Post Office Limited — Strictly Confidential
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POST OFFICE LTD BOARD MEETING (Company Number 2154540)
in the Boardroom at 148 Old Street, London EC1V 9HQ
Meeting to be held at 8.45am on 30" April 2014
Members of the Board will be asked to declare any interest that could give rise to conflict in relation to any
item on the agenda at the beginning of the item in question. All interests so disclosed will be recorded in the
minutes of the Board. If the Chairman of the meeting deems it appropriate, the member shall absent himself
or herself from all or part of the Board's discussion of the matter.
The meeting will be preceded by a Board photograph from 8.45am in the café area.
0930
1030
1110
1130
1230
1330
1400
1430
1450
1510
1530
1545
1600
4
10
11
Project Titan
Discussion on the approach to the lunch with Bank of Ireland
Annual Report — Overall Approach
Milestones to Mutualisation
Commercial Update — the Year Ahead (including a break):
LUNCH to be joined by Des Crowley, Christopher Fisher & Richie
Boucher, Bank of Ireland, and Nick Kennett
Network:
Mails
FS
Government
Home Services/Telephony
e¢ NT Update
e Crowns (including target exit run rate)
e Access Points
Horizon — Deloitte Report
Chief Executive's Report
Financial Performance Update
Minutes of Previous Meeting and matters arising
Committee Minutes for noting
Status report update
Board Sub Committee updates
Items for Noting
e Separation Update
« Head office relocation update
e Analysis of the Post Office relationship with the Co-operative
Group
Final
incial Services Sub-brand
Significant Litigation Report
Health and Safety Report
Cyber/Information Security Update
Sealings
Any other business
Date of next meeting: 21° May 2014
CLOSE
Nick Kennett/ Chris
Aujard
Chris Day/Mark
Davies/Sarah Hall
Mark Davies
Martin George/ Nick
Kennett/
Kevin Gilliland
Kevin Gilliland/Martin
George
Lesley Sewell/Chris
Aujard
Paula Vennells
Chris Day
Alice Perkins
Sub Committee
Chairmen
Alwen Lyons
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POST OFFICE LIMITED BOARD
Transforming the Insurance operating model - Project Titan
Purpose
1.4.
This paper updates the Board on the insurance transformation program. It follows
papers supported by the Board in March and July 2013? which set out inter alia the
insurance strategy, and a specific paper tabled to the Financial Services Committee
(Committee) in April 2014.
At the April Committee meeting, members requested that, due to the nature of the
proposal, the material be brought to the full Board. They also asked that further
details be provided of the application process and implications of establishing a
subsidiary which would be authorised by the Financial Conduct Authority (FCA).
The paper is tabled for noting and also seeks support to proceed to establish the
MGA as a subsidiary as set out in Section 11 below.
Background
2.1.
2.2.
2.3.
24.
25.
The insurance transformation program is targeted to increase Post Office’s gross
income from insurance activities from £18 million in 2013/14 to £138 million in 2020
and net income of £86 million. The core components of the change as set out in the
July 2013 paper will be delivered in three discrete phases.
Stage 1 - Project Titan: Post Office assumes greater involvement in, and
concomitant value from, the business value chain. In particular Post Office will
establish a specialist subsidiary (a Managing General Agent or MGA) that will direct
and manage the interface between the customer and product delivery. Titan
specifically focuses on developing this capability for Post Office’s travel insurance
business, providing the structure for other insurance products thereafter. It is due to
deliver by January 2015.
The project will give Post Office the capability and structure to run a specialist
broker business, delivering:
. Direct control of customer management, policy conditions and pricing;
. A structure to negotiate tailored agreements with underwriters;
° A share in underwriting profits without taking underwriting risk; and
. In time the MGA could take on risk through its own lines of business.
Stage 2 (Hawk) is the acquisition of the Bank of Ireland (UK) plc (Bol) interests in
insurance; the Eagle buy-option is available for two years from September 2014,
although management is considering seeking to instigate this earlier.
Stage 3 is the removal of Junction broker relationship.
Target Operating Model (TOM), Role and Structure of an MGA
3.1.
To deliver the new structure, the project has completed four initial work streams to:
° Extend the existing travel insurance arrangements with Aon to January
2015 to ensure customer continuity and protect revenues;
. Build the new target operating model including the MGA operating model;
° Understand the requirements, processes and timings that the MGA will need
to meet regulatory requirements; and
See papers POLB Papers FS Strategy 2020, 20 March 2013 Board Meeting and Financial
Services Strategy Update, 16 July 2013 Board Meeting
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° Gain approval for an updated business case from POLIC in April 2014.
3.2. The project team has worked with four specialist consulting firms? to confirm the
appropriateness and suitability of the strategy, assess the business model and
assist build the detailed operating model. This work has confirmed that the
proposed approach follows established market practice, and in particular that an
MGA would enable the Post Office to develop a significant value (income and asset)
within low risk parameters.
3.3. The design envisages that the MGA would carry out the following roles:
. Designing product, sourcing product capacity, managing underwriter
relationships and ensuring products are managed in accordance with
regulatory review frameworks. The new business will initially purchase certain
services on commercial terms from Post Office (including people and
systems, facilities, HR and finance) whilst a transition plan is implemented to
create an independent organisation;
. Administering products, through an outsourced contact centre, claims
management (up to FNOL’) and quote and sales processes; and
° Performing regulatory and financial management.
3.4. To deliver these functions and fully capture the target value, the MGA would:
° Be a Post Office subsidiary authorised by the FCA to conduct its business“;
. Operate as a low cost, commercial organisation outside the constraints of a
public body (including procurement). To support this, the project team
recommends that Post Office provide the MGA a commercial-rate loan to
cover initial project costs and working capital;
. Be a lean and small organisation with a separate board and decision
authority;
. Hold the customer relationship with full marketing, brand and distribution
rights agreed with Post Office, i.e. MGA acquires a brand licence from Post
Office and in turn provides marketing and distribution rights to the Post Office;
. Operate under a brand licence from Post Office, ensuring that it operates in
accordance with the brand values of, and to the brand standards established
by, the Post Office; and
. Create an asset to Post Office that, based upon current market valuations,
could be worth c£500m by 2020°, providing strategic options for Post Office.
3.5. The project team also recommended that the MGA Board comprises four directors -
two Post Office executives and two NED’s one from the Post Office Board (chair)
and one independent with specialist market expertise. The latter is an important
component of providing comfort to the FCA of the competence of the MGA Board.
3.6. The MGA will also be supported by Customer & Conduct Risk and Product
Committees that will drive the business.
MGA regulation
4.1. As an insurance broker, an MGA requires authorisation from the FCA to conduct its
business. The authorisation permissions will broadly cover:
Peachtree (TOM and Program Management), Thistle (FCA authorisation and structure), Miller/Aon (Operating
model)
First Notice of Loss — registering the customers claim and then passing through to underwriters to manage
If the MGA were run as a division within Post Office, rather than a subsidiary, Post Office would need to be
authorised, which would be almost impossible due, in particular, to the inability to separate insurance and
non-insurance risks.
Estimated ebitda of £70m, with valuation multiples of 8x (market currently pays between 8-10x)
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. Product design and management of insurance contracts;
° Binding contracts of insurance to arrange insurance contracts within pre-
determined parameters;
. Marketing/selling of insurance products to consumers;
. Arranging contracts of insurance on behalf of an insurer/underwriters;
. Collection of insurance premiums from customers; and
° Taking a margin and paying underwriters.
4.2. The MGA will not need permission to handle client money and so would not need to
comply with the FCA's detailed rules in relation to client money.
4.3. This form of arrangement is standard in the insurance industry and consistent with
the approach of a number of non-insurance businesses such as Saga, the AA and
Age Concern for their insurance businesses.
Gaining FCA authorisation
5.1. In order to undertake regulated activities in the UK, the MGA will need to meet the
FCA’s threshold conditions, including confirming:
. The business model and location of offices;
. That appropriate and suitable resources are deployed to run the business;
. That effective supervision is in place; and
. That the business is run and managed by individuals deemed ‘Fit and Proper’
by the FCA®.
5.2. The key submission in the application is the Business Plan, which must set out:
. Objectives, financial model, market analysis and target clients of the MGA;
. Its governance, ethics and culture and compliance and financial structures,
including systems, controls and financial reporting;
° Key personnel (board, executives and senior management); and
. “Conduct” risk processes (eg TCF, complaint handling etc).
5.3. The MGA will also need to have in place appropriate systems and controls to
ensure on-going compliance with the FCA's rules and the terms of its delegated
underwriting agreements with underwriters.
5.4. Significant progress has been made to complete these documents (with support
from Post Office Legal), with completion on track in June.
5.5. The program will need to establish the regulatory model between the MGA and Post
Office, with two options being considered:
. Option 1 - Post Office to become the Appointed Representative (“AR”) of the
MGA for selling and marketing travel insurance.
. Option 2 - Post Office to remain the AR of Bol, as today
° For either option, Post Office will need to reach agreement with Bol, given the
wider relationship and the on-going position of Post Office as the AR for other
regulated financial services products.
5.6. The conclusion of this matter will be brought to the Committee in June.
Prior to submission it will be necessary to complete a check on individuals that are candidates to
become FCA Approved Persons to ensure that they pass fit and proper tests.
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Establishing the MGA as a Post Office subsidiary
6.1. It is proposed to use an existing dormant company, Post Office Managed Services
Ltd (“POMS”), to create the MGA’s legal entity. POMS has not traded since it was
formed in March 2013 and Post Office Finance has confirmed that there is no
current intention to utilise POMS for any activities.
6.2. Subject to Board approval to proceed, the purpose of POMS will need change to
that of an insurance broker, requiring a change to its articles of association’.
6.3. The project team is:
. Liaising with Company Secretary's to confirm the necessary process; and
. Working with Finance to define the financial structure of POMS, including,
initial funding by Post Office and optimum taxation structure.
6.4. It is critical that the relationship between Post Office and POMS is clearly set out,
from a commercial, legal and regulatory position. This will be established through a
series of intra-company contracts:
° As POMS will be a regulated company it will need to ensure that it has
suppliers (eg Post Office) that meet the service standards and certainty of
supply necessary for it to meets its regulatory obligations;
° It is essential that POMS operates as a regulated business without undue
influence from its non-regulated parent (Post Office). As part of the application
process, Post Office will submit an “owner and influences” form to confirm that
it is “fit and proper” and that it will not unduly influence the subsidiary*®.
6.5. The intra-company agreements will need to cover:
. A parent-subsidiary agreement for funding and financial and management
reporting.
. A commercial service-provision agreement between Post Office and POMS,
which is likely to include:
- Financial systems and IT support and shared services (e.g., HR, security,
property, finance).
- Staff - POMS resourcing will need to be established and supported by
either a seconded management team or a formal transfer of staff. The
programme team will work with HR to create the most effective solution.
. Intermediary commissions agreement between POMS and Post Office.
6.6. The project team and POL Legal are finalising the appropriate processes to
conclude these agreements as effective “hands-off” commercial contracts.
6.7. As aregulated entity, the MGA will require a minimum level of regulatory capital. As
the MGA will not hold client money, this would be at the level of 2.5 percent of the
MGA's annual income. It will be a condition of FCA authorisation that sufficient
capital is provided to the MGA to meets this requirement.
Regulatory and brand risk
Establishing POMS as an MGA will not result in Post Office becoming regulated by
the FCA. However, this proposal does involve some additional administrative
requirements on the Post Office:
It will also require notification to, and confirmation from, the Shareholder that it does not object.
If Post Office were found to be exercising "significant influence" over the activities of POMS then it
could be regarded as unlawfully acting as approved persons without prior FCA approval, It is
therefore important that POMS is operationally independent from other Post Office group
companies.
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° Post Office will own a regulated firm for the first time. It will need to take an
interest in the performance and regulatory compliance of its investment,
including oversight from Group Compliance & Risk and Internal Audit;
° As the MGA’s infrastructure is likely to be provided by Post Office (albeit on an
‘arm’s length’ basis as above), the regulator will be concerned to ensure that
the capabilities and services provided are appropriate and fit for purpose;
. Whilst Post Office owns 100 percent, as a separate legal entity, POMS will
legally be solely responsible for its liabilities®;
. POMS will be liable to the FCA for any regulatory breaches (and any fines);
. Directors/senior managers of POMS who are approved persons could also
incur personal liability. This contrasts with the current arrangements where
regulatory risk resides with Bol (subject to Eagle liabilities agreements); and
. Post Office’s AR responsibilities and obligations do not change. (However, if
Post Office is an AR of POMS, POMS takes regulatory responsibility for the
acts and omissions of Post Office in relation to the regulated activities it
carries out in that capacity. POMS would therefore need to ensure it had
systems and controls in place to supervise Post Office effectively.)
7.2. The project team also believe that there is limited additional brand risk to Post
Office from establishing the MGA for insurance services. The MGA will utilise
underwriters of a similar quality and standing as those contracted today.
8. Key activities and governance
8.1. The programme team has created a comprehensive project plan to enable a
complete application to be submitted to FCA in June 2014, including necessary
company and stakeholder approvals and legal sign-off
8.2. An indicative timetable is set out below. This is realistic, but has little contingency:
KEY ACTIVITY APPROVING BODY TARGET DATE
POMS name and structure ExCo Early May 2014
AR status defined ExCo Early May 2014
AR approach Bank of Ireland Mid/late May 2014
Business Plan completed ExCo Mid/late May 2014
- Reviewed by Legal,
Risk, HR and Finance
Engagement with BIS on ShEx Late May 2014
change of status of POMS
POMS Board and senior ExCo End May 2014
management team confirmed
Commercial agreements & ExCo End May 2014
SLAs; drafted with Procurement
and Legal
FCA application Post Office Board Financial I Early June 2014
Services Committee
Submit FCA application '° nla June 2014
Target launch of MGA January 2015
The project team is proposing that the MGA does not have a guarantee from the Post Office,
although it is unlikely that the Post Office would allow a subsidiary to fail.
The authorisation process takes up to six months but more typically is concluded within three-four
months.
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9. Business case update and implication on other Post Office programs
9.1. On 8" April 2014 POLIC approved an updated business case and project funding
for 2014. The business case estimates an NPV of £27.3 million, IRR of 75% and
payback after three years.
9.2. The update also confirmed that completing Titan has minimal impact on other
strategic Post Office projects. The only anticipated reliance is on Horizon, which will
be managed through a web service, and on Common Digital Platform; the project
will support the single customer log-in initiative. There is no impact on Crown or
Network Transformation.
10. Risks and Mitigation
10.1. The MGA places no regulatory risk on Post Office as the owner, with the MGA (and
its board) being responsible for regulated compliance. Post Office’s obligations to
the FCA will consist of being a controller and having to notify the FCA of any
changes in shareholder control of the MGA and/or of the Post Office itself.
10.2. FCA approval is not received within the target six month plan:
Mitigation - Thistle Initiatives, a firm specialising in FCA regulation, is
providing support to establish a fit-for-purpose submission backed by best practice
in regulatory oversight models. Furthermore Thistle can provide a principal status
for the MGA, if required.
10.3. MGA fails to operate in compliant manner post-authorisation:
Mitigation — Using Thistle as the interim external compliance team ensures the
transition into a regulated environment is managed closely. Thistle will assist in
“bedding in” the MGA, including compliance and risk management.
10.4. Failure of the operating model to deliver the anticipated results and improved
commerciality of the insurance business:
Mitigation — the MGA model has been subject to multiple reviews by Miller
Insurance (Post Office’s specialist insurance advisor), Aon and Peachtree; all
believe the proposed model will deliver significant value to the Post Office.
Operating this model for Travel Insurance first, enables it to be proven before
further investment or significant business change occurs:
10.5. The revised budget and resources are insufficient to conclude the program.
Mitigation - Peachtree has reviewed the project plan and costs and has a high
degree of confidence that all required activities are included.
11. Next steps and recommendation
11.1. The Board is asked to note the developments in the Titan project and give approval
for management to:
. Utilise POMS to be the Post Office MGA;
. Appoint directors to POMS, including identifying a specialist independent
director (appointments would be brought to the Committee for agreement);
. Proceed to complete the documentation for FCA authorisation for POMS;
. Authorise management to transfer sufficient funds to POMS to enable it to
complete the application process, as approved by Post Office Finance
Committee; and
° Conclude services agreements between POMS and Post Office and between
POMS and third party suppliers, as required.
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11.2. In addition, the project seeks Board approval to authorise the Committee to review
and give support (or otherwise) to the authorisation application, prior to submission.
Nicholas Kennett,
Director, Financial Services
Chris Aujard
General Counsel
April 2014
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2.2
2.3
24
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POST OFFICE LTD BOARD
Publication of our Annual Report and Financial Statements
Background and Purpose
The purpose of this paper is to set out plans for publication of the Post Office’s
Annual Report and Financial Statements for the financial year 2013-14. It deals with
key messages and the overall suggested tone of the document and seeks Board
agreement to this approach. It also proposes a timeline for clearance of the report
and sets out proposals for the style and promotion of its publication.
Tone and key messages
The messages in the Report and Accounts will align with the key themes and
messages detailed in our Strategy 2020 communications.
The theme ‘Heart of the Community’ is being used to create a strong narrative thread
throughout the report, lead the design agency brief and shape the style of
photography used throughout the report.
The report will follow the structure established in 2012-13, enabling a reader to follow
the progress of the journey through a consistent layout and style. This format was
well regarded, winning the Annual Report (public sector) category of the 2014
Business Finance Awards. A high level outline of the structure is given at Annex 2.
The tone of the report should therefore be one of:
- clear purpose and direction with the Strategy 2020 and public purpose.
- good progress on modernisation — pleasing progress within the Network
Transformation Programme and Crown performance which has improved year on
year, despite on-going IR challenges.
- atough year but a solid profit performance - notwithstanding the decline in our
revenue performance, we have delivered a solid profit result which shows positive
growth year on year through strong cost management.
- laying foundations for the future — investment both through the major programmes
and in improvements such as roll-out of mortgage specialists.
Although there is freedom to deliver the messages we wish to, there are constraints
within which we must work. The ‘front half’ must be consistent with the content of the
financial statements and the text should be ‘fair, balanced and understandable’ as it
describes our performance. Premium listed companies (those required to meet the
UK’s highest standards of regulation and corporate governance) are required under
the new Corporate Governance Code to make the following statement:
“The board confirms that the annual report and accounts, take as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the performance, strategy and business model of the
company.
The Post Office is not required to make this statement but has aspired to act as a
listed company so is following these principles. Further information on this new
requirement will be provided for the May ARC and Board meetings.
Report and Accounts Mark Davies and Chris Day Page 1 of 4
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2.6 A précis of the key content of the Chairman’s and Chief Executive’s reports is
attached at Annex 3 together with a first draft of the Chief Financial Officer's Financial
Review to give early sight of the tone and messages.
3. Timeline
3.1 An outline of the timetable is given at Annex 1. The intention is for the Board to
approve the Annual Report in late May and for publication from mid-June.
4. Publication and promotion
44 We plan to produce our second annual report to build on our maiden report for 2012-
13. It will support our communications strategy to promote our business, its strategy
and its products and services and to protect the reputation of the business.
4.2 We propose that the primary delivery of the report is an interactive online version,
supported by a pdf version to download and limited numbers of paper copies for
sending to key stakeholders and placing in reception.
4.3 A full PR and stakeholder plan is being developed around the report which will
depend on final results and will be subject to change depending on IR, product
developments and network transformation.
5. Recommendation
5.1 The Board is asked to:
. Note and agree the proposed theme, tone and key messages;
. Review and provide comments by 30 April on the structure and draft content
attached at Annexes 2 and 3;
. Note the proposed timetable and approach;
Mark Davies and Chris Day
April 2014
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Annex 1
Timetable showing key dates and meetings
Date Activity
30 April Board meeting — review of tone, key messages and initial content of the
front half of the Annual Report
7 May Draft Annual Report and Financial Statements circulated to ARC, Board
members and ShEx and RM (word document format)
12 May ARC and Board feedback — review and provide comments on ‘words and
design’ of the front half of the Annual Report and back half Financial
Statements.
15 May ARC meeting - review of updated ‘words and design’ of the front half of the
Annual Report incorporating Board comments. Review of back half Financial
Statements.
15 May Draft Annual Report and Financial Statements circulated to Board
incorporating previous Board feedback (in final design format)
21 May Board Meeting — presentation of full Annual Report and Financial
Statements and
— to approve the financial statements and delegate authority
(i) to the sub-committee to undertake any further detailed review, as
needed; and
(ii) to a sub-committee of the Board to give final approval for
publication
Early June I Announcement expected from RM
Early June I Board Sub-Committee — to give final approval for publication
Mid June Announce results (subject to alignment and discussion with Royal Mail)
Report and Accounts Mark Davies and Chris Day Page 3 of 4
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Annex 2
High Level Outline of Report and Accounts structure
Overview
Who we are — The Post Office in numbers
Chairman’s Statement
Chief Executive’s Review
Strategy Review — a more detailed look at 2020 plans
Operational review
Business in detail - Business area updates (FS, Mails, Telecoms, Gov)
Branch network - Modernising the Post Office branch network (NTP and CTP updates,
a modern IT infrastructure, technology in Post Office branches
Customer excellence — our performance, case studies
Performance review
Our people - supporting and progressing our people, case studies
Corporate responsibility — focus on supporting colleagues and communities
Financial review - Financial numbers with general explanation of movements
Business risk — key business risks and how they are managed.
Directors and advisers — biographies/pictures
Governance — covering
Compliance Statement, making reference to the UK Corporate Governance Code
Development of Processes
Roles of Chairman, Chief Executive and Non-Executives and attendance at meetings
Governance and Committee Structures
Mutualisation developments
Risk management /internal control overview
Directors’ Remuneration Report
Directors’ report - covering
e Principal activity, business review and employee engagement/CSR (cross ref to review
section above) and standard Directors’ report content (dividend, donations etc)
Post Office Group consolidated Financial Statements and notes
Post Office company Financial Statements and notes
Report and Accounts Mark Davies and Chris Day Page 4 of 4
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Annex 3
Chairman’s Foreword
Laying foundations for the future
e 2013/14 was a tough year in both our traditional and newer markets.
e Despite this our business has moved forward by increasing the momentum behind the
investment, modernisation and innovation that will secure its future.
«This can be shown by the pace of modernisation within our branch network. We have now
transformed over 2,000 of our agency branches and almost a third of the Crown network. Over
1,000 branches are now trading on a Sunday and as a result of our transformation programmes,
we have added an additional 50,000 opening hours per week.
Revenue challenge
e But our revenue has not grown as we would have wished.
e We have improved the efficiency of our operations and improved profitability before exceptional
items.
« Weare progressing towards becoming a commercially sustainable business with a much reduced
reliance on government subsidy.
Funding and building our business for the future
e Securing the Future allows us to use our unrivalled branch network to develop our financial
services offer, consolidate our position as the number one mails retailer, continue to be a key
partner for Government in the delivery of services and enter new markets.
e Wewill complement our unrivalled physical presence across the UK with online accessibility and
convenience delivering key products and outstanding customer service.
e Weare undertaking the business transformation of the decade. This Annual Report and Financial
Statements shows the latest steps and the increasing pace. It displays the innovation, energy and
forward thinking of Post Office people and, most importantly, their commitment to securing the
future of the Post Office for the benefit of the communities that it serves.
Chief Executive’s Review
Financial position
e 2013/14 represented a solid profit performance from the Post Office with an increase of £14
million on 2012/13. This has been achieved against a backdrop of falling revenue and the
subsequent strong cost control.
e Our year on year revenue has fallen by 4.5%, in mails, telecoms and government services but we
have put in place the fundamentals which will allow us to build and open up new revenue streams
in the future.
e Weare fast becoming the ‘challenger’ brand in the financial services market with a widening
product portfolio that now, critically, includes current account and mortgage offers.
e Through improvements to the running of our Crown branches, the operating loss for these offices
has reduced this year by £11 million to £26 million.
Modernisation
e The 2013-14 financial year saw the number of transformed branches exceed 2,000 delivering
longer opening hours and brighter retail environments.
«These branches show our customers, subpostmasters and colleagues the continued commitment
of this business to be at the heart of their communities, connecting people and providing access
to key services into the future.
e But the maintenance and development of our physical network is just part of how the Post Office
is developing as a business. We have an increased presence online, and we are investing in
technology to ensure that we are easy to do business with. We are changing the way we work
and we are listening to our people to ensure we continue to improve.
e Commercially, this has been a challenging year for us but I believe that we have met those
challenges head on. We have accelerated our change and have continued to put in place the
building blocks upon which our onward journey of transformation can be soundly based.
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e Modernised branches and longer opening hours allow us to support the growth of new, innovative
products. With Royal Mail we have announced the launch of the UK's largest Click & Collect
network which will provide a greater choice of convenient parcel delivery options for online
retailers and their customers.
e Over 21,000 small businesses have signed up for our Drop and Go service — allowing them to
bring their packages into the Post Office and we do all the pricing /postage work, simply billing the
firm on account — increasing efficiency and convenience for all concerned.
e The modernisation of the Post Office means more than simply enhancing our physical branch
infrastructure. Investment in our mobile website, a Travel Money Card app and the next
generation of Post and Go machines are just three examples of how we are creating a modern
and dynamic Post Office.
Mutual ways of working
e We continue to develop new ways of working and engagement with our people and stakeholders.
The Post Office has launched business and branch user forums, a branch improvement
programme and the Post Office Advisory Council over the past 12 months. These bodies and
schemes initiatives will all help us to learn as we develop our approach to work in a way which
meets the challenge of mutual ways of working.
Concluding remarks
e But itis the progress and commitment to securing the future that is the most important result of
the last year. The Post Office is a unique organisation with a unique role in national life. We will
continue the drive for the change that will ensure it is both vibrant and secure into the future for
the communities it serves.
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The Post Office
2013/14 Annual Report and Accounts
Financial Review
Paving the way towards financial sustainability
Summary results
The Post Office has faced a challenging year with decreases in turnover in each of the core
product pillars. Despite this, operating cost savings have resulted in the operating profit
before exceptional items increasing by £14 million to £108 million. The costs of
transformational change in the year were significant as the network modemisation
accelerated.
Profit and Loss Summary
2014 2013
Variance Variance
£m £m ¢m 4
Turnover 979 1,024 (45) (4.4)
Network Subsidy Payment 200 210 (10) (4.8)
Revenue 1,179 1,234 (55) (4.5)
People costs (254) (259) 5 1.9
Other operating costs (850) (913) 63 6.9
Total costs __ (4,104) (4,172) I 68 58
Share of profit from joint ventures and 33 32 1 3.4
associates
Operating profit before exceptional items 108 94 14 14.9
Revenue
The Post Office's revenue decreased by £55 million (4.5%) to £1,179 million including a
decrease of £10 million in the Network Subsidy Payment from the government. The Post
Office segments income into four pillars; Mails & Retail, Financial Services, Government
Services and Telecoms. The pillars and their performance are detailed below:
2014 2013
Variance Variance
£m £m
£m %
Mails & Retail 390 409 (19) (4.6)
Financial Services 279 281 (2) (0.7)
Government Services 146 164 (18) (11.0)
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Telecoms 124 129 (5) (3.9)
Other income 40 41 (1) (2.4)
Turnover 979 1,024 (45) (4.4)
Network Subsidy Payment 200 210 (10) (4.8)
Revenue 1179 1,234 (55) (4.5)
4 >)
Revenue - Prior Year to Current Year
&m
a
(19) (2) I a es
(18) 7 1 =
‘ OM 1175
2013 Mails & — Financial Government Telecoms Other Network 2014
Revenue Retail ~~ Services_ Services Income Subsidy Revenue
Payment
XX J
Mails & Retail
The Mails and Retail pillar includes all the services provided for Royal Mail and Parcelforce. It
also includes Lottery and retail services such as sales of collectibles as well as packaging and
stationery.
Mails and Retail revenue of £390 million decreased by £19 million (2012: £409 million). Of
this, turnover in relation to Royal Mail products decreased by £16 million, driven primarily by
a reduction in consumer parcel volumes and lower stamp sales. In addition, retail turnover
decreased by £2 million due to the one-off increase in the prior year for collectibles relating
to the Diamond Jubilee and the Olympics memorabilia. Revenue from sales of lottery tickets
declined marginally by £1m.
Financial Services
The Financial Services pillar includes Post Office branded personal financial services products,
ATMs and travel services as well as traditional services such as bill payment and over-the-
counter banking transactions.
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Financial Services revenue in 2014 decreased by £2 million to £279 million (2013: £281
million).
Through an agreement with its long-term banking partner, Bank of Ireland (UK) plc, the Post
Office continues to offer an increasing range of transparent, value-for-money financial
products and services.
Personal Finance Services revenue rose by £15 million (14.5%) driven by strong growth in
savings commissions (particularly Growth Bonds, Reward Saver and ISAs), insurance and new
mortgage products. Revenue from traditional financial services products including bill
payment services, business banking services and Postal Orders declined. This was due to the
increasing shift from paper-based to electronically delivered products and the increasing use
of alternative payment methods. In addition, the cessation of the Department of Work and
Pensions contract for cash cheques (Green Giros) and the continued to migration of NS&I
products through their own direct channel have resulted in revenue decline.
Government Services
The Government Services pillar covers services provided under contract to government
departments. This includes services in relation to the work of the Department for Work and
Pensions (DWP), the Driver and Vehicle Licensing Agency (DVLA), Her Majesty's Passport
Office (HMPO) and UK Visas and Immigration (UKVI).
Government Services revenue of £146 million decreased by £18 million (2013 - £164
million). Revenue from the Passport Check & Send service increased by £2 million in line
with the growth in the overall market. However, revenue from the DVLA for car tax and
ten year licence renewals decreased by £14 million due to lower volumes and a lower fee
per transaction under the new contract effective from 1 April 2013. Revenue from the
payment of benefits through the Post Office Card Account was £6 million lower, impacted
by customers continuing to migrate to receiving benefits through bank accounts.
Telecoms
The Telecoms pillar includes the Post Office HomePhone and Broadband services as well as
e-top up services and phonecards.
Telecoms revenue of £124 million (2013 - £129 million) decreased by £5 million. During
the year, the Homephone and Broadband service was transitioned to a new provider and
experienced operational issues initially which both the provider and Post Office resolved as
quickly as possible. The revenue from HomePhone and Broadband decreased by £4 million
primarily due to a reduction in customer numbers driven by reduced sales and marketing
activity following the transition to the new supplier. Revenue from e-top ups was £1
million below prior year as more customers moved away from pre-pay and mobile
networks reduced their transaction fees. However, the Post Office continues to be a
significant provider in the top-up market and its share of the retail market has been
maintained at approximately 5%.
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Other income
Other income is generated primarily from the Supply Chain business which manages and
distributes cash for Post Offices and for third parties. It also offers warehousing services,
mainly to Royal Mail. Other income decreased by £1 million to £40 million (2013: £44
million).
Network Subsidy Payment
The Network Subsidy Payment is government grant revenue towards the costs of
maintaining the Post Office network. The payment decreased by £10 million in the year to
£200 million; this will continue to reduce as set out in the current funding agreement with
the government.
Costs
Total costs decreased by £68 million to £1,104 million (2013: £1,172 million).
~
em Costs - Prior Year to Current Year
I
(1,172)
(1,104)
2013 People Costs Other Operating Costs 2014
u )
People costs
People costs of £255 million (2013 - £259 million) decreased by £4 million reflecting
efficiency savings, particularly in the Crown network, and lower performance-related bonuses,
partly offset by some pay increases and higher pension costs.
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Other operating costs
Other operating costs decreased by £63 million to £850 million (2013 - £913 million), driven
largely by lower sales volumes resulting in lower subpostmasters’ costs and cost of sales.
There was also a decrease in investment in new products and services which had been
particularly high during 2012-13.
Joint venture and associate
Share of operating profit from the joint venture (First Rate Exchange Services Limited) was
£33 million, £4m higher than in 2013 when the result also included the associate
(Midasgrange Ltd until its sale on 1 September 2012 (2013 - £32 million). First Rate
Exchange Services Limited results improved mainly through delivering efficiencies in
operating costs.
Exceptional Items
2014 2013
Exceptional items £m £m
Operating exceptional items:
Restructuring costs including subpostmasters’ (260) (79)
compensation -
Impairment of investment, property, plant and (114) (66)
equipment
Amendment to the terms of RMPP . 102 -
Government grant 317 98
Subtotal operating exceptional items (45) (47)
Non-operating exceptional items: .
Profit on disposal of property, plant and equipment 3 2
Loss on sale of associate . = (30)
Net exceptional items (42) (75)
Restructuring costs
Restructuring costs include the costs of delivery of major change. Network transformation
resulted in costs of £94 million for subpostmasters’ compensation (2013: £12 million) and
£107 million programme costs (2013: £40 million) with the increases in each reflecting
the greater pace of transformation this year. Costs of £21 million relate to IT
transformation (2013: £10 million) which will create the appropriate IT infrastructure for
the future. Redundancy costs of £23 million were incurred during the year and mainly
related to the Crown network (2013: £11 million). There were further business
transformation payments charged in the year of £5 million (2013 - £4 million). Business
transformation payments are payments that are periodically made to staff as an incentive
in order to secure agreement for significant changes in working practices in order to
improve business efficiency. In addition a gain of £102 million arose on the change to the
terms of the Royal Mail Pension Plan (see page XX).
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Government Grant
In addition to the Network Subsidy Payment to support the network, the Post Office also
receives government grant funding towards the transformation programme. Government
grant funding of £215 million was received in the year. The additional government grant
funding is included within operating exceptional items to match the associated costs. £102
million of the 2012-13 grant also remained available for use in the year. The entire balance
of £317 million of this government grant funding has been allocated (2013: £98 million) in
accordance with the designation letters, dated 2 April 2012 and 27 March 2013, from the
Department of Business, Innovation and Skills, to cover £114 million capital expenditure
(2013: £66 million), £94 million network transformation related subpostmasters’
compensation (2013: £12 million) and £109 million network and IT transformation
programme costs (2013: £20 million).
Cash Flow and Net Debt
Post Office Limited operates a Treasury function and manages its own financial assets
(including network cash) and financial liabilities (mainly government loans).
The Treasury function derives its authority from the Board and provides regular reports for
Board review. It has the authority to undertake financial transactions relating to the
management of the underlying business risks, however, it does not engage in speculative
transactions and does not operate as a profit centre. The principal financial instruments
utilised are deposits and borrowings.
The cash position of the business remains strong with cash and cash equivalents of £688
million (2013: £971 million). There was a net cash outflow during the year of £283 million
(2013: inflow £151 million). The outflow was driven by the repayment of the opening loan
balance of £291 million. Net debt (excluding cash in the Post Office network) decreased by
£174 million year on year as shown in the table below:
2014
£m
Net debt brought forward at 31 March 2013 (497)
Net cash inflow before financing activities (see page XX) - 15
Add: Decrease in cash in the network included in net cash inflow 162
Finance costs paid (3)
Total net debt carried forward at 30 March 2014 (23)
Post Office Limited's borrowing facility from the government and the associated Framework
Agreement imposes constraints on the purposes for which the facility can be used and the
availability of external borrowing. Post Office Limited's treasury policy is to minimise the
amount drawn down on the loan in order to reduce its interest cost. The facility is limited to
a maximum of £1.15 billion or the amount of security available (mainly network cash),
whichever is the lower. The maximum drawn down under the facility during the year was
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£261 million on 19 and 20 December 2013 but there was no loan drawn down at 30 March
2014. The facility is available at two days’ notice and has an end date of 31 March 2016.
Pensions
Post Office Limited is a participating employer within the Post Office Section of the Royal
Mail Pension Plan (RMPP) and is a participating employer within the Royal Mail Defined
Contribution Plan (RMDCP). Royal Mail Group Ltd is the principal employer of the Royal Mail
Senior Executives’ Pension Plan (RMSEPP) and Post Office Limited is a participating
employer within RMSEPP. RMPP and RMSEPP are both defined benefit plans.
On 1 April 2012 - after the granting of state aid by the European Commission on 21 March
2012 - almost all of the pension liabilities and pension assets of the Royal Mail Pension Plan
(RMPP), built up until 31 March 2012, were transferred to HM Government. On this date,
the RMPP was also sectionalised, with Royal Mail Group Ltd and Post Office Limited each
responsible for their own sections in future. This pensions transfer left the RMPP fully
funded on an actuarial basis in respect of historic liabilities at this date. During the year
there was a consultation exercise with members of the defined benefit Royal Mail Pension
Plan on proposed changes to the terms. These changes were agreed and implemented on
15 October 2013. The key change is to the definition of pensionable pay which broadly will
increase in line with RPI (capped at 5%) in future regardless of actual pay growth. The
changes resulted in a one-off exceptional gain of £102 million.
The balance sheet pension position moved from an asset of £97 million at March 2013 to
an asset of £145 million at March 2014. The improvement in position is primarily due to the
change in terms noted above offset by an actuarial loss mainly arising from lower than
expected asset values.
Both defined benefit plans closed to new members in March 2008, and RMSEPP closed to
future accrual on 31 December 2012. New employees are offered membership of the
RMDCP.
Pension cash payments for all plans
The future funding of ongoing pension contributions into RMPP and deficit payments into
RMSEPP was agreed with the respective pension trustees during the year and payments
were made in accordance with the agreements.
2014 2013
£m £m
Regular pension contributions (23) (24)
Funding of the pension deficit - RMSEPP (1) (2)
Payments relating to redundancy (1) (2)
Net cash payments (25) (28)
7
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The regular future service contributions cash rate for RMPP expressed as a percentage of
pensionable pay remained at 17.1% (2013 - 17.1%). The regular rate of employee
contributions for the RMPP remains unchanged at 6%.
Events after the reporting period
In accordance with the funding agreement with government announced on 27 October
2010, for which State Aid approval was received on 28 March 2012, Post Office Limited
received £330 million of funding on 1 April 2014.
Chris Day
Chief Financial Officer
Post Office Limited
XX June 2014
Key Financial Performance Indicators
2014 2013
Variance Variance
£m £m
£m &
Turnover 979 1,024 (46) (4.4)
Operating profit before exceptional items 108 94 14 14.9
Operating loss before exceptional items and 21.6
Network Subsidy Payment (91) (116) - 25
Operating cashflow 15 151 (136) (90.1)
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Business risk
The information below details the key business risks, their impact and how the Post Office
manages these risks.
Key risk
Impact
Mitigation
Changes in customer
Preferences
There is decline in the traditional
Post Office income streams as
customer preferences change.
New income streams may fail to
grow sufficiently to exceed the
losses from traditional products in
decline
The Post Office might not be
able to reduce its reliance on
government subsidy
We have introduced new
services in growth areas and
continue to refine and develop
these product offerings. There
is an active programme in place
to deliver the growth trajectory.
Progress is monitored
rigorously and risks to the
programme are actively
managed.
Business
transformation
programmes
We are managing a significant
number of change programmes to.
modernise the Post Office and
enable its processes to operate
independently of those of Royal
Mail Group. These include the
network, Crown and IT
transformation programmes. The
success of the Post Office strategic
plan depends on the successful
realisation of benefits from these
programmes.
Failure to implement the
modernisation programme
would leave the Post Office
with an unsustainable cost
base and a continued reliance
on significant government
subsidy.
There are detailed plans in
place to manage the
transformation and ensure it is
delivered within budget and on
time. The 2013/2014
objectives have been met.
Delivery is tracked monthly by
a Transformation Board made
up of Executive Committee
members which provides
direction and oversight over the
programmes’ delivery.
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Engagement risk
The support of our staff and
subpostmasters and engagement
with them during this significant
time of change is key to the
successful delivery of our
strategy. Withdrawal or lack of
support from our staff or
subpostmasters in the network
could cause delays in the Post
Office transformation
programmes and limit our ability
to meet business objectives.
Lack of support from our staff
and subpostmasters would
jeopardise our ability to meet
our strategic goals of growth,
profitability and reduced
reliance on government subsidy
We maintain a fluid and
comprehensive engagement
programme with unions, staff
and subpostmasters. These
include regular meetings with
the National Federation of
Subpostmasters (NFSP), the
Communication Workers Union
(CWU) and Unite; senior
management briefings to staff
and subpostmasters; and events
to engage our people in our
vision and strategy.
We have a people plan aimed at
addressing staff motivation and
skill needs. This includes
development of new leadership
and reward frameworks and
increased focus on recruitment
and training.
Regulatory
& compliance
There is a risk of non-compliance
with the changing regulatory
environment.
The Post Office operates under
an extensive regulatory
environment, including areas
such as financial and postal
services, procurement,
competition law and data
security.
Failure to comply with
regulation could result in fines,
adverse outcomes for our
customers and significant
damage to The Post Office
brand.
Our legal and compliance team
works closely with the relevant
business owners in identifying
new requirements
and monitoring compliance
against existing ones.
Regular compliance tests are
conducted across the entire
branch network covering a
broad range of regulatory
requirements. The results are
closely monitored and corrective
action taken where required.
10
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Business Continuity
The Post Office has particular
operational risks relating to
disruption of its services. This
includes adverse weather
conditions, industrial action,
systems breakdown
and the failure of a critical
supplier
Breakdowns in the network
would reduce quality of service,
increase costs and damage our
reputation.
The Post Office brings together a
wide range of business
continuity arrangements
throughout the company under
one central policy and
governance framework to
ensure that the business is
capable of withstanding any
significant threat to its on-going
operations. This includes
contingency planning and
training in the event of
disruption such as industrial
action or IT failure. Key
suppliers’ ability to continue to
meet the Post Office’s
requirements is closely
monitored.
a
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POST OFFICE LTD BOARD
Milestones to mutualisation
1. Purpose
The purpose of this paper is to invite the Board to:
1.1 approve the publication of a document setting out the conditions which would
need to be met to allow the opportunity to consider the mutualisation of Post
Office Ltd;
1.2 approve the wording of the document as set out in ANNEX 2.
2. Background
2.1 In its 2010 policy document ‘Securing the Post Office Network in the Digital Age’,
the Government made two key commitments on the long term ownership
arrangements for the Post Office. Firstly it made clear that the Post Office would
not be privatised. Secondly it set out an ambition to create the opportunity for
Post Office Ltd to be mutualised (recognising that mutualisation would only be an
option when the business is financially viable).
2.2 The Postal Services Act 2011 created the legal framework to create Post Office
Ltd as a company separated from Royal Mail while it also enshrined in legislation
the processes whereby Post Office Ltd could become a mutual.
2.3 Following a public consultation, Building a Mutual Post Office, launched in
September 2011, and the Government's response in July 2012, Post Office Ltd
established a Stakeholder Forum to help define the public purpose of the Post
Office.
2.4 This purpose has now been defined and it is proposed that it is launched on in
May 2014 (see final Purpose in ANNEX 1).
25 In our strategic plan, submitted to Government in November 2013, we committed
to publishing a document in Q1 of 2014/15 setting out next steps towards
mutualisation. Subject to Board approval we propose to publish this document
alongside the purpose statement.
3. Acti
ies/Current Situation
3.1 The document in ANNEX 2 has been agreed by ExCo and its approval is
recommended to the Board. The announcement is proposed to take place ahead
of the NFSP conference on 12 May.
3.2 The document underlines the ways in which the purpose definition and initiatives
aim at delivering mutual ways of working are aligned with the milestones. It also
seeks to achieve clarity about the core conditions which must be met in order to
allow consideration of mutualisation, primarily the commercial sustainability of the
business.
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3.3 The launch in May will be followed by a period of engagement with people across
the business and network that will embed the Purpose in business decisions and
actions.
4. Proposal
4.1 The document sets out four tests against which Post Office Ltd would measure
progress towards creating the opportunity for a mutually owned business:
« Commercial sustainability must be achieved, building on the successful
delivery of our new strategy. This will mean developing a business with a
track record of revenue and profit growth and positive cashflow generation
which is able to operate wholly independently.
e A clear funding relationship with Government will be defined and maintained,
linked closely to Government policy for the post office network. Such funding
will be materially lower than today and will provide the Post Office with
improved long-term visibility as to its future.
«The purpose of the Post Office will need to be embedded in the approach to
our stakeholders, employees and customers. The standards required by the
purpose will need to be met, demonstrating our long-term commitment to this
purpose and our shared vision.
e A cculture of mutual engagement will need to be developed, demonstrated by
strong performance in key engagement measures. This will help to
encourage new behaviours that support a broad commitment across the
business to mutual ways of working.
4.2 The document states that the key milestones are those of commercial
sustainability and the related need for a fundamentally redefined relationship with
Government. Specifically it sets out that the subsidy would fall to less than 10pc
of the business' income base each year without threatening the size of the
network.
4.3 It is proposed that progress against these tests will be set in the Annual Report
and Accounts.
44 Following an assessment by the Post Office Ltd Board that the tests had been
met, a detailed mutual proposition, with defined governance structures, would be
prepared. This would be presented to the Secretary of State by the Post Office
Board and then, as required by the Postal Services Act 2011, be put before
Parliament for approval.
5. Key Risks/Mitigation
5.1 There is a risk that some stakeholders will believe this proposal fails to signal
sufficient progress towards mutualisation, the mitigation against which must be to
stress the imperative to achieve commercial sustainability, which is widely
understood. The document, for the first time, provides a clear road map which
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could lead to a mutually-owed Post Office, but also sets out the challenges
inherent in this ambition.
5.2 There is a further risk that the milestones obscure the commercial imperative: this
is mitigated, as in the point above by the emphasis placed on the necessity to
reach commercial sustainability through the delivery of the 2020 strategy.
Communications Impact
6.1 A clear statement around the milestones to mutualisation will be a useful
communications tool which, combined with our purpose statement, will help to
build understanding of our strategy internally and externally
6.2 The statement provides clarity about the potential journey to mutualisation while
also ensuring the emphasis is firmly placed on commercial sustainability
6.3 It will therefore be a key building block in the development of the post office
narrative over the years ahead, placing mutualisation in context
6.4 It will also support the development of mutual ways of working as an end in
themselves rather than a factor only to be considered in the context of a change
in ownership and governance.
Recommendations
7.1. The Board is asked to:
* approve the publication of a document setting out the conditions which would
need to be met to allow the opportunity to consider the mutualisation of Post
Office Ltd;
* approve the wording of the document as set out in ANNEX 2.
Mark Davies
30 April 2014
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ANNEX 1
The Purpose of the Post Office
The Post Office is unique: a commercial business set apart by its public purpose. We believe in
the importance of connecting communities and enhancing the powerful role they play in all our
lives. We will stay true to this commitment by meeting customer needs through our unrivalled
local presence across the UK.
To deliver our purpose we will run our organization by following four principles:
. Keep customers at the heart of everything we do
. Build relationships based on trust
. Treat everybody with fairness and honesty
. Make a positive social and economic contribution to all the communities in which we work
As an organisation we pledge to:
. Maintain ethical attitudes in our behaviours
. Invest in the organisation to secure the business for the future
° Listen with care to the views of customers, colleagues and others with an interest in the
Post Office, and support their development.
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ANNEX 2
Milestones to Mutualisation Statement
In its 2010 policy document ‘Securing the Post Office Network in the Digital Age’, the
Government set out an ambition to create the opportunity for a mutually owned Post Office.
Significant progress has been made in realising this ambition:
. Together with its stakeholders the Post Office has developed a clear definition of its
purpose.
. Steps have been taken to embed mutual ways of working within the Post Office including
revised engagement surveys, the establishment of branch user forums, closer integration
of stakeholder groups into key change programmes and the creation of the Post Office
Advisory Council.
. Anew growth strategy has been developed that will enable the Post Office to achieve a
position of commercial sustainability.
. A legal framework has been established that, for the first time, creates the opportunity for
the mutualisation of the Post Office subject to the final approval of Parliament.
These steps have established a foundation upon which the Post Office and its stakeholders will
be able to build a strong future. We will now be working closely with our stakeholders towards
four key milestones that will need to be met in order to create the opportunity for mutualisation.
1. Commercial sustainability must be achieved, building on the successful delivery of our new
strategy. This will mean developing a business with a track record of revenue and profit
growth and positive cashflow generation which is able to operate wholly independently.
2. Linked to this, a clear funding relationship with Government will be defined and maintained.
Such funding will be materially lower than today and will need to provide the Post Office with
improved long-term certainty and visibility as to its future
3. The Post Office will deliver measurable success in embedding its purpose statement within
the business and in meeting the standards it sets.
4. A culture of mutual engagement will need to be further developed, demonstrated by strong
performance in key engagement measures. This will help to encourage new behaviours that
support a broad commitment across the business to mutual ways of working.
The Post Office will work closely with its stakeholders to make progress towards these
milestones, reporting on progress annually.
Once the Post Office Board is able to confirm that these milestones have been achieved it can
progress with the final steps towards creating the opportunity for mutualisation. This includes:
« Developing appropriate organisational and governance structures learning from best
practice in other mutual organisations
« Presenting these proposals for the endorsement of the Government and the approval of
Parliament as required by the Postal Services Act 2011.
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POST OFFICE LTD BOARD
2014/15 Trading Outlook
1. Purpose
The purpose of this paper is to:
1.1. Update the Post Office Limited Board (Board) on the trading outlook for the
financial year, 2014/15.
2. Background/context
2.1. The 2013/20 strategy sets out a revenue flight path based upon achieving
sustainable growth throughout the plan period across all of the key products areas.
2.2. Final Commercial and Financial Services income outturn for 2013/14 was £826m;
this represented a reduction of £35m on the previous year.
2.3. 2013/14 Q4 performance has been reviewed in detail by the Commercial
Committee in order to inform plans and targets for 2014/15.
2.4. In order to return to the flight path required to remain on track with the strategic
plan, Commercial and Financial Services income will need to grow to £898m in the
current year 2014/15; this represents a growth of £72m on 2013/14.
2.5. In the remainder of this paper, we provide more detail on the growth required in
each product area and the plans in place to deliver a return to the growth forecast
within the strategic plan. Further information can be found in the Commercial and
Financial Services Update paper which has been added to the Board reading
room.
3. High level income profile
(£m) Net Budget Outturn Budget Required %
FY13/14 FY13/14 FY 14/15 Growth Growth
Mails & Retail 415 386 424 38 9.8%
Financial Services 277 278 295 17 6.1%
(excluding FRES profit
share)
Government Services 116 116 117 4 0.9%
Telephony (including 50. 46 62 16 34.8%
Home Services)
Other 42 40 36
Contingenc (9)
Total 900 866 925 59 6.8%
FRES profit share 32 33 35 2 6.1%
4. FY 14/15 — delivering the target
4.1. It is clear that the business will face significant challenges in delivering the 2014/15
income targets particularly given the growth required in Mails following a
disappointing outturn in 2013/14. The Commercial and Financial Services teams
2014/15 Trading Outlook MG, NK, KG Page 1 of 2
April 2014
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have been closely monitoring 2013/14 exit run rates and developing plans to
deliver the required growth.
« In Mails and Retail the 2013/14 outturn was £30m below budget with Mails
alone accounting for £21m of the deficit. However the Quarter 4 run rate
following the introduction of the ‘shoebox’ in October 2013 demonstrates that
this deficit would have been reduced by at least £13m with a full year impact;
effectively reducing the growth required in 2014/15 from £39m to £26m. Other
factors including increases in the fees charged to Royal Mail, product
development, sales efficiency initiatives, collections and returns growth and
dangerous goods payments are planned to close the remaining gap and
deliver the 2014/15 target.
e In Government Services, we had a strong end to 2013/14 achieving the overall
target. Modest growth is planned for 2014/15 although this masks the
continued decline in some of the traditional products which is countered by
growth in Passports, AEI and the initial entry into the identity market.
e In Telephony we had issues with the financial reporting from Fujitsu which
resulted in a disappointing outturn in 2013/14. Despite these issues and the
cancellation of the Quarter 4 marketing campaign we have ended the year
with 450k customers as planned. This, combined with the price changes,
Quarter 1 campaign and new colleague offer provide confidence that 2014/15
targets are achievable.
« In Home Services, the launch of our planned mobile service is scheduled for
September 2014 and is progressing well.
«In Financial Services we ended 2013/14 strongly, finishing slightly ahead of
target. Growth of £17m is required in 2014/15 but strong momentum in
Personal Financial Services continues to overcome structural decline in
Payments giving confidence that 2014/15 targets will remain within reach.
4.2. The key message is that the 2014/15 net revenue target of £925m appears
challenging but achievable.
5. Next Steps
5.1. Over the next three months the Commercial Committee (comprising of
Commercial, Network, Financial Services and Finance) will oversee:
« Progress on operating plans to ensure delivery of the strategic priorities
required to deliver the income flight path set out in the 2013/20 plan.
e Delivery of the marketing plan required to maximise income through existing
products and channels.
6. Recommendations
The Board is asked to:
6.1. Note the plans to deliver the 2014/15 income targets.
Martin George, Nick Kennett, Kevin Gilliland
2014/15 Trading Outlook MG, NK, KG Page 2 of 2
April 2014
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Contents
* Mails & Retail
+ Year end review
* Outlook for the coming year
* Key programmes and deliverables
* Government Services
* Year end review
* Outlook for the coming year
* Key programmes and deliverables
* Home Services
* Year end review
* Outlook for the coming year
* Key programmes and deliverables
* Financial Services
* Year end review
* Outlook for the coming year
* Key programmes and deliverables
* Overall Income summary
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Mails & Retail - year end review
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Product Area 13/14 Budget I 13/14 Actual I Variance Main reason for variance 14/15 Target
Premium Mails £80.4m £74.6m (£5.8m) Smaller standard mails base for upselling I £78.0m
Standard Mails £164.5m £150.6m (£13.9m) I RM price/format changes £179.0m
C&R £13.4m £11.2m (€2.2m) RM delay in on-boarding major retailers I £26.0m
Other Mails (incl. I £102.0m £104.4m £2.4m Dangerous Goods income not budgeted £93.0m
Mailwork etc.)
Mails Subtotal £360.2m £340.8m (£19.5m) £376.0m
Retail £5.5m £4.8m (€£0.8m) Reduced packaging sales as a result of £5.4m
mails volume decline
Lottery £46.0m £38.9m (£7.1m) Underperformance of Camelot games £42.6m
and new terminals.
Retail Subtotal £51.5m £43.7m (£7.9m) £48.0m
Total £412.0m £384.5m (€£27.5m)
£424,0m I _—_—
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Mails
Changes in the market
* Competitors growing volume and market share on collections & returns and fulfilment.
* Combined number of competitor outlets now at 13.5k. New third party C&C host models coming into play (Doddle).
+ Consumer Parcels market becoming more competitive and prices reducing (race to the bottom).
* Retailers looking to cut out carriers and create new value chains.
* Customers becoming more price and service aware
* RMG account activity increases as POL and RMG growth objectives + RMG funds sales efficiency programme - £5m.
are not aligned i.e. growth in account volumes compared to
consumer/retail volumes - £2-10m * Increased opening hours to win back lost volume and increase
Collections, Returns and acceptance - £2m.
* New product developments e.g. Drop & Go products, Same Day,
POL courier, customer pick up - £1m.
* Enabling 1c and 2c parcels for Click & Collect - £0.5m.
+ RMG do not on-board significant volume into C&R - £14m.
* Dangerous Goods - £8m.
* Sales efficiency does not deliver - £5-£10m.
¢ Failure to meet operational SLAs - £9.5m.
* Competitor threats e.g. My Hermes doubling volume - £3m.
* Online proposition does not deliver - £4m.
* Project Ivy does not deliver - TBC . a
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Retail
Changes in the market
* Growth in e-commerce and multi-channel retailing.
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* Tough trading year in 2013/14 for the lottery category impacting sales and
customer buying habits.
* Reduced retail selling space in Crown network due to impacts of
Crown transformation programme and franchising - £0.7m
* Reduced lottery branch distribution due to impacts of Network
transformation and Camelot Sales Improvement Programme (SIP) -
£3.2m
* Camelot EMOP not delivered - £1.5m
+ Reduced distribution of new Camelot scratchcards only offer -
£0.4m
* Mails decline affecting packaging sales - £0.4m
———a—
Opportunities (budgeted)
Introduction of new seasonal promotions and impulse ranges into the
Crown network - £0.6m
Launch of new retail small business offer in Crown network - £0.3m
Pro-active selling of lottery products in agency network - £1.5m
Increased availability of Camelot scratchcards from 72% to 85% - £0.7m
Sales of Commonwealth Games collectibles - £0.25m
Retail buying club / symbol group for agency network - TBC
(unbudgeted)
Retail and Lottery benefits from sales efficiency - TBC
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Lessons Learnt
Mails
* Mails customers are increasingly price and service sensitive and will not only switch to competitors
but stop posting all together without the right price/proposition.
* POL must find ways of exerting more control over Mails products and services, either by influencing
clients or controlling more levers (offers, service, added value etc.).
« With the combined number of competition outlets now at 13,500 there is additional pressure to
react quickly to maintain market share on C&R and fulfilment.
* Retailers looking to cut out carriers and create new value chains.
Retail
* POL needs to understand what the optimum retail offer should be for it's customer base and how
to maximise retail selling space effectively within the Crown estate.
* POL must take a pro-active approach with the selling of lottery products in order to protect and
grow market share.
* Growth in e-commerce and multi-channel retailing has lead to a tough trading year with impacts
on sales and customer buying habits. I
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Mails - Key programmes and deliverables
Everyday customers can “purchase” parcel postage online
Branches can serve customers in queues using mobile devices.
Programme Key Deliverables Benefits - Income benefits
Income £m over Strategic
Plan
Collections and Enable 1c and 2c parcels, fix conformance, enable PFW failed £2m £36m (2015/16 -
Returns Phase 2 delivery, eBay returns, conduct customer research to build inform 2016/17 inclusive)
enhancements and new solutions.
Click and Drop (Online I Online functionality for Drop & Go customers (improved account £4.4m £54.5m
Mails) management, transaction history, online top-ups). (2015/16 -
2018/19 inclusive)
Drop and Go Continued campaigns to increase quality sign-ups Retained income I £20m retained
enhancements & SME I Improve branch MI to improve advocacy £1.75m income (2015/16 -
prospecting Better, bespoke, customer journeys, including value-based service 2018/19 inclusive)
Sales efficiency Conformance, increasing up-sell ratios, re-engineered TBC TBC
transactions
New Products Sameday service, POL to POL product etc. TBC TBC
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2013/14 Mails performance and how the “
target will be acheived
= Dangerous Goods Q1 feast] Q2 feast] 03 feast} 4 fcastI
400.0 1 13/14] a2 13/14] 03 13/14] 04 13/14]14/5 run}14/45 run]14/15 run/44/15 runI
m= C&R Phase 2 m judget run rateI_runrateI_runrateI_run ratel rate] rateI rate rateI
350.0
I RMG payment for Sales Vatiable 2906I 2651] 263.2] _265.7I_283.2]__287.7I_287.7I__287.7I_287.7
300.0
Eff
250.0 m Sales efficiency Fixed 72.5 72.5) 72.5) 72.5) 72.5) 72.5) 725) 72.5) 72.5)
: programme SR Onboarding A 8.0)
200.0 ™ New product
developments lick and Drop (Online Mails) 05] 25 4.)
150.0 ™ Click and Drop (Online
Mails) Jew product developments 0.5] 1.0]
100.0 = C&R Onboarding
[Sales efficiency programme 1.0} 4 10.0}
50.0 Variable
. . IRMG payment for Sales Eff 5.0} 5. 5.0}
uFixed &R Phase 2 1 2.9)
[Dangerous Goods 4 2.0] 29 3.9]
[Total 363.0 337.5] 335.7 338.1] 355.7] 362.2) __368.7I__379.2] _ 393.2
er” This table shows the planned delivery dates and associated benefits of key Mails
programmes
. The run rate drop in Q1 and Q2 relates to the introduction of RM's sized based pricing model - customers switched to
competitors or stopped trading
. The run rate increase in Q3 and Q4 relates to the introduction of the “shoe box” template - meaning additional items could
be priced at the lower small parcel rate - customers returned to Post Office oe
° The run rate increase in Q1 14/15 relates to the RPI -1% increased income rates Post Office receives per item versus the :
previous year
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Mails & Retail Pillar
Income growth of £27m required to deliver 14-15 target with reliance on winning Click and Collect volume
and introducing new product propositions whilst maintaining parcel volumes both over and under 2kg
Driven by
International product
changes as well as
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Assumes 15% decline inland and marketing
in 1st class and 5% in these.
2nd class 4 1
9
=
: ia
s ia
: I > I
a (8) _— This will require a
(2) combination of drop and
go growth, network
10% volume This is based upon rie ern
decline without on-boarding big Bioy
introducing new clients, including eBay
product offerings and Amazon in
Summer
13/14 FYF Stamps Airmail Collections & New Mails Labels Lottery Other Mails 14/15 Target
Returns:
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Government Services - year end review
Product Area 2013/14 2013/14 Variance Main reason for variance 2014/15
Budget Actual Target
Motoring £21.4m £19.9m (£1.5m) Known volume risk £15.2m
POca £59.4m £59.2m (£0.2m) Additional balance income and £60.0m
controlled CoS offset lower
number of accounts
Passports £20.4m £23.0m £2.6m Increased demand for passports £25.8m
AEI DVLA £3.6m £3.14m (€0.5m) DVLA delayed mailing off set in £3.6m
part by POL marketing
AEI UKBA £4.3m £5.3m £1.0m Backlog being cleared by UKVI £5.2m
gave early uplift
Other £6.8m £5.7m (€1.1m) Known risks of brand marketing £6.8m
stretch and withdrawing from
local authorities
Total £115.9m £116.1m £0.2m = £117.0m
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Government Services:
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£117m
Key Risks
Changes in the market
¢ — Government may close Poca to all new applicants from 2015 (post election) and seek to
migrate working age customers to bank accounts - this is unlikely to have a material impact
on 2014/15 numbers
e — The removal of tax disc and introduction of direct debit payment represent a significant
change in the car tax market
e DVLA AEI - The DVLA will now accept passport photos up to 10 years old if the customer is
making an on line application to renew their photo card counterpart
Passports are not automated this financial year - net risk of £3m
We do not press DWP for payment for extra ring fenced customers
- £6m
IDA does not generate the anticipated volume - £1m
No increase in LIBOR - £1.5m
OpportunI
Cost of Sale reduction on Poca - £2m
DVLA change controls and upside on motoring volume £3m
DVLA AEI promotion £1m
DVLA release backlog of Ten Year renewal reminders £2m
Price increase on DVLA AEI - £0.5m - £1m
Price increase for passport check and send - £1.5m (this will help
offset the risk of HMPO not automating)
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Lessons Learnt 2
¢ The intended DVLA commitment to invest in Ten Year Renewal Marketing Campaign did not
materialise, therefore POL undertook its own Marketing campaigns resulting in over target
performance. This is our “Case Study” to showcase what is truly achievable; wherever possible
we should look for the opportunity to repeat such activities on other Departments
¢ Despite Cabinet Office using agile development, timescales for implementation still tend to slip
° Our greatest strength in dealing with Government is understanding our customers - Account
Teams (HO, DWP, CO and DVLA) will optimise further investment in Customer Insight during
14/15
¢ Government procurement timescales inevitably slip e.g. Assisted Digital was due to be March
2014, is now expected to be summer 2014 and may be further delayed
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Government Services - Key programmes eS
and deliverables
Programme Key Deliverables Year 1 benefits- I Lifetime
Income (contract) value -
Income
Passport automation Use of AEI to support on line passport £3m £70m
applications
Identity Assurance Launch of service £2m £200m
POca Reach agreement with DWP. - £350m (est)
Assisted Digital Test and launch of concepts - £124m
DVLA Re-negotiation of terms of contract to - £40m (est)
return to profit
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Government Services Pillar
Income growth of £3m relies on delivery of new Digital services for DVLA and HMPO to recover volume loss through
channel shift
15% volume decrease to
EVL £1.8m, price Assumes HMPO
decrease 72p to 70p launch in April 0
£0.4m, loss of fixed fee 4
from old contract £1.5m _ —
_ a
‘ I
Natural attrition of active
and new accounts offset
5 im a by LIBOR rate rise
oy © assumption and increased
JPM commission
Volume flat but Loss of c20% volume due
price dropped by to channel shift offset by
50% new digital service
offerings
13/14 FYF Motoring Asylum Benefits FOoG Passports IDA POCA other 14/15 Target i
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Telecoms - year end review
Product Area 2013/14 Budget I 2013/14 Actual I Variance Main reason for variance 2014/15
Target
HomePhone £121.2m £118.8m (£2.5m) Issues with Fujitsu financial reporting £124.4m
Revenue Lower customers than planned
HomePhone (£76.9m) (£78.3m) (€1.4m) (£71.5m)
Cost of sales
HomePhone £44.3m £40.5m (£3.8m) £52.9m
Net Income
Mobile Top-up £4.7m £5.0m £0.4m Average commission received higher than I £4.0m
budget
Phonecards £0.6m £0.4m (€0.2m) Market declining more rapidly than £0.3m
planned
Mobile £0.8m 0 (£0.8m) Mobile launch delayed to 14/15 £1.5m
Total £50,4m £45,9m (£4.4m) £58.8m
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Telecoms: 2013/14 has been a tough year but we
now have the platform to grow the business £61.8m
Changes in the market
* Fixed Line market continues to consolidate and is dominated by big 4 (BT, Virgin,
Sky & TalkTalk)
* — Increased focus from Big 4 on provision of content particularly BT's acquiring rights
to Premier League and Champions League
* Increased focus of MNO’s on 4G and high value customers to detriment of pre-pay
and low data using customers. Cheap smartphones coming to market.
Key Risks Opportunities
+ The acquisition targets for 14/15 are stretching and + Develop affinity deals with third parties such as Cancer
maintaining branch engagement is going to be critical to Research UK to increase distribution - £0.5m
hitting these targets - risk c. £1m * Possibility to look at acquiring small scale ISP’s to grow
+ Customers data usage continues to increase exponentially customer base - TBC
and is putting pressure on our cost of sale - risk c. £3m * — Possibility to target c. 1m customers who use our
+ Wholesale regulatory pricing may not progress as branches to pay their phone bills - £1m+
anticipated and lead to increased cost of sale - risk c. * Pre-paid mobile customer disengaged and passively loyal
£3m to current providers. Hugh opportunity to disrupt
* Mobile development timeframes are aggressive and customer behaviour and gain significant market sh
require whole business focus to deliver - risk c. £1m limited in year.
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Lessons Learnt 2
¢ Whilst there was significant focus on the telecoms network and data migrations,
we needed to have greater focus on the call centre as this was the area where
we experienced greatest issues
e We need to ensure that contract exit plans are agreed early in the contract
lifecycle to get the best possible position for Post Office
e We must invest in experienced programme and project managers who have
delivered the same type of project in the past and get them in as early as
possible
e We need to ensure that all parties in the supply chain have aligned objectives to
ensure our customers get the best possible service
¢ Following the decision to delay billing after the issues in the call centre, further
pro-active monitoring of the impact on financial management information
should have been undertaken to ensure that reports remained robust
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Telecoms :
- Key programmes and deliverables
Programme Key Deliverables In year benefits - Income Income benefits over
£m Strategic Plan
Service Stabilisation + Improved call centre quality - -
¢ — Right first-time
Q1 Campaign & Price + 40K new customer acquisitions £8m c. £50m
Changes + New rates implemented
Mobile * Pre-pay pilot - September 2014 £1.5m £110m
+ Pre-pay launch - November 2014
¢ Post-pay launch - April 2015
SME / Fibre + Simple small business proposition pilot TBC TBC
¢ Fibre broadband product available for customers
Q4 Campaign + 45K new customer acquisitions £250K (significant impact c. £10m
on 15/16 income)
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Telephony Services Pillar
Income increases by £11m from improved margins on HomePhone and launch of Energy and Mobile
propositions
Reflects downward
trend in fixed line 3 2 1
phone usage 9 =
=
=. —_—_— —<— I
(2) (1)
£m
Soft launch July
Reflects £8m from price with national rollout
increase and reduction in October
Wholesale cost and £1m.
from sales uplift
13/14 FYF Reduced ETU Margin Energy Mobile Sales uplift 14/15 Target
ARPU. improvement
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Financial Services delivered 2013/14 targets and ended year with
strong business trajectory
Product Area I 2013/14 I 2013/14 Variance Comment 2014/15 Budget
Budget Actual
Banking, £150.0m £154.0m £4.0m Higher volumes than anticipated in Personal & Business £150.0m
Payments & Banking and Housing balanced by significant ATM
ATMs shortfall
Travel & £41.0m £42.0m £1.0m Improved commercials through new Junction deal, £51.0m
Insurance balanced by poor life sales
Services
Savings £€54.0m £56.0m £2.0m Bring forward of premium bond income following near £56.0m
completion of tranche
Mortgage & £22.0m £23.0m £1.0m Mortgage back book income £31.0m
Transaction
Services
Other £10.0m £3.0m (£7.0m) Sales effectiveness ‘unallocated’ delivered through £7.0m
product areas
Total £277.0m I £278.0m £1.0m £295.0m
FRES Profit £32.0m £33.0m £1.0m £35.0m
share
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2014/15 plan balances strong growth in PFS overcoming continued .
structural decline in payments
* 2014/15 target income of £295 million Financial Services Income (£m)
plus FRES profit share of £35 million, (2013/14 actual; 2014/15 plan)
on track to deliver the Strategic Plan 50.0
¢ 2014/15 net income grows £18m or
6% on 2013/14: 40.0 STS
¢ -2% decline in Banking & Payments Pall
(especially bill payment, postal orders I 399 —_——_y
and Santander)
° +19% increase in travel & insurance nf
* +21% increase in international money Qt 02: «08K
transfer ——Payments & Banking 9 —=—=PFS
¢ +44% increase in mortgages
Note: 2014/15 sales stretch split between P&B and PFS
Premium Bond income has been flatlined
NB: £18m against Budget, £17m against actual —
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Net income growth of £18m delivered through sales effectiveness,
proposition enhancement and new products
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- >)
1 1
. 2 2 1 —_— =
Santander transactions Reflects improved —_—
£3.7m, Personal banking Junction contract 2
£0,6m £3m and product 2 = II
re-engineering a 3 Ea
Y I
a = =
6
» =
ie _I
“ —
cE 3) (3) (0)
&
2% overall reduction in Reflects challenge PSP £1.8m,
2014/15 including to bridge TI cost of General Spend
marketing support to sales Card £1.2m
grow clients and
retaining/winning all
contract renewals and
tenders
“ 2 Z e . g wf 3 z 2 & g ° % 2 a g 3
= o 2 a > = =
e £ § g 2 € G2 PF £& & g g8 § 8 F & F E 8
= & & %& ge § §5 = $$ SE £€ 8 &$ § BF §& 2B ie
5 § 3 a @ $8 § § 3s 5 &% 8 2 g =
= = 3 B32 3 o = #8 § = 8 3 2
a & 28 3 ira 8 4 = s ~
a & a é )
NB; £18m against Budget, £17m against actual
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FS is well placed to deliver 2014/15 Q1 and Q2 income 2
¢ Benefits from new insurance and money transfer contracts locked-into
2014/15
¢ Strong momentum in mortgages (£260m pipeline) & savings into Q1 2014/15
¢ Full complement of Mortgage Specialists in place & MMR ready
¢ New sales model being rolled out, supported by lead generation improvements
¢ Data analytics lessons learned and gearing up
e FS sub-brand on track for September 2014 launch; FS supported by ‘always-
on’ marketing
¢ Q4 growth will require delivery of product and change initiatives in H1 2014/15
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2014/15 plan is tight, with a number of risks, especially in Q4 eon ken
Lessons Learned from 2013/14
e Network focus & engagement, incl. supporting better training for Network (e.g. PSP)
e¢ — More emphasis on lead generation, in particular for Mortgages & Current accounts
e — Impact of CTP and NTP on ATM income
e Inability to deliver FS incentive scheme due to CWU action
Key Risks Opportunities
e — Annuity & Investment projects under threat after budget: High, e — Extension of NS&I contract for Premium Bonds: High, £2.4m
(£2m) e Premium Bond sales uplift as limit increases: Med-High, £1m+
e PSP & PPD sales below target due to focus on Mails: Med-High ¢ Payments & Banking: Med, £1m
(€3m)
Launch of Post Office M brand
e ATM transactions hit by removals during CTP/NTP: Med-High, ° @unen or rose asics Money ora
(€3m)
e Hawk acquisition is not agreed with Bol: Med-High, (£2m)
e — Banking & Payments decline at a faster rate; Santander business
declines; POL is unable to retain business: Med, (E2-3m)
e — Sales performance is not delivered: Low-Med, (£<3m)
; e _CWU focuses action on FS product sales ————
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FS markets & sectors are characterised by increased regulatory
changes, with additional risk & compliance requirements
Reduced demand for retail liabilities (increasing availability of
securitisation capacity) and ultra-low base rates
Customer rates continue to decline, resulting in low demand
Significant regulatory changes: New ISA (NISA) introduction, with
increased limits; Pensioner’s Bond creation; fundamental changes to
pension annuity rules, with removal of annuity requirement
BOI continues to restructure its balance sheet, reducing their demand
Insurance & Travel
e Motor insurance regulatory changes and increased competition have
driven premium reduction, expected to be extended by ‘My Licence’
e = Over-50s life growing faster than anticipated
e Banks losing share in travel money, to the benefit of supermarkets
e — Travel market picking up
Mortgages, Credit Cards & Current Account
Incredibly competitive mortgage market, with new intermediaries
expected; CML predicting growth in 2014
‘Current Account Switch Guarantee’ has driven lower volumes than
anticipated
Credit card consolidation, with decline in outstanding balances;
market expected to remain flat in 2014/15 and increasingly
competitive, with surge in approval rates
Significant regulatory changes, e.g. credit card interchange, current
account
Payments, Banking & ATMs
Higher than expected transaction volumes in some banking
categories, partly driven by bank branch closures and migration of
transactions to local post office
Co-op Bank plans being monitored
Risk from VOA change to business rates
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Summary Income Position
2011/12 - 2015/16
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—Mails & Retail
Financial Services
Govt. Services
— HomeServices
500 5
450
400 + —
350 +
300
250 +
200 +
150 - __
100 + _
50
7 11/12 12/13 13/14 14/15 15/16
Mails & Retail 388 404 386 430 425
Financial Services 292 311 311 329 361
Govt. Services 136 133 116 lag 158
HomeServices 41 45 46 60 94
Net income - £m
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Strictly Confidential
POST OFFICE LTD BOARD
Network & Sales
1. Purpose
1.1. To update the Post Office Board on progress with Network Transformation, discussions
with the NFSP and Crown Transformation.
2. Network Transformation — converting Mains and Locals
2.1. The programme reached the end of financial year 13/14 ahead of the original contracts
signed and opening targets. The contracts target of 3,000 was met with two weeks to
spare, while the opening target of 1,950 was met in the last week. The final outturn was
3,246 contracts signed (2,021 Mains and 1,225 Locals) and 2,058 branches open
(1,325 Mains and 733 Locals).
2.2 The programme continues at pace into the new financial year. Targets have been
agreed for this financial year of 4,800 contracts signed and branches open at 3,600
minimum/ 3,700 stretch. The outlook for Q1 targets is good, based upon pipeline and
forecasts from the field teams.
2.3. There are a number of levers open to us for the ‘cliff to be implemented from
September 2015. We will refine our approach to these options depending on progress
this year and how the stakeholder and external environment develops. Options include:
extending compulsory exit or conversion to Locals with good retail, or to Mains;
incentivising conversion or exit by imposing reductions in fixed pay or announcing future
reductions in compensation or investment. Further discussions are planned in the
second half of this financial year.
2.4 There has been little adverse publicity surrounding the launch of the new phase of NT
and increased noise is most likely to occur at the point when the compulsory exit
process starts. Our approach to compulsory exits (guided leavers) is currently being
refined with the NFSP and a pilot group of 50 branches is planned to start in May. Pilot
branches will be visited by managers to discuss options, including the possibility of
improving retail to enable conversion to a Local. The aim is to lead the subpostmaster
to reach their own conclusion on the best solution for them and their branch. The pilot
will test ways of working for Post Office, the NFSP’s role in the process and the agent
and stakeholder response, while containing the potential fallout to a limited number of
branches. Lessons learnt from the pilot will influence the nature and speed of the
subsequent roll-out to around a further 500 branches, starting not before July.
3. Network Transformation — performance of the new models
[To be read in conjunction with NTP P12 Scorecard]
3.1. The Mains model continues to perform well. Mains open for more than 6 months have
consistently out-performed the control group: the latest scorecard shows 4% higher
than control group in total income and 7% higher in focus income. Customer sessions
are up 5% against control group.
3.2 Mains open 12-24 months are also performing favourably against the control group
albeit less well than the 6-12 month group in terms of customer sessions. As these are
different groups of offices, the performance difference is due to the nature of the offices
in each group (including a smaller sample and a larger proportion of offsite conversions
in the 12-24 month group), rather than a function of the time they have been open;
analysis of offices over time does not suggest that performance drops off after 12
months
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3.3. The Local model continues to deliver P&L improvements to Post Office, although not
currently to the level expected. With fixed pay savings of £931 and monthly income on
average down £254, POL is net £677 better off this month per Local conversion.
However, whilst income is expected to reduce on conversion to the Local model (on
average by 5% / £125 due to the reduced product set for Locals), income in the
converted Locals is also lower than the control group which is down £250 (after
adjusting for the reduced product set).
3.4 As described in 3.3, sales performance in the Local model this month is lower (2%) than
expected and field work continues through the new team established to help Locals
make the most of the Local model. The monthly scorecard measures the changing
sample of Locals that have been open 6-12 months. Analysis of particular branches
over time — rather than the changing cohort — shows that income is improving in
converted Locals over the first 12 months after opening.
3.5 In particular, the model performs
well in branches that have
converted onsite. Across months
6-12, the average is 97% of the 100%
level pre-conversion — 2% higher 80%
than the expected 5% drop from
lost products. Branches that are.
relocated offsite are also showing
continued improvement after 20%
conversion, but their performance o%
drops further initially (as branch MonthMonth MonthMonthMonthMonth MenthMonthMonthMonthMonth
moves do even without model PPS 8 SS TS 8
change) and therefore takes longer to get back to the expected level. Across months
6-12, average income is 90% of pre-conversion — 5% below the expected 5% drop.
—onsite —offsite
120%
60%
3.6 We feel that there is potential for the model to improve further, both in the initial 12
month period following conversion and beyond. We are developing and trialling a range
of initiatives e.g. improved customer communication, product mix, signage.
4. Long term relationship with the NFSP
4.1. NFSP continue to show the commitment they made to Network Transformation — both
publicly and via the monthly joint meetings we have in place to look at NT
developments. We are also now meeting regularly to discuss the growth agenda with
Commercial and Financial Services in order to build George’s confidence and his
support for the income plans.
4.2 The draft (unsigned) MOU is now functioning as an agreed (by both parties) set of
principles from which the framework document will be developed. We are working with
NFSP over the course of the next 2 to 3 months to develop the detailed agreement
including elements relating to the Dispute Resolution Process, payment mechanisms
and communications approach. Our thinking remains that this will be launched in the
summer.
4.3 NFSP are currently developing the relevant framework that will ensure that their legal
status is fit for purpose in light of their de-listing as a Trade Union. No agreement will
be signed or further payments made until this has been clarified but will be in advance
of their transition to a new organisation design.
44 Our current assumptions are that their new organisation design will be completed by the
autumn, endorsed by their Executive Council pre-Christmas and authorised by a
Special Conference in early 2015.
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5. Crown Transformation
5.1. The Crown P&L for FY13/14 out-turned at a £25.7m loss versus our target of a £23m
loss. The principal reason for this has been income where performance was lower than
projected for the financial year.
5.2 The £23m target was dependent on an increase in income of £2m, whereas a
decrease in income of c£3m was experienced. This resulted in a net gap of c£5m
against our start of year target.
5.3 On staff costs and franchising, there have been a number of movements on and off
from the start of year plan including delays to in-year staff savings due to the industrial
relations position, which were mitigated by other cost saving activities.
5.4 The draft Crown P&L budget for 14/15 is £8.5m loss. This is still subject to change
whilst audit and review checks are being completed. Achieving this target and
delivering the planned activities during the year will deliver a breakeven exit run rate at
March 2015 (Appendix A).
5.5 The activities that have underpinned the achievements in FY13/14 and those planned
for FY14/15 are covered below:
5.6 The full programme of branch transformations began in September 2013 and by the
end of FY13/14, 122 completed transformations, against a target of 117, had been
delivered. Transformation works continue with the aim to have transformed all 294
retained branches by November.
5.7 By the end of March 2014, over 1,200 staff in transformed branches had been trained
to support the transition to new ways of working. Transformed branches are showing
year on year income performance that is 2.5% better than that of non-transformed
Crown branches over the same period (December-March). Financial services (FS)
performance over the same period is 7% better in transformed branches versus non-
transformed. Given the reliance on growth in Financial Services (FS) income in the
plan to return to breakeven, this is especially encouraging.
5.8 Customer satisfaction has also been positively impacted. Voice of the Customer (VoC)
scores have been 2% better in transformed branches with FS customers reacting very
positively to the new private consultation rooms and scoring 21% higher when
questioned regarding privacy to conduct confidential discussions. Feedback from staff
and the unions on the content of the training has been positive. Staff satisfaction with
the training has scored over 90%. Staff engagement scores will also be monitored as a
metric through which to measure the impact of the training.
5.9 Significant progress has been made to deliver staff cost savings required in the
retained Crown branches. To date Voluntary Redundancy (VR) acceptances combined
with unfilled vacancy removal have secured 462 FTE of staff savings against a plan of
503 FTE (92% achieved). This equates to c.£12m of staff savings (full year effect)
secured against a plan of £12.7m. The first tranche of VR exits took place w/c 21st
April with 150 CSC staff (122 FTE) leaving the business, delivering a full year effect
saving of c.£3.9m. Following this, staff will continue to be released in accordance with
the branch transformation date and the rollout of the Self Service Kiosks (SSK).
5.10 Progress is also being made in pursuit of £3.3m of cost savings from management
grades in the network. A series of meetings with the CMA have taken place where
potential options for a future management structure were discussed. A proposal has
been worked up which once formally approved will progress to formal consultation and
a VR preference exercise undertaken.
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5.11. Alarge proportion of the staff saving benefit is linked to the rollout of c.500 new NCR
SSKs which will replace the existing Wincor Post & Go machines. The first kiosks
began operating in Harpenden branch in February 2014 to enable testing in a ‘real life’
environment. No significant defects were identified and wider rollout in the network is
now underway. By w/c 21* April, 100 kiosks had been installed across 42 branches,
with the rollout synchronised with branch transformations and staff exits across the
remaining life of the programme.
5.12 Work to progress branch mergers, two into ones and relocations is ongoing. Whilst the
relationship with Consumer Futures has proved testing, to date in each case all of their
objections have been addressed in advance of a decision being announced.
5.13 By the end of FY13/14 the franchising of 22 of the 70 branches in scope had occurred.
WHSmith took 19 franchises with 3 more moving to independents — providing a full
year positive P&L impact of c.£2m. Of the remainder, 15 branches have progressed
into the selection and application stage of which decisions on 3 have been announced,
with two branches (Keighley & Burnley) due to go live in April. Performance from the
first wave of franchised branches has been encouraging. The target migration of
income is 90%. The branches are currently achieving 80% with week on week
improvements; this is 10% better than during the last round of WHS franchising. We
have a number of applicants where the lack of suitable property for their business is the
inhibitor. The programme has engaged BNP Paribas to conduct property searches in
those areas where potential partners cannot locate suitable premises. Additionally, the
programme is actively pursuing an option whereby an independent operator runs a
Post Office within the premises of a 3” party retailer.
5.14 Whilst performance this year has been below the desired P&L target the flowthrough
into FY14/15 from a number of cost reduction activities will be strong, especially staff
cost savings which account for a large part of the programme’s savings target. Property
is also expected to meet targets for 2014/15.
5.15 The key risks (with mitigations) to delivery of a run rate break even P&L position for
next year are:
Income - A shortfall in income delivery against target would materially impact the
ability of the Crown network to reach a break even run rate. The Post Office
Commercial Committee is monitoring progress against income targets and the
impact on the Crown run rate. Income growth in Crowns remains a business priority
and, although high risk, the plan is considered achievable
Franchising - The programme fails to franchise the remaining 48 branches that are
within scope, negatively impacting the programme’s ability to reach the run rate
breakeven P&L. A raft of approaches are being taken to support the successful
franchising of branches including: using BNP Paribas (Post Office’s Estates
Management partner) to assist potential partners locate suitable premises; the
hosting of franchise operators within 3” party retailers; and continuing dialogue with
existing multiple and independent partners. In the event that any branches are not
successfully franchised and are retained within the network then all efforts will be
made to reduce their P&L loss through BAU staff savings delivery; the introduction
of SSKs and property cost reductions. We are also working with the CWU on 5
branches to identify potential changes to ways of working to support returning these
specific branches to breakeven.
Kevin Gilliland
April 2014
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Appendix A
Crown P&L position (draft) for 14/15 and through to breakeven
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DRAFT CROWN P&
13/14 14/15
Actuals Change 16/15 Budget
Retained branches: £m £m £m
Income 126.6 pa 131.9
Staff Costs -89.8 67 -83.1
Property Costs -28.9 20 -26.9
Other Costs -26.2 -1.0 Bene
PBIT - retained branches -18.3 13.1 =k]
70 franchise branches:
PBIT -franchised branches “74 42 -3.2
PBIT TOTAL s7/ aly h2 Eas)
What must happen to achieve the breakeven position at the end of 14/15-
"Business must achieve POL 14/15 income budgets
=Business must be on trajectory for POL 15/16 strategic plan income
Full programme benefits delivered on franchising
Full programme benefits delivered on staff savings
Full programme benefits delivered on property savings
14/15 Flowthrough
14/15 Flow
through
Year End
Tun rate
£m £m
a2 133.1
441 -79.0
0.0 -26.9
0.0 Eene
G5} 0.0
3.2 0.0
8.5 0.0
Risk level
High
High
Med
Low
Low
The precise calculation is being tested and will then be formalised but will be based on an annualised Crown P&L
derived from the 2014-15 exit position.
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April 2014
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POST OFFICE LTD BOARD
Network Development (Project Ivy)
1. Purpose
1.1.
The purpose of this paper is to update the Post Office Ltd Board (Board) on
progress with Post Office Ltd (POL) Network Development (Project Ivy).
2. Background
2.1.
2.2.
2.3.
The 2020 strategy outlines plans to extend the current network size by at least an
additional 2,000 access points. These plans are predominantly aimed at
countering the increasing activity of competitors in the UK retail parcels market.
Additionally POL has committed to the Shareholder Executive (ShEx) that it will
seek to demonstrate progress against these plans by opening enough new
access points to ensure that the total network size exceeds 12,000 outlets by
March 2015. This commitment is subject to certain agreed caveats to avoid
adverse impact on Network Transformation and ensure the achievement of
commercial sustainability.
POL has created Project Ivy to deliver both the short term imperative to reach
12,000 access points by March 2015 and produce plans for network expansion
which will meet the threat from competitors.
3. The competitive environment
3.1.
3.2.
3.3.
3.4.
3.5.
In recent months there has been a rapid expansion of competitor access points in
the UK retail parcels market. The main competitors are Collect+ and My Hermes
who between them now have in excess of 8,000 outlets. These parcel shops
typically offer basic consumer parcels combined with click and collect collection
and home shopping returns.
The vast majority of business derived in these competitor outlets is from the
consumer parcels and home shopping returns products; this is a market where
POL has been traditionally competitive.
In addition to these competitors there are smaller players who are targeting
specific locations such as Network Rail and London Underground stations with
parcel shops such as Doddle and ByBox. Other players are launching stand-
alone locker boxes for collections and returns these include InPost and Amazon.
POL must ensure that it keeps pace with these developments if it is to protect its
market share and continue to be customer’s preferred choice for consumer
parcels in the UK. This may require POL to expand far beyond the proposed
2,000 access points in the 2020 strategy.
The total optimum size of the network is being considered within the work which
the POL Strategy team is currently leading to establish a greater level of detail
behind the delivery of the 2020 strategy.
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4. Progress to date
41.
4.2.
4.3.
4.4,
45.
The Project Ivy team has identified a number of potential models for the
expansion of POL access points; these include full service branches, parcel
shops, extended parcel shops with a range of simple core services (bill
payments), automated parcel shops and dedicated travel money kiosks.
Following an initial evaluation workshop it has been decided to prioritise parcel
shops, both automated and extended, for the purposes of achieving some early
trials. Annex 1 provides an overview of the models currently being developed for
taking to a trial.
This decision is based upon the clear competitive threat from the expansion of a
number of competitors in this market, in particular Collect+t and My Hermes, and
the potential speed to market of installing self-service technology and or Horizon
capability with a host retailer. Parcels products also account for the majority of
revenue currently derived in existing POL Locals branches.
The initial trial opportunities include partnering with Transport for London utilising
tube station ticket office sites (initial trial expected by the end of June 2014),
Tesco for placing self-service kiosks in prime locations (first trial expected to go
live in Lincoln in June 2014), Royal Mail Group for placing self-service kiosks in
Parcelforce Worldwide and Royal Mail enquiry offices (first trial expected in July
2014).
The team has been working on a pipeline of opportunities (Annexes 2 and 3
provides an overview of the opportunities) for both the initial trials mentioned
above and the longer term objective of ensuring that POL maintains its parcels
market share.
5. Risks and mitigations
5.1.
The National Federation of Sub-postmasters (NFSP) has historically been
opposed to the concept of Network Expansion and may react negatively and
publicly to any POL plans to make this a reality. This reaction will be based
around fears of cannibalisation of volume from the existing network. POL is
seeking to mitigate this risk by considering the following activities:
e The Project Ivy team will engage with the NFSP to fully explain the
rationale behind Network expansion and outline the competitive threat in
the parcels market. In short if POL does not expand then competitors will
and the volume will be lost from the existing network in any case.
e POL will target locations for Network Expansion where its current market
penetration is low or where competitor activity is high. This will be with the
intention of winning competitor volume rather than simply migrating
existing POL volume around the estate.
e POL will look at a number of potential ownership models which allow local
agents to benefit from the new access points. This may include hub and
spoke access points or minimum income guarantees.
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5.2 Models for new access points interfere with POL’s ability to deliver Network
Transformation because they may be seen as more attractive to potential retail
partners than existing models or because current agents will not sign up to new
contracts due to fear of cannibalisation increasing the risk of losing their fixed
pay. The Project Ivy team will work closely with the Network Transformation
programme to ensure that the models are complimentary. This will include
looking at ways to grow and protect income so that it can be shared appropriately
to sustain the entire network.
6. Next Steps
6.1. Finalise the customer and client propositions, as well as stakeholder
communication plans, and conduct the initial trials. The Board will be informed of
the detail of the proposed first trials in May 2014.
6.2. Identify successful models and partnerships to take forward into the longer term
strategy for access point expansion.
Martin George
April 2014
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Annex 1 — Ivy Concepts
The table below highlights initial concepts to be developed and trialled
Concept
Brief Description
Technology
Status
Assisted self-service
Offers convenient opening hours and locations for sending
mails and parcels using self-service kiosks.
Additional services to be developed could include bill pay;
information point; cashless/NFC; eTopup.
Longer term developments to include an intelligent drop
box and a move to a fully automated solution.
¢ Post and Go (POGO
machines —for tactical
use)
© Self-Service Kiosks
(SSKs)
Quick win trials already
identified to test concept with
retail partners.
Parcel Shop
Offer simple mails products to ensure that we have a clear
/ easily understood proposition for customers.
Located in convenient locations, i.e. offers
coverage/scale.
This model is a build on 1) Self -Service and incorporates
parcel collection.
There is a potential to build other relevant core products
e.g. volumetric, bill payment etc and channels e.g. ‘pop up’
shops.
« Post and Go (POGO
machines —for tactical
use)
° Self-Service Kiosks
(SSKs)
e Horizon (as
appropriate)
e Tablet (potential longer-
term
Potential trial sites to be
identified. .
Cut down Local model
Any combination of products / services, however does not
meet network access criteria.
¢ Horizon Terminal
Investigate potential of testing
other potential models via e.g.
POL property that isn't currently
in use.
Parcel Lockers
Offer convenience, longer opening hours and coverage
(i.e. scale). The first choice for failed delivery.
New technology could enable selling of various POL
products. Further innovations e.g. allow pre-order products
to be sold through partnerships.
e Intelligent dropbox
« Parcel locker
Commercial and operational
viability to be investigated as a
standalone solution or in
conjunction with the Mails and
Parcel Shops.
Project Ivy Martin George
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Annex 2 — Opportunities in train
Confidential
The table below provides a high-level overview of each of the live opportunities we are actively pursuing to commence small scale trials
Opportunity
Concept to be
trialed
Potential Scale
Timescale
Next Steps
Tesco - keen to explore different models
with POL including Self Service.
Assisted self-
service
239 Tesco Extra
Trial 2 x SSKs in
Lincoln by June 2014
and Cambridge
(timescales tbc)
Securing SSKs for the Tesco
pilots
Transport for London exploring locating a I* parcel shop 240 ticket offices I tbc + Site evaluation to identify potential
Crown in TfL as well as other potential + Cut-down Local I +x other pilot sites
options, including ticket offices. POL is model locations
keen to get a foothold with TfL.
Thomas Cook Group : tbe 500-900 sites tbc + Concept development workshop
a. POL access points in TCG premises arranged for May.
b. TCG access points in POL premises + Site evaluation to identify potential
c. Consolidation / transfer of TCG pilot sites
locations to POL
Argos - Working through a reciprocal Assisted self- 120 sites Trial SSKs in 5-6 Argos I + Sites for potential trials using
approach i.e. locating Argos terminals in service locations — timescale SSKs have been identified
POL and POL concepts in Argos. tbe
Self Service kiosks in Royal Mail Delivery I Assisted self- 1,250 + Trial by end Q1 + Meeting on 10th April to scope
Offices and Parcelforce depots as part of I service + Roll out from Q3 opportunity and agree next steps
RM's Enquiry Office of the future (tbc) for trials.
strategy, + Currently assessing options for
using decommissioned POGOs
for trials.
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Annex 3 — Other potential opportunities
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In addition to the live opportunities being actively pursued, a number of opportunities have been
identified and will be developed in the coming weeks to the point which will enable us to actively
pursue additional trials
Opportunity / Idea Potential Scale
Use empty / surplus properties ranging from the Lyceum 120 sites
to small PO with temp SPM. Sit within HC’s POL
property portfolio as a cost.
Use 26 Crown offices which don’t have a franchise. 26 sites
Extra stops on mobile PO tbc
Network Rail / Doddle — opportunity to be scoped 2,500
As a satellite to new Locals or Mails via NTP (subject to tbe
discussions with NTP team to identify areas of synergy)
Pop-up shops to cover peak periods during the year tbe
(e.g. Christmas)
Project lvy Martin George
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POST OFFICE LTD BOARD
Chief Executive’s Report
1. Digital and multi-channel Programme
e We are now commencing the roll-out in around 50 Crown and agency branches of the
following technologies designed to modernise the way we serve our customers:
° Wi-fi will be deployed to enable branch staff to use mobile devices that can access
and manage appointment and queue data; at a later stage the wi-fi will also be
made available to customers to access the internet in branch via a ‘landing page’,
facilitating light touch data acquisition and targeted sales messages.
° An online appointment booking service will be tested, initially for AEI services but
at a later point this can be extended to other areas such as FS as appropriate.
° We will also be testing a virtual queue management service that alerts customers
via SMS or email to where they are in the queue, allowing them to get on with
other activities in the area while they are waiting for their slot. The trial will enable
us to assess the impact on branch workflow, sales and customer data capture.
e The plan for extending these technologies to the wider network will be finalised in light of
our evaluation of this initial trial, although we have provisionally budgeted for around 1,000
branches to be covered in the current financial year.
e Next month we will also be opening a new digital concept branch at London South Bank
University. It will not have traditional counters, instead serving customers through a
combination of self-service machines, online tablets and ATMs. Initially the branch will not
be open to the general public, and will instead be used to assess these technologies in a
controlled environment and to host VIP visits that were previously confined to the model
office at 148 Old Street (for example enabling us to demonstrate innovative approaches to
assisted digital). However, in parallel we have also decided to keep open Kennington Park
Crown (previously earmarked for closure as part of CTP) and transform it into our first live
digital branch, incorporating the concepts which prove to be most successful at the South
Bank site. The new layout for Kennington will be developed from August.
e Beyond these in-branch activities, the Common Digital Platform (CDP) development
remains on track to deliver a separated platform from Royal Mail by the end of the year,
with content from the existing web platform migrated over in several iterations starting
from June. The CDP also gives us the flexibility to implement a range of other customer
journeys that are not confined to Horizon and traditional counters, such as the use of
tablets which we will be testing in the South Bank branch.
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2. Business Transformation Programme
Our focus over the past few weeks has been on establishing the resourcing needed to
take forward the next stage of detailed work to develop our target operating model, assess
the different sourcing options and drive out additional shorter-term savings. David Ryan,
our Interim Business Transformation Director, started work on 22 April and will lead the
overall programme, reporting directly to the CEO. The ITT for our external design partner
was issued to a group of external suppliers (McKinsey, Bain, Deloitte, PWC, PA and
KPMG) on 8 April with responses due on 22 April. We will be holding presentation and
clarification sessions with each of the suppliers over the coming week with the aim of
selecting the preferred bidder by the start of May.
3. Project Maypole (future of POCA)
We are continuing to engage closely with DWP following the submission of our initial
outline proposition for the future of POCA in March. DWP have expressed concerns
around the pricing of our proposals, although it should be noted that this was to be
expected and is consistent with the approach they are taking with all their suppliers in
order to meet their own stretching efficiency targets. We are meeting Steve Webb (the
DWP Minister responsible for POCA) and Jenny Willott on 20 May, and will be working
with DWP officials in the interim period to assess the scope for closing the gap between
our respective positions. BIS officials are also helping to intermediate with DWP. The
programme is being tightly managed during this critical period, with daily internal planning
calls and an ExCo sub-group overseeing all key decisions on the negotiating mandate.
4. Other programme updates
Updates on the other key programmes will be covered through the following Board
agenda items:
° the commercial update paper covering mails, financial services, government and
home services;
° the network paper which covers NTP, CTP and network expansion;
° an oral update will be provided on the first Project Sparrow Sub-Committee
meeting (and any other notable developments); the next meeting is scheduled
immediately after the Board.
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POST OFFICE LIMITED
Performance Report
March 2014
Produced By : Financial Control and Compliance Team
For Queries & Comments Contact : Sarah Hall or Kam Bassra
CONFIDENTIAL
Commercially Sensitive and not for onward circulation
mation that is li
and the consequence:
thin the Post Office.
Period 12 Performance Pack - Chris Day 30th April 2014 Page 1 of 11
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( >)
Contents
Page
Headlines 3
Profit & Loss Statement 4
Crown Profit & Loss Statement 5
Cost Management update 6
Cashflow Analysis 7
Business Scorecard 8
Network Transformation Scorecard - Mains 9
Network Transformation Scorecard - Locals 10
Transformation Delivery 11
X )
Period 12 Performance Pack - Chris Day 30th April 2014 Page 2 of 11
POL-BSFF-0234189_0072
Headlines Strictly Confidential
March 2014
FY - The EBIT outturn of £108.1m is in line with the CFO forecast last month, £6.0m better than the budget of
£102.0m and £13.9m better than last year. However, the net income outturn of £866.1m was £3.9m lower than the
P11 CFO forecast, £33.9m lower than budget and £36.3m lower than last year.
Although the FY outturn was in line with the P11 forecast at operating profit level, a worsening in the position for both
Mails and Telephony is masked by other upsides. Net income for both was lower but was offset by lower
subpostmasters costs. Non staff costs were higher than expected as a provision was recognised for the ongoing
uncertainty with telephony income, there were higher (partially disputed) internet costs during migration and a provision
was included for a mails segregation penalty reflecting that this was not resolved by year end. However, staff costs
were lower as the bonus estimates reduced more than expected reflecting anticipated scorecard performance.
Versus budget, the shortfall on income of £33.9m (mainly Mails £20.8m, Lottery £7.2m and Telephony £4.4m) has
been largely offset by the subpostmasters costs (£32.4m favourable). The remaining favourable variance is driven by
project underspend of £9.0m (of which £7.0m was moved to exceptionals for Separation). The VAT recovery upside of
£5.8m has been more than offset by the non staff adverse variance of £13.0m including the Telephony costs and Mails
segregation penalty noted above.
Period 12 - Operating profit of £1.5m was £8.9m adverse to budget.
* P12 net income was £1.4m favourable driven by Financial Services and Government Services. The FS variance was
driven primarily by NS&i catch up for prior months and GS variance is a result of increased passport Check and Send
volumes.
© P12 costs were £13.3m adverse, comprising primarily of £3.9m higher marketing costs, higher Telephony costs
referenced above, the Mails segregation penalty and the VAT recovery budget of £3m for P12 but received earlier in
the year.
Cashflow
The full year cashflow was an inflow of £180m which is £196m favourable to the full year budget of £16m outflow. The
main driver for the favourable variance, as forecast, was the slower than planned capex on the transformation projects
of £53m. The commitment of expenditure accelerated at year end and there is over £100m of capex and exceptional
items that have been committed but not yet paid for particularly in relation to NTP and CTP. This cash flow will now fall
into 2014-15. In addition, the new DVLA contract resulted in improved settlement terms driving the £36m favourable
variance in client balances, as forecast, and network cash was £47m lower due to careful management. Working capital
was favourable by £48m, more than forecast, reflecting the acceleration of programme activity late in the year and
associated increased pace of purchasing,
Crown P&L
The Crown loss is £2.7m adverse to budget. Income was £4.7m adverse driven primarily by Mails, partially offset by
Period 12 Performance Pack - Chris Day 30th April 2014
(Profit & Loss >)
\, Government Services. Costs are £1.6m favourable and share of JV is £0.5m favourable. D
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Cumulative EBIT pre exceptionals
100 Actual Budget
80
60
40
20
Total Net Income - Budget to Actual Bridge
£m
Bos
(28.7)
900.0
(4.4)
SEES ESSEESSESE
(1.6)
866.1
2013-14 FullMalls & Retail Financial Government Telephony
Yr Net Services Services
Income
Budget
Financials
Total Net Income (excl NSP) £m (Bonus)
Operating profit £m (Bonus)
Free cashflow £m
Crown Profit (Loss) £m (Bonus)
Non Financials
Queue time % <5 minutes - Top 4k branches
NT Conversions - (Mains & Locals) (Bonus)
Other — 2013-14 Full
Yr Net
Income Actual
Full Year
Act Target Var
866.1 900.0
108.1 102.0
179.7 (16.2)
(25.7) (23.0)
82.1% 80.6%
3,246 3,000
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POL-BSFF-0234189_0073
Profit & Loss Statement
March 2014
Strictly Confidential
THESE FULL YEAR RESULTS ARE SUBJECT TO AUDIT REVIEW
Operating profit (EBIT) of £1.5m was €8.9m adverse
to budget.
BAU was £11.5m adverse due to:
* Higher non staff costs of £20.8m due to £3.9m
higher marketing costs, £4.4m higher Telephony
costs, £3.0m Mails segregation penalty, VAT
recovery budget of £3,0m but actual received
earlier and savings task budgeted in P12.
Offset by:
‘* Higher income of £1.5m, due primarily to NS&i
income catch up reflecting the new contract
+ Lower staff costs of £4.7m reflecting the reduced
bonus accrual for 2013-4, and
+ Lower subpostmaster costs of £2.8m, £1.8 sales
related and £1.0m VAT recovery.
Below EBIT
Due to the combined effect of the new strategy and
the recent survey sent to subpostmasters, we have
seen an increase in potential leavers for which we
have increased our provision (offset by increased
grant utilisation). Additionally in P12 we incurred
£30m on the NT programme costs and £12m IT&C
(combined budget £7m).
Operating profit (EBIT) of £108.1m was £6.0m favourable to budget.
BAU variance of £2.9m adverse was mainly due to:
+ Lower income of £33.9m, mainly Mails £20.8m and Lottery £7.2m. Mails
performance was impacted by lower parcel volumes following the RM price
changes in April, but new parcel formats have been introduced at the end of
October. Lottery continues to underperform and Telephony is also adverse
due to lower customer numbers and higher cost of sales, and
‘Higher non staff costs of £7.2m due to higher telephony costs, the mails
segregation penalty, higher marketing costs, Horizon costs originally
budgeted for in prior year, but incurred this year, partially offset by VAT
recovery saving this year.
Offset by:
+ Lower subpostmaster costs of £32.4m; £19.8m relates to lower sales
income, £4,0m sales rix (parcels), £2.8m WHS provision, £2.9m budgeted
but incurred in 2012-13 and £2.6m improved VAT recovery.
+ Lower staff costs of £3.8m due to the reduced bonus accrual based on
scorecard outturns,
‘Higher FRES JV income of £1.5m.
Project One-off variance of £9.0m favourable. The underspend is driven by the
movement of Separation costs to exceptionals and reduced due to cost
constraint.
Below EBIT
Exceptional costs are favourable mainly due to a £102m unbudgeted credit
relating to the change in pensions terms. Other variances are adverse,
particularly the NT programme costs which are £55m adverse.
XN 7
Current Month Prior Year Period Full Year Prior Year
lem ‘Actual Budget Variance I Actual Variance I Outturn Budget Variance I Outturn Variance
TOTAL GROSS INCOME Bar B19 22 965 2a) 9788 70122 10236 (Cr)
Cost of Sales (9.4) (87) (07) (11.8) 24 (212.7) (112.2) (121.2) 85
[TOTAL NET INCOME 747 732 15 84,7 0.07 866.1 900.0 902.4 136.3)
Staff Costs (15.0) (19.7) 47 (26.5) 116 (252.3) (256.1) (257.4) 54
Subpostmaster Costs (34.5) (373) 28 (47.6) 13.2 (447.6) (480.0) (478.4) 30.6
INon-Staff Costs (including Interbusiness) (36.4) (15.7) (208) (31.5) (4.9) (264.8) (257.6) (260.7) (44)
Depreciation (0.0) 00 (0.0) (0.0) 00 (0.4) (09) (0.4) (0.0)
Total Expenditure (pre POOC) (65.9) (72.6) (13.3) (105.7) 198 (965.0) (994.5) (996.7) 316
FRES - Share Of Operating Profits 23 19 03 24 02 33.4 315 31.9 12
EBIT - BAU (9.0) 2.6 2.5) (29.0) 10.0 (65.97 (63.0) (62.6) Ba)
JOne off Project costs (POC) (4.9) (7.6) 26 (15.7) 10.8 (26.0) (35.0) (52.3) 263
EBIT - Post Project Costs 123.9) (5.0) (CO) (34.77 20.8 (91.9) (98.0) (4.77 22.8
INetwork Payment 15.4 15.4 00 19.8 (6.4) 200.0, 200.0 210.0) (10.0)
IEBIT pre exceptionals items a5 10.4, (Co) (44.8) 16.3 408.4 102.0 95.3 12.8
interest O1 (0.5) 06 02 (0.0) 3a (6.0) (0.8) 39
impairment (34.5) (28.0) (16.5) (12.4) (22.1) (114.2) (167.5) (65.6) (48.7)
Exceptionals & Redundancy & Severance Costs, (703) (485) 18) (19.2) (51.1) (253.0) (189.4) (77.0) (76.0)
IGovernment Grant Utilisation 273 207 66 301 (28) 3168 3169 98.2 2186
Profit/(Loss) On Asset Sale (0.0) 0.0 (0.0) 0.0 (0.0) 3.4 00 (27.7) 311
(Colleague Share/ Business Transformation Payments (4.8) 00 (48) (3.3) (15) (48) 00 (3.3) 00
[Total Profit/(Loss) Before Tax (80.7) (5.9) (74.7) (49.4) (61.2) 159.2 57.0 102.2 ECEY UAT
(Period vs. Budget (Full Year Outturn vs. Budget ») (Fut ear Outturn vs. Pir Year
Operating profit (EBIT) of £108.1m was £13.9m favourable to prior year,
Like for like BAU adverse variance of £3.5m was mainly due to:
‘* Lower net income of £36.3m. The variance versus prior year is driven by the stamps buy forward
ahead of last year’s price increase and lower parcel volumes this year. Government Services also
decreased as a result of lower rates from the new DVLA contract and falling Card Account
‘customers. NS&i income fell as NS&I migrated its customers to its online channel. There is also the
53rd week impact of ¢. €9m, and
‘+ Higher non staff costs of £4.1m due to higher marketing spend, and the removal of the FX bureau
rebate received in H1 last year, mails segregation penalty, higher telephony costs, offset by VAT
recovery this year.
Offset by:
+ Lower subpostmaster costs £30.6m favourable variance to POL; £16.2m due to lower sales,
including impact of 53rd week, Mails including buy forward pre price increase, £7.5m lower fixed
pay from 53rd week, unfreezing the Core Tier Payment and roll out of Locals, £3.2m relating to the
DVLA rate accrual and £2.5m improved VAT recovery, partially of set by a £1.0m increase for
payments for mails segregation.
‘+ Lower staff cost of £5.1m due to the 53rd week, lower bonus payments and efficiency savings
offsetting higher pension costs and pay awards.
‘+ Higher JV income of £1.2m,
Non like for like favourable variance of £17.4m was due to:
* Lower project costs of £27.4m, offset by
++ Lower Network payment of £10.0m,
Below EBIT
NT exceptionals including compensation are ahead of the equivalent pace in 2012/13. 2013/14 grant
Utilisation includes £30m against 2012/13 exceptional costs not covered by the 2012/13 grant.
Ne
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30th April 2014
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POL-BSFF-0234189_0074
Crown Profit & Loss Statement
March 2014
Period Prior Year Period Full Year Prior Year Outturn
£m Actual Budget Variance Actual Variance Actual Budget Variance I Actual Variance
Income and Distributions
Variable income
~ Mails 3.0 3.2 (0.2) 3.9 (0.8) 39.6 43.2 (3.6) 44.8 (5.2)
~ Financial Services 20 21 (0.4) 2.6 (0.6) 28.2 28.2 (0.0) 30.4 (2.2)
~ Government Services 19 19 0.0 3.0 (1.1) 21.9 20.2 16 26.4 (4.5)
~ Telephony 01 01 (0.0) 01 (0.1) 08 13 (0.5) 13 (0.6)
Fixed income 24 22 02 24 (0.0) 25.2 24.8 04 28.2 (3.0)
Gamma/ Other 16 12 04 11 Os 128 14.7 (1.9) 10.9 9
Renewals and Retentions 09 1.3 (0.4) 09 (0.0) 16.9 17.7 (0.7) 44.4, 5.8
Total Income including Gamma/other 11.9 12.1 (0.2) 14.1 (2.2) 145.4 150.1 (4.7) I 153.2 (7.8)
Direct Product Costs (0.8) (0.2) (0.6) (1.9) 44 (7.2) (5.0) (2.2) (8.3) 141
Branch costs
- Staff (7.3) (7.9) 0.5 (10.5) 3.1 (106.0) (106.0) 0.0 (117.9) eL1.@
- Property (2.8) (26) (0.1) (4.8) 2.0 (34.4) (35.4) 10 (36.9) 26
- Other branch costs (0.5) (0.3) (0.2) (0.9) 0.5 (4.3) (4.7) 03 (6.3) 2.0
Infrastructure costs (2.1) (1.8) (0.3) (1.9) (0.2) (21.9) (22.9) 1.0 (22.5) 06
Allocated central costs (0.3) (0.5) 0.2 (1.4) 11 (6.8) (8.4) 16 (7.7) 09
Total Expenditure (13.7) (43.3) (0.5) (21.4) 7.6 (180.6) (182.2), 1.6 =I (499.7) 19.4
JV Share of Profits 0.7 06 0.1 0.6 0.0 9.6 94 0.5 9.6 0.0
Statutory PBIT (1.2) (0.6) (0.5) (6.6) 5.4 (25.7)___(23.0)__(2.7)_I_ (37.0) 11.3
(< >)
Summary
Income £4.7m adverse to plan:
Costs are £1.6m favourable to plan:
Ne
+ Staff costs on target, delays in CTP were offset by savings from industrial action earlier in the year.
+ Remainder mainly driven by property costs, VAT recovery and a purchase order efficiency drive.
+ Mails income continued to underperform against target following the Royal Mail pricing changes earlier in the year.
+ Main drivers of favourable Government income are UK Visa & Immigration (UKVI) (due to UKVI reducing their backlog in applications) £0.6m, ID Services
£41.1m and Passport Check & Send £0.5m, partially offset by Motorist services (DVLA Licences and AEI) which are £0.6m behind target.
+ Financial Services overall was on budget, with variances between products. Favourable products were Savings, Premium Bonds and Postal Orders, offset
by Life Insurance and Credit Cards. Mortgage sales run rates continued to increase as the FS team moves towards full strength
+ Other income was £1.9m adverse due to the stretch targets being included here.
Period 12 Performance Pack - Chris Day
30th April 2014
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POL-BSFF-0234189_0075
Cost Management update
March 2014
Strictly Confidential
Cost reduction opportunities: Confidence and value FY14/15
Progress since P11 update £50m
Value and confidence
+ The re-structure of Producl/Commercial teams will not deliver the budgeted savings due to £40m
a need to increase capability. This reduces the anticipated savings by £0.7m to £0.5m.
+ Akey supply chain initiative to remodel the cash delivery operations has been delayed due 30m 4 mLow
to on-going union discussions. The budget FY14/15 saving was £1.7m. This saving has Med
been reduced to £1.4m to reflect the delay. a m= Medium
+ The impact of the above is to reduce the total value of initiatives in FY14/15 to £41.2m, 4] High
and leave a shortfall of £0.9m versus the £34.2m of budgeted savings. We are identifying
opportunities to mitigate this shortfall £10m
Delivery and governance
The "Delivery Stage” based measure for FY14/15 cost reduction initiatives shows: £0m
+ Initiatives currently in delivery will contribute £14.1m of cost reductions in FY14/15. This is ames) Get Wino Daas: aN Geom) IMMER Reeds my: lath
up from £9.1m last month, principally due to further voluntary redundancy acceptances in san letios .
the CTP and procurement savings £50m FY14/15 cost reduction initiatives, by stage of delivery
+ Benefits from initiatives that are in the budget, but not yet in delivery total £23.7m. Of
these, implementation plans have been developed for £17.8m (75%). 640
m
Strategic initiatives for FY15/16 and beyond uD) a 80 Potential early-stage savings identified, not
The strategic business transformation programme provided a progress update to the Post a0 in Budget
Office Board in March 2014. The Board noted that the programme proposed to proceed with a . mates
a Design Phase - to complete in November 2014 - and in parallel continue to examine and pic from ee in FY 14/15 Budget,
refine the long term partnering options. The Business Case was approved by POL IC on 8th eon I a eels ee rhea nee
April and the Invitation to Tender for the Design Phase went to market the same day. Design
work will begin in May and will inform procurement of the delivery partner, scheduled to start B pale fon uted in FY14/15 Budget
in September. The programme will next update the Board in May. £10m shetnow Mri TEDety
1a
oA
£0m :
P10 Pll P12 PL P2 P3 Pa PS P6
update update update update update update update update update
FYI4/15 (Em)
ee Impact Initiatives Directorate pil a Confidence ea Nntd Significant changes since P14 update
L M H Total
= Procurement savings in Network and Supply Chain
(€2.6m Facilities Management; £1.2m Fleet Maintenance; £1.5m Official Come oy 6.2 6.2 £1.5m
Mails, £1.0m Branch consumables etc)
4/15 saving re fr I
Reduce cash delivery frequency and move to sinle person operation Supply Chain I 50 14 2.4 I Planning IPY14/25 saving reduced from £2.8m due to delays
I- Reduce cost and volume of Official Mail Finance a3) 1.3. I Planning IProgress being made on reducing rates and volumes
- Restructure Commercial to reduce duplication and increase customer focus Commercial 10 05 0.5 Planning [Previously £1.2m. See section ‘Value and Confidence’
- Manchester Cash Centre Closure Supply Chain 20 07 I 0.7 I £0.7m
I Restructure Audit and Training team in the Agency network Network 20 o7 0.7 Planning
I- Deliver remainder of Finance Roadmap Programme savings Finance 15 o7 0.7 Planning
- Restructure call centres transferring from Royal Mail and improve efficiency Network 20 06 0.6 Planning
Period 12 Performance Pack - Chris Day 30th April 2014
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Cashflow Analysis Strictly Confidential °
March 2014
Full Year Cashflow (Eashtow »
2as The full year cash inflow of £180m is £196m favourable to budget of £16m outflow.
£m om The current favourable variance is mainly due to:
* Capital expenditure was in line with forecast and ended the year £53m favourable to
a II a0 budget due to lower than planned expenditure- mainly NTP and Separation. Cash
: flow on exceptional items caught up to be just over budget at the year end. There
a I i= (a1) was an acceleration of both capex and exceptional expenditure in the final months of
153 the year and there is over £100m of committed spend that has not yet been paid
for. This is particularly in relation to NTP and CTP and includes agents’
compensation, Crown redundancy payments and Crown business transformation
oo) a8) payments. This cash flow will fall into 2014-15 and the budget will be reviewed in
the light of the year end position
EBITDAS —Cient & Network Wrking Capa! Captel_ Redundancy, Cashew before Network Govt Funding Fre cath fow
Cash pale expenditure i> vd Subsidy Lae * Working capital was favourable to budget and forecast by £48m, also reflecting the
acceleration of programme activity in the final months of the year resulting in higher
: creditors from the increased pace of purchasing
Full Year Cashflow Variances
Ps * Client balances continued to be £36m favourable in line with forecast and driven by
49 7 the improved settlement terms within the new DVLA contract.
* ‘+ Network Cash is £47m favourable to budget due to effective management
51
na * Operating profit is £6m favourable to budget.
— I ; : Full Year
a) £m Outturn Budget Variance
FullYearGudgat Operating prof Network Cash Working Capital Cient Balances CapExand aru Your Quturn
echt nen (Operating Profit 1084 102.0 00
Working Capital 71 (42.2) 483
Client Balances (8.4) (44.4) 36.0
Network Cash Network Cash 1613 114.6 46.7
£m Prior Year I _Mar-13 P12 Capital Expenditure (114.2) (167.5) 53.3
P12 Opening Actual Budget var Government funding 215.0 215.0 0.0
Retail, Cash Centres 650 650 522 580 58 NSP in advance 0.0 0.0 0.0
Bureau 59 59 58 65 7 Exceptional Items (203.1) (198.8) (4.3)
Cheques, debit cards 161 161 128 110 (18) Other 57 (1.3) 7.0
Network Cash Free cashflow before interest, tax 171.5 (21.6) 193.4
Interest (2.0) (5.0) 3.0
[ Opening [ P12 Tax 10.2 10.3 (0.4)
Headroom (£m) 838 844 Free Cashflow 179.7 (16.3) 196.0
Period 12 Performance Pack - Chris Day 30th April 2014 Page 7 of 11
POL-BSFF-0234189_0077
Business Scorecard
March 2014
Strictly Confidential
Current Month
Key Performance Indicators e0as=1é- Full Year 2012-13 YoY
Act Target Var Act Target Var Outturn Var
Growth
747 73.2 866.1 900.0 902.4
fit £m h) 15 10.4 108.1 102.0 94.2 13.9
Earnings before ITDA and Subsidy £m* (3.9) (5.0) (91.5) (97.1) (115.4)
Free cashflow £m (133.7) (72.0) 179.7 (16.2) 132.2 475
Customer
Customer Satisfaction** 87.8% 88.0% 86.8% 88.0% 87%
Easy to do business w 36% 4h% 41% 44% 42%
Net Promoter score** (2) 5 (4) 5 4
Queue time % < 5 minutes - Top 1k branches 82.8% 82.1% 82.1% 80.6% 80.7%
Horizon availability 99.9% 99.7% 99.9% 99.7% 99.8%
Branch - Compliance (new basket) 99.0% 98.0% 97.6% 98.0% 97.8%
People
E ement mar A s 10%) TBC 56% TBC TBC 56% TBC 55% TBC
een mind over total recruits at senior leadership. 44% 4% 11% 4% 3.0%
sete ial over total recruits at senior leadership 43% 40% 46% 40% 33.0%
Modernisation
(1.2) (0.6) (25.7) (23.0) (37.0)
333 211 3,246 3,000 1,450 1,796
NT Branches Open (Mains & Locals)*** 304 114 2,058 1,950 507 1,554
Be
* ITDA Interest, Tax, Depreciation, Amortisation
** Monthly = 3 month average. YTD = 12 month average
*** YTD and FY = cumulative including prior years
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30th April 2014
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Network Transformation Scorecard - Mains
Strictly Confidential
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March 2014 Reporting prior months data (i.e. one month in arrears)
Current Month % Ave £'s per branch Mains
Control cal Control Branches that have been converted to a Mains model
Key Performance Indicators Actual Var I Sample IActual Var _}I for ore tran 6 month have corctent out
See Size ey performed the control group in delivering POL
Finance Approved Investment per Mains £000 - - - (42) (42) 0 income. These agents receive a dedicated package
. and a renewed focus on sales targeting and
Total Income: Post vs Pre Conversion performance at the point of conversion. This is having
Branches live 6-12 months 1% (3)% 4% 387 44 (199) 243 I I a significant impact on focus income for many
POL Branches live 12-24 months 1% (3% 4% 75 61 (199) 259. J J branches.
Focus Income: Post vs Pre Conversion The following products are performing particularly
Branches live 6-12 months 16% % 7h 387 310 142 167 I I well
Branches live 12-24 months 16% 9% 7% 75 345142203 Pease Chest and Send
Agents Remuneration: Post vs Pre Conversion Cash Withdrawals
Branches live 6-12 months (4% (78 3% I 387 I (239) (376) 137 rowth Bonds
Insurance products
Branches live 12-24 months (je (7% 6% 75 (63) (376) 343
roma Customer Sessions In addition, these agents have increased their POL
Branches live 6-12 months 1% (4)% 5% 387 vane he togpreved sales rei echencd
Branches live 12-24 months (4% (7)% 3% 75
Operator Feedback on Retail Sales Performance % 137 Note: the control group is based on those branches of
= similar size that have not yet converted.
Operator Satisfaction 78% 118
Actual
Actual Target Var I Sample
Size e
Average Increase in Opening Hours. 41% 20% 21% 1,009
Customer I Customer Satisfaction 98% 90% 8% 30
Queuing Times 2m 15s< 5 mins2m 45s 63
Customer
Customer Satisfaction,
extended opening hours and queue times all remain positive.
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30th April 2014
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Network Transformation Scorecard - Locals Strictly Confidential
March 2014 Reporting prior months data (i.e. one month in arrears)
‘Current Month % ‘Ave £'s per branch
Actual
Key Performance Indicators Actual ear Var Sample I Actual eam Var
Group Size Group
LOCALS
Finance Approved Investment per Local £000, - - - 1 #41) Oo
Total Net Impact: Post vs Pre Conversion
Branches live 6-12 months
Income (12)% (40/8 (2)% 113 I (254) (250) (4)
aL Actual Fixed pay savings 931 «0 931
Actual Net impact 677° (250) 927
Branches live 12-24 months
Income (41)% (10) = (4)& 91 (309) (250) (59)
Actual Fixed pay savings 905 0 905
Actual Net impact 596 (250) _846
Customer Sessions
Branches live 6-12 months 7% (3)% 10% 113,
Agent. Branches live 12-24 months 2% (6)% 8% 91
(Operator Feedback on Retail Sales Performance 13% 31
Operator Satisfaction 72h 29
Actual
Actual Target Var Sample
Size
Average Increase in Opening Hours 116% 80% 36% 616
Customer Customer Satisfaction 94% 90% 4% 30
(Queuing Times 2m 01s < 5 mins 2m 59s} 25
Locals
Branches that have been converted to a Locals model are
performing below expectation due to the sharp decline at
the point of conversion.
Branches converted 12-24 months ago included a large
number of service issues, where the decline was steep,
taking these branches longer to recover.
Branches converted in the last 12 months have also seen
a decline at point of conversion but have improved each,
month and are tracking towards recovering their pre
conversion position at around the 12 month point,
Further work is underway to reduce the gap further. It's
recognised that Local operators require more support
after converting to ensure they manage their Post Office
effectively within the retail environment. A new (but
small) team of Local relationship managers has recently
been established (December 20 13) to work with a
sample group.
Additional analysis is in progress to determine all of the
factors that contribute to the drop off at conversion as
well as on-going performance. Alongside this we are also
developing and trialling a range of initiatives.
The positive for the agents is that customer
sessions/footfall is greater and this should support their
retail growth.
Note: the control group is based on those branches of similar
size that have not yet converted less 5% to reflect lost products.
POL
products,
+ Fixed pay has been reduced to zero for all converted branches, in line with the strategic plan.
‘Agent
+ Customer sessions indicate that retailers are benefiting from greater footfall that should support their retail growth.
+ The footfall is delivering quicker but lower value Post Office sales which in turn should allow the retailer to utilise their staff in different ways or reduce their staff costs.
Customer
* Customer Satisfaction, extended opening hours and queue times all remain positive.
+ Products such as bill payments, etop ups, cash withdrawals and moneygram have delivered growth for these branches - with associated footfall. This has been offset in income terms by poorer performance on more complicated
Period 12 Performance Pack - Chris Day 30th April 2014
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March 2014
This chart illustrates the programme risks reviewed and discussed at April Transformation Committee (using the Post Office Risk Management framework).
The Transformation Committee delivery performance report is currently being reviewed and improved for inclusion in the 2014-15 performance report.
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POL-BSFF-0234189_0081
POLB 14(3")
POLB 14/31-14/48
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POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held on 26 March 2014
Present:
Alice Perkins
Neil McCausland
Tim Franklin
Virginia Holmes.
Alasdair Marnoch
Paula Vennells
Chris Day
Susannah Storey
In Attendance:
Alwen Lyons
Richard Callard
Chris Aujard
Angela Van Den Bogerd
Christa Band
Lesley Sewell
Neil Hayward
Kevin Gilliland
Tom Moran
Martin George
Jeremy Woodrow
Vicky Hampshire
POLB 14/31
(a)
(b)
POLB 14/32
(a)
(b)
at 148 Old Street, London EC1V 9HQ
Chairman
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive (except minute 14/35)
Chief Financial Officer (except minute 14/35)
Non-Executive Director (minutes 14/31-14/38)
Company Secretary
Non-Executive Director designate, Shareholder Executive
General Counsel (minute 14/32)
Network Change Operations Manager (minute 14/32)
Linklaters LLP (minute 13/32)
Chief Information Officer (minute 14/33)
Group People Director (minutes 14/33 and 14/36)
Network & Sales Director (minute 14/36)
Head of Industrial Relations and Network Strategy (14/36)
Chief Marketing and Commercial Officer (minute 14/44)
Head of Telecoms Acquisition and Strategy (minute 14/44)
Mobile Product Manager (minute 14/44)
INTRODUCTION
A quorum being present, the Chairman opened the meeting.
The Chairman reminded the Board that this was to be Susannah
Storey’s last meeting as a Non-Executive Director and thanked
Susannah for her contribution to the Board.
PROJECT SPARROW
The CEO reminded the Board of the background to Sparrow and the
Initial Complaint Review and Mediation Scheme (‘the Scheme’), and
introduced the work which Linklaters had been asked to undertake to
clarify the Company's legal position.
Chris Aujard, General Counsel, Angela Van Den Bogerd, Network
Change Operations Manager, and Christa Band from Linklaters LLP
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joined the meeting.
(c) Christa Band presented the legal advice to the Board, which dealt
with the Company's contractual relationship with sub-postmasters
and the Company’s right under the contract to recover losses. She
emphasised that the advice focussed on the legal issues, not
questions of fact or individual cases. Christa Band questioned the
approach taken by Second Sight with respect to the work produced
by them to date. In particular she would have expected them to:
(i) produce a review of the system as a ‘baseline’ before
considering any specific complaints; and
(ii) cite hard evidence to back up any conclusions made.
(d) The Board discussed the Scheme and possible compensation
payments. Christa Band explained that, because of the terms of the
contract between sub-postmasters and the Post Office, the Company
would not be required to pay compensation and that if compensation
were given this would not give sub-postmasters outside the scheme
any legal right to demand such compensation although it may lead to
claims of ‘unfairness’.
(e) Christa Band explained that English Law did not allow for
compensation for distress as claimed by many of the cases in the
Scheme.
(f) IThe Board thanked Christa for her report covering the legal aspects
of the claims against the Business. Christa Band left the meeting.
ACTION: (g) The Board agreed to set up a Sparrow Board Sub Committee which
Company the Chairman would Chair and would involve the CEO, Alasdair
Secretary Marnoch (Chairman of the Audit Committee) and Richard Callard.
Other NEDs were invited if they wished to join.
(h) The CEO reported on other work underway. She noted that the
quality of the work undertaken by Second Sight had been challenged
by Sir Anthony Hooper, Chairman of the Working Group, who was
now insisting on more evidence based reports.
(i) I The CEO had met the CEO of the Financial Ombudsman Service to
understand the principles they would recognise as good practice for
goodwill payments.
(j) IThe CEO, General Counsel and Angela Van den Bogerd had also
attended an MPs meeting, called by James Arbuthnot, at which a
couple of the MPs with cases in the Scheme were pushing for
compensation for their constituents.
(k) The Board agreed that they needed to commission a piece of work,
to complement that undertaken by Linklaters, to give them and those
concerned outside the Business, comfort about the Horizon system.
The Business was asked to revert with the terms of reference and
timescale for the work which should cover:
« The work undertaken by Angela Van Den Bogerd explaining
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how the system works
e A review of the data integrity aspects of the system
e A reference to all audits and tests carried out on the system
e A response to the most significant thematic issues raised by
Second Sight.
ACTION: (!) These terms of reference should be tested with Linklaters to ensure
Chris Aujard that this work would satisfy them as evidence that Horizon is reliable
and then agreed by the Board Sparrow Sub Committee.
(m) The Board noted the update on the Scheme.
(n) After due consideration, and in the interest of regularising Second
Sight’s engagement, the Board authorised the execution of the draft
ACTION: engagement letter. Chris Aujard was asked to try to extend the time
Chris Aujard period restricting Second Sight from acting against the Company
beyond a 12 months period.
ACTION: (0) The Board requested a one page lessons learned covering 3 or 4
Belinda Crowe areas by the next Board meeting.
(P) Chris Aujard and Angela Van Den Bogerd left the meeting.
POLB 14/33 BUSINESS TRANSFORMATION PROGRAMME
(a) Tim Franklin declared an interest in two of the Companies who may
be involved in this work. It was noted that he is a strategy advisor for
Firstsource, and a member of the advisory board at L&T Infotech,
both interests had been previously logged with the Company
Secretary.
(b) The Board welcomed Neil Hayward, Group People Director, and
Lesley Sewell, Chief Information Officer, to the meeting and received
an update on the Business Transformation Programme.
(c) The CFO explained the changes since the last Board meeting and
the decision to spend more time on the design phase of the plan. He
acknowledged that the effect of this delay would be to produce a gap
ACTION: in the strategic plan in 2014/15 of circa £10-15million which the
Chris Day Business would need to find more radical options to cover. Supply
Chain was one of the areas being considered, which would be
presented at the May Board.
ACTION: (d) The Board asked the CFO to model the scenario where revenue
Chris Day remained flat next year, to show the cost savings which would be
required to hit the strategic plan profit target.
(e) The CEO explained the recruitment process for an_ interim
Transformation Director and that additional consultant assistance
was being sought, so that the business would be fully supported.
(f) Lesley Sewell assured the Board that the base case now being
considered included a model where TUPE applied.
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(g) The Board noted the update and the next steps regarding the design
phase, risk management activity and communications and
stakeholder planning.
(g) Neil Hayward and Lesley Sewell left the meeting.
POLB 14/34 APPROVAL OF 2014-15 BUDGET AND SCORECARD TARGETS
(a) Further to previous discussions, the Board received a request to
approve the 2014-15 budget.
(b) The Board recognised the challenge in the revenue budget and were
concerned by the level of growth required as compared to this year’s
performance. The CFO reported that the Commercial team were
committed to delivering these numbers and that they recognised the
importance of hitting revenue targets to help achieve breakeven for
the Crown network.
(c) The CEO explained that she had set up a Commercial Committee,
which is chaired by Martin George, to drive the revenue and ensure
that the Business have the right incentives in place. The commercial
team would be presenting their plans at the April Board.
(d) The Board:
e noted the actions being taken in response to the
challenges given on the Board conference call on 10
March 2014;
e on the basis of these actions, approved the 2014-15
budget; and
e noted the development of the Key Performance
Indicators for 2014-15.
(€) Paula Vennells, CEO, and Chris Day, CFO, left the meeting.
POLB 14/35 EXECUTIVE REMUNERATION FRAMEWORK 2014-15
(a) Richard Callard declared an interest that as the Shareholder
representative on the Board who would be considering the
recommendation in his capacity at the Shareholder Executive, he
could not be seen to be giving implicit approval to the proposals. The
Chairman recognised this conflict.
(b) The Board received a recommendation from Neil McCausland,
Chair, Remuneration Committee, for:
e the level of base pay of the Executive Directors for 2014-15;
e the Short Term Incentive Plan (STIP) scorecard measures for
2014-15; and
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e the Long Term Incentive Plan (LTIP) performance conditions
for the award dated April 2014-17.
(c) The Board recognised that the base pay of the Executive Directors
was circa 70% of the market benchmark and that although the Board
would not recommend an increase this year that this situation was
not sustainable.
(d) The Board discussed the proposed changes to the STIP measures
and the percentage of bonus attributed to each. It was recognised
that neither the Board nor the Shareholder liked threshold targets,
but with the challenge in the revenue target next year it was thought
appropriate to maintain this one threshold.
(e) The Board agreed the business’s proposal for Net Promoter Score
rather than Easy to do Business for Financial Services in 2014-15
and Neil McCausland explained that this was tracked on the
Business Scorecard but not bonus worthy.
(f) IThe Board received the personal objectives for the CEO and were
ACTION: All asked to revert back to the Chairman with any comments. The CEO
ACTION: CEO would be asked to circulate the objectives for the CFO.
(g) The Board discussed the LTIP measures and retaining access
ACTION: criteria as the gateway. The Business was asked for a paper to
Martin George explain the work underway to increase access points.
(h) The Board agreed:
e not to award an increase in base pay for the Executive
Directors for 2014-15;
e the STIP scorecard for 2014-15, as detailed in Appendix A of
the paper; and
e the LTIP performance conditions of access criteria and
Earnings Before Interest and Tax, Depreciation, Amortisation
and Subsidy, for the award dated April 2014.
(i) Paula Vennells and Chris Day re-joined the meeting.
POLB 14/36 INDUSTRIAL RELATIONS UPDATE
(a) The Board welcomed Kevin Gilliland, Network & Sales Director, Neil
Hayward, Group People Director and Tom Moran, Head of Industrial
Relations and Network Strategy, to the meeting.
(b) The Board received an update on the pay talks, including the details
and parameters of a potential pay deal as agreed by the Executive
Committee.
(c) The Board discussed the effect of the industrial action on the
performance of the Business and specifically on the topline and on
the Engagement Index.
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(d) The Board noted the update and the restatement of the negotiating
mandate.
(e) The Board also noted the pay proposal, as detailed in Section 4 of
the paper.
(f) Kevin Gilliland, Neil Hayward and Tom Moran left the meeting.
POLB 14/37 CHIEF EXECUTIVE’S REPORT
(a) The Board noted the Chief Executive’s report.
(b) The CEO reported that she and the Chairman had had a positive
meeting with Vince Cable, Secretary of State, and Jenny Willott,
Minister for Employment Relations and Consumer Affairs. Richard
Callard, who also attended, agreed that the positive messages had
been well received.
(c) The CEO thanked Tim Franklin for chairing the Post Office Advisory
Council. The inaugural meeting had been very successful with a high
level of engagement from the members.
(d) The CEO referred to the final version on the Public Purpose
Statement, which had been circulated to the Board, and explained
that the Business was now pulling together a plan for its launch.
POLB 14/38 FINANCIAL PERFORMANCE UPDATE
(a) The Board received a financial performance update for February
2014.
(b) The CFO recognised the pressure that the shortfall in revenue was
ACTION: putting the Business under and suggested that he produce some
Chris Day analysis to further understand the underlying quality of earnings.
(c) The Board appreciated the new Network Transformation reports but
were concerned that the Locals model did not appear to be working
as expected. The CFO assured the Board that work was underway
to understand this trend and that the Business recognised that the
Locals required more support after converting.
(d) The Board asked the CFO to explain the reduction in customer
ACTION: sessions in the Mains Branches that have been open for 12-24
Chris Day months.
(e) The CFO recognised that an additional page of narrative to explain
ACTION: the remedial actions being taken by the Business and his views and
Chris Day any concerns on performance would enhance the report and
promised to include this from next month.
POLB 14/39 CORPORATE GOVERNANCE REVIEW
(a) The Board received an update on corporate governance from Alwen
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Lyons, Company Secretary.
(b) The Board:
e noted the current level of compliance with the UK Corporate
Governance Code;
e approved the terms of reference presented for the Board,
including a Schedule of Matters reserved for Board decision,
and the Board sub-committees;
* approved the definition of the roles of the Chairman and Chief
Executive;
* approved the matrix of Delegated Authorities and the
Delegated Authorities for Remuneration Matters; and
e authorised the Executive Committee to be permitted to use its
discretion to authorise delegates to approve contracts,
commitments of expenditure and implementation of change
that the Executive Committee would be authorised to approve
under the authority granted to the Executive Committee by
the Board. Such authority:
(i) may not exceed the limits of the authority granted by
the Board to the Executive Committee; and
(ii) must be in writing and specify any limits to the
authority.
e authorised any member of the Executive Committee to be
permitted to use his or her discretion to authorise delegates
to approve contracts, commitments of expenditure and
implementation of change that that member of the Executive
Committee would be authorised to approve. Such authority:
(i) may not exceed the limits of the authority granted by
the Board to that Executive Committee member; and
(ii) must be in writing and specify any limits to the
authority.
POLB 14/40 MINUTES OF PREVIOUS MEETING AND MATTERS ARISING
(a) The minutes of the Board meeting held on 26 February 2014 were
approved for signature by the Chairman.
POLB 14/41 COMMITTEE MEETING MINUTES FOR NOTING
(a) The Board noted the minutes of:
e the Audit, Risk and Compliance Committee meetings held on
19 November 2013 and 11 February 2014;
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POLB 14/42
POLB 14/43
ACTION:
CFO
POLB 14/44
ACTION:
Martin George
(a)
(a)
(b)
(a)
(b)
(c)
(d)
(e)
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e the Financial Services Committee meetings held on 27
January 2014 and 10 February 2014;
e the Pensions Committee meetings held on 20 November
2013 and 8 January 2013; and
e the Remuneration Committee meeting held on 11 February
2014.
STATUS REPORT
The Status Report, showing matters outstanding from previous
Board meetings, including an Energy proposition update, was noted.
PROJECT SPARROW - INSURANCE
The Board discussed the Professional Indemnity (Pl) insurance and
the Sparrow compensation risks. The CFO explained that PI
insurance could only cover incidents for which the Business was
legally responsible. Therefore any compensation paid outside that
legal requirement could not be covered by PI insurance.
The Board asked the Business to consider enhancing its insurance
expertise and to reconsider how it tracks events and near misses
which should be reported to the insurers. The CFO was asked to
provide an update for the next ARC on his proposal for PI insurance.
PROJECT WAVE
The Board welcomed Martin George, Chief Marketing and
Commercial Officer, Jeremy Woodrow, Head of Telecoms
Acquisition and Strategy, and Vicky Hampshire, Mobile Product
Manager, to the meeting and received an update on Project Wave.
The Board noted the fact that the proposals to enter the energy
market had been put on hold, as detailed in the Board Status Report.
This gave them comfort that Project Wave was likely to be a good
investment for the Company.
Martin George explained the proposition as outlined in the paper and
explained how the Business would work with the chosen suppliers.
The Board were given assurance from the Business that working
with these small companies would deliver the best innovation and
results.
The Board raised concerns about the Post Office’s contract
management resource but were reassured by the Business’ proposal
to bring in the necessary relevant expertise.
The Board supported the product but asked the Business to consider
what it would take to deliver the results more quickly and achieve the
targets in the strategic plan. Martin George agreed that he would
like to grow the business more quickly and understood that this
product might be challenged if it was only delivering the targets in the
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business case.
(f) The Board discussed the opportunities for cross product marketing if
the Business had a single view of the customer and Martin George
ACTION; promised to let the Board know when a single view of the customer
Martin George was likely to be available.
ACTION: (g) Martin George explained that the product would be launched with a
Neil Hayward/ colleague offer. The CEO promised a paper on ‘colleague offers’ for
Martin George the next Board.
(h) The Board:
* noted the update;
e authorised any member of the Executive Committee to sign
the contracts with the mobile vendors as detailed in Part E,
Annex 1 of the Paper;
¢ approved the deployment of a mobile service in accordance
with the launch strategy outlined in the Paper and in support
of the objectives outlined in the Strategic Plan; and
e noted the investment requirement of £6.6m to establish the
service.
(i) Martin George, Jeremy Woodrow and Vicky Hampshire left the
meeting.
POLB 14/45 ITEMS FOR NOTING
(a) The Board noted the Project Maypole update.
(b) The Board noted the Significant Litigation report.
(c) The Board noted the Health & Safety report.
(d) The Board noted the update on Cyber Security and Information
Assurance.
(e) The Board noted the Report on Sealings and resolved that the
affixing of the Common Seal of the Company to the documents
set out against items numbered 1129 to 1140 inclusive in the
seal register was hereby confirmed.
POLB 14/46 CHANGE OF DIRECTORS
(a) The Board approved the appointment of Richard Callard and noted
the resignation of Susannah Storey with immediate effect.
(b) The Company Secretary was authorised to make all the necessary
filings with Companies House.
POLB 14/47 DEFINED CONTRIBUTION PENSION ARRANGEMENT
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(a) The Board ratified the decisions made by correspondence on 21
March 2014 regarding the Defined Contribution Pension Scheme.
POLB 14/48 PENSIONS SUB COMMITTEE
ACTION: (a) Virginia Holmes, Chairman of the Pensions Sub Committee,
Virginia Holmes/ suggested that the Terms of Reference for the Sub Committee
Company needed review and undertook to discuss a proposed draft at the next
Secretary Sub Committee meeting.
ACTION: (b) It was agreed that Richard Callard would replace Susannah Storey
Company on the Pensions Committee and that Neil Hayward would replace the
Secretary CFO.
POLB 14/48 DATE OF NEXT MEETING
(a) It was noted that the next Board meeting would be held on 30 April
2014.
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POST OFFICE LIMITED 26 MARCH 2014 BOARD ACTION LOG
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REFERENCE ACTION BY WHOM
Project Sparrow
March 2014 Set up a Sparrow Sub Committee with the Chairman as Chair and to involve the CEO, Alasdair I Company
POLB 14/32(q) Marnoch and Richard Callard Secretary
March 2014 Draft Terms of Reference for a piece of work to provide the Board and those outside the I Chris Aujard
POLB 14/32(1) Business comfort about the Horizon system. These terms of reference should be tested with
Linklaters to ensure that this work would satisfy them as evidence that Horizon is reliable and
then agreed by the Board Sparrow Sub Committee.
March 2014 Try to extend the time period restricting Second Sight from acting against the Company beyond I Chris Aujard
POLB 14/32(n) a 12 month period.
March 2014 Prepare a one page lessons learned covering 3 or 4 areas by the next Board meeting. Belinda Crowe
POLB 14/32(0)
Finance
March 2014 Present on options to cover the gap in the strategic plan (Supply Chain) at the May Board CFO
POLB 14/33(c)
March 2014 Model the scenario where revenue remained flat next year, to show the cost savings which I CFO
POLB 14/33(d) would be required to hit the strategic plan profit target.
March 2014 Produce some analysis to further understand the underlying quality of earnings. CFO
POLB 14/38(b)
March 2014 Explain the reduction in customer sessions in the Mains Branches that have been open for 12-24 I CFO
POLB 14/38(d) months.
March 2014 Include an additional page of narrative to explain the remedial actions being taken by the I CFO
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POLB 14/38(e) Business and the CFO’s views and any concerns on performance to be included in the financial
performance update from next month.
Strategy
March 2014 Provide a paper to explain the work underway to increase access points. Martin George
POLB 14/35(g)
March 2014 Consider what it would take to deliver the results more quickly and achieve the targets in the I Martin George
POLB 14/44(e) strategic plan for Project Wave.
March 2014 Inform the Board when a single view of the customer was likely to be available. Martin George
POLB 14/44(f)
March 2014 A paper on ‘colleague offers’ to come to the next Board meeting. Martin George/Neil
POLB 14/44(g)
Hayward
Miscellaneous
March 2014 Revert back to the Chairman with any comments on the personal objectives for the CEO. All
POLB 14/35(f)
March 2014 Circulate the objectives for the CFO. CEO
POLB 14/35(f)
March 2014 Provide an update for the next ARC on the CFO's proposal for PI insurance CFO
POLB 14/43(b) —_—
March 2014 Discuss proposed draft Pensions Committee terms of reference at the next Pensions Committee I Virginia Holmes/
POLB 14/48(a) meeting. Company
Secretary
March 2014 Richard Callard to replace Susannah Storey on the Pensions Committee and Neil Hayward to I Company
POLB 14/48(b) replace the CFO. Secretary
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POLARC14 (2nd)
14/4 - 14/17
POST OFFICE LIMITED
(Company no. 2154540)
(the Company)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE SUB-COMMITTEE held
on 6 March 2014 at 148 Old Street, London, EC1V 9HQ
Present:
Alasdair Marnoch Chairman of Committee
Neil McCausland Senior Independent Director
Tim Franklin Non-Executive Director
In attendance:
Chris Aujard General Counsel (GC)
Gill Catcheside Assistant Company Secretary
Chris Day CFO
Sarah Hall Head of Financial Control and Compliance
David Mason Head of Risk Governance
Malcolm Zack Head of Internal Audit
Mark Davies Communications Director (Minute POLARC 14/6-14/7 only)
Angus Grant Partner, Ernst & Young (Minute POLARC 14/8-14/10 only)
Steve Lyon Ernst & Young (Minute POLARC 14/8-14/10 only)
POLARC INTRODUCTION
14/4
A quorum being present, the Chairman of the Committee opened the
meeting and welcomed all those present.
POLARC MINUTES OF THE LAST MEETINGS AND MATTERS ARISING
14/5
(a) The Committee approved the minutes of the meetings held on 19
November 2013 and 11 February 2014 for signature by the Chairman of
the Committee.
(b) The Committee noted the actions list dated 26 February 2014.
(c) The Committee received a report on the Bank of Ireland’s saving strategy.
It was noted that balances had been actively reduced to £16.0bn so that
the savings book could be grown in line with the mortgage book growth,
and that it was anticipated there would be no further re-structuring of the
balance sheet. CD advised that there was a statement of intent with Bank
of Ireland to grow both sides of the balance sheet with the Post Office but
that there was no contractual arrangement in place. Nick Kennett,
Director of Financial Services, was asked to confirm (i) that there were no
restrictions on Post Office by being tied to the structure and growth of
Bank of Ireland’s balance sheet; and (ii) details of the benchmark for
competitiveness to ensure that customers were not disadvantaged.
ACTION: NK
Page 1 of 5
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POLARC ANNUAL REPORT AND ACCOUNTS 2013/14
14/6
(a) Mark Davies, Communications Director, was welcomed to the meeting.
(b) The Committee noted the key messages and plans for the publication of
the Post Office’s Report and Accounts for the financial year 2013/14
(‘R&A’). It was agreed that the work of the Post Office Advisory Service
should be included in the public purpose section.
(c) Mark Davies was asked to circulate a timeline for the production of the
ACTION: MD R&A, together with more detail for the high level themes to include “the
most difficult words and issues”. It was agreed that a balanced sensible
approach was required as 2013/14 had been a tough year. It was agreed
that the R&A should be consistent with the Post Office’s corporate
branding.
(d) It was noted that the publication date for the R&A would be after that of
Royal Mail due to the price sensitive nature of the reporting of Mails. Chris
ACTION: CD Day undertook to advise Matthew Lester of Royal Mail of Post Office’s
R&A timeline.
POLARC ADOPTION OF NEW UK GAAP REGIMES
14/7
(a) The Committee received a report on the new UK financial reporting
framework, and considered Post Office’s response to the changes
outlined.
(b) Sarah Hall advised that, following consultation with the Company's
Pension providers and corporation tax advisers, there would be no
disadvantage to working towards early adoption of the new UK GAAP
regimes.
ACTION: SH (c) The Committee asked Sarah Hall to raise the issue with the Shareholder
Executive, and subject to their agreement, agreed that Post Office should
early adopt the new UK GAAP regime and prepare the Company financial
statements for the 2013/14 financial year end under FRS 101 (reduced
disclosure).
POLARC AUDIT PLANNING REPORT 2013/14
14/8
(a) Angus Grant and Steve Lyon of Ernst & Young (“EY”) were welcomed to
the meeting.
(b) The Committee considered the Audit Planning report for the 2013/14
financial year. Angus Grant advised it would be a year of transition with
new corporate governance rules being introduced, including the “fair,
ACTION: EY balanced and understandable” requirement. Chris Day suggested it would
be helpful for EY to review Post Office’s 2012-13 R&A in light of the new
best practice and to provide examples of good reporting by other
companies.
(c) Angus Grant noted that the Fujitsu IT controls report had been received
and had no issues of concern. The Committee discussed the
independence of the report on Fujitsu’s controls. It was noted that a
separate team from EY prepared the report against defined standards,
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and underwrote its accuracy. The Committee was advised that the audit
of the Fujitsu work had improved over the last two years with higher levels
of engagement and oversight, and that lessons learnt would be
implemented at the start of the re-platforming process to take place in
2015.
ACTION: (d) It was agreed that the Business share its top risks with EY.
CA
ACTION: EY (e) It was also agreed that EY should be invited to provide a briefing to the
. Financial Services Sub-Committee on regulation under the FCA.
(f) The classification of exceptional items was discussed, including the
impact of the change in RMPP terms and the utilisation of Government
grant for transformation expenses. Counterparty risk was also discussed
and it was agreed that Gill Catcheside would forward to EY the Terms of
Reference for the Financial Services Sub-Committee which had oversight
of the Bank of Ireland capital and liquidity for Eagle Contract
requirements
ACTION: GC
(g) IThe Committee discussed and noted EY’s fees for the 2013/14 audit work
which had been agreed with the CFO. It was noted that the inflationary
increase had been mitigated by efficiencies but there was a 7% uplift in
fees mainly due to the work required for the preparation of the interim
consolidated accounts for the first time in 2013-14.
POLARC REVIEW OF BUSINESS TOP RISKS
14/9
(a) The Committee received a paper on the Executive Committee’s
assessment of the key risks facing the Post Office in the achievement of
its strategic objectives.
ACTION: DM (b) It was agreed that a note on the key risks should be circulated to the
Board, and that a copy of the paper be sent to EY. It was noted that the
Executive Committee Governance structure included a Risk &
Compliance Committee, and that each committee within the structure had
risk management incorporated into its Terms of Reference.
(c) A paper was tabled on the insurance-related issues for Project Sparrow.
The Committee was advised that the risks associated with Project
Sparrow were being identified and action taken to mitigate those risks,
and that this was being regularly monitored by the Board. The Committee
discussed the position with regard to Professional Indemnity insurance
(“PI”), and was concerned at the apparent lack of clarity on the
current/historic levels of insurance which might cover Sparrow risks.
Chris Day and Chris Aujard would provide a report to the 26 March 2014
ACTION:CD/ Board meeting to provide clarity on the insurance position, including PI
cA cover, in respect of Sparrow; and the legal liabilities in respect of claims
made in connection with Sparrow
(d) The Committee reviewed the other eight key risks. It was noted that
these risks had been discussed by the Board.
(e) Chris Aujard advised that he was liaising with Nick Kennett regarding
ACTION: CA Project Titan and the implications of a potential FCA authorisation.
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(f) It was noted that the ExCo owner of the People Capability was now Neil
Hayward, and that Capability and Capacity to Change would be included
in the risk description.
(g) With regard to the Network Transformation programme, the Committee
agreed that it was important to deliver a sustainable network.
(h) The continuing trend of “red” mystery shops was discussed, and the
Committee agreed that an understanding of the process together with an
ACTION: NK urgent remedial action was required. Nick Kennett would be asked to
produce an update for the next Board meeting.
ACTION: LS (i) I Lesley Sewell was asked to provide the Committee with an update on
. Data Security/Integrity at the next meeting, to include lessons learnt and
what controls and processes were now in place.
(j) The Committee was informed that the report from Price Waterhouse
Coopers on risks, risk management best practice and assurance in
relation to the IT Transformation programme would be considered by the
Board.
ACTION: (k) Chris Aujard, Chris Day and Dave Mason undertook to incorporate the
CD/CA/DM Committee’s feedback on the Business’ top risks.
(l) I The Committee noted the progress made in the management of the risks
affecting the Post Office strategy.
POLARC CORPORATE GOVERNANCE AND KEY ACCOUNTING STANDARDS
14/10 BRIEFING
(a) Steve Lyon tabled a presentation outlining the changes to UK Regulatory
and Corporate Governance requirements.
(b) The Companies Act 2006 requirements for a Strategic report within the
R&A, and the need for the Board to present a fair, balanced and
understandable (“FBU”) assessment of the Company's position and
prospects within the R&A was discussed. Angus Grant advised that the
Company did not have to make an FBU statement in the 2013/14
accounts, but should evaluate what work was necessary to be able to
make an FBU statement in next year's R&A.
(c) Angus Grant would send through a model set of accounts reflecting the
ACTION: EY recent changes in Corporate Governance and Key Accounting Standards.
. EY would also advise what level of reporting other companies were
considering for the current financial year.
(d) Angus Grant and Steve Lyon left the meeting.
POLARC INTERNAL AUDIT PLAN 2014/15
14/11
(a) The Committee received the proposed internal audit plan for 2014/15.
Malcolm Zack advised that the plan incorporated the Business’ top risks.
(b) It was agreed that an internal audit plan be recommended to the
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ACTION: MZ Committee at the next meeting, incorporating a prioritisation of work and
the necessary resource requirements.
POLARC INTERNAL AUDIT ACTIVITY REPORT
14/12
(a) A paper on Internal Audit activity since November 2013 including key
outcomes, and proposed audit and advisory work for Q1 2014 was noted.
ACTION: LS (b) Lesley Sewell was requested to provide updates on the outstanding
actions.
ACTION: Mz (Cc) It was agreed that Internal Audit should encourage management to
complete outstanding actions.
POLARC MORTGAGE MARKET REVIEW & BUSINESS COMPLIANCE
14/13 SCORECARD
(a) It was noted that the Mortgage Market Review and Business Compliance
Scorecard would be considered by the Financial Services Sub-
Committee.
POLARC ITEMS FOR NOTING
14/14
(a) The summary of 2013/14 IA activity was noted.
(b) IThe recommendations log updates was noted.
(c) The review of the regulatory risk framework was noted.
POLARC ANY OTHER BUSINESS
14/15
(a) Chris Aujard advised that a report on the Data Centre procurement
process would be given at the next meeting.
POLARC DATE OF NEXT MEETING
14/16
The date of the next meeting is 12 May 2014. It was agreed that the
timing of the meeting be altered so that Angus Grant was able to attend
by telephone.
POLARC CLOSE
14117
There being no further business, the meeting was declared closed.
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POST OFFICE LTD BOARD
Update on EXCO Risks
1. Purpose
The attached paper was considered by the Audit, Risk & Compliance Committee (the “ARC”) at
its meeting on 6 March 2014. The ARC asked that the paper be circulated to the Board for its
information.
2. Recommendations
The Board is asked to note the update on EXCO risks.
Dave Mason
17 April 2014
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AUDIT, RISK AND COMPLIANCE COMMITTEE
Update on EXCO risks
1. Purpose
The purpose of this paper is to update the committee on the ExCo assessment of the
key risks facing Post Office in the achievement of its strategic objectives.
2. Background
Since the November meeting of the committee, ExCo has further reviewed the key risks.
The original risks have been revised and refined and now number nine, including a
merged data integrity and cyber-security risk. Details of each risk are included in section
3 of this paper.
There are strong interdependencies between these risks. Individually and jointly they all
have the potential to prevent Post Office delivering its strategic plan. There is therefore
a major commercial imperative in ensuring they are successfully managed.
The ExCo risk owners and the risk management function have been working to develop
the assessment and mitigation of these risks in line with their impact on the strategic
plan.
3. Key Risk Status Summary
Whilst the fierce competition for resources has meant that the current pace of progress
in the management of these risks has been slower than expected, this is improving
rapidly and actions have been taken to further reinforce the process.
e The ExCo sub-committee — the ‘Risk & Compliance Committee’ now focusses
on these risks. To ensure this focus is maintained at the appropriate level the
committee is chaired by the General Counsel and is attended by the CEO. The
committee will be performing regular in depth reviews of each risk ensuring
appropriate rigour is in place
e CoSec is leading a restructure of the various governance committees in the
organisation which will ensure they formally consider the management of risk.
e The risk and compliance function business partners are actively assisting the risk
owners in challenging and supporting the risk assessments and developing
appropriate mitigating actions.
The following sections provide a clarification of each risk’s impact on the strategy, a view
of its current state and mitigating actions planned or in place.
Due to the varying levels of maturity of risk management in the Post Office this view
remains subjective in the majority of cases. For many of the risks, detailed plans for
mitigating actions are still being developed. The business risk partners are supporting
risk owners to ensure that more objective assessments can be performed and that plans
for corrective action completed.
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3.1 Allegations relating to the integrity of the Horizon system
ExCo Owner: Chris Aujard
Owner’s Risk Description
Originally known as Project Sparrow, the Initial Complaint and Mediation Scheme
programme currently carries a substantial level of risk which is being managed with
support of colleagues across the business, including ExCo. It will be important to
maintain this focus as we move into a critical delivery phase for the programme.
Risk Owner Update
It has been the subject of extensive previous discussions at Board level; a further Board
discussion was held on 26 February 2014 to consider the various options for managing
the risks and issues relating to the programme. A copy of the board paper is provided
as Appendix A. Consequently a detailed update is not appropriate for this meeting.
For completeness, the following mitigating actions are in place:-
« CEO participation in stakeholder communications,
« Strengthening the Post Office resources available, and
* Close Board involvement.
3.2 Failure to deliver top line growth in line with strategic plans
ExCo Owner: Martin George & Nick Kennett
Owner’s Risk Description
Lack of growth in both Financial Services (FS) and across the Commercial portfolio
would have a detrimental impact on delivery of the strategic plan. Non delivery of growth
targets will reduce the appeal of the franchise model impacting Network Transformation.
There is an immediate threat that long term growth targets could become unachievable if
we do not respond quickly to competitors.
Risk Owner Update - Financial Services
The FS business is charged with significantly growing overall income by 2020 with a
step change in insurance revenue in 2016/17. FS’s assessment is that the growth plan is
on track albeit with risks that are being monitored, managed and controlled. The FS
management team have a number of existing metrics in place to monitor these growth
risks. These include;-
Sales and marketing effectiveness measures (in place)
Business model enhancements project measures (in place)
Product development and launch MI (in place)
External factors review i.e. competition, regulation and government (partly in
place)
BOl/Third party capability and strategy (partly in place)
« People and resources (in development)
eooee
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The business risk partner is working with FS management to develop and present these
measures in a common format aligned to the growth risk. This is planned to be in place
in March.
A key risk area is the Project Titan work where the scope of the work involves
significantly changing the business model and potentially FCA authorisation. This is to
be delivered to challenging deadlines. Separate reporting of this business model
enhancement is in place and is currently reporting ‘amber’.
Risk Owner Update - Commercial
The main risks facing the Commercial product portfolio which have the potential to
impact the achievement of the 2020 Growth requirements can be summarised into four
main areas:
e Mails: The on-going commitment from Royal Mail will not be sufficient to meet
our growth aspirations for Mails, inhibiting our ability to innovate and compete
effectively in an increasingly competitive marketplace;
« Government Services: The Government will act in line with our time
expectations in developing new products and service, such as the next version of
POca, and especially adopting a more digitally oriented agenda. Revenue
development would be hampered in services for HMPO, Identity Assurance and
Assisted Digital Services;
e New Product Development: The income targets from current products and
services will be insufficient to achieve our strategic plan targets and new
products and service development is inadequate to close the revenue shortfall;
e Digital: The failure to develop an effective omni-channel proposition makes Post
Office vulnerable to customer's opting for other more attractive options from
competitors.
The active management of these risks can be summarised as follows:
« Mails: On-going engagement at both an operational and directorial level with
Royal Mail to include, joint targets, action plans, milestones and clear
accountabilities. Work is progressing well and these should be available in 90
days;
« Government Services: On-going engagement with key Governmental personnel
to include joint targets, actions plans, milestones and clear accountabilities. Key
departments are engaged, and work is underway to deliver plans , milestones
and the key accountabilities within 90 days;
« New Product Development: On-going Commercial team focus on current
performance of existing product portfolio, detailed 3 year plans and regular
updating of forecasts, in addition to work undertaken to identify possible new
business opportunities consistent with our core purpose. Work is progressing
well and the plans should be finalised by the end of June 2014;
e Digital: The Digital Group consisting of key executives from across the business
that will ensure that there is a detailed digital roadmap, as a core component of
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creating an integrated omni-channel offer to customers. This group are
accountable for the roadmap, milestones and metrics.
The current conclusion is that the 2020 growth requirement that the Commercial
Directorate is tasked to achieve is attainable, but there are some sizeable challenges to
overcome.
3.3 Operating Model fails to deliver requisite cost savings
ExCo Owner: Chris Day
Owner’s Risk Description
Our exposure to this risk is being explored but not yet fully understood.
A new operating model has been proposed to make the Post Office more cost
effective. The most significant instrument progressing delivery of the new operating
model is the Business Transformation Programme.
Risk Owner Update
A workshop will be held on 3rd March, facilitated by the business risk partner, to identify
causal factors, likely consequences and mitigating controls of the Operating Model
Risk. The outputs will be considered to shape the future scope and structure of the
Business Transformation Programme.
The Programme's current mandate from the Board is to examine the business case to
engage a transformation partner and, assuming the business case is sufficiently
compelling, prepare for a partner selection exercise. The transformation partner would
be contracted to help Post Office shape and deliver the new operating model. In the
short term the Programme will develop the core design principles and elaborate the high
level structure of the new operating model.
Key risks & issues identified for Programme:
e If the procurement is approved the Programme will require a dedicated team
of post office subject matter experts and is working with ExCo to address this;
e Post Office does not have the supplier management skills to manage the
commercial contracts associated with the new operating model and then
manage our own people to drive full benefit from the contract. The
Programme will ensure this skill set is developed as part of the retained
organisation;
e The risk that industrial relations may be strained by the implications of
business transformation will be addressed through Stakeholder and
Communications plans which will be presented to ExCo and the Board with
the partner business case in March;
e With a general election due in 2015 potentially at the same time as a
transformation partner mobilises in Post Office there is a risk of political
impact. The Public Affairs team will address this in Stakeholder and
Communications plans.
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3.4 Inadequate people capability or capacity to deliver transformational change
and the strategic plan
ExCo Owner: Fay Healey
Owner’s Risk Description
The capability of our people is critical to successful delivery of all facets of the strategy.
There is a risk that we cannot retain, recruit and effectively performance manage our
people to the level of capability required within the necessary timeframe.
Risk Owner Update
The current level of exposure is higher than that deemed acceptable by management.
Whilst activity is underway to reduce the exposure, implementation is in the early stages
and therefore there is no evidence, as yet, that capability or capacity is at the requisite
level. A timeline will be produced to ascertain when the current exposure will be
reduced to an acceptable level and whether interim controls to mitigate the risk are
required.
Detailed analysis and assessment of key control design effectiveness has commenced
and activity to close known gaps continues. The nature of several controls required to
appropriately mitigate the risk are complex and broad in their design e.g. ‘Management
Training Programme’ and as such will take time to implement. Where this is the case,
interim action is taken to address the most pressing gaps e.g. targeted ‘Honest
Conversations Workshops’ for line managers with poor performing team members.
3.5 Non-delivery of Network Transformation Programme
ExCo Owner: Kevin Gilliland
Owner’s Risk Description
Failure to deliver network transformation in a timely fashion would result in a non-viable
business model requiring additional subsidy from the Government or closure of
branches, neither of which are sustainable options. There is an immediate risk that if we
do not manage current and prospective partners and stakeholders effectively, we may
find that we cannot secure the retail partners we need to secure the future of our
network.
Risk Owner Update
The NT programme is currently on track to meet its 2013/14 targets for contracts and
branch openings, and the launch of the revised strategy has provided additional
momentum to the transformation programme. However there remains a significant
residual risk of non-delivery of programme benefits due to the semi compulsory nature of
the programme, the difficulty of finding replacement leavers, maintaining the
attractiveness of models and the possibility of government lobbying by disaffected
stakeholders. These require mitigation and recent activity has included the appointment
of a General Manager to the programme with a mandate to maintain delivery momentum
whist improving governance, risk management and programme resilience as well as
improving programme efficiency and value for money.
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3.6 Strike action within supply chain could damage ability to distribute cash to
network (IR/CWU)
ExCo Owner: Kevin Gilliland
Owner’s Risk Description
Whilst there are multiple controls, and back up plans, in place to mitigate the risk of a
breakdown in cash distribution there is a risk that these will be insufficient to deal with
continued strike action. The impact of branches not receiving the cash they need to
serve our most vulnerable customers would be detrimental to the Post Office reputation.
Risk Owner Update
There continues to be a long term risk of strike action in supply chain but immediate
action is unlikely. No strike activity has taken place since early December, and a joint
CWU/Post Office statement reporting progress in negotiations was issued on 6 February
2014. The negotiating teams have met once on supply chain pay since then. There is a
common goal to try and reach a negotiated settlement but these are complex
negotiations and the CWU negotiating team will also be facing difficult challenges from
its own Postal Executive. Further meetings on supply chain issues will be scheduled
next month.
Contingency plans remain in place to enable the distribution of cash to the network
should industrial action re-occur.
3.7 Delivering poor customer outcomes through FS mis-selling
ExCo Owner: Nick Kennett
Owner’s Risk Description
Financial Services has a demanding growth agenda that will require more sales to be
generated through a variety of channels particularly in insurance. This includes a
number of new projects, product developments and pilots. There is a risk of regulatory
failure and client dissatisfaction through mis-selling by staff or agents.
Risk Owner Update
The FS mis-selling risk and controls are well defined and measures to manage the risk
are in place.
The findings of the Financial Specialist video mystery shopping measure (where there
has been a continuing trend of “red” mystery shops) remain a key area for control
improvement. Actions required include further training as well as increased management
oversight to ensure that compliance requirements ‘stick’ with Financial Specialists. In
addition, where behaviour has not improved sales management will continue to use their
powers to suspend licences and accreditation to sell.
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3.8 The security and integrity of Post Office data cannot be maintained.
ExCo Owner Lesley Sewell
Owner’s Risk Description
Any failure to protect customer or corporate data could have a disproportionate
reputational impact, sufficient to prevent Post Office achieving the growth necessary to
achieve its strategic objectives. The integrity and security of Post Office data is reliant on
a complex network of interrelated processes and controls. The number of potential
threats, particularly of external attacks through the internet, is rapidly increasing.
Risk Owner Update
Some elements of this risk are not yet managed at an appropriate level. Examples are:
data ownership and classification, business continuity and incident management.
However, many other controls are operating giving assurance that the risk as a whole is
being managed. Further assurance is obtained through third party reviews and
certification audits such as those by external and internal audits, network security
penetration testing, ISO 27001 and PCI/DSS. The risk will be subject to a detailed “deep
dive” review at the next Risk and Compliance Committee.
Risk mitigation is under way through projects which are reviewing the controls and
putting in place active measures to monitor the risks and their mitigation. These include
implementation of a new GRC tool, appointment of a Data Protection Officer and
procurement of a communications and training tool covering data protection and
information security. An additional five resources have been provided to augment the
existing team to increase the effectiveness of existing risk measures.
3.9 Post Office cannot operate or deliver services following IT Transformation
ExCo Owner Lesley Sewell
Owner’s Risk Description
The cost savings and flexibility to be delivered by the IT Transformation programme are
critical to the overall strategy. The various contractual relationships, the multiple
components of the programme and the pervasive nature of the changes create a
complex and changing risk landscape.
Risk Owner Update
The programme risks are adequately managed. Controls, including programme
oversight and contract management, have been implemented. These are supported by
planned post-implementation processes and controls.
Governance and control structures for post implementation “business as usual” (BAU)
are being defined. The programme management process provides multiple performance
measures which are being reviewed to ensure they provide adequate measures of
control effectiveness.
At the request of the Committee, Internal Audit have engaged Price Waterhouse
Coopers to advise on risks, risk management best practice and assurance needs for a
programme of this scope and magnitude. This work is under way and will consider both
transition and BAU.
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4 Action
The committee is asked to note the progress made in the management of the risks
affecting the Post Office strategy.
David Mason
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POST OFFICE LTD
PENSIONS SUB-COMMITTEE
Minutes of a meeting of the Pensions Sub-Committee of the Board
held at 148 Old Street, London EC1V 9HQ on Wednesday 5 March 2014
Present:
In Attendance:
PC 14/4
PC 14/5
ACTION: NW
Virginia Holmes (VH) Chair
Chris Day (CD) CFO
Susannah Storey (SS)
Natasha Wilson (NW) Head of Reward and Pensions
Harpreet Singh (HS) Pensions Adviser
Tim Giles (TG) AON Hewitt (for items 14/4-14/9)
Ross Mitchell (RM) AON Hewitt (for items 14/4-14/9)
lan McKnight (IM) RMPTL (for item 14/9)
Gill Catcheside (GC) Secretariat
OPENING OF MEETING
A quorum being present, VH opened the meeting.
MINUTES OF PREVIOUS MEETINGS AND MATTERS ARISING
The minutes of the meetings held on 20 November 2013 and 8 January
2014 were approved for signature by VH.
The actions list as at February 2014 was noted.
The following matters arising from the minutes were discussed:
a) PC 13/12 - It was noted that market valuations were now at levels that
made equity futures unattractive.
b) PC 13/46 — NW undertook to circulate the Robin Summary to the Post
Office Board.
c) PC 13/47 — NW advised that she and Ken Potter had attended the
Implementation Working Group (“IWG”) meeting on 12 December
2013, and had raised Post Office’s issues of implementation of the
Transition Plan and the Liability Hedging Triggers. NW advised that
Post Office’s concern regarding the slowness of implementation had
been acknowledged by Chris Hogg. It was noted that the IWG
meetings were held following the Investment Sub-Committee (“ISC”)
meetings, and that the next IWG would be held on 3 April 2014. The
letter to Royal Mail Pension Plan (“RMPP”) regarding the Liability
Hedging Triggers dated 6 January 2014 was tabled.
d) PC 13/47 - Implementation Plan. The Committee discussed the
overweight cash position with draw-downs to target asset allocations
being slower than anticipated, and considered whether the cash should
be placed in higher risk funds in the short term. It was agreed that the
issue should be raised with RMPP, along with the possibility of
investing in diversified growth funds as an interim measure.
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PC 14/6 COMMITTEE TERMS OF REFERENCE
The Committee endorsed the Terms of Reference as circulated and
agreed to recommend them to the Board for adoption.
PC 14/7 STATEMENT OF INVESTMENT PRINCIPLES
The Committee considered the draft Statement of Investment Principles,
which was being reviewed by RMPP. It was noted that there was no change
in strategy or risk, but that there was a “tidy up” of the Project Robin
wording, and consolidation of asset-class classifications. TG advised that
he was happy to give the level of freedom in the asset-class classifications
to ease RMPP'’s strategic rebalancing procedure.
The Committee endorsed the Statement of Investment Principles.
PC14/8 REVIEW OF INVESTMENT POSITION
The Committee considered Aon Hewitt's overview of the Investment
Report.
TG voiced his on-going frustration at RMPP’s slow implementation of the
Section’s agreed investment strategy. It was noted that the Section
remained significantly underweight to risk assets and would underperform if
risk assets continue to outperform
PC 14/9 INVESTMENTS
lan McKnight of RMPTL joined the meeting. He tabled a paper from
Mercers covering the periods 31 March 2012-31 October 2013, and 31
July-31 October 2013. These showed the Section’s surplus position to
have deteriorated by around £30million, despite material pension
contributions, with accruing liabilities being the single largest source of the
change in the surplus position.
IM presented the Quarterly Investment Report as at 31 December 2013
together with an Investment Strategy Update, which was considered by the
Committee. The Section’s assets returned 0.2% in Q4, outperforming the
liability benchmark by 0.9% and the strategic benchmark by 0.8%. Of this,
the return seeking assets delivered 0.9% and the liability hedging assets
0.6%. Over the full 2013 year the return was -2.7%, an outperformance of
4.0% versus the liability benchmark and 3.6% versus the strategic
benchmark.
The performance of individual asset managers within the underlying asset
classes was reviewed. In aggregate, return-seeking assets in Q4
outperformed their composite benchmark by 2.8%, with every asset class
except Absolute Return Strategies posting an outperformance. Private
Market assets and Property also showed an underperformance. However
allocations to these had yet to be filled. In terms of absolute contribution to
the overall Section return for the year as a whole, the biggest contributions
had been Developed Market Equities and Investment Grade Credit but
negative contributions from Liability Hedging assets had offset this.
IM advised that the Post Office Section benefitted from the economies of
scale with regards to the fees paid to the individual managers by being part
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of the RMPP.
The Committee was advised that the Dodge & Cox mandate had started
strongly. It had been funded in September 2013 and in its first full quarter
had outperformed its benchmark by 2.8% with strong returns from its
rotational value style which had favoured the IT sector. Its style
complemented that of Walter Scott which had underperformed its
benchmark by 1.5% and had moved to amber status. IM advised that the
annual base fee for Walter Scott shown in the report was the total fee for
RMPP and that the Post Office Section paid a flat fee of around 12.5 bps
plus a performance fee.
It was noted that the Lazard Emerging Market Equity mandate was local
currency and unhedged.
IM reported that the ISC was still in the process of considering whether to
amend the Absolute Return Strategies’ USD benchmark back to Sterling. It
was noted that if this was approved, RMPP would look to take it forward
with Black Rock over the coming months. TG advised that a tactical delay
of 12-18 months would be sensible, as currently the fair value of the US
Dollar was currently low, and the impact of a hedge at 1.50 would be
ACTION: VH around £1m. VH undertook to send IM a copy of a paper on US hedging
from Calpers. IM undertook to advise the Committee of the ISC’s decision
ACTION: IM on hedging.
IM advised that the liability hedge was being extended to 4 years of future
accrual as agreed. A 3.5 year hedge would be in place by March 2014, and
the four year hedge by September 2014.
The Committee expressed its on-going dissatisfaction with the speed of
implementation of the key transitions required in order to take the Section
to its target asset allocations. It encouraged RMPTL to make investments
to Private Market assets and Property as soon as possible. It was
suggested that a mainstream diversified growth fund with returns of LIBOR
+4-5% should be targeted for the as yet uninvested growth asset short-term
cash holding, rather than Loomis Sayles at Gilts +1%. However, IM went on
to explain that the interest rate exposure of the credit portfolio was hedged
out and additionally that the holding was smaller than the Committee had
feared as a result of the very recent funding of Gramercy and the
temporary housing with Beachpoint of the private debt funds waiting to be
drawn down with Oaktree.
IM undertook to circulate the current position to TG for review to ensure
that it would satisfy the Committee in terms of meeting the Section’s
expected returns and risk budget.
ACTION: IM/TG
It was further noted that the revised Statement of Investment Principles
would allow the Post Office Plan to participate fully in private equity funds,
and that a proposal would be submitted to the June ISC for investment in
specific funds. IM advised that that this would bring the Section into line
with its risk profile. It was reported that the “Alternative Investments” listed
in the SIP included absolute return funds, private debt, and, if agreed,
unstructured debt.
It was noted that VH would be meeting with Joanna Matthews on 25 March
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and she would re-iterate the negative impact on the Section’s surplus of the
slow implementation of the agreed asset allocation strategy.
PC 14/10 DEFINED CONTRIBUTION PENSION ARRANGEMENTS
The Committee received a report on Defined Contribution Pension
Arrangements, outlining proposed changes to the contribution rates for
members, and the possibility of separating from the Royal Mail Defined
Contribution Plan (“RMDCP”) and creating a new Post Office Defined
Contribution pension arrangement.
The Committee:-
(i) Noted the update on the Royal Mail position on pension
contributions;
(ii) Agreed to recommend to the Post Office Board to remove the lower
3% contribution tier and replace it with a 4% employee, 7%
employer contribution rate and to add an upper contribution rate of
6% employee, 9% employer; and
(iii) Agreed to recommend to the Post Office Board to separate from the
Royal Mail Defined Contribution Plan with effect from 1 April 2015
and to arrange for a new Post Office pension arrangement to be put
in place from that date; and
(iv) Endorsed the need to investigate urgently the types Defined
Contribution pensions arrangements available on the market
HS advised that he would be supported in the process by Procurement to
select a new pension provider and that external professional advice will also
be sought. It was noted that as both AON Hewitt and Towers Watson were
service providers listed in the Master Services Agreement, they would be
asked to provide indicative fees for providing professional advice on this
matter. It was noted that the selection of an adviser would be progressed
in the spirit of public procurement.
PC 14/11 INITIAL REVIEW OF ASSUMPTIONS FOR REPORT & ACCOUNTS
DISCLOSURES
The Committee noted the approach to be taken with regard to the
assumptions for Report & Accounts Disclosures.
PC 14/12 PROFESSIONAL FEES UPDATE
The Committee noted the professional fees incurred to date for the
Scheme, and discussed the proposed fees for the next six months.
It was agreed that the fees proposed in the paper be approved, and that
future work should be on a fixed fee basis.
PC 14/13 ANY OTHER BUSINESS
(a) HS reported that as REMSEP had a Trustee position available, Post
Office would ask RMPP to consider a Post Office representative for the
position.
(b) HS advised that Post Office would participate in the pension’s
educational programme that the RMPP and RMDCP Trustee Boards
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were preparing for participants.
ACTION: VH
(c) VH undertook to circulate a note of her meeting with Joanna Matthews.
PC14/14 NEXT MEETING
It was noted that the next Pensions Committee meeting would be held on
25 June 2014 at 148 Old Street starting at 10am.
PC 14/15 CLOSE
There being no further business, the meeting was declared closed.
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Robin Term
Pensions Committee — Robin Summary for Post Office Limited - Strictly Confidential and not for circulation
Description
Rationale
Effect/Details
Cost and benefit impact
Pensionable salary s preserved as
‘at 31° March, 2013 and re-valued
in line with RPI thereafter, with a
‘cap of 5%; starts 1 April 2014
Any pensionable allowances are
added to this figure as they are
now
Bonuses for managers flow
through into CSDB Salary as they
do now
Alate change to the strategy
following consultation is that within
‘existing pay grades, an increase
due to a promotion which results
from a change of role or a job-
speeific Increment will not be
considered as a promotion for
pension purposes but an
Increment or progression. The
resulting pay increase will
therefore flow through to both Final
Salary Pensionable Pay and
Career Salary Defined Benefit
Pensionable Pay. Otherwise
promotions on an inter-band basis
‘only flow through into CSDB.
Penslonable Pay and not Final
Salary Pensionable Pay
Pensionable pay
generally ceases to
be linked to final
salary for pre-2008
service with effect
from 1 April 2014
Existing link to CSDB
(the career average
accrual since 2008)
blocks continues —
based upon actual
pay but re-valued at
RPI up to 5%
thereafter with effect
from 1 April 2014
+ The stratagy frees up the “opening
funding balance" attributable to the
Pensions Solution based upon the
pre-unding of the scheme at RPI +
1% agreed with Government
‘+ Controls one of the principal defined
benefit pension risks for Post Office
in the future in respect of the
existing final salary link risk
© Takes advantage of the unique
funding position of RMPP post-
Pensions Solution.
Creates @ surplus in the POL Fund (the
Post Office Section of RMPP) of around
£170 million
This is the key outcome for Robin ~
permits Post Office to continue to
fund the employer contributions at
17.1% of pensionable salary rather
than the revised rate of 30% based
upon recent market conditions
reflected in the agreed 2012
valuation
Keeps pension costs manageable in
the medium to long term (8 -13 years)
‘Average approximate annual pension costs 2013/14 to 2017/18,
assuming 5% member turnover and 17.1% contribution rate are
£21.4 million
Average approximate annual pension costs assuming the employer
contribution rate increases to 30.0% (without Robin) are £37
million
Therefore the annual average “saving” if Robin is introduced is
£16.6 million
Towers Watson estimated in 2012 that the “reserve” based upon
Robin would last for between 8 years and indefinitely if the current
contribution rate of 17.1% is maintained. This is sensitive to
assumptions. For example, assuming an investment retum of gits +
0.75% and turnover of 5% per annum (both conservative) then the
reserve would last for 7 years on a “solvency’ basis (were the basis
similar to winding up or insurance costs extemally) or 13 years on
an “on-going” basis on the Retained Asset basis used at
segregation.
The late change to the strategy will, depending upon the number of
relevant movements within bands, impact the rate at which surplus
{s used up. TW estimated that on a worst-case scenario, this would
be some two years eattier.
It should be noted that these are cash cost impacts and not
necessarily the same as the accounting impact
Note that costs without Robin could have been higher as the
strategy for investment allocation may have been different. Itis likely
that the Trustee would have required a more conservative approach
which may have reduced the estimated rate of retum and increased
costs further
Employee Contribution Rate to
remain at 6%
The rate of employee
contribution based
upon CSDB salary
plus any allowances
* Previous communications have
stated that these will ‘never’
increase
Contibutions will be based upon the
CSDB salary as is the case now
DG Plan Contributions
Employer and
employee
contribution rates
under discussion
‘The proposal is to
Increase these by 1%
for each
+The existing levels are low
compared to other schemes
+ Seen as part of the “pensions
package’ stil being negotiated
Improves Post Office DC pension
offering
Likely to be effective from 1 June 2014
to permit system changes and possible
consultation
Each 1% of additional employer contributions would cost
approximately £300,000 per annum
It should also be noted that when auto-enrolment is necessary for
Post Office, costs would be likely to rise then. The latest date for AE
is May, 2017
Ken Potter
December 2013
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POST OFFICE LIMITED BOARD
Status Report
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No. I REFERENCE I ACTION BY WHOM STATUS
ta January 2014 I Ensure that there is common understanding of the I CFO On- -going
POLB 14/5(f) I position and the precise definition of ‘break even’
between the Business and BIS via the final budget
presentation.
1b I March 2014 Present on options to cover the gap in the strategic I CFO To May Board
POLB plan (Supply Chain) at the May Board
14/33(c)
te I March 2014 Model the scenario where revenue remained flat next I CFO An alternative lower revenue scenario will be covered in
POLB year, to show the cost savings which would be the Financial Performance Update at the April Board
14/33(d) required to hit the strategic plan profit target. meeting.
1d I March 2014 Produce some analysis to further understand the I CFO Statutory Quality of Earnings will be presented to the 15
POLB underlying quality of earnings. May ARC meeting. Management definition and 13/14
14/38(b) outturn will be covered in the Financial Performance
Update at the April Board meeting.
te I March 2014 Explain the reduction in customer sessions in the I CFO An explanation has been included in paragraph 3.2 of
POLB Mains Branches that have been open for 12-24 the Network & Sales update. We continue to review the
14/38(d) months. NT scorecard, in particular the 6-12 mth and 12-24 mth
groupings, to provide the most appropriate performance
metrics.
1f I March 2014 Include an additional page of narrative to explain the I CFO This will be incorporated for 2014/15 performance
POLB remedial actions being taken by the Business and the reporting.
14/38(e) CFO's views and any concerns on performance to be
included in the financial performance update from next
month.
ase nn oo
2a I February Further paper on _ Data Centre procurement to be Chris Aujard To come to May ARC
2014 brought to the Board after the lessons learned have
Status Report at 24 April 2014 Alwen Lyons Page 1 of 3
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POLB 14/28 been considered by the ARC.
(a)
2b I March 2014 Provide a paper to explain the work underway to I Martin George Project lvy paper enclosed.
POLB increase access points.
14/35(g)
2c I March 2014 Consider what it would take to deliver the results more I Martin George Update attached.
POLB quickly and achieve the targets in the strategic plan for
14/44(e) Project Wave.
2d I March 2014 Inform the Board when a single view of the customer I Martin George
POLB was likely to be available.
14/44(f)
2e I March 2014 A paper on ‘colleague offers’ to come to the next I Martin Noting paper to May Board.
POLB Board meeting. George/Neil
14/44(g) Hayward
3. Project Sparrow & Prosecuti 4 _ ul
3a I July 2013 Review of Second Sight report to be provided to ARC I Belinda To May ARC
POLB explaining how we awarded and managed the contract I Crow/Alwen
13/51(g) and include an internal ‘lessons learned’ review for Lyons
September Project Sparrow.
2013
POLB
13/95(b)
3b I March 2014 Try to extend the time period restricting Second Sight I Chris Aujard In progress
POLB from acting against the Company beyond a 12 month
14/32(n) period.
3c I March 2014 Prepare a one page lessons learned covering 3 or 4 I Belinda Crowe In progress
POLB areas by the next Board meeting.
14/32(0)
ae 4, Miscellaneous ce ae i - ae : : ce o a
4a I February An industry expert to be invited to a future Board to I Company To be included in a future agenda.
2014 present on Cyber Security. Secretary
POLB 14/28
(b)
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4b I March 2014 Provide an update for the next available ARC on the I CFO A recommendation to review general insurance,
POLB CFO's proposal for PI insurance including PI, is being taken to ARC on 15 May.
14/43(b)
4c I March 2014 Discuss proposed draft Pensions Committee terms of I Virginia Holmes/ I Currently under review.
POLB reference at the next Pensions Committee meeting. Company
14/48(a) Secretary
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POST OFFICE LTD BOARD
Wave Programme - April 2014
Reference: POLB 14/44 — Action (e)
1. Purpose
The purpose of this paper is to:
1.1. Respond to the action arising from the Post Office Board held on 26th March
2014 following the Wave Programme update.
1.2. The action; “The Board supported the product but asked the Business to consider
what it would take to deliver the results more quickly and achieve the targets in
the strategic plan. Martin George agreed that he would like to grow the business
more quickly and understood that this product might be challenged if it was only
delivering the targets in the business case.”
1.3. The short paper outlines an accelerated growth scenario, the associated
prerequisites to deliver the growth and resulting financial metrics.
2. I The key changes between the baseline scenario and the Accelerated Growth
Scenario
2.1. The key driver influencing improvement to net income and contribution numbers
is customer acquisition rates. It is possible that a significant increase in
acquisition can be achieved, but would require an increase in the level of focus
and investment from the Business. The Accelerated Growth Scenario shows a
significant ramp up in acquisition volumes from 2016/17. It is likely that a period
of ‘bedding in’ in 2015/16 will be required when capability is being developed and
credibility established.
2.2. In order to achieve the acquisition rates, the following factors have been
adjusted:
. Increase in annual marketing spend from £2m to £3.5m.
. Increase in branch costs (Agency commission, support costs, training etc).
These costs now reflect 19% of net income compared to 11% (£12m to
£42m).
. A reduction in price by 10%, reflecting a more aggressive approach to
promotions and pricing.
3. Financial Implication
3.1. The financial case demonstrated to the Board on 26th March met all financial
hurdles with the exception of payback. The additional scenario (“Accelerated
Growth Scenario”) shown in this paper also meets all financials hurdles, and
improves payback from 4 years to 3 years. The table below shows the key
financial metrics associated with the original case compared to the new scenario:
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Metric Baseline Scenario Accelerated Growth
Scenario
Customer Base at 2019/20 I 390,000 895,600
Funding requirement £6.6m £6.6m
2014/15
Cumulative contribution to I £48.7 £93.4m
2019/20
Contribution in 2019/20 £23m £40.9m
NPV to 2019/20 £25m £57m
Payback Nearly 4 years 3 Years
IRR 67% 100%
PV:1 3.8 8.6
3.2. The resulting P&L for the baseline scenario, the accelerated growth scenario and
the Strategic Plan is shown below. Over the period to 2019/20, the Accelerated
Growth scenario meets the Net Income targets in the Strategic Plan. The profile
of achieving the Net Income target is slightly back end loaded and reflects the
issue that Post Office is later to market by a year than is reflected in the Strategic
Plan. Even when growth is accelerated in the early years, it is not quite sufficient
to completely recover the early years Net Income numbers outlined in the
Strategic Plan which contains income from a retained base of customers.
£m 2014/15 I 2015/16 I 2016/17 I 2017/18 I 2018/19 I 2019/20 I Total
Accelerated Growth
Scenario:
Net Income 0.0 5.6 27.0 48.6 63.3 78.5 I 223.0
Contribution -0.9 6.1 6.6 21.4 30.5 40.9 93.4
Baseline Scenario:
Net Income 0.2 24 12.8 22.9 30.8 40.7 I 109.8
Contribution -0.7 -3.9 3.3 11.0 15.9 23.1 48.8
Strategic Plan*
Net Income 0.0 24.7 39.1 47.7 51.1 51.1 I 213.7
Accelerated Growth
Scenario vs Strategic
Plan 0.0 -19.1 -12.1 0.9 12.2 27.4 9.3
* The Strategic Plan does not break down contribution at an individual product level
4. Conclusion
41.
4.2.
In order to deliver the Strategic Plan targets, a significant increase in customer
acquisition is required. These would be achievable where additional investment is
made available in terms of marketing and branch support and focus. Additionally,
a more aggressive approach to pricing and promotions would be required.
This Accelerated Growth Scenario will now be evaluated with the Business and a
recommendation provided to the ExCo in 4 weeks time.
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POST OFFICE LTD BOARD
Separation Programme Update April 2014
1. Purpose
The purpose of this paper is to:
1.1. Update the Board on the progress of the Separation Programme, including the status
of key projects;
1.2. Update the Board on the outputs of the March Master Services Agreement (MSA)
Board meeting.
2. Background
2.1. Post Office is separating from Royal Mail Group (RMG), as per the terms and
timetable specified in the MSA. Establishing the Post Office as an independent
commercially viable entity is a key premise of the 2020 Vision and the Separation
Programme supports this.
2.2. The scope of the programme includes separating 131 business services and 248 IT
systems. The Separation activity ranges from low risk, minimal intervention to larger
projects with high impact and requiring significant IT intervention.
2.3. It was agreed in Quarter 4 2013 that a strategic review of the IT orientated
workstreams would be undertaken to ensure that the approaches being followed for
IT separation were being conducted in the most effective manner and were in the
best interests of both organisations. The review also sought to mitigate the risks
arising due to the Royal Mail Information Technology Service Transformation (ITST)
Programme and the Post Office IT Tower Procurement Programme running
concurrently.
2.4. March 31° 2014 was the target date set by the MSA for the Separation of Business
Services with IT services targeting the end of September. As a result of the strategic
review, some of the IT dates have moved beyond the September target. This
approach has been endorsed by the MSA Board.
3. Current Situation
3.1. Of 248 systems and services to Separate, 109 have been completed and a further 7
will close during April. The remaining Separation activity will be completed within the
revised timelines of the MSA.
3.2. As of the 31° March 2014, we have successfully separated a number of business
services, including: Fleet, Fuel, Property, Long Term Storage, Freedom of
Information, and Company Cars. Despite the complexity and the scale of the task,
the implementation of these revised services was achieved with minimal impact to the
business.
3.3. The cessation of the Contact Centre service was completed on the 28th of February,
with the successful transfer of 73 staff to Post Office. The remaining 39 staff were re-
deployed within Royal Mail. The outcome of this work included the consolidation of
three disparate call centres into one, serving both our internal and external customer
base.
“Separation Programme Update Lesley Sewell Page 1 of 3
April 2014” April 2014
POL-BSFF-0234189_0119
3.4.
3.5.
3.6.
3.7.
3.8.
41.
4.2.
4.3.
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An extension to the Facilities Management service has been agreed and signed off
by the MSA Board. This provides continuity of service while allowing us to go to
market for a new service provider. The Post Office has now issued an Invitation to
Tender to the market.
Negotiations are continuing between Post Office and Royal Mail on Official Mail and
services will continue at no extra cost until these conclude. The desired outcome for
both parties is a continuation of service, subject to acceptable commercial terms.
Should this not be possible Post Office will go to market for a replacement provider.
The IT strategic review completed in November 2013 concluded that there was
insufficient time to complete the IT Networks and EUC / Microsoft Domain separation
within the original MSA cessation date. The revised timelines have a negligible impact
from a cost perspective; more closely matches our risk appetite and is aligned to the
Royal Mail ITST programme and the Post Office Tower procurement programme.
Another recommendation of the strategic review was to extend the eBusiness project
to ensure strategic alignment with the Common Digital Platform programme. This
also provides a seamless customer experience and avoids unnecessary costs.
The HR system is scheduled to move to a Post Office only Unix' platform in May
2014, this constitutes physical Separation. We are reviewing the opportunity of a
direct contract award, for hosting, with CSC which will complete the remaining
commercial Separation.
Key Risks/Mitigations
There is a risk that the Royal Mail Information Technology Service Transformation
Programme (ITST) takes priority for Royal Mail over Separation. This may result in
longer turnaround times for requests from Post Office to Royal Mail, resource
constraints and a delay to the Separation programme overall. The Separation
programme team is fully integrated with the ITST programme and has identified
contingencies, should they be needed.
As a consequence of the early Royal Mail privatisation, the cost of separating
licenses is greater than the budget provisioned. Proactive engagement with suppliers
is taking place, with an approach of promoting the transfer of licenses. The cost
exposure has been largely mitigated by optimising the use of resources and funding
in other areas of the programme. The risk extends to reputational damage through
contravening licensing agreements; discussions are ongoing with Royal Mail to
resolve matters in line with Post Office risk appetite.
An existing Royal Mail data security and liability risk has been identified during the
work to setup the Post Office ATOS SI/SD service. It relates to Post Office non-
permanent employees accessing Royal Mail controlled IT systems and data. A joint
Post Office and Royal Mail team has been working together to mitigate this risk
exposure. This has resulted in gaining aligned legal interpretations of elements of
the MSA, and a joint plan being produced led by the respective Information Security
teams to further embed IT and business data controls.
"UNIX is an industry standard IT operating system that supports the running of a number of Post Office
applications.
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April 2014” April 2014
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5. Finance
5.1. At the end of 2013/14, the programme spent £20.2m; within its approved spend of
£21.8m, with some activities moving to the next financial year following the strategic
review.
5.2. The programme budget for 2014/15 is £21.3m.
5.3. As services have moved away from Royal Mail, the Inter Business Charge has been
re-negotiated and significantly reduced (from £11.5m to £5.7m in FY 14/15). This
reduction is offset by direct contracts with external suppliers and increases to staff
costs as services are transferred. During FY 2014/15 we will seek to further reduce
the Inter Business Charge where possible.
6. Next Steps
6.1. Implement new governance structure across the Separation Programme to take into
account the progress to date, and the predominantly IT nature of the remaining
workstreams.
6.2. Conclude negotiations with Royal Mail in respect of the provision of Official Mail.
6.3. We are currently aligned with both the Post Office and Royal Mail Tower
Procurement programmes. Maintaining this engagement is vital to the on-going
success of Separation and we will continue to focus on this.
7. Request
7.1. The Board is asked to note the update and support the actions set out above.
Lesley Sewell
April 2014
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POST OFFICE LTD BOARD
Head Office Relocation
1. Purpose
1.1 The Post Office Board is asked to note plans to take advantage of a lease break on 148
Old Street in May 2105 and relocate to Finsbury Dials, Finsbury Street, London EC2Y
9AQ to realise savings of £1.9m pa.
2. Background
2.1 Post Office Ltd (POL) holds a 10 year full repairing and insuring lease on 148 Old St
which expires on 19 May 2020. POL can break the lease on 19 May 2015 by serving
notice on the Landlord by the 18 November 2014.
2.2 Currently, POL occupy 73,582 sq ft of the 97,807 sq ft within 148 Old St. Royal Mail
Group occupy 13,315 sq ft by way of an under-lease and there is 10,910 sq ft of
ancillary space comprising Romec facilities, gym, coffee bar and storage.
2.3 Rents at 148 Old St are £22.19 per sq ft rising to £26.99 per sq ft from May 2015 with
the total rent payable by POL amounting to £2.17m pa. Rent receivable from Royal Mail
is £0.36m pa resulting in net rents of £1.8m pa.
2.4 The current building desk numbers stood at circa 900 in January 2014 with an average
occupancy rate of 80%.
2.5 The heating and ventilation systems in 148 Old St are old and whilst functioning do not
cope well with the extremes of cold and warm weather. There is a risk of catastrophic
failure of the system due to both age and uniqueness of design. Under the terms of the
lease POL would be required to replace the systems at a cost of c£5m excluding the
renting of temporary accommodation to cater for the significant disruption to the office
environments whilst work is undertaken.
2.6 Investigations into the options for relocating head office were undertaken including
moving outside of London and maintaining a small head office. The potential cost of
redundancy and compensation related to excess travel expenses were felt to render
this option unaffordable.
2.7 The search was therefore focused on a securing a new London based head office
against the following principles:
e Minimise the people related costs relating to the move.
¢ Ensure flexibility in the lease to accommodate fluctuations in the numbers of
head office staff.
e Minimise property costs
e Ensure the new location adequately reflected the brand
3. Finsbury Dials
3.
BNP Paribas conducted an extensive site search on behalf of POL. From the list of
potential properties it was determined that securing a lease of three floors on the
building at Finsbury Dials to accommodate c480 desks and touchdown facilities for 70
people would suffice.
3.2 The office accommodation at the new location would be supplemented by the utilisation
of space above Crown offices in Clapham and Camden Crown offices to house circa
130 desks between them.
3.3 Desk space in this new configuration has therefore been reduced by 290 desks to
reflect the anticipated reduction in headcount as part of the Business Transformation
Programme.
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3.4 Finsbury Dials is located less than a 10 minute walk from 148 Old Street on Finsbury
Street. It is close to Moorgate Underground and the mainline railway station. The
property benefits from good open plan floor plates and natural light.
3.5 The property is currently leased and fully occupied by JP Morgan. They will begin
vacating the whole building in May 2014 and Post Office Ltd will take a sub-let of
54,000 sq ft across the Ground, First and Second floors along with 2,000 sq ft of
basement storage. Floors three through to six, basement and sub-basement are
available to let to other occupier(s).
3.6 Post Office Ltd will take a separate lease per floor, which gives it the flexibility to sub-let
to another tenant on a floor by floor basis if necessary in the future. The lease term will
be for the remainder of JPMorgan’s term of occupation until May 2023. There are no
break clauses included within the leases.
3.7 POL will be part of a multi-tenanted property and as such will share a central reception
point. There will be a dedicated Post Office reception within our demise on the Ground
floor. The landlord will be responsible for maintenance of common services such as the
air conditioning, lifts, common toilets, building fabric, cleaning of the common parts,
windows, etc.
3.
@
As part of JPMorgan’s vacation of the building they will be removing all of their furniture
and moveable fittings. They will also upgrade the air-conditioning, lifts, toilets and
common areas and leave all the services under the raised floor including structured
cabling and floor outlets for both power and data.
4. Financial highlights
4.
The rent of the property is £22.57 per sq ft which compares favourably with the £26.99
POL will pay from May 2015.
4.2 The on-going annualised cost savings associated with the relocation to Finsbury Dials
amount to £1.9m when compared to 148 Old St.
5. Timescales
5.
The plan is to finalise the lease and exchange contracts at the end of April 2014. We
are proceeding with the detailed design and implementation plan prior to that date in
order to obtain landlord’s consent for proposed works. These will be run in conjunction
with negotiations with our existing landlord at 148 Old Street regarding the physical
works required to return the property on the break date of 19 May 2015. Occupation of
the building is planned to begin in January 2015 and complete by March 2015.
6. Options
The following options were considered:
a) Do Nothing until lease expiry in 2020 — This option is viable if POL is prepared to
invest c£5m to bring the building up to acceptable accommodation standards
especially with regard to the replacement of heating and ventilation systems. We will
also have to either sub-let the floors that we will not occupy or incur the full uplifted
rent from May 2015.
b) Vacate 148 Old Street and relocate the Headquarters to Finsbury Dials and use
existing space above Crown Offices and the vacant space above Clapham
Common Crown Office.- Preferred
c) Relocate all staff above Crown offices in the London area. There is insufficient
space to accommodate the reduced number of staff in Crown offices without
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including space in Croydon, Dartford, Ferndale Road, Stockwell, Kennington Park,
Sutton and Poplar. This would involve the dispersal of small teams across greater
London into premises carrying retail rather than office rents and with significant
planning consent issues and capex costs to render them suitable for office
accommodation. This option is not recommended.
d) Relocate POL’s Head Office operation outside of central London — This was
discounted due to the high staff relocation costs and the potential to lose key
members of staff due to the new geographic location.
7. Benefits of the preferred option
The preferred option:
e Avoids replacing heating and ventilation equipment in 148 at a cost of circa £5m and
the resultant disruption to the POL staff working within the building;
« Avoids the potential for the space currently occupied by Royal Mail Group space to
remain vacant at a cost to POL of £0.4m per annum if Royal Mail serve their break
notice as expected;
e Relocates the headquarters building within a 10 minute walk and removes any staff
relocation/excess travel expenses costs;
e Utilises surplus office accommodation above Crown Offices, thereby reducing size and
cost of new headquarters and defrays some of the costs of maintaining Crowns;
e Improves the workplace rather than simply replacing the heating and ventilation
systems;
e Delivers competitive rents of £22.57 per sq ft compared with Old St (£26.99 psf from
May 2015) and cost savings of £1.9m pa.
e Meets the proposed timescale with regard to the lease break on 148 Old Street;
8. Key Risks And Dependencies
8.1 The key risks (with mitigations) relate to:
e Failure to serve the break notice by the 18 November 2014. This date is fixed and
although we can serve notice before this date, we cannot serve notice afterwards.
Robust project management and governance will ensure we give notice in a time;
e Failure to secure the lease on the new premises, which would leave insufficient time to
find another suitable property before having to serve the break notice. We are close to
sign-off on the lease;
« Failure of the business to deliver the necessary headcount reduction which has been
factored into the space being provided by the new properties. We will need to invoke
similar contingencies to those utilised during the London Olympics;
e Failure to serve the pre-emptive notice on Royal Mail by the 17 July 2014. This date is
fixed and although we can serve notice before this date, we cannot serve notice
afterwards. Robust project management and governance will ensure we give notice in a
time.
e Failure to vacate 148 Old Street and occupy the new premises by May 2015. We do not
envisage this risk materialising. However, we can rely on the space in Clapham Crown
being ready for use by then and we are in dialogue with the landlord of 148 Old Street
regarding the potential for flexibility on exit date. We are also re-examining the re-
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instatement of the contingencies that were invoked for the 2012 London Olympics
including: home-working for extended periods; and utilising available desk space in
other admin buildings and Crown branches.
8.2 The major dependencies are:
e Sign off of the design concepts produced by the technical design teams to agreed
timescales.
« Availability of the necessary BT connectivity into the new premises.
e Resource within the appointed suppliers.
9. Request of the Board
e The Board is asked to note the plans to progress with the exit from 148 Old Street and
a move to Finsbury Dials supplemented by space at Camden and Clapham Crown
offices.
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CONFIDENTIAL >
Post Office Ltd
Update on various risk
matters including Bank
of Ireland (UK) plc
capital & liquidity
Nicholas Kennett, Director, Financial Services
26.03.2014
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Post Office Ltd Board
Financial Services Committee - 2" April 2014
Item 5.1
1. Purpose
1.1. The purpose of this paper is to update the Committee for noting on:
1.1.1. Bank of Ireland (UK) plc's (“Bol”) capital and liquidity position against its regulatory and
Eagle contract requirements;
1.1.2. Mortgage Market Review update;
1.1.3. FCA “deep dive” on mortgages in Post Office
1.1.4. PRA visit to Post Office branch
1.1.5. Video Mystery Shopping
1.1.6. FCA market study on general insurance “add ons”
2. Bank of Ireland (UK) - Capital and Liquidity position
2.1. Under the Financial Services Joint Venture Agreement (“FSJVA”), Bol must attest that it is
meeting the capital and liquidity levels set out in the agreement. This is part of the early warning
system that would enable the Post Office to take action within the termination provisions, should
this become necessary.
2.2. Bol has confirmed that it continues to meet its obligations during 2013, providing certificates on
27th March, 3rd June, 23rd August, 26th November 2013 and most recently on 7th March 2014
that, on each occasion:
2.2.1. Bol's Core Tier 1 Capital Ratio exceeded the amount required in the FSJVA and has
increased during 2013;
2.2.2. Bol was holding a surplus over its regulatory liquidity requirements;
2.2.3. Bol is meeting the Capital Planning Buffer as set by the regulator.
2.3. Post Office is of the view that Bol remains well capitalised with surplus liquidity.
2.4. _ The public rating agencies’ ratings of Bol's parent (BoIG) are stable, but remain a grade below
“investment-grade, viz:
2.4.1. Moody's - B1 with stable outlook 30" January 2014) down from Ba’ to bring it into line
with BolG, following a change in the BolG baseline credit assessment;
2.4.2. S&P - BB+ stable outlook (July 2013) - revised up from negative.
2.5. BolG's financial position continues to improve. The Preliminary Statement for the year ended a
December was published on 3° March 2014. The key points were:
2.5.1. Financial results substantially improved - almost €1 billion improvement in underlying
performance.
2.5.2. Safely managed Eligible Liabilities Guarantee (ELG) Scheme expiry.
2.5.3. Reimbursement of Irish Government investments in 2009 Preference Stock and 2011
Contingent Capital.
2.5.4. Net interest margin of greater than 2% achieved, despite the low interest rate
environment.
2.5.5. Asset quality improved; defaulted loans reduced by €1.2 billion since June 2013.
2.5.6. Regulatory Balance Sheet Assessment / Asset Quality Review addressed.
2.5.7. Raised over €3 billion during 2013 through capital markets, showing that it has access to
these markets on a consistent basis
2.5.8. Significant investment in infrastructure including Single European Payments Area (SEPA)
compliance and new branch operating models.
STRICTLY CONFIDENTIAL 71
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Item 5.1
3. MMR
3.1. Mortgage advice went live in branches on li February. Non-advised in-branch mortgage sales
will cease with effect from 1° April 2014.
3.1.1... There are currently no significant negative compliance indicators in relation to in-branch
mortgage sales.
3.2. Post Office has established a Quality Assurance Team (QAT) with Bol to ensure the advice given
is appropriate. The QAT has confirmed that the quality of advised cases from branches has been
good, with a ‘reassessed’ pass-rate of 98% (based on 64 cases). Prior to reassessment and
remedial action, the pass rate was 66%. Only one case was assessed as not meeting the
suitability requirements.
3.3. We are currently undertaking a post-implementation review of the MMR, to ensure that all
relevant regulatory requirements have been met.
4. FCA Mortgage Deep Dive
4.1. During Q2 2013/4 the FCA undertook a deep dive on the Post Office Mortgage strategy and
distribution, interviewing Bol and POL employees, including Paula Vennells, Nick Kennett,
Mortgage Specialists and Post Office’s sales supervisory personnel. Feedback was positive with
the only call outs being for us to review the structure of our incentive schemes (please see item 4)
and in particular the impact of red rated Video Mystery Shopping reviews.
5. Prudential Regulation Authority (PRA) visit to City Branch on 13" March 2014
5.1. The PRA requested, as part of its continuous monitoring of Bol UK, a visit to a Post Office branch
to gain a better understanding of how the financial services model works. This was a ‘formal
informal’ visit. The PRA met the FS Area Manager, the Branch manager and the Mortgage
Specialist. The visit was accompanied by Bol Risk and Compliance.
5.2. We await feedback from Bol on the visit.
6. Video Mystery Shopping — Life Insurance “Deep Dive”
6.1. There is a continuous focus on sales compliance and monitoring of the risk of mis-selling.
Together with Bol, we have conducted a deep dive on Life Insurance
6.2. A significant proportion of the Life Insurance mystery shops conducted in January (89%) and
February (69%) 2014 were rated 'red'. The majority of these demonstrated failures to follow the
approved sales process.
6.3. A further ‘deep-dive’ analysis of the Life Insurance mystery shopping reviews conducted in
January 2014 highlighted the following types of problems: (1) no/ineffective status disclosure; (2)
mandatory statements not read/not read in full or paraphrased; (3) mandatory system instructions
not followed; (4) mandatory health and lifestyle questions not asked/not asked in full; (5)
inaccurate or poorly explained product information provided; and (6) specialists used
inconsistent/unstructured sales conversations. However, there was no indication that customers
are systematically being provided with unauthorised advice in relation to life insurance and thus
there is no evidence of significant customer detriment.
6.4. A full analysis, detailing the above findings and the resulting risk of customer detriment, was
considered by the Customer and Conduct Risk Committee in February 2014. As a result we have
developed an action plan, designed to deal with the issues identified by the Life Insurance 'deep-
dive’ and the results of mystery shopping in general.
6.5. The Customer and Conduct Risk Committee has agreed a deadline of the end of September
2014 for there to be significant improvements in the results of mystery shopping.
6.6. I Further mystery shopping in relation to Life Insurance will be performed in May 2014 to assess
whether the actions taken to resolve the issues identified have been effective.
STRICTLY CONFIDENTIAL 2
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Item 5.1
6.7. _ In addition, a further ‘deep dive’ on VMS results will be undertaken in March for Credit Card
shops involving Bank and POL Compliance and POL T&D resource.
7. Consumer Credit Licence
7.1. On 1st April, regulation of Consumer Credit moves from the OFT to the FCA. The FCA is
managing a two year programme to get all companies and individuals needing a consumer credit
licence approved. In order to continue business all such companies are required to apply for an
“interim” consumer credit licence, which Post Office has done.
8. FCA market study — general insurance “add-on” products
8.1. In March 2014, FCA published the provisional findings from its market study into general
insurance add-on products, to which Post Office contributed. The FCA concluded that (a)
competition in the markets for general insurance add-ons is not effective and that this can lead to
poor consumer outcomes; and (b) consumers can be significantly overpaying when they buy
products as add-ons.
8.2. The report also sets out a number of proposed remedies that the FCA believes will strengthen
competition in the markets for add-ons by improving the way decisions are presented to
consumers and the way add-ons are sold, and by putting pressure on firms to improve product
value across both add-on and stand-alone products - these are:
e Imposing a deferred opt-in on add-on sales of Guaranteed Asset Protection (GAP)
e Banning pre-ticked boxes (so-called ‘opt-outs’) for the sale of add-ons
e Requiring firms to publish claims ratios
* Improving the way add-ons are offered through price comparison websites, focusing in
particular on what information consumers can access about add-ons and when this is
introduced.
8.3. The provisional findings are currently under review to understand the impact, if any, on the
distribution of products through the Post Office. Given the products we sell and our distribution
model, it is not expected that there will be a significant risk for Post Office.
9. Competitions & Market Authority - preliminary review of SME Banking and Personal Current
Accounts
9.1. I The new Competition & Markets Authority (CMA) is undertaking a “short programme of works” on
banking to enable it to decide if it going to carry out a full market investigation. On 26" March the
CMA informed Post Office that it is to be included in this preliminary review and will be required to
respond to the information request during April and May 2014.
9.2. Weill liaise with Bol on this as it is the provider of our current account products.
10. Recommendations
10.1. The Sub-Committee is asked to note this update. It will be then passed to the ARC for noting.
Nicholas Kennett
Director, Financial Services
March 2014
STRICTLY CONFIDENTIAL 3
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POST OFFICE LTD BOARD
Financial Services Sub Brand
1. Purpose
1.1. The purpose of this paper and the attached PowerPoint presentation is to update the
Board on progress towards launching a Financial Services sub brand. The details
were presented to the Financial Services Board Committee in April, who requested
that it be shared to the Board. It is tabled for noting.
2. Strategic opportunity
2.1 The 2020 strategy targets a doubling of income from Financial Services, rising from
£310m to £538m. A key concern in developing the strategy has been low levels of
awareness that Post Office offers financial service products, with concomitant low
consideration.
* Post Office research has concluded that consumers’ awareness of Post
Office financial services is only 6 percent, while consideration is 16 percent.
The plan seeks to increase these to 20 and 35 percent respectively by 2020.
2.2 To support this mind-set change the business has been developing a number of
business changes, including:
e Improving the customer experience;
e Increasing the use of data and data analytics to understand customers’
needs better and improve offer targeting;
« Launching a wider range of relevant products and services.
2.3. The final component of building the financial services business is to launch a sub
brand. This should allow Post Office to be seen and recognised as a serious and
committed player in the market, thereby increasing our credibility as a financial
services provider.
2.4 Post Office undertook extensive research on consumers’ views on Post Office
Financial Services. The supporting presentation providing a brief outline of the
decision making process, the new sub brand logos, samples of customer facing
material and branch fascia.
2.5 Separating the FS brand from the main Post Office brand, but retaining a clear link,
will enable Financial Services to portray a “fresh” perspective to the offerings, while
maintaining a link to the strong loyalty and trust elements in the core brand.
3. Roll out Plans
3.1. The brand rollout is planned to commence in September 2014. Limited funding of
£0.5 million is included in the current budget to develop brand logos, marketing
designs, brand guidelines, photography and design of the website. The rollout will be
managed within the Eagle marketing fund:
« Post Office Money branded literature and marketing will be migrated as
business as usual costs, with stocks run down and small leaflet runs to
ensure literature is kept in branches;
« Wherever possible, branch fascia will be changed as part of the Crown
Transformation Programme;
e Web migration will be completed as part of the move to the Common Digital
Platform.
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3.2 Product launches and changes to product designs and propositions will be targeted
for the September launch, to maximize PR for the sub brand.
4. Recommendations
4.1 The Board is asked to note this update and attached presentation.
Nicholas Kennett
Director, Financial Services
April 2014
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In customer research, two clear preferred
names emerged
Popularity with customers
& Money & Bank i
v Brings associations of freshness and modernity ¥ Clear understanding of product range H
v Shows confidence, commitment and credibility v Shows confidence, commitment and credibility 4
Y Allows forgiveness of narrower product range Y Indicates a strong digital and multichannel offering !
Lower expectations for multichannel functionality + Seen as ‘safe’ and ‘boring’ H
* Must work harder to convey full offering i
NB: FCA requirement to use an equal or larger sized reference to Bank of Ireland if using ‘Post Office Bank’
which may cause customer confusion.
kata = Potentially awkward to use
Sounds alien and foreign
@® swiss Bork No clear sense of what's being offered and sounds ‘old fashioned’
it Lacks modernity and progression __—
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Post Office Money Logo’s
I Money
Your money, handled with care
Your money, handled with care
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la
Branch Fasc
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Examples of customer touch points
Current Account
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Next Steps for September Launch
June July August § September
Brand Development
Website Branding
Branch Collateral
Branding
Post Sale Material
Branding
Go Live with Launch
Marketing and PR
K anes
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APRIL 2014
POST OFFICE LIMITED MATTERS — DISPUTE RESOLUTION
PRIVILEGED AND CONFIDENTIAL — CLAIMS OVER £500K OR THOSE OF A SENSITIVE NATURE
NAME 5 UN IPTION STATUS
Horizon claims I POL/RW Belinda Crowe /IA sub-committee of the Board has been I Following the Second Sight Report, on I Bond
Angela van den I formed to oversee the program managing I 27.08.13 POL launched a Mediation I Dickinson
Bogerd these claims, and consider options for the I Scheme aimed at resolving individual
future. The sub-committee had its first
meeting on 10.04.14, and will next meet on
30.04.14.
POL has received various claims from
subpostmasters (SPMs) alleging defects in
the Horizon system and POL's internal
processes.
These allegations were initially made in 5
claims brought through solicitors
Shoosmiths. Similar allegations have been
made by the “Justice for Subpostmasters
Alliance” (JFSA) and advanced through
SPMs’ MPs.
Following discussions with James Arbuthnot
MP and JFSA, in July 2012 independent
investigator Second Sight Support Services
Ltd (Second Sight) was appointed to carry
out a review into these allegations.
On 08.07.13, Second Sight published a
Report finding shortcomings in POL's
internal training and support to SPMs on the
Horizon system, but no systemic problems
with Horizon itself.
complaints made about Horizon. POL
has also been developing and
implementing a Business Improvement
Program to improve the way POL
supports SPMs run their branches.
The Scheme has received 150
applications. These are being progressed
through the Scheme under the direction of
a Working Group chaired by retired Court
of Appeal Judge Sir Anthony Hooper, and
comprising representatives from POL,
Second Sight, and JFSA.
POL has also reviewed its approach to
the criminal prosecutions it brings against
SPMs which use Horizon data and
generally. To ensure POL complies with
the continuing evidential, public interest,
and disclosure standards required for
prosecutions, POL has also undertaken a
review of past criminal prosecutions which
used Horizon data.
To date, no claim has been made against
POL in the civil courts, and no appeal has
been made against any conviction in the
criminal courts, following Second Sight's
Significant Litigation Report
17 April 2014
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Employment
POL/NM
Colin Stretch
Employment
POL/NM
Colin Stretch
Report.
Significant Litigation Report
17 April 2014
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PART (B) — PRINCIPAL CRIMINAL CASES BROUGHT BY POST OFFICE LIMITED
The defendant has applied to vary down to a nominal sum a Confiscation Order
Sub postmaster accused of theft of £78,660.63. originally made for £22k on the ground that the main asset has been
repossessed and there is no other source of funds. This application will be
heard on 25.04.14.
Subpostmaster accused of two offences of theft of £175,260 and A final hearing in the Confiscation Proceedings is scheduled for 06 and
£9,999.43, and two offences of false accounting regarding the same 07.11.14. Any further prosecution evidence must be served by 11.07.14.
sums
Voluntary restitution has been made of the full amount taken. Confiscation
Subpostmaster accused of fraud of £115,172.11 Proceedings have therefore been withdrawn and the case closed.
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Confidential
POST OFFICE LTD BOARD
Health & Safety Report
1. Purpose
The purpose of this paper is to:
a Provide an update on safety performance.
1.2 Outline risk reduction activities.
2. Current Situation
2.1 The majority of accidents 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 severity. The lower frequency types of incident can carry the
potential for very high impact, for example, assaults and road traffic collisions.
2.2 Injury accidents, up to period 11, are showing an 11.9% reduction on the same
period last year ahead of the target reduction of 5%. Accidents involving absence
have decreased significantly from 42 to 30 compared to the same period last year
and are significantly favourable against the 5% reduction target. The “per 1000 staff
in post” comparison indicator, which takes account of head count fluctuation year on
year, is showing a similarly favourable trend for ‘all accidents’ and significantly
favourable for ‘absence’ accidents. (Table 1)
Table 1 All Injury accidents and those resulting in absence (Cumulative)
350
300 al
250
o Ga —+— 2012/13 All
€ 200 _— =~ 2013/14 All
2 150 = 2012/13 Absence
< 2013/14 Absence
100
S I
(e)
P1 P2 P3 P4 P5 P6 P7 P8& P9 P10 P11 P12
Period
2.3. The number of days lost due to accidents is showing a significantly favourable
trend compared to the same period last year and against a target reduction of
5%. This reduction is predominantly due to the absence of major injuries and
indicates that not only is there a favourable trend in the frequency of accidents
there is also a favourable trend in a reduction of the severity of those accidents.
(Table 2 below refers)
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Table 2 Days lost resulting from injury accidents (Cumulative)
—— 2012/13
= 2013/14
P1 P2 P3 P4 PS P6 P7 P8& P9 P10 P11 P12
Period
2.4 The total number of road traffic collisions (RTCs) up to and including period 11
is up 9.8% on last year. This increase is believed to be related to a more robust
approach to the reporting of incidents no matter how minor. The number of
incidents where the Post Office driver is ‘at fault’ is 11.6% up against the same
year to date period as last year although the ratio of ‘fault’ against total number
of incidents remains similar to last year. (Table 3) Road risk reduction
opportunities continue to be the subject of analysis at the Road Risk Forum with
a view to identifying improvement activities in addition to those already in place.
(3.1 below) Reversing incidents are currently becoming a cause for concern
and will be the subject of additional attention. Injuries as a result of road traffic
collisions are extremely infrequent. Road traffic collisions account for less than
3% of the overall number of injury accidents, however they have the potential
for high impact in terms of injury and loss.
Table 3 Road Traffic Collisions (cumulative)
250
200
$ ;
2012/13 All
f 150
S —® 2013/14 All
Fy ~~ 2012/13 ‘at fault’
2 100
= —— 2013/14 ‘at fault’
2 50
0
P1 P2 P3 P4 P5 P6 P7 P8& P9 P10 P11 P12
Period
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25 Robberies on Post Office Cash and Valuables in Transit (CViT) crews are down
from 49 to 40 cumulative for the past 11 months. Physical injuries during
robberies, of which there have been 10, a reduction of 4 on last year, remain
relatively minor in severity. There is a reducing trend in the use of firearms with
5 of the 40 robberies enabled by the presence and/or threat of use of fire arms
and on no occasions were the firearms discharged. Support for those affected
by robberies is provided by trained trauma supporters and support resources
available through the occupational health service provision. Risk reduction
activities are identified at 3.2. (Appendix 1 — Significant Incidents refers)
26 Robberies and attempted robberies on the Post Office network, cumulative to
period 11, are higher than last year — 105 compared to 100 — 58 of the 105
were successful. Injuries sustained during robberies are down from 24 to 20.
Robberies take place predominantly at sub post offices. Supporting activities
have been introduced to continue to mitigate this risk and are identified at 3.2.
(Appendix 1 — Significant Incidents refers).
27 Burglaries and attempted burglaries (which do not involve personal attack) have
increased from 79 to 84 compared to the same 11 month period last year — 23
of the 84 incidents were successful.
3. Act
ies
3.1 Road Risk
Current activities to mitigate road risk are:
«Road risk forum in place to scope and develop road risk reduction initiatives
and activities
e Analysis of effectiveness of face to face training given to top 50 high risk drivers
has indicated that accidents amongst this community have reduced significantly
following the refresher training
Analysis of and interventions for reversing incidents
Eye sight checks for operational drivers are in place
Technical accident reduction interventions on new vehicles e.g. Reversing aids
Analysis and evaluation of data (e.g. risk profiles) to determine further accident
reduction interventions
Introduction of coloured ‘high visibility’ seat belts on new vehicles
Safety team input and concurrence for vehicle specification and changes
Safe driver of the year award
Weekly case conferences to ensure consistent approach to accident
investigation, follow up activity and sharing of best practice
ocee
3.2 Robbery/Burglary Risk
Current activities to mitigate robbery and burglary risk are:
e Active liaison activities with the police and increased police support activity
e Liaison with Met. Police on the increase in gun enabled robberies
«Introduction of new deterrent technologies e.g. DNA taggant — a solution that
contains a unique identifier that is released automatically in the event of a
robbery, spraying those involved and enabling identification of the individuals
involved in the robberies
« Significant reduction in opportunities for duress type robberies linked to the
introduction of single person vehicles
« Increased security support visits to Post Offices in ‘hotspot’ areas
e ‘Darker nights’ security awareness campaign
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Increased use of crime alert communication techniques to Post Offices
Trialling new point of transfer arrangements to reduce exposure
Increased use of surveillance vehicles
A three month ‘Crime stopper’ campaign in the West Midlands has
commenced, aimed at reducing cash in transit robberies
eoee
3.3 Health and Wellbeing
Current activities to enhance wellbeing
« Programme of visits to all Post Office sites to offer and encourage the use of
health check equipment that provides a wide range of indicators on physical
wellbeing
e Plans in place to re-visit all Post Office Crown Branches and Supply Chain sites
within 18 months
Health and wellbeing ‘Team Talk’ modules
Health and wellbeing poster themed campaigns
Online wellbeing monitoring tool to support health check initiative
Roll out of mental health awareness programme
3.4 Safety
The Post Office occupational health and safety management system (OHSMS)
is certified by external auditors to the standards required by British Standard
OHSAS 18001.
3.5 Asbestos Management
Transfer of the ownership of asbestos management following separation has
led to a programme of actions to ensure that up-to-date surveys are available,
defined responsibilities post-split are clear and that an asbestos management
‘action plan’ is in place to ensure that these issues can be managed effectively
and in line with legislation. Professional advice and support continues to be
available via RMG. Legal Services have been engaged to assess the
responsibilities and to ensure arrangements for on-going management of
asbestos are robust.
4. Residual Risks
44 Driving activities have the potential for high impact/loss and therefore remain as
a significant residual risk. However, the actions identified in 3.1 above are
aimed at mitigating that risk and improving performance.
5. Recommendation
The Post Office Ltd Board is asked to:
5.1 Note the overall safety performance
6.2 Note the risk reduction activities.
5.3 Note the residual risks
Neil Hayward
April 2014
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Appendix 1
I Significant Incidents (Period 11)
Crowns and Network
Location Loss Circumstances Physical Injuries Any further details
Fazeley SPSO, 8 Enil Wed 05/02/2014, 19:00. 3 masked males armed with I None
Coleshill Street, crowbars came in to the shop by forcing a side door,
Fazeley, Tamworth, the front door and shutters were down at the front,
Staffs B78 3RA. They demanded the ATM cassettes, Spmr had safe
and himself locked inside the secure area. The
assailants damaged the screen and fled with the
empty reject cartridge. CCTV available
Gosforth MSPO, St I £56,565 I Fri 21/02/2014, 8:17.Female Spmr was followed in to I Injured shoulder and
Nicholas Avenue, the PO when she was opening up by a male, who ligature marks.
Gosforth, threatened and assaulted her, Spmr was tied to a
Newcastle-Upon- door and the safe was accessed. Spmr has been
Tyne. NE3 12AA taken to hospital for checks to injured shoulder and
ligature marks.
St Marys Bay SPSO, I £10,780 Sat 15/02/2014, 9:30.. 2 males in balaclava entered None
1 Teelin Close, via the shop, they forced the secure area door. 1
Marsh, Tonbridge male was armed with a gun and demanded that the
TN29 OSE safe be opened. No injuries but Spmr is very shaken.
CCTV not working
Supply Chain (Cash, delivery and collection)
Rookery Road £26,000 Tue 04/02/2014, 10:30. Crew member was making None
SPSO, 171 Rookery his 2nd trip with stock and cash pouch when a male
Road, Handsworth, assailant grabbed the Ibox, and pushed the crew
Birmingham B21 member to the floor and fled.
9QZ
Fullhurst SPSO, 8 £26,000 Tue 18/02/2014, 14:05. The crew member was None
Fullhurst Avenue, making his delivery when 2 masked offenders
Leicester LE3 1BH. approached him inside the office one offender was
armed with a crowbar. They demanded the box to be
opened. When the crew member stated he could not,
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they snatched the box and made their escape in a
White BMW.
Hardy Lane SPSO, I £26,000 I Fri 21/02/2014, 12:15. Crew member was at the point I None
343 Barlow Moor of transfer when 2 males ran in to the PO and
Road, Manchester snatched the pouch.
M21 7QH.
Glenhills SPSO, 3 £15,000 Wed 26/02/2014, 10:50. Crew member was crossing I None Tracker on the Ibox was
Carvers Corner, the car park to make his delivery, when a car raced in activated and the Ibox has
Grange Drive, Glen and 2 males, one armed with an axe got out. They been located.
Parva, Leicester LE2 demanded the Ibox and the crew member dropped
OPE. the box, 1 of the males picked up the box and the
fled in the car.
Hough Green £6,000 Wed 26/02/2014, 11.55,. The Crew member was at None
SPSO, 285 the rear of the van when he turned around he saw a
Ditchfield Road, White Audi car being driven towards him. The crew
Widnes WA8 8JX. member dropped the Ibox and jumped out of the
way, the car hit the rear of the CViT vehicle. 2 males
got out of the car, one armed with a hammer they
grabbed the Ibox and fled in the car.
Aldi Fallowfield, 143 I £nil Mon 03/02/2014, 9:30. Crew member was taking coin I Shaken and bruised
Lord Street South,
Manchester M14.
TLA.
into Aldi when he was attacked with a sledgehammer
from behind by a male assailant. Crew member was
dragged to his feet and forced into the store assailant
tried to gain access to the Aldi secure area, crew
member took a few blows to his helmet. No access
gained and assailant fled empty handed
Health and Safety
Neil Hayward
April 2014
Page 6 of 6
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Strictly Confidential
POST OFFICE LTD BOARD
Cyber Security and Information Assurance
Purpose
The purpose of this paper is to:
1.1 Update the Board on European, UK and industry Cyber Security initiatives;
1.2 Update the Board on key Information Security and Assurance Group (ISAG)
activities;
1.3 Outline risk reduction activities being implemented at Post Office in Cyber
Security.
European, UK and industry Cyber Security initiatives
241 Data Protection
In March the European Parliament passed a new Data Protection regulation,
aimed at strengthening online data protection rights. The two most significant
points for consideration are;
. Businesses may face fines of up to 5% of their annual global turnover, or
€100 million if greater, if they breach the new proposed data protection
laws;
. A certification scheme may be introduced under which organisations will
be able to certify that their processing of personal data is compliant.
Organisations issued with a valid ‘European Data Protection Seal’ would
face immunity from fines for breaches of the regulation unless the breach
was “intentional” or involved “negligent incompliance”.
The exact nature, and therefore the impact, of the new data protection rules is
still to be clarified. ISAG will keep a watching brief for further developments,
ensuring that Post Office is adequately prepared, should the regulation be
passed into UK law. It should be noted that if this initiative becomes law in UK it
will take at least 2 years to be fully adopted.
22 Computer Emergency Response Team UK (CERT-UK)
The UK Government have this week launched CERT-UK, which will take the lead
in coordinating the management of national cyber security incidents. The
organisation will also act as the UK central contact point for international
counterparts in this field. CERT-UK will work closely with industry, government
and academia to enhance UK cyber resilience. This includes exercising with
government departments and industry partners, sharing information with UK
industry and academic computer emergency response teams and collaborating
with national CERTs around the globe to enhance our understanding of the cyber
threat.
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2.3 ISAG are currently discussing CERT-UK with HMG Security Agencies and how
Post Office may play its part in this important initiative.
3. Activities/Current Situation
3.1 Incident Summary
There are currently 14 active incidents or breaches that ISAG are aware of, out of
those; 8 will be discussed at the next information Security Committee 3" May
2014) and formal closure will be requested, leaving only 6 active incidents. All
incidents are analysed to ensure lessons learnt are incorporated into ‘Business as
Usual’.
At the time of writing this report there are no significant risks to the business
known as a result of the 6 incidents.
3.2 Programme/Project Governance
The ‘Self Service Kiosk’ and ‘Mortgage Brain’ projects that were referred to in the
last ExCo/Board paper have been subject to formal risk acceptance and on-going
review.
This exercise identified gaps in governance and risk management in Post Office,
enabling a review and strengthening of these processes.
3.3 Marketing Due Diligence
Regular engagement continues with Marketing due to the high level of reliance on
processing personal information. An ISAG Service List has been passed to
Marketing to enable them to budget for the ISAG services that need to be
reflected in any commercial undertaking.
3.4 IT Supply Chain Transition to ATOS
Regular meetings continue with the Atos team to define and govern the detailed
Information Security services that they provide to Post Office.
ISAG are participating in the PWC risk review of the Transition Programme.
3.5 Governance Risk and Compliance Tool
The Governance Risk and Compliance Tool called ‘Synergy’ has been procured,
with the target date of mid-April for the start of implementation. This tool will help
align Post Office Information Security certification activities as well as provide
executive and management risk reports across Post Office.
Information Security will be the first to utilise, followed by IT Services with the
potential of Corporate Risk adopting within 2 years. Corporate Risk want to see
the tool working before they commit to ‘Synergy’, they are currently using a tool
called ‘Stratex’ which has a licensing commitment for the next 2 years. All parties
have been part of the decision making process.
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3.6 Business Impact Assessment/Privacy Impact Assessments
A key activity in assessing risk is in understanding where Information Assets
(critical services, systems, information, and people) are located.
The Business Continuity Business Impact Assessments (BIA’s), undertaken by
Corporate Risk, identify key risks and link them to business strategy and
objectives. It has been agreed with Corporate Risk representatives that ISAG will
take the lead and align their BIA’s to the ISAG version, ensuring that both groups
requirements are represented.
3.7 Training and Awareness
The new and combined Information Security and Data Protection e-learning
training is on schedule to be rolled out this month for all corporate staff. This will
also be included in the induction and annual training programmes for network
colleagues.
ISAG are engaged with HR representatives to ensure ISAG policies are reflected
in colleague induction, communications and HR policies.
A new programme is in the planning stage for cross Post Office Information
Security and Data protection awareness and training to provide a focus on
Networks and Sales. The Network and Sales directorate will be fully engaged
before taking this to the next stage.
This activity will be reviewed on an on-going basis and longer term may need a full
time resource. Currently this resource is shared with Security.
4. Request
4.4 The Board is asked to note the update and support the actions set out above.
Julie George/Lesley Sewell
7 April 2014
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POST OFFICE LIMITED BOARD
Sealings 20 March 2014 — 24 April 2014 inclusive
Register of Sealings
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 numbered 1141 to 1159 inclusive in the seal register.
“The Directors resolve that the affixing of the Common Seal of the Company to the documents set out against items numbered 1141 to 1159 inclusive in
the seal register is hereby confirmed.”
Alwen Lyons
Company Secretary
24 April 2014
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Date 5 . Company Number
24/04/2014 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
1141 24/03/2014 14/03/2014 — Lease of 351 and 353 Kings Road, London, SW3 between Alwen Lyons Jean Reynolds
The Mayor and Burgesses of the Royal Borough of
Kensington and Chelsea and POL i i
1142 24/03/2014 24/03/2014 — TR1 relating to land on the east side of Egerton Crescent, Alwen Lyons Jean Reynolds
Withington, Manchester, M20 4PL between POL
(transferor) and Nashud Limited (transferee).
1143 24/03/2014 21/03/2014 I Renewal lease by reference to an existing lease relating to I Alwen Lyons Jean Reynolds
Part Ground Floor, Brazennose House, Brazennose Street,
Manchester, between The Prudential Assurance Company
_ Limited and POL
1144 24/03/2014 24/03/2014 — Reversionary lease relating to ground floor shop 234/236, Alwen Lyons Jean Reynolds
Walworth Road, London, SE17 1JE between Omegacrest
Limited and POL
1145 24/03/2014 24/03/2014 Deed of variation of a lease dated 28 March 2011 between = Alwen Lyons Jean Reynolds
_Omegacrest Limited and POL I
1146 27/03/2014 27/03/2014 Variation Deed to Master Services Agreement between Piero D'Agostino Jean Reynolds
__POL and Royal Mail Group Limited il it I
1147 28/03/2014 28/03/2014 I Deed of Amendment and Resolution to Modify in respect of _Alwen Lyons Harpreet Singh
the Royal Mail Pension Plan between POL, Royal Mail
Group Limited and Royal Mail Pensions Trustees Limited I
1148 28/03/2014 28/03/2014 I Deed of Amendment in respect of the Royal Mail Pension Alwen Lyons Harpreet Singh
Plan between POL and Royal Mail Pensions Trustees
I Limited L
1149 31/03/2014 31/03/2014 — Underlease of Premises at Part of 22 Market Square, Piero D'Agostino Jean Reynolds
Poplar, E14 6AB between POL and Iridium Assets Limited
1150 31/03/2014 31/03/2014 Licence for alterations relating to premises at part of 22 Piero D'Agostino Jean Reynolds
Market Square, Poplar, E14 6AB between POL and Iridium
Assets Limited
1151 01/04/2014 31/03/2014 Licence to occupy the Ground Floor and Basement Gill Catcheside Jean Reynolds
Premises at Upper Street, Islington, London N1 i
1152 02/04/2014 01/04/2014 Licence to Occupy relating to Space at West Block, Future —_ Gill Catcheside Jean Reynolds
Register of Sealings Alwen Lyons Page 2 of 3
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Date 5 . Company Number
24/04/2014 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
Walk, West Bars, Chesterfield, S49 1PF between Post
Office Limited and Atos IT Services UK Limited
1153 02/04/2014 01/04/2014 Collateral Agreement relating to 54-60 High Street & 17 Gill Catcheside Jean Reynolds
Ram Street Wandsworth SW19 4LD
1154 03/04/2014 02/04/2014 Lease of Ground Floor and Basement 67/68 (2/6 Maple Piero D'Agostino Jean Reynolds
Walk) Chelmsley Wood Shopping Centre Solihull West
Midlands between Fordgate Midlands Properties Limited
(in administration), Anthony Cliff Spicer and Henry Anthony
_Shinners of Smith & Williamson LLP and POL.
1155 03/04/2014 02/04/2014 Licence to Assign premises at 27 Bournemouth Road, Piero D'Agostino Jean Reynolds
Poole, Dorest, BH14 OEL between POL, Stephen Graham
Cliff and Arti Hiren Modi
1156 09/04/2014 08/04/2014 Land Registry Transfer Deed in respect of Lands at Piero D'Agostino Jonny Gribben
Greenpark Road between Katherine McAlerney, Bank of
_ Ireland (UK) ple and POL I
1157 09/04/2014 09/04/2014 Land Tranfer Deed in respect of lands and premises at 60 Piero D'Agostino Jonny Gribben
Greenpark Road between Katherine McAlerney, Bank of
Ireland (UK) ple and POL 7
1158 11/04/2014 10/04/2014 TR1 relating to 66 - 70 Lichfield Street Wolverhampton Piero D'Agostino Jean Reynolds
WV1 1AB between POL and Primeco Limited I
1159 22/04/2014 17/04/2014 Licence for access over 250 - 252 Stamford Hill N16 6TW Gill Catcheside Jean Reynolds
between POL and JCDEAUX UK Limited
Register of Sealings Alwen Lyons Page 3 of 3
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