Investment expenditure is favourable to budget.
P3 Full Year
Period Variance YTD ‘Variance
om Actual toBudget Actual to Budget Budget
EBITDAS (0.0) 0.7 1.5 1.2 28.0
Depreciation* (2.6) 0.0 (8.3) 0.0 (36.0)
Network Payment 5.4 0.0 17.5) (0.0) 70.0
EBIT pre exceptionals items 2.8 0.7 10.7 a2) 62.0
Interest 0.3 0.9 (0.6) 1.2 (7.0)
Impairment 0.0 0.0 0.0 0.0 0.0
Capital & Investment (4.2) 4.9 (13.6) 9.0 (103.0)
Government Grant Utilisation 5.8 0.0 W753) 0.0 70.0
Profit/(Loss) On Asset Sale 0.0 0.0 5:0) 5.0 0.0
Total Profit/(Loss) Before Tax 4.8 6.4 18.9 16.4 22.0
. Assumes that Post Office no longer impairs assets on acquisition, and that assets are depreciated over their
useful life.
. In the period spend on capital assets was £9.0m, £21.7m YTD.
. Capital & Investment (previously exceptional) expenditure is favourable to budget:
* £3.6m of which relates to the Network and delays in ATM deployment and branch fit out phasing.
* £0.4m People & Engagement Transformation due to delays in Success Factors roll out.
* £0.9m OSOP due to phasing of payments made from the redundancy provision.
. YTD profit on asset sale driven by disposal of Great Portland Street property in P1.
* Estimated depreciation charge.
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P3 balance sheet shows a net asset position assuming
reversal of impairment accounting policy
Balance Sheet
£m June 2017 Mar 2017 Variance
Fixed Assets 397 374 23
Debtors 317 335 (18)
Cash 804 680 124
Creditors (640) (583) (57)
Pension surplus 1 1 ie)
Provisions (67) (88) 21
Other 8 8 (0)
Loan (634) (561) (73)
Net Assets/(Liabilities) 185 166 19
[capital and Reserves I 185 I 166 19 I
. As at P3 the balance sheet would be in an net liability position of £(84)m if the impairment accounting policy
were reinstated.
. The increase in the cash balance since the year end is largely offset by the increase in creditor and loan
balances.
. Increase in creditors driven by the government grant which is received in April, recognised on the balance
sheet as a creditor and released to the income statement over the year.
. Reduction in provisions balance due to OSOP and agents compensation payments.
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RCF borrowings have increased by £73m since March
primarily to fund a higher network cash balance
(1) Where was our cash?
ém Branches CViT Cina
Centres
March 648 8 291
June 633 9 382
Variance (15) 1 91
(2) How was it funded?
£m RCF Clients "Network
Cash
March 561 130 691
June 634 150 784
Variance 73 20 93
(3) What was our facility headroom on the RCF?
Board a
£m cap Board Net Limit
March 950 (200) 750
June 950 (200) 750
(4) What was our security headroom on the RCF?
Network her otal
&m cash net security
assets
March 691 227 918
June 784 213 997
(5) What was our actual headroom?
Given we do not apply £200m buffer to Security headroom our actual headroom is £116m.
(lower of £116m facility and £363m security headroom)
Total
947
1,024
7
NRF
256
240
(16)
RCF
(561)
(634)
RCF
(561)
(634)
Total
947
1,024
77
Facility
Headroom
189
116
Security
Headroom
357
363
Increase in cash centres since the year end is
largely due to higher cash in transit awaiting
processing at the cash centres (Inward Rems).
Inward Rems were £84m in March 2017, rising to
£144m in June 2017.
Initiatives are in place to reduce the level of
Inward Rems, which have reduced to £110m
since the period end.
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BOARD
FS&T — portfolio overview
Author: Nick Kennett Meeting date: July 2017
Executive Summary
Context
At the Board strategy away day in June directors challenged whether Financial
Services & Telecoms (FS&T) and POMS should focus on a fewer number of products and
whether small product market shares are sustainable. This paper provides an overview
of the strategic positioning of FS&T as a portfolio and should be read in conjunction with
the product market overviews tabled in the Board Reading Room.
Questions addressed in this report
1. What is the shape of the FS&T portfolio and what are the areas of greatest value
and opportunity and threat?
2. Is a portfolio approach still appropriate or should FS&T focus on fewer businesses?
3. I
4./
i}
Conclusion
1. FS&T is managed as a portfolio business and has grown overall income and profit,
despite declines in certain longstanding products. While the greatest current DPC
value is in Bol banking, without changes to the relationship this will decline; the
significant growth opportunities are in POMS and banking framework and to a lesser
extent Telecoms; areas that might have less focus are Bol banking, if Peregrine is
unsuccessful, and motor insurance if this remains sub-scale. Exiting a product line
will eliminate its contribution with limited cost savings opportunity.
2. In a digital world customer, rather than product, market share is key. Smaller niche
players can derive greater returns than larger scale players.
3. Savings and mortgages are inextricably linked, both in the effective management of
a bank’s balance sheet and through the contractual exclusivity with Bol - it is not
possible to demand additional capacity without mortgage growth, or realistic toseek
an alternative provider.
4. The focus of mortgage growth will be through intermediaries, who account for c75%
of the UK market. Through Peregrine, BoI has undertaken that Post Office will be
its primary brand in this channel and therefore the mortgage growth numbers should
be achievable.
Input sought
The Board is asked to note the findings and reconfirm its support of the strategy.
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The Report
FS&T portfolio overview
1. In 2016/17 FS&T generated _aross. ji
Product Contribution (DPC) of! mR
2. FS&T comprises a wide range of retail customer businesses “with ‘Varying
product structures, market positioning and forecast growth rates, sales,
commission and channel models, business focus and supplier relationships.
Much of this variety results from historic contracts that in differing ways have
locked Post Office into long term, distributor-focused arrangements; in these
Post Office generally plays a limited added-value role in product or customer
management and is paid on a commission-for-volume basis (with limited
involvement in customer pricing).
3. Management strategies have focused on taking greater ownership and value
from the customer value chain and relationship (e.g. insurance/POMS and
Customer Hub) to derive value commensurate with the brand and customer
relationship.
4. The business has been run as a portfolio, targeting overall income and
contribution, with “ups and downs” being managed in aggregate to deliver
overall growth.
a. From 201
million to
Financial Serivces Gross Income
2015/16 2016/17
b. This growth is despite the loss of income of} rsevanrimillion over the period
from the termination by NS&I to distribute
-Excluding the impact of NS&I_and. payments,
IRRELEVANT! QVer r the period, Or ;!RRevevanr;
million, a CAGR o i!
a. POMS’ income rises from; ~ IRRELEVANT
b. Banking Framework’s gross income grows from
(7.8%);
s (£69.2m) = £409m
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c. Bol product:
decline from___
d. Telecoms gross income rises from,
6. The following chart highlights the drivers of growth. The appendix provides
the detailed financial data.
DPC (2016/16- 2020/21)
alaillas .
s # (fo
2016/17 2020/21
Source: 5 year Plan
Note: POMS is fully allocated profit, others are DPC pre-POL indirect costs and overheads; Forex
includes share of FRES profit and assumed Peregrine value addition (as per 5YP)
7. All FS&T businesses contribute strongly, led by the Bol relationship; without
the changes Peregrine is seeking to deliver this is forecast to decline to
2020/21. This decline is balanced by growth, particularly in banking
framework and POMS.
FS&T - Growth and Value
8. Asa portfolio, the different products generate varying rates of growth and
contribution; below is a BCG-style assessment matching DPC growth (from
the 5 year plan) against 2016/17 margins.
FS&T Portfolio - “BCG” assessment
20
? * Medium Margin) wan bec
High Growth lows ame
tenner. i730
heiecom 7% 398
pc exe a2
Growth 49 bot 2% 14
(cAGR %) MoneyGram 3% Sx
booners 2%
Lem}
Cees
rt oa
f Peregtne uplift n SYP
0
L DPC Margin %
9. As illustrated, the business is characterised by three groups:
a. High DPC growth potential (c17% CAGR 2017-21) and medium DPC
margin, comprising POMS (fully allocated profit growth) and banking
framework. These could be considered “star” businesses.
b. Telecoms is a medium margin
agreement.on
year plan).
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IRRELEVANT
pa. FRES/Travel
Money is also a
IRRELEVANT
10. From this analysis the standard actions would be:
a. Stars - invest and grow;
b. Telecoms
c. Cash-cows - “milk the products without killing the cow!”
outcome of Peregrine, we will invest i
supported by the Customer Hub to support growth;
d. However with each product line generating a
product line wil i
Subject to the
Jas
IRRELEVANT _ wit ~]
id generally has low variable
Post Office is not the manufacturer
product costs.
11. These strategic intents are consistent with the various papers presented
to the Board and/or strategies underway by management:
a. POMS - invest in growth (but challenged by in-year J-curve impact);
looking at acquisitions to leverage business model and gain
scale/capabilities.
b. I Banking Framework - assessing opportunities to add services under the
Framework and evolve to be the provider of transaction services for all
banks and their face-to-face access to customers.
d. Telecoms - the discussion at the June away-day confirmed the strategy
to drive yield over the next two years and then decide whether to
retain/divest; exit would not create a residual cost problem as operations
are largely outsourced.
ral
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h. The investment in the Customer Hub discussed at the strategy away day
supports the high growth areas of insurance, mortgages and potentially
telecoms; it will also enable us to defend our market share in forex
(particularly if linked to identity) and to enter into new growth areas such
as investments and (possibly) energy.
12. The Peregrine strategy recognises the issues highlighted above, confirming
that the current model is not generating sufficient growth and focuses o
a.
yield from the combined savings-mortgage businesses (rather than sales
commissions), su,
jorted by an offer from
jwould be Post Office branded. This approach
would reduce the reliance on sales savings and flows and ensure that
Post Office gains from stock value.
b. Seeking to free credit cards and personal loans from the exclusivity
provisions or at the least ensuring that BoI has market-leading capability
to deliver a competitive product.
c. Increasing the value generated from the forex business.
d. Building and leveraging the Customer Hub to win and retain customers
into Post Office, understand better their needs and behaviours and offer
them targeted products from across the portfolio (see below and away-
day papers).
FS Portfolio Overview Conclusion
13. FS&T is a portfolio business with each product delivering material contribution.
a. The major growth opportunities are in: and banking framework;
b. Telecoms has yield opportunities over the next two years, followed by
tions;
ol banking generates strong value, but long terms attractiveness is
pendent on the outcome of Peregrine;
d. Forex is a low margin, low growth business but with strong market share
- it is a core focus of Peregrine.
Is market share a fundamental requirement?
14. At the June strategy discussion the Board challenged as to whether effective
competition and value-creation is dependent on having a certain market
share, and will larger market share generate increased returns.
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15. Post Office is the leading distributor of another bank’s products; Tesco,
Sainsbury's and Marks & Spencer have all established fully regulated banks
(the latter in partnership with HSBC).
16. With the exception of forex and some insurance products, Post Office
has a low/very low market share, reflecting the widely competitive market
and the relatively low levels of brand and product marketing by Post Office
- we are generally “not known” as a provider of these products, although
our history in savings (including the association with NS&I) does belie a small
market share.
17. In the FS&T portfolio with the exception of forex, we are not focused on
market share as a core business driver or objective:
a. Asa distributor Post Office does not generally gain/lose from the scale of
the business written. In banking we have suffered from the lack of scale
of Bol, in particular for the cost of platform builds and of balance sheet
flexibility (e.g. risk appetite (RAS) limits on credit cards); however, with
the exception of being out of market for a few weeks in 2015 when RAS.
limits were reached, the lack of scale has not unduly impacted business
performance or competitive positioning. This will change the closer we
approach the expiry of the FSJVA, hence the need to develop a future
relationship beyond 2023;
b. In insurance the scale generally comes from the underwriter, although
as discussed at the strategy away-day, if POMS is to build a motor book
consistent with its longer term business model it is currently sub-scale.
Forex
Savings (stock)
Credit Cards
Mortgage (completions)
Personal Loans H
{Travel insurance
Home insurance i
Motor insurance i
(Over 50s Whole of Life
Term Life assurance
Sources: YouGov; Mintel; ebenchmarkers; BOE
18. The FS product markets are generally characterised by a few major players
with 10%+ market share, followed by multiple smaller player targeting niches
either based on specialism or brand. At these market share levels, Post Office
is often amongst other recognised players.
19. With generally small market share, management has focused on leveraging
the trust of the brand to offer a range of products/service to satisfy their wider
financial needs. This is supported by small product teams driving value from
the supplier relationship and will be augmented by the Customer Hub.
20. Below are overviews of the market dynamics and Post Office’s positioning in
selected key product markets. Fuller details of the core businesses are
provided in the Reading Room:
a. Forex — ati rrevevanr! Post Office is the market leader:
At the highest lével, competition is between debit/credit cards (which
dominate overseas expenditure) and Travel Money (cash and pre-paid
travel money cards), with customers usually holding a mix. Demand for
FS&T Portfolio Re
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travel money is driven by general economic conditions, such as the value
of Sterling and consumer confidence, but also by externalities such as
terrorism and natural events (e.g. Icelandic ash cloud); as a result
demand is volatile as seen before and after the Brexit referendum. Post
Office’s market position is driven by awareness (recognised as #1 player
for travel money), supported by convenience (10,000 on-demand
locations) and breadth of currencies available. Key competitors are the
supermarkets and retailers who also leverage convenience, although
their propositions are often tied to a loyalty programme, with travel
money seen as a benefit; travel agents, who use it as an add-on to the
sale of the holiday; and digital players, such as Transferwise and Revolut,
with the former initially focused on bank-to-bank cross-border transfers.
Post Office seeks to maintain its market leading position through
convenience, strong marketing and an increasing focus on travel money
card, which turns an otherwise single transaction into a long term
relationship. The FRES board is focused on maintaining in-branch and
on-line market share as a key focus to confirm that Post Office is
maintaining its competitive position.
b. Travel insurance - POMS is #3 in market wit!
Aviva, Tesco, AA and Saga.
Overall, the volume of Travel insurance policies has fallen over recent
years from the increase of Added Value credit cards and bank accounts.
Market profitability is “event” driven with underwriters posting profits
most years. Profitability affects distributors’ income as commercial
arrangements (including POMS’) tend to be on a ‘net rate’ basis where
distributors pay a wholesale rate to the manufacturer covering the
risk/manufacturing costs and apply their own margins to set the retail
price. In general, the lower the net rate the higher the margin the
distributor can take while maintaining competitive retail prices. There is
good market awareness of Post Office TI on the back of travel money,
but the growth in digital will drive new proposition development,
marketing and channel management. “oF the market is digital, of
which is through price comparison Websites. The strength of our
travel T y business drives significant cross-sales opportunity through
the network and digital channels. POMS will drive value by building direct
capability and expanding presence on PCWs; enhancing pricing capability
to optimize value/ volume; and developing specialist products for
medically impaired customers.
— share, ahead of
it is closely positioned with!
The market is a mix of price- -driven “PCWs, “captive distribution
(bancassurers such as HBOS and Lloyds), brand insurers such as Aviva
and Legal and General and brand distributors such as AA, Saga, TESCO
and Post Office. Profits derive from lifetime value, which is a function of
retention rates and commission (driven by cost of net premiums),
premium financing (instalment interest income) and from sales of add-
, home assist). POMS current retention rate
nd is above market. PCWs drive negative
by moving from an urced broker/panel to a self-
managed intermediary model with a so/us-p/us underwriter. We will take
more control of the value chain, retaining a greater share of profit,
supported by increased marketing investment.
ential FS&T Portfolio Re
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d. Car insurance - POMS has a market share
The market is price-driven with new business dominated by PCWs and
direct insurers accounting for 7 of the top 10 providers. With negative
returns in year one due to aggregator commissions, returns are derived
from lifetime value - a function of premiums, retention and sale of add-
on products (e.g gal_ cover, breakdown cover, key cover). POMS’
retention rate is jirretevant; (target Low profitability and high
competition suggests that POMS sho! not build capability unless it is
able to gain scale e.g., through acquisitions. In the meantime POMS is
seeking to optimise returns from the existing broker/ panel model ahead
of the expiry of that contract in 2019.
e. Savings, despite historic presence, Post Office is a small player with a
Large retail banks dominate the market, mainly derived from the strength
of their current account base. New savings flows are however reducing
as a result of ultra-low interest rates, reduced savings rates as real wages
fall and possibly from customers switching to interest-bearing current
accounts. In early 2012, new flows were consistently reachin:
versus more recently. While Post Office has an established
association with savings (in part due to the former relationship with
NS&I) volumes have tended to be based on best-market pricing rather
than effective branch selling; the portfolio has become more heavily
weighted to fixed rate products, with management seeking to move
proposition development from a price-led to a value-led model. The
recent focus has been t structure the size and shape of the balance
sheet reducing it from: billion to: ‘billion and the Net Interest
Margin to} rre.evant this has been supported by the Value Share agreements
with Bol. The strategic and market positioning has enabled Post Office to
focus on “guerrilla” style market (coming in/out quickly) without
attracting competitor reactions.
Office is a minor player in the market, with stock and
t is dominated by intermediaries, with brokers/IFAs accounting
iof applications. This drives a model based on price, application
id in the mass-market, scale. A number of challenger banks
including One Savings, Aldermore, Metro and Paragon outperform the
market in terms of RoE on their balance sheet, while operating at <1%
market share by pursuing niche segment strategies built on investment
in customer proposition, innovation and high service. Post Office has
tended to perform well in digital sales but has only had limited access to
intermediaries through brokers affiliated to Legal & General. The future
strategy is based on extending intermediary coverage to the majority of
brokers and deploy innovative products into targeted segments (rather
than mass-market positioning) - hence the Family-Link and Freedom
mortgages discussed at the away-day.
Is targeting product market share the right approach?
21. There is a consumer-led revolution in banking, driven by three core factors:
a. The breakdown in trust of banks as a consequence of the banking crisis,
b. Advances in technology, with the ability of consumer to access vast
information and communicate directly with businesses and other
consumers (social media); and
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c. The experience that retailers/service providers such as Amazon, Apple
and Google are giving their customers. This creates an
expectation/demand from consumers on financial services and products.
22. The winners in this environment will be players that can:
a. Build on the trust they have from customers (or create it from scratch);
b. Adopt, adapt and apply the technology to communicate directly with
customers and refresh the offering as technology evolves; and
c. Continually challenge to create a consistent, compelling, identifiable and
dynamic customer experience focused, explicitly, on helping and
improving our customers’ lives.
This is the basis of the Customer Hub.
23. To win one does not need to hold customers’ money nor own the products -
you can, but you then need to be a bank (“power” has switched to the
customer and a “trusted partner’ and away from the manufacturer). Product
providers need access to a provider who has access to customers. The advent
of PSD2/Open Banking makes this all the more important and, critically for
Post Office, possible, as seen by the significant investment flowing into fintech
and digital banks.
24. The key target, therefore, is to win market share in customer relationships
not in individual product lines (unless you are a bank and are able to hold
customers’ money). The former will grow the latter if you give a great
customer experience underpinned by good products. The Customer Hub is
Post Offi e's key tool to ) delivery.
IRRELEVANT
26. On a bank's balance sheet, savings and lending are intrinsically linked;
liabilities (savings), which are a cost, are raised to support lending which is
where the bank earns income. Savings without lending is unsustainable (and
not permitted by the regulator). The lack of interest of a liability heavy
27. In the financial crisis, liquidity was scarce, with banks (including Bol),
seeking retail funds, and during Eagle Post Office was able to negotiate very
favourable terms for liabilities raising. Favourabl i
strong brand assisted the portfolio grow from: 1
2015. Most sales were customer driven, based on price, latterly on-line, rather
than proactive branch selling.
28. This portfolio supports a Post Office derived lending book of
The remainder is used to support Bol’s other lending, in particul.
commercial and residential books. We receive a weighted average o'
for all deposits.
IRRELEVANT
29. The easing of the banking crisis from 2015, government intervention with
various Funding for Lending schemes and the collapse of interest rates has
reduced banks’ need for liabilities, even with the recent counter-cyclical
increased capitalisations demanded by the PRA. This has resulted in Bol
reducing the cost, shape and size of its balance sheet; today BoI UK has Post
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In conclusion, without a growth in assets, the bank will not be able to fund
additional liabilities beyond the new lending, net of runoff, of existing loans
- hence the criticality of building mortgage lending and the focus in Peregrine
in a combined balance sheet.
Can Post Office realistically grow its mortgage business?
31. Post Office has three channels to market - in-house through mortgage
specialists; on-line through www.postoffice.co.uk and via third party
intermediaries.
32. While considerable focus has been made on the role of MSs, the significant
growth will be intermediary based - this channel accounts for >75% of the
UK market, and at present Post Office has limited exposure. Bol has confirmed
its intent that Post Office will be the majority brand for this channel5. Fully
entering the intermediary market represents a significant growth opportunity;
it will to require a competitive product pricing strategy from Bol, reinforcing
the need for Post Office to raise liabilities efficiently to support asset growth.
33. Bol has historically demonstrated its ability to provide competitively priced
mortgages (critical in the intermediary market). This is supported by Post
Office’s ability to raise cost effective liabilities - Macquarie analysis in 2016
identified a 20bps advantage relative to a peer average, reinforcing that
savings and mortgages markets are intrinsically connected. Furthermore, Bol
will see efficiency benefits from significant recent investment in their
mortgage infrastructure.
34. If the intermediary strategy is realised, and combined with the targeted
propositions discussed at the away-day, Post Office is well positioned to build
a sustainable mortgage business - although this is clearly linked to a
successful outcome in Peregrine. A growth in mortgages will then support a
growth in savings.
35. As we finalise the joint mortgage strategy with Bol, we will undertake a further
review to determine the role, volume and nature of the MS salesforce; as part
of this, we will explore the opportunities for a more integrated distribution
model with Bol, potentially leveraging their existing telephony advisory model
in Bristol for remote advice to Post Office’s customers.
Conclusion
36. From the assessments undertaken, including those set out in this paper,
management strongly believe that:
. There are significant opportunities within the consumer FS portfolio,
however these are dependent on the success of Peregrine;
. While the standout opportunities for FS&T are currently in POMS and
Banking Framework, a portfolio approach remains the appropriate
approach to ensure the overall growth of the business;
. The future of retail banking is changing and Post Office is well-placed to
succeed through the Customer Hub initiative;
. The growth of savings is inextricably tied to growth in lending;
The exce if-build a
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. We are well positioned to grow mortgages through the broker channel;
. Whilst we are not targeting to be a top player in most markets, the
growth we achieve will deliver greater income and profit.
Nicholas Kennett
Chief Executive, Financial Services & Telecoms
CEO, POMS Ltd.,
July 2017
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Appendix 4 IRRELEVANT
Gross income Direct Product Contribution
2016/17 2020/21 a 2016/17 outturn _] 2020/21 projection I 4, 2016/17 I 2020/21
Product line £m gross I %of total] £m gross I % of total CAGR em vec I *°Ftt* I en, ppc I *2Ftot@! I cacr oma mae
income _I portfolio] income _I portfolio portfolio portfolio
Post Office branded ‘relationship’ products {dit on 4
Products provided by Bol
~ Savings
- Mortgages
- Credit Cards and Other lending
Telecoms *
{Travel money (incl. FRES profit share)
- Bureau & Travel Money Card
-FRES profit share
Investments
[Subtotal of the above
Insurance (POMS EBITDA) i
[Subtotal of the above I
Transactional products on behalf of third,
Banking services
- Banking services framework
- Banking services transactions
MoneyGram
Postal Orders and other income
ISubtotal of the above:
{Total portfolio
Note: The Telecoms numbers for 2020/21 are Option 1 of the Telecoms Strategy presented to the Board in June, but are not included in the 5 Year Plan.
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BOARD
IRRELEVANT Update - what are the Options?
Author: Jonathan Hill Sponsor: Nick Kennett Meeting date: July 2017
Executive Summary
Context
The exclusive contract with Bank of Ireland for banking and related product
manufacture and governed by the FSJVA expires in 2023; the closeness of this date is
impacting Bol’s treasury flexibility and thence ability to deliver cost effective products
(especially savings). This combined with major concerns about the imbalance of
commissions on savings and loans, the Parties agreed to renegotiate core components
of the FSJVA; following Post Office Board approval in June 2016 of a negotiating
mandate, the parties have been in dialogue.
At its strategy meeting in June 2017, Post Office board sought reassurance that the
proposed strategy was still appropriate and whether there are viable alternatives.
Questions addressed in this report
1; Why are we negotiating now?
2. What are the negotiating mandate and objectives and are they still appropriate?
3. What are the consequences of not reaching agreement?
4. What is the current status of the negotiations and how will we complete them?
5. Is Bol the right partner and are there realistic alternative - today and post 2023?
6. What are our options in the event that negotiations are unsuccessful?
Conclusion
1. I The unintended consequences of the high commissions Post Office receives for
liabilities compared to assets, combined with the unbalanced portfolio heavily
skewed to liabilities and increasing restrictions that Bol Treasury is imposing on
product available ahead of 2023 expiry, encouraged the parties of the need to
reset the commercial terms of the relationship. Post Office took the opportunity
to add various other proposals.
2. The mandate approved in June 2016 proposed a new model that provided Bol
greater operational certainty primarily through a significant extension to the
contract and operational flexibility. In return Post Office would generate greater
returns from FRES and flexibility in other products, including changes to
exclusivity provisions. It is intended that a new agreement would provide the
flexibility and alignment of interest that removes the need for further
renegotiations in the future.
8: There have been no commercial or market developments to change the basis on
which the Board mandate was proposed.
4. If we fail to conclude an agreement the FSJVA would continue to 2023 at which
time Post Office would have the option of seeking alternative providers. We
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7. Management's preferred outcome remains an agreement with Bol that aligns
interest, gives strategic certainty and increases value to Post Office, ver it is
nuanced against the uncertain opportunities potentially available in:
8. While soundings from Bol executives and NEDs suggest that they are committed
to reaching agreement, at this stage I think that the chances of concluding a
satisfactory agreement are still at best, balanced.
Input sought
The Board is asked to note the position and reconfirm the existing mandate and
negotiating approach.
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The Report
Why are we negotiating now?
1. The renegotiations with Bol in 2011-12 (Eagle) significantly improved the value
Post Office derives from the business, particularly in savings and risk protection;
however it has also created unintended consequences that are increasingly
hampering the development of the business to both parties. With the contract
running to 2023 it was agreed that attempts should be made to renegotiate
selected key commercial components.
2. _Post Office’s portfolio with Bol is heavily skewed to liabilities i
Ui with the surplus funds used to support non-Post Office derived assets.
Although this is a direct result of Bol’s drive for liabilities during and after the global
financial crisis, Bol Treasury is now facing difficulties as it manages the funding
mismatch to and beyond 2023; notwithstanding the spirit and terms of the FSJVA,
Bol is advising now that the imbalance will increasingly restrict its ability to offer
Post Office customers a full range of competitive savings products. Furthermore as
2023 approaches (and the risk that the business would be transferred to another
party) Bol is expected to attempt to rebalance its portfolio (e.g. by using Bi
significantly impacting ‘Post Office’s income.
8. Since 2015 Post Office has assisted Bol restructure its balance sheet, reducing
H nda target of 55bps. Value Share agreements compensated Post Office for
the loss of income and ensured that the parties had aligned objectives. The latest
agreement expires in March 2018, after which, with a subsequent agreement,
our income will fall to match the balances held - million in 2018/19 - this
reduction has been included in the 5 year plan. ,
4. Bol and Post Office recognise that the current commission structure and divergent
incentives is driving conflicting agendas; a key component of the negotiations is to
align incentives by ensuring that Post Office gains value as balance sheet value is
created, rather than focused on asset or liability sales alone.
5. The rationale for negotiations derived from the need to resolve the liabilities
“problem”; waiting would only exacerbate it and summarised as:
Growth restrictions from Bol Treasury;
Misaligned interests and drivers based on the imbalanced portfolio, with Post
Office compensation being weighted towards liabilities;
Post Office revenue cliff from March 2018 as the value share expires;
Additional balance sheet reductions as we approach 2023;
e. The FSJVA contained the option for the parties to review and change
commissions, although there is no obligation on either side to agree.
6. The parties agreed that it would be important to resolve these problems now and
re-establish the relationship based on a revised commercial and strategic basis.
Appendix A provides a summary of BoI UK’s balance sheet.
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What are the negotiating mandate and negotiating objectives and are they still
appropriate?
7. Atits June 2016 meeting the Board approved the proposed negotiating mandate:
a. Significant extension to BoI beyond 2023 (assumed i
sheet products (i.e. assets and liabilities but not unsecured lending) - this
was seen as the main source of leverage (as both value and a threat);
b. More sustainable share of the value from Bol balance sheet, based around
greater operational flexibility to BoI and a new commission structure that
balances assets and liabilities;
Increased share of value to Post Office from FRES; and
Flexibility for Post Office to work with other providers outside of mortgages
and savings (i.e. a dilution of the exclusivity provisions).
8. The Board also noted the potential EBITDAS. rom 2018 to 2023
negotiations were not successful (see Appendix B).
9. The negotiation term sheet (Appendix C) sets out the key proposals, the conditions
we are looking to put in place, possible concessions to Bol and red lines as well as
the estimated value impact for both Post Office & Bol.
a. We would look to offer Bol a for
mortgages and savings, giving Borsignificant value and long-term security
for its UK business.
b. The proposal also gives Bol greater flexibility to manage the Post Office assets
and liabilities book within the totality of its UK balance sheet, with Post Office
actively supporting Bol achieve its margin and growth objectives.
c. A new commercial construct that reduces Post Office’s risk from actions by
Bol to manage its balance sheet (including a share of margin improvement,
a blended commission for the whole book and collars on the size of the book).
10. In return Post Office would look for Bol to:
a. Remove the exclusivity terms for all products bar mortgages and savings or
commit to significant investment in unsecured lending capabilities. This would
enable Bol to focus on its core expertise and not have to commit significant
investment in new products (e.g., current accounts);
b. Support the transition of newly non-exclusive businesses to new providers;
Commit to linking up to the Customer Hub platform;
Realign the commercial arrangement of FRES so that Post Office’s commercial
outcome is significantly improved, recognising the work we perform;
e. Agree the continuance of other key FSJVA matters (e.g., pro-rated marketing
fund, termination clauses etc.);
11. It is intended that the flexibility and alignment anticipated in a new model should
be able to “stand the test of time”, therefore removing the requirement of further
major renegotiations should market conditions or strategic priorities changes.
12. Management believes that the rationale and drivers on-which the mandate and
negotiating strategy was built still apply, and as such, is not looking to the Board
for any amendment.
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What are the consequences of not reaching agreement?
13. If there is no agreement, the FSJVA will expire ini IRRELEVANT ‘and thereafter
Post Office will be free to seek alternative produ ufact Ig arrangements,
assuming new partners accept the transfer of the existing portfolio(s).
14. The consequences to Post Office would be:
a. Loss of value, estimated to bel . __ IRRELEVANT __ I
‘with no extension of the value share agreement and an expectation
I restructure its balance sheet ahead of 2023;
b. Loss of momentum (and likely skills) in banking as a business for Post Office;
c. Deteriorating relationship with Bol that would be driven by firm adherence to
the FSJVA terms;
d. Inability to make changes to unsecured lending propositions and customer
interactions through the Customer Hub;
e. No increased value from FRES;
f. Uncertainty as to the options available in 2023, but the freedom to seek
alternative partners.
15. The FSJVA is very clear as to the expectations and actions available to the parties
at termination, but severely restricts Post Office’s options before 2020:
a. On termination Post Office retains the business and has the option to move
to a new provider(s); BoI must support this process;
b. The earliest Post Office can exit is!” with two year’s notice;
c. Post Office is forbidden from contacting or discussing opportunities with
potential partners before March 2020 when it can initiate a tender process to
identify potential new partner(s).
16. Post Office had internally assumed that our processes and decision points as to
whether to terminate/migrate away from Bol in 2023 or remain with the Bank for
some/all products would commence in early 2018.
What is the current status of the negotiations and how are we proposing to complete
them?
17. Peregrine negotiations have been frustrated by Bol’s slow response to our
proposals and their initial unwillingness to engage formally. Bol has now agreed
to develop with us proposals for a new savings and mortgages commercial model,
which is a key to our proposal and feedback from the formal discussions and
informally from NEDs reiterates their desire to conclude negotiations.
18. We have agreed to their request to hold discussions on the long term commercial
opportunity in parallel (indeed slightly ahead) of the commercial negotiations. This
should agree the “size of the prize”.
19. The negotiations are therefore in two streams:
a. “Enablement workshops” led by Owen Woodley for Post Office and facilitated
by E&Y to assess what the possible future could look like for our joint
businesses and how we might manage them; and
b. Asecond stream focusing on the commercial negotiations, including contract
term, exclusivity and financial levers. These are led by NK for Post Office and
John Tudor for Bol. Both parties agree to limit contractual changes to avoid
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lengthy and costly legal discussions. Bol is targeting to present a commercial
proposal in the first week of September; this is in effect a response to ours of
August 2016. Post Office is supported by Post Office Legal and Linklaters (who
supported us in Eagle) and anticipate using KPMG again for financial analysis
as required.
20. While the parties are focused on reaching an overall agreement in Q3 2017/18,
we looking to accelerate this in readiness for the new CEO of Bol Group taking up
her position in the autumn.
21. While we remain concerned as to whether Bol has rationalised our determination
to rebalance the commercial terms, on receipt of their proposal we should have a
view as to whether there is a deal to be done, or that we should commence building
contingency plans ahead of a 2023 exit.
Is Bol the right partner and are there realistic alternative - today and post 2023?
22. This question can only be answered in terms of the potential options available in
2023 as the exclusivity provisions prevent Post Office discussing options with
external parties today, and no product lines can be moved without Bol’s consent.
23. In assessing potential partners we are balancing between a known partner today,
but committing for 21 years, and an unknown partner(s) in six years times that
may/may not provide a better solution. Post Office therefore has two options:
a. Negotiate a new deal consistent with the mandate, giving greater flexibility in
certain areas, but extends others well beyond 2023; or
b. Continue under the existing arrangements to 2023 and seek to maintain the
business in what would potentially be an “unhappy marriage”. There is,
unfortunately, no middle ground.
24. We have however scanned the market and assessed whether, if we were to go to
market today, would there be players who see value in a partner such as Post
Office with a strong UK branch and distribution coverage. In particular we assessed
their balance sheet capacity and shape, and apparent brand/distribution strategy
to determine potential strategic fit.
25. In assessing potential alternative partners it is critical to understand the strategic
driver that a relationship with Post Office could satisfy, such as:
a. Is the bank seeking excess liabilities?
b. Is there a wider strategic fit?
c. Is the bank seeking to enter the UK market?
d. Could Post Office split the portfolio to multiple providers?
e. In additional we have considered whether Post Office should establish a bank?
26. Are banks seeking liabilities?
Anew partner would need to take over the savings/lending books, thereby needing
to absorb a liability surplus of over £7 billion. However, UK banks are fully (in some
cases over-) funded and do not need additional liabilities (for example in 2016
TSB, Tesco Bank, Sainsbury’s Bank and Virgin Money were all fully funded with a
slight surplus of assets over liabilities).
27. This funding position has been seen in the inability to find a partner for the'RRELevANT
POCA book. With the PRA’s focus on ensuring bank stability, including reduced
reliance on wholesale funding, it is unlikely that there are banks who could
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28.
29.
30.
81.
32.
33.
34.
easily/willingly take on these additional liabilities (although a buyer could seek to
acquire asset-only portfolios to balance the liabilities). Therefore, while liquidity
demand may change by 2020/23, in the current market the attractiveness of Post
Office needs to be strategic rather than balance sheet driven.
Is there a strategic fit with any current players? Will there be new entrants?
The Post Office brings a strong and trusted brand and access to customers
throughout the UK via its network. However as the FS strategy highlights, the
focus will be “digital first” and therefore strategic fit must also work online. An
optimum partner profile would be one with little or no brand profile in the UK, thus
giving Post Office its main focus and seeing the Post Office as “its brand” in the
UK. There are no UK banks known to be seeking a major multi-product distribution
partnership; one potential option could have been j=; which lacks scale to
compete effectively, however it has been acquired by: Whilst
the impact of Brexit remains uncertain there are unlikely to be overseas banks
seeking to enter the UK market.
Can Post Office split the portfolio between providers?
In 2023 Post Office can parcel the portfolio of businesses to different providers, as
long as Bol’s balance sheet is left whole, although no provider is likely to want to
work with Post Office for liabilities alone. If Post Office were to act as the regulated
principal it could engage with multiple providers. Splitting the portfolio does
provide an option in:
Are there opportunities with new banks and Fintech?
At present none of the challenger banks would have the capacity to take over the
balance sheet and in the medium term are likely to be more growth constrained
than Bol.
Should Post Office create a Bank?
The Strong Integrator/Customer Hub model does not preclude Post Office
becoming a bank, but the earliest contractual time to either establish from new or
purchase a bank would be ire This strategy would require significant investment
in people, systems, compliance and governance and would need to be done
through a separate legal entity.
We would need to be able to finance the transfer of the balance sheet from Bol to
the new Post Office bank, including handling the surplus liabilities at the same time
as satisfying the prudential capital and liquidity regulations.
Will the opportunities change by
While the scan has not identified any domestic or international players who today
could have the interest or capacity for a relationship with the Post Office, much
could change by {including greater clarity over Brexit). We believe that with
the strength of thé brand and market reach, the Post Office would be an attractive
banking partner, particularly if we were to split the portfolio and have the
necessary time to engage with the market.
The FSJVA provides Post Office with clear options i
partly/wholly with Bol under the existing or a new contract;
new partner(s); or even to exit the market. These o
the relationship with Bol. If we were to continue to
(probably in mid:
whether to remain
move portfolios to a
hold if we do not extend
we would appoint an IB
to assist identify potential players and structures.
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Is Bol the right bank for Post Office?
35. In contractual terms Bol is the only partner we can work wi
question therefore is, will it likely to be the best partner afte:
be willing to give up optionality then for more certainty and value now?
a. Bol is stable, with a solid capital and liquidity base, much of which has been
provided through Post Office and its customers. It remains an unknown UK
bank (except in Northern Ireland) and with limited channels to market. As
such it gives Post Office a much greater influence on the management of its
business.
b. Outside NI, Bol does not have branches, therefore there is complete
symmetry between a bank with no branches and a branch/brand with no
banking license.
c. The scale of the bank and the criticality of Post Office ensures that we get
immediate and extensive access into executive management and board
members as required, and can influence (but not dictate) strategies - it is
uncertain that this closeness could be achieved elsewhere.
d. Interms of capability, Bol is a strong mortgage provider based on the historic
Bristol & West business and recent investment in the ROME? platform - this
puts Bol at a market leading position. The access to Post Office liabilities also
ensures that asset pricing is competitive. As discussed, Bol is less strong in
unsecured lending.
36. The significant negatives are that Bol’s balance sheet is so dependent on the
imbalanced Post Office portfolio that it is curtailing growth opportunities; limited
balance sheet, which can constrain fast growth ("“J” curve effect); and its capability
in unsecured lending.
a. We believe that Bol has been constraining its ambitions for growing the
it approaches the threshold at which “ring-fencing” rules
If this level is breached Bol would have to invest additional
capital and provide greater regulatory oversight to protect the business — this
threshold is seen in the wider market as being a constraint on challenger
banks “breaking through”.
b. Bol has advised that, as part of establishing a new relationship, it has the
appetite to exceed the threshold if the partnership exhibits the ability to
deliver significant growth to justify the investment - hence the focus on
enablement workshops. As part of the renegotiations, we will seek to ensure
that Bol has the capacity to deliver such growth.
c. In addition our proposal included applying collars on portfolio movements and
to allow the Post Office to source capacity outside Bol if the bank is unable to
support our growth ambitions (capacity or credit criteria).
37. With the limited other partner options open to Post Office and the uncertainty of
options in 2023, Bol remains the best option for Post Office, at least for the main
balance sheet products (savings and mortgages), so long as we are able to
successfully achieve the large part of Peregrine.
ROME is a specialist mortgage broking platform
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What are our options in the event that negotiations are unsuccessful?
38. If the negotiations fail the FSJVA gives key contractual rights, controls and
protections for Post Office. While we have focused our relationship on building the
partnership rather than enforcing terms rigidly, we would use these if the
negotiations failed. These key levers could be pulled either as part of a negotiating
strategy with Bol and/or to be the basis of the on-going relationship following a
decision by Post Office to preserve full optionality for 2023. The key levers are:
a. Require BoI to provide investment products to the specification
(including commissions) set out in our product proposal; Product provision is
a quid pro quo for exclusivity. By unlocking this, we can drive growth without
the limitations of BolI’s balance sheet. Bol can only refuse for three reasons
(not allowed by regulations, have no capacity/capability and is commercially
unviable for BoI), in which case the product ceases to be exclusive and we
can source from another party. In a disputed process we might be subject to
subject to an independent expert (IE) process which could take 6-9 months
(longer for current accounts).
b. Product reviews: Require Bol to enter into rolling 2-year product reviews to
ensure that products remain fit for purpose. Products cannot just be sold on
price alone all of the time. We can contend that Bol does not have effective
systems and products to ensure the products are fit for purpose. This could
force them to make changes, thus making products more attractive. BoI may
say that this is unaffordable and/or that they do not agree. We can enact a
dispute process, potentially again involving an IE.
c. Challenge Bol’s book limits on savings & lending: Post Office & Bol are
obliged to set targets aligned to product “Book Limits”. Bol is required to take
“reasonable steps to avoid the imposition of a Book Limit on the business”
because of Bol actions outside of the joint business. While this is relevant as
Bol would look to reduce liabilities, it is only “reasonable steps” (so will be
hard to win a contractual fight), but it sets out the intent of the parties and is
based on an agreed plan (which the parties are required to do annually);
39. Whilst the key terms of the agreement that drive value are more biased in Post
Office’s favour, Bol may also seek to enforce the terms of the agreement more
rigidly and/or claim that Post Office has not met, in part or in full, its obligations
(e.g., failure to meet th nches open for face-to-face sales of FS products
or a failure to meet the’ jJannual Eagle investment, neither of which are
anticipated).
40. From a portfolio perspective if negotiations failed we would look to “double-up”
the focus in POMS and ensure that it has the opportunity and scope to develop
and grow.
Conclusion
41. Overall management believes that it would be preferable to conclude negotiations
satisfactorily with Bol, giving strategic certainty and alignment and increased
value to Post Office. It would ensure that we continue to offer banking products to
our customers, drive value and build the brand as an FS provider. However if we
do not conclude negotiations the FSJVA gives us clear options in evan} Post Office
will likely be of interest to the market as a potential partner. 9
42. At this stage we are not yet confident that Bol will respond sufficiently to our
proposal and as a result we view the likely outcome of negotiations based on the
mandate as, at best, balanced.
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Nicholas Kennett
Chief Executive, Financial Services & Telecoms
July 2017
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APPENDIX A - Bol UK balance sheet summary (as at December 2016)
Bol UK Balance Sheet (as at end 2016) - source Bol
Assets.
Ms
Residential Mortgages
lof which POL-branded
Cards & loans
lof which POL-branded
Other {inc impairment provisions)
Total Assets
lof which POL-branded i
Tavis IRRELEVANT
ems
Bol-branded deposits I
POL-branded deposits
IAA-branded deposits
Total savings I
Current account
Total Liabilities
lof which POL-branded i
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APPENDIX B - Estimated POL EBITDAS impact should Peregrine negotiations fail
Existing modelled value
Bol savings ur
Total income
Total operating expenses (excl FRES)
EBITOAS (exc!
EBITDAS (excl FRES)/ Net income i
Adjusted modelled value
Total operating income
income
FRES)
POL operating income
Bol savings underpin income
Total POL inci
Total operating expenses (excl FRES)
“ome
EBITDAS (excl FRES)
Difference vs. existing model
EBITDAS (excl FRES) / Net income
Adjusted Model (undiscounted)
om
ing model trom 90% in-20
other distnbuton channels
Omeet Mot ges
© No creditcard or personalioans ayaa
‘© Bal other lending book remains he same with POL deposits Ireermesiary Logages
Feducedto fune POL mortgages angie other Bol ass Moagige stoct
Ral et
‘per modalling crops POL valu
assumolions given large
Bol FSJVA PBT
(2017-23)
POL FSIVA PET !
(2017-23)
Strictly Confidential
POL margin assumacto remain static (Assur
17 (by 10 per
to £19m unde!
NSIS cost:
IRRELEVANT
IRRELEVANT I
Adjusted Mortgage and Deposit book
gage Tlows 35sume oradual step down as percentage of
Mot poge tow
Total mortgage stock
5
Total cepone stock
A
A
m
I~
<
>
=a
=
roentage point annual a a eee
ments te 30% by 2023. given challenge to Bal in sheng to - ~
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APPENDIX C - Post Office Term Sheet
~ IRRELEVANT
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POL BOARD DECISION PAPER
Retail Product Arrangement for DMBs
Author: Mark Siviter Sponsor: Kevin Gilliland Meeting date: 17 July 17
Executive Summary
Context
Packaging and other stationery is a core offer for Post Office. It generate:
‘income
p.a. for Post Office through the Directly Managed (DMB) channel. The
current contract with VOW Retail to supply this stock expires in January 2018 and we
need to agree a new arrangement consistent with our strategic and commercial
objectives before then. This paper asks the Board to delegate authority to the CEO and
CFO to sign a new contract which will deliver this aim.
Questions addressed in this report
1. How important is our retail (packaging and stationery) offer to Post Office?
2. What is the current commercial situation and what options do we have now?
3. What are the next steps to secure a new agreement to supply stationery products?
Conclusion
1. Providing good quality packaging and stationery is a core offer for Post Office,
particularly in DMBs, with a good income stream Of fmecveria year.
2. Our current contract with VOW Retail ends in January 018 and our recommended
option is a new, agency-type arrangement for future sales.
3. We need to finalise negotiations with our two potential providers and get an
agreement in place for August 2017 so we can be ready for customers during
Christmas peak.
Input Sought Input Received
The Board is asked to endorse the recommended 1. Retail
approach and delegate authority to the Post 2. Procurement
Office CEO and CFO to sign a contract consistent 3, Finance
with what is set out in the paper. 4. Legal
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The Report
How important is our retail (packaging and stationery) offer to Post Office?
1. Retail (defined here as the envelopes, packaging and paper stationery segment of
the wider stationery market) is an important offer for us. Customers expect us to
offer these complementary products and we make a significant profit on selling
them. This sub-section of the overall market is wort!
from which Post Office secures income of IRRELEVANT
2. We offer a packaging and stationery range in all DMBs. Sales are largely impulse or
distress purchases by consumers already in a branch to complete a mails journey.
These sales provide an additional income stream and increase branch space
utilisation. From a brand and customer perspective, we believe having a good quality
offer for these products is essential and want to ensure we continue to do so while
maximising our financial return and complementing our broader retail strategy.
3. While Post Office’s market segment is in long term decline, Post Office’s priority
remains to maximise the financial benefits from selling retail products to our
customers in DMBs, noting that our network development strategy remains to
reduce the size of our directly managed network. As such the scope for this offer is
only a small proportio coe “4 of our total retail network, although DMBs remain our
largest and most high-profile branches
What is the current commercial situation and what is our recommended option?
4. The current contract with VOW expires in January 2018, having been extended from
its original end date of March 2015. The contract is non-exclusive with a 4-month
transition period for a new supplier. We therefore need a new arrangement in place
no later than February 2018, and it would be beneficial to have this in our DMB
branches in time for the Christmas peak which accounts for; f annual sales.
We therefore want to implement the new arrangement by No’ ber 2017. Given
the 4-month transition, this would require an agreement in August 2017
5. Our recommended option (see paragraph 6 below) is based on us having ruled out
two other approaches: discontinuing the sale of retail stationery in DMBs; and
procuring a supplier on the same basis as the current contract. The first option is
discounted on customer grounds - we need to offer a quality product to meet their
needs. The second is discounted following a recent (2016) public procurement which
we did not complete after it became clear during dialogue that we could better
service our customers in a simpler, lower risk way by adopting a new arrangement
1 The UK stationery market is worth c£2bn. Future growth is principally driven by drawing and
writing instruments and is expected to slow from 3.2% to 2.4% p.a. by 2021.
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which is based on an agency model. In this model Post Office acts as the sales agent
and makes available retail space in branch for a third party provider to sell its goods.
7. We are confident this commercial deal complements our wider retail strategy,
including our current work to explore options suggested at the June Away Day. From
a wider retail perspective, stationery is a complementary offer for our large branches
- WHS, Ryman and UOE (run by Elliot Jacobs) are all good partners with estates
which match ours as the customer needs overlap significantly. And contractually:
e« We will require two important mitigations in the contract: a 6-month notice
period and a ‘carve out’ of a small number of branches allowing Post Office to
undertake a wider trial of a convenience retail or other offer; and
« The contract only covers our DMBs, leaving over 11,200 other branches in our
network (plus new ‘whitespace’ locations) in which we could conduct further
trials.
What are the next steps to secure a new agreement to supply stationery products?
8. We started discussions over a possible retail arrangement with the two principal
parties from the previous procurement exercise, VOW Retail and WH Smith, in May
2017. Both have submitted proposals for the right to manage the retail space in
Post Office’s DMB network for a five-year period, and potentially beyond on a rolling
arrangement until terminated (see Appendix 1).
9. At time of writing we are concluding the evaluation process and will have identified
a preferred provider by w/e 21* July 2017. We will continue discussions with the
preferred provider with a view to concluding negotiations as soon as possible after
the Board meeting (unless the Board chooses not to endorse this proposal). As part
of this we will be ensuring that we have the right contractual protections in place to
preserve our commercial interests and the quality of the offer (and therefore our
brand reputation with customers). We will be able to expand on these and other
points when we discuss this paper with the Board.
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Appendix
1. Summary Financials of Proposals from Potential Providers
SYr
Yra Yr2 Yr3 Yra Yrs Total
VOW sales
VOW income
samt IRRELEVANT
WHS sales
WHS income
WHS POL DPC
DN: Current POL annual sales £6.4m; DPC £2m
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BOARD DECISION PAPER
Resignation and Appointment of the Company Secretary
Author: Alwen Lyons Sponsor: Alwen Lyons Meeting date: 25" June 2017
Input Sought
The Board is asked to note the resignation of Alwen Lyons as Post Office Company
Secretary, with effect from 30" August 2017.
The Board is asked to approve the appointment of Jane MacLeod as Post Office Company
Secretary, with effect from 31% August 2017, and authorise Alwen Lyons to make the
necessary filings at Company House.
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BOARD DECISION PAPER
Royal Mail Pension Plan
Author: Harpreet Singh Sponsor: Natasha Wilson Meeting date: 25/08/2017
Executive Summary
Context
The Royal Mail Pension Plan (the “Plan”) was closed to future accrual on 31 March 2017 on
the basis that Post Office could not take the future risk of the Plan falling into deficit. The
Board agreed at a meeting in 2016 that its strategy was to have the Aan de-risked as
much as possible to minimise the Plan’s reliance on Post Office funding.
In order to do this, the Board agreed that it would request the Trustee to examine the
validity of a “buy-out” of the Plan’s liabilities once the Plan closed to future accrual. In
response to the request the Trustee commissioned “Project Spitfire” to look at derisking
with their advisers, Mercers, from an investment perspective, LCP as “buy-in/buy-out”
specialists and Oliver Wyman a specialist company to provide due diligence on the chosen
insurer, which in this case is Rothesay Life Plc. Post Office signed a Letter of Reliance with
Oliver Wyman over their advice to the Trustee, and we have validated their advice with
our advisers AON Hewitt.
Questions addressed in this report
1. Does the transaction deliver the Board’s derisking strategy?
2. Is Rothesay a suitable provider for the transaction?
3. What are the risks to Post Office with a “buy-in”?
Conclusion
1. Post Office closed the Plan to mitigate the risk to the business of funding the Plan. The
Board agreed to seek agreement with the Trustee to derisk the liabilities as much as
possible and provide greater protection to Post Office. The proposal put forward by the
Trustee to transact a “buy-in” of the Plan liabilities satisfies the Boards derisking
strategy. The Trustee has also indicated that they seeking to pursue a “buyout” of
the Plans post-2012 liabilities, however this cannot happen until 1 April 2018 as there
is a legal requirement for the discharge of liability and responsibility that cannot
happen until this date.
2. Following advice received from LCP on the market and providers of “buy-in” and “buy-
out” contracts, the Trustee agreed that Rothesay Life Plc ("Rothesay”) provided the
most competitive pricing for a “buy-in” contract and they had sufficient assets and
capital to complete the transaction before 31 March 2018 with a view to exercising a
“buy-out” transaction after this date (See Appendix 1).
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In order to come to the conclusion that Rothesay was a suitable provider Oliver
Wyman have looked at the following:
i) Rothesay being regulated by Prudential Regulated Authority (“PRA”).
ii) I Rothesay have sufficient capital to complete transaction and maintain the Pla
under a “buy-out” contract.
iii) I The administration services provided by Rothesay can keep the level of
expectation of a seamless service and interaction with the Royal Mail Statutory
Pension Scheme (“RMSPS”).
3. The main risk to Post Office under a “buy-in” is credit risk on the basis that Rothesay
become insolvent and the compensation authority responsible for PRA regulated
organisations, the Financial Services Compensation Scheme (“FSCS”) fails to be able to
cover the liability in full. If this was ever to occur, the liability of the Plan would revert
back to Post Office. From the due diligence conducted by Oliver Wyman this scenario
is highly unlikely, however not improbable. It should be noted that a substartial claim
on the FSCS has never been made against an insurer providing bulk annuities and de
risking contracts, therefore the implication of such an event is unclear. This means
there needs to be a reliance on the financial strength of Rothesay is a vitd
consideration.
In accordance with the PRA requirement set under “Solvency II” regime, an insurance
company has a Solvency Capita Reserve (“SCR”) of 99.5% confidence interval, this
equates to the ability to withstand a 1 in 200 year event. Rothesay has an SCR of
177% as at 31 December 2016.
AON Hewitt has advised that they are comfortable with the chosen provider Rothesay and
see no reason why the Trustee should not transact with Rothesay (see Appendix 2).
Slaughter & May have reviewed the policy and contract terms and proposed amendments
to the Trustee lawyer, Sackers LLP and Rothesay. Chris Hogg of the Trustee executive
confirmed to Natasha Wilson on 7 July that the Trustee understands the concerns and will
give the amendments consideration.
Input Sought Input Received
1. The Board is asked to consider 2. Input has been received from:
and agree with the Trustee i) RMPP Trustee Executive
proposal to transact a “buy-in” ii) AON Hewitt, Post Office adviser
policy with the proposed insure, iii) Slaughter & May, Post Office Pensions
Rothesay Life Plc, with a view to lawyer
“buy-out” post-2012 Plan iv) Oliver Wyman, Due Diligence adviser for
liabilities. the Trustee
v) Willis Towers Watson, Post Office Actuary
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The Report
Is the Proposal in line with de-risking strategy of the Board?
The Board of Post Office communicated to the Trustee of the Plan its strategy to de-
risk as much as possible the liabilities in the Plan in order to provide greater security
for the future viability to Post Office as a commercial business.
As part of the closure agreement with the Trustee of the Plan, Post Office agreed that
it would not seek to claim any surplus that may exist in the Plan and any recognised
surplus could be used for the benefit of members of the Plan who were most effected
by the closure of the Plan. In order to determine what a recognised surplus is, it was
agreed that it would be the level of assets above a “solvency” level of funding ie £1 of
liability = £1 of asset. It was agreed that this would be akin at the minimum to a
“buy-in” of the Plan’s liabilities with clear “path” to “buy-out” of as much of the
liabilities as possible before any “surplus” can be released to effect members of the
Plan.
Since the closure of the Plan the Trustee has been investigating the de-risking of the
Plan liabilities and have commissioned LCP to investigate the insurance market to
initially look at transacting a “buy-in” of the liabilities before 31 March 2018 and set
the “path” to a “buy-out” of post-2012 pension liabilities. Having reviewed the
market, Rothesay provided the most competitive basis. In order to benefit from the
“pricing lock” the Trustee is required to transact shortly and within 5 days of signing
the policy they will need to transfer c£500m of assets to Rothesay. Under the Trust
Deed & Rules that govern the Plan, a “buy-in” is classed as an investment decision,
therefore whilst the decision to transact lies with the Trustee they have a duty to
consult with Post Office before making a final decision. In this circumstance, the
Trustee is acting in accordance to the Board's de-risking strategy and also complying
with the Memorandum of Understanding signed in March 2017 so it can release a
viable surplus to effected members of the Plan.
Elements for consideration?
Suitability of Rothesay
Rothesay Life is a PRA authorised UK insurance company specialising in the market for
bulk annuity transactions and longevity insurance for defined benefit pension fund
liabilities.
The main shareholders of Rothesay are as follows:
. The Goldman Sachs Group Inc - 32.7%
. The Blackstone Group - 26.5%
. Government of Singapore Investment Corp — 26.5%
. MassMutal Financial Group - 6.5%
. Manangement/EBT - 7.9%
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In 2015 Rothesay transacted on a £1.6bn buy-in with the Civil Aviation Authority
Pension Scheme, this is another Government backed organisation that had a funded
pension arrangement like Post Office.
An insurance company such as Rothesay is not permitted to write additional new
business unless it can demonstrate to the PRA that it has sufficient capital resources
to cover its existing business and fund the initial capital strain incurred in writing new
business. The capital strain arises from the need to fund transaction costs, meet the
regulatory requirements for the valuation of liabilities and hold additional capital on
top of those liabilities.
Since January 2016, Rothesay has to comply with PRA Solvency II requirements as
set by the EU.
Rothesay has provided the following information to Oliver Wyman to support it capital
adequacy under Solvency II as at 31 December 2016:
A. Assets
B. Available Capital (‘Own Funds”) H
I mmevevanr
C. Solvency Capital Requirement (“SCR”)
D. Surplus (B - C)
Solvency II Coverage Ratio (B/C)
The table shows that Rothesay was comfortably solvent under the Solvency II basis.
In the opinion of Oliver Wyman and verified by AON Hewitt, Rothesay has sufficient
capital resources to support the proposed transaction whilst comfortably meeting its
solvency requirements.
To reassure Rothesay, has a prudent investment strategy and the majority of it’s
investments reflect the long term nature of the “buy-in” and “buy-out” market in that
it operates in.
Risk to Py
The main risk to Post Office is the insolvency of Rothesay and the liability of the Plan
returning Post Office whilst the “buy-in” contract is in place, however, the Trustee
would first need to make a claim to the FSCS to compensate for the full value of the
liability of the Plan which would be covered in full as they fall due. Since inception in
2001 no major claim has been made from an insurer in an insolvency position.
The FSCS is funded by levies on firms covered by the FSCS. The Government is
intending to provide further surety on the FSCS by setting legislate to ensure that the
FSCS has access to immediate liquidity through public borrowing from the National
Loans Fund if necessary.
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Should the FSCS not be able to fund liabilities as they fall due, the Trustee of the Plan
would seek Post Office to provide funds for the liabilities to ensure members receive
the benefits they are entitled to.
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Appendix
te LCP of best price from “buy-in” market paper.
2. Confirmation from Post Office Adviser AON Hewitt on suitability of
Rothesay based upon Oliver Wyman Due Diligence.
1. LCP of best price from “buy-in” market paper
[Insert Appendix item 1]
2. AON Hewitt paper
[Insert Appendix item 2]
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ADVICE
Project Spitfire 10 July 2017
Response to questions raised by Post Office
Limited (“POL”)
This note has been prepared by Lane Clark & Peacock LLP (“LCP”) for the Royal
Mail Pension Trustee Limited as Trustee of the POL Section of the Royal Mail
Pension Plan. It sets out a response to the questions raised by Post Office Ltd
(“POL”) in respect of the proposed purchase of bulk annuity contracts with
Rothesay Life (“Project Spitfire”). We are happy for this note to be shared with
POL on a non-teliance basis.
This note comments on the following elements of the proposed purchase of BPA
contracts by the Trustee with Rothesay Life:
. Details on the process undertaken by the Trustee to select Rothesay Life;
. Overview of the transaction structure; and
= Generic comments on the potential accounting implications of an insurance
transaction.
If the Trustee decides to proceed with the transaction then it is expected to be signed
with Rothesay Life before the end of July.
1. Insurer selection process
As part of considering the feasibility of insurance options, LCP approached Legal &
General (“L&G”), Pension Insurance Corporation (“PIC”) and Rothesay Life to provide
indicative full buy-out pricing on a monthly basis. Between them these three insurers are
responsible for all completed full buy-out transactions of a similar size (£400m) or larger
in the past 10 years. The indicative pricing was sought based on a number of provisional
assumptions (including a provisional benefit specification, the member data available
from the 2015 valuation and provisional estimates for possible reserves).
Following the decision by the Trustee to explore purchasing bulk annuity contracts, a
project plan was drawn up with a target to complete a transaction in November 2017.
This included detailed work to produce a final benefit specification, obtain up to date
member data and to consider the appropriate reserves for expenses and other potential
liabilities following a buy-out.
In late March 2017, Rothesay Life approached LCP stating that it expected to shortly
obtain certain attractive long-dated assets which would allow it to improve its price to a
materially lower level than under normal circumstances. Rothesay Life could put this
Lane Clark & Peacock LLP is a limited lability partnership registered in England and Wales with registered number 0C301436, LCP is
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ADVICE
lower pricing forward for a number of transactions but chose to offer it to the POL
Section, subject to agreeing an accelerated timeline to target completion by end June
rather than the original target completion date of November 2017. Given that Rothesay
Life’s price was already materially ahead of the other insurers’ prices this provided a
potentially attractive offer.
Following the go-ahead from the Funding Sub-Committee, LCP requested final “no
regrets” prices from PIC and L&G. Both insurers put forward the lowest price they could
offer for a transaction within the accelerated timescale and an estimate of further
“aspirational” price reductions they may be able to provide if they were given a longer
period to review their pricing. In addition, following a meeting between the Trustee
Executive and Rothesay Life a further price reduction of £10m was negotiated.
The quotations considered at the Trustee Board meeting on 5 May 2017 showed that:
= Rothesay Life's price as at 31 March 2017 was materially lower (over £45m; c10%)
than the next best price; and
. Even the “aspirational” prices put forwards by other insurers (reflecting further
reductions that they may be able to provide if they were given a longer period to
review their pricing) were c£20m (c4%) or more above Rothesay Life’s price
As a result, it was agreed to enter into exclusivity with Rothesay Life on an “accelerated
timeline” targeting completion in mid-July, reflecting the significantly improved pricing
that this would achieve. In addition, beneficial features had been negotiated with
Rothesay Life including a price lock mechanism to a portfolio of the POL Sections’ gilt
holdings, significantly reducing the risk of adverse financial condition movements.
The accelerated timeline meant that a number of price adjustments would come through
during exclusivity (rather than in advance of making an insurer selection) such as
membership data, final benefit specification, due diligence on the data and benefits and
any changes from reviewing the appropriate provisions for expenses and salaries. The
exclusivity agreement with Rothesay Life therefore included a number of break clauses if
there were material changes in the terms or the costs.
In addition to the three insurers who provided updated quotations, we also considered
the possibility of other insurers who might be able to put forward a competitive quotation:
* Aviva had previously provided an indicative price for insuring the POL Section,
which was significantly behind the other insurers’ prices at that time.
* Scottish Widows has recently begun to quote on deferred liabilities and had
expressed an interest in quoting in late 2017. Their focus has been on older
deferred populations, as part of a buy-in covering predominately pensioners. We
therefore do not believe Scottish Widows could, at this time, put forward a credible
proposal for insuring the POL Section, given the very long dated liabilities.
. All other insurers in the market either quote for transactions comprising pensioners
only, or do not quote on transactions of the size of the POL Section.
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INSIGHT
Li Pp CLARITY
ADVICE
3303296 Since 31 March 2017, there has been a number of adjustments to the price and other
provisions. However, we wouldn't expect these adjustments to change the conclusion
Page 30f5 on the selection of Rothesay Life.
As part of their due diligence process, the Trustee commissioned an independent report
on the financial strength of Rothesay Life from Oliver Wyman.
2. Structure of the transaction
The transaction with Rothesay Life will consist of two bulk purchase annuity (“BPA”)
contracts:
* The “Post-2012 Buy-out contract’, which will cover current deferred and pensioner
members as well as any benefits accrued from 1 April 2012 for current POL
employees. This is designed to meet the requirements of the MoU, and will include
provisions to allow additional benefits to be purchased for members from surplus,
should the Trustee decide to do so. This contract will initially act as a buy-in
contract, with the Trustee having the option to move it to buy-out in the future; and
. The “Pre-2012 Buy-in contract” which will cover the “margin” benefit for current
POL employees which has resulted from promotional salary increases granted to
members’ pre-2012 benefit. This policy is designed to remove, where practicable,
the mis-match risks relating to the residual benefits (which due to the salary link
cannot be moved to buy-out). There will be triennial exercises to adjust the insured
benefits for members who have left service to ensure they match the Plan benefits
precisely. A reserve will be held within the POL Section to cover the salary mis-
match risk. The Trustee will have the option to move members to buy-out once
they have left service and a triennial exercise has been completed.
The following diagram sets out the structure of the transaction:
Employed members
can be moved to
buy-out after leaving
service
Post-2012 policy
can be moved to
buy-out in due
course
By entering into the two transactions together, the Trustee matches the benefits in the
POL Section closely so that the risk of further liabilities arising in future is significantly, if
not fully, reduced. This also provides a route to eventual buy-out and wind-up of the
POL Section through the BPA contracts.
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Page 4 of 5
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INSIGHT
Li Pp CLARITY
ADVICE
3.
1AS19 accounting treatment of an insurance transaction
POL will need to obtain advice from its actuarial advisers in relation to the IAS19.
accounting treatment of the purchase of BPA contracts and agree the treatment with its
auditors.
POL's actuarial advisers will need to consider a range of points including:
4,
Whether the purchase of a BPA contract is a “settlement”, where a loss will be
recognised as a charge to the income statement (broadly equal to the price paid
less the I[AS19 value of the liabilities). Whether it is a settlement will normally
depend on the extent to which there is an intention to move the insurance policy to
individual policies and remove the liabilities from the balance sheet.
If the purchase of a BPA contract is not a settlement then it will normally be
considered an investment. Any loss is then treated in the same way as any other
asset loss, and the loss is recognised in Other Comprehensive Income (“OC”)
outside of the income statement.
If the purchase of a BPA contract is not a settlement, the company directors then
need to decide the appropriate IAS19 asset valuation for the insurance policy.
Where the payments from the insurance policy exactly match the cashflows
underlying the liabilities, it is normal to set the valuation equal to the IAS19
liabilities. Where there is not an exact match then other valuation approaches are
possible. If the asset valuation for the insurance policy is less than the price paid
then this will result in an asset loss.
The comments above are based on a generic situation and we have not considered the
specific situation of the POL Section. We note that the interpretation of the accounting
treatment is a matter of judgement and different auditors can have different views. For
the POL Section, there are two BPA contracts being purchased which could each be
‘subject to different accounting treatments.
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INSIGHT
Li Prcvanrs
ADVICE
3303296 I hope this note is useful. Please contact me if you have any questions or would like to
discuss any of the points raised in more detail
Page 5 of 5
75 Prepared as an attachment to an email
at 19:18 on 10 July 2017
Charlie Finch FIA
Partner 10 July 2017
95 Wigmore Street
London W1U 1DQ
www.lep.uk.com
The use of our work
This work has been produced by Lane Clark & Peacock LLP under the terms of our written agreement with Our
Client, the Trustee of the Royal Mail Pension Plan.
This work is only appropriate for the purposes described and should not be used for anything else. It is subject to
any stated limitations (eg regarding accuracy or completeness). Unless otherwise stated, itis confidential and is
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Ifthe purpose of this work is to assist you in supplying information to someone else and you acknowledge our
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them,
POL-0023688
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Aon Hewitt
Retirement & Investment
Post Office Ltd
Date: 12 July 2017
Prepared for: Harpreet Singh, Head of Pensions
Prepared by: Dominic Grimley
Bulk annuity purchase — Comments on due diligence
advice
Background As discussed on the telephone, we have reviewed the Oliver Wyman due
diligence report and believe it provides clear reassurance that Rothesay
Life (“Rothesay”) are an appropriate counterparty for the bulk annuity
transaction. The overall opinion is summarised in section 1.3.1-1.3.2 of
the report.
Business model and Rothesay is a mono-line insurer, having built up a substantial annuity
risks borne back-book specifically through transfers from companies’ final salary
pension schemes and from other insurance companies’ existing annuity
books. This leaves it bearing specific risks, such as interest rate, inflation,
longevity and credit spread risk, without the diversification from other
business lines. However, Rothesay acts to addresses these risks through:
= Substantial hedging of each of these risks, including hedging of credit
risk (unlike some of its peers), and passing on most of its longevity
risk to the reinsurance market. Section 7.4.1 of the Wyman report
shows that spreads on investments and residual longevity exposure
are the biggest risks retained, reflecting the extent to which Rothesay
has eliminated interest rate and inflation exposure through hedging;
= Maintaining an operating solvency margin range significantly in
excess of regulatory requirements. To date Rothesay has always
reported a substantial cushion over the required reserves, even in
periods of rapid growth, because it has been able to raise capital from
investors to support larger transactions. The buffer in Rothesay’s
reserves over required solvency margins is shown in section 5.1.1
and in the company’s reporting in all previous years. It actively seeks
to maintain an additional buffer of at least 30% of required margins,
as an extra safeguard on top of the regulatory regime. Sections 8.2-
8.3 confirm that the key assumptions used to determine the required
reserves are in line with peers or more conservative.
= Close monitoring of its asset and liability position
Their professed focus is on gaining a more predictable level of return and
more stable solvency position, compared with peers, from their approach
to risk management.
Colmore Gate, 2 Colmore Row I Birmingham I B3 20D
t +44 (0) 121 2625000 I f +44 (0) 121 262 5099 I aon.com
‘Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority
Registered in England & Wales No. 4396810
Registered office:
The Aon Centre I The Leadenhall Building I 122 Leadenhall Street I London I EC3V 4AN
This report and any enclosures or attachments are prepared on the understanding that itis
solely for the benefit of the addressee(s). Unless we provide express prior written consent
sca inp to pre tie spots barrens cedtaue/ of soertntadod is anyone cea
of ac purpose or to anyone other than the addressee(s) ofthis report
Quality Assurance Scheme Copyright © 2017 Aon Hewit Limited, All rights reserved Empower Results®
POL-0023688
Aon Hewitt
Retirement & Investment
Ownership
Asset strategy
Administration
Action
Signed on behalf of
Aon Hewitt Limited
Post Office Ltd
The investors are predominantly four large private institutions (shown in
section 3.2 of the Wyman report, with debt issuance shown in section
4.7.6) and at some point this may change to a full or partial listing
Unlike some rivals such as Aviva and L&G, Rothesay does not have an
internal source of assets to invest in, and so has taken a relatively
innovative approach to designing its asset portfolio. As shown in section
10.3 the assets are invested across a range of bond-like investments, with
substantial holdings in gilt or similar quality stocks and hardly any bonds
rated below A. A further 40% of the portfolio was allocated to secured
lending, including collateralised asset loans to investment banks and
investment in residential property developments, or to infrastructure. This
left only 8% invested in normal corporate bond stocks at the end of 2016,
much lower than would apply to most annuity books. This will reflect
Rothesay’s views of relative risk-adjusted long-term returns available. The
remaining 4% is held in cash
The report does not cover Rothesay’s administration services, which are
outsourced to a ring-fenced team at Willis Towers Watson subject to
oversight by a team at Rothesay that monitor performance and manage
administration transfers. The trustees are likely to hold information on this
from presentations by Rothesay, and administration is generally regarded
as a strong point in the Rothesay service. Rothesay also has a historically
acquired administration service with JLT, but we assume this would not
be used here — this should be, and probably has been, confirmed to the
trustees.
Please let us know if you have any questions on this.
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POST OFFICE BOARD PAGE 1 OF 2
Post Office Limited Sealings
Author: Alwen Lyons Meeting date: 25 July 2017
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1522 to 1543 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1522 to 1543 inclusive in the seal register
is hereby confirmed.
Strictly confidential
POL-0023688
POST OFFICE LIMITED
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Date Register of Sealings Company Number
25.07.2017 21554540
‘Seal Number Date of Date of Persons Attesting Destination of
1 File Ref. Sealing Authority Description of Document To Document Document
1522 / Deed of 22/05/2017 27/04/2017 I POL and VOW Retail Limited. Deed of variation relating to agreement for _I Alwen Lyons. Company Secretary ‘CoSec Contract
variation supply of goods for resale through the Crown network and associated Depository
services to extend contract until 31 January 2018. (x2)
1523 / Deed of 2210512017 2710472017 I POL and VOW Retail Limited. Deed of variation relating to agreement for _I Alwen Lyons, Company Secretary ‘CoSec Contract
Variation the supply of goods for wholesale and online sales and associated Depository
services to extend contract until 31 January 2018. Deed of variation to
amend contract terms (reduce POL liability cap from £7m to £2m and
other amends). (x2)
7524 I Deed of 2205/2017 2704/2017 I POL and VOW Retail Limited. Deed of variation relating to agree ment for I Alwen Lyons, Company Secretary ‘CoSec Contract
Variation the supply of goods for wholesale and online sales and associated Depository
services to extend contract until 31 January 2018. Seal no 1524 x2
7525 / Deed of 22I05I2017 2710472017 I POL and VOW Relail Limited. Deed of variation relating to agreement for _I Alwen Lyons, Company Secretary ‘CoSec Contract
Variation the supply of goods for wholesale and online sales and associated Depository
services to amend contract terms (reduce POL liability cap from £7m to
£2m and change of supplier name from ISA Retail Limited to Vow Retail
Limited). Seal no 1525 x2
15267 Renewal 26/05/2017 26/05/2017 I Renewal of counterpart lease between GIB Properties Limited and Post I Victoria Moss, Deputy Company Jean Reynolds
of counterpart Office Limited relating to Ground Floor and Basement, 111 Baker Street I Secretary
lease London W1U 6SG. £220K per annum for a term of five years from
completion.
1527 TLicenceto I 01/06/2017 30/05/2017 I Licence to assign relating to Parkstone MSP, 27 Bournemouth Road, Victoria Moss, Deputy Company Jean Reynolds
Assign Poole, BH14 OEL between Post Office Limited, Arti Hiren Modi and Tejas I Secretary
Shah.
75287 Rent O106/2017 30/05/2017 I Rent Deposit Deed relating to Parkstone MSP, 27 Bo urnemouth Road, Victoria Moss, Deputy Company Jean Reynolds
Deposit Deed Poole BH14 OEL between Post Office Limited and Tejas Shah. Secretary
15297 08/06/2017 02/06/2017 I Agreement for sale relating to 65 High Street Lewes BN7 1AA between ‘Alwen Lyons, Company Secretary Jean Reynolds
Agreement for Post Office Limited and The Foundation Stage Forum Limited
Sale
7530 / Transfer 08/06/2017 02/06/2017 _I Transfer of whole registered fite in respect of 65 High Street Lewes BN7__I Alwen Lyons, Company Secretary Jean Reynolds
of Whole Reg 1A between Post Office Limited (Transferor) and The Foundation Stage
Title Forum Limited (Transferee).
1531 / Lease 08/06/2017 31/05/2017 _I Lease renewal by reference to the Original Lease in respect of title ‘Alwen Lyons, Company Secretary Jean Reynolds
number MS270806 the property known as part ground floor and
basement India Buildings Water Street Liverpool
1532 / Transfer 08/06/2017 07/06/2017 __I Transfer of whole registered fitle in respect of 2 - 3 Henley Street between I Alwen Lyons, Company Secretary Jean Reynolds
of Whole Reg Post Office Limited (Transferor) and Hawridge Properties Limited
Title (Transferee).
75337 08/06/2017 07/06/2017 I Agreement for sale relating to 2 - 3 Henley Street Stratford-upon-Avon ‘Alwen Lyons, Company Secretary Jean Reynolds
Agreement for CV37 6PU subject to leases between Post Office Limited and Hawridge
Sale Properties Limited,
Register of Sealings
Alwen Lyons
Page 2
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POST OFFICE LIMITED
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Date Register of Sealings Company Number
25.07.2017 21554540
‘Seal Number Date of Date of Persons Attesting Destination of
1 File Ref. Sealing Authority Description of Document To Document Document
1534 I Deed of 08/06/2017 07/06/2017 _I Deed of Assignment of Arrears relating to 2 - 3 Henley Street Stratford- I Alwen Lyons, Company Secretary Jean Reynolds
Assignment upon-Avon CV37 6PU between Post Office Limited and Hawridge
Properties Limited,
7536/7 Written 08/06/2017 08/06/2017 _I Letter to Daisy Wholesale Limited from New Call Telecom Limited and ‘Alwen Lyons, Company Secretary Stephenson
Undertaking Post Office Limited. Related to Project Jaguar - Acquisition of New Call Harwood LLP
Telecom Limited customer base. Sealed as 1535x2
1535 / Deed of 12/06/2017 0906/2017 __I Deed of Appointment and Removal relating to the Post Office Health TrustI Alwen Lyons, Company Secretary Bond Dickinson
Appointment & between Multiplex Financial Trustee Limited (continuing trustee) and
Removal Natasha Wilson (new trustee) and Harpreet Singh (new trustee) and
Charles Colquhoun (outgoing trustee) and Keith Murdoch (outgoing
trustee) and Post Office Limited (Appointor). Contract number 773
1538 I Notice of 79/06/2017 79/06/2017 I Notice of an election to use an alternative apportionment in accordance I Alwen Lyons, Company Secretary Jean Reynolds
an Election with section 198 Capital Allowances Act 2001 in respect of 65 High Street
Lewes BN7 1AA.
7537 I Deed of DOIOGI2017 74/06/2017 I Deed of Adherence to the Post Office Healthcare Trust between Post ‘Alwen Lyons, Company Secretary ‘CoSec Contract
‘Adherence Office Limited (Company) Natasha Wilson, Harpreet Singh and Multiplex Depository
Financial Trustees Limited (Trustees) and Post Office Management
Services (Employer) to admit the Employer to the Trust with effect from 10
September 2015. Contract number 774
1539 / Notice of 20/06/2017 19/06/2017 I Notice of an election to use an alternative apportionment in accordance ‘Alwen Lyons, Company Secretary Jean Reynolds
an Election with section 198 Capital Allowances Act 2001 in respect of 2-3 Henley
Street, Stratford Upon Avon CV37 6PU.
75407 Deed of 2A06/2017 75/05/2017 I Extension for a fully managed service for the manufacture, supply and ‘Alwen Lyons, Company Secretary ‘CoSec Contract
Amendment return of Post Office Careerwear and Workwear and supporting services. Depository
Executed as a deed - contract number 776.
1541 I Deed of 28/06/2017 27/06/2017 _I Deed of Surrender relating to lease of Post Office Premises Threshold Victoria Moss, Deputy Company Jean Reynolds
Surrender House, Shepherds Bush Green London between NEWCO 8915LIMITED I Secretary
and Post Office Limited (Tenant).
T5427 Licence to I 14/07/2017 72/07/2017 I Licence to Occupy between Derwent Holdings Limited and Pos t Office Victoria Moss, Deputy Company Jean Reynolds
Occupy Limited relating to Totem Signage, Walkden Town Centre, Walkden, Secretary
Greater Manchester.
75437 Transfer T4/07I2017 74/07/2017 I Transfer of whole registered title between Post Office Limited (Transferor) I Victoria Moss, Deputy Company Jean Reynolds
of Whole Reg and CN Anderson Ltd (08022092) CV Anderson Ltd (08022088) DS Secretary
Title Anderson Ltd (08022135) and RD Anderson Limited (08022162)
(Transferee) in respect of Adwalton House, Leeds 27 Industri al Estate
LS27 OSS. TR1 executed by seal. Related to same transaction but
executed by signature are Notice of an Election to use an Alternative
Apportionment in Accordance with Section 198 Capital Allowances Act
2001 (in duplicate) and Agreement for the Sale.
Register of Sealings
Alwen Lyons
Page 3
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POST OFFICE PAGE 1 OF 7
POST OFFICE BOARD
Performance Review — Health and Safety
Authors: Martin Hopcroft Sponsor: Al Cameron Meeting date: 25" July 2017
Executive Summary
Context
1.1 Keeping our employees healthy and safe is fundamental to Post Office success. This
is reflected in the Post Office Board’s legal responsibilities and members of the
board have both collective and individual responsibility for health and safety.
1.2 Our Health & Safety performance has improved significantly in the past 6 years
and we have a rolling 3-year plan to drive health and safety compliance, targeting
a reduction in four key safety metrics: accidents; lost time accidents; days lost;
and personal injury claims. Our H&S reporting and safety management system is
measured against the externally recognised standard, OHSAS 18001. We also
recognise the importance that wellbeing can play in creating engaged and
motivated employees.
Questions this paper addresses:
2.1 What is going well across health and safety and what are the current activities?
2.2 What are we doing to mitigate the key risks, including driving and robberies?
2.3 Are there any significant emerging risks?
Conclusion:
1. Accident Performance, including absence accidents and lost days, increased over
Q1, however, volumes returned to normal in June (see Report-H&S Metrics). A
recent increase in the number of accidents reported in May has been investigated
and remedial action taken with ongoing monitoring and support provided.
Benchmark data has been requested from suppliers for ARC in September.
2. Mitigating action has reduced road risk which remains at a low level. The Road
Risk Policy is being reviewed and an overarching policy will be developed for all
business drivers (including those using personal cars)
3. There was one CViT attack in May, and Post Office robberies remain higher with
a review being undertaken by the Security team.
4. Property H&S training workshops have been delivered to Persons in Control of
Directly Managed branches and coaching provided to Supply Chain Managers.
5. We have undertaken an annual deep dive review of safety and agreed a number
of areas for focus in 2017/18 including a review of road policy, guidance for lone
workers, safety of vacated buildings, competency and statutory compliance.
6. A number of initiatives have been implemented to raise awareness of mental
health resources. From August we aim to train and introduce up to 60 Mental
Health First Aiders to provide proactive support to colleagues across the business.
Input Sought
The Post Office Board are requested to note the current health safety performance and
content of this report.
Strictly Confidential Health & Safety Report July 2017
POL-0023688
The Report - H&S Metrics
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Summary of Safety Performance - YTD Period 3 (June 2017)
All Accidents ~ Monthly - Period 3
(Target to achieve a 5% year on year reduction)
Directly Managed Branch
Accidents P3 YTD
Number of accidents
' LW
P. pP2 P3
2016/17 @ 18
Accidents have increased by 32% YTD P3 (June) when compared to
previous year. There have been 41 accidents compared to 31 in
2016/17.
Lifting and handling related accidents remain at a low level. However
stepping and striking accidents have increased in the Supply Chain, esp.
the Stock Centre, with colleagues bumping into inanimate objects due to
a lack of attention. Investigations and follow up briefings have been
provided to raise awareness at the Stock Centre. There were also a few
vehicle door related injuries, due to faults or a lack of awareness.
There have been 7 lost time accidents in 2017/18 and 152 total lost
days which is an increase of 9% compared to 2016/17. Trauma related
lost days, following an attack, are down 50% on 2016/17.
DAYS LOST TO ACCIDENT / 000 EMPLOYEES -
CUMULATIVE
a
x 6.1.
_ p12
16.1
nt
114
0.0 0.0
PL P2 P3
— 2015/16 — 2016/17 — 2017/18
Post Office lost days: 28 in Period 3
DMB lost days P3 YTD : 57 (96 in 16/17) ~ 1 slip/trip & 1 lifting injury
Supply Chain lost days P3 YTD: 89 (43 in 16/17) 1 RTA, 2 slips & trips
Support lost days P3 YTD : 6 (6 in 16/17)
Trauma days lost: Supply Chain P3 YTD: 11 (21 in 16/17)
Post Office CViT Robberies ~ P2 (May 17)
Following a low volume of incidents reported in Q4 of 2016/17, there were
5 incidents reported in P1 and 1 incident in P2, which was violent and led
to injury. Trend is being monitored closely, esp. the Birmingham area.
ie
Year to Date
15/16 12
16/17 12
017/18 13
Supply Chain Accidents P3 YTD
20
15
: Lal
0
Year to Date
915/16 21
916/17 1
a17/18 24
Post Office (All branch types) Robberies
- P2 (May 17)
There were:
14 incidents in March v 9 (15/16)
(152 incidents in 2016/17 v 104 in 2015/16)
13 incidents in April v 3 (16/17)
15 incidents in May v 7 (16/17)
A review of causation and mitigating activity is
being undertaken by the Security Team and a
paper being prepared for GE.
2017/18
Violence - 2 vs 1 last year
Injuries - 1 vs 0 last year
Weapons - 13 (3 firearm) vs 5 last year (2
firearms)
Strictly Confidential
Health & Safety Report July 2017
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1.80
1.60
1.40
1.20
1.00
0.80
1.60
1.40
LTIFR - Lost Time Incident Freq Rate
1.00
Pi
P2 P3
——LTIFR DMB ——=LTIFR Supply Chain —-=LTIFR Post Office —==LTIFR Target
Lost Time Injury Frequency Rate (LTIFR) - Period 3 YTD
Supply Chain
YTD P3 - 0.592
2016/17 out turn - 0.586
2017/18 target - 0.500
All Post Office - Employee
YTD P3 - 0.357
2016/17 out turn - 0.168
2017/18 target - 0.180
Road Risk
P3 YTD Road Traffic Collisions
* 23 RTC’s - YTD.
* 7 at fault, 6 not at fault
* 11 minor RTC's, 2 major.
* Some additional analysis is being
done regarding fleet size, staff
hours and headcount for future
reporting.
Comparing 2016 v 2017
* There were 61 RTCs YTD in
2016/17 v 23 this year (17/18),
a 62% reduction YTD.
* At fault RTC’s were 34 in
2016/17 and have reduced to 12
in 2017/18, a 64% YTD
improvement
New providers have been confirmed for
maintenance and accident management
for Commercial fleet and for provision,
maintenance and accident management
of Business Car fleet. Enhanced MI and
accident analysis can be expected later in
2017/18.
An overarching Road Risk Policy, with
improved training and compliance checks
is being developed by the Fleet
Management team to cover Commercial,
Business Cars and Personal Car use.
Road Traffic Incidents - Cumulative
Zz
Pi P2 P3
—aAll 16/17 —aAll 17/18
—aAt Fault 16/17 —at Fault 17/18
Strictly Confidential
Health & Safety Report July 2017
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Summary of Wellbeing Performance - YTD Period 3 (June 2017/18)
* The overall attendance level remains stable at 96.8% YTD P3 (June 2017/18). Short Term absence is
0.9% YTD and long term absence is 2.2% YTD. Supply Chain LTS is reducing to 2.3% and DMB LTS
increasing to 2.7%
« Mental health related absence remains the most common cause of long term absence and there is an
increase in lost days in Directly Managed Branches. Some additional analysis is being undertaken by
our Occupational Health and HR Service Providers to understand trends and areas of concern to
target intervention.
+ Proactive activity across the business, includes ‘positive mental health awareness’ sessions for
colleagues, additional awareness training being piloted for line managers and the introduction of
Mental Health First Aid initiatives. The recruitment approach for MHFA is being developed with the
HR Business Partners and OH Assist ™ and training courses planned for August and September.
Business Area Absence Performance v Target - P3 YTD 2017/18
2017/2018 Sick Absence %ge
‘Gross
Period I Period I Period Iy.1.D I Hours
o1 02 03 _ITotats_I Target
FIN: FINANCIAL CONTROL MI 0.2%) 2.39%] 3.79%] _1.99¢] 3.300
FIN: SUPPLY CHAIN 4.0%! 3.7%! 3.9%! 3.9% 3.6%
FIN: HRSC 0.8%) 3.6%] 1.19] _1.80q 3.800
FIN: NO CONTACT CENTRES 3.7%] 1.9%I 2.3%] 2.89] 4.200
FIN: NETWORK OPERATIONS 2.1% 3.6%! 2.0%!) 2.6%] 3.3%
FIN: FSC 4.0% 1.7%] 2.19) 2.7% 3.490)
[RETA office sae] 3 106 3.400] 3.340] 3.306
RO: OMB SALES 3.8%) 3.3%] 3.79% 3.6%] 3.70%
RO:CS: NETWORK AGENCY SALES SVCES & TRANSFORMI 5.0%] _5.1%I 4.0%] 4.7%] 3.390.
RO: NETWORK DEVELOPMENT 0.7%) 0.9% 1.2%) 0.9%] 3.3%
HR:_ENGAGEMENT 0.096 0.696] 3.596] _1.39¢
0.0% 15%]
0.0%}
0.2% 1.0%
2.4% 1.9%
4.7%] 3.7%
3.6% 3.5%]
CIO: IT CHIEF TECHNOLOGY OFFICE 20.0%] 24.0% 40.0%] 27.49%]
Strictly Confidential Health & Safety Report July 2017
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The Report
2.1 What is going well across health and safety and what are the current activities?
2.2 What are we doing to mitigate the key risks, including driving and robberies?
SAFETY and ENVIRONMENT
Performance remains strong across many key health & safety metrics, including road
risk and CiT related robberies (see Report-H&S Metrics). The number of accidents
reduced in June, following the spike in May. Current activities include:
1. Person in Control (PiC) Training - Refresher PiC training and Property H&S
workshops have been delivered to all Supply Chain and DMB Managers. This is being
extended to all Support Centres and satellite offices. A Team Talk session is also
being developed for all colleagues in DMBs to ensure minimum awareness and
support for H&S and will be issued in July.
2. Property related risk (As reported in the Property Compliance Report)
e The overall level of risk remains low with property compliance 95.5%.
¢ Current activities include ‘Fabric inspections’, shipment of the site log books and
the re commencing of site audits. Vacant property inspections are currently
being reviewed on a monthly basis.
3. Health & Safety Activity Calendars - To ensure Health & Safety activities are
undertaken, H&S calendars have been updated and launched for 2017/18. H&S BPs
are attending Lead Team meetings to help raise awareness and compliance and this
is being extended across all areas of the business during July - September.
4. Road Risk - The volume of road traffic incidents continues to reduce. The Fleet
Management Team and H&S Team are creating an overall driver policy to provide
additional guidance and training to all commercial and business drivers including
those using own vehicles.
5. Security / Robbery Risk - A report is being developed by Security Manager to
support a GE discussion, due to the recent increase in Post Office robberies. CViT
related incidents have remained relatively low.
6. Hosted Directly Managed branches - Post Office and WHSmith H&S Managers
and Property Compliance Managers are working closely to share processes and
documentation and to resolve any local property related issues. Guidance for Post
Office Managers has been issued by Health & Safety Business Partners.
7. Environment - The Environmental Tactical Group is currently reviewing policy and
plans and checking energy, recycling and carbon data for year-end reporting with
the Facilities Management suppliers, CBRE and Servest.
Guidance has been provided to ‘Persons in Control’ for the management of waste
and to raise awareness of the risk of receiving fixed penalties/enforcement notices.
HEALTH & WELLBEING
1. The Health & Safety team are raising awareness of resources that are available to
colleagues at Support Centre, Supply Chain & Directly Managed team meetings.
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2. Mental Health awareness ‘Time to Talk’ sessions are being rolled out to all areas of
the business, including use of the Team Talk session to encourage the conversation
at Directly Managed Branches and Supply Chain sites.
3. The Occupational Health provider has provided guidance for ‘Mental Health First Aid’
training for volunteers across the business (approx 60) and selection criteria which
has been considered by the HR Directors and BPs in June. The preferred approach
has been agreed to invite applications, endorsed by line managers and HR BPs to
undertake short video interviews. Training is being scheduled for Aug / Sept.
4. Anew MH Awareness training product is being piloted for line managers in July.
. Health Checks will continue to be offered to all employees (either Kiosk or Mobile)
6. The range of available OH services has been extended and current activity includes:
o Launch of the Post Office Wellbeing Portal in July, enabling access (externally
and internally) to all services and resources through one landing page.
Extension of the absence ‘case management’ pilot, OH Assist™ Advice Plus.
Training provided to Support Centre call advisers and team leaders for
‘difficult’ and traumatic calls to be extended to Contract & Security Managers.
uw
What additional activity has been undertaken to address specific risks?
1. Compliance to Driving and Mobile Phone Policy
A policy check has been incorporated into the local risk assessment undertaken by
all line managers who have staff who drive for work. This will be incorporated into a
new online training module that has been developed and will be issued in August via
Success Factors.
Environmental Policy
The Property Compliance and H&S teams are working closely with Legal, Servest
and IT to minimise risk associated with waste, especially hazardous. Guidance has
been issued to Persons in Control to minimise the risk of waste reaching landfill sites.
Security and lone working in Support Centres
H&S, Property and Security Managers are reviewing personal security arrangements
in place at all Support Centres and satellite offices. A report will be discussed at the
GE Safety Board in July, following the current review of Security at Finsbury Dials.
Trauma Support and Self Harm / Suicide Policy
Additional training has been provided to call handlers in Chesterfield and the HR
Service Centre to help them manage ‘difficult calls’, including threats of suicide.
Similar appropriate training will be extended to their team leaders, contract advisers
and field advisers who may also benefit. This is being planned for August -
September.
5. Fire Training and Evacuation Plans — Finsbury Dials
Additional Fire Wardens and First Aiders have been identified for Finsbury Dials and
are receiving training as a priority. Additional Persons in Control are also being
trained. Communications have been issued to remind all staff of the evacuation
plan. Online Fire Training has been issued in July via Success Factors to employees.
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2.3 Are there any significant emerging risks for 2017?
1. Change Programmes
« H&S Business Partners are monitoring absence, accident causation and working
closely with lead teams, providing training and improving the focus on safety,
attendance management and wellbeing across the business.
e The Induction Programme, including H&S content, has been reviewed and
updated to ensure line managers of new employees complete the checklist.
e Support and training has been provided to upskill Supply Chain Shift Managers,
ensuring records brought up to date to meet OHSAS 18001 audit requirements.
Property / IT - Disposal of hazardous waste - Previous concerns on how we
dispose of IT hazardous waste, in particular Horizon printer cartridges are being
addressed by IT. Current Objectives include: Closure of outstanding remedial
actions from previous ‘5 Year Electrical Inspections’, further fabric inspections and
site audits to review the risk of vacant buildings and quality of building fabric. Our
CRC submission will be completed for 16/17 by CBRE in July.
2. An annual Health & Safety ‘deep dive review’ has been undertaken by the GE
H&S Sub Committee (Safety Board).
Areas carrying a higher risk of fatality or serious injury were reviewed including:
a. Property (Fire, Electrical, Fabric and Asbestos, Legionella, behaviour)
b. Security (ATMs, Agents robberies, Supply Chain attacks)
c. Road Risk for Commercial and Business Drivers (maintenance, fatigue and
distraction, alcohol and drugs, mobile phone use, working hours and travel
policy, lone working).
A review of H&S in Supply Chain, Directly Managed branches and Support teams
also took place. GE Committee members and senior leaders for each function
discussed and reviewed the risks and considered the current controls, agreeing
areas for prioritisation and attention during 2017/18. These include:
a) Implementation of a single road risk policy for all business drivers and to
monitor its application, including document checks and risk assessments
b) Identifying and then providing guidance and training to all lone workers
c) Improving safety of our vacated buildings, to include surveys of external fabric
d) Review and reissue personal security guidance for agents and consider best
ways to share guidance for H&S and Business Continuity related matters.
e) Improve H&S competency of new line managers and PiCs across the business
f) Monitor compliance to H&S Activity Calendars and procedures and provide
reports to GE, Safety Board and Senior Leaders to enable them to support
and satisfy their business areas are compliant.
g) Consider an external audit of H&S governance, procedures and compliance
during the second half of the year.
h) Urgently increase the number of Fire Wardens and First Aiders at Finsbury
Dials and review provision at all largely populated sites.
i) Summarise and review the business crisis plan updates and evacuation plans.
j) Review Stay Calm manuals, update contents, simplify instruction and
guidance and develop a consistent process that is fit for purpose.
An action plan has been developed and an update will be provided to the GE in August
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PAGE 1 OF 1
Post Office Limited Board Meetings
Author: Alwen Lyons Meeting date: 25 July 2017
Executive Summary
Context
The Directors are requested to note the future meetings dates scheduled in respect of
Post Office Limited Board meetings.
Input Sought
The Board is requested to note the future meeting dates.
The Report
2017
Date Time Notes
Tuesday 26 September 2017 09.30 - 14.00
Tuesday 31 October 2017 09.30 - 14.00
Thursday 23 November 2017 13.30 - 17.00
2018
Date Time Notes
Thursday 1 February 2018 11.45 - 16.30
Tuesday 27 March 2018 11.45 - 16.30
Thursday 24 May 2018 11.15 - 16.00
Tuesday 26 June 2018 TBA Board Away Day
Wednesday 27 June 2018 TBA Board Away Day
Tuesday 31 July 2018 11.45 - 16.30
Tuesday 25 September 2018 11.45 - 16.30
Tuesday 30 October 2018 11.45 - 16.30
Tuesday 27 November 2018 11.45 - 16.30
Board July 2017
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Post Office Board Agenda - Draft
26' September 2017 + Tim Parker (Chairman) + Alwen Lyons None
+ Richard Callard * Steve Ashton (item 4)
Start Time Finish Time + Tim Franklin + Nick Kennett (item 4, 5 & 6)
10.30hrs 14.45hrs + Virginia Holmes + Kevin Gilliland (item 5, 6 & 7)
+ Ken McCall + Martin Edwards (item 7)
Papers are due 19" September 2017 * Paula Vennells
* Alisdair Cameron
Agenda Item Action Needed Purpose ad Timing
41. Minutes of previous Board and Decision Minutes formally agreed. Alwen Lyons 10.30 — 10.35
Committee meetings including
Status Report
2 CEO Report CEO report noted CEO to update the Board on the report. CEO 10.35 — 10.55
Including IR update
3. Financial Report For noting CFO to update the Board on the report CFO 10.55 — 11.15
4. POMS strategy Steve Ashton / 11.15 — 11.45
Nick Kennett
BREAK 11.45 — 11.55
5. Performance Report - FS&T For information and To review performance of FS&T. Nick Kennett 11.55 — 12.25
input
6. Performance Report - Retail For information and To review performance of FS&T. Kevin Gilliland 12.25 — 12.55
input
ts Retail Acquisition Kevin Gilliland / 12.55 — 13.25
Martin Edwards
LUNCH 13.25 — 14.00
8. Board Committee Chair updates For noting To update Board 14.00 - 14.15
(verbal)
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Post Office Board Agenda - Draft
9. Ratifications of decisions made by 14.15 — 14.25
correspondence
10. Items for noting 14.25 - 14.35
10.1 Sealings For noting Board aware of the affixing of the seal
10.2 Health & Safety For noting To update Board
10.3 Meeting dates and forward
agendas
11. AOB 14.35 - 14.45
CLOSE 14.45
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