POLB(11)8th
POLB11/67-78
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Post Office Limited — Strictly Confidential
Post Office Limited
(company no. 2154540)
Minutes of the meeting of the Board of Directors
held at 148 Old Street, London EC1V 9HQ on 13"' December 2011
Present:
Alice Perkins
Neil McCausland
Les Owen
Paula Vennells
Chris Day
In attendance:
Alwen Lyons
Apologies:
POLB11/67
POLB11/68
ACTION:
Chris Day
ACTION:
Chris Day
POLB11/69
(a)
(b)
(a)
(b)
(a)
Chairman, Post Office Ltd
Senior Independent Director, Post Office Ltd
Non Executive Director, Post Office Ltd (items 11/67 — 11/75)
Managing Director, Post Office Ltd
Chief Financial Officer, Post Office Ltd
Company Secretary, Post Office Ltd
MINUTES OF PREVIOUS MEETINGS
The minutes of the meeting of 10"" November 2011 were agreed:
the minutes of the POFS Board (POFS(11)4") were noted;
the minutes of the FRES Board (FRES(11)3") were noted.
MATTERS ARISING — Status Report
Les Owen clarified that the management information required to
track the insurance product risk would be more useful if it contained
trends and triggers to predict if any action was required. Paula
Vennells explained that weekly tracking was undertaken and future
Board Reports would show a trend versus a moving monthly
average. The use of aggregators to “buy policies” was only used as
a last resort as this was an expensive solution;
Chris Day reported that he has had discussions with Neil
McCausland on the content and structure of the Finance Report.
The Chairman asked for sight of the revised version taking into
account Neil McCausland’s input. Les Owen said he was now
comfortable with the report and had no further comments.
NETWORK TRANSFORMATION UPDATE
Sue Huggins explained that the planned changes to the Network
involved two separate programmes running in tandem but on
separate timelines. The Crown Office work, taking these Branches
back to profit, was an emerging plan. The Network Transformation
was in pilot and preparing to rollout. The programmes had different
challenges not least the engagement with the unions and
Federation;
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The Crown Office Plan
(b) I Sue Huggins emphasised that a lot of work had gone into working
with the NFSP driving Network Transformation planning, and that a
similar engagement had started with CWU and CMA/Unite.
However there were risks in the Crowns’ plan as it included no pay
increase for 3 years; reduction of circa 790 staff; challenging
changes to working practices including moving to monthly
balancing, and all of these issues could have Industrial Relations
(IR) implications;
Les Owen asked how we would achieve these changes with the
existing commitment to non-compulsory redundancy. Sue Huggins
explained that the plan included a 290 reduction in the first year
which looked as if it could be covered by redeployment, natural
wastage and voluntary redundancy. The last offer of voluntary
redundancy was made to these staff in 2009;
Neil McCausland suggested that there would be less need for
redundancy if we could drive more sales to enable longer opening
hours with different staff contracts. Sue Huggins explained that at
the trial office in Birmingham, although there had been no staff
reduction to date, to make the economics work there would need to
be changes when further automation was introduced;
(c) _ the next trial Crown will be in Haywards Heath where the branch is
being moved into a host retailer (the Coop) but still run by Post
Office colleagues. The trials are being used to develop a range of
solutions which can be deployed across the Network such as longer
opening hours; self service offerings including the use of lobbies for
out of hours access. Neil McCausland encouraged the Business to
be as innovative as possible in the second phase of the trial,
especially around plans for Government Services. Sue Huggins
acknowledged the need to make any new services being offered
very visible and emphasised the opportunities we have by using
Trafalgar Square branch to showcase what a future Crown Office
could offer;
ACTION: (d) _ the Chairman asked what support the Board could give to the team.
Kevin Gilliland Chris Day reported that Kevin Gilliland had asked for support from
the Board if the IR landscape becomes difficult. It was agreed that
an updated Crowns plan be brought back to the Board next year to
cover the new economic model, optimum self service vending and
the impact on Crown branch numbers;
Network Transformation Plan
(e) Neil Ennis explained the economics highlighted in table 5.2 of the
paper (POLB(11)57). Neil McCausland asked about the retail uplift
and staff cost reductions. Neil Ennis acknowledged that information
from the pilot offices suggested these improvements were realistic;
(f) I Sue Huggins confirmed the three part process for the rollout of the
programme:
e suitability test — taking into account the Subpostmasters’
interest, alongside Network considerations and financial
hurdles;
Action:
Alana Renner
Action:
Kevin Gilliland
(g)
(hy
(i)
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e selection — deciding on the appropriate model for the branch,
including a face to face discussion with the Subpostmaster,
testing their Business plan;
e prioritisation.
The year 1 priorities will include all suitable onsite conversations
and large geographically dispersed Mains, as these two categories
will reach 35% of our customers, and produce the highest return;
the Chairman asked how we were engaging the communities who
will be affected by these changes. Alana Renner explained that the
communication and engagement plan was in place and would start
early in the New Year, Sue Huggins explained that all changes
would include a 4 week communication with customers. However
any off site move required a 6 week public consultation. She
highlighted the emerging risk that Consumer Focus were asking for
consultation for all changes which would be very expensive and
slow the programme down. This risk has been highlighted to BIS
as this change would cost the business £6m to implement;
the Chairman asked if the programme was considering rationalising
branches in areas of over provision. Sue Huggins explained that
this was being factored into the plans, but if a closure was needed
then a full public consultation would take place;
Les Owen referred to an article in the Telegraph originating from
Consumer Focus which suggested that the new Locals model
provided a reduction in service and that these offices were likely to
run out of cash. Paula Vennells explained that there was no
substance to the article and told the Board that she had written to
the Telegraph as well as lodging a complaint with BIS and
Consumer Focus as this article was very unhelpful. Neil
McCausland asked if we should bring forward the communications
plan to deal with this misinformation, but Paula Vennells explained
that this had been considered but because of Christmas it had been
decided to stay with the January timing. Sue Huggins informed the
Board that new customer research would be available this week
which would be published to try to mitigate the Consumer Focus
view;
the Chairman asked what support the Board could give to the
Business as it transformed the Network. Sue Huggins emphasised
the need to believe in the plan and be confident in its deployment;
Les Owen asked that in the event of any adverse publicity in the
National Press, that the Board receive an email with 2 or 3 bullet
points to explain the facts. Sue Huggins also warned the Board that
they may be contacted by MPs, local dignitaries or even
subpostmasters asking for their support for certain branches and
that the Board should explain the appropriateness or otherwise of
such approaches, as they could undermine the integrity of the
process;
the Chairman suggested that the programme team return to the
Board every quarter for an update.
POLB11/70
ACTION:
Martin Moran
POLB11/71
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TELEPHONY STRATEGY / BROADBAND AND TELEPHONY
TENDER
Martin Moran presented the current Telephony Strategy and the
four options considered for the future. Les Owen asked how the
business has managed to sustain a lower quartile price with upper
quartile service. Martin Moran explained that customer service in
the telephony market was poor and by maintaining a dedicated call
centre the Post Office's complaints were relatively low, and this
would continue with a new supplier. He emphasised the need to
move to a better cost base than provided by the current supplier;
Neil McCausland supported the chosen option but asked why the
Telephony offer faired so badly on comparison sites if it was such a
good customer offer. Martin Moran explained that the pricing was
complicated and these sites did not always compare like for like.
Les Owen asked for research to be undertaken to understand why
our rating is so low on comparison sites and how we could improve
our position as well as our search engine ranking. Martin Moran will
circulate an e-mail explaining how the comparison sites and ranking
work.
Martin Moran explained that 95% of our sales are driven by in-
branch and call centre activity but acknowledged it was desirable to
have an accurate online position;
the two tenders were discussed and Martin Moran stressed that he
would be comfortable working with either company. Les Owen
asked how visible any change would be to the customer. Martin
Moran explained that the customer should not see any change as
the crossover would be facilitated by dual running of call centres for
a few weeks to ensure new staff are trained with the Post Office
‘tone of voice’ etc, Les Owen challenged whether a marketing
campaign before any change was advisable but was reassured that
the size of customer base enabled cost savings so any campaign
would be an advantage;
the Chairman asked if the Board were content with Fujitsu being
one of the tenderers because of the business’ reliance on this
company. Les Owen emphasised that there had been issues with
the SAS70 and audit but the Board accepted we should progress as
proposed. Martin Moran explained that a paper would come back
to the Board in January for a decision;
the Board endorsed the Telephony strategic direction.
EAGLE UPDATE
Nick Kennett reported that POL and Bank of Ireland (Bol) have
finalised commercial terms and non-binding Heads of Terms should
be ready for signing forthwith;
the deal is better than that laid out in the Board mandate and is
close to the target position. The Chairman congratulated Nick
(b)
(c)
(d)
(e)
(f)
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Kennett on the negotiations;
Nick Kennett explained that the main focus of recent negotiations
had been on triggers for termination and that he was comfortable
that these now give POL enhanced contractual protection.
POL termination rights will be based on Bol UK breaching
prescribed events, based on Bol UK failing to:
® maintain a buffer above its minimum regulatory Core Tier 1
capital requirements (meeting both base and stressed
scenarios);
e maintain a buffer over Individual Liquidity Guidance (ILG). In
certain stress scenarios the liquidity ratio may fall below ILG,
with an agreed remediation plan with the Regulator;
° meet regulatory requirements (by providing a Recovery and
Resolution Plan —- RRP), including entering a Special
Resolution Regime (SRR).
In addition POL. will have termination based on Bol’s insolvency and
inability to obtain funding;
Bol UK will have in place a business continuity plan to ensure that it
can continue to operate in the event of a failure of its parent;
Neil McCausland asked if this plan would be in place before the
contract extension was agreed; Nick Kennett explained that the
contract will require Bol UK to establish such a plan. Failure to meet
this condition or its regulatory obligation in this regard would
constitute a termination right;
Nick Kennett reported that Bol Group had confirmed that it could
hold over a market announcement;
Les Owen asked how the business would know if a breach had
occurred. Nick Kennett explained that POL will receive Bol’s
monthly management and quarterly capital and ILG certificates and
summaries of Arrow and RRP reports to provide continual comfort
as to its financial position. Nick Kennett emphasised that the
contract negotiations have still to agree a resolution period in the
event of a breach. Les Owen agreed that the right to terminate was
very powerful and wanted that right to remain in place for a period
of time to enable the Post Office to find alternative providers.
Nick Kennett laid out the actions POL could take on termination
caused by a breach. He explained that the actions on termination
would be dependent on the cause of the termination and the then
prevailing market conditions:
e Key focus would be continuation of operations in Ireland
through the use of pre-emptive rights (in the event of a failure of
Bol’s parent);
° Transfer of Bol business to a “white knight” (including
potentially POL acquiring the book) in the event of the failure of
Bol;
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It is critical that the principles to achieve such an outcome are
enshrined in the contract;
(g) Nick Kennett emphasised that the process to approve the extension
was underway in the Treasury with a follow up meeting planned for
21% December;
(h) Neil McCausland raised the question of whether a Post Office
universal credit bank account would be acceptable to the
Government if provided through the Bol. Paula Vennells reported
Lord Freud had questioned this, and she had asked BIS to
investigate. Stephen Lovegrove had fed back the view that this had
ACTION: been a one off comment and was not an issue for Government.
Paula Vennells Paula Vennells will be seeing Lord Freud again in Q1 and will check
this is the case;
(i) the Chairman asked how the business would keep track of the
costs involved in dismantling POFS. Nick Kennett explained that a
high level Business Case would pull together the costs as there
would be some operational overlap, but that POL needed this
internal expertise. Les Owen asked who would take the lead on
insurance products. Nick Kennett explained that this had still to be
resolved. Les Owen accepted that Bol do have legitimate interests
but that he wouldn’t want POL to be beholden to them for insurance
products in which they are not the manufacturer. Nick Kennett
accepted this was an outstanding item before the Heads of Terms
could be signed;
ACTION: (j) the Chairman asked Nick Kennett to come back to the Board when
Nick Kennett the detail of termination rights and the principles on which the
business leads on products had been agreed;
({k) the Board agreed that when the Contract was ready for signature
after input from external counsel, it should be signed on behalf of
the business by Paula Vennells and Chris Day;
ACTION: (l) Nick Kennett was asked to produce a noting paper for the next
Nick Kennett Board to cover the contingent liability risk from the existing
insurance business and actions taken to mitigate.
POLB11/72 MANAGING DIRECTOR’S REPORT
(a) The Managing Director's report was noted.
POLB11/73 HEALTH & SAFETY UPDATE
(a) Paula Vennells reported that since the report was written three
additional armed robberies had taken place.
The Health and Safety paper was noted.
POLB11/74 FINANCE / PERFORMANCE UPDATE
(a) Performance report for Period 7 was noted.
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(b) Chris Day gave an update on Period 8 during which the year to date
trends continued, project spend was flat. The full year PBIT was
still expected to be in excess of £50m.
POLB11/75 POSTAL MUSEUM
(a) Minutes shown at Appendix A because of Conflicts.
POLB11/76 MDA
(b) I Minutes shown at Appendix B because of Conflicts.
POLB11/77 NOTING PAPERS
(a) © Olympic Plan (POLB(11)64) was noted.
ACTION:
Susan Crichton (6) ® Significant Litigation Report (POLB(11)65) was noted. Susan
Crichton was asked to give an oral update at the January Board.
ACTION: (c) e Procurement Procedures for Government Contacts
(POLB(11)66) was noted, Paula Vennells explained that she
continued to have informal conversations with BIS and the
Ministers encouraging them to look at new ways to draw up
procurement rules to help the Post Office. Martin Moran would
update the Board at a future FOoG presentation.
Martin Moran
(d) ° Post Office Sealings (POLB(11)67) was noted.
(e) ¢ Pensions Overpayment (POLB(11)68) was noted.
POLB11/78 CLOSE
(a) There being no other business, the Chairman closed the meeting.
' Alice Perkins
Pu Jonsson Bor,
POLB11/75
ACTION:
Chris Day
(a)
(b)
(c)
(a)
(e)
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Appendix to Minutes POLB(11)8"
POSTAL MUSEUM
Les Owen declared an interest as he is also a member of RMH
Board;
Chris Day explained that the Post Office contribution to the Postal
Museum had increased significantly from the original £3m loan
signed off by the Board. The increase was brought about because
of a change in the cost proportion attributed to POL (moving from
7.65% to 50%) resulting in an annual running cost of £1m for twenty
years;
the Chairman asked if this amount could be reduced through
negotiation stressing that she did not want it included in the main
MDA negotiation;
Chris Day was asked to wait until the MDA negotiations were
complete and then to challenge the assumptions. Post Office was
happy to support the loan but not the ongoing costs as suggested
by RM;
Paula Vennells suggested that if RM will not reduce the apportion of
costs falling to POL it may need to be escalated to ShEx to ensure
they are comfortable with this contribution.
POLB11/76
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Appendix to Minutes POLB(11)8"
MDA/MSA
Property
Paula Vennells explained that Royal Mail had now agreed to
transfer the property to POL at no cost and that separation costs
would be picked up by the first party to move out of premises (likely
to be Royal Mail in the majority of cases). However, Royal Mail still
required POL to pay rent on the properties for the life of the MDA,
albeit reduced in the second 5 years.
Collections and Returns
Paula Vennells reported that RM have now removed the September
2012 Business Case approval breach point from the exclusivity for
collections and returns. RM have agreed that this would be
replaced by a ‘letter of comfort’ between the two Chairmen
emphasising that both businesses want to work together and realise
they will need to invest to enable them to do so;
RM had suggested a 5 year exclusivity breach point but this is not
acceptable to POL. Paula Vennells explained that POL needed
protection if RM were unable to deliver the agreed figures and that
she had asked RM to consider a three year breach point if targets
had not been met and the businesses had not been able to resolve
the issue, Paula Vennells explained she had further discussion
planned after the Board Meeting;
Neil McCausland was uncomfortable with the returns targets being
suggested and the lack of firm commitment to the significant
investment required. He would prefer hard targets on market share
and business investment but supported the view that it would be
better to work with RM if possible. Neil McCausland pointed out
that the market was growing at 20% a year and other organisations
were moving quickly. The Chairman supported Neil McCausland
although acknowledged that it would take time for RM and POL to
be ready so the modest growth in the first year might be acceptable
and stressed the need to work collaboratively with Royal Mail in the
future and to build on the positive negotiations in the collections and
returns area.
Tax
Chris Day reported that there had been good progress made with
Matthew Lester on Tax and VAT issues. The Tax losses had now
been resolved and it had been agreed that the stamp solution
should not disadvantage POL. The only area where VAT could be
an issue was in the MSA where POL would have to pay VAT on any
services provided by RM after the VAT group is broken. The worst
case risk would be £5m in 2014/15 but POL would work to mitigate
this risk, The Board accepted that POL would have to pay this VAT
if it arose.