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UK Government
Investments
Post OFFICE LIMITED (“POL”)
OVERVIEW
JULY 2016
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@ summary ano Key Issues
Government is sole
shareholder of Post
Office Limited (POL),
setting requirements
which POL must meet,
then allowing it to
operate commercially
POL is loss making
and relies on
Government subsidy;
however it is in the
middle of a complex
transformation
programme to reduce
that subsidy
This is ambitious but
achievable, and with
political support will
place POL on a
sustainable long term
footing within this
Parliament
UK Government
Investments
The Post Office network is a relatively small and discrete policy area, but one which attracts a
‘significant amount of interest from both Parliament and the public. On one hand, Post Offices are
held in high esteem as hubs of the community (particularly rural communities) providing essential
services to often vulnerable people; on the other, some see them as outdated and inefficient, with the
majority of their services replaced by other providers and the Internet
Government policy has tended to strike the balance between recognising the social and economic
functions that the network provides, with the need for the company to operate commercially and
taxpayers paying no more to support it than is necessary. Since 2010, Post Office Limited (the
Government-owned company responsible for the network) has been undertaking a transformation
programme, supported by Government investment, which should see the company moving towards
‘a more sustainable long term footing within this Parliament with reduced subsidy
This pack gives a high-level overview of how POL is set up, the areas in which it operates, and its
long term strategy. There are also some short term matters (below) which you need to understand
and may require prompt action. We recommend you receive more detailed advice on each
INDUSTRIAL RELATIONS (SLIDE 13): The Communication Workers Union (CWU) which represents
POL's directly-managed employees is balloting for industrial action and calling on Government to
step in and halt POL’s modernisation. It fears job losses and “privatisation by the back door". POL
are well-placed to manage any disruption caused by strike action, but the vocal way in which the
union flag their concems may attract attention of the media and Parliamentarians
HoRiZoN (SLIDE 14): A small number of mostly former-subpostmasters have raised concerns about
POL's Horizon IT system, which they claim has caused their businesses losses. Over two years’
worth of independent investigation has found no systemic faults in Horizon, but campaigning and
media interest persists. Civil litigation has been commenced against POL
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© structure AND OWNERSHIP
POL is one of the
largest retail business
in the UK with a 350
year history, operating
a network of c.11,600
branches across the
country
It was separated from
Royal Mail in April
2012 and is 100%
Government owned,
via a holding
company that also
previously owned the
remaining stake in
Royal Mail
Government does not
seek to influence
POL's day-to-day
operations
"
UK Government
Investments
POL is a commercial business that operates independently of Government. It has a Chief Executive
and a Board of Directors, who are responsible for running POL day-to-day and for providing strategic
oversight, respectively
The Government owns 100% of POL, through the Postal Services Holding Company (POSH) which
previously also owned the Government's remaining stake in Royal Mail. There are currently plans to
wind-up POSH in early 2017 to simplify this shareholding structure
The Post Office team in UK Government Investments (UKGI) manage the Government shareholding
in POL. This includes a non-executive seat on POL's Board. The Government has various
shareholder rights in areas such as Board appointments, remuneration, and POL's strategic plan.
The Postal Services Act 2011 requires POL to be wholly public-owned, but allows for the move to a
mutually-owned structure in the future. Any alternative structure or ownership model would require
further primary legislation. Mutualisation will only be possible if POL is financially sustainable
BEIS Secretary of State
Postal Services Holding Company Limited (POSH)
POSH formerly held I
G's etako In Royal Mall f Royal Mail
0% 100% 3
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Government funds
POL to enable it to
maintain a network of
post offices beyond
its optimal
commercial size, and
to make that network
more efficient
Without support, POL
would not be a going
concern
Government has.
committed nearly
£2bn between 2010
and 2018
Funding benefits
POL’s customers, and
also helps to reduce
POL’s overall reliance
on taxpayer support
UK Government
Investments
Government provides funding to POL in order to maintain a network beyond its optimal commercial
size and footprint. Currently the requirement is a network of more than 11,500 branches which meets
5 clearly defined access criteria (e.g. 99% of the UK population must live within 3 miles of their
nearest post office). There is a legally-binding funding agreement between Government and POL
Since 2010, Government funding for POL has been focused on two areas:
Network SussiDy: Payment to maintain @ network of post offices in line with Government's
requirements. Recognised by POL as revenue in its accounts
INVESTMENT FUNDING: Funding for POL to invest in its network, to make it more efficient and less
reliant on taxpayer funding. It is recognised by POL as a direct cashflow in its accounts
BEIS received SR funding cover for £60m subsidy in 2018/19 and £50m subsidy in 2019/20, which
‘was in line with an indicative funding requirement set out by POL in 2013. Recent discussions with
POL however suggest senior management have an appetite to go further with POL's transformation
and as such a funding “ask” for these years might be higher than planned. It would be expected that
any additional investment funding would further reduce POL’s need for long term taxpayer support
FUNDING PROFILE (£m)
= ee Caer ae ae
nar panera
io *
peaenie ae
100 te 70
7
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C+) FINANCIAL OVERVIEW
Last financial year
POL generated
revenue of £871m
which was broadly flat
on 2014/15
Underlying operating
profit (i.e. after
adjusting for a £30m
reduction in network
subsidy) was higher
by £34m, and ahead of
expectations
POL's profitability is
‘expected to improve
further in 2016/17
although revenue is
forecast to fall
marginally, due to
‘ongoing difficult
market conditions
UK Government
Investments
In 2015/16 POL generated revenue of £871m
(£1,001m including Network Subsidy) and an
operating profit of £104m
Revenue was below budget, mainly due to
underperformance in Financial Services and
Other (specifically Supply Chain)
However due to tight cost control and certain
one-off benefits operating profit was ahead of
‘expectations
POL's most significant cost is payments made
to subpostmasters — in 2015/16 £413m was
paid out to ¢.11,400 subpostmasters, a simple
average of ¢.£36,000 per branch
Due to Network Transformation these costs are
now more closely linked to sales volumes and
are becoming increasingly flexible
After subpostmaster payments, POL's largest
‘expenditures are: Staff Costs (¢.£231m); IT and
Operations (¢.£123m); and Property (¢.£55m)
REVENUE SPLIT (% TOTAL)
Total 2015/16A Revenue: £871m
11.0%
14%
34.5%
«Malls and Retail
= Government Services » Telephony and Other
«= Financial Services
REVENUE & PROFIT PERFORMANCE (£m)
© REVENUE
1,000
750
soo I
Perrys (119) B(116)I
0 (2
11/128 12/138 13/140 14/15 18/16A 16/178.
sme Total Rev. —O-Op. Profit Op. Profit (pre-Subsidy)
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eo LONG-TERM STRATEGY
POL’s 2013 strategy —_ In 2013 Government agreed a new strategy with POL for the period to March 2020. It was part of the
was considered _basis on which POL secured Government's recent £640m funding commitment and focuses on
ambitious, and —_delivering a financially sustainable POL, less reliant on subsidy. It was centred on three core pillars
although the business
has faced a number of
NETWORK TRANSFORMATION
+ Aim: Complete the network investment strategy, modernising branches to improve customers’
challenges it has ¢ " t
managed to meet profit experience and making them less reliant on taxpayer support
targets * Status: Generally NT has progressed in line with plans
This planwas REVENUE Grown
refreshed in early-2015, _* Aim: Increased sales in existing areas and launch of new products and services, focusing on
fo keep it currentin the particular strengths in Mails, Government Services and Financial Services
face of difficult revenue _* Status: Slower than expected progress, with challenging demand conditions, delays to product
trends launches and fewer new contracts than expected (particularly in Government Services)
Managementis TRANSFORMATION AND EFFICIENCY
working on a further * Aim: Reduce costs through a significant transformation of POL's IT infrastructure and a
iteration of POL’s restructuring of the corporate overhead
strategy at the + Status: Again, progress has been slower than expected, partly due to management needing to
moment, to support prioritise a large number different initiatives and partly due to difficult stakeholders relations
funding discussions
POL refreshed its 2013 plan in early 2015. While the mix of revenue and costs in this updated
that will be taking place
strategy shifted (e.g. responding to revenue trends) the overall themes, objectives and profit targets
in Autumn 2016 were unchanged. POL is currently developing a further iteration of its plan which it will use to
support funding discussions with Government for the period after March 2018; UKGI officials
are engaging closely with POL on this
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© Services: MAILS AND RETAIL
Through its
exclusive
relationship with
Royal Mail, POL is
the leading provider
of retail mails
services in the UK
and is responsible
for c.£2.5bn of Royal
Mail's revenue
Recent years have
been challenging:
traditional mails
products are in
decline whereas key
growth markets (e.g.
Click and Collect) are
evolving and highly
competitive
UK Government
Investments
POLis the leading provider of retail mails in the
UK, offering access to Royal Mail services for
retail and small business customers
Range includes stamps and labels, special
delivery, Parcelforce, signed-for and Home
‘Shopping Returns; also provides selected retail
services including lottery, packaging and Royal
Mail / Royal Mint collectibles
A 10-year exclusive Master Distribution
‘Agreement (MDA) was agreed with Royal Mail
in 2012.0n an arms length basis ~ this was the
longest period permitted at the time by the
European Commission
Royal Mail services are offered at all POL
branches ~ this is a bigger and denser network
than Royal Mail needs to meet its Universal
Service Obligation
Mails is in structural decline but parcels is
growing, particularly due to online retail.
However competition is fierce in this segment
(e.g. Collect+, MyHermes, Amazon) and the
market direction is unclear
REVENUE
£M REVENUE % GROWTH
a%
eges8
(6%)
11128 12/138 13/148 14/18 15/16 161178
"=== Malls and Retall ~O-% growth
RECENT DEVELOPMENTS / LIVE ISSUES
ROYAL MAIL RELATIONSHIP: Despite having a
scheduled opportunity to renegotiate in 2017
POL might look to amend certain aspects of
its contract with Royal Mail sooner
ComPETITiION: The UK parcels market is
increasingly fast moving and competitive. This
is impacting POL as the largest provider
MA\Ls STRATEGY: POL has lacked a clear
n for its Mails business since separating
from Royal Mail. It is hoped current work, that
forms part of the business's broader strategy
update, will address this
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@ services: FINANCIAL SERVICES
POL's financial
services business has
been transformed in
recent years with the
launch of a number of
new services and
“Post Office Money”, a
category focused
brand for personal
financial services
POL has also
benefited in recent
years from customers’
perception of it as a
trusted provider
Opportunities for
future growth are
strong, but not
without challenges
UK Government
Investments
POL is a leading challenger in the UK Financial
Services market, offering POL branded
products ~ many in partnership with Bank of
Ireland ("Bol") - and 3rd party services. POL's
relationship with Bol was renewed in 2013 for
10 years
Branded products, many offered under the Post
Office Money brand, cover insurance, savings,
travel money, loans, mortgages, ATMs and
current accounts
3 party services include bill payments, counter
services for high street banks’ customers (e.g.
cash withdrawal and deposit), business banking
and money transfers
Recent years have seen POL focus more on its
higher value branded services, e.g. launch of
current accounts and mortgages, and
transformation of its insurance business
This requires close strategic alignment with Bol;
POL provides the retail front-end of the
relationship and Bol provides balance sheet
capacity, regulatory cover and support functions
REVENUE
‘EM REVENUE
(8%)
TIM2A 12/13 13/148 14/150 15/160 16/178,
j= Financial ServicesI ~O-% growth
RECENT DEVELOPMENTS / LIVE ISSUES
Bol RELATIONSHIP: POL is keen to look at
changes to the Bol relationship, to bring the
patties into closer alignment. This may touch
on post-2023 when the current contract ends
‘COUNTER SERVICES: For the past 18 months.
POL has been working with banks and the
BBA to develop a range of standardised
services for customers of all banks. TI
targeted to launch end-2016
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© Services: GoveRNMENT SERVICES
Revenue from
Government Services
has fallen in recent
years, as not only
have contracts been
renewed on less
favourable terms but
expected growth in
new areas has not
materialised
POL has however won
its place on a number
of key frameworks
There could be new
‘opportunities for POL
in Identity Assurance
and Assisted Digital
in particular, but POL
will need to ensure
they can seize these
opportunities
UK Government
Investments
POL is the #1 provider of over-the-counter
Government Services in the UK. Its largest
contracts ere:
+ DWP for Post Office Card Account (POca)
+ DVLA for driving license renewals and
vehicle tax payment
+ Home Office for Passport Check and Send
POL also provides rod licenses, Security
Industry Authority verification, and visa services
Despite POL's ambition to be the “front office
for Govement’, there have been significant
challenges in recent years (i.e. competition has
been intense in a number of segments, and
more services have moved online). Further,
illegal for Government to simply award
contracts to POL
itis
Key contracts have been extended but on less
favourable terms, and with increased volumes
migrating to direct channels (e.g. online)
New opportunities have also been slow to
emerge and where they have, volumes have
fallen short of expectations
REVENUE
‘£M REVENUE % GROWTH
esesees
11128 12/13 13/148 14/158 15/160 16/178,
"== Government Services. —O-% growth
RECENT DEVELOPMENTS / LIVE ISSUES.
New OppoRTUNITIES / DIGITAL: Areas where
POL could play a key role (e.g. Assisted Digital,
Identity Assurance) have been slower to build
than expected; at the same time Digital has
created pressures for POL
FRONT OFFICE COUNTER SERVICES (FOCS):
POL is exclusive provider on this framework,
enabling Departments to contract with POL
easily and cheaply. Progress has been siow
GOVERNMENT SERVICES STRATEGY: POL has
historically lacked a clear vision for Goverment
Services. This is being addressed
5%
16 19 eS
So as (5%)
(10%)
(15%)
(20%)
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© Services: TELEPHONY AND OTHER
The UK telecoms
market is competitive
and fast evolving —
POL's products have
particular strength
among older
customers who trust
the brand
POL is responding to
market developments
with new product
launches and a
broader review of its
market position
POL is in the process
of exiting its external
Supply Chain
business, as it is
unprofitable. This
accounts for c.£[e]m
revenue a year
UK Government
Investments
TELEPHONY: POL is the fifth largest provider of
home phone and broadband services in the UK
with ¢.450k customers. It foouses on value and
has a particular strength among older
customers. Success in recent years has been
achieved through active management of pricing
POL's telephony product is provided by Fujitsu
and is Post Office branded. It moved across
from BT in 2013 in a challenging migration
process; these were reflected in impacts on
customer satisfaction and retention rates
The market is fast evolving with consolidation
among telecoms firms and the line between
telecoms and media fading. Traditionally POL
has struggled to catch up with the market (e.g. it
recently withdrew from mobile, and is expected
to launch @ high-speed internet product soon)
OTHER: POL is the #3 cash distributor in the UK,
however this is not a profitable service. It will be
withdrawing from this market in 2016/17 leading
to redundancies and the closure of a number of
depots. Separately POL also earns revenue
from Royal Mail from warehousing services
REVENUE
‘£M REVENUE % GRowrH
120
90
60
30
«
TIM2A 12/138 13/140 14/15 15/160 16/178,
"== Telephony and Other —O-% growth
RECENT DEVELOPMENTS / LIVE ISSUES.
‘CASH SUPPLY RESTRUCTURING: POL is shutting
its external cash supply activity in 2016/17,
leading to depot closures and redundancies.
This is a major contributing factor to tensions
with POL's unions
‘STRATEGIC REVIEW: POL has been reviewing
its strategic positioning in the telecoms market;
after a number of years of lacking clarity a new
plan is expected to form part of the ongoing
group-wide strategy development process
Home Services: POL has previously looked at
launching energy supply services
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© Network
Post Office’s network POL operates the largest retail network in the UK, larger than that of the four major banks
Stands at around —_ combined. Funding from Government requires it to operate a network above a commercially-optimal
11,600 branches size and meet a set of strictly-defined access criteria
across the UK
Of this, only c.300 are
‘owned and operated
by POL; the
remainder are sub
post offices operated
by independent
businesspeople or
retailers
POL’s Network
Transformation (NT)
programme is making
good process at
modernising the
branch network,
although there is still
work to be done
UK Government
Investments
(1) Community and Outreach branches (s
Underserved communes, and many would not be viable as one of the new NT "models" which operate on diferent payment terms.
The vast majority (97%) of Post Office branches are not operated by POL directly, but by a
subpostmaster or a multiple retailer (e.g. WH Smith, Tesco) - these are known as sub post offices
or agency branches. The contract between a subpostmaster or multiple retailer and POL is similar in
nature to that of a franchisee. Often, agency branches are co-located in another retail premises,
typically a shop or convenience store
NETWORK TRANSFORMATION (NT) is a central element of POL's strategy and sees a historic level of
investment over six years to transform and modemise POL's agency branch network (of around
11,400 branches, although only 8,000 - 8,500 are in direct scope of NT‘))
Network Transformation:
Improves customer experience by investing in branch environments
Improves operator performance by driving footfall and enabling more efficient branch operation
Makes POL's cost base more flexible, allowing costs to move more closely with revenue
v Reduces POL's reliance on taxpayer support
Over 80% of branches eligible for NT have either completed their transformation or have contracted
to do so. More detail on the Network and its transformation programme is provided in the annexes
Page 18 for futher details) are curently exempted fom NT. These are often low-volume branches serving remote and
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@ Board anv MANAGEMENT
POL is governed by a
fiduciary Board,
chaired by Tim Parker.
The Board is
functioning well, and
is now relatively
stable in composition
after a period of
change over the last
financial year
The CEO has been in
place since POL
became an
independent company
in 2012, and the
executive team is
stable, with a good
CFO. Remuneration is
and will continue to
bea key issue
regarding the quality
of management
UK Government
Investments
MANAGEMENT OVERVIEW CURRENT ISSUES
POL's Board consists of a Chair and five Non-
Executive Directors, together with the Chief
Executive Paula Vennells and Chief Financial
Officer Al Cameron
‘The current Non-Executives are:
Tim Parker, Chair (joined October 2015)
Ken McCall, Senior Independent Director
(oined January 2016)
Virginia Holmes, NED (joined April 2012)
Tim Franklin, NED (joined September 2012)
Carla Stent, NED (joined January 2016)
1ard Callard, NED (UKGI representative)
‘Overall, we consider that the Board works well
Their primarily private sector specialisms
(particularly retail and financial services) drive
‘a more commercial outlook for the company
Ministers approve remuneration for the CEO
and CFO, including base pay and bonuses.
Remuneration has been a sensitive issue,
balancing public sector pay restraint with
attracting and retaining private sector talent
With three new Board members appointed
within the last year, and Tim Franklin's term as
NED extended for a further three years, the
Board is now relatively stable with a mixture of
experience and new blood. No further changes
are planned for the next 18 months
The remuneration framework for the CEO and
CFO for the current financial year is currently
with the CST for clearance, having been
approved by Ministers in July. These
arrangements relate only to base pay and
short term incentive plans: POL are
considering the appropriate targets for the
long-term incentive plan in the light of ongoing
work on their future strategy. The
Remuneration Committee will submit a
proposal to Ministers in the autumn
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© key StakeHoLveRs
In general,
stakeholders support
the large scale
investment in the post
office network
The Unions are
hostile to cost
reduction in the core
POL team - industrial
action is likely
especially from the
cwu
POL has robust
contingency plans in
place to mitigate the
expected industrial
action
UK Government
Investments
NATIONAL FEDERATION OF SUB POSTMASTERS (NFSP)
‘The NFSP is the body that represents subpostmasters — the independent business people who run
the vast majority of Post Offices. POL has recently started funding the NFSP directly, to enable it to
transform into a trade association working in partnership with POL and not a union-like organisation
often in conflict with it. Although this is has been widely welcomed there remain tensions in the
group's relationship with POL (e.g. the NFSP negotiates with POL on subpostmaster remuneration)
In addition some subpostmasters, including certain multiple retailers who operate large batches of
branches, believe the NFSP is now compromised as it received funding direct from POL. Since POL
started funding the NFSP membership has been free, but take-up has fallen below expectations
COMMUNICATIONS WORKERS UNION (CWU) & UNITE COMMUNICATION MANAGERS ASSOCIATION (CMA)
Of POL's c.6,600 staff, the CWU represent c.4,000 non-managerial grades and Unite CMA
represent c.800 manager grades. Because of the scale of business reform underway (c.2,000 jobs
going over the next 15 months and the defined benefit pension scheme being closed) both unions
met Baroness Neville Rolfe in March to register their concems
‘The CWU has since campaigned with rallies and a modestly attended “Battie Bus" national tour, and
we expect it to ballot for industrial action soon. Indications from POL are that while CWU will get a
good tumout for the ballot, strike tumout is likely to be low. Usefully, POL has agreed terms with
Unite who are now content with terms of staff reductions; this support will help to mitigate any action
the CWU might take
We recommend you receive further briefing on this subject, and POL would be happy to
meet with you to provide any further briefing or information
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© Horizon IT system: ComPLAINTS AND LEGAL ACTION
There has been over Following complaints from a small number of (mostly former) subpost masters about the Horizon IT
two years of system, in 2012 POL commissioned an independent firm, Second Sight, to examine the system for
independent scrutiny _ systemic flaws that could cause accounting discrepancies
of POL’s Horizon IT
system and no
evidence of systemic
flaws has been found The interim report raised some questions about the training and support offered to some
subpostmasters, and POL implemented a series of measures to improve its processes. It also
created a mediation scheme to consider individual subpostmasters’ cases
‘Second Sights interim report, published in July 2013, and final report, published in April 2015, both
make clear that there is no evidence of system-wide problems with Horizon
POL have offered
mediation to those
affected and in some __This scheme gave applicants the opportunity to have their case reinvestigated by POL and Second
cases have reached —_ Sight, and to enter a mediation process with POL to seek resolution. This scheme was independent
agreement, but others _of Government and details of individual cases are confidential. While some cases were resolved
remain unresolved through mediation, a number were not — in particular, cases where individuals had received criminal
convictions (e.g. theft or false accounting), since mediation cannot overturn a Court judgement
Group civil litigation
is being taken against Earlier this year, group civil litigation on behalf of 91 claimants was commenced at the High Court.
POL by 91 claimants, _Thisis at an early stage and precise details of the claim are unclear. As there are legal proceedings
This is still at an early underway, our advice is that this should remain independent of Government: itis a matter of law
stage. The Criminal
Cases Review
Commission are
looking at around 20
cases We recommend you receive further briefing on this subject, and POL would be happy to
, meet with you to provide any further briefing or information
The Criminal Cases Review Commission (CCRC) is understood to be considering c.20 cases raised
on this subject. This review has been underway since early 2015; we have no indication of when the
CCRC may reach conclusions on any of the cases. POL are engaging fully with the CCRC's work
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C.) TIMELINE TO MARCH 2017 (KEY DATES)
EARLY-SEPT: Approvals ‘MID-Nov To END-Dec: ‘Mip-MaR: Targeted start
process and comms Drafting and publication of date for discussions with
planning for the Network Government's response to. _the European Commission
Consultation ‘the Network Consultation begin on POL funding
MiD-SEPT To MiD-Nov: EARLY-JAN: Earliest date to
Network Consultation period ‘announce a new funding
agreement for POL for the
period after March 2018”)
A A
Cc i
i .
9 Horizon
I svrrcvcnn
PENSIONS
UL To Dec: POL
strategy development
process:
(1) Its recommended that a funding agreement ether follows the Network Consultaon or is published alongside it (e. making sure the
UK Government evidence base o support funding egreementisin place prirto he agreement being finalise).
15
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ANNEXES
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© Uuprcominc Susmissions AND SUGGESTED MEETINGS
UPCOMING SUBMISSIONS
‘August
September
Succestep MEETINGS
August / September
Before Christmas
UK Government
Investments
‘Advice regarding upcoming strategy and funding discussions with POL
‘Advice regarding upcoming consultation on the Post Office network
Decision on POL’s request to be exempt from public sector voluntary severance caps
Advi
ona rescheduled meeting with CWU
on outcome of Trustees decision on whether to close the defined benefit pen:
Introductory meeting with Paula Vennells, CEO and Tim Parker, Chairman
Meet George Thomson, Chair of National Federation of Subpostmasters
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DONE
© Post OFrice OPERATING MODELS
Model Name I Number? I Overview
Branches owned and operated by POL, typically located in city centres. These are mostly the largest and highest
Crown 315 volume branches in the network and offer the widest range of services. They account for only c.3% of branch numbers.
but represent c.16% of revenue
Ahiigh-volume model designed as part of NT that offers customers an effectively complete range of post office services.
‘A majority of these are standalone although some are co-located with a retail business. In converting from a Traditional
Main 2,857 —_ Branch these post offices benefit from investment that refreshes branch environments and extends opening hours. Main
Model Agency Branches do not receive fixed rernuneration — all payments for post office services are linked to
transaction volumes
A lower-volume model co-located with a retail business designed as part of NT that offers customers an extensive range
of post office services. In converting from a Traditional Branch these post offices benefit from investment that refreshes
ocell 2,967 __ branch environments and extends opening hours. Co-location of the retail til also frees up space for retail use, and
frees up employee time which delivers efficiency and cost-savings for subpostmasters. Local Model Agency Branches
do not receive fixed remuneration — all payments for post office services are linked to transaction volumes.
‘Traditional post offices that are capable of converting to be a Main or Local, or which exist in a community with suitable
premises that could host such a Branch (e.g. an existing post office might convert “offsite” by closing and being replaced
Traditional 2,262 by a Main or Local Model Agency Branch in a new location). Traditional branches are often underinvested, operate short
‘opening hours, use “fortress” positions not aligned to modern retail markets and receive some fixed remuneration
‘Abranch that cannot convert to a Main or Local due to it being unviable as one of these models, or it is exempted from
Community 1,961 NT due to the lack of alternative hosts nearby (e.g. “last shops"). These maintain current pay structures and can access.
a £20 million Community Branch Fund which allows operators to invest in branches.
Post offices operating in shared premises (e.g. a community centre for a scheduled amount of time each week) or
Outreach 1,290 mobile from secured vehicles (e.g. with scheduled routes). Almost all of these branches are also considered to be
“Community” branches and can access the £20 million Community Branch Fund
Total 14,652
*Numbers correct as of end-May 2016
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Investments 18
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@ Network TRANSFORMATION
NT has improved the
offer to customers
with better layouts
and hugely increased
opening hours - over
200,000 extra hours
every week have been
added to the network
since 2012
Changes to fixed pay
have also helped
reduce subsidy, from
£210m in 2012 to £80m
today
The space freed up in
smaller stores and the
better layouts in larger
ones have helped
postmasters improve
non-Post Office retail
by almost 10%
UK Government
Investments
NT is a combination of:
PHYSICAL CHANGE: Modemising and investing in branches to make them brighter and more
welcoming, and extending opening hours. This includes reducing the number of “fortress" style
counters in favour of open plan positions in Mains, and in Locals allowing the post office til to be co-
located with the retail til (this frees up space used for the “fortress”). While many modernisations
have taken place “on site” many branches have also relocated as part of NT; these usually move
from being standalone branches to be co-located with retailers (e.g. convenience stores)
CONTRACTUAL CHANGE: Variablising remuneration structures and linking them to transaction
volumes; this aligns subpostmasters interests with those of POL (i.e. subpostmasters are better
incentivised to sell more effectively). The change involves removing the fixed element of
subpostmaster pay worth about £10k p.a. (known as the “Core Tier Payment" or CTP)
NT has been a success with more than 6,000 branches modernised to date and POL expects to
convert c.7,500 by the scheduled end of the programme in March 2018. This leaves c.500-800
“unmodernised” branches — POL is currently working on alternative solutions for these locations
Now the majority of work on NT is complete, POL is in the process of downsizing its programme
team. Employee numbers are expected to fall from c.610 posts today to .50 by next March
Note: For further information on the different types of branches that POL operates, including the NT
models (i.e. “Main and *Local” Post Offices) see Page 18.
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© Board AND MANAGEMENT PROFILES
DONE
im Parker, Chair
‘Tim became Chair of POL in
‘October 2015. He has an
‘ranstomation, nciuding CEO
roles at Clarkes, Kwikfit and
Samsonite, He is also curently
I nteine-nsniumun! Chair ofthe National Trust
Januery 2016. A serving
executive at Europcar Group,
he also has a strong mals
backgroundincluding Chief
Executive roles at DHL and
TINT. Ken is also @ NED at
‘Supergroup pe.
ia Holmes, NED
Virginia brings extensive
financial services experience to
the Board, including more than
f@ decade at Barclays Bank, and
‘@ number of curent Board
roles, She has served on POL's
Board since April 2012 and is
“+ on her second three-year term,
arla Stent, NED
‘Carla chairs the Aucit, Risk and
Tim Franklin, NED
Tim's career spans both
building societies and banking,
including roles at Barcays and
Link Cash, as well as the Land
Registry. He has served on the
Board since 2012 and has just
renewed for a second term, to
end September 2019,
“Richard Callard, NED
Richards the head of the Post
Office team in UK Government
Investments andis the
shareholder representative on
the Board. A chartered
‘accountant, he previously
Worked at Deloitte before
“Joining the civil service.
Paula Vennells, Chief Executive Officer
Paula became Chief Executive in 2012 having been the
‘managing director of the network prior to that point. Her
previous roles include commercial director at Whitbread,
pic and has worked at other major retailers including
‘Argos and Dixons. She also has non-executive roles at
Montisons pic and Hymns Ancient and Modern Group,
UK Government
Investments
Al Cameron, Chief Financial Officer
‘Appointed in Januery 2015, Al had a number of roles at
‘Cenitica plc, including finance director of Britsh Gas. He
was brought infor his experience of tuming around
‘businesses that required significant cost reductions in a
regulated customer oriented environment. He is also 8
NED on the Board of Oxford University Hospitals,
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TBC LAURA
© Remuneration
Remuneration of the Executive members of the Board must be approved by the Secretary of State and the Chief Secretary to
the Treasury each year. This involves approval of their base pay and bonus arrangements. The Remuneration Committee of
POL (RemCo) present their proposals to the Shareholder each year to seek approval
‘The packages for Paula and Al are noted below, but it is worth noting that remuneration has tended to be a sensitive topic for
ministers and the Board alike:
+ The Board, via the RemCo, seek to motivate, attract and retain talent through offering sufficient pay packages to the
‘executives, balanced against pay restraint required by the public sector
Paula's base salary has not increased since she took the role in 2011, and benchmarking would suggest that her
remuneration is significantly behind that of a similarly sized commercial company. Furthermore, salaries of other members of
the executive team (below Board level) have increased and the gap between them and Paula has become much smaller
+ Nevertheless, Paula’s pay (and Al's) are high compared to public sector levels, and the shareholder team continues to try
and balance these competing tensions
Details of Paula and A\'s pay are as follows, reflecting the outturns for the respective years. Note that 2015-16 figures are not
yet public
Pewee Dien cis
Base Pay £250k £250k Base Pay £240 £60k
Other benetits £72k £71k ther benefits £70k £18k
Short Term Incentive Plan* £154k 88k ‘Short Term Incentive Plan’ £125k + £75k" £15k
Long Term Incentive Plan™* £14k £112 Long Term incentive Pian"* na va
Total for year £619 521k Total for year ‘£508k £93k
* Targets for the STIP are based on metrics such as revenues, profs, customer satisfaction, network transformation etc.
“The LTIP targets based on maintaining @ minimum level of branches and achieving profit targets
“**Ajaned POL in January 2015, so the gues given relate only to part of the year. There was no change to base pay or bonus sructue between financial years. 94
“++ The £75,000 relates to a one-off bonus payable afer 6 months in post against agreed objectives, to compensate for salary?bonus reductions on joining POL
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(=) Legal Structure
DONE
POL is 100% owned by
Government, via a
holding company
that also previously
owned
Government's
shareholding in
Royal Mail
Now the remaining
shares in Royal Mail
have been sold,
there are plans to
wind-down POSH to
simplify POL’s
shareholding
structure
POL is subject to
‘Companies Act
provisions,
competition law, and
European framework
(ie. State Aid)
UK Government
Investments
OVERVIEW STRUCTURE
POL separated from Royal Mail in 2012 prior to
the sale of Royal Mail shares. It is now 100%
directly owned by Government through POSH
* Set up to hold Government's stake in Royal
Mail and its shareholding in POL
+ POSH Board is made up of 3 directors (2x
UKGI and 1x Other BEIS)
Through POSH Government holds @ special
share in POL
* Gives a range of rights including approving
appointment of directors and directors’
remuneration
Other rights relate to matters such as sale of
assets, changes to strategy, changes to
governance structures, etc.
POL's regulated insurance business is run
through a subsidiary called POMS
+ Restructured in 2015 to allow POL to
transform its insurance activities
POL also owns a 50% stake in FRES
* Joint venture with Bank of Ireland, supplying
POL's bureau de change business with
currency
BEIS Secretary of State
100%
Postal Services Holding Company
Limited (POSH)
100%
Post Office First Reserve
Management Exchange
Services Services
Limited (POMS) Limited (FRES)
Not: FCA regulted Note: Joint verte with
subsicary that Bank of Ireland.
operates POL's Supplies POL's eeign
insurance business ‘exchange business
with eurency
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Tim
8 Recent Developments / Live Issues — Mails and Retail
+ POL's contract with RM was signed in
2012 before the separation of the two
businesses. It is a commercial
agreement agreed on an arms-length
basis and, with a 10-year duration, was
the longest permitted by the European
Commission at the time.
Government was not involved in the
discussions and has also not sought to
influence this relationship. Any such
action would have significant legal and
financial implications for POL and RM.
‘The contract has a “renegotiation event”
scheduled for 2017 when the contract
‘ean be revised, but POL is considering
‘opening discussions with RM sooner.
Formal dialogue may commence during
2015.
POL is keen to realign certain aspects of
the relationship as in reoent months
tensions have emerged (e.g. around
POL's plans to grow its network and in
felation to product structuring, pricing
and new launches (e.g. Click and
Collect)).
UK Government
Investments
+ With the letters market in structural
decline POL and RM see the
opportunity in parcels as the biggest
source of retail Mails growth. However
in recent years a number of competitors
have emerged, placing pressures on
both parties
Many grocery stores now work with
competing parcel delivery providers
(eg. Collect+, MyHermes) while other
areas of the market are innovating fast
(e.g. Amazon Logistics, retailers’ Click
and Collect, same-day delivery, etc.)
There are now more pick-up/drop-off
points for parcels (ie. rival services)
than there are Post Office branches
The Impact of increased competition is
being compounded by the fact that
expected growth in the parcels market
has not materialised. itis also not clear
whether POL and RM are offering the
right product set (e.g. simplicity and
price)
* Historically POL has not taken a
strategic approach to its Mails business,
instead seeing itself as a supplier to RM
This has negatively impacted POL in
recent years as RM's strategy has been
exposed to unexpected changes in the
‘market. In response POL is now taking
action to develop its own Mails plan
*+ The early work coming out of POL's
strengthened Mails team is encouraging
and the outputs of this work are
expected to feed into POL's broader
strategic refresh which will be presented
to Government in mid-2015
This is focused on optimising POL's
position in the market and it could look
at some radical options (e.g. looking at
ways POL could move away from its
exclusive relationship with RM in some
segments of the market)
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Tim
(2) Recent Developments / Live Issues — Financial Services
* The majority of POL's own-branded * Today 98% personal current account
financial services are provided in customers and a large number of SMEs
‘conjunetion with Bol. POL provides can make withdrawals and deposits at
exclusive access to its retail network post offices and check their balances,
and customers, while Bol brings balance albeit not in a consistent manner (e.g.
‘sheet capacity and product/ technical the way to deposit differs between
‘support. The relationship has historically banks). Most recently, Santander
worked well and financial services has agreed to make this service available to
been a key growth area for POL. its current account customers.
‘+ In recent months tensions have + Since December 2014 POL has been
emerged (e.g. in respect of current ‘working with the high-street banks and
accounts, mortgages and savings and the BBA to launch a standardised offer
investments) and discussions to that would make a consistent service
address these issues are ongoing. It is available to all personal and SME_
important that progress can be made so customers. The challenge for POL will.
that POL can deliver planned income be to ensure the agreement works for
growth (e.g. new product launches) and them commercially.
‘meet its financial targets. + After a good start progress has slowed
* POL expects Bol will want some clarity recently. Despite this POL remains.
for the period after 2023 when the hopeful of successfully taking the
current contract ends and are opportunity forward, in particular as it
considering handling. would be a welcome revenue upside for
the business.
UK Government
Investments 24
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Tim
C>) Recent Developments / Live Issues — Govt. Services
New Opportunities / Digital
* POL has faced considerable
disappointment in its efforts to grow
Government Services in recent years as
significant revenue opportunities have
been deferred or have failed to
‘materialise, and as such, POL exercise
a degree of caution in respect of the
opportunities below.
Passport Applications: POL is working
with the Home Office on the possible
launch of a POL digital passport
applications service, with potential
launch in November 2015 to coincide
with HMPO's digital journey public beta.
Assisted Digital: POL is an obvious
‘candidate to provide AD services (for
those who can't or won't use digital
channels), but POL will need to be
certain on future volumes and revenues
to invest in both kit and training
Identity Assurance: POL launched its
IdA product on the Government Verify
service in pilot phrase in April and is
currently gaining around 60% of that
market. Progress has been siow to date
I ut volumes are now well above
‘pectations — the challenge will be to
nd innovate further.
Investrnents
in 2012 POL won a tender for the FOCS
contract, which is an exclusive
framework enabling Departments to
contract with POL without running
separate time consuming and costly
procurements. Contracts under FOCS
have a duration of 7-years, with the
option for a 2 year extension. This
‘means that call-offs from FOCS can be
made at any time during the life of the
underlying contract for 7 years (plus the
extension).
FOCS was expected to unlock a number
of new Government Services
opportunities but since 2012 only
existing contracts have moved to this,
framework (e.g. DVLA, POca and
Passport Check and Send).
Few new opportunities have emerged
despite considerable work to improve
Whitehall’s knowledge and
understanding of this opportunity, and to
find ways to align the interests of FOCS
with the Government Digital Service.
Front Office Counter Services (FOCS) Government Services Strategy
Over recent years the Digital by Default
agenda has been implemented across
‘Whitehall, reflecting a growing
preference by the public to interact with
Government online, and as a means to
reduce admin costs.
Led by the Government Digital Service
(GDS), key Government services and
transactions have moved online and
been adapted for the digital journey.
However, the Digital by Default agenda
conflicts directly with the ambition to
make Post Office a front office for
Government. Departments hosting
online services have to consider the
value for money case for offering non-
digital offerings (e.g. post, phone, or
counter services). With volumes both
Uncertain and diminishing, Government
Services contracts are less profitable
and appealing for POL.
There have been instances where GDS
has appeared to block Departments
taking forward services with POL,
although there are some new
opportunities too (see right)
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Tim
C«) Recent Developments / Live Issues — Telephony / Other
* POL's supply chain activity is high cost,
highly unionised and lacks the
innovation of its peers.
While POL is taking some actions to
reduce costs (e.g. redundancies, new
vehicles, etc.) itis also looking at ways
in which it can reposition the business
(e.g. simplifying products, changing the
way branches demand and manage
cash).
Changes must be managed carefully.
Anything that risks branches’ access to
cash has significant reputational and
operational implications (e.g. for POL,
and Government, and for vulnerable
customers unable to access benefits).
UK Government
Investments
In response to significant recent
changes in the UK telecoms market, in
the last few months POL has initiated a
review ofits telephony business.
POL needs a clear long-term strategy
and business case to justify investment
in mobile and high-speed internet, and it
also needs a plan on how it can win
customers in an intensely competitive
environment.
One option POL has considered, on a
very preliminary basis, is a sale of its
customer base or a combination ofits
telephony business with one of its
peers.
Itis important to note that shareholder
approval will be required before any
process can formally commence and
before any transaction can take place.
+ When POL developed its overall
strategy in 2013 it proposed setting up a
Home Services business, starting with
the launch of a POL branded energy
‘supply activity.
Given the reputational damage
‘experienced by many energy suppliers
in recent years it was thought that this
would be an attractive opportunity for
POL (e.g. the right product would be
aligned to POL's trusted brand).
However given POL's focus on
delivering the core of its strategy and
‘due to changes in the regulatory and
‘competitive environment that make a
launch more complex, POL has
‘currently put this on-hold.
+ While it remains a possible area for
future expansion, POL is not expected
to take action in the near-term,
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e Business Overview — Revenue Split
MAILS AND RETAIL (£m) FINANCIAL SERVICES (£m)
Total 2015/16 Revenue: £376m Total 2015/16 Revenue: £300m
s sg
7\ 4
«= Stamps and Labels = Fixed Fee = Savings “ATM
« Special Delivery Retail and Lottery » Insurance = Personal Banking Clients
Int Priority and Standard Signed F — sMeneySrem
. ie a ———, = Business Banking = Bureau and Travel Money Card
=Parcelforce = Other Mails Postal Orders okandiing
SN
= Mailwork and Mails Non-trading_=Home Shopping Returns —= Other
UK Government
Investments 2
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(2) Business Overview — Revenue Split (cont.)
GOVERNMENT SERVICES (£m) TELEPHONY AND OTHER (£m)
Total 2015/16 Revenue: £99m Total 2015/16 Revenue: £95m
=POca = HomePhone and Broadband
«= Passport Services
«Motoring Services allel
Digital ID Services, UKVI and Asylum = Other Income
«= Other Government Services
1S Assurance = Other Telephony and Mobile
UK Government
Investments 28