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RMH(11)97#
RMH11/136- 149
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
Minutes of the meeting of the Board of Directors
held at 100 Victoria Embankment, London, on 14 December 2011
Present:
Donald Brydon Chairman
David Currie Non-Executive Director
Moya Greene Group Chief Executive
Mark Higson Managing Director, Operations and Modernisation
Nick Horler Non-Executive Director
Cath Keers Non-Executive Director
Matthew Lester Group Chief Finance Officer
Paul Murray Non-Executive Director
Orna Ni-Chionna Non-Executive Director
Les Owen Non-Executive Director
Paula Vennells Managing Director, Post Office Ltd (for RMH11/136-RMH11/145)
In attendance:
Jon Millidge Company Secretary
Sue Whalley Regulation and Government Affairs Director (for RMH11/141)
Rico Back Chief Executive, GLS
Frank Schinella Deputy Finance Director (for RMH11/142)
Jeff Triggs Interim General Counsel (for RMH11/142 and RMH11/145)
Stuart Simpson Finance Director, Modernisation and Operations (for RMH11/143)
Mark Thomson Olympic & Interim International Director (for RMH11/146)
RMH11/136 MINUTES OF PREVIOUS MEETING - RMH(11)8™
(a) The Board approved the minutes of the meeting held on 26""
October 2011;
(b) the Board noted the minutes of the POL Board dated 10
November 2011. The Board noted that it would be asked to
ACTION: approve the formal agreement on Project Black Eagle and asked
Paula Vennells that a paper on the negotiations be submitted to the Company
Secretary for circulation to the Board;
(c) the Board noted the minutes of the Audit & Risk Committee of 17
November 2011.
RMH11/137 MATTERS ARISING - RMH(11)112
(a) The Board noted the status report.
RMH11/138 CHAIRMAN’S BUSINESS
(a) The Chairman noted that good progress had been made on the
discussions between Royal Mail and Post Office on the separation
issues, and that both sides had reported that all substantive issues
had been resolved. The Board expressed its thanks to those
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(b)
(c)
(d)
(e)
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involved;
the Board noted that Les Owen had indicated his intention to
resign from the Post Office Board because of the potential for
conflicts of interest to emerge. The Chairman of Post Office Ltd
had asked Les Owen to stay until a replacement could be found
and he had agreed subject to being able to manage any conflicts.
The Board also noted that for similar reasons, Paula Vennells’
position on the Royal Mail Holdings Board was currently being
discussed between the two Chairmen. As part of this discussion,
consideration was being given to the process for approving the
Post Office Ltd budget for 2012/13;
the Chairman reminded the Board that his period of appointment
as a director would reach three years in January 2012 and that the
Shareholder Executive had asked him to stay as Chairman for a
further three year period. The Chairman had expressed an
intention to do so and was subject to arrangements with the
Shareholder Executive;
the Chairman had recently met with Dave Ward, Deputy General
Secretary, to share with him the main issues that the Board would
discuss at this meeting and to allow Dave Ward to express views
on the issues which would be relayed to the Board. The Chairman
reported that the meeting had been open and productive, and that
it would be a regular feature and would remain confidential. Dave
Ward had expressed a view that the Company had not made
sufficient progress on innovation and growth, and was keen that
the CWU should have a role on pushing those agendas forwards.
He had also advised that the CWU had started to make progress
on their thinking around the proposed employee share scheme
and it was agreed that this would be given more impetus;
the Chairman advised that progress was continuing on finding the
BPMA a new home. The Board agreed to continuing funding the
BPMA at a level of c£1m pa for a period of 20 years;
the Board noted that an inquiry into dog attacks on our people
would be announced shortly and that a reputable judge had been
identified to lead the inquiry.
REPORTS FROM THE CHAIRS OF BOARD COMMITTEES
Pensions Committee: The Board noted that this item would be
covered later on the agenda;
Audit and Risk Committee. Paul Murray reported that the ARC had
met on two occasions since the last Board meeting. The first
meeting was convened to review the interim financial results, to
note the Going Concern position and to discuss the approach to
the year end audit with Ernst & Young. Because of events, the
ARC had also reviewed an interim report on the investigation into
irregularities in the management of iRed. A fuller report was
expected in February.
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RMH11/140
RMH11/141
(c)
(a)
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The second ARC meeting had reviewed specific projects on IT
resilience and IT security. Both had identified an unsatisfactory
position that was not a surprise to management, and actions had
been identified to provide more comfort in this area. Reports on the
recording of benefits from investment and on revenue protection
also raised concerns for the Committee. The Committee also
considered a number of concerns in Post Office, notably around
the pension overpayment problems, Financial Services compliance
and the SAS70 audit approach for Horizon. There were also
updates on compliance across the group, governance structures
for taxation issues and the implications of weakening banking
covenants;
Remuneration Committee: Orna Ni-Chionna reported on the
meeting of the Remuneration Committee of 26 October where
there had been a discussion around the targetry for the LTIP. The
Committee had noted that whilst the targetry in the plan submitted
to the European Commission was more stretching than the
management had been comfortable with, the threshold under the
scheme was at a lower level than previous schemes so that plan
would be adopted for the purposes of the LTIP.
It was noted that the Committee had also reviewed the
benchmarking work of executive remuneration that had revealed
that whilst there were some issues around remuneration, it was not
a particularly widespread problem at most levels.
HEALTH & SAFETY PERFORMANCE - RMH(11)113
The Board noted the comprehensive Health & Safety Performance
summary dated November 2011. The Board noted with sadness
that two colleagues had lost their lives in separate recent road
accidents. Police reports on both incidents were awaited.
CEO REPORT
Moya Greene advised the Board that the Shareholder Executive
had reported that the case team in Europe had concluded the
official advice that £1090m of aid was allowable in response to the
Government's submission. The Board noted that whilst this advice
would be provided to Commissioner Almunia over the following
week, it was not certain whether he would accept the advice nor
whether he would be able to secure the agreement of other
parties. It was, nonetheless, a major step forward in our state aid
case. Moya Greene explained that the aid covered both the
pension solution (where the case team had concluded that all but
£120m - £150m of the pension deficit was attributable to abnormal
costs) and for the balance sheet restructuring. The Board agreed
that the balance sheet restructuring element was short of its ideal
position but probably sufficient for an investment grade rating. The
Board further noted that there had not been any indication of
required compensatory measures and congratulated the team, and
particularly Sue Whalley, on the progress so far;
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Sue Whalley
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ACTION:
Jon Millidge
ACTION:
Jon Millidge
(b)
(c)
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Moya Greene further reported that Ofcom had published a second
consultation document. The Board noted that a number of
constraints that had previously been applied were proposed to be
removed. The price for this had been that Ofcom had requested
more extensive reporting and this request had been agreed to on
the basis that the information was not to be published. The Board
asked the Company to consider adding a condition that the
information would be provided to Ofcom only if they used it;
the Board was advised that a programme of public relations with
customers was being developed for the following year in order to
help customers understand why the Company is having to take the
action that it is doing.
PENSIONS GOVERNANCE - RMH(11)114
The Chairman advised the Board that in his meeting, Dave Ward
had raised a view that employees looked to the CWU to protect
their pension more than they looked to the Trustee. He had also
expressed a view that colleagues were unaware of the implications
of the pension solution;
Jon Millidge explained that the Trustee Board of RMPP was
scheduled to experience a number of changes of personnel over
the forthcoming months and that this coincided with the
implementation of the pension solution and discussions on future
contribution rates and investment strategy. The Board agreed to
the proposals in the paper to extend the terms of office of
Jonathan Evans, Alwen Lyons, Martin Gafsen and Law Debenture
by varying periods to ensure a more manageable change of
trustee directors in future.
The Board agreed that the current RMSEPP employer nominated
trustees would be replaced at the end of their period of office by
representatives who are not members of the scheme. The Board
noted that there was no suggestion that any of the current trustees
had managed any conflicts inappropriately.
The Board noted that John Duncan had recently been appointed
as a trustee of RMSEPP and would resign from the Pensions
Committee but would attend wherever appropriate;
Jon Millidge reminded the Board that the original pension solution
proposed by Government had left the risk of pensionable pay
increases above the CPI level with the RMPP (and therefore
ultimately with the Company). This would be fully funded with
assets which, at the time were estimated to be about £1.5bn to
£2bn. Since then market conditions had changed and the liabilities
on that basis would have increased by about £2bn, leaving
Government with a requirement to leave with the RMPP around
£4bn. of assets to match those liabilities. This had resulted in the
Government revisiting its proposal and they now proposed to leave
the fund with just the risk of pay inflation above RPI. This was
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expected to bring the liabilities (and assets required to match them)
back down to around £2bn. This was attractive to the Company
because of the reduction in volatility but there was an arguable
legal case that this went beyond the powers that the Government
had, and there was a small risk that a member or other party could
take action against the scheme. The Company had sought from
Government a commitment that if, as a result of a successful legal
challenge, the RMPP were left with more liabilities than the parties
intended then the Government would return assets of an
equivalent value so as to make the liabilities fully funded as at the
cut-off date. The Government had been reluctant to give a binding
commitment of that nature.
The Board considered the risk and concluded that:
i. whilst the risk of a claim was small, the potential
consequences of a successful claim were substantial;
ii. any risk such as this would have to be disclosed to potential
investors and could damage the prospects of a successful
transaction;
iii. the risk of a successful claim needed to be offset against
the volatility of additional liabilities;
iv. that the risk needed to be looked at in the context of a
potential insolvency situation;
v. that the Government could choose to implement whatever
arrangements it wished in relation to this issue.
ACTION: The Board asked Jon Millidge to continue to push for the best
Jon Millidge possible assurance from Government and devolved the decision to
the Pensions Committee, adding that the Company Secretary
should circulate the relevant papers to all Board members. The
Board further agreed that the Pensions Committee be authorised
to approve any statutory instruments or other documents required
for the effecting of the pensions solution;
(d) Frank Schinella explained to the Board that the current plan had
assumed an increase in contributions for future accrual in RMPP
up to 18.3%. Since the plan had been signed off and submitted to
the European Commission, market conditions had worsened and
there was a risk that the poor return on bond yields could drive this
contribution rate up significantly by the time the negotiation with
the Trustee on future contribution commenced in earnest. The
Board noted this position and that there were a range of options
which would be discussed later in the meeting which would be
aimed at bringing the plan back into balance;
(e) the Board then considered the risk of RMPP returning into deficit
and noted that under the current investment strategy, there was a
5% chance of a deficit of c£1.5bn arising in any one year but that
through hedging at a relatively low cost, this could be brought
down to a 5% risk of a deficit of about £0.5bn arising over the
period to March 2015. The Board noted this position and that this
would be used as the initial assumption in discussion with the
Trustee, but agreed that a final decision would have to be made in
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the understanding of future plans for pension benefits;
Jon Millidge explained that the Company had been reviewing
options of how to deal with the change in investment market
conditions and how that may affect the future funding costs. Given
that the Company could not seek any further funding from
Government, the Board noted that the Company would be required
to resolve the issues itself to keep its current plan whole should
such a change in funding costs arise. In that context, the Company
had taken the precaution of looking at a number of options that
would limit cost of future accrual. These options had included:
i. closing to future accrual. The Board understood that this
would have significant cost benefits but that there was likely
to be major industrial action as a result which would
certainly have an impact on the revenue performance of the
Company and would slow the modernisation progress;
ii. reducing the career salary accrual rate. This would produce
lower savings but would probably result in industrial action;
iii. changing the rules of the scheme so that pensionable pay
would increase in line with the retail price index. This would
have some benefits to employees during periods of pay
restraint and would produce sufficient funds in the RMPP to
allow an investment strategy more in line with normal
practice. The Board was concerned about the potential
impact on people being promoted and asked that options
be drawn up to be presented to the Board.
The Board expressed confidence in its overall plan that had been
submitted to the European Commission but recognised that the
Company would have to plan for contingencies to ensure that the
plan remained achievable and would succeed in restoring the
Company to viability. The Board asked that the third option above
be developed further in case such action was needed;
Jon Millidge explained that the trustees of RMSEPP had received
legal advice that pensions in payment for some members should
be increased at RPI rather than CPI (which is the level that the
Company believes the increases should be made at). Whilst they
had agreed to continue to operate increases at CPI, this would
only be for a limited period and the Company had commenced
proceedings to have the issue tested in court. The Board noted
that the case was far from clear but given that Section B members
of RMPP would have their increases at CPI, it was important that
the Company should challenge the Trustees of the senior
executive scheme on this issue.
The Board noted that the consultation on changes to future accrual
in RMSEPP had concluded and noted that decisions on the future
accrual of that scheme would be taken by the Remuneration
Committee.
OPERATIONS & MODERNISATION REPORT - RMH(11)115
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Mark Higson advised the Board that the Christmas operation was
proceeding in line with expectations. There had been some
resourcing problems for temporary resources as a result of moving
to a new model for Christmas recruitment and this would be
investigated but the issue was severe in some areas. The Board
was also advised that nine packet sort centres had been
established for the operation this year which would give some
added strengthening to the operational plan. Mark Higson advised
the Board that October had seen the highest number of delivery
revisions being implemented and that there had been no
measurable adverse impact on quality in the November period;
Moya Greene explained that when the plan was constructed there
was a good understanding that mail volumes would decline and
this would be offset to some degree by an increase in parcel
volumes. It had been understood that parcels would take longer to
be delivered than letters but the initial view of the difference was
proving to be inaccurate;
the Board noted that the overall performance of the operations
area was roughly in line with budget even though volumes were
higher by 5.1% for letters against the budget. Packets were also
up against last year (3.2%) and budget (4.5%) and this was having
a Significant impact on our ability to reduce costs;
the Board noted that the budgeted impact of volume decline was
that £64m of costs could be saved. However, due to the higher
than Budgeted volumes of Letters and Packets and the improved
understanding of cost drivers, it is now understood there is a
maximum saving opportunity of £19m. The Board noted that this
assumption was the result of current work in progress (looking at
disaggregating the activities in the pipeline and by adding in the
costs of new activities such as scanning), and that the figures and
industrial engineering values would be updated as the work
progressed on this. The Board further noted that the figures would
be independently verified by external specialists;
Mark Higson advised the Board that the efficiency and technical
changes were in line with expectations;
the Chairman reported that Dave Ward had expressed a view that
the Company was not taking sufficient action to communicate to
people why change had to happen in the way that it was being
done;
the Board noted that whilst there was some significant progress on
implementing revisions, there was some substantial opposition at
both national and local level from the CWU. Moya Greene advised
that much work would have to be done to ensure that consultation
with the CWU became more systematic. She further advised that
she had engaged in discussions with the CWU about the
possibility of a long term arrangement to secure change which
would have a no strike deal at its centre;
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(h)
RMH11/144
(a)
(b)
(c)
ACTION:
Matthew
Lester
(d)
ACTION:
Moya Greene /
Paula Vennells
ACTION:
Paula Vennells
(e)
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the Board noted the revised approach to delivery flow and the
decision to focus activity on the larger offices. The consequence
would be that the plan would be slower to implement but with the
larger offices implemented on time.
FINANCE DIRECTOR’S REPORT - RMH(11)116-122
The Board noted the Period 8 report and that the profit of £43m
was in line with budget. Although revenue was £19m below
budget, this was offset by a favourable cost variance. The Board
further noted that the YTD cash inflow had increased to £434m
over the month;
Matthew Lester advised the Board that the full year operating profit
was forecast to be at £449m (budget £310m) but the Autumn and
Christmas trading results would be critical to this performance;
the Board discussed at length the financial circumstances of the
Company and, in particular the improved cash position. Given what
the Board had heard earlier in the meeting about the positive
response from the European Commission to the State Aid
submission, the Board concluded that the Company remained a
going concern. The Board agreed to review the position at its next
meeting;
Paula Vennells updated the Board on the major issues within Post
Office Ltd. The Board noted that financial performance remained
ahead of target and that POL and RMG had committed to work
together to exploit the Collections and Returns market. The Board
asked that the two teams present their progress on the plan at the
meeting in February. The Board noted that the recent Horizon
failure had disrupted service on one of the busiest days of the year
but that the cause of the system failure had been identified and the
system is now stable. Paula Vennells advised the Board of the
dissatisfaction within POL of the recent report from Consumer
Focus. The Board advised that the Cabinet Office be copied in on
correspondence with Consumer Focus.
Rico Back advised that Christmas performance was improving
slightly over recent weeks for GLS compared with earlier in the
autumn, and that the competition had followed GLS on price
increases. Nonetheless, trading conditions remained challenging.
The Board was advised that GLS France had now successfully
disposed of its In — Night business. Rico Back noted three big
challenges over the forthcoming year:
i. the general economic position in the Eurozone remained
very uncertain;
ii. there is a move in Germany to try to ensure that
subcontractors are unionised to the same extent as direct
employees;
iii, there is a substantial reduction in the number of working
days in Germany in 2012/13;
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(f) the Board noted the Commercial and Consumer and Network
Access Reports.
RMH11/145 FINANCIAL RESTRUCTURING — RMH(11)123
(a) The Board noted Matthew Lester's paper and that:
i. RMG currently has negative distributable reserves of
£8.4bn and that the pension solution would reduce this by
about half. Thus RMG would still have £4.2bn of negative
distributable reserves and be un-investable;
ii. various solutions to the problem had been evaluated and it
was proposed that a Topco be created which could acquire
ACTION: RMG in return for the issue of shares, thus enabling Topco
to be able to have distributable reserves. The deficit of
distributable reserves at RMG level would also be
addressed through a reduction in capital, allowing RMG to
distribute reserves to Topco;
iii, there are two methods which would allow for the reduction
in capital, and both of these methods are intended to
ensure that reserves are not distributed to the detriment of
creditors. The methods are either through High Court
approval or by a solvency statement from the Directors to
the effect that they believe that the Company will be able to
pay its debts for a period of 12 months from the solvency
statement. The Board agreed that the use of a solvency
statement was the preferred option;
(b) The Board noted that the timing of a solvency statement was still to
be decided but noted that it could be made at the year end
following the pensions solution and rely on the same diligence that
provides comfort that the accounts can be produced on a going
concern basis. The alternate timing was immediately preceding a
transaction and the Board noted that it would not be proceeding
with a transaction if it did not feel able to make such a solvency
statement.
Secretary’s Note: Paula Vennells left the Board at this point as
she was conflicted regarding item RMH11/146 and it was noted
that Les Owen was expected to resign from the Post Office Ltd
Board shortly was excluded at POL Board meetings from items
relevant to RMG and since negotiations on substantive issues
had been concluded he was not conflicted.
RMH11/146 POL SEPARATION REPORT
(a) A separate minute was produced for this item.
RMH11/147 ANNUAL SECURITY REPORT RMH(11)124
ACTION: (a) The Board noted the report and asked that Tony Marsh attend the
Jon Millidge next Board meeting to provide an update. The Board asked for an
update on progress in Special Delivery issues recognising that the
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RMH11/148
RMH11/149
RMH11/150
ACTION:
Jon Millidge
RMH11/146
(a)
(a)
(a)
(b)
(c)
(a)
(b)
(c)
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ARC is looking at the issue also. The Board asked that it be made
clear where issues were being dealt with by Internal Audit.
COMPANY SECRETARY’S REPORT- RMH(11)125
The Board noted the report.
GROUP REGULATION UPDATE — RMH(11)126
The Board noted the report.
CLOSE
The Board expressed approval of the summary sheets for Board
papers and asked that they continue with some modification. They
also asked the Company Secretary to provide a guide to iPad use;
the Chairman thanked Jeff Triggs for his service as interim General
Counsel over the previous year;
in the absence of any further business, the Chairman closed the
meeting. The next meeting of the Board was scheduled for the
8" February 2012, at 100 Victoria Embankment, London.
POL SEPARATION
Mark Thomson advised the Board that good progress had been
made on the substantive issues and all had been resolved
satisfactorily. There were some minor issues still to be covered and
final drafting would take place over the next few weeks;
the Board noted that since their last meeting, the main principles of
the Mails Distribution Agreement had been unchanged with the
exception of:
i. POL would offer exclusivity to all RMG products including
Collections and Returns;
ii. should exclusivity fall avay RMG could give POL 12
months notice of termination and there would be no
stranded costs payable by RMG to Post Office Ltd;
iii. the opening hours and size of the POL network was now
covered in the contract;
the Board noted that there had only been minor changes to the
Master Services Agreement, notably that the stranded costs would
be shared after the first £15m (which would fall to RMG in line with
its plan);
Jon Millidge advised the Board that properties occupied by POL
would transfer at nil cost, but that the rental income that RUG
would have received from POL would be recovered by way of an
offset against the charge on the Mails Distribution Agreement. This
would reduce after 4 years. POL occupied properties which form a
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valuable part of a much bigger property (eg Mt Pleasant) would not
transfer;
the Board congratulated Mark Thomson and colleagues on a
successful outcome, and authorised the executive team to sign the
agreements and terminate the current Inter Business Agreement.
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