Royal Mail PLC Annual Report 2019

FY2019 Annual Report · Royal Mail PLC

Loading PDF…

C O N N E C T I N G
C U S T O M E R S ,
C O M PA N I E S
A N D C O U N T R I E S

A N N U A L R E P O R T A N D
F I N A N C I A L S TAT E M E N T S 2 0 1 8 -19

INTRODUC TION

Royal Mail plc is an international
business, developing a modern,
optimised and efficient network
to deliver letters, parcels and
new products.

We operate across 44 countries
and nation states worldwide,
41 in Europe and, following recent
acquisitions, eight states in the
Western US and Canada.

We are a digitally innovative brand,
connecting customers, companies
and countries.

More information – www.royalmailgroup.com

STR ATEGIC REPORT

Who we are

International presence

Financial and operational highlights

Strategy and financial outlook:
three and five years

Chair’s statement

Group Chief Executive Officer’s review

Summary of our five-year strategic plan

Business review 2018-19

Market overview

Business model

Key Performance Indicators

Financial review

Principal risks and uncertainties

Viability statement and going concern

Corporate responsibility

CORPOR ATE GOVERNANCE

Chair’s introduction

Group Board of Directors

Executive Board

Governance structure

Board in action

Board composition and diversity

Our stakeholders

Reporting against the 2018
Corporate Governance Code

Nomination Committee

Audit and Risk Committee

Directors’ Remuneration Report

Shareholder engagement

Pensions Committee

Directors’ Report

Statement of Directors’ Responsibilities

FINANCIAL STATEMENTS

Independent auditor’s report

Consolidated income statement

Consolidated statement
of comprehensive income

Consolidated balance sheet

101

105

106

109

116

120

146

147

149

151

156

157

158

Consolidated statement of changes in equity

160

Consolidated statement of cash flows

Notes to the financial statements

Significant accounting policies

Royal Mail Plc – parent Company
financial statements

SHAREHOLDER INFORMATION

Group five year summary (unaudited)

Shareholder information

Forward-looking statements

161

163

214

226

229

231

232

STR ATEGIC REPORT

CONTENTS

GROUP CEO RE VIE W

OUR STR ATEGY IN AC TION

GROUP CHIEF E XECU TIVE OFFICER’S RE VIE W

RE SPONSIBLE BUSINE SS

HOW ARE WE BEING RE SPONSIBLE?

INTERNATIONAL PRE SENCE

SHAPING ROYAL MAIL FOR THE F U T URE

STAKEHOLDER ENGAGEMENT

UNDERSTANDING ROYAL MAIL GROUP

LISTENING TO AND ENGAGING WITH OUR STAKEHOLDERS

101

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19UNDERSTANDING ROYAL MAIL GROUP

W H O W E A R E

Royal Mail plc is transforming from a UK-
focused letters business that delivers parcels,
to a parcels-led, international business that
delivers letters in the UK.

We operate across 44 countries and nation
states worldwide, including 41 in Europe and,
following recent acquisitions, eight states in
the Western US and Canada.

We are a modern, digitally innovative brand,
connecting customers, companies and countries.

UK PARCEL S, INTERNATIONAL AND LE T TERS (UKPIL)

We are the UK’s pre-eminent delivery company. This year,
we handled and delivered around 13 billion letters, and around
1.3 billion parcels. Our extensive UK network enables us to
benefit from the joint delivery of letters and parcels. We estimate
that we visit 60 per cent of UK delivery points each day.

Our contribution to the UK economy, including through
employment and procurement, totalled £10.3 billion¹ last
year in terms of value added. We made the seventh largest
contribution to the UK economy of all UK corporations².

GENER AL LOGISTIC S S Y STEMS (GL S)

GLS offers us increasing product and geographical diversification.
In Europe, it is one of the largest ground-based deferred parcel
networks. Outside of Europe, GLS operates in North America,
in eight states in the Western US and Canada. This year, GLS
delivered 634 million parcels for its c.300,000 clients.

OUR VISION AND STR ATEGY

Our ambition is to build a parcels-led, more balanced, and
more diversified, international business. Our purpose is to
connect customers, companies and countries. Royal Mail’s
access to a global network of postal partners provides a postal
option for all our customers. By combining the expertise of
GLS and Royal Mail, and through partnerships with postal
operators and national posts, we want to offer postal solutions
to anywhere in the world, for any customer.

We have real strengths. We are transforming to further
leverage those strengths and become the pre-eminent
delivery company in our key markets.

CEBR research, conducted for Royal Mail in May 2019, comprising direct and
indirect contributions.
CEBR research, conducted for Royal Mail in May 2019, comprising direct contributions.
CEBR research, conducted for Royal Mail in May 2019.

2
3
4 Business CSI’s Brand Tracker 2018-19 survey.
5 Under the Postal Services Act 2011 (‘the Act’), Ofcom is the regulator for postal services
in the UK. Ofcom’s primary regulatory duty for postal services is to secure the provision
of the Universal Postal Service. Ofcom has designated Royal Mail as the Universal
Service Provider.

OUR PEOPLE

We employ around 162,000 people across our Group, of
which 143,000 are in the UK. One in every 192 jobs in the UK
is provided by Royal Mail³. Our ‘feet on the street’ network
of around 90,000 postmen and women is an important part
of local communities. Thanks to them, Royal Mail is the UK’s
most trusted and most preferred delivery company4.

GLS employs 19,000 people worldwide. We are proud
to provide secure, fairly-paid employment in tight
labour markets.

OUR CUSTOMERS

As the UK’s sole designated Universal Service Provider⁵,
we deliver a ‘one-price-goes-anywhere’ service on a range
of letters and parcels to over 30 million addresses across
the country, six-days-a-week. We also provide a range of
commercial services to consumers, sole-traders, SMEs,
large businesses and retailers, and other postal operators
who use our downstream network.

GLS provides a whole range of B2B and B2C services across
Europe and North America. Whilst B2B remains its main focus
for growth, contributing around 60 per cent of total volume
(2017-18: c.55 per cent), GLS is expanding into selective B2C
markets, notably, in Denmark, Italy and Eastern Europe.
Thanks to its extensive network, GLS is well positioned
to participate in cross-border parcel traffic growth.

OUR SHAREHOLDERS

Royal Mail is one of the most widely held stocks in the UK.
We have a proactive programme of engagement with our
shareholders, including institutional investors in the UK and
overseas. Our diverse shareholder base includes many of our
own people, who own around eight per cent of Royal Mail as
Free Shares.

OUR OPER ATIONS AND NE T WORK S

UKPIL
UKPIL comprises our core UK and international parcels
and letters delivery businesses under the ‘Royal Mail’ and
‘Parcelforce Worldwide’ brands. Royal Mail’s combined letter
and parcel delivery network supports the provision of services
for the collection, sorting and delivery of parcels and letters by
Royal Mail. This includes those services Royal Mail provides as
the UK’s designated Universal Service Provider. Parcelforce
Worldwide is a leading provider of express parcel
delivery services.

GLS
GLS is one of the largest ground-based, parcel delivery
networks in Europe. The GLS network covers 41 countries
and nation states in Europe, eight states in the Western US and
Canada, through a combination of wholly-owned companies
and partner companies.

STRATEGIC REPORT UK PARCEL S, INTERNATIONAL AND LE T TERS (UKPIL) 1

GENER AL LOGISTIC S S Y STEMS (GL S) 1

EMPLOY EE S

143,000

V EHICL E S

48,000

M A IL CEN T RE S

EMPLOY EE S

19,000

DEP OT S

1,400

CL IEN T S

300,000

LOC A L COL L EC T LOC AT IONS

NE T WORK HUBS

11,000

PA RCEL SHOP S

23,000

OUR BR A NDS

OUR BR A ND

Read more – see page 76

PURPOSE

Our purpose is to connect
customers, companies and
countries. We are building
a more balanced, more diversified,
international parcels business,
with a continued focus on letters
in the UK.

1 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19CHAIR’S STATEMENT CONTINUED

Thank you
On a personal note, it has been a privilege to be involved with
such an iconic company over the last nine years, during a period of
major change, including our listing in 2013. I would like to extend my
personal thanks to our Non-Executive Directors for the significant
additional workload they have taken on over the last 12 months, and
the support and counsel they have offered me and the Board during
a difficult period. I wish Royal Mail, the Board and the management
team every success as we embark on another period of challenging
change. We have many strengths, particularly our strong reputation
and respected brands. I believe there are great opportunities for
Royal Mail, if we can move quickly to change in step with our
evolving marketplace.

On behalf of the Board, I would like to thank everyone at Royal Mail
for their hard work and dedication. Special companies are made
special by special people. I had the pleasure of overseeing the
Chair’s Awards this year which highlighted the remarkable work
of our people right across the organisation. Royal Mail’s postmen
and women are the best in the business. Our customers choose
us because of the quality of service they provide. Thanks to the
continued hard work of our people, Royal Mail makes a difference.

Les Owen
Chair
21 May 2019

I believe there are great
opportunities for Royal Mail, if we
can move quickly to change in step
with our evolving marketplace.

A responsible employer
I am proud that in an extremely challenging trading environment we
continue to be regarded as the best employer in our industry, where
‘gig economy’ conditions prevail at many of our competitors.

We are making good progress with the Communication
Workers Union (CWU) in lobbying Government to make the
necessary legislative and regulatory changes to enable the
introduction of Collective Defined Contribution (CDC) pension
schemes in the UK. In my time at Royal Mail, including five years
as Chair of the Board Pensions Committee, I have seen the shared
commitment with our unions to putting in place appropriate
retirement arrangements for both our people and the company.
Government’s recent consultation, and its confirmation that it
will bring forward primary legislation as soon as Parliamentary
timing allows, is encouraging progress towards our goal to
introduce one pension plan for all our people.

Since 2013, Government has given eligible Royal Mail
employees 12 per cent of the shares in the Company for
free. These employees have now each received up to 913 Free
Shares, regardless of grade. Taking into account the proposed
final dividend for 2018-19, those employees will have received
around £1,091 (before tax) in dividends since privatisation.

A responsible Company
We make the seventh largest contribution of any UK company
to the UK economy¹. One in every 192 jobs in the UK is provided by
Royal Mail2. Our geographic employment distribution is weighted
to areas where there are fewer job opportunities, enabling us to
make a significant contribution to social inclusion.

During the year, we took further steps to manage our
environmental impact. For example, GLS Austria became the first
delivery company in the country to deliver parcels by e-scooter
following trials in Salzburg, Linz and Graz. Electric bikes, scooters
and vans are already in operation in GLS Germany. In the UK, our
‘feet on the street’ network of around 90,000 postmen and women
plays a key role in keeping carbon emissions low. Last year, we
purchased 100 electric vans to be used on delivery rounds and
are trialling electric-powered HGVs to transport mail between
distribution centres in London and the south east. We also
launched a trial of zero-emission e-Trikes in three UK locations.

Through our partnership with Action for Children, we aim to
raise £2 million to fund the Blues Programme, where experienced
youth workers support young people who have or are at risk of
developing mental health issues. The Blues Programme operates
in 91 schools, and more than 1,457 young people have completed
the programme. We are working with The Prince’s Trust to support
the development of a new mental health strategy. Our support has
enabled the Trust to develop pilots across the UK, giving young
people access to one-to-one counselling, wellbeing sessions and
art therapy. Royal Mail is also proud to support the charity Chance
to Shine which aims to give all children, especially young women,
the opportunity to play, learn and develop through cricket. Our
support will help young women develop personal skills, improve
social wellbeing and help create personal opportunities for them.

1
2

CEBR research, conducted for Royal Mail in May 2019, comprising direct contributions.
CEBR Research, conducted for Royal Mail in May 2019.

1 2

STRATEGIC REPORT 1 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19GROUP CHIEF E XECUTIVE OFFICER’S REVIEW

O U R B U S I N E S S I S C H A N G I N G,
A S A R E T H E M A R K E T S W E S E R V E .

Backdrop and overview
It was a privilege, just under a year ago, to become Group CEO
of Royal Mail. For over 500 years, we have been part of the fabric
of the UK. We have many strengths; in particular, our strong
focus and unparalleled scale. Through our growing International
business and GLS, we have an excellent platform to grow and
expand overseas.

Shortly after I became Group CEO, I commissioned a review to;
(a) assess the productivity and efficiency opportunities available
to us under the 2018 Agreement; and (b) better understand if our
UK network was equipped to handle the ever-growing number of
parcels – large and small. Our review has been about how we can
‘future proof’ our UK business – never forgetting the importance
of letters – as e-commerce and other societal changes profoundly
impact how we all go about our daily lives.

The backdrop to the commencement of our review was challenging.
In recent years, the profits generated by our UK business have been
in decline and our costs have increased. Our productivity improvement
has slowed appreciably due to the absence of both new working
tools and network enhancements. In an unscheduled trading update
in October 2018, we reported a very disappointing UK productivity
performance and a significant reduction in our cost avoidance
target. Our share price performance has been negatively impacted
by these factors, and others. As a shareholder myself, I understand
the disappointment other shareholders, including postmen and
women, feel.

From 2019-20, to support the delivery of our strategic goals,
including the investment necessary to transform our UK
business, and as part of our prudent approach to balance sheet
management and maintaining our investment grade rating, our
policy is for a full year dividend underpin of 15.0 pence per share,
which may be supplemented by additional payouts in years with
substantial excess cashflow. The dividend is expected to be
covered by cumulative trading cashflows over both three and
five years.

Royal Mail is one of the most widely held stocks in the FTSE.
The Board appreciates the support of our shareholders, including
our postmen and women who have received Free Shares. We
very much understand the importance of the dividend to all our
shareholders. Our decision to rebase the dividend and change the
policy is not one that we have taken lightly. In doing so, we have
sought to find the appropriate balance between investing in the
future sustainability of our business, and shareholder returns.

In line with our current dividend policy, we are proposing a final
dividend payment of 17.0 pence per share, subject to shareholder
approval at the 2019 AGM. This represents a four per cent increase
in the full year dividend to 25.0 pence per share (2017-18: 24.0 pence
per share.

The review of our UK business was informed by some of the
key features of our UK business model. Ongoing structural
decline in letters is a reality we know only too well. While we
expect to handle many more parcels in the years to come,

Rico Back
Group CEO

Our ambition is to build a parcels-led, more balanced and
more diversified, international business. To achieve this,
we will focus on the delivery of three strategic priorities:

– ‘turnaround and grow’ in the UK;
– ‘scale up and grow’ GLS; and
– enhancing our cross-border proposition.

We aim to deliver sustainable shareholder value in the medium-
term and underpin the UK’s Universal Service. Accordingly, our
ambition is to deliver an adjusted Group operating profit margin
of over four per cent in 2021-22, increasing to over five per cent
in five years’ time. For a review of our financial and business
performance in 2018-19, please see pages 24-27.

STRATEGIC REPORT work we commissioned indicates we should expect UK domestic
letter volumes to fall by about 26 per cent over the next five years
or so¹. We forecast UK addressed letter volumes will decline by
five-seven per cent in 2019-20, returning to our medium-term rate
of four-six per cent per annum (excluding political parties’ election
mailings) from 2020-21, as GDP recovers and the impact of GDPR
diminishes. More broadly, Royal Mail’s business performance
remains closely aligned to UK economic growth. We assume that
GDP growth will remain below average in the near-term, and
return to a typical growth rate in the medium-term.

At the heart of our renewed Group strategy is a five-year
‘turnaround and grow’ plan for the UK business. This
transformation is vital. We will invest to change and grow. It is
about a focus on efficiency and productivity through a range of
digitally-enabled, new work tools. Handling larger and small
parcels more efficiently and effectively through an enhanced UK
network is another key part of the transformation. We will be able
to do that through a range of targeted investments, particularly
now the overall cost of parcel automation is coming down as the
technology gets better and better. Royal Mail’s unit cost for handling
large and small parcels will reduce. We will be able to accept
parcels at all our new parcel hubs (see below) late in the night and
in the early hours of the morning from large e-retailers. We expect
that our network extension will facilitate more UK e-commerce
growth and increase the demand for our parcels services.

We know this is a demanding change programme. It will be
carefully sequenced with a foundation period, including parcels
automation, in our existing Mail Centres, followed by the
embedding of the new work tools across our UK operations
and the deployment of the new network design. We have already
informed our unions about it. We are committed to working
through these changes – including new ways of working and new
trials and more flexibility – with them. Given the major cultural
shift underway in UK society – more e-commerce and therefore
fewer letters and more parcels – it is very important that Royal
Mail changes too. Change underpins our future, with the absence
of major industrial action a key turnaround assumption.

1. ‘Turnaround and grow’ our UK business
Backdrop and shape of the transformation programme.
Our last major transformation programme, which delivered
significant benefits, concluded in 2015. In recent years, our
annual productivity improvement has been modest: one per cent
on average over the last two years. Our UK costs have continued
to grow with frontline pay, with an increase of two per cent
on last year.

The Outlook for UK letter volumes to 2028, PwC, May 2019.

1 5

FIVE-Y E AR STR ATEGIC PL AN

‘Turnaround and grow’
our UK business

‘Scale up and grow’ GLS

Enhancing our
cross-border proposition

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19GROUP CHIEF E XECUTIVE OFFICER’S REVIEW CONTINUED

The 2018 Agreement brought significant financial benefits
to the Company in relation to our pension arrangements. In particular,
the agreement to close the Royal Mail Pension Plan to future accrual
on 31 March 2018 avoided an expected increase in annual cash
contributions to around £1.2 billion: an unaffordable amount.
However, an analysis of the productivity and efficiency opportunities
under the Agreement showed that the cost of the deal is significant.
There needs to be a step change in the pace and focus of the initiatives
we deploy to fund it, and a greater focus on day-to-day operational
excellence. Both of these themes are at the heart of the five-year
transformation programme we are announcing. This integrated,
cross-functional transformation programme is expected to deliver
a cumulative productivity improvement of 15-18 per cent over the next
five years, weighted to the latter years of the plan. In addition, we
expect to be able to deliver cumulative cost avoidance of around
£1 billion over the life of the plan.

The turnaround – which encompasses productivity initiatives
and the network extension – will be carefully sequenced. As many
businesses know, consistently delivering major productivity gains
is never easy. In the early years, we will lay the foundations for
change. This will include rolling out parcels automation, for
example, in our existing Mail Centres. About 12 per cent of our UK
parcels are machine sorted. Our objective is to increase that to over
80 per cent within five years. This has obvious productivity benefits.

In the second stage of the transformation, we will build our
extended network, embed our new working tools and harvest
the main benefits of the programme. The necessary sequencing
of the main elements of the turnaround means that significant
investment will be needed in the early years, with many of the
benefits flowing through in the latter years of the plan. In the
final phase, we will roll out and run our extended UK network.

1a) A renewed focus on productivity: operational excellence
and key new work tools.
Business as usual productivity improvements will be an
important part of our targeted productivity gains. The main
focus will be on delivery and processing. Our new Operations
organisational structure – effective from 1 April 2019 – is
deliberately designed to drive up day-to-day productivity gains.
Service Delivery Leaders now have responsibility for delivery
and processing in dedicated geographical areas, providing
focus and accountability.

Our assessment found that the operational direction set out in
the 2018 Agreement is right: more digitally-enabled work tools
enabling us to better align resource to workload, a key factor in
a genuinely people-driven business. Three key tools – Automated
Hours Data Capture, PDA Outdoor Actual and Resource Scheduler
– will enable us to allocate duties and tasks based on reliable
management information. Our workplace will be a fairer one
too, as a result. A key principle, benefiting the Company and
colleagues, will be operationalised through this new technology:
resourcing to workload, with a data driven approach to people
management. There will, of course, be other initiatives, particularly
improved delivery methods, including reducing the amount of time
spent in Delivery Offices on sorting items. There will also be
important enabling prerequisites put in place, including strategic
workforce planning, greater labour flexibility and better workflow
forecasting. We have held a considerable number of discussions
with our unions about the new work tools. We have developed
guidelines on how data will be used to manage the operation and
for our people. We will proceed in line with our plan and existing
agreements. Any changes in flexibility to maximise the use of
technology will be discussed with our unions.

The turnaround will be challenging to execute. Given the major
shift underway in UK society – more e-commerce and, therefore,
fewer letters and more parcels – it is very important we change too.
Change underwrites our future. The transformation programme
ensures Royal Mail will continue to be one of the UK’s biggest
employers. We anticipate an hours reduction of around three per
cent per annum. We are committed to working carefully and
considerately with our unions and our colleagues in relation to
the impact on them of our transformation programme. We have
a good track record of delivering change sensitively through
natural turnover, redeployment and voluntary redundancy
wherever possible. In line with current agreements, we will
continue to deliver change without compulsory redundancies.

1b) Extending our UK network to handle small and larger
parcels more efficiently and effectively. This includes a unit
cost reduction for both, and significantly enhancing our next
day parcel proposition.
Our review found that our existing network has many strengths.
We aim to preserve them. It provides us with good economics,
particularly in letters and small parcels, with the latter accounting
for most of our parcel volumes. The review established that our
network can be enhanced to handle the growing number of next
day and larger parcels, including our current reliance on manual
sortation and a two-sort approach. Having assessed the models
adopted by other countries, there is no ‘one size fits all’ network
design. Our approach is to therefore seek the best of both worlds.
This means maintaining our existing network for letters and small
parcels, and extending our network to handle next day and larger
parcels more cheaply and more competitively.

STRATEGIC REPORT Our network extension is timed to coincide with a strategically
important period for the UK parcels market. We expect addressable
UK parcel market volume growth of four-five per cent a year¹.
We are targeting revenue growth of over five per cent CAGR.
Parcels generated by UK retailers will be a key growth area for us.
Royal Mail’s own view is that small (less than 2kg) parcels will
continue to grow at above the market rate, while parcels at the
larger end of the volumetric scale will grow at around the market
rate. Within all size categories, next day parcels are expected to
significantly outpace growth in other delivery time categories.

A range of consumer and e-retailer initiatives will launch
in the next 12 months. They will include the single biggest
repurposing of our postbox network for over 160 years: we will
introduce c.1,400 parcel postboxes across the UK. In addition,
we will begin to collect returns – a fast-growing category – from
consumers at their homes and offer in-flight redirections for
individual parcels. The value of online returns is expected to
increase by more than 27 per cent over the next five years;
clothing and footwear is forecast to account for almost £7 in
every £10 of goods returned2.

Today, parcels of all sizes move through our network in the
same way, from collections to our Delivery Offices. This approach
does not deliver the appropriate efficiency gains for the following
reasons: a) the current reliance on manual sortation is not
scalable; b) there is insufficient capacity in the existing Mail
Centres to handle growing numbers of large parcels; and c) the
current two sortation approach entails slower delivery and limits
our later acceptance time capabilities. The new, fully-automated
parcels hubs will ensure highly efficient sortation of parcels.

In addition, the dedicated processing of larger items will also
enable us to handle smaller parcels in a more efficient way. Taking
these together, we expect a unit cost reduction in the handling of
small and larger parcels. Finally, the combination of dedicated
parcel hubs and separate van delivery for larger and later posted
items, will significantly enhance our next day parcel proposition.
We believe this to be an important strategic consideration, given
the growing importance of next day delivery in our industry.

The main elements of the network extension are as follows.
The continued combined delivery of letters and small parcels is a key
design principle. We estimate that we visit around 60 per cent of UK
delivery points each day. Our review confirmed the compelling cost
advantages of joint delivery. Three new automated parcel hubs will
be located close to major shippers. They will handle our larger
parcels, tracked items and later posted items. Letters and small
parcels will continue to be processed in our existing Mail Centre
estate. Our thinking includes separate van delivery for larger and
later posted parcels, routed through potentially 200-300 of our
existing, larger Delivery Offices. We will closely inform our unions
on the strategy, detailed design and deployment, including a trial
for the separate van delivery. The trial will inform the outcome.
The delivery of letters and most small parcels will remain
unchanged through our existing Delivery Office network.

Putting all our domestic and our international initiatives
(see below) together, we expect to transition to being a parcels-
led business in five years, with an even greater emphasis on
standardised processes to drive efficiency gains. So, in 2023-24,
we anticipate that around 70 per cent of Group revenue will come
from parcels and 30 per cent from letters. More broadly, Group
revenue is targeted to have increased from £10.4 billion in 2018-19
to around £12 billion in 2023-24.

Following the deployment of the enhanced network and, in a
major increase in delivery frequency for consumers and SMEs,
we will introduce two deliveries a day in most parts of the country
from 2023 onwards. Firstly, the usual letters and small parcel
delivery. Secondly, the delivery later that day of large parcels that
have been ordered online, including in many instances the night
before. We will continue to offer customers the convenience of
visiting our Customer Service Points, which, together with the
Post Office, represent the UK’s largest parcels pick up and drop
off network.

Triangle/RMG UK Fulfilment Market Measure; RMG analysis.

1
2 GlobalData Online Returns in the UK, 2018.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19GROUP CHIEF E XECUTIVE OFFICER’S REVIEW CONTINUED

2. ‘Scale up and grow’ GLS
GLS will be a key driver of our strategic ambition to become a
parcels-led, more balanced and more diversified international
business with a strong presence in the UK.

GLS is one of the largest, ground-based deferred parcel networks
in Europe. It also has a growing presence in the Western US and
Canada. Our strategy is designed to ensure that GLS builds on its
strong, 30-year track record, making a major contribution to the
Group’s product and geographical diversification. By illustration,
GLS revenue grew from £1 billion in 2001-02 to £3 billion in
2018-19, underlining the strength of its business model. There
is a specific focus on improving performance in the US, France
and Spain. We are pursuing our previously-announced plans to
integrate GSO and Postal Express in the US and transition them
to our proven business model. Improvement plans in France focus
on quality and targeting profitable segments. GLS Spain is making
progress with the integration of Redyser, but it is taking longer
than anticipated. Together, these markets account for around
20 per cent of GLS revenue. Across GLS, management’s focus
will be on profitable revenue growth, including focused yield
management. Selective acquisitions will be combined with a
continued focus on organic growth. The Company’s balanced
customer portfolio of medium and large companies – of whom
none represent more than one per cent of GLS group revenue –
is a major advantage.

GLS is targeting revenue of around €4.5 billion in 2023-24,
compared with €3.3 billion in 2018-19. The Company’s extensive
European coverage, including strong, entrepreneurial, local
management and partnerships will play a key role. So too will
the growing importance of international B2C volumes as retailers
and marketplace platforms expand their cross-border offerings.
GLS is well placed to benefit from growing cross-border parcels,
which currently account for around 20 per cent of its revenue.
International shipments have grown in recent years. GLS
will enter the small parcel market, working with Royal Mail
International to improve its export offering to Europe and
North America (see below).

B2B, currently 60 per cent of volume (2017-18: c.55 per cent),
will continue to be at the heart of the GLS business model. We
will continue to focus on quality and core economics, like high
drop density and a balanced customer portfolio. Selective growth
in B2C (40 per cent of volume) will be pursued. Here, a margin led
approach will remain in place, coupled with the provision of
value-added services. The GLS ParcelShop network – currently
around 23,000 across Europe – will be selectively expanded to
enhance customer convenience. In Italy, many GLS small depots
are already close to city centres and are open on Saturdays for
customer pick-ups.

A focus on pricing to support revenue growth and to offset
costs will be a key part of the GLS strategy. Prices will be
increased where appropriate to improve profitability and offset
cost pressures like tight European labour markets. This will
include the optimisation and introduction of new service fees,
like residential delivery fees: they are currently, for example,
in place at GLS Denmark.

Combined with an emphasis on network optimisation, these
levers will underpin GLS’s adjusted operating profit margin,
which we expect be in the range of six-seven per cent per annum.

1 8

At the heart of our renewed Group
strategy is a five-year ‘turnaround
and grow’ plan for the UK business.
This transformation is vital.

STRATEGIC REPORT 3. Enhancing our cross-border proposition
Royal Mail Group currently generates combined revenue of
£1.7 billion from its cross-border parcel and letter business.
The parcels market is large, global and growing. For example,
the proportion of UK adults purchasing online cross-border has
increased substantially from 28 per cent in 2013 to 43 per cent in
2017³. It is an attractive growth opportunity for us, centred around
three key geographies: Europe, North America and Asia. At a
product level and based on volume, deferred parcels (65 per cent)
and small parcels (12 per cent) predominate; express parcels
account for about 23 per cent. This profile matches the Group’s
focus on deferred (GLS) and small parcels (Royal Mail International).

Our cross-border strategy will play to our strengths and is focused
on deferred and small parcel shipments. Royal Mail will provide GLS
with access to the lightweight small parcel segment, where national
postal operators, given their final mile networks, usually have a cost
advantage compared to other operators. GLS is currently not active
in the segment (below 2kg). GLS will enter the market through Royal
Mail and expand its service proposition accordingly.

We see a significant market opportunity for Royal Mail International
to grow its share of the UK export parcels market. Growth will be
driven by the highly developed and sophisticated UK e-commerce
market and increased purchasing by overseas consumers of goods
from UK online shopping sites. Royal Mail International has a very
limited presence through Parcelforce Worldwide in the larger
parcel export market (above 2kg). By combining the Royal Mail
International and GLS network propositions, the 2kg weight
restriction will be removed gradually, starting with key Royal Mail
account customers. Through GLS, a weight range of up to 30kg
will be available, as well as value added services, including faster
delivery, tracked and signed for.

The strong combined European network of Royal Mail and
GLS is a value add for import customers. Royal Mail and GLS
are targeting to grow volume coming from Asia-Pacific. The Asia-
Pacific market is the fastest growing cross-border e-commerce
market globally. The GLS and Royal Mail network will also
connect Europe with GLS North America (and vice versa) to offer
tracked services. In fact, GLS North America is already delivering
for Royal Mail on the US West Coast and in Canada. Connected
networks will be a key theme underpinning our growing cross-
border proposition.

Delivering our future together
Our turnaround plan is challenging, stretching and ambitious.
We have changed before – many times in fact – during our 500-year
history. Our ambition is to build a parcels-led, more balanced, more
diversified international business. At the heart of our strategy is
a ‘turnaround and grow’ plan for our UK business. Alongside our
focus on the UK, we will ‘scale up and grow’ GLS and enhance
our cross-border proposition. We therefore expect to deliver an
adjusted Group operating profit margin⁴ of over four per cent
in 2021-22, increasing to over five per cent in five years’ time.

In my first year as Group CEO, I have been impressed by
the continued commitment and dedication of all our people.
Royal Mail is a business made great by its people. Our plans are
ambitious. I am confident we have the right team to successfully
execute them. I thank my colleagues, and all our stakeholders,
for their commitment to this Company. I look forward to the
coming years as we change and transform for the benefit of
all our stakeholders.

Rico Back
Group Chief Executive Officer
21 May 2019

Eurostat ICT Usage in Households and Individuals 2017.

3
4 Adjusted group operating profit will include the impact of voluntary redundancy and project

costs (previously categorised as transformation costs).

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19SUMMARY OF OUR FIVE-YE AR STRATEGIC PL AN

S U M M A R Y O F O U R
F I V E-Y E A R S T R AT E G I C P L A N

The Group Chief Executive Officer’s Review, alongside
the Summary of our Five-Year Strategic Plan replace the
“Our Strategy” section, which has previously appeared in our
Annual Report and Financial Statements.

1) TR ANSFORMING AND GROWING OUR UK BUSINE SS

Following a review of our UK business, we are
announcing a major, five-year UK ‘turnaround and
grow’ plan. By investing in productivity, network and
customer focused initiatives, following a period of
margin compression in the early stages of the plan
due to the cost of the Agreement (see below) and
productivity gains weighted toward the latter period,
our objective is to restore and enhance the UKPIL
adjusted operating profit margin. We are targeting
an adjusted UKPIL operating profit margin of
three-four per cent in 2021-22. We anticipate the
margin will reach five per cent in 2023-24, ensuring
a sustainable Universal Service. This transformation
is vital. While we expect to handle many more
parcels in the years to come, forecasts suggest the
number of UK domestic letters in our mail bag will
decline by around 26 per cent over the next five
years1. That is a key imperative for change.

An assessment of the productivity and efficiency
opportunities under the 2018 Agreement underlined the need
for a turnaround programme. The pension settlement achieved
under the Agreement delivered significant financial benefits
to the Company in terms of avoidance of large increases in
costs avoided if the defined benefit pension arrangements had
continued. The assessment found that a step change was
required in the form of a new transformation plan to fund the
overall cost of the Agreement to Royal Mail. While the overall
operational direction set out in the Agreement is right – more
digitally enabled work tools and better data capture – the
review found that the initiatives so far designed to fund it
were not enough in themselves to do so; nor were they all at
the appropriate stage of readiness. Hence the need for a major
shift in focus and pace, including a new transformation plan
for our UK operations.

We know this is a demanding change programme: we have
informed our unions about our plan. We will engage closely
with them, and our colleagues, in the coming months as we
work collaboratively through the strategy, detailed design
and deployment.

1a) Renewed focus on productivity: operational excellence
and key work tools
– We are targeting a cumulative productivity improvement of

15-18 per cent over the next five years, weighted to the latter
years of the plan: We aim to do so through: (a) a stronger
focus on day-to-day productivity gains; and (b) embedding
key, digitally-enabled work tools (e.g. PDA Outdoor Actuals,
which gives better visibility of outdoor activity). These tools
in combination will deliver better alignment of resources to
workload and a data driven approach to people management.

The Outlook for UK letter volumes to 2028, PwC, May 2019.

2 0

STRATEGIC REPORT 1) TR ANSFORMING AND GROWING OUR UK BUSINE SS

– A major increase in parcel sorting automation: About 12 per
cent of our UK parcels are machine sorted. Our objective is
to increase that to over 80 per cent within five years. We will
install parcel sorting machines in our Mail Centres in the early
years of the plan.

1b) Extending our UK network to: a) deliver a reduction
in the unit cost of handling larger and small parcels; and
b) secure productivity gains:
– Continued combined delivery of letters and small parcels will
be a key design principle: We estimate that we visit around 60
per cent of UK delivery points each day. Our review confirmed
the compelling cost advantages of combined delivery.

– We will extend our UK network to: (a) maximise the benefits

of delivering letters and small parcels together; and (b) handle
larger and small parcels more efficiently, including a unit cost
reduction for both:
• Three new, fully-automated parcel hubs will be built,

handling all large parcels, later posted items and small
tracked parcels. They will operate alongside the existing
Mail Centres.

• Separate van delivery for next day and larger parcels routed
through potentially 200-300 of our existing, larger Delivery
Offices. We have already informed our unions about our
plan. We will closely engage with them on strategy, detailed
design and deployment, including a trial for the separate
van delivery. The trial will inform the outcome. Delivery of
letters and small parcels will remain unchanged through
our existing Delivery Office network.

1c) Market leading terms and conditions, a major UK
geographical presence and enhanced customer service
– Royal Mail is one of the UK’s biggest employers with the

best terms and conditions in the UK delivery industry: We
anticipate an hours reduction of around three per cent per
annum. We are committed to working carefully and considerately
with our unions and our colleagues in relation to the impact on
them of our transformation programme. We have a good track
record of delivering change sensitively, through natural turnover,
redeployment and voluntary redundancy wherever possible. In
line with current agreements, we will continue to deliver change
without compulsory redundancies.

– One of the UK’s biggest physical networks: Potentially 200-300
of our bigger Delivery Offices will receive significant investment
to handle more larger and later posted next day parcels.
– With the new parcel hubs and separate van deliveries in

place in 2023, in a major increase in delivery frequency for
consumers and SMEs, we will introduce two deliveries a day
in most parts of the country: Firstly, consumers will receive
the usual letters and small parcels delivery. Secondly, there
will be a delivery later that day of larger or next day parcels
they have ordered, in many instances, in less than 24 hours.

2 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19SUMMARY OF OUR FIVE-YE AR STRATEGIC PL AN CONTINUED

1) TR ANSFORMING AND GROWING OUR BUSINE SS CONTINUED

1d) UK Parcels and Letters: becoming a parcels-led
business; letters remain important
Parcels
– Targeting volume growth at above the expected addressable
UK parcel market growth rate: We expect addressable UK
parcel market volume growth of four-five per cent per year2.
We are targeting revenue growth of over five per cent CAGR
over five years.

– Major new customer and e-retailer initiatives coming on
stream: In the single biggest repurposing of our postbox
network for some time, we will introduce c.1,400 parcel
postboxes across the UK. The majority of these postboxes
will be in place by the end of 2019-20. We will also for the first
time begin collecting returns from consumers at their home,
and offering more in-flight redirections for individual parcels.
Further initiatives will follow.

Letters
– Letters – and letters communication – will continue to be

important to Royal Mail and the UK: After Germany, the UK
currently has the most letters per capita (151 per annum)
in Europe³.

– The structural decline of letters will continue but, even on a

five-year view, there will still be significant numbers of letters
in our mailbag: According to research we commissioned from
PwC, the number of UK letters will decline by around 26 per
cent from 10.3 billion today to 7.6 billion in 20234.

– Addressed letter volume declines: Royal Mail forecasts UK

addressed letter volume declines will return to our medium-
term rate of four-six per cent per annum (excluding political
parties’ election mailings) from 2020-21, as GDP recovers and
the impact of GDPR diminishes.

2
Triangle/RMG UK Fulfilment Market Measure; RMG analysis.
3 Annual reports, IPC, Statistical Database, Worldometer.info.
The Outlook for UK letter volumes to 2028, PwC, May 2019.
4

2) SC ALING UP AND GROWING GL S

GLS is one of the largest, ground-based deferred
parcel networks in Europe, with a growing presence
in the US and Canada. It includes a diverse portfolio
of businesses which are local, flexible and close to
customers. Our strategy is designed to ensure that
GLS builds on its strong, 30-year track record and
makes a major contribution to the Group’s product
and geographical diversification over the next five
years. We are also implementing improvement plans
in the US, France and Spain. These three markets
represent 20 per cent of revenue. More broadly,
the GLS overall focus will be on profitable revenue
growth, including focused yield management.
We will bring together the best of Royal Mail and
GLS to grow our own cross-border and global
parcel propositions.

– We are targeting around €4.5 billion revenue in 2023-24:

We expect to deliver this through organic growth.

– Continued focus on B2B, selective growth in B2C: The GLS

B2C approach will be centred on service and margin
management, a balanced e-retailer portfolio and tailored
solutions for local market needs.

– GLS well placed to benefit from growing cross-border:

parcels: International shipments have grown in recent years.
GLS will enter the small parcel market, working with Royal
Mail International, to improve its export offering to Europe
and North America (see below).

– We are targeting a GLS adjusted operating profit margin

of six-seven per cent per annum: Network optimisation, a
focused pricing strategy and an emphasis on high margin
products will underpin the margin.

2 2

STRATEGIC REPORT 3) ENHANCING OUR CROSS-BORDER PROPOSITION

Royal Mail Group currently generates combined annual
revenue of around £1.7 billion from its cross-border
parcel and letter business. The cross-border parcels
market is a large, attractive growth opportunity
for the Group. Cross-border, B2C spend, driven by
e-commerce, has been predicted to grow by 33 per
cent CAGR5. We will combine the best of Royal Mail
International and GLS to offer a global proposition
in smaller and larger cross-border parcels.

2014-2020 data; Why Cross Border Ecommerce is the Future of Ecommerce, 2017.

– Focused strategy centred on deferred parcels and small

parcel shipments (mainly untracked): We will leverage Royal
Mail International’s (small parcels) and GLS’ (deferred, larger
items) combined strengths. Small and deferred parcels
account for around 75 per cent of all cross-border deliveries.

– We expect to grow the Royal Mail International share of the

UK export parcels market: With GLS, Royal Mail International
will, for the first time, offer export parcel delivery services
above the current 2kg limit to key account customers.
– GLS will leverage Royal Mail International’s cross-border

expertise and reach in small parcels: approximately 70 per
cent of e-commerce cross-border deliveries are below 1kg.
National postal operators have strong economics in this
segment through combined foot delivery. Through Royal Mail,
GLS will have access to this network and will extend its
service proposition accordingly.

– Royal Mail International and GLS are jointly developing a

pan-European solution for Asian imports: The Asia-Pacific
market is the fastest growing cross-border e-commerce
market globally. Royal Mail International and GLS will
participate in this market by offering a joint, consolidated
import solution across Europe.

2 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19BUSINESS REVIEW 2018-19

B U S I N E S S R E V I E W 2 0 18-19

Turning to our overall revenue performance, at the Group
level, revenue increased by two per cent. UKPIL revenue was flat.
A six per cent decline in total letter revenue (mitigated by business
mail price increases) was offset by the strongest growth in parcel
revenue since 2013-14. Adjusted UKPIL operating profit margin after
transformation costs declined from 5.1 per cent to 2.6 per cent. GLS
revenue rose eight per cent on an underlying basis. Volumes were
up five per cent. Adjusted GLS operating profit margin of 6.1 per cent
was in line with our expectations of over six per cent.

Winning in parcels

In 2018-19, we handled around 1.3 billion parcels in the UK.
The addressable parcels market has, according to our estimates,
returned to its medium-term growth rate of four–five per cent per
annum². Our parcel volume growth in key areas has outpaced
the addressable market growth rate for some years, including
2018-19, when our combined Royal Mail Tracked 24®/48® and
Tracked Returns® volumes grew by 24 per cent.

Customers – both senders and recipients – rate us highly on
trust and reliability. Royal Mail is the UK’s most trusted delivery
provider. Three out of four people trust Royal Mail to deliver their
online purchases³.

GLS provides the Group with significant geographical diversification
and has a leading position in its major markets. More than half its
volumes (60 per cent) are generated by B2B parcels (2017-18: c.55 per
cent); 40 per cent comes from B2C traffic. During the year, GLS
delivered 634 million parcels. Revenue growth was achieved in the
majority of GLS’ developed European markets, with its largest
markets (Germany, France and Italy) contributing 57 per cent of the
total. There was strong, double digit revenue growth in all developing/
emerging European markets. GLS is also underpinning its margins by
optimising both its line haul and last mile logistics operations. This
includes aligning cross-border and domestic line haul networks and
developing route optimisation software tools for delivery partners.

For further details of reported results, adjusted and underlying Alternative Performance
(APMs) used in the Financial Report for the full year ended 31 March 2019, including
reconciliations to the closest IFRS measures where appropriate, see section entitled
‘Presentation of results and Alternative Performance Measures.’ Movements are presented
on an underlying basis.
Triangle/RMG UK Fulfilment Market Measure; RMG analysis.

2
3 Delivery Matters, 2018; RMG analysis.

This section reviews our business, financial and operating
performance for the full year to 31 March 2019 on an adjusted
52 week basis. Our reported results are set out in the ‘Group’
section of the Financial Review on page 40-63. Its structure
reflects our previous strategic framework, which was based on
three strategic priorities: winning in parcels; defending letters;
and adding value and expanding our networks. This is the last
year that we will review performance against these priorities,
as we have a new strategic framework and approach (see the
CEO Review on pages 14-19).

Reported Results
Group revenue increased by £409 million. This was largely due
to the 53rd week in UKPIL and higher parcels revenue in GLS and
UKPIL, which more than offset the decline in UKPIL letters revenue.
Operating profit before transformation costs increased by £238
million, largely due to the reduction in the IAS 19 pension charge in
UKPIL of £371 million, following the closure of the RMPP to future
accrual in its previous form from 31 March 2018. Operating specific
items increased by £124 million, largely due to the impact of the
impairment of the GSO and Postal Express businesses in GLS and
the accounting consequences of the purchase of a further buy-in
insurance policy for the Royal Mail Senior Executives Pension
Plan (RMSEPP).

Group operating profit increased by £94 million to £160 million.
Profit before tax increased to £241 million, of which UKPIL
accounted for £160 million (2017-18: £39 million) while GLS
accounted for £81 million (2017-18: £173 million). Basic earnings
per share decreased to 17.5 pence.

Adjusted Results
It has been a challenging year. Trading conditions in the UK,
including but not limited to the impact of GDPR and ongoing
economic uncertainty around Brexit, have been difficult. Tight
European labour markets created margin pressure for all delivery
operators, including GLS. We were very disappointed to announce
in October 2018 that we would not deliver our productivity
improvement and cost avoidance targets. This was due to the after
effects of the industrial dispute, delayed implementation of cost
avoidance projects and the complexity of implementing elements
of our Agreement with CWU. It is important to note that, as
expected, our performance improved in the second half of 2018-19.
Productivity in collections, delivery and processing improved to
0.9 per cent; an improvement, but not where we want to be.

Adjusted UKPIL operating costs before transformation costs1
increased by two per cent on an underlying basis, driven by an
increase in both people and non-people costs. As previously
announced, we were disappointed, following our poor productivity
performance, to have to lower our cost avoidance target from
£230 million to £100 million for 2018-19. We have achieved our
revised target, with a performance of £107 million. This reflects
an improved performance in the second half. Group adjusted
operating profit before transformation costs was £509 million,
within our revised range of £500-530 million.

STRATEGIC REPORT In September 2018, we announced the acquisition of Dicom
Canada for a total consideration of C$360 million (c. £212 million).
Canada is the world’s tenth largest economy⁴, with Ontario and
Quebec – Dicom’s two key markets – accounting for two thirds
of the Canadian Courier, Express and Parcel market. Since its
acquisition, Dicom’s performance has been in line with our
expectations. In our Half Year 2018-19 Results, we recognised a
£68 million impairment against goodwill and other assets related
to the acquisition of GSO and Postal Express in the Western US.
The impact of local cost pressures, refocusing the customer base,
and transitioning to a new business model mean that expected
synergies and benefits will take longer to be realised.

Turning to important broader considerations, the shape of
the future relationship between the UK and the EU continues
to be unclear. It is therefore not appropriate, at this stage, to
set out with any degree of accuracy the impact of various Brexit
eventualities on the Group. We believe the immediate risk to our
domestic operations is low. We are working with key suppliers
to ensure our supply chain remains secure. Internal procedures
are in place to monitor and manage ongoing risks. As previously
outlined, the main issues for the Group are expected to relate to
any potential economic downturn and changes associated with
customs and VAT processing.

Defending letters

Letters continue to be important to Royal Mail, accounting
for 51 per cent of UKPIL revenue. Letters are a powerful
communications tool, with many advantages compared with
social media and email. For example, recent research found that
letters have a 35 per cent better recall rate among consumers
compared to social media, or 49 per cent better compared to
email. They are also a proven driver of sales for businesses:
around one third of addressed advertising mail generates a
commercial action⁵.

While addressed letter volumes are in structural decline, the
UK mail bag continues to be one of the biggest in Europe. After
Germany, the UK currently has the most letters per capita (151
per annum) in Europe⁶. For some years, addressed letters have
declined within our forecast four-six per cent range, primarily
driven by e-substitution. This year, however, while the rate of
e-substitution is broadly unchanged, addressed letter volumes
have declined by eight per cent (excluding political parties’
election mailings), in line with our updated expectations.
Marketing mail revenue declined by ten per cent, largely
reflecting the impact of GDPR.

During the year, we introduced a number of customer-led
initiatives. For marketing mail (around one third of addressed
mail volumes), we launched a partially addressed product for
advertisers, which enables brands to target potential customers
without using third party data. A new magazine subscription
product for publishers provides them with more notice of any
price changes, giving them greater certainty when they set
subscription levels for their customers.

In February 2019, we announced that First Class and Second
Class stamp prices would increase from 25 March 2019, to 70
pence and 61 pence, respectively. Royal Mail’s stamp prices
are among the best value in Europe compared with other postal
operators. In October 2018, we announced an average nine per
cent increase in wholesale business mail pricing, which affects
companies like banks and insurance companies. We know many
households and companies are finding it hard in the current
economic environment. We considered these changes very
carefully. They are necessary to help ensure the sustainability
of the Universal Postal Service.

The World Bank GDP ranking, 2017.
JICMAIL, Kantar TNS, Q2 2017 – Q1 2018.

4
5
6 Annual Reports, IPC, Statistical Database, Worldometer.info.

2 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19BUSINESS REVIEW 2018-19 CONTINUED

In August 2018, we announced that we would appeal Ofcom’s
competition law infringement decision. The decision, and fine
of £50 million, relates to a price change announced in 2014 –
never implemented or paid – under our Access Letters Contract.
The announced price change had been robustly stress tested by
Royal Mail under competition law and the relevant regulatory
framework. Royal Mail has now lodged an appeal with the
Competition Appeal Tribunal to have both Ofcom’s decision
and fine overturned. No fine is payable until the appeals
process is exhausted.

purchased abroad. Anyone shopping beyond national borders
in linked countries can choose from a range of delivery options.

In July 2018, Parcelforce Worldwide launched an online dashboard
enabling sending customers to track the delivery of their UK and
International parcels. It shows which items have been delivered
and which are in transit, helping businesses identify and monitor
priority customers where extra focus might be required. In
October 2018, Parcelforce Worldwide opened its new South East
Processing Centre (SEPC) in Hatfield, Hertfordshire.

Adding value and improving our network
GLS continues to innovate in processing and delivery, including
initiatives to pursue targeted growth in B2C parcels. Customers
of GLS Germany can view expected delivery times on almost
all parcels. The Company has introduced a letterboxable parcel
delivery service, offering customers a fully trackable service and
24-hour delivery. Items can be delivered first time, even if no one
is at home to receive them. It has enhanced its parcel tracking
service, with five separate pictograms to show delivery progress.

GLS’ customer offering is built upon the customer convenience
and flexibility of one of the largest, ground-based deferred parcel
delivery networks in Europe. This includes a presence in 41
countries across Europe, around 26,000 delivery vehicles and
around 23,000 ParcelShops for customer collection. Following the
acquisition of ASM in 2016-17, GLS became one of the biggest B2C
delivery players in Spain. Its Spanish network of more than 450
agents means that it is close to business customers and parcel
recipients. GLS Italy’s diverse fleet, including e-vans, e-bikes,
e-scooters and diesel vans can be flexed to suit the needs of
the local area. GLS is harvesting the growth in cross-border
e-commerce. FlexDeliveryService, available in 21 European
countries, makes it easier for online shoppers to receive goods

The 60,000 sq. ft. operation uses the latest parcel handling and
processing technology. It can process more than 50,000 parcels
a night – increasing to 60,000 in peak periods.

With the UK’s largest ‘feet on the street’ network of around
90,000 postmen and women, Royal Mail plays a key role in
keeping carbon emissions low. Across our UK fleet of around
48,000 vehicles, including around 2,600 trailers, we are
committed to reducing our carbon footprint. Alongside the
introduction of 100 electric vans in a number of locations in
2017-18, we have launched a trial of zero-emission e-Trikes in
Stratford (East London), Cambridge and Sutton Coldfield. SEPC
(see above) will help to reduce Parcelforce Worldwide’s carbon
footprint for parcels that can be processed locally within the
South East.

Becoming more digitally-enabled
In October 2018, we launched a new mobile app to help consumers
track their items from their smartphone. With a reference number,
parcel recipients can check the progress of deliveries. They can
book a redelivery if it has not been possible to deliver an item, or
arrange for a redelivery to their address, neighbour or a local Post
Office – all via the app. Amazon Alexa was launched on the app in
April 2019, and allows you to quickly track the status of your Royal

2 6

STRATEGIC REPORT Mail deliveries, by providing Alexa with your Royal Mail tracking
number. This is available through all Alexa voice enabled devices.
More enhancements will make it even easier for recipients to
manage deliveries.

In June 2018, we launched a new shipping tool designed to help
larger businesses and retailers fulfil complex shipping needs.
‘Pro Shipping’ makes it simpler for retailers to manage orders
and returns across distributed sites. It complements the suite of
in-house shipping tools to ensure: the easy management of large
lists of recipients or customers; the ability to print outward and
return labels simultaneously; and multiple user access from
different locations and the automatic printing of customs
documentation. Alongside the shipping tool, Royal Mail API
Shipping makes it easier for firms to integrate their systems
with Royal Mail. Both tools have been developed by Intersoft, a
software development company acquired by Royal Mail in 2016.

Our workforce
We provide high-quality jobs and industry leading employment
conditions. We are making Royal Mail a fairer place to work and
providing equal employment opportunities for all. In the UK, our
Annual Gender Pay Gap Review 2018 showed that, on a mean
basis, women are paid 0.6 per cent more than men. On a median
basis, men are paid one per cent more than women, due to men
selecting more work that qualifies for allowances, like shift work
during the evening or at night. We pay bonuses equally to men
and women on a median basis. The bonus gap is 22.7 per cent in
favour of women on a mean basis, compared to 9.1 per cent in the
previous year. We have also seen an increase in the number of
women hired across Royal Mail. The Times has named Royal Mail
a Top 50 Employer for Women for the sixth consecutive year.

Our Agreement with the CWU secured a fair and sustainable
pension solution for the Company and its people. Regrettably,
it was necessary to close the Royal Mail Pension Plan (RMPP) to
future accrual in its previous defined benefit form on 31 March
2018. Without this action, we could not have avoided an expected
increase in cash contributions to around £1.2 billion every year
– an unaffordable amount. From 1 April 2018, transitional
arrangements have been in place. RMPP members participate
in a Defined Benefit Cash Balance Scheme. Employees receive
a total contribution from the Company of 15.6 per cent of
pensionable pay towards their retirement benefits and life
assurance. Members of the Defined Contribution Plan have
benefitted from an increased contribution from the Company.

Working with the CWU, we are lobbying Government to make
the necessary legislative and regulatory changes to enable
the introduction of a Collective Defined Contribution (CDC) pension
scheme. We were pleased to see that in March 2019 that, after a
consultation, HM Government confirmed that primary legislation
would be brought forward to introduce CDC pensions as soon as
Parliamentary time allows. This is an important step towards
allowing the introduction of a CDC scheme for our employees
as soon as possible.

In March 2019, we confirmed a two per cent pay award for
CWU grade employees. The award, effective from 1 April 2019
onwards, was specified in the Agreement, alongside the prior five
per cent award from October 2017 – March 2019. In October 2018,
we confirmed the implementation of the first hour’s reduction
as part of the Shorter Working Week. Subsequent hours off the
working week are subject to a joint evaluation of factors including
ongoing efficiency improvements, implementation of changes
from trials in the operation and technological changes.

We saw an increase in our employee engagement score to 60.
Our annual employee engagement survey also measures our
employees’ pride to work for Royal Mail, which increased to
70, and how likely our people would be to recommend us as
an employer to friends and family, up 1 point to 60. Employee
turnover remained low at 7.2 per cent, compared to the UK
average of 23 per cent.

Customer focus
We are making our services simpler and more flexible to
remain competitive. In August 2018, we announced the trial of
30 new parcel postboxes to support growth in e-commerce. The
postboxes allow SMEs and marketplace sellers to post pre-paid
parcels as they currently post letters. 17 parcel postboxes were
trialled in Northampton and 13 in Leicester. Our Mail Centres
accept parcels from e-retailers up to 1.30am for next day delivery.

In March 2019, we noted Ofcom’s provisional decision not to
impose a financial penalty with respect to its investigation into
our Quality of Service performance for 2017-18. Ofcom itself said
that Royal Mail’s performance was disrupted by certain events
beyond its control – in particular, the severe weather in February
and March 2018. We are disappointed that our regulatory First
Class Quality of Service performance for 2018-19 was 91.5 per
cent, below the target to deliver 93 per cent of this mail the next
working day. Second Class Quality of Service met the regulatory
target. We delivered 98.6 per cent of this mail within three
working days, against a target of 98.5 per cent. We take our
commitment to delivering a high quality service very seriously.
We are redoubling our efforts to tackle quality issues where
they arise.

Digital enhancements have enabled us to introduce a range
of improved products and services for customers. We offer
customers a two-to-four hour estimated delivery window for
parcels, shared the day before delivery. Customers who are not
in can request delivery to neighbour or a digital Something for
You card. Our mean business customer satisfaction score was 78,
in line with our performance in 2017-18. Our Net Promoter Score,
which measures the loyalty of our business customers, was 39
in the period, down from 40 in 2017-18.

2 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19REPURPOSING
THE
POSTBOX

As UK parcel volumes continue to grow,
Royal Mail is introducing the first major
change to the postbox in over 160 years,
in the form of the Parcel Postbox.

K E Y FAC T S

1,400

the number of Parcel Postboxes
to be introduced nationwide

160 years

since the postbox was first introduced

Following a successful trial, Royal Mail
will introduce 1,400 new Parcel
Postboxes across the UK. The majority
of these postboxes will be in place by
the end of 2019-20. Small businesses
and marketplace sellers will be able to
post pre-paid parcels through securely
designed parcel postboxes, in the same
way that they currently post a letter.

The roll-out involves adapting
pre-existing meter boxes, which have
a wider aperture and secure design for
mailing larger items – making parcel
posting for small businesses and
marketplace sellers both safe
and convenient.

Parcel Postboxes will be introduced
in locations across the UK, from
Dagenham to Dundee. The launch
represents the first major change of
use for the UK postbox since it was
first introduced over 160 years ago.

More information – www.royalmailgroup.com

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19R APID GROW TH
IN THE UK
SUBSCRIPTION
BOX MARKE T

A subscription box is a recurring, physical delivery
of products packaged as an experience and designed
to offer additional value on top of the actual retail
products contained in the box, such as through
surprise, a saving on what is on offer in the shops,
or by giving the user a chance to experiment with
a tailored selection of products. Royal Mail’s ‘UK
Subscription Box Boom report’ forecasts exponential
growth in this market by 2022. Compiled by
GlobalData, the market was sized and forecasted using
a combination of data from consumer and B2B
surveys, company financials, other secondary data
(such as industry reports, macro-economic and
population data) and GlobalData’s own proprietary
database of consumer, market and retailer data.

K E Y FAC T S

£1bn

estimated value (per annum) of the
subscription box market by 2022

27%

UK customers already signed up
to a subscription box service

72%

the forecast growth of the total UK
subscription box market by 2022

A report we commissioned from
GlobalData found consumer demand
for subscription box services, and an
appetite amongst UK businesses to
invest time and money to participate
in the future success of this part of the
delivery market. The UK subscription
box market is still in relative infancy
compared to mature markets like
the US. But it is in a phase of
rapid growth.

Spurred on by the growth of mobile
devices, subscription commerce
has moved on from a past focus
on magazines and newspapers to
embrace everything from recipe food
kits, to pet food, to shaving gear and
self-care. By 2022, the number of
subscription box deliveries is set to
grow to an estimated 65.3 million.

At Royal Mail, we are ready to help
businesses across the UK to succeed
in the subscription space whether they
already have a subscriber base or are
looking to enter the market.

More information – www.royalmailgroup.com

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19MARKET OVERVIEW

R O YA L M A I L P L AY S A C R U C I A L R O L E
I N T H E U K E C O N O M Y A N D I S W E L L
P O S I T I O N E D T O C A P T U R E G R O W T H
I N I T S I N T E R N AT I O N A L M A R K E T S

UK PARCEL S MARKE T

The annual UK parcels market consists of over three billion
domestic and international parcels and is valued at over £10 billion.
Growth continues to be driven by e-commerce, as consumers
increasingly shop online, on mobile and through their smart
connected devices.

In 2018, online retail grew more than three times faster than the
wider UK retail market, accounting for 17 per cent of the overall
market, rising to 23 per cent for non-food retail spending. It
is forecast to increase to 20 per cent of total retail spending
(28 per cent of total non-food retail spending) by 2023¹.

The UK is Europe’s most competitive parcels market, with
15 major parcel carriers. Across the industry, parcel carriers
are investing in new capacity, parcel collection points and new
technology. At the same time, retailers are expanding their
own delivery services.

Personal deliveries (i.e. delivery to an individual’s home or office)
is the largest and most mature e-retail segment and remains the
consumer’s preferred delivery option². But, in-store click & collect
is expected to outperform personal delivery growth, as more
and more consumers opt to pick up their online orders in-store.
Parcels collections and returns through parcel shops and locker
banks are also growing quickly, albeit from a low base as retailers
provide consumers with a wide selection on delivery options.

Growth in streaming services for music, video and computer
games is driving declines in physical deliveries of these categories.
On the other hand, the clothing and footwear and health and beauty
categories are generating volume growth, particularly as retailers
develop their online and mobile platforms in these areas.

About half of UK domestic parcels are still delivered later than
next day, but, in a competitive retail environment, customers
are increasing their use of next day delivery, particularly as
a promotional tool during sales events such as Black Friday.

1 GlobalData E-retail in the UK 2018-2023, 2018.
2

Consumer Home Delivery Review 2018/19, IMRG, 2019.

3 2

In this section, we review the major market
developments in the UK. This includes insights
from a major new report by PwC, commissioned by
Royal Mail, looking at the outlook for UK letters to 2028.
We are also increasing our analysis of international
parcels markets to reflect our areas of strategic focus.

COUN T RIE S COV ERED

P OS T MEN A ND WOMEN T HE UK

90,000

UK DEL I V ER Y P OIN T S
V ISI T ED DA ILY

c.60%

STRATEGIC REPORT ONLINE ORDER FULFILMENT

INTERNATIONAL PARCEL S

E-commerce is fuelling growth in cross-border parcels. The
proportion of UK adults purchasing online cross-border has
increased substantially, from 28 per cent in 2013 to 43 per cent
in 2017⁵. In 2018, European B2C e-commerce is expected to have
grown around 13 per cent to €602 billion6. In 2017-18, international
outbound parcels (exports) represented seven per cent of all
parcel volumes shipped, but 23 per cent of revenue6.

Consumers are increasingly shopping when it suits
them, including shopping online late in the evenings.
Retailers have extended their online order acceptance
times for next day delivery, with some accepting
orders as late as midnight. Carriers are adapting their
networks to facilitate accepting parcels later in the
night or early in the morning for next-day delivery.

Online order fulfilment continues to be a key differentiator.
Many retailers are investing in a range of flexible purchasing
and online delivery options. The use of free delivery is a
major draw for consumers; retailers are now offering
delivery saver schemes and buy now, pay later payment
services as a sales and customer loyalty tool. While these
tools successfully drive customer conversion, they can lead
to increased returns.

Consumers are demanding more choice in relation to online
returns locations. Postal returns remain the preferred channel
for 45 per cent of online returns³. Meanwhile, free and easy
returns are increasingly important to online shoppers, driving
sales and customer loyalty⁴. The value of online returns is
expected to increase by more than 27 per cent over the next
five years, with clothing and footwear expected to account
for almost £7 in every £10 of goods returned³.

VA LUE OF ONL INE RE T URNS
E X PEC T ED INCRE A SE IN F I V E Y E A R S

+27%

RE T URNS, CLOT HING A ND FOOT W E A R
E X PEC T ED TO ACCOUN T FOR

£7 in £10

of all goods returned

3 GlobalData Online Returns in the UK, 2018.
4 Klarna Re-thinking Returns research paper, 2019.
5
6

E-commerce European B2C Report, 2018.
Including Amazon – Ofcom Annual Monitoring Report, 2017-18.

3 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19MARKET OVERVIEW CONTINUED

UK ONLINE RE TAILERS

A recent Royal Mail study into the international ambitions
of small UK online retailers found that 38 per cent of
small businesses think Europe holds the most potential to
generate new sales for their business in 2019. 34 per cent
think the US and 29 per cent believe Canada are the most
promising markets.

Inbound parcel growth rates have experienced high levels
of growth, driven in particular by low value items from Asia.
Consumers mainly purchase from international sellers offering
better prices, unique products or specific brands. They expect
clear information about delivery charges, a simple returns
process and a seamless cross-border delivery and returns
experience7. The top three countries for cross-border
purchases into the UK are China, the US and Germany. In fact,
half of UK consumers purchasing cross-border in 2018 said
their most recent purchase was from China8. Clothing and
footwear, jewellery and watches, health and beauty and
consumer electronics were the most frequently
purchased items.

In an increasingly competitive environment, operators are
providing innovative, high quality services at lower prices.
In the UK, there are a range of major operators that deliver
cross-border- services, alongside hundreds of smaller
operators and online retailers looking to increase market
share. Outside the EU, Chinese e-commerce marketplaces are
strengthening international cross-border- services. Alibaba
has reported that the value of goods sold on its marketplace
on Singles’ Day (11 November) rose 27 per cent to almost
$31 billion breaking the 2017 record of $25 billion. Singles Day
is the world’s largest shopping event, eclipsing both Black
Friday and Cyber Monday.

7
8

IPC cross-border e-commerce shopper survey, 2017.
IPC cross-border e-commerce Survey, 2018.

3 4

STRATEGIC REPORT UK LE T TERS MARKE T

Letters are important to Royal Mail. They support our joint network
with parcels. We delivered around 13 billion letters in 2018-19, of
which 78 per cent were addressed letters. But, the volume of
addressed letters we deliver has halved since peak in 2004.
Research we commissioned from PwC forecasts that total UK
domestic letter volumes are expected to fall to 6.2 billion in 2028, a
further decline of 40 per cent. Despite this decline, the UK is second
only to Germany when it comes to the number of letters per capita.

The UK letters market is highly competitive. While Royal Mail
accounts for almost all downstream (final mile) deliveries, the
UK ‘Access’ market is, by some distance, the biggest in Europe.
Access competition is where a postal operator other than Royal Mail
collects mail from the customer, sorts it and then transports it
to our Mail Centres for us to deliver. This enables other operators
to offer postal services to larger business customers for letters
and large letters without setting up a delivery network. Access
operators accounted for 63 per cent of addressed inland letters
in the nation’s postbag in 2017-18, up from 61 per cent in 2016-179.

We continue to see the impact of GDP performance and overall
business uncertainty in the UK on letter volumes, in particular,
transactional and publishing mail. There is an ongoing focus by
organisations and Government on driving digital uptake, with
new technologies such as mobile payments driving further
letter volume declines.

Since the EU referendum, non-digital advertising market
growth has slowed10. Television advertising was flat, while
print media declined in 2018. Advertisers have shifted from
traditional to cheaper digital forms of advertising. Digital forms
of advertising account for more than one in every two pounds spent
on advertising in the UK, driven by paid search and online display
formats, particularly social media and online video. While it is the
third largest media by advertising spend, the amount spent on
direct mail fell sharply following the introduction of GDPR in May
2018. However, the rate of decline has somewhat recovered in
recent months, with customers returning to the direct mail
advertising market.

The UK is the number one country in the world for greeting
card sales, with consumers purchasing 33 cards a year. Greeting
cards make up the majority of social mail volumes, but social
letters have experienced a significant decline as consumers opt for
alternative, quicker and more convenient means of communication
such as social media messaging and email.

E-COMMERCE

UK L E A DING IN E-COMMERCE

£1,332

Total online spend per head is set to reach £1,332
in 2018 and continue rising 28 per cent over
the next five years to £1,706 in 202311

BL ACK F RIDAY/C Y BER W EEK

53%

of consumers delayed making purchases
during the 2018 Black Friday period, compared
with 48 per cent in 2017

M-COMMERCE

39%

of consumers shop online via smartphone

DEL I V ER Y M AT T ER S

8 in 10

of online shoppers prefer to have items
delivered to their home

SUBSCRIP T ION BOX E S

27%

of UK consumers are currently
signed up to a subscription service

9 Ofcom Annual Monitoring Report, 2017.
10 AA/WARC, Q4 and FY 2018.
11 GlobalData E-retail in the UK 2018-23, 2018.

3 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19BUSINESS MODEL

C O N N E C T I N G C U S T O M E R S ,
C O M PA N I E S A N D C O U N T R I E S

Royal Mail benefits from strong focus and significant scale.
We operate in 44 countries – including, most recently, in Canada and
the Western US. We are building a parcels-led, more balanced and
diversified international company. Our business model leverages our
resources and relationships, delivering high quality, value for money
delivery services for customers all over the world.

Key sources of value

BR ANDS

Royal Mail’s postmen and women, our red vans and our postboxes
are part of the fabric of the UK. Havas Media’s 2019 survey rated
Royal Mail one of the UK’s top 3 ‘meaningful’ brands, alongside
Amazon and Google.

GLS is a highly respected brand, with a leading position in the majority
of its European markets. GLS France was awarded a gold trophy in
the ‘Logistics Innovation’ category at the E-Commerce Awards. GLS
Poland received the highest rating of 29 logistics operators for several
services, including financial services and guaranteed delivery time the
next day.

TECHNOLOGY

We have a strong technology infrastructure in all our businesses.
In the UK, we securely handle over 1.4 billion data points daily. We
innovate to deliver improved products and services for customers and
transform our operations to deliver efficiency gains. For example,
new digital work tools like Automated Hours Data Capture, Resource
Scheduler and PDA Outdoor Actuals will deliver better alignment
of resources to workload and a data driven approach to
people management.

INVE STMENT

Since privatisation, we have invested around £2.1 billion in our
UK business. We plan to invest an additional £400-500 million
cumulative incremental gross capital expenditure (predominantly
in the UK) in the next five years (in addition to our ongoing annual
investment capital expenditure of around £400 million). This includes
funding an expansion to our existing network so we can participate in
parcel market growth driven by UK e-commerce. Our investment also
supports targeted and focused investment in GLS, as we seek to grow
organically and inorganically. Acquisitions, like the purchase of Dicom,
give us a foothold in growing, profitable delivery markets.

NE T WORK S

Our combined parcels and letters UK network delivers the Universal
Service. We estimate that we visit around 60 per cent of UK delivery
points each day. Our recent review (see pages 16-19) confirmed the
compelling cost advantages of joint delivery. Through around 1,200
Delivery Offices, 115,000 postboxes and our commercial partnership
with over 11,500 Post Office branches across the country, we are the
most accessible delivery operator in the UK.

As one of Europe’s largest ground based, deferred parcel networks,
GLS operates in 41 countries and nation states across Europe. It has
a growing presence in North America through acquisitions in the
Western US and Canada. Together, Royal Mail International and GLS
have relationships with postal and other partners across the world.

PEOPLE

With around 143,000 colleagues in the UK, we deliver around
13 billion letters and 1.3 billion parcels per annum. We provide
the best terms and conditions of employment in the delivery
industry. We offer around 19,000 GLS employees secure, fairly-paid
employment with long-term prospects and career development.
GLS promotes a culture of openness and transparency. It is
replicating its independent contractor model in its newly
acquired North American businesses.

3 6

STRATEGIC REPORT Creating value

How we do this

Our five-year plan focuses on the delivery of three key strategic
priorities: ‘turnaround and grow’ the UK; ‘scale up and grow’ GLS;
and enhancing our cross-border proposition. The delivery of our
strategy enables us to realise the benefits of our scale, reach and
focus on quality and value for money.

Renewed focus on productivity:
operational excellence and key
work tools

DIVERSIF Y ING

A 30 year track record of growth in GLS is helping us to become
more diversified; revenue outside the UK today accounts for 28 per
cent of the Group’s total, compared with 17 per cent five years ago.
We expect this trend to continue as GLS continues to expand
organically and through selected acquisitions.

Driven by a cultural shift in the way we communicate and shop,
the delivery market is shifting towards parcels and away from letters.
Today, nearly two thirds of our revenue comes from parcels; compared
with just over half, five years ago. The expansion of our existing UK
network and increasing levels of automated parcel sortation,
alongside further growth in GLS and the continued, structural decline
in UK addressed letter volumes, will continue to tip this balance.

S Y NERGIE S

We will combine the best of Royal Mail and GLS, sharing expertise
and best practice to benefit our customers and business. For example,
we will leverage Royal Mail’s (small parcel) and GLS’ (deferred, larger
items) combined strengths to grow in cross border deliveries, of
which 75 per cent are small and deferred parcels. Royal Mail and GLS
have also combined to offer a pan-European import product, which
aims to tap the full potential of the fast-growing Asian import market.

Sharing expertise can also deliver broader social and environmental
benefits. We are piloting e-Trikes in the UK, following the successful
adoption of these vehicles in GLS Germany and other European markets.

INVE STING

Our ‘turnaround and grow’ plan in the UK entails significant investment
in the UK over five years. We are targeting a UKPIL adjusted operating
profit margin of three-four per cent in 2021-22, and reaching five per
cent in 2023-24. It will facilitate further e-commerce growth in the UK
and enable us to handle small parcels and more larger parcels more
efficiently and effectively, against a continued decline in UK letters.
We are targeting GLS revenue of around €4.5 billion in 2023-24.

Extend our UK network to:
a) deliver a reduction in the unit cost

of handling small and larger parcels;
and

b) secure productivity gains

UK Parcels and Letters:
becoming a parcels-led business;
letters remain important

Scaling up and growing GLS

Enhancing our cross-border proposition

More information – www.royalmailgroup.com

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-192018-19 Actual:

Above target

Audit Compliance: 76.2%

LATFR reduction: 9.2%

RTC reduction: 5.3%

2017-18: Composite safety
index not a KPI

2017-18: RTC reduction
9% (above target)

2016-17: RTC reduction
12.3% (above target)

2017-18: 59 (at stretch)

2016-17: 57 (above target)

2018-19 Actual:

91.8% (below target)

2017-18: 91.7% (below target)

2016-17: 93.2% (above target)

KE Y PERFORMANCE INDIC ATORS

M E A S U R I N G O U R
P E R F O R M A N C E

KPI AND STRATEGIC LINK(S) MEASURED BY

KEY ACTIVITIES AND
ACHIEVEMENTS IN THE YEAR

PERFORMANCE
AGAINST TARGET

NON FINANCIAL KPIS

Composite safety
index (%)1

A composite safety measure,
comprising three separate metrics,
with Audit Compliance achievement
acting as a gateway.

– Audit Compliance was above target. We
reduced our LTAFR by 9.2 per cent and
our reported road traffic collisions by
5.3 per cent.

Weighting:

– Audit Compliance (four

percentage points)

– Lost Time Accident Frequency Rate

(LTAFR) reduction (three
percentage points)

– Road Traffic Collision (RTC) per
1,000 vehicles reduction (three
percentage points)

Average score from the Ipsos MORI
annual employee opinion survey
measuring involvement, alignment and
loyalty of colleagues through a number
of employee engagement questions.

Employee
engagement (score)

– Our employee engagement score was
60, a one point increase on prior year.

2018-19 Actual:

60 (at stretch)

First Class Retail
Quality of Service
(%)

An independent, audited measure of
Quality of Service for First Class retail
products delivered by the next working
day, which may be adjusted for
force majeure.

– Our First Class Quality of Service fell

below the 93.0 per cent target.

– Achieved the 98.5 per cent Second

Class mail target, with a performance
of 98.6 per cent.

Mean business
customer
satisfaction (score)

Results from the customer satisfaction
survey completed by business customers.

– Levels of satisfaction amongst our

business customers were in line with
last year.

2018-19 Actual:

78 (above threshold)

Customer premium
parcels composite
measure (%)1

Productivity
for collections,
processing and
delivery (%)

The composite premium parcel
performance measure was introduced
in 2018-19. It is the combined on time
delivery measurement of our premium
Tracked Parcel Products (Special
Delivery Guaranteed, Tracked 24/48®
and Tracked Returns®).

Percentage change year-on-year in the
number of weighted items per gross hour
paid in Delivery Units and Mail Centre
Units (delivery and processing, including
regional logistics and collections) and
Regional Distribution Centres.

1 Added to the Corporate Balanced Scorecard in 2018-19.

2017-18: 78 (at stretch)

2016-17: 78 (above target)

– Performance was above target per cent.

2018-19 Actual:

– Note: Measurement excludes peak
period of weeks 35-40 inclusive.

97.3% (above target)

2017-18: Not a KPI

2016-17: Not a KPI

2018-19 Actual:

0.9 (below threshold)

2017-18: 1.0%
(below threshold)

2016-17: 2.7% (above target)

– A 0.9 per cent improvement

in productivity.

– As a result of poor productivity in the

first half, we expected our productivity
improvement for the full year to be
significantly below our target range of
two to three per cent. Productivity in the
second half was 1.9 per cent, giving a
full year productivity improvement of
0.9 per cent.

3 8

STRATEGIC REPORT KE Y PERFORMANCE INDIC ATORS

The 2018-19 Corporate Balanced Scorecard includes 10 equal measures, all weighted at
10 per cent. The 10 measures alongside the relevant key performance indicators (KPIs) are
set out below. The Corporate Balanced Scorecard links all managers’ remuneration to our
performance against a set of key financial and non-financial performance measures.

Further details relating to the link between our KPIs and Executive Remuneration, and the
Corporate Balanced Scorecard for 2018-19, can be found in the Directors’ Remuneration
Report on page 134.

KE Y

Link to strategy

Winning in parcels

Target/stretch

Defending letters

Threshold

Growing in new areas

Below threshold

KPI AND STRATEGIC LINK(S) MEASURED BY

FINANCIAL KPIS

KEY ACTIVITIES AND
ACHIEVEMENTS IN THE YEAR

PERFORMANCE
AGAINST TARGET

UKPIL costs (£m)2

Adjusted operating costs for UKPIL.

– Adjusted UKPIL costs increased by two

per cent on an underlying basis.

– This was largely due to a poor

performance in people costs as we did
not achieve the expected benefits from
our business-as-usual initiatives,
transformation projects and cost
avoidance activities.

2018-19 Actual:

£7,365m
(above threshold,
below target)

2017-18: £7,112m
(above target)

2016-17: £7,082m
(above target)

Group revenue (£m)3

Group revenue adjusted for budgeted
foreign exchange rate (£16m) and the
impact of GLS acquisitions (£84m).

– Group revenue was up two per cent.

– Adjusted for budgeted foreign exchange
rate and the impact of GLS acquisitions,
Group revenue was up versus prior year.

2018-19 Actual:

£10,481m
(above threshold)

2017-18: £10,051m
(above target)

2016-17: £9,455m
(threshold)

Group operating
profit before
transformation
costs (£m)2,3

Adjusted Group operating profit before
transformation costs, adjusted for
budgeted foreign exchange rate (£1m)
and the impact of GLS acquisitions (£7m).

– Adjusted Group operating profit

before transformation costs decreased
to £536 million.

2018-19 Actual:

£536m
(below threshold)

In-year trading
cash flow (£m)

In-year trading cash flow before cash
flows relating to London development
property portfolio.

– In-year trading cash flow was

£117 million, due to lower adjusted
EBITDA before transformation costs
and the timing of the settlement
of the 2017-18 frontline pay award
(£101 million). The 2017-18 in-year
trading cash flow excludes this
£101 million timing difference.

2017-18: £685m
(above target)

2016-17: £701m
(threshold)

2018-19 Actual:

£117m
(below threshold)

2017-18: £444m
(at stretch)

2016-17: £420m
(above target)

2 Adjusted to reflect the cash impact of pensions.
3 Reported results are adjusted to reflect a constant foreign exchange rate of £1/€1.14 in GLS. Adjustments are also made to remove the impact of the first year of the Dicom acquisition in 2018-19.

3 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW

F I N A N C I A L R E V I E W

Reported results and Alternative Performance
Measures (APMs)
Reported results are prepared in accordance with International
Financial Reporting Standards (IFRS). Reported results are set
out in the section entitled ‘Presentation of results and Alternative
Performance Measures’ (APMs) and the audited Financial Statements.

In addition to reported results, the Group’s performance in this
Financial Review is also explained through the use of APMs
(including adjusted results) that are not defined under IFRS.
Management considers that these measures provide a more
meaningful basis on which to analyse business performance.
They are consistent with the way that financial performance
is measured by Management and reported to the Board.

The APMs used are explained in the section entitled ‘Alternative
Performance Measures (APMs)’ and reconciliations to the
closest measure prescribed under IFRS are provided where
appropriate. The analysis of underlying movements in adjusted
results is provided on a 52 week basis and is set out in the
paragraph entitled ‘Underlying change’ in the sections entitled

‘Group Results’ and ‘Alternative Performance Measures (APMs)’.
Commentary is provided on both reported and adjusted results.

Results on a 53 and 52 week basis
The Group and UKPIL reported results are for the 53 week period
to 31 March 2019.

In order to provide a meaningful comparison of revenue and
costs with the prior year, we are also presenting the Group and
UKPIL income statements to operating profit after transformation
costs on an adjusted 52 week basis. The adjusted 52 week
2018-19 results are derived by removing an estimate of the 53rd
week’s revenue and incremental costs. All comparisons between
2018-19 and 2017-18 income statements to operating profit after
transformation costs are on a 52 week basis unless otherwise
stated. The GLS financial year is 12 months to 31 March 2019.

Further details on the calculation of the 52 week adjusted results
can be found in the ‘Consolidated adjusted 52 weeks results’
paragraph in the section entitled ‘Presentation of results and
Alternative Performance Measures’.

UK PARCELS, INTERNATIONAL AND LET TERS (UKPIL)
Reported results

Summary results (£m)

Revenue

Operating costs

Operating profit before transformation costs

Transformation costs

Operating profit/(loss) after transformation costs

Operating specific items

Operating profit/(loss)

Operating profit/(loss) margin

Reported
53 weeks
March 2019

Reported
52 weeks
March 2018

7,732

(7,435)

297

(133)

164

(92)

0.9%

7,615

(7,570)

(113)

(68)

(43)

(111)

(1.5%)

The detailed UKPIL reported results are set out in the paragraph
entitled ‘Segmental reported results’. UKPIL reported revenue
was £117 million higher than in 2017-18. This was largely due
to £137 million of revenue in relation to the 53rd week.

Operating profit before transformation costs increased to
£297 million. This was largely due to the reduction of the
International Accounting Standards (IAS) 19 pension charge to
£628 million (2017-18: £999 million) following the closure of the
Royal Mail Pension Plan (RMPP) to future accrual in its previous
form from 31 March 2018. Operating costs were also impacted by
higher people costs (excluding pension costs), distribution and

conveyance and infrastructure costs. Further explanation of costs
are set out in the paragraph entitled ‘Adjusted operating costs
before transformation costs’ in this section.

Operating profit after transformation costs was £164 million,
compared with a loss of £68 million in the prior year. Operating
profit also included £35 million of profit in relation to the 53rd
week. Operating specific items increased by £49 million, largely
due to the accounting consequences of the purchase of a further
buy-in insurance policy of £64 million for the Royal Mail Senior
Executives Pension Plan (RMSEPP) on 21 September 2018.
Further details are set out in the paragraph entitled ‘Pensions’.
UKPIL generated an operating profit of £72 million for the year,
£183 million higher than 2017-18.

4 0

STRATEGIC REPORT Adjusted results
The Group makes adjustments to reported results under IFRS to exclude specific items and the IAS 19 pension charge to cash
difference adjustment as set out in the paragraph entitled ‘Specific items and pension charge to cash difference adjustment’.
We are presenting the 2018-19 adjusted results on a 53 and 52 week basis.

Summary trading results (£m)

Letters and other revenue2

Marketing mail2

Total letters2

Parcels

Revenue2

Operating costs before transformation costs

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating profit margin after transformation costs

Letters volumes (m)

Addressed letters

Unaddressed letters

Parcels volumes (m)

Royal Mail

Parcelforce Worldwide

Total

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

Underlying
change1

2,963

1,012

3,975

3,757

7,732

2,909

994

3,903

3,692

7,595

3,051

1,101

4,152

3,463

7,615

(7,365)

(7,263)

(7,112)

367

(133)

234

3.0%

332

(133)

199

2.6%

503

(113)

390

5.1%

10,455

2,928

10,266

2,880

11,269

3,109

1,247

100

1,347

1,224

1,323

1,132

1,230

(5%)

(10%)

(6%)

Flat

(32%)

18%

(48%)

(240bps)

(8%)

(7%)

1 Movements in revenue, profits and margins are shown on an underlying 52 week basis, taking into account non-recurring or distorting items such as the impact of working days in UKPIL.

See paragraph entitled ‘Underlying change’ for further information.
Stamped, metered and other prepaid revenue channels are subject to statistical sampling surveys to derive the revenue relating to parcels, marketing mail and letters. These surveys are subject
to continuous refinement, which may over time reallocate revenue between the products above, and which may occasionally lead to a consequent change to this estimate.

Revenue was flat on an underlying basis. Total parcel revenue was
up seven per cent, while total letter revenue was down six per
cent on an underlying basis.

of letterboxable parcels. We benefitted from new volumes due to
the extension of our customer Latest Acceptance Times (LATs)
for our Tracked 24® product.

Our UK parcels business is performing well. Total parcel
volumes increased by eight per cent and revenue increased
by seven per cent on an underlying basis. Royal Mail domestic
account parcels volumes, excluding Amazon, were up eight per
cent as we won new customers and gained more traffic from
existing customers. Royal Mail Tracked 24®/48® and Tracked
Returns® volumes, our key e-commerce products, grew by 24 per
cent. Our propositions targeting fast growing sectors and major
new features like estimated delivery times supported this growth.
Strong Amazon parcel traffic growth resulted in higher volumes

Our international parcels business continued to benefit from
our initiative to attract cross-border traffic, mainly from Asia
into mainland Europe and the UK. This accounted for around two
percentage points of the underlying parcel volume growth and
around one percentage point of the parcel revenue growth in the
year. We saw improved import volumes outside our cross-border
initiative. Contract export volumes declined due to the competitive
market. Parcelforce Worldwide volumes increased by one per cent,
compared with two per cent in 2017-18, largely due to a customer
withdrawing from the online retail market during the year.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

Addressed letter volumes (excluding political parties’ election
mailings) declined by eight per cent on an underlying basis. This
was in line with our revised expectation of a seven to eight per
cent decline. Letter volumes, including marketing mail, were
impacted by ongoing structural decline, business uncertainty
and General Data Protection Regulation (GDPR). Excluding the
impact of GDPR, addressed letter volume (excluding political
parties’ election mailings) decline would have been around two
percentage points better.

We are expecting a decline of five to seven per cent in 2019-20, due
to the impact of GDPR in the first quarter of the year and continued
business uncertainty. Our medium-term guidance of addressed
letter volume (excluding political parties’ election mailings) decline
of four to six per cent per annum remains unchanged.

Adjusted operating costs before transformation costs

Low average unit revenue (AUR) unaddressed letter volumes
were down seven per cent on an underlying basis, reflecting
strong growth in 2017-18 due to initiatives that encouraged
incremental volume growth.

Total letter revenue (including marketing mail) decreased by
six per cent, including the impact of business mail price rises
implemented in January 2019. The impact of political parties’
mailings related to the General Election in June 2017 did not have
a material impact on the underlying change in letter revenue in
the full year. Marketing mail revenue decreased by ten per cent
on an underlying basis largely due to the impact of GDPR.

(£m)

People costs

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Total

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

Underlying
change1

(5,045)

(2,320)

(842)

(826)

(652)

(4,975)

(2,288)

(827)

(819)

(642)

(4,908)

(2,204)

(798)

(751)

(655)

(7,365)

(7,263)

(7,112)

(2%)

1 Movements in revenue, profits and margins are shown on an underlying 52 week basis, taking into account non-recurring or distorting items such as the impact of working days in UKPIL. See

paragraph entitled ‘Underlying change’ for further information.

Total adjusted operating costs before transformation costs
increased by two per cent on an underlying basis. The single
largest contributing factor was poor performance in people
costs as we did not achieve the expected benefits from our
business-as-usual initiatives, transformation projects and
cost avoidance activities.

As a result of poor productivity in the first half, we expected
our productivity improvement for the full year to be significantly
below our target range of two-three per cent. Productivity in
the second half was 1.9 per cent, giving a full year productivity
improvement of 0.9 per cent. We achieved a 1.1 per cent reduction
in core network hours as we implemented and partially absorbed
the impact of the one hour reduction in the working week to
38 hours and saw a step up in operational efficiency activities
in the second half. This was partially offset by an increase in
variable hours during the first half, as a result of high levels
of sick absence and resourcing to recover Quality of Service.
Workload was 0.2 per cent lower as the decline in letters volume
was only partially offset by the increase in parcel volumes.

Given the poor cost performance in the first half, our 2018-19
cost avoidance target was lowered from £230 million to £100
million. The UKPIL cost avoidance programme delivered £107
million of costs avoided for the full year. The costs avoided
comprised a number of initiatives, including short-term actions
where we saw reductions in discretionary spend and central
costs. We performed a review of our organisational structure
and management roles in support and central functions which
resulted in management headcount reduction that will deliver

financial benefits in 2019-20. We also achieved savings through
a reduction in core network hours including partial absorption
of the one hour reduction of the working week, modernisation
of our Heathrow Worldwide Distribution Centre, a linehaul
review, supplier contract renegotiation and rationalisation
of operations management.

Adjusted people costs were one per cent higher on an underlying
basis, largely due to the frontline and manager pay awards.

Higher people costs in the year included the impact of high-levels
of sickness-related absences and adverse weather conditions
earlier in the year and additional investment in resourcing to
improve Quality of Service. Bonus costs for around 10,500 eligible
managers across the UK were £50 million lower as we missed
our threshold profitability level. Higher volumes in Parcelforce
Worldwide and the implementation of LATs for certain account
parcels led to incremental people costs.

Non-people costs were four per cent higher on an underlying
basis. Distribution and conveyance costs increased by four per
cent on an underlying basis. This was largely driven by higher
vehicle repair costs due to adverse weather at the beginning of
the year and delays to the delivery of new vehicles, resulting in
higher maintenance costs on older vehicles. Total diesel and jet
fuel costs increased to £156 million (2017-18: £147 million) as
parcel volumes were higher than expected in the second half of
2018-19. We expect diesel and jet fuel costs to be around £162
million in 2019-20 largely as a result of the expected growth in
parcel volumes. Terminal dues were £6 million higher largely
due to adverse foreign exchange rate movements.

4 2

STRATEGIC REPORT Infrastructure costs increased by nine per cent. Depreciation
and amortisation were £44 million higher. This was higher than
the £10 million increase we expected. Management conducted a
review of investment spend in the year resulting in changes to the
investment portfolio. The depreciation charge includes £30 million
of impairment costs as a result of this review. Due to the higher
than expected decline in letters volumes, management reviewed
the estate of letters sorting machinery and plan to decommission
some of this equipment over the next three years. £12 million
of accelerated depreciation has been incurred because of these
anticipated changes. Technology costs increased by £21 million
largely due to the implementation of data projects supporting
the operations.

Other operating costs decreased by two per cent on an underlying
basis largely due to the impact of the cost avoidance programme.

Adjusted operating profit before transformation cost
Adjusted operating profit before transformation costs declined by
32 per cent on an underlying basis. This was due to: the impact of
GDPR on marketing mail revenues; poor performance in people
costs as we did not achieve our cost avoidance target and
increased infrastructure costs.

Transformation costs

(£m)

Voluntary redundancy

Project costs

Total

Transformation costs of £133 million were lower than our
expectation of around £150 million. Voluntary redundancy costs
were driven by our short-term actions, which led to a reduction
in management headcount across support and central functions.
Voluntary redundancy costs were £2 million higher than 2017-18
but below our expectations due to the lower than expected levels
of efficiencies in operations.

There was a net reduction of around 840 full-time equivalent
employees (FTE)3 to around 147,145 compared with March 2018
as we decreased variable hours. The calculation of FTEs was
impacted by a one hour reduction in the working week from
39 to 38 hours. If FTEs for March 2019 were restated to reflect
a 39 hour working week, the reduction in FTEs would have been
around 3,795, reflecting both a reduction in variable hours and
partial absorption of the one hour reduction in the working week.
There was a net increase of around 1,600 employees in the year,
reflecting an increase in part-time employees.

GENERAL LOGISTICS SYSTEMS (GLS)
Reported results

Summary trading results (£m)

Revenue

Operating costs

Operating profit before specific items

Operating specific items

Operating profit

Operating profit margin

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2018

(46)

(87)

(133)

(44)

(69)

(113)

Project costs of £87 million largely comprised costs associated
with initiatives supporting investments and the cost avoidance
programme. The increase of £18 million was largely due to
operating costs in relation to operations data projects to support
future productivity improvements, investment to upgrade our IT
and parcel systems and projects related to the implementation
of the Defined Benefit Cash Balance Scheme (DBCBS) and
development of the Collective Defined Contribution (CDC)
pension scheme.

Adjusted operating profit after transformation costs
Adjusted operating profit after transformation costs of
£199 million was 48 per cent lower on an underlying basis due
to flat revenue and higher costs. Operating profit margin after
transformation costs was 2.6 per cent, down 240 basis points
compared with 2017-18 on an underlying basis.

Reported
March 2019

Reported
March 2018

2,888

(2,711)

177

(89)

2,557

(2,366)

191

(14)

177

3.0%

6.9%

FTE numbers relate to the total number of paid hours (including part-time, full-time and agency hours) divided by the standard full-time working hours in the same year. The current year FTE is
calculated on a 38 hour week basis (2017-18: 39 hour week basis).

4 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

The detailed GLS reported results are set out in the paragraph entitled ‘Segmental reported results’. GLS reported revenue was
£331 million higher than the prior year. GLS operating profit was £89 million lower largely due to the impairment of the Golden State
Overnight (GSO) and Postal Express businesses in the US, as explained in the paragraph entitled ‘USA’ in this section. GLS also
experienced increased operating cost pressures in the year.

Adjusted results
Adjusted GLS Sterling and Euro results exclude the impact of the impairment of the US businesses and amortisation of intangible
assets related to acquisitions. The adjustments made to reported results are set out in the paragraph entitled ‘Specific items and
pension charge to cash difference adjustment’.

Summary trading results (£m)

Revenue

Operating costs

Operating profit

Operating profit margin

(€m)

Revenue

Operating costs

Operating profit

External volumes (m)

Adjusted
March 2019

Adjusted
March 2018

Underlying
change1

2,888

(2,711)

177

6.1%

3,274

(3,073)

201

634

2,557

(2,366)

191

7.5%

2,899

(2,682)

217

584

(9%)

(120bps)

(9%)

Overall, GLS delivered a good revenue performance. Volumes were up five per cent on an underlying basis, with growth in
both domestic and international volumes in most markets. Volume growth moderated compared with the prior year. This was
largely a result of the general competitive environment and yield management activities. Revenue increased by eight per cent
on an underlying basis – three percentage points higher than volume growth – largely due to price increases and customer mix
changes in several markets.

There was no material foreign exchange impact on revenue in Sterling terms. Including the impact of acquisitions, revenue was
up 13 per cent. Revenue growth was achieved in most markets and from a broad customer base. The largest customer accounted
for around one per cent of total GLS revenue as our customer base continues to diversify. The three major markets (Germany, Italy
and France) accounted for 57 per cent of total GLS revenue. This is down from 60 per cent in 2017-18, reflecting the impact of recent
acquisitions and growth in other GLS markets.

Adjusted operating costs (£m)

People costs

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Total

Adjusted
March 2019

Adjusted
March 2018

Underlying
change1

(667)

(2,044)

(1,803)

(169)

(72)

(608)

(1,758)

(1,558)

(148)

(52)

(2,711)

(2,366)

11%

24%

1 Movements in revenue, costs, profits and margins are shown on an underlying basis, taking into account non-recurring or distorting items such as the first year impact of acquisitions and

foreign exchange translation in GLS. Revenue from GLS acquisitions in the year was £114 million (2017-18: £105 million), which has been excluded from underlying movements. See paragraph
entitled ‘Underlying change’ for further information.

Total adjusted operating costs were up nine per cent on an underlying basis. People costs increased by four per cent on an underlying
basis. This was a result of higher semi-variable costs linked to volumes and higher rates of pay, due to high wage inflation and driver
shortages, especially across Central and Eastern European and US markets.

Adjusted non-people costs increased by 11 per cent on an underlying basis. Distribution and conveyance costs were up 11 per cent
on an underlying basis. This was driven by higher volumes and increased network costs due to higher contractor costs across the
majority of GLS markets. We also incurred increased costs in the US as we transition GSO and Postal Express to a fully independent
contractor model.

4 4

STRATEGIC REPORT USA
Our US businesses, GSO and Postal Express, provide an
interstate overnight parcel delivery service with full US west coast
coverage, which is well positioned to serve both the B2B and
B2C segments.

In Postal Express, profitability has been impacted by yield
management activities to exit low margin customers. The
profitability of GSO and Postal Express continues to be
impacted by local cost pressures.

As well as pursuing our plans of integrating the businesses,
we have accelerated the transition of the businesses to a fully
independent contractor model, similar to GLS’ business model
in Europe. While we are making progress with our plans, the
combined impact of local cost pressures, refocusing the customer
base and transitioning to the new business model means that
the expected synergies and benefits will now take longer to
be realised.

Accordingly, we recognised a £68 million impairment against
the goodwill and other assets related to the acquisition of these
businesses in the first half. This was a non-cash operating specific
item. The combined businesses were loss-making in the year, with
operating losses of around €15 million (approximately £14 million).

Canada
On 3 September 2018, we announced the acquisition of Dicom,
a Canadian parcel delivery company, for a total consideration
of C$360 million (approximately £212 million). Performance
has been in line with our expectations in the seven months
since acquisition.

Other developed European markets (including Austria,
Belgium, Denmark, Ireland, Netherlands and Portugal)
Revenue growth was achieved in the majority of GLS’ other
developed European markets. In particular, there was continued
strong volume and revenue growth in Denmark as we continue
to drive higher B2C volumes by increasing the number of
ParcelShops to support growth.

Other developing/emerging European markets (including
Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia
and Slovenia)
We saw strong, double digit revenue growth in all developing/
emerging European markets. We continue to invest in our
network in these countries to take advantage of their growing
parcel markets.

Infrastructure costs increased by seven per cent on an underlying
basis, largely due to higher rents and rates and repairs and
maintenance costs. We are also seeing higher depreciation costs
as we continue to invest to increase the capacity of our network.
Other operating costs increased by 24 per cent on an underlying
basis, principally due to higher litigation and claims costs and the
impact of provision releases in the prior year.

Adjusted operating profit
Adjusted operating profit was £177 million, nine per cent lower
than 2017-18 on an underlying basis. There was no material
foreign exchange impact on operating profit in Sterling terms.

Adjusted operating profit margin of 6.1 per cent was in line with
our target of over six per cent. This was down by 120 basis points
compared with the prior year, largely due to the ongoing cost
pressures in the majority of GLS’ markets, losses in France and
the US and a reduction in profitability in Spain. We do not expect
cost pressures to ease in the short-term. We took action through
prudent price increases and a review of discretionary spend to
help mitigate these cost pressures.

Germany
GLS Germany remains the largest GLS market by revenue.
Revenue grew by nine per cent, driven by international volumes
and improved pricing. We saw a decrease in operating profit
margin due to increased cost pressures and driver shortages.

Italy
GLS Italy revenue grew by five per cent, moderating in line
with our expectations. We experienced lower growth compared
with the prior year due to the competitive environment, including
the impact of the launch of Amazon’s own logistics network
in the country.

France
France remains a challenging market. GLS France revenue grew
by four per cent, driven largely by improved pricing, including
service fees for over-sized parcels and higher export volumes.
However, operating losses increased by €5 million to €18 million
(approximately £16 million).

Improvement plans in France focus on quality and targeting
profitable segments. Despite the challenges in the domestic
market, GLS France continues to be integral to the GLS network
by supporting exports from other markets into France and
allowing GLS to provide a comprehensive service across Europe.

Spain
GLS Spain revenue grew by seven per cent on an underlying
basis, driven by higher international volumes. ASM has been fully
integrated with GLS Spain. Integration of Redyser is proving more
complex than anticipated and has resulted in network inefficiencies
and one-off costs impacting profitability. An increasing proportion
of domestic volumes from relatively low margin customers has
also impacted profitability. We expect the integration of Redyser to
be completed during 2019-20.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

GROUP RESULTS
Reported results

Summary trading results (£m)

Revenue

Operating costs

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating specific items

Operating profit

Non-operating specific items

Net finance costs

Net pension interest (non-operating specific item)

Profit before tax

Earnings per share (basic)

Reported
53 weeks
March
2019

10,581

(10,107)

Reported
52 weeks
March
2018

10,172

(9,936)

474

(133)

341

(181)

160

(13)

241

236

(113)

123

(57)

(16)

212

17.5p

25.9p

Group revenue increased by £409 million. This was largely due to the 53rd week in UKPIL and higher parcels revenue in GLS and UKPIL,
which more than offset the decline in UKPIL letters revenue. Operating profit before transformation costs increased by £238 million,
largely due to the reduction in the IAS 19 pension charge in UKPIL of £371 million, following the closure of the RMPP to future accrual
in its previous form from 31 March 2018. Operating specific items increased by £124 million largely due to the impact of the impairment
of the GSO and Postal Express businesses in GLS and the purchase of a further buy-in insurance policy for the RMSEPP.

Group operating profit increased by £94 million to £160 million. Profit before tax increased to £241 million, of which UKPIL accounted
for £160 million (2017-18: £39 million) while GLS accounted for £81 million (2017-18: £173 million). Basic earnings per share decreased
to 17.5 pence. A full reconciliation of reported to adjusted results is set out in the section entitled ‘Presentation of results’.

Adjusted results
Group revenue

(£m)

UKPIL

GLS

Intragroup revenue

Total

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

Underlying
change1

7,732

2,888

7,595

2,888

(39)

7,615

2,557

–

10,581

10,444

10,172

Flat

1 Movements in revenue, costs, profits and margins are shown on an underlying basis, taking into account non-recurring or distorting items such as the first year impact of acquisitions and

foreign exchange translation in GLS and working days in UKPIL. See paragraph entitled ‘Underlying change for further information.

Intragroup revenue represents revenue from trading between UKPIL and GLS. This was due to Parcelforce Worldwide being GLS’s
partner in the UK. As the amounts involved have no impact on group profit before tax and are not material, the prior year has not
been adjusted.

Group revenue was up two per cent on an underlying basis, driven by parcel growth in GLS and UKPIL more than offsetting the decline
in UKPIL letters revenue.

Total parcel revenue continued to grow as a percentage of Group revenue, accounting for 63 per cent on a 52 week basis (2017-18:
59 per cent). The main factors impacting revenue are described in the sections entitled ‘UK Parcels, International & Letters (UKPIL)’
and ‘General Logistics Systems (GLS)’.

4 6

STRATEGIC REPORT Group operating costs

(£m)

People costs

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Total

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

Underlying
change1

(5,712)

(4,325)

(2,606)

(995)

(724)

(5,642)

(4,293)

(2,591)

(988)

(714)

(5,516)

(3,962)

(2,356)

(899)

(707)

(10,037)

(9,935)

(9,478)

Flat

1 Movements in revenue, costs, profits and margins are shown on an underlying basis, taking into account non-recurring or distorting items such as the first year impact of acquisitions and

foreign exchange translation in GLS and working days in UKPIL. See paragraph entitled ‘Underlying change for further information.

Group operating costs increased by four per cent on an underlying basis. The increase in UKPIL was largely due to higher people and
distribution and conveyance costs. GLS people and distribution and conveyance costs were impacted by cost pressures and higher
volumes. The main factors impacting operating costs in the year are described in the sections entitled ‘UK Parcels, International &
Letters (UKPIL)’ and ‘General Logistics Systems (GLS)’.

Group operating profit before transformation costs

(£m)

UKPIL

GLS

Total

Operating profit margin before transformation costs

Group operating profit after transformation costs

(£m)

UKPIL

GLS

Total

Operating profit margin after transformation costs

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

367

177

544

5.1%

332

177

509

4.9%

503

191

694

6.8%

Adjusted
53 weeks
March 2019

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

234

177

411

3.9%

199

177

376

3.6%

390

191

581

5.7%

Group operating profit margin after transformation costs was down 200 basis points on a 52 week underlying basis, driven by the lower
level of profitability in both UKPIL and GLS.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

Specific items and pension charge to cash difference adjustment

(£m)

Pension charge to cash difference adjustment (within People costs)

Operating specific items

Impairment relating to GSO and Postal Express businesses

Accounting impact of RMSEPP buy-in settlement

Employee Free Shares charge

Amortisation of acquired intangible assets

Legacy/other costs

Potential industrial diseases claim credit

Other

Total operating specific items

Non-operating specific items

Profit on disposal of property, plant and equipment

Net pension interest

Total non-operating specific items

Total specific items and pensions adjustment before tax

Total tax credit on specific items and pensions adjustment

The pension charge to cash difference adjustment was £70 million,
£388 million lower than in 2017-18. This was due to the closure of
the RMPP to future accrual in its previous form from 31 March 2018.
The difference between the pension charge and cash cost largely
comprises the difference between the IAS 19 income statement
pension charge rate of 18.9 per cent for the DBCBS from 1 April
2018 and the actual cash payments rate agreed with the Trustee
of 15.6 per cent. There is also a small difference between the
pension charge of 41.0 per cent and cash cost of 17.1 per cent for
the RMPP for the week of 26 to 31 March 2018. The pension charge
to cash difference adjustment is expected to be around £85 million
in 2019-20, £15 million higher than in 2018-19 due to the increase
in the DBCBS pension charge rate to 19.6 per cent in 2019-20. The
increase is due to a reduction in the discount rate used to calculate
the DBCBS liabilities as a result of lower year-on-year corporate
bond yields.

Operating specific items in the year included a previously
announced £68 million impairment of the goodwill and
assets related to the acquisition of the GSO and Postal Express
businesses by GLS. More details on the impairment are provided
in the section entitled ‘General Logistics Systems (GLS)’.

Operating specific items also included a £64 million charge in relation
to the accounting consequences of the purchase of a further buy-in
insurance policy for the RMSEPP on 21 September 2018. A buy-in
involves purchasing an insurance policy that provides cash flows
that exactly match the value and timing of the benefits payable to the
members it covers. This is an accounting adjustment in relation to
the write off of the closing surplus as a result of the purchase of the
policy. It has no cash impact to the Group. Further details are set out
in the paragraph entitled ‘Pensions’.

4 8

53 weeks
March
2019

(70)

(68)

(64)

(22)

(20)

(7)

–

(7)

(181)

(157)

52 weeks
March
2018

(458)

–

(33)

(16)

(8)

(10)

(57)

162

(353)

157

The Employee Free Shares charge for the year in relation to our
Share Incentive Plans (SIP) was £22 million (2017-18: £33 million).
This is expected to be £8 million for 2019-20 and not material
thereafter. Amortisation of acquired intangible assets of £20
million largely relates to acquisitions in GLS. Other specific items
in the year include the impairment of intangible assets relating
to a UK subsidiary. Other specific items in the prior year relate
to the integration of Romec into the Group.

Non-operating specific items mainly comprise the net pension
interest credit of £79 million (2017-18: £91 million), which was
lower than the prior year due to the lower pension surplus
position at 25 March 2018 compared with 26 March 2017. The
net pension interest credit is expected to be around £86 million
in 2019-20.

The profit on disposal of property, plant and equipment of
£15 million (2017-18: £71 million) largely relates to the sale of
Delivery Offices in the year. The prior year included a £24 million
overage payment in relation to the sale of Rathbone Place in
2011, a gain of £22 million from the completion of the sale of the
Phoenix Place plot at Mount Pleasant, the £20 million overage
payment in respect of the sale of the Paddington Mail Centre in
2014 and £2 million from the sale of vehicles.

The tax credit on specific items and the pension adjustment of
£27 million has be recognised at statutory rates. The £130 million
reduction compared with the prior year mainly related to the tax
impact of the decision to close the RMPP to future accrual in its
previous form from 31 March 2018.

STRATEGIC REPORT Net finance costs
Reported net finance costs of £13 million (2017-18: £16 million) largely comprised interest on the €500 million bond of £11 million
(2017-18: £11 million).

Facility

€500 million bond

Loans in overseas subsidiaries

Revolving credit facility

Total

Rate

2.5%

0.9%

LIBOR+ 0.55%

Facility
(£m)

430

1,050

1,481

Facility
end date

2024

2022

2020-22

Drawn
(£m)

430

–

431

The blended interest rate on gross debt, including finance leases for 2018-19, is expected to be approximately three per cent. The
retranslation impact of the €500 million bond is accounted for in equity.

Taxation

(£m)

Reported

Profit/(loss) before tax

Tax (charge)/credit

Effective tax rate

Adjusted

Profit before tax

Tax charge

Effective tax rate

53 weeks
March 2019

52 weeks
March 2018

GLS

Group

GLS

Group

160

(23)

14%

229

(40)

17%

(43)

53%

169

(53)

31%

241

(66)

27%

398

(93)

23%

n/a

378

(59)

16%

173

(47)

27%

187

(52)

28%

212

n/a

565

(111)

20%

The UK adjusted effective tax rate of 17 per cent (2017-18: 16
per cent) was higher than the prior year mainly because 2017-
18 included a catch up on patent box claims. The effective rate
was less than the UK statutory rate of 19 per cent, largely as a
result of a patent box claim and a one off, first time recognition
of a deferred tax asset on non-trading tax losses, partially offset
by non-deductible expenditure.

of these items on the effective tax rate was partially offset by
the net pension interest credit, on which there was no tax charge,
and profits made on operational property disposals, which were
offset by reinvestment relief. The prior year was a tax credit of
£46 million on a reported profit before tax of £212 million mainly
due to the one-off deferred tax credit of £78 million arising from
the closure of the RMPP to future accrual after 31 March 2018.

The GLS adjusted effective tax rate of 31 per cent (2017-18: 28 per
cent) is higher than the prior year, largely due to the derecognition
of deferred tax assets in GLS US and increased losses in GLS
France, for which no deferred tax asset was recognised.

Adjusted earnings per share (EPS)
Adjusted basic EPS was 30.5 pence compared with 45.5 pence
in the prior year. This largely reflected lower UKPIL and GLS
operating profit.

The Group reported effective tax rate was 27 per cent. The
effective rate was significantly impacted as there was no tax
credit on the impairment of goodwill in respect of GLS US and the
cost of the buy-in insurance policy for the RMSEPP. The impact

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

In-year trading cash flow

(£m)

Reported EBITDA before transformation costs1

Pension charge to cash difference adjustment

Adjusted EBITDA before transformation costs

Trading working capital movements

Share-based awards (SAYE, LTIP and DSBP) charge adjustment

Total investment

Income tax paid

Research and development expenditure credit

Net finance costs paid

Total

53 weeks
March
2019

865

935

(237)

(487)

(91)

(12)

117

52 weeks
March
2018

577

458

1,035

(485)

(75)

(15)

545

1 Reported EBITDA before transformation costs has been adjusted to exclude the share of associate Company profits or specific operating items. For further details of Reported EBITDA

before transformation costs, see section ‘Alternative Performance Measures’.

In-year trading cash inflow of £117 million was £428 million
lower than the prior year mainly due to lower adjusted EBITDA
before transformation costs and higher outflows in trading
working capital.

Trading working capital outflow of £237 million was £311 million
higher than 2017-18. This was largely due to the reversal of
the benefit seen in the prior year in relation to the timing of the
settlement of the 2017-18 frontline pay award of £101 million. This
was paid in the first quarter of 2018-19. There was an impact on
working capital due to an additional monthly payroll payment of £47
million and VAT payment of £17 million as a result of the 53rd week.

Excluding these timing adjustments, the in-year trading cash flow
would have been £282 million. Trading working capital in 2019-20 will
see a benefit of around £64 million from the reversal of the 53rd week
timing differences. The remainder of the working capital movement
was largely in relation to the lower expectation of bonus payments
for around 10,500 eligible managers across the UK in 2018-19.

Income tax paid increased by £16 million largely because there was
no tax relief on payments made to the pension escrow in 2017-18. Net
finance costs largely comprised interest on the €500 million bond and
the decrease is mainly due to the increase in interest received, which
includes interest from the RMPP escrow investments.

Net cash investment

(£m)

Growth capital expenditure

Replacement capital expenditure

Transformation operating expenditure

Voluntary redundancy

Project costs

Total investment

Proceeds from disposal of property (excluding London Development Portfolio), plant and equipment

Net cash investment

53 weeks
March 2019

52 weeks
March 2018

(224)

(140)

(123)

(36)

(87)

(487)

(462)

(224)

(136)

(125)

(56)

(69)

(485)

(445)

Net cash investment of £462 million was less than our expectation
of around £500 million. This was due to the review of investment
spend in the year resulting in the deferral of some expenditure
whilst the review was conducted.

Growth capital expenditure was flat. We continue to invest in
strategic projects in UKPIL and GLS, including expanding the
GLS network, IT systems and activities supporting data projects.
Total GLS capital expenditure was £113 million. Replacement
capital expenditure increased by £4 million due to higher vehicle
purchases. This was partially offset by lower property spend
on refurbishments and a reduction in IT and data systems
replacement costs.

5 0

Transformation operating expenditure decreased by £2 million.
Voluntary redundancy cash expenditure was £20 million lower
than 2017-18, largely due to timing of cash flows in relation to
management headcount reduction which will be paid in the first
half of 2019-20. This was offset by £18 million higher project
costs, largely due to data projects to support future productivity
improvements, investment to upgrade our IT and parcel systems
and projects related to the implementation of the Defined Benefit
Cash Balance Scheme (DBCBS) and development of the Collective
Defined Contribution (CDC) pension scheme.

STRATEGIC REPORT Proceeds from disposal of property (excluding London Development Portfolio) of £25 million largely relate to the sale of Delivery
Offices in Whetstone, Hendon and Hampton as well as various other smaller Delivery Offices. 2017-18 included a £24 million overage
payment in relation to the sale of Rathbone Place in 2011 and £14 million from the sale of various smaller Delivery Offices.

Net debt
A reconciliation of net debt is set out below.

(£m)

Net cash/(debt) brought forward at 25 March 2018 and 26 March 2017

Free cash flow

In-year trading cash flow

Other working capital movements

Cash cost of operating specific items

Proceeds from disposal of property (excluding London Development Portfolio), plant and equipment

Acquisition of business interests

Cash flows relating to London Development portfolio

Debt transferred on acquisition

Purchase of own shares

Employee exercise of SAYE options

Foreign currency exchange impact

Increase in finance lease obligations (non-cash)

Dividends paid to equity holders of the parent Company

Net (debt)/cash carried forward

53 weeks
March 2019

52 weeks
March 2018

(71)

117

(6)

(220)

–

(10)

–

(242)

(300)

(338)

562

545

(3)

(12)

(18)

(3)

–

(2)

(231)

Movements in GLS client cash are included within other working
capital. The amount held at 31 March 2019 was £20 million
(25 March 2018: £24 million).

of receipts. Receipts include £21 million in relation to the Mount
Pleasant plots and the £20 million overage received under the
agreement for the sale of Paddington Mail Centre.

The cash cost of operating specific items was an outflow of
£6 million mainly due to National Insurance contributions on the SIP
2013, 2014 and 2015 employee share sales and industrial disease
settlements. Proceeds from disposal of property (excluding London
Development Portfolio), plant and equipment of £25 million is
explained in the paragraph entitled ‘Net cash investment’.

Cash inflow relating to the London Development Portfolio was £7
million. Infrastructure and enabling works costs of £34 million on
the Nine Elms and Mount Pleasant sites were offset by £41 million

Purchase of own shares relates to the Company purchasing its
own shares to fulfil Save As You Earn (SAYE) options exercised
in the year and to meet Long Term Incentive Plan (LTIP)
requirements.

Acquisition of business interests in the year largely related to
the acquisition of Dicom Canada by GLS (further information
is available in the section entitled ‘General Logistics Systems
(GLS)’). The acquisition of business interests in the prior year
related to the acquisitions of Postal Express and Redyser by GLS.

A reconciliation of cash flows relating to acquisitions is shown in the following table:

(£m)

Dicom Canada

Trento (Italy)

Acquisition of business interests, net of cash acquired (see statutory cash flow statement)

Deferred consideration paid in respect of prior years’ acquisitions

Acquisition of non-controlling interests

Acquisition of business interests

53 weeks
March 2019

(210)

(2)

(212)

(4)

(220)

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

2018-19 approach to capital management
The Group had established four key objectives for capital management during 2018-19. Management proposes actions which reflect
the Group’s investment plans and risk characteristics as well as the macro-economic conditions in which we operate. The Board
keeps this policy under constant review to ensure that capital is allocated to achieve our stated objective of delivering sustainable
shareholder value.

OB JEC TIVE S

ENABLERS

2018-19 UPDATE

Meet the Group’s obligations as they
fall due

Maintaining sufficient cash reserves and
committed facilities to:

– meet all obligations, including pensions; and
– manage future risks, including those set out

in the Principal Risks section

Support a progressive dividend policy

Generate sufficient in-year trading cash flow to
cover the ordinary dividend. Maintain sufficient
distributable reserves to sustain the Group’s
dividend policy

At 31 March 2019, the Group had available
resources of £1,286 million (2017-18:
£1,650 million); made up of cash and cash
equivalents of £236 million (2017-18: £600
million) and undrawn committed revolving
credit facilities of £1,050 million (2017-18:
£1,050 million).

The Group met the loan covenants and
other obligations for its revolving credit
facility and €500 million bond.

As set out in the Viability Statement, the
Directors have a reasonable expectation
that the Group will continue to meet its
obligations as they fall due.

The Group reported £117 million of in-year
trading cash flow (2017-18: £545 million). In-
year trading cash flow included an outflow
of £101 million, due to the timing of the cash
payment of the 2017-18 frontline pay award
and an outflow due to impact of the 53rd
week, which included an additional monthly
payroll and VAT payment. Reversing the
impact of these items would give an
Adjusted-in-year trading cashflow of £282
million (2017-18: £444 million), sufficient to
cover the full year dividend of 25.0 pence per
share (2017-18: 24.0 pence per share).

Capital managed by the Group, excluding
the net assets of the pension scheme, is
£2,284 million (2017-18: £2,273 million).

The Group had retained earnings of
£4,561 million at 31 March 2019 (2017-18:
£4,381 million). The Group considers it has
a maximum level of distributable reserves
of around £2 billion which excludes the
impact of the pension surplus on retained
earnings, more than sufficient to cover
the dividend.

Reduce the cost of capital for
the Group

Target investment grade standard credit
metrics i.e. no lower than BBB- under Standard
& Poor’s rating methodology

During the year, the Group maintained a
credit rating of BBB with a stable outlook
from Standard & Poor’s.

Retain sufficient flexibility to invest
in the future of the business

Funded by retained cash flows and manageable
levels of debt consistent with our target
credit rating

During the year, the Group made
total gross investments of £487 million
(2017-18: £485 million) and acquisition of
business interests and non-controlling
interests of £220 million (2017-18:
£18 million) while retaining sufficient
capital headroom.

5 2

STRATEGIC REPORT Future approach to capital management
Our objective is to maintain a prudent financial policy. We believe
we need to retain prudent levels of financial gearing given the high
operational gearing inherent in our business. Balanced against this is
the imperative to invest in the long-term sustainability of the Group.
Our strategic plan requires a step up in investment, predominantly in
the UK, over the next five years. This is a priority in our approach to
capital management.

However, reflective of the Board’s confidence in the Group’s
updated strategy, strong balance sheet position and future cash
generation, the Board is today committing to underpin an annual
dividend at not less than 15.0 pence per share from 2019-20 to
2023-24, regardless of Group’s annual earnings or in-year trading
cash flow. At this level the dividend is expected to be covered by
cumulative trading cash flow over both three and five years.

Any excess capital will be used to support further returns to
shareholders, fund selected bolt-on acquisitions in GLS and
reduce net debt, as appropriate.

Given the level of underpinned annual dividend, the Board would
expect to pay an interim dividend each year equal to half the
underpinned annual dividend.

Pensions
A summary of the plans operated by Royal Mail and the timelines
in context of this Financial Review is as follows:

– Closed in December 2012

• Royal Mail Senior Executives Pension Plan (RMSEPP)

– To 31 March 2018

• Royal Mail Pension Plan (RMPP)
• Royal Mail Defined Contribution Plan (RMDCP)

– 1 April 2018 to 31 March 2019

• Defined Benefit Cash Balance Scheme (DBCBS)
• Enhanced Royal Mail Defined Contribution Plan (RMDCP)

– Proposed future scheme

• Collective Defined Contribution (CDC) together with a Defined

Benefit Lump Sum Scheme (DBLSS)

The RMPP closed to future accrual in its previous form
from 31 March 2018. The Company put in place transitional
arrangements from 1 April 2018 and implemented a new DBCBS
within the RMPP, and an improved RMDCP.

Details of each of the above are set out below.

Defined Benefit Cash Balance Scheme (DBCBS)
RMPP members automatically started building up DBCBS benefits
from 1 April 2018 (unless they opted to join the improved RMDCP
instead) together with eligible RMDCP members who opted to join.

The DBCBS guarantees members a minimum lump sum at age
65. It is therefore being accounted for as a defined benefit scheme
in a similar way to the RMPP. The DBCBS will aim to provide
increases to the lump sum each year, depending on investment
performance. An IAS19 deficit of £81 million is shown on the
balance sheet. The scheme is not in funding deficit and it is not
anticipated that deficit payments will be required. The DBCBS
will be subject to triennial valuations.

An IAS 19 pension service charge of 18.9 per cent (£362 million)
has been charged to the income statement. The pension charge
is greater than the cash contribution rate as the assumed rate
of future increases in benefits (4.2 per cent) is greater than the
assumed discount rate (2.6 per cent).

5 3

The Company has made contributions at 15.6 per cent
(£297 million) of DBCBS pensionable pay in respect of the
scheme. Members contribute six per cent (including Pension
Salary Exchange).

The IAS 19 pension service charge to cash difference adjustment
for 2018-19 was £70 million. Pension interest will be calculated
on the assets and liabilities as at 31 March 2019 for inclusion in
the income statement from 2019-20 onwards. For 2019-20, the
interest will be a charge of £3 million.

Royal Mail Defined Contribution Plan (RMDCP)
Under the RMDCP, Company contributions have increased by one
percentage point in each tier, up to a maximum of ten per cent.
Current and future RMDCP members in the standard section
will contribute at the highest contribution tier (employee: six per
cent; employer: ten per cent) unless they opt to contribute at a
lower level.

Royal Mail Pension Plan (RMPP)
The RMPP closed to future accrual in its previous form from
31 March 2018. The pre withholding tax accounting surplus
of the RMPP at 31 March 2019 was £3,696 million, comprising
assets of £10,458 million and liabilities of £6,762 million. The pre
withholding tax accounting surplus has increased by £434 million
in the period, mainly as a result of updated mortality assumptions
identified as part of the March 2018 valuation exercise, together
with the fact that the decrease in the real discount rate has had a
greater impact on assets than on liabilities. After the withholding
tax adjustment, the accounting surplus of the RMPP was £2,402
million at 31 March 2019. This is an accounting adjustment with
no cash benefit to the Company. For 2019-20, the pension interest
will be a credit of £89 million.

The triennial valuation of RMPP at 31 March 2018 is still in
progress. The actuarial funding position at that date will not be
known until the actuarial valuation has been completed, with
the results being very sensitive to the assumptions adopted at
that date. However, based on a set of assumptions which we
believe could form the basis for the March 2018 valuation and then
rolled forward, the RMPP actuarial surplus at 31 March 2019 was
estimated to be around £50 million (31 March 2018: £100 million).

Royal Mail Senior Executives Pension Plan (RMSEPP)
The RMSEPP closed in December 2012 to future accrual and
the Company makes no regular service contributions.

On 21 September 2018, the RMSEPP Trustees purchased a
further buy-in insurance policy in respect of all remaining
pensioners and deferred members. A buy-in involves purchasing
an insurance policy that provides cash flows that exactly match
the value and timing of the benefits payable to the members it
covers. This insurance policy, alongside the previous insurance
policy purchased in April 2016, means that substantially all the
liabilities of the scheme are now covered by insurance policies.
After consideration of the facts outlined above, Management
have concluded that the purchase of this further insurance policy
should be treated as a settlement. The difference between the IAS
19 surplus before and after the transaction has resulted in £64
million being charged to the income statement as an operating
specific item. This insurance policy includes provisions for the
possible issue of individual policies in respect of individual
members at the future discretion of the RMSEPP Trustees.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

As with the previous insurance policy purchased in April 2016,
this policy is considered an asset of the RMSEPP and does not
confer any rights to individual members. All benefit payments
due from the RMSEPP remain unchanged. Further details can
be found in the paragraph entitled ‘Royal Mail Senior Executive
Plan (RMSEPP)’ in Note 10 in the notes to the consolidated
financial statements.

The RMSEPP triennial valuation at 31 March 2018 has been
completed. Based on the rolled forward assumptions used for
that valuation, the RMSEPP actuarial surplus at 31 March 2019
was estimated to be £10 million (31 March 2018: £36 million).

In accordance with the updated Schedule of Contributions agreed
as part of the 2018 triennial valuation, a final deficit payment of
£1 million has been paid in 2018-19, together with £1 million in
respect of death-in-service lump sum benefits and administration
expenses. In accordance with the new Schedule of Contributions
signed on 28 March 2019, around £500,000 a year will be paid for
the period 1 April 2019 to 31 March 2025 in respect of death-in-
service lump sum benefits and administration expenses.

The High Court has recently ruled that pension schemes have
to address the issue of unequal Guaranteed Minimum Pensions
(GMPs). From Royal Mail’s perspective, the transfer of RMPP’s
historic pension liabilities to Government in 2012 included
all of the Plan’s GMP liabilities. The requirement to remove
the inequality in former RMPP benefits deriving from GMPs
therefore rests with Government.

RMSEPP, however, does still have its GMP liabilities and will
be required to take action to equalise benefits. The Trustees’
actuaries estimate that the cost of GMP equalisation will not be
material. This is still subject to any further clarification from the
Court on exact equalisation requirements, and also to the actual
equalisation approach adopted by the Trustees.

Collective Defined Contribution (CDC) scheme and Defined
Benefit Lump Sum Scheme (DBLSS)
The Government has published its response to the consultation
on CDC pension schemes. It has committed to bringing
forward legislation to enable CDC pension schemes at the
earliest opportunity.

Based on current expectations, the CDC will be accounted for as a
defined contribution scheme when implemented. The DBLSS will
be accounted for as a defined benefit scheme with the accounting
treatment expected to be similar to the transitional DBCBS.
The new arrangements will have fixed employer contributions
of 13.6 per cent and employee contributions of six per cent.

In 2019-20, the Company expects to contribute around £400
million in respect of all UK pension schemes.

Financial risks and related hedging
The Group is exposed to commodity price and currency risk. The
Group operates hedging policies which are stated in the Notes to
the Annual Report and Financial Statements 2018-19. The forecast
diesel and jet commodity exposures in UKPIL are set out below
together with the sensitivity of 2019-20 operating profit to changes
in commodity prices and fuel duty.

Fuel duty/other
costs (incl
irrecoverable
VAT) – not
hedged
2019-20
£m

Underlying
commodity
exposure (incl
irrecoverable
VAT) 2019-20
£m

Underlying
commodity
volume hedged
%

Residual
unhedged
underlying
commodity
exposure (incl
irrecoverable
VAT)
£m

Impact on
2019-20
operating profit
of a further
10% increase in
commodity
price
£m

Impact on
2019-20
operating profit
of a further
10% increase in
fuel duty/other
cost
£m

100

–

Forecast
total cost
£m

153

162

2019-20 Exposure

Diesel

Jet fuel

Total

As a result of hedging, it is anticipated that the diesel and jet
fuel commodity cost for 2019-20 will be around £6 million higher.
Without hedging, the associated cost would be around £12 million
higher (based upon closing fuel prices at 31 March 2019).

The Group is exposed to foreign currency risk due to interest
payments on the €500 million bond, certain obligations under
Euro denominated finance leases, trading with overseas postal
administrations and various purchase contracts denominated
in foreign currency. GLS’ functional currency is the Euro
which results in translational exposure to revenue, costs
and operating profit.

The average exchange rate between Sterling and the Euro
was £1:€1.13, the same as 2017-18. The impact on GLS’ reported
operating profit before tax in 2018-19 was not material. The
impact of foreign exchange transactions in the UK was not
material in 2018-19. The net impact on Group operating profit
before tax was not material.

The Group manages its interest rate risk through a combination
of fixed rate loans and leasing, floating rate loans/facilities and
floating rate financial investments. At 31 March 2019, all of the
gross debt of £556 million was at fixed rates to maturity.

5 4

STRATEGIC REPORT The Group will continue to implement and refine procedures and
processes to apply the new requirements of IFRS 16. As a result of
this ongoing work, it is possible that there may be some changes
to the adoption impact outlined above, before the half year results
to 29 September 2019 are issued. However, at this time these are
not expected to be material. Further detail of IFRS 16 is provided
in the section entitled ‘Significant Accounting Policies’ in the
Notes to the to the consolidated financial statements.

Dividends
The final dividend of 16.3 pence per share in respect of the
2017-18 financial year was paid on 31 August 2018, following
shareholder approval.

The interim dividend of 8.0 pence per share in respect of the
2018-19 financial year was paid on 16 January 2019, following
shareholder approval, to shareholders on the register at the
close of business on 7 December 2018.

Dividend in respect of 2018-19
The Board of Royal Mail recognises the importance of dividends
to shareholders as well as the imperative to invest in the business
to ensure the long-term sustainability of the Group to drive
shareholder value.

Taking into account certain timing difference, the in-year trading
cash flow in 2018-19 supports our stated progressive dividend
policy. The Board is therefore recommending a final dividend of
17.0 pence per share, giving a full year dividend of 25.0 pence per
share for 2018-19, an increase of four per cent.

Property
We invested £34 million in 2018-19 on works to separate the
retained operational sites from the development plots at Mount
Pleasant and infrastructure works at Nine Elms.

Mount Pleasant
Further cash proceeds are to be paid in contractually agreed
staged payments over the 2019-20 to 2020-21 financial years, with
the final balance of consideration to be paid in 2024. All proceeds
received up to 2020-21, in aggregate, are expected to cover Royal
Mail’s outgoings on the separation and enabling works over
this year.

Nine Elms
The Mayor of London and Borough of Wandsworth granted
planning consent to Greystar and we are currently awaiting
the completion of the judicial review period. Subsequent to the
judicial review period, we anticipate receipt of £98 million cash
proceeds on formal completion of the sale in the first half of the
2019-20 financial year. We have committed to reinvesting around
£30 million for infrastructure works associated with these plots.

On 17 January 2019, it was announced that unconditional
contracts had been exchanged for the sale of Plot C at the Nine
Elms site to Galliard Homes for a total consideration of £22 million
in cash. We are expecting to receive this payment in the first half
of 2019-20.

IFRS 16 ‘Leases’
The Group will apply IFRS 16, which replaces IAS 17, with effect
from 1 April 2019. The standard will have a material impact for
the Group as it introduces a new lessee accounting model and
requires the recognition of assets and liabilities for the majority
of leases. Rental costs currently recognised in operating profit
will be replaced by depreciation of the assets and finance costs on
the liabilities. The total cash outflow for lease payments will not
change. However, the payments related to the principal liabilities
will be presented as cash outflows from financing activities,
as opposed to the current treatment as cash outflow from
operating activities.

At 31 March 2019, the Group held a significant number of
operating leases for which the future undiscounted minimum
lease payments amounted to £1,327 million as disclosed in note
25 to the consolidated financial statements. On adoption of IFRS
16, the expected effect on the balance sheet is the recognition of
‘right of use’ assets of around £0.8-1.0 billion, a corresponding
lease liability of around £1.0-1.2 billion and a decrease in equity
by around £100-200 million after tax. The expected effect on
the income statement in 2019-20, based on the leases held on
transition, will be an increase in the Group annual depreciation
charge of around £120-130 million and an improvement in
operating profit after transformation costs of around £35-
45 million.

5 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL REVIEW CONTINUED

Underlying change
Movements in revenue, costs, profits and margins are calculated on an adjusted 52 week basis. We also made adjustments for the first
year impact of the Redyser and Dicom acquisitions. There was no movement in foreign exchange in GLS this year (2018-19: £1:€1.13;
2017-18: £1:€1.13).

We have made adjustments for working days in UKPIL. The UKPIL 53 week period consisted of 310.0 working days in 2018-19.
The UKPIL working days for 2018-19 on a 52 week basis is 304.5 days (2017-18: 305.0 working days).

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

Working
days

Acquisitions

Underlying
52 weeks
March 2018

Underlying
change

–

114

–

114

–

(34)

(76)

(61)

(9)

(6)

7,603

2,671

–

10,274

(4,908)

(2,204)

(798)

(751)

(655)

(7,112)

(642)

(1,834)

(1,619)

(157)

(58)

(110)

(2,476)

(34)

(76)

(61)

(9)

(6)

(5,550)

(4,038)

(2,417)

(908)

(713)

(110)

(9,588)

Flat

–

(2%)

11%

24%

Flat

–

(£m)

Revenue

UKPIL

GLS

Intragroup revenue

Group

Costs

UKPIL

People

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

7,595

2,888

(39)

7,615

2,557

–

10,444

10,172

(12)

–

(12)

(4,975)

(2,288)

(827)

(819)

(642)

(4,908)

(2,204)

(798)

(751)

(655)

Operating costs before transformation costs

(7,263)

(7,112)

GLS

People

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Operating costs

Group

People

Non-people costs1

Distribution and conveyance costs1

Infrastructure costs

Other operating costs

(667)

(2,044)

(1,803)

(169)

(72)

(608)

(1,758)

(1,558)

(148)

(52)

(2,711)

(2,366)

(5,642)

(4,293)

(2,591)

(988)

(714)

(5,516)

(3,962)

(2,356)

(899)

(707)

Operating costs before transformation costs1

(9,935)

(9,478)

5 6

STRATEGIC REPORT (£m)

Profit, margin and EPS

UKPIL

Adjusted
52 weeks
March 2019

Adjusted
52 weeks
March 2018

Working
days

Acquisitions

Underlying
52 weeks
March 2018

Underlying
change

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating profit margin after
transformation costs

332

(133)

199

503

(113)

390

2.6%

5.1%

GLS

Operating profit

Operating profit margin

Group

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating profit margin after
transformation costs

177

6.1%

191

7.5%

509

(133)

376

694

(113)

581

3.6%

5.7%

(12)

–

(12)

–

(12)

–

(12)

–

491

(113)

378

(32%)

18%

(48%)

5.0%

(240bps)

195

7.3%

(9%)

(120bps)

686

(113)

573

(26%)

18%

(34%)

5.6%

(200bps)

1 Group Distribution and Conveyancing costs includes a £39 million adjustment for intragroup costs between UKPIL and GLS. This was due to Parcelforce Worldwide being GLS’s partner in the UK.
This was not previously disclosed as the amount was not material. Total intragroup revenue has grown to a material amount in 2018-19 and we are therefore disclosing it separately. No prior year
restatement is required.

5 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Further details on specific items excluded are included in the
paragraph entitled ‘Specific items and pension charge to cash
difference adjustment’. A reconciliation showing the adjustments
made between reported and adjusted group results can be found
in the paragraph entitled ‘Consolidated reported and adjusted
results reconciliation’.

Underlying change
Movements compared with prior year in volumes, revenue,
costs, profits and margins are shown on an underlying basis on
a 52 week basis. Underlying movements improve comparability
between periods by making adjustments to the prior year to take
into account differences in working days in UKPIL and movements
in foreign exchange in GLS. We only adjust for items with a full
year impact greater than £10 million.

In addition, adjustments are made for non-recurring or distorting
items, which by their nature may be unpredictable, such as
the first year impact of acquisitions. For volumes, underlying
movements are adjusted for working days in UKPIL and the first
year impact of acquisitions. It also excludes political parties’
election mailings in addressed letter volume movements.

The paragraph entitled ‘Underlying change’ provides further
details on the adjustments we have made to the prior year to
calculate the underlying change.

PRESENTATION OF RESULTS AND ALTERNATIVE
PERFORMANCE MEASURES (APMS)
The Group uses certain Alternative Performance Measures
(APMs) in its financial reporting that are not defined under
International Financial Reporting Standards (IFRS), the
Generally Accepted Accounting Principles (GAAP) under which
the Group produces its statutory financial information. These
APMs are not a substitute, or superior to, any IFRS measures
of performance. They are used by Management, who considers
them to be an important means of comparing performance
year-on-year and are key measures used within the business
for assessing performance.

APMs should not be considered in isolation from, or as a
substitute to, financial information presented in compliance with
GAAP. Where appropriate, reconciliations to the nearest GAAP
measure have been provided. The APMs used may not be directly
comparable with similarly titled APMs used by other companies.

A full list of APMs used are set out in the section entitled
‘Alternative Performance Measures (APMs)’.

Reported to adjusted results
The Group makes adjustments to results reported under IFRS
to exclude specific items and the IAS 19 pension charge to cash
difference adjustment (see definitions in the paragraph entitled
‘Alternative performance measures’). Management believes this
is a more meaningful basis upon which to analyse the business
performance (in particular given the volatile nature of the IAS 19
charge) and is consistent with the way financial performance is
reported to the Board.

IFRS can have the impact of causing high levels of volatility in
reported earnings which do not relate to changes in the operational
performance of the Company. Management has reviewed the long-
term differences between reported and adjusted profit after tax.
Cumulative reported profit after taxation for the five years ended
31 March 2019 was £1,256 million compared with cumulative 53
week adjusted profit after tax of £2,048 million. Annual reported
profit after tax showed a range of £175 million to £328 million. The
principal cause of the difference and volatility is due to pension-
related accounting.

5 8

FINANCIAL REVIEW CONTINUEDSTRATEGIC REPORT Presentation of results
Consolidated reported and adjusted results
The following table reconciles the consolidated reported results, prepared in accordance with IFRS, to the consolidated 53 week
adjusted results.

(£m)

Revenue

Operating costs

People costs

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating specific items:

Impairment of assets relating to GSO and
Postal Express businesses

Accounting impact of RMSEPP buy-in
settlement

Employee Free Shares charge

Legacy/other costs

Amortisation of intangible assets
in acquisitions

Operating (loss)/profit

Non-operating specific items:

Profit on disposal of property,
plant and equipment

Earnings before interest and tax

Finance costs

Finance income

Net pension interest (non-operating
specific item)

Profit before tax

Tax (charge)/credit

Profit for the period

Profit for the period attributable to:

Equity holders of the parent Company

Non-controlling interests

Earnings per share

Basic

Diluted

53 weeks March 2019

52 weeks March 2018

Specific items
and pension
adjustment

–

(70)

–

(70)

–

(70)

(68)

(64)

(22)

(7)

(20)

(251)

(236)

–

(157)

(130)

–

Reported

10,581

(10,107)

(5,782)

(4,325)

(2,606)

(995)

(724)

474

(133)

341

(68)

(64)

(22)

(7)

(20)

160

175

(18)

241

(66)

175

–

Adjusted

10,581

(10,037)

(5,712)

(4,325)

(2,606)

(995)

(724)

544

(133)

411

Reported

10,172

(9,936)

(5,974)

(3,962)

(2,356)

(899)

(707)

236

(113)

123

–

411

–

411

(18)

–

398

(93)

305

–

(33)

(8)

(16)

137

(19)

212

258

259

(1)

Specific items
and pension
adjustment

–

(458)

–

(458)

–

(458)

–

(33)

(8)

(16)

(515)

(444)

–

(353)

157

(196)

–

Adjusted

10,172

(9,478)

(5,516)

(3,962)

(2,356)

(899)

(707)

694

(113)

581

–

581

–

581

(19)

–

565

(111)

454

455

(1)

17.5p

(13.0p)

30.5p

25.9p

25.7p

(19.6p)

(19.5p)

45.5p

45.2p

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Consolidated adjusted 52 week results
We are presenting the Group and UKPIL 2018-19 income statements to operating profit after transformation costs on an adjusted
53 and 52 week basis. The 52 week adjusted results provide a direct comparison of revenue and costs with 2017-18 by removing
an estimate of the 53rd week’s revenue based on working days and incremental costs for frontline staff, distribution and conveyance,
property rates and utilities and Post Office commissions. Incremental costs exclude monthly staff salaries, depreciation and amortisation
and technology costs.

The following table reconciles the consolidated 53 week adjusted results to the consolidated 52 week adjusted results.

(£m)

Revenue

Operating costs

People costs

Non-people costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Adjusted
53 weeks
March 2019

53rd week
revenue
and costs

Adjusted
52 weeks
March 2019

10,581

(10,037)

(5,712)

(4,325)

(2,606)

(995)

(724)

544

(133)

411

(137)

10,444

102

(35)

–

(35)

(9,935)

(5,642)

(4,293)

(2,591)

(988)

(714)

509

(133)

376

Segmental reported results
The following table presents the segmental reported results, prepared in accordance with IFRS.

(£m)

Revenue

People costs

Non-people costs

Operating profit before
transformation costs

Transformation costs

Operating profit/(loss) after
transformation costs

Operating specific items

Operating profit/(loss)

Non-operating specific items

Earnings before interest and tax

Net finance costs

Net pension interest
(non-operating specific item)

Profit before tax

Tax (charge)/credit

Profit for the period

53 weeks March 2019

52 weeks March 2018

UKPIL (UK
operations)

GLS (Non-UK
operations)

Intragroup
elimination

Group

UKPIL (UK
operations)

GLS (Non-UK
operations)

7,732

(5,115)

(2,320)

297

(133)

164

(92)

(5)

160

(23)

137

2,888

(667)

(2,044)

(39)

10,581

–

(5,782)

(4,325)

7,615

(5,366)

(2,204)

2,557

(608)

(1.758)

–

474

(133)

341

(181)

160

175

(13)

241

(66)

175

(113)

(68)

(43)

(111)

(40)

(12)

132

191

–

191

(14)

177

–

177

(4)

–

173

(47)

126

177

–

177

(89)

(8)

–

(43)

6 0

Group

10,172

(5,974)

(3,962)

236

(113)

123

(57)

137

(16)

212

258

FINANCIAL REVIEW CONTINUEDSTRATEGIC REPORT ALTERNATIVE PERFORMANCE MEASURES (APMS)
This section lists the definition of the various APMs disclosed
throughout the Annual Report and Financial Review. They are
used by Management, who considers them to be an important
means of comparing performance year-on-year and are key
measures used within the business for assessing performance.

Adjusted operating profit
This measure is based on reported operating profit (see above)
excluding the pension charge to cash difference adjustment and
operating specific items, which Management considers to be key
adjustments in understanding the underlying profit of the Group
at this level.

Reported operating profit before and after
transformation costs
These measures are in accordance with IFRS and are a means by
which Management can understand the financial performance
of the Group, taking into account business-as-usual (BAU) costs
e.g. people, distribution and conveyance, infrastructure and
other operating costs excluding operating specific items. They
are presented before and after transformation costs, to provide
Management with a view of the ongoing impact of the costs of
transforming the business.

Reported operating profit
This measure is in accordance with IFRS and is a means by which
Management can understand the financial performance of the
Group. It is based on reported profit after transformation costs
(see above) including operating specific items.

Adjusted operating profit before and after
transformation costs
These measures are based on reported operating profit before
and after transformation costs (see above) further adjusted to
exclude the volatility of the pension charge to cash difference
adjustment, which Management considers to be a key adjustment
in understanding the underlying profit of the Group at this level.

These adjusted measures are reconciled to the reported results
in the table in the paragraph entitled ‘Consolidated reported and
adjusted results reconciliation’. Definitions of operating costs, the
pension charge to cash difference adjustment, transformation
costs and operating specific items are provided below.

Adjusted operating profit margin after transformation costs
This is a fundamental measure of performance that Management
uses to understand the efficiency of the business in generating
profit. It calculates ‘adjusted operating profit after transformation
costs’ as a proportion of revenue in percentage terms.

Earnings before interest, tax, depreciation and amortisation
(EBITDA) before transformation costs
Reported EBITDA before transformation costs is reported
operating profit before transformation costs with depreciation
and amortisation and share of associate company profits
added back.

Adjusted EBITDA before transformation costs is reported EBITDA
before transformation costs with the pension charge to cash
difference adjustment added back.

EBITDA is considered to be a useful measure of operating
performance because it approximates the underlying operating
cash flow by eliminating depreciation, amortisation and the
performance of associate companies.

The following table reconciles adjusted EBITDA before transformation costs to reported operating profit before transformation costs.

(£m)

Reported operating profit before transformation costs

Depreciation and amortisation

Reported EBITDA before transformation costs

Pension charge to cash difference adjustment

Adjusted EBITDA before transformation costs

53 weeks
March 2019

52 weeks
March 2018

474

391

865

935

236

341

577

458

1,035

6 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Adjusted earnings per share
Adjusted earnings per share is reported basic earnings per share,
excluding operating and non-operating specific items and the
pension charge to cash difference adjustment. A reconciliation
of this number to reported basic earnings per share is included
in the adjusted results table in the section entitled ‘Presentation
of results’.

People costs
These are costs incurred in respect of the Group’s employees and
comprise wages and salaries, pensions and social security costs.

Distribution and conveyance costs
These costs relate to non-people costs incurred in transporting
and delivering mail by rail, road, sea and air, together with costs
incurred by international mail carriers, Parcelforce Worldwide
delivery operators and GLS.

Infrastructure costs
These are costs primarily relating to the day-to-day operation of
the delivery network and include depreciation and amortisation,
IT and property facilities management costs.

Other operating costs
These are any operating costs which do not fall into the
categories of people costs, distribution and conveyance costs or
infrastructure costs including for example, Post Office Limited
agency costs, consumables and training. Other operating costs
exclude transformation costs and operating specific items.

Transformation costs
These costs relate to the ongoing transformation of the business,
including management time and costs associated with the
cost avoidance programme, and other projects with the aim of
making our operations more efficient or improving our customer
offering. They also include voluntary redundancy and other
termination costs.

Pension charge to cash difference adjustment
This adjustment represents the difference between the IAS 19
income statement pension charge rate of 41 per cent for the
RMPP to 31 March 2018 and 18.9 per cent for the DBCBS from 1
April 2018 and the actual cash payments agreed with the RMPP
Trustee of 17.1 per cent of pensionable pay for RMPP to 31 March
2018 and 15.6 per cent for the DBCBS. Management believes this
adjustment is appropriate in order to eliminate the volatility of the
IAS 19 accounting charge and to include only the true cash cost of
the pension plans in the adjusted operating profit of the Group.

Operating specific items
These are recurring or non-recurring items of income or expense
of a particular size and/or nature relating to the operations of
the business that, in Management’s opinion, require separate
identification. Management does not consider them to be reflective of
year-on-year operating performance. These include items that have
resulted from events that are non-recurring in nature, even though
related income/expense can be recognised in subsequent periods.

Employee Free Shares charge
These relate to accounting charges arising from the granting
of free shares to employees upon the Government’s sales of its
stake in the business (SIP 2013, 2014, 2015 and 2016) with no
direct cash impact on the Group.

Amortisation of intangible assets in acquisitions
These notional charges, which arise as a direct consequence
of IFRS business combination accounting requirements, are
separately identified as Management does not consider these
costs to be directly related to the trading performance of
the Group.

Legacy/other costs
These costs relate either to unavoidable ongoing costs
arising from historic events (industrial diseases provision)
or restructuring costs.

Non-operating specific items
These are recurring or non-recurring items of income or expense
of a particular size and/or nature which do not form part of the
Group’s trading activity and in Management’s opinion require
separate identification.

Profit/loss on disposal of property, plant and equipment
(PP&E)
Management separately identifies recurring profit/loss on
disposal of PP&E as these disposals are not part of the Group’s
trading activity and are driven primarily by business strategy.

Profit/loss on disposal of business
These non-recurring events are excluded on the basis that by
their nature they are individually unique and therefore distort
comparison of year-on-year business performance.

Free cash flow
Free cash flow (FCF) is calculated as statutory (reported) net cash
flow before financing activities, adjusted to include finance costs
paid and exclude net cash from the purchase/sale of financial
asset investments. FCF represents the cash that the Group
generates after spending the money required to maintain or
expand its asset base.

In-year trading cash flow
In-year trading cash flow reflects the cash generated from
the trading activities of the Group. It is based on reported net
cash inflow from operating activities, adjusted to exclude other
working capital movements and the cash cost of operating
specific items and to include the cash cost of property, plant
and equipment and intangible asset acquisitions and net finance
payments. Other working capital movements include movements
in GLS client cash held and in deferred revenue from stamps
purchased in prior periods. In-year trading cash flow is used
primarily by Management to show cash being generated by
operations less cash investment.

6 2

FINANCIAL REVIEW CONTINUEDSTRATEGIC REPORT The following table reconciles in-year trading cash flow to the nearest IFRS measure ‘net cash inflow from operating activities’.

(£m)

Net cash inflow from operating activities

Adjustment for:

Other working capital movements

Cash cost of operating specific items

Purchase of property, plant and equipment

Purchase of intangible assets (software)

Net finance costs paid

In-year trading cash inflow

Add back 2017-18 pay award

Add 53rd week payroll and VAT payments

Adjusted in-year trading cash flow

Reported
53 weeks
March 2019

Reported
52 weeks
March 2018

493

905

(6)

(264)

(100)

(12)

117

101

282

(219)

(141)

(15)

545

(101)

–

444

In-year trading cash flow included an outflow of £101 million, due to the timing of the cash payment of the 2017-18 frontline pay award
and an outflow due to impact of the 53rd week, which included an additional monthly payroll and VAT payment. Reversing the impact
of these items would give an Adjusted in-year trading cashflow of £282 million (2017-18: £444 million), sufficient to cover the full year
dividend of 25.0 pence per share (2017-18: 24.0 pence per share).

Net cash investment
Net cash investment is a measure of the cash utilised by the Group in the period on investment activities netted off against cash
received on the disposal of property, plant and equipment. It is a measure used by Management to monitor investment within the
Group. The items making up this balance in the statutory cash flow are indicated in the section ‘Condensed consolidated statement
of cash flows’.

Net debt
Net debt is calculated by netting the value of financial liabilities (excluding derivatives) against cash and other liquid assets. It is a
measure of the Group’s net indebtedness that provides an indicator of the overall balance sheet strength. It is also a single measure
that can be used to assess the combined impact of the Group’s indebtedness and its cash position. The use of the term net debt does
not necessarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure.
Details of the borrowing facilities in place and the amounts drawn can be found in the section titled ‘Net finance costs’.

A reconciliation of net debt to reported balance sheet line items is shown below.

(£m)

Loans/bonds

Finance leases

Cash and cash equivalents

Pension escrow (RMSEPP)

Net debt

At 31 March
2019

At 25 March
2018

(431)

(125)

236

(300)

(437)

(169)

600

Net debt excludes £187 million (2017-18: £178 million) related to the RMPP pension scheme of the total £207 million (2017-18:
£198 million) pension escrow investments on the balance sheet which is not considered to fall within the definition of net debt.

Adjusted effective tax rate
The adjusted effective tax rate is the adjusted tax charge or credit for the period expressed as a proportion of adjusted profit before
tax. Adjusted effective tax rate is considered to be a useful measure of tax impact for the period. It approximates the tax rate on the
underlying trading business through the exclusion of specific items and the pension charge to cash difference adjustment.

6 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19RISK OVERVIEW

P R I N C I PA L R I S K S
A N D U N C E R TA I N T I E S

The table below details each principal business risk, those aspects
that would be impacted were the risk to materialise, our assessment
of the status of the risk and how the Group mitigates it.

Principal risk

Status

How we are mitigating the risk

Pensions, Pay and Pipeline Agreement and the risk of industrial action
There is extensive trade union recognition in respect of our workforce in the UK, with a strong and active trade union.
As Royal Mail Group continues to transform in order to remain competitive in the letters and parcels markets, including
delivering its ‘turnaround and grow’ plan in the UK, there remains a risk of industrial action.

Industrial action

There is a risk that one or more material
disagreements or disputes between the
Group and its trade unions could result
in widespread localised or national
industrial action.

The absence of major industrial action
is a key assumption underpinning the
‘turnaround and grow’ plan in the UK.
But, the plan requires a high level of
operational change in an increasingly
competitive market, which may put
additional strain on the stability of
our industrial relations.

Widespread localised or national
industrial action would cause material
disruption to our business in the UK and
would be likely to result in an immediate
and potentially ongoing significant loss
of revenue for the Group. It may also
cause Royal Mail to fail to meet the Quality
of Service targets prescribed by Ofcom,
which may lead to enforcement action
and fines.

Our Agenda for Growth agreement with
the CWU provides a joint commitment
to improved industrial relations and
to resolving disputes at pace in a way
that is beneficial to both employees
and Royal Mail.

Our transformation plan will be carefully
sequenced, with a foundation period,
including parcels automation in all our
existing Mail Centres, followed by the
embedding of the new work tools across
our UK operations and the deployment of a
new network design. We have informed our
unions about our plan. We will work closely
with them on strategy, detailed design and
deployment. We are committed to working
corroboratively through these changes –
including new ways of working new trials
and more flexibility – with them.

Under the Agenda for Growth, there
is a prescribed resolution process for
disputes which requires trained mediators
nominated by and representing both
the CWU and the business. This must be
followed before any industrial action
can take place. The Agenda for Growth
agreement has legally binding protections
for the workforce in respect of future job
security and our employment model.
These can be rescinded in a number of
circumstances, including in the event
of national industrial action.

The Agenda for Growth agreement
developed jointly with the Communication
Workers Union (CWU) represented a
fundamental change in our relationship
with the CWU, and continues to promote
stability in industrial relations.

In February 2018, following an industrial
dispute late in 2017, we announced the
Pensions, Pay and Pipeline Agreement
(the ‘2018 Agreement’) with the CWU,
which the union membership subsequently
ratified. As part of the Agreement, Royal
Mail and the CWU committed to a broad
programme of operational change, as well
as pension reform, changes to pay and
terms and conditions.

The after effects of the industrial dispute,
delayed implementation of cost avoidance
projects and the complexity involved in
implementing elements of the Agreement
contributed to our announcement in
October 2018 that we would not deliver
our productivity and cost avoidance
targets for 2018-19.

Subsequent analysis of the productivity
and efficiency opportunities under
the 2018 Agreement found that a step
change was required in the form of a new
transformation plan to fund the overall
cost of the Agreement to the Company.
While the overall operational direction set
out in the Agreement is right the review
found that the initiatives so far designed to
fund it were not enough in themselves to
do so; nor were they all at the appropriate
stage of readiness. Hence, the need for a
new transformation plan.

6 4

STRATEGIC REPORT

KE Y

Link to
strategy

Winning in parcels

Defending letters

Relative
severity

High

Medium

Growing in new areas

Low

Change during
the year

Speed at which
the risk could impact

↑

Increasing risk

Fast: 6 months

Decreasing risk

Medium: 6-12 months

←→ Stable

New

Slow: >12 months

Principal risk

Status

How we are mitigating the risk

We are continuing to work with
Government to make the necessary
legislative and regulatory changes required
to introduce the CDC pension scheme.

Pension arrangements

We recognise that pension benefits are
important to our people and that we need
to continue to provide sustainable and
affordable pensions arrangements that
are acceptable to our people and unions.

There is a risk that we may be unable to
obtain the necessary legislative changes
to enable us to implement the UK’s first
Collective Defined Contribution (CDC)
pension scheme as agreed with the CWU.

Efficiency

The Royal Mail Pension Plan closed to
future accrual in its Defined Benefit form
on 31 March 2018. A new Defined Benefit
Cash Balance Scheme was put in place
from 1 April 2018.

The overall ongoing cash cost of both the
transitional arrangements and the proposed
CDC scheme are expected to continue to be
around £400 million per annum.

The Government has published its
response to the consultation on CDC
pension schemes. It has committed to
bringing forward necessary legislative
changes to enable CDC pensions as soon
as Parliamentary time allows.

Royal Mail must become more efficient
and flexible in order to compete effectively
in the parcel and letter markets.

The success of our strategy relies on
the effective control of costs across all
areas of the business and the delivery
of efficiency benefits.

We continue to operate a tight
balance between achieving efficiency
improvements whilst delivering high
service levels. This requires careful
management of efficiency and Quality
of Service.

Royal Mail is launching its ‘turnaround
and grow’ plan in the UK. There is a
risk we will not be able to deliver our
transformation programme and meet our
required cost avoidance and productivity
improvement targets during the life of
the plan.

In recent years, the profits generated
by our UK business have been in decline
and our costs have increased. Our
productivity has slowed appreciably due
to the absence of both new working tools
and network enhancements.

The ‘turnaround and grow’ plan is about
a renewed focus on our efficiency and
productivity and our UK network through
a range of new, digitally enabled work
tools, operational excellence and targeted
investments. This five-year plan will
enable us to maximise the benefits,
particularly in delivery and processing,
of joint letter and parcel delivery, and
facilitate our transition to become a
parcels-led business where letters in the
UK continue to be important. There will be
an even greater emphasis on standardised
processes to drive efficiency gains.

Our ‘turnaround and grow’ programme
in the UK is about a renewed focus on
our efficiency and productivity and
our UK network through a range of
digitally enabled work tools and targeted
investments. Operational excellence is
another key feature of the plan.

This is a demanding change programme.
We have informed our unions about our
plan. We will work closely with them on
strategy, detailed design and deployment
(See ‘Industrial Action’ above). Change
underpins our future, with the absence of
major industrial action a key turnaround
assumption. Our ambition is to deliver
around £1 billion of costs avoided, and a
cumulative productivity improvement of
15-18 per cent over the life of the plan.

6 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

RISK OVERVIEW CONTINUED

Principal risk

Status

How we are mitigating the risk

Customer expectations and Royal Mail’s responsiveness to market changes
The industry sectors in which we operate remain highly competitive, with customers demanding more and our competitors
responding quickly to these changing demands.

Customer expectations and Royal Mail’s responsiveness to market changes

Changes in customer expectations and
changes in the markets in which the Group
operates, could impact the demand for
our products and services.

Given the major cultural shift underway
in UK society – more e-commerce and
therefore fewer letters and more parcels
– it is very important that Royal Mail
changes too.

While we expect to handle many more
parcels in the years to come, work we
commissioned from external consultants
indicates we should expect domestic letter
volumes to fall by about 26 per cent over
the next five years or so. This structural
decline will continue to be driven by
e-substitution, lower GDP, the impact
of GDPR and business uncertainty.

Our renewed focus on productivity,
through operational excellence and
key work tools, is vital to remaining
competitive in the UK parcels market –
one of the most developed e-commerce
markets in the world. So too is our
network extension, which, in combination
with productivity gains, should enable
us to future proof our UK business
against a backdrop of significant
changes in customer demand.

The impact of GDPR led to a reduction
in marketing mail volumes. We expect
addressed letter volumes (excluding
political parties’ election mailings) to decline
by five-seven per cent in 2019-20, due to
the impact of GDPR and continued market
uncertainty. We expect addressed letter
volume declines to return to our medium-
term forecast range of four-six per cent
thereafter. The rate could move outside
of this range if economic conditions falter
or business uncertainty deteriorates.

Competition in the UK domestic and
international parcels markets is intense,
with competitors offering innovative
solutions that include convenient, reliable
delivery and return options, improved
tracking services and features that put
recipients increasingly in control of
their deliveries.

Our UK Network review found that our
existing network has many strengths.
It provides us with good economics,
particularly in letters and small parcels,
with the latter accounting for most of our
parcel volumes. The review established
that our network is not optimised for the
anticipated increase in the proportion of
next day delivery and larger parcels,
including our current reliance on manual
sortation and a two-sort approach. Our
approach is to therefore seek the best
of all worlds. This means maintaining our
existing network for letters and small,
parcels, and a greater proportion of next
day delivery items extending our network
to handle large parcels more cheaply
and more competitively.

We plan to leverage the Parcels
technology investments of recent years
by bringing to market new features that
improve convenience and customer
control of parcel deliveries, such as
the Estimated Delivery Window feature
we have just launched or the Inflight
Redirection feature that forms part of
this coming year’s development plan.

Our ‘turnaround and grow’ plan underpins
the future of our UK business – never
forgetting the importance of letters – as
e-commerce and other societal changes
profoundly impact on how we all go about
our daily lives.

We are extending our UK network to a)
maximise the benefits of delivering letters
and small parcels together and b) handle
more next day delivery and larger parcels
more efficiently. This will facilitate
e-commerce growth and increase demand
for our services. We are targeting UK parcel
volume growth at above the expected UK
addressable parcel market growth rate,
underpinned by continued investment in
customer-led features and channels.

We will continue to promote the case for
mail in a post GDPR environment. During
the year, we helped expand the usage and
availability of JIC MAIL data (Joint Industry
Committee) to offer standardised data on
the reach and frequency of mail through
all mainstream media and campaign
planning tools. JIC MAIL data helps
demonstrate more clearly to the market
how consumers interact with all mail
types and the commercial benefits this
drives for brands.

6 6

STRATEGIC REPORT

Principal risk

Status

How we are mitigating the risk

Economic and political environment

Historically, there has been a correlation
between economic conditions and the
level of letter and B2B parcel volumes.
Low rates of economic growth could
impact our ability to maintain and grow
revenue, either by reducing volumes or
encouraging customers to adopt cheaper
products or formats for sending letters
and parcels.

The UK voted to leave the EU in 2016. The
shape of the future relationship between
the UK and the EU remains unclear.

The Labour party’s 2017 manifesto
included a pledge to bring a number of
private companies, including Royal Mail,
back into public ownership

The Board continues to monitor the
economic and wider external environment
in the UK and the Group’s other markets.
Specific areas of focus include:

– Business uncertainty, with the recent

slowdown in economic activity, this may
be an indicator that business customers
will look to reduce costs and compete
aggressively for contracts, impacting
letter volumes, in particular
marketing mail.

– A decline in the value of Sterling, which
impacts our International business in
terms of the exchange rate effect on
imports and exports, higher inflation
resulting from increases in the prices
of UK imported goods and services,
increase terminal dues and
wage increases.

– Economic growth in the Eurozone has
recently shown signs of weakening in
some countries (notably Germany and
Italy). The Board will continue to monitor
this position in terms of the impact on
our international parcel volumes,
including those handled by GLS.

More broadly, Royal Mail’s business
performance remains closely aligned to
UK economic growth. We assume that
GDP growth will remain below average
in the near-term, and return to a typical
growth rate in the medium-term.

While the shape of the future relationship
between the UK and the EU remains
unclear, it is not possible to predict with
any degree of accuracy the impact the
UK’s departure from the EU could have
on the Group. The main issues relate to
any potential economic downturn, and
changes associated with customs and VAT
processing. We believe the immediate risk
to our domestic operations is low. We are
working with key suppliers to ensure our
supply chain remains secure. We continue
to monitor the development of Labour
Party policy on nationalisation closely.

We continue to monitor the development
of Labour Party policy on nationalisation
closely.

Macroeconomic risk assessments are
embedded within the monthly Letters
forecasting processes.

The Group also has the following
strategies in place:

– A cost avoidance programme to respond

to possible revenue headwinds.

– Business initiatives that are responding

to fluid competitive pressures.

– A possible, absorbable reduction in

investment in the short term to protect
the cash and indebtedness position of
the business.

Internal procedures are in place to monitor
and manage ongoing risks associated with
the UK leaving the EU. Material risks are
reported to and handled through a Brexit
steering group. This is led by the Group’s
Chief Risk and Governance Officer and is
comprised of senior executives.

The impact on cross-border parcel
volumes will depend on the nature of
the UK’s future trading relationships,
and what the future EU/UK customs and
VAT arrangements will be. In a ‘no deal’
situation, we expect the rules which apply
to non-EU imports to be extended to EU
items. Similarly, we would expect the EU to
treat UK imports as it does non-EU imports
today. We are well placed to manage the
impact of changes to customs processing.

We are working closely with Government to
put in place systems to ensure the movement
of cross-border parcels continues to operate
effectively. We have developed a new model
for the collection of taxes and duties with
Government. We are also engaging with
Ofcom and the Department for Business,
Energy, and Industrial Strategy (BEIS) on
the applicability of Quality of Service targets
after the UK leaves the EU.

Royal Mail engages regularly with politicians
and policy makers, and closely monitors
the potential impact of political and policy
changes on the company. The Company
runs an extensive public affairs programme
of engagement with politicians and policy
makers. We regularly demonstrate the
significant progress that the company
has made since privatisation in 2013.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

RISK OVERVIEW CONTINUED

Principal risk

Status

How we are mitigating the risk

Growing in new areas

Our success in growing in new areas of
business is dependent on such factors
as our continued ability to identify new
profitable and sustainable areas of
business, implementing appropriate
investments, and having in place suitable
structures to support continued
transformation of the business.

Royal Mail Group is well positioned to grow
in new markets through its subsidiary, GLS.
It has a replicable and scalable business
model founded on the development of
strong regional businesses.

Through increasing its footprint and
focusing on growth opportunities in
areas such as the deferred parcels space
and B2C parcels market, GLS is well
positioned to support Royal Mail Group’s
overall strategy.

Royal Mail and GLS together currently
generate £1.7 billion in annual revenue
from cross-border parcels and letters.
The cross-border parcels market is a large,
attractive growth opportunity for the Group,

We are continuing to seek opportunities
to develop a broader revenue base and
growth in the UK and overseas.

Our five-year transformation programme
aims to build a parcels-led, more balanced,
more diversified business. This includes
increasing the proportion of Group revenue
generated by parcels and increasing our
geographical diversification programme
through our ‘scale up and grow’ plan
for GLS and our cross-border parcels
strategy. These are two of our three
strategic priorities.

Our strategy is designed to ensure that
GLS builds on its strong, 30-year track
record and makes a major contribution
to the Group’s product and geographical
diversification over the next five years. The
focus will be on profitable revenue growth,
including focused yield management.

We will combine the best of Royal Mail
and GLS to offer a global proposition in
smaller and larger cross-border parcels.

6 8

STRATEGIC REPORT
Principal risk

Status

How we are mitigating the risk

Regulatory and legislative environment
The business operates in a regulated environment. Changes in legal and regulatory requirements could impact our ability
to meet our targets and goals.

Absence of a sustainability framework to sustain the USO

USO finances are fragile. The regulatory
system applies some constraints to
Royal Mail’s ability to compete for traffic
to support the costs of the Universal
Service network. These may impact our
revenues and our ability to compete in
the highly competitive sectors in which
we operate. This could ultimately impact
our ability to deliver the Universal Service
on a sustainable basis.

Given the continuing structural decline in
addressed letter volumes, and broader
changes in the parcels market, Ofcom is
enhancing its monitoring of Royal Mail.
It is bringing forward some of the work
it plans to undertake as part of its next
review of the regulation of Royal Mail,
which, overall, will be completed by 2022.
The work it will undertake includes: a) a
review of Royal Mail’s efficiency, designed
to give more insights into the future
sustainability of the Universal Postal
Service; and b) research to review the
extent to which the postal market is
meeting the reasonable needs of users
and consumers and SMEs.

Ofcom will continue to be focused on
monitoring Royal Mail’s efficiency. It will
complete its delivery cost model to help
inform Ofcom’s view on how delivery
costs might change over time under
different scenarios. Ofcom intends to
extend this detailed cost modelling work
to other parts of Royal Mail’s operations.

The Universal Service, as we have
stressed to Ofcom and Government,
needs to meet the 21st century
requirements of consumers and SMEs.
In short, a contemporary USO is required.
We have also noted the importance of
considering the revenue pools needed to
sustain the Universal Service, alongside
the legitimate needs of consumers and
SMEs. Given that the USO has high, fixed
costs, irrespective of volume, it is also
crucial to focus on underpinning USO
and non-USO revenue pools to fund it.
We have made all of these points both
to Ofcom and Government.

We have been engaging Ofcom to
introduce supportive changes to the
regulatory environment that will help
to keep the Universal Service market
funded. Ofcom has not taken forward
our proposal for a proactive sustainability
framework. It has also not taken forward
the opportunity to raise consumer
protection standards across the industry.

A key part of our ‘turnaround and grow’
plan for our UK business is to underpin
the sustainability of the Universal Service.
The plan will be challenging to execute,
and we will be asking Ofcom for its
support, wherever possible, to facilitate
its delivery. In doing so, we will note that
our transformation is designed to future
proof our UK business by enabling us to
become even more efficient and better
placed to respond to changing customer
demands. We will stress the power and
economic value of the Universal Service
as it makes commerce happen across the
UK and connects customers, companies
and countries. We will also renew our
request to Ofcom for a level playing field
across the whole industry, including
higher consumer protection standards
in parcels and lifting labour standards
across the delivery sector.

We undertake extensive engagement with
Ofcom across all workstreams, including
the cost modelling. We will actively engage
with Ofcom on both its efficiency and user
needs work. We will also engage with the
relevant Government departments and
consumer interest groups.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

RISK OVERVIEW CONTINUED

Principal risk

Status

How we are mitigating the risk

Competition Act investigation

On 14 August 2018, Ofcom announced
its decision following its investigation
into whether Royal Mail had breached
competition law. The investigation was
launched in February 2014, following a
complaint brought by TNT Post UK (now
Whistl). Ofcom found that Royal Mail had
abused its dominant position in the
market for bulk mail delivery services in
the United Kingdom by issuing Contract
Change Notices on 10 January 2014 which
introduced discriminatory prices. It fined
Royal Mail £50 million.

Strategic workforce planning

Workforce planning could be adversely
impacted as the demographic of our
workforce changes alongside the
availability of people with the right
skills to join our organisation.

We have added this risk to our Principal
Risks to reflect its strategic importance.

Royal Mail Group will continue to robustly
defend our conduct in the hearing before
the CAT.

Royal Mail is very disappointed by Ofcom’s
decision to impose a fine of £50 million.
The decision relates to a price change
announced in 2014, which was never
implemented or paid under Royal Mail’s
Access Letters Contract.

Royal Mail strongly refutes any suggestion
that it has acted in breach of the Competition
Act, and considers that the decision is
without merit and fundamentally flawed.

Royal Mail Group lodged an appeal with
the Competition Appeal Tribunal (CAT)
on 12 October 2018 to have both Ofcom’s
decision and fine overturned. The main
hearing for the appeal to the CAT will take
place in Summer 2019. A final decision is
not expected from the CAT until around six
to nine months after this hearing. No fine
is payable until the appeals process
is exhausted.

As our workforce ages, our physically
demanding roles may become more
difficult to fulfil. Advancement in
technology is leading to increased
automation, which requires a different
specialist skillset.

Availability of people to fill frontline roles
may decline as more people enter Further
and Higher Education.

Economic trends and the impact of Brexit
may influence the availability of workers.

We monitor the demographic of our
workforce, and track key external
metrics such as the employment
rate and demographic.

We undertake market research and analysis,
and perform industry benchmarking.

We review our workforce with an
active programme of recruitment to
fill vacancies as and when they arise.

7 0

STRATEGIC REPORT

Principal risk

Status

How we are mitigating the risk

Health, Safety and Wellbeing

The health, safety and wellbeing of
our employees, contractors, agency
workers and members of the public is of
the utmost importance to us. There is a
risk that a health and safety incident or
failure of our processes could result in
the serious injury, ill health or death of
employees, contractors, agency workers
or members of the public.

Such an incident may lead to criminal
prosecution or fines by the enforcing
authority or civil action by the injured
party resulting in large financial losses
and reputational damage for the Group.

Similarly, inadequate arrangements for
effectively managing the health and
wellbeing of our employees could also
lead to financial losses and reputational
damage through increased sickness
absence, lower productivity, civil action
or criminal prosecution.

The business has a large number of
employees including seasonal staff and
agency workers. It also operates a very
large fleet, employs a large number of
contractors and interacts extensively with
members of the public. A large proportion
of our employees spend most of their time
working outdoors, on foot or driving,
where the environment cannot be
controlled. Due to this wide reach and
the number of people affected by the
business’ undertakings, the risk of serious
harm to people cannot be totally mitigated.
We acknowledge that every health and
safety incident has a human impact.

A full review of the integrated Safety,
Health and Environment Management
System (SHEMS) has been carried out
in 2018-19 to identify gaps in legal
compliance or risk controls, and identify
opportunities for simplification to make
the SHEMS more accessible for managers.

We will continue to review SHEMS to
identify any further opportunities for
streamlining and simplification. We are
investing in improved technology so that
our risk assessment processes can be
completed more easily by managers and
better meet the needs of our business.

Operational implementation of
SHEMS is monitored via an annual
audit programme and a professional
and independent SHE function is in place
to provide advice, support and guidance
on the implementation of standards.

There is an annual SHE initiative and
communications plan in place. This is
informed by a review of compliance
data, risk data, KPI performance and
legislative requirements.

Employees have access to health and
wellbeing assistance through our Feeling
First Class website, First Class Support
helpline and Occupational Health provision.

SHE performance is discussed and
reviewed by the Board and senior leaders
are committed to driving full compliance
to SHEMS.

Major breach of information security, data protection regulation and/or cyber

We are subject to a range of regulations,
contractual obligations, and customer
expectations around the governance and
protection of various classes of data.

In common with all major organisations,
we are the potential target of cyber-attacks
that could threaten the confidentiality,
integrity and availability of data in our
systems. A cyber security incident could
trigger material service and / or
operational interruption.

A major breach of data protection regulation
is also considered a risk that could result in
financial and reputational damage, including
loss of customer confidence.

While no material losses related to
cyber security or data breaches have
been identified, given the increasing
sophistication and evolving nature of
this threat, and our reliance on technology
and data for operational and strategic
purposes, we consider cyber security
and/or a breach of data protection
regulation a principal risk.

As external threats become more
sophisticated, and the potential impact
of service disruption increases, we
continue to invest in cyber security.
Recognising that this risk cannot be
eliminated, we continuously review our
security enhancement and investment
plans to reflect the changes in the
threats we face.

We are undertaking activities across the
Group to ensure compliance with GDPR.
This includes protecting us from loss of data,
managing information rights and managing
our marketing permissions correctly.

7 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

RISK OVERVIEW CONTINUED

Principal risk

Status

How we are mitigating the risk

Talent and capability

Our performance, operating results
and future growth depend on our ability
to attract and retain talent with the
appropriate level of expertise.

The capability, experience and cohesion
of senior management is integral to
delivering our transformation programme.

Voluntary turnover in senior management
continues at similar levels to previous
years but remains a business risk.

The Group’s remuneration policy sets out
that the overall remuneration package
should be sufficiently competitive to
attract, retain and motivate executives
with the commercial experience to run
a large, complex business in a highly
challenging context.

We operate a succession planning process
and have in place talent identification and
development programmes.

Environment and sustainability

Climate change and governmental
actions to reduce its impact may have
adverse operational, financial and
reputational consequences.

With the UK’s largest ‘feet on the street’
network of around 90,000 postmen and
women, Royal Mail plays a key role in
keeping carbon emissions low.

We have a requirement to maintain a
large fleet of vehicles. Growth in parcels
is also driving up our energy demand. We
recognise our responsibility to reduce the
energy we use and emissions associated
with our fleet to help improve air quality in
the communities in which we operate.

The cost of operations is likely to increase
as we adapt our business in response
to government action to reduce the
effect of harmful emissions such as
the introduction of Clean Air Zones in
UK cities.

An increase in the frequency of extreme
weather events may result in disruption
to our operational pipeline and impact our
ability to meet USO requirements. We may
also see price rises as a result of resource
scarcity such as water shortages.

This risk is now being included as a
principal risk given its major significance
both internally and externally.

We are investing in new vehicles and
technologies, changing driving styles,
and making our transport network more
efficient. We are undertaking trials and
initiatives in our current fleet to drive
down fuel consumption. Our fleet also
includes electric and liquefied natural gas
vehicles. Over time, we plan to increase
the number of alternative fuel or advanced
technology vehicles to meet current and
future legislation.

We are also taking proactive steps to
reduce our energy and water consumption
and to reduce the amount of waste we
send to landfill.

7 2

STRATEGIC REPORT

These risks were quantified to create
a downside scenario that took into
account the levels of committed capital
and expenditure, as well as other
short-term cost and cash actions which
could mitigate the impact of the risks.
Mitigating actions included:

(i)

reducing variable hours and cost
of sales;

(ii) removing discretionary pay;

(iii) reducing our internal investment; and

(iv) reducing our one off projects

Consideration was also given to the large
fixed cost base required to deliver the
Universal Service Obligation in its current
form. The downside scenario was tested
to determine whether the Group would
remain solvent.

Viability Statement
Based on the results of their analysis, the
Directors have a reasonable expectation
that the Group will be able to continue in
operation and meet its liabilities as they
fall due over the period to March 2022.

The Directors have assessed the viability
of the Group as part of their ongoing risk
management and monitoring processes.
The Directors have considered their
stewardship responsibilities, previous
viability statements, the nature of the
business and its investment and planning
periods when making this assessment.

The key factors affecting the Group’s
prospects are:

– Transforming and growing our

UK business;

– Scaling up and growing GLS; and
– Enhancing our cross-
border proposition.

Further details on these factors can be
found on pages 20-23.

While the Directors have no reason to
believe that the Group will not be viable
over the longer-term, they consider the
three financial years to March 2022 to
be an appropriate planning time horizon
to assess Royal Mail’s viability and to
determine the probability and impact
of our principal risks. Although forecasts
have been prepared for longer periods for
the purposes of the strategy day, there is
inevitably more uncertainty associated
with a longer time frame, and the Group
will revert to a three year time frame for
future business plans. This period also
aligns with the performance criteria in
our Long Term Incentive Plans (LTIP).

Business divisions have prepared detailed
annual forecasts for a 12 month period
and project performance over five years
with reference to economic assumptions
and strategic initiatives.

The key assumptions within the Group’s
financial forecasts are outlined in the
section entitled ‘Strategy and financial
outlook: three and five years’ on page 8.

V I A B I L I T Y
S TAT E M E N T A N D
G O I N G C O N C E R N

– No change in capital structure. The

Group has €500m bond which expires
in 2024 and a revolving credit facility
(RCF), the majority of which expires in
March 2022. It is assumed that the RCF
could be renewed on similar terms.
– The current Regulatory Framework

was extended in March 2017 through to
March 2022. It is therefore assumed that
there is no change in the Regulatory
Framework over this period.

Assessment of Viability
The key assumptions within the
projections were stress-tested with
reference to risks set out in the Principal
Risks section on pages 64-72 but focused
on those that could have a plausible and
severe financial impact over the
plan horizon.

This year, the Directors considered:

(i)

the potential impact of industrial
action; (Principal risk:
Industrial Action);

(ii) deteriorating economic and market
conditions which could result in
letters volume decline greater than
our projected four-six per cent in
the medium term (Principal risk:
Economic and Political Environment);

(iii) a no deal Brexit, which could cause
economic conditions to deteriorate
further (Principal risk: Economic and
Political Environment); and

(iv) increased competition in the UK

parcels sector. (Principal risk:
Customer expectations and
Royal Mail’s responsiveness
to market changes).

7 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19CORPORATE RESPONSIBILIT Y

R E S P O N S I B L E B U S I N E S S

SUS TA IN A BIL I T Y

CH A RI T BL E CON T RIBU T IONS

1st

£62m

ranked in our industry, Dow Jones
Sustainability Index

raised through payroll giving since 1989

UK ECONOM Y

£10.3bn

W EL L BEING

9.2%

Added to the UK economy in 2018-19

reduction in Lost Time Accident Frequency
rate from 2017-18

Our corporate responsibility (CR) strategy
is an integral part of realising our core
strategic priorities. The objectives at
the heart of our business and corporate
responsibility strategies are the same –
to generate sustainable shareholder value.

Our CR strategy comprises six
key objectives:

– Deliver economic and social benefit

to the communities we serve

– Drive colleague advocacy for the Group

and its community role

– Manage the environmental impacts

of our business and operations

– Deliver our transformation responsibly
– Operate with integrity
– Communicate our management of
corporate responsibilities openly
and transparently

Our CR objectives support the delivery
of our business strategy. We report
progress against them under the
areas of Customer, People, Community,
Environment and Suppliers. Our CEO
has overall responsibility for CR, with
members of the senior leadership team
taking responsibility for each of the
major strands of our CR agenda.

We are committed to communicating with
our stakeholders openly and transparently.
In line with the requirements of the UK
Government’s Non-Financial Reporting
Directive, this section summarises
information relating to Royal Mail’s
position on, and performance in, social
and environmental matters material to our
Company. We publish a full report on the
outcomes and impacts of our activities
in our annual CR report. The CR report is
prepared to meet the requirements of the
Global Reporting Initiative (GRI) Standards,

at the Comprehensive level. It is reviewed
by the Board prior to being published. The
CR policies and reports referred to in this
section are available at the following
address: www.royalmailgroup.com/
responsibility.

We engage an external auditor to assure
our key non-financial performance
indicators, covering customer, people,
community investment and environment
metrics. The assurance process involves
data testing and a review of the key
structures, systems, processes and
controls for managing and recording
information to ensure that the data
we report is reliable and complete.
Assurance is performed in accordance
with internationally recognised reporting
standards – ISAE 3000/3410 and
AA1000AS. Our 2018-19 assurance
statement will be available on our
website in due course.

Ipsos MORI Corporate Image Survey Winter 2018.

STRATEGIC REPORT Social and environmental
risk management
We assess risks arising from the social
and environmental issues relevant to our
business at least once a year, using our
risk management framework to determine
their criticality. The risks deemed most
critical to the Company are set out on
pages 64-72 in the Principal Risks section
of this report. More information about our
approach to risk management is given in
the Governance section, on pages 113-114.
Our non-financial key performance
indicators are available on pages 38-39.

Measuring our progress
We are independently rated as a
leading responsible business. In 2018,
we were named global leader of the
Transportation industry group in the
Dow Jones Sustainability Indices, ahead
of over 135 companies in ground-based
transportation, marine and aviation
industries. We have been included every
year we have been eligible, since
our flotation.

We were also included in the FTSE4Good
Global Index again in 2018. We were ranked
in the top four per cent of companies
included, on account of our environmental,
social and governance performance.

We respond to the Carbon Disclosure
Project (CDP) climate change questionnaire
each year. This year, we achieved a score
of A-, which was an improvement on last
year’s score. This is ahead of the Air Freight
Transportation and Logistics industry
average score of C.

Our customers
Our vision is to be recognised as the best
delivery company in the UK and across
Europe. This requires us to get customer
service right consistently and meet the
changing needs of all who depend on our
services. We are proud of the role we play
in connecting companies, customers and
communities across the UK through Royal
Mail and overseas through GLS.

With so many options available
to consumers, we need to make
our services simple and flexible to
ensure we remain competitive.

We are introducing new products and
services, as well as strengthening those
currently available, to provide a better
customer experience. For example, in
October 2018, we launched a new mobile
app to help consumers manage their
deliveries more effectively. The new app
enables consumers to easily track their
items from their smartphone. There is
also an option to book a redelivery if it
has not been possible to deliver an item.
This latest enhancement is part of a
programme of innovation making Royal
Mail’s services more accessible and
convenient. In Europe, GLS expanded
its FlexDeliveryService, which is now
available in 21 countries. This service
makes it easier for online shoppers to
take delivery of goods they have purchased
abroad, with a wide range of delivery
options to their home country.

Our Corporate Balanced Scorecard
includes three customer service
performance indicators. In 2018-19, our
mean business customer satisfaction
score remained the same at 78 points.
Our consumer sending satisfaction score
remained the same at 80 points. The mean
proportion of business customers rating
Royal Mail as being ‘Easy to Do Business
With’ decreased marginally from 80 to 79.

We take complaints seriously. We have
developed a ‘root cause’ approach to
managing them. This helps us to resolve
customer issues while identifying and
addressing the underlying causes. We
focus on First Time Delivery, and aim
continuously to improve our performance.
This year, we received 578,600 complaints,
a 0.1 per cent decrease compared to last
year, despite delivering more parcels and
working an additional week in the financial
year. The reduction was driven by improved
scanning and recipient notifications to give
customers greater awareness of their
items. There was also a continued focus
on key processes and conformance to
standards in our operation, and consistent
management of complaints with the
emphasis on the timeliness and quality
of investigations.

7 5

LBGT+

In 2018-19, Royal Mail took part in both
London Pride and UK Black Pride. Our
LGBT & Friends steering group and local
networks hosted a series of Prides across
the UK, with over 300 of our colleagues
attending. We commissioned Pride-
themed vans and a postbox in London,
to show our support for our colleagues.
The steering group also marked the
International Day against Homophobia,
Transphobia and Biphobia, Bi-Visibility
Day and National Coming Out Day, and
partnered with Stonewall for a Role
Models event, which empowered
35 colleagues to engage with peers
and promote LGBT+ inclusion in the
workplace. In addition, the steering group
promoted transgender awareness and
shared the inspiring stories of our trans
colleagues via our Digital Pride Campaign.
A series of transgender awareness
films featuring Royal Mail transgender
employees from across the country
were launched as part of this campaign.
The group partnered with Gendered
Intelligence, a not-for-profit Community
Interest Company that works with the
trans community, to raise awareness
of trans inclusion in the workplace.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19REPRE SEN TAT ION

32%

of senior managers are female

GENDER PAY G A P

0.6%

Women are paid 0.6% more than men
(on a mean basis)

C A RBON EMISSIONS

29%

reduction in C02e since 2004-05 baseline

Our people can also tell us how customer
focused our products and services are.

Our annual employee survey asks our
people what they think about the customer
experience. This year, we received a
customer focus score of 70 out of 100,
equal to the previous year.

Scam mail
Royal Mail never knowingly delivers scam
mail. We understand the upset and distress
that it can cause. During the year, we
worked with our customers, the National
Trading Standards Scams Team and law
enforcement agencies to tackle this issue.
Our people play a vital role in detecting
scam mail. We actively encourage them
to report any suspicions, and any concerns
about vulnerable households, to their line
managers. Since November 2016, we have
stopped over 4.3 million items of scam mail
from reaching our customers.

Our people
Engagement and culture
Engaged employees, who feel valued by
our business, are the foundation of our
customer focused culture. As such employee
engagement is one of the two people-related
key performance indicators on our Corporate
Balanced Scorecard. It is measured through
our annual Employee Survey.

In 2018-19, we saw an increase in our
employee engagement score, from
59 points to 60. Since our flotation in 2013,
our engagement score has increased by
6 points. In 2018-19, our employee turnover
rate was 7.2 per cent. This compares well
against the average UK turnover rate of
23 per cent.

Our values; Be positive, Be Brilliant and
Be Part of it, apply to every employee.
They represent the way we do things as
individuals and as a company. We use our
culture index, to understand how aligned
our colleagues are with our values. This
year, our culture Index score has remained
the same at 53 points.

Pay, pensions and terms and conditions
Royal Mail recognises its responsibility
to employees. We are proud to offer our
people good working condition and fair pay.

Over 99 per cent of our employees are
on permanent contracts, offering them
competitive salary and benefits such as
national insurance contributions, paid
holiday and a good pension. Around 69
per cent of our employees work full time,
with 31 per cent working part time.

CORPORATE RESPONSIBILIT Y CONTINUED

Royal Mail Group wants to provide
employees with a positive experience when
they have a family, supporting employees
during their pregnancy, maternity leave
during their return to the workplace by
helping them to manage their work-life
balance. We have formal policies in place
to cover maternity, adoption leave, shared
parental and parental leave. Specifically,
our policies for maternity and adoption
leave offer our employees up to 26 weeks
of full pay ordinary leave.

We are committed to providing the best
pay and terms and conditions in our
industry. We work closely with our unions
to agree changes to our working practices.
During the year we made agreements with
our union, the Communications Workers
Union (CWU) on pay increases for frontline
colleagues, up to April 2020, and continue
to work closely with the CWU to support
the Government in its work to introduce a
new pension scheme. We have worked
with Unite/CMA on new processes to help
standardise and improve ways of working
at all operational levels. See the Chief
Executive Officer’s review on pages 14-19
for more information.

Rewarding people fairly
We believe that all our people should be
rewarded fairly for their work. Each year,
we conduct a Company-wide review to
identify any pay discrepancies between
men and women. We were pleased to find
that, as in previous years, the average
salaries paid to men and women are
broadly the same.

On a mean basis, women are paid 0.6 per
cent more than men. This is due to a greater
proportion of women in senior positions,
compared to junior and operational roles. On
a median basis, men are paid one per cent
more than women, due to men selecting
more work that qualifies for allowances, like
shift work during the evening or at night. We
pay bonuses equally to men and women on
a median basis. On a mean basis, our Bonus
Gap is 22.7 per cent in favour of women –
compared to 9.1 per cent in the previous
year. This is due to the higher proportion
of women in our management populations
compared to our operational population.
Our full Gender Pay Report is available at the
following address: www.royalmailgroup.
com/responsibility/our-people.

STRATEGIC REPORT themselves to be from Black, Asian and
Minority Ethnic (BAME) backgrounds.
Royal Mail is a signatory of the Race at
Work Charter. We work with Business in
the Community’s Opportunity Now and
Race for Opportunity campaigns to ensure
we support and follow best practice in
gender and race diversity. Our BAME
steering group participated in targeted
focus groups to better understand the
experiences of our BAME colleagues –
feedback from which will be used to
inform our Diversity and Inclusion strategy.

Supporting people with disabilities
We are committed to supporting
disabled applicants and employees
at all stages of the employment cycle,
including reasonable adjustments to
the workplace where appropriate. We
introduced mandatory Disability and
Reasonable Adjustments training for
Operational Managers to ensure they
are confidently and effectively supporting
disabled colleagues. Approximately
13 per cent of our employees identify
themselves as having a disability. Our
Disability Confident Employer status was
confirmed by the Department for Work and
Pensions in August 2018 following the
submission of a robust self-assessment.

Supporting our LGBT+ colleagues
We are proud to be part of Stonewall’s
Diversity Champions programme. It
campaigns for equality for lesbian, gay,
bisexual and transgender people, and
provides access to guidance and good
practice in LGBT+ inclusion. Stonewall helps
us identify areas for improvement within
our LGBT+ programme. One per cent of
our employees identify themselves as
transgender and five per cent identify
themselves as lesbian, gay or bisexual.
We worked with Gendered Intelligence, a
not-for-profit Community Interest Company
that works with the trans community, to
undertake a trans-inclusion check to inform
our future activities and initiatives. Our
LGBT & Friends steering group focused on
promoting transgender awareness and
sharing the inspiring stories of our trans
colleagues via our Digital Pride Campaign.

Investing in our future
Around 87 per cent of our people
are Royal Mail shareholders. Since
privatisation, 12 per cent of the Company
has been awarded to Royal Mail employees
through the Royal Mail Share Incentive
Plan. All our eligible full-time employees
received a maximum of 913 free shares,
regardless of their role in our organisation.

Diversity and inclusion
Royal Mail believes that diversity
involves more than just a workforce
with representation from a wide variety
of groups. It also involves giving every
one of those groups a voice and valuing
contributions from all of our people. As
a company, we are committed to placing
fairness, diversity and respect at the
heart of our business and to creating
a welcoming and inclusive environment
for everyone.

Gender diversity
At our year end, 29 per cent of our Board
were female. We support Lord Davies’
recommendation that Boards should have
33 per cent female representation by 2020.
At senior management level, 32 per cent of
our colleagues are women, compared with
18 per cent in operational grades. In
2018-19, Royal Mail was named as one of
The Times Top 50 Employers for Women
for the sixth consecutive year.

Career development for women in Royal
Mail is one our key diversity priorities.
We have a clear strategy to increase the
number of women in management by
giving internal candidates the confidence
to apply for promotions.

During the year, we adopted the online
personal and professional development
platform Everywoman. This is designed
to empower women to take control of their
personal and career development. Open
to women and men, over 1,200 colleagues
have signed up to the platform. It provides
them with webinars, workshops, articles,
videos and webcasts aimed at building
leadership skills, promoting yourself and
developing your personal brand.

We continue to take steps to make our
recruitment process more inclusive and
accessible. During the year, we updated the
language used in our job advertisements to
make them more attractive to people with
childcare and caring responsibilities. Where
appropriate, we use balanced shortlisting
to help address the gender balance in our
business. In 2018-19, women were hired
into 32 per cent of new operational roles.

Ethnic diversity
Royal Mail’s ethnic profile is broadly
representative of the UK population.
According to our 2018-19 Employee Survey,
around 14 per cent of employees declared

7 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Training and career development
We are committed to investing in our
people at all levels of Royal Mail. We aim
to provide our employees with the tools,
knowledge and resources to deliver our
business strategy while offering fulfilling
careers and opportunities for continual
development. In 2018-19, we invested
nearly £6.9 million in training, delivering
the equivalent of around 17,000 training
days, covering technical health and safety,
compliance and job-specific training.

Health and safety
Royal Mail’s top priority as an employer
is to create a safe and healthy working
environment for our people. Our goal is
to create a workplace where everyone is free
from injury whether physical or mental. Our
group-wide Health and Safety policy outlines
our commitment to maintaining a safe and
healthy workplace. It is operationalised
through our integrated Safety, Health and
Environment Management system, which
sets out our standards and procedures for
managing risks and maintaining a safe,
healthy and environmentally
responsible workplace.

In 2018-19, we recorded a Lost Time
Accident Frequency Rate (LTAFR) of 0.49
per 100,000 hours worked, a decrease of
9.2 per cent compared with 2017-18. This
improvement is largely attributable to a
22 per cent improvement in slips and trips
incidents – our largest root cause of lost
time accidents.

We are working hard to reduce road
traffic collisions. As such, the Road Traffic
Collision Frequency Rate is one of the
measures on our Corporate Balanced
Scorecard. This year, we reduced our

CORPORATE RESPONSIBILIT Y CONTINUED

Road Traffic Collision Frequency Rate by
5.3 per cent, compared with 2017-18. We
continue to invest in driver training and
road safety campaigns to promote safe
driver behaviours. During the year, we
updated and expanded the courses that we
offer. We also successfully trialled the use
of forward facing cameras in Heavy Goods
Vehicles and have since expanded the trial
with a view to national deployment.

We believe that every life lost is
unacceptable. Therefore, it is with great
regret that we report that seven people
tragically lost their lives in connection with
our activities in the UK in the past year. The
fatalities were associated with road traffic
collisions involving our vehicles. We liaise
closely with the relevant authorities and
complete our own detailed investigations
to determine the root cause of each
accident and identify any lessons that can
be learned. Investigations are discussed
at Board level, and outcomes are
communicated across the Group.

During the year, there was an increase
in sick absence, from 5.09 per cent in
2017-18, to 5.41 per cent in 2018-19.
Musculoskeletal and mental health issues
remain the leading causes of long-term
illness among our people. Supporting
health and wellbeing boosts workplace
morale and is crucial to our people
strategy. Our five-year mental health
strategy, ‘Because Healthy Minds Matter’,
aims to increase awareness of mental
health issues; reduce the associated
stigma; and provide tools and guidance to
our people so they know how to support
themselves, their colleagues and their
family members.

AC TION FOR CHILDREN

Our charity partnership with Action for
Children, aims to raise £2 million to fund
the Blues Programme, a preventative
programme delivered in schools by
experienced youth workers. It helps young
people, aged between 13 and 19 who are
identified as being at risk of developing
or having mental health issues. The
programme is a six-week course delivered
by specialist youth workers that enables
young people identify situations that can
trigger anxiety, fear or depression and
teaches them a range of coping strategies.
During 2018-19, 1,306 students completed
the programme, with 80.6 per cent saying
they had increased confidence, 91.8 per
cent gave the Blues Programme a score of
4 or 5 out of 5. Since our partnership began
in May 2017, we have raised over £1 million
for Action for Children and have rolled out
the Blues programme in 91 schools in 10
locations across the UK.

GENDER DISTRIBU TION (NUMBER OF PEOPLE)

Royal Mail plc Board

Senior Management

Management

Administration

Operational

UKPIL

GLS

Female

720

1,495

1,398

Male

1,551

5,523

974

Female

–

Male

–

203

3,585

3,260

22,531

105,634

2,100

10,042

7 8

STRATEGIC REPORT Our communities
Our main contribution to communities is
our social and economic impact. We seek
to extend our positive impact through
strategic community investments. We
leverage our core business competencies,
infrastructure, people and brand, to benefit
good causes. Our Corporate Responsibility
Policy outlines how we interact with, and
manage our impacts on, the communities
that we serve.

We make the seventh biggest contribution
of any UK company to the UK economy.
One in every 192 jobs in the UK is provided
by Royal Mail1. We make a significant
contribution to social inclusion through
the vital employment and earnings that we
bring to some of the UK’s poorer regions.

In 2018-19, Royal Mail contributed
£5.8 million directly to good causes and
schemes for disadvantaged groups. That
includes around £655,000 in matched giving
and grant schemes to support employees’
fundraising for charities and good causes.
In addition, our people donated £3.1 million
to hundreds of charities and good causes
across the UK. Over the last 30 years, our
people have given £62 million through our
payroll giving scheme.

GLS Belgium was chosen as the official
transport partner in 2018 for Red Nose Day,
responsible for the distribution of red noses
free of charge to businesses and individuals.
The red noses were then sold to raise money
for schools supporting young people with
mental health issues. In addition, 57 of GLS’
ParcelShops sold red noses in their shops
and all GLS’ Flemish depots organised
fundraising events for the cause.

Our environment
We are embedding environmental
management throughout our organisation.
We identify and address environmental
issues that result from our business
through our risk management process. Our
Environment Policy sets out our commitment
to managing our environmental impacts,
such as energy, water and waste, as well as
how we work with customers and suppliers
on environmental issues.

Our environment strategy drives
continuous improvement in our
performance. The five year strategy
focuses on the following key objectives:

– embedding internal and external

environment standards across our
operation, such as our Safety, Health
and Environment Management System
standards for energy, carbon, waste and
water management, and developed to

be compliant with the requirements of
International Standard ISO14001;
– actively anticipating and responding
to emerging environmental issues
by working closely with relevant
stakeholders and implementing
effective governance controls;

– adopting existing and new technologies
that will help us to reduce our emissions
and resource use;

– building environmental awareness and
encouraging behavioural change in our
workforce in order to drive performance
against our carbon, waste and water
targets; and

– promoting the benefits of strong
environmental management with
customers and through our
supply chain.

We will monitor our performance against
our strategy using three existing targets:
a) reducing our total carbon emissions, b)
reducing our water consumption, and c)
reducing the waste we sent to landfill.

Climate change risks and opportunities
We welcome the recommendations of the
Taskforce on Climate-related Financial
Disclosures (TCFD), an industry-led
taskforce founded by the Financial Stability
Board following a request from the G20. The
TCFD’s recommendations aim to standardise
climate-related financial reporting to make
it easier for investors to assess the impact
of climate-related risks and opportunities.
Royal Mail is committed to implementing the
TCFD recommendations and we will continue
to enhance our climate related disclosures
as our analysis evolves.

Governance: Overall accountability
for the management of climate related
risks and opportunities sits at Board level,
with support from the Risk Management
Committee (RMC) and Audit and Risk
Committee. The management of climate
related risks and opportunities is integrated
into the Company’s overarching risk
management framework.

Our Environmental Governance
Board (EGB) key purpose is to drive the
environment strategy for the business.
During 2018-19, the EGB established a
working group to work on embedding the
TCFD recommendations throughout the
business. In the coming year the working
group will expand its work aimed at
increasing our understanding of how
climate change could impact different
areas of our business for example, our
operations, fleet and property.

USING OUR LOC AL PRE SENCE

Our postmen and women are the eyes
and ears of the local community. Our
partnership with Missing People uses
this local presence to support the search
for vulnerable, high-risk missing people.
For the fourth consecutive year, we
provided a donation of £60,000 to fund
the Missing People’s Child Rescue Alert
system, specifically for children that
have been abducted or who are believed
to be in immediate danger. The system
runs 24 hours a day, 365 days a year by
sending location-specific alerts through
our network of handheld Postal Digital
Assistants (PDAs) and business
television screens. In 2018-19, we
enhanced our PDA technology send
images of high-risk missing people
to postmen and women along with the
written description. We hope that this
will enhance our ability to help find
those missing and provide further hope
to their loved ones. During 2018-19, we
issued 57 alerts, with 54 people found
safe and well.

DI V ER SI T Y

14%

of employees identify themselves BAME

SC A M M A IL

4.3m

items of scam mail intercepted,
since November 2016

CEBR research, conducted for Royal Mail in May 2019.

7 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19CORPORATE RESPONSIBILIT Y CONTINUED

S AFE T Y ME TRIC S

Sick absence (%)

Lost Time Accident Frequency Rate (per 100,000 hours worked)

Reduction in road traffic collisions from previous year (%)1

1 Reduction in road traffic collisions was added to the Corporate Balanced Scorecard in 2016-17.

2018-19

2017-18

2016-17

2015-16

5.41

0.49

5.3

5.09

0.54

9.0

4.63

0.49

12.3

4.51

0.49

N/A

Strategy: The RMC reviews business
unit risk registers on a regular basis.
It ensures all risks on the Company’s
consolidated environmental risk register
are reflected in business units’ risk
registers as appropriate. Where climate-
related risks and opportunities are
identified, individual business units are
required to factor the actual and potential
impacts into their strategies and financial
planning, then develop mitigation plans
as necessary.

Risk Management: In line with the TCFD’s
recommendations, we consider both
physical and transitional risks in the risk
assessment process, along other types
of risk. During the year, the RMC agreed
that climate-related risks be added to the
Group Principal Risk Profile. We recognise
that climate change presents both risks and
opportunities for our company. As such.
we maintain an environmental risk and
opportunity register. The EGB and other
relevant internal stakeholders, including
the Group Risk team, review and update this
regularly. Information about Royal Mail’s
overarching risk management framework
is set out on pages 113-114 of the 2018-19
Annual Report and Financial Statements.

Metrics and Targets: Our public
commitment to reducing our carbon
emissions relates to the climate-related
risks and opportunities that we have
identified. Further work is required
to quantify the financial risks and
opportunities with these climate related
risks and associated adaptation, in line
with the TCFD. This will form part of the
remit of the working group in 2019-20.

We have a target to reduce our absolute
carbon emissions by 20 per cent by
2020–21, against a 2004–05 baseline. We
are proud to have met this target, with
current reduction of 29 per cent against
the 2004-05 baseline, as such we are

8 0

STRATEGIC REPORT currently reviewing and updating our
emissions target. Over two-thirds of
our carbon emissions are derived from
our vehicles and transport, therefore, a
vital part of maintaining our performance
against our carbon emissions reduction
target is improving our fleet fuel efficiency.

We will continue to improve our
understanding and assessment of both
climate and financial risks in line with
TCFD recommendations.

Carbon emissions
The table on page 82 sets out our Group
carbon dioxide equivalent (CO2e) emissions
for 2018 19. Our current UKPIL target is to
keep our carbon emissions at 20 per cent
below the levels in 2004–05 until 2020–21.
We are proud that we have already met
this target four years early. This year, our
total UK carbon footprint decreased by
1 per cent compared with the previous
year. It was 29 per cent lower than the
2004–05 baseline. On a normalised basis,
emissions decreased by 2.9 per cent per
£1 million of revenue last year, compared
with the previous year.

We are committed to reducing our
emissions further, and are pursuing
energy-saving opportunities across our
fleet and property portfolio to maintain
our performance and continue to meet
our targets.

Fleet emissions
We recognise our responsibility to
reduce emissions associated with our
fleet and help improve air quality in the
communities in which we operate. We
align our fleet strategy to changes in
environmental legislation and the growth
in parcels, to ensure that we use our
existing fleet more efficiently, prioritise
vehicle replacements in London and
other Clear Air Zones, use the cleanest
technology available and the correct size
of vans, trucks and trailers. Our approach
to reducing fleet emissions focuses on
three key areas:

Investing in new vehicles and technologies:
We are undertaking a number of trials and
initiatives in our current fleet to drive down
fuel consumption. When older vehicles
come to the end of their lifecycle, they are
replaced with new vehicles that meet the
latest emissions standards. Our fleet also
includes electric and liquefied natural gas
(LNG) vehicles. During 2018-19, 100 electric
vans were used for delivery and collection
in 17 Delivery Offices across the UK. We
also trialled an electric LDV van in our
Mount Pleasant Mail Centre which is able
to support the larger volumetric

OP TIMISE PRIME

In November 2018, we announced
that Royal Mail is part of the Optimise
Prime consortium, the world’s biggest
trial of commercial electric vehicles.
The project will deliver a comprehensive
understanding of the impact that
electrification of commercial vehicles
will have on power distribution
networks. It will explore opportunities to
minimise this impact, such as optimising
network and charging infrastructure,
providing network services and testing
technical and commercial solutions, to
save electricity customers £207 million
by 2030. As part of the trial, Royal Mail,
Centrica and Uber will purchase up to
3,000 electric vehicles and trial depot,
home and on-the-road charging
solutions. The project will deliver an
end-to-end overview of what the switch
to electric vehicles means for the cables
and substations that deliver electricity to
the community, for the businesses that
need to invest in new infrastructure,
and for the end users that need to power
their vehicles. Over time, we plan to
increase the number of alternative fuel
or advanced technology vehicles in our
fleet. Our longer-term ambition is to
transition to a low-carbon fleet and
ensure that we are investing in a fleet
that meets future legislation.

requirements within London. Following
the success of the trial and introduction of
ultra-low emission zone streets in London,
we have purchased three electric LDV
vans. We have recently purchased a
number of zero emission cargo trikes,
which we are trialling in Stratford,
Cambridge and Sutton Coldfield.

In November 2018, we announced
that Royal Mail is part of the Optimise
Prime consortium, the worlds biggest trial of
commercial electric vehicles. The project will
deliver a comprehensive understanding of
the impact that electrification of commercial
vehicles will have on distribution networks
(see Case Study for more information).

Changing driving styles: We use
telemetry systems to promote safer
and more efficient driving. We use our
telemetry data in our training to change
driver behaviour, and encourage safer and
more fuel-efficient driving styles. Around
53 per cent of our vehicle fleet is fitted with
telemetry, which in 2018-19 saved us
approximately 380,000 litres of diesel,
equating to over 990 tonnes of CO2e.

Making our transport network more
efficient. We use cutting-edge routing
technology to improve efficiency for
our transport networks. We maximise
our capacity by loading mail items as
efficiently as possible. We are focused on
minimising the use of air transport in order
to reduce both CO2e emissions and costs.

Buildings emissions
Reducing energy use in our buildings is
a priority for our environment strategy.
Due to the size of our property portfolio
and the scale of our energy consumption
it is important for us to manage energy
efficiency. During the year, we launched
a new Energy Bureau, to monitor energy
use across our UK property estate and
highlight sites which are the highest
users, or appear to have anomalies in their
patterns of consumption. This enables us
to understand our energy usage and target
both energy and cost savings.

We drive continuous improvement by
engaging our people in energy efficiency
and investing in technology to monitor
and reduce energy consumption. Despite
a reduction in total building-related
emissions of 8.4 per cent, our total UK
electricity consumption increased by 1 per
cent, compared with 2017-18. Our total UK
gas consumption increased by 8 per cent
compared with the same period.

2 Principal risks are those identified by the Risk

Management Committee which have the potential
to threaten the business model, future performance,
solvency and liquidity of the group. Informed by financial
evaluation of severe but plausible scenarios.

8 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19CORPORATE RESPONSIBILIT Y CONTINUED

CO2e emissions (’000 tonnes)

Total

UKPIL

GLS

Total

UKPIL

GLS

Total

UKPIL

GLS

Total

UKPIL

2018-19

2017-18

2016-17

2015-16

Scope 1

Scope 2

Scope 3

Total

474.2 460.0

100.4

80.9

80.1

80.9

14.2

20.3

462.3

447.8

118.1

83.8

98.3

83.8

14.5

19.8

458.2

444.9

134.4

116.3

13.3

18.1

473.7

458.4

152.2

134.1

87.7

88.7

655.5

621

34.5

664.2

629.9

34.3

680.3

648.9

31.4

714.6

681.2

33.4

GLS

15.3

18.2

Tonnes CO2e per £1 million
revenue

80.3

Scope 2 (market-based)

29.0

7.1

21.9

38.3

82.7

8.5

29.8

40.3

84.7

14.3

26.0

40.7

88.8

14.1

26.6

We report our carbon emissions in line with the Greenhouse Gas (GHG) Protocol Corporate Standard. The standard classifies a company’s GHG emissions into three ‘scopes’. Scope 1 emissions
are direct emissions from sources that are owned or controlled by Royal Mail, such as the fuel used in our vehicles. 2017-18 data has been restated for scope 1 emissions following the provision
of natural gas data which was previously estimated. Scope 2 emissions are indirect emissions from the generation of purchased energy, such as the emissions from our electricity consumption.
Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. For Royal Mail,
this includes GHGs emitted through the use of third party road or air freight for the transportation of mail.

We use our Building Energy Management
System (BEMS) to maximise energy
efficiency at our top energy consuming
sites. In 2018-19, Solar panels at our
Chelmsford Mail Centre generated 82,101
kWh in 2018-19, saving approximately
23,240 KgCO2e.

Waste and water management
We are committed to reducing the
amount of waste sent to landfill. In
2018-19, our target was to divert 95 per
cent of our waste from landfill. In total, we
diverted 99 per cent of waste, achieving
our target for the year. Our ‘Green Parts’
initiative reuses parts from our vehicles
that would otherwise end up in as waste.
The project extracts body, engine and
gearbox parts from vehicles due for
decommissioning to use as spares.

Recognising water as a precious natural
resource, we are committed to reducing
our water use. We use water for domestic
purposes, such as washroom facilities
and keeping our vehicles and equipment
clean. In 2018-19, our target was to reduce
our water consumption by four per cent
compared to the previous year. We missed
our target, increasing our consumption
by 15 per cent, or 242 megalitres. This
increase due in part to construction
activities at a large site consuming
additional water, as well as improved
data process across the business.

During the year, we partnered with a new
third-party contractor to cover all water
purchases in England and Scotland. By
switching to a single supplier, we have
greater visibility to better monitor our

8 2

STRATEGIC REPORT Royal Mail weights social, environmental,
ethical factors as Pass / Fail elements in
the contract award process.

Ethical principles are embedded in the
Partner Code used by GLS Germany. The
Code requires suppliers working with GLS
to adhere to principles relating to anti
bribery and corruption, health and safety,
environment and transparency. Further
information about our approach to supply
chain risk management is available in our
2018-19 Corporate Responsibility Report.

Although we work extensively to address
any risks and ensure our suppliers have
corrective action plans in place, there are
still occasional instances where suppliers
fail to meet the standards we expect from
them. We may, ultimately, terminate
dealings with a supplier if we find that
our codes are not being complied with.

Business integrity
Anti-bribery and corruption
Royal Mail Group has a strict zero
tolerance policy towards bribery and
corruption. The principles of the UK
Bribery Act are embedded within our
Anti-bribery and Corruption Policy which
sets out the standards of behaviour we
expect to minimise the risk of bribery
and corruption in our business and
supply chain. The policy is available
on our website.

Our Business Standards outline the
expected behaviours we expect to see
in all of our people at Royal Mail Group:
doing the right thing, following the law,
acting honourably and treating others
with respect. The standards cover both
business and personal behaviour including
potential conflicts of interest and anti-
bribery and corruption. We encourage
our people to report any instances of
bribes or suspected bribes through our
confidential Whistleblowing hotline
Speak Up, which is available to employees,
contractors, temporary workers, and
suppliers, business partners and their
employees. GLS’ Code of Business
Standards reinforces our strict approach
to any form of corruption. The Code is
available to all GLS employees and
translated into 20 languages.

water use. We calculate average daily
water usage for each type of Royal Mail
site. This enables us to pinpoint the
locations where water consumption
is higher than average for the site type,
investigate the reasons and take
appropriate action.

Our suppliers
Royal Mail acknowledges that our
business extends beyond our direct
operations through our supply chain.
Working collaboratively with our
suppliers helps to create economic value
for our communities and deliver better
experiences for our customers. In the UK,
we contributed around £2.3 billion to the
economy annually procuring goods and
services from around 3,800 suppliers.
We are committed to working across our
supply chain to have a positive impact
on society and the environment, as such
we have taken action, to ensure that
all our suppliers are complying with
internationally recognised standards
for CR, including the UN Global Compact
principles throughout all stages of our
procurement process.

All our suppliers are required to comply
with our Responsible Procurement
Code of Conduct, helping us to manage
associated risks in our supply chain whilst
promoting responsible practices across
human rights, labour, environment and
anti-corruption and adherence to the UN
Universal Declaration of Human Rights.
Suppliers must also comply with our mail
security procedures and our approach to
anti bribery and corruption. In 2018-19,
we revised the Code to make it clear that

8 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19CORPORATE RESPONSIBILIT Y CONTINUED

All our employees learn about our
zero-tolerance approach through our
online and face-to-face training. As
part of our induction process, all new
employees are required to complete a
compliance e-learning course which
includes a module on anti-bribery and
corruption. Each year, our mandatory
compliance refresher training helps to
ensure that responsible behaviour is
embedded throughout the business.
In 2018-19, 100 per cent of Royal Mail
managers had completed this training
and attested to maintaining our Business
Standards. Anti-bribery and corruption
sessions are included as part of face-to-
face training sessions with our frontline
employees. Further information is
available in our 2018-19 Corporate
Responsibility Report.

Human rights
Royal Mail Group is committed to playing
its part to uphold and protect human
rights in our business and supply chains.
We obey the laws, rules and regulations
of every country in which we operate. Our
commitment is embedded in our
Company-wide Corporate Responsibility
Policy, our Responsible Procurement Code
and our Business Code of Conduct. We are
committed to implementing the United
Nations (UN) Guiding Principles on

Business and Human Rights as well as
the UN Declaration of Human Rights and
the International Labour Organisation
Fundamental Conventions. These cover
freedom of association, the abolition of
forced labour, equality and the elimination
of child labour. We recognise that human
rights violations, including forced labour
and trafficking, can occur in all sectors and
countries, and as a responsible business
are committed to playing our part to help
eliminate it.

We are committed to helping to
prevent any incidence of modern slavery
throughout our operations. We expect
the same level of commitment from all
our business partners, suppliers and
contractors, and to do the same within
their respective supply chains. Our
Modern Slavery Act statement, provides
an overview of our operations and our
approach to responsible business, the
risks we have identified and the steps we
take to mitigate them. It is available at the
following address: www.royalmailgroup.
com. We strive to continuous improvement
and therefore will take on board feedback
on the content of our statement from the
Business & Human Rights Resources
Centre report – From Disclosure to
Action in account when we publish
our 2018-19 statement.

Our taxation strategy
Our taxation strategy is published on
www.royalmailgroup.com/responsibility/
policies. Our taxation strategy sets out our
taxation principles, alongside a detailed
description of our approach. Royal Mail
has a low risk appetite in relation to tax
matters. We are committed to complying
with all applicable tax laws and will make
decisions in relation to tax with due regard
to our reputation, integrity and status as
a Group whose shares are listed on the
London Stock Exchange.

Non-financial information statement
The Company has complied with the
Non-Financial Reporting Directive
contained in sections 414CA and 414CB
of the Companies Act 2006.

The Strategic Report was approved by the
Board on 21 May 2019 and signed on its
behalf by:

Rico Back
Group Chief Executive Officer
21 May 2019

Stuart Simpson
Chief Finance and Operating Officer
21 May 2019

8 4

STRATEGIC REPORT O U R G O V E R N A N C E S E C T I O N

The Governance section on pages 86–149
forms part of the Directors’ Report on pages 147-149.

CONTENTS

Chair’s introduction

Group Board of Directors

Executive Board

Governance structure

Board in action

Board composition and diversity

Our stakeholders

Reporting against the 2018 Corporate Governance Code

Nomination Committee

Audit and Risk Committee

Directors’ Remuneration Report

Shareholder engagement

Pensions Committee

Directors’ Report

Statement of Directors’ responsibilities

101

105

106

109

116

120

146

147

149

8 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19GOVERNANCE INTRODUC TION

C H A I R ’ S I N T R O D U C T I O N

Les Owen,
Chair

COMPLIANCE WITH THE UK CORPOR ATE
GOVERNANCE CODE 2016

The UK Corporate Governance
Code published in April 2016 by the
Financial Reporting Council applied
to Royal Mail’s financial year ended
31 March 2019. This Corporate
Governance section describes how
Royal Mail applied the Code’s main
principles during the year.

Throughout the year, Royal Mail has
been in compliance with the relevant
provisions of the Code with one
exception. The Board’s approach to
the evaluation of its own performance
and that of its Committees and
Directors is set out on pages 98-99.

The Code is publicly available at:

http://www.frc.org.uk.

On behalf of the Board, I am pleased to
present this year’s Corporate Governance
Report which should be read in conjunction
with pages 1 to 84 of the Annual Report and
Financial Statements, where we expand on
the ways in which the Board has addressed
communication with stakeholders,
corporate culture and diversity.

I would like to thank our shareholders for
taking the time to meet with us and for
providing constructive feedback. Lessons
have been learnt. We take the views of our
shareholders very seriously and we have
sought to address their concerns. See
page 120 for more information on our
approach to Executive Remuneration.

Stakeholders
The Board recognises the importance
of increasing focus on a wider range
of stakeholders, in addition to our
investors. We continue to take into
account all stakeholder views and
interests in the support and development
of Royal Mail. As a significant contributor
to the economy in the UK, we are aware of
our responsibilities to local communities,
and our contribution to society.

Engagement with our stakeholders is
vital as we embark on a period of major
change. We will look at ways to further
communicate and engage with them
during the year ahead. Details of how
we engage with our stakeholders are
covered on pages 102-104.

Strategy
Royal Mail’s strategy presentation on
22 May 2019 is our first since listing in
2013, where we will provide an update on
our strategy for the next five years. A
range of presentations set out our plans
to develop our UK operations to meet
changing customers’ requirements,
to further improve our productivity
and cost efficiency, to underpin the
Universal Service in the UK and to
deliver sustainable shareholder returns.

Board changes
In the Chair’s Statement I have covered
the Board changes in 2018-19 and some
announced after the reporting period.
Please see pages 10-12 for more details.

Reflecting on the 2018 Annual General
Meeting (AGM)
We were disappointed by the votes for
the Directors’ Remuneration Report and
re-appointment of the Chair, Peter Long.
Since then, led by Orna Ni-Chionna,
Chair of the Remuneration Committee
and Senior Independent Director (SID),
the Board has taken action to address
the concerns of our shareholders.

One of the commitments we made at the
AGM was to adopt early the recommendation
in the UK Corporate Governance Code, (‘2018
Code’) to publish an update on shareholders’
views and actions taken when 20 per cent or
more of votes are cast against a resolution.
A statement was published on our website
on 14 January 2019 with respect to votes
against the Chair (34.4 per cent) and votes
against the Directors’ Remuneration Report
(70.2 per cent). In that statement, we outlined
the actions we had taken following the AGM
and gave an update on the feedback received
from shareholders. This included an investor
perception study specifically covering
their views on strategy, remuneration and
governance. We held meetings with many
of our larger shareholders and have made
changes to our Remuneration Policy which
we will put to them for approval at our 2019
AGM. We also met with proxy voting
agencies and groups presenting to some
of our smaller shareholders.

8 6

CORPORATE GOVERNANCEFollowing a difficult year,
we are transforming to
address the challenges we
face. Good governance, strong
stakeholder relationships and
an inclusive culture support
that transformation, and our
purpose to connect customers,
companies and countries.

During the year, we have celebrated
individuals from each diversity work
stream, including BAME, gender, LGBT,
disability and youth, parents and carers.
We are proud that average pay continues
to be broadly the same for men and
women. On an mean basis, women are
paid 0.6 per cent more than men. On a
median basis, men are paid one per cent
more than women. Our mean bonus gap
is 22.7 per cent in favour of women; on
a median basis we pay bonuses equally
to men and women.

For further details see our 2018 Gender
Pay Report (www.royalmailgroup.com/
media/10646/royal-mail-group-ltd-
gender-pay-report-2018.pdf).

Following a review, the Board updated
its Diversity Policy in January 2019.
The Executive Board, in consultation
with the Nomination Committee, has
considered and reviewed our high potential
individuals, taking into account the skills
and experience (including financial
expertise) required for each subsidiary
company, and diversity from a BAME and
gender perspective. This has led to some
changes to the membership of subsidiary
boards and we are pleased that, on the
majority of our UK subsidiary boards,
we have increased female and BAME
representation. Further details on the
review and the Board’s approach to
diversity can be found on page 108.

Les Owen
Chair
21 May 2019

Compliance with the UK Corporate
Governance Code 2016 (‘2016 Code’)
and the 2018 Code
We place a high value on good governance.
It is essential for the sustainable growth
of our business. We review governance
structure and processes periodically,
enabling us to discharge our obligations
and oversee the Group’s performance for
the benefit of all our stakeholders. We
have placed significant focus on this during
the year. The Company complied in full
with the provisions of the 2016 Code,
except in relation to the timing of the
annual evaluation of the performance of
the Board, its Committees and Directors
which was carried out after the end of the
financial year. Further information is set
out on pages 98-99.

The 2018 Code applies to accounting
periods beginning on or after 1 January
2019. We chose to adopt some of this Code’s
principles and to comply with some of its
provisions on a voluntary basis during the
year. These are detailed on page 105. The
Codes are issued by the Financial Reporting
Council (FRC) and are available for review at
http://www.frc.org.uk.

Culture, diversity and inclusion
The Board sets the vision, purpose and
values of the Group. We recognise the
importance of a diverse workforce and
an inclusive culture, which promote
respect and have a positive impact
on performance. Our culture supports
our purpose, to “connect customers,
companies and countries”. We recognise
the importance of Royal Mail’s culture and
actively support its promotion across the
business. Following the strategy day we
will ensure that our culture is aligned to
our strategy over the next year. We are
also reviewing aspects of our current
culture and how this has been embedded
throughout the organisation. We describe
this in more detail on page 76.

Royal Mail encourages diversity. Our
Equality and Fairness Policy and our
‘Thrive’ campaign aim for transparency,
diversity and fairness at all stages of
employment. Our ‘Thrive’ campaign
raises awareness of diversity across
our employee base.

8 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19GROUP BOARD OF DIREC TORS

G R O U P B O A R D O F D I R E C T O R S

We are committed to sustainable governance

Les Owen
Chairman

Keith Williams
Deputy Chairman

Rico Back
Group Chief Executive Officer

A N

Orna Ni-Chionna
Senior Independent
Non-Executive Director

A N R

Stuart Simpson

Rita Griffin

Chief Finance and Operating Officer

Non-Executive Director

Simon Thompson

Non-Executive Director

Designated Non-Executive Director

for Engagement with the workforce

A N R

Skills and Experience

Les is a qualified actuary with over
35 years’ experience in the financial
services industry. He has extensive
experience of working in international
listed companies in the financial,
pensions and insurance sectors. Prior
to joining Royal Mail, Les was Group
Chief Executive Officer of AXA Asia
Pacific Holdings Ltd and a member
of the Global AXA Group Executive
Board responsible for AXA’s Asian Life
Insurance and Wealth Management
operations. He was a Non-Executive
Director of Post Office Limited until
March 2012 until 14 November 2018.

Keith Williams is a highly regarded
business leader with extensive industrial
relations, operational and customer
service experience. Keith worked in the
UK and internationally before joining
British Airways plc in 1998. He worked
there for 18 years, including five years
as CFO, three years as CEO and two
years as Executive Chairman. During
that time, he led the transformation of
the company, building a leaner and more
customer focused organisation with
a sustainable future. Prior to British
Airways, Keith worked for companies
including Reckitt and Colman, Apple
Computer Inc., and Boots. He was also
an Executive Board member and Chair
of the Audit Committee at Transport for
London until 2016. Keith is a chartered
accountant. Keith will assume the
role of Non-Executive Chairman on
22 May 2019.

Rico Back has 30 years’ experience as
a senior executive in the international
parcels industry. A founding member of
German Parcel in 1989, which Royal Mail
acquired in 1999, Rico has been a Royal
Mail Group executive and CEO of GLS for
almost 20 years. Under Rico’s leadership,
GLS has become the leading delivery
company of its kind in Europe. He has
a strong track record of delivering
profitable growth, successfully
integrating acquisitions and leading
on innovation. In 2016, his remit was
extended to include UK parcels and all
our international activities. On 1 June
2018, Rico was appointed our Group CEO.
His track record, his strong commercial
acumen and his deep understanding of
the delivery industry are major assets
for the Group.

Orna brings to the Board expertise
in strategy, particularly in consumer
focussed businesses, alongside
substantial experience of plc Boards
and governance. She has previously held
the Senior Independent Non-Executive
Director position at HMV plc, Northern
Foods plc and Bupa and was also Non-
Executive Director of the Bank of Ireland
UK Holdings plc and Bristol & West plc.
Before this, Orna was a Partner at
McKinsey & Company where she co-led
their European Retail Practice.

Stuart has significant finance, strategy

Rita has considerable experience in

Simon has an outstanding record as

and operational experience. Prior to

developing and implementing strategies

a global business leader with proven

joining Royal Mail, Stuart worked in the

and leading substantial transformation

expertise in the digitisation of business

automotive industry for 15 years, where

programmes, which she has gained

and the customer experience. Simon is

he held senior roles in both finance and

through her career at BP group. Rita

the Chief Product Officer of Ocado Group

strategy, primarily based outside of the

is currently Chief Operating Officer for

plc. Over his career, Simon has held

UK. He joined the Royal Mail Group in

Global Petrochemicals at BP plc, one of

senior executive positions at Apple Inc,

2009, was appointed as Deputy Chief

three main divisions of BP’s downstream

HSBC, lastminute.com, Wm Morrison

Operations Officer in January 2014 and

business. She has held a number of

Supermarkets plc, Motorola Inc. and

was subsequently appointed as Director

leadership positions within BP plc in

Honda Motor Europe Ltd. In 2019, Simon

of Group Finance in July 2015. In

manufacturing, logistics, retail and

was appointed as the Designated Non-

November 2018, Stuart took on the

functional organisations. Rita was

Executive Director for engagement with

additional responsibility of Chief

previously Chief Marketing Officer,

the workforce.

Operating Officer.

BP plc.

Appointed to the Board*

Appointed to the Board

Appointed to the Board*

Appointed to the Board

Non-Executive Director on 20
September 2013. Chairman on
19 September 2018. Will step down
from the Board on 22 May 2019.

Non-Executive Director on 1 January
2018. Deputy Chairman on 7 November
2018. Will become Non-Executive
Chairman on 22 May 2019.

Group Chief Executive Officer and
Executive Director on 1 June 2018.

Appointed Senior Independent Director
on 1 April 2011. Non-Executive Director
on 20 September 2013.

Chief Finance Officer and

Executive Director

on 20 July 2017. Chief Operating Officer

on 7 November 2018.

Non-Executive Director on

1 December 2016.

Non-Executive Director on

1 November 2017.

Designated Non-Executive Director

for engagement with the workforce

on 26 February 2019.

External appointments

External Appointments:

Non-Executive Director of Discovery
Limited, a listed South African
financial services company.

None.

Non-Executive Director and Chair of
Aviva plc’s Audit Committee until 23 May
2019. Deputy Chairman of John Lewis,
Chairman of Halfords Group plc and
Independent Chair of a review on behalf
of UK Government of British Railways.

Non-Executive Director of Burberry
Group plc, Senior Independent Non-
Executive Director of Saga plc, Deputy
Chair of the National Trust, Trustee of
Sir John Soane’s Museum.

None

Chief Operating Officer for Global

Chief Product Officer of Ocado Group plc

Petrochemicals, Director of BP Chemicals

and a member of the Digital Advisory

Investments Limited and BP Chemicals

Board of Coca Cola European Partners.

East China Investment Limited.

8 8

CORPORATE GOVERNANCELes Owen

Chairman

A N

Orna Ni-Chionna

Senior Independent

Non-Executive Director

A N R

Les is a qualified actuary with over

Keith Williams is a highly regarded

Rico Back has 30 years’ experience as

Orna brings to the Board expertise

35 years’ experience in the financial

business leader with extensive industrial

a senior executive in the international

in strategy, particularly in consumer

services industry. He has extensive

relations, operational and customer

parcels industry. A founding member of

focussed businesses, alongside

experience of working in international

service experience. Keith worked in the

German Parcel in 1989, which Royal Mail

substantial experience of plc Boards

listed companies in the financial,

UK and internationally before joining

acquired in 1999, Rico has been a Royal

and governance. She has previously held

pensions and insurance sectors. Prior

British Airways plc in 1998. He worked

Mail Group executive and CEO of GLS for

the Senior Independent Non-Executive

to joining Royal Mail, Les was Group

there for 18 years, including five years

almost 20 years. Under Rico’s leadership,

Director position at HMV plc, Northern

Chief Executive Officer of AXA Asia

as CFO, three years as CEO and two

GLS has become the leading delivery

Foods plc and Bupa and was also Non-

Pacific Holdings Ltd and a member

years as Executive Chairman. During

company of its kind in Europe. He has

Executive Director of the Bank of Ireland

of the Global AXA Group Executive

that time, he led the transformation of

a strong track record of delivering

UK Holdings plc and Bristol & West plc.

Board responsible for AXA’s Asian Life

the company, building a leaner and more

profitable growth, successfully

Before this, Orna was a Partner at

Insurance and Wealth Management

customer focused organisation with

integrating acquisitions and leading

McKinsey & Company where she co-led

operations. He was a Non-Executive

a sustainable future. Prior to British

on innovation. In 2016, his remit was

their European Retail Practice.

Director of Post Office Limited until

Airways, Keith worked for companies

extended to include UK parcels and all

March 2012 until 14 November 2018.

including Reckitt and Colman, Apple

our international activities. On 1 June

Computer Inc., and Boots. He was also

2018, Rico was appointed our Group CEO.

an Executive Board member and Chair

His track record, his strong commercial

of the Audit Committee at Transport for

acumen and his deep understanding of

London until 2016. Keith is a chartered

the delivery industry are major assets

accountant. Keith will assume the

for the Group.

role of Non-Executive Chairman on

22 May 2019.

Keith Williams

Deputy Chairman

Rico Back

Group Chief Executive Officer

Stuart Simpson
Chief Finance and Operating Officer

Rita Griffin
Non-Executive Director

Detailed biographies can be found
at – www.royalmailgroup.com

BOARD COMMIT TEE KE Y

Audit and Risk Committee

Nomination Committee

Remuneration Committee

Chair of Committee

Member of Committee

Simon Thompson
Non-Executive Director
Designated Non-Executive Director
for Engagement with the workforce

Skills and Experience

A N R

Stuart has significant finance, strategy
and operational experience. Prior to
joining Royal Mail, Stuart worked in the
automotive industry for 15 years, where
he held senior roles in both finance and
strategy, primarily based outside of the
UK. He joined the Royal Mail Group in
2009, was appointed as Deputy Chief
Operations Officer in January 2014 and
was subsequently appointed as Director
of Group Finance in July 2015. In
November 2018, Stuart took on the
additional responsibility of Chief
Operating Officer.

Rita has considerable experience in
developing and implementing strategies
and leading substantial transformation
programmes, which she has gained
through her career at BP group. Rita
is currently Chief Operating Officer for
Global Petrochemicals at BP plc, one of
three main divisions of BP’s downstream
business. She has held a number of
leadership positions within BP plc in
manufacturing, logistics, retail and
functional organisations. Rita was
previously Chief Marketing Officer,
BP plc.

Simon has an outstanding record as
a global business leader with proven
expertise in the digitisation of business
and the customer experience. Simon is
the Chief Product Officer of Ocado Group
plc. Over his career, Simon has held
senior executive positions at Apple Inc,
HSBC, lastminute.com, Wm Morrison
Supermarkets plc, Motorola Inc. and
Honda Motor Europe Ltd. In 2019, Simon
was appointed as the Designated Non-
Executive Director for engagement with
the workforce.

Original appointment dates to the
Board of a Royal Mail parent company.

Les Owen: appointed to Royal Mail
Holdings plc on 27 January 2010
(retired 1 April 2012). Appointed to
Royal Mail Group Limited on 1 April
2012 (retired 12 September 2013).

Orna Ni-Chionna: appointed to
Royal Mail Holdings plc on 1 June 2010
(retired 1 April 2012). Appointed to
Royal Mail Group Limited on 1 April
2012 (retired 12 September 2013).

Appointed to the Board*

Appointed to the Board

Appointed to the Board*

Appointed to the Board

Non-Executive Director on 20

September 2013. Chairman on

Non-Executive Director on 1 January

Group Chief Executive Officer and

Appointed Senior Independent Director

2018. Deputy Chairman on 7 November

Executive Director on 1 June 2018.

on 1 April 2011. Non-Executive Director

19 September 2018. Will step down

2018. Will become Non-Executive

from the Board on 22 May 2019.

Chairman on 22 May 2019.

on 20 September 2013.

Chief Finance Officer and
Executive Director
on 20 July 2017. Chief Operating Officer
on 7 November 2018.

Non-Executive Director on
1 December 2016.

Non-Executive Director on
1 November 2017.
Designated Non-Executive Director
for engagement with the workforce
on 26 February 2019.

External appointments

External Appointments:

Non-Executive Director of Discovery

Non-Executive Director and Chair of

None.

None

Limited, a listed South African

financial services company.

Aviva plc’s Audit Committee until 23 May

2019. Deputy Chairman of John Lewis,

Chairman of Halfords Group plc and

Independent Chair of a review on behalf

of UK Government of British Railways.

Non-Executive Director of Burberry

Group plc, Senior Independent Non-

Executive Director of Saga plc, Deputy

Chair of the National Trust, Trustee of

Sir John Soane’s Museum.

Chief Operating Officer for Global
Petrochemicals, Director of BP Chemicals
Investments Limited and BP Chemicals
East China Investment Limited.

Chief Product Officer of Ocado Group plc
and a member of the Digital Advisory
Board of Coca Cola European Partners.

8 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

E XECUTIVE BOARD

E X E C U T I V E B O A R D

Rico Back
Group Chief Executive Officer

Stuart Simpson
Chief Finance and Operating Officer

Mel Tomlin
Chief of Staff

Jon Millidge
Chief Risk and Governance Officer

For Rico’s biography please refer
to Board of Directors on page 88.

For Stuart’s biography please refer to
Board of Directors on page 88.

Mel has performed a number of senior
roles across the Group both in the UK and
internationally, most recently as Chief of
Staff for GLS and Royal Mail Parcels. She
has held senior Group roles in Strategy,
HR and Customer Experience. Previously
Mel held a number of international
Operational Director roles and was
Managing Director of GLS Ireland.
Prior to joining Royal Mail, she held
senior general management roles in
the construction materials industry
both in the UK and US.

Jon Millidge has worked across many
areas of the business since joining
Royal Mail as a graduate in 1985. His
experience includes HR, Letters,
Parcelforce Worldwide and Pensions.
Before being appointed Chief Risk and
Governance Officer in June 2018, Jon
was Group HR Director and member of
the Chief Executive’s Committee. From
May 2010 to February 2014, he was
Company Secretary and prior to that
he was the Acting Group HR Director.

Shane O’Riordain

Managing Director of Corporate

Affairs, Regulation and Marketing

James Rietkerk

GLS Chief Executive Officer

Shane joined Royal Mail in November 2010

James was Chief Financial Officer

and was appointed to his current role

of GLS from 2001 to 2018. He was

in 2018. Previously he had responsibility

appointed Chief Executive Officer of GLS

for Strategy and Pricing in addition to

following the appointment of Rico Back,

Corporate Affairs and Regulation. Before

former GLS Group Chief Executive

joining Royal Mail, Shane was Corporate

Officer, to Group Chief Executive Officer

Affairs and Group Economics Director

of Royal Mail plc. James was appointed

for a range of major financial services

to the Executive Board in June 2018.

organisations, including Flemings,

Before joining Royal Mail, James was

Halifax, HBOS and Lloyds Banking Group.

Group Financial Controller at Charter

Shane was previously a diplomat in the

plc. He qualified as a Chartered

Irish Foreign Service

accountant with Price Waterhouse.

Appointed to the Executive Board

Appointed to the Executive Board**

Appointed to the Executive Board

8 June 2018.

8 June 2018 until 8 April 2019.

8 June 2018.

External appointments

None

Sally Ashford
Chief HR Officer

Christian Herrlich
Group Chief Information Officer

Achim Dünnwald
Chief Strategy &
Transformation Officer

Sally joined Royal Mail in June 2015 to
head up Reward and Recognition and
became HR Director of Parcels. She
was appointed Group Chief Human
Resources Officer in June 2018. Sally
has over 25 years’ experience in
Human Resources specialising in
reward, performance, talent and
organisation design. Prior to joining
Royal Mail, Sally was HR Director
for Telefonica Europe. Sally has also
worked in a variety of HR related
roles at O2, BT and Tesco.

Christian joined Royal Mail in
June 2017 and was appointed Group
Chief Information Officer in July 2018.
Christian is responsible for Royal Mail’s
technology estate and specifically for
driving digital transformation and IT
innovation across the business. Christian
has more than 20 years of experience
in the postal & parcels industry, providing
leadership for numerous successful IT
transformations. He was previously
Managing Director IT at GLS for five years.
Prior to that, Christian spent 13 years at
Deutsche Post DHL, most recently in the
role of Parcels CIO.

Achim is leading the Strategy and
Transformation function as it develops
and implements projects to support
the transformation of our UK business.
Achim has extensive experience,
including holding senior positions in
the international postal and logistics
sectors, most recently as CEO DHL
Parcel with Deutsche Post DHL Group.
Prior to that, he was a partner with the
consulting firm McKinsey & Company,
where he worked for postal operators in
Europe, North America, and the Middle
East, and lead the global post, express
and parcels service line.

Mark Amsden
Group General Counsel and
Company Secretary
Chief Risk and Governance Officer

Mark joined the Company in April 2019.
Mark is the former General Counsel and
Company Secretary of Wm Morrison
Supermarkets plc, and the former
Interim Company Secretary of Yorkshire
Water. Prior to joining Morrisons, Mark
was for 14 years, a partner in the
national law firm Addleshaw Goddard
LLP where he specialised in corporate
litigation and headed up Addleshaw’s
national IT litigation practice.

Appointed to the Executive Board

8 June 2018.

1 August 2018.

25 March 2019.

8 April 2019.

External appointments

Member of Telefonica Deutschland
supervisory board and Chair of its
Remuneration Committee

None

9 0

CORPORATE GOVERNANCERico Back

Stuart Simpson

Mel Tomlin

Jon Millidge

Group Chief Executive Officer

Chief Finance and Operating Officer

Chief of Staff

Chief Risk and Governance Officer

For Rico’s biography please refer

For Stuart’s biography please refer to

Mel has performed a number of senior

Jon Millidge has worked across many

to Board of Directors on page 88.

Board of Directors on page 88.

roles across the Group both in the UK and

areas of the business since joining

internationally, most recently as Chief of

Royal Mail as a graduate in 1985. His

Staff for GLS and Royal Mail Parcels. She

experience includes HR, Letters,

has held senior Group roles in Strategy,

Parcelforce Worldwide and Pensions.

HR and Customer Experience. Previously

Before being appointed Chief Risk and

Mel held a number of international

Governance Officer in June 2018, Jon

Operational Director roles and was

was Group HR Director and member of

Managing Director of GLS Ireland.

the Chief Executive’s Committee. From

Prior to joining Royal Mail, she held

May 2010 to February 2014, he was

senior general management roles in

Company Secretary and prior to that

the construction materials industry

he was the Acting Group HR Director.

both in the UK and US.

Shane O’Riordain
Managing Director of Corporate
Affairs, Regulation and Marketing

James Rietkerk
GLS Chief Executive Officer

Shane joined Royal Mail in November 2010
and was appointed to his current role
in 2018. Previously he had responsibility
for Strategy and Pricing in addition to
Corporate Affairs and Regulation. Before
joining Royal Mail, Shane was Corporate
Affairs and Group Economics Director
for a range of major financial services
organisations, including Flemings,
Halifax, HBOS and Lloyds Banking Group.
Shane was previously a diplomat in the
Irish Foreign Service

James was Chief Financial Officer
of GLS from 2001 to 2018. He was
appointed Chief Executive Officer of GLS
following the appointment of Rico Back,
former GLS Group Chief Executive
Officer, to Group Chief Executive Officer
of Royal Mail plc. James was appointed
to the Executive Board in June 2018.
Before joining Royal Mail, James was
Group Financial Controller at Charter
plc. He qualified as a Chartered
accountant with Price Waterhouse.

Appointed to the Executive Board

Appointed to the Executive Board**

Appointed to the Executive Board

8 June 2018.

8 June 2018 until 8 April 2019.

8 June 2018.

External appointments

None

Detailed biographies can be found
at – www.royalmailgroup.com

** Previously served on the

Chief Executive’s Committee
under Moya Greene as follows:
Jon Millidge was appointed to
the Chief Executive’s Committee.
Shane O’Riordain was appointed
to the Chief Executive’s Committee.

9 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

GOVERNANCE STRUC TURE

G O V E R N A N C E S T R U C T U R E

Board structure and leadership
The Board is responsible for the
stewardship of the Company, overseeing
its strategy, conduct and affairs to create
sustainable value for the benefit of its
shareholders. The Board recognises that,
to be successful over the long-term, it has
a wider duty to a broader stakeholder
community whose support is required to
create sustainable value. It is therefore
essential that the Board considers the
impact of the business and its decisions on
our colleagues, customers, shareholders,
suppliers and the communities in which
the Company operates. Pages 100-104
highlight how we consider and engage with
our stakeholders. The Board has adopted
the governance framework as set out
below, which assists us in the exercise of
our responsibilities, namely providing
strategic direction to the Company in order
to create long-term shareholder value.

The Board has established several
Committees and has delegated to them
authority to carry out certain tasks.
During the year, the number of Board
Committees has reduced from four to
three. The Pensions Committee became
a management committee following a
review undertaken by Independent Board
Evaluation1 on behalf of the Committee,
which assessed the long-term need for
a separate Board Pensions Committee.
Having closed the Royal Mail Pensions
Plan to future accrual and agreed revised
pension arrangements with the CWU
and Unite/CMA, and in light of the
Government’s favourable response to
the proposed introduction of a Collective
Defined Contribution scheme (CDC), which
reduced the financial exposure of the
Company to pensions risk significantly,
it was agreed that the Committee is no
longer required to be a committee of the
Board. The Pensions Committee is now a
management committee and reports to
the Audit and Risk Committee. Some
material pensions matters remain
reserved for the Board.

Independent Board Evaluation have no other connections
with the Company.

The terms of reference of each Board
Committee, and the Matters Reserved for
the Board have been reviewed during the
year. Relevant changes have been made in
line with 2018 Code, and further detail can
be found on page 105. These documents
are available at www.royalmailgroup.com.
Reports from each of the Board Committee
Chairs have been included in this section
and can be found as listed below.

Board of Directors

Nomination Committee

Pages 106-108

Audit and Risk Committee Pages 109-115

Remuneration Committee Pages 116-145

Pensions Committee*

Page 146

* Now a management committee.

The minutes of each meeting are made
available to and approved by Committee
Members on a timely basis. Each
Committee Chair reports to the Board on
matters discussed at Committee meetings
and highlights any significant issues that
require the Board’s attention.

9 2

CORPORATE GOVERNANCETHE BOARD AND ITS COMMIT TEE S

T HE BO A RD

The Board is responsible for the stewardship of the Company, overseeing its strategy, conduct and
affairs to create sustainable value for the benefit of its shareholders. Responsible for the long-term
success of the Group, the Board sets the tone in building company culture. It has oversight and
accountability for the interests of wider stakeholders, it sets the objectives and strategy and
monitors performance and risk management. It approves major contracts, investments, internal
controls and key policies. The Board has three Committees that are set out below.

More information – www.royalmailgroup.com/en/about-us/governance/

NOMINATION
COMMIT TEE

AUDIT AND RISK
COMMIT TEE

REMUNER ATION
COMMIT TEE

Reviews the balance and composition of
the Board and its Committees in relation
to the diversity of skills, knowledge,
independence and experience.

Ensures a progressive renewal of
Board membership through orderly
succession planning.

Considers talent reviews and succession
planning for senior executives.

Reviews and recommends for approval
by the Board, all financial statements
and associated disclosures.

Satisfies itself that internal controls
and risk management processes
work effectively.

Determines, and recommends for
the Board’s approval, the framework
for the remuneration of the Group’s
senior executives.

This includes individual remuneration
arrangements for the Chair, the Executive
Directors, Executive Board and the
Company Secretary.

Agrees targets for any performance-
related incentive schemes.

SEPAR ATION OF CHAIR, CHIEF E X ECU TIVE OFFICER AND SENIOR INDEPENDENT ROLE S

There is a clear division of responsibilities between the Chair and the Group CEO. The separation of authority, which is set out in writing and
agreed by the Board in a policy on the segregation of the roles of the Chairman, Senior Independent Director and the Group CEO, enhances
independent oversight of executive management by the Board. It helps to ensure that no one individual on the Board has unfettered powers
or authority.

CHAIR

NON-E X ECU TIVE DIREC TORS

CHIEF FINANCE OFFICER

Responsible for the leadership and
management of the Board and for promoting
high ethical standards. Ensures an effective and
complementary Board, including appropriate
contribution and sufficient challenge from the
Directors. Ensures the Board determines
the nature and extent of the significant risks
that the Company is willing to accept in
implementing its strategy. With support from
the Company Secretary, promotes the highest
standards in corporate governance. Maintains
effective communications with shareholders
and makes the Directors aware of their views.

Responsible for contributing sound
judgement and objectivity to the Board’s
deliberations and overall decision-making
process, providing constructive challenge,
and monitoring the Executive Directors’
delivery of the strategy within the Board’s
risk and governance structure. Satisfy
themselves of the integrity of financial
information and of the effectiveness of
financial controls and risk management
systems is another key role. Determine
the appropriate level of remuneration for
Executive Directors

SENIOR INDEPENDENT DIREC TOR

GROUP CHIEF E X ECU TIVE OFFICER

Acts as a sounding board for the Chair and
serves as a trusted intermediary for the other
Directors. Leads the annual appraisal of the
Chair’s performance. Available to meet with
shareholders should they have issues
or concerns.

Responsible for the executive leadership and
day-to-day management of the Company, to
ensure the delivery of the strategy as agreed
by the Board and in accordance with the
Group’s risk appetite and business plan.
Promotes the Company’s culture
and standards.

Responsible for providing strategic financial
leadership of the Company and the day-to-
day management of the finance function.
Develops and monitors the control systems
designed to preserve Company assets and
report accurate financial results.

COMPAN Y SECRE TAR Y

Advises the Board members, particularly in
relation to corporate governance practices,
induction training and development. Ensures
that Board procedures are complied with,
applicable rules followed and that good
information flows exist to the Board and its
Committees. Communicates with shareholders
as appropriate and ensures due regard is paid
to their interests.

9 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19BOARD IN AC TION

B O A R D I N A C T I O N

BOARD AT TENDANCE

Les Owen

Peter Long

Rico Back

Moya Greene

Stuart Simpson

Sue Whalley

Keith Williams

Orna Ni-Chionna

Rita Griffin

Paul Murray

Simon Thompson

Board

Nomination
Committee

Audit and Risk
Committee

Pensions
Committee*

Remuneration
Committee

9/9

3/4*1

8/8*2

0/3*3

9/9

3/3*4

9/9

2/3*5

9/9

2/2

1/1*6

2/2

4/4*7

2/2

2/2*10

2/2

1/1*9

5/5

1/2*8

5/5

3/3*11

The attendance above reflects the number of scheduled Board and Committee meetings held during the financial year. During the year there were also a number of ad-hoc Board and
Committee meetings to deal with matters arising outside of the usual meeting schedule. The majority of Directors made themselves available at short notice for these meetings.
* Meetings were held up until December 2018.
*1 Peter Long stepped down 19 September 2018.
*2 Rico Back was appointed 1 June 2018.
*3 Moya Greene stepped down 19 July 2018.
*4 Sue Whalley stepped down 7 November 2018.
*5 Paul Murray stepped down 19 July 2018.
*6 Peter Long stepped down 19 September 2018.
*7 Les Owen stepped down as a member of the Audit and Risk Committee on appointment as Chair on 1 February 2019.
*8 Paul Murray stepped down 19 July 2018.
*9 Paul Murray stepped down 19 July 2018.
*10 Les Owen stepped down from the Remuneration Committee on appointment as Chair on 15 October 2018.
*11 Simon Thompson was appointed to the Remuneration Committee on 15 October 2018.

2018-19 Board meetings
The details of the Board’s scheduled meeting
and attendance during 2018-19 can be found
below. The Non-Executive Directors and the
Chair met on several occasions without the
Executive Directors present. These meetings
are an important way to develop working
relationships between the Non-Executive
Directors and to assess the performance
of senior management. In addition, the
Senior Independent Director met with
the Non-Executive Directors to assess
the Chair’s performance, without
the Chair being present.

Non-Executive Directors regularly met
with Management and spent extra time
increasing their understanding of the
business through site visits, informal
briefing sessions and networking
sessions. This allows discussions

to take place in a different format to
Board meetings and helps to “open out”
discussions, enabling formal Board
meetings to be more focused. It also helps
to reframe Non-Executive Directors’ views
of their roles, recognising that attendance
at Board meetings is only one part of their
role and, enabling them to engage as
proactively and frequently as possible with
the business. For more information on
activities of the Board, see page 95.

Directors unable to attend a Board or
Committee meeting receive the relevant
papers prior to the meeting with the
opportunity to provide in advance any
comments to the Chair or the relevant
Committee Chair. The minutes of the
meeting are also available for the
Directors to review for their
future reference.

Site visits
In order to facilitate employee engagement
and give exposure to the Non-Executive
Directors of our many different sites and
operations, some Board meetings are
held away from Royal Mail’s Head Office in
London. These visits are an opportunity for
Board members to talk to the workforce
and better understand Group operations.
For example, the Company’s first UK
Employee Voice forum was held in
Northampton in February 2019.

Over the year, the Board visited the Mail
Centre and Fleet Maintenance Workshop in
Sheffield, the GLS depot in Copenhagen, the
South Midlands Mail Centre in Northampton
and our National Distribution Centre
in Northampton.

9 4

CORPORATE GOVERNANCEBoard activities
The Board’s annual plan is designed to ensure that sufficient time is allocated to ensure all necessary matters are addressed.
The agendas are adjusted throughout the course of the year to prioritise relevant issues and ensure focused consideration of
strategic priorities. Sufficient time is provided for the Chair to meet privately with the SID and Non-Executive Directors to discuss
any issues arising.

The table below outlines specific areas the Board focused on during the course of the year and up until 21 May 2019.

Matter Considered

Activity

Strategy and business plan

Group Strategy

Business Plan

Budget

Projects

Leadership

– Participated in strategy sessions covering UK business functions and GLS.
– Reviewed and approved strategy that will be announced at the Strategy Day.
– Reviewed and approved:

• UK ‘turnaround and grow’ plan, including UK Network Review, assessment of productivity

and efficiency opportunities in the 2018 Agreement with CWU.

• GLS Strategy, including acquisitions and expansion in North America.
• Royal Mail International.
• Pricing Strategy.
• Long-term growth in Parcels.
• Technology developments including automation.

– Reviewed and monitored progress against Group’s long-term business plan.

– Monitored progress against annual budget for the Group as a whole.

– Received updates on projects and work streams, and their impact on strategic ambitions.

Organisational change and development
of talent in pipeline

– Monitored and received updates on structural changes within the Executive Leadership team.
– Considered recommendations from the Nomination Committee and HR about succession and

developing talent for colleagues below Executive Board level.

Board composition and succession
planning for Board

– Developed a succession plan to replace Non-Executive Directors approaching nine-year tenure.
– Continued to refresh Board membership, with a focus on Diversity.
– Reviewed and evaluated our skills matrix of Directors individually and as a whole, against the

Succession planning (Chair)

Stakeholder engagement

Ofcom

Unions/ Industrial relations

Investor relations and Shareholders

Group’s developing strategic ambitions.

– Progressed appointment of new Non-Executive Directors.
– Refreshed Non-Executive Director Induction Plan.

– Developed a succession plan (interim and permanent).
– Les Owen became Chair on 19 September 2018 , Keith Williams became Deputy Chair on 7

November 2018 and will become Chair on 22 May 2019.

– CEO met regularly with Ofcom.
– Chair met regularly with Ofcom.

– Conducted regular updates and deep dive reviews of Industrial Relations.
– Chair met with the CWU.

– Regularly reviewed investor relations updates and reports at Board meetings.
– Received updates provided by Corporate Brokers.
– The Chair and Senior Independent Director met with most large shareholders and with proxy

advisory groups following the AGM and reported outcomes to the Board for discussion
and consideration.

– Commissioned an Investor Perception Study.

Pensions

– Held discussions and updates on detail on how the Collective Defined Contribution (CDC) scheme

would work and its impact on stakeholders.

– Chief Risk and Governance Officer met Pensions Minister, Guy Opperman, MP.

9 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19BOARD IN AC TION CONTINUED

Matter Considered

Activity

Engagement with employees

– Through the People Panel, reviewed and oversaw development of an action plan following the

results of our employee survey.

– Guided development/expansion of People Panel sessions into Employee Voice forum.
– Sought feedback from employees regarding proposed mechanism for increased employee

engagement and topics they wanted to discuss.

– Met with senior leaders in informal settings to get to know people based in different sites and the

talent pipeline.

– Review of engagement with non-UK colleagues and development of an engagement plan.

Governance

Board key priorities

– Revisited the Board’s key priorities.

Board agendas and meetings

– Reviewed agendas and topics for discussion, identified key topics to be focused on over the

Board and Committee Evaluations

Remuneration Policy

course of year.

– Undertook an internal evaluation of the Board and its Committees by questionnaire.
– Developed Board objectives for 2019-20.
– Completed Board effectiveness review.

– Discussed shareholder feedback on the Remuneration Policy and other issues.
– Developing a revised Remuneration Policy, reflecting on feedback and concerns of shareholders.
– Implemented early some of the recommendations of the 2018 Code outlined on page 105.
– Appointed Deloitte LLP as new remuneration consultants.

New Corporate Governance Code

– Introduced early some of the requirements of the 2018 Code outlined on page 105.

Risk and Internal Controls

Health & Safety

GDPR

Cyber Security

Brexit

Whistleblowing

Operational

CEO Reports

Property

Financial

– Received updates on health and safety matters.

– Received regular updates on the Company’s compliance with GDPR.

– Received update on cyber security and the associated risks.
– Reviewed the updated cyber security response plan.

– Reviewed and discussed potential impacts of Brexit.
– Considered the Company’s response to various scenarios.
– Oversaw planning for Brexit and associated customs impact.

– Received reports from Audit and Risk Committee.
– Updated Matters Reserved for Board to reflect overall responsibility for

whistleblowing mechanisms.

– Discussed regular CEO reports on the operating performance of the Group’s business functions

and progress of recent acquisitions.

– Received updates from GLS CEO.
– Received updates on management structure, following CEO changes in June 2018 and

updates thereafter.

– Received updates on the Group’s property portfolio including discussions regarding the sale of

the Nine Elms plots.

Performance Reports

– Regularly discussed and considered reports on performance of different business functions.

Cost reduction

– Regularly reviewed cost/efficiency with particular focus on UK business.

Reports and announcements

– Considered half year, full year and trading updates.

Dividend Policy

– Considered the Dividend Policy.

9 6

CORPORATE GOVERNANCEBOARD COMPOSITION AND DIVERSIT Y

B O A R D C O M P O S I T I O N
A N D D I V E R S I T Y

Board terms of appointment
Copies of the Directors’ service contracts
and letters of appointment are available
for inspection at the Company’s registered
office during normal office hours and by
the shareholders at each AGM.

Time commitments
The terms of appointment for the Non-
Executive Directors require them to
devote a minimum of two days a month
to working for the Company.

In practice, they tend to devote considerably
more time than this, supporting projects
where their areas of expertise can support
specific initiatives. Since his appointment, the
Chair has devoted a minimum of two days per
week to Royal Mail. During the year, the Chair
stepped down as Non-Executive Director of
Computershare ensuring sufficient time to
devote to his responsibilities at Royal Mail.
Keith Williams is stepping down from Aviva
plc on 23 May 2019.

The Non-Executive Directors were
required to declare any of their other
significant outside commitments prior
to their appointment with an indication
of the time commitment involved. Any
new external appointments which may
impact existing time commitments are
considered by the Chair and agreed by
the Board in advance.

The delivery of the Company’s strategy
depends on attracting and retaining
the right skills across the Group, starting
with the Board, as well as the executive
management team, and their direct reports.
A list of the Company’s current Directors,
including their biographies, who were in
office during the year and up to the date of
signing the financial statements, can be
found on pages 88 to 89.

The Board and the Nomination Committee
actively consider the structure, size and
composition of the Board and its Committees
when considering new appointments and
succession planning. A range of diversity
factors are taken into account in determining
the optimum composition of the Board and
its Committees, together with the need to
balance their composition and refresh
this progressively over time.

As at 31 March 2019 and as at the
date of this Annual Report, the Board
comprised the Non-Executive Chair, four
independent Non-Executive Directors, and
two Executive Directors with wide-ranging
backgrounds and varying industry and
professional experience. The Company
complies with the Code’s recommendation
that at least half the Board should
be independent.

The Company’s Chair, Les Owen was
independent on appointment and Keith
Williams will also be independent upon
his appointment on 22 May 2019.

Royal Mail recognises the importance
and benefits of having a diverse Board. The
Board considers that diversity should not be
limited to gender and that a diverse Board
should include and make good use of
differences in skills, geographic and industry
experience, background, race, gender
and other characteristics of Directors.

The Board seeks to construct an effective,
robust, well balanced and complementary
Board, whose capability is appropriate
for the nature, complexity and strategic
demands of the business. The Nomination
Committee leads the process for Board
appointments as detailed in the
Nomination Committee Report.

The Company’s Non-Executive Directors
come from a wide range of industries,
backgrounds and geographic locations
and have appropriate experience of
organisations with international reach.
The skills and expertise of the Board have
been extended and reinforced through the
appointments of Maria da Cunha and
Michael Findlay with effect from 22 May
2019. The Nomination Committee will
continue to consider and develop
succession plans for the Board and its
Committees. When considering Board
appointments and internal promotions
at senior level, Royal Mail will continue
to take account of relevant codes and
voluntary guidelines and the performance
of peer companies while seeking to ensure
that each post is offered strictly on merit
to the best available candidate.

Information and support
The Board receives business and
financial performance reports at each
Board meeting and reports on health and
safety, regulation, market dynamics and
governance. The Directors receive regular
updates and training on matters such as
developments in corporate governance
and compliance policies. The Company
Secretary is responsible for ensuring
the timely provision of information to
the Directors. In addition, the Directors
also have access to an online Directors’
Reference Manual to support them in
the performance of their duties.

9 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Board and Committee evaluations
External evaluations
In accordance with best practice, an
effectiveness review is carried out with
external facilitation at least once every three
years. In early 2018, the Board engaged
Independent Board Evaluation to conduct
a review of the Board and its Committees,
assisted by the Company Secretary.

This externally-facilitated review sought
to prioritise issues and risks identified
by Board members. It aimed to identify
improvements to the oversight framework,
and communication with management.
There was particular focus on reviewing
the quality of Board papers, with a view to
reducing unnecessary detail, so that Board
discussions could be more focused and
effective. Part of the review involved
designing a plan to increase Directors’
engagement with the workforce and to
promote the Company culture.

BOARD COMPOSITION AND DIVERSIT Y CONTINUED

Conflicts of interest
The Companies Act 2006 and the Articles
require the Board to consider any potential
conflicts of interest. The Board operates a
policy to identify and, where appropriate,
manage potential conflicts of interest
for Directors. The Board considers the
conflicts during the financial year and, if
appropriate, authorises each Director’s
reported actual, and potential, conflicts of
interest regularly. Each Director abstains
from approving their own reported potential
conflicts. The Board will continue to monitor
the status of each conflict or potential
conflict(s). It will also review potential
conflicts of interest and take action to
mitigate them as necessary.

The conflicts of interest register was
reviewed several times during the year
by the Board. It concluded that where
Directors’ conflicts were appropriately
authorised, the process for authorisation
was operating effectively.

Related party internal controls are in place
to ensure Directors advise the Board of
any related party transactions involving
themselves or their connected persons,
and that these are conducted on an arm’s
length basis. Directors have an ongoing
obligation to advise of any changes that
are required to be reviewed and monitored
by the Board. As at 31 March 2019, no
Director had advised the Board of any
related party transactions. Note 27 on
page 207 sets out the Group’s related
party transactions over the year.

Simon
Thompson

EMPLOY EE VOICE FORUM

As the Employee Board Representative,
it is my role to make sure that our
decisions answer the question: “what
would our employees think of that?”.

It is very important as a Board to talk
directly to our colleagues so we can
understand what matters to them as
well as allowing us to understand our
business better.

Understanding our reality directly from
our people, without any filters, will allow
us to make better decisions.

As a business, for many years we have
used a number of ways to capture the
employee’s voice including leadership
forums and numerous surveys. This will
continue, but in addition we are going
further by giving our people the chance
to ask us questions directly and confirm
straight away, that our answer was
clearly understood.

In February this year, we trialled our new
Employee Voice Forum at our National
Distribution Centre in Northampton, as
well as spending time walking the site
and seeing the operation during its peak
period. It was a great session, and I was
really struck by how interested the team
were to learn about the increasing
demands of the consumer and how we
plan to compete and win in the market
against the competition.

We have communicated what we learn
in our monthly newspaper, Royal Mail TV
and through our new employee social
media channel.

It is vital that we openly discuss the
things that are troubling us all, and work
together as a team to share what can be
improved to ensure Royal Mail & GLS
continue to flourish.

9 8

CORPORATE GOVERNANCEaddressed in the ongoing Board
recruitment process.

Outside of Board composition and
experience, Directors asked to spend more
time on training, in particular Company
related issues such as regulation and the
wider competitor environment, and to
receive better, shorter discussion papers.

Directors also reflected on the Board
moves that had taken place in the last year,
and how the composition of the Board was
undergoing significant change. There was
a wish to ensure that the newly constituted
Board under Keith Williams should find its
cohesiveness as quickly as it can.
Accordingly, it was decided to use the
services in 2019/20 of a specialist external
board evaluator to help the Board form
once the new members have joined, and
had the opportunity to attend several
Board meetings. The Board would then
carry out a more formal external board
evaluation later in the year.

Committee evaluations
Information on the evaluations of each
Board Committee are described within
the Committee reports.

Key elements of the review were:

– The Board and its separate Committees

were provided with self-
assessment questionnaires;
– Board and Committee meetings

were observed by a representative
of Independent Board Evaluation;

– Individual interviews with every Board
member were conducted, according to
a set agenda; and

– Recommendations were discussed with
the Chair and Committee Chairs, before
reports were discussed at the relevant
Committee or Board meeting.

All the recommendations resulting from
the evaluation were implemented.

This evaluation resulted in the decision
that there was no longer a need for the
Pension Committee to be a formal
Committee of the Board and should
operate as a Management Committee .

Internal evaluation
The Board had anticipated carrying out a
further external evaluation to follow on the
external evaluation concluded in March 2018
(and which was referred to in last year’s
annual report). It was felt at the time that this
would assist the Board in its development
and with a new Chief Executive and an
additional Executive Director.

The year proved to be one of significant
change for the Board. In addition to the
changes mentioned above, a new Chair
was appointed in September 2018 with
the brief to strengthen the Board. A long
standing Non-Executive and an Executive
Director both stood down during the year.

Following a search led by Orna Ni-Chionna,
the Senior Independent Director, Keith
Williams was announced as incoming
Chair with effect from 22 May 2019. In
addition and with the support of the
specialist search agencies Egon Zehnder
Limited and Ridgeway Limited, and
observations from Independent Board
Evaluation, the Board carried out an
analysis of Board capabilities and
embarked on a comprehensive search
programme to supplement and strengthen
Board expertise and experience.

In light of the above the Board did not then
conclude the external evaluation. Instead,
subsequent to the announcement of the
incoming Chair Keith Williams, the Board
carried out an internal evaluation of the
Board and each of its Committees. This was
conducted by the Company Secretary and
the Chair and facilitated by board
questionnaires with Lintstock Limited. These
questionnaires were distributed in April 2019.
As such the annual evaluation was
undertaken following the financial year
end rather than during the period under
review as recommended by the 2016 Code.

The results of this internal evaluation
largely reflected the work that had been
done in preparing for the Board
recruitment process. Whilst it concluded
that the Board worked effectively,
directors acknowledged that the Board
needed to be enlarged and strengthened.
The Board would also benefit from more
Directors with experience in people related
change and engagement, industrial
relations and relevant industry experience.
All of these issues were already being

9 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19BOARD COMPOSITION AND DIVERSIT Y CONTINUED

The Board dedicated a very significant
amount of time and focus to detailed
discussions of the strategy. Alongside
the annual review of the budget and
business plan, this included a number
of specific Board meetings to discuss
proposals for a UK Network Review.
There were also dedicated reviews of
our assessment of the productivity and
efficiency opportunities under the 2018
Agreement with the CWU.

Strategy
In prior years, the Board has held one
annual Strategy Day. This year, the Board
held two sessions, one in June 2018 and one
in September 2018 (the Strategy Days). The
June session focused on pricing, acquisitions
and evaluating UK performance. The Board
also considered the outcome of the strategy
discussions and the impact on the skills
required for future Non-Executive and the
Executive Directors on the Board. The
September session was held over two days
and focused on a strategic overview of the
Group and three to five year plans.

In light of our disappointing productivity and
cost avoidance performance in 2018-19, and
the consequential impact on our profitability
expectations, we held a Strategy Day in May
2019 for our stakeholders (the updated
strategy presented at the meeting is
summarised in the Group Chief Executive
Officer’s Review on pages 14-19 and the
Summary of our Five-Year Strategic Plan
on pages 20-23. This covered an extensive
review of the UK business and the
operational and productivity/efficiency
challenges and opportunities, a review of
GLS and the growth opportunities we have
as we aim to become a parcels-led, more
balanced and more diversified business.

1 0 0

Colleague Engagement
People Panels
Our “People Panel” sessions were set up
after the 2016 Employee Survey as part
of our Group Engagement Action Plan.
We hold two sessions a year in different
Mail Centres. All areas of the business
are represented, along with CWU and
Unite. These sessions help us review our
engagement activity including identifying
how Royal Mail can be a better place to
work. Our most recent People Panel was
held on 10 April 2019 at Wolverhampton.
Over 40 colleagues from across the
business joined us. Colleagues are given
a briefing note to share with their teams
after each session and articles are
included in our Courier magazine
which is received by all colleagues.

Discussions during the year included:

– new uniform and process for

future review;

– employee engagement survey results

and subsequent action plan;

– tools to support self-development;
– review of the recognition programme

and how it can be evolved;

– question and answer sessions with

senior leaders; and
– employee benefits.

Employee Voice Forum
During the year, the Board has introduced
‘Employee Voice’ forums in addition to the
People Panels. This initiative aims to give
the global workforce a voice on key matters,
enabling the Board to hear first-hand from
employees across the Group and to consider
their views when deliberating Board matters.

Forums will be held in different Mail
Centres across the country with 160 – 200
colleagues from across all parts of the
business invited to attend each one.

The first of the new Employee Voice
forums was held in February 2019
at the National Distribution Centre in
Northampton. The session was attended
by Les Owen, Rico Back, Stuart Simpson,
Orna Ni-Chionna, Simon Thompson and
Rita Griffin. Feedback was obtained from
attendees regarding how they felt the
forum should operate and what topics
they would like to see at future events.

CORPORATE GOVERNANCETwo sessions will be held per year. Some
of the topics discussed at the February
session included:

– career opportunities;
– our performance against compeititors ;
– customer perceptions of our quality;
– royal Mail image and brand strength;
– investment and innovation; and
– new initiatives and trials.

Appointment of a designated NED
for workforce engagement
In February 2019, Simon Thompson was
appointed the designated Non-Executive
Director for engagement with the workforce;
Simon has increased his time commitment

to the Company after assuming this role. He
has been instrumental in leading the work
on culture and stakeholder consultation. The
Board believes he will add substantial value
to the Royal Mail’s plans for engagement
with our workforce.

Colleague engagement from
2019-20 onwards
UKPIL: The Board has reviewed how it
engages with the UK workforce. A number
of existing mechanisms were reviewed
including site visits, informal meetings
with employees, reports on employee
engagement surveys and People Panels.
The Board will continue to engage in these
ways, in addition to rolling out the
Employee Voice Forums.

GLS: Due to GLS’ broader geographical
spread, and smaller groups of employees
in each region, the Board is devising a
specific employee engagement approach,
to be implemented in 2019-20. A GLS
management conference will be held
which will include a dedicated session on
the Employee Voice. This will enable our
leaders to define how the recommendations
of the requirements of the 2018 Code should
be implemented across GLS. At least one
cycle will be completed before the end of
the 2019-20 year. Bi-annual, reports will be
provided to the Board on the outcomes
of local employee engagement activity.
As previously mentioned, the Board will
listen to feedback from local GLS teams
during their Board visits to various
GLS locations.

STAKEHOLDER ENGAGEMENT

Our stakeholders are integral to the success
and sustainability of our business

Royal Mail communicates proactively with our stakeholders
through a range of channels. We regularly engage with
them to obtain their views and understand their needs
and expectations.

Our purpose of connecting customers, companies and
countries demonstrates the importance we place on
stakeholder relationships and our impact on wider
society. We seek to obtain their views about our role
and responsibilities as a key part of the UK’s economic
and social infrastructure. We take issues raised by them
into account in our decision making.

SUPPLIERS

SHAREHOLDERS

LOC AL COMMUNITIES

COLLE AGUES

O U R
S TA K E H O L D E R S

GOVERNMENT

REGUL ATORS

This report can be found on our website at:

http://www.royalmailgroup.com

1 0 1

UNIONS

CUSTOMERS

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19O U R S TA K E H O L D E R S

SHAREHOLDERS

COLLE AGUES

UNIONS

We have one of the broadest
shareholder bases in the FTSE. Eight
per cent of our shares are held by
colleagues as Free Shares.

Board engagement
The Chair and Senior Independent
Director (SID) are available to meet
shareholders. The Board receives
monthly reports from the Director
of Investor Relations. Our Corporate
Brokers provide updates.

After the 2018 AGM, the Chair and SID
held meetings with many of our large
shareholders, and with advisory bodies,
including those representing retail
shareholders, to better understand
their concerns. Our response to the
shareholder vote at the AGM, in line
with the new Code, can be found on
royalmailgroup.com.

Further meetings covered our revised
Remuneration Policy, which is subject
to binding vote at the 2019 AGM.

An investor perception study
was commissioned.

Investor relations
We have a comprehensive engagement
programme, including for our financial
results, trading updates and divisional
presentations. The Group CEO and CFO
meet institutional investors on a
regular basis.

Royal Mail employs around 160,000
people through UKPIL and GLS.

Board engagement
Our first Employee Voice session,
led by Simon Thompson, took place in
February 2019. Our annual UK employee
engagement survey tracks overall
engagement, culture and areas for
improvement. This year, the Board
reviewed and updated its Diversity
Policy. The Executive Board and
Nomination Committee reviewed high
potential individuals, their skills and
experience, and diversity from a BAME
and gender perspective. This led to
some changes in membership of
subsidiary boards.

Internal communications
We run one of the UK’s largest face-to-
face programmes, from ‘Town Halls’
with senior executives, to team
briefings. Internal communication
channels include a monthly magazine,
a weekly TV programme, daily intranet
and extranet updates, WhatsApp
and, from 2019, Facebook Workplace.
We cover strategy, performance,
recognition and operational excellence
to improve understanding of our
direction, the need for change, and
our people’s role in delivering it.

Diversity and inclusion
We continue to work towards greater
representation of minority groups and
increasing the number of women in
frontline roles.

We value the input of the
Communications Workers Union (CWU)
and Unite/CMA, and the role they play
in representing the interests of our
workforce. We are committed to open
and constructive engagement with them.

Board engagement
The Group CEO and CFO meet regularly
with senior union leadership. This year,
this has included meetings about the
challenges we face in the UK.

Engagement across our business
Elected union members in every
operational unit, office and plant
work closely with managers on a
daily basis to plan resources, assess
workload and share key initiatives
with colleagues. Joint working
groups consult on aspects of change
and deployment, determined by our
framework agreements. Negotiations
on national agreements, including pay,
pensions, terms and conditions take
place at a national level.

Working together
As part of our 2018 Agreement, the
Royal Mail Pension Plan (RMPP) closed
in its previous form on 31 March 2018.
Working with CWU, we are lobbying
Government to underpin the retirement
plans of employees through a Collective
Defined Contribution (CDC) scheme.

GLS works councils
GLS works councils are formed by
employees from a specific location in
line with the applicable national law.
GLS Germany elected its first works
council in November 2000. Since it was
set up, the council has addressed areas
such as working schedules and
working behaviours.

1 0 2

CORPORATE GOVERNANCEOur 2018 Modern Slavery Statement
is available at:

http://www.royalmailgroup.com

CUSTOMERS

REGUL ATOR

GOVERNMENT

As the UK’s Universal Service provider,
Royal Mail delivers to more than 30
million addresses across the country.
GLS has c.300,000 customers across
43 countries. From consumers,
marketplace sellers and SMEs to the
biggest companies and e-retailers,
customers expect high quality, access
to up-to-date delivery information,
and value for money.

Board engagement
Our Regulatory Retail target for First
Class Quality of Service is a 2018-19 KPI.
Each quarter, we review our performance
against a large number of measures,
reflecting our performance, and that
of our competitors. Mean customer
satisfaction – a key advocacy measure –
was 78 points. Our Net Promoter Score
was +39 – a market-leading performance.

Feedback
Every year we survey thousands of
customers, including consumers. We
also conduct touchpoint surveys to
understand customers’ experiences with
a range of products, including Tracked
and Special Delivery Guaranteed.

Ofcom has a comprehensive
monitoring regime for us as the UK’s
Universal Service Provider. We provide
detailed information on our Quality
of Service, complaints, financial and
volumetric performance and efficiency
metrics, as required by regulatory
reporting obligations.

Board engagement
The Chair has met with the Chair of
Ofcom. The Group CEO meets regularly
with Ofcom’s CEO. The Group CEO and
CFO lead on engagement with Ofcom’s
senior representatives on our
Business Plan.

Designated team
We have a dedicated regulatory
team who work with Ofcom at all
levels. It leads on responding to
Ofcom’s consultations and regularly
engages with the regulator through
face-to-face meetings.

We have an open dialogue with Ofcom
and share, as appropriate, information
it needs. We continue to press our case
for a supportive regulatory environment
that will help to keep the Universal
Service market funded.

We remain strictly neutral on political
matters but engage with all levels of
Government. Key priorities in 2018-19
have been our campaign for CDC
pension legislation and preparations
for Brexit.

Board engagement
The Board receives regular updates
and briefings on matters of political
relevance to the business. In 2018-19,
Executives met with key politicians,
including the Postal Affairs and
Pensions Ministers. Updates were
provided to the Board as appropriate.

Designated team
The Public Affairs team meets a
range of political and Government
stakeholders. This includes ministers
and officials from BEIS, Treasury and
HMRC, DfT and the Home Office, key
departments in Brussels and
devolved administrations.

We run the UK’s largest political
stakeholder programme, organising
over 900 Christmas visits in 2018.
Our ‘Walking in a postie’s shoes’
programme, where individuals
accompany a postman or woman
on their walk, is popular.

Consultations
We monitor and respond to
consultations affecting our
business including those focusing
on environmental, employment
and pensions issues. We respond
to relevant Parliamentary
Select Committee inquiries.

1 0 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19 LOC AL COMMUNITIES

SUPPLIERS

We are creating long-term benefits for
the communities we serve, through our
social and economic impact, and our
community investments. Stakeholders
rank community impact as a key issue
for our business. They expect us to
operate responsibly and maintain
our presence in local communities.

Board Engagement
Our Board is committed to reducing
our environmental impact, helping to
improve air quality in the communities
in which we operate. We work with the
Centre of Economics and Business
Research to assess our contribution
to the UK economy. This helps the Board
to understand the value we add to UK
society above and beyond delivering
the mail.

Key programmes
We launched a multi-year campaign
“because healthy minds matter”
for our colleagues and customers.
We encourage involvement in local
communities through the provision of
matched giving, grants and volunteering
opportunities, enabling them to support
local and national charities. Our
employees are the eyes and ears of local
communities, which is reflected in our
involvement with the charity Missing
People and our funding of the Child
Rescue Alert System.

We engage with our suppliers through
fair contracting processes and efficient
ordering and payment. We proactively
engage with our suppliers to promote
awareness of our policies and monitor
compliance with our Responsible
Procurement Code (‘Our Code). It sets
out the high standards of ethical, social
and environmental conduct we expect.

Board engagement
A report is provided to the Audit and
Risk Committee on Payment Practices
regulation for relevant businesses.
New contracts considered critical
in terms of risk profile (including
business dependency, financial status,
reputation, compliance and safety) may
be referred for Board approval prior
to award.

Our standards
Suppliers must state compliance
with Our Code. In 2018-19, we updated
it so social, environmental and ethical
performance are pass/fail elements in
the contract award process. Suppliers
identified as having high sustainability
risk enrol onto a platform that tracks
ESG performance and conducts third
party audits. Our supplier management
portal shows whether suppliers are
meeting their ethical, social and
environmental obligations,
contractual requirements and KPIs.

Our 2018 Modern Slavery Statement is
available at www.royalmailgroup.com/
en/responsibility

1 0 4

CORPORATE GOVERNANCEREPORTING AGAINST THE 2018 CODE

R E P O R T I N G A G A I N S T
T H E 2 0 18 C O R P O R AT E G O V E R N A N C E C O D E

Further to our confirmation on page 86 that we comply with all provisions of UK Corporate Governance Code 2016, except in relation to
the timing of the annual evaluation of the performance of the Board, its Committees and Directors as mentioned on pages 98-99, this
section sets out how Royal Mail has applied most of the principles and complied with certain provisions of the 2018 Code on a voluntary
basis. Actions that have been taken in 2018-19 to comply with the provisions of the 2018 Code are detailed below.

PROVISIONS

ACTIONS TAKEN

1-8

Board Leadership and Company Purpose

The approach as to how the Board will monitor culture has been reviewed and a report will be provided to the Board
on a twice-yearly basis.

The Matters Reserved for the Board have been updated to reflect the Board’s enhanced role regarding the monitoring
of culture, whistleblowing, stakeholder engagement, external appointments and conflicts of interest.

A statement was published on 14 January 2019 regarding the significant votes against the Chair (34.4%) and the
70.2% vote against the Remuneration Report at the 2018 AGM, including actions taken. An investor perception study
was commissioned, and meetings held with shareholders, proxy voting agencies and shareholder representative
bodies. Further detail can be found on page 102 of this report.

Simon Thompson was appointed as the designated Non-Executive Director for employee representation, and the first
‘Employee Voice’ Forum was held on 26 February 2019.

A review of the approach to stakeholder engagement is being undertaken and a report will be provided to the Board
on a twice-yearly basis.

The Audit and Risk Committee’s Terms of Reference and the Matters Reserved for the Board have been updated to
reflect that it is the Board’s responsibility to routinely review the whistleblowing reports. Going forward the Board
will receive the whistleblowing reports.

The Nomination Committee’s Terms of Reference have been updated to enhance the responsibilities regarding
Directors’ conflicts of interest and external appointments. The Board places emphasis on development of diversity
within the Group senior management roles.

9-16

Division of Responsibilities

The Chair, Les Owen, reached his nine-year tenure on the Board on 26 January 2019. It was announced on 22 March
2019 that Keith Williams will be appointed Chair on 22 May 2019 and that Les Owen will then step down as Chair and
a Director.

The responsibilities of the Chair, Chief Executive, Senior Independent Director, have been reviewed and updated and
published on our website found here http://www.royalmailgroup.com/en/about-us/governance/.

A guidance note for the Board has been produced on external appointments and required time commitments.

7-23

Composition, Succession and evaluation

The Board diversity policy has recently been reviewed. There are a number of initiatives are in place to increase
female and BAME representation to the executive and senior management team.

24-31

Audit, Risk and Internal Control

Royal Mail complies with all of these principles.

32-41

Remuneration

Guiding principles and a remuneration dashboard have been established to provide the Remuneration Committee
with oversight of company-wide remuneration policies and practices.

The vesting and holding periods for Long Term Incentives are already five years.

The Terms of Reference have been updated to reflect the enhanced role of the Remuneration Committee.

The remuneration report has been reviewed and refreshed following the significant votes against, including the
incorporation of the new reporting requirements.

1 0 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Les Owen
Nomination Committee Chair

Committee members:
Les Owen

Orna Ni-Chionna

Rita Griffin

Keith Williams

Simon Thompson

NOMINATION COMMIT TEE REPORT

N O M I N AT I O N C O M M I T T E E

I am pleased to update you on the
Committee’s activity for the year ended
31 March 2019. The Committee’s main
activities were: i) identifying a successor to
the Chair and conducting a search for new
Non-Executive Directors; and ii) reviewing
Executive talent and appointments to the
Executive Board following Rico Back’s
appointment as Group Chief Executive
Officer on 1 June 2018.

Michael Findlay and Maria da Cunha will
be appointed as Non-Executive Directors
with effect from 22 May 2019 (see page
11). We are well advanced in the search
for additional Non-Executive Directors
and expect to be able to make an
announcement before the AGM. We have
ensured long lists for potential future
Non-Executive Directors include at least
50 per cent female candidates.

The Committee reviewed the structure,
size, diversity and composition of
the Board and its Committees and
as part of this process reviewed our
skills experience matrix. We reviewed
each Board member’s experience,
independence, tenure, industry
knowledge and knowledge of Royal Mail.

I succeeded Peter Long as Chair in
September 2018. On 7 November 2018,
Keith Williams was appointed as Deputy
Chair and increased his commitments to
the Company. On 22 March 2019 it was
announced that Keith will be succeed
me as Chair on 22 May 2019.

The process for identifying a successor for
me as Chair was led by Orna Ni-Chionna,
the Senior Independent Director with
assistance from Egon Zehnder Limited.
Myself and Keith Williams were not
involved in the selection of my successor.
Both internal and external candidates
were considered. The identification of
potential candidates for both the Chair
and Non-Executive Director roles followed
a rigorous selection process against an
agreed set of criteria. Proposed candidates
were from diverse backgrounds. We also
employ Egon Zehnder and Ridgeway
Partners Limited for Non-Executive
Director appointments. Egon Zehnder also
assist the Company for Senior Executive
appointments. Both firms have signed up
to the Executive Search Firms’ Voluntary
Code of Conduct and neither have any
other connections with the Company.

There was an extensive review of the
Executive team leadership structure.
An Executive Board was established on
1 June 2018. A Chief Information Officer,
a Chief Strategy and Transformation
Officer, a Chief Risk and Governance
Officer and a Group General Counsel
and Company Secretary were appointed.

Other areas we have spent time on
include a review of the organisational
structure, global talent, diversity and
the Board’s exposure to a range of
senior management. The composition
of the subsidiary boards was reviewed
and refreshed taking into account
development needs, gender and
BAME diversity.

Board diversity
The Board has reviewed its Diversity
Policy and updated it to include
measurable objectives and a
commitment to aspire to achieve the
diversity targets of the Parker and
Hampton-Alexander reviews. The
policy also includes a commitment to
only engage with search firms who are
signatories of the Voluntary Code of
Conduct for Executive Search Firms.
The Policy is reviewed annually by the
Nomination Committee and progress
against the objectives reported on.

1 0 6

CORPORATE GOVERNANCEIt has been a year of
major change at Board
and Senior Executive
level. We have made
good progress in
refreshing and
strengthening
our Board.

Committee changes
There were a number of Committee
changes during the year. In April 2018
myself, Rita Griffin, Simon Thompson
and Keith Williams were appointed as
members of the Nomination Committee.
When Paul Murray stepped down from
the Board in July 2018, he also stepped
down as Chair of the Audit and Risk
Committee and as a member of the
Remuneration, Nomination and the
Pensions Committees. Keith Williams
was appointed as Chair of the Audit and
Risk Committee in July 2018. When Peter
Long stepped down September 2018,
I assumed the role of the Nomination
Committee Chair. Simon Thompson
joined the Remuneration Committee in
October 2018 and I stepped down from
the Committee at that time. I stepped
down from Audit and Risk Committee
in February 2019.

Corporate Governance developments
The Committee reviewed and updated
its Terms of Reference taking into
consideration the 2018 Code.

Committee evaluation
The Committees performance was
internally evaluated by the members of
the Committee by way of self-evaluation
questionnaire as referred to on pages 98
and 99. The Committee concluded that it
was performing effectively albeit during
a year of significant change for both the
Board and at the senior executive level.

More information on the Board
effectiveness process can be found
on pages 98-99. The key priorities for
2019-20 are to:

– further strengthen and refresh

the Board;

– further strengthen the senior

leadership team;

– review the capability and performance
of the top layers of management and to
develop succession plans; and

– meeting our diversity objectives with
particular regard to the upper level of
management and the Board.

Directors independence
and re-appointment
The Board reviews the independence of
its Non-Executive Directors as part of
its Annual Board Effectiveness review. It
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
impact their judgement. The Board has
a majority of independent Directors. Full
biographies of each of the Directors are
on pages 88-89.

The Committee considered the
performance of each individual Director,
including whether they continued
to be effective and demonstrate
commitment to their roles. All Directors
are considered by the Board to be fully
effective. This supports the proposal
for those Directors standing for re-
appointment at the AGM.

I am stepping down as Chair and
as a Director on 22 May 2019 having
reached a nine year tenure on the
Board in January 2019.

Composition of the Committee
and Responsibilities
The composition of the Committee meets
the recommendations of the UK Corporate
Governance Code, with all members being
independent Non-Executive Directors. The
composition and attendance of Committee
meetings during the period under review
are set out on page 94. The full Terms of
Reference for the Committee can be found
on our website at www.royalmailgroup.
com. The responsibilities for the
Committees is outlined on page 93.

Les Owen
Chair

1 0 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19NOMINATION COMMIT TEE CONTINUED

Review of progress against Policy
The Board Diversity Policy (‘the Policy’)
sets out our approach to transparency
and diversity in making appointments to
the Board on the recommendation of the
Nomination Committee.

The Board promotes diversity in its
broadest sense, including professional,
education, skills, age, gender and ethnic
diversity. It is our belief that a diverse
Board with different backgrounds and
viewpoints in decision making, benefits
the Group’s stakeholders and the
performance of the business.

The Nomination Committee reviews and
assesses progress against the Diversity
Policy. The principles of this Policy are
embedded in the appointment process for
Director and Senior Executives. During the
year, the Board reviewed and updated the
Policy. All appointments to the Board are
based on merit and considered against a
range of objective criteria.

The Board will report annually against
the objectives in the Policy and other
initiatives taking place within the Company
to promote gender and other forms of
diversity. Progress against each objective
is described below.

Endeavour to achieve target for
33 per cent female representation
on the Board:
The Board is committed to its target
for female representation and is mindful
of the target set out in the Hampton-
Alexander Review of 33 per cent female
representation. The Committee will
continue to make recommendations for
new appointments to the Board based on
merit, with candidates measured against
objective criteria and with regard to the
skills and experience they would bring to
the Board. As at 21 May 2019, the female
representation on the Board represents
29 per cent of the membership.

Place emphasis on development of
diversity within the Group. Royal Mail
is committed to further pursuing
diversity, as appropriate and on merit,
within the Group senior management
roles. Intend to meet where possible
the recommendations of the Hampton-
Alexander Review of 33% women
in senior leadership positions:
We continue to strengthen the pipeline
of senior female executives within the
business. Our initiatives are outlined on
page 77. At senior management level, 32
per cent of our colleagues are women,
compared with 18 per cent in operational
grades. In 2018-19, Royal Mail was named
as one of The Times Top 50 Employers for
Women for the sixth consecutive year.

Aspire to achieve the recommendations
of the Parker Review by having at least
one director on the Board from an
ethnic minority background:
The Committee has adopted this in its
Policy. There are a number of Company-
wide initiatives: the Diversity Council
which monitors and progresses the
Group’s diversity performance in terms
of women, ethnic background, parents
and carers, disabilities, young and LGBT+;
Working with Business in the Community’s
(BITC) Opportunity Now and Race for
Opportunity programmes, Mentoring
schemes to increase female and BAME
representation and the Spring Forward
programme aimed at supporting those
relatively new to management, including a
BAME programme for under-represented
colleagues in higher positions.

In searches for candidates, engage
with executive search firms which are
signatories to the Voluntary Code of
Conduct for Executive Search Firms:
The Board supports the provisions of the
Voluntary Code of Conduct for Executive
Search Firms will only engage who have
signed up to this Code.

Report annually against these
objectives and other initiatives taking
place within the Company to promote
gender and other forms of diversity:
The Board places a strong emphasis on
increasing diversity in senior leadership. It
is proud of the many initiatives that were in
place during the year to achieve this, such
as the Springboard women’s development
programme which, since 2005, has helped
to encourage women into leadership
positions. Other schemes include:

– The Diversity Council which monitors
and progresses the Group’s diversity
performance in terms of women,
ethnic background, parents and carers,
disabilities, young and LGBT.
– Working with Business in the

Community’s (BITC) Opportunity Now
and Race for Opportunity programmes.
– Mentoring schemes to increase female

and BAME representation.

– Spring Board programme aimed at

supporting women with confidence and
personal development.
– Women’s Steering Group.
– “W” magazine for women in Royal Mail
with copies sent to every woman in the
business. Detailing networking events,
role models and showcasing activity.

– Vote 100 campaign.
– Series of International Women’s Day

events and talks.

– Spring Forward programme aimed
at supporting those relatively new
to management, including a BAME
programme for under-represented
colleagues in higher positions.
– Everywoman online personal and

professional development platform
available to all colleagues.

There is also an adopted Equality and
Fairness Policy which is our overarching
policy for diversity within the Group.
A copy of the Equality and Fairness
Policy is available on our website at
royalmailgroup.com.

This Policy provides a statement of Royal
Mail Group’s commitment to diversity.

1 0 8

CORPORATE GOVERNANCE
Keith Williams
Audit and Risk Committee Chair

Committee members:
Keith Williams

Orna Ni-Chionna

Rita Griffin

Simon Thompson

AUDIT AND RISK COMMIT TEE

A U D I T A N D R I S K C O M M I T T E E

I was delighted to become the Chair of
this Committee following Paul Murray’s
retirement from the Board on 19 July 2018.
I would like to thank Paul for his support
during the transition period and for his
contributions to the Committee. I am
pleased to update you on the Committee’s
activity for the year ended 31 March 2019.

During the year we have been primarily
focussed on the Group’s financial
performance as well as the integrity of
the Group’s financial reporting, including
annual and half-year financial statements
and announcements. There have not been
any significant changes to the Committee’s
primary functions this year. The Committee,
along with management and the external
auditor, considered the impact of reporting
recommendations published by the FRC, as
well as the new accounting and reporting
requirements introduced by IFRS 15 Revenue
and IFRS 16 Leases and their impact on
the Group’s financial statements. A area
of core continued focus was reviewing the
Company’s internal controls and systems of
internal control and risk management and
in particular monitoring the Group risks and
their linkage to strategy to Group strategy.

As a Committee we have developed the
agenda to enable us over the course of
the year, to have active oversight of all
key areas of responsibility and to facilitate
deep dives into key areas of strategic
focus. Deep dives were presented to the
Committee by the management team on
Technology and Parcels which facilitated
a healthy debate between management
team and the Committee and enhanced
knowledge on these topics.

The Committee also considered the
impact of Brexit and associated risks and
following the implementation of GDPR we
focused on technology, data governance,
cyber security, access controls and
business continuity and received regular
updates through the year from the
management team.

Lastly, we have also reviewed and
updated our terms of reference with the
2018 Code. The Committee will continue
to receive the whistleblowing reports
however this is now a matter reserved
for the Board.

Keith Williams
Chair

Composition of the Committee
and Responsibilities
The composition of the Committee
complies with the Code, which provides
that all members should be independent
non-executive directors. Meetings of the
Committee were also attended, where
relevant, by the Chair of the Board,
the Group Chief Executive Officer, the
Chief Financial and Operating Officer,
the Director of Internal Audit and Risk
Management and other members of
senior management and representatives
from the external auditor, KPMG LLP.
The Committee is supported by the
Company Secretary.

The Board regards the Chair of the
Committee as having recent and relevant
financial experience for the purposes
of the Code and the Financial Reporting
Council’s (‘FRC’) Guidance on Audit
Committees. Biographical details of
all Committee members are included
on pages 88-89.

The composition and attendance of
Committee meetings during the period
under review are set out on page
94. The Committee also met without
management present before each full
meeting. We also met privately with
the lead Audit partners, and separately
with the Director of Internal Audit &
Risk Management after Committee
meetings. The full Terms of Reference
for the Committee can be found on our
website at www.royalmailgroup.com.
The responsibilities for the Committees
is outlined on page 93.

1 0 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19AUDIT AND RISK COMMIT TEE CONTINUED

Key judgment areas
The main areas of focus for the Committee during the year in relation to the financial statements were:

Matter

Action taken by Committee

One-off matters considered due to their materiality or nature

Ofcom alleged infringement of competition law
On 14 August 2018, Ofcom published its decision
following its investigation into whether Royal Mail
had breached competition law. The investigation was
launched in February 2014, following a complaint
brought by TNT Post UK (now Whistl). Ofcom found
that Royal Mail had abused its dominant position
in the market for bulk mail delivery services in the
United Kingdom by issuing Contract Change Notices
on 10 January 2014 which introduced discriminatory
prices. It fined Royal Mail £50 million.

Following Ofcom’s publication, on 14 August 2018, of its decision
regarding its investigation into whether Royal Mail had breached
competition law, the Committee sought detailed background
information from General Counsel and an assessment of
accounting treatment from Management.

This investigation remains a key agenda item and regular updates
have been provided to the Committee throughout the year. We have
continued to review and challenge Management’s assessment of
the issue with reference to the accounting standards.

We concluded that it continues to be appropriate to treat this
issue as a contingent liability. The Committee has reviewed and
approved the wording of its disclosure.

Accounting for GLS acquisition: Dicom
The Group acquired the business divisions of Dicom
Transportation Group Canada and US John Deere
(‘Dicom’) on 31 August 2018. IFRS 3 requires the
purchase price to be allocated between Tangible
assets, Intangible assets and Goodwill.

The Committee examined reports from Management which
summarised the results of an independent purchase price
allocation exercise performed by EY.

We also received KPMG’s comments on the assumptions and the
calculation used to allocate the purchase price. We concluded that
the approach taken was appropriate. Details of purchase price
allocation can be found in Note 11 in the financial statements.

Carrying value of US goodwill
During the year Management performed an impairment
review of the assets comprising the GLS US network.
The goodwill of £49 million in these businesses was
fully impaired, along with other assets with a carrying
value of £19 million.

The Committee examined reports from Management summarising
the outcome of the impairment reviews performed. Further
details of the assumptions can be found in Note 13 of the
financial statements.

We also received KPMG’s comments on the assumptions and the
calculation used to perform the impairment review. We concluded
that the approach taken was appropriate.

1 1 0

CORPORATE GOVERNANCEMatter

Action taken by Committee

Ongoing matters considered due to their materiality and/or the application of judgement

Advance customer payments
Included within Advance customer payments is an
estimate of the amounts of stamps and meter credits
that have been sold but not used prior to the reporting
date. At March 2019, this estimate totalled £239 million
(March 2018: £234 million).

Although the relevant survey and extrapolation is
conducted by an independent company, the level at
which a stamp holding is considered abnormal, and
therefore excluded from the estimate, is a judgement
made by Management. This judgement impacts
revenue, profit and net assets.

Management as to the level at which a stamp holding is
considered abnormal. We compared the level of deferred revenue
recognised by Management at each reporting date to ensure a
consistent application.

Separately, the auditor used its own experts to review the
statistical processes and assess the judgemental assumption. We
concluded that the level of deferred revenue remained appropriate.

Pension surplus calculation and recognition
The valuation of the pension liabilities and assets
relies on the estimation of long-term assumptions
such as RPI/CPI and mortality and the selection of
appropriate asset valuation methods. Small movements
in these assumptions can lead to material impacts
on the balance sheet.

In view of the complexity of accounting for pension
schemes, significant focus is required on the
associated disclosure to ensure that it is fair,
balanced and understandable.

Key long-term assumptions were prepared by the Group’s
actuary, Willis Towers Watson Limited, and benchmarked
against prevailing economic indicators and other large pension
schemes. The assumptions were reviewed and approved by
the Pensions Committee (see report on page 146). All of these
assumptions are disclosed in Note 10 to the financial statements.
Changes in the assumptions were summarised for the Committee
and explanations provided for the returns on scheme assets,
particularly as a result of the liability hedging strategy.

The auditor used its own independent actuarial experts to confirm
that the assumptions used were reasonable and appropriate.

Pensions: Defined Benefit Cash Balance Scheme
(DBCBS) constructive obligation
The principal accounting judgement in relation to
the DBCBS scheme is the extent of any constructive
obligation for future discretionary pension increases
which should be included in the pension liabilities
calculation. A constructive obligation arises
from previous Management communications and
actions and the reasonable employee expectations
arising from these.

Impact of changing employment legislation
The Group has a large workforce and changes to laws
and regulations relating to employment can have a
significant effect on the Group’s results.

The Committee has examined reports from Management
considering the content and nature of communications made
in relation to the DBCBS scheme.

We also received KPMG’s comments on the nature of the
constructive obligation. We concluded that recognition of
the constructive obligation at CPI plus 2% was reasonable
and appropriate.

Throughout the year, the Committee received regular updates on
relevant employment law cases from the General Counsel along
with impact assessments of judgements on the Group.

We examined reports prepared by Management to determine
whether their interpretation of the potential liabilities for the
Group was appropriate.

We concluded that these potential liabilities were accounted for
appropriately based on the legal assessments provided by the
General Counsel.

1 1 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Committee Advisers
To help us with our responsibilities,
the Committee receives independent
assurance from the Group’s Internal
Audit and Risk Management (IA & RM)
function. We also receive regular reports
from the Compliance function as well
as the external auditor, KPMG, across a
wide range of issues in support of their
respective oversight responsibilities. The
Committee is further supported by the
Risk Management Committee (RMC).

We also obtain support from external
experts, such as the Group’s actuary,
Willis Towers Watson Limited, who provide
expert opinion and long-term assumption
advice with respect to pension accounting.
Aon Limited provides similar expertise
in relation to other long-term liabilities.
The Committee has concluded that these
companies have the required expertise and
resources to provide the necessary advice.

The Committee also relies on the advice
and information provided by the Group
General Counsel with respect to specific
provisions and other contingent liabilities.
The Committee is satisfied that the Group
General Counsel has, or has access to,
the relevant necessary expertise and
resources. The external auditor has full
access to these experts and, using their
own actuarial and statistical experts, is
able to provide further assurance to the
Committee on these matters.

AUDIT AND RISK COMMIT TEE CONTINUED

The Statutory Audit Services for
Large Companies Market Investigation
(Mandatory Use of Competitive Tender
Processes and Audit Committee
Responsibilities) Order 2014.
We have complied fully throughout the
year with the Statutory Audit Services
Order 2014 issued by the Competition
and Markets Authority.

Effectiveness of the external
audit process
Meetings between the senior audit team
and Finance have been held at least
monthly, giving the opportunity for any
concerns to be raised and addressed
on a timely basis. KPMG’s 2018 Audit
Quality Inspection Report has also been
discussed. The Committee also received a
report on the areas of audit risk identified
by KPMG and approved their proposed
audit approach.

The Committee also reviewed and
approved the respective engagement
letters for the statutory and
regulatory audits.

At the end of the half year review and
year end statutory audit, the Committee
received reports from KPMG covering
significant issues identified and discussed
during the audit visits. In addition, KPMG
presented updates on their data and
analytics approach, and their control
findings. These reports were compared
with the matters that Management had
identified, to ensure consistency. The
Committee also held regular private
meetings with the external auditor.

Overall, the Committee and KPMG both
considered that the 2018-19 external audit
process had gone well. The Committee
concluded that KPMG carried out its audit
for 2018-19 effectively and efficiently.
The Committee agreed that KPMG’s
engagement was managed well and there
had been appropriate level of challenge
from the audit team. The Committee
identified key lessons from this review
which have been considered for 2019-
2020 audit.

As in previous years, the formal evaluation
of the external audit process for 2018-
19 has been addressed using an online
questionnaire. It was completed shortly
before our full year results announcement
and responses were sought from
individuals who had been closely involved
in the audit (predominantly IT, Finance
and HR) as well as Executive and Non-
Executive Directors, and audit partners
and team members. The results of the
2018-19 online questionnaire will be
supplemented using meetings with key
stakeholders following the conclusion of
the year-end audit and will focus on the
execution of the audit; the preparedness
of the business; sufficiency of resources;
communication and interaction; and
overall satisfaction. While the outcome
of the meetings will not be available
until after the signing of the financial
statements, the feedback from the
online survey and the review of reports
presented by Management and KPMG to
their May 2019 meeting has enabled the
Committee to conclude that there has been
appropriate focus on the primary areas of
audit risk and KPMG have applied robust
challenge and scepticism throughout.

Safeguarding the independence and
objectivity of the external auditor
The Committee has a policy in respect
of non-audit work which requires
Management to seek pre-approval prior
to the engagement of the external auditor
for the provision of any non-audit services.
This is to ensure that the level of fees
earned from non-audit services and the
type of services provided do not impair
the external auditor’s independence
and objectivity. In general, the external
auditor is not approached to perform non-
audit work.

However, the auditor may be engaged
to perform non-audit services if they
are uniquely placed to undertake them,
or if the performance of the non-audit
services will support a future statutory
audit (including the provision of buyer
assist due diligence). The engagement
may follow a competitive tender process.

1 1 2

CORPORATE GOVERNANCEInternal control framework
The Group has in place an internal
control framework in relation to the
Group’s financial reporting process and
our process for preparing consolidated
accounts. This framework includes an
established organisational structure with
clear lines of responsibilities, approval
levels and delegated authorities; policies
and procedures to ensure that adequate
accounting records are maintained and
transactions are recorded accurately;
robust quarterly business unit performance
reviews by the Chief Executive Officer
and Chief Finance Officer; and a rigorous
preparation process for the consolidated
financial results, including technical and
disclosure reviews.

Risk Management framework
The Group wide risk management
framework includes risk governance,
risk identification, measurement and
management, reporting and horizon
scanning and sets out the ‘top down’ and
‘bottom up’ approach to risk identification
for the Group.

The Committee currently permits the
external auditor to provide non-audit
services in respect of audit related services,
tax services and other services insofar as
permitted by auditor independence rules.

The Committee has delegated authority
to the Chief Financial and Operating Officer
to pre-approve assignments up to £25,000,
with an annual limit of £500,000.

During the year, KPMG has been
engaged to provide certain agreed upon
procedures. Total fees earned for non-
audit services during 2018-19 were
£125,000 which represented around 5 per
cent of the external audit fee. In addition
to the fees earned from the Company,
KPMG has been engaged by the respective
Pension Trustee as external auditor of the
Royal Mail Pension Plan and the Royal Mail
Defined Contribution Plan, the fees for
which were £198,000 in 2018-19. KPMG has
now adopted a policy of not undertaking
non-audit work for audit clients unless
there is a clear requirement for the auditor
to perform this work.

The Committee also has a policy that
restricts the recruitment or secondment
of individuals employed by the external
auditor into positions that provide financial
reporting oversight where they could
exercise influence over the financial or
regulatory statements of the Group or
the level of audit and non-audit fees.

KPMG was appointed as external auditor
in July 2015, following a competitive tender
process during the 2014-15 financial
year. Under the current regulations, the
Company will be required to tender no
later than the 2025-26 financial year
and the current audit partner will be
required to rotate after the 2019-20 audit.
The Committee has recommended the
reappointment of KPMG as the Group’s
external auditor to the Board for approval
by shareholders at the AGM in July 2019.

Risk management and internal
control overview
The Board collectively, including the
Committee members, believes that
effective risk management and a sound
control environment are fundamental to
the Group. The Code requires the Board
to maintain sound risk management and
internal control systems, to review their
effectiveness at least annually and to
report on this review to shareholders. A
sound system of internal control depends
on a thorough and regular evaluation of
the nature and extent to which the Group
is exposed to risk.

The Group’s risk management and internal
control system is designed to manage,
rather than eliminate, risk. Taking on
manageable risk is an inherent part of
undertaking the commercial activities of
the Group. The system can only provide
reasonable – not absolute – assurance
against material misstatement or loss.

There is an ongoing process for identifying,
evaluating and managing the principal
risks faced by the Group in accordance
with the guidance detailed by the Code,
including financial, operational and
compliance risks, and risks to reputation.
The process has been in place throughout
the year and up to the date of the approval
of these financial statements.

In addition, the Directors carry out a robust
risk assessment of the Principal Risks
facing the Group as set out on pages 64
to 72. These include those principal risks
that threaten the business model, future
performance, solvency and liquidity of the
Group. These reviews have been informed
by the financial evaluation of severe but
plausible scenarios of our principal risks
which has also been used to support our
Viability Statement on page 73.

1 1 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19AUDIT AND RISK COMMIT TEE CONTINUED

ROYAL MAIL GOVERNANCE AND THREE LINE S OF DEFENCE

ROYAL MAIL PLC BOARD

E
C
N
A
N
R
E
V
O
G

E
C
N
E
F
E
D

F
O

S
E
N

E X ECU TIVE BOARD

AUDIT AND RISK COMMIT TEE

RISK MANAGEMENT COMMIT TEE

SENIOR MANAGEMENT

FIRST LINE

SECOND LINE

OPER ATIONAL AND
BUSINE SS MANAGEMENT

INTERNAL MONITORING AND
A SSUR ANCE MECHANISMS

THIRD LINE

INDEPENDENT
A SSUR ANCE

Primary business-as-usual controls
over the risks to the business,
located in the day-to-day operation.

Internal monitoring and oversight
of the first line, through regular
reviews, assessments and dedicated
oversight functions.

Independent evaluation of the
adequacy and effectiveness of
risk management, control and
governance processes by IA and
RM and other assurance providers
external to the business.

RC SA 1 – MONITORING AND REPORTING OF RISK S AND INTERNAL CONTROL S*1

ROLE OF THE COMMIT TEE IN A SSE SSING THE PRINCIPAL RISK S

RE VIE W OF PRINCIPAL
RISK ARE A S

– The Committee routinely assessed the risks that might impact the achievement of the Business
Plan, including consideration of whether these should be categorised as a principal risk to the
business (see Principal Risks on pages 64-72). Committee discussions on risk also covered new
and emerging risks and the interrelationships between the significant risks to the business.

– In particular, the Committee reviewed changes to the Group Risk Profile on a quarterly basis and
held ‘deep dive’ discussions of principal risk areas with risk owners. The Committee holds the
business to account for the management of risk and operation of control across the Group.

DEEP DIVE DISCUSSIONS

During the year, deep dive risk discussions included:

– revenue diversification;

– required pace and level of cost reduction;

– parcels risk management;

– GDPR;

– economic environment;

– business continuity and disruption; and

– executive talent.

*1 Risk & Control Self-Assessment.

1 14

CORPORATE GOVERNANCE

During the year the business has:
– assessed its approach to risk

management in line with the Code
requirements, reviewed its Risk
Management Policy and continued
to strengthen the management and
monitoring of risk within the Group. This
includes strengthening the assessment
of risk in terms of gross (inherent), net
(residual) and target risk. There was a
focus on risk appetite, reporting the key
actions required to move from net to
target risk and the development of key
risk indicators; and

– continued its emerging risk identification

process through regular structured
workshops and dialogue with business
units and subject matter as well as
externally to industry, business political
and the regulatory environment.

The Group’s approach to risk management
is based on the underlying principle of line
management accountability for effective
implementation of internal controls to
manage risk as illustrated below.

Speak Up line
Arrangements are in place to enable
employees to raise concerns about
potential wrongdoings in confidence and
to ensure independent investigation of
such matters. During the year, Compliance
reported to the Committee on the number
of cases received and an analysis of
the outcomes through the Employee
Confidential Disclosure Committee. The
Audit and Risk Committee in 2019-20 will
continue to provide reports to the Board,
as the Board now has overall responsibility
for whistleblowing.

Assessing the effectiveness of the
system of risk management and
internal control
In addition to the specific constitution,
meetings, reliance on experts, and
focus areas highlighted above, the
Committee uses several mechanisms
to help it to arrive at its conclusions on
the effectiveness of the system of risk
management and internal control in
the business. These include:

Risk governance – The Board has
delegated responsibility for specific
review of risk and control processes to the
Committee and the Committee, in turn, is
supported by the RMC, to help discharge
its duties. The RMC meets to promote and
support the establishment,

communication and embedding of risk
management throughout the Group.
It also seeks to ensure that risks that
are significant at Group level are being
effectively managed. The RMC oversees
and evaluates a ‘bottom up’ assessment
of risks on a quarterly basis. It receives
presentations from Business Units on the
operation of risk management and control
processes on a cyclical basis.

Assurance from internal audit – Internal
Audit and Risk Management (IA and RM)
provide independent assurance to the
Committee, Executive Management and
the Board on the effectiveness of the
internal control system and elements
of the risk management process. This
includes supporting the business in
complying with the Risk Management
Mandatory Standards and of the reporting
of key controls and mitigation plans for
Group level risks. IA and RM establish and
agree with the Committee a bi-annual
rolling plan of assignments and activities
covering the whole Group, including GLS,
based on discussions with the Board and
Management. This takes into account key
areas of business risk, areas of importance
to the delivery of the strategy, areas
subject to strong or emerging regulation or
legislation or specific issues in the industry.
During the year, the Committee evaluated
the performance of IA and RM. It concluded
that the function continued to be effective.

The IA work programme during 2018–19
included 29 risk-based audits in the UK
and over 170 audits in GLS, covering
depots, head office and compliance
audits in addition to 7 risk based audits.
The internal audit programme was risk
focussed and included audits of key
strategic and business priorities including:

– governance of major business

transformation and programmes:
Delivery of the Pensions, Pay and
Pipeline agreement, major programmes
in Finance, Parcels, International
and Operations including digital and
enterprise projects.

– major business processes and

regulatory requirements including
Cyber security, access controls, key
financial controls, GDPR readiness and
Business Continuity.

– cultural themes arising from Internal

Audit activity.

External audit activity – External audits
and reviews take place during the year
to provide Management, the Board and
Ofcom with assurance on specific matters.
Activity includes:

– the external auditor performs a

statutory year-end audit;

– the external auditor performs an

audit of the regulatory accounts as
part of Universal Service Provider
accounting requirements;

– the externally measured end to end
Quality of Service is audited by an
independent accounting firm (appointed
by Ofcom) as part of Royal Mail’s
Designated Universal Service Provider
condition requirements; and

– the Universal Service Obligation daily

collections and deliveries performance
reporting and methodology is assured
by an independent accounting
firm (appointed by Royal Mail) as
part of Royal Mail’s designated
Universal Service.

In the carrying out of these activities,
the Board considers it has fulfilled its
obligations under the Code in respect of
risk management and internal controls.

Further details of the Principal Risks and
how they are managed and mitigated can
be found on pages 64-72.

Committee’s evaluation
The Committee’s performance was
internally evaluated by the members of
the Committee by way of self-evaluation
questionnaire as referred to on page 98-
99. This concluded that the Committee was
performing effectively.

The key priorities for 2019-20 are:

– continued focus on the emerging
risks on the risk register and
scenario planning;

– continued education and
training programme;

– focus on understanding newly acquired
businesses as part of the expansion of
GLS; and

– continued focus on risk management

and more deeps dives.

1 1 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT

R E M U N E R AT I O N R E P O R T

Remuneration Report 2018-19
Last year a large majority of shareholders
voted against our Remuneration Report.
We were very disappointed, as we had
aimed to establish a responsible approach
to executive pay when the Company was
floated on the London Stock Exchange,
and this approach had enjoyed strong
shareholder support in past years. In
response to the vote we embarked on an
intensive programme of meetings and
conversations with a cross-section of our
shareholders to explore their reasons
for voting against our report.

As reported on the Investment Association
website in January, shareholders said
they were very unhappy with the existence
of a clause in our former Chief Executive
Officer’s contract, which had resulted in a
requirement for us to pay her an amount
in lieu of bonus as part of her ‘liquidated
damages’ payment on departure. This
clause dated from 2010 and although we had
referred to it in past Remuneration Reports,
it became clear that we had not explained it
comprehensively enough. Its existence and
the way in which it worked was therefore
a surprise to shareholders. We have
confirmed that no other Executive Director
has had such a clause in their contract
and nor would they have in future; and we
have overhauled our communications to
achieve greater transparency and clarity
on remuneration issues.

Shareholders were also concerned that
since the salary of the incoming Chief
Executive Officer (CEO) was higher than
that of the outgoing CEO, this would lead
to higher potential total pay. We explained
to shareholders in our meetings that our
objective had been to keep the fixed pay
of the incoming CEO at the same level as
the fixed pay of the outgoing CEO; and that
our intention had been to adjust targets
for bonuses to ensure that the CEO could
not get higher bonuses unless exceptional
performance was achieved. The proposals
in our new Policy, described in outline below
and in more detail on pages 123 to 131,
follow through on this intention.

1 16

Proposed Remuneration Policy
In the course of our meetings and
conversations we asked a number of
shareholders what changes they would
like to see as we prepared to refresh our
Policy in accordance with the 2018 UK
Corporate Governance Code. The key
requests that we heard were a wish for:

– simplification of our annual bonus
measures with more weight on the
financial metrics;

– a broadening of measures in our Long

Term Incentive Plan;

– a reduction in the reward for median
performance on the relative Total
Shareholder Return (TSR) metric; and
– a rebalancing of our incentive schemes
to weight them much more strongly
to the long-term.

We have listened to this feedback and
have included these features in our
proposed Policy.

We have also followed evolving investor
attitudes to a number of other remuneration
elements. Therefore we are proposing to:

– reduce the cash pension allowance for

new Executive Directors to be in line with
the employer pension contribution for the
majority of the workforce. The rate for
the majority of the workforce is currently
15.6 per cent but is likely to change
under our proposed Collective Defined
Contribution (CDC) arrangements. As
mentioned elsewhere in this report,
we are working with the CWU to lobby
Government to make the necessary
legislative and regulatory changes to
enable the introduction of CDC pension
schemes in the UK;

– reduce the proportion of the short-

term bonus that would be payable for
achieving target performance;
– maintain the current shareholding

requirement at 200 per cent of salary; and

– introduce a post-cessation

shareholding requirement for the
Executive Directors.

I hope you will agree that the changes
to our Policy that we are proposing
reflect both the specific and the more
general themes heard from shareholders;
and that the Policy therefore achieves an

Orna Ni-Chionna
Remuneration Committee Chair

Dear Shareholder,
On behalf of the Board, I am pleased
to present our Remuneration Report
for 2018-19. This year I would like to
reflect on three themes: the vote against
our Remuneration Report last year;
the changes that we are proposing to
make to our Remuneration Policy which
will apply from 2019-20 if supported by
shareholders; and the performance of
the Group in the financial year that has
just ended, which means that no short-
term bonus will be payable to Executive
Directors this year, nor will the 2016
Group Long Term Incentive Plan (LTIP)
award vest. I would also like to outline
what we are doing to ensure that we
comply with both the letter and the spirit
of the changes to the 2018 UK Corporate
Governance Code.

Remuneration Policy

Our new Remuneration Policy is designed to
support the delivery of our ambition to build
a parcels-led, more balanced and diversified
global business:

– Bring sharper focus on a smaller number

of critical measures required to
drive efficiency.

– Increase sustainable sources of cash

generation to fund investment.

– Place more emphasis on the long-term

transformation of the business.
– Continue to align executive and

shareholder interests.

CORPORATE GOVERNANCEappropriate balance between incentivising
Executive Directors and ensuring that
variable remuneration will only be
payable for high or exceptional company
performance that delivers sustainable
value to shareholders. Full details are set
out in the Policy section of this report.

Financial Performance of the Group and
Remuneration Outcomes 2018-19
As discussed elsewhere in the Annual
Report and Accounts, this has been a
challenging year for Royal Mail. We had
many successes: our parcels revenue in the
UK grew strongly and GLS also reported
good volume gains. We continued to make
progress in all our safety metrics, and our
employee engagement also improved.
However, costs remained a challenge
in the UK, and we failed to achieve the
productivity targets that we had set
ourselves. As a result, our profits did not
achieve the gateway level of performance
at which bonus would be payable and
accordingly no short-term bonus will be
paid to our Executive Directors for 2018-19.
This outcome also means that there will
be no Deferred Share Bonus Plan (DSBP)
award for this year. Further details about
our performance against the Annual Bonus
measures is given on pages 134 to 135.

The 2016 LTIP is due to vest in July
2019, following the conclusion of the
performance period at the end of March.
This was the first award granted under
the current Remuneration Policy, with the
single metric of relative TSR compared to
the FTSE 100 excluding mining and financial
companies. For any portion of the award
to vest, median performance was required
against this comparator group. As this
has not been achieved this award will not
vest. Further detail about our performance
against the LTIP measure is given on
page 135.

As referenced in last year’s Report, our
Group Chief Executive Officer, Rico Back,
had some outstanding LTIP awards arising
from his prior role at GLS. Prior to the
performance requirements for the two
tranches of these awards that relate to
2018-19 being reviewed by the Committee,
Rico Back proposed that he should waive
these awards due to the fall in the share
price over the performance period.
The Committee accepted his proposal
and thanked the Group Chief Executive
Officer for his awareness of the current
environment. The resulting outcome for
Rico Back is reported in the Single Figure
Table for 2018-19 on page 133 with further
details on about how the plan operates on
page 135.

The Committee has also decided to reduce
the 2019 LTIP grant for Executive Directors
by 25 per cent due to the fall in the share
price during the year (see page 138).

Corporate Governance Changes
In July 2018, substantial changes to the
UK Corporate Governance Code were
announced, to take effect for accounting
periods starting on or after 1 January
2019. In anticipation of these changes, the
Remuneration Committee has reviewed
its Terms of Reference, has agreed a set
of Remuneration Principles that operate
across the Group, and also regularly reviews
a remuneration dashboard highlighting key
statistics across the organisation, which
allows the Committee to request further
insight into particular areas. We are taking
this opportunity to report our CEO pay ratio
in this report, ahead of the requirement
coming into force next year, in a new section
on Executive Remuneration in Context,
starting on page 140 where we are also
highlighting our Gender Pay Gap report.

Board changes and Implications
for Remuneration
A number of Board changes are
mentioned elsewhere in the Annual
Report and Accounts but I will summarise
them here in the context of reporting on
the implications for remuneration. Moya
Greene stepped down from her position
as CEO at the AGM in July 2018 and left
the Company in September 2018. As her
departure was in the financial year covered
by this report, we are obliged to report
the payment of the ‘liquidated damages’
clause that was disclosed in last year’s
report. You will see this on page 137, with
further details on the payment that was
made. For the avoidance of doubt, I would
like to stress that this is the same payment
that was reported in last year’s Directors’
Remuneration Report.

As we previously announced, Peter
Long stepped down from the Board in
September 2018. His fee as Chair of the
Board ceased on his departure. As reported
elsewhere, Les Owen was appointed to
the Chair of the Board role, on the same fee
level. As Les Owen’s tenure was already
close to nine years’ service on our Board,
we initiated a search for a new Chair of the
Board, which we have reported elsewhere.
I am delighted that Keith Williams agreed to
become our Chair of the Board from 22 May
2019. His fee will be £300,000 per annum,
which is the same level that Les Owen and
Peter Long received.

In November 2018, we announced
that Sue Whalley would be leaving the
business as a result of a reorganisation

1 17

of responsibilities within the UK business.
Sue Whalley left on 31 March this year;
she will receive her base salary until early
November 2019, in line with her contractual
entitlement of receiving only her monthly
salary in lieu of notice. As detailed at the
time, this payment is subject to deductions
if she receives any earnings from alternative
employment. The Remuneration Committee
exercised its discretion to determine
that Sue Whalley will remain eligible to
receive deferred share bonus awards
that have already been granted, and where
no subsequent performance conditions
apply, as these awards relate to prior
performance years and have already been
earned. Sue Whalley will therefore retain
her deferred share bonus awards that were
previously granted and these will continue
to vest over the normal schedule. All of Sue
Whalley’s outstanding LTIP awards lapsed
in November 2018.

As explained above, we have worked
closely with shareholders this year
to explore and resolve the issues that
caused such a negative vote at last
year’s AGM. Our discussions suggested
that shareholders’ concerns were
predominantly over one-off issues that
will not be repeated but we are aware that
shareholders’ trust in us was damaged;
we are determined to rebuild that trust.
During those discussions, we reiterated
our intention to remain responsible in our
approach to the pay of Executive Directors,
aiming to maintain both fixed pay and
potential bonus opportunity at the lower
levels of those typically paid in companies
of our size and complexity. We believe that
the changes in our Policy are consistent
with this aim. I am confident that these
changes, along with the new metrics,
will incentivise our Executives to deliver
the transformation required to ensure
sustainable shareholder returns and
underpin the Universal Service in the UK.

Finally, during our discussions with
shareholders, I committed to overhauling
the Directors’ Remuneration Report
to ensure that our key messages and
outcomes were far clearer. I hope you will
agree that what follows is a step forward
in that endeavour. Together with the rest of
the Board, I look forward to hearing your
views on our remuneration proposals and
I will be available to answer any questions
you may have at the AGM.

Orna Ni-Chionna
Remuneration Committee Chair
21 May 2019

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

O U R P R O P O S E D
P O L I C Y

KE Y THEME S

Sharper focus on
fewer key annual
bonus metrics to
drive efficiency

We have reduced the
number of annual bonus
metrics, with financial
targets now accounting
for 75% of the total.

We have reduced the target
bonus to 50% of maximum.

Long-term
transformation
of the business

Cash generation to
fund investment

Alignment of
executive and
shareholder interests

We have rebalanced the ratio
of our short and long-term
incentives with the long-term
increasing from 100% to 150%
of salary at maximum, and
a corresponding decrease
in the short-term.

Earnings and Group parcels
revenue growth have been
added as LTIP metrics in line
with the Group strategy, to
deliver cash for investment.

We have a post-cessation
holding period of 200% of
salary for two years.

Under the proposals
the majority of the pay
structure is equity based.

PROPOSED REMUNER ATION STRUC T URE

Fixed

29%

Base salary

Aligned externally and reviewed in line with
the workforce.

Pension

17.5% of salary, new Executive Directors will be aligned to the
rate for the majority of the workforce, currently 15.6% of salary.

Benefits

Market standard benefits package.

Variable

71%

Annual bonus

LTIP

Read more on our policy – see pages 123 to 131

Target reduced to 50% of maximum (from 67%).

Financially weighted award, maximum reduced from 200%
of salary to 150% of salary.

One third of annual bonus deferred into shares for three years.

Subject to a three year performance period, maximum award
increased to 150% of salary.

Vesting for threshold performance reduced from
50% to 25% for all metrics.

1 1 8

CORPORATE GOVERNANCEO U R R E M U N E R AT I O N
I N 2 0 18-19

WHAT OUR DIREC TORS WERE PAID

CEO (£000’s )

CFO (£000’s )

Fixed Remuneration

Variable Remuneration

Fixed Remuneration

Variable Remuneration

Actual 2018-19
(pro-rated for
service)

100%

£647

Actual
2018-19

100%

£544

Minimum

100%

£790

Minimum

100%

£544

On Target

39%

21%

19%

£2,032

On Target

39%

21%

19%

£1,417

Maximum

28%

24%

£2,710

Maximum

28%

24%

£1,894

500

1,000

1,500

2,000

2,500

3,000

500

1,000

1,500

2,000

2,500

3,000

Fixed Remuneration

Annual Bonus

Deferred Share Award

LTIP

Fixed Remuneration

Annual Bonus

Deferred Share Award

LTIP

OUR PERFORMANCE AGAINST KE Y ME TRIC S

As profit was below the gateway for 2018-19, despite positive progress against some metrics, no short-term bonus is payable.

Group Operating Proﬁt Before Transformation Costs (£m)

S
U
N
O
B

L
A
U
N
N
A

Threshold

Target

Max

Composite Safety Index

Employee Engagement

First Class Retail Quality of Service (%)

Threshold

Target

Max

Threshold

Target

Max

Target

Max

Mean Business Customer Satisfaction

Composite Premium Parcel Performance (%)

Productivity for Collections,
Processing & Delivery (%)

Threshold

Target

Max

Threshold

Target

Max

Threshold

Target

Max

UKPIL Costs (£m)

Group Revenue (£m)

In-year Trading Cash Flow (£m)

Threshold

Target

Max

Threshold

Target

Max

Threshold

Target

Max

Read more on performance against the Corporate Balanced Scorecard on page 134

P
I
T
L

The 2016 LTIP was based on performance against a relative Total Shareholder Return measure. As performance
during the three year period was below median, the 2016 LTIP will not vest in July 2019.

TSR vs FTSE 100 (excluding mining and ﬁnancial companies)

Threshold

Max

Read more on the 2016 LTIP on page 135

1 19

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19
DIREC TORS’ REMUNERATION REPORT CONTINUED

H O W W E E N G A G E D
W I T H O U R S H A R E H O L D E R S

We have worked closely with our shareholders since the
disappointing vote against our Remuneration Report at the last
AGM. We have taken a number of steps to ensure we understood
why they voted against last year’s Remuneration Report and their
views on the development of our new Remuneration Policy.

In August 2018, we commissioned an independent Investor
Perception survey focusing on remuneration and governance.
This survey gathered detailed feedback from a number of
shareholders to provide the Board with a clear understanding of
their views. Between September and December 2018, the then
Chair of the Board and the Chair of the Remuneration Committee
held meetings with 15 of our larger shareholders. They also
met with several proxy voting agencies. During these meetings
valuable suggestions in relation to our Remuneration Policy
development were received.

We continued to engage with shareholders between January and
March 2019 to gain feedback on the evolution of our proposed
Remuneration Policy. This included meetings with several
shareholders individually, an Investment Association roundtable
and a meeting with representatives of our retail shareholders.
With this feedback we refined our Remuneration Policy proposals
as set out below.

Employee considerations
In developing the proposed Remuneration Policy, the
Remuneration Committee has carefully considered the
remuneration arrangements across the Group. The Committee
receives information on wider workforce demographics and
remuneration on a regular basis, to ensure the Committee has
a good understanding of the structure and application of reward
policies throughout the Group. Additionally, the Committee has
agreed a set of Guiding People Principles, against which it can
assess the Company’s reward arrangements. When making
decisions about executive remuneration the Committee ensures,
for example, that pay review budgets for senior managers and
executives are set at levels which are typically lower or the same

as those agreed with our trade unions for employees whose pay
is collectively bargained. In addition, the different incentive and
commission schemes in operation across the Group support the
delivery of the Company-wide annual bonus plan, through which
the Executive Directors are incentivised. The broader workforce
has not had direct input into the proposed Policy, but its
application is heavily influenced by remuneration arrangements
for all employees.

We are strengthening our approach to communicating with our
employees in line with the provisions of the 2018 UK Corporate
Governance Code. Under our updated approach a designated Non-
Executive Director will have direct accountability for listening
to employees. In addition to our existing and comprehensive
employee engagement activity, we are running two Employee
Voice Forum events in the UK per annum. These will be focused
on encouraging employees to share their views on broader
business topics directly with the Board. Our site visits across GLS
will also have more formal opportunities for Board members to
meet local teams. An annual report will be presented to the Board
on the outcome of local engagement activity in GLS, including
with trade unions and works councils.

MEE TING A R ANGE OF SHAREHOLDERS

In March, the Investment Association hosted a roundtable discussion
between the Chair of the Remuneration Committee and seven of their
members. The purpose of the session was to discuss the proposals for the
new Policy and initial thoughts on the metrics to be used in the
incentive plans.

In April, Orna Ni-Chionna met with representatives from the UK Shareholders’
Association and Sharesoc to hear their views on the proposals being
put forward.

The input from all shareholders was extremely useful in understanding how
the proposals addressed the concerns previously raised regarding
remuneration at Royal Mail.

TIMELINE OF SHAREHOLDER ENGAGEMENT AC TIVIT Y

2018

August –
September

October –
December

January –
February

March

April

2019

Investor perception
survey and
review of
survey results

Chair of the Board
and Remuneration
Committee Chair
meetings with
shareholders,
proxy agencies,
Investor Forum and
the Investment Association

Initial discussion
on Remuneration
Policy with
shareholders and
proxy agencies

Investment
Association
roundtable

Meeting with
Retail
shareholders

1 2 0

CORPORATE GOVERNANCEF E E D B A C K F R O M
O U R S H A R E H O L D E R S

A summary of key feedback from shareholders, both in relation to last year’s vote, and our proposed Remuneration Policy,
is outlined below.

We received clear feedback on two specific issues in last year’s Remuneration Report:
What was said

What we have done

Unhappy with the payment to the outgoing CEO
comprising salary and bonus, in accordance with
the ‘liquidated damages’ clause in her contract.

– Confirmed that no other Directors have such a clause in their contract

and nor will such a clause be written into any future contract.

– Reviewed all aspects of our communication approach to

improve transparency.

With the higher salary for the new CEO there is a
risk that he will earn significantly more than his
predecessor for the same level of performance.

– Reaffirmed our commitment to retaining a responsible approach to

executive remuneration.

– Reflected that commitment in the changes to Policy that we are proposing.
– Our CEO’s on-target earnings will be lower in our new Policy than under

the current Remuneration Policy.

During our discussions, shareholders also commented on elements of our current Remuneration Policy:
What we heard

What we propose

There is too much weighting towards the short-
term in the remuneration package.

– Rebalancing the maximum total variable pay. Reducing the short-term
from 200% of salary to 150% and increasing the long-term from 100%
of salary to 150% of salary.

There are too many metrics in the annual bonus,
with not enough financial weighting.

– We are significantly reducing the number of metrics; and increasing

the financial weighting to 75%.

It would be preferable to have more than one metric
in the LTIP and for some of those metrics to be
within management control.

The vesting of the LTIP at 50% for median
performance is too high.

– We are proposing to add further metrics, within management control.

– We are reducing the vesting for median performance to 25%.

We are also proposing changes to our Policy to reflect wider investor sentiment and changes under the 2018 Code:
What shareholders expect

What we propose

Base salary should only increase in line with the
majority of the workforce.

– There are no proposed changes to the base salaries for the

Executive Directors this year, despite the pay increases for our
frontline employees.

The cash pension allowance percentage should
be in line with the employer contribution for the
majority of the workforce.

– The allowance was reduced to 17.5% three years ago.
– For future Executive Directors this will be reduced further to the level
of employer pension contribution for the majority of the workforce
(currently 15.6% see comment on page 116).

Target bonus should be no more than 50% of maximum.

– We are reducing the target bonus from 67% of maximum to 50%.

The shareholding guideline should be a minimum of
200% of base salary.

– The shareholding guideline remains at 200% of salary.

A formal policy for post-cessation
employment shareholdings.

– The new Policy requires 200% of salary to be held in granted shares

for two years after leaving.

1 2 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

O U R N E W
R E M U N E R AT I O N P O L I C Y

The Directors’ Remuneration Policy set out below is proposed
for shareholder approval at the Annual General Meeting to
be held on 18 July 2019. Subject to shareholder approval,
this Remuneration Policy will take effect from the date of
the 2019 AGM. Further information on the decision-making
process for the Policy is set out in the ‘How we engaged with
our shareholders’ section (pages 120 to 121) and the ‘Advice
to the Remuneration Committee’ section on page 145.

We have engaged
extensively with investors
to develop a Policy which
is aligned with our group
strategy and incentivises
shareholder returns.

Orna Ni-Chionna,
Remuneration Committee Chair

CONTENTS

Overview of changes to the Remuneration Policy

Proposed Remuneration Policy – Executive Directors

Fixed Remuneration

Variable Remuneration

Shareholding Guideline

Alignment with strategy

Remuneration opportunity

Remuneration for a new Executive Director

Terms of employment

123

124 to 130

124

124 to 125

125

126 to 127

128

129

What happens when an Executive Director leaves

129 to 130

Policy on Executive Directors holding external positions

Proposed Remuneration Policy – Chair and Non-Executive Directors

Fee structure

Terms of appointment

130

131

1 2 2

CORPORATE GOVERNANCEOVERVIE W OF CHANGE S TO THE REMUNER ATION POLIC Y

We have worked closely with our shareholders in developing our proposed Remuneration Policy. More information can be found on pages 124 to 131.

Link to strategy

Base Salary

Reflects the scope and
responsibility of the role, while
taking account of the skills and
experience of the individual.
Used to attract and retain
talented executives to deliver
the business strategy.

Benefits

To support the attraction and
retention of talented executives by
providing a competitive offering.

Pension

To provide a competitive
post-retirement income.

Annual Bonus

Designed to reward achievement
of key strategic, financial and
operational priorities for the year,
to deliver strong performance in
service of longer-term strategic
goals and creation of long-term
shareholder value. Part of the total
annual incentive opportunity is a
deferred share award encouraging
a long-term view, providing
alignment with shareholders’
interests.

Long Term Incentive Plan

Supports executive recruitment
and retention, with an appropriate
balance between short-term
performance and the creation
of long-term, sustainable
shareholder value.

Summary of current Policy

Proposed change and rationale

No change.

Salary levels for the Executive Directors are
normally reviewed annually taking into account:
the performance of the Company; the performance
of the Executive Director; any changes in role
and responsibility; assessment against relevant
comparator groups and internal relativities.
Increases will normally be in line with the
wider employee population.

Benefits currently include company car and health
insurance (or cash equivalent), life assurance,
health screening and financial advice. Executive
Directors are entitled to participate in any SIP or
SAYE schemes currently available to employees.
Additional benefits may be offered, such as
relocation allowances on recruitment.

Company contribution to a defined contribution
pension scheme and/or a cash supplement (in lieu
of pension). For Executive Directors hired during the
current Policy, pension allowances were reduced
to 17.5 per cent of salary. The Committee maintains
historical rates of pension allowance for current
Executive Directors in line with their contracts.

No change. There is currently no live SAYE
scheme. Executive Directors are eligible to
participate in the current Partnership and
Matching Shares SIP scheme.

It is proposed that the pension contribution for
any future Executive Directors will be aligned to
the employer contribution for the majority of the
workforce (currently 15.6 per cent: see comment
on page 116).

Maximum total annual incentive opportunity
of 200 per cent of salary, split equally between
two plans, an annual cash bonus award and a
deferred share bonus award. Two thirds earned
for target performance.

A minimum of 50 per cent of the scorecard targets
shall be financial, with the remainder including
robust operational, customer and people KPIs.
A minimum level of operating profit must be
achieved before any bonus is payable to an
Executive Director.

Malus provisions will apply to the deferred share
award over the three year vesting period. Clawback
will apply to the cash bonus for a period of three
years following the bonus determination.

Maximum total annual incentive opportunity
reduced to 150 per cent of salary, with target
performance earning 50 per cent of maximum.
The annual cash bonus award continues to
have a weighting of 100 per cent of salary at
maximum, with the deferred share element
reduced to 50 per cent at maximum.

The number of metrics has been simplified
to bring more focus to the key metrics that
will drive cost reduction and cash generation,
while still maintaining a safe environment
and delivering a high quality service to
our customers.

More clearly defined malus and
clawback provisions.

Maximum award level of 100 per cent of salary.
Awards are granted annually to Executive Directors
in the form of a conditional share award. These will
vest at the end of a three year period subject to:

– the Executive Director’s continued employment

at the date of vesting; and

– the satisfaction of the performance conditions.

A two year holding period applies after vesting.
Malus provisions apply over the performance
period. Clawback will apply over the holding period.

Awards made under the 2016 Remuneration
Policy were based 100 per cent on relative TSR
performance against the FTSE 100 (excluding
mining and financial companies).

Maximum award level increased to 150 per
cent of salary, alongside an increased number
of metrics.

For the first year of operation, the relative TSR
measure has been adjusted:

– Revised comparator group of FTSE 50-150
(excluding mining and financial companies).

– Threshold vesting level has been reduced
from 50 per cent vesting to 25 per cent
vesting for median performance. Upper
quartile performance will continue to vest
at maximum.

More clearly defined malus and
clawback provisions.

Shareholding Guidelines

To ensure alignment between
remuneration and long-term
shareholder value creation.

Shareholding guideline of 200 per cent of salary.

Added a post-cessation shareholding: 200 per
cent of salary to be held in Company granted
shares for two years after leaving.

1 2 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

PROPOSED REMUNER ATION POLIC Y – FI X ED REMUNER ATION

At a glance

Base Salary

Operation

Purpose and link to strategy
Reflects the scope and responsibility of the role, while taking account of the skills and experience of the individual. Used to attract and retain talented executives
to deliver the business strategy.

CEO (Rico Back): £640,000 (effective 1 June 2018)

CFO (Stuart Simpson): £450,000 (effective
20 July 2017)

Salary levels for the Executive Directors are normally reviewed annually. The Committee takes into
account factors such as the performance of the Company, the performance of the Executive Director, any
changes in role and responsibility, assessment against relevant comparator groups, internal relativities
and the level of increase being offered to our frontline employees.

Increases will normally be in line with the broader employee population. Increases may be made above this
level to take account of changing circumstances such as a change in responsibility, progression in the role,
individual performance or a significant increase in the scale or size of the role.

Benefits

Purpose and link to strategy
To support the attraction and retention of talented executives by providing a competitive offering.

The value of the benefits stated is the maximum
cost to the Company of providing them

Benefits currently include the provision of a company car and health insurance, or the cash equivalent of
these benefits. Life assurance and health screening are also provided. Additional benefits may be offered
such as financial advice and relocation allowances on recruitment.

Executive Directors are entitled to participate in any SIP or SAYE schemes currently available to employees.

Pension

Purpose and link to strategy
To provide a competitive post-retirement income.

CEO (Rico Back): 17.5 per cent of salary
cash allowance

Company contribution to a defined contribution pension scheme and/or a cash supplement (in lieu
of pension).

CFO (Stuart Simpson): 17.5 per cent of salary
cash allowance

For newly appointed Executive Directors the
pension allowance will be in line with the employer
contribution for the majority of the workforce.

The Committee maintains historical rates of pension allowance for current Executive Directors in line with
their contracts. The rate for the majority of the workforce is currently 15.6 per cent: see comment on
page 116.

PROPOSED REMUNER ATION POLIC Y – VARIABLE REMUNER ATION

At a glance – Maximum
opportunity

Annual Bonus

Operation

Performance Measures

Purpose & Link to Strategy
Designed to reward achievement of key strategic, financial and operational priorities for the year, to deliver strong performance in service of longer-term
strategic goals and creation of long-term shareholder value. Part of the total annual incentive opportunity is a deferred share award encouraging a long-term
view, providing alignment with shareholders’ interests.

Maximum total annual incentive
opportunity of 150 per cent of
salary, split between two plans:
an annual cash bonus award of up
to 100 per cent of salary and a
deferred share bonus award of up
to 50 per cent of salary. 50 per cent
earned for target performance.

The total annual incentive opportunity is provided as follows:

– Two thirds is payable in cash, paid at the end of the annual

performance period.

– One third is granted as a deferred share award, after the
end of the performance period and subject to continued
employment over the three year vesting period.

Deferred share awards will be granted to Executive Directors
in the form of a conditional share award. The Committee will
normally award dividend equivalents on deferred shares to
plan participants to the extent that they vest.

Annual performance measures and weightings will be
selected at the start of each financial year to align with the key
strategic, financial and operational priorities of the business.
The measures themselves may change on an annual basis as
financial and operational priorities of the business change.

In 2019-20, 75 per cent of the targets shall be financial,
with the remainder being operational KPIs and
strategic objectives.

The metrics and the strategic objectives for 2019-20 are
shown on page 138.

Malus and clawback provisions will apply to both elements
of the award.

A minimum level of Group operating profit must be achieved
before any bonus is payable to an Executive Director.

The Committee may use its discretion to:

– change the performance measures and targets and the weighting attached to the performance measures and targets part way through a performance year if
there is a significant and material event which causes the Committee to believe that the original measures, weightings and targets are no longer appropriate;
– make downward or upward movements to the amount of bonus earned resulting from the application of the performance measures, if the Committee believes

that the bonus outcomes are not a fair and accurate reflection of business performance.

1 24

CORPORATE GOVERNANCELong Term Incentive Plan

Purpose and link to strategy
Supports executive recruitment and retention, with an appropriate balance between short-term performance and the creation of long-term, sustainable
shareholder value.

Maximum award level of
150 per cent of salary.

Awards are granted annually to Executive Directors in the
form of a conditional share award.

These will vest at the end of a three year period subject to:

– the Executive Director’s continued employment at the date

of vesting; and

– the satisfaction of the performance conditions.

The Committee will normally award dividend equivalents on
those shares to the extent that they vest.

Following the vesting, there is a holding period of two years
when Executive Directors cannot sell the vested shares
other than to pay tax.

Malus provisions apply over the performance period.
Clawback will apply over the holding period.

Performance measures and/or weightings reflect the
business strategy at the time, and are measured over or
at the end of three years. The Committee may change the
balance of the measures, or use different measures for
subsequent awards, as appropriate.

For the 2019 award, 40 per cent of the award will be based on
relative TSR against the FTSE 50-150 (excluding mining and
financial companies). If the Group’s relative TSR performance is
ranked at median, 25 per cent of the award will vest, increasing
to full vesting if performance is in the top quartile of the group.
Additional financial and strategic metrics will be included.

The underlying performance of the business will also be
taken into account when determining the vesting.

More information on the metrics is included on page 138.

In exceptional circumstances the Committee retains the discretion to vary or waive the performance conditions applying to LTIP awards if the Board considers it
appropriate and the new performance conditions are deemed reasonable and are not materially more or less difficult to satisfy than the original conditions.

The periods over which malus and clawback apply under our proposed Policy

Start of
performance period

+1 year

+2 years

+3 years

+4 years

+5 years

+6 years

Annual Cash Bonus

Performance period,
subject to malus

Subject to clawback

Cash award paid

Deferred Share Award

Pre-grant performance
period, subject to malus

Vesting period, subject to malus

Subject to clawback

Long Term
Incentive Plan

Performance period, subject to malus

Holding period, subject to clawback

Deferred
shares released

Award vests subject
to performance

Post-tax
shares released

Malus and Clawback may be applied by the Committee in the event of: i) discovery of a material misstatement resulting in an adjustment in the Company’s accounts; ii)
discovery that the grant or vesting of an award was based on error or inaccurate or misleading information; iii) conduct by an Executive Director that amounts to fraud or
gross misconduct; iv) conduct by an Executive Director that results, or could result in, serious reputational damage to the Group; v) conduct by an Executive Director that
has caused a material failure of risk management; vi) the Company enters involuntary administration or insolvency process; vii) an Executive Director breaching any
restrictive covenants or confidentiality obligations that apply after the termination of their employment. Events iv) to vii) only apply to awards granted after 1 April 2019.

PROPOSED REMUNER ATION POLIC Y – SHAREHOLDING GUIDELINE

At a glance

Operation

Shareholding Guidelines – during employment

Purpose and link to strategy
To ensure alignment between remuneration and long-term shareholder value creation.

Shareholding guideline of 200 per cent
of salary.

Directors are expected to keep any shares they already own and any shares released under the LTIP and the
Deferred Share Bonus Plan (DSBP) (except for those sold to cover any tax and social security obligations) until
this is achieved.

Shareholding Guidelines – post cessation

Purpose and link to strategy
To ensure continued alignment of Executive Directors with shareholders as they transition out of the business.

200 per cent of salary to be held in granted
shares for two years after leaving.

On cessation, Executive Directors are required to maintain their shareholding guideline for two years. The
number of shares to be held will be based on the shares vested under executive share schemes only (including
the shares from any Deferred Share Bonus Plan award that are yet to vest, based on a net calculation) and will be
determined by the share price on the date of cessation. If an Executive Director has not yet reached the 200 per
cent of salary guideline at the point of departure they will be required to hold any shares granted under executive
share schemes for two years. The post cessation shareholding requirement will be included in Settlement
Agreements for Executive Directors on leaving the business.

1 2 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

A L I G N M E N T W I T H S T R AT E G Y

Our new Remuneration Policy is designed to support the delivery of our ambition to build a parcels-led, more balanced,
more diversified global business, by:
– bringing sharper focus on a smaller number of critical measures required to drive efficiency;
– increasing sustainable sources of cash generation to fund investment;
– placing more emphasis on the long-term transformation of the business; and
– continuing to align executive and shareholder interests.

The incentive scheme metrics determined in our proposed Remuneration Policy support the delivery of our strategic priorities as
shown below.

OUR STR ATEGIC PRIORITIE S

‘Turnaround and
grow’ the UK

‘Scale up and grow’
GLS

Enhancing our cross-
border proposition

Targeting
above market
revenue growth

Selective
acquisitions with
continued focus on
organic growth

Offer a global
proposition
in cross-
border parcels

Grow our share of
UK export market

Invest in
productivity,
network and
customer initiatives
to ensure a
sustainable
Universal Service
Obligation (USO)

Become a parcels-
led business; letters
remain important

S
U
N
O
B

L
A
U
N
N
A

P
I
T
L

Incentive Scheme Metrics

Group operating profit

UKPIL costs

Group revenue

First Class Quality of Service

Reduction in Lost Time Accident Frequency Rate

Strategic objectives

Relative TSR

Group EBITDA

Group Parcels revenue growth

1 2 6

CORPORATE GOVERNANCE
PROPOSED ANNUAL BONUS ME TRIC S FOR 2019-20

Definition

Rationale for inclusion

Group operating profit

UKPIL costs

Group revenue

Key to driving longer-term cash flow, so needs to be delivered on a year-on-
year basis.

A gateway level of performance must be achieved against this metric for any
award under the Annual Bonus.

To improve efficiency and drive operating costs to a lower rate
(as a function of volume).

To incentivise revenue growth, particularly in parcels in the UK and across the
GLS countries of operation.

First Class Quality of Service

A regulated measure that ensures we keep focused on the customer – and
that cost containment does not impact our service levels.

Reduction in Lost Time Accident Frequency
Rate

Safety is a key metric to target a continually improving safety culture for our
employees, customers and communities.

Strategic objectives

Measures annual progress towards achieving our long-term outcomes.

PROPOSED LTIP ME TRIC S FOR 2019

Definition

Rationale for inclusion

Relative TSR
Compared to the FTSE 50-150 excluding mining and financials

Measures the success of the delivery of the strategy and alignment
to shareholder outcomes.

Group EBITDA

Critical to drive earnings to deliver investment over the next three
to five years.

Group Parcels revenue growth

Growing parcels revenue is the core of the Group strategy.

Weighting

30%

25%

20%

7.5%

10%

Weighting

40%

20%

1 2 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

REMUNER ATION OPPORT UNIT Y UNDER THE PROPOSED POLIC Y

The following charts set out the remuneration scenarios under the Policy for the Executive Directors in 2019-20. Under the 2018 amendments to
the Regulations, any new Remuneration Policy brought forward from 1 January 2019 must include an indication of the maximum remuneration
receivable assuming company share price appreciation of 50 per cent during the relevant performance period for Long Term Incentive Plans.
This has therefore been included below. It should be noted that there is no change to the maximum remuneration receivable for the Executive
Directors, compared to the previous Policy scenarios (set out on page 119) but there has been a reduction in the remuneration at target.

CEO (£000’s )

CFO (£000’s )

Fixed Remuneration

Variable Remuneration

Fixed Remuneration

Variable Remuneration

Minimum

100%

£790

Minimum

100%

£544

On Target

45%

18% 9%

28%

£1,750

-14%

On Target

45%

18% 9% 28%

£1,219

Maximum

29%

24%

12%

35%

£2,710

0%1

Maximum

29%

24%

12%

35%

£1,894

-14%

0%1

Maximum
(With 50%
share price
growth)

25%

20%

10%

30%

15%

£3,190

500

1,000

1,500

2,000

2,500

3,000

3,500

Maximum
(With 50%
share price
growth)

25%

20%

10%

30%

15%

£2,232

500

1,000

1,500

2,000

2,500

3,000

3500

Fixed Remuneration

Annual Bonus

Deferred Share Award

LTIP

Share price growth

Change compared to previous year

Please see note regarding lower 2019 LTIP grant.

Assumptions
Minimum/fixed remuneration: This includes salary (CEO: £640,000, CFO: £450,000), pension allowance at 17.5 per cent of salary (CEO: £112,000, CFO: £78,750) and maximum
benefits value (CEO: £38,000, CFO: £15,000).
On target: Bonus: Target is 50 per cent of maximum for both the cash bonus and deferred share award. LTIP: The expected value is taken as 50 per cent of the maximum.
Maximum: Bonus: The maximum bonus is 150 per cent of salary, 100 per cent in cash, and 50 per cent in deferred shares. LTIP: The maximum LTIP under the proposed Policy
is 150 per cent of salary. For 2019 awards, this will be reduced on a one-off basis by 25 per cent due to the fall in share price during the year (see page 138).
Maximum with 50 per cent share price appreciation: LTIP: A 50 per cent share price growth assumption over three years has been shown. The basis of the share price appreciation
calculation is that the share price embedded in the calculation for the ‘maximum’ bar chart is assumed to increase by 50 per cent across the performance period.
Dividend equivalents have not been estimated for the deferred share award or LTIP under any of the above scenarios.

Remuneration for a new Executive Director
The following table sets out the remuneration arrangements for a new Executive Director:

Element

Policy

Base salary

Benefits

Pension
allowance

Incentives

Salaries for new Executive Directors appointed to the Board will be set in accordance with the terms of the
approved Remuneration Policy in force at the time of appointment. In particular, they will take account of the
appointee’s skills and experience as well as the scope and market rate for the role.

Benefits consistent with those offered to other Executive Directors under the approved Remuneration Policy
in force at the time of appointment will be offered, including the discretion to offer additional benefits such
as relocation allowance on recruitment.

The pension allowance paid to any newly appointed Executive Director will be aligned to the wider workforce
pension arrangements as outlined in the proposed 2019 Remuneration Policy.

Incentive arrangements for new Executive Directors will be in accordance with the approved Remuneration Policy
in force at the time of appointment. Under the proposed 2019 Remuneration Policy:

– maximum total annual incentive opportunity award in any year would be 150 per cent of salary, split between

cash and shares (100 per cent and 50 per cent respectively)

– maximum LTIP award would be 150 per cent of salary (with the ability to offer up to 300 per cent of salary for

the year of recruitment).

For an externally appointed Executive Director, the Company may offer additional cash or share-based payments
that it considers necessary to buy out current entitlements from the former employer that will be forfeited on
recruitment. Any such arrangements would reflect the type of award (for example, cash or shares); time horizons;
and levels of conditionality of the remuneration foregone. In order to facilitate buy-out arrangements, existing
incentive schemes will be used to the extent possible, and the Committee will retain discretion on the application
of holding periods, performance conditions and performance periods.

For an internally appointed Executive Director, any outstanding variable pay element, such as an LTIP awarded in
respect of the prior role, will continue on its original terms.

The Committee always seeks to use its judgement to ensure that any remuneration package is set such that the Company is able
to attract the right calibre of individual required, whilst maintaining a responsible attitude to executive compensation.

1 2 8

CORPORATE GOVERNANCEExecutive Director terms of employment
The Executive Directors are employed under service contracts. The dates of these contracts are:

Rico Back

Stuart Simpson

Date of Contract

20 April 2018

15 May 2017

Notice Period
From RMG
(months)

The contracts have an indefinite term that may be terminated by the Executive Directors with six months’ written notice. The
Company can terminate contracts with twelve months’ notice. Copies of the Executive Directors’ service contracts are available
for inspection at the Company’s AGM.

What happens when an Executive Director leaves
Policy
Element

Payment in
Lieu of Notice

Under current Executive Director service contracts, and the policy for future hires, the Company may
terminate the contract by making a payment in lieu of any unexpired notice period. The payment in lieu
of notice is limited to a maximum of 12 months’ base salary.

Service contracts for Executive Directors expressly provide for the use of monthly phased payments
in the event of a payment in lieu of notice with a reduction in amounts paid if the executive obtains
alternative paid employment.

Other Payments

Payment in lieu of accrued holiday, incidental expenses, outplacement services and payments relating
to post-termination restrictions may be paid/provided for as appropriate. Any statutory entitlements or
sums to settle or compromise claims in connection with a termination (including, at the discretion of the
Committee, reimbursement for legal advice) would be paid as the Committee considers necessary.

Post-Cessation
Shareholding

Executive Directors will be required to maintain their shareholding guideline for two years. The number
of shares to be held will be based on the shares granted under executive share schemes only and will
be determined by the share price on the date of cessation. If an Executive Director has not yet reached
the 200 per cent of salary guideline at the point of departure, they will be required to hold any shares,
granted under executive shares schemes for two years.

The following table sets out the position under the incentive plans on cessation of employment:

Good Leaver Reason1

Other Reasons2

Committee Discretion

Annual Bonus:
Cash Awards

Performance conditions
will be measured at the
bonus measurement
date. Bonus will normally
be pro-rated.

No bonus
payable for year
of cessation.

– to determine that an executive is a good leaver and
– to determine whether to pro-rate the bonus to time.
The normal policy is that bonus will be pro-rated

provided that where any discretion is exercised there is
an appropriate business case which will be explained
to shareholders.

Annual Bonus:
Deferred Share
Awards

All subsisting deferred
share awards will
normally vest on the
normal vesting date.

Lapse of any
unvested
deferred
share awards.

– to determine that an executive is a good leaver
– to vest deferred shares at the date of cessation

of employment

– to determine whether to pro-rate the award to time.

The normal policy for existing awards is that they will
not be pro-rated; provided that where any discretion is
exercised there is an appropriate business case which
will be explained in full to shareholders

– In respect of the year of cessation, discretion may be

exercised to provide a pro-rated deferred share award
based on achievement of performance conditions as
measured at the bonus measurement date.

1 2 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

LTIP

Good Leaver Reason1

Other Reasons2

Committee Discretion

Lapse of any
unvested
LTIP awards.

Pro-rated to time and
performance in respect
of each LTIP award.
Awards will vest on the
normal vesting date and
the holding period will
apply, except in the case
of death when awards
will vest on date of
cessation of employment
(and no holding period
will apply).

– to determine that an executive is a good leaver
– to measure performance over the original performance

period or at the date of cessation of employment

– to vest the shares on date of cessation of employment
– to determine whether to pro-rate the award to time. The

normal policy is that awards will be pro-rated; and

– to disapply the holding period

provided that where any discretion is exercised there is an
appropriate business case which will be explained in full
to shareholders.

1 A good leaver reason is defined as cessation in the following circumstances: death; injury, ill health or disability, as established to the satisfaction of the Committee; redundancy with

the agreement of the Committee; retirement with the agreement of the Committee; the company employing the executive ceasing to be a member of the Group; the business or part
of the business to which the executive’s office or employment relates being transferred to a person who is not a member of the Group; or any other reason where the Committee in its
discretion so permits.

2 Cessation of employment in circumstances other than those set out above is cessation for other reasons.

What happens in case of a takeover
The Committee’s Policy on the vesting of incentives on a change of control is summarised below:

Takeover

Committee Discretion

Annual Bonus: Cash Awards

Pro-rated to time and performance
to the date of the takeover.

Annual Bonus: Deferred
Share Awards

Subsisting deferred share awards
may vest on a takeover.

LTIP

Subsisting LTIP awards may vest
on a takeover, pro-rated to time
and performance.

The Committee’s normal policy is that it will pro-rate
the bonus for time. It is the Committee’s intention to
use its discretion to not pro-rate in circumstances
only where there is an appropriate business case
which will be explained in full to shareholders.

The Committee has discretion regarding whether to
pro-rate the award to time. The Committee’s normal
policy is that it will not pro-rate awards for time. The
Committee will make this determination depending
on the circumstances of the takeover.

The Committee will determine the proportion of the
LTIP award which vests taking into account, among
other factors, the period of time the LTIP award has
been held by the participant and the extent to which
any applicable performance conditions have been
satisfied at that time.

In the event of a demerger, the Committee has wide flexibility as to what should happen to awards, including whether all or part
of an award should vest and on what terms, or whether an award should continue on amended terms.

Policy on Executive Directors holding external positions
It is the Company’s policy to allow each Director to accept one Non-Executive Director position on the board of another listed
company. The fees for such appointments are retained by the Executive Directors and are disclosed in the Remuneration Report.

1 3 0

CORPORATE GOVERNANCEPROPOSED REMUNER ATION POLIC Y FOR CHAIR OF THE BOARD AND NON-E X ECU TIVE DIREC TORS

At a glance

Operation

Purpose and link to strategy
Provides a level of fees to support recruitment and retention of Non-Executive Directors and a Chair of the Board with the necessary experience to fulfil the
leadership role required of them

Non-Executive Directors are paid an annual fee and
additional fees for being Chair of a Committee or a
member of a Committee, and if appropriate, other
additional time commitments.

The Chair of the Board does not receive any
additional fees for membership of committees.

The Board is responsible for setting the remuneration of the Non-Executive Directors. The Remuneration
Committee is responsible for setting the Chair of the Board’s fees. The fees for Non-Executive Directors for
2019 are as follows:

Non-Executive Director Fees

Chair of the Board*

Base Fee

Senior Independent Director

Committee Fees

Audit and Risk Committee

Remuneration Committee

Nomination Committee

£300,000

£50,000

£10,000

Chair

£15,000

£0

Membership

£6,000

£4,000

The Chair of the Board is not eligible for additional fees for being Chair or a member of Committees. Chairs of
Committees are not eligible for additional membership fees for that Committee.

The fees for Non-Executive Directors and the Chair of the Board are set at broadly the median of the
comparator group. Fees are reviewed annually based on equivalent roles in the comparator group used to
review salaries paid to the Executive Directors. In general, the level of fee increase for the Non-Executive
Directors and the Chair of the Board will be set taking account of any change in responsibility and will take
into account the general rise in salaries across the UK workforce.

The Company will pay reasonable expenses incurred by the Non-Executive Directors and Chair of the Board
and may settle any tax incurred in relation to these. Non-Executive Directors and the Chair of the Board do
not participate in any variable remuneration or benefits arrangements.

Change from current Policy and rationale
The Board has reviewed the structure and level of fees for Non-Executive Directors against the external market, and is proposing to introduce formal
membership fees for Committees. This will reflect more closely the time and commitment demands imposed by membership of the Committees. As a
result, the base fee has been realigned to the previous level of £50,000. There has been no change to the fees for the Chair of the Board, Senior Independent
Director, or Chair of the Committees.

Chair of the Board and NEDs terms of appointment
The Non-Executive Directors (including the Chair of the Board) are appointed by rolling letters of appointment. The Non-Executive
Directors are appointed for up to three years, subject to annual review and reappointment. The fees for new Non-Executive Directors
appointed will be set in accordance with the terms of the approved Remuneration Policy in force at the time of appointment.

One month’s notice is required by either party (four months’ notice in the case of the Chair of the Board). The dates of the Chair of the
Board’s and Non-Executive Directors’ letters of appointment are set out in the following table:

Les Owen

Rita Griffin

Orna Ni-Chionna

Simon Thompson

Keith Williams

Date of Contract

19 September 2018

1 December 2016

20 September 2016

1 November 2017

22 March 2019

Unexpired Term at 31 March 2019 (months)

As of January 2019, Les Owen reached nine years as a Non-Executive Director of the Royal Mail Group. Keith Williams has now been
appointed as his successor and became Chair of the Board on 22 May 2019. On that date, Les Owen stepped down from the Board.

1 3 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

2 0 18-19
R E M U N E R AT I O N R E P O R T

CONTENTS

Single Figure Table and supporting information

133 to 135

Single Figure Table – Executive Directors

Single Figure Table – Non-Executive Directors

2018-19 Base Salary Changes

Outcome of 2018-19 Annual Bonus

Outcome of 2016 Long Term Incentive Plan

Other Remuneration Elements

Outstanding Share Awards

Shareholding Levels

Payments for Loss of Office

Payments to Past Directors

Payments from External Positions

Policy implementation in 2019-20

Executive Remuneration in Context

Wider workforce remuneration

Overall spend on pay

CEO pay ratios

Change in CEO pay vs average employee pay

CEO pay over the last 10 years

TSR comparison

Gender pay gap

Remuneration Committee

Membership

Role of the Remuneration Committee

Advice to the Remuneration Committee

Remuneration Committee Evaluation

Voting by Shareholders

1 3 2

133

134

134 to 135

135

136 to 139

136

137

138 to 139

140 to 144

140

141

141 to 142

142

143

144

145

CORPORATE GOVERNANCESINGLE FIGURE TABLE (AUDITED)

This part of the Directors’ Remuneration Report sets out how the current Remuneration Policy has been applied for the financial
year 2018-19. This detailed information, set out below, has been audited by the Company’s independent auditors, KPMG LLP.

Executive Directors

£’000

Rico Back6

Stuart Simpson

Moya Greene⁷

Sue Whalley8

Matthew Lester9

Total

Salary/ Fees

Benefits1

Annual Bonus
Plan2

Long Term
Incentive Plan3 4

Pension
Allowance5

Other

Total

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

533

450

164

197

–

315

548

–

158

–

1,344 1,021

–

432

774

–

0 1,206

–

107

239

–

200

–

346

266

318

–

647

544

–

920

235 1,790

238

–

227

0 1,664 2,937

Notes
1

There has been no change to the contractual benefits entitlement, which includes medical insurance and car allowance. Moya Greene was entitled to two return flights to Canada, and
she made use of one of these during the 2018-19 year. She had not used this benefit during the 2017-18 year.

2 Bonuses are determined based on the salary as at 1 January 2019 in line with the Company’s policy for all staff. 50 per cent of the annual bonus plan is granted as a deferred share award
at the end of the annual performance period. This award is subject to continued employment over a three year vesting period. There are no bonus payments or deferred share awards in
relation to the 2018-19 year.

3 The 2016 RMG LTIP did not vest, as the threshold performance level over the period to 31 March 2019 was not achieved, and has lapsed in full. The figure shown for Rico Back relates to

grants under the GLS LTIP with performance periods ending in 2018-19, which he has waived. Further information is shown on page 135.

4 The 2018 figures relate to the vesting of the 2015 LTIP award. This amount has been updated since the 2018 report, as the 2015 LTIP vested after the publication of the Report, which

showed the estimated vesting. The share price used to estimate the value on vesting was £5.29 based on the closing share price on 23 March 2018. The actual share price on vesting was
£4.57. The combination of the actual share price, and the application of dividend equivalents (as set out in the Policy) led to a decrease in the value of the LTIP vesting for Moya Greene of
£7,000 and for Stuart Simpson of £3,000 from that set out in the 2017-18 Directors’ Remuneration Report.

5 For 2019, the full amount for Rico Back is paid as an allowance. For Stuart Simpson, £10,000 is paid into the Royal Mail Defined Contribution Plan and the remaining £68,750 is paid as
an allowance. For Moya Greene, £3,000 was paid into the Royal Mail Defined Contribution Plan and the remaining £57,000 was paid as an allowance (amounts reflect her service as an
Executive Director). For Sue Whalley, the full amount was paid as an allowance.

6 Rico Back joined the Board on 1 June 2018, and all amounts for 2018-19 above reflect his service as an Executive Director.
7 Moya Greene stepped down from the Board on 19 July 2018, and all amounts for 2018-19 above reflect her service as an Executive Director.
8 Sue Whalley was a member of the Board between 1 June 2018 and 7 November 2018 and all amounts for 2018-19 above reflect her services as an Executive Director.
9 Matthew Lester left Royal Mail on 31 July 2017.

1 3 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Non-Executive Directors

£’000

Chair of the Board
Peter Long1

Les Owen2

Non-Executive Directors

Rita Griffin

Cath Keers

Paul Murray³

Orna Ni-Chionna

Simon Thompson

Keith Williams⁴

Total

DIREC TORS’ REMUNERATION REPORT CONTINUED

Fees⁵

Other

Total

2019

2018

2019

141

195

–

2018

300

636

666

–

141

195

–

636

666

2018

300

Notes
1 Peter Long stepped down as Chair of the Board on 19 September 2018. He received no pay in lieu of notice.
2 Les Owen was appointed as Chair of the Board on 19 September 2018. His 2018-19 remuneration is pro-rated for his period as a Non-Executive Director and his period as Chair of the Board.
3 Paul Murray stepped down from the Board on 19 July 2018.
4 Keith Williams was appointed as Deputy Chair of the Board on 7 November 2018. He received no additional fees for this role.
5 As stated in the 2018 DRR, 2018-19 base fees were adjusted to take account of the time commitment required by each NED during the year. Due to the smaller number of NEDs for 2018-19, the

overall cost has reduced, while some NEDs have seen an increase in their individual fees due to taking on broader responsibilities. The introduction of Committee membership fees is proposed
under the new Remuneration Policy to simplify the fee structure.

Change to base salaries
The Committee has reviewed the salaries of our Executive Directors and decided not to make any increases during the 2018-19 financial year. Rico
Back’s salary was set on his appointment as CEO effective 1 June 2018. Stuart Simpson’s salary was set on his appointment to the role of CFO.

Over the last five years, our frontline employees have received increases of a total of 12.4 per cent of salary, including an increase of five
per cent effective 1 October 2017. This was followed by a reduction in frontline employees’ contractual working hours by one hour per week
effective 1 October 2018 with no change in pay. A further increase of two per cent has since been implemented, effective 1 April 2019.

Annual cash bonus outcome
The performance period for the Annual Cash Bonus is the same as the financial year, with achievement being assessed against a
range of financial and non-financial targets, as set out in the Corporate Balanced Scorecard, and against a set of strategic objectives.
The maximum cash bonus opportunity for the CEO and CFO was 100 per cent of salary.

As the profit gateway has not been met, under the rules of the Annual Cash Bonus plan no bonus is payable to the Executive Directors
for the 2018-19 financial year.

Performance against the Corporate Scorecard makes up 80 per cent of the bonus for Executive Directors. The table below contains
a summary of the performance metrics and achievement against these for the 2018-19 year.

Corporate Balanced Scorecard

Measure

Composite Safety Index

Audit Compliance

Lost Time Accident Frequency Rate reduction

Road Traffic Collision per 1000 vehicles reduction

Employee Engagement

First Class Retail Quality of Service (%)

Mean Business Customer Satisfaction

Composite Premium Parcel Performance

Productivity for Collections, Processing & Delivery (%)

UKPIL Costs (£m)

Group Revenue (£m)

Group Operating Profit Before Transformation Costs (£m)

In-year Trading Cash Flow (£m)

Weighting

Threshold

Target

Maximum

Actual

Outcome as
% of Target

10%

70.0

2.0

N/A

77.5

96.5

2.2

74.9

7.0

93.0

78.0

97.0

3.0

78.4

12.0

93.2

78.5

97.5

3.2

76.2

9.2

5.3

91.8

77.7

97.3

0.9

(7,509)

10,288

559

246

(7,362)

10,606

659

296

(7,215)

10,924

759

346

(7,365)

10,481

536

117

4.7%

3.7%

2.5%

15.0%

0.0%

7.0%

13.0%

0.0%

9.9%

8.0%

0.0%

63.8%

Scorecard Achievement (as % of target)

100%

Financial targets and actuals are based on reported results subject to adjustments approved by the Remuneration Committee. Bonus targets and results are based on a 53-week basis, in line with audited
outcomes. Group revenue and Group operating profit before transformation costs are adjusted for foreign exchange movements.

1 3 4

CORPORATE GOVERNANCE

The remaining 20 per cent of the bonus for Executive Directors is based on achievement against the strategic objectives set by
the Board:

2018-19 Objective

Progress

Embed the new UK Post and Parcel
system, by driving value from letters,
investing in network development,
implementing the deal with the CWU and
progressing the Collective Defined
Contribution (CDC)
pension arrangement.

Specific business customers were targeted to encourage them to send more mail and use letters in new and innovative ways,
delivering a positive return on investment. The proportion of barcoded letters continued to increase, helping the business to reduce
costs through automation and simplification of processes. Both parcels volume and revenue growth were above budget, with
significant increases in the volume of Tracked 24®, Tracked 48® and Enhanced Tracked Returns®. Following the strategic review of
the UK business, a major transformation plan will be defined for the next five years. This will deliver a meaningful reduction in the
unit cost of handling small and larger parcels.

As part of the UK strategic review, we commissioned an assessment of the productivity and efficiency opportunities of the CWU
deal. It found that, while the overall direction is right, the initiatives so far designed to fund it were not in themselves enough to do
so, nor were they at the appropriate state of readiness. There is a need for a major shift in focus and pace – hence our UK
‘turnaround and grow’ plan.

Significant progress has been made on the development of the CDC pension arrangement. The Department for Work and Pensions
has held a public consultation on the implementation of such plans, with the Government confirming its intention to legislate as
soon as possible using the proposed Royal Mail scheme as its benchmark.

Accelerate the expansion of our
international business while avoiding
undue risk.

GLS delivered a good performance. Revenue was up and we saw strong, double-digit revenue growth in all developing/emerging
European markets. Organic revenue growth, i.e. excluding acquisitions, across the GLS companies was 8 per cent. The selective
franchisee acquisition strategy has continued in Europe, with the acquisition of Trento in Italy. In Canada, the acquisition of Dicom
was completed, with performance in line with our expectations in the seven month period to 31 March 2019. GLS US existing
businesses (GSO/PEX) are being changed to a subcontractor operating model, to provide a platform for scalable future growth, but
the expected synergies and benefits will now take longer to be realised.

Focus the Head Office functions to
support the delivery of our strategy and
business results, by simplifying
processes and implementing
transformational programmes.

A review of our organisational structure and management roles was completed, without material risk to the Group, delivering
cash savings. Value has been created by simplifying and standardising business processes and increasing automation. A
process simplification and automation programme has been deployed across many corporate functions which will continue to
drive simplicity and efficiency.

Due to the profit gateway of the Corporate Balanced Scorecard not being met, despite the positive progress against some aspects of
the strategic objectives, in line with the rules of the plan no cash bonus is payable. The Remuneration Committee chose not to exercise
discretion on the outcome of this incentive plan.

In line with the Remuneration Policy, the performance outturn against the Annual Cash Bonus plan determines the value of the
deferred share award to be granted to the Executive Directors. There will therefore be no deferred share award made to the Executive
Directors in relation to the 2018-19 financial year.

2016 LTIP outcome
The 2016 LTIP was based on performance against a relative Total Shareholder Return (TSR) measure, with a performance period from
1 April 2016 to 31 March 2019, as set out below:
Measure

Achievement

Threshold

Weighting

Maximum

TSR vs FTSE 100

(excluding mining and financial
companies)

100%

Performance

Median

Top Quartile

Below Median

Vesting

50%

100%

The Remuneration Committee agreed that the performance of the 2016 LTIP was in line with the wider performance of the business
and therefore chose not to exercise discretion on the outcome of this plan. Due to the above performance, the 2016 LTIP will not vest
in July 2019. There is therefore no element attributable to share price appreciation.

GLS LTIP
As disclosed in the 2017-18 Directors’ Remuneration Report, the grants made to Rico Back under the GLS LTIP prior to his appointment
as CEO will continue to vest on their normal schedule. Rico Back has received annual grants under the GLS LTIP with the final grant
being made in 2017. From 2018, Rico Back has been eligible for the Royal Mail LTIP, and did not receive any further grants under the
GLS plan.

Under the GLS LTIP, participants receive a maximum award of 98 per cent of salary, 40 per cent in shares and 60 per cent in cash.
The performance conditions are based on GLS profit performance. A separate target is set for each of the three financial years of the
vesting period: 25 per cent of the award is based on achievement in year one; with 37.5 per cent based on achievement in year two, and
three respectively. Performance is assessed annually and banked, ahead of vesting at the end of the three year period.

The Single Figure Table (on page 133) shows the legacy GLS LTIP awards with performance periods ending in the 2018-19 year. Prior
to the performance requirements for the two tranches of these awards being reviewed by the Committee, Rico Back proposed that he
should waive these awards, for the performance year 2018-19, due to the fall in the share price during that performance period. The
Committee accepted his proposal and therefore Rico Back will not receive any payment or shares for the third tranche of the 2016 LTIP
and the second tranche of the 2017 LTIP.

The single figure table in next year’s Annual Report will include the third and final tranche of Rico Back’s 2017 GLS LTIP award.

1 3 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

OTHER REMUNER ATION ELEMENTS

Outstanding LTIP awards (audited)
The grants made under the 2017 RMG LTIP and 2018 RMG LTIP remain outstanding at 31 March 2019. The performance conditions
for both LTIPs are:

Weighting

Threshold

Maximum

Measure

TSR vs FTSE 100 (excluding
mining and financial companies)

Performance

Vesting (% of award)

Performance

Vesting (% of award)

100%

Median

50%

Top Quartile

100%

Additionally, Rico Back is eligible for the 2017 GLS LTIP. Participants in this plan received a maximum award of 98 per cent
of salary, 40 per cent in shares and 60 per cent in cash. The number of shares shown below for Rico Back (53,154) therefore
represents 40 per cent of the total award.

The amount of the LTIP awards outstanding for each of the Executive Directors is shown in the following table, as at 31 March 2019.
This excludes the 2016 LTIP which lapsed in full in May 2019:

Max value of
award at grant
(% of salary)

Max value of
award at grant
(£’000)

Type

% vesting at
threshold
performance
(% of salary)

Final year of
performance
period

Executive Director

Rico Back

Year

2017

GLS LTIP
(shares and cash)

Stuart Simpson

Moya Greene

2018 RMG (LTIP shares)

2017 RMG (LTIP shares)

2018 RMG (LTIP shares)

2017 RMG (LTIP shares)

98%

100%

525

640

450

548

42%

2019-20

50%

2020-21

2019-20

2020-21

2019-20

Number
of shares
at grant

53,154

140,052

113,857

98,474

138,602

The 2017 LTIP award was granted on 28th July 2017 at a price of £3.95 per share. The 2018 LTIP award was granted on
9 August 2018 at a price of £4.57 per share.

Moya Greene has an outstanding award under the 2017 LTIP which is shown in full in the table above. As disclosed in last
year’s Remuneration Report, this award was pro-rated to reflect her service during the performance period to a maximum
of 65,450 shares.

As disclosed in November 2018, under the terms of Sue Whalley’s departure from the Company, all outstanding share awards
under the LTIP have lapsed.

1 3 6

CORPORATE GOVERNANCEShareholding levels (audited)
The table below sets out details of the shareholdings of the Executive and Non-Executive Directors as at 31 March 2019. There
has been no change in the Directors’ interests in the ordinary share capital of the Company between 31 March 2019 and 21 May
2019 except as noted in 5 below.

Shareholding
guideline

Number
of shares
owned on
31/03/191

Number of
shares
owned on
25/03/18

Value of shares
owned on
31/03/192

Value of shares
owned on
31/03/19
(as % of salary)

Value of
conditional
share awards
not subject to
performance
(DSBP)³

Conditional
share awards
subject to
performance
(LTIP 2017,
2018)

Chair of the Board

Peter Long

Les Owen⁴

Executive Directors

Rico Back

Stuart Simpson⁵

Moya Greene

Sue Whalley

Non-Executive Directors

Rita Griffin

Paul Murray

Orna Ni-Chionna

Simon Thompson

Keith Williams

–

100,000

£474,100

81,058

3,030

£193,161

–

200%

–

613,528

88,400

124,984

105,981

15,943

14,851

–

£1,462,037

228%

£264,600

25,936

72,163

–

15,943

13,953

£210,657

£585,675

£368,814

£0

£74,709

£35,390

£0

47%

£430,490

£439,883

£416,294

–

193,206

212,331

65,450

–

For Directors who have stepped down from the Board, the number of shares owned is shown as at the date they stepped down. For Peter Long, this is 19 September 2018. For Moya
Greene, this is 19 July 2018. For Sue Whalley, this is 7 November 2018. For Paul Murray, this is 19 July 2018. Number of shares owned includes unvested deferred shares on a net basis, as
well as vested LTIP shares (including those subject to a holding period).

2 Value of shares owned based on the closing share price as at 29 March 2019, or the date the Director stepped down from the Board if earlier. Value of shares owned includes unvested

deferred shares on a net basis, as well as vested LTIP shares (including those subject to a holding period).
Includes the DSBP granted in respect of the 2016-17 Annual Bonus and the 2017-18 Annual Bonus, with value based on share price at the time of grant.

3
4 Les Owen’s shares are owned by a connected person.
5 Between the end of the financial year and 21 May 2019, Stuart Simpson acquired a further 81 shares through the Partnership and Matching Share Scheme.

Payments for loss of office (audited)
Sue Whalley stepped down from the Board on 7 November 2018
and left the Company on 31 March 2019. She continued to receive
full pay and benefits during this period. In line with her contractual
entitlements she will also receive payments in lieu of approximately
seven months’ basic salary, in monthly instalments over the
remainder of what would have been her 12 month notice period.
There is a requirement for Sue Whalley to immediately disclose
any payment received from alternative employment. Her phased
payments in lieu of notice will be reduced by any earnings from
alternative employment.

The Committee exercised its discretion to determine that Sue
Whalley will remain eligible to receive deferred share bonus
awards that have already been granted and where no subsequent
performance conditions apply as these awards relate to prior
performance years and have already been earned. The awards
were 48,302 shares under the 2017 grant and 40,101 shares under
the 2018 grant. These awards will continue to vest according
to the normal schedule. The Committee determined that she
would not be eligible for any awards relating to the 2018-19 or
future performance years, and she was therefore not eligible
for any annual bonus award for the 2018-19 financial year, and
all outstanding share awards under the LTIP have lapsed.

As was disclosed in full in last year’s Remuneration Report, Moya
Greene received a total payment of £914,800 for loss of office on her
termination in September 2018 comprising: 12 months’ base

salary (£547,800) and 12 months’ cash bonus based on the target
bonus level (£367,000). These payments were made under the
terms of Moya Greene’s employment contract, which was approved
by Government in 2010 when Royal Mail was in State ownership.
The provisions of this contract are not replicated in the terms of
the employment contracts of any other Executive Directors.

Payments to past Directors (audited)
For her period of service after stepping down from the Board on
19 July 2018, Moya Greene received salary of £86,735 and benefits
and pension of £5,796 and £31,667, respectively. As disclosed in
the Annual Cash Bonus section on pages 134 to 135, no bonus is
payable to Executive Directors in relation to the 2018-19 financial
year and there is no vesting under the 2016 LTIP.

As disclosed above in the Payments for Loss of Office section,
Sue Whalley continued to receive full pay and benefits during the
period from 7 November 2018 to 31 March 2019 when she left
the business.

Executive Director fees from external positions (unaudited)
The Executive Directors are entitled to receive fees from external
appointments. Stuart Simpson, Rico Back and Sue Whalley
held no external appointments at other listed companies for the
last reported financial year. Moya Greene was a Non-Executive
Director at easyJet plc and received fees of £18,000 for the period
from 1 April 2018 to 19 July 2018, when she stepped down as an
Executive Director at Royal Mail.

1 37

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

Policy Implementation in 2019-20 (unaudited)
The following table sets out how the Committee proposes to operate the Policy for Executive Directors next year:

Element

Base salary

Implementation of Policy in 2019-20

We review the salary of each Executive Director annually and will do the same in 2019-20. Any increases in salary will be no greater than
the general increase provided to employees. The salaries for the Executive Directors for 2019-20 have not been increased:

– Group CEO (Rico Back) £640,000
– CFO (Stuart Simpson) £450,000

Benefits

No change to benefit provision for 2019-20.

Pension allowance

No change to pension allowance provision for existing Executive Directors for 2019-20, as set out in the proposed Remuneration Policy:

– Group CEO (Rico Back) £112,000 (17.5% of salary)
– CFO (Stuart Simpson) £78,750 (17.5% of salary)

Annual bonus

As set out under the proposed Remuneration Policy on pages 123 to 131. Maximum total annual incentive opportunity of 150 per cent of
salary, split between a cash bonus award of up to 100 per cent of salary and a deferred share bonus award of up to 50 per cent of salary.
50 per cent earned for target performance.

75 per cent of the targets shall be financial, with the remainder including robust operational KPIs and strategic objectives. The metrics
and strategic objectives are set out below. A minimum level of operating profit must be achieved before any bonus is payable to an
Executive Director. Targets for these measures will be disclosed retrospectively in next year’s Annual Report.

Metric

Group operating profit¹

UKPIL costs

Group revenue

First Class Quality of Service

Reduction in Lost Time Accident
Frequency Rate

Strategic objectives

Total

Weighting

Threshold

Target

Maximum

30%

25%

20%

7.5%

10%

100%

Targets to be disclosed retrospectively2

See below

1 Measured after transformation project costs but before voluntary redundancy. Adjusted for budgeted exchange rates.
2 Targets are deemed to be commercially sensitive so will only be disclosed retrospectively.

The following Strategic Objectives have been agreed between the Chair of the Board and CEO and will apply to the Executive Directors for
the 2019-20 financial year:

1. Progress on specific milestones in the turnaround plan

Increase the focus on productivity whilst laying the foundations of the extension of our UK network.

2. Scale up and grow GLS

Drive profitable revenue growth and margin improvement in GLS.

3. Enhance our cross-border proposition

Leverage the combined Royal Mail and GLS networks to drive profitable cross border revenue growth.

Long Term
Incentive Plan

As set out under the proposed Remuneration Policy on pages 123 to 131 the maximum award would be 150 per cent of salary. However, due to the
significant fall in the share price during the 2018-19 financial year, the 2019 LTIP grant will be reduced by 25 per cent.

Awards are granted annually to Executive Directors in the form of a conditional share award. These will vest at the end of a three year
period subject to:

– the Executive Director’s continued employment at the date of vesting; and
– the satisfaction of the performance conditions.

Performance Condition

Weighting

Performance

Threshold

Vesting
(% of award)

Performance

Maximum

Vesting
(% of award)

Total Shareholder Return (TSR) vs FTSE 50-150
(excluding mining and financials)
comparator group

Group EBITDA1

Group Parcels Revenue Growth

Total

40%

Median

10% Upper quartile

40%

20%

100%

£925m

£7.0bn

£1,200m

£7.8bn

10%

25%

40%

20%

100%

1 Outturn of Group EBITDA after three years, adjusted back to budgeted exchange rates. Includes project costs but excludes voluntary redundancy costs

and exceptional charges. Performance measure assumes £160 million impact from the adoption of IFRS 16 ‘leases’.

Shareholding guideline

200 per cent of salary for Executive Directors.

Post-cessation
shareholding guideline

200 per cent of salary (or holding at the point of departure) to be held in granted shares for two years after leaving.

1 3 8

CORPORATE GOVERNANCE

The following table sets out how the Committee proposes to operate the Policy for the Chair of the Board and Non-Executive
Directors next year:

Element

Fees

Implementation of Policy in 2019-20

As set out under the proposed Remuneration Policy on page 131. Non-Executive Directors are paid an annual fee and additional fees for
being Chair or a member of Committees, and, if appropriate, other additional time commitments. The Chair of the Board does not receive
any additional fees for membership of committees.

Non-Executive Director Fees

Chair of the Board¹

Base Fee

Senior Independent Director

Committee Fees

Audit and Risk Committee

Remuneration Committee

Nomination Committee

£300,000

£50,000

£10,000

Chair

£15,000

£0

Membership

£6,000

£4,000

1 The Chair of the Board is not eligible for additional fees for being Chair or a member of Committees. Chairs of Committees are not eligible for additional membership fees

for that Committee.

1 3 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

E X ECU TIVE REMUNER ATION IN CONTE X T (UNAUDITED)

Wider workforce remuneration
The Committee is directly responsible for the remuneration
of the Executive Directors and the Executive Board. The
Board and the Remuneration Committee are also given
regular updates and, as required, take key decisions on
incentive schemes that cascade through the organisation. The
Committee takes changes in workforce remuneration into
account when making decisions on executive remuneration.

At senior manager level, pay is set based on the role and an
individual’s experience and skills, within broad bands. Senior
managers are not eligible for shift pay, overtime or allowances,
but have a higher proportion of their remuneration linked to
the management bonus. Our most senior managers are also
eligible for a grant of shares under the Deferred Share Bonus
Plan (DSBP). The Executive Board is also eligible for the Long
Term Incentive Plan.

Royal Mail employs over 140,000 people in the UK, with the
majority of these carrying out operational roles. For these
roles, the vast majority of pay is fixed. Base salary is based
on role, location and service, with new hires starting at the
bottom of the relevant pay scale, and progressing to the
maximum based on service or acquisitions of skills for more
technical roles. Salary increases are negotiated with the
Communication Workers’ Union and are applied to the pay
scales, with no personal or performance-related element to
salary increases. Operational colleagues are also eligible for
allowances (including functional, shift and legacy allowances),
overtime and scheduled attendance (a form of planned
overtime). In the run up to, and immediately post-Christmas,
operational colleagues will typically earn significant overtime,
as well as receiving a ‘Christmas bonus’ reflecting the huge
effort and impact colleagues have during our busiest period.
There is no performance-related pay for roles at this level.
We believe that it is right that our operational colleagues have
no portion of their pay at risk, but instead can influence their
remuneration through working additional, or antisocial, hours.

Middle and junior managers typically have a similar fixed pay
structure to operational colleagues, with pay scales that they
progress through based on service. Some roles at this level
are also eligible for shift pay, overtime and allowances. All
our managers are eligible for a management bonus based on
corporate and personal performance.

The Annual Bonus Plan that applies to our Executive Directors
is cascaded out to our managers, so that we are incentivising
all our managers against the same or similar key measures
for the business. A smaller proportion of remuneration is
linked to the bonus, and therefore at risk, moving out through
the levels of the organisation. For our most senior managers,
eligible for the DSBP, the structure of the plan is the same as
for Executive Directors, but a smaller proportion of the annual
bonus is granted in shares. A summary of this structure is
shown below:

FIXED VS VARIABLE PAY BY LEVEL (%)

EXECUTIVE DIRECTOR

SENIOR LEADER

SENIOR MANAGER

MANAGER

OPERATIONAL

100

Fixed

Variable (at target)

Notes: The above table is an indicative summary of remuneration at key levels. Fixed
remuneration includes salary, benefits and employer pension contribution (but excludes
allowances, overtime and shift pay). Variable pay includes bonus and executive share plans
at target.

14 0

CORPORATE GOVERNANCEOverall pay spend
The chart shows the Company’s actual spend on pay for all
employees relative to dividends, revenue and operating profit.
Revenue has been included because this measure represents
the income the Company received during the year and provides
a clear illustration of the ratio of people costs to income.

OVERALL PAY SPEND (£M)

12,000

10,000

8,000

6,000

4,000

2,000

Revenue

Adjusted
People Costs

Adjusted
Operating Proﬁt

Declared
Dividends

2018-19

2017-18

Note: the data used for Revenue and Adjusted Operating Profit in the chart are not adjusted for
foreign exchange movement, which is included in the outturn for the Scorecard.

CEO Pay Ratio
As the new Corporate Governance Regulations have been
published with the required calculation methodology, the
Company has decided to publish its CEO Pay Ratio for the 2018-19
financial year. This is set out below, with the required explanation,
and some further contextual information.
25th
percentile
pay ratio

50th
percentile
pay ratio

75th
percentile
pay ratio

Method

Year

2019

Option A

28:1

26:1

22:1

The table below sets out both the salary, and the full pay and
benefits value received by the employees identified at the 25th,
50th and 75th percentile, during the 2018-19 financial year. All
three of the identified employees have a base salary of £22,574
per annum. There are over 85,000 operational colleagues on
this salary on a full time equivalent basis across the business.
The difference in total pay and benefits is due to the different
allowances, overtime, shift payments and pension arrangements
received by these employees during the 2018-19 year.
50th
percentile

25th
percentile

75th
percentile

2019

Salary

£22,574

Total pay and benefits

£27,425

£30,442

£35,771

As this is the first year we have calculated the CEO Pay Ratio
under this methodology, it is not possible to make any year on
year comparisons. However, in future years, we will be able to
comment, as required under the Regulations, on the change in
pay ratios from the previous year and our understanding of the
reasons for this, along with the longer-term trend of the median
pay ratio.

In order to set this first year’s pay ratio in context, we have
included a chart showing the ratio of the 25th, 50th and 75th
percentile employees’ pay to the CEO’s actual 2018-19 pay, but
also the potential ratios based on the CEO’s theoretical fixed,
target and maximum pay for the financial year as set out in the

proposed Remuneration Policy. It is important to note that for
the CEO, a high proportion of their pay is based on performance
against the short and long-term incentives plans. It is therefore
possible that the CEO’s total remuneration varies significantly
year on year. For 2018-19, due to the performance against the
incentive plans, the CEO’s remuneration is at the minimum (i.e.
fixed pay) level, and this impacts the CEO pay ratios accordingly.
If business performance were to improve in the 2019-20 year,
we would expect the CEO’s remuneration to increase (due to
higher payouts on incentive plans) and the CEO pay ratios would
also increase.

CEO TO EMPLOYEE PAY RATIO

89:1

57:1

100

26:1

Fixed

Target

Max

Lower quartile

Median

Upper quartile

26:1

Actual
2018-19

We believe that the CEO to median pay ratio at target of 57:1
is appropriate in our business, assuming good business
performance. As business performance has been challenging
in the 2018-19 year, no bonus was paid and so the pay ratio was
lower, at 26:1. We believe that it is appropriate for our CEO, and
other senior executives, to have a far higher proportion of their
remuneration at risk, compared to our operational colleagues.

How we have calculated our pay ratios
Under the Regulations, companies are required to identify
the employee with pay and benefits at the 25th, 50th and 75th
percentile of all UK employees for the relevant financial year.
These employees are identified as P25, P50 and P75 respectively,
and the relevant pay and benefits figures are identified as Y25, Y50
and Y75 respectively. X is the total remuneration of the CEO as set
out in the Single Figure Table for the relevant financial year.

Where a company has had more than one CEO serving during
the financial year, X should be the sum of the total remuneration
received for their relevant periods of service as CEO. For 2018-19,
X has been calculated as the sum of the remuneration received
in the period 1 April to 31 May 2018 by Moya Greene, and the
remuneration received in the period 1 June 2018 to 31 March 2019
by Rico Back, reflecting their respective service as CEO during the
financial year.

The Company has chosen to use Option A to identify the
employees at the 25th, 50th and 75th percentiles and their
respective pay and benefits, as it is recognised that this is the
most accurate approach. All UK employees as at 31 March 2019
have been included in the reporting, with employees ranked based
on their remuneration for the 2018-19 financial year.

141

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

The data included in our reporting, and a summary of any adjustments or estimations required, is set out below:
Element

Description

Base Salary

The Regulations require that full time equivalent (FTE) salaries are used to identify P25, P50 and P75
in order to ensure comparability across the organisation. At Royal Mail, over 35,000 colleagues work
part-time, primarily in operational roles. A significant proportion of these colleagues will also have
multiple changes of hours during the year, often due to increased hours over the Christmas trading
period. We have therefore used the FTE salary, as at 31 March 2019, as the salary figure to rank our
employees. This also ensures that employees who have started part way through the financial year
are included on an annualised, and therefore comparable, basis.

Allowances and overtime

This includes a range of functional, shift, location and role-based allowances for those grades
who are eligible. Overtime and scheduled attendance (a form of planned overtime) are also included.
Allowances and overtime have been included on an actual basis, and not pro-rated to an FTE rate
for part-time colleagues, or annualised for new starters.

Taxable Benefits

Taxable benefits included are car allowance (or equivalent cash amount) and healthcare for
senior managers.

Employer pension contributions Actual employer pension contributions have been included. These amounts have not been pro-rated

to an FTE rate for part-time colleagues, or annualised for new starters.

Incentives

The Regulations require that incentives relating to the relevant financial year are included. The
incentive received by operational colleagues is paid in December, and has therefore been accurately
included in these calculations. However, the management bonus and the Long Term Incentive Plan
(LTIP) vesting is not complete until after the publication of this report, and cannot therefore be
accurately included. An estimate of these amounts has been included as follows:

– Management bonus: estimated for all managers based on confirmed business performance.
This therefore excludes the personal performance element which acts as a multiplier on
business performance.

– LTIP: estimated based on confirmed performance, and share price as at 29 March 2019 but
excluding dividend equivalents (in line with the amounts for the CEO included in the Single
Figure Table).

As our management population make up only a small proportion of the workforce, we do not expect
these estimates to have any impact on the overall ranking and the selection of P25, P50 and P75.

Change in CEO pay vs average employee pay
The table below shows the percentage change in the CEO’s salary, benefits and annual bonus between 2018-19 and 2017-18, compared
with the average for all UK employees. For 2018-19, the amounts shown for the CEO reflect the service of Moya Greene and Rico Back
as CEO during the financial year. The CEO received no bonus for the 2018-19 year.

Over the last five years our frontline employees have received increases totalling 12.4 per cent of salary, including an increase of
five per cent effective 1 October 2017. This was followed by a reduction in frontline employees’ contractual working hours by one hour
per week effective 1 October 2018 with no change in pay. A further increase of two per cent has since been implemented, effective
1 April 2019.

Salary2

Benefits3

Bonus

CEO1

Average of All Employees

2018-19

2017-18

% Change

2018-19

2017-18

% Change

£624,633

£547,800

£27,068

£29,000

14.0%

-6.7%

£0

£386,800

-100.0%

£30,269

£28,724

£44

£733

£48

£868

5.4%

-7.5%

-15.6%

The CEO for the 2017-18 year was Moya Greene. For the 2018-19 year, Moya Greene served as CEO for the period 1 April to 31 May 2018. Rico Back was appointed as CEO on 1 June 2018. The figures
above have been pro-rated for their respective service during the 2018-19 financial year.

2 Full time equivalent salary including overtime and shift allowances.
3 All taxable benefits.

14 2

CORPORATE GOVERNANCECEO pay over the last 10 years
The total remuneration figure for the CEO over the last ten years is shown in the table below. The annual bonus payout and the LTIP
vesting level as a percentage of the maximum opportunity are also shown.

Chief Executive Officer

Financial Year

Total Remuneration
(£’000)

Annual bonus awarded
as % of maximum

LTIP vesting as % of maximum

Rico Back

Moya Greene

Adam Crozier

2018-19

2017-18

2016-17

2015-16

2014-15

2013-14

2012-13

2011-12

2010-11

2009-10

647

235

1,790

1,901

1,529

1,522

1,360

1,962

1,107

778

2,428

858

71%

80%

82%

85%

77%

80%

74%

41%

–

43%

46%

59%

69%

100%

–

100%

–

TSR comparison
Total Shareholder Return (TSR) is the measure of the returns that a company has generated for its shareholders, reflecting both
movement in the share price and dividends, which are assumed to be reinvested over a period of time. The graph shows the TSR of the
Company, since the date of the first day of trading, relative to both the FTSE 100 Index and the FTSE 250 Index. While the Company is
currently part of the FTSE 250, the Company has been a constituent of the FTSE 100 Index for the majority of the period, therefore both
indices are shown for comparison.

200

150

100

171

109

104

140

119

112

157

119

104

100

193

146

127

145

139

130

148

140

11-Oct-13

30-Mar-14

29-Mar-15

27-Mar-16

26-Mar-17

25-Mar-18

31-Mar-19

RMG

FTSE 100

FTSE 250

TSR over the Financial Year

FY 2013-14*

FY 2014-15

FY 2015-16

FY 2016-17

FY 2017-18

FY 2018-19

Royal Mail plc

FTSE 100

FTSE 250

71%

-18%

12%

-7%

-8%

25%

17%

33%

-2%

-52%

10%

The chart and table show performance since the first day of conditional trading following the IPO (11 October 2013); in accordance with the reporting requirements, they will show an increasing
time frame in the coming years.

14 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19DIREC TORS’ REMUNERATION REPORT CONTINUED

Gender Pay Gap
The Company’s second Gender Pay Gap report, published during
the 2018-19 financial year, continues to show that average pay
for men and women is broadly the same. The Total Pay Gap on
a mean basis has reduced to – 0.6 per cent, in favour of women,
and the median has reduced to 1.0 per cent, in favour of men. We
would expect to see small changes in the Total Pay Gap year on
year, due to changes in the composition of the workforce, and the
payment of allowances and shift pay, and therefore believe that
our current position is reasonable. Our Total Pay Quartiles show
a slight increase in the proportion of women across three of our
quartiles, reflecting the increased number of women being hired
into the organisation.

The small difference in median pay rates is due to men taking
more work that qualifies for allowances, such as shift work
during the evening or at night. Women are paid more than men
on a mean basis as Royal Mail has a higher proportion of women
in managerial roles than in operational roles. Women make up
21 per cent of our middle and junior management population and
31 per cent of our senior management population. Our Total Pay
Quartiles do not show this clearly, as our management population
only makes up a relatively small proportion of our upper quartile.

97 per cent of men and 94 per cent of women received a bonus
in 2017-18. This is a small reduction compared to the previous
year. All Royal Mail employees are eligible for a bonus, with the
exception of those who have not reached the minimum service
requirement. The slightly lower percentage of employees
receiving a bonus in 2017-18 is due to an increase in the number
of new hires, who joined after the qualifying period for the bonus.
There was also an increase in the proportion of women being
hired into the organisation in 2017-18 who have not yet reached
the minimum service requirement.

BONUS GAP

Mean

Median

2017

-9.1%

2018

-22.7%

(male < female)

0.0%

(male = female)

PROPORTION RECEIVING A BONUS
PROPORTION RECEVING A BONUS

TOTAL PAY GAP

Mean

Median

2017

-2.1%

2018

-0.6%

(male < female)

1.5%

1.0%

(male > female)

2017 – MALE

2017 – FEMALE

2018 – MALE

2018 – FEMALE

99%

97%

94%

TOTAL PAY QUARTILE S

100

Quartile

Lower

Lower Middle

Upper Middle

Upper

Male

82%

83%

85%

84%

2017
Female

18%

17%

15%

16%

Male

82%

83%

2018
Female

18%

17%

We pay bonuses equally to men and women on a median basis.
There is no change in this year on year.

On a mean basis, our Bonus Gap is 22.7 per cent in favour of
women, compared to 9.1 per cent in the previous year. Overall,
our mean Bonus Gap is in favour of women due to the higher
proportion of women in our management population compared
to our operational population. However, the year-on-year change
also reflects a shift in the sales of Free Shares, with women
selling at a higher average value than men in 2017-18. All eligible
full-time employees of Royal Mail were granted the same number
of Free Shares in the Company (pro-rated for part-time) in four
tranches from 2013 to 2016. These shares are subject to tax if sold
within five years of grant, and so are required to be included in the
Bonus Gap calculations.

Male

Female

While we are pleased that our Gender Pay Gap reporting shows
that the Company has no significant pay gap, we continue to
focus on improving the representation of women at all levels
of the organisation. Our gender strategy focuses on attracting,
retaining and developing female talent, and we have women’s
representation and recruitment targets for operational roles and
a range of interventions and initiatives in place. These include:
mandatory recruitment and unconscious bias training for
assessors and hiring managers; gender balanced shortlisting;
targeted development programmes; women’s networking events
and campaigns, such as Vote100; and Women’s and Parents and
Carers’ networks. These are sponsored by senior executives. We
are externally recognised for our work on diversity and inclusion
and the progress we have made to improve gender diversity at
Royal Mail. In 2018, our Company was named a Times Top 50
Employer for Women for the sixth consecutive year.

Royal Mail will continue to work in partnership with external
organisations, such as the Business in the Community
Opportunity Now campaign, Everywoman, Working Families and
Employers for Carers to further enhance our gender strategy
and champion best practice, as part of our wider Diversity and
Inclusion agenda.

14 4

CORPORATE GOVERNANCEREMUNER ATION COMMIT TEE (UNAUDITED)

Remuneration Committee members and meetings
The members of the Remuneration Committee during the
2018-19 financial year are shown below:

Number of meetings
eligible to attend

Number of meetings
attended

Chair

Orna Ni-Chionna

Members

Rita Griffin

Paul Murray

Les Owen

Simon Thompson

Role of the Remuneration Committee
– To determine and recommend for the Board’s approval the
overall design of the remuneration of the senior executives
of the Group.

– To determine the individual remuneration arrangements for
the Chair of the Board, the Executive Directors, the Company
Secretary, and the members of the Executive Board.

– To agree the targets for any performance-related incentive

schemes applicable to the Executive Board.

The full Terms of Reference for the Committee have
been updated to reflect the changes to the UK Corporate
Governance Code and can be found on our website: https://
www.royalmailgroup.com/en/about-us/management-and-
committees/remuneration-committee.

Advice to the Remuneration Committee
The Committee takes information and advice from inside and
outside the Company. Internal support was provided by Sally
Ashford, the Chief HR Officer (supported by other members of the
HR department and senior leadership as appropriate), and Kulbinder
Dosanjh, the Company Secretary. No individual was present when
matters relating to his or her own remuneration were discussed.

The Committee seeks advice from independent external advisers
as appropriate. PwC has provided advice to the Committee since
October 2014. Following a review of its external advisers and a

competitive tendering process led by the Chair of the Remuneration
Committee, Deloitte was appointed in October 2018.

PwC provided advice to the Committee on changes to the Executive
Director population, shareholder consultation and preparation for
the AGM during the period April 2018 to September 2018. The total
fees paid to PwC in respect of this advice were £130,000. PwC has
also provided tax, technology, finance, operations, and other HR,
commercial and strategic consulting services to the Group during
the financial year.

Deloitte provided information to the Committee regarding external
market trends, and advice on the development of the proposed
Remuneration Policy and other Committee matters during the
period October 2018 to March 2019. The total fees paid to Deloitte
in respect of this advice were £108,420. Deloitte also provided
tax, technology, internal audit, strategy and business consulting
services to the Group during the financial year.

Both PwC and Deloitte are signatories to the Remuneration
Consultants Group Code of Conduct and reported directly to the
Chair of the Committee during their respective periods of service.
The Chair of the Committee meets regularly with its advisers
without Management present. The Committee is satisfied that
the advice it receives is objective and independent.

Remuneration Committee evaluation
The Remuneration Committee’s performance was evaluated
by the members of the Committee by way of a self-evaluation
questionnaire, as referred to on pages 98 to 99. Following the vote
on the Remuneration Report at the 2018 AGM, the Remuneration
Committee acknowledged the need for greater involvement with
stakeholders and shareholders. It believes it has now put in place
an appropriate programme for engagement, as explained further in
the Directors’ Remuneration Report. The Committee has changed
remuneration advisers during the year and this has assisted the
Committee in the second half of the year. The Committee concluded
it was operating more effectively now than before last year’s AGM.

The priorities for 2019-20 are:

– continued shareholder engagement particularly in relation to the
Directors’ Remuneration Policy which is due for a binding vote at
this year’s AGM.

– to focus on ensuring remuneration is transparent and clearly
articulated in a period in which the Company is undergoing a
substantial transformation.

Voting by Shareholders
The table below shows the advisory vote on the 2017-18 Remuneration Report at the AGM on 19 July 2018, and the vote on the
Remuneration Policy, which was effective from the date of the 2016 AGM for up to three years.

Votes for

% For

Votes against

% Against Total votes cast

Votes withheld
(abstentions)

Approval of Remuneration Report

181,812,927

29.83% 427,691,494

70.17% 609,504,421

50,347,487

Approval of Remuneration Policy

523,665,626

83.46% 103,807,987

16.54% 627,473,613

7,731,040

The Remuneration Committee was very disappointed with the outcome of the vote on the Remuneration Report for 2017-18. We have set
out in detail in the Chair’s statement on pages 116 to 117, and the Shareholder Engagement section on pages 120 to 121, how we have taken
steps to fully understand the views of our shareholders, and to ensure that our approach to the remuneration of our Executive Directors
remains responsible.

Approved by the Board on 21 May 2019 and signed by

Orna Ni-Chionna
Remuneration Committee Chair

145

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Les Owen
Pensions Committee Chair

Committee members:
Les Owen

Stuart Simpson

PENSIONS COMMIT TEE

P E N S I O N S C O M M I T T E E

Future Role of the Committee
The Committee was originally set up as
a Committee of the Board in September
2013 in recognition of the significance
of the Group’s pension schemes to the
overall financial management of the
Company. The Committee has played
an important role in reviewing the
performance of the Royal Mail pension
schemes, alongside strategy, policy and
strategy and investment matters.

Given the developments in 2018 the
Board concluded there was no longer a
need for the Committee to be a formal
Committee of the Board, and that the
Committee should in future operate as
a management Pensions Committee.

The management Pensions Committee
will review and recommend to the Audit
and Risk Committee the key assumptions
relating the accounting of Royal Mail’s
pension liabilities. It will continue to
provide oversight as the revised pension
arrangements are introduced and report
to both the Audit and Risk Committee and
the Board as appropriate.

The management Pensions Committee
reports into the Audit and Risk Committee
regarding the pension assumptions, and
to the Board for a number of pensions
matters that remain reserved to
the Board.

The number of Committee meetings held
during the year and Committee members’
attendance is set out on page 94.

Pension Committee meetings were also
attended, as required, by the Group HR
Director, the Chief of Staff, the Legal
Director for Pensions and Employee
Benefits, the Head of Pensions Strategy
and representatives from the Company’s
pensions’ advisers, Willis Tower Wilson
Limited, and was supported by the
Company Secretary.

Committee activity
During 2018 the Royal Mail Pension Plan
was closed to future accrual in its previous
form. The Committee provided oversight
as Royal Mail and the Communication
Workers Union (CWU) worked jointly to
have Government introduce the legal,
regulatory and tax changes needed for
Collective Defined Contribution (CDC)
schemes to be established in the UK.

In addition, the Committee reviewed initial
discussions with the Trustee regarding
the outcome of the March 2018 actuarial
valuation of the Royal Mail Pension Plan.

The Committee also reviewed the
performance of the Royal Mail pension
schemes, and the actuarial assumptions
used in the pension disclosures in the
Company’s interim Financial Results.

Committee changes
In July 2018, Paul Murray stepped
down from his role as a Royal Mail
Non-Executive Director and member
of the Pensions Committee. I would like
to express my thanks to Paul for his
contributions to the Committee, especially
during a time of immense change to Royal
Mail’s pension arrangements.

14 6

CORPORATE GOVERNANCEDIREC TORS’ REPORT

D I R E C T O R S ’ R E P O R T

The Directors present their report together
with audited financial statements for the
year ended 31 March 2019.

This Directors’ Report together with the
Strategic Report (on pages 1-84) form
the Management Report for the basis
of DTR 4.1.5R.

The following information is incorporated
in the Directors’ Report by reference and
can be found on the pages of the Annual
Report as indicated in the table below:

Business model

Strategy for delivering objectives

Results

Page

Financial assets and liabilities

196

Principal risks

Corporate responsibility

Greenhouse gas emissions

Disabled employees

Our people

Diversity

Going concern

Viability statement

Dividend

Corporate Governance Report

Future developments

Directors’ Responsibility
Statement

147

149

Listing Rule 9.8.4R disclosures
The location of information required to
be disclosed in the Annual Report under
Listing Rule 9.8.4R is as follows:

Long-term Incentive Plan

Statement of the amount of
interest capitalised

Dividend waiver

Page

191

187

147

Share capital
As at 31 March 2019, the Company’s issued
share capital comprised 1,000,000,000
ordinary shares of one penny each as set
out in Note 24 to the accounts on page
205. Although a block listing of 5,000,000
shares was undertaken in November 2014,
to date, no new shares have been issued.

Dividend waivers
The trustee of the Royal Mail Share
Incentive Plan will not receive any
dividends (other than any special dividend
declared by the Board) on Free Shares
which it has not been possible to award
to, or which have been forfeited by,
participants in the plan.

Authority of the Directors to allot shares
At the 2018 AGM, the Company acquired
shareholder consent to allot Ordinary
Shares in the Company and to grant rights
to subscribe for or to convert any security
into shares in the Company up to a nominal
amount of £3,333,333 and comprising
equity securities up to a nominal amount
of £6,666,666. To date, no new shares were
allotted. The Directors will be seeking to
renew this authority at the AGM on 18 July
2019, although the Company has no plans
to exercise this authority.

Purchase of own shares by
the Company
At the 2018 AGM, the Company was
authorised by its shareholders to purchase
up to a maximum of 100,000,000 of its
Ordinary Shares. The Company did not
repurchase any of its Ordinary Shares
during the year ended 31 March 2019 or
to date. The Directors will be seeking
to renew this authority at the AGM on
18 July 2019, even though at the present
time, the Company has no plans to
exercise this authority.

Subject to the Articles of association
(the Articles), any member may transfer
all or any of his or her certificated shares
by an instrument of transfer. The Board
may decline to register a transfer of any
share which is not fully paid.

The Company is not aware of any
agreements between shareholders that
may result in restrictions on the transfer
of securities and/or voting rights. Ordinary

147

shareholders have the right to receive
notice of, attend, vote and speak at general
meetings. A holder of ordinary shares is
entitled to one vote per ordinary share held
when a vote is taken on a poll.

Employees allocated Free Shares under
the Employee Free Shares Offer, which
are held in trust by the Trustee of the
Royal Mail Share Incentive Plan, are
entitled to exercise any voting rights in
respect of such Free Shares by instructing
the Trustee how to vote on their behalf.

Going concern
These consolidated financial statements
have been prepared on a going concern
basis. The financial performance and
position of the Group, its cash flows and
its approach to capital management are
set out in the Financial Review on pages
40-63. The Board has reviewed the Group’s
projections for the next 12 months. The
Directors have a reasonable expectation
that the Group has adequate resources
to continue in operational existence for
at least 12 months.

Viability Statement
The Viability Statement is set out on
page 73 of the Strategic Report.

Future developments
Possible future developments are
described in Summary of our Five-
Year Strategic Plan on pages 20-23
and Principal Risks on pages 64 of the
Strategic Report.

Special rights
There are no persons holding securities
that carry special rights with regard to
the control of the Group.

Employee Benefit Trust (EBT)
As at 31 March 2019, a total of 70,331
shares (2017-18: 513,230 shares) were
held by the EBT on behalf of the Company.

Substantial shareholdings
As at 31 March 2019, the Company had
been notified, in accordance with the
Disclosure Guidance and Transparency
Rule 5 (DTR 5), of the following interests
amounting to three per cent or more of the
voting rights in the issued ordinary share
capital of the Company. There have been no
changes to these notifications or additional
notifications as the date of this report.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19Shareholder

Aberdeen Standard
Investment

Number
of shares

% voting
rights

48,827,341

5.96

Schroders Investment
Management

59,617,288

4.88

Company’s Articles of Association
(Articles)
The Articles may be amended by special
resolution in accordance with the
Companies Act 2006 and are available
at https://www.royalmailgroup.com/en/
about-us/governance/.

Directors
Details of the current Directors can be
found on pages 88-89. The following Board
changes have occurred during the year:

Rico Back

Appointed 1 June 2018

Moya Greene

Retired 19 July 2018

Paul Murray

Retired 19 July 2018

Peter Long

Retired
19 September 2018

Sue Whalley

Appointed 1 June 2018,
Retired 7 November 2018

Les Owen

Retired 22 May 2019

Keith Williams Appointed Chair

22 May 2019

Michael Findlay Appointed 22 May 2019

Maria da Cunha Appointed 22 May 2019

Appointment and replacement
of Directors
The Articles, the UK Corporate
Governance Code and the Companies Act
2006 govern the appointment, retirement
and replacement of Directors. Unless
otherwise determined by ordinary
resolution of the Company, the Directors
shall be no fewer than two and no more
than 15 in number. Directors may be
appointed by the Board but hold office only
until the next AGM when they are eligible
for election by the Company’s shareholders.
The Company’s Articles provide that
Directors shall retire from office other than
employment or executive office and may
offer themselves for re-appointment by
shareholders if they have held office for a
continuous period of nine years or have not
retired at two AGMs previously. However, in
practice, and in accordance with the Code,
all Directors of the Company are subject
to annual re-election.

DIREC TORS’ REPORT CONTINUED

In addition to any power of removal
conferred by the Companies Act 2006, the
Company may by special resolution remove
any Director before the expiration of his or
her period of office.

Copies of the Directors’ service contracts
and letters of appointment are available
for inspection at the Company’s registered
office during normal office hours and by the
shareholders at each AGM.

Directors’ Powers
The business of the Company is managed by
the Board who may exercise all the powers
of the Company, subject to the provisions
of the Articles, the Companies Act 2006 and
any resolution of the Company.

Directors’ interests
Details of the Directors’ share interests, and
where applicable their connected persons,
can be found in the Directors’ Remuneration
Report on page 137.

Directors and officers insurance
The Company also maintains directors’
and officers’ liability insurance which is
reviewed annually.

Post-balance sheet events
There were no post balance sheet events
after the reporting period.

Political donations
No political donations were made during
the year. The Company intends to continue
its policy of not making such donations for
the foreseeable future.

Financial instruments
The Group’s financial risk management
objectives and policies in relation to its
financial instruments are summarised
in Note 22 on page 196.

Change of control
The following agreements contain
provisions permitting exercise of
termination or other rights in the event of
a change of control of the Company:

– The Mails Distribution Agreement

with Post Office Limited provides for
the supply of certain services to the
Group and allows for a request for
renegotiation of terms in the event of a
change of control of either party where
such change of control is likely to have
a material adverse effect on the party not
undergoing the change of control.

– The Syndicated Loan Facility with various
financial institutions provides the Group
with a revolving credit facility for general
corporate and working capital purposes.
The agreement contains provision on
a change of control of the Group for

14 8

negotiation of the continuation of the
agreement or cancellation by a lender.

– The €500 million bond issued by the

Company in July 2014 contains provisions
such that, on a change of control that is
combined with a credit rating downgrade
in certain circumstances, the noteholders
may require the Company to redeem or,
at the Company’s option, purchase the
notes for their principal amount, together
with interest accrued to (but excluding)
the date of redemption or repurchase.

The Company does not have agreements
with any director or employee that would
provide compensation for loss of office
or employment resulting from a takeover
except that provisions of the Company’s
share schemes and plans may cause
options and awards granted to employees
under such schemes and plans to vest
on a takeover.

Branches
As a global Group, our interests and
activities are held or operated through
subsidiaries, branches, joint arrangements
or associates and subject to the laws and
regulations of the relevant jurisdictions in
which they operate. More details can be
found on pages 208-213.

Greenhouse gas emissions and
risks associated
Information regarding the Company’s
greenhouse gas emissions can be found
on page 82. Details on key environmental,
social and governance (ESG) risks faced
by the business are also set out on
those pages.

Audit information
The Directors confirm that, so far as
they are aware, there is no relevant audit
information (as defined in section 418 of the
Companies Act 2006) of which the Auditor
is unaware and that each Director has taken
all reasonable steps that they ought to have
taken as a director to make themselves
aware of any relevant audit information
and to establish that the Auditor is aware
of that information.

Statement on Competition and
Markets Authority’s Statutory
Audit Services Order
The Directors confirm full compliance with
the Competition and Markets Authority’s
Statutory Audit Services Order.

By Order of the Board

Mark Amsden
Company Secretary
21 May 2019

CORPORATE GOVERNANCESTATEMENT OF DIREC TORS’ RESPONSIBILITIES

S TAT E M E N T O F D I R E C T O R S ’ R E S P O N S I B I L I T I E S
I N R E S P E C T O F T H E A N N U A L R E P O R T A N D
F I N A N C I A L S TAT E M E N T S

The Directors are responsible for
preparing the Annual Report and the
Group and parent Company financial
statements in accordance with applicable
law and regulations.

Company law requires the Directors
to prepare Group and parent Company
financial statements for each financial
year. Under that law they are required to
prepare the Group financial statements in
accordance with International Financial
Reporting Standards as adopted by the
European Union (IFRSs as adopted by the
EU) and applicable law and have elected
to prepare the parent Company financial
statements on the same basis.

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 parent Company and
of their profit or loss for that period. In
preparing each of the Group and parent
Company financial statements, the
Directors are required to:

– select suitable accounting policies and

then apply them consistently;

– make judgements and estimates that
are reasonable, relevant and reliable;
– state whether they have been prepared
in accordance with IFRSs as adopted by
the EU;

– assess the Group and parent

Company’s ability to continue as a going
concern, disclosing, as applicable,
matters related to going concern; and

– use the going concern basis of

accounting unless they either intend
to liquidate the Group or the parent
Company or to cease operations, or
have no realistic alternative but to
do so.

The Directors are responsible for
keeping adequate accounting records
that are sufficient to show and explain
the parent Company’s transactions and
disclose with reasonable accuracy at any
time the financial position of the parent
Company and enable them to ensure
that its financial statements comply
with the Companies Act 2006. They are
responsible for such internal control as
they determine is necessary to enable
the preparation of financial statements
that are free from material misstatement,
whether due to fraud or error, and have
general responsibility for taking such
steps as are reasonably open to them
to safeguard the assets of the Group
and to prevent and detect fraud and
other irregularities.

Under applicable law and regulations,
the Directors are also responsible for
preparing a Strategic Report, Directors’
Report, Directors’ Remuneration Report
and Corporate Governance Statement
that complies with that law and
those regulations.

The Directors are responsible for the
maintenance and integrity of the corporate
and financial information included on
the company’s website. Legislation in
the UK governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.

Responsibility statement of the
Directors in respect of the annual
financial report
We confirm that to the best of
our knowledge:

– the financial statements, prepared

in accordance with the applicable set
of accounting standards, give a true
and fair view of the assets, liabilities,
financial position and profit or loss of
the company and the undertakings
included in the consolidation taken
as a whole; and

– the Strategic Report includes a
fair review of the development
and performance of the business
and the position of the issuer and
the undertakings included in the
consolidation taken as a whole,
together with a description of the
principal risks and uncertainties
that they face.

We consider the Annual Report and
Financial Statements, taken as a whole,
is fair, balanced and understandable
and provides the information necessary
for shareholders to assess the Group’s
position and performance, business
model and strategy.

This responsibility statement is approved
by the Board of directors and is signed
on its behalf by:

Rico Back
Group Chief Executive Officer

Stuart Simpson
Chief Finance and Operations Officer

149

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL STATEMENTS

O U R F I N A N C I A L S E C T I O N

CONTENTS

Independent auditor’s report

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated statement of cash flows

Notes to the financial statements

1. Basis of preparation

2. Segment information

3. Revenue

4. Operating costs

5. People information

6. Net finance costs

7. Taxation

8. Earnings per share

9. Dividends

10. Retirement benefit plans

11. Acquisition of businesses

12. Property, plant and equipment

13. Goodwill

14. Intangible assets

15. Investments in associates and joint venture

16. Share-based payments

17. Non-current assets held for sale

18. Current trade and other receivables

19. Cash and cash equivalents

20. Current trade and other payables

21. Loans and borrowings

22. Financial assets and liabilities and risk management

23. Provisions

24. Share capital and reserves

25. Commitments

26. Contingent liabilities

27. Related party information

28. Related undertakings of Royal Mail Plc

Significant accounting policies

Royal Mail Plc – parent Company financial statements

1 5 0

151

156

157

158

160

161

163

164

166

167

168

169

170

175

176

185

186

188

189

190

192

193

194

196

204

205

206

207

208

214

226

FINANCIAL STATEMENTSINDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF ROYAL MAIL PLC

1 Our opinion is unmodified
We have audited the financial statements of Royal Mail plc (“the
Company”) for the 53 week period ended 31 March 2019 which
comprise the Consolidated income statement, Consolidated statement
of comprehensive income, Consolidated and parent company balance
sheet, the Consolidated and parent company statement of changes in
equity, the Consolidated statement of cash flows and the related notes,
including the Significant accounting policies on page 214 to 225.

In our opinion:

– the financial statements give a true and fair view of the state

of the Group’s and of the parent Company’s affairs as at
31 March 2019 and of the Group’s profit for the year then ended;
– the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union;

– the parent Company financial statements have been properly

prepared in accordance with UK accounting standards,
including FRS 101 Reduced Disclosure Framework; and

– the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards
the Group financial statements, Article 4 of the IAS Regulation.

Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
are described below. We believe that the audit evidence we have
obtained is a sufficient and appropriate basis for our opinion. Our
audit opinion is consistent with our report to the audit committee.

We were first appointed as auditor by the shareholders on
23 July 2015. The period of total uninterrupted engagement is for
the four financial years ended 31 March 2019. We have fulfilled our
ethical responsibilities under, and we remain independent of the
Group in accordance with, UK ethical requirements including the
FRC Ethical Standard as applied to listed public interest entities.
No non-audit services prohibited by that standard were provided.
Overview

Materiality:
group financial
statements as
a whole

Coverage

£18 million (2017-18: £20 million)

4.6% (2017-18: 5%) of normalised group profit
before tax

97.3% of normalised group profit before tax
(2017-18: 99.2% normalised group profit before tax)

Risks of material misstatement

Recurring
risks

Deferred revenue associated with
advance customer payments arising
from stamps sold

Valuation of pension scheme liabilities
and certain unquoted assets

Ofcom competition investigation
contingent liability

Recoverability of parent company’s
investment in subsidiaries and debt
due from group entities (parent
company only)

vs
2017-18
◀▶

◀▶

2 Key audit matters: our assessment of risks of material
misstatement
Key audit matters are those matters that, in our professional
judgement, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified
by us, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. We summarise
below the key audit matters in arriving at our audit opinion
above, together with our key audit procedures to address those
matters and, as required for public interest entities, our results
from those procedures. These matters were addressed, and our
results are based on procedures undertaken, in the context of,
and solely for the purpose of, our audit of the financial statements
as a whole, and in forming our opinion thereon, and consequently
are incidental to that opinion, and we do not provide a separate
opinion on these matters.

Deferred revenue associated with advance customer
payments arising from stamps sold
– £188 million (2017-18: £179 million)
– Refer to page 112 (Audit Committee Report), page 215

(accounting policy and estimates and judgements note)

The risk
Subjective estimate
Revenue is recognised on delivery of letters, not at the point
stamps are sold to customers. There can be a considerable delay,
because stamps held by customers remain valid indefinitely.
Therefore the Group estimates the value of advanced customer
payments and defers revenue to reflect the value of services still
to be performed.

As the Group is unable to track individual stamps, the calculation
and methodology of the advanced customer payments balance is
inherently subjective and is based on inputs including a third party
survey to poll independently a sample of the UK population to
assess the value of stamps held by customers at each reporting
date and Group sales data. Together with the third party, and
consistent with prior years, the Group makes adjustments that
seek to address the potential bias in the data.

As part of our risk assessment, we determined that the stamps
in the hands of the public balance has a high degree of estimation
uncertainty, with a potential range of reasonable outcomes greater
than our materiality for the financial statements as a whole, and
possibly many times that amount. The financial statements (page
215) disclose the sensitivity estimated by the Group.

Our response
Our procedures included:

– Survey specialist’s credentials: assessing the competence,
independence and integrity of the Group’s third party survey
specialist which provides the survey data, including a meeting
with them to discuss their findings.

– Our statistical expertise: with the support of our own
statistical specialists, assessing and evaluating the
methodology used by the Group’s independent third party
specialist to determine the number of stamps held at the
balance sheet date and its consistent application each year.

1 51

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF ROYAL MAIL PLC CONTINUED

– Benchmarking assumptions: challenging key assumptions

and inputs to the calculation, including survey size and
respondents, UK population demographics, constraining and
caps in place to take into account any abnormal holdings.
– Independent re-performance: testing the survey data used
in the calculation, agreeing inputs to the survey specialist’s
results, and re-performing the calculation of deferred revenue
and comparing this to the Group’s result.

– Assessing transparency: Considering the adequacy of

the Group’s disclosures in respect of the deferred revenue
adjustment, particularly the sensitivity to changes in
key assumptions.

Our results:
We found the estimate of deferred revenue to be acceptable
(2018: acceptable).

Valuation of pension scheme liabilities and certain
unquoted assets
Pension scheme liabilities and hard to value unquoted pension
scheme assets

Refer to page 112 (Audit Committee Report), page 215
(accounting policy) and page 176 (financial disclosures).

The risk
Subjective valuation
Significant estimates are made in valuing the Group’s post
retirement defined benefit plan obligations of £7,578 million
(2017-18: £7,038 million), including in particular the discount
rate, the inflation assumptions, mortality and pension
increase assumptions.

Significant estimates are made in valuing certain of the unquoted
pension schemes assets, which are hard to value and make up a
portion of unquoted pension scheme assets reported on page 181.
Small changes in the assumptions and estimates used to value
the Group’s pension obligations and these assets would have a
significant effect on the financial position of the Group.

As part of our risk assessment, we determined that the valuation
of the unquoted pension scheme assets and liabilities includes a
high degree of estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount.
The financial statements (note 10) disclose the sensitivity of the
liabilities to key assumptions estimated by the Group.

Our response
Our procedures included:

– Benchmarking assumptions: challenging key assumptions

applied in the calculation of the liability, including the discount
rate, inflation rate, mortality and pension increases with
the support of our own actuarial specialists to compare key
assumptions against market data.

– Actuary’s and fund managers’ credentials: assessing

the competence, independence and integrity of the Group’s
actuarial expert and third party expert fund managers.

– Tests of details: obtaining third party valuation confirmations
directly from fund managers. Comparing those confirmations
with unaudited net asset value statements and testing the
ability of fund managers to prepare accurate valuations by

performing a retrospective review by comparing a sample of
the net asset value statements available during the year to
audited financial statements.

– Our property valuation expertise: obtaining third party
valuations and using our internal property specialists in
assessing the valuation methodology and challenging
key assumptions.

– Assessing transparency: considering the adequacy of

the Group’s disclosures in respect of the sensitivity of the
liability to key assumptions and the accuracy of the asset
split by category.

Our results:
We found the valuation of the pension obligation and unquoted
scheme assets to be acceptable (2017-18: result acceptable).

Ofcom competition investigation contingent liability
Refer to page 112 (Audit Committee Report), page 216
(accounting policy) and page 207 (financial disclosures).

The risk
Dispute outcome
During the year Ofcom has fined Royal Mail £50.0 million,
following the result of its investigation into suspected anti-
competitive behaviour in 2014. Royal Mail has lodged an appeal
to the Competition Appeals Tribunal, and no fine is payable until
the process has been completed.

No provision is recognised and whether a fine will be paid is
currently contingent upon the outcome of the legal process.
There is significant judgement involved in determining whether
a provision is required.

Our response
Our procedures included:

– Enquiry with lawyers: inspecting relevant correspondence
and holding discussions with the Group’s in house team and
external legal advisers to understand the current position of
the legal process.

– Accounting analysis: challenging the assessment performed

by the Directors to determine whether the criteria for
recognising a provision are met at period end.

– Assessing transparency: Considering the adequacy of the
Group’s disclosures in respect of the contingent liability.

Our results:
We found the treatment of the matter as a contingent liability
and the related disclosures to be acceptable (2017-18:
disclosures acceptable)

Recoverability of parent company’s investment in
subsidiaries and debt due from Group entities
(Parent company only)

(Investments – £2,111 million; 2017-18: £2,081 million)

(Debt due from Group entities – £427 million; 2017-18:
£434 million)

Refer to page 227 (accounting policy) and page 228
(financial disclosures).

1 5 2

FINANCIAL STATEMENTSThe risk
Low risk, high value
The carrying amount of the parent company’s investments in
subsidiaries and debt due from Group entities represents 100%
(2017-18: 100%) of the company’s total assets.

Their recoverability is not at a high risk of significant misstatement.
However, due to their materiality in the context of the parent
company financial statements, this is considered to be the area that
had the greatest effect on our overall parent company audit.

Our response
Our procedures included:

– Tests of detail: Compared the carrying amount of 100% of

investments with the relevant subsidiaries’ draft balance sheet
to identify whether their net assets, being an approximation
of their minimum recoverable amount, were in excess of their
carrying amount and assessing whether those subsidiaries
have historically been profit-making.

– Assessing subsidiary audit: Assessing the audit work

performed on the subsidiary balance sheet and considering the
results of that work on the subsidiary’s profit and net assets.

– Assessing transparency: Assessing the adequacy of the
parent company’s disclosures in respect of the investment
in subsidiaries and Group debtor balance.

Our results
We found the carrying value of investments and the recoverability
of intercompany receivables to be acceptable (2017-18: acceptable).

Whilst the estimation uncertainty associated with the industrial
disease claim provision was identified as a key audit matter in the
prior year, we no longer consider it as such. Whilst the calculation
of the provision is subjective, the related circumstances are
unchanged and therefore presented fewer complexities for
our audit.

3 Our application of materiality and an overview of the scope
of our audit
Materiality for the Group financial statements as a whole was set
at £18.0 million (2017-18: £20.0 million).

Materiality is based on profit before tax, normalised for the IFRS
2 charge for Employee Free Shares, the profit on disposal of
property plant and equipment, the settlement in respect of the
RMSEPP pension scheme buy-in and the impairment charge in
respect of GSO and Postal Express. The items not included in the
benchmark were all subject to audit procedures by the Group
team, and the quantum of these items is disclosed in note 2 of the
financial statements. An additional adjustment was made in 2017-
18 for the IAS 19 pension charge due to the closure of the scheme
to future accrual in the year. Following changes to the Group’s
pension arrangements, this adjustment is no longer deemed
appropriate. Materiality represents 4.7% of the adjusted profit
before tax measure of £381 million (2017-18: 5%; £404 million).

Materiality for the parent company financial statements as a
whole was set at £3 million (2017-18: £3 million), determined with
reference to a benchmark of net assets, of which it represents 1%
(2017-18: 1%).

We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £4.5 million
(2017-18: £5.0 million) in respect of misstatements which relate
solely to classification within the balance sheet, and £0.9 million
(2017-18: £1.0 million) in respect of all other misstatements,
in addition to other identified misstatements that warranted
reporting on qualitative grounds.

Of the Group’s 20 (2017-18: 23) reporting components, we
subjected four (2017-18: four) to full scope audits for Group
purposes. The components within the scope of our work
accounted for 99.7% of revenue, 97.3% of adjusted profit
before tax and 99.7% of total assets.

The work on two (GLS and Royal Mail Property and Facilities
Solutions) of the four components (2017-18: two of the four
components) was performed by component auditors and the rest,
including the audit of the parent company, by the Group team.

The Group team instructed component auditors as to the
significant areas to be covered, including the relevant risks
detailed above and the information to be reported back. The Group
team also set the component materialities, which ranged from
£3 million to £17 million (2017-18: £6 million to £17 million), having
regard to the mix of size and risk profile of the Group across
the components.

The Group team visited the GLS component and held telephone
meetings with the RMPFS component (2017-18: visited the GLS
component and held telephone meetings with RMPFS) at the
planning, execution and finalisation stages of the audit including
to assess the audit risk and strategy. The Group team attended
the key clearance meetings. Telephone conference meetings were
also held regularly with the component auditor. At these visits and
meetings the findings were reported to the Group team in more
detail, and any further work required by the Group audit team was
then performed by the component auditor.

4 We have nothing to report on going concern
The Directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Company or
the Group or to cease their operations, and as they have concluded
that the Company’s and the Group’s financial position means that
this is realistic. They have also concluded that there are no material
uncertainties that could have cast significant doubt over their ability
to continue as a going concern for at least a year from the date of
approval of the financial statements (“the going concern period”).

Our responsibility is to conclude on the appropriateness of the
Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit
report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes
that are inconsistent with judgements that were reasonable at
the time they were made, the absence of reference to a material
uncertainty in this auditor’s report is not a guarantee that the
Group and the Company will continue in operation.

In our evaluation of the Directors’ conclusions, we considered
the inherent risks to the Group’s and Company’s business model
and analysed how those risks might affect the Group’s and
Company’s financial resources or ability to continue operations

1 5 3

over the going concern period. The risks that we considered most
likely to adversely affect the Group’s financial resources over this
period were:

– the potential impact of industrial action;
– deteriorating economic and market conditions, resulting in

a greater than projected letter decline; and
– increased competition in the UK parcels sector.

As these were risks that could potentially cast significant doubt
on the Group’s and the Company’s ability to continue as a going
concern, we considered sensitivities over the level of available
financial resources indicated by the Group’s financial forecasts
taking into account of reasonably possible (but not unrealistic)
adverse effects that could arise from these risks individually
and collectively and evaluated the achievability of the actions the
Directors consider they would take to improve the position should
the risks materialise. We also considered less predictable but
realistic second order impacts such as the impact of Brexit which
could cause economic conditions to deteriorate.

Based on this work, we are required to report to you if:

– we have anything material to add or draw attention to in relation

to the Directors’ statement in Note 1 to the Group financial
statements on the use of the going concern basis of accounting
with no material uncertainties that may cast significant doubt
over the Group and Company’s use of that basis for a period of
at least twelve months from the date of approval of the financial
statements; or

– the related statement under the Listing Rules set out on page

147 is materially inconsistent with our audit knowledge.

We have nothing to report in these respects, and we did not
identify going concern as a key audit matter.

5 We have nothing to report on the other information in the
Annual Report
The Directors are responsible for the other information presented
in the Annual Report together with the financial statements. Our
opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion
or, except as explicitly stated below, any form of assurance
conclusion thereon.

Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent
with the financial statements or our audit knowledge. Based
solely on that work we have not identified material misstatements
in the other information.

Strategic report and Directors’ report
Based solely on our work on the other information:

– we have not identified material misstatements in the Strategic

report and the Directors’ report;

– in our opinion the information given in those reports for the

financial year is consistent with the financial statements; and
– in our opinion those reports have been prepared in accordance

with the Companies Act 2006.

Directors’ Remuneration Report
In our opinion the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with the
Companies Act 2006.

Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:

– the Directors’ confirmation within the Viability Statement on

page 73 that they have carried out a robust assessment of the
principal risks facing the Group, including those that would
threaten its business model, future performance, solvency
and liquidity;

– the Principal Risks disclosures describing these risks and
explaining how they are being managed and mitigated; and
– the Directors’ explanation in the Viability Statement of how
they have assessed the prospects of the Group, over what
period they have done so and why they considered that period
to be appropriate, and their statement as to whether they
have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications
or assumptions.

Under the Listing Rules we are required to review the Viability
Statement. We have nothing to report in this respect.

Our work is limited to assessing these matters in the context
of only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent
with judgements that were reasonable at the time they were
made, the absence of anything to report on these statements
is not a guarantee as to the Group’s and Company’s longer-
term viability.

Corporate governance disclosures
We are required to report to you if:

– we have identified material inconsistencies between the

knowledge we acquired during our financial statements audit
and the Directors’ statement that they consider that the Annual
Report and financial statements taken as a whole is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy; or

– the section of the Annual Report describing the work of the
Audit & Risk Committee does not appropriately address
matters communicated by us to the Audit & Risk Committee.

We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the eleven
provisions of the UK Corporate Governance Code specified by the
Listing Rules for our review.

We have nothing to report in these respects.

1 5 4

FINANCIAL STATEMENTS6 We have nothing to report on the other matters on which
we are required to report by exception
Under the Companies Act 2006, we are required 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.

We have nothing to report in these respects.

7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 151,
the Directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing
the Group and parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the parent Company or
to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or other irregularities (see
below), or error, and to issue our opinion in an auditor’s report.
Reasonable assurance is a high level of assurance, but does
not guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud, other irregularities or error
and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.

Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably
be expected to have a material effect on the financial statements
from our general commercial and sector experience, through
discussion with the Directors and other management (as required
by auditing standards), from inspection of the Group’s regulatory
and legal correspondence and discussed with the Directors
and other management the policies and procedures regarding
compliance with laws and regulations. We communicated identified
laws and regulations throughout our team and remained alert
to any indications of non-compliance throughout the audit. This
included communication from the Group to component audit teams
of relevant laws and regulations identified at Group level.

The potential effect of these laws and regulations on the financial
statements varies considerably.

Firstly, the Group is subject to laws and regulations that directly
affect the financial statements including financial reporting
legislation (including related companies legislation), distributable
profits legislation, taxation legislation, and pension legislation
and we assessed the extent of compliance with these laws and
regulations as part of our procedures on the related financial
statement items.

Secondly, the Group is subject to many other laws and regulations
where the consequences of non-compliance could have a material
effect on amounts or disclosures in the financial statements, for
instance through the imposition of fines or litigation. We identified
the following areas as those most likely to have such an effect:
competition law, postal regulation and health and safety legislation
recognising the financial and regulated nature of the Group’s
activities and its legal form. Auditing standards limit the required
audit procedures to identify non-compliance with these laws and
regulations to enquiry of the Directors and other management and
inspection of regulatory and legal correspondence, if any. Through
these procedures, we became aware of actual or suspected non-
compliance and considered the effect of any known or possible
non-compliance in these areas as part of our procedures on the
related financial statement items. Further detail in respect of
competition law is set out in the key audit matter disclosures in
section 2 of this report.

Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some material
misstatements in the financial statements, even though we have
properly planned and performed our audit in accordance with
auditing standards. For example, the further removed non-
compliance with laws and regulations (irregularities) is from the
events and transactions reflected in the financial statements,
the less likely the inherently limited procedures required by
auditing standards would identify it. In addition, as with any audit,
there remained a higher risk of non-detection of irregularities,
as these may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We are
not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.

8 The purpose of our audit work and to whom we owe
our responsibilities
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.

Richard Pinckard (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
21 May 2019

1 5 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FINANCIAL STA TEMEN TS

CONSOLIDATED INCOME STATEMENT
CONSOLIDATED INCOME STATEMENT

FOR THE 53 WEEKS ENDED 31 MARCH 2019
FOR THE 53 WEEK S ENDED 31 MA RCH 2019
AND 52 WEEKS ENDED 25 MARCH 2018
AND 52 WE EK S EN DE D 25 MARCH 2018

Continuing operations

Revenue

Operating costs1

People costs

Distribution and conveyance costs

Infrastructure costs

Other operating costs

Operating profit before transformation costs2

Transformation costs

Operating profit after transformation costs2

Operating specific items

RMSEPP buy-in settlement

Employee Free Shares charge

Impairment/legacy/other costs

Amortisation of intangible assets in acquisitions

Operating profit

Profit on disposal of property, plant and equipment (non-operating specific item)

Earnings before interest and tax

Finance costs

Finance income

Net pension interest (non-operating specific item)

Profit before tax

Tax (charge)/credit

Profit for the year

Profit for the year attributable to:

Equity holders of the parent Company

Non-controlling interests

Earnings per share

Basic

Diluted

Notes

2/3

4/5

10(c)

Reported
53 weeks 2019
£m

Reported
52 weeks 2018
£m

10,581

(10,107)

(5,782)

(2,606)

(995)

(724)

474

(133)

341

(64)

(22)

(75)

(20)

160

175

(18)

241

(66)

175

–

10,172

(9,936)

(5,974)

(2,356)

(899)

(707)

236

(113)

123

–

(33)

(8)

(16)

137

(19)

212

258

259

(1)

17.5p

25.9p

25.7p

1 Operating costs are stated before transformation costs, RMSEPP buy-in settlement, Employee Free Shares charge, impairment/legacy/other costs and amortisation

of intangible assets in acquisitions.

2 These measures of performance are both before operating specific items.

1 5 6
1 5 6

FINANCIAL STATEMENTS

FINANCIAL STA TEMEN TS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

AT 31 MARCH 2019 AND 25 MARCH 2018
AT 31 MAR CH 2019 AN D 25 MARC H 2018

Profit for the year

Other comprehensive income/(expense) for the year from continuing operations:

Items that will not be subsequently reclassified to profit or loss:

Amounts relating to pensions accounting

Withholding tax payable on distribution of RMPP and RMSEPP surplus

Remeasurement gains of the defined benefit surplus in RMPP and RMSEPP

Remeasurement losses of the defined benefit deficit in DBCBS

Deferred tax

Items that may be subsequently reclassified to profit or loss:

Foreign exchange translation differences

Exchange differences on translation of foreign operations (GLS)

Net gain/(loss) on hedge of a net investment (€500 million bond)

Net gain on hedge of a net investment (Euro-denominated finance lease payables)

Tax on above items

Designated cash flow hedges

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

Tax on above items

Total other comprehensive income/(expense) for the year

Total comprehensive income/(expense) for the year

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

Equity holders of the parent Company

Non-controlling interests

Reported
53 weeks 2019
£m

Reported
52 weeks 2018
£m

Notes

175

258

10(c)

10(d)

239

(138)

383

(8)

(9)

(16)

(3)

(17)

(1)

227

402

–

(658)

(1,144)

–

476

(4)

(5)

–

(7)

(1)

(660)

(402)

(401)

(1)

1 5 7
1 5 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET

AT 31 MARCH 2019 AND 25 MARCH 2018
AT 31 MAR CH 2019 AN D 25 MARC H 2018

Non-current assets

Property, plant and equipment

Goodwill

Intangible assets

Investments in associates and joint venture

Financial assets

Pension escrow investments

Derivatives

RMPP/RMSEPP retirement benefit surplus – net of withholding tax payable

Other receivables

Deferred tax assets

Assets held for sale

Current assets

Inventories

Trade and other receivables

Income tax receivable

Financial assets

Derivatives

Cash and cash equivalents

Total assets

Current liabilities

Trade and other payables

Financial liabilities

Interest-bearing loans and borrowings

Obligations under finance leases

Derivatives

Income tax payable

Provisions

Non-current liabilities

Financial liabilities

Interest-bearing loans and borrowings

Obligations under finance leases

Derivatives

DBCBS retirement benefit deficit

Provisions

Other payables

Deferred tax liabilities

1 5 8
1 5 8

Reported at
31 March 2019
£m

Reported at
25 March 2018
£m

Notes

19/22

2,066

380

631

207

2,408

5,777

1,310

236

1,588

7,401

2,016

324

608

198

2,163

5,404

1,160

600

1,803

7,257

(1,883)

(1,927)

22/25

21/22

22/25

–

(37)

(3)

(8)

(58)

(1)

(59)

(3)

(33)

(59)

(1,989)

(2,082)

(431)

(88)

(2)

(72)

(104)

(41)

(55)

(793)

(436)

(110)

(4)

–

(103)

(41)

(45)

(739)

FINANCIAL STATEMENTS

FINANCIAL STA TEMEN TS

CONSOLIDATED BALANCE SHEET (CONTINUED)

AT 31 MAR CH 2019 AN D 25 MARC H 2018

Total liabilities

Net assets

Equity

Share capital

Retained earnings

Other reserves

Total equity attributable to parent Company

Reported at
31 March 2019
£m

Reported at
25 March 2018
£m

Notes

(2,782)

4,619

4,576

4,619

(2,821)

4,436

4,381

4,436

The financial statements were approved and authorised for issue by the Board of Directors on 21 May 2019 and were signed on its behalf by:

Rico Back
Group Chief Executive Officer

Stuart Simpson
Chief Finance Officer

1 5 9
1 59

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

CONSOLIDATED STATEMENT OF CHANGES IN EQUIT Y
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE 53 WEEKS ENDED 31 MARCH 2019
FOR THE 53 WEEK S ENDED 31 MA RCH 2019
AND 52 WEEKS ENDED 25 MARCH 2018
AND 52 WE EK S EN DE D 25 MARCH 2018

Reported at 26 March 2017

Profit for the year

Other comprehensive (expense)/income for the year

Total comprehensive (expense)/income for the year

Transactions with owners of the Company, recognised
directly in equity

Dividend paid to equity holders of the parent Company

Share-based payments (see Note 16)

Employee Free Shares issue1

Save As You Earn (SAYE) scheme

Long-Term Incentive Plan (LTIP)2

Deferred Share Bonus Plan (DSBP)

Employee exercise of SAYE options

Deferred tax on share-based payments

Settlement of LTIP 2014

Reported at 25 March 2018

Profit for the year

Other comprehensive income/(expense) for the year

Total comprehensive income/(expense) for the year

Transactions with owners of the Company, recognised
directly in equity

Dividend paid to equity holders of the parent Company

Reversal of put options for non-controlling interests

Share-based payments (see Note 16)

Employee Free Shares issue1

Long-Term Incentive Plan (LTIP)2

Deferred Share Bonus Plan (DSBP)

Purchase of own shares3

Employee exercise of SAYE options

Deferred tax on share-based payments

Settlement of LTIP 2015

Reported at 31 March 2019

Share
capital
£m

Retained
earnings
£m

4,940

–

259

(658)

(399)

(231)

(3)

4,381

–

175

239

414

(242)

(10)

(1)

(3)

Foreign
currency
translation
reserve
£m

Hedging
reserve
£m

Equity
holders of
the parent
£m

Non-
controlling
interests
£m

–

(3)

–

4,997

259

(660)

(401)

(231)

(3)

4,436

175

227

402

(242)

(10)

(1)

(3)

4,619

(1)

–

(1)

–

Total
equity
£m

4,998

258

(660)

(402)

(231)

(3)

4,436

175

227

402

(242)

(10)

(1)

(3)

4,619

–

(4)

–

(9)

–

4,576

1 Excludes £1 million credit (2017-18: £2 million credit) for National Insurance, recognised in the income statement, included in provisions on the balance sheet.
2 Excludes £1 million credit (2017-18: £1 million charge) for National Insurance, recognised in the income statement, included in provisions on the balance sheet.
3 Shares required for employee share schemes.

A description of the reserves in the above table is included in Note 24.

1 6 0
16 0

FINANCIAL STATEMENTS

FINANCIAL STA TEMEN TS

CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE 53 WEEKS ENDED 31 MARCH 2019
FOR THE 53 WEEK S ENDED 31 MA RCH 2019
AND 52 WEEKS ENDED 25 MARCH 2018
AND 52 WE EK S EN DE D 25 MARCH 2018

Cash flow from operating activities

Profit before tax

Adjustment for:

Net pension interest

Net finance costs

Profit on disposal of property, plant and equipment

RMSEPP buy-in settlement

Employee Free Shares charge

Impairment/legacy/other costs

Amortisation of intangible assets in acquisitions

Transformation costs

Operating profit before transformation costs1
Adjustment for:

Depreciation and amortisation

EBITDA before transformation costs1
Working capital movements

Increase in inventories

Increase in receivables

(Decrease)/increase in payables

Net decrease/(increase) in derivative assets

Decrease in provisions (non-specific items)

Pension charge to cash difference adjustment

Share-based awards (SAYE, LTIP and DSBP) charge
Cash cost of transformation operating expenditure2

Cash cost of operating specific items

Cash inflow from operations

Income tax paid

Research and development expenditure credit

Net cash inflow from operating activities

Cash flow from investing activities

Finance income received

Proceeds from disposal of property (excluding London Development Portfolio), plant and
equipment (non-operating specific item)

London Development Portfolio net proceeds (non-operating specific item)
Purchase of property, plant and equipment2

Acquisition of business interests, net of cash acquired
Purchase of intangible assets (software)2

Payment of deferred consideration in respect of prior years’ acquisitions

Net cash outflow from investing activities

Net cash (outflow)/inflow before financing activities

1 6 1
16 1

Reported
53 weeks 2019
£m

Reported
52 weeks 2018
£m

Notes

241

212

10(c)

12/14

(79)

(15)

133

474

391

865

(231)

(2)

(176)

(51)

(4)

(123)

(6)

582

(91)

493

(264)

(212)

(100)

(4)

(543)

(50)

(91)

(71)

–

113

236

341

577

(2)

(7)

(9)

–

458

(125)

(12)

975

(75)

905

(219)

(16)

(141)

(2)

(325)

580

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

FOR THE 53 WEEKS ENDED 31 MARCH 2019
FOR THE 53 WEEK S ENDED 31 MA RCH 2019
AND 52 WEEKS ENDED 25 MARCH 2018
AND 52 WE EK S EN DE D 25 MARCH 2018

Cash flow from financing activities

Finance costs paid

Acquisition of non-controlling interests

Purchase of own shares

Employee exercise of SAYE options

Payment of capital element of obligations under finance lease contracts

Cash received on sale and leasebacks

Repayment of loans and borrowings

Dividends paid to equity holders of the parent Company

Net cash outflow from financing activities

Net (decrease)/increase in cash and cash equivalents

Effect of foreign currency exchange rates on cash and cash equivalents

Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the year

1 See APMs section on page 58 for a definition of these measures.
2

Items comprise total gross investment within ‘In-year trading cash flow’ measure (see Financial Review).

Reported
53 weeks 2019
£m

Reported
52 weeks 2018
£m

Notes

(17)

(4)

(10)

(56)

(1)

(242)

(312)

(362)

(2)

600

236

(18)

–

(63)

(32)

(231)

(281)

299

600

1 6 2
16 2

FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation

This Note explains how these consolidated financial statements have been prepared, including details of; the basis of preparation on an
IFRS basis; use of non-IFRS performance measures; and the Directors’ going concern assessment.

General information
Royal Mail plc (the Company) is incorporated in the United Kingdom (UK). The consolidated financial statements are produced in accordance
with the Companies Act 2006 and applicable International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The
UK is the Company’s country of domicile.

The consolidated financial statements of the Company for the 53 weeks ended 31 March 2019 (2017-18: 52 weeks ended 25 March 2018)
comprise the Company and its subsidiaries (together referred to as ‘the Group’) and the Group’s interest in its associate undertakings and
joint venture.

The consolidated financial statements for the 53 weeks ended 31 March 2019 were authorised for issue by the Board on 21 May 2019.

Basis of preparation and accounting
The consolidated financial statements are presented in Sterling (£) as that is the currency of the primary economic environment in which
the Group operates. All values are rounded to the nearest whole £million except where otherwise indicated. The consolidated financial
statements have been prepared on an historic cost basis, except for pension assets and derivative financial instruments which are
measured at fair value.

Accounting reference date
The Group’s financial reporting year ends on the last Sunday in March and, accordingly, these financial statements are prepared for the
53 weeks ended 31 March 2019 (2017-18: 52 weeks ended 25 March 2018). GLS’ reporting year end date is 31 March each year. No
adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group’s reporting year end date of the last
Sunday in March, a full year of GLS results is consolidated into the Group.

Presentation of results and accounting policies
The Group’s significant accounting policies, including details of new and amended accounting standards adopted in the reporting year,
can be found after the Notes to the consolidated financial statements.

The consolidated financial statements and associated Notes have been prepared in accordance with IFRS as adopted by the EU, i.e. on a
‘reported’ basis. In some instances, Alternative Performance Measures (APMs) are used by the Group to provide ‘adjusted’ results. This is
because Management is of the view that these APMs provide a more meaningful basis on which to analyse business performance and is
consistent with the way that financial performance is measured by Management and reported to the Board. Details of the APMs used by the
Group are provided on page 58.

Going concern
In assessing the going concern status of the Group, the Directors are required to look forward a minimum of 12 months from the signing
date of these financial statements to ensure that there is sufficient headroom to enable the Group to pay its creditors as they fall due.

The Directors have reviewed business projections and assessed these against committed and undrawn funding facilities (£1,050 million at
31 March 2019) and other liquid resources available to the Group (cash at bank £142 million and cash equivalent investments £75 million at
31 March 2019). Cash and cash equivalents and funding facilities available to the Group are described in further detail in Notes 19
and 21.

The Directors are satisfied that these facilities, coupled with business projections, show that the Group will continue to operate for a
minimum of 12 months from the signing date of these financial statements.

The Group’s Viability Statement can be found on page 73.

1 6 3
16 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Segment information

The Group’s revenue, costs and earnings before interest and tax are segmented in this Note to align with how business performance
is managed and reported to the Royal Mail plc Board.

The Group’s operating segments are based on geographic business units whose primary services and products relate to the delivery of
parcels and letters. These segments are evaluated regularly by the Royal Mail plc Board – the Chief Operating Decision Maker (CODM)
as defined by IFRS 8 ‘Operating Segments’ – in deciding how to allocate resources and assess performance.

A key measure of segment performance is operating profit before transformation costs (used internally for the Corporate Balanced
Scorecard). This measure of performance is disclosed on an ‘adjusted’ basis, a non-IFRS measure, excluding specific items and the pension
charge to cash difference adjustment (see APMs section on page 58). This is consistent with how financial performance is measured
internally and reported to the CODM.

Segment revenues have been attributed to the respective countries based on the primary location of the service performed. Transfer prices
between segments are set at an arm’s length/fair value on the basis of charges reached through negotiation between the relevant business
units that form part of the segments.

53 weeks 2019

Adjusted

Specific items
and pension
adjustment1

Reported

Continuing operations

Revenue

People costs

Non-people costs

UKPIL
(UK operations)
£m

GLS
(Non-UK
operations)
£m

Eliminations2
£m

Group
£m

7,732

2,888

(39) 10,581

(5,045)

(667)

(2,320)

(2,044)

–

(5,712)

(4,325)

544

(133)

411

–

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating specific items

RMSEPP buy-in settlement

Employee Free Shares charge

Impairment/legacy/other costs

Amortisation of intangible assets in acquisitions

367

(133)

234

–

177

–

177

–

Operating profit

234

177

Profit on disposal of property, plant and equipment
(non-operating specific item)

Earnings before interest and tax

Finance costs

Finance income

Inter-segment interest

Net pension interest (non-operating specific item)

–

234

(17)

–

177

(1)

(9)

–

Profit before tax

229

169

–

£m

Group
£m

–

10,581

(70)

(5,782)

–

(4,325)

(70)

474

–

(133)

(70)

341

(64)

(22)

(75)

(20)

(64)

(22)

(75)

(20)

411

(251)

160

–

411

(18)

–

398

(236)

–

(157)

175

(18)

–

241

1 A net £1 million credit for specific items and a £70 million charge for the pension charge to cash difference adjustment relate to UKPIL. An £88 million charge for specific items

relates to GLS, of which £68 million relates to the impairment of the GLS US businesses.

2 Eliminations relate to intra-Group revenue from trading between UKPIL and GLS. This was due to Parcelforce Worldwide being GLS’ partner in the UK. As the amounts involved

have no impact on Group profit before tax and are not material, the prior year has not been adjusted.

1 6 4
16 4

FINANCIAL STATEMENTS

2. Segment information (continued)

52 weeks 2018

Continuing operations

Revenue

People costs

Non-people costs

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating specific items

Employee Free Shares charge

Legacy/other costs

Amortisation of intangible assets in acquisitions

Operating profit

Profit on disposal of property, plant and equipment
(non-operating specific item)

Earnings before interest and tax

Finance costs

Finance income

Inter-segment interest

Net pension interest (non-operating specific item)

Adjusted

GLS
(Non-UK
operations)
£m

UKPIL
(UK operations)
£m

Group
£m

7,615

(4,908)

(2,204)

503

(113)

390

–

390

–

390

(18)

–

2,557

10,172

(608)

(1,758)

191

–

191

–

191

–

191

(1)

(5)

–

(5,516)

(3,962)

694

(113)

581

–

581

–

581

(19)

–

Profit before tax

378

187

565

Specific
items and
pension
adjustment3

£m

–

(458)

–

(458)

–

(458)

(33)

(8)

(16)

(515)

(444)

–

(353)

Reported

Group
£m

10,172

(5,974)

(3,962)

236

(113)

123

(33)

(8)

(16)

137

(19)

–

212

3 A net £119 million credit for specific items and a £458 million charge for the pension charge to cash difference adjustment relate to UKPIL. A £14 million charge for specific items

relates to GLS.

The depreciation and amortisation below are included within ‘operating profit before transformation costs’ in the income statement.

The non-current assets below exclude financial assets, retirement benefit surplus and deferred tax and are included within non-current
assets on the balance sheet.

53 weeks 2019

Depreciation

Amortisation of intangible assets (mainly software)4

UKPIL
(UK operations)
£m

GLS
(Non-UK
Operations)
£m

(213)

(121)

(45)

(32)

Total
£m

(258)

(153)

Non-current assets

2,103

991

3,094

1 6 5
16 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Segment information (continued)

52 weeks 2018

Depreciation

Amortisation of intangible assets (mainly software)4

UKPIL
(UK
operations)
£m

GLS
(Non-UK
Operations)
£m

(207)

(83)

(39)

(28)

Total
£m

(246)

(111)

Non-current assets

2,160

806

2,966

Includes £20 million (2017-18: £16 million) presented as an operating specific item in the income statement.

3. Revenue

This disclosure provides a disaggregation of Group revenue by revenue type. Revenue is recognised net of Value Added Tax and
principally relates to the rendering of services derived from contracts with customers.

53 weeks 2019

Letters and other revenue

Marketing mail

Parcels

Total

52 weeks 2018

Letters and other revenue

Marketing mail

Parcels

Total

UKPIL
£m

2,963

1,012

3,757

7,732

Intra-
Group
revenue
£m

–

(39)

GLS
£m

–

2,557

GLS
£m

–

2,888

UKPIL
£m

3,051

1,101

3,463

7,615

Group
£m

2,963

1,012

6,606

10,581

Group
£m

3,051

1,101

6,020

10,172

During the year, around £280 million (2017-18: £290 million) revenue was recognised which was previously held as a deferred revenue
balance at 25 March 2018 (2017-18: 26 March 2017). This balance mainly relates to stamps held and not yet used by customers and is
recognised as ‘advance customer payments’ within ‘current trade and other payables’ (see Note 20).

1 6 6
16 6

FINANCIAL STATEMENTS

4. Operating costs

This analysis of operating costs in the income statement includes amounts that require either separate disclosure under IFRS or have
been disclosed because of their nature and/or materiality.

Operating profit before transformation costs is stated after charging the following operating costs:

People costs (see Note 5)

Distribution and conveyance costs

Charges from overseas postal administrations

Fuel costs

Operating lease costs – vehicles

Short-term vehicle hire

Infrastructure costs

Depreciation, amortisation and impairment

Charge for property, plant and equipment (see Note 12)

Charge for intangible assets (see Note 14)1

53 weeks
2019
£m

52 weeks
2018
£m

(5,782)

(5,974)

(348)

(156)

(25)

(33)

(391)

(258)

(133)

(342)

(147)

(21)

(28)

(341)

(246)

(95)

1 Excludes £20 million (2017-18: £16 million) amortisation of intangible assets in acquisitions, presented as an operating specific item in the income statement.

Other operating costs

Post Office Limited charges

Inventory expensed

Operating lease costs - property, plant and equipment

53 weeks
2019
£m

52 weeks
2018
£m

(354)

(34)

(165)

(341)

(35)

(152)

Regulatory body costs
The following disclosure is relevant in understanding the extent of ongoing compliance costs in relation to the regulation of the Group.

Ofcom administrative charge

Citizens Advice/Consumer Council for Northern Ireland

Total

53 weeks
2019
£m

52 weeks
2018
£m

(3)

(2)

(5)

(3)

(2)

(5)

1 6 7
167

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. Operating costs (continued)
Statutory audit costs
Disclosure of statutory audit costs is a requirement of the Companies Act 2006.

Auditor’s fees

Audit of Group statutory financial statements

Other fees to Auditor:

Review of the interim financial information

Regulatory audit

Other assurance

Total

53 weeks
2019
£000

52 weeks
2018
£000

(2,384)

(1,946)

(215)

(125)

–

(200)

(125)

(72)

(2,724)

(2,343)

The 2018-19 fees relate to the services of the Group’s appointed auditor KPMG LLP which in addition to the above amounts, was paid by the
respective Trustees, £165,000 for the audit of the Royal Mail Pension Plan (2017-18: £98,000) and £35,000 for the audit of the Royal Mail
Defined Contribution Plan (RMDCP) (2017-18: £31,000).

5. People information

People costs account for 57 per cent (2017-18: 60 per cent) of total Group operating costs (before transformation costs and specific
items). The analysis below provides details of people costs and numbers as well as specific disclosures in relation to Directors’
remuneration. Further details on Directors’ remuneration paid can be found in the Directors’ Remuneration Report.

People costs

Wages and salaries

UKPIL

GLS

Pensions (see Note 10)

Defined benefit UK

Defined contribution UK

Defined benefit and defined contribution Pension Salary Exchange (PSE) UK

GLS

Social security

UKPIL

GLS

Total people costs

Defined benefit pension plan rates:

Income statement – RMPP 6 days to 31 March 2018

– DBCBS from 1 April 2018

Cash flow

– RMPP 6 days to 31 March 2018

– DBCBS from 1 April 2018

Defined contribution pension plan average rate:
Income statement and cash flow1

53 weeks
2019
£m

(4,666)

(4,086)

(580)

(635)

(374)

(82)

(172)

(7)

(481)

(401)

(80)

52 weeks
2018
£m

(4,506)

(3,976)

(530)

(1,006)

(791)

(57)

(151)

(7)

(462)

(391)

(71)

(5,782)

(5,974)

41.0%

18.9%

17.1%

15.6%

41.1%

–

17.1%

–

8.0%

6.3%

1 Employer contribution rates are two per cent for employees in the entry level category and ten per cent for the majority of those in the standard level category. For the remaining

standard level employees, the employer contribution is either eight or nine per cent, depending on the employees’ selected contribution rate.

1 6 8
16 8

FINANCIAL STATEMENTS

5. People information (continued)
People numbers
The number of people employed, expressed as both full-time equivalents and headcount, during the reporting year was as follows:

Full-time equivalents2

Headcount

Year end

Average

Year end

Average

53 weeks
2019

52 weeks
2018

53 weeks
2019

52 weeks
2018

53 weeks
2019

52 weeks
2018

53 weeks
2019

52 weeks
2018

147,148

147,985

149,212

149,281

142,757

141,162

141,792

141,034

14,969

13,866

14,954

13,694

19,221

17,955

19,198

17,812

162,117

161,851

164,166

162,975

161,978

159,117

160,990

158,846

UKPIL

GLS

Total

2 These people numbers relate to the total number of paid hours (including part-time, full-time and agency hours) divided by the number of standard full-time working hours in the

same year.

Directors’ remuneration

Directors’ remuneration3

Amounts earned under Long-Term Incentive Plans (LTIP)

Number of Directors accruing benefits under defined benefit plans

Number of Directors accruing benefits under defined contribution plans

53 weeks
2019
£000

52 weeks
2018
£000

(2,300)

(3,257)

–

(356)

–

3 These amounts include any cash supplements received in lieu of pension. Details of the highest paid Director are included in the Directors’ Remuneration Report.

6. Net finance costs

This Note provides details of interest payable on loans and finance lease obligations and interest received from investments and loans.
This analysis excludes net pension interest which is a non-cash item and is derived to comply with the requirements of the accounting
standard IAS 19 ‘Employee Benefits’.

Unwinding of discount relating to industrial diseases claims provision

Interest payable on financial liabilities

Syndicated bank loan facility

Loans and borrowings

Unused facility fees

Arrangement fees

€500 million bond – 2.375% Senior Fixed Rate Notes due July 2024

Finance leases

Capitalisation of borrowing costs on specific qualifying assets

Other finance costs

Finance costs

Finance income – interest receivable on financial assets

Net finance costs

1 6 9
169

53 weeks
2019
£m

52 weeks
2018
£m

(2)

(16)

–

(2)

(1)

(11)

(3)

(1)

(18)

(13)

(2)

(17)

–

(2)

(1)

(11)

(4)

(2)

(19)

(16)

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Taxation

This Note provides details about current tax on profit and deferred tax relating to the impact of past events on expected future tax.
The Note also provides details about the tax impact of specific items.

Tax (charged)/credited in the income statement

Current income tax:

Current UK income tax charge

Foreign tax

Current income tax charge

Amounts over-provided in previous years

Total current income tax charge

Deferred income tax:

Effect of change in tax rates

Relating to origination and reversal of temporary differences

Amounts (under)/over-provided in previous years

Total deferred income tax (charge)/credit

Tax (charge)/credit in the consolidated income statement

Tax credited/(charged) to other comprehensive income

Current tax:

Tax credit on foreign currency translation

Deferred tax:

Tax credit/(charge) in relation to remeasurement gains of the defined benefit pension schemes

Tax credit in relation to the change in manner of recovery of the defined benefit pension surplus

Tax credit/(charge) on revaluation of cash flow hedges

Total deferred income tax credit

Total tax credit in the consolidated statement of other comprehensive income

53 weeks
2019
£m

52 weeks
2018
£m

(21)

(48)

(69)

(64)

–

(5)

(2)

(66)

–

(45)

(51)

(96)

–

(96)

(4)

133

142

–

(2)

478

(1)

475

In addition to the amount charged to the income statement and other comprehensive income, the following amount relating to tax has
been recognised directly in equity:

Deferred tax:

Change in estimated excess tax deductions related to share-based payments

Total deferred income tax (charge)/credit recognised directly in equity

53 weeks
2019
£m

52 weeks
2018
£m

(1)

1 7 0
17 0

FINANCIAL STATEMENTS

7. Taxation (continued)
Reconciliation of the total tax (charge)/credit
A reconciliation of the tax (charge)/credit in the income statement and the UK rate of corporation tax applied to accounting profit for the 53
weeks ended 31 March 2019 and 52 weeks ended 25 March 2018 is shown below.

Profit before tax

At UK statutory rate of corporation tax of 19% (2017-18: 19%)

Effect of different tax rates on non-UK profits and losses

Tax under-provided in previous years1

Non-deductible expenses

Impairment of goodwill

Tax reliefs and incentives (including previous years)

Tax effect of property disposals (including previous years)

Tax effect of closure of RMPP to future accrual

Net pension interest credit

Buy-in insurance policy for the RMSEPP

Uncertain current tax positions

Net increase in tax charge resulting from non-recognition of certain deferred tax assets

Share-based payments - deferred tax-only adjustments

Effect of change in tax rates

Tax (charge)/credit in the income statement

Tax on specific items and pension adjustment

Continuing operations

Total tax credit on specific items and pension adjustment

53 weeks
2019
£m

52 weeks
2018
£m

241

212

(46)

(3)

(7)

(13)

(2)

(12)

(8)

(5)

–

(66)

(40)

(7)

–

(7)

–

(2)

(3)

(4)

53 weeks
2019
£m

52 weeks
2018
£m

157

A tax credit on certain specific items and the pension adjustment of £27 million (2017-18: £157 million) has been recognised at statutory
rates. In 2017-18, this credit amounted to £81 million along with certain tax-only adjustments totalling £76 million credit, for which no
equivalent material adjustments were recognised in 2018-19.

The 2017-18 tax-only adjustments comprise the impact of the closure of the RMPP to future accrual of £78 million credit; the impact of
property transactions of £2 million credit; and the impact of changes in tax law of £4 million charge.

1 The tax under-provided of £3 million (2017-18: £nil) is different to the total tax underprovided in the income statement of £nil (2017-18: £13 million over-provided) as certain

items have been disaggregated, specifically, tax overprovided of £2 million (2017-18: £13 million over-provided) relating to tax reliefs and incentives and tax over-provided of £1
million (2017-18: £nil) relating to the tax effect of property disposals.

1 7 1
17 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Taxation (continued)
Deferred tax

Deferred tax by balance sheet category
53 weeks 2019

Liabilities

Accelerated capital allowances

Pensions temporary differences

Employee share schemes

Intangible assets

Hedging derivatives temporary differences

Jurisdictional right of offset

Deferred tax liabilities

Assets

Deferred capital allowances

Pensions temporary differences

Provisions and other

Losses available for offset against
future taxable income

R&D expenditure credit

Jurisdictional right of offset

Deferred tax assets

At
26 March
2018
£m

(Charged)/
credited to
income
statement
£m

(Charged)/
credited to
other
comprehensive
income
£m

(Charged)/
credited
directly to
equity
£m

Acquisition of
subsidiaries
£m

At
31 March
2019
£m

(3)

(1)

(48)

(2)

(55)

(45)

–

(10)

–

(8)

(1)

(13)

(10)

–

(10)

–

(1)

–

(1)

–

(1)

–

(3)

–

(15)

–

(18)

–

(18)

–

(6)

–

(1)

(57)

(1)

(65)

(55)

(10)

(1)

(18)

Net deferred tax asset

(2)

1 7 2
17 2

FINANCIAL STATEMENTS

7. Taxation (continued)

Deferred tax by balance sheet category
52 weeks 2018

Liabilities

Accelerated capital allowances

Pensions temporary differences

Employee share schemes

Intangible assets

Hedging derivatives temporary differences

Jurisdictional right of offset

Deferred tax liabilities

Assets

Deferred capital allowances

Provisions and other

Losses available for offset against future
taxable income

R&D expenditure credit

Jurisdictional right of offset

Deferred tax assets

At
27 March
2017
£m

(Charged)/
credited to
income
statement
£m

(Charged)/
credited to
other
compre-
hensive
income
£m

(Charged)/
credited
directly to
equity
£m

Acquisition
of
subsidiaries
£m

Jurisdictional
right of
offset
£m

R&D
credit
£m

At
25 March
2018
£m

(16)

(647)

(11)

(36)

(1)

(711)

108

(603)

123

(108)

170

(9)

–

179

–

179

(23)

(1)

(14)

(37)

–

(37)

–

476

–

(1)

475

–

475

–

(3)

–

(3)

–

(3)

–

(3)

–

(4)

–

(4)

–

(98)

–

(3)

(1)

(48)

(2)

(55)

(45)

(10)

Net deferred tax liability

(588)

142

475

Deferred tax assets and liabilities are offset within the same jurisdiction where the Group has a legally enforceable right to do so.
The following is the analysis of the deferred tax balances (after offset) for balance sheet presentation purposes.

Deferred tax – balance sheet presentation

Liabilities

GLS group

Deferred tax liabilities

Assets

GLS group

Net UK position

Deferred tax assets

Net deferred tax asset

At 31
March
2019
£m

At 25
March
2018
£m

(55)

(45)

The deferred tax position shows a decreased overall asset in the reporting year to 31 March 2019. This decrease in the net asset is primarily
resulting from the utilisation of tax losses and capital allowances and the recognition of deferred tax liabilities related to the acquisition
intangibles for Dicom Canada.

1 7 3
17 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Taxation (continued)
GLS has deferred tax assets and liabilities in various jurisdictions which cannot be offset against one another. The main elements of the
liability relate to goodwill and intangible assets in GLS Germany, for which the Group has already taken tax deductions, and intangible
assets in relation to acquisitions in Canada and Spain. The deferred tax liability related to intangible assets recognised on the acquisition
of Golden State Overnight Delivery Services Inc and Postal Express Inc has been written down in line with the US impairment.

At 31 March 2019, the Group had unrecognised tax losses and temporary differences of £333 million (2017-18: £327 million) with a tax
value of £85 million (2017-18: £79 million). Unrecognised tax losses comprises £63 million (2017-18: £55 million) relating to losses of
£215 million (2017-18: £188 million) in GLS, that are available for offset against future profits if generated in the relevant GLS companies,
and £9 million (2017-18: £15 million) in relation to £51 million (2017-18: £90 million) of historical UK non-trading and capital losses carried
forward. Other unrecognised amounts comprises £5 million (2017-18: £nil) relating to GLS other temporary differences of £18 million
(2017-18: £ nil) and £8 million (2017-18: £8 million) relating to UK other temporary differences of £49 million (2017-18: £49 million). The
Group has not recognised these deferred tax assets on the basis that it is not sufficiently certain of its capacity to utilise them in the future.

The Group also has temporary differences in respect of £191 million (2017-18: £202 million) of capital losses, the tax effect of which
is £32 million (2017-18: £34 million) in respect of assets previously qualifying for industrial buildings allowances. Further temporary
differences exist in relation to £421 million (2017-18: £406 million) of gains for which rollover relief has been claimed, the tax effect of which
is £72 million (2017-18: £69 million). No tax liability would be expected to crystallise on the basis that, were the assets (into which the gains
have been rolled over) to be sold at their residual values, no capital gain would arise.

Changes to UK corporation tax rate
The UK corporation tax rate is 19 per cent and will reduce to 17 per cent on 1 April 2020. In accordance with accounting standards, the effect
of this rate reduction on deferred tax balances has been reflected in these financial statements, dependent upon when temporary
differences are expected to reverse.

1 7 4
174

FINANCIAL STATEMENTS

8. Earnings per share

This Note explains the calculation of the Group’s earnings per share. The adjusted earnings per share (a non-IFRS measure) is a key
indicator used by Management to assess earnings performance.

Attributable to equity holders of the parent Company

Profit for the year (£million)

Weighted average number of shares issued (million)

Basic earnings per share (pence)

Diluted earnings per share (pence)

53 weeks 2019

Specific
items and
pension
adjustment1

Adjusted

Reported

52 weeks 2018

Specific
items and
pension
adjustment1

(130)

n/a

305

1,000

30.5

259

999

25.9

25.7

(196)

n/a

Reported

175

1,000

17.5

Adjusted

455

999

45.5

45.2

1 Further details of the specific items and pension adjustment total can be found in the Financial Review on page 40 to 63.

The diluted earnings per share for the year ended 31 March 2019 is based on a weighted average number of shares of 1,000,375,291 (2017-
18: 1,005,852,049) to take account of the potential issue of 445,534 ordinary shares resulting from the Deferred Share Bonus Plans (DSBP)
for certain senior management and 88 ordinary shares resulting from the Save As You Earn (SAYE) scheme (see Note 16).

The 70,331 shares held in an Employee Benefit Trust for the settlement of options and awards to current and former employees are treated
as treasury shares for accounting purposes (see Note 24). The Company, however, does not hold any shares in treasury.

9. Dividends

This Note provides details on the amount of dividends paid to equity holders of the parent Company during the year. Details are also
provided on the amount of dividends per share which have been paid and proposed.

Dividends on ordinary shares

Final dividends paid

Interim dividends paid

Total dividends paid

53 weeks
2019
Pence per share

52 weeks
2018
Pence per share

16.3

8.0

24.3

15.6

7.7

23.3

53 weeks
2019
£m

162

242

52 weeks
2018
£m

154

231

In addition to the above dividends paid, the Directors are proposing a final dividend for the year ended 31 March 2019 of 17.0 pence per
share, equivalent to £170 million. This dividend will be paid to shareholders on 4 September 2019 subject to approval at the AGM to be held
on 18 July 2019.

1 7 5
17 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Retirement benefit plans

This Note explains the pension plans in the Group and sets out the accounting, surplus valuation, key assumptions and sensitivities in
accordance with IAS 19 ‘Employee Benefits’. In applying IAS 19, the Group has recognised an RMPP/RMSEPP pension asset of £2,408
million at 31 March 2019, compared with £2,163 million at 25 March 2018, and a DBCBS pension liability of £72 million at 31 March 2019
(at 25 March 2018: £nil).

Summary pension information

Ongoing UK pension service costs

UK defined benefit plans (including administration costs)1

UK defined contribution plan

UK defined benefit and defined contribution plans’ Pension Salary Exchange (PSE) employer contributions2

Total UK ongoing pension service costs

GLS pension costs accounted for on a defined contribution basis

Total Group ongoing pension service costs

Cash flows relating to ongoing pension service costs

UK defined benefit plans’ employer contributions3

Defined contribution plans’ employer contributions

UK defined benefit and defined contribution plans’ PSE employer contributions

Total Group cash flows relating to ongoing pension service costs

RMSEPP deficit correction payments

Pension-related accruals (timing difference)

Pension charge to cash difference adjustment

UK pension plans – active members

UK defined benefit plan

UK defined contribution plan

Total

53 weeks
2019
£m

52 weeks
2018
£m

(374)

(82)

(172)

(628)

(7)

(791)

(57)

(151)

(999)

(7)

(635)

(1,006)

(304)

(89)

(172)

(565)

(2)

(70)

(321)

(64)

(151)

(536)

(10)

(2)

(458)

At 31 March
2019
‘000

At 25 March
2018
‘000

134

130

1 These pension service costs are charged to the income statement. They represent the cost (as a percentage of pensionable payroll – 41.0 per cent (2017-18: 41.1 per cent) for the
RMPP until 31 March 2018 and 18.9 per cent for the DBCBS from 1 April 2018) of the increase in the defined benefit obligation due to members earning one more year’s worth of
pension benefits. They are calculated in accordance with IAS 19 and are based on market yields (high quality corporate bonds and inflation) at the beginning of the reporting year.
Pensions administration costs for the RMPP of £8 million (2017-18: £7 million) and the DBCBS of £2 million (2017-18: £nil) continue to be included within the Group’s ongoing UK
pension service costs.

2 Eligible employees who are enrolled into PSE opt out of making employee contributions to their pension and the Group makes additional contributions in return for a reduction in

basic pay.

3 The employer contribution cash flow rate forms part of the payroll expense and is paid in respect of the RMPP (17.1 per cent to 31 March 2018, and the prior period) and the
DBCBS (15.6 per cent from 1 April 2018). This includes payments into RMPP pension escrow investments. The contribution rate for the RMPP is set following each actuarial
funding valuation, usually every three years. These actuarial valuations are required to be carried out on assumptions determined by the Trustee and agreed by Royal Mail,
and will be required in respect of the DBCBS.

1 7 6
176

FINANCIAL STATEMENTS

10. Retirement benefit plans (continued)
In the period, the Group operated the following plans.

UK Defined Contribution plan
Royal Mail Group Limited, the Company’s main operating subsidiary, operates the Royal Mail Defined Contribution Plan (RMDCP). This plan
was launched in April 2009 and is open to employees who joined the Group from 31 March 2008, following closure of the RMPP to new
members. Improvements to the RMDCP were made during the year and further details can be found in the Financial Review.

Ongoing UK defined contribution plan costs have increased from £93 million in 2017-18 to £135 million (including £54 million PSE costs).
This is mainly due to the continued increase in plan membership and an increase in the average employer’s contribution rate from 6.3 per
cent in 2017-18 to 8.0 per cent in 2018-19 following an increase in Company contributions from 1 April 2018.

UK Defined Benefit plans
Royal Mail Pension Plan (RMPP)
The RMPP is funded by the payment of contributions to separate trustee administered funds. The RMPP includes sections A, B and C, each
with different terms and conditions.

– Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
– Section B is for members (or beneficiaries of members) who joined on or after 1 December 1971 and before 1 April 1987, or for members

of Section A who chose to receive Section B benefits; and

– Section C is for members (or beneficiaries of members) who joined on or after 1 April 1987 and before 1 April 2008.

Section A/B members built up a pension of 1/80th of pensionable salary plus a tax-free lump sum of 3/80ths of pensionable salary for each
year of pensionable service, until 31 March 2018.

Section C members built up a pension of 1/60th of pensionable salary for each year of pensionable service, until 31 March 2018. If they want
to take a tax-free lump sum at retirement they do so by exchanging some of their pension.

From 1 April 2018, Section A, B and C members began building up benefits on a DBCBS basis.

Royal Mail Pensions Trustees Limited acts as the corporate Trustee to the RMPP. Within the Trustee, there is a Trustee Board of nine
nominated Trustee Directors. The Trustee Board is supported by an executive team of pension management professionals. They provide
day-to-day plan management, advise the Trustee on its responsibilities and ensure that decisions are fully implemented.

The Trustee has several responsibilities. It must always act in the best interests of all RMPP beneficiaries – including active members,
deferred members, pensioners and beneficiaries. Specifically, it must pay all benefits as they fall due under the Trust Deed and Rules.
The Trustee is responsible for:

– monitoring the RMPP – to help protect benefits, the Trustee monitors the financial strength of the participating employers;
– investing contributions – the Trustee invests the member and employer contributions in a mix of equities, bonds, property and other

investments including derivatives. It holds the contributions and investments on behalf of the members; and

– keeping members informed – the Trustee sends active members an annual benefit illustration together with a summary of the RMPP’s

annual report and accounts.

One week of RMPP4 service contributions was paid during 2018-19 up to when the scheme closed on 31 March 2018. This payment was paid
at 17.1 per cent in accordance with the 8 May 2017 Schedule of Contributions. As the March 2015 valuation continued to show the scheme in
surplus, no deficit correction payments are expected to be made.

An agreement has been made with the Pension Trustee to ringfence certain employer contributions in an escrow arrangement in order
to give the Trustee and the Company more flexibility over how these assets are best used for the benefit of members in future. These
contributions are not considered to be Plan assets as the Trustee does not have control over the assets.

Defined Benefit Cash Balance Scheme (DBCBS)
A new Defined Benefit Cash Balance Scheme (DBCBS) has been put in place from 1 April 2018. This is a transitional arrangement until the
proposed Collective Defined Contribution (CDC) scheme can be established. Section F of the RMPP is for RMDCP members who became
eligible to join the RMPP and build up DBCBS benefits from 1 April 2018. RMPP section A,B and C members accrue benefits under the
DBCBS from 1 April 2018.

The Company signed a new Schedule of Contributions on 27 March 2018. This covers the period of five years from the date of certification of
the schedule i.e. until March 2023. In accordance with this schedule, the Company is required to make payments totalling 15.6 per cent per
annum of pensionable payroll in respect of DBCBS.

4 Any references to the RMPP relate to the scheme’s defined benefit pension liabilities built up to 31 March 2018. Members built up DBCBS benefits from 1 April 2018.

1 7 7
17 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Retirement benefit plans (continued)
Royal Mail Senior Executives Pension Plan (RMSEPP)
Royal Mail Group Limited also contributes to a smaller defined benefit plan for executives: RMSEPP. This closed in December 2012 to future
accrual, therefore the Group makes no regular future service contributions. In accordance with the Schedule of Contributions agreed as part
of the 2018 triennial valuation, a final deficit payment of £1 million was paid in 2018-19, together with £1 million in respect of death-in-
service lump sum benefits and administration expenses. In accordance with the new Schedule of Contributions signed on 25 March 2019,
£500,000 per annum is due to be paid for the period 1 April 2019 to 31 March 2025.

On 21 September 2018, the RMSEPP Trustees purchased a further buy-in insurance policy in respect of all remaining pensioners and deferred
members. This insurance policy, alongside the previous insurance policy purchased in April 2016, means that substantially all the liabilities of
the scheme are now covered by insurance policies. As with the previous insurance policy purchased in April 2016, this policy is considered an
asset of the RMSEPP and does not confer any rights to individual members. This insurance policy includes provisions for the possible issue of
individual policies in respect of individual members at the future discretion of the RMSEPP Trustees. After consideration of the facts outlined
above, Management has concluded that the purchase of this further insurance policy should be treated as a settlement. The difference between
the IAS 19 surplus before and after the transaction has resulted in £64 million being charged to the income statement as an operating specific
item.

All benefit payments due from the RMSEPP remain unchanged. The insurance policy exactly matches the value and timing of the benefits
payable under the RMSEPP (for the remaining pensioners and deferred members) and the fair value is deemed to be the present value of the
related obligation. The total value5 of the buy-in annuity policies in place is £335 million (March 2018: £148 million) and is included as a pension
asset and a pension liability at 31 March 2019.

A liability of £2 million (2017-18: £2 million) has been recognised for future payment of pension benefits to a past Director.

In 2019-20 the Company expects to continue to contribute around £400 million in respect of all UK pension schemes.

Accounting and actuarial funding surplus position (RMPP, RMSEPP and DBCBS)
In addition to the accounting valuations calculated in accordance with IAS 19, actuarial funding valuations are carried out every three years by
actuaries commissioned by trustees for purposes of calculating contributions and funding requirements. The main difference between the
accounting and actuarial funding valuations is that different rates are used to discount the projected scheme liabilities. The accounting valuation
uses yields on high quality corporate bonds and the actuarial funding valuation uses gilt yields. As the accounting discount rate is higher than
the actuarial funding discount rate, this leads to a lower computed liability. The triennial valuation of the RMPP at 31 March 2018 is still in
progress. The actuarial funding position at that date will not be known until the actuarial valuation has been completed, with the results being
very sensitive to the assumptions adopted at that date. However, based on a set of assumptions which we believe could form the basis for the
March 2018 valuation and then rolled forward, the RMPP actuarial surplus at 31 March 2019 was estimated to be around £50 million (at 31
March 2018: £100 million). The accounting liabilities have been based on the preliminary results of the 31 March 2018 valuation rolled forward,
and use certain assumptions that are expected to be consistent with funding valuation once finalised. As the actuarial funding figures are based
on estimates, these are subject to change once the funding valuation has been finalised. The full funding valuation is expected to be concluded
by the statutory deadline of 30 June 2019. The DBCBS will be subject to triennial actuarial valuations in the future. Below is a summary of the
combined plans’ assets and liabilities on an accounting (IAS 19) and actuarial funding basis.

DBCBS

Accounting
(IAS 19)

DBCBS

Actuarial
funding

RMPP and RMSEPP
Accounting (IAS 19)

RMPP and RMSEPP
Actuarial funding

At 31 March
2019
£m

At 25 March
2018
£m

At 31 March
2019
£m

At 31March
2018
£m

Fair value of plans’ assets (10(b) below)6

Present value of plans’ liabilities

Surplus in plans (pre withholding tax payable)7

Withholding tax payable

(Deficit)/surplus in plans8

402

(474)

(72)

n/a

(72)

402

(393)

n/a

10,803

10,361

10,877

(7,097)

3,706

(1,298)

2,408

(7,038)

(10,818)

3,323

(1,160)

2,163

n/a

10,461

(10,318)

143

n/a

143

There is no element of the present value of the plans’ liabilities above that arises from plans that are wholly unfunded.

In accordance with IAS 19.

5
6 Difference between accounting and actuarial funding asset fair values on 25 and 31 March 2018 arises from the different year end dates used for the valuation of the assets, and

in both years due to the valuation of the RMSEPP buy-in assets under both methods.

7 Any reference to a withholding tax adjustment relates to withholding tax payable on distribution of a pension surplus.
8 On an actuarial funding basis, the excess of DBCBS assets over liabilities is as a result of the risk reserve.

1 7 8
17 8

FINANCIAL STATEMENTS

10. Retirement benefit plans (continued)
Having taken legal advice with regard to the rights of the Company under the trust deeds and rules, the Directors do believe there is a right
to recognise a pension surplus on an accounting basis. The Directors do not believe that the surplus in the RMPP on an accounting basis will
result in a surplus on an actuarial funding basis. However, the Directors are required to account for the plans based on the Company’s legal
right to benefit from a surplus, using long-term actuarial funding assumptions current at the reporting date, as required by IFRS. As the
Group has a legal right to benefit from a surplus in the RMPP and RMSEPP, under IAS 19 and IFRIC 14, it must recognise the economic
benefit it considers to arise from either a reduction to its future contributions or a refund of the surplus. This is a technical adjustment made
on an accounting basis. There is no cash benefit from the surplus.

The legal right to benefit from a surplus has not changed as a result of the Company’s decision to close the RMPP from 31 March 2018.
However, since this date, any surplus is no longer considered to be recoverable as a reduction to future employer contributions. Therefore,
at 31 March 2019 the surplus is considered to be available as a refund. This surplus is presented net of a withholding tax adjustment of £1,294
million (at 25 March 2018: £1,134 million) on the balance sheet, which represents the tax that would be withheld on the surplus amount.

Included in the IAS 19 figures in the table above is an RMSEPP surplus at 31 March 2019 of £10 million (pre withholding tax payable)
(at 25 March 2018: £73 million surplus).

As the RMSEPP is closed to future accrual, the surplus is considered to be available as a refund as per IFRIC 14 and, as such, is shown net
of a withholding tax adjustment of £4 million (at 25 March 2018: £26 million) on the balance sheet which represents the tax that would be
withheld on the surplus amount.
Guaranteed Minimum Pensions (GMP)
The High Court has recently ruled that pension schemes have to address the issue of unequal Guaranteed Minimum Pensions (GMP). From
Royal Mail’s perspective, the transfer of RMPP’s historical pension liabilities to HM Government in 2012, in accordance with the Postal
Services Act 2011, included all of the Plan’s GMP liabilities. The requirement to remove the inequality in former RMPP benefits deriving from
GMPs therefore rests with Government.

The RMSEPP, however, does still have its GMP liabilities and will be required to take action to equalise benefits. The Trustees’ actuaries
estimate that the cost of GMP equalisation will be less than £0.5 million. This is still subject to further legal clarification on exact
equalisation requirements, and also to the actual equalisation approach adopted.

1 7 9
17 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Retirement benefit plans (continued)
The following disclosures relate to the major assumptions, sensitivities, assets and liabilities in the RMPP, RMSEPP and DBCBS assumptions.

a) Major long-term assumptions used for accounting (IAS 19) purposes – RMPP, RMSEPP and DBCBS
IAS 19 assumptions will be derived separately for the legacy RMPP and DBCBS, in particular taking into account the different weighted
durations of the future benefit payments. The RMSEPP will continue in line with legacy RMPP benefits.

The major assumptions used to calculate the accounting position of the pension plans are as follows:

Retail Price Index (RPI)

Consumer Price Index (CPI)

Discount rate – RMPP/RMSEPP9

– nominal

– real (nominal less RPI)

Discount rate – DBCBS10

– nominal

– real (nominal less RPI)

Rate of increase in pensionable salaries11

Rate of increase for deferred pensions

Rate of pension increases – RMPP Sections A/B

Rate of pension increases – RMPP Section C11

Rate of pension increases – RMSEPP members transferred from Section A or B of RMPP

Rate of pension increases – RMSEPP all other members11

Rate of pension increases – DBCBS benefits

Life expectancy from age 60 – for a current 40/60 year old male RMPP member

Life expectancy from age 60 – for a current 40/60 year old female RMPP member

At 31 March
2019

At 25 March
2018

3.2%

2.2%

2.4%

(0.8%)

2.2%

(1.0%)

3.1%

2.1%

2.4%

(0.7%)

2.4%

(0.7%)

RPI–0.1%

CPI

RPI–0.1%

CPI

RPI–0.1%

CPI+2.0%

CPI

RPI–0.1%

CPI+2.0%

28/26 years

29/27 years

31/29 years

9 The discount rate reflects the average duration of the RMPP of around 27 years and RMSEPP of around 20 years.
10 The discount rate reflects the average duration of the DBCBS benefits of 11 ½ years. The pension service cost applicable from 1 April 2018 is based on 25 March 2018

assumptions.

11 The rate of increase in salaries, and the rate of pension increase for Section C members (who joined the RMPP on or after April 1987) and RMSEPP ‘all other members’, is capped

at five per cent, which results in the average long-term pension increase assumption being 10 basis points lower than the RPI long-term assumption.

Mortality
The RMPP assumptions are based on the latest Self-Administered Pension Scheme (SAPS) S2 mortality tables with appropriate scaling
factors (118 per cent for male pensioners and 116 per cent for female pensioners). Future improvements are based on the CMI 2017 core
projections (smoothing factor 8.0) with a long-term trend of 1.5 per cent per annum. These assumptions were adopted following a recent
mortality study undertaken as part of the March 18 actuarial valuation.

Sensitivity analysis for RMPP and DBCBS liabilities
The RMPP and DBCBS liabilities are sensitive to changes in key assumptions. The potential impact of the largest sensitivities on the RMPP
and DBCBS liabilities is as follows:

Key assumption change

Additional one year of life expectancy

Increase in inflation rate (both RPI and CPI simultaneously) of 0.1% p.a.

Decrease in discount rate of 0.1% p.a.

Increase in CPI assumption (assuming RPI remains constant) of 0.1% p.a.

Increase in constructive obligation of 0.1% p.a.

1 8 0
1 8 0

Potential
increase in
DBCBS liabilities
£m

Potential
increase in
RMPP liabilities
£m

–

270

180

–

FINANCIAL STATEMENTS

10. Retirement benefit plans (continued)
This sensitivity analysis has been determined based on a method that assesses the impact on the defined benefit obligation, resulting from
reasonable changes in key assumptions occurring at the end of the reporting year. Changes inverse to those in the table (e.g. an increase in
discount rate) would have the opposite effect on liabilities.

b) RMPP, RMSEPP and DBCBS assets

Equities

Overseas

Bonds

Fixed interest – UK

– Overseas

Index linked – UK

Pooled investments

Absolute return

Equity

Private equity

Fixed interest

Private debt

Property

Liability-driven investment

Property (UK)

Cash and cash equivalents

Other

Derivatives

RMSEPP buy-in annuity policies

Total plans’ assets

At 31 March 2019

At 25 March 201812

Quoted
£m

Unquoted
£m

Total
£m

Quoted
£m

Unquoted
£m

Total
£m

319

268

–

7,126

–

385

(7)

–

394

–

649

152

501

202

270

295

–

(6)

(20)

335

393

337

450

–

649

152

501

202

385

297

175

–

7,396

6,296

295

385

(5)

(27)

335

–

426

(113)

–

121

584

–

396

467

147

386

271

–

148

506

369

683

175

396

467

147

6,682

271

426

(92)

148

8,158

3,047

11,205

7,579

2,782

10,361

12 Restated following re-interpretation of the classifications, including the allocation between quoted and unquoted assets.

There were no open equity futures or options derivatives within this portfolio at 31 March 2019 (2017-18: £nil). £7 billion (2017-
18: £6 billion) of HM Government bonds are primarily included in liability-driven investment above. The plans’ assets do not include property
or assets used by the Group, or shares of the Royal Mail plc at 31 March 2019 (2017-18: £84,000 approximate market value of shares).

Risk exposure and investment strategy
The investment strategy of the RMPP Trustee aims to safeguard the assets of the Plan and to provide, together with contributions, the
financial resource from which benefits are paid. Investments are inevitably exposed to risks. The risks inherent in the investment markets
are partially mitigated by pursuing a widely diversified approach across asset classes and investment managers. The RMPP uses derivatives
(such as swaps, forwards and options, from time to time) to reduce risks whilst maintaining expected investment returns. The RMPP
Trustee recognises that there is a natural conflict between improving the potential for positive return and limiting the potential for poor
return. The RMPP Trustee has specified objectives for the investment policy that seeks to balance these requirements.

The RMPP’s liabilities and assets are impacted by movements in interest rates and inflation. In order to reduce the risk of movements in
these rates driving the RMPP into a funding deficit, the RMPP Trustee has hedged the funding liabilities which it was estimated would be
built up by March 2018. It has done this predominantly through investment in index-linked gilts and derivatives (interest rate and inflation
rate swaps and gilt repurchase agreements) held in liability-driven investments providing economic exposure to gilts and swap rates. The
nature of risks and their mitigation process are similar for the DBCBS.

1 8 1
1 8 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Retirement benefit plans (continued)
The change in value of the liability-hedging assets is predominantly reflected in the liability-driven investment values above, which have
increased from £6,682 million at 25 March 2018 to £7,396 million at 31 March 2019.

The notional value covered by the inflation rate swaps (full exposure to the relevant asset class incurred by entering into a derivative
contract) held in a specific managed portfolio for this purpose at 31 March 2019 was £2.4 billion (2017-18: £2.4 billion). The notional value
covered by the interest rate swaps at 31 March 2019 was £1.5 billion (2017-18: £3.2 billion).

The equity exposure of the RMPP has been reduced by means of a short Total Return Swap (TRS). This is a derivative that can be used to
reduce exposure to a particular asset class without selling the physical assets held. TRS were introduced in order to reduce downside risk
whilst broadly maintaining the existing expected returns. The TRS has a market value as at 31 March 2019 of £(20) million (2017-18: £21
million) included in the derivative values above. The TRS economically offset £303 million as at 31 March 2019 (2017-18: £257 million) of the
Plan’s global equity market exposure.

The RMPP’s liabilities are impacted by longer than expected life expectancy resulting in higher than expected payout levels. Although this
risk is not hedged, mortality studies are undertaken as part of actuarial funding valuations and where appropriate updated assumptions are
adopted for accounting valuations.

A fall in yields on AA- rated corporate bonds, used to set the IAS 19 discount rates, will lead to an increase in the IAS 19 liabilities. The
RMPP’s assets included corporate bonds, HM Government bonds and interest rate derivatives that are expected to partly offset the impact
of movements in the discount rate. However, yields on these assets may diverge compared with the discount rate in some scenarios.

In the pension schemes, many of the Inflation linked increases that apply are restricted to a maximum increase of five per cent in any year.
Therefore, the pension schemes give some protection from this risk of significantly higher levels of Inflation (i.e. above five per cent a year),
as many of the increases in the schemes would be restricted to five per cent in this scenario.

The spread of investments continues to balance security and growth in order to pay the RMPP benefits when they become due.

In addition to property and cash, the RMSEPP holds two buy-in annuity policies of £335 million at 31 March 2019 (2017-18: £148 million)
to match its liabilities.

Further details on sources of material uncertainty relating to pension assets can be found in the significant accounting policies section
(‘Sources of estimation uncertainty’, ‘Pensions and other post-retirement benefits’).

Further details on how the assets have been valued can be found in the significant accounting policies section (‘Sources of estimation
uncertainty and critical accounting judgements’ and ‘Pensions and other post-retirement benefits’).

1 8 2
1 8 2

FINANCIAL STATEMENTS

10. Retirement benefit plans (continued)
c) Movement in RMPP and RMSEPP assets, liabilities and net position
Changes in the value of the defined benefit pension liabilities, fair value of the plans’ assets and the net defined benefit surplus are analysed
as follows:

Retirement benefit surplus (pre withholding tax payable)
at 26 March 2018 and 27 March 2017

Amounts included in the income statement

Ongoing UK defined benefit pension plan and administration
costs (included in people costs)

RMSEPP buy-in settlement – operating specific item

Pension interest income/(cost)13

Total included in profit before tax

Amounts included in other comprehensive income –
remeasurement gains/(losses)

Actuarial (loss)/gain arising from:

Financial assumptions

Demographic assumptions

Experience assumptions

Return on plans’ assets (excluding interest income)

Total remeasurement gains/(losses) of the defined
benefit surplus

Other

Employer contributions14

Employee contributions

Benefits paid

Curtailment costs

Movement in pension-related accruals

Total other movements

Defined benefit asset

Defined benefit liability

Net defined benefit surplus

2019
£m

2018
£m

2019
£m

2018
£m

2019
£m

2018
£m

10,361

9,847

(7,038)

(5,992)

3,323

3,855

(8)

(64)

247

175

–

344

–

(78)

–

(2)

(77)

(7)

–

251

244

–

272

(70)

–

208

(5)

–

(168)

(173)

(899)

–

(160)

(1,059)

(13)

(64)

(906)

–

(815)

(197)

169

–

(3)

(53)

(197)

(53)

–

169

344

(52)

383

–

(5)

(3)

–

(5)

(2)

–

272

–

(3)

273

Retirement benefit surplus (pre withholding tax payable)
at 31 March 2019 and 25 March 2018

10,803

10,361

(7,097)

(7,038)

3,706

3,323

Withholding tax payable

n/a

(1,298)

(1,160)

Retirement benefit surplus (net of withholding tax
payable)
at 31 March 2019 and 25 March 2018

n/a

2,408

2,163

13 Pension interest income results from applying the plans’ discount rate at 25 March 2018 to the plans’ assets at that date. Similarly, the pension interest cost results from

applying the plans’ discount rate as at 25 March 2018 to the plans’ liabilities at that date.

14 Excludes payments into pension escrow investments of £7 million (2017-18: £178 million), but includes PSE contributions of £1 million (2017-18: £115 million).

1 8 3
1 8 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Retirement benefit plans (continued)
d) Movement in DBCBS assets, liabilities and net position
Changes in the value of the defined benefit pension liabilities, fair value of the plans’ assets and the net defined benefit deficit since the start
of the scheme on 1 April 2018 are analysed as follows:

Retirement benefit at 26 March 2018

Amounts included in the income statement

Defined
benefit asset

Defined
benefit
liability

Net defined
benefit
deficit

2019
£m

–

2019
£m

–

2019
£m

–

Ongoing UK defined benefit pension plan and administration costs (included in People costs)

Total included in profit before tax

Amounts included in other comprehensive income – remeasurement losses

(2)

(465)

(467)

Actuarial gain loss arising from:

Financial assumptions

Return on plan assets

Total remeasurement losses of the defined benefit deficit

Other

Employer contributions15

Employee contributions

Benefits paid

Total other movements

Retirement benefit deficit at 31 March 2019

15 Includes PSE contributions of £110 million.

–

403

(11)

396

402

(16)

–

(16)

–

(4)

(474)

(16)

(8)

403

–

403

(72)

1 8 4
1 8 4

FINANCIAL STATEMENTS

11. Acquisition of businesses

This Note provides details of the Group’s business acquisitions, which mainly relates to the acquisition 100 per cent of the share capital
of Dicom Canada by GLS.

On 3 September 2018, the Group announced it had acquired Dicom Canada for total consideration of £211 million. This acquisition was
funded through a mix of cash and the temporary drawdown of the Group’s revolving credit facility. This information includes the fair value of
the identifiable assets and liabilities recognised as at the date of acquisition.

Tangible assets acquired

Intangible assets recognised on acquisition

Trade and other receivables

Cash and cash equivalents

Goodwill recognised on acquisition

Total assets acquired

Trade and other payables

Deferred tax liabilities

Net assets acquired

Cash paid during the year

Consideration (to be recovered)/deferred

Total consideration

Dicom Canada
£m

Other
£m

103

110

251

(22)

(18)

211

212

(1)

211

–

Total
£m

104

113

255

(22)

(18)

215

214

215

The fair value of trade debtors is equal to the gross contractual amounts receivable. An initial review of trade debtors has not indicated any
recoverability issues.

The intangible assets recognised relate to customer lists, software and brands. The goodwill of £113 million arising on these acquisitions,
of which £107 million is non-tax deductible, is indicative of the acquired business knowledge of products and markets, and future
efficiencies that are expected through changes in the operations.

No material fair value adjustments have been identified in respect of the remaining assets and liabilities acquired in the year.

Revenue generated from these entities since the date of acquisition is £88 million and profit is £8 million, of which £85 million and £8 million
relate to Dicom. If these combinations had taken place at the beginning of the financial year, revenue generated would have been £158
million and the profit would have been £15 million, of which £151 million and £14 million relate to Dicom.

There are no non-controlling interests in relation to these acquisitions.

1 8 5
1 8 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. Property, plant and equipment

Below are details of the Group’s property, equipment and vehicle assets, which are recorded at their historic cost (i.e. what the Group
paid for them) less accumulated depreciation, reflecting their usage within the business over their useful life – from two to 50 years.

Cost

At 26 March 2018

Exchange rate movements

Reclassification

Additions

Disposals

Acquisition of business

Reclassification from non-current assets held for sale

At 31 March 2019

Depreciation and impairment

At 26 March 2018

Exchange rate movements

Reclassification

Charge for the year (see Note 4)1

Impairment (operating specific item)

Disposals

Reclassification to non-current assets held for sale

Land and buildings

Freehold
£m

Long
leasehold
£m

Short
leasehold
£m

Plant and
machinery
£m

Motor
vehicles
£m

Fixtures and
equipment
£m

Total
£m

1,767

292

827

1,152

724

400

5,162

(6)

(10)

115

(8)

–

(1)

–

(3)

–

(3)

(2)

(1)

–

(26)

(51)

–

(1)

–

(10)

–

(11)

–

298

(99)

1,868

296

844

1,180

763

424

5,375

191

611

770

922

(2)

–

(4)

(5)

–

(1)

–

(4)

–

361

(1)

–

(1)

(2)

(25)

(45)

–

815

–

377

291

3,146

(1)

–

(11)

–

(4)

–

258

(90)

(5)

317

3,309

At 31 March 2019

959

199

642

Net book value

At 31 March 2019

At 25 March 2018

Net book value comprises:

Owned assets

Finance leased assets

At 31 March 2019

909

845

101

202

216

365

382

386

363

107

109

2,066

2,016

909

–

909

200

202

296

365

167

219

386

107

1,764

–

302

107

2,066

Includes £12 million accelerated depreciation relating to a reassessment of the remaining useful lives of letters sorting machinery, recognised prospectively in ‘infrastructure
costs’ in the income statement.

1 8 6
1 8 6

FINANCIAL STATEMENTS

12. Property, plant and equipment (continued)

Cost

At 27 March 2017

Exchange rate movements

Reclassification

Additions

Disposals

Acquisition of business

Reclassification to non-current assets held for sale

At 25 March 2018

Depreciation and impairment

At 27 March 2017

Exchange rate movements

Reclassification

Charge for the year (see Note 4)

Disposals

Reclassification to non-current assets held for sale

At 25 March 2018

Net book value

At 25 March 2018

At 26 March 2017

Net book value comprises:

Owned assets

Finance leased assets

At 25 March 2018

Land and buildings

Freehold
£m

Long
leasehold
£m

Short
leasehold
£m

Plant and
machinery
£m

Motor
vehicles
£m

Fixtures and
equipment
£m

Total
£m

1,743

287

799

1,129

702

393

5,053

(23)

(26)

–

(23)

–

(1)

–

(8)

–

(27)

–

(42)

–

(14)

–

239

(118)

(23)

1,767

292

827

1,152

724

400

5,162

894

186

572

736

339

264

2,991

(1)

(8)

–

(1)

–

(3)

–

922

191

611

845

849

845

–

845

101

216

227

213

216

(26)

–

770

382

393

298

382

–

(37)

–

361

363

142

221

363

–

(13)

–

246

(88)

(8)

291

3,146

109

129

2,016

2,062

109

–

109

1,695

321

2,016

Depreciation rates are disclosed within ‘significant accounting policies’. No depreciation is provided on land, which represents £229 million
(2017-18: £223 million) of the total cost of properties.

The net book value of the Group’s property, plant and equipment includes £207 million (2017-18: £122 million) in respect of assets in the
course of construction. The net book value of the Group’s land and buildings includes £362 million (2017-18: £389 million) in respect of
building fit-out.

The £298 million (2017-18: £239 million) additions include £1 million (2017-18: £1 million) borrowing costs capitalised at a rate of 2.5 per
cent in relation to specific qualifying assets.

1 8 7
1 8 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. Goodwill

This Note provides details of the Group’s goodwill, which mostly relates to its overseas subsidiary, GLS including its business
acquisitions in the year.

Cost

At 26 March 2018 and 27 March 2017

Exchange rate movements

Acquisition of businesses

At 31 March 2019 and 25 March 2018

Impairment

At 26 March 2018 and 27 March 2017

Exchange rate movements

Impairments (Operating specific item)

At 31 March 2019 and 25 March 2018

Net book value:

At 31 March 2019 and 25 March 2018

At 25 March 2018 and 26 March 2017

2019
£m

715

(7)

113

821

391

(3)

441

380

324

2018
£m

703

715

387

–

391

324

316

The carrying value of goodwill of £380 million (2017-18: £324 million) at the balance sheet date includes £257 million (2017-18:
£261 million) in relation to GLS’ European network (cash generating unit – CGU). The carrying value of the GLS European network,
excluding interest-bearing and tax-related assets and liabilities, is £775 million (2017-18: £719 million).

The recoverable amount of this CGU, being its net realisable value (i.e. ‘fair value less costs to sell’) for the purposes of the impairment
review, has been assessed with reference to EBITDA earnings multiples for quoted entities in a similar sector of 5.8 (fair value hierarchy
level 2 input – see significant accounting policies on page 223). On this basis, the CGU’s net realisable value has been assessed to be in
excess of the carrying value. The earnings multiples referenced would need to reduce by more than 43 per cent to 3.3 to reduce the net
realisable value to below the carrying value.

GLS’ US businesses (CGU) comprise Golden State Overnight Delivery Services Inc. (GSO) and Postal Express Inc. These businesses are in
the process of being integrated to create an interstate overnight parcel delivery service with full US west coast coverage, with the aim of
realising operational synergies and commercial benefits. While progress is being made against plans, the combined impact of local cost
pressures, refocusing the customer base, transitioning to the new business model and ongoing integration costs means that the expected
synergies and benefits will now take longer to be realised.

The recoverable amount of GLS’ US businesses are based on ‘value in use’, using five year forecast cash flows, including terminal growth
rates of one per cent and a pre-tax discount rate of 12.5 per cent, including a risk premium for the US.

In the first half year, these combined businesses were loss-making, with operating losses of around $8 million (approximately £6 million).
Management therefore performed an impairment review of the assets comprising the GLS US CGU on a ‘value in use’ basis and, as a
result, the goodwill in these businesses, amounting to £49 million, was fully impaired, along with all other assets with a carrying value
of £19 million.

During the reporting year, GLS acquired Dicom Canada which resulted in the recognition of £110 million goodwill for this GLS Canada CGU.
There are no indicators of impairment of the carrying amount of this goodwill.

The remaining goodwill of £13 million (2017-18: £17 million) arising from an aggregation of goodwill on business acquisitions, each being
a separate CGU within the UKPIL business, is not material in the context of the Group’s total goodwill.

1 8 8
1 8 8

FINANCIAL STATEMENTS

14. Intangible assets

Intangible assets, mainly software, are recorded in much the same way as the Group’s physical assets such as property and vehicles,
but with shorter useful lives over which they are amortised (one to eleven years).

2019

2018

Master
franchise
licences
£m

Customer
listings
£m

Software
£m

Brands
£m

Total
£m

Master
franchise
licences
£m

Customer
listings
£m

Software
£m

Brands
£m

Total
£m

Cost

At 26 March 2018 and
27 March 2017

Exchange rate movements

Additions

Disposals

Acquisition of business

At 31 March 2019 and
25 March 2018

Amortisation and impairment

At 26 March 2018 and
27 March 2017

Exchange rate movements

Charge for the year (see Note 4)1

Impairment (operating specific
item)

Disposals

At 31 March 2019 and
25 March 2018

Net book value:

At 31 March 2019 and
25 March 2018

At 25 March 2018 and
26 March 2017

–

(6)

–

945

1,060

(2)

(22)

–

(6)

(22)

104

–

(1)

–

807

(1)

143

(6)

(1)

–

914

(3)

143

(6)

157

1,025

1,230

945

1,060

–

(3)

–

373

452

(1)

138

(22)

–

(2)

153

(22)

–

279

–

100

–

(6)

–

347

–

111

–

(6)

495

599

373

452

–

530

572

631

608

–

572

608

528

567

Includes £30 million impairment relating to certain operational assets, recognised in ‘infrastructure costs’ in the income statement.

The intangible assets detailed above have finite lives and are being written down on a straight-line basis. The net book value of the Group’s
intangible assets includes £81 million (2017-18: £141 million) in respect of assets in the course of construction. The £94 million (2017-18:
£143 million) additions include £1 million (2017-18: £2 million) borrowing costs capitalised at a rate of 2.5 per cent in relation to specific
qualifying assets.

The Group holds individually material intangible assets totalling £212 million (2017-18: £233 million). These assets relate to various
IT initiatives taking place across the business. They have an average remaining useful life of eight years (2017-18: eight years).

1 8 9
1 8 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. Investments in associates and joint venture

This Note provides details of the Group’s associate and joint venture companies, including the Group’s share of the revenue, profit and
net assets of these entities.

Details of the associates and joint venture of the Group are listed below. To ensure that the reported share of the results of these companies
aligns with the Group’s reporting year ended 31 March 2019 (2017-18: 25 March 2018), information provided by each of the respective
companies is analysed and an estimate of profit/loss accrued as appropriate.

Principal activities

Country of incorporation

Reporting date

Associate company

JICMAIL Limited

Market research

United Kingdom

31 March

Quadrant Catering Limited

Catering services

United Kingdom

30 September

Mallzee Limited

Personal shopping application (app) United Kingdom

30 April

Market Engine Global Pty Limited Software development

Australia

30 June

Joint venture company

%
ownership
2019

%
ownership
2018

20.0

51.0

21.1

34.5

–

51.0

21.1

34.5

ParcelLock GmbH

Parcel locker provision

Germany

31 December

–

33.3

The majority of board membership and voting power to direct relevant activities in Quadrant Catering Limited (Quadrant) is held by the other
investor company. For this reason, it is Management’s view that the Group does not have control over Quadrant. It is therefore not
considered to be a subsidiary in line with IFRS 10 ‘Consolidated Financial Statements’.

All shares in the joint venture ParcelLock GmbH were disposed of in August 2018. The profit on disposal was £260,000.

Movements in interests in associates

Cost

At 26 March 2018 and 27 March 2017

Share of loss after tax for the year from continuing operations1

Impairment2

At 31 March 2019 and 25 March 2018

2019
£m

2018
£m

–

(2)

There are no significant restrictions on the ability of the associates to transfer funds to the Group in the form of cash dividends or repayment
of loans and advances.

1 The share of loss after tax is included within ‘other operating costs’ in the income statement.
2 The impairment is included within ‘legacy/other costs’ in the income statement.

16. Share-based payments

This Note provides details about the Free Shares awarded to employees, including the associated accounting charge to the Group’s income
statement under IFRS 2 ‘Share-based Payment’, and the number of shares held at the end of the reporting year. Details of shares awarded
under the Long-Term Incentive Plan (LTIP), Deferred Shares Bonus Plan (DSBP) and Save As You Earn (SAYE) scheme are also included.

Employee Free Shares
Employee Free Shares are held on behalf of employees in a tax-advantaged Share Incentive Plan (SIP).

The shares are held in a Trust administered by Equiniti Share Plan Trustees Limited (Equiniti) and may only be distributed to, or for the
benefit of, eligible employees. The Trust is funded by the Company and has therefore been consolidated within these financial statements.

2015 SIP
On 5 October 2015, ordinary shares representing one per cent of the Company were granted free of charge to eligible full-time employees
by HM Government. This was in addition to a portion of the unallocated shares arising from earlier SIP schemes. Accordingly, each eligible
full-time employee received 103 shares as their 2015 SIP allocation with part-time eligible employees being allocated a pro-rata number
of shares. The vesting period for the award is three years from the award date with all allocated shares to be equity-settled.

1 9 0
19 0

FINANCIAL STATEMENTS

16. Share-based payments (continued)
2016 SIP
On 6 October 2016, ordinary shares representing one per cent of the Company were granted free of charge to eligible full-time employees
by HM Government. Accordingly, each eligible full-time employee received 81 shares as their 2016 SIP allocation with part-time eligible
employees being allocated a pro-rata number of shares. The vesting period for the award is three years from the award date with all
allocated shares to be equity-settled.

Partnership and matching shares
Beginning in October 2018, a partnership and matching share scheme was introduced for eligible employees. Under the terms of the
scheme employees may elect to purchase a limited number of Royal Mail plc shares through monthly payroll deductions at the current
market price (partnership shares). For every five partnership shares purchased, the employee receives one unallocated SIP share
(matching shares), up to a maximum of two matching shares per month, free of charge.

At the year end there had been six such monthly awards and a total of 191,468 matching shares had been awarded to eligible staff members
at a weighted average market price of 295.7 pence. The vesting period for each award is three years from the award date with all allocated
shares to be equity-settled.

A charge to the income statement of £22 million (including a net £1 million National Insurance credit) has been made for the year ended
31 March 2019 for all SIP allocations (see page 48 of the Financial Review).

A reconciliation of the ordinary shares held in the SIP at 31 March 2019 is shown below.

Total shares remaining in SIP at 26 March 2018

Shares sold/transferred out of SIP during the reporting year (fully vested)

Shares transferred out of SIP during the reporting year (‘good leavers’) 1

Total shares remaining in SIP at 31 March 2019

Number of shares

81,917,180

(2,368,290)

(4,365,455)

75,183,435

‘Good leavers’ refers to former employees whose shares vested under specific circumstances, in accordance with the rules of the scheme.

Of the total shares remaining in the scheme, 72,589,514 have been allocated to current employees. The remaining 2,593,921 shares are
unallocated and have arisen as a result of forfeitures.

Award of shares under the Long-Term Incentive Plan (LTIP)
2016 LTIP
LTIP awards were granted to senior management on 21 July 2016 and 8 December 2016 (together the 2016 LTIP). The vesting period of
three years from 1 April 2016, and the performance conditions, are identical for both awards. These awards are equity-settled with the fair
value of the shares awarded being calculated using a Monte-Carlo simulation, taking into account dividend accrual, and set at 333.0 pence
and 278.0 pence, respectively. The maximum shares that have the potential to vest under the 2016 LTIP are 2,337,394.

2017 LTIP
LTIP awards were granted to senior management on 28 July 2017 and 11 December 2017 (together the 2017 LTIP). The vesting period of
three years from 1 April 2017, and the performance conditions, are identical for both awards. These awards are equity-settled with the fair
value of the shares awarded being calculated using a Monte-Carlo simulation, taking into account dividend accrual, and set at 203.0 pence
and 283.0 pence, respectively. The maximum shares that have the potential to vest under the 2017 LTIP are 2,170,407.

2018 LTIP
LTIP awards were granted to senior management on 9 August 2018 (2018 LTIP) with a vesting period of three years from 1 April 2018. This
award is equity-settled with the fair value of the shares awarded being calculated using a Monte-Carlo simulation, taking into account
dividend accrual, and set at 160.0 pence. The maximum shares that have the potential to vest under the 2018 LTIP are 1,230,222.

A charge to the income statement of £3 million (including £1 million credit for National Insurance) has been made for the year ended
31 March 2019 in relation to all LTIP schemes (2017-18: £4 million, including £1 million charge for National Insurance).

The LTIP shares are not part of the SIP explained above. Further details of each LTIP plan, including performance conditions, can be found in
the Directors’ Remuneration Report on page 136.

Deferred Shares Bonus Plan (DSBP)
2016 DSBP
DSBP awards were granted to senior management on 20 June 2017 (2016 DSBP). The vesting period is three years from 1 April 2017. This
award is equity-settled with the fair value of the shares awarded, being set at the grant date market value of 441.4 pence. The maximum
shares that have the potential to vest under the scheme are 557,261.

1 9 1
19 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. Share-based payments (continued)
2017 DSBP
DSBP awards were granted to senior management on 20 June 2018 (2017 DSBP). The vesting period is three years from 1 April 2018. This
award is equity-settled with the fair value of the shares awarded, being set at the grant date market value of 506.5 pence. The maximum
shares that have the potential to vest under the scheme are 453,212.

Save As You Earn (SAYE) share option scheme
On 24 July 2014, a SAYE share option scheme was introduced for eligible employees. Under the terms of the scheme, the Board permits the
grant of options in respect of ordinary shares in the Company to those employees who enter into an HMRC-approved SAYE savings contract.

These contracts are for a term of three years, with contributions from employees of an amount between £5 and £59 each month. The
options purchased may be exercised during the six month period following the end of the contract at an exercise price of not less than 80per
cent of the average of the mid-market quotations of an ordinary Share over the three dealing days immediately preceding the offer date.

A charge to the income statement of £nil has been made for the year ended 31 March 2019 (2017-18: £1 million) in relation to the SAYE
scheme. The fair values of the options have been calculated using the Black-Scholes share option pricing model.

The table below shows the movements in share options during the reporting year.

Balance at the beginning of the reporting year

Options exercised

Options expired

Options forfeited

Balance at the end of the reporting year

Number of options

2,772,480

(1,538,600)

(1,229,574)

(3,526)

780

For SAYE options exercised during the year (by ‘good leavers’), the weighted average share price at the date of exercise was 406 pence.
The weighted average exercise price for each of the above categories of share options is 360 pence.

As a result of reaching the end of the contribution period and scheme rules in relation to ‘good leavers’, 780 (2017-18: 2,748,990) share
options were exercisable at 31 March 2019 at a weighted average exercise price of 360 pence.

17. Non-current assets held for sale

This Note provides details of the assets classified as held for sale at the beginning and end of the reporting year. Assets and liabilities are
classified in this way when their carrying value is to be recovered principally through a sale transaction and a sale is considered highly
probable. Their value in the balance sheet is the lower of their carrying amount and fair value less costs to sell. At the reporting date
of 31 March 2019, only certain surplus property assets are held for sale.

The balance sheet values of the assets held for sale during the reporting year are shown below.

Property assets held for sale

Total

At 31 March
2019
£m

At 25 March
2018
£m

Property assets held for sale
Non-current assets held for sale of £36 million (2017-18: £50 million) relate to land and buildings in UKPIL which are being actively
marketed with a view to a sale within 12 months. The carrying value relates primarily to plots at the Nine Elms site. The in-year decrease
in the carrying value represents the reclassification of certain plots on this site back to property, plant and equipment (see Note 12). This
is because although they are being marketed, they are not expected to be sold in the next 12 months due to the current economic climate
and also, the expected length of negotiations with prospective purchasers. Management, however, remain firmly committed to a sale of
these plots.

An assessment of the fair value of the properties was made at the time of their reclassification to ‘held for sale’ and no adjustment to the
carrying amount of these properties was necessary.

1 9 2
19 2

FINANCIAL STATEMENTS

18. Current trade and other receivables

The following information relates to amounts owed to the Group by third parties and also the loss allowance for bad and doubtful debts
that the Group has provided for in the financial statements.

Trade receivables

Accrued income

Prepayments

Total

Movements in the loss allowance for bad and doubtful debts are shown below.

At 26 March 2018 and 27 March 2017

Receivables provided for during the year

Release of allowance

Utilisation of allowance

Acquisition of business

At 31 March 2019 and 25 March 2018

The amount of trade receivables that were past due but not impaired are shown below.

Not yet overdue

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

At 31 March
2019
£m

At 25 March
2018
£m

1,176

103

999

124

1,310

1,160

2019
£m

(36)

(17)

(1)

(39)

2018
£m

(35)

(24)

(5)

(36)

At 31 March
2019
£m

At 25 March
2018
£m

1,046

101

1,176

883

999

1 9 3
19 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. Cash and cash equivalents

This Note details the Group’s cash balance and other short-term investments that can be readily converted into cash.

Cash and cash equivalents at 31 March 2019 and at 25 March 2018 are as follows:

Cash at bank and in hand

Client cash

Cash equivalent investments: Short-term bank and local authority deposits and money market fund investments

Total cash and cash equivalents

At 31 March
2019
£m

At 25 March
2018
£m

141

236

172

404

600

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.

Client cash is cash collected from consignees by GLS on behalf of its posting customers.

20. Current trade and other payables

The following details relate to amounts owed by the Group to third-parties and deferred revenue for services still to be provided.

Trade payables and accruals

Advance customer payments (mainly for stamps held, not yet used by customers)

Social security

Client creditors

Capital expenditure payables

Other

Total

At 31 March
2019
£m

At 25 March
2018
£m

(1,369)

(1,449)

(291)

(126)

(28)

(60)

(9)

(283)

(104)

(32)

(48)

(11)

(1,883)

(1,927)

The fair value of trade and other payables is not materially different from the carrying value.

21. Loans and borrowings

Details of loans and borrowings, including interest rates, additional loan facilities available and any security provided against the loans,
are provided below.

At 31 March 2019

Loans and
borrowings
£m

Further
committed
facility
£m

Total
facility
£m

Average
interest rate
of loan drawn
down
%

Basis of
interest
rate
chargeable

Average
maturity date
of loan
drawn down
Year

Average
maturity date
of loan
facility
Year

Syndicated bank loan facilities

€500 million bond – 2.375% Senior
Fixed Rate Notes

Loans in overseas subsidiaries

Total

–

1,050

430

–

430

431

1,050

1,481

1 9 4
19 4

LIBOR
plus
0.55%

Fixed at
2.5%

Fixed at
0.9%

n/a

2.5

0.9

2.5

n/a

2022

2024

2022

2024

2022

FINANCIAL STATEMENTS

21. Loans and borrowings (continued)

At 25 March 2018

Loans and
borrowings
£m

Further
committed
facility
£m

Total
facility
£m

Average
interest rate
of loan drawn
down
%

Average
maturity date
of loan
drawn down
Year

Average
maturity date
of loan
facility
Year

Basis of interest
rate chargeable

Syndicated bank loan facilities

–

1,050

n/a LIBOR plus 0.55%

n/a

2022

€500 million bond – 2.375% Senior
Fixed Rate Notes

Loans in overseas subsidiaries

Total

435

–

435

437

1,050

1,487

2.5

1.4

2.4

Fixed at 2.5%

Fixed at 1.4%

2024

2020

2024

2020

2022

The €500 million bond, issued in July 2014, is shown net of issue discount and fees and at a closing spot rate of £1/€1.158. The effective
interest rate on the bond (2.5 per cent) consists of the interest coupon of 2.375 per cent plus the unwinding of the discount and fees on
issuing the bond (0.08 per cent). The bond is designated as a hedge of the net investment in GLS, which has the Euro as its functional
currency. During the year, a gain of £5 million (2017-18: £5 million loss) on the retranslation of this borrowing was transferred to other
comprehensive income, which offsets the losses on translation of the net investment in GLS. There was no hedge ineffectiveness in the
current or comparative reporting years.

The syndicated bank loan facility can be cancelled and any loans drawn under the facility can 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 (excluding arrangement fees), adjusted net debt and EBITDA. It is not anticipated that the Group is at risk
of breaching any of these obligations.

The covenants require the Group to maintain the (leverage) ratio of adjusted net debt to EBITDA below 3:1 and EBITDA to interest (excluding
certain arrangement fees) above 3.5:1. Adjusted net debt consists of net debt plus Letters of Credit (contingent liabilities in respect of the
UKPIL insurance programme, where the possibility of an outflow of economic benefits is considered remote) and is adjusted for exchange
rate movements during the year. The Group’s leverage ratio at 31 March 2019 is 0.5:1 (2017-18: 0.2:1). The Group’s ratio of EBITDA to
interest (excluding certain arrangement fees) at 31 March 2019 is 72.8:1 (2017-18: 38.6:1). Accordingly, the Group comfortably meets the
covenants tests within its syndicated bank loan facilities agreement.

The interest rate chargeable on the syndicated bank loan facility would increase if more than one third of the facility was drawn and also if
the Group’s leverage ratio exceeded 1:1. Under the loan agreement, the maximum interest rate chargeable would be LIBOR plus 1.45 per
cent. The €500 million bond becomes repayable immediately on the occurrence of an event of default under the bond agreement. These
events of default include non-payment and insolvency. It is not anticipated that the Group is at risk of breaching any of these obligations.

The undrawn committed facilities, in respect of which all conditions precedent had been met at the balance sheet date, were £1,050 million
of which £952 million are maturing in March 2022 with the remaining £98 million maturing in March 2020 (2017-18: £1,050 million of which
£952 million are maturing in March 2022 and £98 million maturing in March 2020).

There is no security in place under the syndicated bank loan facilities or the bond.

The syndicated bank loan facility contains provision on a change of control of the Group for negotiation of the continuation of the agreement
or cancellation by a lender. The €500 million bond contains provisions such that, on a change of control that is combined with a credit rating
downgrade in certain circumstances, the noteholders may require the Company to redeem or, at the Company’s option, purchase the notes
for their principal amount, together with interest accrued to (but excluding) the date of redemption or repurchase.

1 9 5
19 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22. Financial assets and liabilities and risk management

In considering the financial assets and liabilities of the Group, Management use judgement to assess the materiality to users of the
financial statements, at a Group level, of each of the disclosure areas highlighted in IFRS 7 ‘Financial instruments: Disclosures’. This
assessment is based on both the magnitude and nature of the financial instruments involved and informs the level of disclosure of
the risk management objectives and policies in place across the Group provided in this Note.

The following table summarises the disclosures:

Disclosure requirement

a) Classification, carrying amount and fair values of financial assets and liabilities – Carrying amounts and fair value of each
category of financial assets and liabilities.

b) Movement in liabilities arising from financing activities – A reconciliation of the opening and closing balances of liabilities arising
from financing activities.

c) Foreign currency risk management – How Management addresses the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates.

d) Commodity price risk management – How Management addresses the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices.

e) Interest rate risk management – How Management addresses the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market interest rates.

f) Liquidity risk management – How Management addresses the risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities that are settled by delivering cash or another financial asset.

g) Credit risk management – How Management addresses the risk that one party to a financial instrument will cause a financial loss for
the other party by failing to discharge an obligation.

h) Sensitivity analysis – How the income statement and balance sheet would have been affected by changes in commodity prices and
exchange rates in the reporting year.

a) Classification, carrying amount and fair value of financial assets and liabilities
The following table shows the classification, carrying amount and fair value of the Group’s financial assets.

Financial assets

Cash

Cash equivalent investments

Money market funds

Short-term deposits – bank

Cash and cash equivalents

Pension escrow investments

Derivative assets (current)

Derivative assets (non-current)

Total financial assets

Level

Classification

At 31 March
2019
Carrying amount
£m

At 31 March
2019
Fair value
£m

At 25 March
2018
Carrying
amount
£m

At 25 March
2018
Fair value
£m

Amortised cost

FVTPL

161

236

207

455

161

236

207

455

196

404

206

198

600

198

818

196

404

206

198

600

198

818

1 9 6
19 6

FINANCIAL STATEMENTS

22. Financial assets and liabilities and risk management (continued)
The following table shows the classification, carrying amount and fair value of the Group’s financial liabilities.

Financial liabilities

Loans in overseas subsidiaries (current loans and
borrowings)

Obligations under finance leases (current)

€500 million bond

Loans in overseas subsidiaries (non-current loans
and borrowings)

Obligations under finance leases (non-current)

Derivative liabilities (current)

Derivative liabilities (non-current)

Total financial liabilities

Net total financial (liabilities)/assets

Level

Classification

Amortised cost

FVTPL

At 31 March
2019
Carrying Amount
£m

At 31 March
2019
Fair Value
£m

At 25 March
2018
Carrying
Amount
£m

At 25 March
2018
Fair Value
£m

–

(37)

(430)

(1)

(88)

(3)

(2)

(561)

(106)

–

(37)

(454)

(1)

(95)

(3)

(2)

(592)

(137)

(1)

(59)

(435)

(1)

(110)

(3)

(4)

(613)

205

(1)

(59)

(474)

(1)

(116)

(3)

(4)

(658)

160

Derivatives that do not qualify for hedge accounting are classified as fair value through profit and loss (FVTPL) and any gains or losses
arising from changes in fair value are taken directly to the income statement in the year. The ‘Level’ classification in the above table is
explained in the ‘Fair value measurement of financial instruments’ section of ‘Significant accounting policies’.

The main purpose of these financial instruments is 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 and are not
considered further in this Note.

No speculative trading in financial instruments has been undertaken during the current or comparative reporting years, in line with
Group policy.

1 9 7
19 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22. Financial assets and liabilities and risk management (continued)
b) Movement in liabilities arising from financing activities
The following table reconciles the opening and closing balances of liabilities arising from financing activities.

Interest-bearing loans
and borrowings
(current)
£m

Interest-bearing
loans and borrowings
(non-current)
£m

Obligations under
finance leases (current)
£m

Obligations under
finance leases
(non-current)
£m

Total
£m

At 26 March 2018

Movements through income
statement

Interest payable on financial
liabilities

Movements through cash
flow

Finance costs paid

Repayment of loans and
borrowings

Payment of capital element of
finance lease contracts

Cash received on sale and
leasebacks

Other movements

Reclassification between
categories

Effect of foreign currency
exchange rates

At 31 March 2019

At 27 March 2017

Movements through income statement

Interest payable on financial liabilities

Movements through cash flow

Finance costs paid

Repayment of loans and borrowings

Payment of capital element of finance
lease contracts

Cash received on sale and leasebacks

Other movements

Non-cash increase in finance lease

Reclassification between categories

Effect of business combinations

Effect of foreign currency exchange rates

At 25 March 2018

(1)

(2)

–

(436)

(59)

(110)

(606)

(11)

–

(431)

–

(34)

–

(37)

(3)

(16)

–

(13)

–

(88)

(556)

Interest-bearing loans
and borrowings
(current)
£m

Interest-bearing
loans and borrowings
(non-current)
£m

Obligations under
finance leases
(current)
£m

Obligations under
finance leases
(non-current)
£m

Total
£m

(430)

(64)

(130)

(657)

(11)

–

(2)

(5)

(436)

–

(58)

–

(59)

(4)

(18)

–

(35)

(2)

–

(1)

(35)

(2)

–

(3)

(4)

(110)

(606)

(33)

(3)

–

(1)

1 9 8
19 8

FINANCIAL STATEMENTS

22. Financial assets and liabilities and risk management (continued)
c) Foreign currency risk management
Foreign currency transaction risk
UKPIL is exposed to foreign currency risk due to interest payments on the €500 million bond, certain obligations under Euro-denominated
finance leases, trading with overseas postal administrations and various purchase contracts denominated in foreign currency. GLS’
functional currency is the Euro. It also has some exposure to non-Euro currencies, principally in emerging European markets, and to
the US Dollar.

Where possible, exposures are netted internally. Any remaining exposure is hedged using a combination of external spot and forward
purchase and sale contracts. Hedging will not normally be considered for exposures of less than £1 million. Hedging is normally confined
to 80 per cent of the forecast exposure, where forecast cash flows are highly probable.

The following table shows, for each hedge programme, the risk and the percentage hedged of the next 12 months’ exposure:

Hedge programme

Risk

Capital programmes

€/£ exchange rate movements

Overseas postal administrations

SDR/£ exchange rate movements

Percentage of next 12 months’
exposure that has been hedged

At 31 March
2019

At 25 March
2018

82%

84%

91%

21%

The next 12 months’ exposure is calculated as the combination of the cost of settling liabilities during the next 12 months and the cost of
revaluing unsettled liabilities at the end of 12 months.

Foreign currency translational risk
The Group’s functional currency is Sterling (£). GLS Euro profits are converted at the average exchange rate for the year which can result
in reported growth or decline that does not relate to underlying performance. GLS’ balance sheet is converted at year end exchange rates
and movements related to foreign currency translation are taken to equity.

The €500 million bond issued in July 2014 acts as a hedge of part of the translation exposure created by the net assets of GLS. Royal Mail
also entered into €15 million of Euro-denominated finance leases during the year (2017-18: €31 million). This similarly acts as a hedge of
the net assets of GLS. The remaining net assets of GLS in excess of the bond and lease payables are not hedged. Foreign currency exchange
differences arising from the translation of the net assets of GLS, the €500 million bond and the Euro-denominated finance lease payables,
at closing Sterling/Euro exchange rates, are recognised in the consolidated statement of comprehensive income. These exchange
differences would be released to the income statement as part of the gain or loss if GLS was sold. During the year, foreign currency
exchange gains on the bond of £5 million (2017-18: £5 million losses) and foreign exchange gains on the lease payables of £1 million (2017-
18: £1 million losses) were recognised in the consolidated statement of comprehensive income. There was no hedge ineffectiveness in the
current or prior reporting years.

The net total financial assets and liabilities are held in various different currencies as summarised in the table below. The majority of
the non-Sterling financial assets and liabilities (other than the €500 million bond and €78 million of finance leases) are held within cash
or derivatives.

Net total financial assets/(liabilities) at 31 March 2019

Net total financial assets /(liabilities) at 25 March 2018

Sterling
£m

222

521

US$
£m

Euro
£m

(394)

(381)

Other
£m

Total
£m

(106)

205

d) Commodity price risk management
UKPIL 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 forward
commodity price swaps in US Dollar or Sterling and forward currency purchase contracts 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 price
contracts with suppliers and using forward commodity price swaps in Sterling.

As the GLS business relies on the use of subcontractors, responsible for purchasing their own fuel, GLS has no direct exposure to diesel
costs. The only other significant commodity exposure within GLS is electricity, which is fragmented across its European bases. In view of
the other highly hedged positions, the Group takes the view that the unhedged exposure arising from the commodities in GLS does not add
significant risk to the Group.

1 9 9
19 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22. Financial assets and liabilities and risk management (continued)
e) Interest rate risk management
The Group’s policy is to manage its net interest expense using an appropriate mix of fixed and floating rate financial instruments, combined
with external hedging of interest rate risk, as appropriate, to keep a high percentage of its gross debt fixed. At 31 March 2019, there was no
external hedge of interest rate risk (2017-18: none). Interest on financial instruments classified as floating rate is re-priced at intervals
of less than one year. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument.

The analysis below sets out the carrying amount of the Group’s financial instruments that are exposed to interest rate risk.

Fixed rate

Financial liabilities

Loans in overseas subsidiaries

€500 million bond

Obligations under finance leases

Total

Floating rate

Cash at bank

Cash equivalent investments – money market funds

Cash equivalent investments – bank deposits

Financial assets

Pension escrow investments (non-current)

Total

Non-interest bearing

Cash at bank or in hand

Derivative assets

Derivative liabilities

Total

Total financial assets

Total financial liabilities

Net total financial assets/(liabilities)

Average
effective
interest
rate
%

0.9

2.5

2.7

0.1

0.8

0.9

At 31 March 2019

Within
one year
£m

One to two
years
£m

Two to
five years
£m

More than
5 years
£m

Total
£m

–

(37)

–

145

(3)

244

(40)

204

–

(30)

(1)

–

(44)

(45)

–

(430)

(14)

(444)

(1)

(430)

(125)

(556)

–

(2)

(32)

(28)

–

(45)

–

207

–

207

(444)

(237)

207

352

(5)

455

(561)

(106)

2 0 0
2 0 0

FINANCIAL STATEMENTS

22. Financial assets and liabilities and risk management (continued)

Fixed rate

Cash equivalent investments – bank deposits

Financial liabilities

Loans in overseas subsidiaries

€500 million bond

Obligations under finance leases

Total

Floating rate

Cash at bank

Cash equivalent investments – money market funds

Cash equivalent investments – bank deposits

Financial assets

Average
effective
interest
rate
%

0.6

1.4

2.5

2.7

0.2

0.4

0.5

Pension escrow investments – money market funds (non-current)

0.4

Total

Non-interest bearing

Cash at bank or in hand

Derivative assets

Derivative liabilities

Total

Total financial assets

Total financial liabilities

Net total financial assets/(liabilities)

At 25 March 2018

Within
one year
£m

One to two
years
£m

Two to five
years
£m

More than
5 years
£m

–

(1)

–

(59)

206

128

–

407

123

(3)

135

615

(63)

552

(1)

–

(27)

(28)

–

(4)

–

(32)

(28)

–

(69)

–

(69)

(68)

–

(435)

(14)

(449)

–

198

–

198

(449)

(251)

Total
£m

(2)

(435)

(169)

(536)

206

128

198

605

123

(7)

136

818

(613)

205

Drawings under the syndicated bank loan facilities are at fixed rate to maturity (which must be six months or less). There are no balances
outstanding at 31 March 2019 (2017-18: none). The total interest-bearing financial assets of the Group (excluding the RMPP and RMSEPP
pension escrow investments) of £145 million (2017-18: £477 million), which consist of the fixed and floating rate cash and cash equivalent
investments, plus current financial asset investments, are at short-dated fixed or variable interest rates with an average maturity of three
days (2017-18: an average maturity of four days). These short-dated financial instruments are maturity-managed to obtain the best value
out of the interest yield curve.

Obligations under finance leases are either unsecured or secured on the leased assets. The average interest rate is 2.7 per cent (2017-18:
2.7 per cent). The average maturity date is more than five years (2017-18: more than five years).

The RMPP pension escrow investment of £187 million (2017-18: £178 million) represents a money market fund investment, established
with the agreement of the Pension Trustee for the benefit of members.

The RMSEPP pension escrow investment of £20 million (2017-18: £20 million) was established to provide security to the RMSEPP. The next
scheduled review point in the agreement is in 2025 and the investment is therefore disclosed as maturing in more than five years. The
escrow investment comprises a money market investment of £14 million (2017-18: £20 million) and a loan of £6 million (2017-18: £nil) to
the Plan Trustees to enable them to purchase a further buy-in insurance policy.

2 0 1
2 0 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22. Financial assets and liabilities and risk management (continued)
f) Liquidity risk management
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. Borrowing facilities are regularly reviewed
to ensure continuity of funding. The unused facilities for the Group of £1,050 million expire in 2020-22 (2017-18: £1,050 million expiring
in 2020-22).

Below is a summary of the gross (undiscounted) contractual cash flows of the Group’s financial liabilities. The cash flows for the
€500 million bond and Euro-denominated finance leases represent the undiscounted total amounts payable (interest and nominal
repayment) which have been converted to Sterling at 31 March 2019 market forward exchange rates. For derivatives that are settled gross,
these cash flows represent the undiscounted gross payment due and do not reflect the accompanying inflow. For derivatives that are settled
net, these cash flows represent the undiscounted forecast outflow.

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

Less interest

Less exchange rate adjustment

Net total

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

Less interest

Less exchange rate adjustment

Net total

At 31 March 2019

Gross
loans and
borrowings
commitments
£m

Gross
finance lease
instalments
£m

Sub-total
£m

Gross
payments on
derivatives
settled gross
£m

Gross
payments on
derivatives
settled net
£m

514

471

524

(63)

(30)

431

207

121

721

592

246

770

(119)

(182)

(2)

125

(32)

556

–

n/a

–

n/a

At 25 March 2018

Gross
loans and
borrowings
commitments
£m

Gross
finance lease
instalments
£m

Gross
payments on
derivatives
settled gross
£m

Gross
payments on
derivatives
settled net
£m

Sub-total
£m

231

122

293

(122)

(2)

169

768

111

614

841

(198)

(37)

606

–

n/a

–

n/a

537

492

548

(76)

(35)

437

2 0 2
2 0 2

Total
£m

143

723

592

866

n/a

Total
£m

167

772

111

614

939

n/a

FINANCIAL STATEMENTS

22. Financial assets and liabilities and risk management (continued)
g) Credit risk management
The level of credit granted to customers 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 to ensure that UKPIL is not in breach of compliance legislation.
Assessment of credit for non-regulated products is based on commercial factors, commensurate with the Group’s appetite for risk.
An analysis of aged debt is included within Note 18.

The Group’s exposure to credit risk from other financial assets arises from default of the counterparty, with a maximum exposure equal
to the carrying amount of these instruments. At 31 March 2019, 83 per cent of financial assets (2017-18: 73 per cent) were held with AA
or above rated counterparties.

GLS operates a decentralised credit management model, with each country responsible for managing the credit risk associated with its
customers. Where appropriate, external credit checks are performed for new and existing customers, taking into account the customer
profile, expected volume of business and consequent risk to the respective GLS companies.

None of the financial assets is either past due or considered to be impaired.

h) Sensitivity analysis
As a result of the mix of fixed and variable rate financial instruments and the currency and commodity hedge programmes in place, the
Group has no material exposure to 2018-19 operating profit risk from interest rate risk or commodity price risk (2017-18: £nil risk). Further
details of the Group’s exposure to commodity price risk can be found in the Financial Review.

The Group has an exposure to the exchange rate risk on translating the GLS profits; on trading with overseas postal administrations; on
various purchase contracts, and on the interest on the €500 million bond and Euro-denominated finance leases. The impact of a ten per cent
strengthening of Sterling across all currencies on forecast profits/trade during 2018-19 would be to reduce the Group operating profit by
£13 million (2017-18: £3 million). However, changes in exchange rates could also cause other impacts on operating profit, including a
change in import/export volumes.

The Group has an exposure to the exchange rate risk on translating the GLS net assets into Sterling on consolidation. This is partially offset
by an exposure on translating the €500 million bond and Euro-denominated finance leases into Sterling at each balance sheet date. The
impact of a ten per cent strengthening of Sterling against all currencies at 31 March 2019 would have been to reduce the Group net assets
by £27 million (2017-18: £24 million).

2 0 3
2 0 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. Provisions

This Note provides an analysis of the Group’s constructive or legal obligations, resulting from a past event, that have been provided for in
the financial statements.

At 26 March 2018

Arising during the year:

Transformation
costs
£m

Specific
items
£m

Other
£m

Total
£m

(1)

(106)

(55)

(162)

Charged in transformation costs and operating specific items

(46)

(1)

Charged in other operating costs

Unused amounts released

Utilised in the year

Unwinding of discount – industrial diseases claims

At 31 March 2019

Disclosed as:

Current

Non-current

At 31 March 2019

Disclosed as:

Current

Non-current

At 25 March 2018

–

(11)

–

(11)

(1)

–

(1)

–

(2)

(100)

(9)

(91)

(100)

(13)

(93)

(106)

Transformation costs
Transformation costs provisions comprise £11 million (2017-18: £1 million) in respect of redundancy schemes.

–

(27)

–

(47)

(27)

(2)

(51)

(162)

(38)

(13)

(51)

(45)

(10)

(55)

(58)

(104)

(162)

(59)

(103)

(162)

2 0 4
2 0 4

FINANCIAL STATEMENTS

23. Provisions (continued)
Specific items and other provisions
Below is a summary of the ageing profile of specific items and other provisions.

At 31 March 2019

At 25 March 2018

Expected period of settlement

Within
one year
£m

One to
two years
£m

Two to
five years
£m

After five
years
£m

Total
£m

Within
one year
£m

One to
two years
£m

Two to
five years
£m

After five
years
£m

Total
£m

Specific items

Industrial diseases claims

German property tax

Employee Free Shares – NI

Legacy property costs

Other

Total

Other

Property onerous lease and
decommissioning
obligations

Litigation claims

LTIP – NI

Other

Total

(3)

–

(4)

–

(2)

(9)

(5)

(30)

–

(3)

(38)

(3)

(5)

–

(9)

(68)

(83)

–

(1)

–

(5)

–

(5)

(4)

(6)

(2)

(3)

–

(5)

–

(5)

(8)

(10)

(73)

(100)

(13)

(3)

(1)

–

(5)

(3)

(5)

–

(16)

(31)

(1)

(3)

(5)

(51)

(12)

(31)

–

(2)

(45)

(3)

(5)

(1)

–

(9)

–

(2)

(4)

(3)

–

(1)

–

(4)

(5)

(1)

–

(6)

(74)

(83)

–

(6)

–

(5)

(6)

(7)

(5)

(80)

(106)

–

(17)

(32)

(2)

(4)

(55)

The potential liability for industrial diseases claims relating to both current and former employees of the Group arose in 2010 as a result of a
Court of Appeal judgement that held the Group liable for diseases claims brought by individuals who were employed in the General Post
Office Telecommunications division and whose employment ceased prior to October 1981. Consequently, a provision was first recognised in
2010-11. The Group has derived its current provision by using estimates and ranges calculated by its actuarial adviser, which are based on
current experience of claims, and an assessment of potential future claims, the majority of which are expected to be received over the next
25 to 30 years. The Group has a rigorous process of ensuring that only valid claims are accepted.

Provisions for litigation claims mainly comprise outstanding liabilities in relation to road traffic accident and personal injury claims.

24. Share capital and reserves

This Note details the number of shares Royal Mail plc has issued, and any special features of the issued shares. A description of certain
reserves that form part of total equity is also included.

Authorised and issued

1,000,000,000 ordinary shares of £0.01 each

Total

At 31 March
2019
£m

At 25 March
2018
£m

Of the issued ordinary shares, a total of 70,331 (2017-18: 513,230) are held by an Employee Benefit Trust (EBT) administered by Sanne
Fiduciary Services Limited. These shares are treated as treasury shares for accounting purposes in accordance with IAS 32 ‘Financial
Instruments: Presentation’. The Company, however, does not hold any shares in treasury. The EBT is funded by the Company and has
been consolidated within these financial statements.

2 0 5
2 0 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

24. Share capital and reserves (continued)

Reserves included in the consolidated statement of changes in equity
Foreign currency translation reserve
The Foreign currency translation reserve is used to record the gains and losses arising since 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 since 28 March 2005 from cash flow hedges.

25. Commitments

The information below includes details of committed future rental payments for the use of assets which the Group does not legally own,
and are either not recognised on the Group’s balance sheet (operating leases) or are recognised on the Group’s balance sheet (finance
leases) on the basis that the risks and rewards incidental to ownership of the leased assets lie with the Group.

Operating lease commitments
The Group is committed to the following future minimum lease payments under non-cancellable operating leases:

Land and buildings

Vehicles and equipment

IT equipment

Total

At 31 March
2019
£m

At 25 March
2018
£m

At 31 March
2019
£m

At 25 March
2018
£m

At 31 March
2019
£m

At 25 March
2018
£m

At 31 March
2019
£m

At 25 March
2018
£m

Within one year

Between one and five years

Beyond five years

Total

(147)

(489)

(564)

(1,200)

(135)

(395)

(457)

(987)

(27)

(74)

(10)

(23)

(64)

(15)

(111)

(102)

(5)

(11)

–

(16)

(4)

(5)

–

(9)

(179)

(574)

(162)

(464)

(472)

(1,327)

(1,098)

Existing leases for UK land and buildings have an average term of 17 years and lease renewals are agreed with the lessor as appropriate.
Existing land and buildings leased overseas by the GLS subsidiary have an average lease term of 10 years. Vehicle leases generally have a
term of between one and seven years, depending on the asset class, with the average term being six years. The existing leases have an
average term remaining of four years. The majority of the IT commitments relate to three contracts, with an average term remaining of
two years.

Finance lease commitments

Within one year

Between one and five years

Beyond five years

Total minimum lease payments

Less future finance charges

Less exchange rate impact

Total

At 31 March 2019

At 25 March 2018

Minimum
lease
payments
£m

Present value of
minimum lease
payments
£m

Minimum
lease
payments
£m

Present value of
minimum lease
payments
£m

(39)

(86)

(121)

(246)

119

(125)

(37)

(74)

(14)

(125)

–

(125)

(62)

(109)

(122)

(293)

122

(169)

(59)

(96)

(14)

(169)

–

(169)

The Group has finance lease contracts for vehicles, land and buildings and plant and equipment. The leases have no terms of renewal,
purchase options, escalation clauses or restrictions concerning dividends, borrowings or additional leases. Vehicle leases have a term
of between one and five years, depending on the class of vehicle, with the average term being two years. Property leases have a term
of between 10 and 109 years with the average term being 48 years. The plant and equipment leases have a term of five years.

Capital commitments
The Group has commitments of £73 million (2017-18: £62 million) for property, plant and equipment, £8 million (2017-18: £14 million)
for vehicles and £3 million (2017-18: £11 million) for intangible assets, which are contracted for but not provided for in the
financial statements.

2 0 6
2 0 6

FINANCIAL STATEMENTS

26. Contingent liabilities

Contingent liabilities are possible obligations depending on the outcome of uncertain future events, or present obligations where
outflows of resources are not certain or cannot be measured reliably. This disclosure has been included on the basis that the Group
may be subject to a financial penalty, dependent on a future Ofcom decision.

On 14 August 2018, Ofcom published its decision following its investigation into whether Royal Mail had breached competition law. The
investigation was launched in February 2014, following a complaint brought by TNT Post UK (now Whistl). Ofcom found that Royal Mail had
abused its dominant position in the market for bulk mail delivery services in the United Kingdom by issuing Contract Change Notices on 10
January 2014 which introduced discriminatory prices. It fined Royal Mail £50 million. In October 2018, Whistl filed a damages claim against
Royal Mail at the High Court relating to Ofcom’s decision.

The Group robustly defended its conduct in written and oral representations made to Ofcom during the investigation and continues to
maintain that it has not infringed competition law. It launched an appeal with the Competition Appeal Tribunal on 12 October 2018 to have
both Ofcom’s decision and fine overturned. No fine is payable and Whistl’s High Court claim is on hold until after the completion of the
appeal process.

27. Related party information

This Note provides details of amounts owed to and from related parties, which include the Group’s defined benefit pension plans
(RMPP and RMSEPP), the Group’s associate companies, and payments to key management personnel. Details of the Group’s principal
subsidiaries and associates are also provided.

Related party transactions
During the reporting year the Group entered into transactions with related parties as follows:

Sales/recharges to:

RMPP (administration and investment service recharge)

Purchases/recharges from:

Associate undertaking (Quadrant Catering Limited)

Amounts owed to:

Associate undertaking (Quadrant Catering Limited)

Amounts owed from:

RMSEPP1

53 weeks
2019
£m

52 weeks
2018
£m

(7)

(1)

(7)

(1)

–

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.

In December 2018 Royal Mail Group Ltd, a subsidiary of Royal Mail plc, agreed to a loan of £7,750,000 being made from the RMSEPP escrow to the Trustees of that Plan. This
facilitated completion of the purchase of a buy-in policy of insurance. This loan is unsecured and is being repaid with the proceeds from the sale of Plan investments, as they are
received by the Trustees. The loan is due to be repaid by 21 September 2019, or such later date as the Company agrees. At 31 March 2019, £6,200,200 is still outstanding. The
outstanding loan is included as a non-current asset as it will be repaid to the pension escrow investment - money market funds.

2 0 7
2 0 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

27. Related party information (continued)
Key management compensation

Short-term employee benefits

Post-employment benefits

Other long-term benefits

Share-based payments

Total

53 weeks
2019
£000

52 weeks
2018
£000

(4,999)

(14,592)

(23)

(135)

(70)

(551)

(1,531)

(3,679)

(6,688)

(18,892)

Key management are considered to be the Executive and Non-Executive Directors of Royal Mail plc, all other members of the Executive
Board (formerly the Chief Executive’s Committee see pages 90 to 91) and the remainder of the Persons Discharging Managerial
Responsibilities.

The ultimate parent and principal subsidiaries
Royal Mail plc is the ultimate parent Company of the Group. The consolidated financial statements include the financial results of Royal
Mail Group Limited and the other principal subsidiaries listed below. The reporting year end for these entities is 31 March 2019 unless
otherwise indicated.

Company

Principal activities

Country of incorporation

General Logistics Systems B.V.2

Parcel services holding company Netherlands

Royal Mail Estates Limited

Royal Mail Investments Limited

Property holdings

Holding company

RM Property and Facilities Solutions Limited

Facilities management

United Kingdom

% equity
interest
2019

% equity
interest
2018

100

The Company has complied with section 410 of the Companies Act 2006 by including, in these financial statements, a schedule of interests
in all undertakings (see Note 28).

2 GLS’ reporting year end date is 31 March each year. No adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group’s reporting year

end date (last Sunday in March) a full year of GLS results is consolidated into the Group.

28. Related undertakings of Royal Mail plc

This Note provides a full list of the related undertakings of Royal Mail plc in line with Companies Act requirements.

In accordance with Section 409 of the Companies Act 2006 a full list of related undertakings, the country of incorporation, registered office
address and the effective percentage of equity owned, as at 31 March 2019 is disclosed below. Unless otherwise stated, the share capital
disclosed comprises ordinary or common shares which are held by subsidiaries of Royal Mail plc Group.

Subsidiary undertakings included in the consolidation
Company Name

Austria

Traunuferstrasse 105A, A-4052 Ansfelden, Austria

General Logistics Systems Austria GmbH

Belgium

Humaniteitslaan 233, 1620 Drogenbos, Belgium

General Logistics Systems Belgium N.V.

GLS Belgium Distribution S.A/N.V.

China

Share Class

% held by Group

Ordinary shares

100.000

€100.00 Ordinary shares

€4.27 Ordinary shares

100.000

Suite 966, 9F, No.2 bldg, China Central Place, No.79, Jian Guo Rd, Chao Yang District, Beijing

EBP Consultancy (Beijing) Co. Ltd

–

100.000

2 0 8
2 0 8

FINANCIAL STATEMENTS

28. Related undertakings of Royal Mail plc (continued)

Company Name

Canada

10500, av. Ryan Dorval Quebec H9P 2T7

Dicom Transportation Group Canada, Inc.

Dicom Real Estate Holdings, Inc.

Modern Forwarding Incorporated

Dicom Dedicated Fleet, Inc.

1055, West Hastings Street, Suite 1700, Vancouver BC V6E 2E9

1176984 B.C. Ltd

Croatia

10010360 Popovec, Varazdinska ulica 116, Croatia

General Logistics Systems Croatia d.o.o

Czech Republic

Průmyslová 5619/1, 58601 Jihlava, Czech Republic

General Logistics Systems Czech Republic s.r.o

Denmark

Kokmose 3, 6000 Kolding, Denmark

General Logistics Systems Denmark A/S

Kokholm 13, 6000 Kolding, Denmark

General Logistics Systems Express A/S

Finland

Rydöntie 6, 20360 Turku, Finland

General Logistics Systems Finland 0y

France

Share Class

% held by Group

Common shares, no par value

100.000

Common shares, no par value

100.000

Ordinary shares

100.000

Ordinary shares

100.000

DKK100.00 Ordinary shares

100.000

DKK1,000.00 Ordinary
shares

100.000

€50.00 Ordinary shares

100.000

14 Rue Michel Labrousse, CS 93730, 31037 Toulouse Cedex 01, France

General Logistics Systems France S.A.S

GLS Invest France S.A.S

€50.00 Ordinary shares

€271.21 Ordinary shares

100.000

2 0 9
2 0 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

28. Related undertakings of Royal Mail plc (continued)

Company Name

Germany

Doerrwiese 2, 36286 Neuenstein, Germany

Der Kurier Beteiligungsgesellschaft mbH

Der Kurier GmbH & Co. KG

GLS Germany-Str. 1-7, 36286 Neuenstein, Germany

General Logistics Systems Germany GmbH & Co. OHG

GLS IT Services GmbH

GLS Beteiligungs GmbH

GLS Verwaltungs-und Service GmbH

GLS eCom Lab GmbH

Wendenstraße 349, 20537 Hamburg, Germany

Share Class

% held by Group

Ordinary shares

€2,561,572.32 Cash
contribution

€47,968,004.75 Cash
contribution

Ordinary shares

100.000

Overnight Services GmbH Vermittlung Ueberregionaler Kurierdienste

Ordinary shares

100.000

Guernsey

PO BOX 160, Dixcart House, St Peter Port, GY1 4EY, Guernsey

Postcap (Guernsey) Limited

Hungary

GLS Europa utca 2, 2351 Alsonemedi, Hungary

GLS General Logistics Systems Hungary Kft.

Ireland

Unit 1 Stadium Business Park, Ballycoolin Road, Ballycoolin, Dublin, D11 DK24, Ireland

£1.00 Ordinary shares

100.000

Ordinary shares

100.000

RM Financing Operations Limited

RMF Operations Designated Activity Company

Italy

Via Basento No. 19, 20098 San Giuliano Milanese, Italy

Agone S.r.L

General Logistics Systems Enterprise S.r.L

General Logistics Systems Italy S.p.A.

Gruppo Executive Societa Consortile a.r.l

Luxembourg

Avenue de Luxembourg, 2 a 4950 Bascharage

€1.00 Ordinary shares

€1.00 Redeemable Preference shares

US$1.00 Ordinary shares

US$1.00 Redeemable Preference shares

€10,000.00 Ordinary shares

€1,014,000.00 Ordinary shares

€0.52 Ordinary shares

€0.51 Ordinary shares

100.000

–

100.000

83.670

General Logistics Systems Belgium S.A. Succursale de Luxembourg1

–

2 1 0
2 1 0

FINANCIAL STATEMENTS

28. Related undertakings of Royal Mail plc (continued)

Company Name

Netherlands

Breguetlaan 28-30, 1438 BC Oude Meer, Netherlands

Share Class

% held by Group

General Logistics Systems B.V.

€100.00 Ordinary shares

100.000

Proostwetering 40, 3543 AG Utrecht, Netherlands

General Logistics Systems Netherlands B.V.

GLS Netherlands Holding B.V.

GLS Netherlands Services B.V.

Poland

Ul. Teczowa 10, Gluchowo, 62-052 Komorniki, Poland

€50.00 Ordinary shares

€0.50 Ordinary shares

€50.00 Ordinary shares

100.000

General Logistics Systems Poland Spolka zo.o

PLN1,721.00 Ordinary shares

100.000

Portugal

Rua da Bica, No. 10, 2669-608 Venda do Pinheiro, Portugal

General Logistics Systems Portugal Lda

Romania

106, Str. Dorobantilor, 550231 Sibiu, Romania

GLS General Logistics Systems Romania Srl

Slovakia

Budca 1039, 962 33 Budca, Slovakia

GLS General Logistics Systems Slovakia s.r.o

Slovenia

Cesta v Prod 84, 1129 Ljubljana, Slovenia

General Logistics Systems, logisticne storitve, d.o.o.

1 Branch of GLS Belgium. No shares are issued or held.

Ordinary shares

100.000

RON4,000.00 Ordinary shares

100.000

Ordinary shares

100.000

Ordinary shares

100.000

2 1 1
2 1 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

28. Related undertakings of Royal Mail plc (continued)

Company Name

Spain

Avenida Fuentemar 18, 28823 Coslada, Madrid, Spain

General Logistics Systems Spain S.A

United Kingdom

100 Victoria Embankment, London, EC4Y 0HQ, United Kingdom

Angard Staffing Solutions Limited

Community Couriers Ltd2

Consignia (Customer Management) Limited2

Consignia Limited2

DGMH Clayton Limited2

Envision Licensing Limited2

Intersoft Systems & Programming Limited

IRED Partnership Limited2

Nine Elms Parkside Estate Management Company Limited

Parcelforce Limited

Phatware Limited2

POSG Limited2

Revisecatch Limited

RM (International) Limited

Royal Mail Courier Services Ltd

Royal Mail Enterprises Limited

Royal Mail Estates Limited

Royal Mail Finance (No2) Limited2

Royal Mail Finance Limited2

Royal Mail Group Limited

Royal Mail Innovations Limited

Royal Mail Investments Limited

Senditnow Limited2

Storefeeder Ltd

Viacode Limited2

Share Class

% held by Group

€60.10 Ordinary shares

100.000

£1.00 Ordinary shares

£1.00 Ordinary-A shares

£1.00 Ordinary-B shares

£1.00 Ordinary-C shares

£1.00 Ordinary shares

£0.01 Ordinary shares

£1.00 Ordinary shares

100.000

69.044

16.231

4.691

10.034

Century House, 19 High Street, Marlow, Buckinghamshire, SL7 1AU, United Kingdom

NetDespatch Ltd

In liquidation

£0.001 Ordinary-A shares

£0.001 Ordinary-B shares

£0.001 Ordinary-C shares

£0.001 Ordinary-D shares

2 1 2
2 1 2

FINANCIAL STATEMENTS

28. Related undertakings of Royal Mail plc (continued)

Company Name

Share Class

% held by Group

Highbank House, Exchange Street, Stockport, Cheshire, SK3 0ET, United Kingdom

RM Property and Facilities Solutions Limited (formerly Romec Limited)

£1.00 Ordinary shares

£1.00 B shares

£1.00 C shares

98.040

0.980

Romec Enterprises Limited

£1.00 Ordinary shares

100.000

11 Ironmonger Lane, London, EC2V 8EY, United Kingdom

Royal Mail Pensions Trustees Limited

£1.00 Ordinary shares

100.000

USA

1679 S. Dupont Highway, Suite 100, Dover, Delaware 19901, USA

General Logistics Systems North America Inc.

USD 0.001 Common stock

100,000

7901 Stoneridge Drive, Suite 400, Pleasanton, CA 94588, USA

Golden State Overnight Delivery Services, Inc.

1,000 Shares Common stock

100.000

3400 Capital Blvd SE 101, Tumwater, WA 98501, USA

Postal Express, Inc.

428.57 Shares Common stock

100.000

676, N. Michigan Ave, Suite 3700, Chicago IL 60611

Dicom JD, LLC.3

–

Dicom Transportation Group Canada Parent, Inc.

99.00 Shares Common stock

100.000

Associate undertakings
Company Name

Associates

Australia

Level 1, 60 Toorak Road, South Yarra, VIC 3141

Market Engine Global Pty Limited

United Kingdom

Share Class

% held by Group

AUD1.00 Preference shares

34.474

Hayweight House, 5th Floor, 23 Lauriston Street, Edinburgh, Scotland, EH3 9DQ, United Kingdom

Mallzee Ltd

£0.01 Ordinary shares

21.050

Parklands Court, 24 Parklands, Birmingham Great Park, Rubery, Birmingham, West Midlands, B45 9PZ, United Kingdom

Quadrant Catering Limited

£1.00 Ordinary-A shares

51.000

70 Margaret Street, London, W1W 8SS, United Kingdom

JICMAIL Limited4

3 Member managed company.
4 Limited by guarantee.

–

20.000

2 1 3
2 1 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES

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 at arm’s length/fair value on the 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 interests 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 interests balance is presented within equity in the consolidated balance sheet, separately
from equity attributable to shareholders of the Company.

Changes in accounting policy and disclosures
The accounting policies applied in the preparation of these financial statements are consistent with those in the Annual Report and Financial
Statements for the year ended 25 March 2018, and the adoption of new and amended accounting standards with effect from 26 March 2018
as detailed below:

New and amended accounting standards adopted in 2018-19
IFRS 15 ‘Revenue from Contracts with Customers’

IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’

IFRS 2 (Amended) ‘Classification and Measurement of Share-based Payment Transactions’

IFRS 4 (Amended) ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’

IAS 40 (Amended) ‘Transfers of Investment Property’

Annual Improvements 2014-2016

The adoption of IFRS 15 has been made in accordance with all transitional provisions and disclosure requirements of the standard.
Management has elected to follow the modified transition approach, under which there is no requirement to restate prior year balances,
applying the standard to all contracts from 25 March 2018.

From a review of existing revenue policies and specific significant contracts in place at the transition date, no adjustment to the opening
retained earnings balance was required. The adoption of IFRS 15 has had no significant impact on the current year financial statements or
earnings per share.

The principal impacts of the new standard are additional disclosure requirements, which have been included in a new Note to the accounts,
and required updates to the revenue recognition policy. Further details of these changes, and of all practical expedients applied, can be
found in this section.

Other accounting standards
The Directors do not expect that the adoption of any other new or amended standards issued during the reporting period that are not yet
effective will have a material impact on the financial performance or position of the Group in future periods.

IFRS 9
The Group adopted IFRS 9 ‘Financial Instruments’ for the 2017-18 reporting year, one year earlier than the effective date
advised by the International Accounting Standards Board.

Sources of estimation uncertainty and critical accounting judgements
The preparation of consolidated financial statements necessarily requires Management to make certain estimates and judgements
that can have a significant impact on the financial statements. These estimates and judgements are continually evaluated and are
based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the
circumstances. The areas involving a higher degree of judgement or complexity, or areas where there is thought to be a significant risk of
a material adjustment to the consolidated financial statements within the next financial year as a result of the estimation uncertainty are
disclosed below.

2 1 4
2 14

FINANCIAL STATEMENTS

Key sources of estimation uncertainty
Pensions
The value of defined benefit pension plan liabilities and assessment of pension plan costs are determined by long-term actuarial
assumptions. These assumptions include discount rates (which are based on the long-term yield of high-quality corporate bonds), inflation
rates and mortality rates. Differences arising from actual experience or future changes in assumptions will be reflected in the Group’s
consolidated statement of comprehensive income. The Group exercises its judgement in determining the assumptions to be adopted, after
discussion with a qualified actuary. Details of the key actuarial assumptions used and of the sensitivity of these assumptions for the RMPP
are included within Note 10.

Defined benefit pension plan assets are measured at fair value. Where these assets cannot be valued directly from quoted market prices,
the Group applies judgement in selecting an appropriate valuation method, after discussion with an expert fund manager. The assumptions
used in valuing unquoted investments are affected by current market conditions and trends, which could result in changes to the fair value
after the measurement date. Details of the carrying value of the unquoted pension plan asset classes can be found in Note 10.

Constructive obligation – Defined Benefit Cash Balance Scheme (DBCBS)
In accounting for the DBCBS pension scheme Management must apply judgement in determining whether a constructive obligation exists in
relation to annual pension benefit increases in the absence of a legal obligation. Any such constructive obligation must be included in the
calculation of the fair value of the DBCBS defined benefit liability. From an assessment of announcements and internal communications
made to members of the scheme to date, Management is of the view that scheme members would have a reasonable expectation of returns
of CPI plus two per cent. Further details are available in Note 10, including sensitivities around measures involving CPI.

Deferred revenue
The Group recognises advance customer payments on its balance sheet, predominantly relating to stamps and meter credits purchased
by customers but not yet used at the balance sheet date (see Note 20).

The majority of this balance is made up of stamps sold to the general public. To determine the amount of sales to defer, estimates of stamp
volumes held are made on the basis of monthly surveys performed by an independent third-party. Surveys of this nature are inherently
subjective, and rely upon the number and demographic profile of respondents. Together with the third party and consistent with prior years,
we make adjustments that seek to address potential bias by capping and constraining the data.

The impact of these adjustments are shown in the table below:

Number of public stamp holdings

At 31 March 2019 (£m)

At 25 March 2018 (£m)

Constrained (as reported)
Unconstrained
Constrained (as reported)
Unconstrained

156
196
154
190

Capped
As reported
99
188
232
179
220

300

211
252
188
228

Uncapped

213
254
188
228

The survey provides a 95 per cent confidence that the amount reported is unlikely to fall outside a range of +/- £ 22 million (2017-18: £19
million), and this approximately represents 44 days of stamp holdings in the hands of customers. Should the actual number of days of
stamp holdings be 10 days more or less, then the amount deferred would change by £43 million (2017-18: £43 million). The results are
reviewed by Management in order to make a judgement of the carrying amount of the accrual.

2 1 5
2 1 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Other sources of estimation uncertainty
Business acquisition - Dicom Canada
Identifiable assets acquired and liabilities and contingent liabilities assumed in business acquisitions are measured initially at their fair
values at the acquisition date. The fair value of an asset or liability represents the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. An independent valuer was used to assist in the valuation of the
Dicom Canada acquisition.

In determining the fair value of the intangible assets acquired, risk-adjusted future cash flows discounted using discount rates specific to
the asset are generally used. In determining cash flows, a combination of historical data and estimates regarding revenue growth, profit
margins and operating cash flows have been used:

– customer relationships were measured using estimates of future cash flows and expected customer retention rates.
– brands were measured by estimating the savings realised by owning or holding the right to use the brand name (as opposed to paying a
royalty fee to a third party). This includes an estimate of the projected revenues attributable to the brand, potential royalty rates and the
estimated life of the brand to a third party.

– internally developed software acquired was measured using a lost profit approach, taking into account additional software licensing
costs, the replacement cost of recreating the existing technology platforms and foregone profits during a hypothetical rebuild phase.
– other tangible assets and liabilities were measured by estimating the current cost to purchase or replace the assets, taking into account

available market data for the sale or transfer of such assets.

The excess of the consideration transferred over the fair value of the net identifiable assets acquired is recorded as goodwill. The Group has
one year from the acquisition date to remeasure the fair values of the acquired assets and liabilities and the resulting goodwill if new
information is obtained relating to conditions that existed at the acquisition date.

Acquisition-related costs are expensed as incurred. Details of the Dicom Canada acquisition during the period are disclosed in Note 11.

Goodwill impairment - GLS US businesses cash generating unit (CGU)
In assessing whether there has been any impairment of goodwill, Management determines whether the CGU carrying value is higher than
the recoverable amount of the underlying CGU. The recoverable amount is the higher of a CGU’s fair value less costs to sell (realisable
value) and value in use. In the case of goodwill allocated to the GLS US businesses CGU, the realisable value is estimated using five year
forecast cash flows. Details of the impairment review of the CGU and the relevant estimates and assumptions are included in Note 13.

Provisions
Due to the nature of provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future.
The industrial diseases claims provision is considered to be the area where the application of judgement has the most significant impact.
The industrial diseases claims provision arose as a result of a Court of Appeal judgement in 2010 and relates to individuals who were
employed in the General Post Office Telecommunications division prior to October 1981.

The provision requires estimates to be made of the likely volume and cost of future claims, as well as the discount rate to be applied to
these, and is based on the best information available as at the year end, which incorporates independent expert actuarial advice. The result
of a 0.5 per cent decrease in the discount rate estimate would be a £6 million increase in the overall industrial diseases provision. Any
income statement movements arising from changes in accounting estimates are disclosed as an operating specific item. The carrying value
of this provision is included within Note 23.

Critical accounting judgements
Contingent liabilities – Ofcom fine
Management considered Ofcom’s decision following its investigation into whether Royal Mail had breached competition law, the subsequent
imposition of a fine and Royal Mail’s appeal of Ofcom’s decision and fine. Following this assessment, which included extensive legal review,
both internal and external to the Group, Management’s view is that it is not probable that Royal Mail will be required to pay the fine and,
accordingly, no liability should be recognised in these financial statements. Further details are provided in Note 26.

Pension settlement – Royal Mail Senior Executives Pension Plan (RMSEPP) buy-in
During the period the RMSEPP Trustees purchased a further buy-in insurance policy in respect of all remaining pensioners and deferred
members of the RMSEPP. Alongside previous insurance policies purchased, this means that substantially all the liabilities of the scheme
are now covered by insurance policies. The new policy also includes provisions for the possible issue of individual policies in respect
of individual members at the future discretion of the RMSEPP Trustees. From an assessment of the nature of the policies in place,
Management has applied judgement to conclude that the purchase of this additional insurance policy should be treated as a
settlement under IAS 19.

Revenue
Revenue relates principally to the delivery of letters and parcels for a wide range of public and private customers. In the majority of
cases contracts contain a single service performance obligation, which is considered to be satisfied at the point of delivery. Transaction

2 1 6
2 16

FINANCIAL STATEMENTS

prices for services rendered are typically fixed and agreed in advance with the price being allocated in full to the single delivery
performance obligation.

Payment for services is typically received shortly before the related performance obligation is satisfied, leading to no significant contract
assets or liabilities arising. In some cases payment may be received in advance for a service that is due to be performed over a longer
period of time, for example a 12 month redirection service. In these cases the payment is initially recognised on the balance sheet as
a contract liability (deferred revenue), with revenue recognised on a straight-line basis over the life of the contract, in line with the
performance of the service.

Where products are sold through third party agents, such as the Post Office, but the responsibility to fulfil the service lies with the Group,
the revenue receivable is recognised gross with any commission payments being charged to operating costs. Where sales are known to
have occurred through a third party vendor at the balance sheet date, and the proceeds are yet to be received, revenue for the sale is
recognised, with the amount to still to be received recognised as a contract asset (accrued revenue).

In some instances volume-based incentives may be offered to customers, which leads to variable transaction prices. In these cases the
relevant contracts are continually assessed, and revenue for services performed to date at the period end recognised in line with the
expected contract outturn price. Where incentives are issued in the form of sales-based vouchers an element of the initial sales proceeds,
proportional in value to the voucher issued, is held as a contract liability and released to revenue upon use or expiry of the voucher.

Further details of the major revenue streams in each operating segment are provided below:

UK Parcels, International and Letters (UKPIL)
Revenue from direct sales of products or services is recognised when services are rendered, goods are delivered and the amount of
revenue that will flow to the Group can be measured reliably. Where payments are received for a service to be provided over a specified
length of time, payments received are recognised as deferred revenue and released to the income statement over the period that the
service is performed.

Account revenue is derived from specific contracts and recognised when the delivery of an item is complete. Contracted services that have
been paid for but not yet rendered at the balance sheet date are designated as deferred revenue.

Revenue derived from Network Access agreements is recognised when the delivery of the related items is complete.

Revenue relating to public, retail and business stamp and meter sales is recognised when the sale is made, adjusted to reflect a value of
stamp and meter credits held but not used by the customer. Further details on this deferred revenue adjustment are provided in the ‘Key
sources of estimation uncertainty’ section above.

General Logistics Systems (GLS)
Revenue is derived from specific parcel contracts and is recognised when the delivery of an item is complete.

Practical expedients:
Management has taken advantage of the following practical expedients available under IFRS 15:

(a) to not adjust transaction prices for financing components where it is expected that the time between payment and the satisfaction of the
performance obligation is less than one year (IFRS 15.63);

(b) to recognise any incremental costs of obtaining a contract (such as commissions) as an expense if the amortisation period of any
capitalised costs would be expected to be less than one year (IFRS 15.94); and

(c) to exclude disclosures on any remaining performance obligations where the original contract was expected to last for less than one year
or where revenue from a service contract corresponds directly with value to the customer of the performance completed to date (IFRS
15.121(a-b)).

People costs
These are costs incurred in respect of the Group’s employees and comprise wages and salaries, pensions and social security costs.

Distribution and conveyance costs
Distribution and conveyance costs relate to non-people costs incurred in transporting and delivering mail. These include conveyance by rail,
road, sea and air, together with costs incurred by international mail carriers, Parcelforce Worldwide delivery operators and GLS. These
costs are disclosed separately on the face of the income statement.

Infrastructure costs
These are costs primarily relating to the day-to-day operation of the delivery network and include depreciation/amortisation, IT and
property facilities management costs. These costs are disclosed separately on the face of the income statement.

2 1 7
2 17

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Transformation costs
These costs relate to the ongoing transformation of the business, including management time and costs associated with the cost avoidance
programme, and other projects with the aim of making our operations more efficient or improving our customer offering. They also include
voluntary redundancy and other termination costs.

Operating specific items
These are recurring or non-recurring items of income or expense of a particular size and/or nature relating to the operations of the
business that, in Management’s opinion, require separate identification. Management does not consider them to be reflective of year-on-
year operating performance. These include items that have resulted from events that are non-recurring in nature, even though related
income/expense can be recognised in subsequent periods.

RMSEPP buy-in settlement
These costs relate to the settlement costs incurred in the period arising from the purchase of a further buy-in insurance policy in respect of
all remaining pensioners and deferred members of the RMSEPP by the RMSEPP Trustees (see ‘Critical accounting judgements’ on page
216).

Employee Free Shares charge
This relates to accounting charges arising from the granting of free shares to employees upon the Government’s sales of its stake in the
business (SIP 2013, 2014, 2015 and 2016) with no direct cash impact on the Group.

Impairment/legacy/other costs
These costs relate either to the impairment of the GLS US network, unavoidable ongoing costs arising from historical events (industrial
diseases provision) or restructuring costs.

Amortisation of intangible assets in acquisitions
These charges, which arise as a direct consequence of IFRS business combination accounting requirements, are separately identified as
Management does not consider these costs to be directly related to the trading performance of the Group.

Non-operating specific items
These are recurring or non-recurring items of income or expense of a particular size and/or nature which do not form part of the Group’s
trading activity and, in Managements’ opinion, require separate identification.

Profit/loss on disposal of property, plant and equipment (PP&E)
Management separately identifies recurring profit/loss on disposal of PP&E as these disposals are not part of the Group’s trading activity
and are driven primarily by business strategy.

Net pension interest
Management separately identifies pension interest income as this is not part of the Group’s trading activity and is driven primarily by
actuarial calculations.

Share-based payments
The Group operates a number of equity-settled, share-based compensation schemes under which the Group receives services from
employees as consideration for equity instruments (shares) of the Company. These include the HMRC-approved (Employee Free Shares)
Share Incentive Plan (SIP) and the Save As You Earn (SAYE) scheme. Both schemes are based on non-market conditions and do not vest
until the employee completes a specific period of service. Share-based payments awarded as part of Long-Term Incentive Plans (LTIP) vest
based on a combination of non-market and market conditions. Share-based payments awarded as part of the Deferred Share Bonus Plan
(DSBP) is a deferred share award, granted to Executive Directors at the end of the annual performance period, the grant being of equal
value to the Annual Bonus, and subject to continued employment over a three year vesting period. The fair value of the employee services
received in exchange for the grant of the shares is recognised as an expense in the income statement, with a corresponding credit entry in
equity, as per the requirements of IFRS 2 ‘Share-based Payment’. The total amount expensed is determined by reference to the fair value of
the equity instruments at the date on which they are granted. The fair value of each award is measured with reference to the share price
upon issue and using the Black-Scholes model where appropriate.

The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be
satisfied. No expense is recognised for awards that do not ultimately vest. At each balance sheet date before vesting, the cumulative
expense is calculated, representing the extent to which the vesting period has expired and Management’s best estimate of the achievement
or otherwise of service conditions and of the number of equity instruments that will ultimately vest. The movement in cumulative expense
since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. The social security
contributions payable in connection with the grant of shares is considered an integral part of the grant itself, and the charge is treated as a
cash-settled transaction.

Income tax and deferred tax
The charge for current income tax is based on the results for the reporting year as adjusted for items that are non-assessable or
disallowed. It is calculated using rates that have been substantively enacted at the balance sheet date.

2 1 8
2 1 8

FINANCIAL STATEMENTS

Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and unused tax assets and
losses except:

– 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 and loss;

– taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing
of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the
foreseeable future; and

– deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which they can

be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date against internal forecasts of future profits against which
those assets may be utilised and increased or reduced to the extent that it is probable that sufficient taxable profit will be available to allow
them to be utilised.

Where tax returns remain subject to audit with the relevant tax authorities in the various jurisdictions in which the Group operates, a
provision is made for uncertain tax items where the agreed amount could differ materially from management’s estimates. Any such
provisions are included within the relevant current and deferred tax carrying amount.

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 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 charged or credited directly to equity,
otherwise it is recognised in the income statement.

Where tax credits are claimed against eligible research and development costs, these amounts are credited against the relevant expense or
capitalised asset to match the accounting treatment applied to the original expenditure.

Earnings per share (EPS)
Basic EPS from continuing operations is calculated by dividing the profit/loss from continuing operations (adjusted for the non-controlling
interests’ share of profit) by the weighted average number of ordinary shares in issue. The total Group EPS is calculated in the same way,
except that it also includes profit/loss from discontinued operations.

Diluted EPS is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all
potentially dilutive ordinary shares arising from share-based payment schemes. These potential shares are treated as dilutive only when
their conversion to ordinary shares would decrease EPS from continuing operations.

Segment information
The Group’s operating segments are organised and managed separately according to the nature of the products and services provided,
with each segment representing an operating unit that offers different products and serves largely different markets.

The Board monitors the operating results of its main operating units separately for the purpose of making decisions about resource
allocation and performance assessment. Segment performance is evaluated based on operating profit before and after transformation
costs.

Operating segments are made up of business units based in the UK, other parts of Europe and the US with the latter two being relevant
to the GLS operations. The UK operating segment comprises the various business units which make up UKPIL. There is no aggregation of
operating segments.

Segment revenues have been attributed to the respective countries based on the primary location of the service performed. Transfer prices
between segments are set at arm’s length/fair value on the basis of charges reached through negotiation between the relevant 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 IFRS.

2 1 9
2 19

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 cost, the 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

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 to 15 years

2 to 12 years

2 to 15 years

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use
or disposal. Any gain or loss arising at derecognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the asset) is included in the income statement in the year that the asset is derecognised. Gains or losses from the
disposal of assets are recognised in the income statement at the point that all significant risks and rewards of ownership are transferred.

All subsequent expenditure on property, plant and equipment is capitalised if it meets the recognition criteria, and the carrying amount of
those parts replaced is derecognised. All other expenditure including repairs and maintenance expenditure is recognised in the income
statement as incurred.

Business combinations and goodwill
Business combinations 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. For the purpose of such impairment reviews, goodwill is allocated to the relevant cash-generating units (CGUs), or groups of
CGUs, which are expected to benefit from synergies of the combination.

A goodwill impairment loss is recognised in the income statement for the amount by which the carrying value of the related CGU, or group
of CGUs, exceeds the recoverable amount, which is the higher of a CGU’s net realisable value and its value in use. Goodwill arising on the
acquisition of equity accounted entities is included in the cost of those entities and therefore not reported on 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 a finite useful life, with key strategic assets generally having the longest lives. Those with a
finite life are amortised over their useful life, but 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 intangible 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
Brands

3 to 10 years
3 to 10 years
1 to 3 years

Investment in associates
The Group’s investments in its associate companies are accounted for under the equity method of accounting. Under the equity method, an
investment is carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the associate, less
any impairment in value. The income statement reflects the Group’s share of annual post-tax profits from the associates (netted off other
operating costs as the values are not material enough for separate disclosure).

2 2 0
2 2 0

FINANCIAL STATEMENTS

Any goodwill arising on acquisition of an associate, representing the excess of the cost of the investment compared with 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.

Borrowing costs
Interest on borrowings related to the construction or development of qualifying assets is capitalised, until such time as the assets are
substantially ready for their intended use. Borrowing costs capitalised are deducted in determining taxable profit in the reporting year in
which they are incurred.

Non-current assets held for sale
Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction, rather
than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for
immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as
a completed sale within one year from the date of classification. Following their classification as held for sale, the assets (including those in
a disposal group) cease to be depreciated.

Impairment reviews
Unless otherwise disclosed in these accounting policies, assets and CGUs 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 CGU) 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 is recognised as a reduction of
rental expense over the lease term on a straight-line basis.

In addition to lease contracts, other significant arrangements or contracts are assessed (by reference to IFRIC 4) to determine whether,
in substance, they are, or contain, a lease. This assessment is based on the substance of the arrangement at inception date, including
whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to
use the asset.

Trade receivables
Trade receivables are recognised and carried at the original invoice amount less an allowance for any non-collectable amounts. This
allowance is calculated by first creating an allowance for identified trade receivables where collection of the full amount is no longer
probable and then applying lifetime expected credit loss (ECL) rates to the remaining unprovided balance. ECL rates have been set by ageing
category based on historical loss rates with adjustments made to reflect forward-looking information where material. Movements in the
loss allowance are recognised in the income statement within other operating costs. At the point that a debt is considered unrecoverable, it
is written off against the allowance for trade receivables. Subsequent recoveries of amounts previously written off are credited against
other operating costs in the income statement.

Inventories
Inventories are valued on a weighted average cost basis and carried at the lower of cost and net realisable value. Cost includes all direct
expenditure and other costs attributable in bringing inventories to their present location and condition. The principal stock balance relates to
engineering spare parts.

Trade payables
Trade payables are recorded initially at fair value and subsequently measured at amortised cost. Generally this results in their recognition at
their nominal value.

Capital management
The Group has established four key objectives for capital management. Details of these can be seen in the Financial Review on page 52.

Financial instruments
Financial assets within the scope of IFRS 9 ‘Financial Instruments’ are classified as financial assets at; fair value through the profit and loss
(FVTPL) if they are not part of an effective hedge designation (held for trading); amortised cost: or fair value through other comprehensive

2 2 1
2 2 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

income (FVOCI) as appropriate. Financial liabilities within the scope of IFRS 9 are classified as either financial liabilities at FVTPL 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 reporting
date. 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 FVTPL, any directly attributable transactional costs. The Group only has financial assets and liabilities measured
at amortised cost and derivative assets and liabilities measured at FVTPL if they are not part of an effective hedge designation.

The subsequent measurement of financial instruments depends on their classification as follows:

Financial assets measured at amortised cost
Non-derivative financial assets which are held for the purpose of collecting contractual cash flows, including interest, are classified as
financial assets measured at amortised cost. These assets are carried at amortised cost with finance income recognised in the income
statement using the effective interest rate method. Any gains or losses are recognised in the income statement when the assets are
derecognised or impaired.

Financial liabilities measured at amortised cost
All non-derivative financial liabilities are classified as financial liabilities measured at amortised cost. These liabilities are measured at
amortised cost with finance costs recognised in the income statement using the effective interest method. Any gains or losses are
recognised in the income statement when the liabilities are derecognised or impaired.

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, and
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 financial assets at amortised cost.

Financial assets – pension escrow investments
Pension escrow investments comprise a Royal Mail Senior Executives Pension Plan (RMSEPP) money market fund investment, a Royal Mail
Pension Plan (RMPP) money market fund investment and a short-term loan to the RMSEPP Trustees.

Financial assets – other investments
Other investments comprise short-term deposits (other investments) with banks with an original maturity of three months or more. Short-
term deposits are classified as financial assets at amortised cost.

Financial liabilities – interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost. The €500 million bond is measured at amortised
cost in Euro and converted to Sterling at the closing spot Sterling/Euro exchange rate.

Financial liabilities – obligations under finance leases
All obligations under finance leases are classified as financial liabilities measured at amortised cost. The Euro-denominated finance lease
creditors are measured at amortised cost in Euro and converted to Sterling at the closing Sterling/Euro exchange rate.

Derivative financial instruments and hedging programmes
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 attributable either to a particular risk associated with a recognised asset or liability, or to a highly probable
forecast transaction.

In relation to cash flow hedges to hedge the interest rate, 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 reporting year in which the hedged firm commitment affects the net
profit/loss, for example when the hedged transaction actually occurs.

Derivatives that do not qualify for hedge accounting are classified as FVTPL and any gains or losses arising from changes in fair value are
taken directly to the income statement in the year. 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 13 ‘Fair Value Measurement’.

2 2 2
2 2 2

FINANCIAL STATEMENTS

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 reporting year.

Fair value measurement of financial instruments
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value
hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).

Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date.

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.

The Group determines whether any transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each
reporting year. For the purposes of disclosing the Level 2 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. For the €500 million bond, the disclosed fair value is calculated
as the closing market bond price converted to Sterling using the closing spot Sterling/Euro exchange rate.

For the purposes of comparing carrying amounts to fair value, fair values have been calculated using current market prices (bond price,
interest rates, forward exchange rates and commodity prices) and discounted using appropriate discount rates.

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. Accounting estimates used in calculating the provisions are discussed further in the ‘Key sources of estimation uncertainty and
critical accounting judgements’ part of this accounting policies section.

Contingent liabilities
Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or present obligations
where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial
statements but are disclosed unless an outflow of resources is considered to be remote.

Dividends
Distributions to owners of the Company are not recognised in the income statement under IFRS, but are disclosed as a component of the
movement in shareholders’ equity. A liability is recorded for a dividend when the dividend is approved by the Company’s shareholders but
not paid at the year end. Interim dividends are recognised as a distribution when paid.

Pensions and other post-retirement benefits
The pension assets for the defined benefit plans are measured at fair value (levels 1 and 2). Unquoted securities and other pooled
investment vehicles are valued using published prices, the latest information from investment managers, or at cost less any necessary
provisions for impairment. Direct property held is valued using the latest external Royal Institute of Chartered Surveyors (RICS) valuations
(under ‘Red Book’ guidelines) adjusted for any capex spend and impairments since that valuation. 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.
The amount of any pension surplus that can be recognised is limited to the economic benefits unconditionally available in the form of
refunds or reductions in future contributions. Where the economic benefit to be obtained is in the form of a refund, this is recognised less
tax expense, in line with IFRIC 14. The Group considers this tax to be a tax other than income tax, and the pension surplus is presented net
of this tax on the balance sheet.

Full actuarial/cash funding 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 surplus disclosed.

For defined benefit plans, 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 amount resulting from applying the plan’s discount rate (for liabilities) to the pension

2 2 3
2 2 3

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

surplus at the beginning of the reporting year is recognised as net pension interest in the income statement. Remeasurement gains and
losses are recognised immediately in the statement of comprehensive income. Any deferred tax movement associated with the
remeasurement gains and losses is also recognised immediately in the statement of comprehensive income.

For defined contribution plans, the Group’s contributions are charged to operating profit within people costs in the year to which the
contributions relate. Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits.

Foreign currencies
The functional and presentational currency of Royal Mail plc is Sterling (£). The functional currency of the overseas subsidiaries in Europe is
mainly the Euro (€) and for the overseas subsidiaries in the US it is the Dollar (US$).

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 year, being a reasonable approximation to the actual
transaction rate. The exchange rate differences arising on the translation, since the date of transition to IFRS, are taken directly to the
foreign currency translation reserve in equity.

Foreign currency exchange differences arising from translation of the €500 million bond and the Euro-denominated finance leases
(designated as hedges of the net investment in GLS) to closing Sterling/Euro exchange rates are deferred to the foreign currency translation
reserve in equity. These exchange differences would be released from equity to the income statement as part of the gain or loss if GLS was
sold.

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 their 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 a foreign currency are translated using the exchange
rates at the date when the fair value is determined.

Accounting standards issued but not yet applied
The following new and amended accounting standards are relevant to the Group and are in issue but were not effective (and in some
instances have not yet been adopted by the EU) at the balance sheet date:

IAS 1 (Amended) and IAS 8 (Amended) ‘Definition of Material’*

IAS 19 (Amended) ‘Plan Amendment, Curtailment or Settlement’*

IAS 28 (Amended) ‘Long-term Interests in Associates and Joint Ventures’

IFRS 3 (Amended) ‘Definition of a Business’*

IFRS 9 (Amended) ‘Prepayment Features with Negative Compensation’

IFRS 10 (Amended) and IAS 28 (Amended) ‘Sale of Assets between an Investor and its Associate or Joint Venture’*

IFRS 16 ‘Leases’

IFRS 17 ‘Insurance Contracts’*

IFRIC 23 ‘Uncertainty over Income Tax Treatments’

Annual Improvements 2015-2017*
* Not yet endorsed by the EU.

With the exception of IFRS 16, the Directors do not expect that the adoption of the amendments, interpretations and annual improvements
listed above (which the Group does not expect to early adopt) will have a material impact on the financial performance or position of the
Group in future periods. IFRS 16 is explained in more detail below as it is considered of particular importance to the Group.

2 2 4
2 24

FINANCIAL STATEMENTS

IFRS 16 ‘Leases’
Effective 1 January 2019, IFRS 16 ‘Leases’ was issued in January 2016 to replace IAS 17 ‘Leases’. The Group will apply the standard with
effect from 1 April 2019. As lessees the Group will capitalise operating leases through the recognition of assets representing the contractual
rights of use. The present value of contractual payments will be recognised as lease liabilities.

The most significant impact on the Group from applying IFRS 16 will be the recognition of ’right of use’ assets in respect of property, vehicles
and equipment, leased by the Group under contracts previously classified as operating leases under IAS 17. The Group will apply IFRS 16 on
a modified retrospective basis without restating prior years and apply the following exemptions and choices on transition at 1 April 2019:

– Only apply IFRS 16 to contracts previously identified as leases under IAS 17.
– Apply a single discount rate to portfolios of leases with similar characteristics.
– Not apply IFRS 16 to operating leases with a remaining lease term of less than 12 months; instead, continue to recognise the lease costs

through the income statement as they are incurred.

– Rely on the assessment of whether the lease contract is onerous under IAS 37 at 31 March 2019 as an alternative to performing an

impairment review of the right of use assets created. Where this is the case the carrying amount of the assets will be adjusted by the
onerous lease provision.

– Exclude initial direct costs from the measurement of the right of use asset.

The opening balance sheet at 1 April 2019 will be adjusted to create ‘right of use’ assets of around £800 million to £1.0 billion. A
corresponding lease liability of around £1.0 billion to £1.2 billion will also be recognised. Equity will decrease by around £100 million to £200
million after tax. This adjustment to equity arises from the decision to calculate the opening ‘right of use’ asset values for certain properties,
as if IFRS 16 had always applied, and represents depreciation that would have been charged up to 1 April 2019. Based on the expected
‘right of use’ assets and associated liabilities at 1 April 2019, the estimated increase in ‘operating profit after transformation costs’ is around
£35 million to £45 million.

The Group will continue to implement and refine procedures and processes to apply the new requirements of IFRS 16. As a result of this
ongoing work, it is possible that there may be some changes to the adoption impact outlined above, before the 29 September 2019 half year
results are issued. However, at this time these are not expected to be material.

Application of IFRS 16 by the Group is not expected to have a significant impact on Group finance lease accounting.

2 2 5
2 2 5

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

ROYAL MAIL PLC
ROYAL MAIL PLC
PARENT COMPANY FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL STATEMENTS

The Annual Report and Financial Statements primarily relates to the consolidated results of Royal Mail plc Group’s trading entities. The
mandatory disclosures in this section relate to the financial statements of the ultimate parent Company, Royal Mail plc (‘the Company’).

Statement of changes in equity
For the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018

At 27 March 2017

Profit for the year

Employee exercise of SAYE options

Share-based payments

Dividend paid

At 25 March 2018

Profit for the year

Purchase of own shares

Employee exercise of SAYE options

Share-based payments

Dividend paid

At 31 March 2019

Balance sheet
At 31 March 2019 and 25 March 2018
Registered number: 08680755

Non-current assets

Investment in subsidiary

Total non-current assets

Current assets

Trade and other receivables

Current liabilities

Trade and other payables

Provisions

Net current assets

Interest-bearing loans and borrowings

Net assets

Equity

Share capital

Retained earnings

Total equity

Share
capital
£m

–

Retained
earnings
£m

1,984

230

Total
equity
£m

1,994

230

(231)

2,052

2,062

–

235

(10)

235

(10)

(242)

2,070

2,080

At 31 March
2019
£m

At 25 March
2018
£m

Notes

2,111

2,081

427

434

(28)

–

399

(430)

2,080

2,070

2,080

(18)

–

416

(435)

2,062

2,052

2,062

The balance sheet was approved and authorised for issue by the Board of Directors on 21 May 2019 and signed on its behalf by:

Stuart Simpson
Chief Finance Officer

2 2 6
2 2 6

FINANCIAL STATEMENTS

1. Parent Company accounting policies
Accounting reference date
The financial reporting year ends on the last Sunday in March and, accordingly, these financial statements are made up for the 53 weeks
ended 31 March 2019 (2017-18: 52 weeks ended 25 March 2018).

Authorisation of financial statements and statement of compliance with FRS 101
The financial statements of the Company for the year ended 31 March 2019 were authorised for issue by the Board of Directors on
21 May 2019. The Company is incorporated and domiciled in England and Wales.

These financial statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (FRS 101)
and in accordance with applicable accounting standards. The amendments to FRS 101 (2016-17 Cycle) issued in July 2017 and effective
immediately have been applied.

The Company has not presented its own income statement as permitted by section 408 of the Companies Act 2006. However, the results of
the Company are presented in Note 4 to these financial statements.

Basis of preparation
The Company has applied FRS 101 for all periods presented. The accounting policies which follow, set out those policies which apply in
preparing the financial statements for the reporting year ended 31 March 2019.

The Company has taken advantage of the following disclosure exemptions under FRS 101:

(a) the requirements of IFRS 7 ‘Financial Instruments: Disclosures’1;

(b) the requirements of paragraphs 91-99 of IFRS 13 ‘Fair Value Measurement’ (disclosure of valuation techniques and inputs used for fair
value measurement of assets and liabilities)1;

(c) the requirements of the second sentence of paragraph 110 and paragraphs 113(a), 114, 115, 118, 119(a) to (c), 120 to 127 and 129 of
IFRS 15 ‘Revenue from Contracts with Customers’;

(d) the requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative information in respect of:
(i) paragraph 79(a)(iv) of IAS 1 (reconciliation of shares outstanding);

(e) the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B-D, 40A-D, 111 and 134-136 of IAS 1 ‘Presentation of Financial Statements’;

(f) the requirements of IAS 7 ‘Statement of Cash Flows’;

(g) the requirements of paragraphs 17 and 18(a) of IAS 24 ‘Related Party Disclosures’ (details of key management compensation and
related party transaction amounts);

(h) the requirements in IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more
members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and

(i) the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

Changes in accounting policy
The accounting policies are consistent with those of the previous year.

Key sources of estimation uncertainty and critical accounting judgements
Due to the relatively straightforward nature of the Company and its activities, it is Management’s view that there are no significant
estimates or accounting judgements applied in the preparation of these financial statements.

Investment in subsidiary
The investment in subsidiary is stated at cost plus deemed capital contributions arising from share-based payment transactions, less any
accumulated impairment losses.

Trade receivables
Trade receivables are recognised at the original invoice amount less an allowance for any non-collectable amounts, including where
collection is no longer probable.

1 Exemption taken as equivalent disclosures are included within the consolidated financial statements of Royal Mail plc.

2 2 7
2 2 7

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

ROYAL MAIL PLC
ROYAL MAIL PLC
PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)

2. Directors’ remuneration
The Directors of the Company are not paid any fees by the Company for their services as Directors of the Company. The Directors are paid
fees by other companies of the Group. This remuneration is disclosed in the Group consolidated financial statements (see Note 4).

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 other companies of the Group.
This remuneration is disclosed in the Group consolidated financial statements (see Note 4).

4. Income statement
The Company is a non-trading company. The profit for the year of £235 million (2017-18: £230 million) is primarily the net sum of: the £243
million dividends received from Royal Mail Group Limited; management charges to and from Royal Mail Group Limited; and net interest on
the €500 million bond and intercompany balances. A loss of £5 million and a profit of £5 million (2017-18: both £5 million), on the translation
of Euro-denominated assets and liabilities has also been recognised in the year.

5. Taxation
There is no tax charge/credit for the year.

6. Investment in subsidiary

At 26 March 2018 and 27 March 2017

Investment in subsidiary – charge for Employee Free Shares/LTIP/DSBP/SAYE1

At 31 March 2019 and 25 March 2018

1 Excludes £2 million credit (2017-18: £1 million credit) associated National Insurance costs.

At 31 March
2019
£m

At 25 March
2018
£m

2,081

2,111

2,040

2,081

7. Trade and other receivables
This balance mainly consists of an intercompany loan to Royal Mail Group Limited amounting to the proceeds from the issue of the
€500 million bond (see Note 9).

8. Provisions
In relation to the transfer of Royal Mail Group Limited to the Company in 2013-14, a provision of less than £1 million remains.

9. Interest-bearing loans and borrowings
In July 2014 the Company issued €500 million 2.375 per cent Senior Fixed Rate Notes due July 2024 with a fixed annual interest coupon of
2.375 per cent. The proceeds raised were loaned to Royal Mail Group Limited.

10. Share capital

Authorised and issued
1,000,000,000 ordinary shares of £0.01 each

Total

At 31 March
2019
£m

At 25 March
2018
£m

Of the issued ordinary shares, a total of 70,331 (2017-18: 513,230) are held by an Employee Benefit Trustee (EBT) administered by Sanne
Fiduciary Services Limited. These shares are treated as treasury shares for accounting purposes in accordance with IAS 32 ‘Financial
Instruments: Presentation’. The Company, however, does not hold any shares in treasury.

The EBT is funded by the Company and has been treated as an extension of the Company for accounting purposes within these
financial statements.

2 2 8
2 2 8

FINANCIAL STATEMENTS

SHAREHOLDER INFORMATION
FINANCIAL STA TEMEN TS

GROUP FIVE YEAR SUMMARY (UNAUDITED)
GROUP FIVE YEAR SUMMARY (UNAUDITED)

This five year summary includes the financial performance and position of the DPD SL subsidiary, up to and including the 2014 reporting
year, after which time it was sold (on 31 March 2015).

Income statement – Reported

Revenue

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Operating specific items

Non-operating specific items

Earnings before interest and tax

Finance income – net pension interest (non-operating specific item)

Finance costs

Profit before tax

Tax credit/(charge) (specific items and other)

Profit after tax

Income statement – Adjusted

Revenue

Operating profit before transformation costs

Transformation costs

Operating profit after transformation costs

Finance costs

Profit before tax

Tax

Profit after tax

Financial reporting year ended March

52 weeks

2018
£m

2017
£m

2016
£m

2015
£m

53 weeks

2019
£m

10,581

10,172

9,776

9,251

9,328

474

(133)

341

(181)

175

(13)

241

(66)

175

236

(113)

123

(57)

137

(16)

212

258

490

(137)

353

(134)

231

120

(16)

335

(62)

273

485

(191)

294

(156)

167

113

(13)

267

(45)

222

611

(145)

466

(248)

133

351

(26)

400

(72)

328

At March financial reporting year end date

52 weeks

2018
£m

2017
£m

2016
£m

2015
£m

53 weeks

2019
£m

10,581

10,172

9,776

9,251

9,328

544

(133)

411

(13)

398

(93)

305

694

(113)

581

(16)

565

(111)

454

712

(137)

575

(16)

559

(121)

438

742

(191)

551

(13)

538

(118)

420

740

(145)

595

(26)

569

(138)

431

2 2 9
2 2 9

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19

FINANCIAL STA TEMEN TS

GROUP FIVE YEAR SUMMARY (UNAUDITED) (CONTINUED)
GROUP FIVE YEAR SUMMARY (UNAUDITED) (CONTINUED)

Balance sheet

Property, plant and equipment

Intangible assets

Pension escrow investments

Inventories

Trade and other receivables

Trade and other payables

Other net assets/(liabilities)

Provisions

Goodwill

Investments in associates

At March financial reporting year end date

2019
£m

2018
£m

2017
£m

2016
£m

2015
£m

2,066

2,016

2,062

2,002

1,935

631

187

608

178

567

–

451

–

1,322

1,176

1,137

1,038

300

–

960

(1,924)

(1,968)

(1,857)

(1,741)

(1,708)

(162)

380

(162)

324

(196)

316

(18)

(247)

206

(33)

(253)

182

Net operating assets and investments in associates

2,574

2,232

2,085

1,721

1,408

Cash and cash equivalents

Pension escrow investments

Loans and borrowings

Other net financial liabilities

Net cash/(debt)

Deferred tax assets/(liabilities)

Net assets before pension surplus

Pension surplus

Net assets

People numbers – year end headcount

UKPIL

GLS

Group total

236

(431)

(125)

(300)

2,283

2,336

4,619

600

(437)

(169)

2,273

2,163

4,436

299

(463)

(194)

(338)

(588)

1,159

3,839

4,998

368

(392)

(220)

(224)

(460)

1,037

3,430

4,467

287

(366)

(216)

(275)

(504)

629

3,367

3,996

Financial reporting year ended March

52 weeks

2018
£m

2017
£m

2016
£m

2015
£m

53 weeks

2019
£m

142,757

141,162

141,819

142,544

146,109

19,221

17,955

17,136

13,991

14,409

161,978

159,117

158,955

156,535

160,518

2 3 0
2 3 0

SHAREHOLDER INFORMATION

Managing your shares online
Shareholders can register through Shareview, a platform
provided by the Company’s registrars, to access shareholder
information online. www.shareview.co.uk. This service allows
you to:

– Manage your shares online.
– Receive notifications of new shareholder information by e-mail.
– Arrange dividend payments.
– Update personal records.

Company contact details
Registered office
Royal Mail plc, 100 Victoria Embankment, London, EC4Y 0HQ

Registered in England and Wales

Company number 08680755

Investor Relations
investorrelations@royalmail.com

Director of Investor Relations – Catherine Nash

When registering, you will need to have your shareholder
reference number which can be found on your share certificate,
dividend voucher or AGM voting documents.

Company Secretariat
cosec@royalmail.com

Shareholder fraud
Share scams are often run from ‘boiler rooms’ where fraudsters
cold-call investors offering them worthless, overpriced or even
non-existent shares. While they promise high returns, investors
usually end up losing their money.

5,000 people contact the Financial Conduct Authority (FCA) about
share fraud each year, with victims losing an average of £20,000
each. As much as £200 million is lost in the UK each year.

It is strongly advised that you only deal with financial services
firms that are authorised by the FCA. You can report a firm or
scam by contacting the FCA Consumer Helpline on 0800 111 6768
or using the reporting form at https://www.fca.org.uk/
consumers/report-scam-unauthorised-firm. If you have already
bought or sold shares through a ‘boiler room’, be especially
careful as fraudsters are likely to target you again or sell your
details to other criminals.

Information for investors
Our website provides information for investors, such as trading
updates, share price information, AGM and dividend information,
shareholder FAQs and results and reports. The website can be
accessed via http://www.royalmailgroup.com/investor-centre. If
you have any queries relating to your shareholding you can also
email shareholderquestions@royalmail.com.

Company Secretary - Mark Amsden

Registrar
Equiniti, Aspect House, Spencer Road, Lancing, West Sussex,
BN99 6DA

www.shareview.co.uk

Tel: 0371 384 2656 (from outside the UK: +44 (0)121 415 7086).
Lines are open 8:30am to 5:30pm UK time, Monday to Friday,
excluding public holidays in England and Wales.

Independent auditor
KPMG LLP

Corporate brokers
Bank of America Merrill Lynch
Barclays Bank plc

Financial Calendar

Strategy presentation

Trading update

Annual General Meeting

Ex-dividend date

22 May 2019

16 July 2019

18 July 2019

25 July 2019

Final Dividend Record date

26 July 2019

Final Dividend Payment date

4 September 2019

2 3 1

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATIONROYAL MAIL PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19FORWARD LOOKING STATEMENTS

Disclaimers
This document contains certain forward-looking 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. Forward-looking statements are sometimes, but not
always, identified by their use of a date in the future or such words
as ‘anticipates’, ‘aims’, ‘due’, ‘could’, ‘may’, ‘will’, ‘should’, ‘expects’,
‘believes’, ‘intends’, ‘plans’, ‘potential’, ‘targets’, ‘goal’ or ‘estimates’.

Forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the Group’s
actual financial condition, performance and results to differ
materially from the plans, goals, objectives and expectations set
out in the forward-looking statements included in this document.
Accordingly, readers are cautioned not to place undue reliance on
forward-looking statements.

By their nature, forward-looking statements relate to events
and depend on circumstances that will occur in the future and
are inherently unpredictable. 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:
changes in the economies and markets in which the Group
operates; changes in the regulatory regime within which the
Group operates; changes in interest and exchange rates; the
impact of competitive products and pricing; the occurrence
of major operational problems; the loss of major customers;
undertakings and guarantees relating to pension funds;
contingent liabilities; the impact of legal or other proceedings
against, or which otherwise affect, the Group; and risks
associated with the Group’s overseas operations.

All written or verbal forward-looking statements, made in this
document or made subsequently, which are attributable to the
Group or any persons acting on their behalf are expressly qualified
in their entirety by the factors referred to above. No assurance can
be given that the forward-looking statements in this document
will be realised; actual events or results may differ materially as
a result of risks and uncertainties facing the Group. Subject to
compliance with applicable law and regulation, the Company
does not intend to update the forward-looking statements in
this document to reflect events or circumstances after the date
of this document, and does not undertake any obligation to do so.

2 3 2

SHAREHOLDER INFORMATIONConsultancy, design and production
www.luminous.co.uk

Royal Mail, the Cruciform and the Parcelforce Worldwide logo are registered trademarks of Royal Mail Group Limited.
The GLS arrow logo is a registered trade mark of General Logistics Systems Germany GmbH & Co. OHG.
Annual Report 2018-19 © Royal Mail Group Limited 2019. All rights reserved

Design and production