Royal Mail PLC Annual Report 2011

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FY2011 Annual Report · Royal Mail PLC

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Royal Mail Holdings plc

Annual Report
and Financial
Statements
2010-11

Contents

Royal Mail Group

Financial and business performance highlights

Chairman’s Statement

Chief Executive’s Review

Modernising Royal Mail

Our people

Our customers

Regulation

Community

Our Transparency report

Our businesses

Key Performance Indicators

Financial review

Risk Management and Control

Royal Mail Holdings plc Board

Directors’ Report

Corporate Governance

Directors’ Remuneration Report

Statement of Directors’ responsibilities in relation
to the Group financial statements

Independent Auditor’s Report to the members of
Royal Mail Holdings plc

Consolidated income statement for the year ended
27 March 2011 and 28 March 2010

Consolidated statement of comprehensive income
for the year ended 27 March 2011 and 28 March 2010

Consolidated statement of changes in equity for the
year ended 27 March 2011 and 28 March 2010

Consolidated balance sheet at 27 March 2011 and
28 March 2010

Consolidated statement of cash flows for the year ended
27 March 2011 and 28 March 2010

Notes to the Group financial statements

1. Authorisation of financial statements and statement

of compliance with IFRSs

2. Accounting policies

3. Segment information

4. People information

5. Operating costs

6. Auditor’s remuneration

7. Operating exceptional items

8. Net finance costs

9. Income tax

10. Property, plant and equipment

11. Leasehold land payment

12. Goodwill

13. Intangible assets

14. Business combinations

15. Investments in joint ventures and associates

16. Non-current assets held for sale

17. Inventories

18. Current trade and other receivables

19. Cash and cash equivalents

20. Financial liabilities

21. Provisions for liabilities and charges

22. Current trade and other payables

23. Non-current other payables

24. Financial risk management objectives and policies

25. Financial instruments

26. Employee benefits – pensions

27. Issued share capital and reserves

28. Commitments

29. Related party disclosures

30. Events after the balance sheet date

Group five-year summary (unaudited)

Parent Company financial statements

Statement of Directors’ responsibilities in relation
to the parent Company financial statements

Independent Auditor’s report to the members of the
Company, Royal Mail Holdings plc

Parent Company balance sheet

Notes to the parent Company financial statements

Forward looking statements

Corporate information

100

101

102

104

105

107

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Royal Mail Group (‘the Group’) is unique in reaching
everyone in the UK through its mails, Post Office and
parcels businesses. The Group is a key component of the
UK’s economic and social infrastructure, providing services
to private individuals, companies and communities.

The Group is the sole provider of the UK’s Universal Service.
It does so for some of the lowest prices in Europe. Every
working day, the business processes and delivers around
62 million items to 28.8 million UK addresses.

Each year, our European and UK express parcels businesses
– General Logistics Systems (GLS) and Parcelforce
Worldwide – handle some 423 million parcels. In 11,820
Post Office branches, we serve around 20 million customers
every week.

The business is changing fast. The Group is modernising
its core letters business to make it more efficient, effective
and customer responsive. The Post Office is transforming
its branch network in response to changing customer needs
and the demands of a modern and dynamic business.

This process of change is about ensuring a sound, secure
and sustainable Royal Mail. The mails market is in
significant decline in the developed world. Royal Mail is no
different. It faces significant financial challenges which are
being urgently addressed. The Board has a clear plan. The
Postal Services Act is an important part of the process.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial and business performance highlights

Financial performance

During the year, the Group changed the structure of its internal
organisation which has resulted in a change to the composition of its
reportable segments. As a result of this change, corresponding
information for earlier periods has been restated.

The Group’s operating segments – UK Letters & Parcels and
International (UKLPI), Post Office Limited (POL), General Logistics
Systems (GLS) and our smaller other companies, such as Romec
Limited – are organised and managed separately according to the
nature of the products and services provided.

We have also changed the way we report our performance.
Performance of the Group is now reported after costs associated
with modernising the business. This provides a better understanding
of our performance against our strategic aims.

Revenues

Balance sheet

• Net liabilities of £3,107 million are lower than £6,281 million last

year primarily because of the reduction in the pension deficit

• The accounting pension deficit has decreased from £8.0 billion
in 2010 to £4.5 billion in 2011, driven by an actuarial gain of
£3.4 billion. Cash payments of around £300 million were made
in the year to fund the pension deficit

• The accounting pension deficit has reduced by £3.5 billion mainly

as a result of the announcement by Government to use CPI
rather than RPI as the inflation measure (CPI is now the statutory
minimum indexation for pensions in deferment and in payment)
and an increase in asset values due to market conditions

Business performance

Modernisation

• Group revenues of £9.2 billion. Inland addressed volumes down by

• Modernisation programme is delivering cost savings and efficiency

4% with UKLPI revenues falling by £121 million

• GLS underlying revenues grew by around 4% at constant exchange

rates

• Post Office Limited core volumes continue to decline. Revenues

down £62 million

Profits and cash flow

• Operating profit after modernisation costs of £39 million** is

£141 million lower than last year, driven by the reported revenue
decline

• Improved free cash outflow of £213 million down from £545 million
as a result of lower modernisation costs and one-off disposals
proceeds this year

– Reduction in hours of 2.4% to partially offset volume decline

– 554 new/upgraded machines, walk sequencing rates of

nearly 34%

– 24 World Class Mail Centres

– 117 delivery offices using new delivery methods

– Accidents down 25%1

Quality of service

• Retail First Class quality of service – 91.4% – this figure is without any

adjustments. After adjustments are made, the Retail First Class quality
of service figure is 93.0%, after account is taken of the extraordinary
combination of the severe winter weather and the unprecedented
closure of UK airspace because of Icelandic volcanic ash.

• Post Office Limited customer satisfaction – 85%

Business unit

UKLPI*

Post Office Limited

General Logistics Systems

Other

Group

External revenue

2010-11
£m

2009-10
£m

6,857

776

1,485

9,156

6,978

838

1,487

9,349

Operating (loss)/profit
after modernisation costs**

2010-11
£m

(120)

118

2009-10
£m

112

180

* UKLPI – UK Letters & Parcels and International.
** All references to operating profit/(loss) after modernisation costs are before other exceptional items. The operating loss for 2010-11 was £49 million

(2010 profit of £113 million) as shown on the consolidated income statement on page 51.

UK frontline employees.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Chairman’s Statement

Donald Brydon
Chairman

The postal world is
changing rapidly; so too
are all communication
channels. The lives of
everyone in Royal Mail
Group are affected.

Work practices, structures and processes, regulation, product
offerings and customer needs are all changing. Royal Mail Group
is determined to succeed in this complex environment.

2010-11 was a very challenging year; much remains to be done
to improve our financial and operational performance.

In spite of the outstanding efforts of all our colleagues, the Board
was disappointed with our overall financial results. Overall revenues
were 2.1% lower than last year. Group operating profit, after
modernisation costs, was only £39 million. Tiny changes in revenue
have a major impact on profitability. Our financial position is
challenging, our core letters volumes are declining and we have
a large and disproportionate historic pension deficit.

We have again reported negative free cash flow – of £213 million –
albeit significantly down from last year’s negative £545 million. This
is not sustainable. The main cash outflow relates to payments to the
pension fund, and the capital investment and voluntary redundancy
costs associated with modernisation. The accounting pension fund
deficit is approximately £4.5 billion. In 2010-11, we contributed
nearly £300 million towards reducing it.

Our transformation
We know that we are a business which, with a different structure
and regulatory regime, could be commercially successful on a
sustained basis. Parts of our business, like GLS and Parcelforce
Worldwide, continue to increase profits. They show what we can
do in an unregulated environment and with the same commercial
freedom as other companies.

We are in a process of transformation. It is as radical as
any that has happened in the history of the UK’s postal
industry. It is a transformation that has been likened
to rebuilding the engine of a car while the vehicle is
still moving.

Inland addressed mail volumes have traditionally tracked GDP. A
buoyant economy meant more mail; recessions meant less. The
internet has changed the paradigm. Inland addressed mail volumes
in the UK peaked for the year 2005-06 at around 80 million items
of mail per day. They have declined ever since. During 2010-11,

Royal Mail delivered 62 million items of mail per day. We can expect
further declines in the future of about 5% a year.

Against this backdrop of significant and ongoing structural decline,
we need to ensure that our core letters business is cost effective and
we need to diversify our revenue streams.

Modernisation of our processes is not optional. Moya Greene
and her team are focused on successfully delivering the required
transformation. The scale and depth of the changes that we have
made and will continue to make are set out in this report.

The UK businesses are undergoing profound changes.
Every part of the organisation is affected. We are making
real and tangible progress.

Our significant progress
We have strengthened our focus on health and safety. This is a key
measure which we now closely review at every Board meeting. Given
the scale of our financial challenges, we have also redoubled our
emphasis on managing our cash flows. This discipline is now deeply
embedded across the Group.

The Board and the senior management team have also been part of
the profound change taking place. The senior management team has
been rebuilt. Following a comprehensive search, Moya Greene,
formerly CEO, Canada Post, was appointed as our Chief Executive in
July 2010. She has made significant progress in a very short time in:

• Restructuring the business, reducing costs at the centre in

the process

• Significantly sharpening our focus on the customer

• Beginning the process of putting our business on a more

sustainable financial footing

• Changing the focus of the debate around regulation

In light of the trading results, during the second half of the year the
strategic plan was reviewed and our view of future profitability and
cashflows showed a worsening position. The Board has had to
review whether the Group (excluding Post Office Limited) can pay its
debts as they fall due over the foreseeable future. This has involved
regular reviews of projected monthly cash headroom until March
2013. The deteriorating financial position and expected future
cashflows means that the value of ColleagueShares at the end of
March 2011 is nil. The final value of ColleagueShares will not be
known until the end of March 2012.

The Postal Services Act is a key enabling framework which will prove
essential in the years ahead, particularly through dealing with the
pension issues and in ensuring access to new capital. We have more
work to do on the next steps and we are looking forward to
constructive engagement with a new regulator.

We have had very significant support from the Government,
including in particular, its work to promote the Postal Services Act.
Government has also responded well to the needs of the Post Office
with a commitment to invest £1.34 billion. These commitments to
the future of the Royal Mail and Post Office are most welcome.

The Government has announced its intention, subject to State Aid
approval, to relieve the Company of its legacy pension deficit with
effect from March 2012.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Chairman’s Statement continued

Our Board
Three new executive directors and three new non executives have
joined the Board in the past 12 months. Four are women. Along
with Moya, Dave Smith joined the Board as the first Chief Customer
Officer. Dave had previously been Managing Director of Parcelforce
Worldwide and of the Post Office. The new Chief Finance Officer,
Matthew Lester, joined from ICAP. Paula Vennells, who has
been with the Group since 2006, was appointed Managing Director
of the Post Office in October, having previously been its
Chief Operating Officer.

Three new non executive Directors with extensive customer
experience, Cath Keers, Orna Ni-Chionna and Nick Horler, joined
during the year. Cath was Customer Director and Marketing
Director of O2 UK. Orna is a former partner at McKinsey where she
specialised in retail and consumer clients, looking at the customer
experience from a strategic perspective. She has been appointed
Senior Independent Director. Nick Horler was, until recently,
Chief Executive of Scottish Power. He also brings regulated-
business experience.

There were two retirements during the year: Baroness Prosser
retired after six years’ service as did Richard Handover, after eight
years. He was latterly Senior Independent Director. We will miss their
counsel. I thank them for their excellent contributions to the Group.

Thank you
Moya and I both understand how much we are asking of everybody
at Royal Mail. The process of change is stretching. In an organisation
of our scale and reach, it is having an impact on the lives of tens of
thousands of people and their families. I would like to offer my
sincere thanks to all of my colleagues on the great work they have
done over the past 12 months. We now have a clear plan in place.
I am confident we can – and will – successfully deliver it.

Donald Brydon

Royal Mail’s operation involves road, rail, air, and in some
cases sea, to transport the mail around the country.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Chief Executive’s Review

Moya Greene
Chief Executive

We have a clear plan in place
to deal with our difficult
business environment. It will
be a stretch to achieve our
plan, but we are determined
to do so.

Introduction
Royal Mail Group is a vital part of the UK’s economic and social
infrastructure. Our service is comprehensive, six-days-a-week,
and with overnight delivery. We delivered around 62 million items
to almost 29 million homes and businesses every working day last
year. We collect mail from 115,271 post boxes – often more than
once a day – as well as from approximately 11,800 Post Offices and
more than 80,000 businesses. Our Post Office network is bigger
than all of the UK high street banks combined; around 20 million
customers visit per week.

Our service is not only comprehensive, it is also good value for
money. For collecting a First Class letter, sorting it, carrying it by
road, rail or air and delivering it by hand, we charge 46p. This
journey could be as much as 800 miles from collection to delivery.

Our prices are among the lowest in Europe. Most
countries do not provide a six-day service, or enable
their customers to post as late in the day as we do.
Our standards for on-time performance are higher
than most countries.

In this, my first Annual Report as Chief Executive, I would like to use
this opportunity to set out our core strategic approach.

We need to address the fact that we are losing money in our core
letters business. As the availability of public capital is restricted, we
need access to private capital to invest and grow. We need to
modernise our core letters business. This involves not only our
investment in new equipment and processes, but investment in
our people.

We must develop new products and services. Innovate to meet the
needs of our customers and generate additional revenues to offset
the decline in earnings from our core letters business. In addition,
continued change in the regulatory regime is required.

Modernising our business
The Group’s operating profit after modernisation costs fell from
£180 million last year to £39 million at the end of this financial year.
The Group has been in significant financial difficulty for a number of
years, reporting negative cash flow four years in a row. Our challenge
is to put the Group on a sound, secure and sustainable footing.

Royal Mail is honoured to collect and deliver the mail on behalf of
households and businesses across the UK. But our industry is in
decline. Few could have predicted the dramatic decline in the postal
market. Letters now account for a very modest share of daily social
messaging. The continued structural decline in the number of items
of mail in the UK is well documented.

Single piece mail volumes have declined by 40% in the past five
years. We anticipate total mail volumes continuing to decline by
around 5% a year for the foreseeable future.

Consumer mail is in decline. In volume terms, it now accounts for
around 12% of our total business. The typical household spends less
than 40p a week on postage. As volumes fall, our revenues decline.
Revenues were down 2.1% (£193m) last year. Our costs are falling.
But, they are not declining fast enough to offset the reduction
in revenue.

Our current margin, after modernisation charges, at 0.4%, is
down from 1.9% in 2009-10 and is slim compared to other postal
operators. We need a reasonable and sustainable margin to
maintain the comprehensive Universal Service our customers
enjoy and to invest in our Group.

One of the key ways we are going to improve our financial
performance is to modernise our core letters business.

We achieved our First Class quality target with a 93.0% performance
when account is taken of the impact of the extraordinary
combination of the worst winter weather in living memory and the
unprecedented closure of UK airspace, because of Icelandic volcanic
ash. Without any adjustment, the performance for the year would
be 91.4%.

Our modernisation is one of the largest change management
programmes ever undertaken in the UK. The peak period of change
is under way – now. The jobs of over 100,000 people are changing.

I know that this change is hard for our people. The section on
modernisation explains what we are doing in more detail.

Royal Mail and Post Office are brands that enjoy considerable
public support. People trust us. We offer and provide services that
customers, large and small, need. At a time when many companies
do not enjoy strong brand profiles, this is a major advantage for us.
We know better than to be complacent. We need to maintain
that trust.

Modernisation changes every process – collecting, transporting,
sorting and delivering mail. It affects everyone who works for the
organisation. It will, unfortunately, continue to mean significant job
reductions. There will be job losses. These will be in addition to
almost 45,000 UK full-time equivalent employees who have left the
Royal Mail Group over the last decade.

Moving forward
There is much more for me and my team to learn and, most
importantly, to deliver. One of the things we need to do is to
communicate more and be more responsive. We will. I hope this
document is a good start. If you have any feedback, please do
write to me at moya.greene@royalmail.com.

In some of our offices where we have revised delivery methods,
we have cut operating hours by an average of 11%. This is our best
in class performance. It is not the case everywhere. Our future
depends on our ability to achieve this level of improvement
everywhere. We have a great deal still to do.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Chief Executive’s Review continued

Change needs to be continuous. The automation of packets, for
example, has just begun. The boom in online retailing means parcel
delivery requirements will increase. This is growth that Royal Mail
needs to capture.

The World Class Mail programme, developed by Royal Mail itself, is
another key factor in our future success. This programme is having a
major impact – in performance and attitudes. In 2011, we will see the
programme rolled out to all mail centres and schemes established in
collection and delivery offices. I was pleased in October when the
World Class Manufacturing Association gave awards for operational
excellence to our mail centres in Cardiff, Gatwick and Belfast.

Investing in our people
We are a people business. Our greatest asset is our people. In our
delivery network, our people are daily ambassadors for Royal Mail.
Almost no other company has daily contact with customers in the
way that Royal Mail does.

For many years, our employee engagement scores have been
disappointing. Our colleagues, justifiably, take great pride in Royal
Mail itself and the valuable work they do in so many communities
across the country. The turnover rate of our full-time frontline
workforce is about half the UK average. On the other hand, our
colleagues, given the difficult situation facing the Group and the scale
of the modernisation, do not have confidence in our future. It is
imperative that we change this.

A major focus for me, personally, is to ensure that we are a much
more open and communicative company – starting first and foremost
– with each other. We are committed to much more active
engagement by senior managers with the frontline. Starting this
summer, around 150 of our senior managers will be taking part in
workplace visits around the country briefing our people.

Royal Mail will be a much more efficient and effective
organisation. That is the best outcome for all our
stakeholders, and particularly our people.

Meeting the needs of our customers
A more rigorous focus on who our customers are, what they want
and how they want mail delivered, is absolutely critical.

We need to ensure customers know we value their custom and that
we fix their problems quickly. In the next 12 months, we will seek to
simplify our products and processes, accurately measure and track
customer perception, promptly respond to problems and drive up
our performance significantly in this crucial area.

Our new organisational structure is designed to bring us much closer
to our customers in both the regulated and unregulated sectors. In
the Post Office, with significant financial support from the
Government, we are investing in transforming the network and
piloting new branch models, including longer opening hours.

We are now tracking on a regular basis what our business customers
think about Royal Mail through the Net Promoter Score methodology.
More detail can be found in the Customer section in this report. We
have a great deal to do to improve our customer proposition.

At the moment, our customers see Royal Mail primarily as a delivery
and distribution company. To remain relevant in the future, we must
innovate and re-establish ourselves as a market-leading
communications and distribution company.

We will do this not just by transforming our Universal Service
network and revitalising our parcel network. We must diversify
our revenues to make up for declines in our core letters business.
We aim to capture and sell more data and link with more
digital networks.

We will establish more external partnerships to expand our
capabilities and commercial propositions that generate substantial
financial value for Royal Mail and its new partners. There is no
certainty that all – or most – of these new ventures will succeed. Our
clear success with GLS and Parcelforce Worldwide demonstrates,
however, that Royal Mail Group has a successful track record of
growing businesses.

Changing our regulatory framework
The time is right to change the existing regulatory structure. The
Postal Services Act, including the welcome provision for Ofcom to
become the regulator and a Government commitment to a new
regulatory approach, constitutes a new framework for change. Any
significant changes would not impact on the one-price-goes-
anywhere, six-days-a-week Universal Service. That is now enshrined
in the Postal Services Act.

The objective of the Postal Services Act is to safeguard the Universal
Service by ensuring that Royal Mail can attract external capital and
deliver a commercial rate of return. A different approach to
regulation is essential. We will work closely with Ofcom to achieve
the changes needed for the good of the Universal Service.

Outlook
The next two years will be challenging. We must put the Group and
our ability to deliver the Universal Service on a sound, secure and
sustainable footing. We need to improve our efficiency to reduce
our costs faster than the decline in revenues from our core letters
business. We must continue to modernise and to invest in the Group
and our people. Just as importantly, we must sharpen our focus on
customers and put their needs at the heart of everything we do.
We will also innovate and build new partnerships with respected
third parties.

By any measure, this is a very significant change agenda. I am very
grateful – as the Chairman has already articulated – for the
considerable support we have received from the Government:
Secretary of State for Business, Innovation and Skills, Vince Cable,
Parliamentary Under-Secretary of State for Postal Affairs, Edward
Davey and their officials. I am particularly conscious of the
commitment of all my colleagues and their pride in Royal Mail Group.
I would like to thank them. I know I can count on them again as we
reshape and rebuild Royal Mail.

Moya Greene
Chief Executive

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Modernising Royal Mail

Our modernisation
programme is one of the
biggest transformations
in UK industry.

A major programme
A major programme to modernise Royal Mail is under way – it
is one of the biggest transformations in UK industry. Significant
progress has been made over the last year, but much remains
to be done.

Before the current modernisation programme started in 2007,
Royal Mail did not have the latest technology to sequence mail to
the order of a postman and woman’s walk. Most of the mail was
still hand sorted before being delivered. Postmen and women carried
the full mail weight on their shoulders. All this is changing – fast.

The programme is led by Mark Higson, Executive Director and
Managing Director, Operations and Modernisation. A dedicated team
is working to update every aspect of our operations – collections,
processing, sorting and delivery.

Around £400 million was invested by Royal Mail Group in
modernisation this year.

Why is modernisation important for customers and external
stakeholders?
Revenues are falling as the mail market continues to decline. Fewer
mail items are being handled every year and we have too much
capacity given this smaller mail market.

As part of the Group’s modernisation programme, 378 walk
sequencing machines have been installed at mail centres
across the UK to improve efficiencies in the sorting process.
The equipment automatically sorts the mail into the exact
sequence of a postman or woman’s walk.

Modernisation is about generating cost savings faster than the
decline in revenues. It is at the heart of ensuring a sound, secure and
sustainable Universal Service for everybody in the UK. It is as
fundamental as that.

Modernisation is about a more innovative Royal Mail and a more
customer-responsive business. While traditional ‘white letters’ have
seen a dramatic decline, packet volumes are increasing following the
boom in online retailing. Modernisation enables us to provide new
customer solutions such as tracking to the doorstep that better
reflect the reality of a changed – and changing – mail market, and
crucial to the competitiveness and commercial success of Royal Mail.

The pace will intensify
We are committed to fully engaging and involving our people as we
implement these changes, which are affecting the working lives of
more than 100,000 colleagues. We are working closely with the
Communication Workers Union (CWU) under the Business
Transformation agreement reached in early 2010. As our Chief
Executive said: “The peak period of change is under way – now”.

Our postmen and women are our main asset and modernisation is
challenging for many of them. They may need to work differently,
there are changes to their start and finish times, more efficient
working methods and different delivery rounds. We are also
significantly reducing the size of our workforce. Since 2002, around
45,000 people have left Royal Mail Group as part of our ongoing
change programme.

We are committed to working with our people and the CWU to
manage operational job reductions on a voluntary basis.

Many of the changes are improving the working lives of our
colleagues. They include the installation of modern technology and
better equipment for our postmen and women, including more
trolleys, shared vans to handle packets and parcels, and handheld
devices to record signatures when mail is delivered.

Most importantly of all, modernisation is about ensuring that our
core letters business is placed on a sound, secure and sustainable
footing. That is the key to ensuring a viable business and protecting
as many jobs as possible.

Our recent progress
In the 12 months since we signed the Business Transformation
agreement with the CWU, we have made significant progress. A
significant number of delivery office revisions have been completed
and major changes have been made to our mail centre and transport
networks. We have also reduced accidents in the workplace by 25%
in 2010-11 – a key and vital improvement – and met our licence
targets for First Class and Second Class mail quality of service after
force majeure adjustments for volcanic ash and extreme weather in
December and January.

Nevertheless, the programme has taken longer to start fully
delivering results than we planned. So, much more needs to
be done.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Modernising Royal Mail continued

Key examples of significant progress

• Installed 378 sequencing machines

• Introduced 38 ‘intelligent’ Letter Sorting Machines which can sort
38,500 letters an hour, nearly twice the speed of older machines

• Upgraded and extended 138 Integrated Mail Processing machines

• Sequencing 34% of the mail

• Closed 12 mail centres, and, following extensive consultations,

announced the closure of a further 16

Modernisation – the next phase
As we reported earlier, the key phase in the modernisation
programme is now.

We are introducing new delivery methods throughout our 1,371
delivery offices and, in the next year, will complete this delivery
transformation in more than 700 offices, over 50%.

Many postmen and women are now using new equipment
such as trolleys, replacing the need to carry mail by foot
or bicycle.

This is a major and far-reaching exercise. Traditional methods
involving postmen and women carrying the mail on foot or bicycle
are being replaced by the use of 5,000 high-capacity trolleys and
11,300 two-person vans. Delivery rounds are being changed so that
they will be more effective and efficient.

The pace of change in our mail centres will continue. We expect
that around half of the mail centres could close by 2016-2017.
We are focused on delivering all the benefits of the modernisation
programme as quickly and effectively as possible, working closely
with our people and with the CWU.

World Class Mail

World Class Mail is revolutionising the way we work. Developed
within Royal Mail, based on leading global practice and expert
advice, World Class Mail is a unique and comprehensive system
for improving safety, customer service, quality and productivity.
A key element is engagement with our people to ensure they are
fully involved in all aspects of our modernisation.

World Class Mail is already in operation in 24 mail centres and
seven delivery sectors. This year will see the approach introduced
in all our mail centres and an extension to many more delivery
offices and collection hubs.

Root cause analysis of problem areas by employee teams is at the
heart of World Class Mail. Safety is the first of its 10 improvement
‘pillars’. At Greenford mail centre, the packet sorting conveyor
area was the scene of six accidents in the year before World Class
Mail was introduced and 50 working days were lost to injury.
Since the programme was put in place, the area has been
accident-free for 700 days – a remarkable achievement by the
local team.

We were pleased when the World Class Manufacturing
Association recognised the progress and achievements of our
people last autumn in three mail centres – Gatwick, Cardiff and
Belfast – by awarding them Bronze Awards at a ceremony in the
Greenwich Maritime Museum in London.

Last October, teams at mail centres in Cardiff (pictured),
Gatwick and Northern Ireland were presented with
Awards by the World Class Manufacturing Association.
They were recognised for their efforts to create safer
and more productive places to work, in turn helping to
improve quality of service.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our people

To modernise Royal Mail
successfully, our employees
need to be fully engaged
with the business and our
strategy. Our postmen and
women are both the medium
and the message: they drive
the brand experience for
many of our customers.

Our UK workforce is relatively mature and stable. More than a
third have been with Royal Mail for over 20 years, 6% have less than
two years’ service. The average age is 44. Many of our staff have
spent their entire careers at Royal Mail.

Our profile
Royal Mail Group is one of the largest employers in the country. We
currently have around 163,000 staff in the UK. Employees currently
represent approximately 70% of our costs.

A postman unloading a letter sorting machine at South
Midlands mail centre.

Number of employees at the end of the financial year1

UKLPI

Post Office Limited

GLS

Other

Total

1 Source: see note 4 page 68
2 Source: Royal Mail Have Your Say Survey 2007-2011

2011

2010

155,181 160,291

7,782

8,209

13,167

12,885

4,254

4,217

180,384 185,602

Our workforce is mainly represented by the Communication Workers
Union with around 120,000 members. In terms of diversity, women
represent 18% of the workforce and we are seeking to increase this
proportion. Nine per cent of our employees are from black and
minority ethnic (BME) backgrounds, in line with the proportion of
BME citizens in the UK population as a whole.

In terms of diversity, women represent 18% of the
workforce and we are seeking to increase this proportion.

Engaging with our colleagues
To modernise Royal Mail successfully, our employees need to be fully
engaged with the business and our strategy. We are a people
business.

As outlined earlier, our colleagues are true ambassadors for the
Group. They are our delivery network. As our Chief Executive said
they are the “daily ambassadors for Royal Mail”. They are both the
medium and the message. Almost no other company has daily
contact with its customers in the way that Royal Mail does.

Our employee engagement scores are simply not where we want
them to be. We are taking action to improve this situation.

Between 2007 and 2011 the picture has not changed significantly.

Have Your Say survey trend2
%
80

Enjoy my job

Feel valued

Proud to work

Leadership

2007

2011

Each month, we carry out a ‘Have Your Say’ (HYS) survey of
employee opinion. This is a snapshot taken across the organisation.
The HYS surveys show that our colleagues take great pride in Royal
Mail and the valuable work they do in so many communities across
the country. The turnover rate for full-time frontline employees is
about half the UK average.

On the other hand our colleagues, given the difficult situation facing
the Group and the scale of modernisation, do not have the confidence
we would like them to have in our future.

During 2010, the numbers in respect of employee engagement
varied from a maximum of 34% in the summer to a low of 12% in the
snowbound Christmas rush. The average was around 20%. The
figures do vary across the business. They are better in Parcelforce
Worldwide and in Post Office Limited.

Our culture
Royal Mail is a communications business. Yet our communications –
particularly internally – require a significant overhaul.

We are not always seen to be a responsive employer. We have not
always been good at listening.

Focus group research carried out between January and March 2011
found that Royal Mail is felt to say too little, too late; and that what is
said is often not believed.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our people continued

The modernisation programme that Royal Mail has embarked on
requires the entire workforce to accept changes to how and
sometimes where they work. Yet postmen and women can, quite
understandably, feel that their job hasn’t changed: they are still
delivering to the same people they always were.

There were positives too, including a feeling that the Group is now
moving in the right direction:

• People want to do a good job

• People on the frontline want to be listened to

• When people are asking questions they deserve answers

• People who have years of valuable experience want to feel

involved

Our future
We know what the issues are. Now we have to solve them.

In 2010, Royal Mail signed a Business Transformation agreement
with the Communication Workers Union. This includes a commitment
on both sides to modernise Royal Mail, and change working practices
and working conditions.

For more details about our modernisation programme see pages 7
and 8. One of the ‘pillars’ of our World Class Mail (WCM) programme
is safety. WCM is transforming the efficiency of our operations and is
improving the safety performance. At the Gatwick mail centre, for
example, reportable accidents have fallen by 80% in the past three
years. In Scotland, accident rates were down 32% in 2010 alone.

While we aim to deliver our modernisation programme
through effective engagement with our people, we will
also be continuing to engage with our unions.

Royal Mail’s industrial relations in the past have been difficult. We
believe that having a positive relationship with our unions, based on
openness and honesty will help us through the challenges ahead.

Alongside our focus on safety for all of our people, there will be an
increased focus on learning and development both in our operations
and across the Group. In May 2011 (after the end of our financial
year), we started to implement the largest SAP Human Resources
and payroll system in Europe – our People System Programme. This
completely modernises all of our HR systems and gives a single
source of people information across the Group as well as helping to
drive performance improvements.

We acknowledge that we have not done enough to communicate
with our people. But starting in summer 2011, around 150
members of the senior leadership team will be going out to meet
employees in mail centres and delivery offices to explain where we
are going as a business. Each will be on the road for at least one
week during 2011-12. They will be in the field to listen and learn and
to communicate to colleagues. They will provide feedback on their
visits to our Chief Executive and the senior management team.

The criteria used to assess bonus payments for senior managers are
being changed to reflect the financial and non-financial performance of
the business. Employee engagement scores and safety performance,
customer satisfaction and service delivery are all part of a new
balanced scorecard, which will reward managers according to:

• What customers think of us

• What the people we lead think of us

• How good a service we are providing

• How financially healthy we are making the business

The same measures will eventually be used to assess performance
bonuses across the Group.

We value our people. Without them our business would not be what
it is today.

We will be relying on all of them to tackle head on the challenges we
face in the next two years. The pride that they continue to show will
help us meet those challenges.

We know we have work to do in engaging with our people to make
sure that they are more confident in what lies ahead. We believe that
by being more open and transparent and having the right recognition
in place, we will achieve our goals.

Royal Mail postmen and women play a valuable role. They
‘go the extra mile’ by delivering the mail to customers in all
weathers.

Teams working at the Group’s 12 contact centres provide
telephone assistance to customers, fielding more than
10 million calls annually.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our customers

Our customers want us to
keep our basic service
promises. Consistently
collect on time, deliver on
time and respond quickly
when needed.

Royal Mail Group has appointed Dave Smith as its first Chief
Customer Officer. He is introducing a comprehensive programme to
significantly improve our customers’ experience.

Our programme aims to cement Royal Mail as the most trusted
delivery brand in the UK. Our objective is to do so through the
provision of consistent, high-quality and relevant services to all UK
customers: individual consumers, small and medium-sized
businesses and large companies. We will do so by acting on what our
customers are telling us, by effective and consistent engagement
with our people and by clear and regularly communicated standards
and measurements.

The Post Office is also transforming the way it deals with its
customers. It has more branches than all of the main UK banks
combined and around 20 million customers visit per week.

Currently, it is piloting ways of operating Post Offices to increase
opening hours and to ensure more sustainable branches for
subpostmasters, who manage the vast majority of the network.

Royal Mail’s unique position as Universal Service provider
means we deliver around 62 million letters and packets per
day to almost 29 million addresses across the UK, six days a
week. This comprehensive service is unrivalled by any other
mail provider.

1 Ofcom Report August 2010

Our customers
Today, over 104 billion1 text messages are sent a year in the UK.
As a result of the growth in email and social networking sites, letters
now account for a very modest share of daily social messaging.
There is also a significant decline in transactional communications
through the post, like bank statements and bills.

Business customers represent most of our annual mail bag, while
mail from private individuals – or what we call consumer mail – now
represents a very small fraction of what we deliver every day.

We are equally focused on delivering a consistent and excellent
customer experience to businesses, consumers and recipients who
use our services. The level of service we provide to consumers
remains profoundly important to us.

As part of the Universal Service, we are committed to delivering to
around 29 million addresses, six-days-a-week. Each address
represents a customer who will have a view about Royal Mail and
the service it offers. Many consumers also own or run businesses.
Their decisions to use or not use Royal Mail at work
will be based in part on their experience of how we deliver their
mail at home.

Business customers want us to focus on being easy to
do business with, from the first point of contact, through
offering and setting up relevant and value-for-money
services, to receiving an invoice.

At the heart of our strategy will be a strong focus on the customer
and improving their experience of Royal Mail.

In 2011-12, our Customer Experience Programme will focus on
what our customers tell us is most important by:

• Helping all of our people understand what customers are asking

us to do and why

• Focusing on the vital few things that customers are telling us we
need to improve, whether these are products or processes and
delivering long-term fixes before moving on to other areas

• Working to make us easier to do business with at each customer

touch point, starting with our contact centres

• Introducing new, easy-to-understand measures, based on direct
customer feedback, that everyone will see from top to bottom in
the organisation

Understanding what our customers think of us
A robust understanding of what our customers want and their
perception of the level of service being provided, is essential to
inform both our priorities for action and compelling communications
to all of our people. Our overall net satisfaction score, for example,
rose from 30% to 34% between February and March 2011. We are
also introducing new measures, such as the likelihood that our
customers will increase or decrease their purchase of Royal Mail
products and services, both to track the impact of the changes we
make and to provide a forward looking indicator of customer activity.

For the first time, we have also started to measure what our
business customers think of our services and products through what
is called a Net Promoter Score (NPS). This is a standard tracking
mechanism that assesses the extent to which customers are likely

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our customers continued

Businesses use Royal Mail for a range of high-quality
services, including our premium next day Special Delivery.

to recommend the service provided. This will allow us to benchmark
other UK and International companies, set targets and to build these
customer measures into our corporate and functional scorecards.
The year end Net Promoter Score for the Group was – 1.

As an indicator of what this activity can achieve, three years
ago, Parcelforce Worldwide introduced a Customer Experience
Programme and a year later began using an NPS measure.
By focusing on service at all customer touch points, it has seen
a continuous improvement in customer loyalty and enquiry
handling performance.

Our customer service

Continuously improving customer service is a priority. It
is the right thing to do for the customer. It is clearly right
for our brand. It also has the potential to cut our costs.

Because of the sheer scale of our operation, even a small service
failure percentage can have expensive consequences. For example,
around one million items a week are not delivered first time – for
a myriad of valid reasons.

Being unable to deliver first time causes disappointment and
inconvenience for customers and storage and retrieval issues for
Royal Mail. It also generates millions of phone calls a year direct to
delivery offices and contact centres. Delivering to neighbours, if the
customer is unavailable, would improve the efficiency of our
operation and the customer experience. The rules we operate under
do not allow for this to happen. This is something we believe is
important and should be changed.

More fundamentally, we need to continue to improve our core
customer service proposition. We intend to make it easier and faster
for customers to use us.

We will focus on appropriate first-time fixes and single points of
contact. Our customer service staff and call centre procedures
must be focused on resolving callers’ enquiries swiftly. We need
to continue to develop self-service solutions that customers want.
This is what we are doing in 2011.

How we deal with complaints
We have already been successful at reducing repeat and escalated
complaints, down 12.7% and 24.8% year on year respectively.

We do not always resolve issues quickly. Nor are we good at feeding
customer comments back to delivery office level so that in future we
can get it right first time – saving customers hassle and us money.

This is another priority area for us.

The changing market and our products
In addition to our core letters market of First and Second Class
letters and bulk mail, Royal Mail also offers distribution services to
e-commerce companies, traditional catalogue retailers and other
customers wishing to send packages domestically. Services range
from stamped packets with no tracking or additional value-add to
Special Delivery, a lunchtime next day guaranteed service, and our
next day Tracked service offering full end-to-end tracking.

In 2010-11, we began to rationalise and simplify our products and
to align them more closely to customers’ different needs. Simplicity
in our offer will benefit customers, enhance Royal Mail’s operational
efficiency, and make customers want to choose us. Further details on
our products are given in the UKLPI section later in this report.

Around 11,800 UK Post Office branches have around
20 million customers visit per week. The greeting and
ticketing system in modern Crown branches helps us
to serve customers more efficiently.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Regulation

The time is right to change
the existing regulatory
structure. The Postal
Services Act, including
the provision for Ofcom
to become the regulator,
alongside the Government
commitment to a new
regulatory approach,
constitutes a new
framework for change.
Any significant changes
would not impact the
one-price-goes-anywhere,
six-days-a-week Universal
Service, which is enshrined
in the Postal Services Act.

Customers have increasing choices as to how they receive
information and communications. Today, there are very few
communications that can only be done through printed and mailed
matter. It is appropriate, therefore, that the regulation of post should
come within the remit of the regulator responsible for the
communications sector, Ofcom.

Royal Mail welcomes the Government’s commitment to a
new framework for postal services regulation through its
policy statements and letter to Ofcom. The debate is
heading in the right direction.

The objective of the Postal Services Act is to safeguard the Universal
Service by ensuring that Royal Mail can attract external capital and
earn a commercial rate of return. A different approach to regulation
is essential. We will work closely with Ofcom to achieve the changes
needed for the good of the Universal Service.

The time is right to review the existing regulatory structure
Broad consensus exists among stakeholders that the regulatory
framework needs to change.

European Union Directives in a number of ways. In the UK, the
Universal Service provider is required by regulation to process and
deliver its competitors’ mail and to provide a guaranteed price
advantage. No other country has a regime which mandates access to
do this. Royal Mail has until very recently been making a loss on mail
it delivers for others. It has also lost market share due to the
guaranteed price advantage it provides other players.

Both Universal Service Obligation (USO) and non-USO services are
currently price controlled in the UK. In most European states, only
USO services are subject to price cap regulation. Price controls
currently apply to approximately 80% of Royal Mail revenues at a
time when they are declining every year. In the UK, prices for stamps
are at the low end compared with other countries.

The postal market in the UK was opened up to competition ahead of
other countries and when the process of structural decline had
already begun. The regulatory approach – mandated access and
headroom regulation – has actively promoted private sector
investment in additional capacity when the market is contracting
rapidly. At this time, Royal Mail must now invest to take out capacity.

Postal service regulation across Europe in 20101

Mandatory
access for competitors
to access USP’s network,
and a guaranteed
price advantage

Price control not
limited to USO and
reserved products
and services

Fully liberalised
market

Denmark

Germany

Belgium

Netherlands

Sweden

France

Austria

Spain

Yes

Regulatory developments
During the last year, the focus with Postcomm has been on seeking
to secure a relaxation of the regulatory burdens including price
control and the requirement to publish commercial proposals three
months in advance. We have also worked with Postcomm to secure
a price rise to continue the modernisation programme.

• Postcomm launched a set of consultations in May 2010 on a set
of changes for 2011 which resulted in a number of incremental
changes to narrow price controls.

• Royal Mail made an application to enable the Group to generate up
to £100 million revenue above the regulatory limits to safeguard
the Universal Service and continue modernisation. In addition,
there were a number of applications and investigations.

• Royal Mail made an application to waive quality of service penalties
and compensation payments after industrial action in 2009-10
led to a reduction in the quality of service. In September 2010,
Postcomm accepted the case in full.

• Postcomm accepted in full Royal Mail’s force majeure case for bad

The current framework goes further than the requirements of

weather affecting quality of service in 2009-10.

1 European postal regulation before implementation of Third EU Postal Services Directive
Source: IPC Postal Regulatory Database Country Directory 2010, Copenhagen Economics “Main Development in
the Postal Sector (2008-2010)”

Conclusion
The time is right to review and significantly change the regulatory
structure. Solid progress has already been made.

The postal market is at an inflection point. Volumes continue to
decline very significantly. The current regulatory regime is a burden
on the Universal Service provider and extends beyond the relevant
EU directives. There is growing evidence that Royal Mail, as the
Universal Service provider, should be treated on the same basis
as any other postal player, that is, subject to market conditions and
competition law.

Any significant change of the regulatory framework would not mean
changes to the Universal Service. The one-price-goes-anywhere,
six-days-a-week service is enshrined in the Postal Services Act.
Royal Mail is honoured to deliver to the 28.8 million addresses
throughout the country. We are committed to doing so.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Regulation continued

• Postcomm closed its investigation into allegations of predatory
pricing and margin squeeze on Mailsort® Light. After extensive
responses from Royal Mail, Postcomm decided to take no action
against the Group.

• Postcomm closed its investigation into undue restriction, undue

preference and undue discrimination with regards to term
contracts. The evidence did not support a finding of licence breach.

• Royal Mail developed a costing manual setting out the principles
of our costing system. This was subsequently classed as ‘fit for
purpose’ by the regulator’s economic consultants and published by
Royal Mail.

• Postcomm concluded its investigation into Royal Mail’s monitoring

of quality of service performance stating that Royal Mail had
failed parts of its licence condition relating to the quality of service
measurement system. In light of the investigation’s findings and
Royal Mail’s comprehensive remedial actions, Postcomm did not
consider it appropriate to impose a financial penalty.

During the last year, the cost of regulation has been a major burden
for the Universal Service provider. Royal Mail is making a loss in its
core letters business. Funding and servicing the regulatory regime
cost Royal Mail around £50 million last year including payments for
the regulator’s running costs and Royal Mail’s costs to comply with
the licence and answer the regulator’s questions. It also included the
cost of running a unit to manage access to our network as required
by the licence.

Equivalent prices for domestic stamp postage in Europe*

2011 (0-20g)
Denmark
Greece
Finland
Belgium
Italy
Portugal
UK
Germany
France
Luxembourg
Sweden
Austria
Ireland
Netherlands
Spain

2011 (20-50g)
Italy
Sweden
Greece
Germany
France
Netherlands
Portugal
Denmark
Austria
Finland
Belgium
Spain
UK
Luxembourg
Ireland

65
55
54
54
51
49
46
45
44
44
44
43
42
36
33

120
89
75
74
73
72
71
65
58
54
54
47
46
44
42

Royal Mail First Class versus European next day delivery services or equivalent as at April 2011 (purchasing
power parity)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Community

Corporate Responsibility
(CR) is a priority for us.
The Group fully integrates
CR into its everyday
working environment.

2010-11 represents the eighth year that we have published an
external Corporate Responsibility report. It is also the third
successive year that we have reported on our activities using the
Business in The Community (BiTC) four-fold classification framework.

We also moved from a Silver award rating to a Gold award rating
in the BiTC Corporate Responsibility Index. The Group’s score
moved eight percentage points, from 86% to 94%. The BiTC
Corporate Responsibility Index is a voluntary benchmark for UK
companies. It provides a benchmark for organisations to evaluate
their management and impact within the key CR areas of
community, environment, marketplace and workplace. We will
be working towards Platinum status in 2011-12, as this year we
missed Platinum status by only 0.8%.

Payroll Giving

We have one of the largest and longest established Payroll Giving
schemes in the UK. The scheme makes it easy for our people to
donate some of their salary each month to their chosen charity.

Since its launch in 1989, colleagues have donated more than
£43 million. The biggest beneficiaries among the 850 charities
supported by the scheme include Barnardo’s, County Air
Ambulance Trust, Help the Hospices, Macmillan Cancer Support
and our own charity which supports our colleagues, the Rowland
Hill Benevolent Fund.

Over the past year, the scheme has raised more than £2.5 million.

We currently have 42,694 colleagues – one in four employees –
taking part. Typically, companies have to work hard at promoting
their scheme to reach 10% of their people signing up to the
scheme to attain a Gold level National Payroll Giving Certificate.
In the UK, 6% of all Payroll Giving donors work for Royal Mail Group.

Tax relief encourages people to donate. For example anyone who
pays tax at the basic rate of 20%, only has to contribute £8 from
their salary to give £10 to charity.

Barnardo’s
Our flagship charity, chosen by our people, is Barnardo’s. To date,
over £1 million has been raised for the children’s charity.

predominantly UK-based company, we have a large procurement
programme that makes a major contribution through the purchase of
goods and services.

Last summer, disabled ultra-distance athlete Chris Moon, MBE,
ran across the UK in the Post Office 1000 Challenge. He completed
1,000 miles in 30 days, averaging 36 miles a day. Chris met staff
in Post Office branches in many locations where they ran their
own fundraising campaigns, raising cash for Barnardo’s.

£460,000 was also raised specifically for the Children in Need
campaign by our colleagues and customers last November.

A group of postmen and women in and around Lancashire joined
thousands of other people in the Ride the Lights bike ride along
Blackpool promenade to raise money for Barnardo’s.

Community
We are a major part of the UK’s economic and social infrastructure.
That is why we play a role in so many communities across the UK.
Our Post Office network, for instance, is a core part of many urban
and rural communities across the country. Our position as one of the
largest full-time employers in the UK (having 163,000 staff) means
that we also make a significant economic contribution. As a

Workplace
Our key focus in the workplace is the health and safety of our people.
Accidents across the UK businesses fell by 21% this year. In 2010-11
the number of accidents across our business was 19,389, compared
with 24,479 the year before. One of the reasons that the accident
rate has fallen is our investment in modern equipment, such as
high-capacity trolleys as well as more efficient ways of working.

Our sick absence rate for 2010-11 sits below our target and is
in line with the Confederation of British Industry average absence
target. The year end sick absence figure was 4.1%, which was lower
than our target of 4.4%. Royal Mail Group works hard at reducing our
absence rate with its people. We offer a wide range of support in this
area, including health advice and initiatives. The bulk of our absences
continue to be caused by musculoskeletal problems or injuries.

Marketplace
First and foremost, our marketplace contribution is to provide
a high-quality service at reasonable prices. As we have already
pointed out, our prices are amongst the lowest in Europe. Most
countries do not provide a six-day service, or enable their customers
to post as late in the day as we do. Our standards for on-time
performance are higher than most countries.

In our marketplace, the direct marketing industry is making
significant strides to reduce its environmental impact. Royal Mail
is helping in this. More than three-quarters of direct marketing
material is now recycled. This is ahead of the 2013 target set
in agreement between the industry and the Department of
Environment, Food and Rural Affairs. Royal Mail’s Sustainable®
Mail service offers better-targeted, sustainably produced and
easy-to-recycle mail campaigns.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Community continued

Environment
Royal Mail Group understands and monitors its environmental
impact. We have been working hard to reduce it. We have a number
of plans in place designed to reduce our consumption of fuel and
other energy use. We continually seek ways to reduce waste.

Our Carbon Trust Standard certification has been renewed after
we cut greenhouse gas emissions by 47,670 tonnes in two years.

It means that we’re still the only UK postal services operator to
have achieved the prestigious accreditation. Based on a rigorous
independent assessment, the standard – which has to be renewed
every two years – shows that we’ve measured and reduced our
carbon footprint across our business, and are committed to cutting
it further each year.

We are identifying opportunities to avoid and reduce transport
emissions. Telemetry technology has been used to assist
improvements in vehicle use. Over 1,000 vehicles were taken out
of our delivery operations through optimisation and ensuring our
journeys take the most efficient routes. This saved around 4,808
tonnes of C02.
We are also developing our future vehicle roadmap, which will look
at opportunities for low-emission vehicles where commercially and
operationally viable.

In 2010-11, we bought over 1,000 compact diesel vehicles. Our
existing electric vehicles have been complemented by the purchase
of 10 diesel electric hybrids at our West London delivery office as
part of the Government’s Low Carbon Vehicle Procurement
Programme.

Removing mileage from our network trunking vehicles, which
consume the largest proportion of our fuel, is a continued focus.
This can be achieved through effective route planning and national
optimisation. We continue to use double-deck trailers and have
purchased a further 50 double-deck trailers with further
enhancements to boost their mail-carrying capabilities by around
6%. They are entering our operation during 2011.

Key focus
Our Corporate Responsibility and community investment
programmes will be a key focus for the Group in the next 12
months. Our strategy will be reviewed. Our community investment
programmes will be refreshed. A new Corporate Responsibility
report will be produced. It will outline our clear strategy in this area,
alongside enhanced reporting.

Postmen and women in Northern Ireland helped collect
football kit for children in Malawi.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our Transparency report

Royal Mail Group is
committed to being
more responsive, open
and transparent with
its stakeholders.

Royal Mail and Post Office are two of the most respected brands in
the UK. This is a great advantage to the Group. The strength of our
brands derives from how we serve our customers and our
interaction with other stakeholders.

In this, our first Transparency Report, the Group is sharing a number
of key facts with all of its stakeholders. We are doing so because of
our commitment to being more open to and more responsive with
our customers. We also plan to publish a range of key statistics on
our website on a regular basis – monthly and quarterly.

Royal Mail’s 115,271 post boxes are a familiar and much-
loved feature of the UK landscape.

A large-scale business
Royal Mail is a mail business serving 28.8 million addresses across
the UK, six-days-a-week. We deliver to 27.2 million residential
addresses and 1.6 million registered business addresses. We collect
mail from 115,271 post boxes.

With around 11,800 branches nationwide, the Post Office is the
largest retail and financial services chain in the UK. The Post Office
has more branches than all of the UK high street banks combined.
Over 99% of the UK population lives within three miles of a post
office. Around 20 million customers visit a post office per week.

Freedom of Information requests

Royal Mail is a major brand which attracts interest from
a wide range of stakeholders. As a Government-owned
company, it is naturally the case that there is a great
deal of interest in our mission as the UK’s Universal
Service provider, including the work of Post Office
Limited.

One of the ways this interest manifests itself during the year is
the number of Freedom of Information (FOI) requests we receive.
These requests cover a wide range of issues. We receive them
from a broad spectrum of people, including members of the public,
the media and elected representatives.

Some of these requests can be answered quickly but some need to
be considered carefully under the terms of the legislation. In the last
year, 590 requests were referred to our central FOI team. Of those,
267 requests were answered in full, and a further 116 requests
were answered in part. There were 137 requests where the
information requested was not provided because, for example, it
would damage commercial interests or breach principles of the Data
Protection Act. In another 70 cases, the information requested was
not held by us.

Returned letters
The overwhelming majority of all items we handle are delivered
safely to the correct address. A very modest proportion of the items
we handle are undeliverable for a variety of different reasons outside
of our control.

Items are not always able to be delivered if addresses are
incomplete, the recipient has moved, or there is no return address.
In these circumstances, letters and packets are returned to the
National Return Letter Centre in Belfast.

Royal Mail tries very hard to ascertain the correct address and
deliver the item. If that is not possible, we will seek to return it to
the sender free of charge. Our National Return Letter Centre
employs 160 full-time people dedicated to trying to return items.
The number of items processed in 2010-11 by the Centre was
19.6 million. That should be set against the 15.9 billion of items
we delivered this year.

The majority of items are business mail. Under the terms of trade
with our major business customers, if the mail is not delivered then
it will be securely disposed of unless a return address is included on
the envelope. This has been the practice for many years. The mail
which cannot be delivered or returned is stored for up to four
months. If an item is not claimed, it is put out to auction. All the
proceeds, minus a market rate commission for the auction house,
are used to partially pay the considerable cost involved in seeking
to reunite customers with their items.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our Transparency report continued

The annual income from items sold at auction by the National
Return Letter Centre for 2010-11 was £933,255. This income
represents a modest contribution to the annual cost of more than
£4 million of providing this free service.

Exceptions to our delivery and collection service
Royal Mail is not always able to deliver or collect mail as it would like
to. At the time of the Exceptions Annual Review in October 2010
there were 2,985 national Universal Service delivery exceptions in
the UK.

Every day, we deliver to 28.8 million addresses. So, this represents
0.01% of that total.

The exceptions are where our postmen and women have difficulty
gaining access or there is a long-term health and safety risk.
Examples include where we cannot deliver to an address because
it is on an island and has limited ferry services. There were also
414 short-term delivery exceptions, which have been in place for
more than 12 months in October 2010. These are mainly due to
dangerous dogs in gardens.

Last year, there were 2,180 long-term Universal Service collection
exceptions across the UK. There are currently 127,118 collection
points in the UK, the majority of which we collect from on a daily
basis. The small amount of collection exceptions represent 1.7% of
that total. These exceptions can be caused by difficulties in accessing
post boxes. There were also 155 short-term collection exceptions
of more than four months. These were caused by road or building
works, limiting access to post boxes. All of these exceptions are
reported to Postcomm on a regular basis.

Mail security
The security of mail is of the utmost importance to us. Royal Mail
Group has robust security measures in place in all parts of its
operations.

Any person found tampering or interfering with mail will be robustly
dealt with and prosecuted in England and Wales by Royal Mail Group.
In Scotland, cases are handed over to the Procurator Fiscal. In
Northern Ireland they are passed to the Public Prosecution Service.
Anyone attempting to steal from Post Office Limited is also liable to
be prosecuted.

In 2010-11, 312 former employees of Royal Mail Group were
prosecuted in the UK. These prosecutions need to be set against
the fact that the Group employs around 163,000 people in the UK.

The Post Office network
At the end of March 2011, there were 11,820 post offices open and
trading throughout the UK. In March 2010, there were 11,905 post
offices open in the UK. There has been a net reduction of 85 post
offices in the course of 2010-11. The current network is made up
of 373 Crown post offices, and 11,447 agency post offices.

Network turnover
The vast majority of post offices change hands – when a
subpostmaster decides to sell their business – without a break in
service or closure. This is part of the normal market turnover of
businesses in the UK. Around 97% of post offices are operated and
owned by local business people who have a contract to offer post
office services. From April 2010 to March 2011, 800 post offices
changed hands. The previous year around 1,000 changed hands.
These successful transfers bring new energy and focus into
our network.

There are cases where branches which are run by independent
business people from their own premises close due to circumstances
beyond our control. When a branch closes in such circumstances, we
communicate the situation to the local community and stakeholders
and our approach is to try to restore a sustainable post office service
when possible. Our field teams work with local communities to try to
restore services and in many cases, we are able to do this. There are
cases where it is not possible, even after considerable efforts. If a
post office is closed for whatever reason, even if it is just for a short
time whilst work is undertaken to restore service, it is not included in
the numbers we use when reporting network size. Our reported
network size of 11,820 at the end of March 2011 shows the network
of open and trading post offices.

We are committed to being as open and as transparent
as possible. We hope that our first annual Transparency
Report is helpful to our wide range of stakeholders. We
would welcome any feedback on this report.

You can provide feedback by emailing Shane O’Riordain, Director of
Communications, at shane.oriordain@royalmail.com.

Agency post office branches account for 97% of the
network. They are run by independent business people
and the post office is usually part of a retail outlet.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Our businesses

The Group’s main businesses
The Group is organised into three businesses which are covered in
the following pages.

UK Letters & Parcels and International (UKLPI) processes and
delivers letters and packets in line with its unique Universal Service
Obligation (USO), through Royal Mail. It is also a leading provider of
collection and delivery services for express packages and parcels
through Parcelforce Worldwide, providing both businesses and
consumers with a full range of timed delivery options. UKLPI is
responsible for the design and production of the UK’s stamps and
philatelic products. It is also responsible for the processing of
international mail under reciprocal arrangements with other
overseas postal administrations. Within this unit are:

• Commercial Regulated

• Commercial Non-Regulated

• Operations

• Wholesale

• Property

• Central functions

Post Office Limited has a national network of branches and is
represented in many communities across the country. It provides a
trusted access point for everyday products, services and information
in postal services, financial services, travel, banking, telephony, bill
payments, Government services, retail and the secure transportation
of cash.

General Logistics Systems B.V. (GLS) delivers high-quality parcel
services, logistics and express services throughout Europe. GLS is
one of the biggest ground-based parcel service providers in Europe
today. GLS provides a network coverage of 42 countries through
wholly owned and partner companies and is globally connected via
contractual agreements.

Parcelforce Worldwide is the Group’s express parcels
business for business and consumers, delivering from
two hubs and 52 depots in the UK.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

UK Letters & Parcels and International

Royal Mail is the only
provider of the UK’s
Universal Service
for some of the lowest
prices in Europe.

UK Letters & Parcels and International comprises the activities of both
Royal Mail and Parcelforce Worldwide. Royal Mail delivered 62 million
items every working day last year. Parcelforce Worldwide handled
63 million parcels. In total, these businesses employ 155,181 people
in the UK.

Royal Mail is the only provider of the UK’s Universal Service for some
of the lowest prices in Europe. It provides a daily collection and
delivery service at uniform and affordable prices. Royal Mail also
provides the social and economic glue in every single community with
its reach to 28.8 million addresses.

Royal Mail collects from around 115,000 post boxes and
11,820 post offices six-days-a-week. It works through
the night in a network of 59 mail centres. Royal Mail uses
a fleet of 33,600 vehicles and employs 130,000 postmen
and women in 1,371 delivery offices, delivering around
62 million items of mail every single working day.

Royal Mail’s biggest challenge continues to be the digital age. The
competition of technology – email, phone, text and broadband – has
had a dramatic effect on the whole market. It contributed to mail
volume decline of 4% this year.

Parcelforce Worldwide provides express parcel services to both
businesses and consumers. With global reach, it operates from two
hubs and 52 depots within the UK.

Parcelforce Worldwide has had an exceptional year. In a market
where competition is open and intense, it has increased both
revenues and profits.

In the UK market, where there are more than a dozen major parcel
businesses, Parcelforce Worldwide’s growth has outpaced all its
rivals.

It achieved volume growth of 15%, partially offset by a changing
customer mix and market price pressures, leading to another
year of record profits.

Its Business to Business volumes also grew in 2010-11 in what
is the most competitive sector of the market. Its business strategy
rests firmly on one of the highest quality of service records in the
industry.

Parcelforce Worldwide employs 4,508 people. The business has high
employee engagement – amongst the highest levels in the whole of
Royal Mail Group.

Trading results

UK Letters & Parcels and International

We achieved our First Class quality target in 2010-11 with a 93.0%
performance when account is taken of the extraordinary combination of
the harshest winter in 30 years1 and the unprecedented closure of UK
airspace because of Icelandic volcanic ash. Without any adjustment the
performance for the year would be 91.4%.

External revenue

Operating (loss)/profit after
modernisation costs*

* before other operating exceptional items

2010-11
£m

6,857

2009-10
£m

6,978

(120)

Under the terms of its licence from Postcomm and in accordance
with standard practice, Royal Mail is asking the regulator to apply
adjustments to the 2010-11 quality of service figures, to recognise the
severity of the weather conditions and the disruption caused by the
volcanic ash cloud, via an established procedure. The Company believes
the exceptional conditions fully warrant adjustments as Royal Mail did
everything possible to cope with events beyond its control.

Revenue fell by £121 million as tariff increases were not enough
to offset a 4% volume decline in inland addressed mail, which was
primarily driven by losses to alternative digital communications
channels. Single-piece mail like stamped and metered declined by
11%. This means that in five years this type of mail has declined by
over 35%. The decline in inland addressed volumes was lower than
last year’s at 7%, reflecting improvements in the economy and recent
signs that advertising mail is starting to reclaim some market share.
The 4% decline in inland addressed mail was driven by letters 5%,
large letters 4%, offset by a 3% increase in packets.

Movement in operating profit after modernisation costs

(121)

(12)

(7)

(120)

£m
30
0
-30
-60
-90
-120

Royal Mail has one of the largest vehicle fleets in the UK,
with over 33,000 vehicles which are used to transport mail
around the country.

First Class retail quality of service was 91.4% against the background
of adverse weather and volcanic ash cloud conditions during 2010-11.
The timing and severity of snow in November and December 2010,

1 Source: Met. Office.

2009-10

Revenue

Costs

Modernisation
costs

2010-11

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

UK Letters & Parcels and International continued

when Christmas volumes were peaking, was a real test of Royal Mail’s
Universal Service credentials. Even though it proved impossible to
deliver in some parts of the country, unlike others Royal Mail did not
shut down its network. It invested £20 million more to maintain it.

During the year, a pay and modernisation agreement with the
Communication Workers Union was reached, providing a platform to
continue to modernise Royal Mail’s network. However, the delay in
signing this agreement resulted in lower cost savings than originally
anticipated. This contributed to operating profit after modernisation
costs declining from £20 million to a loss of £120 million.

Modernisation

2006-07

2007-08

2008-09

2009-10

2010-11

Royal Mail charters 25 aircraft, which make 54 flights on
average a day.

%
0
(5)
(10)
(15)
(20)
(25)

% Inland addressed volume decline
% FTE decline

The challenge of managing down costs – in a largely fixed costs/
people-based network – more quickly than the decline in revenues
is even more critical if the Universal Service is to be profitable and
sustainable. Since 2006-07, volumes have declined cumulatively
by over 20% whilst the gross cumulative reduction in hours is around
15%. This is why modernising the network is a significant part of the
overall Group strategy. When completed, it will not only be one of the
largest transformations in the UK, but will also provide world-class
productivity, safety and service quality. It will enable mail to compete
successfully with other communications media.

Since March 2006, £2.0 billion has been invested by Royal Mail in
new equipment in mail centres and delivery offices and voluntary
redundancy costs, with some £400 million spent in 2010-11. In that
time nearly 23,000 people have left the business.

£m
2,000
1,500
1,000
500
0

£2.0bn

£1.6bn

£1.1bn

£0.6bn

£0.3bn

2006-07

2007-08

2008-09

2009-10

2010-11

Annual voluntary redundancy
Annual project one-off costs i.e. project
management costs
Annual CapEx i.e. machines, property
Cumulative investment

(cumulative £0.5bn)

(cumulative £0.3bn)
(cumulative £1.2bn)
(£2.0bn)

Royal Mail’s operation at Heathrow Worldwide Distribution
Centre handles international mail to and from the rest of
the world.

The challenging and changing market
In addition to our core letters market of First and Second Class
letters and bulk mail, Royal Mail offers distribution services to
e-commerce companies, traditional catalogue retailers and other
customers wishing to send packages domestically. Services range
from stamped packets with no tracking or additional value-add to
Special Delivery, a lunchtime next day, guaranteed service, and our
next day Tracked service offering full end-to-end tracking.

We have done a lot this year to improve our core products and to
innovate.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

UK Letters & Parcels and International continued

Highlights included:

• Continued strong growth for our Royal Mail Tracked services –
greater than 100% growth in volume and revenue for the third
year running. Growth has been generated by the addition of
around 700 new customers and winning a major contract with
one of the UK’s leading online retailers.

• The launch of our next day tracked service – Royal Mail Tracked
Next Day. This responds to increasing customer demand for
faster services.

• Making it easier for customers to buy our services, and receive
reports on our performance, through the launch of our online
ordering tool, Despatch Manager Online.

• A successful trial of evening deliveries within the London area.

This is now being expanded through Royal Mail Sameday.

• Keeping open around 600 enquiry offices up to two hours later

on a Wednesday and Saturday to provide customers with greater
flexibility.

• For advertisers, Royal Mail’s Advertising Mail™ is a new product,
designed as part of Royal Mail’s commitment to meet the specific
needs of advertisers. Customers sending dedicated advertising
mail that meets direct marketing ‘best practice’ standards can
benefit from better prices, helping them deliver stronger returns
on their marketing investment.

• For fulfilment companies, Royal Mail has developed a simple-

to-use online tool to get the right packet delivery products and
options to meet specific customer needs in this highly competitive
area. This ‘menu-based’ approach allows customers to choose
what works best for them.

While the number of corporate and SME companies including mail
in their advertising mix has slightly increased, overall volumes have
declined. This is because of the substitution of digital communication
by customers. Royal Mail has countered this by offering marketing
support including the Mail Media Centre (mmc.co.uk) – the home of
insight and advice – and financial incentives to encourage both first-
time users and existing users of direct marketing.

Royal Mail is a strong player in the direct mail market, where there
is solid evidence that well-targeted direct mail beats other ways of
advertising. We are developing strategies to be the marketing
partner of choice for direct mailers. We are doing so by offering
expertise in data management, campaign planning and consumer
targeting. We are aiming at growth with both the largest companies
and small businesses.

2010 saw our first ever Direct Marketing Sale, stimulating significant
incremental business.

More traditional transactional mail continues to decline as many of
the banks and utilities run proactive programmes to switch
consumers to digital alternatives, while the customer remains keen
on receiving posted items. Many businesses are reappraising the use
of direct mail and the advertising association WARC is forecasting a
3% growth in 2011-12.

Key Facts and figures

• 62 million items processed and delivered every single working day

• 74% of mail is delivered to just 13% of the country

• 28.8 million addresses – 1.6 million business addresses

• 91.4% First Class quality of service – but post force majeure will

have hit target. Target is 93%

• Royal Mail became the world’s first postal company to help businesses
make their post interactive using digital watermarking technology.

• 115,271 post boxes

The advertising and communications market continues to change.
This has had a direct impact on direct mail and transactional mail –
bills and statements. Although high and low volume business mailers
and those sending statements will see an improved offer from us in
2011-12. The continued trend has been towards highly measurable
low cost media. This has fuelled the growth in cheaper digital media.
Combined with greater consumer access through broadband and
mobile channels, the majority of UK growth has been in the digital
space, with a direct impact on direct mail volumes.

• 59 mail centres, of which 24 are World Class Mail centres

• 1,371 delivery offices

• 33,600 vehicles

• 155,181 people

• UK stamp prices amongst lowest in Europe

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

UK Letters & Parcels and International continued

Royal Mail Special Stamps programme

Royal Mail’s first commemorative stamp was issued in 1924 to
mark the British Empire Exhibition. In the 1960s, the modern-
day Special Stamp programme was launched. This now features
over a dozen issues every year.

By 31 March 2011, over 450 issues of Special Stamps had been
produced. Themes for 2010-11 varied from ‘Britain Alone’, a
tribute to people on the home front in the dark days of 1940,
to UK mammals, Winnie-the-Pooh and stage musicals.

In August 2010, the Great British Railways issue saw the
launch of the world’s first intelligent stamps. When scanned
through a special smartphone app the stamps revealed
exclusive footage of Bernard Cribbins reciting the iconic Night
Mail poem. This technology was also included in stamps
celebrating the 50th anniversary of environmental
organisation WWF in March 2011.

In December, Wallace and Gromit Christmas stamps proved
extremely popular. FAB stamps got 2011 off to a flying start in
January with the UK’s first motion stamps – lenticular printing
revealing the iconic 5–4–3–2–1 opening sequence of
Thunderbirds when the stamps are tilted back and forth.

The year culminated in the announcement on 29 March of
stamps to commemorate the wedding of HRH Prince William
and Catherine Middleton. The stamps made headlines across
the UK and around the globe, reinforcing Royal Mail’s reputation
as a world leader in stamp production and design.

Wallace and Gromit stamps were extremely popular in
December for Christmas mail.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

The Post Office

The Post Office is
part of everyday life in
communities throughout
the UK.

It provides around 170 different services and products spanning
financial services including savings, insurance, loans, mortgages and
credit cards. Post Office also offers Government services; telephony;
foreign currency; travel insurance and mail services.

Around 20 million customers visit the 11,820 Post Office branches
per week.

Trading results

Post Office Limited

External revenue

Operating profit after modernisation costs*

* before other operating exceptional items.

2010-11
£m

2009-10
£m

776

838

Revenue declined by £62 million to £776 million, mainly in traditional
business. This was caused by Post Office Card Account income falling
due to the full year impact of the October 2009 contract on the Card
Account (which yields a lower rate per account) and as customers
continued to migrate to bank accounts. Revenues also declined in
some areas of financial services and telephony. Although revenues
declined in travel services due to economic factors, market share
was maintained.

This has resulted in a decline in profit after modernisation costs of
£12 million from £33 million to £21 million. Some of the revenue
decline was mitigated by careful cost control which included a 16%
reduction in the number of managers.

There has been a focus on addressing customers’ concerns around
queue time in Crown Offices with the benefits of the 2009-10 Crown
Office refurbishment programme providing a platform to improve
our service into the future. Complaints are down in the year, but
there is further work to do. A focus on customer service will continue
into 2011-12, to meet the rising expectations of consumers related
to staff helpfulness and speed of service through staff training and
further self-service in branches.

Maintaining revenues
The challenge in the Post Office is similar to that of Royal Mail: to find
new revenue streams and to manage costs efficiently as traditional
volumes decline.

During the year, the Post Office identified growth in other areas.
This is key in stabilising revenues as traditional volumes fall away.
In Government services, new income has been generated following
the roll out in the first half of the year of biometric identity capture
equipment across 752 branches. In mails, revenues in premium
services have increased by investing in branch specialists who offer
service and support to customers. Working with Royal Mail, there
are further plans to grow our mails services to small businesses. In
financial services, online savings accounts have been very successful,
bringing in excess of £4 billion online balances in the seven-month
period since their launch in August 2010.

The Post Office is piloting new branch formats, which can
offer extended opening hours to customers. In Post Office
locals, the Post Office operation is fully integrated into the
retail outlet where it is located. This means Post Office
services are offered for longer, matching retailers’ opening
hours and, in many cases, open on Sundays too.

The Government has committed to £1.34 billion in funding
over the next four years. This will cement the Post Office’s
vital place in UK communities. It will help to build a Post
Office network that is relevant for the 21st century.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

The Post Office continued

Within the branch network, by far the largest of its kind in the UK,
piloting of the new Post Office trading models is underway to extend
opening hours and to enable more sustainable and profitable
branches for operators in the future. Feedback from customers
and operators about the pilots is positive. Research by MORI for
Consumer Focus shows that 97% of customers believe the
convenience of the location is better or on a par with other post
offices and 83% like the increased opening hours. Research by aba
research for Post Office Limited reports that 94% of customers are
extremely or very satisfied with their overall experience. Working
closely with the National Federation of Subpostmasters,
developments will be reviewed and stakeholder views taken into
account as these models develop.

Securing the Post Office network in the digital age
Post Office Limited is now embarking on a five-year plan based on
the Government’s policy statement ‘Securing the Post Office network
in the digital age’, published in November 2010. This confirmed
Government funding commitment of £1.34 billion over the next four
years, which is vital to ensure further innovation in the Post Office
network.

This support from the Government shows a tremendous commitment
to the future of the Post Office network. It reinforces its place in local
communities, its role as part of UK infrastructure and the social
value that its network provides to the country. The package provides
the investment and confidence to build a Post Office that is relevant
for customers in the 21st century. It will establish a sustainable
future for the Post Office. It provides the foundation we need to build
a Post Office we can all be proud of.

The plan reflects:

• A strong understanding of and commitment to the social and

economic value of the Post Office for communities and businesses
across the UK

• Investing in and modernising to create a sustainable branch

network which offers longer opening hours to customers. There
will be no programme of closures

• Maintaining a strong commercial relationship with Royal Mail for

the mutual benefit of both companies

• Establishing the Post Office as a genuine front office of

Government at both national and local level

• Expanding accessible and affordable personal financial services,

including helping people access their current accounts through our
branches. In the year ahead almost 80% of all UK current accounts
will be accessible at post offices

• Complementing an increasingly online world to benefit customers.
Providing access to online services through our branch network for
those who are digitally excluded and easy general access to those
digital processes that still need a physical element, e.g. handling a
package, checking documents or confirming customers’ identities

• Moving forward with important concepts within the Postal

Services Act such as the opportunities for mutualisation that
would look at new ways for employees, subpostmasters and
communities to be involved in the ownership and running of the
Post Office

Modern Crown Post Office branches feature an open plan
layout, with a separate area for financial services
conversations. The ticketing system helps to manage footfall.

Automated Post & Go machines enable customers to weigh
and pay for postage away from the counter.

Facts and figures

• Around 11,800 branches, including 373 Crown Offices

• Approximately 28,000 customer-facing positions

• Around 20 million customers visit the post office per week

• UK’s leading supplier of foreign currency exchange with a 25%

market share

• Customer satisfaction levels at 85%

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

General Logistics Systems – GLS

GLS is one of the biggest
ground-based parcel
service providers in
Europe today.

GLS is a pan-European company providing reliable, Business to
Business high-quality parcel and express services as well as value-
added logistics solutions. Founded in 1999, it has strong historical
roots in each European country’s domestic market.

GLS is one of the biggest ground based parcel service
providers in Europe today. GLS provides a network
coverage of 42 countries through wholly owned and
partner companies and is globally connected via
contractual agreements.

The GLS network comprises 38 central transhipment points in
Europe made up of 656 depots and 17,100 vehicles. Its 13,167
people deliver over 360 million parcels annually for 220,000
customers throughout Europe.

GLS is the European leader in quality providing market-leading
quality and margins.

GLS pan-European network

• Albania • Andorra • Austria • Belgium • Bosnia-Herzegovina
• Bulgaria • Croatia• Cyprus • Czech Republic • Denmark • Estonia • Finland
• France • Germany • Greece • Hungary • Iceland • Ireland • Italy • Latvia • Liechtenstein
• Lithuania • Luxemburg • Macedonia • Malta • Monaco • Montenegro • Netherlands
• Norway • Poland • Portugal • Romania • San Marino • Serbia • Slovakia • Slovenia
• Spain • Sweden • Switzerland • Turkey • United Kingdom • Vatican City

Trading results

General Logistics Systems

External revenue

Operating profit after modernisation costs*

* before other operating exceptional items.

2010-11
£m

1,485

118

2009-10
£m

1,487

112

Reported revenues are £2 million lower than last year at £1,485
million. This is partly due to the strengthening of Sterling against the
Euro. Underlying revenues were around 4% higher than the prior
year after adjusting for exchange rate movements. This reflects the
improvements in the European economies as they move out of
recession. This underlying improvement was driven by volume
growth.

Operating profit increased by £6 million (5.3%) to £118 million,
despite an adverse currency effect of £4 million. After adjusting for
the currency impact, operating profits increased by 9%.

Profitability improved from economies of scale as higher
parcel volumes were transported through the GLS
network as well as through continued focus on costs.

The operating margin after modernisation costs improved from 7.5%
to 8.0%.

GLS underlying revenue

€m
2,000
1,500
1,000
500
0

2003

2004

2005

2006

2007

2008

2009

2010

2011

Up to 2008-09, GLS grew its revenues every year in line with growth
in the European economies and the expansion of its network. Then
GLS, like other parcel companies, was impacted by the recessionary
environment which started in 2008, resulting in a modest decline
in volumes and revenues. Despite the recession, GLS has continued
to generate healthy cash returns. It continued to strengthen its
European network and focus on excellent service quality. This leaves
GLS well placed as economies and markets improve.

Facts and figures

• Parcel volume 2010-11: 360 million

• Customers: 220,000

• Workforce: 13,167

• Hubs: 38

• Locations: 656

• Vehicles: 17,100

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Key Performance Indicators

The Group’s Key Performance Indicators (KPIs)
Customers are at the centre of everything we do within the Group.
Our main aim is to be the most trusted delivery brand in the UK
which provides the Universal Service for our customers the length
and breadth of the country. We also want to be seen as the premier
European and UK express parcel businesses, offering excellent
customer service.

The Group also wants to sustain and grow the Post Office
commercially while maintaining its key role as part of the UK’s social
and economic fabric.

Our key strategies and objectives will be communicated widely across
the Group, embedded into its day-to-day activities and measured on
a timely basis by appropriate KPIs and performance measurements.
They are monitored by the Royal Mail Holdings plc Board and its sub
committees, as highlighted below:

Customer service
To win and keep customers we must provide a consistently high
quality of service, delivering on time, collecting on time and
responding quickly when needed.

That means:

• delivering a high quality of service and mails integrity

• developing products that match the needs of our customers

• becoming easier to do business with

Our performance measures in this area are:

KPI

Retail First Class quality of service

Number of complaints (millions)

Post Office Limited – customer satisfaction

2011

91.4%

1.23

85%

2010

87.9%

1.20

89%

First Class quality of service continues to improve, building on the
momentum achieved in the previous year. Customer complaints rose
reflecting the challenges posed by the volcanic ash cloud and adverse
winter weather conditions.

Parcelforce Worldwide continues to provide excellent customer service
with its PFWW 24 timed delivery product. Quality of service remained
stable this year, despite the adverse winter weather conditions.

Post Office customers remain satisfied with the service they receive
in the 11,820 post office branches throughout the country. A focus
on customer service will continue in 2011-12.

Modernising Royal Mail
Our modernisation programme continues to drive wide-ranging
efficiency improvements across the business as well as delivering
cost savings. Our World Class Mail programme has been launched in
24 mail centres and in 117 delivery offices this year. Belfast, Cardiff
and Gatwick mail centres have already received awards from the
World Class Manufacturing Association.

Our performance measures in this area are:

KPI

Gross hours reduction (%)

Sequenced mail exit rate

2011

2.4%

34%

2010

5.9%

Handheld devices deployed (cumulative)

33,553

27,000

As set out in the modernisation section we did not achieve the gross
hours reduction we had anticipated. However, we have made
significant progress modernising our mail centres.

Our people
Royal Mail Group believes that health and safety is an important
element of every working day. The Group treats this matter very
seriously and it is discussed regularly at Board meetings. Throughout
our businesses, we are committed to ensuring our employees and
customers are kept as safe as possible. We also understand that we
can only move forward as a successful group of companies if we
involve our people in making change happen. This underpins our
commitment to employee engagement through our regular survey
which was established in 2003.

Our performance measures in this area are:

KPI

RIDDOR Accidents/1000
(12 month rolling average)#

Engagement Index

Total Attendance

2011

20.8

24%

95.4%

2010

27.8

95.0%

* comparative not available due to change in basis of measurement.
# frontline employees

We have improved the accident rate materially but seek a further
positive change in 2011-12. Engaging our people will be a major
focus in the coming years as we have set out on pages 9 and 10.

Profitability and cash flow
Funding from Government continues to be used to support the
capital investment programme which addresses the historic under-
investment in the core letters business. Continuing to develop more
efficient ways of working and well-targeted products and services
will help us to succeed in a highly competitive marketplace.

Our performance measures in this area are:

KPI

External revenue

Operating profit*

Margin*

Free cash flow

2011

2010

£9,156m

£9,349m

£39m

0.4%

£180m

1.9%

£(213)m

£(545)m

* after modernisation costs before other operating exceptional items

Details of our financial performance are included in the Financial
Review on pages 28 to 34.

The current KPIs and performance measures are under review. It is
our intention to share these with all of our stakeholders at our half-
yearly review in the Autumn. The new range of KPIs will follow
similar themes as detailed in this section where the services we give
to our customers will be at the centre of everything we do.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review

Profit and loss summary

External revenue

Operating costs

Modernisation exceptional costs

Share of profits from joint ventures
& associates

Operating profit after modernisation
costs*

Other operating exceptional costs

Non-operating exceptional profits

Profit before financing and taxation

Net finance costs and pensions interest

Taxation charge

Loss for the financial year

* before other operating exceptional items

Balance sheet summary

Net assets before pension deficit

Pension deficit

Net liabilities

Cash flow summary

EBITDA, pre pension costs

Operating exceptional items*

Working capital

Pension payments

Cash outflow from operations

Capital expenditure

Disposal of assets

Other (dividends, tax, interest)

Free cash outflow

* excludes pension payments relating to redundancy

2011
£m

2010
£m

9,156

9,349

(8,938)

(8,986)

(207)

(224)

• Group external revenue fell by £193m, from £9,349m in 2010 to

£9,156m in 2011 as core traditional volumes in Royal Mail and the
Post Office continue to decline;

• Operating profit after modernisation costs of £39m is £141m
lower than last year’s £180m mainly due to the decrease in
revenues offset by lower operating and modernisation costs. Other
operating exceptional costs include impairments of £41m and a
£30m provision for potential industrial claims;

(88)

109

(212)

(106)

(258)

180

(67)

118

(380)

(58)

(320)

• Non-operating exceptional profits of £109m comprise profits on
the sales of property and other assets of £65m (2010 £5m) and
the profit on disposal of a 20% investment in Camelot of £44m
(2010 £nil);

• Finance and pensions interest costs of £212m (2010 £380m)

have reduced by £168m mainly due to a £162m lower notional
pensions interest charge; and

• Taxation charges have increased mainly due to a deferred tax

charge increase of £34m.

2011
£m

2010
£m

1,394

1,760

(4,501)

(8,041)

(3,107)

(6,281)

• Net assets before the pension deficit of £1.4bn are £0.4bn lower
than last year’s £1.8bn, mainly due to property and other asset
disposals;

• The accounting pension deficit has decreased from £8.0bn in
2010 to £4.5bn in 2011, reflecting the decrease in liabilities
following the Government announcing its intention to change the
inflation measure from RPI to CPI and an increase in asset values
as a result of improved market conditions; and

• Net liabilities of £3.1bn are lower than £6.3bn last year primarily

because of the reduction in the pension deficit.

2011
£m

962

(242)

(49)

(771)

(100)

(376)

237

2010
£m

1,082

(243)

(83)

(867)

(111)

(462)

• EBITDA pre pension costs of £962m is lower than last year’s

£1,082m mainly due to the decline in revenues of £193m, offset
by a reduction in operating costs;

• Operating exceptional items of £242m mainly comprise cash

flows relating to modernisation such as voluntary redundancy and
ColleagueShare payments;

• Pension payments of £771m are £96m lower than last year’s

£867m mainly because of the reduction in ongoing contributions
as a result of lower pensionable pay and a reduction in the
employer cash contributions rate;

• Capital expenditure of £376m is £86m lower due to a reduction in

(213)

(545)

capital expenditure on the modernisation programme;

• Disposal of assets of £237m comprises property sales of £164m

and the sale of a 20% investment in Camelot of £73m; and

• As a result, free cash outflow of £213m is £332m lower than
last year, of which some £400m (2010 £500m) relates to
modernisation.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review continued

Background
Royal Mail Holdings plc (the Company) is a public limited company
wholly owned by the UK Government. It became a plc on 26 March
2001. The framework for change was the Postal Services Act 2000
that created a commercially focused company with a more strategic
relationship with the Government. Royal Mail Holdings plc together
with its subsidiaries, associates and joint ventures comprise ‘the
Group’. The Group operates within a regulatory framework
comprising an independent regulator, Postcomm, and a statutory
consumer organisation, Consumer Focus.

Legal structure
Royal Mail Holdings plc is directly owned by the UK Government and
is the ultimate parent company of the Group. The Group primarily
operates within the United Kingdom, having a number of subsidiaries,
joint ventures and associates, but also has presence in most European
countries, mainly through General Logistics Systems B.V. Its basic legal
structure is as follows:

Royal Mail
Holdings plc

Royal Mail
Group Ltd1

Post Office
Limited

Royal Mail
Investments Limited

Royal Mail
Estates Limited

General Logistics
Systems B.V.

The UK Letters & Parcels and International business unit included in Royal Mail Group Ltd is not a separate
legal entity.

Further details on the principal subsidiaries are provided in note 29
to the financial statements.

Operating units
The Group is organised into four operating units:

UK Letters & Parcels and International (UKLPI) processes and
delivers letters and packets in line with its unique Universal Service
Obligation (USO) and is also a leading provider of collection and
delivery services for express packages and parcels, providing both
business and private addresses with a full range of timed delivery
options. It is responsible for the design and production of the UK’s
stamps and philatelic products and also the processing of
international mail under reciprocal arrangements with other
overseas postal administrations. Within this unit are the Commercial
Regulated, Commercial Non-Regulated, Operations, Wholesale,
Property and Central functions which are aligned to products or
specific business areas and functions.

Other comprises: Romec Limited and NDC 2000 Limited, which
provide facilities management services and design consultancy
services respectively for both the Group and to external customers;
PostCap Guernsey Limited which provides captive insurance services
for the Group; Royal Mail Pension Trustees Limited which provides
trustee services to, and manages the administration of, the Group’s
principal pension scheme; and the Group’s investment in Quadrant
Catering Limited, which provides catering services across the Group.

The following table highlights the segmental results of each unit:

Business unit performance

UK Letters & Parcels
and International
(UKLPI)

General Logistics
Systems (GLS)

Post Office Limited

Other businesses

Group

External revenue

Operating (loss)/profit after
modernisation costs*

2011
£m

2010
£m

2011
£m

2010
£m

6,857

6,978

(120)

1,485

1,487

118

776

838

9,156

9,349

112

180

* before other operating exceptional items

Segment performance is discussed in the relevant preceding
sections.

External revenue
The Group’s external revenue fell by £193m from £9,349m to
£9,156m.

UKLPI revenue was £121m lower at £6,857m mainly due to a 4%
decline in core letter volumes despite price increases. The volume
decline is driven by a change in the marketplace, with a move away
from core products to digital communications channels and
competitors, as well as down-trading to other lower priced Royal
Mail products.

Post Office Limited revenue declined by £62m to £776m, mainly in
traditional Government business. This was caused by Post Office
Card Account income falling due to the full year impact of the
October 2009 contract on the Card Account (which yields a lower
rate per account) and as customers continued to migrate to bank
accounts.

GLS revenue was lower by £2m year on year at £1,485m, with an
underlying revenue growth of around 4% being more than offset by
the adverse impact of foreign exchange when converting its Euro
results into Sterling.

External revenue by business unit

General Logistics Systems B.V. (GLS) is one of the largest ground
based parcel service providers in Europe today. GLS provides a
network coverage of 42 countries through wholly owned and partner
companies and is globally connected via contractual agreements.

Post Office Limited has a national network of branches at the
heart of communities across the country. They provide a trusted
access point for everyday products, services and information in
postal services, financial services, travel, banking, telephony, bill
payments, Government services, retail and the secure transportation
of cash.

£m
10,000
8,000
6,000
4,000
2,000
0

6,857

1,485

776

9,156

UKLPI

GLS

POL

Other
business

Total

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review continued

Costs (including modernisation costs)

People costs

Distribution and conveyance costs

Other operating costs

2011
£m

2010
£m

(5,717)

(5,746)

(1,619)

(1,579)

(1,602)

(1,661)

Operating costs before exceptional items

(8,938)

(8,986)

Modernisation costs
(operating exceptional items)

(207)

(224)

Total operating costs of £8,938m have decreased from £8,986m by
£48m whilst modernisation costs have decreased by £17m to £207m.

People costs of £5,717m have decreased by £29m. This decrease is
driven by the modernisation programme delivering efficiencies,
contributing to a headcount reduction of around 5,200 for the Group,
but has almost been offset by higher pay rate and pensions costs.

Distribution and conveyance operating costs of £1,619m have
increased by £40m, principally due to higher year-on-year
international export volumes, differing country mix and higher
freight rates into the USA and Australasia.

Other operating costs (including sales and marketing, property,
communication, IT, and other functional costs) have decreased by
£59m to £1,602m, driven by a focused cost and procurement
exercise across the UK businesses.

Modernisation costs are £17m lower as a result of a £69m net
release of ColleagueShare costs (2010 £44m charge) offset in part
by £84m higher restructuring costs and £12m higher impairments
due to business transformation.

Operating profit after modernisation costs – growth/(decline)
by business unit (£m)*

£m
200
160
120
80
40
0

180

(140)

2009-10

UKLPI

GLS

(12)

POL

Other
Business

2010-11

Operating (loss)/profit after modernisation costs by
business unit (£m)*

£m
120
60
0
-60

-120

118
118

(120)
72

UKLPI

GLS

POL

Other
Business

Total

* before other operating exceptional items

Operating profit after modernisation costs of £39m is £141m lower
than £180m last year. UKLPI and Post Office Limited both returned
year-on-year profit declines due to falling revenues and competitive
and economic factors whilst GLS continued to generate significant
profits and achieve good margins as European economies improve.

Share of profits in joint ventures and associates
The Group’s share of profits in joint ventures and associates of £28m
decreased by £13m from £41m mainly due to the sale of a 20%
investment in Camelot (£7m) and lower profit shares from both G3
Worldwide Mail N.V. (Spring) and the Bureau de Change joint venture.

Net exceptional items, including modernisation costs

Exceptional items

Operating exceptional items:

- Modernisation costs

- Other

Non-operating exceptional items:

- Asset disposals

- Camelot disposal

Net exceptional items

2011
£m

2010
£m

(207)

(88)

(295)

(224)

(67)

(291)

(186)

(286)

Modernisation costs are treated as operating exceptional items
because of their nature and size and have been explained above.

Other operating exceptional costs of £88m comprise a £30m
provision for potential industrial claims, £41m of impairments and
£15m relating to costs associated with the State Aid application and
Postal Services Bill. For further details see note 7 to the financial
statements.

During the year there has been an increase in property and other
asset disposals and a one-off sale of the Group’s 20% investment
in Camelot. Together these generated a non-operating exceptional
profit of £109m (2010 £5m).

ColleagueShare scheme (related credits and charges included
in modernisation costs)
The scheme has completed its fourth year and has one more year
in its five year life span during which notional shares have been
allocated to employees and stakeholder dividends paid based on the
achievement of certain targets. The costs and credits of the scheme
continue to be treated as a modernisation cost within operating
exceptional items.

Fully eligible employees continue to hold 711 notional shares each in
the Company, following their issue in 2007 (408 shares) and 2008
(303 shares). The Board agreed during 2009-10 that the third and
final issue of notional shares was replaced by the payment of an
additional stakeholder dividend, now deemed to be business
transformation payments as they are linked directly to the
achievement of targets, including key modernisation milestones.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review continued

The value of ColleagueShares is based on a share plan valuation
model. The scheme provides employees with two opportunities to
sell ColleagueShares back to the Company, after valuation points at
March 2011 and March 2012. The valuation at March 2011 shows
no value to ColleagueShares. The final value of ColleagueShares will
not be known until after the end of the 2011-12 financial year but it
is expected that this valuation will similarly indicate no value. The
value of ColleagueShares is a result of the deteriorating financial
position of the Group which is reflected in the latest business plan.
This has resulted in the provision at 27 March 2011 for the
redemption value at the end of the scheme being reduced to £nil and
a credit of £109m recognised in modernisation costs.

The impact of the deterioration in the anticipated financial position of
Royal Mail Group Ltd is also reflected in the individual parent
Company financial statements of Royal Mail Holdings plc, where its
carrying value has been written down by £3.8bn to £nil as set out
on page 106.

The Group made the final stakeholder dividend payment relating to
2009-10 of £400 per eligible employee and continued to pay in the
year additional business transformation payments in recognition of
achieving certain targets. The total charge to the income statement
for these payments is £41m.

Net finance and pensions interest costs
Net finance and pensions interest costs of £212m (2010 £380m)
comprise £167m (2010 £329m) net pensions interest costs and
£45m (2010 £51m) of finance costs relating to cash and debt. Net
pensions interest costs are explained in the pensions section below.

Net finance costs of £45m (2010 £51m) comprise finance costs of
£114m (2010 £98m), offset by finance income of £69m (2010
£47m). The increase in finance costs of £16m is mainly due to higher
borrowing volumes and higher finance lease interest payable, partly
offset by lower charges due to unwinding of discounts and lower
commitment fees. The increase in finance income of £22m is mainly
due to higher investment yields on index-linked gilts within the
pension escrow investment portfolio, higher investment volumes
within the escrow investment portfolio and interest receivable on
large VAT repayments.

Taxation
The taxation charge of £106m (2010 £58m) comprises £17m
current tax credit (2010 £27m) with respect to UK operations, a
£35m (2010 £31m) current tax charge on overseas profits, a UK
deferred tax charge of £79m (2010 £53m) and an overseas
deferred tax charge of £9m (2010 £1m).

Operating cash flow
EBITDA pre pension costs of £962m are £120m lower than last
year’s £1,082m mainly due to the decrease in revenues of £193m
offset by a reduction in operating costs of £48m. Operating
exceptional items spend of £242m (excluding pension payments
relating to redundancy) is in line with last year’s £243m due to an
increase of £23m in ColleagueShare dividend (relating to prior year’s
performance) and transformation payments (relating to the pay and
modernisation agreement) being offset by £24m lower restructuring
spend.

Pension payments of £771m are £96m lower than last year’s
£867m mainly because of the reduction in ongoing contributions as
a result of lower pensionable pay and a reduction in the employer
cash contribution rate, further explained below.

Together, the above categories comprise cash outflows from
operations, which totalled an outflow of £100m, £11m lower than
last year’s £111m.

Free cash flow
Capital expenditure comprises spend (property, plant and equipment
and intangibles purchases) of £376m which is £86m lower than
last year’s £462m mainly due to the changing nature of the
modernisation programme in Royal Mail, which has moved from
significant investment in the mail processing centres to changing
work practices in delivery, which requires lower property spend.

This capital expenditure has been offset by disposals of property
and other assets in response to the requirement to fund the
modernisation programme. During the year £237m was generated
from the disposal of assets which includes £159m (2010 £8m) of
property-related disposals and £73m (2010 £nil) relating to the
disposal of the Group’s investment in Camelot. The majority of
property disposal proceeds relate to the sale and operating
leaseback of mail centres and the London Old Street property
and in total contributed £131m in the year, with other property
outright sales contributing £28m.

Together with operating cash flow, these and ‘other’ cash flows of
£26m (2010 £14m) amounts comprise free cash outflows of £213m
for the year, which are £332m lower than last year’s £545m. The
reduction is primarily due to almost flat operating cash outflows
benefiting from lower capital expenditure of £86m and higher asset
disposal proceeds of £223m.

Balance sheet including pensions, funding and treasury
management overview

Property, plant and equipment

Inventory

Trade and other receivables

Trade and other payables

Provisions

Net operating assets

Goodwill (mainly relates to GLS)

Intangible assets (mainly software)

Investments in joint ventures and associates

Investment assets

Pension escrow investments

Other financial investments/derivatives

Cash and cash equivalents

Loans and borrowings

Other financial liabilities

Net financial assets

Other (liabilities)/assets

Net assets before pension deficit

Pension deficit

Net liabilities

2011
£m

2010
£m

1,832

1,935

1,135

1,156

(1,995)

(2,119)

(278)

(276)

732

197

126

105

428

734

197

147

443

1,161

1,189

1,101

937

(1,853)

(1,526)

(261)

235

(1)

(199)

478

105

1,394

1,760

(4,501)

(8,041)

(3,107)

(6,281)

The Group is balance sheet insolvent with net liabilities of £3,107m
(2010 £6,281m) mainly due to an accounting pension deficit of
£4,501m (2010 £8,041m deficit).

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review continued

During the year there have been no material business acquisitions
and only one significant business disposal – the sale of the 20%
investment in Camelot. The following represents a summary of the
movements in the main line items in the balance sheet.

Property, plant and equipment of £1,832m is £103m lower as the
result of depreciation charges, asset write-offs and property disposals
being higher than new investment into property, plant and equipment.

Trade and other receivables of £1,135m are £21m lower than last
year and there continues to be a good track record on receivables
management.

Trade and other payables of £1,995m are £124m lower than last
year almost entirely due to the payment of the ColleagueShare
dividend in June 2010 of £73m and a reduction in capital
expenditure payables of £58m due to the reduction in capital
expenditure.

Provisions of £278m have increased by £2m and mainly comprise
amounts relating to restructuring.

The increase in intangible assets of £27m to £126m is due to £73m
of software additions – the largest project being the People Systems
Programme – offset by amortisation and impairment charges. The
decrease in investments in joint ventures and associates is mainly
due to the disposal of the 20% investment in Camelot.

The pension deficit liability is further explained below.

Pensions
Schemes
Royal Mail Group Ltd is the sponsoring employer for the Royal Mail
Pension Plan (RMPP) and the Royal Mail Senior Executives’ Pension
Plan (both defined benefit schemes), and for the Royal Mail Defined
Contribution Plan (defined contribution scheme). Based on assets,
the Royal Mail Pension Plan is one of the largest pension schemes in
the UK. The assets and liabilities of the defined benefit schemes, as
measured under accounting standards, are reported as a net
pension deficit in the Group balance sheet. The gross assets and
liabilities and the net deficit are significantly larger than any of the
Group’s other assets and liabilities. This results in the Group being
one of the most exposed UK corporates to pension volatility,
particularly with respect to movements in equity values and future
expectations of inflation and bond rates.

Both defined benefit schemes are now closed to new members. New
employees are offered membership of the Defined Contribution Plan.

Pension charges in profit

Pension charges within profit

Operating pension costs

Exceptional pension costs (relating
to redundancy)

Net pensions interest charge

Pension charges

2011
£m

458

167

672

2010
£m

441

329

812

The £17m increase in operating pension costs is principally as a
result of market conditions resulting in a pension charge that is 17.8%1
of pensionable pay, compared to 16.8% last year, offset by a reduction
in the number of people employed. The percentage applied to the
pensionable payroll is determined at the beginning of the financial year

The cash contribution is set once every three years based on a long term view of market conditions at that
time, the profit and loss charge is updated each year reflecting more recent changes in market assumptions.

and is intended to represent the amount by which liabilities will
increase due to employing active members for one more year.

The net pensions interest charge reflects the unwinding of the
discount on the schemes’ liabilities less the long-term expected rate
of return on the schemes’ assets. Net pensions interest charge of
£167m (2010 £329m), a non-cash item for the Group, has reduced
by £162m mainly due to an increase in the expected returns on Plan
assets as a result of the increase in fair value of Plan assets at
March 2010.

Pension balance sheet amounts
The balance sheet pension deficit has reduced from £8,041m in
March 2010 to £4,501m this year end. The reduction in the deficit
of £3,540m principally relates to an actuarial gain of £3,424m.

The actuarial gain arose mainly due to a reduction in liabilities
following the change in the inflation assumption from RPI to CPI,
where relevant, following the Government’s announcement that it
was intending to change the inflation measure used to determine
statutory minimum indexation in deferment and in payment from
RPI to CPI in 2011, together with market conditions giving rise to
improved asset values.

On 23 March 2007 the Group established £1bn of investments
in escrow as security to the Royal Mail Pension Plan in support
of the deficit recovery plan. On 24 March 2011 an agreement
was implemented to substitute £102m pension escrow financial
investments with mortgages against certain property assets.

Pension cash payments

Pensions cash funding: Group
contributions

Regular pension contributions

Funding of pension deficit

Payments relating to redundancy

Net cash payments

2011
£m

442

299

771

2010
£m

526

291

867

Regular pension contributions have reduced from £526m to £442m,
in line with lower pensionable pay and a reduction in the regular rate
of employer contributions for the Royal Mail Pension Plan from
20.0% of pensionable pay to 17.1%1,effective from April 2010 as
agreed with the Pension Trustee as part of the formal triennial
actuarial valuation. The regular rate of employee contributions for
the Royal Mail Pension Plan remains unchanged at 6.0%.

Deficit recovery payments by the Group have increased by £8m
(2.7%) from £291m to £299m and include £7m (2010 £5m) relating
to the Royal Mail Senior Executives’ Pension Plan. Deficit recovery
payments are planned for the Royal Mail Pension Plan over the 38
years from the date of the latest formal triennial actuarial valuation.
There have been no employee deficit contributions.

Funding
There are specific funding arrangements for Royal Mail Group Ltd
(which excludes Post Office Limited) and for Post Office Limited.
However as a result of the pension deficit, the Group is balance sheet
insolvent (meaning the accounting liabilities of the Group exceed its
assets) and has substantial future liabilities in connection with this
deficit. The Directors keep the funding position of the Group under

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review continued

constant review to confirm that it is a going concern. A summary of
their review is set out on pages 58 to 60.

Treasury management overview
The Group operates a central Treasury function that manages
£1.2bn of financial asset investments (substantially all of which are
now held in escrow in favour of the pension fund trustees) and
£1.1bn of cash and cash equivalent investments (including £704m
cash in the Post Office network funded partly by a Government loan
facility), in accordance with investment restrictions set by the
Government. It also manages £2.1bn of financial liabilities (mainly
Government borrowings) and acts as internal banker for the Group’s
business units. The Group finances its operations largely through
cash generated from its operations, borrowings and grants.

Group Treasury derives its authority from the Royal Mail Holdings plc
Board, and provides quarterly monitoring reports for the Board’s
review. It only has the authority to undertake financial transactions
relating to the management of the underlying business risks; it does
not engage in speculative transactions and does not operate as a
profit centre. All strategies are risk-averse, and the treasury policy
has remained substantially unchanged during the year. The principal
financial instruments are Treasury bills, Government gilt-edged
securities, deposits and long- and short-term borrowings.

Facilities
The terms of the Government borrowing facility and the associated
Framework Agreement impose strict constraints on the separation
of cash funds within the Group and the purposes for which they can
be used.

At the balance sheet date the Group is financed as follows:

Borrower Royal Mail Group Ltd
Purpose

GLS funding

Capital Expenditure and Restructuring

General Purpose/Working Capital

Borrower Post Office Limited
Purpose

Network cash

Borrower GLS B.V.
Purpose

General Purpose/Working Capital

Total facility/facilities utilised

Average
interest
rate of loan
drawn down
%

5.8

3.0

–

0.8

4.5

Covenants
Loan covenants for Royal Mail Group Ltd are tested on a rolling
12-month basis in September and March. Royal Mail Group Ltd and
the Government concluded discussions which reset a number of the
key loan covenants for the 12-month testing periods ending March
and September 2011 and March 2012. The revisions are considered
to be on a commercial basis with a consent fee and an increase in
the borrowing margin. All loan covenants were met at September
2010 and March 2011.

Utilised
£m

Average loan
maturity date

Facility
end date

2021-2025

2014

Facility
£m

500

600

300

377

2012

1,150

500

600

377

375

2012

2,928

1,853

2023

2014

2011

–

Loan facilities are repayable on the later of March 2016 and the release of the pension escrow investments. The loan (and facility) increased by £40m (2010 £37m) as a result of accrued interest added to the loan balance.
This Royal Mail Group Ltd loan is subordinate to all other creditors.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Financial review continued

Financial risks and related hedging
The Group is exposed to currency and commodity price risk. The
Group operates hedging policies which are described in the notes
to the accounts. The gross exposures (before hedging) are set out
in the table below, together with how much the 2011-12 operating
profit would differ from 2010-11 as a result of the changes to
27 March 2011 in commodity costs post the impact of our hedging
programmes.

Events after the balance sheet date
On 30 March 2011 Romec Limited, a 51% owned subsidiary of the
Group, disposed of its 99% shareholding in its subsidiary Romec
Services Limited to Balfour Beatty plc which holds the 49% non-
controlling interest in Romec Limited. As a result of this transaction,
Balfour Beatty plc has been released from a contractual obligation
that it had in relation to the pension funding for Romec Limited
employees.

Exposure

Diesel and Jet

US$

Euro

Impact on
operating profit of
a 5% increase in
price/weakening
of sterling
(before hedging)
£m (loss)/gain

Impact of no
further change in
price/rate on
2011-12 operating
profit versus
2010-11 (post
hedging)
£m (loss)/gain

(5)

(2)

(9)

(21)

Nil

On 9 June 2011, Government announced the passing of the Postal
Services Bill. This confirms the Government’s intention to take on
the historic pension deficit with effect from March 2012, and the
intention to restructure the Group’s balance sheet in due course.

It is anticipated that there will be a £21m adverse impact on profits
arising from the change in effective (post hedging impact) diesel
costs from 33ppl in 2010-11 to an anticipated 45ppl in 2011-12.
Without hedging this adverse variance would be £36m (based upon
closing fuel prices at 27 March 2011).

Matthew Lester
Chief Finance Officer
Royal Mail Group
13 June 2011

The Group manages its interest rate risk by maintaining a mix of
fixed and floating rate debt. At the year end 59% of loans were at
fixed rate to maturity. Consequently (and taking into account financial
assets held but excluding the pension escrow investments), an
increase of 100 basis points to interest rates at the year end would
result in an annual reduction to profit of £3m. The impact of such
a change in rates to the pension escrow investments would affect
equity and would offset to some degree the impact of the interest
rate change on the pension liabilities.

Counterparty risk is managed by limiting aggregate exposure to any
individual counterparty based on their financial strength.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Risk Management and Control

Overview
The Board believes that effective risk management and a sound
control environment are fundamental to the Group.

The system is designed to manage rather than eliminate the risk of
failure as taking on risk is inherent in undertaking the commercial
activities of the Group.

There is an ongoing process for identifying, evaluating and managing
the significant risks faced by the Group in accordance with the
guidance detailed by the Turnbull Committee as part of the
Combined Code, including financial, operational, compliance risks and
risks to reputation. The process incorporates both a top-down
element (which collates Executive management/Board view of key
risks) and a bottom-up element (which collates the views of the
business units and functions on risks in their area). Taken together,
these two perspectives are combined to form the Group risk profile.

The process has been in place throughout the year and up to the
date of approval of these financial statements.

The responsibility for joint ventures and associates rests, on the
whole, with the senior management of those operations. The Group
monitors its investments and exerts influence through Board
representations.

Risk Environment
In the main, the principal risks facing the Group have not changed.

The Group has classified its principal risks into three main categories
– Revenues and Costs; Government, Regulation and Legislation; and
Financial:

Revenues and Costs risks comprise those inherent within most
postal operators, namely the ability or not for costs to be reduced as
core traditional letter volumes decline as customers find alternative
digital means to communicate and transact. Royal Mail is currently
undergoing a large scale modernisation programme to improve
productivity, safety, quality and culture and, as the independent
Hooper review confirmed, successful implementation is vital to
Royal Mail’s future viability. For more information see pages 7 and 8.

The majority of the Group’s business is subject to regulation under
the Postal Services Commission’s (Postcomm) Licence for Royal Mail,
the Financial Service Authority (FSA) requirements for financial
services offered through the Post Office and the Office of
Communications (Ofcom) requirements for telecommunication
services offered through the Post Office. The environment creates
two areas of risk for Royal Mail and the Post Office: firstly, Royal Mail
may not have the ability or flexibility to set prices at levels it
considers commercial, and its ability to change the scope of services
and range of products is restricted; secondly for both, any non-
compliance with regulatory requirements may lead to financial
penalties or other sanctions.

The Group’s activities are wide, with significant assets in the form of
property, equipment and vehicles and a substantial workforce.
Changes to legislation can have significant impacts on the business
and financial results. Recent legislation that has impacted Royal Mail
includes the implementation of VAT on postal services and European
work time directives.

The Group is currently balance sheet insolvent, meaning its
accounting liabilities are more than its assets, primarily due to

pension liabilities. Royal Mail is currently wholly owned by UK
Government, which is the sole source for lending for the Group.
Any support given to the Group by Government in this area requires
State Aid approval from the European Commission. Overall, the
business is subject to uncertainties around going concern, and these
are fully discussed in note 2.

Risk Framework
The Group-wide risk management framework includes risk
governance, risk identification, measurement and management, and
risk reporting.

The Group’s approach to control is based on the underlying principle
of line management accountability for internal control and for risk
management. The Group recognises and uses the principle of the
‘Three Lines of Defence’, that is:

a) primary controls over the risks to the business are located in the

day to day operation

b) these are supported by internal monitoring and oversight

c) independent assessments by Internal Audit and others provide the

third line.

The process for risk identification and management consists of
formal identification by management at each level of the Group of
the key risks to achieving their business objectives and the controls
in place to manage them. The likelihood and potential impact of each
risk is evaluated. Risk management action plans are monitored at
executive level to ensure key risks are being mitigated.

The process includes a ‘top down’ and ‘bottom up’ element, which
means that the views of top management and also units/functions
are collated and brought together, in the Group risk profile, to form
a comprehensive view of key risks in the organisation.

The process also includes an annual certification by management
that they are responsible for managing the risks to their business
objectives and that the internal controls are such that they provide
reasonable assurance that the risks are appropriately identified,
evaluated and managed.

The system of risk management and internal control is embedded
into the operations of the Group, and the actions taken to mitigate
risk or address any weaknesses are monitored.

Risk Governance and the Board
The Board has delegated responsibility for specific review of risk and
control processes to the Audit & Risk Committee (ARC), and the ARC
in turn has set up a sub-committee, the Corporate Risk Management
Committee (CRMC), to help discharge its duties. The key responsibilities
for risk and control among the Board, ARC, and CRMC are as follows:

Board
The Board is accountable for the risks taken by the Group. It is
responsible for:

• providing strategic direction on the appropriate balance between

risk and reward

• setting the ‘tone’ and culture for managing risk and embedding

risk management

• ensuring the most significant risks facing the organisation are

properly understood and managed

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Risk Management and Control continued

Audit & Risk Committee
The Committee reports to the Board and meets as a minimum on a
quarterly basis to:

• Increased awareness of and sensitivity to ‘green’ issues, including
use of paper, may impact customer and receiver sentiment and
drive down usage of mail or increase switching to alternatives.

• monitor and review the effectiveness of the risk management

• Government and traditional bill payments transactions are

processes and the control environment

declining in the Post Office.

• review the scope of work, authority and resources of the Internal

Audit & Risk Management function

• regularly review the Group risk profile

• review the scope and work of the external auditor to ensure that it

is appropriate and that the auditor is independent

• review the Annual Report and Financial Statements, and the

associated internal and external processes (including the above
work of the external auditor) to ensure that the whole document
presents an appropriate and balanced view of the business, its
performance and its risks

Corporate Risk Management Committee
The Committee acts as a sub-committee to the Audit & Risk
Committee and meets quarterly to:

• support the business in ensuring proactive management of risks

within the business

• promote the establishment, communication and embedding of risk

management throughout the business

• receive and review analyses on specific key risks

• review emerging risks

Principal Risks and Uncertainties
The Group uses a business-wide framework for the identification,
assessment, treatment, monitoring and reporting of risk. The
process helps support business objectives by linking into business
strategy, identifying and reacting to emerging risks, and developing
cost effective solutions for the management of risk. This process has
been reviewed and refined and is now overseen by the Chief
Executive.

The following Group level risks have been identified and are actively
being managed to support the long-term sustainability of the Group.

Revenues and Costs
Royal Mail, like other postal administrations, faces an inherent risk of
core volume and revenue decline for a number of reasons:

• Historically there has been a correlation between the state of

the UK economy and level of mail volumes. Economic weakness
or uncertainty will have a direct impact on mail volumes and
consequently on Group revenues and profit.

• The marketplace in which we operate continues to change, with

substitution from the traditional letter to e-mails, text messaging
and other digital media.

• Our business customers want to continue to drive transactional
mail (statement, bills and application forms) online to provide
savings to their businesses.

• Advertisers now have more and lower cost options than they used
to, for example the internet has taken a 30% share which reduces
direct mail volumes.

Management has raised prices and is applying for further increases,
and is actively working to simplify the product portfolio, enhance the
customer experience, and develop new revenue streams.

However, responses to structural decline are limited because Royal
Mail’s cost base comprises mainly people costs and is largely fixed in
nature. The workforce is heavily unionised and Royal Mail’s Universal
Service Obligation (USO) requires a national collection and delivery
network irrespective of volumes. Similarly, both the USO and Post
Office network are designed to provide social cohesion and economic
wealth and not maximisation of profit.

Management agreed a 3 year pay and modernisation deal in 2010
with the postal union and its frontline workforce. In the past year,
around 5,000 people have left UK businesses. Despite these
initiatives, overall costs have not decreased as fast as revenue.

Royal Mail is undergoing a significant, extensive modernisation
programme including World Class Mail, and the success of business
strategy relies on successful extraction of benefits from the
programme.

The business needs to successfully manage the deployment of this
programme to drive modernisation and achieve sustainable benefits,
including safety improvements, cost reductions and delivery of
excellent quality of service to our customers. Failure to do so may
lead to increased costs, potential fines and impact on our reputation
and brand value.

Government, Regulation and Legislation
The Group is subject to regulatory requirements on its operations
and the risk of penalties for non-compliance. Royal Mail’s Licence
contains material restrictions on the operation of the business.
These include:

• Obligations over the delivery and collection of mail including mail

integrity and quality of service;

• Restrictions over the freedom to set prices and requirements
to share intellectual property such as new innovations before
products are launched; and

• Obligations to give competitors access to the network.

If Royal Mail breaches Licence conditions or other regulatory
requirements it may be subject to financial penalties.

In addition Post Office Limited has to satisfy the FSA’s requirements
as an appointed representative of The Governor and Company of the
Bank of Ireland who are regulated by the FSA in respect of
investment, mortgage and insurance intermediation activity in the
UK. It is also subject to anti-money laundering regulations issued
under the Proceeds of Crime Act 2002 and enforced by HM Revenue
and Customs. Post Office Limited is also licensed as a telephone
service provider by Ofcom, which requires service providers to issue
and adhere to Codes of Practice.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Risk Management and Control continued

Changes to European or domestic law can have a direct impact on
the Group, such as the European Working Time Directive,
International Financial Reporting Standards (IFRS), speed restrictions
on the Group’s vehicles and increased liberalisation of the market for
postal service providers.

In response, Royal Mail has sought to agree a regulatory regime
which allows the business to serve customers needs, protect the
USO and build a sustainable business. The change in regulatory
regime is now enshrined in the Postal Services Act, with the move
of regulator from Postcomm to Ofcom.

Financial
The Group is facing a number of significant financial risks, including
the requirement to fund a significant historical pension deficit,
volatility in the overall pension obligation, and the ongoing need to
restructure the business with limited funding.

Note 2 to the financial statements provides full disclosure on the
status of going concern in both Royal Mail Group Ltd and Post Office
Limited.

Internal Control and Internal Audit
The Group operates a system of internal control, including
operational, financial, and compliance controls, and risk management
systems, to control the day-to-day operations of the Group’s
activities. The key processes and controls comprise:

1 Key policies and documentation

• Royal Mail’s activities are mandated by the Postal Services Act
and are further bound by a postal service Licence which covers
service standards, complaint handling, integrity of mail, access
to postal facilities, accounting separation and process for postal
services.

• The Group’s Code of Business Standards sets the principles of

professionalism and integrity for our people

• Standard policies exist within each function including:

- Royal Mail GAAP based on IFRS covering all accounting policies
- HR policies covering people – recruitment, sickness, absence,

disciplinary procedures and leavers

- Authority limits delegated into each business unit to control
day to day expenses combined with processes to procure,
requisition and approve spend

- Investment Appraisal policies to cover investment approvals
- Compliance and regulatory policies set by Group Regulation
- Standard operating procedures are followed at the frontline

2 Standard daily and monthly management accounting and payroll

processes through centralised shared services for the UK
businesses. This includes expenditure requisition and order review
and approval by a list of appropriate approvers, generally under
the Finance function

3 A budget prepared, reviewed and set once a year, providing annual
clarity on the short-term strategies for each part of the Group.
This, along with the delegated authorities, resets the levels of
delegated spend in each area on an annual basis

4 Performance management reviews include production of weekly
indicators and a pyramid of monthly balanced scorecards from
front line operations to Holdings Board level which underpin
quarterly reviews and the interim and year end results. The focus
of these reviews is comparing actual in year results to budget,
forecast and prior year

5 Five to ten year business plans are collated on a regular basis and
submitted to both the Shareholder and the regulator as part of
formal external processes such as regulatory framework reviews
and State Aid applications. This provides regular opportunity for
executive management and the Board to re-appraise/re-confirm
long-term strategies and objectives for the Group

6 Self assessment of over 300 key processes

A rolling self assessment of approximately 300 key financial and
non-financial processes across all parts of the UK businesses,
including commercial and operations, and within each key function

7 Sign off by executives

Twice a year, Finance Directors provide a formal confirmation

including:

• business unit financial returns have been properly prepared and

fairly present the financial position

• Group accounting policies have been consistently followed

• a system of internal controls has been maintained and that no

significant deficiencies have been identified

• that all events after the balance sheet date have been identified

In addition, once a year executives confirm whether they are aware
of any material related party transactions.

8 Specific and targeted Internal Audit work programme

The effectiveness of the internal control system is reviewed
regularly by Internal Audit & Risk Management (IA&RM), the
Group’s independent internal audit function. IA&RM reports to the
Audit & Risk Committee (ARC) and provides assurance to executive
management and the Board on the effectiveness of the internal
control system.

Internal Audit reports include an action plan where issues have
been identified, and progress against action plans is regularly
tracked and reported.

IA&RM establishes and agrees with the ARC an annual plan of
assignments and activities based on discussions with the Board
and management, and also taking into account known issues in
the business and the postal industry.

9 External audit and other reviews

There are a number of external audits and reviews that take place
during the year to provide management, the Board and the
regulator with assurance on specific matters, including:

• The external auditor performs a statutory year end audit

• The external auditor performs an audit of the regulatory

accounts and in conjunction with economic consultants performs
a review of the price control submissions to the regulator as
part of Licence Conditions 15 and 21 requirements

• The external auditor confirms that the statement to the

regulator on ‘necessary resources’ is consistent with their audit
findings, as part of Licence Condition 16 requirements

• End to end quality of service is reviewed by an independent
accounting firm, as part of Licence Condition 4 requirements

• The USO daily collections and deliveries reporting systems are
reviewed by an independent accounting firm, as part of Licence
Condition 4 requirements

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Royal Mail Holdings plc Board

Chairman
Donald Brydon CBE (66)
Donald Brydon is Chairman of the Royal Mail
Group and Smiths Group plc. He had a 20-
year career with Barclays Group, during
which time he was Chairman and Chief
Executive of BZW Investment Management
and acting Chief Executive of BZW followed
by ten years with the AXA Group including
holding the posts of Chairman and Chief
Executive of AXA Investment Managers and
Chairman of AXA Framlington. He has also
recently been Chairman of the London Metal
Exchange, Amersham plc, Taylor Nelson
Sofres plc and the ifs School of Finance and
a Director of Allied Domecq plc and Scottish
Power plc. He is a past Chairman of
EveryChild.

Non-executive Directors
David Currie (64)
Lord David Currie was appointed to the
Board in January 2009. He was the founding
Chairman of Ofcom (2002 – April 2009),
Deputy Dean of London Business School and
Dean of Cass Business School, City
University. He is Chairman of the
International Centre for Financial Regulation
and of Semperian PPP Investment Partners
Holdings Ltd, and sits on the boards of the
accountancy firm BDO, the Dubai Financial
Services Authority, IG Group plc, and the
London Philharmonic Orchestra. Previous
appointments include positions with Nomura,
Terra Firma, Unisys, T-Systems and on the
boards of Abbey National plc and Ofgem.

Nick Horler (52)
Nick Horler joined the Board in April 2010.
He was previously Chief Executive Officer of
Scottish Power and has held senior strategic
roles in major companies both in the UK and
abroad.

Cath Keers (46)
Cath Keers was appointed to the Board in
June 2010 as a non-executive Director. She
is a non-executive Director of Telefonica
Europe, the insurance group LV= and The
Children’s Mutual. She was previously
Customer Director and Marketing Director of
02 UK.

Paul Murray (49)
Paul Murray joined the Board in August
2009 and is Chair of the Audit and Risk
Committee. Paul is also Audit Committee
Chairman at Qinetiq plc and is a Trustee of
Pilotlight. He was previously Senior
Independent Director of Taylor Nelson Sofres
plc and has also been Group Finance Director
of Carlton Communications plc and of
LASMO plc.

Les Owen (62)
Les Owen joined the Board in January 2010.
Les is a qualified actuary with 35 years
experience in the financial services industry.
From 2000 to 2006 he was the Group Chief
Executive Officer of AXA Asia Pacific Holdings
Limited and responsible for AXA’s Asian life
insurance and wealth management
operations. Prior to this he was Chief
Executive of AXA Sun Life plc. He was a
member of the Global AXA Group Executive
Board. Les is currently non-executive
Chairman of Jelf Group plc and a non-
executive Director of Post Office Limited,
Computershare, CPP Ltd, Just Retirement
Ltd and of Discovery Holdings, a South
African listed health and life insurer.

Orna Ni-Chionna (55)
Orna Ni-Chionna was appointed to the Board
in June 2010. She became Chair of the
Remuneration Committee and Senior
Independent Director in April 2011. She is a
former Partner at McKinsey & Company,
where she specialised in serving retail and
consumer clients. She is currently the Senior
Independent Director of HMV plc. She was,
until recently, the Senior Independent
Director of Northern Foods plc and of BUPA
and was a non-executive Director of the
Bank of Ireland UK Holdings plc and Bristol &
West plc. She is Chair of Trustees of the Soil
Association.

Directors who retired from the Board
Baroness Prosser OBE 31.10.10
Richard Handover CBE 30.03.11

Paula Vennells (52)
Paula Vennells was appointed Managing
Director of Post Office Limited in October
2010, having been its Chief Operating Officer.
She joined in 2007 from Whitbread plc
where she was Group Commercial Director.
She has held Marketing, Strategy & Sales
Director roles with large retailers Argos/GUS,
Dixons Stores Group and started her career
with Unilever. Paula is also a non-executive
Director & Trustee for Hymns Ancient and
Modern Group.

Directors who left during the year
Adam Crozier 31.03.10
Ian Duncan 15.06.10

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Royal Mail Holdings plc Board continued

Executive Directors
Moya Greene (56)
Moya Greene was appointed Chief Executive
Officer in July 2010, previously having been
President and Chief Executive Officer of
Canada Post Corporation since 2005. Whilst
there she led a wide-ranging transformation
programme to increase quality of service
and efficiency across the organisation. Prior
to joining Canada Post she held senior roles
at companies including Bombardier Inc and
TD Bank.

Mark Higson (55)
Mark Higson joined the Company in
November 2007. He is the Managing
Director, Operations and Modernisation and
is a member of the Group Executive Team.
Mark was previously divisional Chief
Executive and Group Operations Director of
BPB plc. Prior to that, he held senior
positions at Courtaulds plc, including CEO at
its UK Coatings division. He has also worked
at HJ Heinz and British Aerospace.

Matthew Lester (47)
Matthew Lester was appointed as Chief
Finance Officer in November 2010. He was
previously Finance Director of ICAP plc for
four years. Prior to this he worked for Diageo
plc in a number of senior finance roles
including Group Financial Controller. He is a
non-executive Director of Man Group plc.

David Smith (46)
David Smith was appointed to the Board in
April 2010. He is Chief Customer Officer
having been Managing Director of Post Office
Limited and Managing Director of Parcelforce
Worldwide. David joined Royal Mail Group in
2002, initially as Finance Director of Royal
Mail’s Business Sales division before being
appointed as Finance Director of Parcelforce
Worldwide in January 2003 and then
Managing Director of Parcelforce Worldwide.
He is a qualified chartered accountant and,
prior to 2002, held a number of financial and
commercial positions in the electronics
industry, including Finance Director of RS
Components UK.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Directors’ Report

The Directors present the Group financial statements for Royal Mail
Holdings plc. These financial statements relate to the year ended
27 March 2011 (2010 year ended 28 March 2010).
Principal activities
The Group provides a nationwide and international distribution
service, principally of mails and parcels. The Group also provides
access to a wide range of financial and retail services through its
network of Post Office branches across the United Kingdom.
Review of the business and future developments
A review of the Group’s business and future developments is
presented in the Chairman’s Statement and pages 5 to 34.
Results and dividends
The loss before taxation amounted to £152m (2010 £262m loss).
After taxation, the loss was £258m (2010 £320m loss). Of the loss
after taxation, £1m profit (2010 £1m profit) is attributable to non
controlling interest. The Directors do not recommend a dividend
(2010 £nil dividend).
Directors
The names and biographies of the current Directors appear in the
Royal Mail Holdings plc Board section pages 38 to 39.
Political and charitable contributions
During the year the Group made charitable contributions of £2m (2010
£2m). No political contributions were made in the year (2010 £nil).
Research and development
Research and development expenditure during the year amounted
to £nil (2010 £nil).

Policy on the payment of suppliers
The policy of the Company and its principal operating subsidiaries is
to use their purchasing power fairly. Payment terms are agreed in
advance for all major contracts. For lower value transactions, the
standard payment terms of the supplier apply. It is the Company’s
policy to abide with the agreed terms. The Company and its principal
operating subsidiaries in the UK have sought to comply with the
Department for Business, Innovation and Skills (BIS) Better Payment
Practice Code. As the Company is a non-operating company, the
creditor days are zero. The creditor days of the operating
subsidiaries are set out in their financial statements.

Land and buildings
The net book value of the Group’s land and buildings, based upon a
historic cost accounting policy and excluding fit-out, is £690m (2010
£749m). In the opinion of the Directors, the aggregate market value
of the Group’s land and buildings exceeds this net book value by
£480m (2010 £460m).

Financial instruments
Details of financial risk management objectives and policies and
financial instruments are shown in note 24 and note 25 respectively.

Directors and their interests
The Directors of the Company and details of changes during the year
are given on page 46. The Secretary of State appoints the Chairman;
all other Directors are appointed by the Company with the Secretary
of State’s consent.

UK Government is the Company’s sole shareholder and accordingly
the Directors have no interest in shares of the Company.

Audit information
The Directors confirm that, so far as they are aware, there is no
relevant audit information of which the auditor is unaware and that
each Director has taken all reasonable steps to make themselves
aware of any relevant audit information and to establish that the
auditor is aware of that information.

Qualifying third party indemnity provisions for Directors
A partial qualifying third party indemnity provision (as defined in
section 234 of the Companies Act 2006) was and remains in force
for the benefit of all the Directors of the Company and former
Directors who held office during the year. The indemnity is granted
under article 129 of the Company’s Articles of Association. The
indemnity is partial in that it does not allow the Company to cover
the costs of an unsuccessful defence of a third party claim.
People
The Group employs over 176,000 people (2010 approximately
181,000) in our wholly owned subsidiaries. An analysis of the Group
headcount is shown in note 4 to the financial statements. Our people
are our ambassadors, our brand and our service.
The Group’s policy is to encourage effective communication and
consultation between our people, particularly on matters relating
to strategy, financial and economic factors that may influence their
business unit’s performance. This is achieved through the use of an
extensive range of communication channels, including our employee
opinion survey, magazines, briefings, open forums, TV screens and
an intranet website. Our people have various bonus schemes,
significant elements of which are based on business-related targets.

We actively encourage continuous training and skill development for
all our people to ensure achievement of corporate and individual
objectives. Management development and training programmes
have been designed to attract and retain the best. The Group has
worked with the unions to introduce several innovative working
practices to improve efficiency.
Corporate Responsibility
The Group is committed to carrying out its activities in a socially
responsible manner in respect of the environment, employees,
customers and local communities. Details are provided on pages 15
to 16. The Group publishes an annual report of its activities. Further
details of our CR governance structure and activities will be available
in our 2011 CR Report when it is published.

Disabled employees
The Group’s policy is to give full consideration to applications for
employment from disabled persons. Employees who become
disabled whilst employed receive full support through the provision
of training and special equipment to facilitate continued employment
where practicable. The Group provides training, career development
and promotion to disabled employees wherever appropriate.

Going concern
After analysis of the financial resources available, cash flow
projections and the material uncertainties facing the Group the
Directors consider that it is appropriate to prepare the financial
statements on a going concern basis. Further details are provided
under Funding in note 2 to the financial statements.
Auditor
A resolution to reappoint Ernst & Young LLP as auditor will be put
to the Annual General Meeting.
By Order of the Board

Jon Millidge
Company Secretary
13 June 2011

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Corporate Governance

Statement by the Directors on compliance with the
Combined Code
The Board is committed to high standards of Corporate Governance
and supports the Combined Code on Corporate Governance (the
Code), published in July 2003 and revised in June 2008. The
Company has fully complied with the provisions set out in section 1
of the Code during the year in so far as they are appropriate to a
public company with a single shareholder. The following statement is
intended to explain our governance policies and practices in light of
the Code principles and provisions and to provide insight into how the
Board and management run the business for the benefit of the
Shareholder.

The Board
The Board is responsible for setting the objectives and strategy of
the Group and for monitoring performance. At the end of the year,
the Board comprised a Chairman, five executive Directors and seven
non-executive Directors. The biographies of each of the Directors,
setting out their current roles, commitments and previous
experience, are on pages 38 to 39. The Board met on ten occasions
during the course of the year under review.

The Board has defined those matters that are reserved exclusively
for its consideration. These include the approval of strategic plans,
financial statements, acquisitions and disposals, major contracts,
projects, and capital expenditure. It delegates responsibilities to the
Board Committees detailed below. For each scheduled meeting of
the Board, the Company Secretary, on behalf of the Chairman,
collates and circulates the papers, aiming to allow sufficient time for
the Directors to review the information provided.

The Board is confident that all its members have the knowledge,
talent and experience to perform the functions required of a Director
of the business. Executive Directors have rolling 12-month contracts

and non-executive Directors are generally appointed for three-year
terms. The Board considers that each of the non-executive Directors
is independent. This means that in the view of the Board, they have
no links to the executive Directors and other managers, and no
business or other relationship with the Company that could interfere
with their judgement. There is also a clear division of responsibilities
between the Chairman and the Chief Executive.

Performance evaluation of the Board, its Committees and individual
Directors takes place on an annual basis with the support of the
Company Secretary. This year’s evaluation was conducted using a
combination of questionnaires and a full Board discussion. A
performance evaluation of the Audit and Risk Committee has been
conducted by the Chairman of the Committee. Other committees are
undertaking a review of their terms of reference.

Directors may take independent professional advice in the furtherance
of their duties, at the Group’s expense. All Directors have access to the
advice and services of the Company Secretary, the appointment and
removal of whom is a matter for the Board as a whole.

All Directors appointed by the Board are required by the Company’s
Articles of Association to be elected by the Shareholder at the first
AGM after their appointment. All Directors will be standing for annual
re-election at this year’s Annual General Meeting. On appointment, the
Directors take part in an induction programme in which they receive
information about the Group, the role of the Board and matters
reserved for its decision, the role of the principal Board Committees,
the Group’s Corporate Governance arrangements and the latest
financial information about the Group. This is supplemented by visits to
key business locations. The Group engages in two-way communication
with the Shareholder to discuss information on its strategy,
performance and policies. The Board receives feedback on these
meetings from the Directors attending them.

Number of meetings during the year*

Chairman
Donald Brydon
Executive
Moya Greene
Mark Higson
Matthew Lester
David Smith
Paula Vennells
Non-executive
David Currie
Richard Handover
Nick Horler
Cath Keers
Orna Ni-Chionna
Paul Murray
Les Owen
Former Directors
Ian Duncan
Baroness Prosser

Board

10(10)

8(8)
10(10)
5(5)
10(10)
5(6)

10(10)
9(10)
9(10)
8(9)
8(9)
10(10)
7(10)

1(1)
5(5)

Audit and
Risk Committee

Remuneration
Committee

Nomination
Committee

-
-
-
-
-

5(5)
3(5)
1(3)
3(3)
2(3)
5(5)
3(3)

-
-

5(5)

1(1)

-
-
-
-
-

4(4)
5(5)
3(4)
4(4)
4(4)
4(4)
4(4)

-
3(3)

-
-
-
-
-

1(1)
0(1)
1(1)
1(1)
1(1)
1(1)
1(1)

-
-

* During the year, the Directors attended the following number of meetings of the Board and its main Committees with the maximum number that each could have attended shown in brackets.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Corporate Governance continued

Outside appointments
The Board believes that there are significant benefits to both
the Group and the individual from executive Directors accepting
non-executive Directorships of companies outside of the Group.
The Board’s policy is normally to limit executive Directors to one
non-executive Directorship, for which the Director may retain the
fees (see the Directors’ Remuneration Report on pages 45 to 48
for details).

Board Committees
The following Committees deal with specific aspects of the
Group’s governance. The full terms of reference for each of the
principal Committees are available on the Company’s website
www.royalmailgroup.com or on written request from the Company
Secretary. The details of Committee membership shown are as at
27 March 2011.

Chief Executive’s Committee

Chair

Membership

Role

Group Executive Team

Chair

Membership

Role

Moya Greene

Stephen Agar (Director, Regulated products), Rico Back (CEO, GLS), Mark Higson (Managing Director,
Operations and Modernisation), Matthew Lester (Chief Finance Officer), Alex Smith (Director of Business
Development & Technology), David Smith (Chief Customer Officer).

The Committee is responsible for all the key areas of commercial activity within Royal Mail. The Chief
Executive’s Committee (CEC) meets twice a month. The role of the CEC is to manage the overall
framework of financial risk & business controls to meet shareholder, Regulatory and legal requirements.

Moya Greene

Stephen Agar (Director, Regulated products), Rico Back (CEO, GLS), Paul Bates (Managing Director
Wholesale), Paul Budd (Director, Internal Communications), John Duncan (Group HR Director), Derek
Foster (Internal Audit and Risk Management Director), Dale Haddon (Deputy Group HR Director), Kath
Harmeston (Director of Procurement), Mark Higson (Managing Director, Operations and Modernisation),
Matthew Lester (Chief Finance Officer), Jon Millidge (Company Secretary), Shane O’Riordain (Director of
Communications), Frank Schinella (Deputy Chief Finance Officer), Alex Smith (Director of Business
Development & Technology), David Smith (Chief Customer Officer), Dick Stead (Managing Director,
Parcelforce Worldwide), Jeff Triggs (Interim General Counsel), Paula Vennells (Managing Director, Post
Office Limited), Sue Whalley (Director of Regulation and Government Affairs).

The Committee meets every three months and its responsibilities are to develop and monitor deployment
of the Group’s strategy and consider overall performance of the Group.
The Royal Mail Holdings plc Board has delegated authority to the Investment Committee of the Group
Executive Team to make investment decisions of up to £20m. The Investment Committee meets monthly.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Corporate Governance continued

Audit and Risk Committee

Chair

Membership

Paul Murray

All non-executive Directors

Role

The Board is confident that the collective experience of the Audit and Risk Committee members enables
them, as a group, to act as an effective Audit and Risk Committee. The Committee also has access to the
financial expertise of the Group and its auditor, and can seek further professional advice at the Group’s
expense if required.

The Committee, which is assisted by the Corporate Risk Management Committee, provides a forum for
reporting by both internal and external auditors and is responsible for a wide range of matters including:
• to monitor the integrity of the financial statements of the Group;
• to review the Group’s internal financial control system and, unless addressed by the Corporate Risk
Management Committee or by the Board itself, internal control and risk management systems;

• to monitor and review the effectiveness of the Group‘s Internal Audit function;
• to recommend to the Board for shareholder approval the appointment of the external auditor, and to

approve its remuneration and terms of engagement;

• to monitor and review the external auditor’s independence, objectivity and the effectiveness of the audit

process;

• to develop and implement policy on the engagement of the external auditor to supply non-audit services; and
• where the Committee’s monitoring and review activities reveal cause for concern or scope for improvement,

to make recommendations to the Board or management on action needed to address the issue.

Audit & Risk Committee Report
See Risk Management and Control on pages 35 to 37.

Non-audit services provided by the external auditor
In some cases the nature of advice required makes it more timely
and cost effective to select the external auditor who already has
a good understanding of the Group. In order to maintain the
objectivity and independence of the external auditor, the Committee
has determined what work can be provided by the external auditor
and the associated approval processes associated with the auditor.
The Committee monitors the level of non-audit fees paid to the
external auditor.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Corporate Governance continued

Remuneration Committee

Chair

Membership

Role

Richard Handover

Chairman and all non-executive Directors

The Committee’s responsibilities include:
• to determine and recommend for the Board’s approval, the framework for the remuneration of the

senior executives of the Group;

• to determine the individual remuneration arrangements for the Chairman, the executive Directors
and the Company Secretary, subject where necessary to the consent of the Secretary of State; and
• to agree the targets for any performance-related incentive schemes applicable to senior executives.

Remuneration Committee Report
See pages 45 to 48.

Nomination Committee

Chair

Membership

Role

Donald Brydon

All non-executive Directors

The Committee’s responsibilities include:
• to lead a formal, rigorous and transparent process for appointments to the Board of the Company,

to the boards of subsidiaries and to other senior executive positions;

• to advise the Board on succession planning for the positions of Chairman, Chief Executive and all

other Board appointments and other senior appointments; and

• to keep under review the balance of Board membership to ensure that it has the required mix of

skills, knowledge and experience.

Nomination Committee Report
The Committee met formally on one occasion during the year but
had met informally on many occasions during the course of the year
in order to progress the appointments of the executive members of
the Board. The Committee’s main focus was on the selection and
recruitment of Directors and other senior executives. The Committee
took external advice from executive search consultants and
considered internal candidates where appropriate. All Board
appointments require the consent of the Shareholder.

Pensions Committee

Chair

Membership

Matthew Lester

John Duncan (Group HR Director), Jon Millidge (Company Secretary), Les Owen (non-executive Director)

The Committee’s responsibilities include:
• to review funding, benefits, scheme structure and strategic developments impacting on the Group’s

occupational pension schemes; and

• to represent the Group in discussions with the Trustees of the Group’s occupational pension schemes.

Statement by the independent non-executive Directors
A number of structured processes exist throughout the Company to
support good governance. All the non-executive Directors are
members of all the principal Board Committees: Audit and Risk,
Nomination and Remuneration, which gives each of them insight into
a cross-section of important areas, and informs Board discussions.

The independent non-executive Directors are satisfied that the
Company’s corporate governance controls have been effective
throughout the financial year ended 27 March 2011.

Orna Ni-Chionna
Senior Independent
Director

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Directors’ Remuneration Report

The Company’s remuneration policy and practices follow the UK
Corporate Governance Code (formerly known as the Combined
Code). This report explains the Committee’s policy and gives details
of the current remuneration practices in accordance with the
Directors’ Remuneration Report Regulations, in so far as Royal Mail
as a non-listed company can comply with them. In line with the
Regulations, the following parts of the report have been audited:

• Directors’ emoluments with respect to 2010-11;

• Performance-related, annual bonuses outturn for 2010-11; and

• Pensions.

The Remuneration Committee
The Board has overall accountability for executive remuneration and
the terms of the service contracts offered to all executive Directors
but these also require the consent of the Secretary of State for
Business, Innovation and Skills. The Secretary of State also gives
consent for the remuneration arrangements for non-executive
Directors.

The Remuneration Committee’s role is to approve the remuneration
policy for executive Directors and their immediate reports and to
approve recommendations on their salary, benefits, bonuses and
other terms and conditions of employment.

The Remuneration Committee is made up of independent non-
executive Directors and the Chairman of the Board. Membership of
the Committee is given on page 44. The Chief Executive and the
Group HR Director may attend Committee meetings by invitation.
They are not present at the discussion of their own remuneration.

Advice to the Remuneration Committee
The Committee calls for information and advice from inside and
outside the Group. It has taken advice from time to time from
independent professional organisations that are best able to assist it
on the particular topic under discussion.

During 2010-11, information on the external marketplace was
obtained from Monks Partnership (a trading name of
PricewaterhouseCoopers), Deloitte LLP, Hay Management
Consultants, Kepler Associates and Towers Watson Limited. Internal
support is provided by the Group HR Director, John Duncan and the
Company Secretary, Jon Millidge. Other advice and information has
been provided by specialists from the HR and Finance functions. The
Chairman and the Chief Executive have given information to the
Committee on the performance of key executives.

During the year Towers Watson Limited provided the Company with
advice on pensions and actuarial matters.

Remuneration Policy
The Company’s objectives on Directors’ remuneration are that:

• the overall remuneration package should be sufficiently competitive to

attract and retain executives with sufficient commercial experience to run
a large, complex business in a highly challenging context;

• a significant proportion of the remuneration package should be dependent

on performance - both short and long-term; and

• incentives should be designed so that they align the interests of senior

executives, customers and the Shareholder.

The Committee’s policy for senior executives takes into account pay
and employment conditions elsewhere in the Group, including those
of frontline postmen and women.

The Committee regularly reviews the benefits package offered to its
key executives. The Committee aims to ensure that the package is

reasonable in the circumstances and that it follows accepted best
practice. It is mindful of public concerns about remuneration levels,
particularly in the current economic climate.

The Main Components of Remuneration
The main components of remuneration for executive Directors for
2010-11 were: basic salary, an annual performance-related bonus,
pension or pension allowance and other benefits such as a company
car and private medical insurance. A Long-Term Incentive Plan was
also discussed with executive Directors but its duration and detail
have not yet been finalised with the Secretary of State.

Base Salaries
The Committee believes that base salaries should be set at levels
that are enough to recruit and retain executives of proven ability to
manage a very large and complex company which faces many
challenges. In making its judgement, the Committee considers
information from several sources so that a fair comparison can be
made with enterprises of a similar size and complexity to the
Company. This data is provided by independent consultancies, usually
based on the published annual reports of other organisations.
Increases are recommended only where the Committee believes that
it is necessary to reflect contribution, increased individual
responsibilities and market levels. The Secretary of State’s consent is
required for all material changes to Directors’ remuneration.

In the light of the difficult economic circumstances no general
increases to base salary were awarded to Board members in respect
of the 2010-11 salary review. No increases had been awarded in
2009-10 either. In 2008 it had been agreed that the salaries of Ian
Duncan and Alan Cook would increase to £350,000 and £300,000 a
year respectively. These increases were to apply in two phases, with
the second due on 1 July 2009. At the request of Ian Duncan and
Alan Cook, these second increases were postponed for
implementation on 1 July 2010 but in fact both individuals left the
Company before that date.

Performance-related Annual Bonus
In 2010-11, the bonus potential for the Chief Executive was 100% of
base salary. For the Chief Finance Officer it was 60% for on-target
performance, rising to a maximum of 100% of salary in the event of
exceptional results. In the case of the other executive Directors the
figures were 48% and 80% respectively.

For all executive Directors the factors driving annual bonus were
profit, cash, quality of service and personal objectives agreed by the
Remuneration Committee. The measures were changed at the
beginning of the year to include cash management in the light of the
Company’s changing priorities. As the Chief Executive and Chief
Finance Officer joined the Company during the financial year it was
agreed that their bonus plan should depend on the achievement of
Personal Objectives only.

Adverse weather and the disruption to air transport caused by ash
from the Eyjafjallajökull volcano had an effect on quality of service
during the year, as did the changes necessary to modernise working
practices.

Executive Directors also participate in the ColleagueShare plan on
the same terms as all other eligible employees. This is explained in
note 2 on page 61.

Long-Term Incentive Plan
The Committee discussed a Long-Term Incentive Plan (LTIP) with
executive Directors but its duration and detail have not yet been
finalised with the Secretary of State.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Directors’ Remuneration Report continued

Full details of the previous LTIP were included in last year’s Annual Report. The plan lasted for three years and combined annual awards
related to Return on Total Assets with a waiver of a proportion of annual bonuses, all of which were subject to a final factor which reflected
cumulative Return on Total Assets over the three year performance period.

Benefits
Benefits include the provision of a company car and health insurance, or the cash equivalent of any benefits not taken. The Chief Executive is
eligible for two return flights to Canada each year and financial advice. Relocation expenses are paid where applicable.

Fixed and Performance-related elements of executive Directors’ remuneration (excluding pensions)
For 2010-11, 46% of Directors’ potential annual earnings related to fixed elements whilst 54% related to annualised performance elements.
For the Group Chief Executive and Chief Finance Officer 42% was fixed and 58% was variable. The elements of remuneration at risk to
performance are those available through the Long-Term Incentive Plan and the performance-related annual bonus.

Directors’ emoluments in respect of 2010-11
The following table summarises the remuneration of Board members in respect of 2010-11:

Chairman

Donald Brydon

Executive

Moya Greene2

Mark Higson

Matthew Lester6

David Smith7

Paula Vennells9

Non-executive

Lord Currie

Richard Handover10

Nick Horler11

Cath Keers12

Paul Murray

Orna Ni-Chionna13

Les Owen

Former Directors

Alan Cook14

Adam Crozier15

Ian Duncan16

Baroness Prosser17

Total 2011

Total 2010

Annua
salary /fees
£000

Salary/fees
paid in year
£000

Performance
related bonus
£000

Cash
supplement in
lieu of pension
£000

Benefits
£000

2011
£000

20101
£000

200

498

428

250

225

282

633

325

3,634

2,201

350

428

146

250

142

708

1453

1,870

2,132

371

554

183

-4

171

304

571

637

686

265

363

147

2,714

1,7335

1,2525

2,4285

1,3965

7,207

1 For executive Directors this includes LTIP and deferred bonuses
2 Moya Greene was appointed on 15 July 2010
3 This includes the cost of international relocation
4 Details of Moya Greene’s pension arrangements are given on page 48
5 Includes LTIP payments in respect of 2007-2010: Mark Higson £1,012,000, Alan Cook £768,000, Adam Crozier £1,570,000 and Ian Duncan £888,000
6 Matthew Lester joined the Board on 24 November 2010
7 David Smith was promoted to the Board on 6 April 2010 and left the Board on 13 June 2011
8 Will be paid at a later date subject to compliance with the conditions set out by the Remuneration Committee
9 Paula Vennells was promoted to the Board on 18 October 2010
10 Richard Handover left the Board on 31 March 2011
11 Nick Horler joined the Board 1 April 2010
12 Cath Keers joined the Board 1 June 2010
13 Orna Ni-Chionna joined the Board on 1 June 2010
14 Alan Cook left then Board on 15 March 2010
15 Adam Crozier left the Board on 31 March 2010
16 Ian Duncan left the Board on 15 June 2010
17 Baroness Prosser left the Board 31 October 2010

The figures in the table represent the qualifying emoluments earned and receivable by anyone who has served as a Director at any time
during the financial year, whenever paid. Such emoluments are normally paid in the same financial year with the exception of the annual
performance-related bonus, which is paid in the year following that in which it is earned.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Directors’ Remuneration Report continued

Performance-related Annual Bonuses Outturn for 2010-11
Information on the annual bonus plan is given on page 46. Bonus
payments are significantly below the on-target levels in the light of
the Group’s performance.

The non-executive Directors have service contracts but do not have
employment contracts. The service contract dates for the non-
executive Directors who have served during the year are as follows:

Executive Directors’ Outside Appointments
The Board permits executive Directors to hold outside appointments
as non-executive Directors, subject in each case to Board approval.
Directors may retain fees from any such Directorships.

Non-executive
Directors

Date of contract

Expiry date
of current
service contract

Unexpired
term
(months)

The annual fees received by executive Directors as at 27 March
2011 in respect of their non-executive Directorships are shown in
the table below:

Directorship

Adam Crozier

Debenhams plc

Moya Greene

Tim Hortons

* Sterling equivalent of payments received in the year

2011
£000

–

22*

2010
£000

–

Contracts
The Committee’s policy is that executive Directors appointed to the
Board are given notice periods of one year, and that they must give
six months’ notice of departure. The Committee has a defined policy
on compensation and mitigation, to be applied in the event of a
Director’s contract being prematurely terminated. In such
circumstances, steps would be taken to ensure that poor
performance is not rewarded.

The rolling service contracts and letters of appointment of the
Directors include the following terms as at 27 March 2011:

Date of contract

Expiry date
of current
employment
contract

Unexpired
term
(months)

Chairman

Donald Brydon

26 March 2009 25 March 2012

Executive
Directors

Moya Greene*

15 July 2010

Mark Higson

5 November 2007

Matthew
Lester

24 November 2010

David Smith

6 April 2010

Paula Vennells 16 November 2010

* Moya Greene’s contract provides that if the Company terminates her employment at any time during the first
18 months of her contract she will receive 18 months of base salary in lieu of notice together with one year’s
on-target annual bonus.

Lord Currie

1 January 2009 31 December 2011

Baroness
Prosser#

Richard
Handover*

Nick Horler

Cath Keers

1 November
2004

31 October 2010

1 January 2003

31 March 2011

1 April 2010

31 March 2013

1 June 2010

31 May 2013

Paul Murray

1 August 2009

31 July 2012

Orna Ni-Chionna

1 June 2010

31 May 2013

Les Owen

27 January
2010

26 January 2013

# Baroness Prosser left the Board on 31 October 2010
* Richard Handover left the Board on 31 March 2011.

–

The Company is committed to the service contracts for the
remaining term of appointments, subject to annual review and
notice, for non-executive Directors, including the Chairman.

Non-executive Directors
The fees paid to the Chairman are determined by the Secretary of
State. Fees for the non-executive Directors are determined by the
executive Directors and are submitted to the Secretary of State for
approval. Independent market surveys are consulted in determining
them.

Pensions
The Group has a liability to pay pensions in respect of Directors’
services and, for some executive Directors, makes contributions to
pension schemes for this purpose. The Company pays a cash
supplement to Directors whose contributions to the Company
scheme are restricted by the scheme-specific earnings cap. The
Company continues to apply the scheme-specific earnings cap,
indexed by inflation each year, as a constraint on the amount of
salary that is pensionable through the Company scheme.

The Royal Mail Senior Executives’ Pension Plan (RMSEPP) is closed
to new members. Existing members accrue service on a career
average basis on the basis of a retirement age of 65. Current
executive Directors who are members of the plan are subject to a
cap on pensionable earnings which for 2010-11 was £123,600.

Details of RMSEPP are set out in note 26 to the financial statements.
The Plan is a funded, Inland Revenue-registered defined benefit
occupational pension scheme. It provides for a pension on a final
salary basis for service up to 31 March 2008 and for subsequent
service on a career salary basis. The pension is payable from normal
retirement age (currently age 65) and is subject to the maximum
pensionable service and the scheme-specific earnings cap. Pensions
in payment are increased annually in line with the Retail Prices Index
(RPI), subject in some cases to a cap of 5%. Pensions are also payable
to dependants on the death of the member and a lump sum is
payable if death in service occurs.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Directors’ Remuneration Report continued

For senior executives’ whose membership of the Plan (RMSEPP) is restricted by the earnings cap (£123,600 for 2010-11), pension
provision is made by a combination of the Company scheme and a cash pension supplement or its equivalent. David Smith and Paula
Vennells receive a cash supplement of 25% of base pay above the earnings cap. Mark Higson and Matthew Lester are not members of the
Plan and receive a cash supplement of 40% of base pay.

For the Chief Executive the Company makes a contribution to a UK HMRC approved pension plan and promises to pay her after leaving the
Company a sum that accumulates monthly during employment as if it were invested in Government securities

The following table is designed to indicate the increase in the value of Directors’ accrued benefits during the period. The transfer value is
calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions.

Executive Directors

David Smith

Paula Vennells

Accumulated
accrued benefit
at 28 March
2010
£

Increase in
accrued benefits
during the
period
£

Age at
Year end

Increase in
accrued benefits
during the
period (net of
inflation)
£

Transfer value
of increase
before inflation
less Directors’
contributions
£

20,937

10,244

2,671

1,204

2,076

1,072

16,800

11,337

The following table is designed to assess the change in transfer values during the year, taking into account movement in investment market
conditions. Falls in market values may generate a negative movement in the transfer values.

Executive Directors

David Smith

Paula Vennells

Transfer value
at 28 March
2010 or at date
of appointment
to Board if later
£

Age at
Year end

Plus
transfers-in
received
£

Transfer value
at 27 March
2011
£

Movement in
the period less
Directors’
contributions
£

Sub total
£

304,441

184,843

304,441

347,629

36,388

184,843

194,384

6,451

The transfer values disclosed represent a potential liability of the pension plan rather than any remuneration due to the individual and
cannot be meaningfully aggregated with annual remuneration, as it is not money the individual is entitled to receive.

Moya Greene has been provided with contributions of £20,000 to an HMRC approved defined contribution pension plan in respect of service
during the 2010-11 financial year. For 2010-11 the Company has also made her an unfunded promise currently accrued at £120,611 to be
paid on her ceasing to be employed. The value of this promise will fluctuate as if it had been invested in UK 5-year gilts.

Tony McCarthy, a former Director, is in receipt of an annual payment of £43,111 as a result of an unfunded unapproved pension promise
made to him on when he joined the Company.

Orna Ni-Chionna
Remuneration
Committee Chair
13 June 2011

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Statement of Directors’ responsibilities in relation to the Group financial statements

The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and
regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the directors have
elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing these financial statements,
the Directors are required to:

•

select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

•

state whether the applicable IFRSs as adopted by the European Union have been followed, subject to any material departures
disclosed and explained by the financial statements; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in
business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible
for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.

Moya Greene

Matthew Lester

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Independent Auditor’s Report to the members of Royal Mail Holdings plc

We have audited the Group financial statements of Royal Mail Holdings plc for the year ended 27 March 2011 which comprise the Consolidated
income statement, the Consolidated statement of comprehensive income, the Consolidated statement of changes in equity, the Consolidated
balance sheet, the Consolidated statement of cash flows and the related notes 1 to 30. The financial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement set out on page 49, the Directors are responsible for the preparation of the
Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on
the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the Annual Report and Financial Statements to identify material inconsistencies with
the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications
for our report.

Opinion on financial statements
In our opinion the Group financial statements:

•

give a true and fair view of the state of the Group’s affairs as at 27 March 2011 and of its loss for the year then ended;

have been properly prepared in accordance with IFRSs as adopted by the European Union; and

have been prepared in accordance with the requirements of the Companies Act 2006.

Emphasis of matter – going concern
In forming our opinion, which is not modified, we have also considered the adequacy of the disclosures made in note 2 to the financial
statements concerning the Group’s ability to continue as a going concern. The conditions described in note 2 indicate the existence of material
uncertainties which may cast significant doubt about the Group’s ability to continue as a going concern. The financial statements do not include
the adjustments that would result if the Group was unable to continue as a going concern.

Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the Group financial statements are prepared is
consistent with the Group financial statements.

Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

•

certain disclosures of Directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Other matter
We have reported separately on the parent company financial statements of Royal Mail Holdings plc for the year ended 27 March 2011. That
report includes an emphasis of matter.

Alison Duncan (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London

13 June 2011

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Consolidated income statement for the year ended 27 March 2011 and 28 March 2010

Continuing operations

Turnover

Network Subsidy Payment

Revenue

People costs excluding ColleagueShare and restructuring costs

Distribution and conveyance operating costs

Other operating costs

Share of post tax profit from joint ventures and associates

Operating profit before exceptional items

Modernisation costs – operating exceptional items

ColleagueShare – ‘share’ scheme value

- dividend

- business transformation

Restructuring costs

Impairments

Operating profit after modernisation costs before other operating exceptional
items

Other operating exceptional items

Operating (loss)/profit

Profit on disposal of property, plant and equipment

Profit on disposal of associate company

Profit before financing and taxation

Finance costs

Finance income

Net pensions interest

Loss before taxation

Taxation charge

Loss for the financial year from continuing operations

(Loss)/profit attributable to:

Equity holder of the parent company

Non-controlling interest

Notes

2011
£m

2010
£m

4(a)

5(b)

5(c)

26(c)

9,006

150

9,156

(5,717)

(1,619)

(1,602)

246

(207)

109

(41)

(264)

(12)

(88)

(49)

(114)

(167)

(152)

(106)

(258)

(259)

9,199

150

9,349

(5,746)

(1,579)

(1,661)

404

(224)

(72)

(180)

180

(67)

113

118

(98)

(329)

(262)

(58)

(320)

(321)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Consolidated statement of comprehensive income for the year ended 27 March 2011 and 28 March 2010

Loss for the financial year from continuing operations

Other comprehensive income/(expense) for the period

Translation differences on foreign currency net investments

Actuarial gains/(losses) on defined benefit schemes

Gains/(losses) on cash flow hedges deferred into equity

(Gains)/losses on cash flow hedges released from equity to income

Notes

Gains on cash flow hedges released from equity to the carrying amount of non-financial assets 25

Gains on financial assets deferred into equity

Gains on financial assets released from equity to income

Taxation on items taken directly to equity

2011
£m

(258)

2010
£m

(320)

3,432

(1,305)

(11)

(21)

3,424

(1,312)

(7)

(3)

(6)

(9)

(12)

(4)

(19)

Total comprehensive income/(expense) for the period

3,174

(1,625)

Total comprehensive income/(expense) for the period attributable to:

Equity holder of the parent company

Non-controlling interest

3,173

(1,626)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Consolidated statement of changes in equity for the year ended 27 March 2011 and 28 March 2010

Share
premium
£m

Retained
earnings
£m

Financial
Assets
Reserve
£m

Foreign
Currency
Translation
Reserve
£m

Hedging
Reserve
£m

Other
Reserves
£m

Equity
holder
of the
parent
£m

Non-
controlling
interest
£m

At 29 March 2010

430

(6,968)

(Loss)/profit for the period

Other comprehensive income/(expense) for
the period

Translation differences on foreign currency
net investments

Actuarial gains on defined benefit schemes

Gains on cash flow hedges deferred into
equity

Gains on cash flow hedges released from
equity to income

Gains on cash flow hedges released from
equity to the carrying amount of non-
financial assets

Gains on financial assets deferred into
equity

Gains on financial assets released from
equity to income

Taxation on items taken directly to equity
Total comprehensive income/(expense) for
the period

(259)

3,424

3,165

At 27 March 2011

430

(3,803)

(6)

(5)

136

(11)

125

(7)

(3)

(4)

(6,288)

(259)

3,432

(11)

3,424

(7)

(3)

(6)

(9)

3,173

(3,115)

At 30 March 2009

(Loss)/profit for the period

Other comprehensive (expense)/income for
the period

Translation differences on foreign currency
net investments

Actuarial losses on defined benefit schemes

Loss on cash flow hedges deferred into
equity

Loss on cash flow hedges released from
equity to income

Gains on cash flow hedges released from
equity to the carrying amount of non-
financial assets

Gains on financial assets deferred into
equity

Taxation on items taken directly to equity
Total comprehensive (expense)/income for
the period

Share
premium
£m

Retained
earnings
£m

430

(5,331)

(321)

(1,316)

(1,312)

(4)

(1,637)

At 28 March 2010

430

(6,968)

Financial
Assets
Reserve
£m

Foreign
Currency
Translation
Reserve
£m

Hedging
Reserve
£m

Other
Reserves
£m

Equity
holder
of the
parent
£m

Non-
controlling
interest
£m

(10)

157

(21)

136

(4,662)

(12)

(4)

(5)

(321)

(1,305)

(21)

(1,312)

(12)

(4)

(19)

(1,626)

(6,288)

Total
equity
£m

(6,281)

(258)

3,432

(11)

3,424

(7)

(3)

(6)

(9)

3,174

(3,107)

Total
equity
£m

(4,656)

(320)

(1,305)

(21)

(1,312)

(12)

(4)

(19)

(1,625)

(6,281)

A description of the nature and application of the reserves in the above tables is included in note 27.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Consolidated balance sheet at 27 March 2011 and 28 March 2010

Non-current assets

Property, plant and equipment
Leasehold land payment
Goodwill
Intangible assets
Investments in joint ventures and associates
Financial assets – pension escrow investments
- investments
- derivatives
Other receivables
Deferred tax assets

Non-current assets held for sale

Current assets
Inventories

Trade and other receivables
Income tax receivable
Financial assets - investments
- derivatives
Cash and cash equivalents

Total assets
Current liabilities

Trade and other payables
Financial liabilities – interest bearing loans and borrowings

– obligations under finance lease and hire purchase contracts
– derivatives

Income tax payable
Provisions

Non-current liabilities

Financial liabilities - interest bearing loans and borrowings

- obligations under finance lease and hire purchase contracts

- derivatives

Provisions

Retirement benefit obligation – pension deficit
Other payables

Deferred tax liabilities

Total liabilities

Net liabilities

Equity
Share capital
Share premium
Retained earnings
Reserves

Equity attributable to equity holder of parent company
Non-controlling interest

Total equity

Notes

19/25

20/25
20/25
20/25

20/25

2011
£m

1,832
3

197
126

105
1,161

44
6

-
8

3,482
4

38
1,135
-

1
36

1,101
2,311

5,797

(1,961)
(375)

(65)
(3)

(6)
(181)

2010
£m

1,935
4

197
99

147
1,189

49
3

1
95

3,719
5

1,155
14

1
24

937
2,169

5,893

(2,076)
(388)

(61)
(17)

(8)
(130)

(2,591)

(2,680)

(1,478)
(193)

-
(97)

(4,501)
(34)

(10)
(6,313)

(8,904)

(3,107)

-
430

(3,803)
258

(3,115)
8

(3,107)

(1,138)
(120)

(1)
(146)

(8,041)
(43)

(5)
(9,494)

(12,174)

(6,281)

-
430

(6,968)
250

(6,288)
7

(6,281)

The financial statements on pages 51 to 99 were approved by the Board of Directors on 13 June 2011 and signed on its behalf by:

Moya Greene

Matthew Lester

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Consolidated statement of cash flows for the year ended 27 March 2011 and 28 March 2010

Notes

2011
£m

2010
£m

Cash flow from operating activities

Operating profit before exceptional items

Adjustment for:

Depreciation and amortisation

Share of post tax profit from joint ventures and associates

Working capital and other non-cash movements:

Increase in inventories

Decrease in receivables

Decrease in payables

Increase in client receivables

Increase/(decrease) in client payables

Net increase in derivative assets

Increase in non-exceptional provisions

Cash paid in respect of retirement benefit obligations in excess of that charged in operating profit

Cash payments in respect of operating exceptional items (see note (a) below):

ColleagueShare/business transformation payments

Other

Cash outflow from operations

Income tax paid

Net cash outflow from operating activities

Cash flows from investing activities

Dividends received from joint ventures and associates

Finance income received

Proceeds from sale of property, plant and equipment

Proceeds from disposal of associate company

Purchase of property, plant and equipment

Acquisition of businesses

Purchase of intangible assets

Payment of deferred consideration in respect of prior years’ acquisitions

Net sale/(purchase) of financial assets investments (non-current)

Net proceeds from financial assets investments (current)

Net cash inflow/(outflow) from investing activities

Net cash outflow before financing activities

Cash flows from financing activities

Finance costs paid

Payment of capital element of obligations under finance lease contracts

Cash received on sale and leasebacks

New loans

Repayment of borrowings

Net cash inflow from financing activities

Net increase/(decrease) in cash and cash equivalents

Effect of exchange rates on cash and cash equivalents

Cash and cash equivalents at the beginning of the period

Cash and cash equivalents at the end of the period

5(c)

246

286

(28)

(49)

(44)

(9)

(12)

(283)

(272)

(102)

(170)

(100)

(22)

(122)

164

(292)

(2)

(82)

(111)

(60)

(65)

115

332

(42)

280

169

(2)

934

19/25

1,101

404

278

(41)

(83)

(6)

(30)

(14)

(63)

(7)

(376)

(293)

(82)

(211)

(111)

(16)

(127)

(374)

(1)

(80)

(7)

(86)

(446)

(573)

(52)

(22)

451

(2)

448

(125)

(1)

1,060

934

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

(a) Cash flows relating to operating exceptional items charged to the income statement in current and prior years

The net cash outflows relating to the above were as follows:

Net cash outflow relating to:

Current year operating exceptional items

Prior years’ operating exceptional items

Total

2011
£m

179

272

2010
£m

208

293

The net cash outflow of £272m (2010 £293m) comprises £131m (2010 £158m) relating to cash utilised to settle exceptional provisions,
£73m (2010 £75m) relating to ColleagueShare dividends, £25m (2010 £nil) for business transformation payments, £nil (2010 £11m)
incurred for current year pension redundancy liabilities, £30m (2010 £39m) relating to prior year pension redundancy liabilities and £13m
(2010 £10m) in respect of other costs which were recorded within other payables.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Notes to the Group financial statements

1. Authorisation of financial statements and statement of compliance with IFRSs

The Group’s financial statements for the year ended 27 March 2011 were authorised for issue by the Board on 13 June 2011 and the balance
sheet was signed on the Board’s behalf by Moya Greene and Matthew Lester.

The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union and as they apply to the financial statements of the Group for the year ended 27 March 2011. The principal accounting
policies adopted by the Group are set out in note 2.

2. Accounting policies

Basis of preparation and accounting
The Group comprises Royal Mail Holdings plc (the Company) – which is wholly owned by HM Government – and its subsidiaries. The Company
is incorporated in the United Kingdom under the Companies Act 2006 (the Act) and the financial statements are produced in accordance with
the Act and applicable IFRSs. The UK is the Group’s country of domicile.

The Group consolidated financial statements are presented in Sterling and all values are rounded to the nearest £m except where otherwise
indicated. These consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and
available for sale financial assets, which have been measured at fair value.

Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the previous financial year except as follows:

The Group has adopted the following revised and amended accounting standards as of 29 March 2010. The impact on the financial statements
or performance of the Group is also described below:

IFRS 3 (revised) Business Combinations
The key features of the revised IFRS 3 include a requirement for acquisition-related costs to be expensed and not included in the purchase
price; and for contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the
income statement and not as a change to goodwill). The standard also changes the treatment of non-controlling interest (formerly minority
interest) with an option to recognise these at full fair value as at the acquisition date and for previously held non-controlling interest to be fair
valued as at the date control is obtained, with gains and losses recognised in the income statement. The adoption of this revised standard has
not had a material impact on the financial position or performance of the Group.

IAS 27 (amended) Consolidated and Separate Financial Statements
The amended standard no longer restricts the allocation to non-controlling interest of losses incurred by a subsidiary to the amount of the
non-controlling equity investment in the subsidiary. A partial disposal of equity interest in a subsidiary that does not result in a loss of control is
accounted for as an equity transaction and has no impact on goodwill nor does it give rise to any gain or loss. Where there is loss of control of
a subsidiary, any retained interest will be re-measured to fair value, which will impact the gain or loss recognised on disposal. This amended
standard has not had a material impact on the financial position or performance of the Group.

Improvements to IFRSs (issued 2009)
In May 2009 the International Accounting Standards Board (IASB) issued its second omnibus of amendments to its standards, primarily with a
view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each amendment. The adoption of the
Improvements to IFRSs resulted in changes to accounting policies but did not have a material impact on the financial position or performance
of the Group.

Significant accounting judgements, estimates and assumptions
The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that
affect the reported amounts of assets and liabilities at the reporting date. However, uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

The key sources of uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities
within the next financial year relate to the measurement of the defined benefit pension obligations, deferred tax, ColleagueShare plan costs and
provisions.

Defined benefit pension obligations
Measurement of the defined benefit obligations requires certain assumptions to be made including on life expectancy, future changes in
salaries, inflation and a suitable discount rate. The size of these obligations, and therefore the pension deficit, is materially sensitive to the
assumptions adopted. The assumptions which have the most significant impact on the measurement of the defined benefit obligations are the
real discount rate and the mortality rates. A 0.1 percentage point change to the discount rate could change the liabilities by approximately
£690m. An additional one year on the life expectancy could increase liabilities by approximately £840m. The major assumptions and carrying
value of the obligations are disclosed in note 26.

Deferred tax
Assessment of the deferred tax asset requires an estimation of future profitability. Such estimation is inherently uncertain in a market subject
to various competitive pressures. Should estimates of future profitability change in future years, the amount of deferred tax recognised will
also change accordingly. The carrying values of the deferred tax assets and liabilities are included within note 9.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

ColleagueShare plan
The calculation of the ColleagueShare costs and liabilities is reliant on a number of judgements, estimates and assumptions. These include in
particular forecasts for the potential equity value of ColleagueShares, forecasts of joiners and leavers throughout the life of the plan and
judgements on when participants are likely to exercise their rights for the Company to redeem the ColleagueShares that they hold. The
magnitude of the costs involved is sensitive to these forecasts and assumptions. The carrying values of the ColleagueShare liabilities are
included within notes 21 and 22.

Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Due to the nature of
provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future.

Restructuring provisions, including for redundancy and property costs, are derived based upon the most recent business plan for direct
expenditure where plans are sufficiently detailed and appropriate communication to those affected has been undertaken. This includes the
expected number of employees impacted, rate of compensation per employee, rental costs and expected period of properties remaining vacant
and dilapidation costs.

The potential industrial claims provision is based on the best information available as at the year end, including independent expert advice.

Funding

Material Uncertainty in the Financing of Royal Mail Group excluding Post Office Limited (’RMG’)

Background

The postal market in the UK is both open to full competition and in structural decline due to the emergence of alternative digital
communication media. Over the past 5 years inland addressed postal volumes have declined by some 20% and are expected to continue to
decline by some 5% per annum over the next five years. This has resulted in a significant erosion of profits and cash flows, similar to other
postal operators around the world. In addition, the actuarial pension deficit agreed formally with the Pension Trustee in 2010 is some £10bn
as at 31 March 2009 for Royal Mail Group excluding Post Office Limited (‘RMG’) – to be repaid over a 38 year period - and RMG is required to
make pension deficit repayments of £286m per annum rising to around £410m per annum by 2016.

Balance sheet and cash flow solvency

RMG is currently balance sheet insolvent with net liabilities of £2.8bn (2010 £5.8bn) (Post Office Limited net liabilities £0.3bn (2010 £0.5bn)),
brought about by the recognition of the pension deficit on the balance sheet in March 2006. The pension deficit currently stands at £4.5bn
(2010 £8.0bn) with the decrease this year mainly due to the Government requirement to use a CPI based inflation assumption for the majority
of schemes rather than RPI as in previous years.

The pension deficit recognised in the RMG financial statements is calculated based on the requirements of IAS 19 and on different assumptions
to the actuarial deficit agreed periodically with the Pension Trustee and it is the latter that is used to determine the cash payments to repair
the deficit.

At 27 March 2011 RMG has £553m of cash headroom (including cash on hand, short term deposits and unutilised loan facilities) available.

There are severe pressures and risks on RMG’s cash flow and headroom position, brought about by a number of factors, including:

•

recent and forecast declines in inland addressed postal volumes caused by the current economic climate and the emergence of alternative
digital communications media causing a material reduction in the proportion of communications carried out using the mail;

the significant investment required to modernise RMG so as to achieve the cost reductions necessary to keep pace with the reduction in
volumes; and

the costs of meeting RMG’s obligations to fund the pension scheme, including both ongoing pension contributions and pension deficit
payments.

As a result of this pressure on cash flow and the fact that RMG is balance sheet insolvent, the Board has been carefully monitoring, on a
regular basis, whether RMG has sufficient cash flow to meet its liabilities as they fall due over the foreseeable future. This has involved regular
reviews of projected monthly cash headroom until March 2013 and includes a review of the strategic plan cash flows to March 2016.

RMG has been taking a number of steps to preserve its financial flexibility, including property disposals, the disposal of its 20% investment in
Camelot, sales and leasebacks, cost-cutting, supplier initiatives and other measures to reduce expenditure and to release cash. Nevertheless,
the Board has concluded that without Government support RMG may not be able to meet its liabilities as they fall due, including the next
£286m pension deficit contribution payment due in March 2012 and the repayment of £900m Government loan facilities due in March 2014.

Government Policy for Royal Mail

In 2008 the Government commissioned a review of the postal sector and its findings in its report back – titled “Modernise or Decline” and its
findings confirmed that the universal service “is part of our economic and social glue” and that it delivers significant economic value to the
nation and its citizens. Royal Mail, the letters business of RMG, has been modernising its operations over the last five years and will continue to
make further significant investment to reduce its cost base.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

The Government made the restructuring and privatisation of RMG one of its first policies and:

•

the Postal Services Bill – which provides a platform for the Government to relieve RMG of the majority of its historical pension assets and
liabilities, to change the regulatory regime for RMG and allow the introduction of private capital – has now been agreed by both Houses of
Parliament and received Royal Assent; and

a formal State Aid application to the European Commission for restructuring aid (relieving RMG of the majority of its pension deficit and
restructuring the balance sheet) as required by European Law, will be made by the Government in June 2011.

Key Assumptions and Material Uncertainties for Going Concern

The RMG strategic plan (’the plan’) projects a sustained return to profitability and cash generation as the benefits of modernisation are realised.
The plan assumes that core letter volumes will continue to decline by 5% per annum and that a further £1.1bn will be invested into
modernising the Royal Mail letters network to improve profitability and cash flow generation in the next two years. A key material assumption
is that this modernisation programme will be successful in delivering World Class Mail and reducing costs in 2012-13 by £0.6bn in real terms
compared to the cost base of 2010-11.

The plan also assumes that Government will relieve RMG of the majority of its pension deficit, restructure the balance sheet, reset covenants
from March 2012 onwards and that a more appropriate postal regulatory regime will be introduced.

In forming their view regarding RMG’s going concern status, the Directors have identified two material uncertainties that cast significant doubt
upon RMG’s ability to continue as a going concern:

First, the relief of the majority of the pension deficit and the balance sheet restructure are conditional on the obtaining of State Aid approval
from the European Commission. In particular, State Aid approval will need to be obtained by March 2012 when the next pension deficit
payment would otherwise be due.

The Government has announced that it will submit a formal State Aid notification to the European Commission in June 2011 outlining its plan
to provide restructuring aid to RMG with the intention of returning the business to financial viability and that it hopes that the process will be
completed by March 2012.

However, the Directors can not be certain that State Aid approval will be given for the full package of measures or that it will be given by
March 2012.

The second material uncertainty is whether Government would provide alternative financing in the event of a delayed or rejected application
for restructuring aid on suitable terms as described above.

The Directors believe that the Government would continue to provide adequate financing to RMG. This is based on a number of factors
including the prior experience of financing Post Office Limited by the Government from 2006-7 onwards.

Going Concern Basis in the Financial Statements

On this basis and after careful consideration of the cash flow and headroom projections the Directors consider it appropriate to prepare the
financial statements on a going concern basis, which assumes that RMG will continue in operational existence for the foreseeable future.

Should the State Aid application fail and Government not provide alternative debt financing arrangements to relieve the future pension deficit
obligations, the going concern basis would be invalid and adjustments would have to be made to reduce the value of the assets to their
realisable amount, to provide for any further liabilities that might arise and to reclassify fixed assets and long-term liabilities as current assets
and current liabilities. The financial statements presented for the year ending 27 March 2011 do not contain any adjustment that would be
required if it was concluded that RMG was unable to continue as a going concern.

Post Office Limited

Post Office Limited had net liabilities as at 27 March 2011 but has operated at a profit before exceptional items during 2010-11 for the third
year running.

To become viable in the longer-term, new business areas continue to be developed and grown in order to replace the lost contribution from
traditional income sources and significant cost reduction programmes continue to be implemented.

During the year, Post Office Limited has continued with the implementation of a number of programmes which are designed to improve the
profitability of the company. The branch closure programme is completed and no further closures are planned but further work on efficiency
improvements and improving the business model continues. These programmes include:

•

the development of new business and drive for sales growth;

bringing the Crown branch segment into profit; and

a programme of fundamental cost reduction.

On 24 March 2010 a funding agreement was agreed that provides up to £180m for compensation for losses sustained in parts of the network
in 2011-12 as well as providing access to the working capital facility of £1.15bn to 31 March 2012. These arrangements received State Aid
approval on 23 March 2011.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

A further funding agreement with Government was announced on 27 October 2010 which provided for:

•

funding of £410m for 2012-13;

funding of £415m for 2013-14;

funding of £330m for 2014-15; and

extension of the existing working capital facility of £1.15bn up to 31 March 2016.

All of the funding for 2012-13 to 2014-15 and extension of the working capital facility is subject to State Aid approval.

Whilst the Directors are satisfied with the progress that has been made it should be noted Post Office Limited continues to face a challenging
future.

Notwithstanding these uncertainties, the Directors recognise that significant progress has been made in delivering its 2005-11 plan and that a
plan for 2011-15 has been approved so, after careful consideration, continue to believe that Post Office Limited will be able to meet its
liabilities as they fall due in the foreseeable future. Accordingly, on that basis, the Directors consider that it is appropriate that these financial
statements have been prepared on a going concern basis.

Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertakings. The financial
statements of the major subsidiaries are prepared for the same reporting year as the Company, using consistent accounting policies.

All intra-group balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.
Transfer prices between business segments are set on a basis of charges reached through negotiation with the respective businesses.

Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which
control is no longer held by the Group. Where the Group ceases to hold control of a subsidiary, the consolidated financial statements include
the results for the part of the reporting year during which the Group held control.

Non-controlling interest represents the portion of profit/loss, gains/losses and net assets relating to subsidiaries that are not attributable to
members of the Company. The non-controlling interest balance is presented within equity in the consolidated balance sheet, separately from
parent shareholder’s equity.

Investments in joint ventures and associates
The Group’s investments in its joint ventures and associates are accounted for under the equity method of accounting. Under the equity
method, the investment is carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the joint
ventures/associates, less any impairment in value. The income statement reflects the Group’s share of post tax profits from the joint ventures/
associates.

Any goodwill arising on acquisition of an associate, representing the excess of the cost of the investment compared to the Group’s share of the
net fair value of the identifiable assets, liabilities and contingent liabilities acquired, is included in the carrying amount and not amortised. To
the extent that the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities is greater than the cost of the
investment, a gain is recognised and added to the Group’s share of the associate’s profit or loss in the period in which the investment is
acquired.

Revenue
Revenue reported in the income statement is net of value added tax and comprises Turnover and the Network Subsidy Payment. Turnover
principally relates to the rendering of services as follows:

UK Letters & Parcels and International
Account revenue is derived from specific contracts and recognised when the delivery of an item is complete. Prepaid revenue mainly relating to
stamp and meter income is recognised when the sale is made, adjusted to reflect a value of stamp and meter credits held but not used by the
customer.

Post Office Limited
Revenue is recognised at the time that Government, financial, mails and telephony services are provided.

General Logistics Systems
Revenue is derived from specific contracts and is recognised at the time of delivery.

The Network Subsidy Payment is Government grant revenue recognised to match the related costs of providing the network of public post
offices that the Secretary of State for Business, Innovation and Skills considers appropriate and which would otherwise not be provided.

Distribution and conveyance
Distribution and conveyance costs relate to third party costs incurred in carrying mail. These include conveyance by rail, road, sea and air,
together with costs incurred by international mail carriers and Parcelforce Worldwide delivery operators. These costs are disclosed separately
on the face of the income statement.

Operating profit before exceptional items
Operating profit is the profit arising from the normal, recurring operations of the business. This incorporates revenue, people costs (excluding
ColleagueShare and restructuring costs), distribution and conveyance operating costs, other operating costs and the Group’s post tax share of
profit from joint ventures and associates.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

Operating exceptional items
Operating exceptional items, primarily modernisation costs, are material items of income and expenditure arising from the operations of the
business which, due to the nature of the events giving rise to them, require separate presentation on the face of the income statement to allow
a better understanding of financial performance in the year, in comparison to prior years.

ColleagueShare plan
ColleagueShare is the name for the Group’s employee ‘share’ plan. The plan, introduced in 2007-08, is a five-year plan spanning the
accounting years from April 2007 to March 2012 and comprises both a ‘share’ scheme and a related stakeholder dividend worth up to £5,300
per person throughout the life of the plan. The ColleagueShares represent up to a total of 14% of the projected equity value of the Group.

The costs of the plan are included in the income statement as an exceptional item throughout the life of the plan and are included within
payables or provisions as appropriate. The Group will redeem all ColleagueShares by 2012-13.

Operating profit
Operating profit is the profit arising from the normal, recurring operations of the business and after charging operating exceptional items
defined above. It excludes the non-operating exceptional items for profit or loss on disposal of businesses and profit or loss on disposal of
property, plant and equipment. These items are not part of the normal recurring operations of the business but are material, so are presented
separately on the face of the income statement to allow a better understanding of financial performance in the year, in comparison to prior
years.

Goodwill
Business combinations on or after 29 March 2004 are accounted for under IFRS 3 Business Combinations using the purchase method. Any
excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent
liabilities at the date of acquisition is recognised in the balance sheet as goodwill and is not amortised.

After initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill arising from business combinations is
reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

An impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use. For the purpose of such impairment
reviews, goodwill is allocated to the relevant cash generating units.

Goodwill arising on the acquisition of equity accounted entities is included in the cost of those entities and therefore not reported in the balance
sheet as goodwill.

Intangible assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the fair value can be measured reliably
on initial recognition. Intangible assets acquired separately or development costs that meet the criteria to be capitalised are initially recognised
at cost and are assessed to have either a finite or indefinite useful life. Those with a finite life are amortised over their useful life and those with
an indefinite life are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying
value may be impaired. An impairment loss is recognised in the income statement for the amount by which the carrying value of the asset
exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.

Amortisation of intangible assets with finite lives is charged annually to the income statement on a straight-line basis as follows:

Customer listings

Software

1 to 4 years

1 to 6 years

Research and development
Expenditure on research is written off in the year it is incurred. Development costs are capitalised where they meet the criteria required under
IFRSs. If these criteria are not met, then the costs are recognised in the income statement as they are incurred.

Property, plant and equipment
Property, plant and equipment is recognised at cost, including directly attributable costs in bringing the asset into working condition for its
intended use. Depreciation of property, plant and equipment is provided on a straight-line basis by reference to net book value and to the
remaining useful economic lives of assets and their estimated residual values. The useful lives and residual values are reviewed annually and
adjustments, where applicable, are made on a prospective basis. The lives assigned to major categories of property, plant and equipment are:

Land and buildings:
Freehold land
Freehold buildings
Leasehold buildings
Plant and machinery
Motor vehicles and trailers
Fixtures and equipment

Not depreciated
Up to 50 years
The shorter of the period of the lease, 50 years or the estimated remaining useful life
3-15 years
2-12 years
2-15 years

An individual property that the Group has identified as surplus is reclassified within ‘non-current assets held for sale’, a separate category on
the balance sheet, when a sale is highly probable. This has been determined to be when authority to market the property has been given and
the property is vacant and therefore available for immediate sale and occupation by a third party. Such properties are expected to generate
economic cash flow primarily by sale of the asset rather than by operational activities, and are expected generally to be disposed of within a
year.

For a disposal group of properties or other assets and liabilities, the requirements of IFRS 5 Non-current assets held for sale and discontinued
operations are applied to the specific circumstances of the disposal group.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

Impairment reviews
Unless otherwise disclosed in these accounting policies, assets are reviewed for impairment if events or changes in circumstances indicate that
the carrying value may be impaired. The Group assesses at each reporting date whether such indications exist. Where appropriate, an
impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.

Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have passed to the Group, are
capitalised at the inception of the lease with a corresponding liability recognised for the fair value of the leased item or, if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between the finance charges and capital element of the lease liability
to achieve a constant rate of interest on the remaining balance of the liability. Capitalised leased assets are depreciated over the shorter of the
estimated useful life of the asset and the lease term.

Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases and
rentals are charged to the income statement over the lease term. The aggregate benefit of incentives are recognised as a reduction of rental
expense over the lease term on a straight-line basis.

A leasehold land payment is an upfront payment to acquire a long-term leasehold interest in land. This payment is stated at cost and is
amortised on a straight-line basis over the period of the lease.

Inventories
Inventories are carried at the lower of cost and net realisable value after adjusting for obsolete or slow-moving stock. Cost includes all costs in
bringing each item to its present location and condition and comprises weighted average cost for supplies and materials and purchase cost for
merchandise.

Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable amounts. An estimate for
doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Financial instruments
Financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as; financial assets at fair value
through the income statement (held for trading); held to maturity investments, loans and receivables or available for sale financial assets as
appropriate. Financial liabilities within the scope of IAS 39 are classified as either financial liabilities at fair value through the income statement
or financial liabilities measured at amortised cost.

The Group determines the classification of its financial instruments at initial recognition and re-evaluates this designation at each financial year
end. When financial instruments are recognised initially, they are measured at fair value, being the transaction price plus, in the case of
financial instruments not at ‘fair value through the income statement’, any directly attributable transactional costs.

The subsequent measurement of financial instruments depends on their classification as follows:

Financial assets at fair value through the income statement (held for trading)
Financial assets are classified as held for trading if they are acquired for sale in the short term. Derivatives are also classified as held for
trading unless they are designated as hedging instruments. Assets are carried in the balance sheet at fair value with gains or losses recognised
in the income statement.

Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as ‘held to maturity’ when the Group has
the positive intention and ability to hold to maturity. Held to maturity investments are carried at amortised cost using the effective interest rate
method. Gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the
amortisation process. Investments intended to be held for an undefined period are not included in this classification.

Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are not quoted on an active market, do not qualify as trading assets
and have not been designated as either ‘fair value through the income statement’ or available for sale, are carried at amortised cost using the
effective interest rate method if the time value of money is significant. Gains and losses are recognised in the income statement when the loans
and receivables are derecognised or impaired, as well as through the amortisation process.

Available for sale financial assets
‘Available for sale financial assets’ are non-derivative financial assets that are designated as such or are not classified in any of the three
preceding categories. After initial recognition, interest is taken to the income statement using the effective interest rate method and the assets
are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised, or
until the investment is deemed to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income
statement.

Financial liabilities at fair value through the income statement (held for trading)
Derivatives liabilities are classified as held for trading unless they are designated as hedging instruments. They are carried in the balance sheet
at fair value with gains or losses recognised in the income statement.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

Financial liabilities measured at amortised cost
All non-derivative financial liabilities are classified as financial liabilities measured at amortised cost. Non-derivative financial liabilities are
initially recognised at the fair value of the consideration received, less directly attributable issue costs. After initial recognition, non-derivative
financial liabilities are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the
income statement when the liabilities are derecognised or impaired, as well as through the amortisation process.

Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash equivalents) with an original
maturity date of three months or less. In addition, the Group uses Money Market funds as a readily available source of cash, which are bought
and sold on a daily basis to meet the cash requirements of the business. These funds are also categorised as cash equivalents.

For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank
overdrafts.

Cash equivalents are classified as loans and receivables financial instruments.

Financial assets – pension escrow investments
Financial assets – pension escrow investments comprise short-term deposits with banks, conventional gilt edged securities, index-linked gilt
edged securities and Treasury bills.

Short-term deposits with banks (pension escrow investments) are classified as loans and receivables financial instruments.

Conventional gilt edged securities, index-linked gilt edged securities and Treasury bills are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity.

Financial assets – other investments
Financial assets – other investments comprise short-term deposits (other investments) with Government, local government or banks with an
original maturity of three months or more. Short-term deposits are classified as loans and receivables financial instruments.

Financial liabilities – interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.

Financial liabilities – obligations under finance lease and hire purchase contracts
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at amortised cost.

Borrowing costs
Borrowing costs are recognised as an expense when incurred, unless they are directly attributable to the construction or development of a
qualifying asset, in which case they are capitalised using the weighted average cost of borrowing for the period of construction/development.

Derivative financial instruments
The Group uses derivative instruments such as foreign currency contracts in order to manage the risk profile of any underlying risk exposure of
the Group, in line with the Group’s treasury management policies. Such derivative financial instruments are initially stated at fair value.

For the purpose of hedge accounting, hedges are classified as cash flow hedges where they hedge exposure to variability in cash flows that is
either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction.

In relation to cash flow hedges to hedge the foreign exchange or commodity price risk of firm commitments that meet the conditions for hedge
accounting, the portion of the gain or loss on the hedging instrument that is determined to relate to an effective hedge is recognised directly in
equity and the ineffective portion is recognised in the income statement.

When the hedged firm commitment results in the recognition of a non-financial asset or non-financial liability, then at the time the asset or
liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of
the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in
equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit/loss, for example
when the future sale actually occurs.

For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income
statement in the period.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge
accounting. At that point, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecast
transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to
the income statement for the year.

Fair value measurement of financial instruments
The fair value of quoted investments (including conventional gilt edged securities, index-linked gilt edged securities and Treasury bills) is
determined by reference to bid prices at the close of business on the balance sheet date. Hence the conventional gilt edged securities, index-
linked gilt edged securities and Treasury bills are within Level 1 of the fair value hierarchy as defined within IFRS 7.

Where there is no active market, fair value is determined using valuation techniques. These include using recent arm’s length market
transactions; reference to the current market value of another instrument which is substantially the same; and discounted cash flow analysis
and pricing models. Specifically, in the absence of quoted market prices, derivatives are valued by using quoted forward prices for the
underlying commodity/currency and discounted using quoted interest rates (both as at the close of business on the balance sheet date). Hence
derivative assets and liabilities are within Level 2 of the fair value hierarchy as defined within IFRS 7.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

For the purposes of disclosing the fair value of investments held at amortised cost in the balance sheet, in the absence of quoted market prices,
fair values are calculated by discounting the future cash flows of the financial instrument using quoted equivalent interest rates as at close of
business on the balance sheet date.

Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.

Income tax and deferred tax
The charge for current taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated
using rates that have been enacted or substantively enacted at the balance sheet date.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date, between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences except:

(cid:131)

initial recognition of goodwill;

the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss; and

taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of
the reversal of the temporary differences can be controlled and it is probable that the temporary difference will not reverse in the
foreseeable future.

Other than stated below, deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and
unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences,
carry-forward of unused tax assets, and unused tax losses can be utilised. Deferred tax assets are not recognised in respect of:

(cid:131)

deductible temporary differences arising from the initial recognition of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and

deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except to the
extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against
which the temporary difference will be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and increased or reduced to the extent that it is probable
that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax
balances are not discounted.

Current and deferred tax is charged or credited directly to equity if it relates to items that are credited or charged directly to equity. Otherwise
it is recognised in the income statement.

Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect
of the time value of money is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax rate.

Pensions and other post-retirement benefits
The pension plans’ assets for the defined benefit schemes are measured at fair value. Liabilities are measured on an actuarial basis using the
projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet. Full actuarial
valuations are carried out at intervals not normally exceeding three years as determined by the Trustees and, with appropriate updates and
accounting adjustments at each balance sheet date, form the basis of the deficit disclosed. All members of defined benefit schemes are
contracted out of the earnings-related part of the State pension scheme.

For defined benefit schemes, the amounts charged to operating profit are the current service costs and any gains and losses arising from
settlements, curtailments and past service costs. The net difference between the interest costs and the expected return on plan assets is
recognised as net pensions interest in the income statement. Actuarial gains and losses are recognised immediately in the statement of
comprehensive income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the statement of
comprehensive income.

For defined contribution schemes, the Group’s contributions are charged to operating profit within people costs in the period to which the
contributions relate. Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

Foreign currencies
The functional and presentational currency of Royal Mail Holdings plc is Sterling (£). The functional currency of the overseas subsidiaries in
Europe is mainly the Euro (€).

The assets and liabilities of foreign operations are translated at the rate of exchange ruling at the balance sheet date. The trading results of
foreign operations are translated at the average rates of exchange for the reporting period, being a reasonable approximation to the actual
transaction rate. The exchange rate differences arising on the translation, since the date of transition to IFRSs, are taken directly to the Foreign
Currency Translation Reserve in equity.

Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange
ruling at the balance sheet date. Currently hedge accounting is not claimed for any monetary assets and liabilities. All differences are therefore
taken to the income statement, except for differences on monetary assets and liabilities that form part of the Group’s net investment in a
foreign operation. These are taken directly to equity until the disposal of the net investment occurs, at which time they are recognised in profit
or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates
of the initial transactions. Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at the date
when the fair value is determined.

Contingent liabilities and financial guarantee contracts
Financial guarantee contracts are initially measured at fair value and subsequently at the higher of amounts under IAS 37 Provisions,
Contingent Liabilities and Contingent Assets or the amounts initially recognised less, when appropriate, cumulative amortisation recognised in
accordance with IAS 18 Revenue.

Contingent liabilities are not disclosed if the possibility of losses occurring is considered to be remote.

Government grants
Government grants of a revenue nature are credited to the income statement and are shown separately to the expenditure to which they
relate.

Government grants relating to assets are recognised as deferred income that is amortised over the useful life of the relevant assets.

Segment information
During the year the Group changed the structure of its internal organisation in a manner that resulted in a change to the composition of its
reportable segments. As a result of this change, corresponding information for earlier periods has been restated.

The Group’s operating segments are organised and managed separately according to the nature of the products and services provided, with
each segment representing a business unit that offers different products and serves largely different markets. Management monitors the
operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment.
Segment performance is evaluated based on operating profit/loss.

There is no aggregation of operating segments. The operating units that make up the four operating segments are detailed on page 29.

The operating segments comprise operations in both the UK and other parts of Europe, the latter being relevant to the GLS business segment.
The UK operations include the remaining two operating segments plus the ‘Other’ segments.

Segment revenues have been attributed to the respective countries based on the location of the customer.

Transfer prices between the segments are set on a basis of charges reached through negotiation with the respective business units that form
part of the segments.

There are no differences in the measurement of the respective segments’ profit/loss and the consolidated financial statements prepared under
IFRSs.

Accounting standards issued but not yet applied
The International Accounting Standards Board (IASB) has issued accounting standards relevant to the Group with an effective date for
accounting periods beginning after the commencement date of the period to which these financial statements relate. The Group has considered
the impact of these below:

International Accounting Standards (IAS/IFRSs)

IAS 24

IFRS 9

IFRS 10

IFRS 11

IFRS 12

IFRS 13

Related Party Disclosures (Amendment)

Financial Instruments: Classification and Measurement

Consolidated Financial Statements

Joint Arrangements

Disclosure of Interests in Other Entities

Fair Value Measurement

Effective date

1 January 2011

1 January 2013

IAS 24 Related Party Disclosures
This revised standard provides an exemption from disclosure requirements for transactions between entities controlled, jointly controlled or
significantly influenced by the same government and between such entities and the government itself, unless they are individually or
collectively significant. The standard also amends the definition of a related party to remove some inconsistencies. This standard, which will be
adopted with a commencement date of 28 March 2011, will not have any impact on the financial position or performance of the Group.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

2. Accounting policies (continued)

IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 as issued reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of
financial assets as defined in IAS 39. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge
accounting and derecognition. The completion of this project is expected in 2011. The adoption of the first phase of IFRS 9, mandatory for the
Group commencing 1 April 2013, will have an effect on the classification and measurement of the Group’s financial assets. The Group will
quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

IFRS 10 Consolidated Financial Statements
IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included
within the consolidated financial statements of the parent company. The changes introduced by IFRS 10 will require management to exercise
significant judgement to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with the
requirements that were in IAS 27. The standard will be adopted with a commencement date of 1 April 2013 and will be reviewed to
understand any possible impact on the financial position of the Group.

IFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31 Interests in Joint Ventures and provides for a more realistic reflection of joint arrangements by focusing on the rights
and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the
reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. The standard will be adopted
with a commencement date of 1 April 2013 and will be reviewed to understand any possible impact on the financial position of the Group.

IFRS 12 Disclosures of Interests in Other Entities
IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms on interests in other entities, including subsidiaries,
joint arrangements and unconsolidated structured entities. A number of new disclosures are required. One of the most significant changes
introduced by IFRS 12 is that an entity is now required to disclose the judgements made to determine whether it controls another entity. The
standard will be adopted with a commencement date of 1 April 2013 and will be reviewed to understand any possible impact on the financial
position of the Group.

IFRS 13 Fair Value Measurement
IFRS 13 establishes a single framework for measuring fair value where that is required by other standards. The standard applies to both
financial and non-financial items measured at fair value. The standard will be adopted with a commencement date of 1 April 2013 and will be
reviewed to understand any possible impact on the financial position of the Group.

Improvements to IFRSs not yet adopted

In April 2009 and May 2010 the IASB issued amendments to its standards, primarily with a view to removing inconsistencies and clarifying
wording. There are separate transitional provisions for each standard. The Group has adopted the relevant 2009 amendments as detailed on
page 57.

The Group has not yet adopted the following relevant 2010 amendments although they are not expected to impact on the financial position or
performance of the Group. The improvements can be summarised as follows:

IFRS 3 Business Combinations: The measurement options for non-controlling interests resulting from a business combination have been
limited. Further, acquisition related costs are required to be expensed and not included in the purchase price and contingent consideration
should be recognised at fair value on the acquisition date.

IFRS 7 Financial Instruments: Disclosures: The amendment includes multiple clarifications related to the disclosure of financial instruments.

IAS 27 Consolidated and Separate Financial Statements: Any future partial disposal of an equity interest in a subsidiary that does not result in
a loss of control will be accounted for as an equity transaction and will have no impact on goodwill, nor will it give rise to any gain or loss.
Where there is loss of control of a subsidiary, any retained interest will have to be re-measured to fair value, which will impact the gain or loss
recognised on disposal.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

3. Segment information

The Group reports its segments in the way it internally manages its business as follows:

27 March 2011

External revenue

Revenue between segments

Total segment revenue

Operating profit before exceptional items

Modernisation costs – operating exceptional items
Operating (loss)/profit after modernisation costs
before other operating exceptional items

Other operating exceptional items

Operating (loss)/profit

Profit on disposal of property, plant and equipment

Profit on disposal of associate company

UK operations

UK Letters &
Parcels and
International

Post
Office
Limited

£m

6,857

£m

776

345

Other

Total

£m

381

£m

7,671

142

515

Other
European
operations

General
Logistics
Systems

£m

1,485

6,885

1,121

180

8,186

1,485

(192)

(120)

(48)

(168)

(15)

(40)

(19)

128

(207)

(79)

(88)

(167)

118

Total

£m

9,156

515

9,671

246

(207)

(88)

(49)

(Loss)/profit before financing and taxation
1 The ‘Other’ segments’ external revenue comprises £37m (2010 £45m) relating to the provision of facilities management services by Romec

(108)

(14)

(58)

118

Limited and £1m (2010 £1m) for building engineering services provided by NDC 2000 Limited.

Finance costs of £114m (2010 £98m), finance income of £69m (2010 £47m) and net pensions interest of £167m (2010 £329m) when added to
the profit before financing and taxation of £60m (2010 £118m) reconciles to the Group loss before taxation of £152m (2010 £262m).

There is no single customer for which revenues from transactions amount to 10% or more of the total revenues earned in the current period or
in the prior period.

Pages 19 to 26 confirm the activities of the major business segments.

28 March 2010 – Restated for internal organisation structure change in 2010-11

UK Letters &
Parcels and
International

£m

6,978

UK operations
Post
Office
Limited

£m

838

343

External revenue

Revenue between segments

Total segment revenue

7,007

1,181

Operating profit before exceptional items

Exceptional items - modernisation
Operating profit after modernisation costs before
other operating exceptional items

Other operating exceptional items

Operating profit/(loss)

Profit on disposal of property, plant and equipment

Profit/(loss) before financing and taxation

205

(185)

(39)

(72)

(39)

(36)

Other
European
operations

General
Logistics
Systems

£m

1,487

112

Other

£m

461

145

191

Total

£m

7,862

517

8,379

292

(224)

(67)

Total

£m

9,349

517

9,866

404

(224)

180

(67)

113

118

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

3. Segment information (continued)

The following amounts are included within operating profit before exceptional items:

27 March 2011

Depreciation

Amortisation of intangible assets

Share of post tax (loss)/profit from joint ventures and associates

28 March 2010

Depreciation

Amortisation

Share of post tax profit from joint ventures and associates

UK operations

UK Letters &
Parcels and
International
£m

Post
Office

Limited Other Total
£m £m

£m

223

(1)

- 223

UK operations

UK Letters &
Parcels and
International
£m

Post
Office

Limited Other

£m

217

Total
£m

217

4. People information

(a)

People costs excluding ColleagueShare and restructuring costs

Wages and salaries

Pensions

Social security

Subpostmasters

Temporary resource

Other
European
operations

General
Logistics
Systems
£m

Other
European
operations

General
Logistics
Systems
£m

2011
£000

4,398

458

304

475

Total
£m

250

Total
£m

246

2010
£000

4,439

441

300

480

5,717

5,746

(b)

People numbers

The number of people employed, calculated on a headcount basis, were:

UK Letters & Parcels and International

Post Office Limited

UK wholly owned subsidiaries

UK partially owned subsidiaries

General Logistics Systems

Group total

Period end employees

Average employees

2011

155,181

7,782

162,963

4,254

13,167

2010

160,291

8,209

168,500

4,217

12,885

2011

2010

157,317

162,907

8,066

8,576

165,383

171,483

4,244

13,120

4,199

12,917

180,384

185,602

182,747

188,599

The number of subpostmasters employed at the period end were:

Total

2011

8,283

2010

8,448

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

4. People information (continued)

(c)

Directors’ emoluments

Amounts earned under Long-Term Incentive Plans

Number of Directors accruing benefits under defined benefit schemes

2011
£000

2,714

The Directors’ Remuneration Report discloses full details of Directors’ emoluments and can be found on pages 45 to 48.

5. Operating costs
Operating profit before exceptional items is stated after charging:

(a)
Pensions charge (note 26):

Cash

Non-cash

(b)

Distribution and conveyance operating costs:

Operating lease charges on vehicles

Other distribution and conveyance

(c)

Depreciation and amortisation:

Depreciation of owned property, plant and equipment

Depreciation of property, plant and equipment under finance lease and hire purchase contracts

Total depreciation (note 10)

Amortisation of intangible assets (note 13)

Operating lease charges on property, plant and equipment (excluding vehicles);

Minimum lease rentals payable

Lease rentals receivable

Property, facilities and maintenance costs

Computers and telephones costs

Consultancy, marketing and legal fees

Bureau de Change foreign currency exchange losses

Regulatory body costs:

Postcomm

Consumer Focus

6. Auditor’s remuneration

Audit of statutory financial statements

Other fees to the auditor:

Statutory audits for subsidiaries

Other services supplied pursuant to such legislation

Taxation services

Other services

Total

2010
£000

3,035

2,626

2010
£m

441

526

(85)

1,579

1,549

278

210

246

215

220

(5)

308

247

178

2010
£000

597

1,427

329

121

2011
£m

458

442

1,619

1,600

286

205

250

222

228

(6)

297

262

116

2011
£000

597

1,398

442

The Group paid no additional amounts in 2011 in respect of the 2010 audit (£199,000 in 2010 in respect of the 2009 audit).

2,521

2,520

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

7. Operating exceptional items

The results for the year include a number of non-recurring or restructuring costs which fall outside of the Group’s normal trading activity.
These are items which, in management’s judgement, need to be disclosed by virtue of their size or incidence in order to provide greater
visibility of the underlying results of the business, which the Board believes to be a more meaningful indication of ongoing operational
performance. An analysis of the exceptional items included within the income statement is as follows:

2011

£m

2010

£m

Modernisation costs:

ColleagueShare - ‘share’ scheme

- dividend

- business transformation

Restructuring costs:

Provision for restructuring (note 21)

Other restructuring costs

Impairment of property, plant and equipment (note 10)

Total modernisation costs

Other operating exceptional costs:

Provision for potential industrial claims

Impairment of property, plant and equipment (note 10)

Impairment of intangible assets (note 13)

Impairment of investment in associate company (note 15)

Other exceptional items

Total operating exceptional items

109

(41)

(256)

(8)

(30)

(29)

(12)

(2)

(15)

(72)

(44)

(264)

(12)

(207)

(180)

(224)

(177)

(3)

(58)

(18)

(88)

(295)

(67)

(291)

The £109m release (2010 £28m release) for the ‘share’ scheme and the £1m release (2010 £72m charge) for the dividend reflects the
decrease in estimated liability in respect of ColleagueShares as at the balance sheet date (note 21). The £41m charge (2010 £nil) relates to
ColleagueShare payments that are now linked to the achievement of key modernisation milestones as part of the pay deal with the
Communication Workers Union.

The £256m (2010 £178m) restructuring charge in provisions is in respect of redundancy costs of £237m (2010 £167m) resulting mainly
from operational efficiency initiatives in UKLPI and Post Office Limited. Other Group restructuring exceptional charges of £19m (2010 £11m)
were incurred during the year. These were mainly in respect of onerous property lease obligations.

Other restructuring costs of £8m (2010 £3m) refer to employees’ excess travel expenses associated with modernisation of the business.

The £12m (2010 £nil) impairment included within modernisation costs relates to the derecognition of plant and equipment £10m and building
fit-out £2m as a result of business transformation.

Material costs of litigation requiring separate disclosure due to size and incidence amounted to £30m. A provision was raised to meet these
costs of potential industrial claims.

Other impairments of £43m (2010 £76m) relate to Post Office Limited comprising £29m (2010 £57m) property, plant and equipment and
£11m (2010 £15m) intangible assets, iRed Partnership Limited (iRed) comprising £nil (2010 £1m) property, plant and equipment and £1m
(2010 £3m) intangible assets and a further £2m charge (2010 £nil) in relation to impairment of the carrying value of the investment in an
associate company. Due to ongoing losses, the carrying values of asset purchases made by Post Office Limited and iRed during the year have
been impaired to their recoverable amount.

Other exceptional items charged of £15m (2010 net £9m accrual release in respect of professional fees) were in respect of State Aid and
Postal Services Bill related costs.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

8. Net finance costs

The following analysis excludes net pensions interest.

Unwinding of discount relating to ColleagueShare scheme

Interest payable on financial liabilities carried at amortised cost

Finance costs

Interest received on available for sale financial assets

Interest received on loans and receivables financial assets

Finance income

Net finance costs (excluding net pensions interest)

2011
£m

(7)

(107)

(114)

(45)

2010
£m

(9)

(89)

(98)

(51)

The finance costs of £114m (2010 £98m) include £13m (2010 £7m) in respect of finance charges payable under finance lease and hire
purchase contracts.

The finance income of £69m (2010 £47m) includes gains of £6m (2010 £nil) on available for sale financial assets which were released from
equity and recognised in the income statement for the year.

9. Income tax

The major components of the income tax charge for the years ended 27 March 2011 and 28 March 2010 are:

2011
£m

2010
£m

Tax charged in the income statement

Current income tax:

Current UK income tax credit

Foreign tax

Adjustments in respect of current income tax of previous years

Deferred income tax:

Relating to origination and reversal of temporary differences

Income tax charge reported in the income statement

Tax charged to equity

Income tax related to items charged or credited directly to equity:

Deferred income tax charge related to actuarial movements in the pension deficit

Deferred income tax charge related to movements in hedging reserve

Current income tax charge for fair value adjustments on financial assets investments

Income tax charge reported in equity

Total taxation charge

Current income tax charge

Deferred income tax charge

Total income tax charge reported

(16)

(1)

106

115

(24)

(3)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

9. Income tax (continued)
A reconciliation between the tax charges and the product of accounting loss multiplied by the UK rate of Corporation Tax for the years ended
27 March 2011 and 28 March 2010 is as follows:

Loss before taxation

At UK standard rate of Corporation Tax of 28%

Overseas current tax rates

Tax over-provided in prior years

Non-taxable income

Non-deductible expenses

Associates’/joint ventures’ profit after tax charge included in Group pre-tax profit

Net increase in tax charge resulting from derecognition of deferred tax assets

Profit from asset disposals eligible for relief

Other

Tax charge in the income statement

Effective income tax rate

2011
£m

(152)

(43)

(3)

(1)

(12)

(8)

192

(28)

(6)

106

2010
£m

(262)

(73)

(2)

(3)

(6)

(11)

149

(2)

(10)

Deferred tax relates to the following:

Balance sheet

Income statement

Liabilities

Accelerated capital allowances

Goodwill qualifying for tax allowances

Gross deferred tax liabilities

Assets

Deferred capital allowances

Provisions and other

Pensions temporary differences

Losses available for offset against future taxable income

Hedging derivatives temporary differences

Goodwill qualifying for tax allowances

Gross deferred tax assets

Net deferred tax (liability)/asset

Consolidated income statement

2011
£m

2010
£m

2011
£m

(5)

(29)

(2)

(62)

(1)

(9)

(10)

(8)

(2)

(1)

(4)

(5)

(6)

2010
£m

(4)

(103)

(6)

(2)

(1)

(3)

(88)

(54)

The Group has unrecognised deferred tax assets of £2,017m (2010 £2,847m), comprising £1,218m (2010 £2,253m) relating to the
retirement benefit obligation, £452m (2010 £360m) relating mainly to fixed asset timing differences, and £347m (2010 £234m) relating to
tax losses in subsidiaries that are available to offset against future taxable profits. The Group has capital losses carried forward, the tax effect
of which is £15m (2010 £24m) and temporary differences related to capital losses of £91m (2010 £107m). The Group has rolled over capital
gains of £61m (2010 £73m); no tax liability would be expected to crystallise should the assets into which the gains have been rolled be sold at
their residual value, as it is anticipated that a capital loss would arise.

Finance (No 2) Act 2010 reduced the main rate of corporation tax to 27% with effect from 1 April 2011. The effect of this change on
unrecognised deferred tax is included in these accounts and is detailed above. In March 2011 the Chancellor of the Exchequer announced that
the main rate of corporation tax will be 26% for the year commencing 1 April 2011 and that there will be successive annual one percentage
point reductions until the rate reaches 23% with effect from 1 April 2014. However, in accordance with accounting standards the effect of
these rate reductions on deferred tax balances has not been reflected in these accounts due to the relevant legislation not having been
substantively enacted at the balance sheet date. A reduction to 23% would, based on losses and temporary differences at 27 March 2011,
reduce the Group’s unrecognised deferred tax assets by £296m.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

9. Income tax (continued)
The taxation of foreign profits rules were enacted in Finance Act 2009. Under the foreign profits rules, a dividend exemption was introduced
which largely exempts dividends received on or after 1 July 2009 from UK corporation tax. The Group has applied this legislation in arriving at
its UK tax results for the accounting period ended 27 March 2011 and 28 March 2010.

At 27 March 2011, there was no recognised or unrecognised deferred income tax liability (2010 £nil) for taxes that would be payable on the
unremitted earnings of certain of the Group’s subsidiaries, associates or joint ventures, as the Group has no liability to additional taxation
should such amounts be remitted due to the availability of exemptions and other reliefs, including the UK dividend exemption.

10. Property, plant and equipment

Cost

At 29 March 2010

Exchange rate movements

Reclassification

Additions

Disposals

Reclassification to non-current assets held for
sale (note 16)

At 27 March 2011

Depreciation and impairment

At 29 March 2010

Exchange rate movements

Reclassification

Depreciation (note 5)

Impairment (note 7)

Disposals

Reclassification to non-current assets held for
sale (note 16)

At 27 March 2011

Net book value

At 27 March 2011

At 29 March 2010

(5)

(75)

(109)

(12)

1,592

891

(1)

(40)

(21)

(10)

863

729

828

Land and buildings
Long
leasehold
£m

Short
leasehold
£m

Freehold
£m

Plant and
machinery
£m

Motor
vehicles
£m

Fixtures and
equipment
£m

Total
£m

1,719

267

601

1,143

(4)

(5)

277

(4)

693

(2)

(42)

1,182

460

(1)

(34)

472

964

5,154

(1)

(6)

(9)

291

(200)

(12)

1,008

5,224

166

387

682

233

860

3,219

(3)

(1)

169

108

101

(4)

470

223

214

(2)

(42)

722

460

461

(30)

258

214

227

(1)

(6)

(4)

250

(104)

(10)

910

3,392

1,832

104

1,935

Depreciation rates are disclosed within accounting policies (note 2). No depreciation is provided on freehold land, which represents £190m
(2010 £205m) of the total cost of properties. The net book value of the Group’s property, plant and equipment held under hire purchase
contracts and finance leases amounts to £262m (2010 £176m) comprising £152m (2010 £157m) vehicles, £88m (2010 £13m) plant and
machinery and £22m (2010 £6m) land and buildings. The net book value of the Group’s property, plant and equipment includes £150m (2010
£197m) in respect of assets in the course of construction. The net book value of the Group’s land and buildings includes £383m (2010
£409m) in respect of building fit-out.

The £291m (2010 £370m) additions do not include any borrowing costs capitalised in relation to specific qualifying assets (2010 £nil).

On 24 March 2011 an agreement was implemented to substitute £102m pension escrow financial investments with mortgages against certain
property assets. The carrying value of these property assets of £33m is included within the £729m freehold land and buildings total above.
The fair value of these property assets, based on a residual cashflow analysis*, exceeds their carrying value by £124m.

*A residual cashflow analysis determines a price that could be paid for the property given the expected ‘as if complete’ value of the proposed
development and the total cost of the proposed development, allowing for market level profit margins and having due regard to the known
characteristics of the property and the inherent risk involved in its development.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

10. Property, plant and equipment (continued)

Land and buildings
Long
leasehold
£m

Short
leasehold
£m

Freehold
£m

Plant and
machinery
£m

Motor
vehicles
£m

Fixtures and
equipment
£m

Total
£m

1,669

263

549

1,104

(6)

(12)

(8)

(1)

(14)

(5)

(11)

(16)

(18)

1,719

267

601

1,143

851

158

338

642

(2)

(7)

(14)

891

828

818

(1)

(14)

166

101

105

387

214

211

(3)

(6)

(15)

682

461

462

Cost

At 30 March 2009

Exchange rate movements

Reclassification

Additions

Acquisition of businesses

Disposals

Reclassification to non-current assets held for sale
(note 16)

At 28 March 2010

Depreciation and impairment

At 30 March 2009

Exchange rate movements

Reclassification

Depreciation (note 5)

Impairment (note 7)

Disposals

Reclassification to non-current assets held for sale
(note 16)

At 28 March 2010

Net book value

At 28 March 2010

At 30 March 2009

11. Leasehold land payment

Net book value

At 29 March 2010 and 30 March 2009

Amortisation

At 27 March 2011 and 28 March 2010

390

(1)

101

(43)

460

205

(1)

(39)

233

227

185

947

4,922

(3)

(2)

(24)

964

(15)

370

(106)

(18)

5,154

842

3,036

(2)

(23)

860

104

105

(8)

246

(99)

(14)

3,219

1,935

1,886

2011
£m

2010
£m

(1)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

12. Goodwill

Cost

At 29 March 2010 and 30 March 2009

Exchange rate movements

Acquisition of businesses

At 27 March 2011 and 28 March 2010

Impairment

At 29 March 2010 and 30 March 2009

Exchange rate movements

At 27 March 2011 and 28 March 2010

Net book value

At 27 March 2011 and 28 March 2010

At 28 March 2010 and 29 March 2009

2011
£m

2010
£m

636

(11)

628

439

(8)

431

197

663

(27)

636

457

(18)

439

197

206

The carrying value of goodwill arising on business combinations of £197m (2010 £197m) at the balance sheet date includes £195m (2010
£195m) relating to the General Logistics Systems (GLS) business segment. In line with the accounting policy (see note 2), this goodwill has
been reviewed for impairment. An impairment loss is recognised for the amount by which the carrying value of an asset or cash generating
unit exceeds the recoverable amount. The recoverable amount is the higher of net realisable value and value in use. The carrying value of GLS,
excluding interest bearing and tax related assets and liabilities, is £450m (2010 £456m) at year end and the operating profit before
exceptional items is £118m (2010 £112m) for the year (note 3). The carrying value represents a multiple of 3.8 (2010 4.1) on operating profit
before exceptional items. The net realisable value of GLS, for the purposes of the impairment review (i.e. the ‘fair value less costs to sell’), has
been assessed with reference to earnings multiples for quoted entities in a similar sector. On this basis, the net realisable value of GLS has
been assessed to be in excess of the carrying value. No reasonable possible change in the earnings multiples referenced would reduce the net
realisable value to below the carrying value.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

13. Intangible assets

2011

2010

Master
franchise
licences
£m

Customer
listings
£m

Software
£m

Total
£m

Master
franchise
licences
£m

Customer
listings
£m

Software
£m

Total
£m

Cost

At 29 March 2010 and 30 March 2009

325

376

255

Additions

Disposals

Acquisition of businesses

Exchange rate movements

(16)

At 27 March 2011 and 28 March 2010

382

435

Amortisation and impairment

At 29 March 2010 and 30 March 2009

233

277

Impairment (note 7)

Amortisation

Disposals

Exchange rate movements

(16)

At 27 March 2011 and 28 March 2010

260

309

Net book value

At 27 March 2011 and 28 March 2010

At 29 March 2010 and 30 March 2009

122

126

(1)

308

(1)

(2)

(1)

325

376

(1)

189

230

(1)

(2)

233

277

The intangible assets recognised in the Group’s balance sheet, none of which have been internally generated, have finite lives and are being
written down on a straight-line basis.

The amortisation charge of £36m (2010 £32m) relating to intangible assets is aggregated within ‘other operating costs’ in the income
statement and disclosed in note 5. Details of the impairment are disclosed in note 7.

The £73m (2010 £71m) additions include £1m (2010 £0.2m) borrowing costs capitalised in relation to specific qualifying assets.

14. Business combinations

The acquisitions during the current or prior years are not material and therefore the following disclosures are made on an aggregated basis.
The table below sets out the identifiable assets and liabilities that were acquired at their fair values to the Group as at the date of acquisition.

Tangible assets acquired

Intangible assets recognised on acquisition

Goodwill recognised on acquisition

Total cost recognised

Gross consideration

Less deferred consideration

Net cash outflow

Fair value
Total
2011
£m

(3)

The General Logistics Systems (GLS) subsidiary acquired Reggio Emilia and North Turin franchise area businesses in Italy on 1 September
2010 and 1 March 2011 respectively. If these combinations had taken place at the beginning of the financial year, Group revenue from
continuing operations would have been £9,161m. The goodwill of £2m and £1m respectively, arising on these acquisitions is indicative of the
relative quality of the acquired entities.

Combined profits of the acquired entities since their respective acquisition dates and if they had been acquired at the beginning of the financial
year are not material in the context of the Group’s profit after tax.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

15. Investments in joint ventures and associates

Joint ventures

During 2010–11 and 2009-10, the Group’s only joint venture investment was a 50% interest in First Rate Exchange Services Holdings Limited,
whose principal activity is the provision of Bureau de Change.

Associates

Details of the Group’s 2010-11 and 2009-10 associate investments are provided in note 29. The reporting dates for these investments is
31 March 2011 except for Quadrant Catering Limited (30 September 2010) and G3 Worldwide Mail N.V. (Spring) (31 December 2010).
Estimates of the profits of Quadrant Catering Limited and G3 Worldwide Mail N.V. (Spring), from their reporting date to 27 March 2011 (and
28 March 2010 for the prior year), have been included to ensure that the reported share of profits of associates aligns with the Group’s
financial year. There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends,
repayment of loans or advances.

Joint ventures

Share of net assets

Goodwill

Net investments

Associates

Share of net assets

Goodwill

Net investments

Share of post
tax pre
dividend
profit
£m

At 29
March
2010
£m

Impairment
£m

Disposal
£m

Dividend
£m

(2)

(20)

(9)

(29)

Total net investments in joint ventures/associates
During the year the Group disposed of its 20% shareholding in Camelot Group plc and Camelot Global Services Limited.

147

(29)

(2)

The goodwill impairment relates to the Group’s investment in the G3 Worldwide Mail N.V. (Spring) associate company.

At 30
March
2009
£m

Share of post
tax pre
dividend
profit
£m

Reclassification
£m

Dividend
£m

Joint ventures

Share of net assets

Goodwill

Net investments

Associates

Share of net assets

Goodwill

Net investments

Total net investments in joint ventures/associates

141

(2)

The reclassification above relates to the increased shareholding in G3 Worldwide Mail N.V. (Spring).

(30)

(9)

(39)

(29)

(6)

At 27
March
2011
£m

105

At 28
March
2010
£m

(35)

147

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

15. Investments in joint ventures and associates (continued)

2011

2010

Joint
ventures
£m

Associates
£m

Total
£m

Joint
ventures
£m

Associates
£m

Total
£m

Share of assets and liabilities:

Current assets

Non-current assets

Share of gross assets

Current liabilities

Non-current liabilities

Share of gross liabilities

Share of net assets

Share of revenue and profit:

Revenue

Profit after tax

16. Non-current assets held for sale

Net book amount

At 29 March 2010

Reclassification from property, plant and equipment

Reclassification to property, plant and equipment

Disposals

At 27 March 2011

150

152

(80)

(37)

(1)

(38)

199

222

(117)

(1)

(118)

104

380

454

172

175

(101)

123

176

(112)

(3)

(115)

295

351

(213)

(3)

(216)

135

1,206

1,283

Land and buildings

Freehold
£m

Long
leasehold
£m

(2)

(3)

Total
£m

(2)

(3)

The planned disposal of these property assets is as a result of the rationalisation of the Group portfolio.

During the year a gain of £8m (2010 £2m) was recognised in the income statement in relation to the disposal of non-current assets held for
sale.

Net book amount

At 30 March 2009

Reclassification from property, plant and equipment

Reclassification to property, plant and equipment

Disposals

At 28 March 2010

17. Inventories

Supplies and materials (uniforms, fuel, printing and stationery, mailbags, engineering spares)

Merchandise (retail, lottery products and stamps)

Total

Land and buildings

Freehold
£m

Long
leasehold
£m

(1)

2011
£m

Total
£m

(1)

(2)

2010
£m

During the year no inventory items were written off (2010 £1m). Engineering spares items are included net of a provision for impairment of
£5m (2010 £4m). The cost of inventories recognised as an expense in the income statement is £160m (2010 restated £142m).

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

18. Current trade and other receivables

Trade receivables

Prepayments and accrued income

Client receivables in the Post Office Limited network

Total

Movements in the provision for bad and doubtful debts were as follows:

At 29 March 2010 and 30 March 2009

Foreign exchange rate adjustment

Receivables provided for during the year

Release of provision

Utilisation of provision

At 27 March 2011 and 28 March 2010

The amount of trade receivables that were past due but not impaired are as follows:

Past due not more than one month

Past due more than one month and not more than two months

Past due more than two months

Total past due but not impaired

Provided for or not yet overdue

Provision for bad and doubtful debts

Total trade receivables

19. Cash and cash equivalents

Cash in the Post Office Limited network

Cash at bank and in hand

Total cash at bank, in hand or in the Post Office Limited network

Cash equivalent investments: Short-term deposits

Total cash and cash equivalents

2011
£m

853

124

977

158

1,135

2011
£m

(6)

(11)

2011
£m

107

772

(26)

853

2011
£m

704

100

804

297

1,101

2010
£m

855

151

1,006

149

1,155

2010
£m

(7)

2010
£m

111

776

(32)

855

2010
£m

708

145

853

937

Cash and cash equivalents comprise amounts held physically in cash, bank balances available on demand and deposits for three months or less,
dependent on the immediate cash requirements of the Group. Where interest is earned, this is either at floating or short-term fixed rates
based upon bank deposit rates. The fair value of cash and cash equivalent investments is not materially different from the carrying value of
£1,101m (2010 £937m).

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

20. Financial liabilities

Amounts falling due in:

One year or less or on demand (current)

More than one year (non-current)
More than one year but not more than two

More than two years but not more than five

More than five years

Total

Loans
and
borrowings
£m

375

1,478

601

877

1,853

Finance
lease/hire
purchase
contracts
£m

193

109

258

Derivative
liabilities
£m

2011

Total
£m

443

1,671

710

911

2,114

2010

Loans
and
borrowings
£m

Finance
lease/hire
purchase
contracts
£m

Derivative
liabilities
£m

Total
£m

Amounts falling due in:

One year or less or on demand (current)

More than one year (non-current)

More than one year but not more than two years

More than two years but not more than five years

More than five years

Total

388

1,138

301

837

1,526

120

181

Loans
and
borrowings
£m

Further
committed
facility

£m

BIS loans to Royal
Mail Group Ltd
BIS loans to Post
Office Limited

Committed facilities
Miscellaneous loans
and borrowings in
subsidiaries

Total

1,477

375

1,852

1,853

300

775

1,075

Average
interest rate
of loan
drawn down
%

6.3

0.8

4.5

Total
facility
£m

1,777

1,150

2,927

2,928

BIS loans to Royal Mail Group Ltd

BIS loans to Post Office Limited

Committed facilities

Miscellaneous loans and borrowings in subsidiaries

Total

Loans
and
borrowings
£m

Further
committed
facility
£m

1,177

343

1,520

1,526

560

807

1,367

Average
interest rate
of loan
drawn down
%

6.6

0.8

2.2

Total
facility
£m

1,737

1,150

2,887

2,893

466

1,259

374

839

1,725

2011
Average
maturity
date
of loan
drawn down
year

2017

2011

2012

2010

Average
maturity
date
of loan
drawn down
year

2018

2010

2011

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

20. Financial liabilities (continued)

The miscellaneous loans and borrowings in subsidiaries are either unsecured or secured on various assets (mainly property) of the overseas
subsidiaries. The loans are repayable in variable and fixed amounts over their maturity periods.

The obligations under finance leases and hire purchase contracts are either unsecured or secured on the leased assets. These are repayable in
variable and fixed amounts over their maturity periods. The average interest rate is 5% (2010 5%). The average maturity date is more than five
years (2010 within two to three years).

The undrawn committed facilities, in respect of which all conditions precedent had been met at the balance sheet date, expire as follows:

Expiring in one year or less

Expiring in more than one year, but not more than two years

Expiring in more than two years

Total

The following securities apply to the Group’s committed facilities:

2011

£m

775

300

1,075

2010

£m

807

560

1,367

Royal Mail Group Ltd senior
debt facility

Royal Mail Group Ltd
shareholder loan facility

Royal Mail Group Ltd other
drawn down loans

2011

2010

£m
900

£m
900 Fixed charges over Royal Mail Holdings plc’s shares in Royal Mail Group Ltd and Royal Mail

Security

Group Ltd’s shares in Royal Mail Estates Limited. Floating charges over all assets of Royal Mail
Holdings plc, Royal Mail Group Ltd and Royal Mail Estates Limited excluding certain Group
properties over which mortgages are held as security to the Royal Mail Pension Plan

377

337 None

500

500 Fixed charges over any Royal Mail Group Ltd loans to General Logistics Systems B.V., any Royal

Mail Group Ltd loans to subsidiaries of General Logistics Systems B.V. and Royal Mail
Investments Limited’s shares in General Logistics Systems B.V. Floating charge over non-
regulated assets of Royal Mail Group Ltd

1,777

1,737

Post Office Limited facility

1,150

1,150 Floating charge over all assets of Post Office Limited and a negative pledge* over cash and near

Total

2,927

2,887

cash items

*The negative pledge is an agreement not to grant security over these assets or to set up a vehicle that has the same effect.

The Royal Mail Group Ltd shareholder loan increased by £40m (2010 £37m) as a result of accrued interest added to the loan balance.

The Post Office Limited facility of £1,150m is currently restricted to funding the cash and near cash items held within the Post Office Limited
network.

The BIS loans to Post Office Limited under the facility are short dated on a programme of liquidity management and mature on average 1 day
after the year end (2010 1 day). On maturity it is expected that further loans will be drawn down under this facility, which expires in 2012.

The security in place in the previous year was as disclosed above – with the exception of the £102m mortgages over certain Group properties
which were completed in March 2011.

The BIS loans to Royal Mail Group Ltd and Post Office Limited become repayable immediately on the occurrence of an event of default under
the loan agreements. These events of default include non-payment, insolvency and breach of covenant relating to interest and total
indebtedness. It is not anticipated that the Company is at risk of breaching any of these obligations, except as discussed in note 2.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

21. Provisions for liabilities and charges

At 28 March 2010

Arising during the year:

- charged in operating exceptional items

- charged in other operating costs

Unused amounts reversed

Utilised in the year

Discount rate adjustment

At 27 March 2011

Disclosed as:

Current at 27 March 2011

Non-current at 27 March 2011

Current at 28 March 2010

Non-current at 28 March 2010

Exceptional

Restructuring
and other
costs

ColleagueShare

Other

£m

114

299

(13)

(181)

221

141

221

114

£m

108

(109)

(4)

108

£m

(7)

(17)

Total

£m

276

299

(129)

(202)

278

181

278

130

146

276

Restructuring and other exceptional costs
The provision for restructuring principally comprises redundancy schemes of £159m (2010 £97m). Unused amounts reversed of £13m
principally relate to the Heathrow Worldwide Distribution Centre (HWDC) project where a change in business strategy has resulted in it no
longer being probable that an outflow of resources will be required to settle the Group’s obligations. The HWDC strategy has been superseded
by the London Mail Centre Review, a new strategy developed in the current year requiring a new provision to be raised for £34m.

A further £32m relates to onerous property and commercial contracts associated with restructuring projects and £30m relating to the costs of
potential industrial claims.

The timing of cash flows for such provisions is by its nature uncertain and dependent upon the outcome of related events.

ColleagueShare
Royal Mail operates a ‘share’ scheme referred to as ColleagueShare. This is a five-year scheme running to March 2012. The provision at
27 March 2011 of £2m (2010 £108m) represents the potential liability for the financial years up to 2011-12.

Other
Other provisions of £55m (2010 £54m) are those recognised principally for the expected liabilities arising from property exits in the normal
course of business. These principally comprise onerous lease obligations and decommissioning costs. Other provision amounts arise from
estimated exposures resulting from legal claims incurred in the normal course of business. ‘Other’ provision amounts are expected to be
utilised in 2011-12, with the remainder within 2 to 3 years, except £5m onerous property contracts expected to be utilised within 3 to 5 years,
and a further £2m expected to be utilised over a period greater than 5 years.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

22. Current trade and other payables

Trade payables and accruals

Advance customer payments

Social security

Deferred consideration on business combinations

Client payables in the Post Office Limited network

Amounts due to pension schemes relating to redundancies

Interest

Capital payables

ColleagueShare accrual

Total

2011
£m

1,179

307

1,581

314

1,961

2010
£m

1,179

299

1,573

313

108

2,076

The Group, through Post Office Limited, receives and disburses cash on behalf of Government agencies and other clients to customers through
its Post Office branch network. Amounts owed to these parties are separately shown as client payables above. The level of cash held and the
related payables can vary significantly at each balance sheet date.

The change in the carrying value of the discounted element of the payable balance due to the passage of time is not material.

Capital payables represent liabilities outstanding in relation to the acquisition of property, plant and equipment and intangible assets.

23. Non-current other payables

Lease incentives

Other payables

Deferred consideration on business combinations

Total

24. Financial risk management objectives and policies

2011
£m

2010
£m

The Group’s principal financial instruments, other than derivatives, comprise short-term deposits, money market liquidity investments,
Government gilt edged securities, loans, finance leases and hire purchase contracts and cash. The main purposes of these financial instruments
are to raise finance and manage the liquidity needs of the business operations. The Group has various other financial instruments such as
trade receivables and trade payables, which arise directly from operations.

The Group enters into derivative transactions, principally commodity swaps and forward currency contracts. The purpose is to manage the
commodity and currency risks arising from the Group’s operations.

It is, and has been throughout the year under review, the Group’s policy that no speculative trading in financial instruments shall be
undertaken.

The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk, commodity price and
credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate risk
The Group’s exposure to market risk for changes in interest rates relates to the Group’s debt obligations and interest bearing financial assets.
The BIS loans to Royal Mail Group Ltd of £1,477m (2010 £1,177m) are a mix of £600m (2010 £nil) variable rate and £877m (2010
£1,177m) fixed interest rate with a combined average maturity date of 2017 (2010 – average date of 2018). The BIS loans to Post Office
Limited of £375m (2010 £343m) are at short-dated fixed interest rates with average maturity 1 day (2010 average 1 day). The total interest
bearing financial assets of the group (excluding the non-current investments) of £397m (2010 £191m) are at short-dated fixed or variable
interest rates with average maturity 5 days (2010 average 3 days). These short-dated financial instruments are maturity managed to obtain
the best value out of the interest yield curve.

The Group’s policy is to manage its net interest expense using an appropriate mix of fixed and variable rate financial instruments. No external
hedging of interest rate risk is undertaken.

The following table demonstrates the sensitivity to reasonably possible changes in interest rates, with all other variables held constant, of the
Group’s profit before taxation and equity based upon the financial instruments held at the balance sheet date.

The effect from available for sale (whether floating or fixed rate) financial assets is calculated as the change in fair value at the balance sheet
date and impacts equity.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

24. Financial risk management objectives and policies (continued)

The effect from other floating rate financial instruments is calculated as the balance of the instruments multiplied by the change in interest
rates and impacts profit before taxation.

There is no effect on either profit before taxation or equity from other financial instruments.

2011

2010

Effect on
profit
before
taxation
gains/(losses)
£m

Effect on
equity
gains/(losses)
£m

Effect on
profit
before
taxation
gains/(losses)
£m

Effect on
equity
gains/(losses)
£m

Effect of an increase in Sterling interest rates of 100 basis points (1%)

Effect of a decrease in Sterling interest rates of 50 basis points (0.5%)

(3)

(143)

(1)

(149)

Foreign currency risk
The Group is exposed to foreign currency risk due to trading with overseas postal operators for carrying UK mail abroad and delivering foreign
origin mail in the UK, the balances held to operate the Bureau de Change services within Post Office Limited and various purchase contracts
denominated in foreign currency. These risks are mitigated by hedging programmes managed by Group Treasury. Where possible, exposures
are netted internally and any remaining exposure is hedged using a combination of external spot and forward contracts. Hedging will not
normally be considered for exposures of less than £1m and hedging is normally confined to 80% of the forecast exposure where forecast cash
flows are highly probable.

The Group’s obligation to settle with overseas postal operators is denominated in Special Drawing Rights (SDRs) – a basket of currencies
comprised of US dollar (US$), Japanese Yen, Sterling and Euro. Group Treasury operates a rolling 18-month hedge programme, which is
subsequently reviewed on a quarterly basis. An external SDR hedge was put in place during 2010-11.

For the Bureau de Change business, balances of major currency holdings are hedged along with minor currencies showing a closely correlated
movement.

The Group’s obligations to settle conveyance charges in US$ has been hedged to April 2012.

The Group has two active hedge programmes covering obligations to settle Euro invoices on automation projects.

The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries. However it does hedge the
transactional exposure created by inter-company loans with these subsidiaries.

The table below demonstrates the sensitivity of the Group to its gross currency exposures (before hedging) together with how much the 2011-
12 operating profit before exceptional items (‘operating profit’) would differ from 2010-11 as a result of the changes to 27 March 2011 in
exchange rates post the impact of the Group’s hedging programmes.

The sensitivity analysis is the impact on the Group’s operating profit that would result from a movement in exchange rates (excluding any
hedges in place). It is calculated as the difference between the operating profit that would have been reported based upon actual currency
transactions and actual exchange rates during the year (but excluding the impact of any hedges in place) and the operating profit that would
have been reported based upon actual currency transactions but with exchange rates with sterling 5% weaker.

The impact on 2011-12 operating profit is calculated as the movement in operating profit (from actual 2010-11 operating profit) that would
arise on the actual currency transactions in 2010-11 at the actual hedge rates for 2011-12 where hedges are in place and the closing
exchange rates for 2010-11 where no hedge exists.

The analysis below excludes the impact of changes in US$/Sterling exchange on diesel and jet fuel prices as this analysis is included in the
commodity price risk note.

The analysis is different from the analysis provided in last year’s financial statements (which reported the sensitivity of the Group’s financial
instruments at the balance sheet date) as the new analysis is felt to more usefully illustrate the exposures of the Group.

2011

2010

Impact on
operating profit
of a
5% weakening
of sterling
(before hedging)
£m gain/(loss)

Impact of no
further change in
exchange rate on
2011-12
operating profit
versus 2010-11
(post hedging)
£m gain/(loss)

Impact on
operating profit
of a
5% weakening
of sterling
(before hedging)
£m gain/(loss)

Impact of no
further change in
exchange rate on
2010-11
operating profit
versus 2009-10
(post hedging)
£m gain/(loss)

(2)

(9)

(3)

(4)

US$

Euro

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

24. Financial risk management objectives and policies (continued)

Commodity price risk
The Group is exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe, which consumes over 130 million
litres of fuel per year, and a jet fuel price risk arising from the purchasing of air freight services. The Group’s fuel risk management strategy
aims to reduce uncertainty created by the movements in the oil and foreign currency markets. The strategy uses over-the-counter derivative
products (in both US$ commodity price and US$/Sterling exchange rate) to manage these exposures.

In addition, the Group is exposed to the commodity price risk of purchasing electricity and gas. The Group’s risk management strategy aims to
reduce uncertainty created by the movements in the electricity and gas markets. These exposures are managed by locking into fixed rate price
contracts with suppliers and using over-the-counter derivative products to manage these exposures.

The table below demonstrates the sensitivity of the Group to it’s gross commodity price exposures (before hedging) together with how much
the 2011-12 operating profit before exceptional items (‘operating profit’) would differ from 2010-11 as a result of the changes to 27 March
2011 in commodity prices post the impact of the Group’s hedging programmes.

The sensitivity analysis is the impact on the Group’s operating profit that would result from a movement in commodity prices (excluding any
hedges in place). It is calculated as the difference between the operating profit that would have been reported based upon actual commodity
transactions and actual commodity prices during the year (but excluding the impact of any hedges in place) and the operating profit that would
have been reported based upon actual commodity transactions but with commodity prices 5% higher.

The impact on 2011-12 operating profit is calculated as the movement in operating profit (from actual 2010-11 operating profit) that would
arise on the actual commodity transactions in 2010-11 at the actual hedge prices for 2011-12 where hedges are in place and the closing
commodity prices for 2010-11 where no hedge exists.

2011

2010

Impact on
operating profit
of a
5% increase in price
(before hedging)
£m gain/(loss)

Impact of no
further change in
price on 2011-12
operating profit
versus 2010-11
(post hedging)
£m gain/(loss)

Impact on
operating profit
of a
5% increase in price
(before hedging)
£m gain/(loss)

Impact of no
further change in
price on 2010-11
operating profit
versus 2009-10
(post hedging)
£m gain/(loss)

Diesel and Jet

(5)

(21)

(4)

Credit risk
Royal Mail operates a credit policy, which provides a fair and equitable arrangement for all its account customers. The level of credit granted is
based on a customer’s risk profile assessed by an independent credit referencing agent. The credit policy is applied rigidly within the regulated
products area so as to ensure that Royal Mail is not in breach of compliance legislation. Assessment of credit for the non-regulated products is
based on commercial factors, which are commensurate with the Group’s appetite for risk.

Royal Mail has a dedicated credit management team, which sets and monitors credit limits, and takes corrective action as and when
appropriate. Credit controls in place have limited the level of bad debt incurred to around 0.1% (2010 0.1%) of turnover.

With respect to credit risk arising from other financial assets of the Group, which comprise cash, cash equivalent investments, available for sale
financial assets, held to maturity financial assets, held for trading financial assets, loans and receivables financial assets and certain derivative
instruments, the Group invests/trades only with high quality financial institutions. The Group’s exposure to credit risk arises from default of the
counterparty, with a maximum exposure equal to the carrying amount of these instruments.

There are no significant concentrations of credit risk within the Group.

Liquidity risk
The Group’s primary objective is to ensure that the Group has sufficient funds available to meet its financial obligations as they fall due. This is
achieved by aligning short-term investments and borrowing facilities with forecast cash flows. Typical short-term investments include money
market funds, time deposits with approved counterparties, UK Government gilts and Treasury bills. Borrowing facilities are regularly reviewed
to ensure continuity of funding.

The unused facilities for Royal Mail Group Ltd of £300m expire in 2014 (2010 £560m expiring in 2014). The unused facility for Post Office
Limited of £775m expires in 2012 (2010 £807m expiring in 2011). Additionally, the Group has £200m (2010 £200m) of uncommitted lines of
credit which are reviewed annually.

Capital management
Royal Mail Holdings plc is a public limited company whose shares are not traded and the Group regards its capital as share capital, share
premium, retained earnings and debt provided by the UK Government. The sole shareholder and the provider of the majority of debt to the
Group is the UK Government. The management of capital is closely linked to the Group’s relationship with its shareholder. The Group maintains
its liquidity requirements by the management of its internal funds and by the drawing down of equity and debt from its shareholder as well as
drawing on limited external debt facilities. The Group’s debt to equity ratio is determined by its shareholder.

As explained in the going concern section in note 2 the loans and the funding structure of the Group may be subject to change.

Financial assets – pension escrow investments
On 23 March 2007, Royal Mail Holdings plc and Royal Mail Group Ltd established £1bn of investments in escrow. These investments are held
as security to the Royal Mail Pension Plan in support of the 38 year deficit recovery period from March 2009. At 27 March 2011, Royal Mail
Holdings plc had £1,074m (2010 £1,011m) of financial assets in the pension escrow and Royal Mail Group Ltd had £87m (2010 £178m) of
financial assets plus mortgages on certain Group properties. Charges over these assets have been registered. Further details on the Royal Mail
Pension Plan, including the latest full actuarial valuation, are contained in note 26.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments

Carrying amounts and fair values
Set out below is a summary by category of the carrying amounts of all the Group’s financial instruments. Trade receivables, payables,
prepayments, accruals and client payables have been omitted from this analysis on the basis that carrying value is a reasonable approximation for
fair value. Pension scheme assets and liabilities are also excluded. Fair values have been calculated using current market prices (forward
exchange rates/commodity prices) and discounted using appropriate discount rates. There are no material differences between the fair value
(transaction price) of all financial instruments at initial recognition and the fair value calculated using these valuation techniques. The fair value of
the BIS loans to Royal Mail Group Ltd (non-current) is £1,563m at 27 March 2011 (2010 £1,197m). The fair value of ‘Obligations under finance
leases and hire purchase contracts’ is £262m (2010 £184m). For all other financial instruments fair value is equal to the carrying amount.

The tables below also set out the carrying amount of the currency of the Group’s financial instruments:

Level Classification

Sterling
£m

US$
£m

Euro
£m

Other
£m

Financial assets

Cash at bank, in hand or in Post Office Limited network

Cash equivalent investments

- Money market funds

- Short-term deposits – local government

- Short-term deposits – bank

Cash and cash equivalents

Financial assets – investments (current)

Loans and receivables

- Short-term deposits – Government/local government

Loans and receivables

Financial assets – investments (non-current)

- Bank deposits

Loans and receivables

Financial assets – pension escrow investments (non-current)

- Cash at bank

- Treasury bills

- Gilt edged securities (conventional)

- Gilt edged securities (index linked)

Derivative assets – current

- non-current

Total financial assets

Financial liabilities

Financial liabilities – loans and borrowings (current)

- BIS loans to Post Office Limited

Obligations under finance leases and hire purchase contracts
(current)

Financial liabilities – loans and borrowings (non-current)

- BIS loans to Royal Mail Group Ltd

- Miscellaneous loans in subsidiaries (non-current)

Obligations under finance leases and hire purchase contracts
(non-current)

Derivative liabilities – current

Total financial liabilities

Net total financial assets

1 Available for sale

Amortised cost

659

296

142

125

955

1,161

242

143

773

2,124

(375)

(65)

(1,477)

(193)

(2,110)

2011
Total
£m

804

297

142

126

103

1,101

(2)

1,161

242

143

773

112

2,349

(1)

(2)

(375)

(65)

(1,478)

(1,477)

(1)

(193)

(3)

(2,114)

110

235

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments (continued)

There are no financial assets or liabilities designated at fair value through the income statement on initial recognition.

The criteria for codification of ‘Level’ in the above table is described in the accounting policy ‘Fair value measurement of financial instruments’
on pages 63 and 64.

The financial assets – investments (non-current) – bank deposits of £44m (2010 £49m) and £1m (2010 £nil) of the cash equivalent
investments are pledged as collateral to a counterparty bank which has provided a letter of credit in support of a lease payable obligation.

Derivative assets £36m current, £6m non-current (2010 £24m current, £3m non-current) and liabilities £3m current, £nil non-current (2010
£17m current, £1m non-current) are valued at fair value. Effective changes in the fair value of derivatives, which are part of a designated cash
flow hedge under IAS 39, are deferred into equity. All other changes in derivative fair value are taken straight to the income statement.

None of the financial assets listed above are either past due or considered to be impaired.

The decrease in pension escrow investments of £28m (2010 increase of £83m) consists of £54m (2010 £41m) interest on the investments
plus £20m (2010 £42m) movement in fair value deferred into the Financial Assets Reserve, less £102m (2010 £nil) released from escrow,
substituted by mortgages on certain Group properties.

Financial assets

Cash at bank, in hand or in Post Office Limited network

Cash equivalent investments

- Money market funds

- Short-term deposits – bank

Cash and cash equivalents

Financial assets – investments (current)

Level Classification

Sterling
£m

US$
£m

Euro
£m

Other
£m

2010
Total
£m

Loans and receivables

700

116

853

784

116

937

- Short-term deposits – Government/local government

Loans and receivables

Financial assets – investments (non-current)

- Bank deposits

Loans and receivables

Financial assets – pension escrow investments (non-current)

- Cash at bank

- Treasury bills

- Gilt edged securities (conventional)

- Gilt edged securities (index linked)

Derivative assets – current

- non-current

Total financial assets

Financial liabilities

Financial liabilities – loans and borrowings (current)

- BIS loans to Royal Mail Group Ltd

- BIS loans to Post Office Limited

- Miscellaneous loans in subsidiaries (current)

Obligations under finance leases and hire purchase contracts
(current)

Financial liabilities – loans and borrowings (non-current)

- BIS loans to Royal Mail Group Ltd

- Miscellaneous loans in subsidiaries (non-current)

Obligations under finance leases and hire purchase contracts
(non-current)

Derivative liabilities – current

– non-current

Total financial liabilities

1 Available for sale

Amortised cost

1,189

269

137

781

1,974

(383)

(40)

(343)

(60)

(1,137)

(120)

(7)

(1)

(1,708)

(7)

1,189

269

137

781

126

2,203

(5)

(1)

(3)

(10)

(388)

(40)

(343)

(5)

(61)

(1,138)

(1,137)

(1)

(120)

(17)

(1)

(1,725)

Net total financial assets

266

116

478

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments (continued)

Interest rate risk
Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments
classified as fixed rate is fixed until the maturity of the instrument.

The tables below set out the carrying amount by maturity of the Group’s financial instruments that are exposed to interest rate risk. The
pension escrow investments mature between 1 day and 45 years but have been disclosed as maturing in greater than 5 years as the
investments have been provided as security to the Royal Mail Pension Plan in support of the 38 year deficit recovery period from March 2009.
The floating rate BIS loans to Royal Mail Group Ltd mature in 2014 and interest rates on these loans are set for periods between 7 days and
6 months as selected by the Group.

Financial year ended 27 March 2011

Average
effective
interest rate
%

Within
1 year
£m

1-2
years
£m

2-5
years
£m

More
than
5 years
£m

Fixed rate

Cash at bank

Cash equivalent investments:

- Short-term deposits local government

- Short-term deposits - bank

Financial assets – investments (current)

- Short-term deposits – Government/local government

Financial assets – investments (non-current)

- Bank deposits

Financial assets – pension escrow investments (non-
current)

- Gilt edged securities (conventional)

BIS loans to Post Office Limited

BIS loans to Royal Mail Group Ltd

Obligations under finance lease and hire purchase
contracts

Miscellaneous loans in subsidiaries

Total

Floating rate

Cash at bank

Cash equivalent investments:

- Money market funds

- Short-term deposits – bank

Financial assets – pension escrow investments (non-
current)

- Cash at bank

- Treasury bills

- Gilt edged securities (index linked)

BIS loans to Royal Mail Group Ltd

Non-interest bearing

Cash at bank, in hand or in Post Office Limited network

Derivative assets

Derivative liabilities

Total

3.9

0.6

0.8

7.7

0.4

4.8

0.8

8.4

4.6

4.5

0.8

0.7

0.8

0.4

0.5

4.7

3.0

(375)

(65)

(306)

142

263

705

(3)

738

Total
£m

143

(877)

143

(375)

(877)

(50)

(45)

(109)

(34)

(258)

(1)

(86)

(1)

(753)

(1,190)

(600)

242

773

1,018

142

242

773

(600)

681

705

(3)

744

Net total financial assets/(liabilities)

695

(39)

(686)

265

235

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments (continued)

Financial year ended 28 March 2010

Fixed rate

Cash at bank

Financial assets – investments (current)

- Short-term deposits – Government/local government

Financial assets – investments (non-current)

- Bank deposits

Financial assets – pension escrow investments (non-
current)

- Gilt edged securities (conventional)

BIS loans to Post Office Limited

BIS loans to Royal Mail Group Ltd

Obligations under finance lease and hire purchase
contracts

Miscellaneous loans in subsidiaries

Total

Floating rate

Cash at bank

Cash equivalent investments:

- Money market funds

- Short-term deposits – bank

Financial assets – pension escrow investments (non-
current)

- Cash at bank

- Treasury bills

- Gilt edged securities (index linked)

BIS loans to Royal Mail Group Ltd

Miscellaneous loans in subsidiaries

Total

Non-interest bearing

Cash at bank, in hand or in Post Office Limited network

Derivative assets

Derivative liabilities

Total

Average
effective
interest rate
%

Within
1 year
£m

1-2
years
£m

2-5
years
£m

More
than
5 years
£m

3.2

7.7

1.1

4.8

0.8

8.0

4.8

4.5

(343)

(40)

(61)

(1)

(439)

0.4

101

0.4

0.8

0.4

4.9

2.3

1.5

(4)

181

747

(17)

754

(45)

(1)

(702)

(1,211)

Total
£m

137

(343)

(877)

(181)

(2)

101

269

781

(300)

(4)

933

747

(18)

756

(73)

(1)

(25)

(300)

137

(837)

(2)

269

781

(300)

1,052

Net total financial assets/(liabilities)

496

(43)

(325)

350

478

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments (continued)

Contractual maturity analysis for gross financial liabilities

The tables below set out the gross (undiscounted) contractual cash flows of the Group’s financial liabilities. For overdrafts, loans and finance
leases/hire purchase contracts, these cash flows represent the undiscounted total amounts payable including interest. For derivatives which are
settled gross, these cash flows represent the undiscounted gross payment due and do not reflect the accompanying inflow. For derivatives
which are settled net, these cash flows represent the undiscounted forecast outflow.

Gross
loans and
borrowings
commitments
£m

Gross finance
lease/hire
purchase
instalments
£m

Sub-total
£m

Gross
payments on
derivatives
settled gross
£m

Gross
payments on
derivatives
settled net
£m

Amounts falling due in:

One year or less or on demand (current)

More than one year (non-current)

More than one year but not more than two years

More than two years but not more than five years

More than five years

424

2,144

717

1,376

308

119

131

500

2,452

109

836

1,507

379

2011

Total
£m

881

2,455

112

836

1,507

Total

2,568

384

2,952

382

3,336

Gross
loans and
borrowings
commitments
£m

Gross finance
lease/hire
purchase
instalments
£m

Sub-total
£m

Gross
payments on
derivatives
settled gross
£m

Gross
payments on
derivatives
settled net
£m

Amounts falling due in:

One year or less or on demand (current)

More than one year (non-current)

More than one year but not more than two years

More than two years but not more than five years

More than five years

424

1,860

416

1,406

129

492

1,989

492

1,410

345

2010

Total
£m

847

1,993

492

1,410

Total

2,284

197

2,481

348

2,840

Hedging Activities
The Group had the following designated cash flow hedge programmes during the current and previous financial year:

i) The diesel fuel hedge programme uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure

arising from commodity price and US$/Sterling exchange rates for forecast diesel fuel purchases.

ii) The air conveyance hedge programme uses US$ forward currency purchase contracts to hedge the exposure arising from US$/Sterling

and Sterling/Euro exchange rates for forecast air conveyance purchases.

iii) Three capital programmes using Euro forward currency purchase contracts to hedge the exposure arising from Sterling/Euro exchange

rates for contracted capital expenditure on automation projects.

iv) The electricity hedge programme uses forward commodity price swaps to hedge the exposure arising from electricity prices.

v) The gas hedge programme uses forward commodity price swaps to hedge the exposure arising from gas prices.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments (continued)

The following table shows the movements on the hedging reserve for each of these hedge programmes:

Gains/(losses) deferred into
equity during year
£m

(Gains)/losses released from
equity to income during year
£m

Gains released from equity to
the carrying value of non-
financial
assets during year
£m

2011

Diesel fuel

Air conveyance

Capital programmes

Electricity

Gas

Total

2010

Diesel fuel

Air conveyance

Capital programmes

Electricity

Gas

Total

(3)

(2)

(3)

(6)

(4)

(12)

(10)

(2)

(7)

(4)

(3)

(4)

The £7m gains released from equity to income during year (2010 £21m losses) are included within the distribution and conveyance
operating costs in the income statement.

There is no material ineffectiveness recognised in the income statement relating to cash flow hedges.

For all the above cash flow hedge programmes, the underlying cash flows being hedged are expected to occur at the same dates as the
hedge instruments (derivatives) mature. For the non-capital programmes (diesel, electricity and air conveyance), the profit or loss will be
taken on maturity. For capital programmes, the impact on the income statement will be through the depreciation charge over the life of the
asset being hedged.

The following table shows the derivatives outstanding at the year end:

Commodity/
currency

Nominal
amount Maturity date

Average
contracted
commodity price/
exchange rate

Derivative
asset
non-current
fair value
£m

Derivative
asset
current
fair value
£m

Derivative
Liability
non-current
fair value
£m

Derivative
Liability
current
fair value
£m

Diesel fuel 148k tonnes Apr 11-Jan 13

US$795/tonne

US$

Euro

$118m Apr 11-Jan 13

US$1.57/£

$25m Mar 11-Apr 12

US$1.63/£

€67m Mar 11-Apr 12

£0.85/€

Electricity

378k MWH Apr 11-Jan 13

£46/MWH

Gas 24m therms Apr 11-Apr 13

£0.56/therm

Diesel fuel 141k tonnes Apr 10 – Jan 12

US$703/tonne

US$

Euro

$99m Apr 10 – Jan 12

US$1.75/£

$18m Apr 10 – Apr 11

US$1.96/£

€82m Apr 10 – Apr 11

£0.80/€

Electricity

448k MWH Apr 10 – Feb 12

£47/MWH

Gas 20m therms May 10 – Jan 12

£0.55/therm

2011

Diesel fuel

Air conveyance

Capital programmes

Electricity

Gas

Cash flow hedges

Other derivatives

Total

2010

Diesel fuel

Air conveyance

Capital programmes

Electricity

Gas

Cash flow hedges

Other derivatives

Total

(1)

(2)

(3)

(2)

(4)

(3)

(9)

(8)

(17)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

25. Financial instruments (continued)

Other derivatives represent hedges by the Group of other foreign exchange and commodity price exposures, which are not designated as
hedges under IAS 39 (including the hedge of jet fuel costs arising from the purchasing of air freight services, the hedge of the Bureau de
Change currency holdings within Post Office Limited, the hedge of the US$ bank deposits and the hedge of inter-company loans with overseas
subsidiaries).

The Group had outstanding, forward transactions to hedge foreign currency and fuel purchases at contracted rates as follows:

Maturing within one year

Euro

US$

Australian dollars (AU$)

Japanese Yen (JPY)

Diesel and jet fuel (US$)

Electricity and gas (Sterling)

Maturing after one year

Euro

US$

Diesel and jet fuel (US$)

Electricity and gas (Sterling)

In currency
(millions)

Sterling equivalents
(millions)

2011

2010

2011

2010

336

232

1,028

293

206

287

146

258

121

The Group’s fuel hedges, which fix the Sterling cost of purchasing fuel, consist of two elements which may be hedged jointly or separately:

•
•

a commodity forward transaction fixing the cost in US$ of purchasing fuel; and
a currency forward transaction fixing the Sterling cost of these US$.

The table above contains both of these transactions. The commodity forward transactions are shown under the heading ‘Diesel and jet fuel
(US$)’ - US$98m (2010 US$88m) maturing within one year and US$46m (2010 US$36m) maturing after one year. The related currency
forward transactions are contained within the total of US$ – US$232m (2010 US$206m) maturing within one year and US$50m (2010
US$37m) maturing after one year.

26. Employee benefits – pensions

The Group operates pension schemes as detailed below.

Scheme

Royal Mail Pension Plan (RMPP)

Royal Mail Senior Executive Pension Plan (RMSEPP)

Royal Mail Defined Contribution Plan (RMDCP)

Eligibility

UK employees

UK senior executives

UK employees

Type

Defined benefit

Defined contribution

Various other small-scale schemes operated by overseas subsidiaries

Overseas subsidiary employees

Defined contribution

Defined Contribution
A charge for the defined contribution schemes of £10m (2010 £5m) was recognised in operating profit before exceptional items within the
income statement. The Company contributions to these schemes was £10m (2010 £5m). A new defined contribution plan (RMDCP) was
launched in April 2009. New recruits joining from 31 March 2008 are able to begin paying contributions to the new plan after they have
worked for the Company for a year.

Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The latest full actuarial
valuations of both schemes have been carried out as at 31 March 2009 using the projected unit method. For RMPP, this valuation was
concluded at £10.3bn deficit. For RMSEPP, the valuation was concluded at £100m deficit. A series of changes to RMPP and RMSEPP began to
take effect on 1 April 2008.

The changes encompass:

•

the Plan closed to new members from 31 March 2008;

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

from 1 April 2008, defined benefits building up for employee members of the Plan are earned on a career salary basis;

employees can continue to take their pension on reaching 60 but the normal retirement age will increase to 65 for benefits earned
from 1 April 2010; and

from 1 April 2010 it will be possible to draw pension earned before the change to normal retirement age at 60, and continue
working while still contributing to the Pension Plan until the maximum level of benefits has been reached.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

26. Employee benefits – pensions (continued)

Payment of £432m (2010 £521m) was made during the year in respect of regular future service contributions, with £428m (2010 £516m)
relating to RMPP. The regular future service contributions charge for RMPP, expressed as a percentage of pensionable pay, has changed to
17.1% (2010 20.0%), effective from April 2010. This rate is not expected to change materially during 2011-12. For RMSEPP, these
contributions have changed to 35.9% (2010 48.2%) effective from April 2010.

Payment of £299m (2010 £291m) was made during the year to fund the deficit in the schemes, with £292m (2010 £286m) relating to
RMPP. Deficit recovery payments are planned for RMPP over the 38 years from the date of the latest full actuarial valuation. These payments
will be made before each 31 March, and may therefore span across the Group’s year end (the last Sunday in March). Over the 37 years from
1 April 2010, planned deficit payments are £282m per annum, increasing in line with RPI (base year is 2009-10). For RMSEPP, deficit
recovery payments will be £11m per annum less regular future service contributions, from 1 April 2010 to 31 January 2024.

On 23 March 2007, the Group established £1bn of investments in escrow as security to the Royal Mail Pension Plan in support of the deficit
recovery plan. On 24 March 2011 an agreement was implemented to substitute £102m pension escrow financial investments with mortgages
against certain property assets.

A current liability of £12m (2010 £6m) has been recognised for payments to the pension schemes relating to redundancy (note 22). During
the year, payments of £30m (2010 £50m) relating to redundancy were made.

A liability of £1m (2010 £1m) has been recognised for future payment of pension benefits to a past Director (see page 48 Directors’
Remuneration Report).

The following disclosures relate to the gains/losses and deficit in the schemes recognised for the RMPP and RMSEPP defined benefit plans in
the financial statements of the Group:

a) Major long-term assumptions

The size of the pension deficit, which is large in the context of the Group and its finances, is materially sensitive to the assumptions adopted.
Small changes in these assumptions could have a significant impact on the deficit and overall income statement charge. The major
assumptions were:

Rate of increase in salaries*

Rate of pension increases – RMPP Sections A/B

Rate of pension increases – RMPP Section C

Rate of pension increases – RMSEPP all members

Rate of increase for deferred pensions – RMSEPP members not
transferred from Section A or B of RMPP

Rate of increase for deferred pensions – all other members

Discount rate

Inflation assumption

Expected average rate of return on assets

At 27 March 2011
% pa

At 28 March 2010
% pa

4.5

2.8

3.5

2.8

5.5

3.5

6.5

4.6

3.6

5.6

3.6

6.7

*The rate of increase in salaries for 2011-12 and 2012-13 reflects the Business Transformation 2010 and Beyond agreement. From
2013-14 the rate of increase in salaries assumption is RPI + 1%.

During 2010, the Government announced that it was intending to change the inflation measure used to determine statutory minimum
indexation in deferment and in payment from RPI to CPI during 2011. Where relevant, the inflation assumption has changed from RPI to CPI.

The above assumptions relate to both defined benefit plans with the exception of the expected average rate of return on assets which is
computed for the combined assets of the plans. The expected average rate of return on assets is a weighted average of the long-term
expected rate of return of each principal asset class (see section b). The expected average rate of return is computed at each balance sheet
date based on the market values and long-term rate of return of each principal asset class as at that date.

Mortality

The mortality assumptions for the larger scheme are based on the latest self administered pension scheme (SAPS) mortality tables (S1PMA for
male pensioners and S1DFA for female pensioners) with appropriate scaling factors (106% for male pensioners and 101% for female
pensioners), allowing for ‘medium cohort’ projections with a 1.25% floor. These are detailed below:

Average expected life expectancy from age 60:

For a current 60 year old male RMPP member

For a current 60 year old female RMPP member

For a current 40 year old male RMPP member

For a current 40 year old female RMPP member

2011

26 years

29 years

32 years

2010

26 years

29 years

28 years

31 years

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

26. Employee benefits – pensions (continued)

b) Plans’ assets and expected rates of return

The assets in the plans and the expected rates of return were:

Equities

Bonds

Property

Other assets

Fair value of plans’ assets

Present value of plans’ liabilities

Deficit in schemes

Market value

Long-term expected rate of return

2011
£m

4,268

21,409

1,590

418

27,685

(32,186)

(4,501)

2010
£m

5,999

17,652

1,677

486

25,814

(33,855)

(8,041)

2011
% pa

8.2

6.2

6.5

4.2

2010
% pa

8.4

6.2

6.6

4.6

There is no element of the above present value of liabilities that arises from plans that are wholly unfunded.

Certain of the above investments relate to properties occupied by the Group, but the contribution of these properties to the fair value of
plans’ assets is not material. The pension plans have not invested in any other assets used by the Group or in the Group’s own financial
instruments.

c) Recognised charges

An analysis of the separate components of the amounts recognised in the income statement and statement of comprehensive income is as
follows:

Analysis of amounts recognised in the income statement:

Analysis of amounts charged to operating profit before exceptional items:

- Current service cost

Total charge to operating profit before exceptional items

Analysis of amounts charged to operating exceptional items:

- Loss due to curtailments (within provision for restructuring charge – note 21)

Total charge to operating profit

Analysis of amounts charged/(credited) to financing:

- Interest on plans’ liabilities

- Expected return on plans’ assets

Total net charge to financing

Net charge to income statement before deduction for tax

Analysis of amounts recognised in the statement of comprehensive income:

- Actual return on plans’ assets

- Less: expected return on plans’ assets

Actuarial gains on assets (all experience adjustments)

- Experience adjustments on liabilities

- Effects of changes in actuarial assumption on liabilities

Actuarial gains/(losses) on liabilities

2011
£m

448

495

1,881

(1,714)

167

662

2,184

(1,714)

470

(8)

2,962

2,954

2010
£m

436

478

1,701

(1,372)

329

807

5,841

(1,372)

4,469

673

(6,454)

(5,781)

Total actuarial gains/(losses) recognised in the statement of comprehensive
income before deduction for tax

3,424

(1,312)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

26. Employee benefits – pensions (continued)

d) Movement in plans’ assets and liabilities

Changes in the present value of the defined benefit pension obligations are analysed as follows:

Plans’ liabilities at beginning of period

Current service cost

Curtailment costs*

Finance cost

Employee contributions

Actuarial gains/(losses) (recognised in statement of comprehensive income)

Benefits paid

Plans’ liabilities at end of period

2011
£m

(33,855)

(448)

(36)

(1,881)

(152)

2,954

1,232

2010
£m

(26,847)

(436)

(48)

(1,701)

(158)

(5,781)

1,116

(32,186)

(33,855)

*The curtailment costs in the income statement are recognised on a consistent basis with the associated compensation costs. Estimates of
both are included, for example, in any redundancy provisions raised. The curtailment costs above represent the costs associated with those
people paid compensation in respect of redundancy during the accounting period. Such payments may occur in an accounting period
subsequent to the recognition of costs in the income statement.

Changes in the fair value of the plans’ assets are analysed as follows:

Plans’ assets at beginning of period

Company contributions paid

Movement in company contributions accrued

Employee contributions

Finance income

Actuarial gains (recognised in statement of comprehensive income)

Benefits paid

Plans’ assets at end of period

2011
£m

25,814

761

152

1,714

470

(1,232)

27,685

2010
£m

20,071

862

(2)

158

1,372

4,469

(1,116)

25,814

e) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of
comprehensive income is £1,082m loss (2010 £4,506m loss). The Directors are unable to determine how much of the pension scheme
deficit recognised in transition to IFRSs is attributable to actuarial gains and losses since inception of the pension schemes. Consequently, the
Directors are unable to determine the cumulative amount of actuarial gains and losses that would have been recognised in the statement of
comprehensive income between inception of the pension schemes and transition to IFRSs.

Fair value of assets

Present value of liabilities

Deficit in schemes

Experience adjustment on assets

Experience adjustment on liabilities

2011
£m

27,685

(32,186)

(4,501)

2011
£m

470

(8)

2010
£m

25,814

(33,855)

(8,041)

2010
£m

4,469

673

2009
£m

20,071

(26,847)

(6,776)

2009
£m

(5,481)

(10)

2008
£m

23,923

(26,846)

(2,923)

2008
£m

(1,327)

(169)

2007
£m

23,578

(28,563)

(4,985)

2007
£m

172

(122)

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

27. Issued share capital and reserves

Authorised share capital

Ordinary shares of £1 each

Special Rights Redeemable Preference Share (Special Share) of £1 each

Total

Issued and called up share capital

Ordinary shares of £1 each

Special Rights Redeemable Preference Share (Special Share) of £1 each

Total

2011
£

100,000

100,001

2011
£

50,005

50,006

2010
£

100,000

100,001

2010
£

50,005

50,006

The Special Share can be redeemed at any time by its holder (the Secretary of State for Business, Innovation and Skills), subject to such
redemption being compliant with the Companies Act 2006. The Company cannot redeem the Special Share without the prior consent of its
holder. No premium is payable on redemption.

On distribution in a winding up of the Company, the holder of the Special Share is entitled to repayment of the capital paid up on the Special
Share in priority to any repayment of capital to any other member. The Special Share does not carry any rights to vote.

Under section 63(7) of the Postal Services Act 2000, for the purposes of the Companies Act 2006, certain shares issued shall be treated as if
their nominal value had been fully paid up.

Under sections 72 and 74 of the Postal Services Act 2000, the Secretary of State for Business, Innovation and Skills may issue directions to
the Company which, depending on the direction issued, could result in the recognition of a distribution.

Reserves identified in the consolidated statement of changes in equity

Financial Assets Reserve
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets.

Foreign Currency Translation Reserve
The Foreign Currency Translation Reserve is used to record the gains and losses arising from 29 March 2004 on translation of assets and
liabilities of subsidiaries denominated in currencies other than the reporting currency.

Hedging Reserve
The Hedging Reserve is used to record gains and losses arising from cash flow hedges since 28 March 2005.

Other Reserves
Other Reserves of £47m (2010 £47m) comprise £2m (2010 £2m) unrealised gain on First Rate Exchange Services Holdings Limited, a joint
venture entity, and £45m (2010 £45m) relating to unrealised gains on Midasgrange Limited, an associate company.

28. Commitments

Operating lease commitments – Group as lessee

The Group is committed to the following future minimum lease payments under non-cancellable operating leases as at 27 March 2011 and
28 March 2010:

Within one year

Between one and five years

Beyond five years

Land and buildings
2010
£m

2011
£m

146

456

521

138

436

602

Total

1,123

1,176

Vehicles
and equipment
2010
2011
£m
£m

IT equipment
2011
£m

2010
£m

Total

2011
£m

193

488

521

2010
£m

190

487

603

1,202

1,280

Existing leases for UK land and buildings have an average term of 13 years and any new leases entered into generally have a 15-year term
with a 10-year break clause. Existing land and buildings leased overseas by the GLS subsidiary have an average lease term of 9 years. Vehicle
leases generally have a term of between 1 and 7 years, depending on the asset class, with the average term being 4 years. The existing leases
have an average term remaining of 1 year. There is one IT contract with a lease term of 10 years with 2 years remaining at the balance sheet
date.

Subleases
The Group sublets space in certain properties. The future minimum sublease payments expected to be received under non-cancellable
sublease agreements at 27 March 2011 is £8m (28 March 2010 £6m).

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

28. Commitments (continued)

Operating lease commitments – Group as lessor

The Group has entered into lease agreements for unutilised space in the UK estate. These non-cancellable leases have remaining terms of
between one and 995 years.

Future minimum rentals receivable under non-cancellable operating leases at 27 March 2011 and 28 March 2010 are as follows:

Within one year

Between one and five years

Beyond five years

Total minimum lease receipts

Finance lease and hire purchase commitments

Within one year

Between one and five years

Beyond five years

Total minimum lease payments

Less amounts representing finance charges

Present value of minimum lease payments

2011
£m

2010
£m

Minimum
lease payments

2011
Present value
of minimum
lease payments

Minimum
lease payments

2010
Present value
of minimum
lease payments

£m

177

131

384

(126)

258

£m

158

258

£m

125

197

(16)

181

£m

118

181

The Group has finance lease contracts for vehicles, land and buildings and plant and equipment. The leases have no terms of renewal,
purchase options or escalation clauses and there are no restrictions concerning dividends, borrowings or additional leases. Vehicle leases have
a term of between 2 and 7 years, depending on the class of vehicle, with the average term being 3 years. Property leases have a term of
between 12 and 108 years with the average term being 69 years. The term of the plant and equipment leases range from 5 to 8 years with
the average being 6 years.

Capital commitments

The Group has commitments of £159m at 27 March 2011 (28 March 2010 £129m), which are contracted for but not provided for in the
financial statements.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

29. Related party disclosures

The ultimate parent (the Company) and principal subsidiaries

Royal Mail Holdings plc is the ultimate parent company of the Group. The consolidated financial statements include the financial statements of
Royal Mail Holdings plc and the principal subsidiaries listed below:

Company

Principal activities

Country of incorporation

% equity interest

Royal Mail Group Ltd

Mails and parcels services

United Kingdom

Post Office Limited

Counter, retail and financial services

United Kingdom

Royal Mail Investments Limited

Holding company

General Logistics Systems B.V.

Parcel services

Royal Mail Estates Limited

Property holdings

Romec Limited

Facilities management

United Kingdom

Netherlands

United Kingdom

iRed Partnership Limited

Document management services

United Kingdom

2011

2010

100

Royal Mail Holdings plc is the immediate parent company of the Royal Mail Group Ltd subsidiary company. The remaining subsidiary companies
listed above have Royal Mail Group Ltd as their immediate parent company.

Joint ventures

The Group’s 50% interest in First Rate Exchange Services Holdings Limited, a company registered in the United Kingdom, is held by Post Office
Limited. The company’s principal activity is the provision of Bureau de Change.

Associates

The following companies are the principal associates of the Group:

Company

Principal activities

Country of incorporation

% Ownership

Quadrant Catering Limited

Catering services

G3 Worldwide Mail N.V. (Spring)

Mail services

Midasgrange Limited

Financial services

United Kingdom

Netherlands

United Kingdom

During the year the Group disposed of its 20% shareholding in Camelot Group plc (note 15).

2011

2010

32.45

The majority of Board membership and voting power in Quadrant Catering Limited is held by the Group’s business partner, hence it is not a
subsidiary.

Management control lies with the Bank of Ireland business partner in the operation of the Midasgrange Limited company and therefore the
company is not a joint venture.

The investment in Quadrant Catering Limited is held by Royal Mail Group Ltd, the investment in G3 Worldwide Mail N.V. (Spring) is held by
Royal Mail Investments Limited and the investment in Midasgrange Limited is held by Post Office Limited.

Related party transactions

During the year the Group entered into transactions with related parties. The transactions were in the ordinary course of business and included
administration and investment services recharged to the Group’s pension plan by Royal Mail Pension Trustees Limited. The transactions
entered into and the balances outstanding at the financial year end were as follows:

Sales/recharges to
related party
2010
£m

2011
£m

Purchases/
recharges from
related party
2010
£m

2011
£m

Amounts
owed from related
party including
outstanding loans
2010
2011
£m
£m

Amounts
owed to related
party including
outstanding loans
2010
£m

2011
£m

132

134

Royal Mail Pension Plan

Quadrant Catering Limited

Camelot Group plc

G3 Worldwide Mail N.V. (Spring)

Midasgrange Limited

First Rate Exchange Services Holdings
Limited Group

With the exception of Camelot Group plc the investment in which was disposed of during the year and the Royal Mail Pension Plan, the
companies listed above are joint ventures and associates of the Group.

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

29. Related party disclosures (continued)

The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the year end are unsecured,
interest free and settlement is made by cash.

The Group trades with numerous Government bodies on an arm’s length basis. Transactions with these entities are not disclosed owing to the
significant volume of transactions that are conducted.

Separately:

•
•

the Group has certain loan facilities with Government (note 20); and
the Group has received the Network Subsidy Payment from Government (note 2).

Key management compensation

Short-term employee benefits

Post-employment benefits

Other long-term benefits

Total compensation earned by key management

2011
£000

2,714

2,757

2010
£000

3,035

307

2,626

5,968

Key management comprises executive and non-executive Directors of the Royal Mail Holdings plc Board.

HM Government is the Company’s sole shareholder and, accordingly, the Directors have no interest in the shares of the Company.

30. Events after the balance sheet date

On 30 March 2011 Romec Limited, a 51% owned subsidiary of the Group, disposed of its 99% shareholding in its subsidiary Romec Services
Limited to Balfour Beatty plc which holds the 49% non-controlling interest in Romec Limited. As a result of this transaction, Balfour Beatty plc
has been released from a contractual obligation that it had in relation to the pension funding for Romec Limited employees.

On 9 June 2011, Government announced the passing of the Postal Services Bill. This confirms the Government’s intention to take on the
historic pension deficit with effect from March 2012, and the intention to restructure RMG’s balance sheet in due course.

100

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Group five-year summary (unaudited)

Income statement

Revenue

Operating profit before exceptional items

Operating exceptional items – modernisation costs

Operating profit after modernisation costs before other operating exceptional items

Operating exceptional items - other

Operating (loss)/profit

Non-operating exceptional items

Profit/(loss) before financing and taxation

Finance income and costs, including net pensions interest

(Loss)/profit before tax

Taxation

(Loss)/profit after tax

Statement of cash flows

Net (decrease)/increase in cash

Net increase/(decrease) in cash equivalents

Net increase/(decrease) in cash and cash equivalents

Balance sheet

Goodwill and intangible assets

Property, plant and equipment

Other non-current assets, including those classified as held for sale

Net current liabilities

Non-current liabilities

Net liabilities

2011
£m

9,156

246

(207)

(88)

(49)

109

(212)

(152)

(106)

(258)

2011
£m

(44)**

213

169

2011
£m

323

1,832

1,331

2010
£m

2009
£m

2008
£m

2007
£m

9,349

9,560

9,388

9,179

404

(224)

180

(67)

113

118

(380)

(262)

(58)

(320)

2010
£m

(149)

(125)

2010
£m

296

1,935

1,493

321

162

233

(149)*

(441)*

(243)*

172

183

(279)

(221)

(134)

144

(278)

(229)

2009
£m

(255)

(118)

(373)

(77)

212

135

2008
£m

224

(15)

209

2009
£m

2008
£m

284

240

1,886

1,671

1,431

1,824

(10)

118

108

205

313

(27)

286

2007
£m

207

1,619

1,528

(280)

(511)

(385)

(300)

(60)

(6,313)

(9,494)

(7,872)

(3,676)

(5,558)

(3,107)

(6,281)

(4,656)

(241)

(2,264)

*A new measure of profitability after modernisation costs, impacting the presentation of operating exceptional items, has been restated for 2010 only.

**The 2011 net decrease in cash of £44m:

•

includes the repayment of a £3m overdrawn bank balance relating to the General Logistics Systems (GLS) subsidiary which was included in the
2010 net current liabilities balance of £511m.

excludes £2m relating to the impact of foreign exchange rates on cash.

101

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Parent Company financial statements

Statement of Directors’ responsibilities in relation to the parent Company financial statements

The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and
regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to
prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these
financial statements, the Directors are required to:

•

select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

•

state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the
financial statements; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in
business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.

The Directors are not required under UK law to prepare a Remuneration Committee Report but, in accordance with the principles of good
corporate governance, as outlined in the Combined Code, have chosen to do so. This Report has been prepared by the Remuneration
Committee as if the Company was required to comply with both Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008 of the United Kingdom and relevant Listing Rules of the Financial Services Authority and has been approved by
the Board. The only exception is that a performance graph has not been included, since the Company is not quoted.

Moya Greene

Matthew Lester

102

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Independent Auditor’s report to the members of the Company, Royal Mail Holdings plc

We have audited the parent Company financial statements of Royal Mail Holdings plc for the year ended 27 March 2011 which comprise
balance sheet and the related notes 1 to 10. The financial reporting framework that has been applied in their preparation is applicable law and
United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement set out on page 101, the Directors are responsible for the preparation of
the parent Company financial statements and for being satisfied that they give a true and fair view. The Directors are also responsible for the
preparation of the Directors’ Remuneration Report, which they have chosen to prepare as if the Company was required to comply with relevant
requirements of both the UK Companies Act 2006 (and Regulations thereunder) and the Listing Rules of the Financial Services Authority. The
only exception is that a performance graph has not been included, since the Company is not quoted. Our responsibility is to audit and express
an opinion on the parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. In addition, the Company has
also instructed us to review whether the section of the Directors’ Remuneration Report that has been described as audited has been properly
prepared in accordance with the basis of the preparation described therein.

Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the parent Company’s circumstances and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the Annual Report and Financial Statements to identify material inconsistencies with
the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications
for our report.

Opinion on financial statements
In our opinion the parent Company financial statements:

•

give a true and fair view of the state of the Company’s affairs as at 27 March 2011;

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

have been prepared in accordance with the requirements of the Companies Act 2006.

Emphasis of matter - going concern
In forming our opinion, which is not modified, we have also considered the adequacy of the disclosures made in note 1 to the financial
statements concerning the Company's ability to continue as a going concern. The conditions described in note 1 indicate the existence of
material uncertainties which may cast significant doubt about the Company's ability to continue as a going concern. The financial statements do
not include the adjustments that would result if the Company was unable to continue as a going concern.

Opinion on other matters prescribed by the Companies Act 2006
In our opinion:

•

the part of the Directors’ Remuneration Report that has been described as audited has been properly prepared in accordance with the
basis of preparation as described therein; and

the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the
parent Company financial statements.

Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

•

adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or

the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or

certain disclosures of Directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

103

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Independent Auditor’s report to the members of the Company, Royal Mail Holdings plc (continued)

Other matter
We have reported separately on the Group financial statements of Royal Mail Holdings plc for the year ended 27 March 2011. That report
includes an emphasis of matter.

Alison Duncan (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London

13 June 2011

104

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Parent Company balance sheet at 27 March 2011 and 28 March 2010

Fixed assets

Investments in subsidiaries

Investments in pension escrow

Total net assets

Capital and reserves

Share capital

Share premium

Reserves

Profit and loss account

Shareholder’s funds

Notes

2011
£m

1,074

430

588

1,074

2010
£m

3,784

1,011

4,795

430

4,321

4,795

The financial statements on pages 104 to 106 were approved by the Board of Directors on 13 June 2011 and signed on its behalf by:

Moya Greene

Matthew Lester

105

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Notes to the parent Company financial statements

1. Parent Company accounting policies

The following accounting policies apply:

Financial year
The financial year ends on the last Sunday in March and, accordingly, these financial statements are made up to the year ended 27 March
2011 (2010 year ended 28 March).

Basis of preparation
The financial statements of the parent Company, Royal Mail Holdings plc (the Company) were authorised for issue by the Board on 13 June
2011.

The financial statements on pages 104 to 106 have been prepared in accordance with applicable UK Accounting Standards and law, including
the requirements of the Companies Act 2006. Unless otherwise stated in the accounting policies below, the financial statements have been
prepared under the historic cost accounting convention.

In making an assessment on the Company’s ability to continue as a going concern, the Directors have considered the respective going concern
assessments made by the Directors of the Royal Mail Group Ltd and Post Office Limited subsidiary companies (see note 2 on pages 58 to 60).
In reviewing these assessments, the Directors have also taken account of the fact that the Company acts as guarantor for the Royal Mail Group
Ltd £900m senior debt facility and £500m other loans facility (see notes 20 and 25 of the Group financial statements for further details). After
careful consideration of all available information, the Directors are of the view that it is appropriate that these financial statements have been
prepared on a going concern basis.

The Company has not presented its own profit and loss account, as permitted by section 408 of the Companies Act 2006. However, the results
of the Company for the year are disclosed in notes 6 and 9 to the financial statements.

The Company has taken advantage of paragraph 2D of FRS 29 (IFRS 7) Financial Instruments: Disclosures and has not disclosed information
required by that standard, as the Group’s consolidated financial statements in which the Company is included, provide equivalent disclosures for
the Group under IFRS 7.

No new UK Accounting Standards, which affect the presentation of these financial statements, have been issued.

Impairment reviews
Unless otherwise disclosed in these accounting policies, fixed assets are reviewed for impairment if events or changes in circumstances indicate
that the carrying value may be impaired. The Company assesses at each reporting date whether such indications exist. Where appropriate, an
impairment loss is recognised in the profit and loss account for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset’s net realisable value and its value in use.

Investments in subsidiaries
Investments in subsidiaries within the Company’s financial statements are stated at cost less any accumulated impairment losses. The opening
and closing carrying value relates solely to the Company’s investment in Royal Mail Group Ltd, a 100% subsidiary of the Company. Royal Mail
Group Ltd is the only direct shareholding of the Company.

Investments in pension escrow
Investments in pension escrow are financial assets within the scope of FRS 26 Financial Instruments: Recognition and Measurement.

The investments are a combination of short-term deposits and long-term investments which mature between 1 day and 45 years but have
been included within fixed assets as the investments have been provided as security to the Royal Mail Pension Plan in support of the 38 year
deficit recovery period from March 2009.

The investments comprise bank balances, Treasury bills and gilt edged securities.

Treasury bills, index-linked gilt edged securities and conventional gilt edged securities are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity. The investments are
initially recognised at fair value, being the purchase price. After initial recognition, interest is included in the reported profit/(loss) for the year,
using the effective interest rate method and the assets are measured at fair value with gains or losses being recognised in the Financial Assets
Reserve until the investment is derecognised.

Contingent liabilities
Contingent liabilities are not disclosed if the possibility of losses occurring is considered to be remote.

2. Directors’ emoluments

The Directors of the Company are not paid fees by the Company for their services as Directors of the Company. The Directors of the Company
are paid fees by other companies of the Group. These emoluments are disclosed in the Group Annual Report and Financial Statements.

3. Auditor’s remuneration

The auditor of the Company is not paid fees by the Company. The auditor of the Company is paid fees by the other companies of the Group.
This remuneration is disclosed in the Group Annual Report and Financial Statements.

106

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

4. Investments in subsidiaries

At 29 March 2010 and 30 March 2009

Impairment charge

At 27 March 2011 and 28 March 2010

Cost
£m

4,160

Impairment
£m

(376)

(3,784)

(4,160)

2011
£m

3,784

(3,784)

2010
£m

3,784

In accordance with FRS 11 ‘Impairment of Fixed Assets and Goodwill’ the carrying value of the Company’s investment in Royal Mail Group Ltd
has been compared to its recoverable amount, represented by its value in use to the Company. The value in use has been derived from
discounted cash flow projections using the Company’s pre-tax Weighted Average Cost of Capital (WACC). The accounting standard prevents
benefits from future restructuring being included in the cash flow projections. Therefore the cash flow projections have not been adjusted to
reflect any of the potential actions considered by the Directors in concluding on the going concern basis of preparation of the Group financial
statements. Details of these considerations are given in the funding section of note 2 of the Group financial statements. The comparison of the
carrying value of the Company’s investment in Royal Mail Group Ltd to its recoverable amount has resulted in an impairment charge of
£3,784m reflecting the continued decline in revenues and the costs of the modernisation programme.

5. Investments in pension escrow

Cash at bank

Treasury bills

Gilt edged securities (index linked)

Gilt edged securities (conventional)

Investments in pension escrow

6. Profit and loss account

2011
Average
effective
rate
%

0.4

0.5

4.7

4.8

2010
Average
effective
rate
%

0.4

4.9

4.8

2010
£m

229

664

117

1,011

2011
£m

242

707

122

1,074

The Company is a non-trading company. The loss for the period relates to an impairment of the carrying value of the investment in Royal Mail
Group Ltd of £3,784m (2010 £nil), income from the investments in pension escrow of £46m (2010 £35m) and a tax credit of £5m (2010
£10m).

7. Taxation

A tax charge of £5m (2010 £10m) has been taken to the Financial Assets Reserve, reflecting the tax liability on the fair value changes on
available for sale financial assets. A tax credit of £5m (2010 £10m) has been taken to the profit and loss account, reflecting the sheltering of
that tax liability by losses of other Group companies.

8. Share capital

Details of the share capital are disclosed in the Group Annual Report and Financial Statements in note 27.

9. Shareholder’s funds

At 29 March 2010 and 30 March 2009

Loss for the year

Taxation on items taken directly to reserves

Gains on financial asset investments

Share
premium
£m

430

4,321

(3,733)

Profit and
loss
account
£m

Financial
Assets
Reserve
£m

At 27 March 2011 and 28 March 2010

430

588

Financial Assets Reserve

The Financial Assets Reserve is used to record fair value changes on available for sale financial assets.

2011
Total
£m

4,795

(3,733)

(5)

2010
Total
£m

4,724

(10)

1,074

4,795

(5)

10. Charges

Details of charges registered over the assets of the Company are contained in the Group financial statements in notes 20 and 25.

107

Royal Mail Holdings plc
Annual Report and Financial Statements 2010-11

Forward looking statements

This document contains statements concerning the Group’s business, financial condition, results of operations and certain of the Group’s plans,
objectives, assumptions, projections, expectations or beliefs with respect to these items.

The Company cautions that any forward looking statements in this document may and often do vary from actual results and the differences
between these statements and actual results can be material. Accordingly, readers are cautioned not to place undue reliance on forward
looking statements. The Company undertakes no obligation to release publicly the result of any revisions to these forward looking statements
that may be made to reflect events or circumstances after the date of this document, including, without limitation, changes in the Group’s
strategy, or to reflect the occurrence of unanticipated events.

By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will
occur in the future. Such forward looking statements should, therefore, be considered in light of various important factors that could cause
actual results and developments to differ materially from those expressed or implied by these forward looking statements. These factors
include, among other things: the impact of competitive products and pricing; the occurrence of major operational problems; the loss of major
customers; limitations imposed by the Group’s indebtedness; undertakings and guarantees relating to pension funds; contingent liabilities; risks
of litigation and risks associated with the Group’s overseas operations.

Corporate information

Registered Office and Group Head Office

Royal Mail Holdings plc
100 Victoria Embankment
LONDON
EC4Y 0HQ
Telephone: 020 7250 2888
Registered No: 4074919

Royal Mail, the Cruciform, the colour red, Parcelforce Worldwide and the Parcelforce Worldwide logo are registered trademarks of Royal Mail
Group Ltd. Post Office and the Post Office symbol are registered trademarks of Post Office Limited. Group Annual Report and Financial
Statements 2011 © Royal Mail Group Ltd 2011. All Rights Reserved.

Corporate website
Additional corporate and other information can be accessed on the following website www.royalmailgroup.com. Information made available on
the website is not intended to be, and should not be regarded as being, part of the financial statements.

The maintenance and integrity of the Group’s websites is the responsibility of the Directors; the work carried out by the auditor does not
involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the
financial statements since they were initially presented on the website.

Auditor

Ernst & Young LLP
1 More London Place
LONDON
SE1 2AF

Solicitor

Slaughter and May
1 Bunhill Row
LONDON
EC1Y 8YY

Regulator (Postcomm)

Postal Services Commission
Hercules House
6 Hercules Road
LONDON
SE1 7DB

Actuary

Towers Watson Limited
Watson House
London Road
REIGATE
Surrey
RH2 9PQ

Consumer Body

Consumer Focus
4th Floor
Artillery House
Artillery Row
London
SW1P 1RT