POL00103334 - POL Board of Directors - various documents from March 2012, including Information Technology and Change Transformation Programme - Request for Approval by the Post Office Board.

Evidence on official site

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POLB(12)28
POST OFFICE LTD BOARD
Information Technology and Change Transformation Programme — Request for Approval
1 Purpose
The purpose of this paper is to:

1.1 Request approval for the Information Technology and Change (IT&C)
Transformation Programme which will increase IT&C’s capability to support Post
Office business transformation during 2012-15, whilst restructuring the Post Office
IT supplier base.

1.2 Seek authorisation to spend £13.38m of OPEX to deliver the programme, which will
be incurred from FY11/12 through to FY15/16 (summary financials provided at
Appendix 1).

2 Background

2.1 IT&C has a pivotal role in supporting Post Office business transformation. A
significant increase in capability and capacity is necessary to provide the volumes of
skills and resources to deliver the business programmes and IT enablers to drive the
business change. At the same time Post Office is faced with the imminent expiry
and re-procurement of the majority of its IT supplier contracts, e.g. Fujitsu in 2015
for Horizon counters.

In addition, as part of the Post Office Strategic plan, IT&C has committed to a
considerable cost challenge. Whilst business transformation activities will add to the
IT&C cost base, the FY2015-16 target is to maintain the FY2012-13 cost base
(approximately £120m). This is a significant challenge given the level of business
transformation planned. More details can be found in Appendix 1.

The programme has defined a strategic approach for IT&C to address these
challenges covering the IT supply chain' and IT&C operating model. The proposed
models adopt industry standards and good practice whilst remaining pragmatic to
best meeting Post Office needs. They are recognised across the IT industry and,
along with the alternate options considered, have been validated by Gartner®.

3 Governance

3.1. The strategic approach and business case have been reviewed and agreed by the
Programme Board, all individual members of the ET, and by Finance.

3.2 ET and POLIC have approved the programme and associated investment.

vendor supply chain or supply chain - the make-up of suppliers who

vide IT services and products to Post Office.

jet operating model - the future structure of how IT & Change will

anise itself in terms of sses, organisational structure, and
management of its technology domains provided by suppliers, e.g. data centre
provision, service desks etc.

* Gartner - a leading informati technology research and advisory organisation
providing objective insight across all areas of IT.

1

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4 Approach

4.1 The programme has two major activities which will be undertaken over the next
three financial years.

4.2 {T-supply chain re-configuration

The programme will move Post Office from over 60 individual IT supplier contracts
to an industry standard that has prime suppliers providing services through a
simplified ‘tower’* model. IT services will be structured into four primary ‘towers’ of
Service Desk, Workplace, Networks and Applications/Data Centre/Infrastructure
(see Appendix 2 for details). All prime suppliers will be managed by a Service
Integrator® operating across the tower structure.

In addition, the programme is establishing several IT Frameworks® (see Appendix 2
for details) to allow the efficient sourcing of ad-hoc specialist IT services for Post
Office. This approach offers speed to market for new products and services,
provides the opportunity to transform Post Office services, and ensures value for
money.

Procurement and service transition will be phased to minimise impact on business
transformation activities (as detailed in Appendix 3):

e The Service Desk tower will be bundled with the Service Integrator and
targeted for Q1 2013 award. This will offer optimum appeal to potential
suppliers in terms of scope of the requirement and value, and will align IT
service delivery with the first line support functions

¢ Workplace, Network and Applications/Data Centre/Infrastructure towers will be
targeted for Q3 2013 award

e Following award, phased transitions will occur to minimise exit costs and
impact on Post Office separation activities

4.3 IT&C operating model implementation

The programme has identified a number of areas where there is a requirement to
uplift the capability of IT&C. In particular managing current Post Office IT service
delivery has been identified as a critical area to the success of maintaining current
services, supporting the transition to the new IT supply chain and one where the
required capability uplift is significant.

To address this challenge, an external’ Service Integrator will be procured to
manage the performance and deliveries of Post Office IT suppliers. A number of
IT&C colleagues will be transferred to the Service Integrator which will avoid
knowledge loss. Contract award is targeted for Q1 2013.

T Tower - a group of related IT services, delivered by a prime supplier
either directly or through sub- contracting, e.g. Data centres
° Service Integrator - an organisation to whom the current Post Office IT
service delivery function will transfer to manage the IT Supply Chain,
standardise services and implement cost-effective business operations.
° IT Framework - a group of pre-contracted suppliers through which IT services
and products can be competed and procured, without requiring a full OJEU
exercise.

External Service Integrator - the approach to achieving the required Service
Integrator capability through an outsourced model has been independently
challenged by Berkeley Partnership (Post Office SPMO consultants) and
determined to be strategically appropriate to the proposed IT Supply Chain
model and timing within the context of the wider Post ice transformation
agenda.

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The Service Integrator will support the creation of a post-transformation IT&C
organisation that is business focused, responsive and flexible. It will enhance the
quality of services provided by IT&C to its customers, provide a catalyst for the IT
supply chain to transform how services are delivered (e.g. new technologies,
standardisation, off-shoring), and deliver increased value for money.

Robust terms of engagement will be established to make certain Post Office
achieves optimal utility while minimising costs with the Service Integrator. IT&C will
realign its structure, grades and capability to ensure that we have adequate
assurance and governance in place for the management of the Service Integrator.

Investment will be made to up-skill the retained IT&C organisation’, change ways of
working and leverage the Service Integrator to augment IT&C project resources
where appropriate. This approach will deliver a step change in the maturity and
skills of IT&C.

Costs

5.1. The costs for implementation of the programme are £13.38m (as detailed in
Appendix 1).

5.2 The programme has established a baseline IT&C cost base through detailed
evaluation of the current year spend and projected transformation impact. This
baseline has been reviewed and agreed with Finance and aligns with the exit level
used as part of the strategic plan submission to Government in 2010.

5.3 The programme's business case expected scenario targets a return to an IT&C cost
base of £120m by FY2016/17, following an intervening increase due to the Post
Office transformation agenda.

5.4 Following Post Office Board approval, the expected scenario will be baselined as
the operating plan IT&C cost target.

Benefits
6.1 The IT supply chain and operating model reconfiguration will:

e Deliver an expected financial benefit of £57.1m (cumulative until 2016/17) and
a sustainable IT operating run rate reduction of £15.5m (11.5%). These will be
derived through: competitive re-procurement, service transformation, Service
Integrator efficiencies, economies of scale, and a fit for purpose operating
model

Strategically (versus tactically) re-procure key contracts

Implement fit for purpose commercial models

Provide financial transparency and variable costing

Introduce industry standard solutions

Provide a catalyst for IT supply chain service delivery transformation

Provide leverage over the current suppliers

Provide the opportunity to introduce innovative solutions

Enable IT&C to deliver and support the Post Office strategic plan

Enhance IT&C capability (e.g. improved demand management)

eooeceeeo eee

® Retained Organisation - IT 1 retain the core teams for Programme and
Project Delivery/Assurance, hitecture, Resource Management and Vendor
management. These teams will undergo significant up-skilling through

training, recruitment, and collaboration with the Services Integrator.

3

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Next Steps

7.1 Following Post Office Board approval immediate staff and supplier engagement will
occur:
e IT&C staff engagement — 19/20 March 2012
Invites sent and publication of Market Engagement Day — 19 March 2012
Incumbent supplier engagement — 19 to 28 March 2012
Market Engagement Day — 29 March 2012
OJEU and PQQ publications April 2012

ooee

Risks/Mitigation

8.1 The key risks to the programme are provided in Appendix 4.
Recommendations

The Board is asked to:

9.1 Endorse the proposed strategy to deliver an effective Post Office IT supply chain
and uplift in T&C capability.

9.2  Authorise expenditure of £13.38m for the implementation of the programme.

Lesley Sewell
Chief Operating Officer
March 2012
Post Office Ltd — Strictly Confidential

Appendix 1 - Financial overview

This section provides an overview of the costs and benefits of the programme

Comparison of Run costs
Optimised Baseline
Expected Scenario
Expected Saving (€)
Expected Saving (%)
Potential Scenario
Potential Saving (€)
Potential Saving (%)

Investment (£)

Fy14/12

£117,735

£117,735
é

0.0%

£117,735
é

OO

£1,549

Operational cost scenarios

£190,000
£160,000 «
£140,000
£120,000
£100,000
£80,000
£60,000
£40,000
£20,000
€

Fv12/13
£134,394
£137,793
£3,399
25%
£137,808
£3a13

FY13/14
£143,588
£140,288
£3,301
2.3%
£136,450
£7,139
5.0%
£4,107

ELLIS

Fy14/15
£152,451
£131,210
€21,281
13.9%
£122,768
£29,683
19.5%

£919

Fy15/16
£137,219
£116,788
£20,431
14.9%
£107,211
£30,008
21.9%
£453

£453

——— Optimised 8:

aayiz

aseline

Fvi2/13

Fy13/14

rvi4/15

ssa Expected Scenario

ras/at

6

=== Potential Scenario

Fva6/17

FY16/17
£135,508
£119,986
£15,522
415%
£110,030
£25,479
18.8%
£

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‘Cumulative Total
£820,896
£763,800
£57,096

1.0%
£732,001
£88,895
10.8%
£13,376
£9,807
£3,529

* Optimised baseline — the baseline IT&C cost base has been optimised to reflect an assumed level of tactical
contract negotiation and minor transformation with incumbent IT suppliers (the true ‘do nothing’ scenario)

* Expected scenario ~ this is the target IT&C cost base and level of savings for the programme

+ Potential scenario — this represents a stretch target for the programme given appropriate execution and risk
management

Project and implementation costs

Workstream

‘Consultancy (sunk)
“Contractor

beg

‘Programme costs

Skits Group (sung
I Capaoilty Uoitt

- Redundancy

Op. mode!
implementation

Algnment

Other (including expenses)

FYI243 I FYI3M4 I FYI45 I FYt5/16 I FY16/I7
eae : A cee

£870(£300) £2,200
sy £1427
8 e1as2
a7(ea7) 878
0 £233
0 0
£0 £680
£0

£0

e408

fo

Lo
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Post Office Ltd — Strictly Confidential

Appendix 2 — Future IT Supply Chain

Services Integrator ‘Si Supervision for service
consultancy ne I
(Tower 1) Tr ir

solutions II products

I
I H
Service I
i

desk I
> 23 & *
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Stesigpart Caren ST aBusnes stent canoes, comoattn
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Appendix 3 - High-level Procurement and Transition plan

2012 2013 2014 2015 2016

a

I S Pantego

Roy iliestones

Jeon ees

a a enema dy

— yee pe ee

SEED ont prcans dein
Rot! outintemaiprocesses

i
e
i

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Post Office Ltd — Strictly Confidential

Appendix 4 - Key programme risks and mitigations

suppliers. This may result in a reduced
service (e.g. removing key staff, increasing
charges wherever possible).

Risk Impact Mitigation
Impact on current This programme is likely to result in our Mitigation has commenced with clear
suppliers serving notice to one or more of the current communication on our intent and plan to our

current suppliers, and clarity on the potential
opportunities will be highlighted through
market supplier days.

impact on business
transformation

There is a risk that restructuring the IT
suppliers could adversely impact the strategic
business transformation programmes. IT&C is
not configured for delivery of a large
transformation

This risk will be mitigated by a Service
Integrator who can provide additional skilled
resources and delivery capability whilst we
up-skill the retained organisation

Resource availability and
on-boarding

There is a risk that sufficient resources cannot
be ramped up in time to meet the committed
timelines or that insufficient or inappropriate
resources are utilised to deliver this
programme. This is likely to result in the
programme not delivering the predicted
outcomes and benefits within the committed
timeframes.

This is being mitigated by including clear
definition of required roles, considering a
number of delivery models and budgeting for
backfill of key personnel required on this
project.

Constraints introduced by
separation

‘Assumptions have been made on the
constraints introduced by POL independence
and the project plans have been designed to
accommodate these factors. There is a risk
that if the constraints change as a result of the
detailed planning for separation, then the IT&C
Transformation plan will need to be revised
Note, all joint Post Office and Royal Mail IT
supplier contracts are subject to RMG
concurrence before Post Office are able to
exit,

This is being mitigated by integrated planning
with the POL Independence and Separation
programme

Lack of market appetite

There is a risk that market appetite will be
limited due to new entrants believing they will
not be successful. This could reduce
competition and result in the procurement
process being revisited

This will be mitigated through early and
continued communication which reinforces the
‘opportunities for suppliers and demonstrates a
fair competition

Retained Organisation

‘There is a risk that the capability of the
retained organisation will not be sufficient to
effectively manage the Service Integrator and
maintain service levels through the transition
period.

This will be mitigated through engagement of
a strong procurement team and the
implementation of robust terms of engagement
for the Service Integrator. The Service
Integrator will be leveraged to protect service
levels though the subsequent period of
transition

Future Contract
Management

Coniract management in the target supply
chain will follow a different model to that which
Post Office is currently used to and will involve
strong management of risk through the
Service Integrator.

Significant up-skilling and recruitment will be
undertaken in this area to ensure the required
capabilities are embedded into the
organisation.

Timescales for
Procurement

The plan for the procurement of the Services
Integrator and the supplier towers is
aggressive. There is a risk that delays to the
initial on-boarding of staff will impact on the
overall project timescales. Royal Mail is
recruiting at the same time for a similar
transformation programme and we may face
competition for the same resource pool

This will be mitigated through agreed delay to
the procurement process if required, or
increased external support from existing
sources.

Exit and transition cost

‘Over the next three years the majority of key
contracts will need to be re-procured. There is
a risk that services will need to transition from
current to new suppliers. The worst case early
exit and transition costs have been estimated

at a maximum of £31m.

‘A significant portion of this risk is expected to
be mitigated through negotiation.

Note: This risk exists whether or not we
undertake this programme and does not
directly impact the benefits of this case

POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)28
Board of Directors

Date of Board: 15 March 2012

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POL00103334

Subject: IT&C Transformation Programme.

Author/Sponsor:

Author: Neil Lecky-Thompson
Director Sponsor: Lesley Sewell

Contributors / Presenters:

Presenter: Lesley Sewell

Decision Guidance Noting

For: Xx

Reference previous action point:

BACKGROUND AND CONTENT:

IT&C provides the skills and resources to deliver business programmes and IT enablers
required to drive business change. Post Office is embarking on a significant
transformation agenda over the next three years which will substantially increase the
demands placed on IT&C. At the same time we are faced with the imminent expiry and re-
procurement of many of our key IT supplier contracts. Furthermore, as part of the Post
Office Strategic Plan, IT&C has committed to maintaining its FY12/13 cost base whilst
supporting the business transformation.

In response to these challenges, IT&C has defined a strategic approach to re-positioning
its IT supply chain and Operating Model. Post Office Board approval is requested to
progress with the implementation of this approach and to the supporting business case.

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team 6 March 2012

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: YES/NO
POL00103334
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POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)29
Board of Directors

Date of Board: 15" March 2012

Subject: Network Transformation

Author/Sponsor:

Kevin Gilliland/Chris Day

Contributors / Presenters:

Sue Huggins

Decision Guidance Noting

For: xX

Reference previous action point:

BACKGROUND AND CONTENT:

The paper will update the POL Board on progress of the Network Transformation
Programme, as we head to rollout from April 2012. It will:

e Update on our approach to implementation

e Update on our approach to prioritisation of activity

e Update on budget required for 2012/2013 and key areas of spend

« Update on pilot activity, lessons learnt and results from customer and

operator research
e Provide an overview of current programme risks

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: NO
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POST OFFICE LTD BOARD

Update on Network Transformation
Programme

Purpose

14

The purpose of this paper is to update the POL Board on the Network
Transformation Programme. Specifically, it will provide:

e An update on our implementation approach.

An update on our approach to prioritisation.

.
* Anupdate on Programme budget through 2012/2013.
.

An update on pilot activity, including lessons learnt and a summary of results
obtained from customer and operator research.

Approach to Implementation

21

2.2

2.3

24

2.5

26

27

Implementation plans for the Network Transformation Programme have been
developed and can be categorised into six key stages. This process will enable
the implementation of 6000 activities by the end of March 2015.

High level engagement with all Agents - A communications campaign, in place
since October and designed to provide Agents with information on the
Programme, operating models and the choices available to them. The campaign
has included Network Live events and an Agent survey, responses to which have
been encouraging.

Preparation for rollout — enabling the programme to achieve a state of
readiness to engage with Agents in April. Preparation includes recruiting and
training new staff and finalisation of necessary terms and conditions,
documentation and contracts, working closely with the NFSP.

Validation — Over 3000 Agents have expressed an interest in change, via the
estate survey. From early April, face to face conversations will take place with
these Agents regarding the options available and possible impact of change.
Following this initial meeting, POL will validate propositions and establish the
Agents interest in the option and/or operating model that POL is recommending.

Prioritisation of individual branch activity - All branches will be prioritised
using a number of criteria and then released to the field team, as projects, to
progress through to implementation. The financial impact to POL will be taken
into account (see section 3) as will the overall Agent proposition and customer
impact.

Detailed engagement with volunteer Agents - Agents converting to a new
operating model will complete and submit a business plan for approval and
individual contract terms and conditions will be provided. For potential ‘leavers’,
advertisement and recruitment for new operators will commence, in line with
normal business processes.

Implementation of branch changes will commence once conditional contracts
are signed. Consultation activity will be required for relocations — POL is in
discussions with Consumer Focus regarding the new Code of Practice which will
determine the approach to consultation and communication activity. An MOU
between POL and Consumer Focus will govern working practices through the life
of the programme.
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Approach to Prioritisation

3.1 Our approach to prioritisation needs to ensure alignment with the strategic plan;
to deliver 6000 activities (4000 Mains and 2000 Locals over the funding period).
One fifth of activities will be delivered in the first year of the programme (800
Mains and 400 Locals), with two fifths delivered in years two and three (1600
Mains and 800 Locals in each year).

3.2 Financial prioritisation has been undertaken to assess the net benefit/cost of
conversion at branch level for the current, known volunteer on-site population.
Net benefit has been calculated as the change in the agent's total pay.

« Circa 2,000 Agents have expressed an interest in on site conversion, via the
estate survey. These branches have been used in this financial assessment.

e An IRR based on net benefit, expressed as a percentage of the investment
level is used to establish a financial prioritisation.

« For Main branches the saving in fixed payments is offset by the estimated
increase in variable pay of 27%.

e For Local branches, the same method has been used but without increases in
variable payments which are not applicable to this population.

Overall results are £21.3m investment, £11.1m annual net benefit at an IRR of
52.36%. This is based on the circa 2,000 potential on site conversions, as
detailed above. For Main branch conversions, we have agreed with the NFSP
that for a period of up to three years, the remuneration received under the new
contract will not fall below the levels that would have been received under their
existing contract. As a result, realisable benefits for Mains will be lower in the
short term, excluding the positive impacts that conversion will have on customer
numbers and potential new business.

3.3 Based on programme level financial analysis, the Network proposes to give
priority to all on site Locals, followed by on site Mains, before consideration is
given to off site Locals and off site Mains.

3.4 When financial analysis was extended to look at those branches that have
expressed an interest in leaving the network, 47 branches were identified as
providing a greater IRR than the minimum achieved (3.64%) within the on site
population. Therefore, this subset will be prioritised ahead of the bottom on-site
conversions for activity in 2012/2013. The results of this subset are £470k
investment, £388k annual net benefit at an IRR of 82.58%.

3.5 In addition to the above, separate processes for the approval of compensation

payments will be implemented in order to manage this spend to a necessary
minimum.

3.6 As this is a voluntary programme and, in light of the other prioritisation criteria,
highlighted below, network selections may vary. Financial assessments will be
made on an ongoing basis to ensure that an overall understanding of the
economic impacts of change remains understood.

3.7 As mentioned above, the financial impact to POL is only one criteria to be used in
the selection and prioritisation of branches. Other factors will be taken into
account in order to ensure implementation of 1200 activities next year. These
include:

e Quality of the agent and future business proposition — including overall retail
offer and willingness to extend opening hours
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e Exceptional circumstances — prioritisation of potential ‘leavers’ with ill health
for example.

« Customer impact — branches that would deliver the greatest customer benefit.

e Geography - some regional prioritisation will need to take place in order to
smooth workloads and ensure change is being delivered with equal
consideration in each of the devolved administrations.

3.8 Branches that are currently perceived as being unsuitable for conversion or
relocation at this stage will be de-prioritised. For example, branches with less
than 400 customer sessions, those in high risk locations and those with low
conformance ratings will be pushed back until corrective action/solutions have
been found or actioned.

4. Update on Programme Budget for 2012/2013
4.1 The business case for 2012/2013 states full budget required of £144.5m -— this will
be presented at March POLIC. Spend will enable the programme to deliver the
targeted 1200 activities next year (with funding to achieve stretch at 1345). Key
areas of spend include:

« £21m staff and non staff costs.
« £59m compensation payments to branches.
« £33m investment payment to branches.

4.2 Robust controls will be in place to monitor programme spend throughout
2012/2013 at an individual branch level through to a strategic programme level.

4.3 A programme scorecard will be in place from the beginning of April. Key
Performance Indicators include:

« Number of branch conversions, opening hours.

e Benefits tracking — contribution, fixed/variable pay ratios.

« Programme spend, compensation and investment levels.

e Customer and agent satisfaction, including waiting times.

5. Update on Pilot activity

5.1 176 pilot branches are now live throughout the UK. Conducting pilot activity has

allowed us to gauge the attractiveness of the models to Agents. 38% of the
Agents engaged with have withdrawn from the pilot process for a number of
reasons:

¢ Contractual reasons such as the requirement for Mains operators to register
as a company, the need to obtain three quotes for fit out works and the need
to open extended hours.

e Financial reasons such as lack of cash flow to invest in retail or compensation
levels perceived as being too low.

¢ Personal reasons — timing not right for the agent.

5.2 In some cases, we will implement mitigating actions to make conversion to the
new models more attractive: Making voluntary, rather than mandatory, the
requirement to adopt company to company status; reducing quotes for works
from three to two; and providing £10k investment to Mains branches upfront to
enable linked investment on their retail side. If these mitigating actions had been
applied to the pilot group, the withdrawal rate would have been reduced to 23%.

5.3 Customer and operator research has also taken place across our pilot estate:
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e 1216 customer surveys in Local pilot branches.
¢ Operator surveys in Local branches.
e Pre and post conversion research in recent Local and Main pilot branches.

5.4 Headline results from the surveys include the following:

Average weighting time in Post Office Local branches stands at 41 seconds.

96% customer satisfaction with the overall level of service in Local branches.

98% customer satisfaction with the overall level of service in Main branches.

63% of operators surveyed believed that the Post Office helped to increase

their retail sales. The average retail sales uplift is 9%.

67% believed the Post Office helped the sustainability of their branch.

« Some concern amongst operators regarding the level of support from NBSC -
this is being addressed through additional training.

e Some concern amongst operators regarding the level of training provided - a
new training package has been developed which addresses these concerns.

91% of PO Local operators surveyed stated that they had received requests
from customers for products to be added to the Local product set. A review of
PO Local product set has been undertaken with some additional products now
added. These include enveloped cheque deposits, BFPO transactions and gift
cards. On demand Bureau de Change will also be included but only at on site
conversions where the service would not otherwise be available in the
community. MVL transactions will also be available at on site Local
conversions but only by exception.

« 81% customer satisfaction in Locals with the range for products and services

available.

Conclusion and recommendations
6.1 The POL Board is asked to note the progress to date on the Network
Transformation Programme.

Kevin Gilliland & Chris Day
March 2012
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Appendix to March Network Transformation POL Board Paper

Summary of Top Four Programme Risks

[As Network Transformation will] Which may fe Working closely with the NFSP to} Sue Huggins
initially be a voluntary result in us being} review our approaches to the newI
programme and we are unable to contracts and compensation.
removing fixed remuneration I complete the fe Learning from pilot activity
there is a risk that we will not I transformation } Semi voluntary approach throughI
get enough volunteers to take as planned. new commercial transfer policy
on the new operating models le Option of introducing set piece,
larger scale transformation with
our multiple partners
fe Contingency planning is
underway should we need to
move to greater compulsion, in
the event that we do not obtain
sufficient volunteers

As a result of delays in Which may }e Working closely with CSC & IT to} Neil Ennis
development of the NT result in delays ensure the solution is delivered to

Idatabase and workflow tool andI to roll out time.
the very tight timescales le Contingency “infopath” solution

remaining for production, there
is a risk that we may not have
the database ready for roll out

NFSP may not agree Which may I* Working closely with the NFSP to} Sue Huggins
remuneration and result in fewer resolve all outstanding issues
compensation arrangements I volunteers and
which may delay engagement delay the
Programme
Adverse publicity from This may result Je Getting on the front foot with the I Alana Renner
Stakeholder Groups e.g. in fewer Press launch - now scheduled for
Consumer Focus volunteers. the 9th March to launch the
Adverse impact Programme. We are also working
on the closely with Consumer Focus to
Programme develop a new Memorandum of

Client Issues Understanding

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Post Office Ltd — Strictly Confidential
POLB(12)30
POST OFFICE LTD BOARD
Update on the Crown Transformation Programme
Purpose
1.1. This paper updates the POL Board on the Crown Transformation Programme. Specifically, it
will cover:

« Are-cap on the background to the Crown Transformation Programme;
e Anupdate on the refreshed Crown strategy and the 3 year transformation plan;
« An update on the new Premier Branch model trial at Birmingham.

Background
2.1 The Crown network is currently losing £64m and a condition of the funding agreement with
Government requires Post Office to ensure Crowns breakeven by 2015.

2.2 The strategy agreed with BiS [September 2010] to return the Crown network to a break-
even position by Mar 2015 recommended that POL should maintain, in direct ownership, a
small number of Premier (flagship) branches circa 90 and about 50 service hubs.

2.3 The key enablers to deliver the original strategic approach were:
« ‘Buy Down’ of Crown staff pay by 24%;
¢ Divesting c.180 large directly managed branches through franchising and re-siting a
further 50 into 3° party sites.

2.4 Due to the radical and unpalatable nature of the ‘buy down’, the current economic climate
and TUPE regulations, which taken together, impede POL’s ability to franchise its biggest
branches. A new strategy has been devised.

Refreshed / New Strategy:

3.1 The revised strategy, when fully deployed, should improve the Crown P&L by approx £61m.
(see appendix 1) by the end of the planned period. This includes additional income of
£19.2m, staff cost savings of £17.7m and realising benefit of £4.2m through property
initiatives. An additional £6.0m is achieved through some Crown divestment, with £13.7m
delivered from recurring benefits forecast in the 2011/12 P&L, and accounting policy
changes.

3.2 The strategy is based on applying a segmentation to the existing estate which results in the
recommendation:

« To retain 300 — 320 Directly Managed Crown branches, these will typically be in excess
of 3000 customer visits per week. About 30 branches will be flagships and anchor the
network in high profile locations such as capital cities and prominent retail locations;

* To divest 50-70 smaller / worst performing branches and where the impact on focus
product income will be minimised. The Crown network will be reduced through a mixture
of mergers (two branches into one where locations allow), maximising benefit through
hosted models and through franchising to an agency main model.

3.3. The segmentation was determined by assessing each branch against a number of weighted

criteria:

e Potential for staff savings through use of technology to improve the customer journey
(mails products);

« Size of branch based on weekly customer numbers;

« Meeting customer and client requirements for future Financial Services (FS) and Front
Office of Government (FOoG) income projections;

e Average P&L loss per customer session;

° Staff cost to income ratio.

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.
3.4. The plan shows an overall reduction of 1190 staff over the 3 years. This is comprised of:
e 230 staff in 2012/13 as a result of the duties review, now agreed with the CWU;
e A further 420 staff across years 2 and 3 as a result of the rollout of the new Crown model
(based on mails automation only);
e A review of the Crown Area Management (CAM) and Branch Manager (BM) structure
will deliver a reduction of 40 managers;
e The exit of c.50 branches will reduce staff numbers by a further 500 (based on an
average of 10 staff per branch).

3.5 The key enablers of the new Crown Transformation strategy are:
¢ New income streams delivered through a new branch design;
Increasing automation serving customers more effectively whilst improving service;
Increasing staff engagement and focus on a personal face to face service;
A voluntary redundancy package to reduce headcount;
A culture and model that gives branch managers and their teams the ability to take more
control of their branch (e.g. flexible working etc);
e The ability to re-configure POL’s Crown property portfolio to improve space utilisation,
disposals and hosted models;
¢ Collaboration with the CWU and Unite/CMA.

eoeee

3.6 Underpinning this strategy, there is a dependency on:
e Implementation of the FS contract (Eagle);
e Realising the benefits of new FOoG contracts;
¢ The opening up of Horizon to other peripherals and a suitable supplier of improved
automated equipment;
e Realising the benefits through optimisation of property portfolio;
e £124.4m of investment (see 5.5 below).

3.7. The critical path of the Crown plan centres on the IT roadmap for the development and
procurement of automation that will handle a larger proportion of the product set including
mails products, bill payment and POCA. The current plan shows the proof of concept launch
by autumn 2012 enabling full roll out from April 2013.

3.8 We are working collaboratively with both CMA Unite and CWU to develop a plan that is built

with maximum co-operation. Since December continued progress has been made:

« Constructive consultation meetings have been held to agree the overall plan;

¢ Unite/CMA has agreed to the re-structure of the Crown Area Management team;

e CWU have agreed to a full staff duties review that will identify the opportunity to remove
230 staff from the network in 2012/13;

e As part of current negotiations with the CWU on pay, POL is insisting upon key time
workers and more flexible working practises as integral to any agreement.

Branch Design / Pilot Sites
4.1. The optimum Premier branch design will focus on improved customer experience through:
« Bright, welcoming branches zoned to ease customer flow and maximise space
utilisation;
e Self service areas maximising the use of automation to enable customers to fulfil their
transactional needs at their own pace;
« Assisted service at open plan counters for lengthy and complicated transactions;
e Private consultation areas for high value transactions, such as financial services.

4.2 Adesktop analysis around the optimum Premier model and size has been completed. We
will use this analysis to review the property estate to assess current fit and identify any
excess capacity for alternate use. An agency will be selected to work with us to define the

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holistic approach to overall branch design and to deliver a customer centric, future proofed
design for Premier branches.

4.3 Of the current product set, c.89% has potential for a self service solution. Deploying Post &
Go enables 40% automation of the total volume. Further analysis is underway to identify the
level of automation that will provide the optimum business benefit.

4.4 Birmingham was selected as the first pilot site due to its high mails volume and a history of
below average queuing times.

4.5 The agreed objectives for this pilot were:
« Redesigned branch layout to improve customer flow and focus on customer needs;
e The introduction of additional Post and Go (P&G) kiosks to improve customer
experience and reduce waiting times;
« Greater emphasis on Customer Hosts to manage sales and service;
e Improved staff capability and behaviours;
¢ Improved sales and service following implementation of a new model.

Birmingham results to date:

Pre-Pilot_
Customer satisfaction 84%
Average waiting times 4 mins 57 secs 3 mins 58 secs

Sales performance

Total Sales Income 4% 2% 100%

(pre-pilot to pilot)

Focus Sales Income y 9 9
(pre-pilot to pilot) (4%) (8%) 100%
Customers served < 5 minutes 67% 79%
P&G penetration 39% 74%

4.6 Next Steps for Birmingham:
e Complete the full duty review to identify and realise staff hour savings from additional
Post & Go kiosks (March);
e Agree transition timelines and identify key individuals who could become ambassadors
for the Crown Transformation Programme (March);
« Commence Phase two activities (Apr-Jun) to further develop the model including:
« Full post implementation review and learning’s from phase one;
= Refresh signage, point of sale and product categorisation including preparation for
pilot of FOoG initiatives
Introduction of flexible / key time working;
Opening hours extension to 6.30 p.m;
Addition of internal POCA ATM's;
Introduction of open plan travel desks creating an internal ‘sales conversation’ area.

4.7 Further Pilots
Two additional Premier pilots are being scoped at Chester and New Malden to further test
the economic model and optimum branch design. Both branches have been shortlisted as
typical / mid range branches to ensure findings are replicable across the wider network.

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Automation development.

To accelerate our understanding of customer behaviour we are investigating the trialling of
card payment (only) Post and Go as they bring benefits of lower cost of acquisition and
improved service levels (some cash P&G kiosks will be retained in trial branches).

5. The 3 Year Plan

5.1

5.2

53

5.4

5.5

In view of the critical path constraints of IT and automation development, year 1 of the plan

(2012/13) contains initiatives that deliver P&L improvements and allow POL to further test

new models before full rollout commences in 2013/14. Year 1 includes:

e Astaff duties review across the network impacting 230 staff;

The review of the CAM and sales support structure impacting 10 managers;

A review of the BM structure resulting in a reduction of 30 managers;

Develop the HR framework to prepare staff for the Premier model, developing the new

training model, agreeing VR package with CWU / Unite CMA and staff exit programme;

Delivery of new income from UKBA work and improved FS sales;

Delivery of additional pilots: Currently shortlisted are Chester & New Malden;

To finalise the end to end branch design, ensuring alignment of the self service rollout;

Pilot and roll out of Financial Services strategy enabling achievement of additional FS

income;

e Review of internal accounting principles that impact the network: FS joint venture
renewals income and parliamentary branches.

The full rollout of the Premier model to the remaining crown estate is planned to start in year
2 (April 2013), with the objective of opening one new office per working day (excluding
Christmas 2013) until completion in September 2014.

The plan to divest 50-70 branches is anticipated to take place throughout years 2 and 3 but
will be driven by opportunities to franchise and locate to hosted sites.

A summary of the schedule of activities and initiatives that contribute to the P&L
improvement is shown below:

2010/11 baseline (management accounts) I (£64.0m)

£21.2m

2012/13 annual recurring benefits (£42.8m)

Projected 2012/13 Crown P&L £20.3m

(£22.5m)

2013/14 benefits £19.3m

Projected 2013/14 P&L

2014/15 benefits £3.2m

Projected 2014/15 P&L exit rate

Automation / technology costs 1.7 6.7 3.6 12.0
Property Costs including Premier 0.1 34.4 21.9 56.4
rollout.

Programme team / Change & IT 2.7 2.0 1.4 6.1

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[Total [ 154 I 659 I ai [1244 I

Top 3 Risks and Mitigation

6.1 Union engagement. We are working collaboratively with CMA Unite and CWU to ensure
understanding and buy in to the Crown transformation plan;

6.2 IT availability and speed of delivery. We are working with IT to understand and seek
accelerated timescales;

6.3 Certainty of future income growth. As roll out of the transformation strategy does not
commence until April 2013, POL will have greater confidence in the certainty of future
income growth before investment in branches begins.

The Board is asked to:

7.1. Note and approve the refreshed Crown strategy.

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Appendix 1 - The Financial Plan

Summary of incremental P&L benefits by strand

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Strand Activity 2012/13 I 2013/14 I 2014/15 Total
£m £m £m £m
People and ¢ Staff savings from 0 40 49 8.9
Productivity automation
¢ Staff hour & 5.3 25 0 78
management Structure
review
¢ Tactical post and go 0.3 0 0 0.3
deployment and pilots
e Raising of staff bonus
threshold 0 0 07 0.7
Total People & Productivity 17.7
Product ¢ Government Services 3.0 6.0 0 9.0
income
« Financial Services 3.5 25 5.0 11.0
income - Eagle
renegotiation)
¢ Allother 1.1 1.3 28 5.2
e Std income decline (2.0) (2.0) (2.0) (6.0)
Total Product Income 19.2
Property [* Hosted, 2:1andresites I 05 I 11 I 26 42
Total PropertyI 4.2
Other e Management Accounting 5.3 1.9 2.3 9.5
changes (retention /
renewals credit)
e Recurring cost benefit 4.2 0 0 4.2
__from 2011/12 Pat I }— re
e Divest 50 — 70 branches
(net benefit)? 0 3.0 3.0
Total Other 19.7
Total I I 212 I 203 I 193 I 608

(1) Does not include any assumptions in potential uplift of income through improved sales
effectiveness training.

(2) £6.0m net benefit through divesting 50-70 branches, further analysis is underway to
identify the component gross elements e.g. loss of income and the benefits of lower staff
and property costs etc.

Kevin Gilliland
March 2012

Final Version
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)30

Board of Directors

Date of Board: 15" March 2012

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Subject: Crown Transformation
Author/Sponsor:
Kevin Gilliland
Contributors / Presenters:
Sue Huggins

Decision Guidance Noting
For: xX

Reference previous action point:

BACKGROUND AND CONTENT:

This paper updates the POL Board on the Crown Transformation Programme.
Specifically, it will cover:

e Are-cap on the background to the Crown Transformation Programme;

¢ An update on the refreshed Crown strategy and the 3 year transformation plan;
e Anupdate on the new Premier Branch model trial at Birmingham.

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: NO
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POLB(12)31
POST OFFICE LTD
FINANCIAL SERVICES
SALES & BUSINESS DEVELOPMENT STRATEGY
Purpose
1. The paper “First Impressions of the Financial Services Business” tabled at the

September 2011 Board meeting (the Paper) highlighted various issues facing the Post
Office as it seeks to develop its financial services business; critical in this assessment
was the conclusion that the extensive branch network, sales processes and brand do not
“deliver an effective FS sales and service capability”.

1.1. This paper sets out the high level sales and related strategies to deliver a step
change to build and sustain a financial services capability. The value created will
generate long term revenues to Post Office and assist deliver Crown
transformation. While some of the initiatives mentioned are already under-trial,
others require planning, business case finalisation and assessment of
alternatives before proceeding. It is tabled for noting.

Background

2.

The Paper highlighted a number of inter-linked issues in the current financial services
sales model, in particular:

2.1. The Post Office is not associated with financial services, with customers normally
coming to a branch to conduct other product services. This is reflected in very
low scores for spontaneous awareness of the Post Office for general financial
products’ at savings 25%, insurance 34%, credit card 6% and mortgages <1%.
Customers are not considering the Post Office on their ‘list’ of potential providers;

2.2. The current sales model using dedicated financial services representatives?
(FSRs) in selected Crown branches and referrals elsewhere, is not delivering
sustainable results, with low sales numbers and customers each holding less
than 1.1 product? 4:

= Of c360 FSRs 190 deliver fewer than seven sales per week (versus a
breakeven target of 115); in 2011/12 the average sale per FSR is 7.399;

= Overall FSRs account for only 40 percent of sales, with 37 percent
generated from agencies and 22 percent direct;

= The FSRs generally do not have the appropriate sales and product
skills, with most transferring from a branch counter and few (c50) holding
a relevant qualification (eg CeFA and CeMAP)’. FSRs receive 35 days
of induction training (25 is the classroom and ten in branch®); there is no
classroom training thereafter;

Source: Brand & Consumer Insight Program (BCIP), Q2 2011-12.
Referred to as “Financial Specialists”.

While Post Office is unlikely to match market ratios, UK banks target four+ products per customer.

This reflects low sales, minimal cross-selling or bundling and the lack of a transaction account.

Based on five savings, two life, two credit cards and two general insurance products (irrespective of size).
3.77 if growth bonds and fixed rate ISAs (both rate driven products) are excluded.

Certificate for Financial Advisers; Certificate of Mortgage Advice & Practice.

By comparison financial services staff at Post Finance (Swiss Post) undertake 60 days classroom training
and pass an exam before they can interact with customers, followed by compulsory refresher courses.

1
2.3.

2.4.

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FSRs are prohibited from offering advice. While this could allow a
simplified process with reduced compliance risk, it actually provides
unclear boundaries as to what constitutes “advice” and significantly
reduces sales effectiveness;

The sales (and marketing) approach is largely ‘individual product push’ -
pushing products at customers each time they enter the branch; this
risks raising a certain product in every customer conversation
irrespective of the likely need — this leads to wasted opportunities and a
negative customer reaction;

FSR remuneration is well below that of comparable bank sales staff?,
reducing the ability to attract and retain the best talent. Incentive
payments do not encourage sales activity and the failure to meet targets
has not traditionally resulted in performance management action‘°;

Branch (BM) and Crown Area managers to, and through, whom FSRs
report are generally not qualified to provide the necessary support,
oversight and compliance. Further BMs often use the FSR as part of the
general branch compliment and delegate general tasks (for example
general queue hosting" or supporting the Post & Go appliance);

FSRs are targeted on a number of sales across the key products
irrespective of the size’? and the local market dynamics;

The layout and lack of a ‘professional’ feel in branches does not provide
an environment conducive to discussing personal financial matters.

At present FSRs are only located at Crown branches, significantly reducing the
scale and scope of sales opportunities in agencies.

While the un-promoted “propensity to try” is low, the latent opportunity is
confirmed though Post Office’s own surveys of prompted consideration; this is
reflected in the 2011 YouGov Brandindex survey that ranked the Post Office as
the number one “destination for savings” institution in the UK*? based on
prompted responses. Furthermore those that do purchase are strong advocates,
reflected in high product Net Promoter Scores (NPS)"*.

Establishing the long term financial services vision in the Post Office

3.

To underpin the delivery of financial services in the Post Office, the business has
established a long term vision:

“To be a recognised financial services brand and a serious alternative
to the major UK institutions (the “un-bank”);

That a majority of the UK population is aware that the Post Office has
a wide range of financial service products and would genuinely
consider Post Office on their ‘shopping list’;

To generate an increasing profit, supporting ongoing investment in
long term capability and market positioning”.

HSBC agents earn c£25,000 plus £10,000 bonus potential: at Post Office c£17,000 plus £3,000 potential.
Although at present c50 FSRs are being managed for under-performance.

Although some of the best FSRs proactively walk the queue to identify leads.

For example a single deposit of £1,000 and £100,000 are measured equally.

Post Office scored 19.40, followed by NS&I (14.28); Nationwide (13.83); highest major bank was
HSBC, sixth with 4.66; research covered quality, value, satisfaction, reputation, and likelihood to

recommend.

Post Office has a NPS for mortgages (52%), life insurance (45%), home insurance (40%) and credit cards
(35%) based on responses shortly after purchase (source: Satmetrix for Midasgrange).

2
3.1.

3.2.

3.3.

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The Financial Services Sales & Business Development strategy will deliver a
step change in capabilities and focus by fundamentally changing many of the
structures and processes undertaken to deliver financial services in Post Offices.

The specific initiatives set out in section four (below) draw extensively on the
financial services sales models of successful postal operators’® as well as best
practise banking sales management. These are based on:

* — Clear and strong financial services branding;

= Separate sales management structures within the branch network;

= Dedicated, knowledgeable and focused sales and service staff;

= Active sales and performance management;

= Strong referral relationships and hand-off processes from the counter;

» Professional sales environment.

This change program will be largely funded from the £4.0 million annual
investment committed by the Post Office to build financial services capability and
agreed as part of Eagle.

Building the Capability — the Sales & Business Development Plan

4.

The Plan comprises a number of initiatives to build a sustainable and growing capability,
covering the challenges raised in paragraph 2, in particular regarding branches, people,
processes, skills and brand. It should be read in conjunction with the Eagle program
(which inter alia will generate significant additional income to Post Office and a
concomitant commitment to invest £4.0 million per annum), Project Polo (aiming to
launch a current account) and Network Transformation (NTP).

Staffing, Capability and Skills

4.1.

4.2.

4.3.

4.4.

4.5.

46.

To build the long term sales capability a program will be initiated to assess the
capability and performance of all current FSRs; this will likely result in a
exit/redeployment of a significant number and their replacement with experienced
financial services sale and service representatives.

An opportunity has been identified to transfer c60 poor performers to support
NTP, reinvesting the savings (c£1.5 million) into recruiting experienced sales staff
and building the capability of the remaining staff.

It is anticipated that most future recruits will be sourced externally from banks etc
with their profile should reflect the customers that they will target. A critical
component of their induction training will be to spend an extended time with
counter colleagues to understand the customer and process challenges as well
as a significant induction training program (see 4.6).

FSRs should be located in both Agency as well as Crown branches, based on
the market opportunity and the physical capacity of the branch.

At present under 15 percent of FSRs have a financial services qualification. In
the future every FSR will either be qualified or will be in the process of gaining
qualification — it will be a requirement of the role.

To support this, discussions have commenced with specialist financial colleges
and training institutes to develop a “Post Office Finance Academy” to provide

In particular Kiwi Bank (New Zealand Post), Post Finance (Swiss Post) and la Banque Postale (1a Poste).

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entry, intermediate and advanced level training to all staff involved in financial
services, enhancing their skills, knowledge and marketability. It is hoped that
through this focus on skills development financial services in general, and being
an FSR in particular, will be seen as an aspirational role in the Post Office.

4.7. Once an FSR gains an external qualification their reward and bonus potential
would increase to rates comparable with the external market.
4.8. Under Eagle, the Bank of Ireland has committed to fund 40-50 sales

effectiveness managers (SEMs). These will report to the Bank and provide
ongoing training and support on financial services products *®.

Branch structure

4.9.

4.10.

4.11.

4.12.

4.13.

4.14.

To support and focus the FSR and create a financial services team focused,
dedicated and measured on building the financial services business it is
proposed that FSR reporting structure will be realigned with FSRs reporting
through to a dedicated area/regional structure’ to a Head of FS Sales’®. This
reflects best practise structures and enables the development of a base of skilled
expertise and knowledge. Financial services training and sales management
activities will also report into the Head of FS Sales;

The FSRs will continue to source sales through proactive approaches and
referrals from counter staff requiring the FSR to maintain close relationships with
counter colleagues".

Removing the reporting line and training and development responsibilities from
the BM will release significant BM time, increase the effectiveness of the support
and enhance overall risk and compliance.

To ensure that the maximum number of branches (agency and Crown) have a
financial services capability, relevant surrounding branches should operate in a
“hub and spoke” structure”, referring leads to the FSR2".

To enable inter-branch referrals and support the area manager assessment of
the FSR pipeline, an effective sales management tool will be critical. Under the
Customer Management Strategy the Post Office is trialling specialist software -
Salesforce; this will enable inter- and home branch referrals and diary setting and
the monitoring of pipeline and sales plans by area managers. The second phase
of the trial should allow a single-view of the customer to be available to FSRs
eventually including propensity modelling and next “likely product” prompting.
Following the trial, this tool will be rolled out to all FSRs”.

The branch environment will be enhanced through the NTP, creating Premier
branches (with a strong focus on financial services) and Mains branches where
face-to-face financial services sales will be provided via a resident FSR, a hub
and spoke relationship or referrals to specialist contact centres.

A similar model (although on a smaller scale) operates very successfully with First Rate (FRES).

Eg for sales management, pipeline overview and performance management; assumed ratio of 1:15
To be filled by an experienced financial services sales executive likely through an external search,
A referral fee would be payable to the ‘providing’ branch with future sales linked to the branch.

In some cases the FSR may be based in different branches through a week; this will be known in advance

to allow the branch and FSR to pre-arrange client meetings.
The hub and spoke model is standard practice in retail banking.
Initial results from trial area confirm a 120 percent increase in sales.

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Sales Process and Targets

4.15.

4.16.

4.17.

4.18.

4.19.

FSRs are unable to provide advice; it is difficult, however, to ensure compliance
and very easy for the FSR to inadvertently cross the line while talking with a
prospective client. Post Office is launching a trial to assess the benefit and
compliance processes of providing “assisted sale” support; this does not result in
advice being given, but will enable the FSR to have a wider discussion on the
client's needs and the benefits of the products offered. This approach is
consistent with that followed by UK retail banks.

Sales targets are set centrally and then cascaded down, with FSRs and branches
being targeted with a mix of products. These targets are set with no assessment
made against local market dynamics and opportunity potential. Targets should be
nuanced to reflect local opportunities, ensuring that their aggregation delivers the
overall target.

Historically the Post Office has had a weak direct marketing and email-marketing
capability resulting in a very poor cross-sell rate. Direct cross-selling, based on
segmentation, propensity modelling, cohort analysis and bundled offering is a
cornerstone of successful retail banking customer growth strategies. The recently
established Customer Manager Strategy is building a program to establish such a
capability. The initial stages will be to:

= Build integrity and completeness in the database;
= Understand customer segments, profiles and behaviours;

= Develop contact strategy (direct and on-line) to ensure that appropriate
customers receive timely and relevant messages (and not too often);

= Implement propensity models to support face-to-face sales.

At present product processes are inconsistent?, complex and time consuming.
To enhance the customer experience a process re-engineering review will
assess the end-to-end processes of all financial services products to establish a
simple and consistent process. A review of mortgages has commenced.

At present the Post Office web-site does not effectively support the product
proposition. In conjunction with the new on-line team, it is important that the on-
line presence reinforces the branch capability, providing customers an
understanding of product and service benefits as well as an alternative channel.

Brand and PR

24

4.20.

4.21.

To ensure that prospective customers are aware of the products and services
available at a Post Office and to re-enforce Post Office as a credible provider, it is
anticipated that Post Office will launch a financial sub-brand*4. This will be
displayed on all relevant advertising/marketing as well as strongly in
Premier/Main branches, providing a clear message and “call to action” that the
Post Office is an active and relevant player in financial services.

The financial services brand will also be supported by an active PR program
promoting financial services and confirming Post Office executives as “thought
leaders”. This program will commence once Eagle has been concluded and
bedded-down and will support the wider Post Office Communications strategy.

For example there are at least four different Anti Money Laundering product limits.

To establish the Post Office as a credible financial services provider there is a need to re-position the
overall Post Office brand. Therefore it is anticipated that the launch of financial services branding will
follow the re-launch of the Post Office brand in Q3 and will coincide with the roll out of a current
account (subject to the conclusion of the trial).
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4.22. To support establishing the Post Office as a financial services destination it is
proposed to develop a branded banking index presenting the Post Office as the
thought leader in a particular market?5 (for example on UK savings).

New Product Opportunities

4.23. As the FSRs are trained and become qualified and remunerated on delivery,
there will be an opportunity to expand the available product set, including inter
alia investment-linked ISAs, simple investment products, critical illness cover and
stakeholder or other pensions.

4.24. This would also allow Post Office to capitalise on the changes being implemented
from January 2013 under the Retail Distribution Review (RDR)*. The changes?”
are expected to lead to a significant decline in the advice sought from ‘mass
market’ customers and a concomitant reduction in the number of financial
advisers in the market?*.

4.25. Itis anticipated that there will be significant growth in the demand for non-advised
solutions for the ‘mass market’, providing a major long term opportunity for a Post
Office model based on trained, qualified and capable FSRs.

Program management

4.26. The delivery of this major long term program of change will require clear project
management. This will be established by the team currently working on Eagle.

Recommendation

5. The initiatives and long term change program set out above represent a fundamental
step change in the capability, focus, behaviours and delivery of financial services,
establishing the Post Office as a credible and competitive provider.

5.1. Critical to achieving this vision will be the completion of Eagle, Network
Transformation and the establishment of a program management approach. The
benefits generated will support Crown transformation.

5.2. The paper is tabled for noting

Nicholas Kennett
Director, Financial Services

Kevin Gilliland
Director, Sales & Network

March 2012

Similar to the regularly quoted Nationwide Building Society’s UK House Price Index.

FSA driven changes on the distribution of retail investment/pension products, including the role of
advice, standards of professionalism, adviser charging and platforms.

In particular, that financial advisers will no longer be able to earn commissions; henceforth advisers will
charge a direct fee for the service, rather than receiving a ‘hidden’ commission from the manufacturer.

28 Many advisers are not expected to obtain the new qualifications, with those that do likely to target high
net worth customers who are more likely to be willing to pay for advice.

6
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)31
Board of Directors

Date of Board: 15" March 2012

POL00103334
POL00103334

Subject:

FINANCIAL SERVICES - SALES & BUSINESS DEVELOPMENT
STRATEGY

Author/Sponsor: Nick Kennett, Kevin Gilliland

Contributors / Presenters: Nick Kennett, Kevin Gilliland

Decision Guidance Noting

For:

Reference previous action point:

BACKGROUND AND CONTENT:

THE PAPER SETS OUT THE HIGH LEVEL SALES AND RELATED STRATEGIES TO DELIVER A STEP
CHANGE TO BUILD AND SUSTAIN A FINANCIAL SERVICES CAPABILITY. THE VALUE CREATED WILL.
GENERATE LONG TERM REVENUES TO POST OFFICE AND ASSIST DELIVER CROWN

TRANSFORMATION.

RECOMMENDATION (if decision required) Date
Recommended by the Executive Team 6/3/12
Investment Appraisal completed or financial implications n/a
assessed and supported by the CFO

Additional presentation: NO
Post Office Ltd - Strictly Confidential

POST OFFICE LIMITED BOARD.
Status Report

POL00103334

POL00103334

POLB(12)32

No.

REFERENCE

ACTION

BY WHOM

STATUS

[Actions Appertaining to Governance

fa November 2011 To update the Board on the review of future Executive Team Paula Vennells In hand, to be discussed by Paula
POLB11/54(e) Structure and Accountabilities. Vennells, Chairman and NEDs to feed
into the individual Senior Executive's end
of year PDR and future organisation
design.
1b January 2012 Susan to bring back a revised Governance proposal to the Susan Crichton To be discussed at the March Board.
POLB12/06 (a) Board once she has met with the Chairman to discuss this
further.
ate January 2012 Susan Crichton undertook to revisit the requirements under the I Susan Crichton Complete.
POLB12/11 Bribery Act at an Executive Team meeting.

2. Actions Appertaining to IT & Procurement __

2a

November 2011
POLB11/62(c)

January 2012
POLB12/03 (c)

The Chairman requested a deep dive to be organised to cover
procurement and governance.

The Chairman requested that the IT Board paper is clear with
practical language to highlight what the IT changes will mean to
the Business on the ground. A deep dive was suggested.

Mike Young

A session is scheduled for the March
Board on Infrastructure (IT and
Procurement)

Mike Young will ensure that practical
language is used in the IT paper and
arrange individual sessions with Board
members before the March Board.

[Actions Appertaining fo Financial Services

3a

September 2011
POLB11/48(d)

Current Account: The target for introduction is 2013 but a full
proposition needed to be presented to the Board.

Nick Kennett

In hand; target date should read 2012/13
and will come to a Board in 2012 (April).

Post Office Ltd - Strictly Confidential

POL00103334

POL00103334

3b November 2011 The Chairman asked Nick Kennett and Kevin Gilliland to Nick Kennett In hand; on Board Agenda for March.
POLB11/56(c) present a joint paper to the Board in the New Year covering the
Financial Services future sales plan. (previously scheduled for February but
further work needs to be completed on
the most effective investment of £4m
commitment agreed in Eagle)
3c January 2012 Eagle Contract Termination: If the evergreen right was not Nick Kennett Ongoing as part of Eagle negotiations.
POLB12/10(c) negotiable then Nick Kennett was asked to ensure the
resolution period was long enough for POL to find an
alternative provider.
3d February 2012 Eagle: Target date of early March for signing the contract and Nick Kennett

POLB12/24(a)

Nick Kennett will bring the final agreement to the March Board

. Actions Appertaining to Network Transformation _

4a December 2011 It was agreed that an updated Crowns plan be brought back to I Kevin Gilliland In hand, This will be part of the NTP
POLB11/69(d) the Board next year to cover the new economic model; presentation to the Board in March.
optimum self service vending; and the impact on Crown branch
numbers.
4b December 2011 The Board to be provided with 2-3 bullet points to explain the Alana Renner The Board will be alerted to and briefed
POLB11/69(k) facts in the event of adverse publicity or contact by MPs, local ahead of (wherever possible) any major
dignitaries or Subpostmasters. adverse publicity regarding the Post
Office. The Board will also receive a
brief ahead of any major news releases
to ensure they have key messages to
handle any high level enquiries.
4c January 2012 Kevin Gilliland to include in his NTP update to the Board in Kevin Gilliland / In hand, will be included in the March
POLB12/03(a) March how the Business intended to prioritise the offices as the I Chris Day Board presentation.

models had very different commercial implications.

. Actions Appertaining to Board Reports _

2
Post Office Ltd - Strictly Confidential

POL00103334

POL00103334

POLB12/01(b)

the Board based on the discussions to date (including higher
ranges for CEO and CFO) with a gateway for Network
Conversions; a small reward for achieving 90% of the financial
target; but with the main bonus at 100% and significant
rewards for hitting stretch targets. It was agreed that the work
needed to be completed as quickly as possible to enable a
proposal to the Shareholder before the end of the financial
year.

5a November 2011 The Chairman asked Chris Day to arrange briefings for the Chris Day In hand, Charles Colquhoun (Head of
POLB11/57(d) Board on Working Capital. Cash Management & Financial Planning)
co-ordinating a balance sheet/working
capital management briefing session.
Session scheduled for 8"" March.
Complete
5b November 2011 Paula stressed that queuing times was an area on which the Kevin Gilliland In hand, Kevin will bring this to the June
POLB11/57(e) Business focussed heavily and suggested a strategy paper (Paula Vennells) I Board.
comes to the Board on this topic.
5d January 2012 Chris Day to speak to Matthew Lester (RMG CFO) regarding Chris Day Ongoing — Chris Day to report back to
POLB12/06 (a) ‘Going Concern’ discussions as part of the Board’s February Board.
governance, and introduce the necessary reporting process at Update 9" February — Chris Day
the Board. confirmed that POL’s Going Concern
status would be covered within the RMG
consolidation for this year. A paper
would be provided to the Board (April) on
the proposed Going Concern
process/external audit for FY 12/13.
I 6. Actions Appertaining to POL Remuneration _ a cc ee
6a January 2012 LTIP: The Chairman asked that a proposal be brought b back to Matthew Starks I Work is on-going with New Bridge Street

to re-model the LTIP in line with the
feedback provided by the Board and to
establish the metrics with the Finance
team. The revised proposal will be
represented to the board in March
though, following a suggestion by Alice
Perkins, this may be able to be
considered sooner, but outside a main
board meeting.

Extraordinary board meeting 29"
February. Ongoing

Post Office Ltd - Strictly Confidential

POL00103334

POL00103334

6b February 2012 PDR scoring — Les Owen requested two-dimensional matrix Pauline Holroyd Session scheduled for May Board.
POLB12/20(c) rating performance and potential. Paula Vennells suggested
the inclusion of potential ratings for the Top Team in the
succession planning paper.
6c January 2012 Managers Pay 2011-12: Discussions are continuing with the Matthew Starks Update contained within Managing
POLB12/01(d) CMA and Matthew Starks will update the Board if there are any Director Update: POLB(12)19.
significant changes or the pay deal is agreed. Ongoing
6d February 2012 Pay Review: Kevin Gilliland to provide a cost benefit analysis Kevin Gilliland
POLB12/21(a) paper to cover all the options available on Crown pay and their

associated risks.

An additional Board meeting may be required to consider the
pay mandate in detail.

Alwen Lyons/
Paula Vennells

No longer required. Complete

_7. Actions Appertaining to Finance

7a September 2011 Ongoing development of commercial finance capability is Chris Day Ongoing
POLB11/43(e) required.
(ce February 2012 Budget Meeting 8" March: Chris Day confirmed that the budget I Chris Day Included in the Budget Review Pack for
POLB12/21(b) was reconciled to the original strategic plan. The Chairman discussion on 8" March. Complete
asked that significant features in the plan be highlighted and
methodology of approach explained.
7d February 2012 Performance Pack: Chris Day to review the format of the Chris Day Complete

POLB12/23(a)

insurance policies data to make the trend information clearer.

. Actions Appertaining to Front Office of Government

8a

February 2012
POLB12/18(c)

DVLA Tender: Tender stakeholder communication plan to be
circulated to the board highlighting the ministers and officials
involved in the decision making process and detailing how the
Board can support.

Kevin Seller/
Martin Moran

Complete*

Post Office Ltd - Strictly Confidential

POL00103334
POL00103334

8b February 2012 DVLA Tender: Kevin Seller to organise a meeting with Neil Kevin Seller/ KS agreed with NMc that he would send
POLB12/18(d) McCausland to take him through the FOoG communications Martin Moran notes for comment/questions. Complete.
plan.
8c February 2012 The DVLA Tender would return to the July Board but Paula Paula Vennells Ongoing

POLB12/18(e)

Vennells would keep the Board updated on any significant
changes should they arise in the interim.

_I 9. Actions Miscellaneous

9a January 2012 Olympics: A noting paper to be brought to the March Board Mike Young On March Board agenda.
POLB12/03(d) detailing the work underway to mitigate any disruption caused
by the Olympics.
9b January 2012 Integrity of Horizon System: Susan Crichton to clear the audit I Susan Crichton Final amendments to report awaited.
POLB12/07 report with the external lawyers and, if possible, to give the
report privileged status and circulate it to the Board.
9c February 2012 Stamp Prices: Martin Moran to circulate a note covering the Martin Moran On March Agenda.
POLB12/21(d) effect of RM price increases.
9d February 2012 Health & Safety Report: future H&S Reports to include any Alwen Lyons Included in current report. Complete
POLB12/26(a) incidents of aggravated robbery and burglary.

Post Office Ltd - Strictly Confidential

POL00103334
POL00103334

10a

December 2011
POLB11/75

When the MDA negotiations are complete, the RM
assumptions are to be challenged on the Postal Museum.

Chris Day

In hand, Chris Day to provide off line
update note to POL Board members.
Cleared.

Post Office Ltd - Strictly Confidential

POL00103334
POL00103334

tia February 2012 A formal referral policy to be agreed with Junction ensuring Nick Kennett Complete — see notes attached at
POLB12/25(b) no active encouragement of personal injury referrals unless Appendix A
requested by the customer. This to be copied to the Board as
a future noting paper.
11b February 2012 Nick Kennett to investigate the flow of fees to ensure there is_I Nick Kennett Complete - see notes attached at

POLB12/25(c)

no inducement of wrong behaviours.

Appendix A.

POL00103334
POL00103334

Post Office Ltd - Strictly Confidential

POLB(12)32
Appendix A

Paula Vennells asked for a formal referrals policy to be agreed with Junction ensuring no active encouragement of personal injury referrals unless requested by the
customer. At present the following policy statement has been agreed between POFS and Junction:

“Post Office Insurance will always seek to provide our customers with the most relevant advice and support whilst making a claim and will not take any steps to
encourage or incentivise fraudulent Personal Injury Claims.

Further the Post Office Insurance will:

Not pass any Customer Data to Third Party organisation to proactively create Personal Injury Referrals.

Not ‘Claims Farm’ closed claims with the potential for personal injury claims.

Never provide any additional incentives to customers to pursue a personal injury claim.

Never call a customer after notification of a claim without their express consent with the objective of making a personal injury claim referral.
Never contact third parties with the intention of encouraging a personal injury claim referral.”

AVPoOn=

Nick Kennett would also investigate the flow of fees to ensure that there is no inducement for wrong behaviours.

The following are the details of the staff incentive program for the claims team - although a component of the incentive relies on an appropriate introduction for a PI
referral this is part of a balanced score card approach. Inappropriate referrals would count against the agent's incentive.

“When conducting a First Notification of Loss call, the call centre operative is incentivised around the understanding of the customer's needs. A balanced scorecard
approach is used and if the contact centre operative does not meet the required standard, then they will not achieve their monthly bonus.

The key metrics that sit within the balanced score card are as follows:

Time taken to answer the call

Number of calls abandoned

Was the liability decision correct

Did the customer require a replacement vehicle and was a hire referral made

Was the customer injured and if they were, did they want representation and if so was an injury referral made

The call centre operative is also measured on their soft skills and this is done by call listening( both live and recorded). The reviewing manager will focus on the
following:

e — Listening skills
e Empathy
e Building a rapport with the customer

Our [Junction] FNOL providers will monitor under and over performance and, if required, further training will be given to any advisors not meeting the required grade.
In addition to this, ACM also listens to a sample of calls each month and the quality scores are reported into board on a monthly basis.

8
Post Office Ltd - Strictly Confidential

POST OFFICE LIMITED BOARD.
Status Report

POL00103334

POL00103334

POLB(12)32

No.

REFERENCE

ACTION

BY WHOM

STATUS

[Actions Appertaining to Governance

fa November 2011 To update the Board on the review of future Executive Team Paula Vennells In hand, to be discussed by Paula
POLB11/54(e) Structure and Accountabilities. Vennells, Chairman and NEDs to feed
into the individual Senior Executive's end
of year PDR and future organisation
design.
1b January 2012 Susan to bring back a revised Governance proposal to the Susan Crichton To be discussed at the March Board.
POLB12/06 (a) Board once she has met with the Chairman to discuss this
further.
ate January 2012 Susan Crichton undertook to revisit the requirements under the I Susan Crichton Complete.
POLB12/11 Bribery Act at an Executive Team meeting.

2. Actions Appertaining to IT & Procurement __

2a

November 2011
POLB11/62(c)

January 2012
POLB12/03 (c)

The Chairman requested a deep dive to be organised to cover
procurement and governance.

The Chairman requested that the IT Board paper is clear with
practical language to highlight what the IT changes will mean to
the Business on the ground. A deep dive was suggested.

Mike Young

A session is scheduled for the March
Board on Infrastructure (IT and
Procurement)

Mike Young will ensure that practical
language is used in the IT paper and
arrange individual sessions with Board
members before the March Board.

[Actions Appertaining fo Financial Services

3a

September 2011
POLB11/48(d)

Current Account: The target for introduction is 2013 but a full
proposition needed to be presented to the Board.

Nick Kennett

In hand; target date should read 2012/13
and will come to a Board in 2012 (April).

Post Office Ltd - Strictly Confidential

POL00103334

POL00103334

3b November 2011 The Chairman asked Nick Kennett and Kevin Gilliland to Nick Kennett In hand; on Board Agenda for March.
POLB11/56(c) present a joint paper to the Board in the New Year covering the
Financial Services future sales plan. (previously scheduled for February but
further work needs to be completed on
the most effective investment of £4m
commitment agreed in Eagle)
3c January 2012 Eagle Contract Termination: If the evergreen right was not Nick Kennett Ongoing as part of Eagle negotiations.
POLB12/10(c) negotiable then Nick Kennett was asked to ensure the
resolution period was long enough for POL to find an
alternative provider.
3d February 2012 Eagle: Target date of early March for signing the contract and Nick Kennett

POLB12/24(a)

Nick Kennett will bring the final agreement to the March Board

. Actions Appertaining to Network Transformation _

4a December 2011 It was agreed that an updated Crowns plan be brought back to I Kevin Gilliland In hand, This will be part of the NTP
POLB11/69(d) the Board next year to cover the new economic model; presentation to the Board in March.
optimum self service vending; and the impact on Crown branch
numbers.
4b December 2011 The Board to be provided with 2-3 bullet points to explain the Alana Renner The Board will be alerted to and briefed
POLB11/69(k) facts in the event of adverse publicity or contact by MPs, local ahead of (wherever possible) any major
dignitaries or Subpostmasters. adverse publicity regarding the Post
Office. The Board will also receive a
brief ahead of any major news releases
to ensure they have key messages to
handle any high level enquiries.
4c January 2012 Kevin Gilliland to include in his NTP update to the Board in Kevin Gilliland / In hand, will be included in the March
POLB12/03(a) March how the Business intended to prioritise the offices as the I Chris Day Board presentation.

models had very different commercial implications.

. Actions Appertaining to Board Reports _

2
Post Office Ltd - Strictly Confidential

POL00103334

POL00103334

POLB12/01(b)

the Board based on the discussions to date (including higher
ranges for CEO and CFO) with a gateway for Network
Conversions; a small reward for achieving 90% of the financial
target; but with the main bonus at 100% and significant
rewards for hitting stretch targets. It was agreed that the work
needed to be completed as quickly as possible to enable a
proposal to the Shareholder before the end of the financial
year.

5a November 2011 The Chairman asked Chris Day to arrange briefings for the Chris Day In hand, Charles Colquhoun (Head of
POLB11/57(d) Board on Working Capital. Cash Management & Financial Planning)
co-ordinating a balance sheet/working
capital management briefing session.
Session scheduled for 8"" March.
Complete
5b November 2011 Paula stressed that queuing times was an area on which the Kevin Gilliland In hand, Kevin will bring this to the June
POLB11/57(e) Business focussed heavily and suggested a strategy paper (Paula Vennells) I Board.
comes to the Board on this topic.
5d January 2012 Chris Day to speak to Matthew Lester (RMG CFO) regarding Chris Day Ongoing — Chris Day to report back to
POLB12/06 (a) ‘Going Concern’ discussions as part of the Board’s February Board.
governance, and introduce the necessary reporting process at Update 9" February — Chris Day
the Board. confirmed that POL’s Going Concern
status would be covered within the RMG
consolidation for this year. A paper
would be provided to the Board (April) on
the proposed Going Concern
process/external audit for FY 12/13.
I 6. Actions Appertaining to POL Remuneration _ a cc ee
6a January 2012 LTIP: The Chairman asked that a proposal be brought b back to Matthew Starks I Work is on-going with New Bridge Street

to re-model the LTIP in line with the
feedback provided by the Board and to
establish the metrics with the Finance
team. The revised proposal will be
represented to the board in March
though, following a suggestion by Alice
Perkins, this may be able to be
considered sooner, but outside a main
board meeting.

Extraordinary board meeting 29"
February. Ongoing

Post Office Ltd - Strictly Confidential

POL00103334

POL00103334

6b February 2012 PDR scoring — Les Owen requested two-dimensional matrix Pauline Holroyd Session scheduled for May Board.
POLB12/20(c) rating performance and potential. Paula Vennells suggested
the inclusion of potential ratings for the Top Team in the
succession planning paper.
6c January 2012 Managers Pay 2011-12: Discussions are continuing with the Matthew Starks Update contained within Managing
POLB12/01(d) CMA and Matthew Starks will update the Board if there are any Director Update: POLB(12)19.
significant changes or the pay deal is agreed. Ongoing
6d February 2012 Pay Review: Kevin Gilliland to provide a cost benefit analysis Kevin Gilliland
POLB12/21(a) paper to cover all the options available on Crown pay and their

associated risks.

An additional Board meeting may be required to consider the
pay mandate in detail.

Alwen Lyons/
Paula Vennells

No longer required. Complete

_7. Actions Appertaining to Finance

7a September 2011 Ongoing development of commercial finance capability is Chris Day Ongoing
POLB11/43(e) required.
(ce February 2012 Budget Meeting 8" March: Chris Day confirmed that the budget I Chris Day Included in the Budget Review Pack for
POLB12/21(b) was reconciled to the original strategic plan. The Chairman discussion on 8" March. Complete
asked that significant features in the plan be highlighted and
methodology of approach explained.
7d February 2012 Performance Pack: Chris Day to review the format of the Chris Day Complete

POLB12/23(a)

insurance policies data to make the trend information clearer.

. Actions Appertaining to Front Office of Government

8a

February 2012
POLB12/18(c)

DVLA Tender: Tender stakeholder communication plan to be
circulated to the board highlighting the ministers and officials
involved in the decision making process and detailing how the
Board can support.

Kevin Seller/
Martin Moran

Complete*

Post Office Ltd - Strictly Confidential

POL00103334
POL00103334

8b February 2012 DVLA Tender: Kevin Seller to organise a meeting with Neil Kevin Seller/ KS agreed with NMc that he would send
POLB12/18(d) McCausland to take him through the FOoG communications Martin Moran notes for comment/questions. Complete.
plan.
8c February 2012 The DVLA Tender would return to the July Board but Paula Paula Vennells Ongoing

POLB12/18(e)

Vennells would keep the Board updated on any significant
changes should they arise in the interim.

_I 9. Actions Miscellaneous

9a January 2012 Olympics: A noting paper to be brought to the March Board Mike Young On March Board agenda.
POLB12/03(d) detailing the work underway to mitigate any disruption caused
by the Olympics.
9b January 2012 Integrity of Horizon System: Susan Crichton to clear the audit I Susan Crichton Final amendments to report awaited.
POLB12/07 report with the external lawyers and, if possible, to give the
report privileged status and circulate it to the Board.
9c February 2012 Stamp Prices: Martin Moran to circulate a note covering the Martin Moran On March Agenda.
POLB12/21(d) effect of RM price increases.
9d February 2012 Health & Safety Report: future H&S Reports to include any Alwen Lyons Included in current report. Complete
POLB12/26(a) incidents of aggravated robbery and burglary.

Post Office Ltd - Strictly Confidential

POL00103334
POL00103334

10a

December 2011
POLB11/75

When the MDA negotiations are complete, the RM
assumptions are to be challenged on the Postal Museum.

Chris Day

In hand, Chris Day to provide off line
update note to POL Board members.
Cleared.

POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)33
Board of Directors

Date of Board: 15 March 2012

POL00103334
POL00103334

Subject:

Managing Director’s Report

Author/Sponsor:

Paula Vennells

Contributors / Presenters:

ET

Decision Guidance Noting

For:

Reference previous action point:

BACKGROUND AND CONTENT:

To update the POL Board on:
e Strategic Programmes
¢ Business as Usual.

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: NO
POL00103334

POL00103334

POLB(12)33
POST OFFICE LTD BOARD
Managing Director’s Report

Strategic Programmes:

1.

Network Transformation (NT)
Agenda item

Crowns
Agenda item

Front Office of Government

e The Pre Qualifying Questionnaire for the DVLA Front Office Services was submitted
to the DVLA on the 9 March.

¢ The DVLA has confirmed that all Post Offices offering the car tax transaction must
accept cheque’ as a method of payment. This causes an issue where branches have
been converted to the locals model, allowed to retain the car tax transaction but not
accept cheque as a method of payment. If they are now required to take cheques,
this compromises the associated cost savings. The issue has been escalated to the
Network Transformation Programme Board and a compromise solution is being
sought.

« Our week of presentations and exhibition in reception at BIS is proceeding well.

Efficiencies

The Efficiencies Programme for 2012/13 is currently being planned. It is envisaged that
a company-wide programme will be implemented which (1) takes account of efficiency
targets already embedded in most supplier contracts, and (2) applies specific focus to
evidencing value for money in our Network Transformation spend in line with National
Audit Office "best practice". Indicative targets for ‘business as usual’ and major
programme spend efficiencies will be reviewed by the ET in April before being submitted
to the Board for ratification.

Separation

Work with the directorates on the definition of their desired target operating models for
an independent Post Office is progressing. The phased cessation of services is on
schedule with the first 66 services planned to cease by 31 March 2012. Final plans for
the cessation of the remaining services across FY 2012/13 and 2013/14 will be available
by 31 March 2012 as required by the MSA. Initial estimates of the costs associated with
the programme continue to be revised downwards as detailed planning progresses.
One-off costs have been re-estimated to be £22m to £27m (down from £30m to £40m).
Recurring costs post-separation are likely to be in the range £102m to £109m (the FY
2011/12 inter-business charge from RMG is £110m). The core roles for the programme
team will be in place by mid-April 2012 and there continues to be a good working
relationship between the teams from POL and RMG.

Post Office Financial Services (Eagle)
Noting Paper

IT Landscape
Agenda item
8.

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POL00103334

Budget Planning
Agenda item

Business as Usual Report:

1.

Pay Negotiations
Managers 2011 Pay Review: A further meeting took place on 28 February and Brian
Scott stated he would accept our offer. The revised mandate has been approved by
Group and a formal offer submitted to the CMA, which will now go out to ballot. The
offer is as outlined previously and within budget - £2.2m (average 1.5% with some rates
varying for certain grades/functions).
In summary the main benefits are:
e Engagement and delivery of Crown Transformation and Supply Chain strategy (hard
wired to deliver tough changes within the programme)
£400k annual cost saving by removing overtime
Greater amount of pay deal is cash which aids reduction in fixed costs in Crown
P&L.
e Greater flexibility re management structures in Crowns.

Pay Deals

CWU 2012 - 2015: We are exploring an agreed partnership approach which will deliver

a three year pay agreement and a new agreement on flexibility as follows:

e Enabling seasonal to daily variation in staffing levels to more accurately meet
customer demand. This also to enable extended opening hours at no extra cost.

e Review of roles to ensure efficiency and sufficient skilled capacity to deliver growth in
range of services. This could involve changing how old payments such as
‘substitution pay' (this is where colleagues step up to cover in the absence of a
Manager) are paid in order to become more value-adding.

e Improving our “host and sell” offer in branches. “Host and sell” is how we operate in
branch and is being trialled in the Premier in Birmingham. (A “host” is similar to a
meeter greeter and “sell” is looking at how we improve the selling of our products.)

e Working to support more automation, some of which has been piloted in the
Birmingham Premier trial.

e Introduction of profit related pay.

The mandate and options are currently being worked on to take into account the above.

Quarter 4 - 11/12 Product Campaigns

Telephony: The quarter 4 telephony campaign is proving extremely popular with
customers and our branches: colleagues have been driving exceptional levels of sales.
After 8 weeks of the campaign, we have processed in excess of 40,000 applications,
with around 20,000 customers already live. With 5 weeks still to go, we will exceed the
59,000 applications required to deliver the 44,000 live customers targeted.

Insurance: The Post Office, in conjunction with POFS, has continued to roll out a
number of pricing, incentive and marketing initiatives to ensure that the Policy in Force
(PIF) numbers for general insurance remain above 300,000. As at 1 March, PIFs have
risen from a low point of 335,000 in December 2011 to almost 358,000. Management is
confident that growth can be maintained in the forthcoming period.

Mails
Collections and Returns: The team is currently working on storage and paystation
solutions to deliver the out of hour’s proposition and this work is on track. POL is
POL00103334
POL00103334

engaged with the RM team in developing the joint business plan for collections and
returns and ensuring that all of the remaining MDA requirements are delivered.
Separation: From a commercial perspective the Mails team is ensuring that the
relationship with RM commences in a positive way. Meetings have taken place to agree
the successful ‘on boarding’ of the MDA. The first customer forum was held on

21 February and both parties are committed to working in partnership to develop a
positive commercial relationship.

Mailwork negotiations have commenced with Royal Mail. Initial discussions have been
focused on understanding each party’s position and common ground. We expect
negotiations to continue at pace through the next three weeks.

The Data working party has also met for the first time to understand how POL and RMG
will use data and MI in the future relationship. The joint working party will continue this
work over the next few weeks.

Paula Vennells
March 2012
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)34
Board of Directors

Date of Board: 15" March 2012

POL00103334
POL00103334

Subject: Health and Safety Report

Author/Sponsor:

Simon Eldridge/Paula Vennells

Contributors / Presenters:

Decision Guidance Noting
For: v

Reference previous action point:

BACKGROUND AND CONTENT:

The purpose of this report is to enable the Board to fulfil the principles of effective
governance of health and safety outlined in the Health and Safety Executive and Institute
of Directors ‘Leading Health and Safety at Work’, in terms of monitoring health and safety
performance, corporate health and safety risk and health and safety interventions.

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: YES/NO
1.

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POLB(12)34

POST OFFICE LTD BOARD

Health & Safety Report

Purpose

The purpose of this paper is to:

14
1.2

Provide an update on safety performance.
Outline risk reduction activities.

Current Situation

21

Total number of injury accidents, year to date, is better than target at 15.1%
down on last year and accidents involving absence are also better than target
at 40.6% down on last year. The per 1000 staff in post comparison indicator,
which takes account of head count fluctuation year on year, is showing a
similar decrease for absence accidents. Both Crowns and Supply Chain are
showing significant progress in embedding the safety management system
and thereby reducing accidents. The ratio of absence accidents to number of
heads remains significantly higher in Supply Chain than in Crowns, this is an
indicator of the different risk profiles associated with the activities and tasks
undertaken. The ratio of absence accidents to all accidents has improved from
1 in 4.5 to 1 in 6.5. This indicates that, in general, injuries from accidents are
becoming less severe, accepting that there were three exceptions that
resulted in long absences.

Table 1 All Injury accidents and those resulting in absence (Cumulative)

Accidents

—e— 2010/11 All

—#— 2011/12 All

2010/11 Absence

2011/12 Absence

P41

P2 P3 P4 P5 P6 P7 P& PY P10 P11 P12
Period

2.2

The number of days lost due to accidents is now showing a decrease of 6.7%,
year to date, improving from a 2.7% increase last month. The previous
adverse spike in performance was due to 3 long term absences related to
accidents at work compared to one long term absence during the same year
to date period last year. All three have now returned to work following active
occupational health service provider interventions. (Table 2)
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Post Office Ltd — Strictly Confidential
Table 2 Days lost resulting from injury accidents (Cumulative)
1800
1600
1400
1200
g 1000 (2010/11
8 800 —*—-2011/12
600
400
200
fe)
P1 P2 P3 P4 PS P6 P7 P8& PO P10 P11 P12
Period
2.3 Reporting of Injuries, Diseases and Dangerous Occurrences Regulations
(RIDDOR) accidents are down 27.8% year to date from 36 to 26. Crowns and
Supply Chain continue to perform favourably against the two bench mark
metrics — the retail sector for crowns and a comparable CViT organisation for
Supply Chain.
24 The number of road traffic collisions (RTCs) year to date is currently showing

an improving trend although having increased by 1.8% on last year from 214
to 218 with the percentage of ‘at fault’ collisions showing a neutral trend over
the past 3 periods although up from 38.8% to 52.7% on last year. (Table 3)
While road traffic collisions account for less than 3% of the overall number of
injury accidents they have the potential for high impact. The activities to
improve performance are identified in 3.1 below.

Table 3 Road Traffic Collisions (cumulative)

Number of RTCs

300
250
200

150

2.5

—e— 2010/11 All
~~ 2011/12 All

2010/11 ‘at fault’
«2011/12 ‘at fault’

P1 P2 P3 P4 PS P6 P7 PB PO P10 P11 P12
Period

Robberies on Post Office Cash and Valuables in Transit (CViT) crews are
down 52% on last year from 53 to 28, year to date. Physical injuries during
robberies, of which there have been 14 year to date compared to 20 last year,
remain relatively minor in severity. Fire arms have not played a significant part
in the majority of robberies with 3 robberies, year to date, being enabled by
the presence of fire arms compared to 18 last year. The activities that are
considered to be having a positive impact on the robbery risk are listed at 3.2
below.
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2.6 Robberies on the Post Office network are 14.6% down on last year, year to
date, from 116 to 99. Burglaries are up 9.6% on last year, for the same period
year to date, from 115 to 126. Physical injuries sustained during these
incidents have increased from 29 last year to 36 this year to date but remain
predominantly relatively minor in severity.

27 The majority of accidents currently fall into three main categories: lifting and
handling, stepping and striking and outdoor falls, these are high frequency
events with, in the majority, relatively low impact. However the lower
frequency types of incident can carry the potential for very high impact, for
example, assaults and road traffic collisions.

Table 4. Types of accident

Assaults
Animals
Handtools

Lifting/handiing &
Objects falling
Stepping/striking

@ Accidents
Accidents with absence

Falls outdoors

Falls indoors
Fire, Elec etc.
Vehicles RTA

Machinery

3. Activities

3.1 Road Risk — Current activities to mitigate road risk are:

« Analysis of effectiveness of face to face training given to high risk drivers - top
50 -has indicated that accidents amongst this community have reduced
significantly

e Eye sight checks for operational drivers in place

e Technical accident reduction interventions on new vehicles e.g. Reversing
aids

e Analysis and evaluation of data (e.g. risk profiles) to determine further
accident reduction interventions

e Safety team input to vehicle specification

e Weekly case conferences to ensure consistent approach to accident
investigation, follow up activity and sharing of best practice

3.2. CViT Robbery and Injury - The following factors and activities are considered
to be having a significant impact on mitigating the robbery risk:
e Active liaison activities with the police and increased police support activity
¢ Significant arrests - reducing the number of criminals involved in CViT crime
« Introduction of new deterrent technologies e.g. Smartwater — a solution that
contains a unique identifier that is released automatically in the event of a
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robbery, spraying those involved and enabling identification of the individuals
involved in the robberies

e Reduction in opportunities for duress type robberies linked to the introduction
of single person vehicles

e Rigorous training/refresher training programme

« Migration to services that Post Office is less exposed to e.g. ATM robberies.

4. Residual Risks

Driving activities have the potential for high impact/loss and remain a risk however the
actions identified above are aimed at mitigating that residual risk.

5. Recommendation
The POL Board is asked to:

5.1 Note the overall improvement in safety performance
5.2 Note the risk reduction activities.

Simon Eldridge
February 2012
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)35
Board of Directors

Date of Board: 15" March 2012

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Subject: Performance Summary — Period 10

Author/Sponsor:

Chris Day

Contributors / Presenters:

Decision Guidance Noting

For:

Reference previous action point:

BACKGROUND AND CONTENT:

Year to date operating profit of 78.4m was £41.5m favourable against the budget of
£36.9m, mainly due to;
* Higher net income of £17.6m includes Mails £13.3m and FS £11.4m favourable, offset
by Telephony £3.7m and Supply Chain £3.0m adverse,
+ Lower non staff costs of £18.6m includes write back of WHS Tupe claim provision
£2.4m, computer costs £5.3m from negotiation and some timing with prior year.

Full year forecast is expected to outturn at £65m (£29m favourable to budget)

The YTD cashflow at Period 10 was an inflow of £54m which was £186m favourable to
budget, (Period 9: £89m favourable). This variance was mainly due to:

+ Net client balances were £150m favourable and were predominantly driven by: the
£39m benefit from the contract amendment with Santander for ‘Day C' settlement,
£24m benefit from Bank of Ireland settlement amendment and network cash £57m
favourable.

+ Profit £41m favourable.

Full year forecast is expected to be an outflow of £10m (£49m favourable to budget).

RECOMMENDATION (if decision required) Date
Recommended by the Executive Team N/A
Investment Appraisal completed or financial implications N/A
assessed and supported by the CFO

Additional presentation: NO
POST OFFICE LIMITED

Performance Report

January 2012

Produced By : Central Reporting Finance Team

For Queries & Comments Contact : Sarah Hall or Kam Bassra

CONFIDENTIAL
Commercially Sensitive and not for onward circulation
This document contains commer: si ve information that is likely to c

id not be copies forwarded in its entirety un for purpose and o1
‘osure oF to exter who da non-dis

It is normally only circulated to the Senior Le

nsequenc

of

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Contents

Headlines

Profit & Loss Statement

Cashflow Analysis & Balance Sheet Summary
Project Costs (OpEx)

Project Costs (CapEx)

Net Income By Pillar

Net Income by Channel

Crown Profit & Loss Statement

Business Scorecard

Appendices

Profit & Loss Statement (incl FYF)
Staff Cost by Directorate

Non Staff Cost by Directorate

Non Staff Cost by Type

Car & Home Insurance Policies In Force

13
14
15
16
17

Headlines - as reported to Royal Mail Group against Q2 Forecast
January 2012

V4
Headlines

External revenue of £70.6m was £1.9m favourable to forecast in the period.

{2 Operating loss of £2.6m in the period was £2.0m adverse to forecast, driven primarily by higher non people costs and lower JV income.

* Cumulative Cashflow was £172m favourable to forecast and is expected to be closer, but still to outperform forecast at year end.
© Period 10 profit was adverse to forecast by £2,0m due primarily to £0.8m higher than forecast non people costs and £1.4m adverse JV income.

Profit Target

Year to date operating profit was £78.4m against the forecast of £57.1m, giving a favourable variance of £21.3m.

¢ Net Income was £879.5m which was £6.7m favourable to forecast.

* YTD people costs were £2.1m favourable primarily due to continued unfilled vacancies.

* YTD non people costs were £5.2m favourable of which the main variances are; £1.8m from reduced spend on IT contractors, Marketing and Legal fees, £1.6m from Staff &
Agent related plus consumables and £0.9m is property and facilities related.

* YTD share of Joint Venture profits were £0.1m adverse so broadly in line with forecast.

* YTD IB expenditure was £3.3m Favourable.

© Project costs remain under spent YTD by £4.0m, but the period was £0.8m overspent, showing signs of a ramp up.

Year on year the profit is £46.6m favourable mainly due to higher net income of £37.3m (which includes the higher Network Subsidy Payment of £25.4m), £1.1m lower
people costs, £4.6m lower non people costs (including IB), £6.8m higher share from Joint Ventures profits and £1.4m less spent on projects YTD.

Cashflow

The YTD cashflow at Period 10 was an inflow of £54m against a forecast outflow of £118m, favourable by £172m (Period 9: £106m favourable).

This variance was primarily due to:

* Network Cash was £72m favourable, with cash holdings being £67m below forecast levels due to continuing focus on cash management, particularly ATM cash management.
For information, branch cash for January 2012 was £432m (forecast £499m), January 2011 was £490m

* Client balances were £30m favourable due to timing as they have benefited from a higher than anticipated Santander creditor due to January's inflow of tax receipts.

* A contract amendment effective in P10 reducing the receipt of the ATM debtor by one day contributes £24m toward the overall variance, this was not forecast.

© Other variances include; profit £21m favourable, working capital is £16m favourable due to higher trade payables and pay balances than forecast, and finally capital spend is
behind forecast, a further £9m favourable.

Focus Product sales (vs, Budget)

YTD focus product sales are adverse by £1.3m driven mainly by Travel Insurance and Bureau where the budget assumed a flat market but tough trading conditions and
competition are depressing volumes. There is also below budget performance on Telephony and in Life Insurance which had an ambitious growth target and, although there is
small growth year on year, it is not at budgeted levels

Headcount
Headcount is 67 favourable mainly due to lower numbers in the Network & Sales Directorate due to vacancies predominantly for Financial Specialists.

(Key Messages: >)

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Profit & Loss Statement
January 2012

Current Month Tait Vear Forecast _I Prior Year Period Year to Date Half Year Forecast] Prior Vear Y1O
Em Budget Variance I Forecast Variance Actual Variance Actual Budget Variance I Forecast Variance Actual Variance}
External Income 522 11 513 19 516 17 519.9 5165 psmo ul 513.9 61 5255 (5.5)
Interbusiness Income 05) (2.4) 283 08 3023 294.8 301.4 96
TOTAL GROSS INCOME (02) 799 24 e222 8113 8152
Cost of Sales 03 (12.8) 18 (95a) (302.7) (94.8)
TOTAL NET INCOME Or 42 Tara a 7205
Staff Costs (a5) (oe) I (2080) o a (206.8)
lAgents Costs 3.2 (403.4) (404.5) (406.8)
Non-Staff Costs ) iq (219.6)

Interbusiness Expenditure
Depreciation

(74.5)

Total Expenditure (pre POOC)
POFS - Share Of Operating Profits
FRES - Share Of Operating Profits

EBIT Pre Overhead Allocations
[Group Overhead allocations

z

Network Transformation POOC

Network Payment

ES Pre Colleague Share”

interest
Impairment
Exceptionals & Redundancy & Severance Costs
Profit/(Loss) On Asset Sale

Cotte a2 Share

£m

40 Cumulative EBIT pre exceptionals & Colleague Share

80 I

70 I

60

50

40

30

20

10

(32.5)
(13.6)
44
0.0
33)
(Profit (vs Budget)
Period 10

January's profit was €3.1m adverse to budget, mainly due to;

* Staff cost £0.8m adverse due to increased bonus accrual.

‘Non staff cost £0.4m adverse due to increased IT expenditure.

‘Joint Venture share £1.6m adverse due to POFS catch up and reflection of adjustments to prior year now their accounts
have finalised.

* Project costs overbudget by £2.3m as projects ramp up and make up lost ground in earlier months.

Offset by:

‘* Net income £1.7m favourable driven by Financial Services.

yo

Year to date operating profit of 78.4m was £41.5m favourable against the budget of £36.9m, mainly due to;

‘* Higher net income of £17,6m includes Mails £13.3m and FS £11.4m favourable, offset by Telephony £3.7m and Supply
Chain £3.0m adverse,

‘* Lower staff costs £1.6m driven by vacancies and efficiencies in the Crown network which have more than offset pay
increases and delays to efficiencies in Supply Chain,

+ Lower non staff costs of £18.6m includes write back of WHS Tupe claim provision £2.4m, computer costs £5.3m from
negotiation and some timing with PY,

‘* Lower Project opex £1.3m - signs of ramp up (£2.3m overspend in period), and

Higher JV profits of £3.0m mainly FRES outperformance.

Page 4
Cashflow Analysis & Balance Sheet Summary

January 2012

Cumulative Cashflow was £186m favourable to budget primarily due to Net client balances which incorporates the
Santander ‘day c’ settlement, Bank of Ireland settlement amendment and favourable network cash.

YTD Cashflow

YTD Cashflow Variances

YTD Baaget — Gperting pref Working ctl re Callengue YTD Actual

5 Fa
GE ea —— ho
(22) 4)

Headroom (£m)

[Opening [Po io I

427

548

54h

favourable to prior year.

m

7 ce I 5

) 2 ax
(20)
&m . . .
Cperting Network ——-Netchent ‘orig Cntal_ Capt Reining. ret Free cash ow
(oma Toontona, e
Balance Sheet
£m Mar-at Budget_[ Variance] (5,
Fixed Assets 0 ay
Debtors 82 (3)
Cash 705 (57) The YTD cashflow at Period 10 was an inflow of £54m which was £186m favourable to budget.
Client Balances (156) (92) (Period 9: £89m favourable). This variance was mainly due to:
Trade Creditors (246) # Net client balances were £150m favourable and were predominantly driven by: the £39m benefit
pansion defict oS from the contract amendment with Santander for ‘Day C’ settlement, £24m benefit from Bank of
Investments. Funding 45 Ireland settlement amendment and network cash £57m favourable.
Net Assets 197 * Profit £441m favourable.
Funded by Maecar Variance] I°* Other items including working capital net to €4m adverse
[Capital and Reserves 178 (42)
Loan (375) 179
(197) 137
Cash Management Table ‘Cash Management
£m Prior Year I Mar-11 P10
‘Jan-11 I Opening I Actual Budget var * Retail and Cash Centre cash (manageable cost) - £74m favourable against budget, and

Retail, cash Centres 581 562 501 575 Th £80m favourable to prior year. POL has made great improvements in managing cash in
Bureau 42 47 38 42 4 the network.
Cheques, debit cards 303 % 255 233 (22) * Bureau (manageable cost) - £4m favourable to both budget and prior year.
Network Cash 926 705 794 850 56 ‘* Cheques and debit cards (customer driven) - £22m adverse to budget but £48m

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Project Costs (OpEx)

January 2012
OPEX - Programme Expenditure By Directorate
Period 10 ‘Current Month Yro 1 [ Full Year ] 1c Originally
ek I [ Aetuals Actuals I PrevMthFest I Vanance I [FYFCurrentI Flightpath I Variance I I Approved II Requested
Network Transformation (825.2) 7073} (2079) (29289) (con) 6.201.0) (942.4) I (g.2seail} (3.0063)
crown aa) oo i (2.9) ie) 2a] 09) G20] oa
INetwork Other (8) 61.4] 123] (63.4) 123] 200.0) 1053] (76733) oa}
[Crown Transformation (42.2) 66.6) 15.4] (239.2) 15.4 (294.2) I (294.2) 252.0) oo
¥ es Teoria panier eee ee Ta eee (ees ao a) a
(Operations (7 Property (260) (50.5) 643] (6626) 6439) wera, (828.7) 616] (7380) (7000)
Security (329) e933) 563] (244.9) 56.39] 232) 770 (46.2) tsc.al} Gos}
Supply Chain (293) 130] — (6a)] (263) (2628) (3699) 206.2 (6o30] — @oo9)
[Supplier Framework (24) 76.0) 51.2] 51.2] 70289) (2.0800) 3314] I .759.)]] G.060.01
[Technology Road Map (399.9) 382 (613 (st.9) (3.6228I (4.3123) (320.7) (730.
eee es ee eee eee a ea : i
(Commercial [Goverment (226.9) (297.8) 7035] 705) (2619.0) (3.3843) (26%5.6]]] 6.5990)
Mails (91.8) Gea} (638) (63.8) (23278) 6892) (3.4866)
Telephony (20773) @.362z0/ 284.7 284.7 (4.7202) 2.2979) (42920)
Direct (58.7) ass] (393) 39.3) e74.0)] (0.212.6) (563.3) 543.0)
Co (is Lea era a Lees eas ae
Financial Services Financial Services (209.4) Bios] 433.4 (4200) 4332 60] 27298] 1.238) I Car22lf G49)
NAR ee eee a ee ae) ice
(Other Firarce (263.6) 3616) 906) Gi9.0i
Separation (2,248.3) 115.0) (50.0
Legal 04 (205.2) 206.2) 00
es eel I ea ane: e
(Central Held Budget 00 (32.0) 00 00
old Programmes Flow thro 2010/34 (236.4) oo oo oo
SS eee = Tere I
(Client Funded I 5) 0.0 00) ‘00 0
[TOTAL POL POOC 954] Genre] 6275.7 fea) 2000]
300 (‘key Points for OpEx Programme expenditure >)
° Period 10 YTD - £0.6m underspent vs previous month forecast.
£m Programme tenon iture P10 Rest of year forecast spend - £12.4m from project teams;
250 fe Network Transformation - €4m - catch up of delayed start to pilots
am ActuallF'cst Pd
20.0 =ariigntpatn IT Roadmap - £1.3m - Expected to be spent as technical delays with the Data
Strategy Foundation (salesforce) project, expected to be recouped.
—Actual Ytd! Fest
15.0 lightpath Ytd Mails - £4.4m - New authorised projects are spending as brought forward from next

10.0

5.0

0.0

financial year.
Telephony - £2.5m_- Q4 campaign underway and spend is increasing.

Financial Services - £1.2m - Project Eagle costs with external consultants being
incurred.

Some of these actions will stip and itis anticipated that the likely outturn will be

between £20m and £23m.
XN

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Project Costs (CapEx) °
January 2012
CAPEX - Programme Expenditure By Directorate
Period 10 Current Month vio Full Year [a Originally
ek I [Actuals [ Prev Mth Fest [Variance ‘Actuals I PrevMthFest I Vanance FYF Current I lightpath I Variance Approved Requested
Network [Transformation (75.8) (249.3) 73.9) {2,506.2} (1,579.3) 739) {2,969.3} {4.867.9) 1,898.6] (2,283.6) {4,518.3)]
Crown Ch) a0 00 00 ao} a0 oo 00 a0} 0.0 00}
Network Other a.9] a0 oo oo a} a0 oo} (250.0) 250.9 (133.0) 00}
Crown Transformation 2.9] 0.0 00 00 a.9} 0.0 00 00 a.9] 2.0 0.0]
PAO i ee (Le Ti ae (a ae = as
lOperations IT Property 539.3) (745.7) 06.4 3.1978) (3,070.0) (227.7) cosa] seo] 1.877. G.126.2) (6.188.)
Security 2.9] a0 oo 00 a0} a0 00 oo a0} 0.0 0.0}
[Supply Chain 165.2) (276.8 2093 (099.2) (908.5) 2093 (a5275)] 13,9360)] 2.4085 (3,866.9) (2.890.9)
Supplier Framework 2.9] a0 00 00 a0} 0.0 0.0 09 ao} 0.0 00}
[Technology Road Map (1,837.3) (2.240.3)I (677.0) {8.845.0) (8268.9) (677.9) (aa.s47.)] 0469.6] (2.378.5)) I _ (21.4508) (8.0853)
ee Gas nia aaa He I eareee Ber) [easel I aero
[Commercial Government 3508 (2646.2) {2.97.9} (5.2070), (5272.3) 65.3 507.5) (6,600.9)
Mails (54.3) (246)] (166.6) 242.0] (2220) (700.2)
Telephony (699.2) (982.2) (1,309.9) (2.200.
Direct (296) (346.5) (3357) (671.9)
i Sn a [te [ea Tie —sa
Financial Services Financial Services (265) (265) 00 (os) (405.9) 379.3 0.0 @.326.0)
i i a ea a Laas as Pas
lother Finance (128.4) 425.0) a) (2.4528) (2,452.4) (04) 27000) {2.769.0) 69.0 (2,700.0) 2,700)
Separation tr) a0 0.0 00 ao} a0 oo 00 00 00 oo}
Legal 0 a0 00 00 a0 0 00 99 a0 20 0
ees anes Teme (a Di feo I ea =a
[Central Held Budget 0.9] 00 00 00 0.0} 0.0 oof (346.2) 346.2 0.0
JOld Programmes Flow thro 2020/11, 258.7 a0 2587 493.2 a0} 493.2 00 09 a0} 2.0
ac eae I as. re ee [Beato I evens] I rosa
[client Funded 0.0] 3.0 0.0 0.0 0.0] 0.0 0.0 00 0.0] 0.0
[TOTAL POL POOC (25785) (5028.6) 4500 GsscosiI (0181.2) 3504 GoesesI Gears] 67816) [G70]
40.0 ca (‘Key Points for CapEx Pro; its >)
pex spEx Programme expenditure
£m Programme Expenditure P10
35.0 Period 10 YTD - £0.4m underspent vs previous month forecast.
30.0 li Actual / Ficst pd ad Rest of year forecast spend - £10m
25.0 E=Fightpath ’
Actual Yid/ Frost rk Tr - ~ catch up of delayed start to pilots
20.0 ~omFlightpath Yd -
IT Roadmap. - £3.0m - Expected to be spent as technical delays with the Data Strategy
15.0 Foundation (salesforce) project, expected to be recouped.
10.0 Government - £2.6m ~ Delays in DVLA and UKBA tenders, UKBA now won and spend
50 progressing
0.0 +— - DJ

Apr May

Page 7
Net Income By Pillar
January 2012

Period 2 Forecast Period Prior Year Period Year to Date G2 Forecast YD Prior Year VTD
Net income (Em) Real Budget I Variance I Forecast Variance I Actual I Variance I Actual I Budget I Variance I Forecast Variance I Actual I Variance
Maile & Retail 317 329 a 2a) 306 Ti 3142 133 3248 26 3230 Tha
Financial Services 216 190 26 22 240 06 2083 1k 2155 43 2217 9}
Government ServicesI 11.5 119 04) 04 107 09 1146 a 116 18 1062 73
{Telephony 490 44 08) 32 09 393 3.7) 374 (8h 387 G2}
Network Payment 173 173 o 35 14h 29 1523 09 15231 0 1269 254
other 35 24 10 8.4) 27 08 333 (23) 314 (02) 356 iss}
Mais & Rota Services Financia Services
48 28 25 12 08 o7 05
em og ee ‘a
= te
Co] em 20 —
een (06) (1.0)
a7)
la <F
&m Government Services Telephony Services
24 14 fm
san an
ne
at 02 os, AML
a
es an ll
(25)

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Pitar Performance
Mais & Retail Services
2nd Class labels ~ Budget predicted 8% volume
decline, but actuals show increase of 26%
Lottery ~ Tuesday draw has increased volumes
as have rollovers
Financial Services
ATMs ~ Dus to increases in volume (29%) against
plan and anticipated reduced commission rates
rot implemented as planned
Growth Bonds - favourable driven by higher
competitive rate
Bill Payments ~ Decline not as high as planned
Personal Banking ~ priar year bereft, some
volume increase plus £500k expected
compensation payment being accrued for against
Santander (Abbey)
Post Office Payout - adverse due to delay in
new clients. A product review is underway to
mitigate this rick going forward
Government Services
Motoring - Volumes are above target by 1.7%
price has increased! ane €1m is for prior year
catch up.
ID Services - Volumes are below income
guarantee levels due to DVLA nat marketing the
product whist in dispute with a 3rd party
Dispute is resolved but there is now a low
istomer response rate for using the POL
channel
Telephony Services
Homephone - Resulting from lower number of

customer accuisitions, (64% of expected levels)
and lower average revenue per customer. 457k
customers are 36k belaw budget. Early signs
from the Q4 campaign are that itis proceeding
to plan for new acquisitiors.

Other

External CIT - Budget assurnes winning of
significant new contracts from start of year, with
'75k pa,

Warehousing - Lower than expected storage

2 won so far wort

‘and fulfilment for Royal Mail driven by cemand
choke in Royal Mail

S

Page 8
Net Income by Channel
January 2012

Va

All channels are performing ahead of budget, with only the Direct channel being adverse (by £3.6m YTD).

Period 10 YTD Focus Product Income is £1.3m adverse and Standard Product Income is £16.0m favourable to budget.
giving an overall favourable income variance of £14.7m. Adverse variance on Focus products (-0.9%) were mainly due to
lower Travel Money, Telephony and Travel product sales, Standard products were 2.8% higher than budget mainly due to
favourable income from Mails, Lottery, ATMs and Motoring.

XN
£m Month Year to date Full Year
[Targeted Income Actual Budget Variance: Actual Budget Variance Budget
Focus Products
Crown Offices 29 29 00 30.6 29.9 O7 35.5
WHS Os O5 {0.0} 55 5.3 02 63
Agents - Managed 47 49 (0.2) 495 02 58.5
Centrally Supported 42 45 (0.2) 44.0 0.1 521
Direct Sales 06 08 (0.2) 72 {2.9} 118
Central 0.0 0.0 0.0 0.4 04 ie}
Focus Products Total 12.9 13.5 (0.6) 137.7 (23) 164.2
Standard Products’
Crown Offices 46 23 23 465 33 50.9
WHS 1.0 0.9 O41 97 09 10.4
Agents - Managed 14.0 13.8 02 1421 78 158.9
Centrally Supported 19.0 18.7 03 189.3 8.0. 214.7
Direct Sales 05 05 (0.0) 5.4 (1.4) 75
Central (0.2) 25 (2.6} 02 (2.9) 37
Standard Product Total 38.8 38.7 O12 392.9 16.0 446.1
Other Income
Cash Services 22 23 (0.4) 18.3 20.6 (2.3)
Gamma 0.5 05 (0.9) 54 54 (0.0)
Fixed Income & Other 151 12.5 26 149.3 141.4 8.0.
Retentions 28 3.1 (0.4) 24.0 26.9 (2.9)
Network Payment. 173 17.3 0 152.3 152.3 i’)
TOTAL POL NET INCOME 89.6 87.9 17 879.5 861.9 17.6
Centrally Supported Net. Account Mgd Net Income Crown Offices Net Direct Sales Net WHS Net Income YTD
Income YTD (£m) YTD (£m) Income YTD (£m) Income YTD (£m) * (£m)
250 2505 100 205 20
200 pane 200" 200 80
15 45
: 5 495 TOM 9
150 150 I : : 60 102% PE 10 ty 103 10 103% Plead
100} eee aiaocn ee 100 soo 49 72
50 50 20 108%) any ka & 5 atone
0 0 = ar) : 0 “ 0 .
Actual Target Actual Target Actual Terget Actual Target Actual Torget
Standard mStenderd mF: Standard mt WStanderd wm Focus! Wstenkd wFoos

* Both target and actual exclude lead

generation income

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Page 9
Crown P&t
January 2012

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[Cash Holding Costs (Lost interest) & Foreign Currency Holding Cost

(03} (9.3) oa ee (28)

POL00103334
The YTD Crown P&L is performing wall against budget for all categories.
Income is £2.3m favourable in the period, doubling the YTD variance (5% favourable). YTD Staff costs are 1% below budget.
Period Prior Year Period Year To Date Prior Year YTD Full Year
tm ‘Actual__Budget__ Variance I Actual Variance I Actual Budget ‘Actual Variance I Forecast Budget__Varlance,
[Sales income ~ Focus 29 00 26 0% 306 299 262 361 355 07
[Sales income - Standard 23 23 5.9 (0.4) £65 434 464 $87
Sa CCS = aes
Staff Costs -FSS 8) (os) 0.0 (98) (0.0) (73) 75) (6. cr)
[staff Costs ~Crown 20) 06) fa.) I ao as) I 925) (96.2) (91.4) (2099) (4097)_——(9.2)
sates SCE ie Oa I ay wel I on ay aor 6 I Gay ay ees

[Crawn/Branch/CS Property Costs Ba) G8} of 6) 2 [G36 34.3) Gar (4) P05) et
ICrownBranch/CS Losses/Gains end Other (oa) (oa 03 (02) 02 (26) 3.6) G4) os Go) (62)

(3.9)

IHomephane Direct Costs
lother Direct Product Costs
Horizon

Network Equipment
INetwork Admin ~ Channel

IPOL Cash & Stock Distribution Costs

INetwork Admin ~ non-Specific
lOperations - Other Infrastructure Costs

(02) (0) 1) (0.1) ad “an
(0.4) (a.0} (0.2) (0.3) (29) (2.0)
(ost ton} (o.7) 00 (5.2) (55)
(0.3) 00 02) (0.0) Ga) (3)
I Mail/Prism and HelpDesk Costs (03) 0.0 (4) oa 25) 29)
Specific (oa) 0.9 196) 2 7) a7)
(0.3) (a.9} 09 (0.3) (2.8) as)

(0.1) (a0) (0.1) (0.0) aa) (1.4)

(2a)
(4.0)
(66)
(a7)
(26)
(64)
(2.3)
(a7)

[Total infrastructure Costs

en ea eae

OS ea aaa

en Tene

29.4 bale

Lv Income 0.4 (0.4) 02 82 72

ms ile ea ee os a ee a
Total Allocated Costs (0.5) (0.2) (93) (0.5) (0.0) (25) 8.9) Go} 11 0) 64)
lOther Allocation of Non-Transactional Income 3.0 10 25 338 344 £98 422

COTE oe CE

Heeb ee a I we

Ce

Allocations 10 (04) (0.9) 8.9 93
IPSU After Renewal Allocations eee ea HEC ea)
lOvertays. G1) (0) (72) (86) G21)

[Adiusted Pet

en TT) IE

as Tae

Page 10
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POL00103334

Business Scorecard
January 2012
Key Performance Indicators Current Month Year to Date Full Year 2010-11

Act Target Var Act Target Var__IPrior YearI F'cast Target Var Outturn
Performance
Total Net Income £m 89.6 879.5 861.9 VO A7e) 8421 I 10441 1.0253 488 997.8
Focus product sales - Net Income £m (Bonus) 12.9 1371 138.4 N/A 164.0 164.0 . . 81.2
Average sales per FS per week (No.) 51 7.2 8.4 71 7.2 94 68
Direct Sales - Net income £m (Note 1) 11 123 163 13.8 19.3 19.3 00 I 164
All product contribution £m (Bonus) 56.0 558.1 534.8 218.3 657.1 640.0 I a NA
Home and Car Insurance Policies In Force (PIF) (k) 350.1 350.1 350.0 490.0 I 3500 3500 90 I 4100
Financial
Operating profit £m (Bonus) (2.6) 78.4 36.9 31.9 65.2 3630 35.6
Total operational costs £m (Bonus) (Note 2) (92.4) (828.3) (849.3) (830.7) I (4,010.2) (4,017.0) (987.5)
Free cashflow £m (Bonus) 92.6 $4.0 (432.4) (137.8) I (014) (58.9) (16.0)
Levels of cash in the network £m 793.0 793.0 850.0 926.1 705.0 691.6 703.3
Staff costs £m. (23.4) (208.0) (208.6) (212.9) I (251.0) (247.9) (252.8)
Agents pay to income ratio % 95.7% 91.7% 95.6% 93.5% 91.9% 95.5% 93.6%
Crown staff pay to income ratio % 146.9% 120.4% 129.0% 137.4% 115.8% 126.9% 135.5%
Outstanding Audit Recommendations* ie) 0 0 = <3 <3 1
Customer
Customer Satisfaction 86.0% 86.7% 85.0% 86.0% 85.0% 85.0% 85.0%
Customer Complaints* 6,852 74.627 = 75,265 — 71.665 I 90.000 90,000 87,539
Quality of Service % (Note 3) 94.7% 93.6% 91.4% 86.5% 91.4% 91.4% 86.9%
‘Crown queue time Crown Branches < 5 minutes* 79.8% 72.0% T41AG 62.7% 73.4% 75.0% 65.0%
Call centre 3D Measure (Bonus) (Note 4)* 105.7% 105.0% 100.0% 87.9% 100.0% 100.0% 107.5%
Effect (Bonus)* 85.7% 82.8% 82.2% 79.7% 82.2% 82.2% 80.1%
impressions Count (Bonus)* 92.6% 93.1% 93.0% 91.8% 93.0% 93.0% 92.1%
Peopte
HYS engagement index % (Bonus) 58.0% 58.0% 58.0% 41.0% 59.0% 59.0% 41.0%
Headcount 7,750 7,750 7814 8,049 7,807 7,807 7,782
Attendance % 96.6% 96.4% 96.0% 96.8% 96.0% 96.0% 96.7%
RIDDOR Accidents (per 1k Heads) (Bonus)* 0.0 3.4 42 3.1 5.0 5.0 5.2
Compliance Measure (Bonus) 95.4% 944% 95.0% 92.5% 95.0% 95.0% 91.9%
Strategy & Operations
Network Pilots/Trials Milestones Achieved 100.0% 100.0% 100.0% I GOR I NA 100.0% 100.0% NA
Front Office of Government Milestones Achieved 100.0% 100.0% 100.0% 00% NA 100.0% 100.0% NA
ATM availability % 96.2% 95.9% 95.5% I 95.7% 95.9% 95.5% 95.5%
Website availability % 99.5% 99.7% 99.6% 99.7% 99.7% 99.7% 99.7% 99.7%
Horizon Availability % 99.9% 99.8% I 99.5% 99.8% 99.8% 99.8% 99.8% 99.8%

Note 1: Direct Sales is shown excluding Lead Generation income
Note 2: Total Operational Costs is defined as: All Expenditure excluding Cost of Sales
Note 3: QofS target is the average of Retail Standards, Mystery Shopper and Call Centre results.

Note 4: Call Centre 3D target is based on achieving 100% of component targets. 2011-12 targets are more challenging than the previous year.

* These measures are not on the group scorecard

Page 11
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Appendices
Profit & Loss Statement
January 2012

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Headline commentary is against
quarter 2 forecast as requested

Group Overhead allocations

(0.0)

by Group
Quarter 3 Forecast Quarter 2 Forecast

Year to Date Half Year Forecast Prior Year YTD Full Year Full Year Prior YearI
£m Actual Budget _ Variance I Forecast Variance Actual Variance] Forecast Budget _—Variance I Forecast Budget _ Variance I Outturn
External income 519.9 516.5 . 36) 5139 61 525.5 (5.5) 618.9 617.6 8 _ 613.5 617.6 625.6
interbusiness Income 302.3 294.8 ue 5 I 301.4 09 292.7 9.6 358.3 348.3 _ 345.6
TOTAL GROSS INCOME 822.2 8113 I 815.2 70 818.2 40 9774 965.9 : I 9713
Cost of Sales (95.4) (104.7) (94.8) (0.3) (103.0) 79 (413.0) (120.6) _I 423.5)
‘TOTAL NET INCOME 7274 709.6 720.5 67 715.2 12.0 864.1 845.3 . 857.1 847.8
Staff Costs (208.0) (208.6) (206.8) (4.3) (212.9) 48 (254.0) (247.9) (259.9) (252.8)
Agents Costs (403.4) (404.5) (406.8) 3.4 (3.8) (476.8) (481.4) (474.9)
Non-Staff Costs (114.3) (432.9) (119.6) 5.2 (0.5) (152.0) (150.9) (138.2)
interbusiness Expenditure (71.2) (70.3) (7A, 3.3 49 (85.9) (89.2) (89.0)
Depreciation (0.3) (0.7) {0.5) 0.2 O41 {0.7} (7) (0.6)
Total Expenditure (pre POOC) (797.3) (817.4) (808.1) 108 (803.0) 57 (966.5) (973.4) (955.5)
‘One off Project costs (POOC} (13.9) (15.2) (17.8) 3.9 (12.5) (1.4) (23.4) {23.4} (15.3)
POFS - Share Of Operating Profits (1.2) 0.0 0.0 (2) (5.2) 39 0.2 02 (3.3}
RES - Share Of Operating Profits 28.5 243 273 12 25.7 29 30.6 28.6
EBIT Pre Overhead Allocations 3 175 (67.3 244 (85.2} (82.4)

(46.

bit - BAU

Network Transformation POOC

One off Project costs (I

Interest
Impairment
Exceptionals & Redundancy & Severance Costs
Profit/(Loss) On Asset Sale
Colleague Share

(1.8)
07
0.0

(1.0)
0.0
0.0

Page 13
Staff Costs By Directorate
January 2012

YID staff costs are £0.6m favourable to budget, with Network staff
being the most favourable and Operations the most adverse

Communications, -708.86

Legal, -1252.43
Central Items, -3055.8
Commercial, -4362.74

&m

YTD Actual

Finance, -6419.84 SRN
Human Resource, -18540.01

Network, -112522.08

Staff Costs

POL Headcount P10
Actual Budget Variance

Finance 205 203 (2)
HR 117 126 9

Legal 23 15 (8)
MD 4 6 2

Commercial 82 78 (4)
Communications 16 0 (16)
FS 22 0 (22)
Network 5,337 5,486 149
Operations 1,944 4,900 (41)
Chairman's Office 3 0 (3)

Communications, -712.06
Legal, -988.92
Central Items, -3897.69
Commercial, -4730
Finance, -6440,3

Network, -115279.95.

YTD Budget

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Page 14
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Non Staff Costs - By Directorate

January 2012

YTD non staff costs are £18.6m favourable to budget, with Operations IT expenditure being the most
favourable, followed by Commercial and Network.
Legal, -247.96 Legal, -1444.27
Finance, -3713.95 Non Staff Costs Central Items, -2567.07

inance, -3628.95
inancial Services, -5710.49

Financial Services, -5288.54

Human Resource, -5528.2

a uman Resource, -4334.51

£m

Operations IT . -85722.69

Central Items, 4113.83

YTD Actual YTD Budget

Page 15
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Non Staff Costs by Type ‘

January 2012 YTD non staff costs are £18.6m favourable to budget, with IT expenditure being the most favourable,
followed by Compensation payments and staff & agent related consumables.

Collection, Delivery and Collection, Delivery and
Conveyance Charges, -757.44 Non Staff Costs : : onveyance Charges, -951.28
Vehicles, -1742.62 Compensation, -1317.65
Property Maintenance, -3721.92 Vehicles, -1719.84
Accommodation - Property bperty Maintenance, -3992.33
Facilities, -4514.49 Accommodation ~ Property
Consultancy, Marketing and Facilities, -4870.29
Legal fees, -9140.17 Consultancy, Marketing and
Staff & Agent Related plus Legal fees, (9.1)
Consumables, (7.4) Staff & Agent Related plus
Consumables, -11619.37

£m

{7 Costs, -65595.96

Compensation, 1938.15

YTD Actual YTD Budget

Page 16
Car & Home Insurance Policies In Force

January 2012

450,000

400,000

Car & Home PIF Trajectory

350,000

300,000

250,000
200,000 ~

150,000 -

100,000 -—

4

&
we sf

a sonpn og — svegemns ns

SY Ny sy Sy ONY ON SONY nh

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@

vow ACtUAl PIF

Base Case Plan

oom Best Case Scenario
common Worst Case Scenario

—— Contract Threshold

Page 17
Post Office Ltd — Strictly Confidential

POLB(12)36
POST OFFICE LTD BOARD

Resignation of Director

The Board is asked to note the resignation of Les Owen as Non Executive
Director effective 15 March 2012 and to authorise the Company Secretary to
file the necessary TMO1 form with Companies House.

Alwen Lyons
March 2012

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14

24

2.2
2.3

3.1

44

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Post Office Ltd — Strictly Confidential

POLB(12)37
POST OFFICE LTD BOARD

Approval of the 2012-13 Budget

Purpose

The purpose of this paper is to seek Board approval to the 2012-13 budget.

Background

The Board was taken through the budget in detail at a review session on 8 March
2012 and was given the opportunity to ask questions and challenge assumptions.
The budget meets the strategic plan operating profit of £84m (net deficit £126m).
The broad shape of the budget was supported following the review but there was a
key area of challenge regarding the increase in the staff cost base between 2011-12
and 2012-13.

Action taken

The following action will be taken to address the concern regarding the increasing
staff cost base:

e To revisit the Organisational Review principles to ensure that there has been no
dilution of best practice;

« To use the Quarterly Performance Review (QPR) sessions booked for 26 and 27
March to challenge the directors on the increasing staff cost base;

e Toissue a top down challenge to all areas allocating the £5m non staff efficiency
(already in the base budget) and a £5m staff efficiency (not in the base budget
and creating contingency to be held centrally against income risks).

Recommendations
The POL Board is asked to
e Note the actions being taken in response to the challenges given on 8 March

2012 and, on that basis;
e Approve the 2012-13 budget.

Chris Day
March 2012
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Post Office Ltd — Strictly Confidential

POLB(12)37

ANNEX A

1.

14

1.2

1.3

2.1

2.2
2.3

3.1
3.2

Strategic Plan Context

The three years of the Strategic Plan to 2014-15 have been reviewed and
updated and the shape of the budget set out below delivers the foundation for
hitting the 2014-15 exit rate as set out in the Strategic Plan. This is consistent
with the strategic objective of reducing the Network Subsidy Payment to £50m
pa in 2017-18.

There is currently a gap of £30m in the 2013-14 PBIT compared with the
Strategic Plan but this gap is considered to be within an acceptable tolerance.

The cumulative cash flow is c£8m higher than the funding agreement which is
considered a modest variance and well within the £200m headroom included
as a contingency.

Background

This is the second year of Strategic Plan but the first year with additional
funding. It includes:

° An increase in Network Subsidy Payment of £30m to £210m;

. Additional funding of £200m.

The budget delivers the Strategic Plan profit of £84m (net deficit £126m).

This budget delivers income ambition, while maintaining cost control and a
significant level of strategic activity including:

Roll out of the new network models;

Pursuing Front Office of Government pilots/operations;

Delivering Eagle;

Mails — developing SME opportunities and product simplification;
Delivery of the new telephony supplier;

People — building the ‘can do attitude’ and increasing strength for
independence; and

° Financial Services prepaid card platform.

Profit and Loss Account
The proposed budget Profit and Loss Account is set out in Table 1 below.
The key objective to deliver operating profit of £84m as set out in the Strategic

Plan has been met, however, there are some changes to the way it is
delivered. The baseline plan includes:

° Challenge to the income line together with the anticipated impact of a
Mails tariff increase and Eagle results in higher income of £37m;
° Changes to the approach to Crowns, Eagle, independence,

strengthening and pay deals result in higher staff costs by £45m but
these are partly offset by lower agents’ costs by £8m;

° Challenge to mitigate non staff cost increases with efficiencies results
in lower non staff costs by £7m and charges from Royal Mail have not
increased as predicted resulting in lower costs by £14m;

° The improvements above release funds to invest more in project opex
activity by £16m.
3.3

3.4

3.5

3.6

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Post Office Ltd — Strictly Confidential

The operating profit of £84m is £19m higher than the quarter 3 forecast for the
2011-12 outturn driven by a £30m increase in Network Subsidy Payment. The
net deficit of £126m is £11m higher than the 2011-12 forecast. It should be
noted that 2012-13 is a 53 week year which results in higher net income of
£11m and higher costs of a similar level.

The key changes from the 2011-12 forecast (excluding project one off costs)

are:

. Net income has increased of £34m with particular growth in Personal
Financial Services (Eagle) of £20m and increases in Mails income of
£14m from RPI, tariff (net of volume decline) and 53% week. The
growth areas are partially offset by decline in traditional business
including DWP exceptions (green giros), NS&l, payment services and
DVLA.

° Operating costs (excluding project one off costs) have increased by
£32m including staff costs £18m, agents’ pay £6m, non staff costs
£10m offset by savings in interbusiness costs with Royal Mail £2m.

e Staff costs are planned to increase by £18m including £6m for
separation/strengthening, £6m for pay awards (Supply Chain already
agreed and Managers/Admin not yet agreed), £6m for Eagle staffing,
staffing of vacancies and other new services, £2m for pension rate
changes and £3m for the 53% week. These increases are partially
offset by savings of £6m from the Crown Programme. This plan
already includes a centrally overlaid savings task of £4m reflecting an
expected restriction to strengthening requests and underlying level of
vacancies remaining. In addition, and in response to the Board Review
discussions on 8 March, it is planned to task the business with a further
£5m efficiency saving to create a £5m contingency to be held centrally.
The £4m already embedded in the budget and the £5m additional task
represent a 3% efficiency against the requested budgets.

. Agents’ pay is planned to increase by £6m reflecting alignment to the
sales plan and the anticipated new mails tariffs.
° Non staff costs are planned to increase by £10m mainly driven by

£6m separation/strengthening costs, £10m IT related costs and £4m
Eagle commitment. There is a £15m efficiency task embedded in the
non staff budget. £10m of this is owned by the Operations Directorate
and delivery will be through various activities including increased
challenge of suppliers. £5m is to be tasked to the business and
supported through an Efficiency Programme. The £15m efficiency task
represents 8% of the budget requested.

The costs of implementing projects (project one-off costs, POOC) have
increased significantly from £23m forecast for 2011-12 to £38m for 2012-13.
These are explained further in section 3.7 below.

The exceptional items include impairment of capex, redundancy, agents’
compensation and major transformational change costs. The anticipated
grant income from Government funding is also included as exceptional. The
increase reflects the significant extra strategic programme activity arising from
the implementation of the strategic plan with the Network Transformation
Programme forming the largest single activity with £141m of this planned
amount.

Table 1 Profit and Loss Account
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Post Office Ltd — Strictly Confidential

tm 2010-14 2011642 2012-43 AS. , 1243 Budget 12-13 Budget
Outturn FYFatQ3 Strat Plan vs.Q3FYF vs. Strat Plan

Gross Income 971.3 988.5 1,015.8 387 273
Cost of Sales (123.5) (117.9) (4.9) 82
Total Net Income (including Eagle) 847.8 897.9 338 355
Staff Costs (@52.8) (268.9) (179) (446)
Agents Costs (474.9) (482.8) (6.0) 99
Non-Staff Costs (138.8) (162.5) 0.8) 67
Interbusiness & indirect controllable costs (105.7) (104.6) 17 135
‘Total Expenditure . . nnn 72:2) (1,018.8) (82.0). (145)
Share of Operating Profi rom JVs 253 326 44)
PBIT Before POOC, NSP & Exceptional items (99.1) (88.3) 166
Project One Off Costs ° ~~ 53) G77)

(126.0)
210.0
84.0

PBIT Before NSP & Exceptional items (Net Deficit)
Network Subsidy Payment
PBIT Before Exceptional items.

‘Add Exceptional Grant Income

3.7 The strategic programmes and key initiatives proposed for 2012-13 are:

3.7.1 Strategic Programmes

° Network Transformation (£96m exceptional, £45m capex)

. Front Office of Government (£4m POOC, £5m capex)

° Crown Transformation Programme (£9m exceptional, £5m capex)
. Independence & Efficiency (4m POOC)

° IT and Change Transformation (6m POOC, £1m capex)

. IT Delivery (£21m CapEx)

3.7.2 Key initiatives
e Mails (£7m POOC)
Financial Services (£5m POOC)
Telephony (£7m POOC, £1m capex)
Digital (3m Capex)
Customer Engagement (Brand positioning and product marketing
activity) (£10m POOC)

3.7.3 Other initiatives
° Supply Chain (£30m capex)
. Post Office Story (3m POOC)
° Mandatory and compliance activity (3m POOC, £18m capex)
. Flowthrough (finishing activity started in 2011-12) (£3m POOC)

3.8 The benefits of all of the programmes have been overlaid into the budget.
4. Cash Flow
41 The proposed budget for cash flow is set out in Table 2 below.

4.2 The budget has been prepared in greater detail than the Strategic Plan which
has resulted in some changes across headings and a net improvement from
this position to a cash outflow of £85.3m. The redundancies, provisions and
exceptionals variance is driven by Network Transformation Programme cost
being less than anticipated in 2012-13 but this is expected to catch up in later
years.

4.3. The redundancy, provisions and exceptionals cost is entirely driven by NTP
and the Crown Programme.
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Post Office Ltd — Strictly Confidential

4.4 The capex plan includes NTP £45m, Technology (programmes £22m and

required upgrade activity £13m) and Supply Chain vehicles £8m. There is

also £18m included at this stage for a North West Cash Centre. Alternative

options for the North West Cash Centre are being investigated.
fm 2010-14 2012-13 2014-12 2012-13 Budget -Q3 FYF

‘Outturn i ‘Strat Plan FYF at Q3 Budget Variance

PIT before exceptonals and Coteagueshare 35.6 837 65.0 84.0 19.0
Add back Depreciation 06 06 05 07 02
Working Capt 2 (55.0) (65) (55.0) (18.5)
Net Client Balance (4.5) (52.0) 25.5 (78.0) (103.5)
Dividends trom JVs & Associates 47 80 62 60 (0.2)
Coptal Expensture (37.2) (11409) 74) (133.0) (105.6)
Redundancy, Provisions & Exceptonals (167) (201.0) (158) (108.0) (92.4)
Pensions (Ex Redundancy) (15.2) (22.3) 22.3
Operating Cashflow (11.5) (48) (278.7)
Colleague Shares 73) (10.0) 10.0
Free Cashflow before Interest & Tax (18.8) (14.6) (268.7)
Interest (6.5) 65)
Tax .
Funding

Free Cashfiow

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POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)38
Board of Directors

Date of Board: 15" March 2012

Subject: Royal Mail Pension Plan — History and Next Steps for Post Office
Limited
Author/Sponsor:
Chris Day
Contributors / Presenters:
N/A
Decision Guidance Noting
For: Y Y Y.

Reference previous action point: Pensions “deep-dive” Board Session

BACKGROUND AND CONTENT:

The purpose of this paper is to:
e Provide the background to the key features of the Royal Mail Pension Plan
(RMPP);
¢ Set out the actions required by the POL Board over the next 12 months in relation
to the POL section of RMPP;

¢ Set out the terms under which POL is able to participate in the Royal Mail Defined
Contribution Plan, Royal Mail Senior Executives Pension Plan and the insured
arrangements.

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: NO
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POLB(12)38
POST OFFICE LTD BOARD
Royal Mail Pension Plan — History and Next Steps for Post Office Limited
Purpose

The purpose of this paper is to:

1.1. Provide the background to the key features of the Royal Mail Pension Plan
(RMPP);

1.2 Set out the actions required by the POL Board over the next 12 months in
relation to the POL section of RMPP.

1.3 Set out the terms under which POL is able to participate in the Royal Mail
Defined Contribution Plan, Royal Mail Senior Executives Pension Plan and
the insured arrangements.

RMPP history

2.1. The Post Office Staff Superannuation Scheme (POSSS) was established on
1 October 1969 when The Post Office separated from the Civil Service and
was established as a statutory corporation. The scheme was replaced by
the Post Office Pension Scheme (POPS) for new joiners from 1 April 1987.
The two schemes merged to become the Royal Mail Pension Plan (RMPP)
on 1 April 2000. The POSSS is now Sections A and B of RMPP and POPS
is Section C. The membership of Sections A, B and C are as follows:

¢ Section A - applies to joiners up to 30 November 1971. Members
retain rights similar to the Civil Service Pension Scheme and were
unaffected by the Pension Reform changes in 2008.

e Section B — applies to joiners between 1 December 1971 and 31
March 1987.

e Section C - applies to joiners between 1 April 1987 and 31 March
2008.

2.2. The key terms of the sections are set out in Appendix 1.

Postal Services Act 2011

3.1 The Postal Services Act, Parliamentary discussions and Civil Service
discussions make the following statements in relation to the future of the
existing RMPP scheme:

« That the RMPP will be fully funded as at the “cut-off date” (currently
planned as 31 March 2012).

e¢ That the RMPP will be left with residual assets to cover the cost of the pre-
1 April 2008 final salary link at a rate of RPI+1%.

e That a new section of RMPP (the “POL Section”) is established to hold
POL members of RMPP.

¢ That it is possible to transfer the POL Section into a mirror image
independent pension scheme, with the consent of the RMPP Trustee at
some point in the future.
4.

5.

6.

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POL Membership

44

A breakdown of membership of POL section by job area and age for each of
Section A/B and Section C is shown at Appendix 2.

RMPP employee contribution rate

5.4

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

The RMPP employee contribution rate is 6% and has been at this level since
1 December 1971.

There have been anecdotal promises by historic Royal Mail Group senior
executives to maintain (what is now) RMPP employee contributions at 6%.
The first time this was explicitly communicated to the RMPP membership
was in the member communications immediately prior to the merger of the
Post Office Staff Superannuation Scheme (POSSS) and the Post Office
Pension Scheme (POPS) to create the RMPP in 2000.

The contractual status of this promise was questioned by Royal Mail Group
when considering the Pension Reform of 2008. Legal advice obtained by
Royal Mail Group states that, because of the member communication in
2000, the RMPP 6% employee contribution would likely be viewed as a
contractual promise by the Courts.

This rate is therefore not irrevocably fixed into the future but has been
deemed as a difficult change to make in the past.

POL employees will have their employment rights protected via the Transfer
of Undertakings (Protection of Employment) Regulations, commonly known
as TUPE. TUPE prohibits making any changes to the terms and conditions
of employment if the sole or principal reason for the variation is the transfer.
This adds a further layer of complexity to increasing the employee
contribution rate.

It should be noted that the RMG pension plans do not currently operate on a
salary sacrifice basis. Operating on a salary sacrifice basis would allow POL
and RMPP members to save on National Insurance Contributions. This
saving could be used to help offset the cost of an increase in employee
contributions.

Based on information in the Towers Watson Pension Scheme Database and
two general surveys (the NAPF Annual Survey carried out in 2011 and the
2010 Occupational Pension Schemes Survey carried out by the Office for
National Statistics - ONS - in 2010), the average contribution rate paid by
members is around 5.0% to defined benefit schemes (i.e. final salary and
career average).

Restricting this to different sectors does suggest different average member
contribution rates. For example, restricting the Towers Watson database to
retail clients suggests an average of more like 5.3% whereas those that
could be viewed as former public sector organisations appear to have an
average more like 5.8%.

Towers Watson's database (which covers around 300 defined benefit
schemes, almost exclusively private sector, of which 28 are career average)
suggests an average career average rate of around 6.1% (this group
includes the RMPP) and the ONS survey suggests 5.4%. This difference is
likely to reflect the different coverage of the Towers Watson database and
those who responded to the ONS survey.

RMG Pension Reform in 2008
6.1

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Pension Reform was implemented in order to reduce the ongoing costs to
the Group due to concerns over affordability. The employer ongoing rate
was 20% prior to the reform and was expected to fall to c11% but adverse
investment market conditions and changes to actuarial assumptions meant
that this level of reduction was never seen and the rate implemented after
the 2009 actuarial valuation was 17.1%.

6.2 Pension Reform made the following changes:

6.3

6.4

6.5

6.6

67

the RMPP closed to new members from 31 March 2008;

all pensions and benefits earned before 1 April 2008 are still linked to final
salary at the time of leaving the RMPP;

from 1 April 2008, benefits accruing for RMPP members do so on a career
salary basis;

the normal retirement age increased from 60 to 65 for benefits accrued
from 1 April 2010, however benefits accrued prior to 1 April 2010 retain a
normal retirement age of 60; and

from 1 April 2010 it is possible to draw benefits with a normal retirement
age of 60, and continue working while still contributing to RMPP so as to
accrue benefits with a normal retirement age of 65 until the maximum level
of benefits has been achieved.

A new defined contribution plan (Royal Mail Defined Contribution Plan)
was launched in April 2009. New recruits joining from 31 March 2008 are
able to begin paying contributions to the new plan after they have worked
for the company for a year. This is administered by Zurich Assurance Ltd.
Employees may pay 3%, 4% or 5% of pensionable pay and attract
employer contributions of 5%, 6% or 7%, respectively.

The change introduced was not as severe as the original proposed change
as this included severing the final salary link for pre-1 April 2008 service (this
element of pension benefit would be revalued as if the employee had left
service on 1 April 2008) and the closure of RMPP to new entrants as at 31
January 2008.

The changes were successfully implemented following union and employee
consultation.

There was a rolling programme of industrial action by CWU members in
2007 caused by changes to working patterns, pay rises and Pension
Reform.

It should be noted that the change made by the Government to the method
of increasing pensions via the move to CPI indexation from RPI indexation
resulted in an actuarial gain £3.4bn in Royal Mail Group’s 2010-11 accounts
and no industrial action from the Trade Unions.

It may be of interest to know that the averages suggested by the surveys
are:

Accrual rates: around half of schemes accrue benefits on 60ths, as per
RMPP Section C. The other half of schemes have a variety of accrual
rates, with the public sector predominantly on 80ths accrual (as per RMPP
Section A/B).

Normal retirement age: The majority of private sector schemes now have
a normal retirement age of 65 (around 75% of private sector schemes)
with the others mainly having a normal retirement age of 60. In the public
7. Options

74

7.2

7.3

74

75

7.6

77

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sector, there is a roughly even split between 65 and 60, with a small
minority (less than 10%) using a different age.

Please note that the above features should not be taken as indicating that
a typical scheme has the average contribution rates, normal retirement
age and member contributions. Identifying such links can only really be
done by a fuller benchmarking exercise.

available to the Post Office section

The measures that the Postal Services Act puts in place are concerned with
past service only, and do not bind participating employers in RMPP to any
future course of action.

There are a number of stakeholders with whom POL should discuss further
pension reform prior to the launch of a formal member consultation, such as
the Shareholder Executive, Royal Mail Group, Royal Mail Pensions Trustees
Limited, the Trade Unions and the Pensions Service Centre.

The POL Board could consider a number of options, all of which will affect
the POL Section funding risk in a different way. Actuarial advice will be
required to quantify the impact of these options. These options could
include:

Changing the employee contribution rate;

Severing the final salary link to pre-1 April 2008 service;
Changing the accrual structure;

Changing the normal retirement age;

Capping pensionable pay rises;

Changing the revaluation rates to the statutory minima;
Closure of the POL Section to future accrual

In order to make these sorts of changes to the POL Section the following will
be required:

a consultation with scheme members must take place over a period of at
least 60 days, as per The Occupational and Personal Pension Schemes

(Consultation by Employers and Miscellaneous Amendment) Regulations
2006.

RMPP Trustee consent will also be required if the change to the POL
Section requires the POL Section Rules to be altered.

It is important to note that The Occupational and Personal Pension Schemes
(Consultation by Employers and Miscellaneous Amendment) Regulations
2006 require only that a consultation takes place. An agreement over
pension changes does not need to be reached.

Introducing salary sacrifice to the POL Section (assuming no change to the
employee contribution and no other material changes to benefit accrual were
made) would not trigger a 60 day consultation, but would need to be
discussed with the stakeholders mentioned in 7.2. Also RMPP Trustee
consent would be required to change the POL Section Rules to permit salary
sacrifice.

Furthermore, it has been considered appropriate when considering RMPP.
scheme design issues in the past to ensure that any material changes
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applied to the RMPP are also applied in a consistent manner to the Royal
Mail Senior Executives Pension Plan.

8. Immediate next steps

8.1 The Trustee is obliged to carry out a triennial actuarial valuation of RMPP as
at 31 March 2012. Although the POL Section will not have been created on
this date, it is likely that the Trustee will seek to carry out an actuarial
valuation of the POL Section over the course of the 2012-13 Financial Year
as one must take place within one year of the creation of the POL Section.

8.2 As the Trustee has not been informed of any changes to the RMPP scheme
design, it will assume that there would be no material changes to the benefit
structure and will base its actuarial assumptions on this basis.

8.3. It should be noted that the actuarial valuation process will provide POL with
a significant amount of data as to what the future cost of funding the POL
Section will be. Providing accurate funding data at present is very difficult
due to the fundamental change in membership since the previous actuarial
valuation in 2009 (caused by the Pension Solution) as well as the fact that
POL has never undergone a covenant assessment as a separate entity to
RMG.

8.4 The Trustee’s initial requirements of Post Office Limited will therefore be:

«Sign an interim Schedule of Contributions which detail the employer and
employee contribution rates, as well as the timing of payments to the
Trustee, which will be in effect until the actuarial valuation

« Access to senior management and strategic plans in order to review the
strength of covenant;

e Aview from the company on its appetite for risk which will steer the
proposed investment strategy and likely ongoing contribution rate.

9. POL participation in the Royal Mail Senior Executives Pension Plan (RMSEPP)

9.1 There are 5 POL employees who are members of RMSEPP.

9.2 POL is able to be admitted as a participating employer in RMSEPP on the
following terms:

« RMG agrees to POL participating in RMSEPP from 1 April 2012, or such
later date that POL becomes the employer of RMSEPP members.

¢ POL will delegate RMG to carry out negotiations with the Trustees on
funding, investment strategy, etc, on its behalf. RMG will liaise with POL
to obtain its views on such issues (as is currently the case).

e POL will pay future service contributions in respect of its members at the
rate applicable to the Plan membership as a whole (as is currently the
case).

e POL agrees to pay 7% of any deficit payments to the Plan (as is currently
the case) in respect of benefits accrued both before and after 1 April 2012.

« POL agrees to pay 7% of any other expenses incurred by RMG in relation
to the operation of the Plan as a whole, such as actuarial advice to the
Company during valuation negotiations with the Trustees. In 2012/13 this
figure is estimated to be £650,000, meaning that POL would pay £45,500.
A breakdown of these estimated expenses can be provided, if requested.
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e POL agrees to pay the whole cost of any work carried out purely at its
request or relating purely to it. For example, any analysis it asks to be
carried out of its members, or work generated by it ceasing to be a
participating employer.

e RMG will consider any request from POL for a POL employee to be
appointed as one of the employer nominated trustees when a vacancy
arises, if POL puts forward a candidate with the appropriate background
and qualities, but any appointment would always be based on ensuring
that the Board’s overall balance of skills and experience was maintained.

e RMG will prepare the documents required to bring about POL
participation, and POL will assist in completion of such documents where
necessary.

10. POL participation in the Royal Mail Defined Contribution Plan (RMDCP)

10.1 There are currently 809 POL employees who are active members of
RMDCP. This represents 6% of the RMDCP population.

10.2 POL is able to be admitted as a participating employer in RMDCP on the
following terms:

e RMG agrees to POL participating in RMDCP from 1 April 2012, or such
later date that POL becomes the employer of RMDCP members.

e POL will delegate RMG to carry out negotiations with the Trustees on
investment strategy, etc, on its behalf. RMG will liaise with POL to obtain
its views on such issues.

e POL will reimburse RMG for its share of the Plan’s running costs that are
not met by deductions from the members’ accounts. These costs shall be
split between POL and RMG in proportion to each company’s active Plan
membership as at each 1 April, and will be payable quarterly in arrears.
These costs include, for example, Trustees’ advisers’ fees, independent
trustee fees, Plan Secretary costs, and levies. In 2012/13 this figure is
estimated to be £470,000, meaning that POL would pay approximately
£28,200. A breakdown of these estimated expenses can be provided, if
requested.

e POLwill reimburse RMG for its share of the Plan’s life assurance
premiums. This cost shall be based on POL’s actual membership, as
calculated by the insurer. A figure for life assurance premiums is already
charged back to POL from RMG, and it is expected that there will be no
material difference in cost.

e Anew POL “employer reserve” will be set up from its participation date, to
receive the employer contributions released when non-vested POL leavers
take a refund of their own contributions. The existing employer reserve will
remain under the control of RMG.

¢ POL agrees to pay the whole cost of any work carried out purely at its
request or relating purely to it. For example, any analysis it asks to be
carried out of its members, or charges generated by the setting up of
bespoke POL communications channels, or work generated by it ceasing
to be a participating employer.

e RMG will consider any request from POL for a POL employee to be
appointed as one of the employer nominated trustees when a vacancy
arises, if POL puts forward a candidate with the appropriate background
and qualities, but any appointment would always be based on ensuring
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that the Trustee Board’s overall balance of skills and experience was
maintained.

e RMG will prepare the documents required to bring about POL
participation, and POL will assist in completion of such documents where
necessary.

11. POL participation in the insured arrangements

11.1 POL employees who do not contribute to a pension scheme are currently
eligible for a life assurance benefit and an income protection benefit through
an Insured Ill-health arrangement provided via RMG. The life assurance
benefit is provided through an insurance policy held by a trust called the
Royal Mail Group Life Assurance Scheme (RMGLAS).

11.2 POL employees who contribute to RMDCP are currently eligible for an
income protection benefit through an Insured Ill-health arrangement provided
via RMG.

11.3 POL employees who have their pensionable salary capped are currently
eligible for a death in service benefit from outside their pension scheme to
ensure that a 4x basic pay death in service lump sum is paid to their
dependents. This is provided via RMG through an insurance policy held by
a trust called the Royal Mail Supplementary Life Assurance Scheme
(RMSLAS).

11.4 POL is able to be admitted as a participating employer to the above insured
arrangements on the following terms:

« RMG agrees to POL participating in RMGLAS, RMSLAS, and the Insured
Ill-health arrangement from 1 April 2012, or such later date that POL
becomes the employer of members in those arrangements.

« POL will delegate RMG to carry out any negotiations with the Trustees or
the Insurer on its behalf. RMG will liaise with POL to obtain its views on
any issues under negotiation.

« Currently, the running costs of these arrangements are minimal, and POL
membership relative to that of RMG is small. While this continues to be the
case RMG does not intend to ask POL to reimburse it for any of these
costs. RMG does, however, reserve the right to amend this policy in the
future.

« While the above “no reimbursement of costs” policy applies POL agrees
that the RMGLAS “employer reserve” built up from insurance claim
amounts not paid out to beneficiaries remains wholly under the control of
RMG.

e POL will reimburse RMG for its share of the premiums of these
arrangements, based on POL’s actual membership, as calculated by the
insurer. A figure for premiums is already charged back to POL from RMG,
and it is expected that there will be no material difference in cost.

e POL agrees to pay the whole cost of any project type work carried out
purely at its request or relating purely to it. For example, charges
generated by the setting up of bespoke POL benefit categories,
communications channels, or work generated by it ceasing to be a
participating employer.

e RMG will consider any request from POL for a POL employee to be
appointed as one of the employer nominated trustees of RMGLAS or
RMSLAS when a vacancy arises, if POL puts forward a candidate with the

7
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appropriate background and qualities, but any appointment would always
be based on ensuring that the Trustee Board’s overall balance of skills
and experience was maintained.

« RMG will prepare the documents required to bring about POL
participation, and POL will assist in completion of such documents where
necessary.

12. Recommendations

The POL Board is asked:
12.1 To note the above.

12.2 To delegate authority to Chris Day to sign the RMPP POL Section Schedule
of Contributions.

12.3 To delegate authority to Chris Day to extend Alwen Lyons’ appointment as
an Employer Director of Royal Mail Pensions Trustees Limited to 31 July
2012.

12.4 To confirm whether it has received enough information to articulate a view
regarding POL’s attitude to investment risk. If so, the POL Board is asked to
delegate authority to Chris Day to negotiate investment strategy for the POL
Section with Royal Mail Pensions Trustees Limited.

12.5 To agree to POL participation in RMSEPP, RMDCP and the insured
arrangements, and to delegate authority to Chris Day to sign the
documentation that will affect this.

Chris Day
March 2012
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Appendix 1 — Benefits under Section A/B and Section C of RMPP

Section A/B Section C
Benefit (per 1/80 pension plus 3/80 lump 1/60 pension. Lump sum by
Ps sum commutation of pension
annum)

Pensionable
pay

Basic pay plus certain
allowances

Basic pay plus certain
allowances, less State benefit
offset of £3,328

Normal 65 for benefits accrued from 65 for benefits accrued from
Retirement April 2010, 60 for benefits April 2010, 60 for benefits
Age accrued before that date accrued before that date
In-service

revaluation —

post April RPI capped at 5% RPI capped at 5%
2008 CSDB

blocks

Deferred

pension CPI uncapped CPI uncapped
revaluation

Pension in

payment CPI uncapped RPI capped at 5%
increase

Death in 4x pensionable pay lump sum 4 x pensionable pay lump sum
service & child ‘ (no £3,328 reduction) &

4 spouse/childrens pensions " :
benefits spouse/childrens pensions
Redundancy Yes — unreduced, enhanced No — Employer discretion
benefits pension
Ill health
retirement Unreduced, enhanced pension Unreduced, enhanced pension
benefits
Maximum 45 years 45 years
service cap

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Appendix 2

Section A/B by job area

Section A/B
(Cash Handling 140)
(Crown Office 609)
Admin 151
Band 2 282
Band 3 215)
Band 4 59)
ISLP 9
Remco 3
[Total 1468
Section A/B by age
Section AB
Number of

Age employees

41-50 864

51-60 590

61-70 14

Total 1468

H¢ i sti
Employees in Section NB

1%

4% 10%

10%

Section C by age

Section C

Number of

Age employees
21-30 128
31-40 875
41-50 1755
51-60 1291
61-70 109
Total 4158

10

@ Cash Handling
i Crown Office
DAdmin
OBand 2

w Band 3
Band 4

wSLP

Remco

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Employees in Section C
0%>
2%)
0%
5%
20%
12% I Cash HandiingI
Crown Office
Admin
1% Band 2
Bands
Banda
sip
Remco

54%

a

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POLB(12) 39
Appendix B

The Chair reported that:

Royal Mail Holdings plc (RMH), the Company's parent company, and certain of
its group companies including the Company are undertaking a proposed
reorganisation (the Transaction);

it is proposed that, among other things, the Transaction include the transfer of the
entire issued ordinary share capital of the Company from Royal Mail Group
Limited (RMG) to RMH and the issue of one special rights redeemable
preference share of £1 in the capital of the company (the Special Share) to one
of Her Majesty's Secretaries of State; and

the purpose of this meeting was to consider and, if thought fit, to approve certain
actions in respect of the Transaction.

The Board acknowledged the Transaction and resolved that it is in the best
interests of, and for the proper purpose of, the Company to undertake certain
actions in respect of the Transaction, as far as they relate to the Company, and
that the Transaction would promote the success of the Company.

A draft of a secondment termination agreement to be entered into by the
Company and RMG (the Secondment Termination Agreement) was presented to
the Board. It was explained that this document recorded the fact that the existing
secondment arrangements were coming to an end and that the termination of
this arrangement would be a TUPE event, so that all staff currently provided
under this arrangement would transfer from RMG to the Company. The Board
noted that the agreement also included express wording to allocate liabilities for
the transferring staff between RMG and the Company. The Board approved the
terms of the Secondment Termination Agreement and authorised any Director of
the Company to execute the Secondment Termination Agreement on behalf of
the Company in the form tabled or with such amendments as the person signing
the agreement may, in such person’s sole discretion, approve (such signature to
constitute approval of any such amendment).

The Board noted that the Articles of Association of the Company would need to
be amended to reflect the changes to the structure of the group pursuant to the
Transaction, as well as to reflect the implementation of the Companies Act 2006
and the Postal Services Act 2011, among other things. The Board also noted that
it was proposed that the Company remove its objects clause together with all
other provisions of its Memorandum of Association in accordance with the
Companies Act 2006. A draft of the proposed new Articles of Association of the
Company (the New Articles) was presented to the meeting, together with a note
explaining the principal changes. The Board acknowledged that the adoption of
the New Articles by the Company and the deletion of the provisions of its
Memorandum of Association would require a special resolution to be passed by
its sole member.

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The Board noted that it was proposed that, in accordance with the New Articles,
one special rights redeemable preference share of £1 in the capital of the
Company (the Special Share) be issued to the Secretary of State. A draft
subscription letter to be signed by the Secretary of State in respect of the Special
Share was presented to the Board. The Board acknowledged that the issue and
allotment of the Special Share by the Company to the Secretary of State would
require that the Company's sole member pass an ordinary resolution to give
authority to allot the Special Share and a special resolution to disapply pre-
emption rights.

The Board discussed the shareholder approvals required to effect the steps
referred to above and it was resolved that written resolutions of the sole member
of the Company to approve these steps be recommended. A draft of the
proposed written resolutions of the Company (the Written Resolutions) was
presented to the Board. The Board approved the Written Resolutions and
instructed the Secretary to send the same to RMG (as the sole member of the
Company) for execution and to send a copy to the Auditors.

The Board resolved that, subject to the Written Resolutions being passed, the
terms of the Subscription Letter be approved and that, upon the receipt of a duly
executed Subscription Letter from the Secretary of State:

the Special Share be issued and allotted to the Secretary of State;

the Secretary be instructed to register the Secretary of State as the holder of the
Special Share in the Company's Register of Members and to prepare a share
certificate in respect of the Special Share; and

any two Directors or any one Director and the Secretary be authorised to execute
a share certificate in respect of the Special Share in the name of the Secretary of
State.

A draft stock transfer form to effect the transfer of the 50,003 ordinary shares of
£1 each in the capital of the Company (the Ordinary Shares) from RMG to RMH
was presented to the Board. The Board resolved that, subject to the receipt of
the duly executed and stamped stock transfer form and the presentation of such
document for registration in accordance with the provisions of the Articles of
Association of the Company:

the transfer of the Ordinary Shares from RMG to RMH be approved;

the Secretary be instructed to register the transfer of the Ordinary Shares in the
Company’s Register of Members and to prepare the necessary new share
certificate, following cancellation of the existing share certificate; and

any two Directors or any one Director and the Secretary be authorised to execute
the new share certificate in respect of the Ordinary Shares in the name of RMH.

The Board resolved that Paula Vennells and Chris Day be and are hereby
severally authorised on behalf of the Company to sign and/or despatch all
documents and notices to be signed and/or despatched by it under or in

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connection with, and to take any additional actions as are necessary or incidental
to carry into effect the Transaction, the purposes of the resolutions referred to
above or the transactions contemplated thereby.

The Board resolved that all actions taken by any Director, officer (including the
Secretary) or agent of the Company in connection with the Transaction prior to
the date of this meeting be authorised, approved, ratified and confirmed in all
respects as acts of the Company.

The Chair instructed the Secretary to take the following steps, subject to receipt
of the duly executed Written Resolutions:

file the amended Articles of Association of the Company and a print of the
Written Resolutions with the Registrar of Companies;

prepare, sign and deliver to the Registrar of Companies a statement of
company’s objects (Form CC04) and a return of allotment (Form SH01);

update the Register of Members of the Company to reflect the issue of the
Special Share to the Secretary of State and the transfer of the Ordinary Shares
to RMH; and

make all such other filings as are required in relation to the resolutions passed at
this meeting.

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POLB(12)39
POST OFFICE LTD BOARD
Governance Update
1. Purpose
The purpose of this paper is to explain the steps required and resolutions to be passed
relating to the forthcoming group restructure which will result in POL becoming a directly
owned subsidiary of Royal Mail Holdings Limited (RMH) and a sister company to Royal Mail
Group (RMG).
2. Background

There are a number actions to be taken and documents to be signed in order to effect the
separation, which will require Board approval. In brief summary, these are:

2.1 The transfer of the entire issued share capital of POL from RMG to RMH and the
issue of one “Special Share” to a Secretary of State (currently, in practice, BIS).

2.2 Signing of a secondment termination agreement to end the current secondment of
RMG staff to POL and enable them to be permanently transferred (under TUPE).

2.3 Anew set of Articles of Association, taking account not only of the change of
ownership but also various changes arising from the Companies Act 2006 and the
Postal Services Act 2011. The new Articles will also include the delegated authority
levels, which have recently been agreed with BIS (attached as Appendix A).

24 Secretary of State to sign a subscription letter in respect of the Special Share.

2.5  Anumber of agreements, yet to be finalised, (e.g. Trade Marks & Domain Name,
Swindon Agreement etc), for which the board will be asked to delegate authority to
sign to Paula Vennells and Chris Day as and when they are in agreed form.

2.6 Various formalities to be carried out by the Company Secretary after all the relevant
steps have been completed.

Items 2.3 and 2.4 will also require Shareholder resolutions, the wording of which the board
will be asked to approve.

Attached as Appendix B, is a set of draft Board minutes which serve to give a more detailed
explanation of the above requirements.

3. Recommendations

The POL Board is asked to delegate to a sub committee of the board the right to pass the
resolutions substantially in the attached form together with any other documents required to
give effect to the transaction.

Susan Crichton/
Alwen Lyons
March 2012
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POLB(12)39
Appendix A

Discussion Document
Proposal: authorities to commit spend or implement change

ShEx Consent Required Under Articles of Association

SHEX > £50m
Authorise
Planned Spend Unplanned & Decisions with brands and
Complex Spend risk impact
No. per No. per No.
Value oa Value a Description per
year year year
Carries significant risk (ERM
scored).
Attract public and media
Board > £20m 3-4 >20m 3-4 interest 3-4
Risk of impact on brand value
‘New product
Carries significant risk (ERM
score 3).
Attracts local public and
redia inter
route £5-20m I 5-6 I £0.5-5m I 10 _I Impacton customer 10
experience
Changes to products
CFO £1-5m 20 £0.25- 10 Price changes 5
0.5m
Director <£1m 50 <£0.25m 50 N/A

Post Office Ltd — Strictly Confidential

Planned Spend

Covers both bau costs of running the business and projects approved in the budget
unless deemed in the budget to be complex.
Includes: extending a product range, system upgrades, and property projects.
Examples:

¢ Horizon releases

e Rhino Doors cash centre security upgrade

« Payment Card (PCI) security compliance

e Marketing campaigns

Unplanned & Complex Spend

Spend not in budget and projects in the budget that were identified as complex.
Includes: product development, acquisition of new system, major capital spend
Examples:
e IT Transformation
Channel Integration
Returns and Collections
Olympics
FOoG tenders

Change with Risk

Any activity that places business at risk (refer to ERM score).
Includes: change of supplier, compliance cases, and single person vehicles.
Examples:

« HomePhone and Broadband supplier selection

e PlINpads

e Eagle

¢ Sale of credit cards in branch

Brand Impact

Significant issue that will be noticed by all customers and significantly impact a group
of customers.
Includes: completely new product, change to product, new branch model
Examples:
e POCA statement frequency,
Premier trial
Online retail shop
Cheque acceptance
Project POLO

N>B> some cases will fit under more than one heading.

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POLB(12)40
POST OFFICE LTD BOARD

Authentication of POL Company Seal
Purpose

The purpose of this paper is to seek the Board’s approval to revise the delegated
authority to authenticate the fixing of the Company's seal.

Background

21 The company seal is affixed to documents executed as a Deed (most
commonly property documents). According to the existing and proposed new
Articles of Association, unless otherwise authorised by the Board, the seal
must be authenticated by two Company directors or one director and the
company secretary.

2.2 Previously, by authority of a board resolution, the POL seal has only required
the authority of a single Director or the Company Secretary or another named
individual. It is proposed that POL continue with this model going forward.

Recommendations

The Board is therefore asked to approve that the affixing of the company seal may be
authenticated by any current Director of the Company or the Company Secretary or
Assistant Company Secretary or the following signatory:

« Susan Crichton
Alwen Lyons

Company Secretary
March 2012
1.

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POLB(12)41
POST OFFICE LTD BOARD

Appointment of Alice Perkins as a director of Royal Mail Holdings (RMH)

Purpose

The purpose of this paper is to:

14

1.2

24

2.2

advise the Board of Alice Perkins’ proposed appointment as a director of RMH

seek the Board’s agreement that this proposal is in the best interests of the business,
notwithstanding any potential conflict of interest which may arise from such
appointment.

Background

Under the forthcoming re-structure, the proposed RMH Board will comprise only the
relative “Chairs” of the two sister companies — Royal Mail Group and Post Office
Limited.

For the purposes of section 175 of the Companies Act 2006 an appointment as a
director of both the holding company and one of its subsidiaries, could be regarded
as a situation which is reasonably likely to give rise to a conflict of interest and
therefore must be notified to and requires the approval of each relevant Board.

Recommendations

The POL Board is asked to consider the proposed appointment and, if agreed, to
pass a resolution substantially in the form attached as Appendix A.

Alwen Lyons
March 2012
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POLB(12)41
Appendix A

Draft resolution regarding Alice Perkins’ appointment as a director of RMH

It was noted that Alice Perkins had notified the Board in accordance with article 89(B) of
the Company's Articles of Association that she was proposing to take up a position as a
director of Royal Mail Holdings plc (“RMH”) and that this could be regarded as reasonably
likely to give rise to a conflict of interest for the purposes of section 175 of the Companies
Act 2006 (the “Act”). The Board considered this interest and position and noted the
potential for certain situations to give rise to a conflict of interest or conflict of duty. The
Board also noted the terms of the [Letter Agreement from the Department of Business,
Innovation and Skills to Alice Perkins dated [e] regarding the structure of the RMH group,
corporate governance arrangements and the Crown indemnity in favour of Alice Perkins].

It was resolved that it would promote the success of the Company for Alice Perkins to
remain a director of the Company notwithstanding her position and interest as a director
of RMH and accordingly that such position and interest shall be authorised for the
purposes of section 175 of the Act and in accordance with article 89 of the Articles of
Association, and that such authorisation shall extend to any actual or potential conflict
which may arise out of the matter so authorised.

The Board may notify Alice Perkins from time to time of any additional obligations or
restrictions that it considers appropriate for her to observe in order to manage the conflict
situation.

In respect of a matter to which this authority relates, Alice Perkins shall not be obliged to
disclose to the Company any information in respect of which she owes a duty of
confidentiality to a person other than the Company.

This authority may be terminated by the Board at any time.

Subject to any duty of confidentiality, Alice Perkins shall be required to notify the Board
as soon as reasonably practicable if there occurs any other material change of
circumstances of which in her reasonable opinion the Board should be aware if it were
considering granting or renewing any such authorisation.

It was noted that, pursuant to Article 89 and section 175(6) of the Act, the meeting was

quorate without counting Alice Perkins and Alice Perkins did not vote on the foregoing
resolution.

Date [e] 2012

February 2012

Horizon
claims

POL/HF/CD

POST OFFICE LIMITED MATTERS — DISPUTE RESOLUTION
PRIVILEGED AND CONFIDENTIAL — CLAIMS OVER £500K OR THOSE OF A SENSITIVE NATURE

Rod Ismay
of POL

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POLB(12)42

POL has received
notification f a total
of five (5) claims from
former subpostmasters
(SPMs) .

Each alleges wrongful
termination of contract
(based on (a) alleged
defects in POL’s
internal processes and
(b) alleged defects
with Horizon). Each is
seeking damages in the
sum of circa £150,000.

Four of the five claims
remain at the pre-
action stage (i.e.
there are no live court
proceedings). Court
proceedings have been
issued in respect of
the fifth claim.

Shoosmiths assert that
they have consulted on
a further 85 cases,

Cla
tha

(1) Scott Darlington
rejected on the ba:

the SPMR admitted to and was

convicted of false
accounting. Responded to

Shoosmiths on the basis that

the SPM can have no claim
for wrongful termination
circumstances where he ha
repudiated his contract.

Last correspondence sent
Shoosmiths on 14/12/2011.
Shoosmiths have taken no
further action to date,
(2) J n Wilson. Positi
as above,

Last correspondence sent
Shoosmiths on 14/12/2011.
Shoosmiths have taken no
further action to date,

(3) Terence Walters. SPMR
admitted to false
accounting, but not
convicted.

im
t

in
dd

to

on

to

Bond Pearce
(Gavin
Matthews,
Helen
Watson)

which are all likely to
raise similar legal

Last correspondence sent to
Shoosmiths on 14/12/2011.
Shoosmiths have taken no
further action to date,

(4) Thakshila
Somaskandarajah. BP have
responded to Shoosmiths
stating that the claim is
time barred and cannot now
be pursued. No response to
this letter from Shoosmiths
to date.

(5) Lynne Prosser.
Proceedings were commenced

by Prosser in June 2011, but
POL only made aware in
October 2011. POL applied to
have the claim struck out
for procedural error in
January 2012. This
application was successful,
but Prosser has applied for
permission to appeal.

The Appeal Court rejected
her request for permission
to appeal on 22 February
2012. Prosser now has the
option to apply for that
decision to be reconsidered
at any oral hearing. POL
awaits confirmation as to
whether or not _a request for

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an oral hearing has been
made. If no request is made
or permission is again
denied, this will be the end
of the matter.

If permission is granted,
the matter will proceed to a
full appeal hearing. If the
appeal is successful, POL
will need to decide whether
or not to appeal itself.

POL is likely to have
evidential difficulties in
responding to the claim as
it appears the papers
relating to this branch may
have been destroyed in
accordance with POL’s
document destruction policy.

Victoria
Griffiths-
Price

POL/HF/CD

Angela Van-
Den-Bogerd

Griffiths-Price has
made a claim under the
Equity Act and under
the Human Rights Act
alleging disability and
age discrimination
against Shieldex
Limited (as the
franchisee of the
branch) and POL.
Damages are claimed,
but the amount is not
specified. The
estimated potential

Particulars of Claim have
been served on both Shieldex
Limited and POL.

POL has obtained an
extension of time for its
Defence to 2 April 2012.
Draft Defence has been
prepared.

It is unclear what steps
Shieldex are taking to
defend the claim. Bond
Pearce have been pressing

Bond Pearce
(Zan
Newcombe,
Dan

Fawcett)

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exposure (if the claim
succeeds) is likely to
be in the region of
£6,000 to £18,000 plus
costs.

If POL is found to be a
service provider under
the Equality Act and,
therefore, liable to
make reasonable
adjustments this is
likely to have
implications across the
Network.

the solicitors acting for
Shieldex to ensure that
proper steps are taken to
defend the claim.

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POST OFFICE LIMITED

Date i " Company Number
28/02/2012 Register of Sealings 2154540
Seal Number Date of Date of Persons Attesting Destination of
File Ref. Sealing Authority _I Description of Document To Document Document
765/ 26/01/2012 24/01/2012 Franchise Post Office Gorbals branch Neil Owen Denise Reid (Alva Leugh-Doyle -
AL6/AL6/364065 1. Franchise Agreement commencing on 1 February 2011 x2 Bond Pearce)
2. Insurance Waiver Agreement x2.
3. No plans letter x2
7667 30/01/2012 25/01/2012 Franchise Post Office Christchurch Branch Neil Owen Denise Reid - (Alva Leigh-Doyle -
ALGIAL6/364065 Franchise Agreement commencing on 29 Septemner 2011 x2 Bond Pearce)
555 Insurance Waiver Agreement x2
No Plans Letter x2
Personal Guarantees x4
Letter confirming Dave Houghton and William David Houghton are one
I and the same person x2 L
767/ 03/02/2012 03/02/2012 Harold Hill Post Office, 17 Famham Road - Licence for Alterations Neil Owen oni Lyng
Prop/259999659 I i L
768 / POL/JMR: 07/02/2012 07/02/2012 Basingstoke CO/OFF 1st and 2nd Floors Floors - Licence to Alter Neil Owen Jean Reynolds
POL and National Westminster Bank PLC
7697 1470272072 79/02/2012 Fmmachise Post Office Chiswick Branch Nei Owen Denise Reid (Alva Leigh-Doyle =
AL6/AL6/364065 1. Renewal Independant Franchise Agreement commencing on 8 March Bond Pearce LLP)
2012
2. Supplement Agreement x2
3..No Plans Letter x2
7101 15/02/2012 15/02/2012 Franchise Post Office Greenwich Branch Neil Owen Denise Reid (Alva Leigh-Doyle)
AL6/AL6/364065 2x copies of the Supplemental Agreement to extend the term of the
I I original franchise agreement I
7711 45/02/2012 79/02/2012 Franchise Post Office Piccadilly Plaza branch Neil Owen Denise Reid - (Alva Leigh-Doyle -
AL6/AL6/364065 1, Franchise Agreement commencing on 6 June 2011 x2 Bond Pearce)
2. Supplement Agreement x2
3. Personal Guarantee x4
I i __4. No Plans Letters x2 i
7727 POLUMR 17/02/2012 {4/02/2012 The Post Office - 101 East Street, Sudbury, Suffolk Neil Owen Jean Reynolds
: Engrossment of a Deed of Variation -
7731 47/02/2012 76/02/2012 Franchise Post Office Slough Estate Branch Neil Owen Denise Reid (Alva Leigh-Doyie -
AL6/AL6/364065 1. Franchise Agreement commencing on 23 July 2012 Bond Pearce)
2. Supplement Agreement
I I __3.No Plans Letter I
774 / POL/JIMR: 23/02/2012 30/01/2012 Palmers Green, 364 Green Lanes, London - Underletting to Shree (UK) Neil Owen Jean Reynolds
Ltd
I I I_Engrossment of an Underlease I
7751 23/02/2012 2102/2012 Franchise Post Office Swadlincote Branch Neil Owen Denise Reid (Alva Leigh-Doyie -
ALGIAL6/364065 1. Release of Obligations Agreement relating to the previous Franhisee Bond Pearce)
a)
2. Franchise Agreement commencing on 19 January 2012 x2
3. Supplement Agreement x2
4, Personal Guarantees x4

Date 28/02/2012 Registered Office: 148 OLD STREET, LONDON, EC1V 9HQ, ENGLAND Page 1
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POST OFFICE LIMITED

Date i " Company Number
Register of Sealings
28/02/2012 9 9 2154540
‘Seal Number Date of Date of Persons Attesting Destination of
1 File Ref. Sealing Authority Description of Document To Document Document
5. No Plans Letter x2
776 / POLIIMR 27/02/2012 14/02/2012 Ground Floor and Basement Premises, 111 Baker Street, London, WiU I Andrew Poole Jean Reynolds
6sG
Engrossment of a renewal Lease for sealing/authentication on behalf of
Post Office Limited.
Starboard Ventures Limited.

Date 28/02/2012 Registered Office: 148 OLD STREET, LONDON, EC1V 9HQ, ENGLAND Page 2
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POLB(12)43
POST OFFICE LTD BOARD

Sealings — February 2012

Seal Register

The Directors are invited to consider the seal register and approve the affixing of the
common seal of the company to the documents set out against items number 765 to
776 inclusive in the seal register.

“The Directors resolved that the affixing of the Common Seal of the Company to the
documents set out against items number 765 to 776 inclusive in the seal registers
are hereby confirmed.”

Alwen Lyons
Company Secretary
March 2012
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)45
Board of Directors

Date of Board: 15" March 2012

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Subject: Olympics

Author/Sponsor:

Lesley Sewell, Chief Operating Officer

Contributors (Presenters:

Spencer Morse (Project Manager), Angela Van-Den Bogerd (Project Sponsor)

Decision Guidance Noting
For: v

Reference previous action point:

BACKGROUND AND CONTENT:

The paper outlines the activities and progress in respect of Post Office Ltd’s preparations
for the Olympics. It breaks the updates down into:

e Activities to leverage the commercial opportunities of the Olympics

e Activities to maintain normal operational activities during the games

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: ¥ES+4+NO
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POL(12)45
POST OFFICE LTD BOARD
Post Office London Games 2012 Programme Noting Paper

1. Purpose

The purpose of this paper is to:

14

Provide an update on the current status of the Post Office London Games
2012 Programme.

2. Background

21

2.2

2.3

The overarching aim of the Post Office London Games 2012 Programme is to
ensure that Post Office Ltd is prepared for the operational challenges it will
face and take advantage of the Royal Mail Group commercial opportunities
that the London 2012 Olympic & Paralympic Games (the Games) will offer.
The Post Office London Games 2012 Programme is a discrete strand of the
Royal Mail Group (RMG) Olympic Programme. The Post Office London
Games 2012 Programme operates within the governance of RMG and Post
Office Ltd’s Operating Board.

All Post Office Ltd activities must be undertaken within the stipulations
provided by the London Organising Committee of the Olympic and Paralympic
Games (LOCOG).

3. Activities

The following activities feature within the current plan.

Activities to leverage the commercial opportunities of the Olympics

3.1

3.2

3.3

Activities to maintain normal operational act

3.7

3.8

3.9

3.10

Support Royal Mail’s aim to sell Gold Medal Special Issue Stamps in Post
Office branches on the day following the Gold Medal being awarded.

Invite c.500 branches to open on Sunday's during the Games to enable Gold
Medal Stamps sales from the following day.

Enable branches to sell additional licensed Olympic themed items during the
Games.

Extend opening hours in key strategic branches.

Refurbish branches in select locations.

Offer a Post Office presence in both the athlete's village and the media plaza.

ies during the games
Implementing countermeasures to off-set the impacts arising from the Olympic
Road Network closures i.e. by changing opening/delivery/collection times.
Implementing increased branch security arrangements, such as upgrading
alarms, modifying the safe and alarm settings and increasing the number of
ATM fogging kits. This is being done where there's increased risk of attack —
currently this is at circa 100 branches.

Incorporating Business Continuity within the project to ensure that we have
plans prepared for the main scenarios and/or threats. The scenarios, which
include risks such as the failure of the mobile phone network, are being
determined at cross sector groups of businesses and the Metropolitan Police.
Post Office Ltd is represented by the Head of Security.

Publish communications in line with the Communications Plan at the
appropriate points to both internal and external audiences.
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Current Position

4.1. The core project team, incorporating key stakeholders for each strand is in
place to enable collaborative delivery of each activity. Roles and
responsibilities/accountabilities are understood within this team.

4.2. _ The strands are: Business Continuity, Gold Medal Stamps (commercial), HR,
Network, Security, Supply Chain and Communications. Plans are in place to
cover the delivery of each strand.

4.3. All activities across the strands are expected to be delivered in time for the
start of the Games.

4.4. The Post Office London Games 2012 Programme has a regular feed into the
RMG Programme Board and into the Post Office Operating Board for progress
reporting and validation.

4.5. IThe LOCOG stipulation in terms of branding and restricted products are
extremely challenging and work is in progress to address these areas.

4.6. The communication of HR related information concerning attendance at work
during the Games (reduction in BAU travel demands by 30%) has been
absorbed within this programme.

Risks/Mitigation

5.1. Existing Business Continuity Plans may not be adequate for the challenges
presented by the Games. This is being investigated within the Business
Continuity strand.

5.2. Additional work is required to assess our partner's levels of preparation. These
assessments will determine their readiness to support our operations, as well
as identifying good practices that Post Office Ltd could readily adopt.

5.3. I The mechanism by which the reduction in attendance at 148 Old Street will be
delivered has yet to be fully defined. A separate piece of work is being
commissioned to address this and progress will be reported into the Operating
Board.

5.4. There is a risk that Royal Mail will be unable to produce and distribute the
Gold Medal Special Issue Stamps in time to go on sale the day following the
award of the Gold Medal. Royal Mail will be running tests to ensure that they
have the ability to deliver against this activity.

Recommendation

The Board is asked to:

6.1. Note the current status of the Post Office Ltd London Games Programme.
Lesley Sewell

Chief Operating Officer
March 2012
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)46
Board of Directors

Date of Board: 15" March 2012

Subject: Privacy Compliance Strategy

Sponsor:

Susan Crichton

Presenter:

Susan Crichton

Decision Guidance Noting

For: x

Reference previous action point: NA

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BACKGROUND AND CONTENT:

To provide the Board with an overview of the Risk & Compliance team’s strategy for supporting
privacy compliance and managing associated risks within POL:

Introduction

Future state

POL data protection background
Existing privacy compliance activities
Conclusion

Next steps

OaAPONn>=

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: YES/NO
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POLB(12)46
POST OFFICE LTD BOARD

Noting Paper

Privacy Compliance Strategy

1. Purpose

The purpose of this paper is to outline the key elements of an effective privacy compliance
strategy, to be implemented over the coming financial year.

2. Background

24

2.2

2.3

24

Post Office Limited has not previously had a defined strategy to deliver
compliance with privacy legislation, although significant progress has been
made in the last six months in establishing basic elements of governance,
delivering training and ensuring that projects fully take account of privacy
requirements and concerns.

The identified activities are designed to both deliver compliance and to assist
in developing a broader ‘culture of compliance’. To support the latter, the
strategy is based on three ‘pillars’:

¢ Ownership and responsibility (people): ensuring senior ownership of
compliance obligations, real commitment to achieving compliance, and
allocated roles and clarity of responsibilities, reporting and accountability.

e Standards and policies (process): developing an appropriate set of
accessible, coherent and consistent standards and policies which
document compliance.

e Effective implementation (delivery): implementing procedures for putting
the standards into practice, including staff training and guidance for those
with the relevant responsibilities, and putting in place ongoing monitoring
to ensure standards are met.

The privacy laws affecting the handling of personal information or privacy of
individuals by POL principally comprise the Data Protection Act 1998 (DPA)
and associated regulations; and the Privacy & Electronic Communications
(EC Directive) Regulations 2003. The UK regulator in this area is the
Information Commissioner's Office (ICO) which has wide-ranging powers to
investigate, seize data and levy fines, if it believes that a business is not
complying with the DPA or PECR.

European privacy legislation is changing: it is proposed that the EU Directive,
which is the basis of current UK legislation, will be repealed and a new
general legal framework for data protection will be contained in a new, directly
applicable regulation. It is unlikely that the new regulation will be adopted
before early 2014 and EU Member States will then have a two year transition
period before it becomes effective. A draft new regulation has already been
published which sets out changes to almost every area of law relating to data
processing. Whilst it is likely that there will be changes to this draft, the ICO
has already indicated which areas of the draft it actively supports; this
provides some indication of the areas which organisations should focus on.
Ignoring the potential changes at this stage could lead to costly amendments

1
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to any new policies and procedures once the changes in law come into effect.
It is therefore recommended that as part of the proposed gap analysis, current
practices are measured against both existing and proposed legislation.

3. Current Situation

3.1

3.2

3.3

In 2006, the ICO received a complaint about the inappropriate disposal of
confidential waste at a franchised Post Office branch in Southampton. As a
result, the ICO made an adverse assessment against POL. By way of
resolution, POL gave an undertaking in February 2007 in relation to a number
of actions to ensure future DPA compliance. The ICO and POL also agreed
on an inspection to establish whether branches were acting in line with the
undertaking. This inspection was completed and the September 2008 report
on it included ten recommendations to mitigate against future breaches. Since
a further review in 2009, there has been little or no follow-up activity to ensure
these actions are still effective.

Given this background, if the undertaking were breached, the ICO might be
expected to instigate a further investigation and give serious consideration to
issuing an enforcement notice. This might require POL to cease processing
personal data immediately; and/or to take specific steps within a set period of
time. The ICO also has power to fine organisations up to £500,000 for
significant DPA breaches.

In October 2011 a similar data protection incident occurred at a franchised
(agency) branch in Hove. POL conducted an investigation and identified that
six client business partners’ product lines were involved and that more than
130 customers’ details were potentially compromised. Corrective actions
have been implemented, including the deployment of data protection training
across the entire Network in March 2012. Additionally, branch audits now
include specific questions about the disposal and retention of confidential
waste. POL reported this incident to the ICO and although the ICO confirmed
that it intended to investigate the incident, no action has yet been taken.

4. Activities

41

4.2

Several data protection driven compliance initiatives are already under-way,
however these are not currently part of a cohesive strategic approach to
privacy compliance. From a compliance perspective, this creates a risk that
work may be duplicated, some key compliance activities may not be
addressed, and that POL may still have significant gaps in its compliance
infrastructure. These activities are as follows:

Data audit/Data Strategy Programme: POL has recognised that its privacy
compliance is immature and that the lack of a consistent approach to
customer data ownership and use exposes POL to risk of DPA non-
compliance. This also affects POL’s ability to fully utilise customer data and to
effectively protect POL’s position when entering into commercial relationships
with business partners. At the end of 2010, a data audit initiative was set up to
review existing client-facing contracts and customer terms and conditions,
identifying their current status and the steps necessary to address any
deficiencies. The first stage (reviewing the current position on fair processing
notices and contract clauses) was completed at the end of 2011. Phase 2 will
deliver a ‘house position’ including data protection standard clauses for client-
facing contracts, and new fair processing notices which will allow us to use our
customer data fairly and lawfully, and in a way that supports our customer
data strategy.
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4.3 Defining POL’s Data Strategy: There is also a need to identify POL’s
approach to client and business acquisition, and the type of client/customer
relationships we want to develop in the future. This needs to take account of
the strategic direction of the business and identify what compliance support is
required. This work has begun but is still in its early stages.

4.4 Separation driven compliance activities: RMG currently provides some DPA
and Freedom of Information Act (FOI) support to POL (primarily relating to
DPA subject access requests and responding to FOI requests) but from
October 2012 this support will cease and POL will take on these activities in
full. POL is now working towards setting up its own FOI and DPA
infrastructure to manage these activities.

5. Proposed strategy

5.1 The POL Risk & Compliance team proposes to implement a cohesive
programme of activity to support compliance with privacy laws and to prepare
for the new privacy regime. This will bring together the existing activities
outlined above, and those compliance deliverables which are not currently
being addressed.

5.2 The first step will be to undertake a high level gap analysis to identify the
current level of privacy compliance across POL against an agreed set of legal
and regulatory requirements. Even though we already know, to an extent,
where we need to focus our attention (eg establishing a governance and
compliance infrastructure, training, policies, processes and procedures etc) -
based on previous work, including the 2009 internal audit report on data
protection - this analysis will more effectively engage the business, provide
hard evidence to support the need for the action, and define the budget and
resource required.

5.3 Following this, the team will develop an action plan, broken down into work-
streams, based on a risk assessment and taking account of the cost of risk
mitigation, to close the gap between the current situation and an agreed
standard of data protection/privacy compliance. The plan will include
stakeholder communication, resource required and appropriate timeframes.
The work-streams likely to be included in the plan to achieve an acceptable
standard of privacy compliance are as follows: fair processing notices;
ensuring legitimacy of data processing; regulatory notification; security
training; data quality; individual rights; disclosures and legal contracts; data
transfers and export; and governance arrangements. It should be noted that
an ‘acceptable standard’ of privacy compliance will differ between different
organisations and depend upon factors such as business sector, types of
processing activities undertaken and the risk appetite of the organisation.

6. Risks

The 2007 Undertaking means that POL has a higher risk profile in relation to privacy. If POL
is investigated again by the ICO the current lack of a robust compliance programme and
infrastructure would leave POL exposed. Additionally, the changing regulatory landscape
means that POL will inevitably need to demonstrate a much higher level of compliance than
historically required. Failure to comply with privacy laws can, of course, lead to substantial
fines, damage to reputation, affect our ability to effectively use customer data and ultimately
win new business. The strategy set out in the paper seeks to address this situation, and to
allow POL to develop its commercial strategy around data on the basis of greater confidence
in its privacy compliance.
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7. Recommendation
The POL Board is asked to note the proposed privacy compliance strategy for
implementation during 2012/13.

Susan Crichton
March 2012
POST OFFICE LIMITED

Board of Directors

Date of Board: 15" March 2012

EXECUTIVE SUMMARY POLB(12)47

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Subject:

Telecoms Tender Update

Author/Sponsor: Martin Moran

Contributors / Presenters: Jeremy Woodrow

For:

Decision Guidance Noting
v

Reference previous action point:

BACKGROUND AND CONTENT:

At the January Post Office Board, the Board endorsed the decision to move suppliers
from BT Wholesale to Fujitsu Services for the provision of our telecoms services
(HomePhone and Broadband).

This noting paper is intended to provide an update on the contractual negotiations that
have been ongoing with Fujitsu Services since the January Board meeting.

e The negotiations are progressing well
e There are 4 areas that are still to be agreed:

Parent Company Guarantee
Limitations of Liability

Benchmarking and Continuous Improvement

Number porting arrangements

¢ The financial position has improved by c. £10m over the course of the contract due

to a regulated price reduction implemented by Ofcom

¢ It is our intention to be in a position to sign a contract at the end of March post
Separation.

RECOMMENDATION (if decision required)

Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: NO
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POLB(12)47
POST OFFICE LTD BOARD

Noting Paper
Telecoms Tender Update

1. Purpose The purpose of this paper is to:
14 update the Board on progress with the Fujitsu Services contract negotiations
for the provision of our fixed line and broadband telecoms offerings, and
1.2 seek authority to sign the contract with Fujitsu Services at the end of March
subject to all contractual issues being resolved.

2. Background
2.1 The decision to switch suppliers from BT Wholesale to Fujitsu Services for the
provision of our telecoms services was endorsed at the Post Office Board
meeting in January (POLB12/10).
2.2 Contractual negotiations have been ongoing with Fujitsu Services since they
were selected as our preferred bidder and progress is such that we will plan to
be in a position to sign a contract at the end of March.

3. Current Situation
3.1 There are a number of key areas where solutions still need to be agreed:

e Parent Company Guarantee — Negotiations are continuing at pace to
secure a PCG. The issue has been escalated within Fujitsu Services.

e Limitations of Liability — Fujitsu Services’ proposal limits their liability to
125% of our charges’ which equates to ~£20m in year 1 and ~£28m by
year 5. We are seeking to increase the limit to 150%.

e Benchmarking and continuous improvement — TalkTalk, Fujitsu
Services' network subcontractor, are resisting any form of contractual
mechanism relating to benchmarking. Fujitsu do accept that there are
benefits for them and their partners in maintaining price alignment with the
marker and they have already accepted benchmarking mechanisms in
relation to the provision of their contact centre services. We are working
through a number of options with the prospective suppliers that would give
us a similar level of comfort in relation to network services.

e Number porting arrangements — TalkTalk do not currently have a number
porting agreement with Virgin Media (meaning we would struggle to target
Virgin customers as they would have to change their phone number in
order to switch). This has been escalated with Fujitsu Services and they
believe such an agreement will be in place by April 2013.

¢ The financial position presented in January has improved by ~£10m over
the 5 year agreement. This change is due to benefits driven by Ofcom price
controls (regulated products) being passed through to POL.

4. Conclusion & Recommendations
44 Negotiations with Fujitsu Services are progressing well and despite a handful
of issues still to be resolved, we plan to sign the contract on schedule.
4.2 The POL Board is asked to note that negotiations are progressing as planned
and to agree that, subject to reaching agreement on the areas identified in
paragraph 3, we should sign the agreement with Fujitsu Services.

Martin Moran
March 2012

’ Network charges are excluded from the liability calculation.

1
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)48
Board of Directors

Date of Board: 15" March 2012

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Subject: Treasury: Authority Levels

Author/Sponsor:

Chris Day

Contributors / Presenters:

Charles Colquhoun

Decision Guidance Noting

For: Xx

Reference previous action point:

BACKGROUND AND CONTENT:

As part of the separation for RM, the POL Board need to authorise POL personnel to
manage those parts of Treasury currently being managed by RM. In addition, clarity is
required around responsibility of POL’s treasury function.

This approval is required to allow POL to manage it’s own funds post separation.

RECOMMENDATION (if decision required) Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: NO
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POLB(12)48
POST OFFICE LTD BOARD
Noting Paper
Treasury: Authority Levels
Purpose

The purpose of setting out these levels is:

« To ensure clear understanding of the levels throughout Post Office Limited (POL)
to provide the basis for the efficient and effective control of Treasury operations.

¢ To ensure that Treasury operations are accountable to the POL Board.

Principles

In general, all policy will be set by the Post Office Limited Board (“the Board”) and
formally signed off by the Audit & Risk Committee who will sign off the POL Treasury
Policy Statement annually. There are certain levels of authority that will be
delegated, as described below. Delegated authority is given to facilitate the day-to-
day Treasury operation; longer-term strategic authority remains reserved to the
Board.

Authorities

Within POL the Treasury department is part of the Cash Management team, reporting
to the Head of Cash Management, Charles Colquhoun.

Authority to Set Policy

Authority to set Policy is reserved to the Board except the following delegations:

Chief Financial Officer, Chris Day Approve Investment Instrument Limits;
Approve Counterparty Selection Criteria;
Approve Counterparty Limits.

Head of Cash Management, Charles I Approve Counterparties.

Colquhoun

Changes to this policy can only be made with written authority from the appropriate
person(s).

Authority to Invest

Authority to invest POL funds is delegated by the Board as follows:

Reserved to Post Office Limited I Over £50m beyond one year to maturity.
Board
CFO plus one other Board Member _I Up to £50m beyond one year to maturity.
Head of Cash Management Unlimited within liquidity forecast up to one
year to maturity;

Up to five years maturity for the purpose of
providing collateral for the Notes Circulation
Scheme.

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In addition, the Head of Cash Management will delegate authority to facilitate daily
operation of the Treasury department:

Delegated authority to invest will be I £50M up to 6 months

given to the Investment £100M up to 3 months
Authorisation Panel comprising c3x unlimited up to 1 month
named Band 4 managers,

Dealers Up to specific daily investment authority
From authorised dealing panel signed by Head of Cash Management or the
managers on the Investment Authorisation
Panel to the limits as above.

Authority to Borrow

Authority to borrow is given to the CFO, within the limits set out in the Funding
Agreement with BIS, namely limited to £50m of external borrowing plus £50m of lease
financing and up to £1.15bn of the working capital loan facility with BIS, subject to
security being available.

Cash Management has reserved powers for the arrangement of all Post Office
Limited borrowing and acquisition financing.

Working Capital Loan Facility with BIS

Authority to draw down against the agreed (£1.15bn) short-term floating rate loan
facilities with BIS for periods over 6 months is a reserved power to the CFO and Chief
Executive.

Authority to draw down against this facility for periods up to 6 months up to liquidity
needs is delegated by the Board to the Head of Cash Management. Deal authorities
up to 1 month maturities have been delegated to the Investment Authorisation Panel
above.

Uncommitted Facility

Liquidity will be managed so that the uncommitted lines should not be required.
However, should this be the case the following authority levels will be applied:

Head of Cash Management: unlimited
Investment Authorisation Panel: £50m overnight

The uncommitted lines may also be used from time to time to test the processes
and/or to maintain the relationship with the provider.

Authority to Deal

Authority to deal (enter into borrowings on behalf of POL) is given to the dealing
panel as for authority to invest above.
10.

11.

12.

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Leasing and Contact Hire
Authority to contract for the provision of leasing services is delegated to the CFO.

Any proposal to entering into a leasing arrangement must first be authorised by the
CFO.

Authority to sign the leasing documentation on behalf of POL is delegated to the
Head of Cash Management to a limit of £50m for a maximum term of 8 years per
lease.

Authority to Implement Foreign Currency and Commodity Hedge Programmes.

The Head of Cash Management is delegated power to enter into foreign currency
transactions and Commodity transactions in order to hedge pricing risk. Authority to
enter into such transactions for any other purpose is reserved by the Board.

Banking Authority

Authority to open and close bank accounts is delegated to the CFO. In addition, the
CFO will delegate day to day authority to the Banking Control Panel. The Banking
Control Panel comprises named individuals recognised by the banks for
administration of bank accounts. They are responsible for the opening and closing of
the accounts and maintaining day to day controls over them, namely setting up of the
accounts, authorising access to them and adding and removing individuals to/from
the computer banking authorisation panel.

Recommendations
The POL Board is asked to:
12.1 To approve the delegated authorities above.

Chris Day
March 2012
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POLB(12)49

POST OFFICE LTD
Noting Paper

RMG Price Changes

Purpose
The purpose of this paper is:

14

To inform the Board of the implications of a pending RMG tariff increase.

Background

21

2.2

2.3

24

Each year RMG undertake a price (tariff) change in quarter 1, subject to
Postcomm approval. This covers the following services offered via POL; 1*t
and 2" Class stamps, the Special Delivery family (by 9am and by 1pm
delivery), Recorded Signed For, Parcelforce products and International
Services.

The price increases this year will be higher than in previous years with an
average increase of 33% compared to 12% in 2011. The main key increases
are set out in the table below.

Service Weight Price Increase
1c Letter Up to 100g 30%
2c Letter Up to 100g 39%
Special
Delivery Up to 100g 8%
1c Packet Up to 100g 71%
Up to 250g 38%
Up to 500g 9%
Up to 750g -11%
2c Packet I Up to 100g 65%
Up to 250g 28%
Up to 500g 2%
Up to 750g -16%

These annual price changes create ever growing gaps between what is
charged in competing SME mails payment channels (Franking and RMG
accounts) and what POL charges its customers for similar services.

Tariff increases tend to attract a degree of consumer discontent which is
usually focused around the increases in 1° and 2" Class stamps. This could
be particularly pronounced as the increases are significantly higher than in
previous years.

Points to Note

3.1

POL has conducted a review of the above and has concluded the following

key points:

* RMG has informed POL that it expects to see a decline in postage labels
volumes as follows; 19% 1% class and 17% 2"¢ class. If these declines are
accurate then POL would lose up to £18m in labels income next year. This
would be partly offset by an upside in stamp income of £7m. (POL
receives postage label income at a flat rate which increases annually by a
factor of RPI-1 and a percentage of total revenue for stamp sales, this
3.5

3.6

44

4.2

4.3

1C labels

2C labels

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explains why stamps income would increase and labels reduce in this
scenario)

e However, at the outset of financial year 11/12 RMG expected to see a
labels decline of 10% for 1* class labels and 10% for 2™ class labels over
the year. The actual results were a 3% decline in 1* class labels and a
23% increase in 2" class labels. This suggests that RMG have not been
accurate at forecasting market activity to date, and that the reality is that
there is an element of down trading to 2 class which is likely to continue.
Overall this would suggest that POL volumes are relatively resilient to tariff
increases.

The full impact of a large tariff increase on the rate of volume decline remains

uncertain for a number of reasons:

e there is no UK precedent for a mails price increase on the scale of this
year

e the level of press interest, consumer groups and small business interest
groups in the tariff change is uncertain and will drive customer behaviour

e there is a risk of aggressive advertising by the franking industry aimed at
small business and eBay customers

A large tariff increase in 1** and 2" Class, especially in the event of broad

media interest, would increase pressure on POL to deliver on plans for

improving our small business proposition.

Conclusion

Overall, the extent to which POL volumes are impacted by price increases will
depend to some degree on the availability of credible retail alternatives for
customers and at present these are very marginal. The proposed tariff
increases for 12/13 are unlikely to change this situation.

The risk that POL will lose business customers to the franking industry is
minimised by the proposed packet price increases. The planned increase for
the franking industry this year is higher than that proposed for POL customers in
most weight steps over 250g (Appendix 1 shows a comparison between POL
and franking industry proposed tariff changes for 12/13). POL will remain
competitive as 70% of its 1% class, and 71% of its 2 class packet volumes
weigh 250g and above.

The POL mails team will continue to monitor the impact of tariff increases. While
RMG expect volumes to decline and mix to change we do not believe that this
will play out as past history has shown POL volumes to be resilient. The table
below shows how POL volumes have reacted to price change over the last four
years. POL therefore expects its 12/13 Mails operating plan to remain whole.

2008/09 2009/10 2010/11 2011/42 FYF
tariff volume tari volume tari volume tari volume

change change change change change change change change

6% 4% 8% 8% 5% 4% 12% -3%

13% 5% 11% 15% 7% 13% 13% 23%

Martin Moran
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Appendix 1

Comparison between POL and franking industry proposed tariff changes for 12/13

Franking industry proposed tariff changes

Service Weight Price Increase
1c Letter Up to 100g 11%
2c Letter Up to 100g 13%
Special
Delivery Up to 100g 9%
1c Packet Up to 100g 68%
Up to 250g 30%
Up to 500g 21%
Up to 750g 0%
2c Packet Up to 100g 74%
Up to 250g 40%
Up to 500g 24%
Up to 750g 0%

POL proposed tariff changes

Service Weight Price Increase
1c Letter Up to 100g 30%
2c Letter Up to 100g 39%
Special
Delivery Up to 100g 8%
1c Packet Up to 100g 71%
Up to 250g 38%
Up to 500g 9%
Up to 750g -11%
2c Packet Up to 100g 65%
Up to 250g 28%
Up to 500g 2%
Up to 750g -16%

POST OFFICE LIMITED

Board of Directors

Date of Board: 15" March 2012

EXECUTIVE SUMMARY POLB(12)50

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Subject: Horizon
Author/Sponsor:

Lesley Sewell

Contributors Presenters:

Lesley Sewell and Dave Hulbert (IT & Change)

Decision Guidance Noting
For: v

Reference previous action point:

BACKGROUND AND CONTENT:

The purpose of this paper is to:

¢ Brief the board on the Horizon service.

« Update the board on the recent major incidents on Horizon.
e Outline the actions being taken to prevent further failures.

RECOMMENDATION (if decision required)

Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications
assessed and supported by the CFO

Additional presentation: YES/NO
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POLB12(50)
POST OFFICE LTD —- POL BOARD NOTING PAPER

Horizon

1. Purpose

The purpose of this paper is to:

1.4.
1.2.
1.3.

Brief the board on the Horizon service.
Update the board on the recent major incidents on Horizon.
Outline the actions being taken to prevent further failures.

2. Background

2.1.

2.2.

2.3.

24.

25.

2.6.

The recent incident on Horizon was the fourth significant service failure of this
system in nine months. Briefly summarised, they are:

e 27" July 2011 - Pin pad failure caused by a change activity

e 12" December 2011 — Horizon service failure caused by a hardware failure

e 18 February 2012 — Card account failure caused by a change activity

e 1% March 2012 — Horizon service failure caused by a hardware failure
When the Horizon service was initially constructed it was based across two data
centres, both of which were fully operational; providing an active/active resilient
service arrangement.
As part of the move to Horizon on Line, the contract was renegotiated and the
architectural design changed in order to reduce Post Office’s operating costs by
£50m p.a. (excluding VAT). One of the design changes which contributed
significantly (circa £5.5m p.a.) to the savings was moving to an active/passive data
centre arrangement. Consequently the resilience is now housed in one data centre
with the second data centre primarily being used as a test environment, but available
for disaster recovery if required.
As a consequence of moving to the active /passive design, when hardware issues
arise they will result in network wide service disruption.
The previous active/active data centre arrangement would have prevented an impact
to customers for the incidents of the 12'" December and the 1° March, as the
hardware would still have been working in the other data centre.
The level of risk associated with this design is being challenged in light of our future
business strategy.

3. Current Situation — Incidents

3.1.

3.2.

3.3.

The incident on the 1° March was caused by a network router within the data centre
restricting the flow of transactions to the data centre. As it was in effect still working,
the device advertised itself as available and no alert was raised.

The router started failing just after 11am and from that point on branches would have
seen transactions going through the system much slower than normal. Many
transactions were going through so slowly that they timed out. From around 11:10
we were seeing less than a fifth of the expected volume going through the system;
and the situation continued to deteriorate.

By 14:15 Fujitsu had identified the component causing the issue and was
subsequently removed from the live service. The service was restored at 14:25.
3.4.

3.5.

3.6.

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In terms of the two hardware failures, these related to different components within
the Horizon data centre. Whilst backup devices were available in both cases they
didn’t activate due to the way in which the failing hardware acted.

With regards to the two incidents that were caused by change activities. Both of
these relate to updating our product reference data on Horizon. July’s incident was
due to the correct processes not being followed. Whereas February’s incident was
due to the test processes for reference data changes and changes delivered through
a programmed release not being fully cognisant of each other.

All of the above incidents are subject to ongoing operational investigations. A
number of changes have already been made to both the reference data processes
and to the hardware. See section 6 for further details about the proposal for a
strategic review to complement the actions that are already underway to prevent
recurrence.

Service Levels

41.

4.2.

4.3.

44.

The availability service level is measured across the network of counter positions
where they are able to perform all transactions. The Counter Availability metric is
defined as the number of counter position hours available as a proportion of the
maximum number of counter position hours available based upon the Post Office
Core Day (08:00hrs — 18:00hrs Mon — Fri, 08:00-13:00 Sat).
Liquidated damages (£3.50 per unavailable counter hour) are payable if the
unavailable counter hours per month exceed the equivalent of 2.37 hours per
counter in the month.
If the cause of unavailability is a network wide failure event then the contract allows
Fujitsu to cap the damages at £400k for that event.
This has resulted in the following in respect of the four incidents:
e July's incident — a settlement of £250k was agreed
« December's incident — no Liquidated Damages are due as the total
unavailability in the month did not exceed 2.37 hours per counter
« February's incident — yet to be confirmed but looks unlikely that Liquidated
Damages will be due as the availability in the rest of the month was good and
overall unavailability in the month did not exceed 2.37 hours
« March's incident — the amount of Liquidated Damages due is dependent on
the performance in rest of the month.

Risks & Mitigations

5.1.

5.2.

5.3.

5.4.

Since the move to Horizon on Line the disaster recovery service has undergone
several tests, incrementally these provide a level of assurance. A full data centre
failover is the only test which hasn't yet been proven and is an outstanding risk which
we aim to address at the end of the month.

The data centre failover which provides the end to end test assurance means failing
over from the active data centre to the passive data centre and is scheduled for the
weekend of 31%' March/1* April. This will be the first of its kind since the move to the
active/passive data centre set up.

Credence is also hosted in the Fujitsu data centre. Last year Credence had no
disaster recovery service and was involved in the process of delivering transaction
files to clients. Therefore had we conducted the end to end disaster recovery test at
that time it would have meant holding back client transaction flies for 3 days. This
tisk was deemed unacceptable.

Business cases have been approved and action taken to move the delivery of client
files from the Credence environment. This service moved from February and enables
the data centre failover test to take place without the risking the delivery of files to
clients.
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6. Proposal

6.1. We will continue to conduct the operational investigations into each incident and
make the improvements required to ensure the short term stability of the service.

6.2. In recognition of the recent performance history, the media attention this has drawn
and our business transformation plans, we have proposed a fundamental review of
the service and strategy. Within this review we will draw out whether the current
technical design is correct for our future business needs and plans. The review will
run in conjunction with the operational investigations.

6.3. We are proposing that the review will be conducted by Fujitsu and Post Office Ltd
with involvement from independent partners. The review will run under the
governance of a steering board consisting of the Executives from both organisations.

6.4. The review will as a minimum cover:

¢ The technical design of Horizon

All forms of testing

Monitoring and alerting

Best practice in retail and financial service markets

Future requirements of our business strategy that may influence the technical

environment of which Horizon is a critical part.

6.5. The POL Board and the POL Executive Team will be invited to visit the data centres
and receive regular updates on the progress and findings of this review.

7. Recommendations
The POL Board is asked to:

7.1. Note the actions being taken to protect customers from further disruptions to these
services.

Lesley Sewell
Acting Chief Operating Officer
March 2012
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POLB(12)51
POST OFFICE LTD BOARD

Appointment of Yorkshire Bank as Bankers

1. Purpose
The purpose of this paper is to:

1.1. Appoint Yorkshire Bank as Bankers to Post Office Limited.
2. Background

2.1 Post Office Limited has signed a contract with Yorkshire Bank Merchant
Services to process credit and debit card payments. In order to continue to
receive cleared funds into our account the day after the transaction, Post
Office is required to open a bank account with Yorkshire Bank.
2.2. This account is to be operated under the same principles as currently in
operation for the all other bank accounts. There are two appointed signatory
groups:
= The Control Panel is responsible for the maintenance of the account, can
open and close accounts with Yorkshire Bank, change signatory groups,
and can approve changes to both signatory groups.

= The Signature Panel operates the account on a day to day basis, and
approves payments.

No person can be a member of both panels. The current list of panel

members is shown in Appendix 2.

3. Recommendations
The POL Board is asked to:

3.1 Approve the appointment of Yorkshire Bank as Bankers to Post Office Ltd.

3.2 Approve the resolution as detailed in Appendix 1, which is an extract from the
Bank Mandate accompanying this paper.

3.3 Complete the “Mandate for Companies” and “Business Customer Application”
forms where indicated.

Chris Day
September 2011
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APPENDIX 1: RESOLUTION

1. That a bank account or accounts be opened with Yorkshire Bank (the ’Bank’) and the
Bank is authorised to:

a) pay all cheques and any other instructions for payment or accept instructions
to stop such payments signed on behalf of the Company by any one of the
signatory panel (the ‘Signatory’) whether any account of the Company is in
debit or credit;

b) deliver any item held on behalf of the Company by the Bank in safe keeping
against the written receipt of any one of the control panel; and

c) accept any one of the control panel as fully empowered to act on behalf of the
Company in any other transaction with the Bank (including closing the
account(s)); and

d) accept any one of the control panel as fully empowered on behalf of the
Company to enter into at any time any agreements) for or relating to
electronic and/or telephone banking services of any kind whatsoever
(‘Services’), and to delegate (including the power to sub delegate) the
operation of the Services as set out in the terms and conditions governing the
Services and the Company acknowledges that the Bank shall be entitled to
act upon all instructions received in respect of the Services until notified
otherwise in writing by the Company.

2. That any debt incurred to the Bank under this mandate shall, in the absence of written
agreement by the Bank to the contrary, be repayable on demand.

3. That any two of the control panel from time to time is authorised to supply the Bank
as and when necessary with lists of persons who are authorised to sign, give receipts
and act on behalf of the Company, and that the Bank may rely upon such lists.

4. That these resolutions be communicated to the Bank and remain in force until
changed by a resolution passed by the Board of Director(s) or other committee of
management of the Company and a copy, certified by the Chairperson and other
director or Secretary, if applicable, is received by the Bank.

5. That the Company accepts the account(s) and banking relationship with the Bank will
be governed by and subject to the Business Banking Terms and Conditions (a copy
of which has been provided) as amended from time to time together with any terms
and conditions in respect of specific products and services requested by the
Company from time to time.
Post Office Ltd — Strictly Confidential

APPENDIX 2: PANEL MEMBERS

The members of each panel are as shown below:

1. Authorised to Open and Close Accounts

Name Job Title
Matthew Hibbard Product Accounting — Bill, Debt & Payment
Sue Oxley Banking & Debit Card Manager

2. Authorised to Add and Remove Signatories on the Account

Name

Job Title

Chris Day

Product Accounting — Bill, Debt & Payment

Charles Colquhoun

Banking & Debit Card Manager

3. Signature Panel

Name

Job Title

Andrew Ashall

Cashflow advisor

Charles Colquhoun

Head of Corporate Finance

Louise Fairhurst

Senior accountant

Martin Knights

Reporting and analysis manager

Carl Nielson

Senior tax advisor

Ruth Pearson

Senior accountant

Ryan Skidmore

Sales analyst

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Board of Directors

Date of Board: 15" March 2012

EXECUTIVE SUMMARY POLB(12)29

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Subject: NETWORK TRANSFORMATION — AGENCY

AGENTS’ REMUNERATION MANDATE PROPOSAL FOR NFSP

Author/Sponsor:

Kevin Gilliland

Contributors / Presenters:

Decision Guidance

Noting

For: Yes

Reference previous action point:

BACKGROUND AND CONTENT:

THE PURPOSE OF THIS PAPER IS TO:

14.1. PROPOSE AN UNPLANNED ACTIVITY IN THIS FINANCIAL YEAR, PREVIOUSLY IDENTIFIED
AS ARISK TO 2012/13 BUDGETS, TO MAKE AN UNCONSOLIDATED PAYMENT OF £7M,
FUNDED VIA SURPLUS PROFITS IN 2011/12, TO THE AGENCY NETWORK IN RETURN FOR
NFSP SUPPORTING YEAR 1 ROLL OUT OF THE NETWORK TRANSFORMATION
PROGRAMME IN 2012/13 AND IN RECOGNITION OF ANY REMUNERATION SETTLEMENT
FOR SUB-POSTMASTERS RUNNING BRANCHES IN THE LEGACY NETWORK DURING
2012/13, EFFECTIVELY SOFTENING THE IMPACT OF REDUCED REMUNERATION IN THE

FIRST YEAR OF THE STRATEGIC PLAN.

1.2 TO REQUEST FUNDS FROM THE 201 1/12 BUDGET TO FACILITATE 1.1 ABOVE

RECOMMENDATION (if decision required)

Date

Recommended by the Executive Team

Investment Appraisal completed or financial implications

assessed and supported by the CFO

Additional presentation:

YES/NO
POL00103334
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Extract from the minutes of a Board meeting of Post Office Limited held at

148 Old Street, London EC1V 9HQ on 15" March 2012

POL Sealing Authorities

The Board approved that the affixing of the company seal may be authenticated by any current
Director of the Company or the Company Secretary or Assistant Company Secretary or the
following signatory:

e Susan Crichton

I hereby certify that this a true extract of the minutes of the meeting.

Alwen Lyons Chris Day
Company Secretary, Post Office Limited CFO and Director, Post Office Limited
April 2013 April 2013
POL00103334
POL00103334

Extract from the minutes of a Board meeting of Post Office Limited held at

148 Old Street, London EC1V 9HQ on 15" March 2012

“It was resolved that a Sub-Committee be formed to give effect to the legal requirements
necessary for the Transaction to move Post Office Limited to become a sister company of
Royal Mail Group Limited (the “Transaction”). This Sub-Committee comprising of Paula
Vennells and Chris Day would execute the documents required to give effect to the
Transaction including, but not limited to, the secondment termination agreement; the new
Articles of the Company; the Shareholder approvals and the subscription letter in connection
with the special share.”

I hereby certify that this a true extract of the minutes of the meeting.

Alwen Lyons Chris Day
Company Secretary, Post Office Limited CFO and Director, Post Office Limited
March 2013 March 2013
To: From:
Alice Perkins Lorraine Beavis
Chris Day

Virginia Holmes
Neil McCausland
Les Owen

Paula Vennells

ce:
Alwen Lyons

POL00103334
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Date:
8 March 2012

POST OFFICE LIMITED BOARD MEETING, 15™ MARCH 2012

Please find attached the agenda and papers for the forthcoming Board Meeting on
Thursday 15" march 2012. The meeting is scheduled to start at 09:00 and finish by
14:00, and will take place in the Boardroom at 148 Old Street, London, EC1V 9HQ.

If you have any enquiries, please do not hesitate to contact me.

Regards

Lorraine Beavis
Assistant Company Secretary

Tel: 0207 250 2106
POL00103334

POL00103334

Linklaters comments 14/3/12

POST OFFICE LIMITED
(the “Company”)

Written Resolutions of the sole Member of the Company

Circulation date: [e] [March] 2012

Pursuant to Chapter 2 of Part 13 of the Companies Act 2006, the Directors of the Company propose
that the following resolutions are passed (the “Resolutions”). Resolutions 1 and 2 are proposed as
ordinary resolutions. Resolutions 3 and 4 are proposed as special resolutions.

ORDINARY RESOLUTIONS

1

THAT the Directors be and are hereby generally and unconditionally authorised pursuant to
and in accordance with Section 551 of the Companies Act 2006 (the “2006 Act”) to exercise all
the powers of the Company to allot shares or grant rights to subscribe for or to convert any
security into shares up to a nominal amount of £[e], such authority to apply in substitution for
all previous authorities pursuant to [Section 80 of the Companies Act 1985] and to expire on
the fifth anniversary of the date hereof but so that the Company may make offers and enter
into agreements during the relevant period which would, or might, require shares to be allotted
or rights to subscribe for or to convert any security into shares to be granted after the authority
ends.

THAT the proposed reorganisation by Royal Mail Holdings plc, being the Company's sole
member, and certain of its group companies including the Company (the “Reorganisation”) be
and is hereby approved and that any breach of duty committed by any Director of the
Company in approving the transactions comprised in the Reorganisation be and are hereby
approved and ratified, including for the purposes of Section 239 of the 2006 Act.

SPECIAL RESOLUTIONS

3

THAT [with effect from [e]]:

(i) the Articles of Association of the Company be and are hereby amended by deleting all
the provisions of the Company's Memorandum of Association which, by virtue of
Section 28 of the Companies Act 2006, are to be treated as provisions of the
Company's Articles of Association; and

(ii) the attached Articles of Association be and are hereby approved and adopted as the
Articles of Association of the Company in substitution for, and to the exclusion of, the
existing Articles of Association.

THAT, subject to the passing of Resolution 1 above, the Directors be and are hereby
empowered to allot equity securities (as defined in Section 560(1) of the 2006 Act) wholly for
cash pursuant to the authority given by Resolution 1 above as if Section 561(1) of the 2006 Act
did not apply to any such allotment; such power to expire on the fifth anniversary of the date
hereof, but so that the Company may make offers and enter into agreements during this period
which would, or might, require equity securities to be allotted after the power ends.

A14673330/0.5/14 Mar 2012
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Linklaters comments 14/3/12

AGREEMENT

Please read the notes at the end of this document before signifying your agreement to the
Resolutions.

The undersigned, being a person entitled to vote on the Resolutions on [CIRCULATION DATE],
hereby irrevocably agrees to all of the Resolutions:

Signed by ROYAL MAIL HOLDINGS PLC

Date

NOTES:

1 If you agree with the Resolutions please indicate your agreement by signing and dating this
document where indicated above and returning it to the Company by hand or by post.

2 If you do not agree to the Resolutions, you do not need to do anything: you will not be deemed
to agree if you fail to reply.

3 Once you have indicated your agreement to the Resolutions, you may not revoke your

agreement.

4 Unless, by midnight on [INSERT LAST DATE OF VALIDITY OF THE RESOLUTIONS],
sufficient agreement has been received for the Resolutions to pass, they will lapse. If you
agree to the Resolutions, please ensure that your agreement reaches us before this time.

Resolution 1 was passed as an ordinary resolution on [DATE].
Resolution 2 was passed as an ordinary resolution on [DATE].
Resolution 3 was passed as a special resolution on [DATE].
Resolution 4 was passed as a special resolution on [DATE].

In each case, the signatory being the sole member of the Company.

Secretary

A14673330/0.5/14 Mar 2012
Extract of Minutes of the Post Office Limited Board Meeting
held on 15" March 2012

POLB12/36
(a)

ACTION:
Les Owen

ACTION:
Nick Kennett

(b)

ACTION:
Nick Kennett

EAGLE UPDATE

Nick Kennett gave the Board an oral update on the Eagle
negotiations. He explained the problems with the valuation of
the future portfolio which would be sold when the contract
expired. Les Owen suggested an alternative proposal and the
Chairman asked that Les Owen and Nick Kennett convene after
the meeting to discuss. Nick Kennett to send a note round to the
Board to summarise the discussion;

Nick Kennett reported that the Bank had re-opened discussions
on FSR numbers, an area which they had previously dropped in
the Heads of Terms. The Chairman told Nick Kennett to relay
the Board’s disappointment that this issue, which they thought
had been settled, was now being re-opened.

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QUADRANT PROFORMA FUNCTION BOOKING ORDER

To:- Catering Team

POL00103334
POL00103334

FUNCTION DETAILS:

POL Board

Building

148 OLD ST

Date of Function

Wednesday 15" March 2012

Time Meeting Starts 09.00
Time Meeting Finishes 14.00
No of People Attending 10

Location of Meeting

Board Room, 1* floor, Old St Wing,

Ordered By

Lorraine Beavis

Menu Requirements/Beverages

9am - coffee/tea/still and sparkling water /
biscuits

12.25 pm mixed sandwiches (including
some cheese & salad) and fruit plus fresh
coffee/tea/water

NOTE: please leave lunch on trolley
outside Board Room

BUDGET DETAILS:
SAP Budget Code 2540189
Card Holder's Name Alwen Lyons

Contact Telephone Number

0207 250 2106 (5460 2106) — Lorraine
Beavis

Do you require confirmation of receipt of order?

Yes

POLB(12)4"
POLB12/28-43

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Post Office Limited
(company no. 2154540)

Minutes of the meeting of the Board of Directors

held at 148 Old Street, London EC1V 9HQ on 15" March 2012

Present:

Alice Perkins
Neil McCausland
Les Owen

Paula Vennells
Chris Day

In attendance:
Alwen Lyons
Lesley Sewell
Kevin Gilliland
Nick Kennett
Susan Crichton
Sarah Hall
Martin Lacey

POLB12/28

(a)

(b)

(c)

(d)

Chairman, Post Office Ltd

Senior Independent Director, Post Office Ltd
Non Executive Director, Post Office Ltd
Managing Director, Post Office Ltd

Chief Financial Officer, Post Office Ltd

Company Secretary, Post Office Ltd
Interim Chief Operating Officer
Sales and Network Director
Financial Services Director

Legal and Compliance Director
Financial Controller

Pensions Specialist

(item POLB 12/28)
(item POLB 12/29 & 30)
(item POLB12/30 & 36)
(item POLB 12/39 & 40)
(item POLB 12/39)
(item POLB 12/39)

INFRASTRUCTURE (IT AND PROCUREMENT)

Lesley Sewell explained the IT Strategy for the next 3 years which
will support the wider business activity, procure circa 60 IT contracts
and deliver the cost reduction challenge. The Board discussed the
Strategy which involves the proposed introduction of a Service
Integrator (SI) to manage IT providers. Les Owen asked if the SI
would be allowed to provide any of the work towers in the
framework of suppliers. (POL(12)28 Appendix 2). Lesley Sewell
explained that the SI would only supply the service desk but no
other tower;

Lesley Sewell emphasised that the business lacked the capability
and maturity to manage the changes required to deliver the future
IT infrastructure. This work was not a core competency and it made
more sense to outsource. She stressed the importance of getting
the SI contract terms correct and getting good governance in place
to manage that contract;

Chris Day assured the Board that the SI and contracts would
include efficiency targets which were already assumed in the
budget;

Neil McCausland had suggested at a pre-meet that the SI approach
be tested to give the Board some assurance that it was the best
solution. Lesley Sewell reported that Berkeley Partnership had
reviewed the SI strategy and were supportive of the approach
agreeing that the SI would bring the required capabilities to the
business;
(e)

(f)

(g)

(h)

ACTION:
Lesley Sewell

(i)

ACTION:
Lesley Sewell

()

ACTION:
Lesley Sewell
Chris Day

(k)

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Paula Vennells questioned whether the SI would in fact raise
capability, as the same POL staff who were currently working in this
area of the business would be TUPE’d over to the SI. Lesley
Sewell assured the Board that the contract would insist on raised
capability and people would not be retained if they did not achieve
the required level. Paula Vennells flagged to the Board that the
redundancy cost could return to POL under TUPE rules;

Les Owen asked the business to ensure that POL retained the
procurement decisions for the tower contracts. Lesley Sewell
assured him this was the way the SI contract would be structured.
She emphasised that the SI contract negotiation was vital and the
business would need to buy-in consultancy support for this work;

Lesley Sewell assured the Board that the business would retain and
strengthen its in-house resource which would focus on the IT
changes needed for new products and services;

the Chairman understood that Berkeley Partnership had challenged
the concept of the towers within the framework, Lesley Sewell
explained that the Berkeley Partnership have suggested other
solutions and proposed that the framework could be structured
around the business applications. She would take a further look at
a different approach but thought it would be too radical a change for
the business in one go. However, Lesley Sewell assured the Board
that changes could be made to the proposal as it developed and the
team would keep an open mind;

Les Owen asked if the model had been successfully deployed in
other organisations. Lesley Sewell reported that she had visited
Rolls Royce who were currently moving to the model. She agreed
to find a business who are already successfully using the SI and
similar structure to benchmark. She would look at retail / services
sector as well;

Neil McCausland asked for an explanation of the Financial overview
(POL(12)28 APPENDIX 1) and why the costs were so high for
13/14 and 14/15. Lesley Sewell explained that the optimised
baseline was based on existing contracts including RPI increases
and also included the projects involved in business transformation.
Neil McCausland challenged the additional costs. He agreed the
expenditure of £13.38m to implement the programme, but stated
that this did not mean he agreed the targets for subsequent years.
The Chairman clarified that the Board were not being asked to
approve the IT Budget for subsequent years and asked Lesley
Sewell and Chris Day to provide a breakdown and explanation of
the optimised expected cost scenarios for the Board;

the board endorsed the proposed strategy subject to the points
made and authorised expenditure of £13.8m for the implementation
of the programme.
the Board authorised a sub committee to be formed to give effect to the legal
requirements necessary for the transaction to go ahead to move Post Office Ltd to
become a sister company of RM Group. This sub committee comprising of Paula
Vennells and Chris Day would sign off the details of the changes to the Royal Mail
structure; the Secondment Termination Agreement; the new Articles; the Shareholder
approvals and the subscription letter. Minutes of this sub committee would be circulated
to the Board;

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POST OFFICE LIMITED (THE “COMPANY”)

EXPLANATORY NOTE OF PRINCIPAL CHANGES TO THE
COMPANY’S ARTICLES OF ASSOCIATION

It is proposed that the Company adopt new articles of association (the “New Articles”) in order to
update the Company's current articles of association (the “Current Articles”). The changes
proposed are primarily to reflect the change in the shareholding structure of the Company after
separation from Royal Mail Group Limited (“RMG”) but also to take account of the Companies Act
2006 and the Postal Services Act 2011. Please note that the New Articles will need to be further
amended prior to mutualisation.

The principal changes introduced in the New Articles are summarised below:

1 Special Share (Articles 10, 11 and 12):

It is proposed that one special rights redeemable preference share of £0.001 in the capital
of the Company (the “Special Share”) be issued to the Secretary of State (the “Special
Shareholder’). The New Articles sets out the rights attaching to the Special Share which
include the following:

(a) consent rights in relation to certain actions of the Company, for example, in relation
to the appointment or removal of directors, the Chief Executive Officer or
Chairman, the adoption of a strategic plan and any material variation to it, the
incurrence of a commitment or liability in excess of £50 million and the incurrence
of borrowings over £75 million;

(b) the right to attend and speak at shareholder meetings of the Company but no right
to vote at such meetings;

(c) the right to repayment of the capital paid up on the Special Share on a distribution
of capital in a winding-up of the Company in priority to any repayment of capital to
any other member but no right to a dividend or any other right to participate in the
capital or profits of the Company; and

(d) the right to request information on the affairs of the group and meet with directors
and senior managers of the Company.

The rights attaching to the Special Share are exercisable only for such time as the Special
Shareholder beneficially owns the special share in Royal Mail Holdings pic (“RMH") and
the special share in RMG.

2 Strategic Plan

The New Articles provide that the Company must prepare a Strategic Plan for the
Company's group for the following five financial years each year and agree this with the
Special Shareholder in accordance with the consultation and approval provisions set out in
Article 71 of the New Articles.

A14681565/0.2/08 Mar 2012
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3 Updates to take account of the Companies Act 2006
The New Articles reflect changes implemented by the Companies Act 2006, including:

(a) the removal of the requirement for the Company to have an authorised share
capital;

(b) removal of the ability for the directors to suspend the registration of share transfers;
(c) updates regarding proxy voting on a show of hands;
(d) removal of the Chairman's power to a casting vote in general meeting;

(e) insertion of provisions allowing companies to communicate with their shareholders
by electronic means;

(f) changes so as to ensure consistency of the directors’ indemnity and insurance
provisions with the new wording of the Companies Act 2006; and

(g) updates for adjournment for a lack of quorum at a general meeting.

Please note that provisions in the Current Articles which replicate provisions contained in
the Companies Act 2006 have (for the most part) been removed from the New Articles (e.g.
notice of general meetings). This is in line with the approach advocated by the Government
and is also consistent with the approach being taken in the new RMG and RMH articles.

4 Memorandum, objects and limited liability

The Companies Act 2006 significantly reduces the constitutional significance of a
company’s memorandum of association and abolishes the need for companies to have an
objects clause because, without one, a company’s objects are unrestricted. For this
reason the Company is proposing to remove its objects clause together with all other
provisions of its memorandum which, by virtue of the Companies Act 2006, are treated as
forming part of the Company's articles of association as of 1 October 2009.

The written resolution to be signed by the Company's sole shareholder will confirm the
removal of these provisions for the Company. As the effect of this resolution will be to
remove the statement currently in the Company's memorandum of association regarding
limited liability, the New Articles also contain an express statement regarding the limited
liability of shareholders.

5 Directors’ fees

Article 77 has been amended in the New Articles so as to provide for an increase in the
aggregate amount of directors’ fees from £300,000 to £400,000 p.a. (excluding salaries).

A14681565/0.2/08 Mar 2012
In Strictest Confidence

POFS (12)1st
POFS/01- 14
MIDASGRANGE LIMITED (T/A POFS)

(Company no. 4890174)
Minutes of the 57th meeting of the Board

held at East Cheap Court, 11 Philpot Lane, London EC3M 8BA

POL00103334
POL00103334

on 26" January 2012

Present: In attendance:

Des Crowley -

Chairman

Paula Vennells

Patrick Waldron Andrew Poole — Company Secretary

Kevin Gilliland Rob Clarkson for item POFS12/09 and POFS12/11

Gordon Gourlay

Liam McLoughlin Apologies:
Mike Scott David McGowan
Nick Kennett
POFS12/01 WELCOME
Des Crowley welcomed everyone to the meeting.
POFS12/02 AUDIT & RISK COMMITTEE
(a) The Board confirmed the appointment of Nick Kennett as
Chairman of the Audit & Risk Committee.
POFS12/03 MINUTES
(a) The Board approved the minutes of the meeting held on the 30"
November 2011 and 7" December 2011.
POFS12/04 STATUS REPORT
(a) The Board noted the updated status report of actions from the
previous meetings.
POFS12/05 POST OFFICE / BANK OF IRELAND BUSINESS UPDATE
(a) Paula Vennells provided a business update to the Board ona
number of matters including progress with business separation,
State Aid, Network Transformation and the recently announced
new 10-year commercial agreement between POL and RMG.
Des Crowley updated the board on some recent changes to the
BOI Board.
POFS12/06 BUSINESS REVIEW
(a) CEO Business update for January 2012: POFS continued

ahead of budget at the end of December. Profit before
Shareholder Distributions for POFS in December was £1.3m -
£0.1m ahead of budget due to higher fixed rate savings
breakage fees, lower savings clawbacks partially offset by lower

1
In Strictest Confidence
(b)

(d)

(e)

(f)

(9)

(h)

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In Strictest Confidence

insurance sales and lower Online Saver balances. Profits before
Shareholder Distributions YTD at the end of December were
£15.3m - £3.4m ahead of budget and £17.2m ahead of last
year;

Management were proposing an increase of £0.2m in the year
end forecast to £19.7m - £2.5m ahead of target; details of risks
and opportunities to this forecast were included in the Finance
update. If achieved, this annual profit would be the highest
underlying profits achieved by the business since start-up;

Sales YTD to mid-January were at 102% of target — up from
85% of target at the end of August. The major concerns on
sales were increasing life insurance sales, maintaining the
strong momentum on car and home insurance sales and
mortgage applications. The latter would be helped by new
pricing proposals in February;

Average weekly sales in the Crown office network YTD were 9.2
per branch (week 42) — down from 9.6 sales at end week 33,
primarily due to the reduction in Savings sales and the impact of
the Christmas period. Close management of the FS population
had increased sales in Credit Cards, and the Home

Insurance and Car Insurance re-launch had had a positive effect
to date. Life Insurance sales performance was strong to end
December but sales in January to date were well behind target;

Policies in force were at 344,000 by mid-January with an
increase of 1,300 policies for the first time in two years in
December and a further 6,600 growth in the first two weeks of
January. This continues to be closely monitored and a detailed
paper was presented to the Board later on in the meeting;

The savings book reached £16.2bn at the end of December -
with net growth of £2.4bn since the end of March 2011. This
was £2bn ahead of target. However, the business had seen a
net reduction of £167m in January MTD due to lower rates on
our product range and increased withdrawals from the Online
Saver product. The forecast for the end of March is £15.9bn and
the position was being monitored on a daily basis to ensure that
the business achieved the target;

Mortgage completions were only £40m in December - £45m
behind target. The impact of applications being well below target
in the first three quarters of the year was likely to continue to
affect completions negatively for the rest of the financial year.
Lower sales were being partially offset by average completion
values at £173k, 8% higher than target. A re-price of sub-75%
LTV mortgages would be launched in February to improve the
overall position. Des Crowley asked the business to make every
effort to increase the level of mortgage lending;

there had been 2,383 POFS complaints in December 2011, a
decrease of 31% compared with November 2011 volumes. The
overall decrease in complaints in December was driven by a

2

In Strictest Confidence
ACTION
Patrick Waldron

POFS12/07

ACTION
Patrick Waldron

POFS12/08

POFS12/09

10)

(a)

(b)

(a)

(a)

(b)

(c)

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In Strictest Confidence

67% (105) decrease in Online Bond Savings complaints, 62%
(220) decrease in Cash ISA complaints and 58% (402)
decrease in Growth Bond. Paula Vennells asked that the team
consider sending this MI out to the Branch network. Patrick
Waldron would discuss this with Nick Kennett.

Des Crowley thanked Patrick Waldron for the report noting that
it had been a good trading period for the business.

SAVINGS RETENTION UPDATE

POFS’ Operating Plan highlighted the importance of retention in
FY 2011/12 with circa £10.8bn maturing or coming to the end of
a bonus period in the year. Prior to FY 2011/12, retention
activity had focused on Growth Bond; however with the
introduction of new products during FY 2010/11 (Online Saver
and Online Bond) focus on retention had expanded to include
the new products and this had been reflected in FY 2011/12
balance targets;

the Board would consider Savings retention at its meeting on
the 22" March. Patrick Waldron was asked to add an
assessment of the competitive threat of Virgin Money to the
agenda as well.

BRB SALES REPORT & AOP SUMMARY TRACKER

The Board noted the BRB sales report and AOP summary
tracker.

POLICIES IN FORCE

Rob Clarkson joined the meeting and provided an update in
relation to Post Office Car and Home Insurance combined
policies in force (PIF);

In December the portfolio experienced a net growth in PIF,
increasing by 1,318 to 337,703 policies. This continued to
improve with net growth of a further 6,607 policies recorded
between the 1tand 15" January. With an historic focus on
fourth quarter marketing, the next three months represented a
risk of further PIF decline, with over 30% of the current portfolio
falling due for renewal. In order to build portfolio momentum
through 2012/13, the business had implemented further tactical
and strategic initiatives;

POFS had implemented a series of trading actions to maximise
the Network’s opportunities to succeed, including enhanced
propositions, improved pricing, additional incentives and up-
weighted marketing. Aggressive aggregator pricing had been
deployed and had successfully reversed the declining trend
resulting in growth at a rate significantly beyond the original
projections. Year-on-year retention performance across both
Car and Home was both showing signs of significant
improvement also helping accelerate the book growth (January

3

In Strictest Confidence
POFS12/10

ACTION
Mike Scott

POFS12/11

ACTION

Rob Clarkson

POFS12/12

ACTION
Patrick Waldron

(d)

(a)

(b)

(c)

(d)

(e)

(a)

(b)

(a)

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In Strictest Confidence

2011 versus January 2012, 52% versus 62% Car, and 66%
versus 74% Home). Management were currently considering
further actions to ensure that the PIF stabilisation was sustained
whilst seeking to protect the short term financial impact;

the Board approved the approach outlined for PIF until the end
of March 2012 noting the £500,000 adverse impact on the
POFS results, noting that the agreed strategy helped mitigate
the financial risk to the business and further enhanced the
relationship with Junction.

FINANCE REVIEW UPDATE

Mike Scott introduced the Finance update for January 2012, the
board noted the December highlights and key issues for
2011/12 and the proposed forecast for 2011/12;

December YTD of £15.3m PBD was some £3.4m ahead of
budget. Strong sales of GILB, savings interest variances and
lower marketing spend partially offset by lower car, Home and
Life sales and bonus provision;

the key issues for 2011/12 remained PIF, sales shortfalls,
Online Saver retention and SEM costs. The Board noted a
number of risks and opportunities;

Des Crowley asked that the Project Polo costs of £0.7m be
taken in to account for forecast purposes. The Board agreed the
forecast proposed for 2011/12 of £19.7m before Polo costs;
The Board thanked Mike for his report.

INSURANCES

Home Insurance Optimisation: The Board noted the update on

Home insurance and asked for a further update on tactics,
taking into account the market view, at the March Board;

Commercial Vehicle Contract: The Board noted an update on
progress made on establishing the Heads of Terms between
BOI and Aviva in respect of extending the exclusive Van
Insurance distribution agreement. POFS would conclude the
Heads of Terms and work on re-stating the full agreement.

PROJECT POLO UPDATE

The Board noted an update on Project Polo and agreed to
continue with the pilot and to work to develop the business case
— based on a range of customer assumptions, consider the
commercial risks and take into account the wider business
strategy. The Board would consider the business case at the
March Board.

4
In Strictest Confidence
POFS 12/13

(a)
ACTION (b)
Patrick Waldron
POFS12/14

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In Strictest Confidence

ANY OTHER BUSINESS

Patrick Waldron explained that the BRB had recently
undertaken an effectiveness exercise with most of the
recommendations being agreed and implemented.

Patrick Waldron advised that a recent Yougov Brandindex
survey had placed the Post Office as the leading brand in
banking and financial services. Paula Vennells asked that POFS
consider how best to promote this achievement.

DATE OF NEXT MEETING

The next meeting of the Board would be held on Thursday 22"
March 2012.

However, the AOP and Sales targets would be discussed at a
special meeting to be held after the FRES Board meeting on
23° February.

5

In Strictest Confidence
Post Office Limited — Strictly Confidential
POST OFFICE LTD BOARD MEETING (Company Number 2154540)

Meeting to be held at 09.00 on 15 March 2012

POL00103334
POL00103334

at 148 Old Street, London, EC1V 9HQ in the Board Room

Infrastructure (IT and Procurement)

Network Transformation
« Agency
« Crowns

FS Sales

Minutes of previous meetings

Minutes for noting
« POFS Minutes

Matters Arising
e Status Report

Break

Managing Director's Report including
Health & Safety Update

Finance/Performance Update
Eagle Update

Resignation of Director
« Les Owen

Lunch
Budget and Operational Plan 2012-13
Pensions - Next Steps

Board Governance Update
e POL Sealing Authorities
e Appointment of Alice Perkins to
the Royal Mail Holdings Board

Any Other Business

Close

Items for Noting

Significant Litigation Report

Post Office Ltd - Sealings
Communication Action Group Minutes
Olympics

Privacy Compliance Strategy
Verification of Telecoms Supplier
Treasury — Authority Levels

RMG Price Changes

Horizon Update

POLB(12)28

POLB(12)29
POLB(12)30

POLB(12)31
POLB(12)2™4
POLB(12)3"
POFS(12)1*"

POLB(12)32

POLB(12)33
POLB(12)34

POLB(12)35

POLB(12)36

POLB(12)37
POLB(12)38

POLB(12)39
POLB(12)40

POLB(12)41

POLB(12)42
POLB(12)43
POLB(12)44
POLB(12)45
POLB(12)46
POLB(12)47
POLB(12)48
POLB(12)49
POLB(12)50

Lesley Sewell

Kevin Gilliland

Nick Kennett /
Kevin Gilliland

Alice Perkins

Alice Perkins

Alice Perkins

Paula Vennells

Chris Day
Nick Kennett

Alwen Lyons

Chris Day
Chris Day

Susan Crichton

Alice Perkins

Susan Crichton
Alwen Lyons
Alwen Lyons
Lesley Sewell
Susan Crichton
Martin Moran
Chris Day
Martin Moran
Lesley Sewell
Post Office Limited — Strictly Confidential

Attendees:

Alice Perkins (Chairman)

Neil McCausland (SID)

Les Owen (NED)

Paula Vennells (MD)

Chris Day (CFO)

Alwen Lyons (Company Secretary)

In Attendance:
Lesley Sewell

Kevin Gilliland

Nick Kennett

Susan Crichton
Anne Fletcher
Heather Bignell-Blye

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0900

0950

1025

1050

1055

1105

1115

1130
1145

1215

1220
1235
1300

1320

1355

1400

Post Office Limited — Strictly Confidential
POST OFFICE LTD BOARD MEETING (Company Number 2154540)

Meeting to be held at 09.00 on 15 March 2012

POL00103334
POL00103334

at 148 Old Street, London, EC1V 9HQ in the Board Room

Infrastructure (IT and Procurement)

Network Transformation
« Agency
« Crowns

FS Sales

Minutes of previous meetings

Minutes for noting
« POFS Minutes

Matters Arising
e Status Report

Break

Managing Director's Report including
Health & Safety Update

Finance/Performance Update
Eagle Update

Resignation of Director
« Les Owen

Lunch
Budget and Operational Plan 2012-13
Pensions - Next Steps

Board Governance Update
e POL Sealing Authorities
e Appointment of Alice Perkins to
the Royal Mail Holdings Board

Any Other Business

Close

Items for Noting

Significant Litigation Report

Post Office Ltd - Sealings
Communication Action Group Minutes
Olympics

Privacy Compliance Strategy
Verification of Telecoms Supplier
Treasury — Authority Levels

RMG Price Changes

Horizon Update

POLB(12)28

POLB(12)29
POLB(12)30

POLB(12)31
POLB(12)2™4
POLB(12)3"
POFS(12)1*"

POLB(12)32

POLB(12)33
POLB(12)34

POLB(12)35

POLB(12)36

POLB(12)37
POLB(12)38

POLB(12)39
POLB(12)40

POLB(12)41

POLB(12)42
POLB(12)43
POLB(12)44
POLB(12)45
POLB(12)46
POLB(12)47
POLB(12)48
POLB(12)49
POLB(12)50

Lesley Sewell

Kevin Gilliland

Nick Kennett /
Kevin Gilliland

Alice Perkins

Alice Perkins

Alice Perkins

Paula Vennells

Chris Day
Nick Kennett

Alwen Lyons

Chris Day
Chris Day

Susan Crichton

Alice Perkins

Susan Crichton
Alwen Lyons
Alwen Lyons
Lesley Sewell
Susan Crichton
Martin Moran
Chris Day
Martin Moran
Lesley Sewell
Post Office Limited — Strictly Confidential

Attendees:

Alice Perkins (Chairman)

Neil McCausland (SID)

Les Owen (NED)

Paula Vennells (MD)

Chris Day (CFO)

Alwen Lyons (Company Secretary)

In Attendance:
Lesley Sewell

Kevin Gilliland

Nick Kennett

Susan Crichton
Anne Fletcher
Heather Bignell-Blye

POL00103334
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POLB(12)2"
POLB12/018-27

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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 9!" February 2012

Present:

Alice Perkins
Neil McCausland
Les Owen

Paula Vennells
Chris Day

In attendance:
Alwen Lyons
Kevin Seller
Nick Kennett

POLB12/18

(a)

(b)

Chairman, Post Office Ltd (excluding item POLB 12/25)
Senior Independent Director, Post Office Ltd

Non Executive Director, Post Office Ltd

Managing Director, Post Office Ltd

Chief Financial Officer, Post Office Ltd

Company Secretary, Post Office Ltd
Head of Government Innovation (Item POLB12/18)
Financial Services Director (Item POLB 12/24)

FRONT OFFICE OF GOVERNMENT (FOoG)

Kevin Seller circulated a paper (attached as Appendix A to the
minutes) showing the estimated contribution for known FOoG
opportunities. The Board noted the relative importance of winning
the DVLA and Passport contracts. Les Owen asked if Network
capacity planning had been undertaken to ensure the business
could cope with all the initiatives. Kevin Seller explained that
detailed capacity planning was underway, but that many of the new
propositions did not use traditional counter time. The Chairman
asked how the tensions between Network Transformation and the
introduction of new products were being managed. Paula Vennells
assured the Board that the Network Director and Commercial
Director were both involved in the respective Steering Groups set
up to ensure these issues were aligned.

In Neil McCausland’s view the biggest commercial opportunity lay in
continuing to develop identity checking services and he suggested
that the Business should focus on this area as a core strength. He
asked why the commercial returns for new contracts were
significantly lower than those which were already in place. Kevin
Seller explained that the historic contracts with returns of circa 75%
were not won through competitive tendering and were not
sustainable. He pointed out that the paper POLB(12)17 showed
forecast returns from new contracts with a 25% contribution. In
reality POL is winning new contracts at between 30 and 40%
contribution. Chris Day said that pricing was key to winning these
contracts and that although the recent contract wins were small,
they would be used to showcase the Business to different
Government departments.

The Chairman stressed the importance of presenting opportunities
to Government departments which facilitated cost savings and
assisted digital inclusion.
ACTION:
Kevin Seller

ACTION:
Kevin Seller

ACTION:
Paula Vennells

POLB12/19

POLB12/20

ACTION:
Chris Day
April

ACTION:
Pauline Holroyd

(c)

(d)

(e)

(a)
(b)

(a)

(b)

(c)

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Post Office Limited - Strictly Confidential

DVLA Tender

Kevin Seller assured the Board of the strong relationship with DVLA
and explained that the main competitor for the tender was likely to
be a consortium, possibly with Capita, and Paypoint as its network
provider. There seemed to be little appetite for the work from the
major banks or supermarkets despite the fact that the competitor
analysis showed them as being the most credible network partners.

The Chairman asked how the Board could support the tender
process. Paula Vennells suggested that the tender stakeholder
communications plan be circulated to the Board highlighting the
Ministers and Officials involved in the decision making processes
and detailing how the Board could support this.

Neil McCausland asked for a more detailed DVLA project plan and
resource plan and the incentives in place for the team. Kevin Seller
was asked to organise a meeting with Neil McCausland to take him
through the FOoG communications plan.

The Chairman informed the Board that the DVLA tender would
return to the July Board meeting but if any significant changes
arose in the interim they would be reported to the Board.

MINUTES OF PREVIOUS MEETINGS
The minutes of the meeting of 12'" January 2012 were agreed;

the minutes of the Health & Safety Sub-Committee (POLBSC-
HS(12)1*") were noted.

MATTERS ARISING — Status Report

No. 5d (POLB12/02/(b

Chris Day explained that the red status in the Midasgrange Board
Minutes related to the migration of MI databases. The status was
currently amber, moving to green as the majority of products had
now been successfully migrated. ACTION CLOSED

No 5e (POLB12/06(a))
Chris Day confirmed that POL’s Going Concern status would be

covered within the RMG consolidation for this year, and that a
paper would be provided to the Board in due course on the
proposed Going Concern process/external audit for FY 12/13.

No 6b (POLB12/01(c

Les Owen acknowledged the rigour applied to the PDR scoring
system. Chris Day commented that he had also been impressed by
the process used by the Business. Paula Vennells stressed that the
Post Office was a very honest organisation but that the scores
highlighted a concern with the low number of high achievers. Les
Owen explained that he was used to a two-dimensional matrix
rating performance and potential. Paula Vennells suggested the
inclusion of potential ratings for the Top Team in the succession
planning paper at the April Board (subsequently changed to May).
POLB12/21

ACTION:
Kevin Gilliland

ACTION:
Alwen Lyons

ACTION:
Chris Day

ACTION:
Martin Moran

(a)

(b)

(c)

(d)

(e)

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Post Office Limited - Strictly Confidential

MANAGING DIRECTOR’S REPORT

Pay Review

Paula Vennells reported that RMG are working with the
Communications Workers Union (CWU) on a 3-year profit share
payment in return for a no strike deal. She highlighted the CWU's
expectation for a similar offer from POL and the potential risk to the
plan. Chris Day emphasised that the financial headroom this year
did offer an opportunity to the Business if it wanted to offer a
payment to help deliver the plan which assumed a pay freeze over
the next 3 years. However, such headroom would not be available
in FY 12/13. The Chairman challenged whether there was time to
negotiate a deal. Neil McCausland stressed that the Business was
still under an obligation to get the Crowns back to break-even, so
any solution needed to be sustainable.

Kevin Gilliland would be asked to provide a cost benefit analysis
paper to cover all the options available on Crown pay and their
associated risks.

An additional Board meeting may be required to consider the pay
mandate in detail.

Budget Meeting — 8" March

The Chairman asked that the pre-reading for the meeting should
start from the requirements for achieving the strategic plan;
highlighting areas where there is scope to exceed the plan;
documenting the risks and assumptions in order to demonstrate
that the targets have sufficient rigour and stretch.

Chris Day explained that work had already taken place to reconcile
the original strategic plan back to the budget and that he would be
using the meeting to get agreement that the plan contained the
appropriate stretch and risk. The Chairman asked that key
elements in the plan be highlighted such as Mails and methodology
of approach explained.

Quarterly Performance Reviews
Paula Vennells reported to the Board that Quarterly Performance
Reviews were being introduced with individual Directors.

Stamp Pricing
Paula Vennells explained that RMG were planning a significant

increase in stamp prices. She assured the Board that Alana
Renner, the Acting Communications Director, was working closely
with her counterpart in RM to deal with any adverse PR. Martin
Moran to circulate a note covering the effects of the RM price
increases on Post Office revenues and margin.

Collections and Returns
Paula Vennells reported that a joint presentation had been made at
RMH Board which had been very well received.
POLB12/22
(a)
POLB12/23

(a)

ACTION:
Chris Day

POLB12/24

(a)

ACTION:
Nick Kennett

(b)

ACTION:
Alwen Lyons

POLB12/25

POLB12/26

(a)
ACTION:
Alwen Lyons

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Post Office Limited - Strictly Confidential

HEALTH AND SAFETY UPDATE
The Health & Safety Update (POLB(12)20) was noted.
FINANCE/PERFORMANCE REPORT

Chris Day reported the strong performance in Period 9 had
continued in Period 10. He assured the Board that the investment-
spend was now on track and that he was ensuring it was being
spent appropriately. He explained that a provision of circa £6m may
be made in this year to cover the General Insurance Policies in
Force risk.

Neil McCausland requested a change to the presentation of the
Insurance Policies data to make the trend information clearer.

EAGLE UPDATE

Nick Kennett explained the twelve workstreams in place to ensure
Eagle is achieved. The most challenging of these being: the
valuation of Midasgrange; ensuring the correct termination terms
are enshrined in the contract and the wider HR effects of the
change. He has a target date of early March for signing the contract
and will bring the final agreement to the March Board.

Insurance

Nick Kennett presented the negotiations mandate to the Board.
The Chairman asked how far the proposal would reduce the
bureaucracy inherent in the current relationship. Nick Kennett
agreed that the current proposal had not been his initial desired
outcome but was confident it would work. Les Owen urged the
Business to retain as much control as possible over product design
and marketing. Paula Vennells explained that the relationships
between the two businesses would be very important.

Nick Kennett said that Government concurrence to the contract
extension had not been received. Les Owen expressed concern at
the potential impact on signing Eagle. Nick Kennett did not
anticipate any issues but confirmed that the delay in BIS sign-off
risked the achievement of the critical path as the Bank would not
proceed on other matters until the extension was confirmed.

PERSONAL INJURY REFERAL FEES
The Chairman left the meeting due to conflicts.
Minutes shown at Appendix B.

The Chairman rejoined the meeting.
ANY OTHER BUSINESS

The issue of aggravated robbery and burglary had been raised at
RMH Board and the Chairman asked that future Health & Safety
reports include a report on any incidents.
POLB12/26

POLB12/27

(b)

(c)

(a)
(b)
(c)

(d)

(a)

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Post Office Limited - Strictly Confidential

The risk would also be raised with the Audit, Risk and Compliance
Committee for future monitoring.

Separation

The Chairman updated the Board on the likely agreed structure for
the Group post separation. POL would sit as a sister company to
Royal Mail Group under a very thin TopCo consisting of the
Chairmen of both Companies. Responsibility for the businesses
would sit with the respective Boards.

The Chairman informed the Board of several Non-Executive
Director candidates under consideration and three possible
candidates for the Chair of Audit.

NOTING PAPERS
e Significant Litigation Report (POLB(12)23) was noted.
e Post Office Sealings (POLB(12)24) was noted.
e Communication Action Group Minutes (POLB(12)25) were
noted.
«Project Alaska (POLB(12)26) was noted.
CLOSE

There being no other business, the Chairman closed the meeting.
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Post Office Limited — Strictly Confidential

POLB(12)2"4 Appendix A
Annual net income and estimated contribution percentage for all known Front Office of Government propositions

Net Net Net Net Net Est Cont
Expected Income12/13 Income13/14_ —s Income14/15 Income1516 = Income16/17 (target Weighted
Contract Timescales £m &m £m £m &m 25%) Probability income

London PSN Aug-12 0.1 0.1 0.1 0.1 0.1 32% 100% 0.1
Westminster Live 0.1 0.4 0.4 0.1 0.1 25% 100% 0.1
TfL Public Carriage Office Live 0.1 0.1 0.1 0.1 0.1 64% 100% 0.1
Student Loans tbe 0.1 0.4 0.4 0.4 0.4 75% 100% 0.4
Skills Funding Agency Jun-12 04 0.2 0.2 0.2 0.2 49% 100% 0.2
Care Quality Commission Mar-12 0.9 0.6 0.6 0.6 0.6 70% 100% 0.6
UKBA Mar-12 6.7 67 6.7 6.7 67 53% 100% 6.7
DVLA tender (incremental) Oct-12 1.0 21.0 25.0 35.0 35.0 30% 90% 31.5
IPS Passports Sep-13 19.0 27.0 35.0 35.0 35.0 40% 90% 31.5
DSA Mar-13. 30.0 30.0 30% 30% 9.0
Identity Services UC 2012/13 8.0 11.0 11.0 30% 75% 8.3
Identity Services HMRC 2012/13 5.0 5.0 5.0 30% 75% 3.8
Identity Services GB 2012 3.0 7.0 7.0 7.0 7.0 35% 90% 6.3
Identity Services Other e.g. Land
Registry 2013/14 4.5 9.0 9.0 30% 60% 5.4
Universal credit (Asst Applications) 2014/15 5.0 10.0 30% 75% 75
HMRC (Asst Applications) 2013/14 1.0 5.0 30% 75% 3.8
Security Industry Authority Oct-12 0.1 1.0 1.0 1.0 1.0 35% 75% 0.8
Local Authorities Ongoing 1.0 2.0 5.0 7.0 12.0 25% 80% 9.6
CRB 2014/15 5.0 10.0 25% 50% 5.0
HMCTS (Court Services) 2012 0.1 2.0 5.0 10.0 10.0 25% 75% 75
HMRC network 2013/14 1.0 1.0 1.0 1.0 25% 50% 0.5
London PSN (extension to others) Ongoing 3.0 5.0 10.0 10.0 35% 75% 75
Scottish Govt 2012/13 1.0 2.0 4.0 4.0 30% 50% 2.0
Scottish LA 2012/13 0.1 0.5 1.0 2.5 25 30% 50% 1.3
TfL contactless 2012 1.0 2.5 2.5 2.5 2.5 30% 25% 0.6
Total 33.7 76.2 115.2 189.2 208.2 149.9

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Post Office Limited - Strictly Confidential
POLB(12)2"
POLB12/018-27

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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 9!" February 2012

Present:

Alice Perkins
Neil McCausland
Les Owen

Paula Vennells
Chris Day

In attendance:
Alwen Lyons
Kevin Seller
Nick Kennett

POLB12/18

(a)

(b)

Chairman, Post Office Ltd (excluding item POLB 12/25)
Senior Independent Director, Post Office Ltd

Non Executive Director, Post Office Ltd

Managing Director, Post Office Ltd

Chief Financial Officer, Post Office Ltd

Company Secretary, Post Office Ltd
Head of Government Innovation (Item POLB12/18)
Financial Services Director (Item POLB 12/24)

FRONT OFFICE OF GOVERNMENT (FOoG)

Kevin Seller circulated a paper (attached as Appendix A to the
minutes) showing the estimated contribution for known FOoG
opportunities. The Board noted the relative importance of winning
the DVLA and Passport contracts. Les Owen asked if Network
capacity planning had been undertaken to ensure the business
could cope with all the initiatives. Kevin Seller explained that
detailed capacity planning was underway, but that many of the new
propositions did not use traditional counter time. The Chairman
asked how the tensions between Network Transformation and the
introduction of new products were being managed. Paula Vennells
assured the Board that the Network Director and Commercial
Director were both involved in the respective Steering Groups set
up to ensure these issues were aligned.

In Neil McCausland’s view the biggest commercial opportunity lay in
continuing to develop identity checking services and he suggested
that the Business should focus on this area as a core strength. He
asked why the commercial returns for new contracts were
significantly lower than those which were already in place. Kevin
Seller explained that the historic contracts with returns of circa 75%
were not won through competitive tendering and were not
sustainable. He pointed out that the paper POLB(12)17 showed
forecast returns from new contracts with a 25% contribution. In
reality POL is winning new contracts at between 30 and 40%
contribution. Chris Day said that pricing was key to winning these
contracts and that although the recent contract wins were small,
they would be used to showcase the Business to different
Government departments.

The Chairman stressed the importance of presenting opportunities
to Government departments which facilitated cost savings and
assisted digital inclusion.
ACTION:
Kevin Seller

ACTION:
Kevin Seller

ACTION:
Paula Vennells

POLB12/19

POLB12/20

ACTION:
Chris Day
April

ACTION:
Pauline Holroyd

(c)

(d)

(e)

(a)
(b)

(a)

(b)

(c)

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Post Office Limited - Strictly Confidential

DVLA Tender

Kevin Seller assured the Board of the strong relationship with DVLA
and explained that the main competitor for the tender was likely to
be a consortium, possibly with Capita, and Paypoint as its network
provider. There seemed to be little appetite for the work from the
major banks or supermarkets despite the fact that the competitor
analysis showed them as being the most credible network partners.

The Chairman asked how the Board could support the tender
process. Paula Vennells suggested that the tender stakeholder
communications plan be circulated to the Board highlighting the
Ministers and Officials involved in the decision making processes
and detailing how the Board could support this.

Neil McCausland asked for a more detailed DVLA project plan and
resource plan and the incentives in place for the team. Kevin Seller
was asked to organise a meeting with Neil McCausland to take him
through the FOoG communications plan.

The Chairman informed the Board that the DVLA tender would
return to the July Board meeting but if any significant changes
arose in the interim they would be reported to the Board.

MINUTES OF PREVIOUS MEETINGS
The minutes of the meeting of 12'" January 2012 were agreed;

the minutes of the Health & Safety Sub-Committee (POLBSC-
HS(12)1*") were noted.

MATTERS ARISING — Status Report

No. 5d (POLB12/02/(b

Chris Day explained that the red status in the Midasgrange Board
Minutes related to the migration of MI databases. The status was
currently amber, moving to green as the majority of products had
now been successfully migrated. ACTION CLOSED

No 5e (POLB12/06(a))
Chris Day confirmed that POL’s Going Concern status would be

covered within the RMG consolidation for this year, and that a
paper would be provided to the Board in due course on the
proposed Going Concern process/external audit for FY 12/13.

No 6b (POLB12/01(c

Les Owen acknowledged the rigour applied to the PDR scoring
system. Chris Day commented that he had also been impressed by
the process used by the Business. Paula Vennells stressed that the
Post Office was a very honest organisation but that the scores
highlighted a concern with the low number of high achievers. Les
Owen explained that he was used to a two-dimensional matrix
rating performance and potential. Paula Vennells suggested the
inclusion of potential ratings for the Top Team in the succession
planning paper at the April Board (subsequently changed to May).
POLB12/21

ACTION:
Kevin Gilliland

ACTION:
Alwen Lyons

ACTION:
Chris Day

ACTION:
Martin Moran

(a)

(b)

(c)

(d)

(e)

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Post Office Limited - Strictly Confidential

MANAGING DIRECTOR’S REPORT

Pay Review

Paula Vennells reported that RMG are working with the
Communications Workers Union (CWU) on a 3-year profit share
payment in return for a no strike deal. She highlighted the CWU's
expectation for a similar offer from POL and the potential risk to the
plan. Chris Day emphasised that the financial headroom this year
did offer an opportunity to the Business if it wanted to offer a
payment to help deliver the plan which assumed a pay freeze over
the next 3 years. However, such headroom would not be available
in FY 12/13. The Chairman challenged whether there was time to
negotiate a deal. Neil McCausland stressed that the Business was
still under an obligation to get the Crowns back to break-even, so
any solution needed to be sustainable.

Kevin Gilliland would be asked to provide a cost benefit analysis
paper to cover all the options available on Crown pay and their
associated risks.

An additional Board meeting may be required to consider the pay
mandate in detail.

Budget Meeting — 8" March

The Chairman asked that the pre-reading for the meeting should
start from the requirements for achieving the strategic plan;
highlighting areas where there is scope to exceed the plan;
documenting the risks and assumptions in order to demonstrate
that the targets have sufficient rigour and stretch.

Chris Day explained that work had already taken place to reconcile
the original strategic plan back to the budget and that he would be
using the meeting to get agreement that the plan contained the
appropriate stretch and risk. The Chairman asked that key
elements in the plan be highlighted such as Mails and methodology
of approach explained.

Quarterly Performance Reviews
Paula Vennells reported to the Board that Quarterly Performance
Reviews were being introduced with individual Directors.

Stamp Pricing
Paula Vennells explained that RMG were planning a significant

increase in stamp prices. She assured the Board that Alana
Renner, the Acting Communications Director, was working closely
with her counterpart in RM to deal with any adverse PR. Martin
Moran to circulate a note covering the effects of the RM price
increases on Post Office revenues and margin.

Collections and Returns
Paula Vennells reported that a joint presentation had been made at
RMH Board which had been very well received.
POLB12/22
(a)
POLB12/23

(a)

ACTION:
Chris Day

POLB12/24

(a)

ACTION:
Nick Kennett

(b)

ACTION:
Alwen Lyons

POLB12/25

POLB12/26

(a)
ACTION:
Alwen Lyons

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Post Office Limited - Strictly Confidential

HEALTH AND SAFETY UPDATE
The Health & Safety Update (POLB(12)20) was noted.
FINANCE/PERFORMANCE REPORT

Chris Day reported the strong performance in Period 9 had
continued in Period 10. He assured the Board that the investment-
spend was now on track and that he was ensuring it was being
spent appropriately. He explained that a provision of circa £6m may
be made in this year to cover the General Insurance Policies in
Force risk.

Neil McCausland requested a change to the presentation of the
Insurance Policies data to make the trend information clearer.

EAGLE UPDATE

Nick Kennett explained the twelve workstreams in place to ensure
Eagle is achieved. The most challenging of these being: the
valuation of Midasgrange; ensuring the correct termination terms
are enshrined in the contract and the wider HR effects of the
change. He has a target date of early March for signing the contract
and will bring the final agreement to the March Board.

Insurance

Nick Kennett presented the negotiations mandate to the Board.
The Chairman asked how far the proposal would reduce the
bureaucracy inherent in the current relationship. Nick Kennett
agreed that the current proposal had not been his initial desired
outcome but was confident it would work. Les Owen urged the
Business to retain as much control as possible over product design
and marketing. Paula Vennells explained that the relationships
between the two businesses would be very important.

Nick Kennett said that Government concurrence to the contract
extension had not been received. Les Owen expressed concern at
the potential impact on signing Eagle. Nick Kennett did not
anticipate any issues but confirmed that the delay in BIS sign-off
risked the achievement of the critical path as the Bank would not
proceed on other matters until the extension was confirmed.

PERSONAL INJURY REFERAL FEES
The Chairman left the meeting due to conflicts.
Minutes shown at Appendix B.

The Chairman rejoined the meeting.
ANY OTHER BUSINESS

The issue of aggravated robbery and burglary had been raised at
RMH Board and the Chairman asked that future Health & Safety
reports include a report on any incidents.
POLB12/26

POLB12/27

(b)

(c)

(a)
(b)
(c)

(d)

(a)

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Post Office Limited - Strictly Confidential

The risk would also be raised with the Audit, Risk and Compliance
Committee for future monitoring.

Separation

The Chairman updated the Board on the likely agreed structure for
the Group post separation. POL would sit as a sister company to
Royal Mail Group under a very thin TopCo consisting of the
Chairmen of both Companies. Responsibility for the businesses
would sit with the respective Boards.

The Chairman informed the Board of several Non-Executive
Director candidates under consideration and three possible
candidates for the Chair of Audit.

NOTING PAPERS
e Significant Litigation Report (POLB(12)23) was noted.
e Post Office Sealings (POLB(12)24) was noted.
e Communication Action Group Minutes (POLB(12)25) were
noted.
«Project Alaska (POLB(12)26) was noted.
CLOSE

There being no other business, the Chairman closed the meeting.
POL00103334
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Post Office Limited — Strictly Confidential

POLB(12)2"4 Appendix A
Annual net income and estimated contribution percentage for all known Front Office of Government propositions

Net Net Net Net Net Est Cont
Expected Income12/13 Income13/14_ —s Income14/15 Income1516 = Income16/17 (target Weighted
Contract Timescales £m &m £m £m &m 25%) Probability income

London PSN Aug-12 0.1 0.1 0.1 0.1 0.1 32% 100% 0.1
Westminster Live 0.1 0.4 0.4 0.1 0.1 25% 100% 0.1
TfL Public Carriage Office Live 0.1 0.1 0.1 0.1 0.1 64% 100% 0.1
Student Loans tbe 0.1 0.4 0.4 0.4 0.4 75% 100% 0.4
Skills Funding Agency Jun-12 04 0.2 0.2 0.2 0.2 49% 100% 0.2
Care Quality Commission Mar-12 0.9 0.6 0.6 0.6 0.6 70% 100% 0.6
UKBA Mar-12 6.7 67 6.7 6.7 67 53% 100% 6.7
DVLA tender (incremental) Oct-12 1.0 21.0 25.0 35.0 35.0 30% 90% 31.5
IPS Passports Sep-13 19.0 27.0 35.0 35.0 35.0 40% 90% 31.5
DSA Mar-13. 30.0 30.0 30% 30% 9.0
Identity Services UC 2012/13 8.0 11.0 11.0 30% 75% 8.3
Identity Services HMRC 2012/13 5.0 5.0 5.0 30% 75% 3.8
Identity Services GB 2012 3.0 7.0 7.0 7.0 7.0 35% 90% 6.3
Identity Services Other e.g. Land
Registry 2013/14 4.5 9.0 9.0 30% 60% 5.4
Universal credit (Asst Applications) 2014/15 5.0 10.0 30% 75% 75
HMRC (Asst Applications) 2013/14 1.0 5.0 30% 75% 3.8
Security Industry Authority Oct-12 0.1 1.0 1.0 1.0 1.0 35% 75% 0.8
Local Authorities Ongoing 1.0 2.0 5.0 7.0 12.0 25% 80% 9.6
CRB 2014/15 5.0 10.0 25% 50% 5.0
HMCTS (Court Services) 2012 0.1 2.0 5.0 10.0 10.0 25% 75% 75
HMRC network 2013/14 1.0 1.0 1.0 1.0 25% 50% 0.5
London PSN (extension to others) Ongoing 3.0 5.0 10.0 10.0 35% 75% 75
Scottish Govt 2012/13 1.0 2.0 4.0 4.0 30% 50% 2.0
Scottish LA 2012/13 0.1 0.5 1.0 2.5 25 30% 50% 1.3
TfL contactless 2012 1.0 2.5 2.5 2.5 2.5 30% 25% 0.6
Total 33.7 76.2 115.2 189.2 208.2 149.9

POLB12/25

ACTION:
Nick Kennett

ACTION:
Nick Kennett

(a)

(b)

(c)

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POLB(12)2™ Appendix B

PERSONAL INJURY REFERRAL FEES (POLB(12)18)

Les Owen challenged the statement made at the January Board
that POL could be certain it was not involved with any injury referral
fees. Paula Vennells explained that data was only passed to a third
party if the customer asked for this action to be taken. Les Owen
explained he had two fundamental issues that we should be mindful
of; TCF in a growing FS Business, and also the possible bad PR if
we are shown to be involved in referral fees.

Paula Vennells asked for a formal referrals policy to be agreed with
Junction ensuring no active encouragement of personal injury
referrals unless requested by the customer. This would be copied
to the Board as a future noting paper.

Nick Kennett would also investigate the flow of fees to ensure that
there is no inducement for wrong behaviours.
POLB(12)4"
POLB12/28-43

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Post Office Limited
(company no. 2154540)

Minutes of the meeting of the Board of Directors

held at 148 Old Street, London EC1V 9HQ on 15" March 2012

Present:

Alice Perkins
Neil McCausland
Les Owen

Paula Vennells
Chris Day

In attendance:
Alwen Lyons
Lesley Sewell
Kevin Gilliland
Nick Kennett
Susan Crichton
Sarah Hall
Martin Lacey

POLB12/28

(a)

(b)

(c)

(d)

Chairman, Post Office Ltd

Senior Independent Director, Post Office Ltd
Non Executive Director, Post Office Ltd
Managing Director, Post Office Ltd

Chief Financial Officer, Post Office Ltd

Company Secretary, Post Office Ltd
Interim Chief Operating Officer
Sales and Network Director
Financial Services Director

Legal and Compliance Director
Financial Controller

Pensions Specialist

(item POLB 12/28)
(item POLB 12/29 & 30)
(item POLB12/30 & 36)
(item POLB 12/39 & 40)
(item POLB 12/39)
(item POLB 12/39)

INFRASTRUCTURE (IT AND PROCUREMENT)

Lesley Sewell explained the IT Strategy for the next 3 years which
will support the wider business activity, procure circa 60 IT contracts
and deliver the cost reduction challenge. The Board discussed the
Strategy which involves the proposed introduction of a Service
Integrator (SI) to manage IT providers. Les Owen asked if the SI
would be allowed to provide any of the work towers in the
framework of suppliers. (POL(12)28 Appendix 2). Lesley Sewell
explained that the SI would only supply the service desk but no
other tower;

Lesley Sewell emphasised that the business lacked the capability
and maturity to manage the changes required to deliver the future
IT infrastructure. This work was not a core competency and it made
more sense to outsource. She stressed the importance of getting
the SI contract terms correct and getting good governance in place
to manage that contract;

Chris Day assured the Board that the SI and contracts would
include efficiency targets which were already assumed in the
budget;

Neil McCausland had suggested at a pre-meet that the SI approach
be tested to give the Board some assurance that it was the best
solution. Lesley Sewell reported that Berkeley Partnership had
reviewed the SI strategy and were supportive of the approach
agreeing that the SI would bring the required capabilities to the
business;
ACTION:
Lesley Sewell

ACTION:
Lesley Sewell

ACTION:
Lesley Sewell
Chris Day

(e)

(f)

(g)

(h)

(i)

()

(k)

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Paula Vennells questioned whether the SI would in fact raise
capability, as the same POL staff who were currently working in this
area of the business would be TUPE’d over to the SI. Lesley
Sewell assured the Board that the contract would insist on raised
capability and people would not be retained if they did not achieve
the required level. Paula Vennells flagged to the Board that the
redundancy cost could return to POL under TUPE rules;

Les Owen asked the business to ensure that POL retained the
procurement decisions for the tower contracts. Lesley Sewell
assured him this was the way the SI contract would be structured.
She emphasised that the SI contract negotiation was vital and the
business would need to buy-in consultancy support for this work;

Lesley Sewell assured the Board that the business would retain and
strengthen its in-house resource which would focus on the IT
changes needed for new products and services;

the Chairman understood that Berkeley Partnership had challenged
the concept of the towers within the framework, Lesley Sewell
explained that the Berkeley Partnership have suggested other
solutions and proposed that the framework could be structured
around the business applications. She would take a further look at
a different approach but thought it would be too radical a change for
the business in one go. However, Lesley Sewell assured the Board
that changes could be made to the proposal as it developed and the
team would keep an open mind;

Les Owen asked if the model had been successfully deployed in
other organisations. Lesley Sewell reported that she had visited
Rolls Royce who were currently moving to the model. She agreed
to find a business who are already successfully using the SI and
similar structure to benchmark. She would look at retail / services
sector as well;

Neil McCausland asked for an explanation of the Financial overview
(POL(12)28 APPENDIX 1) and why the costs were so high for
13/14 and 14/15. Lesley Sewell explained that the optimised
baseline was based on existing contracts including RPI increases
and also included the projects involved in business transformation.
Neil McCausland challenged the additional costs. He agreed the
expenditure of £13.38m to implement the programme, but stated
that this did not mean he agreed the targets for subsequent years.
The Chairman clarified that the Board were not being asked to
approve the IT Budget for subsequent years and asked Lesley
Sewell and Chris Day to provide a breakdown and explanation of
the optimised expected cost scenarios for the Board;

the board endorsed the proposed strategy subject to the points
made and authorised expenditure of £13.8m for the implementation
of the programme.
POLB12/29

ACTION:
Kevin Gilliland
Chris Day

POLB12/30

(a)

(b)

(c)

(d)

(e)

(a)

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NETWORK TRANSFORMATION

Agency

Les Owen asked if the business had the necessary skills to assess
Subpostmaster business plans submitted for Network
Transformation. Kevin Gilliland assured the Board that the
business was experienced in these assessments as 10% of
branches change every year and the business plans for all these
changes were put through a retail assessment and then a financial
assessment led by Chris Day’s team;

the Chairman emphasised the importance of the selection criteria
used to prioritise branches and the need for them to be fairly and
robustly applied. Neil McCausland suggested a further criteria to
look at the benefit for the Subpostmaster as this could provide
advocacy for the change;

Kevin Gilliland explained that most of the negative press for
Network Transformation was focused on locals and a previous
‘down-grading’ of service. He reported that ‘locals’ could carry out
98% of the core business carried out by the whole Network which
would move closer to 100% once a manual solution was in place
for business banking;

Crowns

The Chairman congratulated Kevin Gilliland on the progress being
made. Neil McCausland encouraged the business to push for more
trials. Kevin Gilliland explained that the most difficult area of the
plan was the staff savings and that achieving the targets would rely
on engaging the front line staff. This was why more time had been
spent on the initial trial at Birmingham. Some of the staff at this
office are now being used as advocates in the next trial offices. The
Chairman reiterated that the Board was pleased with what it had
seen and understood that cultural change was needed, but
encouraged the business to keep pushing for faster deployment.
Paula Vennells agreed and suggested that six to ten pilots are now
needed instead of the couple which are planned;

Neil McCausland asked for a reconciliation between the numbers in
the paper and the Crown P&L.

FS SALES

Nick Kennett explained the suggested management structure and
the importance of the relationship between the financial services
representative (FSR) and the branch staff. Neil McCausland asked
what incentives would be in place for the FSR. Nick Kennett
explained that a qualified FSR would earn circa £25k with an
incentive of an additional £10k available if reaching sales targets.
Kevin Gilliland reported that the structure of the branch staff
incentive was still to be agreed;
(b)

ACTION:
Kevin Gilliland

(c)

(d)

POLB12/31
(a)
(b)

POLB12/32

(a)

ACTION:
Nick Kennett

ACTION:
Neil McCausland

POLB12/33

(a)

(b)

POLB12/34
(a)

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Neil McCausland suggested that the new FSR model be built into
the Crown Trial, including branch incentives. Kevin Gilliland
accepted this would be a good place to trial new concepts. Nick
Kennett reported that the Birmingham trial had already seen an up
lift in sales which if replicated through the Network would bring a
£1m additional profit;

Les Owen asked for clarification as to whether the proposed FSR
role could give advice. Nick Kennett confirmed that although the
FSR would be qualified they would not give advice but would
perform an assisted sale;

Les Owen highlighted the potential opportunity as other financial
organisations’ advisors move to charging a fee post RDR (Retail
Distribution Review). Up to 40% of the population will no longer be
given free financial services advice and this presented an
opportunity for the Post Office.

MINUTES OF PREVIOUS MEETINGS
The minutes of the meeting of 9" February 2012 were agreed;

the Minutes of the POFS Board Meeting (POFS(12)1*) were noted.
Paula Vennells challenged the minuting of the MDA Commercial

Contract; she will ensure it is challenged at the next Midasgrange
Board.

MATTERS ARISING -— Status Report

POLB11/62/(c) Appendix A

Les Owen asked for a report of the number of personal injury
referrals made by Junction. Neil McCausland agreed it would be
good to track these especially as they are part of an incentive
scheme. Because of her potential conflict of interest on this issue,
the Chairman asked Neil McCausland to take ownership of it to
ensure the business was getting the required information and
challenging Junction to ensure that the Post Office was beyond
criticism.

MANAGING DIRECTOR’S REPORT

Paula Vennells updated the Board that cheques would now be
acceptable at ‘locals’ as a new manual process had been agreed;

Paula Vennells told the board about the successful BIS week where
500 Senior Civil Servants attended meetings and seminars with the
Front Office of Government (FOoG) team with very positive
feedback.

HEALTH AND SAFETY UPDATE

The Health & Safety Update (POLB(12)34) was noted.
POLB12/35

(a)

POLB12/36
(a)

ACTION:
Les Owen

ACTION:
Nick Kennett

(b)

ACTION:
Nick Kennett

POLB12/37

ACTION:
Alwen Lyons

POLB12/38

(a)

(b)

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FINANCE/PERFORMANCE REPORT

Chris Day presented the period 10 performance which continued to
show strong sales in FS and Mails as well as accelerated spend in
key investment expenditure. He also reported that period 11
continued the strong performance. The Full Year interim forecast
was now £65 - £70m “profit” including the network subsidy payment
of £180m. Les Owen asked if there was a risk that the Government
would reduce the Network Payment because of the good
performance. Chris Day reported that this had been a concern
especially around cash flow, but was unlikely because the business
had already made the case for next year.

EAGLE UPDATE

Nick Kennett gave the Board an oral update on the Eagle
negotiations. He explained the problems with the valuation of the
future portfolio which would be sold when the contract expired. Les
Owen suggested an alternative proposal and the Chairman asked
that Les Owen and Nick Kennett convene after the meeting to
discuss. Nick Kennett to send a note round to the Board to
summarise the discussion;

Nick Kennett reported that the Bank had re-opened discussions on
FSR numbers, an area which they had previously dropped in the
Heads of Terms. The Chairman told Nick Kennett to relay the
Board’s disappointment that this issue, which they thought had
been settled, was now being re-opened.

RESIGNATION OF DIRECTOR - LES OWEN

The Board noted the resignation of Les Owen as Non Executive
Director effective 15 March 2012 and the Company Secretary was
authorised to file the necessary TMO1 form with Companies House.
The Chairman thanked Les Owen for his contribution to the Board.

BUDGET AND OPERATIONAL PLAN 2012-13

Chris Day took the Board through the budget and operating plan.
He explained that he had incorporated the feedback from the
budget workshop into the adjusted budget figures. He stressed that
the business was not building in costs for independence without
due scrutiny, but recognised the concern about the existing base
costs. He explained that the non-staff costs already included a
considerable stretch challenge of £15m unidentified savings and
suggested a stretch of £8m in the staff and agents costs to be held
centrally as a contingency;

Neil McCausland challenged the increase in staff costs and Les
Owen supported his challenge as the 12/13 staff cost budget was
above the strategic plan agreed with SHEX. Chris Day explained
that the increase in costs driven by separation had been shared
with SHEX who accepted them but obliged the business to find a
way to cover the costs. Les Owen suggested that the business
ACTION:
Paula Vennells
Chris Day

ACTION:
Chris Day

POLB12/39

ACTION:

Martin Lacey

ACTION:
Susan Crichton

(c)

(d)

(e)

(f)

(a)

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consider using a cost reduction firm to look at the staff costs in the
business. The Chairman agreed that the business should look hard
at its costs but noted that it would need to balance this work against
the importance of delivering Network change and revenue growth;

Chris Day emphasised the need for short term increases in costs
but also acknowledged the requirement for an efficiency agenda
with forward looking productivity measures. He explained that a
company called Vanguard are looking at working practices and re-
engineering processes in the Network;

the Chairman suggested that Paula Vennells and Chris Day discuss
the medium term cost reduction challenge with the Executive Team
to decide how they will improve productivity without jeopardising the
major transformation programmes, and report back to the Board.
Neil McCausland supported this approach;

Chris Day to circulate to the Board the updated budget figures
including contingency;

the 2012-13 budget was approved.
PENSIONS - NEXT STEPS

Chris Day introduced the Pensions paper which had been produced
to provide background for the Board. Sarah Hall and Martin Lacey
were on hand to give additional information.

The Chairman mentioned the issue of increasing employee
contribution rate and asked Martin Lacey to start a piece of work on
what POL’s options are re employee contributions.

Les Owen asked whether POL intended to take independent advice
with regard to the comments made in para 5.3 as to the legal
standing of the promise — Susan Crichton confirmed that she
thought that POL should take independent legal advice.

Les Owen also commented on salary sacrifice stating that although
this was common in the private sector, it may not be acceptable in
the POL context.

Chris Day then asked Sarah Hall to outline the increased POL
contribution rate. She explained that the RM guidance for this year
was that the P&L pension rate should be increased from 17.1 to
18.2%. Sarah Hall also mentioned that this flowed through into
cash assumptions. This assumed a stable population but the reality
might be different. Les Owen asked about the risk that the
contribution rate could increase up to as much as 24%. Sarah Hall
responded that this would equate to a cash risk of cE9m per annum
which should be manageable within the context of POL’s cash
flows.

Following a question with regard to the POL section of the RMPP it
was explained that POL would have a separate section of the
pension fund but would use the same trustees as RMG until one of
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two things happened: either that there was a sale of RMG to the
private sector or it became apparent that the strategic objectives of
POL and RMG ceased to be aligned. It was concluded that for time
being and provided the interests of both companies were aligned
and that the RMPP governance arrangement was satisfactory and
cost effective.

The Chairman mentioned that one of the Non Executives who
would shortly be joining the board had a particular interest/expertise
ACTION: in pension matters so suggested that Chris Day should engage with
Chris Day her regarding POL’s pension issues. The POL Board will avoid
taking any unnecessary long-term irrevocable decisions until the
new NED has been fully engaged.

It was thought that three months would be required to develop the

work with respect of risk appetite and looking at the financial impact
ACTION: of the various options. This work will be deferred until the new NED
Susan Crichton has been fully engaged.

There was a brief discussion with regard to the RMSEPP scheme
where Les Owen informed the board that RMG is seeking a final
legal interpretation of the RMSEPP pension revaluation rule. Martin
Lacey outlined a proposal that RM is considering regarding a lump
sum contribution to the RMSEPP Trustees in return for certainty of
future contributions until March 2018. POL has the option to
participate in this arrangement this year. The Chairman suggested
ACTION: that the Board were not in a position to make a decision on this
Martin Lacey proposal and that a paper should be circulated

The board agreed to delegate authority to Chris Day as set out in
the board paper.

POLB12/40 BOARD GOVERNANCE UPDATE

(a) I Susan Crichton reported that the European Commission are likely
to approve the UK Government's notification that the aid to be given
to POL is State Aid in accordance with the EU SGEI Framework on
28th March and that SHEX have sent an email expressing comfort
that they are confident that this will happen to that timetable. The
UK Government's application is going through inter service
consultation and no issues have been raised. Chris Day having
reviewed POL’s financial position was content with the support from
SHEX. The Board took comfort from the assurance and deemed it
was not necessary to write to SHEX at this point;

(b) I Susan Crichton explained the stages the business needed to
complete before separation took place on the 2" April; all the
activities were contingent on Royal Mail Pension Solution State Aid;

(c) Susan Crichton reported that the new POL Articles of Association
were not yet finalised as additional tax clarification was required. At
the request of the shareholder the Articles are aligned with those of

ACTION: RM Group, apart from the section on Delegated Authorities where
Chris Day POL will have to get SHEX approval for spend of over £50m.
Susan Crichton Susan Crichton and Chris Day were asked to update and circulate a
ACTION:
Susan Crichton/
Paula Vennells

ACTION:
Alwen Lyons

(d)

(e)

(f)

(9)

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proposal for Delegated Authorities below SHEX level;

the Articles also require SHEX sign off of a 5 year rolling Strategic
Plan. Paula Vennells pointed out that the operational intention of
the Articles was different to the actual words and wanted comfort
that this would not cause problems. Susan Crichton explained that
a ways of working document would be put in place between SHEX /
BIS and POL with read across for the Articles to ensure they
worked in practice. The Chairman was comfortable to leave Susan
Crichton and Paula Vennells to come to a working accommodation
on this with BIS;

the Board resolved that a sub committee be formed to give effect to
the legal requirements necessary for the Transaction to move Post
Office Limited to become a sister company of Royal Mail Group
Limited (the “Transaction”). This sub committee comprising of Paula
Vennells and Chris Day would execute the documents required to
give effect to the Transaction including, but not limited to, the
secondment termination agreement; the new Articles of the
Company; the Shareholder approvals and the subscription letter in
connection with the special share. Minutes of this sub committee
would be circulated to the Board;

POL Sealing Authorities

Susan Crichton advised the Board of the need to revise the

delegated authority to authenticate the fixing of the Company's seal.

The Board approved that the affixing of the company seal may be
authenticated by any current Director of the Company or the
Company Secretary or Assistant Company Secretary or the
following signatory:

e Susan Crichton

Appointment of Alice Perkins to the Royal Mail Holdings Board

The Board noted the appointment of Alice Perkins to the RMH
Board;

it was noted that Alice Perkins had notified the Board in accordance
with article 89(B) of the Company's Articles of Association that she
was proposing to take up a position as a director of Royal Mail
Holdings plc (“RMH") and that this could be regarded as reasonably
likely to give rise to a conflict of interest for the purposes of section
175 of the Companies Act 2006 (the “Act’). The Board considered
this interest and position and noted the potential for certain
situations to give rise to a conflict of interest or conflict of duty. The
Board also noted the terms of the Letter Agreement from the
Department of Business, Innovation and Skills to Alice Perkins
dated 15" March 2012 regarding the structure of the RMH group,
corporate governance arrangements and the Crown indemnity in
favour of Alice Perkins;
POLB12/41

ACTION:
Paula Vennells

POLB12/42

(a)

(b)

(c)

(a)
(b)
(c)
(d)
(e)

(9)

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it was resolved that it would promote the success of the Company
for Alice Perkins to remain a director of the Company
notwithstanding her position and interest as a director of RMH and
accordingly that such position and interest shall be authorised for
the purposes of section 175 of the Act and in accordance with
article 89 of the Articles of Association, and that such authorisation
shall extend to any actual or potential conflict which may arise out
of the matter so authorised;

the Board may notify Alice Perkins from time to time of any
additional obligations or restrictions that it considers appropriate for
her to observe in order to manage the conflict situation;

in respect of a matter to which this authority relates, Alice Perkins
shall not be obliged to disclose to the Company any information in
respect of which she owes a duty of confidentiality to a person other
than the Company;

this authority may be terminated by the Board at any time;

subject to any duty of confidentiality, Alice Perkins shall be required
to notify the Board as soon as reasonably practicable if there occurs
any other material change of circumstances of which in her
reasonable opinion the Board should be aware if it were considering
granting or renewing any such authorisation;

it was noted that, pursuant to Article 89 and section 175(6) of the
Act, the meeting was quorate without counting Alice Perkins and
Alice Perkins did not vote on the foregoing resolution.

ANY OTHER BUSINESS

Appointment of Yorkshire Bank as Bankers POLB(12)51
The Board approved the appointment of Yorkshire Bank;

the Chairman informed the Board that, following their
recommendation to the Shareholder Executive, Virginia Holmes had
been given Ministerial approval to become a POL Non-Executive
Director and would join the Board in April;

the Chairman explained that she and the Company Secretary had
met James Arbuthnot MP, at his request to discuss the
Subpostmaster cases questioning the integrity of the Horizon
system. The Chairman hoped that she could find a way to convince
him and other MPs that the system was not at fault. This might
mean looking at a further independent study of the issues.

NOTING PAPERS

Significant Litigation Report (POLB(12)42) was noted.

Post Office Sealings (POLB(12)43) was noted.

Communication Action Group Minutes (POLB(12)44) were noted.
Olympics (POLB(12)45) was noted.

Privacy Compliance Strategy (POLB(12)46) was noted.
Verification of Telecoms Supplier (POLB(12)47 was noted.
Treasury — Authority Levels (POLB(12)48) was noted.

ACTION:
Lesley Sewell

POLB12/43

(h)
(i)

(a)

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RMG Price Changes (POLB(12)49) was noted.

Horizon Update (POLB(12)50) was noted.

a) Lesley Sewell reported that a tactical review was underway to
understand the single points of failure within the system. A more
strategic review was also needed for re-visiting decisions made
on critical back-up for system failures. Lesley Sewell would
return to the Board with the outcome of the two reviews and the
options available for the future.

b

the Chairman informed the Board that she and Paula Vennells
were meeting with Duncan Tait (CEO Fujitsu) and Rod Vawdry
(Vice chairman of Fujitsu) that evening.

CLOSE

There being no other business, the Chairman closed the meeting.
POLB(12)3"
POLB12/028-30

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Post Office Limited
(company no. 2154540)

Minutes of the meeting of the Board of Directors

held at 148 Old Street, London EC1V 9HQ on 29" February 2012

Present:

Alice Perkins
Neil McCausland
Paula Vennells
Chris Day

In attendance:
Alwen Lyons

Susan Crichton
Matthew Starks

POLB12/028

(a)

(b)

Chairman, Post Office Ltd

Senior Independent Director, Post Office Ltd
Managing Director, Post Office Ltd

Chief Financial Officer, Post Office Ltd

Company Secretary, Post Office Ltd
Legal & Compliance Director
Head of Employee Relations

STATE AID

Susan Crichton updated the Board on the progress of the UK
Government's notification for approval of the proposed state aid to
fund the Post Office’s transformation programme and network
subsidy. She explained that POL’s notification is the first to be
considered under the European Commissions’ new framework for
the review of Services of General Economic Interest (SGEI). In this
context the Commission is focused on Article 19, which requires
that all SGEI contracts are procured in compliance with EU Public
Procurement law. The Government has been told that a favourable
decision has been drafted but the UK Government are required to
provide two undertakings. Firstly, that the re-procurement of the
POCA contract would be in compliance with EU public procurement
law when it expires. Secondly that the UK authorities will review by
the end of 2017 the processes under which all public contracts to
provide the SGEls have been awarded and ensure their compliance
with obligations under Union public procurement rules. The UK
authorities’ assessment under this review will be made available to
the Commission.

Susan Crichton explained that this would mean the MDA would fall
within the latter category, and provided that RMG is not privatised
by end of 2017 would be one of the contracts reviewed by the UK
authorities. It has been suggested that Royal Mail (RM) and the
Post Office (POL) should sign a side letter to the MDA to the effect
that if, following the review by the UK authorities and discussion
with the Commission, the Government request RMG to re-procure
the contract and if the Post Office do not win the contract from
Royal Mail then the MDA will terminate any claim for loss of
earning from POL. Neil McCausland asked that the shareholder
should request this on the basis that such undertaking would
facilitate in BIS’s State Aid notification.

The Chairman asked that BiS’s advice be captured alongside the
ACTION:
Alwen Lyons
ACTION:
Susan Crichton
ACTION:

Paula Vennells/
Chris Day

POLB12/029

(a)

(b)

(c)

(d)

(e)

(f)

(9)

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side letter for future reference.

Susan Crichton promised to keep the Board updated

The Board agreed to delegate authority to either of the Executives
Directors to sign the side letter.

LONG TERM INCENTIVE SCHEME (LTiP)

Matthew Starks took the Board through the proposed LTiP
structure. The Board discussed the different measures which could
be used and the difficulty of setting the revenue/sales targets so far
in advance. Three measures were highlighted as appropriate;
absolute profit (deficit reduction); sales revenue; and Network
Transformation conversions.

Neil McCausland and the Chairman argued in favour of using deficit
reduction rather than profit because they thought the latter was a
misleading term given the continuing existence of the NSP.

Neil McCausland proposed that deficit reduction be the only
measure in the LTiP. Chris Day asked if it was right that successful
sales and conversion results should get no reward if deficit
reduction was missed by a small amount despite the business
showing good growth in the year. The Chairman agreed that this
could lead the business to drive cost cutting to achieve the budget
instead of focusing on growth. Neil McCausland agreed that the
three measures were important but still wanted deficit reduction as
the prime target.

Chris Day reminded the Board that the business also has a short
term bonus scheme which uses profit (deficit reduction) as a
primary measure and that he would want to guard against
rewarding individuals twice for the same performance.

Paula Vennells and the Chairman stressed the importance of hitting
the Network Transformation target as this was agreed with
Government as part of the funding and was also a contractual
requirement of the MDA and suggested that this could be the
gateway measure. This would also help with the transition from the
current scheme which includes Network Transformation
conversions as a gateway.

The Board discussed the range over which the LTiP would be paid,
agreeing that it would pay a relatively small amount for performance
marginally below target, the agreed payment if the target was hit
and a significantly higher level if a stretch target was achieved.

The Board agreed that the LTIP scheme should have a gateway of
5400 Network Transformation conversions. If this number was not
achieved there would be no payment. The LTiP would then be split
50:50 between deficit reduction and sales growth. The payouts for
these two bonuses would range from slightly below target to a
significant stretch target, and it was acknowledged that the two
ACTION: (h)
Matthew Starks

()
ACTION:
Alwen Lyons

POLB12/030
(a)

Footnote:

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scales would need to be different.

The Board asked Matthew Starks to provide a paper setting out the
detail of the Board decision with some worked scenarios using the
numbers in the plan as an example to show the LTiP which would
be paid for different levels of performance.

The Board agreed the percentage of salary to be used for each
category covered by LTiP. Paula Vennells and Chris Day left the
meeting and the Chairman and Neil McCausland agreed the
differentiation for the CEO and CFO as laid out in the paper to be
appropriate.

The company secretary was asked to clarify which roles within the
Business require Ministerial authorisation for LTiP and if ‘senior
executives" LTIP should be reviewed by ShEx to fulfil the
requirement in the funding agreement. (See footnote)

CLOSE

There being no other business, the Chairman closed the meeting.

The shareholder has confirmed that salary changes including bonus and LTIP for executives
on the Board - ie CEO and CFO will need Ministerial and Chief Secretary of the Treasury

approval.

Under clause 10.1 of the funding agreement ShEx should also have sight of incentives for
the ‘senior executives’ (defined as the ET) to ensure they are aligned to the Strategic
Plan. These would not go through the formal Ministerial approval process that applies above.
Post Office Ltd — Strictly Confidential

POLB12/40
Appendix A

Proposal: authorities to commit spend or implement change

ShEx Consent Required Under Articles of Association

SHEX > £50m
Authorise
Planned I Unplanned I Decisions with brands and risk impact
Spend I & Complex
Spend
Value Value Description
Carries significant risk (ERM score4).
Attract public and media interest
Board > £20m >10m Risk of impact on brand value
New product
Carries significant risk (ERM score 3).
Attracts local public and media interest
POLIC/ £5-20m £0.5-10m Impact on customer experience
ET Changes to products
CFO £1-5m_ I £0.25-0.5m Price changes
Director <£1m <£0.25m N/A

To be reviewed at the end of 2012/13.

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Planned Spend

Covers both bau costs of running the business and projects approved in the budget
unless deemed in the budget to be complex.
Includes: extending a product range, system upgrades, and property projects.
Examples:

¢ Horizon releases

e Rhino Doors cash centre security upgrade

« Payment Card (PCI) security compliance

e Marketing campaigns

Unplanned & Complex Spend

Spend not in budget and projects in the budget that were identified as complex.
Includes: product development, acquisition of new system, major capital spend
Examples:
e IT Transformation
Channel Integration
Returns and Collections
Olympics
FOoG tenders

Change with Risk

Any activity that places business at risk (refer to ERM score).
Includes: change of supplier, compliance cases, and single person vehicles.
Examples:

« HomePhone and Broadband supplier selection

e PlINpads

e Eagle

¢ Sale of credit cards in branch

Brand Impact

Significant issue that will be noticed by all customers and significantly impact a group
of customers.
Includes: completely new product, change to product, new branch model
Examples:
e POCA statement frequency,
Premier trial
Online retail shop
Cheque acceptance
Project POLO

NB some cases will fit under more than one heading.

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