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Annual Report
and Accounts
2021
Contents
Strategic Report
01-114
01
02
Highlights
At a Glance
04 Our Market
09 Our Management Philosophy
11 Our B2G Platform
13
14
16
27
32
Strategic Objectives and Achievements
Chairman’s Statement
Chief Executive’s Review
Divisional Reviews
Key Performance Indicators
35 Our people
39
77
92
95
ESG Impact and Integrity
Finance Review
Risk Management
Principal Risks and Uncertainties
105 Viability Statement
107 Section 172 (1) Statement
Corporate Governance
115-178
116 Board of Directors
119 Chairman’s Governance Overview
123 Board and Governance
125 Group Risk Committee Report
128 Audit Committee Report
133 Nomination Committee Report
135 Corporate Responsibility Committee Report
137 Compliance with the UK Corporate
Governance Code
139 Remuneration Report
171 Directors’ Report
Financial Statements
179-261
180
Independent Auditor’s Report
191 Consolidated Income Statement
192 Consolidated Statement of
Comprehensive Income
193 Consolidated Statement of Changes in Equity
194 Consolidated Balance Sheet
195 Consolidated Cash Flow Statement
196 Notes to the Consolidated Financial Statements
253 Company Balance Sheet
254 Company Statement of Changes in Equity
255 Notes to the Company Financial Statements
259 Appendix: List of subsidiaries and
related undertakings
262 Shareholder information
263 Useful Contacts
Serco is a leading international provider of
public services. Our Purpose, or as some
might call it, our mission, is to be a trusted
partner of governments, delivering superb
public services that transform outcomes
and make a positive difference to our fellow
citizens.
We gain scale, expertise and diversification
by operating internationally across five
sectors and four geographies: Defence,
Justice & Immigration, Transport, Health &
other Facilities Management and Citizen
Services, delivered in the UK & Europe,
North America, Asia Pacific and the
Middle East.
20+
COUNTRIES
500+
CONTRACTS
50,000+
EMPLOYEES
For more and the latest information
please visit our website at:
www.serco.com
Strategic Report
Highlights
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Highlights
Revenue
£4.4bn
2020: £3.9bn
Order book
£13.7bn
2020: £13.5bn
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Underlying Trading Profit
Reported operating profit
£229m
2020: £163m
£216m
2020: £179m
Underlying EPS, diluted
Reported EPS, diluted
12.6p
2020: 8.4p
Dividend per share
2.41p
2020: 1.40p
Free cash flow
£190m
2020: £135m
24.4p
2020: 10.7p
Underlying ROIC
23.7%
2020: 19.1%
Employee engagement
70 points
2020: 73 points
Major incident frequency
Lost time incident frequency
0.36 per
1m hours
2020: 0.43 per 1m hours
4.1 per 1m
hours
2020: 4.5
P.32-34
See KPIs on
pages 32-34
for definitions
P.4-12
See pages 4-12 for
more information
on our market and
business model
Annual Report and Accounts 2021
Serco Group plc
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Financial StatementsCorporate GovernanceContents_GEN_PageL2
At a Glance
At a Glance
What we do
Serco delivers services to governments and other institutions who serve the public
or protect vital national interests.
Serco’s roots go back to 1929, and in 1988 the Group was listed on the London Stock Exchange. Now,
Serco is a FTSE 250 company managing over 500 contracts worldwide and employing more than 50,000
people across our operations.
We deliver services through people, supported by effective
processes, technology and skilled management. Our customers
define what outcomes or services they need to deliver, and we
develop new and more effective ways to deliver them. We provide
innovative solutions to some of the most complex challenges facing
governments, bringing our experience, capability and scale to
deliver the service standards, cost efficiencies and policy outcomes
governments want. In this way we make a positive difference to the
lives of millions of people around the world, often looking after some
of the most vulnerable and disadvantaged in society and helping to
keep nations safe.
Our core sectors
Our business is focused across five core sectors, with revenue in 2021 of £4,425m or £4,663m, including
our share of joint ventures and associates to reflect our total scale in each sector.
Defence
Justice &
Immigration
Transport
Health and
other Facilities
Management
Citizen Services
£1,360m
£843m
£454m
£576m
£1,430m
Base and operational
support
Engineering,
management and
information services
Space and maritime
services
Custodial services
Asylum seeker
accommodation
Immigration detention
services
Detainee transport
and monitoring
Some key services
Rail, ferry and cycle
operations
Road traffic
management
Air traffic control
Integrated facilities
management
Non-clinical support
services
Contact centres and
case management
Employment and skills
services
Patient administration
and contact
Covid-19 related
services
Environmental services
Leisure services
Our fundamental role in the functioning of an orderly society
Defence
Protecting national
and international
security interests
Justice &
Immigration
Safeguarding those in
our care and beyond
Transport
Health
Facilitating safe and
efficient movement of
people and goods
Enhancing patient
experience and
care quality
Citizen Services
Contributing to the
wellbeing of citizens
and communities
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Annual Report and Accounts 2021
Contents_GEN_PageL2 Where we operate
Serco’s operations are across four geographic regions:
Americas
£1,120m
UK & Europe
£2,370m
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Asia Pacific
£908m
Middle East
£265m
Revenue in 2021 (including share of joint ventures and associates).
Our business mix
Serco’s revenue by sector and geographic division:
Revenue by Sector
Revenue by Division
10%
12%
18%
6%
19%
31%
24%
29%
51%
Total revenue £4,663m
Total revenue £4,663m
Citizen Services
Justice & Immigration
Transport
Defence
Health & other FM
UK & Europe
Asia Pacific
Americas
Middle East
P.9
See pages 9-12
for more information
on our business model
Revenue in 2021 (including share of joint ventures and associates).
Annual Report and Accounts 2021
Serco Group plc
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Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Our Market
Our Market
Our core sectors
Defence
Justice &
Immigration
Transport
Health
& other
Facilities
Management
Citizen
Services
Our markets
United
Kingdom
Continental
Europe
North
America
Asia
Pacific
Middle
East
2021 was the second year in which our market – in
common with so many others – was dominated by the
impact of Covid-19, and no one can be sure exactly
how and when things will return to a more normal
state. Our expectation is 2022 will be a year of
transition during which the revenues we have
generated supporting governments in their work
responding to Covid-19 fade away, and that demand
will return to more normal patterns of market growth of
around 2-3% per year from 2023 onwards. Our ambition
is to grow our business at about twice the rate of the
market in the medium term.
Serco delivers services to governments and other institutions who
serve the public or protect vital national interests. We focus on five
sectors: Defence, Justice & Immigration, Transport, Health & other
Facilities Management and Citizen Services, and deliver them in
the UK, Continental Europe, North America, Asia Pacific and the
Middle East.
Government as a purchaser of public services
Governments have two basic responsibilities: to develop policies which meet the needs and
priorities of their citizens, and to ensure that those policies are delivered effectively and at a
cost which represents value for money. Some policies can be delivered simply by enacting
legislation, relying on individuals and corporations to deliver the policy themselves by acting
in accordance with the law, with the police and judiciary acting as enforcers of behaviour. An
example of this would be a policy that required a speed limit of 20 mph near schools, which
can be enforced by the police in the normal course of law enforcement. Other policies require
substantial specialist workforces to be employed to deliver them. One example would be a
policy that, pending the adjudication of their applications, asylum seekers should be housed
in the community, rather than in detention. Such a policy requires the government to employ
– directly or indirectly – the people required to manage housing and welfare services. Another
example of a policy that requires a dedicated workforce to deliver it would be air traffic
control, which requires highly qualified staff to be deployed, often to remote locations.
Public services require people
The delivery of many areas of government policy is labour-intensive, and the number of
people involved in the delivery of government services vastly outnumbers those involved in
developing policy. In some countries, government is the largest employer, employing more
people than any other sector or organisation. For example, according to the United States
Bureau of Labor Statistics, nearly twice as many people (22.1 million as at November 2021)
are employed by government bodies as are in manufacturing (~12.5 million as at November
2021) across the US, whilst in the UK the National Health Service is the single largest employer
in Europe.
The labour-intensive nature of government service delivery demands strong management
of the processes to recruit, organise and oversee the hundreds or even thousands of people
required to deliver a public service efficiently. Many public servants are talented managers,
but governments find it hard to attract and retain managers in the numbers required to deliver
services in the face of private sector competition for these skills and current labour shortages.
Serco helps governments by being a bridge between the drive, energy and innovation of the
private sector, and the very specific culture and requirements of public service delivery.
The private sector as a supplier of public services
Governments have used private contractors to deliver public policy, often in very sensitive
areas, for centuries. Where the line is drawn between public services that are operated by
the state itself, or by its private contractors, varies greatly over time and across countries.
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Contents_GEN_PageL2Contents Generation – Section i
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In medieval times, fighting wars and tax collection were often
outsourced, in whole or part, to private enterprise; this would be
unthinkable now in most jurisdictions. The transportation of prisoners
from the UK to Australia, which started in 1788 and continued until
1868, was carried out entirely by private contractors. Today, in the
UK, frontline medical services provided by the National Health
Service, which is widely perceived as a nationalised service, are largely
provided by privately-owned businesses called General Practitioner
Practices, and the vast majority of GPs are employed by private
partnerships and companies rather than by the state. In Denmark,
much of their emergency fire services are provided by private
companies, something which would be anathema in neighbouring
European countries. In the United States, the organisation responsible
for marine navigation marks and buoyage is the US Coastguard,
working on behalf of the federal government; in the UK this vital work
is carried out by “The Master, Wardens and Assistants of the Guild
Fraternity or Brotherhood of the most glorious and undivided Trinity
and of St Clement in the Parish of Deptford Strond in the County of
Kent” – otherwise known as the charity Trinity House. And in defence,
in almost all jurisdictions some of the most sensitive and secret work
is carried out on governments’ behalf by private companies. Nature
never draws lines, she smudges them, and so it is with the private
provision of public services.
Some of the services which governments need in order to deliver
public policy are identical to those required in the private sector,
and suppliers can happily operate in both markets. Running payroll,
supplying stationery or leasing properties is not vastly different in the
public and private sectors. But some services – such as running prisons,
providing defence or providing air traffic control – are unique to
government and have no private sector equivalent. Many government
services are bought only by government, and providing them is a
specialist business, quite different from anything found in the private
sector. However, many of them can be run most efficiently on behalf
of government by private companies using techniques, management,
technology and processes developed in the private sector.
Unique demands of public service delivery create
barriers to entry
Providing government services to citizens, funded by taxpayers,
is different, and in many ways more demanding, than providing
services to the private sector or consumers. Politics, reputational
risk, transparency and accountability to multiple stakeholders are
sometimes seen only dimly in the private sector, but are writ large in
the public sector, and need careful management.
Public procurement regulations are set by each jurisdiction and
are far more complex than those generally seen in the private
sector. Governments like to use their expenditure to further their
policy initiatives, be it around diversity, targeting investment in
particular geographies, governance or environmental goals. They
set onerous financial reporting, audit, cyber, national security and
information standard requirements. All these things make the market
for government services tangibly different from its commercial
counterpart.
It is not controversial to say that efficiency, flexibility and dynamism
are not always core skills of government administration, and Serco has
deep expertise in providing a bridge between the skills and culture
of the private and public sectors. Overlaid on our private sector
techniques, drive and energy is a public service ethos that means
we can help deliver government services efficiently, but in a way that
recognises the need for public accountability and trust, and the fact
that we are often looking after some of the most vulnerable and
disadvantaged people, or most vital services, in society.
Supplying governments requires unique skills and imposes significant
cost and complexity. The combination of these market characteristics
has the effect of creating barriers to entry that aren’t apparent at
first glance.
More recent history
For nearly thirty years between 1980 and 2010, Serco grew rapidly
as the market for outsourcing public services developed around the
world. Inspired by Thatcherism and the policies of President Reagan,
privatisation and outsourcing became popular in many countries and
drove rapid growth of an industry that had barely existed before.
Suppliers became highly profitable and skilled at extracting value
from government contacts.
As the global financial crisis of 2008 took hold, governments began
to urgently seek ways of reducing costs, and the private sector, now
representing a significant proportion of government expenditure,
became the object of close government attention. Following the
ending of the war in Afghanistan, military expenditure was sharply
reduced, particularly in the US. 2010 saw in the UK the election of
the Conservative-Liberal Democrat Coalition, with an avowed intent
of reducing the deficit, and as a statement of intent demanded
rebates of hundreds of millions of pounds from contractors; more
importantly, the UK Government strengthened its commercial teams
and procurement practices and set about transferring as much risk
as it could to the private sector. It appeared to be a conclusion of UK
Government at the time that if risk transfer was a benefit to them of
outsourcing, surely the more risk you could force suppliers to take,
the better. In the US, ‘Lowest Price, Technically Acceptable’ was
increasingly used instead of an approach of overall ‘Best Value’ as a
tender evaluation methodology.
Whilst these sorts of shifts in demand and in the relative power of
customers and suppliers are common to all markets, the difference
in dealing with government is the fact that government is often
a monopoly purchaser; only governments buy prisons, defence
services, or care of asylum seekers, so when they change their
direction it can have very profound impacts on their supply chain.
The story of the UK government services outsourcing industry has
been one of acute difficulty for much of the period since 2010.
Over-supply, aggressive behaviour by both government and
suppliers, and the ill-advised transfer of risks that private companies
had no way to mitigate or manage led to the near-destruction of a
once thriving industry, as multiple companies suffered huge losses on
government contracts. As a consequence, the UK Government is now
faced by a much more wary, and less vibrant, supply chain. Having
discovered that it could attract new international competition into
the market because barriers to entry seemed low, it has subsequently
discovered that the barriers to exit from the market were genuinely
low. An illustration of this is the number of responses the Government
receives from suppliers to its tenders. In 2013, just 4% of public
tenders in the UK had only one supplier respond but by 2020 this had
increased to 20%*.
Having swung too far in favour of contractors, the balance of
power in the public services market in the UK swung too far back to
government after 2010; it is, we believe, beginning to work its way
back towards a more balanced and sustainable position, and in recent
years the UK Government has developed a series of “playbooks”
which set out common approaches to procurement which over
time should improve the attractiveness of the market. This moving
of the relative power between buyer and seller is common to many
markets as they mature, and we believe that if governments and their
suppliers recognise the consequences of their past excesses and
* Source: Spend Network
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Our Market continued
work co-operatively it will become possible to anchor the balance of
power between customer and supplier in a place that delivers value
for money for taxpayers, high quality and reliable services to users,
innovation and improving efficiency, as well as fair returns to suppliers,
which will in turn ensure that government benefits from a vibrant and
diverse supply chain.
The evidence that private companies can help governments deliver
“more, and better, for less” is compelling. Research on outsourced
services, commissioned by the Serco Institute, and carried out by
Capital Economics, the independent economic research consultancy,
has found:
Since March 2020, the Covid-19 pandemic has had a profound,
but essentially ephemeral, impact on the government services
market. It has led to very large increases in expenditure in nearly all
jurisdictions; much of which has been financial support to businesses
and individuals, followed by provision of health services, vaccine
development and purchase, establishment of testing laboratories
and test kits. Across the whole of government’s response, the private
sector was mobilised to support their efforts, and there is widespread
appreciation across governments that the private sector responded
well to the extreme demands placed on it. The private sector has
proved itself an invaluable partner to governments throughout the
crisis, be it through developing vaccines, contributing management
expertise, providing vastly increased virus testing and diagnostic
capability, setting up emergency hospitals and more. And all at
record speed.
We expect – indeed for all our sakes, hope – that demand for these
services (which generated revenues of over £900m for Serco in
aggregate in 2020 and 2021) will reduce significantly in 2022, and in
our commentary and forward discussions of market size, we base our
statements from a normalised base of 2022.
Drivers of demand
All about us markets are being disrupted and fundamentally changed;
we live in a world where the largest retailer owns no shops, the
largest taxi service owns no vehicles, the largest social networks own
no content and the largest provider of overnight accommodation
owns no property. In nearly every commercial market, disruption and
change and long-term uncertainty are the norm.
In comparison, the business of government appears an island of
stability; not unchanging, but certainly not disrupted or up-ended on
anything like the same scale as commercial markets. Governments
are, and will continue to be, required to deliver services to their
citizens – be it in defence, transport, health, education or social care
– and whilst the balance and mix might change or differ between
jurisdiction, the essential job of governments of collecting taxes which
they then use to provide services to the benefit of their citizens is
highly unlikely to alter in our lifetimes.
We have developed a model which describes drivers of demand for
our services, which we call the Four Forces, comprising:
– Demographic, technology and geopolitical changes –
principally ageing populations, but also the increasing cost
of defence and public infrastructure, which will drive
demand for public services at rates above GDP growth
– The need to reduce public debt and expenditure deficits,
made all the more acute by the increases in expenditure
necessitated by Covid-19
– Rising expectations of service quality amongst public service
users; and
– The unwillingness of voters and corporate taxpayers to
countenance significant tax increases.
These Four Forces give, in our view a structural under-pin to the
enduring need for governments to provide more public services,
of higher quality and resilience, for less money. In short “more, and
better, for less”.
– “The evidence from areas that have been subject to
competition suggests that it is possible to deliver services
more cost efficiently without damaging service quality...”
– “Our analysis on prison management, soft facilities
management in healthcare and air traffic control suggests
that potential average savings to the government of
between 5% and 15% from introducing competitive markets
is a relatively conservative estimate…”
– And perhaps most importantly: “…the private sector
typically delivers services to the same standard or better
than the public sector.”
So, on this foundation of rare stability of need is built the market for
the provision of public services by private companies.
A large and growing market
People ask: how large is the market for the private sector provision
of public services? This is hard to determine with precision, as the
boundaries of the market are fiendishly hard to define. Does the
maintenance contract for a mainframe computer operated by the
government fall within the definition of the market? How should we
treat services provided by government-owned agencies operating
on an arm’s-length basis? Within Defence, do we count supply and
support of, say, missile systems, or just the types of services we
currently supply? And how do we disentangle the very different
definitions of, and accounting for, expenditure used by the various
governments with whom we deal? The boundaries are also forever
moving as governments take decisions to outsource new services or
insource old ones, and as Serco stretches its addressable market into
new areas through acquisitions and building new capabilities.
Over the years, and most recently in 2021, we have commissioned
work to try and size the market in the sectors and geographies we
currently operate in, which are clearly a subset of the global market.
In the latest exercise we used two independent research firms –
Renaissance Strategic Advisers and Oxford Economics – to estimate
market size and growth rates, from which we have formed our own
central estimates. We estimate that total spending by governments
on outsourced services in the markets in which we operate is around
£715bn, which we estimate represents around 65% of the world
market, excluding China and Russia, and that our market share is
between 1% and 3%, depending on whether we look at segments
we operate in or the market as a whole. And we estimate that once
Covid-19 expenditure has normalised the market will grow at around
2-3% per year in the medium term. Rather than concentrate on the
absolute number, which is likely to have a significant margin for error,
some key conclusions from our work are:
– The market for private sector delivery of government
services is very large.
– The supply-side is fragmented; as a leading international
supplier, our market share within our existing footprint,
at around 1%, is small, although it is larger in some specific
segments within certain sectors.
– The market is likely to continue to grow, but given our small
market share, there is ample opportunity for us to grow
faster than the market.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section “The challenge facing governments worldwide
can, like our strategy, be simply expressed:
to deliver more, and better, for less.”
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Benefits of sector breadth and geographic reach
Within government, our business is highly diversified. We focus our
activities in five areas of government service: Defence, Justice &
Immigration, Transport, Health & other Facilities Management and
Citizen Services. Between them, these sectors account for a very
large proportion of government expenditure and employ significant
numbers of people in service delivery. And, unlike our competitors,
we have a big geographic reach, with substantial businesses in
Canada, the US, the UK, Europe, the Middle East and Australia.
As well as providing a bridge between the private and public sector,
Serco also provides the international and interdepartmental sharing
of ideas and best practice which governments often find hard to
achieve. New approaches for running prisons and reducing youth
re-offending in the UK come from Australia; hospitals we manage
in the Middle East use processes developed in the UK; likewise, our
Defence business in the Middle East serves Australian armed forces
with fire services using UK and North American expertise. We transfer
our insights, skills and processes from one sector or region to another,
so we can anticipate and meet new challenges for customers. We
know of no other company in our market which offers such a broad
range of services covering front, middle, and back office requirements
across multiple areas of public service delivery, internationally.
Risk management is central to our thinking at both a strategic and
an operational level. In terms of strategy, although being a focused
and specialist B2G business, we think it beneficial, and a competitive
advantage, to diversify our exposure to individual governments and
sectors. Governments can be capricious; decision-making processes
regularly come to a halt around elections; the attitude to using private
companies can be volatile and political priorities can change in the
blink of an eye, switching discretionary resources from defence to
immigration to healthcare and back again. In this environment, we
believe being diversified both by sector and geography reduces risk
and volatility. Most companies operating in our market are heavily
focused in either a particular sector, or within a geography; in our
market, Serco is a rare beast, operating amongst five sectors and
four regions.
The impact on the market of Covid-19
As discussed above, it will take several years for governments’
expenditure patterns to settle down following Covid-19. The
immediate aftermath will probably focus on continued need
for surveillance of the virus, and catching up on areas of normal
expenditure that were put on hold during the pandemic, such
as in healthcare, court hearings and defence infrastructure which
have been put predominately or substantially on hold during the
pandemic. Overall, while it is true that in some areas arguments
about the importance of national self-sufficiency might make some
governments consider doing more work in-house, we don’t think that
this will happen on a scale that is meaningful; the private sector has
responded extremely well to governments’ emergency requirements.
This will, hopefully, remind governments of the value of resilient,
robust supply chains which can support them in both ordinary and
extraordinary times. Nor do we anticipate a lot of change from
Covid-19 in our basic business model of offering public services
delivered by people supported by good systems and processes.
On the contrary, we know that governments will be massively more
indebted than they were before the crisis and that citizens will be
more in need, as well as more demanding, of public services critical
to rebuilding society and quality of life – be that services to deal
with unemployment, training and skills gaps, social care reform,
acute healthcare capacity, building national resilience, sustainable
transport growth and more. We think the ‘Four Forces’, which we
have previously described as driving demand for our services,
will be amplified by the crisis: increasing and changing demand
for public services; heightened expectations around the quality
and resilience of public services; increased fiscal deficits; the dire
political consequences of increasing taxes. These will continue to
drive governments to want to deliver more public services, of higher
quality, for less money. We believe that this imperative to provide
more, and better, for less will become even more urgent in the years
ahead, and to deliver those objectives governments will need the
skills, resources, innovation and nimbleness of the private sector.
The impact of technology on public services
There are areas of government where technology is transforming
public services: many of the UK Department of Work & Pensions
systems are now on-line and across the world governments deployed
new IT systems to manage Covid-19 responses. Serco often
helps governments in the development and deployment of these
systems, and in our Citizens Services business we have developed
sophisticated multi-channel applications and use robotic process
automation extensively to deliver services. We also have a unique
in-house consultancy called ExperienceLab which helps design public
services. However, we are confident that many public services will
continue to require people not just IT to deliver them, in whole, or
in part. In 30 years’ time, sick people will still go to hospitals, and
when there they will have their rooms cleaned and food served
predominantly by humans. And when people break the law they may
be sent to prison where custody officers will look after them; and
complex defence infrastructure such as near-space radar will still be
maintained predominantly by human beings, who will need to be
security cleared, again by other human beings. The bank teller or
lorry driver or shop assistant may be rightly fearful that technology
will disintermediate their role, but a prison custody officer or hospital
porter can sleep soundly in the knowledge that his or her skills are
highly likely to be required for years to come.
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Our performance framework
and strategic priorities
Our Market continued
But management of risk is only one reason we favour a strategy of
operating across a number of jurisdictions and sectors. Governments
across the world face similar challenges, and we believe that we
can gain competitive advantage and deliver value to customers by
operating internationally. At a detailed operational level, providing
cleaning and catering services in a hospital is very similar in Western
Australia and in the Middle East or indeed, the UK. In terms of
capability, many of our contracts employ hundreds, and some,
thousands, of people, so recruitment, training, staff rostering and time
management are key capabilities applicable across all our sectors and
geographies. The same is true of project and case management; we
are also able to adopt consistent approaches to key operational tools
such as continuous Improvement.
Finally, although in their own country a national government can wield
the power of a monopoly purchaser, every country has a government
(or multiple governments if you consider state and local bodies too).
In this market, agile suppliers with an international footprint together
and a range of service offerings, can move to where the demand
is and where they can get a fair return for the risk they take on, but
governments cannot.
Market – summary
The market for the provision of public services for private companies
is very large indeed, at an estimated £715bn per annum. Serco’s
market share is estimated to be somewhere between 1% and 3%,
and for reasons we explain later, we believe we can grow at about
twice that rate from 2022 onwards. Since 2017, Serco’s revenues have
grown by 50% – a compound annual growth rate of 11%. Underlying
Trading Profit over the same period has grown from £69m to £229m –
a compound annual growth rate of 35%. This illustrates our ability to
grow faster than the market and increase our market share.
We believe that the long-term pressures to deliver value for money,
increasing demand for public services and the need to improve
service delivery will ensure that the role of the private sector in the
delivery of public services will remain assured. The challenge facing
governments worldwide can, like our strategy, be simply expressed:
to deliver more, and better, for less, and they cannot do this without
the support of the private sector. Technology will have an impact on
the delivery of government services, but many frontline services will
still need the social and emotional skills that only humans provide,
and we believe the principal method of delivery of many government
services will remain human beings for years to come. And the
employment of people in the reliable delivery of public services is
what we do, and we do it very well.
08
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageL2Contents Generation – Section Our Management Philosophy
Our Management Philosophy
We have a simple and clear management philosophy, illustrated below, that we
apply across our business. It is designed to provide an approach that will deliver
value to our customers, shareholders, and to the people who work in the business.
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Our Values
Trust
Care
Innovation
Pride
Our Purpose – what we want to be
A trusted partner of governments, delivering superb public services that transform outcomes
and make a positive difference for our fellow citizens
Our organising principles
Flair, agility, innovation
Empowerment
Decentralisation of execution
Loose-Tight management
Disciplined entrepreneurialism
Rigour, discipline
Common processes
Centralised intent
Our method
Winning good business
A place people are proud to work
Executing brilliantly
Profitable and sustainable
Being the best-managed company
in the sector
Our longer-term deliverables
Revenue growth
4-6%
Trading margin
5-6%
Employee engagement
70 points or above
Our management philosophy starts with our Values and ends with our deliverables.
Our Values
Whilst we use technology and processes, the core of our business
is people – many thousands of them – delivering public services. It
is of central importance to our success that our colleagues, many of
whom are former public servants, and our customers, know that we
have values appropriate to a company delivering services paid for by
taxpayers to often vulnerable and disadvantaged citizens. “Working
at the leading edge of technology” may be inspiring to people
working for IT businesses, but they are not reasons why a prison
officer makes a cup of tea for a tearful and frightened prisoner at
two o’clock in the morning; why a hospital cleaner stops on their
round to chat to an anxious patient; why an engineer crawls into an
impossibly small space in the bilges of an aircraft carrier to make sure
the cable-ties are secured correctly so they will stay secure in storm
or battle. It is because they care about their work, they know the work
they do is important, and they take pride in doing it well.
Annual Report and Accounts 2021
Serco Group plc
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Financial StatementsCorporate GovernanceContents_GEN_PageL2Contents Generation – Section
Our Business Model
Our Management Philosophy continued
Before our customers will award us sensitive work, they have to trust
us. And to win business we have to come up with innovative solutions
which will enable governments to deliver more, and better, for less.
This is why our values of Trust, Care, Innovation and Pride are so
important. We don’t pretend to be saints, or to be holier-than-thou;
we are not so naïve as to believe that in a workforce of over 50,000
people there will not be some uncaring bad eggs, and we can reliably
say that around the world, every day, at least one of our employees
or subcontractors is behaving badly; this is one of the reasons why we
invest so much time and effort into controls and assurance processes.
But the overwhelming majority of our colleagues are decent, hard-
working, committed and want to make a positive difference to those
they serve. Never have we seen this more evident than over the last
two years, when throughout the Covid-19 crisis Serco colleagues
stuck by their commitment to deliver to customers and citizens
despite the risks that doing so posed to themselves and to their
families. In this, we reflect the values of our customers, which they
call a “public service ethos”, and we call our Values.
Our organising principles
Our organising principles have to reflect the fact that many of the
things our customers want are contradictory: they want excellent and
resilient services, delivered by highly motivated staff, but they want
them to be low cost; they want local accountability and flexibility,
but they also want strong governance and risk management. As a
management team, we believe in the principle of subsidiarity: that
decisions should be taken by managers who are as close to the
customer as possible. But we are also conscious of the fact that many
of our contracts carry with them risks that need careful management
and supervision. So, we describe our organising principles with two
concepts: ‘loose-tight’, and ‘disciplined entrepreneurialism’. Neither of
these is our own invention; they are based on the work of, respectively,
Tom Peters and Jim Collins. They describe in subtly different ways an
approach to management which recognises the need for both local
management autonomy and strong governance. Two quotations
from their works give a taste of the type of organisation we are trying
to achieve:
“Loose-Tight… is the coexistence of central direction and
maximum individual autonomy. …Organisations that live by the
loose-tight principle, are on the one hand rigidly controlled,
yet at the same time allow (indeed insist on), autonomy,
entrepreneurship, and innovation from their people.”
Tom Peters: In Search of Excellence
“Avoid bureaucracy and hierarchy and instead create a culture
of discipline. When you put two complementary forces together
– a culture of discipline with an ethic of entrepreneurship – you
get a magical alchemy of superior performance and sustained
results.”
Jim Collins: Good to Great
Organisationally we structure ourselves with three types of function:
Divisions, Group and Shared Services. All operational delivery is
executed through four geographic Divisions: UK & Europe, the
Americas, Asia Pacific and the Middle East. Within their domains,
Divisions are responsible for everything involved in winning and
delivering contracts; 98% of our employees work in these Divisions.
A lean Group function provides governance, strategy, asset allocation,
policy-setting and controls and assurance roles, as well as certain
specialist consolidation and functional roles in Finance, Legal,
Risk, ESG, Insurance and HR. The Group also manages Centres of
Excellence (CoEs) which provide focused expertise and support to the
Divisions and enable sharing of best practice and the development
of common propositions in areas such as Justice & Immigration,
Maritime and Health. Shared Services provide common functional
and operational support in areas such as IT, procurement, HR and
finance to the Divisions.
Our method – the strategic priorities to achieve
our aspiration
The method we use to deliver our strategy and our aspiration to be
the best-managed business in our sector is to concentrate on doing
four things really well. These are the four strategic priorities we want
Serco to be famous for:
– Winning good business.
– Executing brilliantly.
– Being a place people are proud to work.
– Being profitable and sustainable.
We try to make sure that everything we do improves our performance
against one or more of these objectives, and start from a position
where we know we can do better. We can improve the way we bid
and manage contracts; develop innovative propositions; measure
performance; reduce the cost and improve the quality of our
administrative systems and processes. We can also continue to
enhance our controls, assurance and compliance processes, and the
robustness of our ‘three lines of defence’. None of these comes easily
or quickly, and we need to steer a tricky course between the need to
reduce our costs relative to revenues in the short term and investing
in systems and processes that will produce sustainable benefits in the
long term.
Our medium-term targets
Our revenues declined organically in each of the five years from 2014
to 2018, before turning to growth in 2019. Between 2017 and 2021, our
revenue grew at a compound annual rate of 11% and our Underlying
Trading Profit grew at a compound annual rate of 35%, with our
margins improving from a nadir of 2.3% in 2017 to 5.2% in 2021.
In the last two years, a significant amount of our growth has arisen as
a result of services delivered supporting governments in the Covid-19
response, and we expect that to reduce very significantly in 2022, with
profits and revenues lower in 2022 than in 2021.
Our new medium-term financial targets are that, from a base in 2022,
we expect:
The addressable
market will grow at
~2.3% per year on
average
Revenue will grow
about twice as fast as
the market
Profit will grow faster
than revenues as
margins increase
Strong conversion of
profit into cash
Shareholder returns
to grow faster than
profits
2-3%
Market CAGR over the
medium term
4-6%
Average revenue
growth
5-6%
Trading Profit Margin
>80%
Cash Conversion
>4x 3x
Dividend cover +
share buybacks
Underpinned and enhanced by value-adding M&A
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Annual Report and Accounts 2021
Contents_GEN_PageL2Contents Generation – Section
Our B2G Platform
Our B2G Platform
Our management philosophy establishes the principles we follow in running the
business. Our Business-to-Government (B2G) platform is our route to market that
allows us to accelerate growth, while assuring quality and managing risk.
Over the last seven years we have developed a specialist B2G operating platform, which allows us to
deliver a wide range of bespoke government contracts in a way that is repeatable, efficient, innovative,
well managed and resilient.
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Public Service DNA
Culture, values, reputation with buyers, understanding of government, public service ethos,
social responsibility, transparency, sustainability
Deep sector expertise,
IP and know-how
Deep knowledge of our market and sectors. Know-how and IP developed delivering complex contracts in
many jurisdictions over 30 years
Solutions delivered in >20 countries
by large regional businesses
Our businesses are major players in their regions, employing thousands of people. They have scale and
deep customer relationships, and they share expertise across the Group
Supported by efficient shared
services and capabilities
HR, finance, assurance, governance, procurement, IT and cyber security, legal and commercial,
risk management, workforce management, asset management, M&A
Our B2G Platform
– Efficient shared services & capabilities. The fourth building
block is a large and well-invested shared services platform. Our
customers’ objective is to buy more, and better, for less, yet they
often insist on buying almost every contract as a bespoke item,
and generally standardisation is not necessarily valued. The way
we square this circle is to look at contracts, not from the
perspective of how they are different, but how they are the
same. All our contracts use HR, finance, compliance, assurance,
governance, procurement, IT and cyber security, legal and
commercial, risk management, workforce management, talent
development, and bidding support. And we provide these
things collectively and in common across contracts from an
efficient shared services infrastructure, which means we can
bring the advantages of efficiency and scale to bespoke
solutions.
This operating platform has four building blocks:
– Public service DNA. The first key part of our platform is
about culture. Across the world, we have public service in our
corporate DNA. We have a set of values and a public service
ethos that comes from the fact that many of our colleagues
come from careers in public service. They bring with them an
instinct for social responsibility, transparency, sustainability and
a commitment to improve outcomes. And this public service
ethos is to be found in colleagues around the world; public
service, as a calling, hums the same tune in Goose Bay, in
Glasgow, in Abu Dhabi and in Adelaide. This public service DNA
means that we speak the same language as our customers, in
the same accent, and builds trust and the right instincts.
– Deep sector expertise, IP and know-how. The second building
block is experience, know-how and intellectual property. With
this public service DNA, comes deep insight, understanding
and know-how about the development and delivery of public
services. Very little of our intellectual property is covered by
patents, it is instead underpinned by many years of experience
delivering complex, mission critical, public service contracts
around the world.
– Solutions delivered in more than 20 countries. The third block
is our international footprint. There is not much point in having
this valuable DNA and know-how if you cannot deliver it.
Historically many of our competitors focused on developing
their businesses in their home markets. Serco focused on
developing an international business with large operations in
Australia, Europe and North America, which is now able to
address approximately 65% of the world’s government
outsourcing spend on services excluding Russia and China.
Our government customers want to have suppliers who employ
people who are part of the community that will use the services;
that will recirculate the taxpayers’ money into taxes and
expenditure in the economy. They want to employ suppliers who
will eat their own cooking, and who share the same culture and
commitment to government as them.
Annual Report and Accounts 2021
Serco Group plc
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Strategy implementation
Our B2G Platform continued
We believe our B2G platform is unique in the industry and gives us five benefits: Agility, Breadth, Reach,
Efficiency and Resilience
Agility
Breadth
Reach
Efficiency
Resilience
The ability to respond
to changing government
priorities and develop,
mobilise and deliver
solutions at speed
We have deep expertise
across the major
areas of government
outsourcing: Defence,
Justice & Immigration,
Citizen Services,
Transport, Health FM
Our international
footprint allows us to
access ~65% of global
government spending
on outsourced services
and bring customers
innovation from around
the world excluding
Russia and China
Our shared services
allow us to invest in
world-class, industrial
scale back-office
systems which provide
standardised and
efficient processes for
delivering contracts
Our common controls,
governance and risk
management processes
help us manage risk and
assure quality outcomes
across the business
Agility is important, because governments change their mind: they
introduce new policies, they retire old ones, and the flow of funding,
whilst in aggregate may stay the same or increase, takes different paths
into the supply chain. Accordingly, we are forever watching for changes
in government priorities and new opportunities, and we have a
well-developed process of assembling teams of subject matter experts
and delivery partners, developing compelling propositions for new
requirements, and then building solutions using our B2G platform. The
revenues we have generated from this agility are astonishing: before the
introduction of Obamacare in the United States, we had never done
healthcare eligibility testing, but since winning a role in this programme
we have generated revenues of over £1.3bn. Likewise, before March
2020, we had never done health-related testing or tracing; by the end of
2021 we will have generated over £900m in revenues from Covid-19
support to governments. Agility is also the ability to mobilise fast.
Between April and May 2020, we recruited and trained 10,500 contact
tracers in the UK.
Breadth of offerings across a wide range of government activities is
important, as this enables us to tap into multiple sources of government
funding. For the same reasons that agility is important, so is having a
wide range of expertise across Defence, Justice & Immigration, Health
& Facilities Management, Transport and Citizens Services.
International reach is important, as it gives us a far wider horizon to
scan for new opportunities, and the ability to focus our resources on
the most attractive opportunities across multiple jurisdictions. None
of our major competitors have such wide reach: we have significant
businesses in the United States, Canada, the UK, Europe, the Middle
East and Australia. Around 55% of our revenue and 65% of our profits
come from outside the UK, while our footprint covers an estimated
65% of the worldwide government services outsourcing market.
Marry the reach, with the agility, with the breadth of services, and
Serco has a powerful platform for selling and delivering services.
But we also need to be efficient; governments are highly cost-
conscious, and at times when they are short of resources (almost
always) it is hard for them not to take the lowest price. Equally, they
expect high levels of compliance; assurance; reporting; transparency;
cyber security and investment in training. Tendering for government
contracts is expensive. For all these things, there are benefits to
scale and Serco is organised with common approaches to common
services, which allows us, subject to security restrictions in each
country, to share these services across our businesses. Sharing and
scale also bring operational resilience, which is important when
delivering vital public services.
A key part of resilience relates to risk management. In the corporate
graveyard are the corpses of companies who failed to manage risk,
and investors are rightly wary about a market where margins are
low, contracts complex, and customers demanding. Resilience in
our business comes from two sources: diversification of exposure by
segment and geography – which we have just covered – and robust risk
management. Serco has had experience of risk-gone-wrong, and when
the current management joined the Company in 2014, there were more
than 50 loss-making contracts against which provisions had to be made.
Inevitably, in a business like Serco, contracts will become loss-making
from time to time, but today we seek to mitigate this by having a strong
bidding process, which has a series of gates from pre-qualification
through go/no-go decisions, customer shortlisting, confirming bid
decisions, approving bids and through to contract signature. And this
process applies to all new contracts and rebids. The process is led at
business unit, regional or Group level, depending on size of contract
and risk profile. As an indication of how seriously this process is taken, in
2021 the Investment Committee met 97 times to consider tenders; that
is about once every other working day. Once a contract has been signed
it is reviewed on a regular basis through the monthly business unit and
divisional performance reviews. During the operational phase, the trick
to managing risk is not about stopping it ever crystallising, it is how you
manage and mitigate it when it does.
Part of our operational capability is our acquisitions (M&A) team. The
ability to identify, execute and integrate acquisitions is an important
part of our armoury, and since 2015 we have completed two significant
disposals and six acquisitions. Three of the acquisitions were in North
America, one in the UK, one in Europe and one in Australia. All of our
opportunities are measured against three strategic criteria: Do they
add capability? Do they bring us scale? Do they give us access to new
segments of the market? That is the first gate. The second gate is
whether, operationally, we can manage them to add value. The third
gate is building a plan to determine whether the project can meet the
stringent financial criteria we set. Finally, we then run thorough due
diligence and operational assessment. So far, this has worked well
for us.
Summary
As managers, our job is to seek to ensure Serco delivers value to
the people and institutions who have an interest in our success: to
our customers and service-users, by providing high-quality, resilient
and innovative public services; to our shareholders, by providing
sustainable and growing returns on capital; to our lenders, by
providing them with solid and secure credit; and to our colleagues,
by enabling them to develop their skills, reach their full potential,
and have interesting and rewarding careers. Our management and
our B2G platform are designed to deliver these objectives.
It is also an integral part of our ambition to be regarded as the
best-managed business in our sector. This may sound trite, but we
believe that it is a worthy and value-creating aspiration, and one
that we can use to inspire our management teams and customers.
In any given circumstances, and whatever the slings and arrows of
fortune, well-managed businesses do better than poorly managed
businesses, and the best-managed businesses do best of all.
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Annual Report and Accounts 2021
Contents_GEN_PageL2Contents Generation – Section Strategic Objectives and Achievements
Strategic Objectives and Achievements
Serco has been transformed from a collection of unrelated commercial and
government contracts in 2014 into a focused B2G platform. We see potential to
enhance the business and create further value.
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2014
Serco
2021
Serco
2026
• Low employee engagement
• Unfocused commercial /
government portfolio
•
Ineffective IT and shared services
• Little international collaboration
• Troubled client relationships
• Significant number of loss-making
contracts
• Weak balance sheet
• Profitable
• Strong balance sheet
• Strong employee engagement
• Focused international B2G business
• c.120% Book to Bill 2017-21
• Strong governance and values
• Extensive international co-operation
• Well-invested IT and systems
infrastructure
• Strong client relationships
• Successful M&A
• The best managed business in our
sector
Increased Reach and Breadth
•
•
Increased scale and greater efficiency
• World-class shared services platform
• Leading and shaping our markets
• Expertise in application of data
analytics and citizen experience
• Recognised for practical and
effective approach to ESG
• Continuation of targeted M&A
We have seen significant progress across a range of key areas of focus for the management ream in recent years:
High growth
Compound average growth since 2017 11% on revenue and 35% in Underlying Trading Profit
Margins increased
Underlying Trading Profit margin increased from 2.3% in 2017 to 5.2% in 2021
Book-to-bill of more than 1
Revenue of £17bn from 2017-2021 and order intake of £20bn
2017-2021 book-to-bill of ~120%
Onerous contracts reduced
Onerous contract provisions reduced from £447m in 2014 to less than £15m in 2021
Employee engagement
Employee engagement score increased from 42 in 2014 to 70 in 2021
Balance sheet strengthened
Net debt: EBITDA reduced from 3.4x in 2014 to 0.7x in 2021
Successful M&A
Six acquisitions completed since 2017, strength of business significantly enhanced
Focused international B2G
Two-thirds of our profit was from outside of the UK in 2021
Summary
We believe we have the right strategy for our business, and every year since 2015 we have delivered results which have been in line or ahead
of our plan, which is no mean achievement. In 2018, 2019, 2020 and 2021 have seen Underlying Trading Profit grow by 34%, 29%, 36% and 40%
respectively; in 2021 we achieved organic revenue growth of 10%. Returns on Invested Capital have increased from 9% in 2017 to 24% in 2021.
We expect revenues and profits to reduce in 2022 as most of the Covid-related work falls away, but this should represent a solid foundation on
which we can deliver our long-term objectives of revenues growing twice as fast as the market, increasing margins, and strong sustainable and
growing returns to shareholders. In summary, our plan to be a focused international provider of services to governments first devised in 2014,
is working well.
Annual Report and Accounts 2021
Serco Group plc
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Chairman’s Statement
Chairman’s Statement
“The platform we have
developed means we can
respond rapidly at scale to meet
our government customers’
needs. I am confident that the
Company is well placed to
continue delivering competitive
returns while meeting the needs
of its multiple stakeholders.”
John Rishton
Chairman
Highlights of 2021
– Revenue grew by 14% to
£4.4bn, of which 10% was
organic.
– Underlying Trading Profit of
£229m, an increase of 40%.
– Free cash flow of £190m,
covenant net debt: EBITDA
at the year-end of 0.7x.
– Order intake of £5.5bn.
– The health of our balance sheet
and the positive outlook give us
the confidence to increase
dividends to our shareholders
and agree a share buyback
programme of £90m.
– Detailed strategy update
identified exciting opportunities
for further growth in revenue,
profit and shareholder returns
over the coming years.
“Covid-19 again cast a dark shadow over much of 2021 and on behalf
of the Board I will start by saying that our thoughts go out to all
those who have suffered from the effects of this terrible pandemic.
Equally, we remain deeply thankful to all those in the front line who
worked tirelessly and selflessly to keep others safe and ensure critical
services were delivered. Despite the widespread disruption and
understandably frequent changes in requirements from our
customers, they responded with commendable resilience, agility and
ingenuity delivering vital services extremely well and an excellent set
of results in exceptionally challenging circumstances.”
Strategy
The strategy, set out in 2015, to stabilise,
transform and grow the business has
been a great success thanks to the
strong leadership provided by Rupert
and his management team as well as
the dedication to execute brilliantly by
all of our employees. Since that strategy
was developed, the business has been
transformed, so in 2021 we undertook a
comprehensive review of our markets and
strategy, presenting our conclusions in
December at a Capital Markets Day event.
Our performance
The Company delivered very good financial
results in 2021, primarily reflecting strong
revenue growth, driven by organic growth
as well as increased demand for Covid-19
related services. As a consequence of
the revenue growth and continuing cost
efficiency, underlying operating profit grew
by 40% and free cash flow of £190m was the
strongest since the Company listed in 1981.
Order intake was also very encouraging at
£5.5bn or 1.25 times 2021 revenue. We made
three acquisitions during the year, the largest
of which was Whitney, Bradley & Brown in
the USA, which provides improved scale and
depth of capabilities in our defence business.
In 2021 we paid our first dividend for seven
years. Reflecting both the strong in year
performance and our confidence in the
outlook, the Board is recommending a final
dividend of 1.61p which is an increase of
15%. We also announced a share buyback
programme of £90m.
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ESG has always been important to Serco. We have been clear on our
purpose, values and impact on society for many years. This year has
brought more attention to these areas and the need for companies
to address environmental and societal issues with more urgency
and focus. Our major customers are governments and frequently
the contracts we enter into have specific measures for ESG. We are
committed to doing our part including achieving net zero by 2030.
More detail on our ESG commitments and performance is included
on pages 39-76.
Our Board evaluation during the year was externally facilitated
and the results were discussed at the December Board meeting.
The conclusions were that the Board was operating effectively and
should continue to focus its attention on strategy, growth, ESG and
leadership and talent succession.
Looking ahead
It is likely that we will be living with the effects of Covid-19 for some
time to come. This will require us to remain agile and apply our
ingenuity to a rapidly changing environment. We have proved we
can do this successfully in the last two years and I see no reason
to doubt we will continue to do so in the future. The platform we
have developed means we can respond rapidly at scale to meet our
government customers’ needs. I am confident that the Company is
well placed to continue delivering competitive returns while meeting
the needs of its multiple stakeholders.
Finally, and on behalf of the Board, let me express our profound
appreciation to the hardworking employees of Serco, and our many
partners, for their incredible commitment and achievements during
another difficult and challenging year.
John Rishton
Chairman
23 February 2022
Supported by independent research, we estimate the markets in
which we operate are worth around £715bn per year and that they will
grow at 2-3% per year on average in the coming years. The focused
Business-to-Government operating model that has been established
at Serco over recent years has enabled the business to grow faster
than the overall market, in part due to our ability to focus on the
areas of greatest government need across multiple countries and
sectors. This journey is not over. Further areas to make the Business-
to-Government platform even better were identified as part of the
strategy review and these will be implemented in the coming years.
We believe this enhanced version of an already highly successful
model will mean the Group can grow its revenue about twice as
fast as the market in the medium term and improve margins further.
Investors should benefit through attractive earnings growth and
shareholder returns, which we intend to increase faster than profits,
thanks to our strong balance sheet and good cash generation.
Corporate Governance
One of my roles as Chair is to ensure that Serco has strong
governance. In recent years this has become an area of intense focus
by all stakeholders and one that I take very seriously. Governance
responsibilities cover many areas (and are covered in detail in our
Corporate Governance Report on pages 116-178, including board
diversity and effectiveness, remuneration, financial reporting as well
as environmental and societal considerations.
Having served on the Board since September 2016, I am well aware
of Serco’s reputation as a purpose driven company, founded on
strong values with a dedicated and talented workforce. It was an
honour therefore to be asked to become Chairman in April 2021,
when Sir Roy Gardner stepped down. I would like to express my
personal thanks and the Board’s to Sir Roy for his strong leadership
as Chair and for his support to ensure a smooth transition. Other
non-executive Board changes this year included the appointment
of Tim Lodge, who replaced me as Chair of the Audit Committee
and Kru Desai. Both are experienced executives but with different
backgrounds who will bring new perspectives to the Board. Eric
Born decided to step down from the Board in December and I thank
him for his contributions over the last three years. In addition, we
appointed Nigel Crossley as our new Chief Financial Officer following
the decision of Angus Cockburn to retire. Angus’s leadership as CFO
was exceptional, guiding the Company through some of its most
difficult challenges to its present success. The Board and I thank
Angus for his dedication and leadership, and wish him well for
the future.
A continuing focus for the Board during the year was our
engagement with Serco’s workforce. Dame Sue Owen took over
responsibility from Kirsty Bashforth as the Board’s employee
representative and worked closely with the Company to ensure
that the Board understands employee perspectives and issues.
Non-Executive Directors participated in virtual and face-to-face
meetings with employees in each of our markets throughout the year
to discuss contracts and hear about issues that were important to
them. In addition, non-executives joined calls discussing health and
safety, diversity and other ESG issues. And in our annual employee
engagement survey we include a section called ‘Ask the Board’,
where employees are given the opportunity to raise issues for our
attention. We discuss these topics during Board meetings and follow
up to ensure common or significant matters are addressed. I was
delighted to see that despite all of the challenges brought about
by the pandemic our engagement scores remained high, at levels
comparable with 2019.
Annual Report and Accounts 2021
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Chief Executive’s Review
Chief Executive’s Review
“This was a year in which
Serco delivered an out-
standing financial and oper-
ational performance across
the world in the
face of constant challenge
and disruption”
Rupert Soames OBE
Group Chief Executive Officer
Another year of strong operational and financial delivery from our businesses around the world; guidance
for 2022 maintained. Our unique Business-to-Government platform set to deliver attractive growth from
2022 onwards.
Year ended 31 December
Revenue(1)
Underlying Trading Profit (UTP)(2)
Trading Profit
Reported Operating Profit(2)
Underlying Earnings Per Share (EPS), diluted(3)
Reported EPS (i.e. after exceptional items), diluted
Dividend Per Share (recommended)
Free Cash Flow(4)
Adjusted Net Debt(5)
Reported Net Debt(6)
2021
2020
£4,424.6m
£3,884.8m
£228.9m
£233.4m
£216.2m
12.56p
24.43p
2.41p
£189.5m
£178.0m
£608.3m
£163.1m
£175.7m
£179.2m
8.43p
10.67p
1.40p
£134.9m
£57.8m
£460.4m
Change at
reported
currency
Change at
constant
currency
16%
45%
14%
40%
33%
21%
49%
129%
72%
40%
208%
32%
Highlights
– Revenue: grew by 14% to £4.4bn,
with organic growth of 10%.
– Underlying Trading Profit: increased
by 40% to £229m. Margin increased
from 4.2% to 5.2%. Around
two-thirds of our profit was from
outside of the UK(7).
– Reported Operating Profit:
increased by 21%, or £37m, to
£216m; prior year included
exceptional credit of £12.5m.
– Earnings per Share: increased by
49% on an underlying basis and
129% on a reported basis, the latter
including the recognition of UK
deferred tax assets.
– Free Cash Flow: increased by 40%
to £190m, Underlying Trading Profit
cash conversion of 112%.
– Adjusted Net Debt: increased by
only £120m to £178m despite
acquisition spend of around £250m.
Covenant leverage at the year-end
was 0.7x EBITDA.
– Return on Invested Capital:
increased from 19.1% to 23.7%.
– Order Intake: very strong at £5.5bn,
125% book-to-bill.
– Closing Pipeline: up more than 50%
year-on-year at £9.9bn despite
strong order intake.
– Dividends: the Board recommends
a final dividend of 1.61p, +15%
year-on-year.
– New £90m share buyback agreed by
the Board: prompt return of surplus
capital to shareholders as financial
leverage is below our target range
of 1-2x net debt: EBITDA. Still leaves
ample headroom for investment.
– £10m of one-off payments
supporting employees. 50,000
colleagues received ex-gratia
payments recognising their hard
work in the year at a cost of £6m.
New charity Serco Peoples’ Fund to
support colleagues in times of
distress set up with a company
donation of £4m. Together, Serco
Peoples’ Fund and Serco
Foundation now have funds of
over £10m.
– Strong start to 2022.
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This was a year in which Serco delivered an outstanding financial and
operational performance across the world in the face of constant
challenge and disruption. Being a contract manager or team leader,
responsible for the daily delivery of vital public services, is never an
easy job, but 2021 was the toughest operational environment I have
seen; around the world shortages of every type of skill – HGV drivers,
Prisoner Escort Officers, engineers, welders, porters, IT staff to name
a few; customers eager to restore services (and themselves critically
short of staff); large numbers of unplanned absences as Omicron
spread; all made operational delivery incredibly stressful, and I want
to pay tribute to the resilience, the skill and commitment of not only
the front-line colleagues, but also of their line managers, for many of
whom 2021 has been a year of relentless pressure.
Notwithstanding this challenging environment, the business excelled;
we dealt with wildly fluctuating demand – in the UK, the number
of people contracted to support tracing rose from 4,000 in April to
13,000 in August, and was down to 600 in December; the number of
asylum seekers we found accommodation for increased by over 6,000
in the year. In Australia we mobilised over 1,000 people to support
the Department of Health in Victoria with their Covid-19 response;
in Canada we have been working to clear a backlog of driving tests,
which stood at around 500,000 in November 2021. And whilst this was
being delivered on the front line, our business development teams
secured our largest ever order intake of £5.5bn, a further increase in
the order book, and a closing qualified prospect pipeline of nearly
£10bn. Since 2017, when our turnaround started to gain momentum,
we have taken orders worth over £20bn, whilst billing revenue of
£17bn, giving a book-to-bill ratio approaching 120% over a five-
year period. There can be no clearer indication of the health of the
business, and its strong competitive position than this, particularly
when matched to the financial performance since 2017, with our
Underlying Trading Profit margins having climbed from 2.3% (2017) to
5.2% (2021), cash conversion improved from 31% to over 100% and
Return on Invested Capital increased from 9.0% to 23.7%. And whilst
supporting governments in their response to Covid has provided a
short-term uplift to revenues and profits, it has left an enduring legacy
of a much more capable and efficient organisation, strong customer
relationships, and lower debt. Crucially, our non-Covid business has
continued to grow apace during the last two years of crisis, and we
expect revenues and trading profit in a largely post-Covid 2022 to be,
respectively, around 30% and 60% higher than in pre-Covid 2019.
We completed three acquisitions in the year for a total consideration
of around £250m; Facilities First in Australia for £42m, WBB in the
US for £207m, and Clemaco in Belgium for £1m. Despite being very
different businesses – FFA is a facilities management company, and
WBB a high-end defence consultancy business – both have a high
proportion of their business dependent on short-term contracts
or task orders, and both found that the second and third waves
of Covid-19, which we did not foresee at the time of acquisition,
disrupted the flow of new work and their ability to hire additional
people. FFA and Clemaco ended the year on budget for Trading
Profit, while WBB was about $5m short. We remain confident that
this disruption will prove temporary and that all these acquisitions
will meet our strategic and financial expectations in the years ahead,
and in the meantime we have made good progress integrating the
businesses. Both FFA and WBB have had encouraging starts to 2022;
WBB in particular won over $100m of contracts since the start of the
year and has a strong pipeline.
Work supporting governments’ response to Covid-19 lasted much
longer than we expected at the start of 2021. As we became more
efficient at delivery of Covid-related work, and better at mitigating
the negative impacts of Covid-19 across the business, the net
contribution to our profits of this work was significantly larger in 2021
than in 2020; whilst it is difficult to precisely untangle what revenue
was and was not directly attributable to Covid, and its impact on
profit, we estimate that revenues partially or wholly attributable to
Covid support work for governments worldwide were around £700m
in 2021. Some impacts such as increased volumes on certain contracts
are likely to continue in the medium term; for example, it will likely
take some time to reduce the numbers of asylum seekers being
looked after to pre-Covid levels. On balance, we estimate that of the
£229m of Underlying Trading Profit in 2021, around £60m related to
Covid will not recur in 2022.
The strong financial performance enables us to deliver all aspects
of our capital allocation strategy: investing in the business to
drive growth and efficiency; increasing returns to shareholders by
increasing dividends (2021 final dividend increasing by 15% on 2020);
using share buybacks to keep our leverage within our target range
of 1-2x EBITDA; maintaining plenty of headroom to fund bolt-on
acquisitions and other investment opportunities which may appear.
With covenant leverage at 0.7x EBITDA, we plan to spend £90m on
a share buyback programme over the next 12 months. Based on our
2022 guidance the buyback amount would return us to the lower end
of our target leverage range, and at a share price of £1.26 (the closing
price on 23 February) would reduce the share count by around 6%.
Our Annual Report will detail the strong progress we have made on
matters related to ESG, including launching our international Serco
Goes Green initiative. Also, recognising that for many colleagues
2021 was no less demanding than 2020 and that we have once again
delivered an outstanding financial performance, we repeated the ex-
gratia payments made in 2020 of £100 to all employees not receiving
bonuses, which benefitted around 50,000 people at a cost of £6m in
the year. In addition, we set up a new charity called the Serco People’s
Fund in the year with a remit to help employees who for one reason
or another are suffering distress and would benefit from financial
support; the Group made a one-off donation to the charity in 2021
of £4m to ensure it had the funds to make a meaningful difference
to people’s lives. The People’s Fund will complement the work of the
existing Serco Foundation, which was established in 2013 and now
has funds of around £6m, whose focus is on supporting community
work and supporting causes sponsored by Serco colleagues. The
£10m now at their disposal will make a very significant social impact
over time.
Guidance for 2022
We have had a strong start to 2022, with order intake of over £600m
and trading consistent with our full-year guidance. We have been
awarded the contract to manage the new HMP Glen Parva prison
on behalf of the UK Ministry of Justice, which we expect to generate
revenue of over £300m during the 10-year term; we have also seen
strong order intake in the US, and our new WBB business has won
important pieces of work. In addition, the US Navy has announced
the award to Serco of the Ship Acquisition Programme / Project
Management (SHAPM) contract, which has an expected value of over
£200m; this award has not been included in our order intake as it
has been protested by a competitor. In January the US Government
Accountability Office (GAO) upheld our protest against the award
of the US Navy SEA21 contract to a competitor, and we have
subsequently been awarded an extension of the existing contract.
Annual Report and Accounts 2021
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Chief Executive’s Review continued
Our guidance for 2022 is unchanged from that we issued at our Capital Markets Event on 2 December 2021, other than to adjust for a lower
opening position on Net Debt, as a result of the better-than-expected cash performance in 2021, and the new £90m share buyback recently
agreed by the Board. As we have consistently said, our success in providing Covid-related services to governments worldwide inevitably
means that revenues and profits will fall as, hopefully, life returns to normal; we expect revenues directly related to these services to be
immaterial beyond the first half. Partially mitigating this, we have a number of new contracts starting to contribute in 2022; in addition, some
overhead and IT investment costs incurred in 2021 will fall away, enabling us to offset a substantial proportion of the non-recurring Covid-
related impact.
Serco is well-protected from inflationary effects as the great majority of our contracts have either indexation provisions or are spot-priced
under framework contracts. In our budgeting we assumed low-single digit indexation impacts, and whilst inflation expectations have
increased since then – and so would tend to increase revenues – higher inflation will also result in higher costs, leaving the effect on profits
broadly neutral.
Revenue
Organic sales growth
Underlying Trading Profit
Net finance costs
Underlying effective tax rate
Free Cash Flow
Adjusted Net Debt
2021
2022
Actual
Initial guidance
New guidance
£4.4bn
10%
£229m
£24m
24%
£190m
£178m
£4.1bn-£4.2bn
~(8)%
~£195m
~£25m
~25%
~£100m
~£160m
£4.1bn-£4.2bn
~(8)%
~£195m
~£25m
~25%
~£100m
~£220m
NB: The guidance uses an average GBP:USD exchange rate of 1.34 in 2022 and GBP:AUD of 1.90. New Net Debt guidance includes the £90m share buyback programme.
We expect a weighted average number of shares in 2022 of 1,195m for basic EPS and 1,217m for diluted EPS.
Notes to financial results summary table and highlights:
(1) Revenue is as defined under IFRS, which excludes Serco’s share of revenue of its joint ventures and associates. Organic revenue growth is
the change at constant currency after adjusting to exclude the impact of relevant acquisitions or disposals. Change at constant currency is
calculated by translating non-sterling values for the year ended 31 December 2021 into sterling at the average exchange rates for the
prior year.
(2) Trading Profit is defined as IFRS Operating Profit excluding amortisation of intangibles arising on acquisition as well as exceptional items.
Consistent with IFRS, it includes Serco’s share of profit after interest and tax of its joint ventures and associates. Underlying Trading Profit
additionally excludes Contract & Balance Sheet Review adjustments (principally Onerous Contract Provision (OCP) releases or charges) and
other material one-time items. A reconciliation of Underlying Trading Profit to Trading Profit and Reported Operating Profit is as follows:
Year ended 31 December 2021
£m
Underlying Trading Profit
Include: non-underlying items
OCP charges and releases
Other Contract & Balance Sheet Review adjustments and one-time items
Trading Profit
Amortisation of intangibles arising on acquisition
Operating Profit before exceptional items
Operating exceptional items
Reported Operating Profit
2021
228.9
1.3
3.2
233.4
(16.0)
217.4
(1.2)
216.2
2020
163.1
5.8
6.8
175.7
(9.0)
166.7
12.5
179.2
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section (3) Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects.
(4) Free Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group’s Consolidated
Cash Flow Statement, adding dividends we receive from joint ventures and associates, and deducting net interest and net capital
expenditure on tangible and intangible asset purchases.
(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS Alternative Performance Measure (APM) used by the Group.
This measure more closely aligns with the covenant measure for the Group’s financing facilities than Reported Net Debt because it
excludes all lease liabilities including those newly recognised under IFRS16.
(6) Reported Net Debt includes all lease liabilities, including those newly recognised under IFRS16. A reconciliation of Adjusted Net Debt to
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Reported Net Debt is as follows:
As at 31 December
£m
Adjusted Net Debt
Include: all lease liabilities accounted for in accordance with IFRS16
Reported Net Debt
2021
178.0
430.3
608.3
2020
57.8
402.6
460.4
(7) Refers to non-UK Underlying Trading Profit as a proportion of group Underlying Trading Profit before corporate costs. Our Underlying
Trading Profit before corporate costs in 2021 was £278.8m.
(8) Our outlook for 2022 is based upon currency rates as 31 January 2022. The rates used, along with their estimated impact on revenue and
UTP are as follows:
Year ended 31 December
Average FX rates:
US Dollar
Australian Dollar
Euro
Year-on-year impact:
Revenue
UTP
2022
outlook
1.34
1.90
1.20
~£1m
~£1m
2021
actual
1.38
1.83
1.16
2020
actual
1.29
1.88
1.13
(£73m)
(£7m)
(£24m)
(£1m)
Reconciliations and further detail of financial performance are included in the Finance Review on pages 77-91. This includes full definitions and
explanations of the purpose and usefulness of each non-IFRS Alternative Performance Measure (APM) used by the Group. The condensed
Consolidated Financial Statements and accompanying notes are on pages 179-261.
Annual Report and Accounts 2021
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Chief Executive’s Review continued
Summary of financial performance
Revenue, Underlying Trading Profit and Underlying Earnings Per Share
Revenue increased by 14%, or £540m, to £4,425m (2020: £3,885m). Of the growth, 10% (£391m) was organic, acquisitions contributed 6%
(£221m) and currency movements were a drag of 2% (£73m). The high level of organic growth was driven by very strong performances from our
UK and Australian businesses. About £700m of our global revenue was from services supporting governments’ response to Covid-19, which
compares to around £400m in 2020.
Underlying Trading Profit (UTP) increased by 40%, or £66m, to £229m (2020: £163m). Excluding the adverse currency movement of £7m,
growth at constant currency was 45%. Acquisitions added 11%, or £18m, of the growth, with the rest being organic. The organic growth arose
from continued strong demand for our Covid-19 work and growth in a range of other contracts, notably in Justice & Immigration and Citizens
Services. Our core operating platform was able to respond efficiently to the additional demand and, as a consequence, all of our regions
improved their Underlying Trading Profit margins by around 90 basis points or more, helping drive our UTP margin from 4.2% to 5.2%.
Diluted Underlying Earnings Per Share increased by 49% to 12.56p (2020: 8.43p). The percentage improvement was higher than the
increase in UTP as the leverage effect of higher profit and a lower finance cost more than offset a 0.9% increase in the effective tax rate.
The Revenue and Underlying Trading Profit performances are discussed in more detail in the Divisional Reviews, starting on page 27.
Year ended 31 December 2021
£m
Revenue
Change
Change at constant currency
Organic change at constant currency
Underlying Trading Profit
Margin
Change
Contract & Balance Sheet Review adjustments
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Operating profit/(loss) before exceptionals
UK&E
Americas
2,131.6
+20%
+20%
+20%
96.0
4.5%
130bps
1.3
2.5
99.8
(0.8)
99.0
1,120.0
+5%
+12%
+2%
117.8
10.5%
105bps
–
–
117.8
(11.7)
106.1
AsPac
908.4
+26%
+24%
+8%
51.3
5.6%
111bps
0.7
52.0
(3.5)
48.5
Middle
East
264.6
(18%)
(13%)
(13%)
13.7
5.2%
89bps
–
–
13.7
–
13.7
Corporate
costs
–
49.9)
(1.1%)
-7bps
–
–
(49.9)
–
(49.9)
Total
4,424.6
+13.9%
+15.8%
+10.1%
228.9
5.2%
97bps
1.3
3.2
233.4
(16.0)
217.4
Cash Flow and Net Debt
Free Cash Flow was very strong at £190m (2020: £135m). The improvement was a result of the £66m increase in underlying profits and a
working capital inflow of £25m, despite revenue growth of £540m. The strong working capital performance was helped by the successful
collection of some older receivables, including on our Dubai Metro contract following its conclusion, efforts by governments to support their
supply chains by ensuring prompt payments and favourable timing of some receipts round the period end. Average working capital days
reduced with debtor days of 19 (2020: 23 days) and creditor days of 23 (2020: 25 days). We are proud to say that 89% of UK supplier invoices
were paid in under 30 days (2020: 89%) and 95% were paid in under 60 days (2020: 97%). No working capital financing facilities were utilised in
this or the prior year.
Adjusted Net Debt increased to £178m at 31 December (31 December 2020: £58m, 30 June 2021: £225m). The £120m increase since the prior
year end includes spend on acquisitions of around £250m, £27m of dividend payments and £41m of share purchases.
The period end Net Debt compares to a daily average of £216m (2020: £209m) and a peak of £346m (2020: £356m). The relatively large range
for these was due to the acquisition of WBB in May and the favourable timing of receipts at the end of the period. As usual, we have not used
any financing or efforts out of the ordinary to reduce period end Net Debt.
Our measure of Adjusted Net Debt excludes lease liabilities, which aligns more closely with the covenants on our financing facilities. Lease
liabilities totalled £430m at the year-end (2020: £403m), the majority being leases on housing for asylum seekers under the AASC contract.
The terms of these leases are generally aligned to the contract we have with the customer.
At the closing balance sheet date, our leverage for debt covenant purposes was 0.7x EBITDA (2020: 0.5x). This compares with the covenant
requirement for net debt to be less than 3.5x EBITDA and our target range of 1-2x.
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VIVO Defence Services, our joint venture with Engie, was successful
in securing several contracts from the UK Ministry of Defence (MOD)
Defence Infrastructure Organisation (DIO) as part of the Future
Defence Infrastructure Services (FDIS) programme, the largest
facilities management procurement currently running across Europe.
In Lot 3, which awarded contracts to provide asset and facilities
management services for the UK defence built estate, VIVO won the
largest two regions of the four that were competed. These have an
estimated total potential value to Serco of around £1.7bn over the
initial seven-year period. VIVO also secured the largest two regions
in Lot 2B, which provides repairs and maintenance work for Service
Family Accommodation, with an estimated total potential value to
Serco of around £200m. Also in the UK, we were awarded contracts
by the Department of Work and Pensions as part of their Restart
programme, which will help unemployed people back into work. We
estimate that the combined value over the initial four-and-a- half-year
contract period will be around £350m, with the amount dependent
on the number of people who find employment. The order intake
also includes our Australian Immigration Services contract, which was
successfully extended to 2023, the £400m contract renewal to provide
support services at the Canadian Forces Base in Goose Bay and our
award to continue to provide services at Covid-19 testing centre
locations in the UK.
Order book
The order book increased from £13.5bn at the start of the year
to £13.7bn at the end of December. This is lower than might be
expected when order intake has been so high as, consistent with our
usual treatment of joint ventures, our order book does not include
the £1.9bn of order intake arising from our VIVO joint venture with
Engie; this is on the logic that as a joint venture, we report its profits
but not revenues. More widely, our order book definition gives our
assessment of the future revenue expected to be recognised from
the remaining performance obligations on existing contractual
arrangements. This excludes unsigned extension periods and the
order book would be £1.2bn (2020: £0.9bn) higher if option periods
in our US business, which always tend to be exercised, were included.
More detailed analysis of earnings, cash flow, financing and related
matters is included in the Finance Review.
Capital allocation and returns to shareholders
At our Capital Markets Day on 2 December 2021 we explained our
capital allocation priorities. We aim to maintain a strong balance
sheet with our target financial leverage of 1x to 2x net debt to
EBITDA, and consistent with this, the Board’s priorities will be to:
– Invest in the business to support organic growth ahead of the
overall market.
– Increase ordinary dividends so shareholders are rewarded with a
growing and sustainable income stream.
– Selectively invest in bolt on acquisitions that add capability,
scale or access to new markets and have attractive returns.
– Return any surplus cash to shareholders through share buybacks.
In 2021, we have deployed all aspects of our capital allocation policy:
– Invest to support organic growth: we took the opportunity of our
strong performance to accelerate investments in our systems
and processes, costing about £10m in the second half.
– Increase ordinary dividends: the Board is recommending a final
dividend of 1.61p, 15% higher than the prior year. Following the
interim dividend of 0.8p, this results in a full year dividend of
2.41p, an increase of 72% compared to 2020.
– Invest in acquisitions: we acquired three businesses in the year,
WBB, FFA and Clemaco.
– Return surplus cash to shareholders: with leverage being below
the bottom end of our preferred range, the Board has agreed
that it intends to buy back up to £90m of its shares over the next
12 months.
The full year ordinary dividend of 2.41p represents dividend cover
of 5.2x. When we resumed paying dividends in respect of 2020, we
were targeting a starting level of cover of around 4x, but the strong
performance on our Covid-related activities has increased cover
temporarily. As these earnings fall away and dividends increase,
the level of cover will naturally fall. As laid out in our Capital Markets
Day, our strong balance sheet, confidence in the outlook and
good cash generation, mean we intend to reduce dividend cover
progressively towards 3x over the coming years. Regarding potential
further share buybacks, we will review our financial position and
capital requirements on a regular basis and return surplus capital to
shareholders as appropriate.
Contract awards, order book, rebids and pipeline
Contract awards
Order intake was strong in 2021 with £5.5bn of work won, a book-
to-bill rate of 125%. There were 56 contract awards worth more than
£10m each and 5 with a total contract value of more than £200m.
Around 60% of order intake came from the UK & Europe, 25% from
the Americas and the remaining 10% from Asia Pacific and 5% from
the Middle East.
Of the order intake, approximately 60% was represented by the value
of new business and 40% was rebids and extensions of existing work.
This is the opposite of the position in the same period last year. The
win rate by value for new work, which has averaged slightly less than
30% over the last five years, was unusually high at around 55%. The
win rate by value for securing existing work was approximately 75%,
which is lower than the 80-90% we typically see, as a result of the loss
of our Dubai Metro contract. Win rates by number of tenders were
60% for new bids and around 90% for rebids and extensions.
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Chief Executive’s Review continued
Rebids
In our portfolio of existing work, we have around 80 contracts with
annual revenue of £5m or more where an extension or rebid will be
required before the end of 2024. Excluding our NHS Test & Trace
contracts, which are short-term in nature and we expect the work
to come to a natural finish, contracts which will either end or need
to be extended in 2022 have an annual contract value of around
£0.5bn. The annual value rises in 2023 to approximately £0.9bn,
which includes our Center for Medicare & Medicaid Services (CMS)
in the US and our Immigration Services contract in Australia, before
reducing to £0.3bn in 2024. The current CMS and Immigration
Services contracts end, respectively, in July and December 2023,
and we will be re-bidding both.
Pipeline
Our measure of pipeline is probably more narrowly defined than
is common in our industry. It includes only opportunities for new
business that have an estimated annual contract value (ACV) of at
least £10m and which we expect to bid and to be adjudicated within a
rolling 24-month timeframe. We cap the total contract value (TCV) of
individual opportunities at £1bn, to lessen the impact of single large
opportunities. The definition does not include rebids and extension
opportunities, and in the case of framework, or call-off, contracts such
as ‘ID/IQ’ (Indefinite Delivery/Indefinite Quantity contracts), which are
common in the US, we only take the value of individual task orders into
our pipeline as the customer confirms them. Our published pipeline is
thus a relatively small proportion of the total universe of opportunities,
many of which have annual revenues less than £10m, are likely to be
decided beyond the next 24 months, or are rebids and extensions.
Our pipeline was £9.9bn at the end of 2021, an increase of more than
50% on the £6.4bn level at the end of 2020 and around 70% higher
than the £5.8bn at the end of June 2021. It is pleasing to see the
pipeline replenish so well given 2021 was a strong year for wins, with
£5.5bn of orders secured. The pipeline consists of around 40 bids with
an ACV averaging approaching £40m and a contract length averaging
more than six years. The pipeline of opportunities for new business
that have an estimated ACV of less than £10m has also increased, with
the value rising from £1.7bn to £2.0bn in the year.
As we have noted before, in the services industry in which Serco
operates, pipelines are often lumpy, as individual opportunities can
be very large, and when they come in and out of the pipeline they can
have a material effect on reported values. Since the year end two of
the larger opportunities in the pipeline have come out due to award
decisions; HMP Glen Parva, a new prison in the UK which we won and
Frankston Hospital in Australia, which we lost. We expect that the
value of the pipeline, having increased from £5.8bn in June 2021 to
£10bn in December 2021, will reduce during the first half as some of
the large opportunities are adjudicated.
Acquisitions
We regard acquisitions as an important part of our strategic
toolkit, which, if deployed correctly, can add significant value to
the business; but they should be in addition to, and designed to
deliver, new opportunities for organic growth. They require discipline
and process, and for M&A we follow our head office mantra of
having a few good people rather than a lot of average ones. Much
of our work we do in-house although we also use advisers where
appropriate. We look at many opportunities, and reject most of
them. Generally speaking, we regard acquisitions as higher risk than
organic growth, so any candidates have to meet our stringent criteria
of being both financially and strategically compelling; strategically
we judge potential acquisitions against three criteria: do they add
new, or strengthen existing capability? Do they add scale which
we can use to add efficiency? Do they bring us access to new and
desirable customers and markets? We also recognise that acquisition
opportunities come in different shapes, sizes and sectors, and a small
one can be strategically important to a region, but not necessarily
significant at Group level. But large or small, all acquisitions are
centrally managed by Group and follow the same rigorous process.
Since 2014 we have undertaken six acquisitions:
– In 2017, we acquired BTP systems, a US defence engineering
company, for $20m (£13m).
– In 2018 we acquired parts of the Carillion Healthcare business,
for £18m.
– In 2019 we undertook a major acquisition in North America in the
form of the Naval Systems Business Unit of Alion, a leading
provider of naval design, systems engineering and acquisition &
programme management, for a consideration of $225m (£186m).
– In January 2021, we acquired FFA, a specialist provider of
cleaning, facilities maintenance and management services to
governments in Australia for A$74m (£42m), including working
capital adjustments.
– In April 2021 we acquired WBB, a leading provider of advisory,
engineering, and technical services to the US military, for $293m
(£207m).
– In July 2021 we acquired Clemaco, which specialises in the
support and maintenance of the ships of the Belgian Navy, for
around €1m (£1m).
The unexpected persistence of Covid-19 meant that both FFA
and WBB faced disruption in both labour supply and order intake;
however, both have bedded in well and the integration of them has
been successful.
FFA has seen a different mix of business as a result of the ongoing
Covid-19 situation, with lower demand for larger, discretionary
facilities maintenance work but higher levels of cleaning. These two
effects have largely broadly offset each other with the business overall
delivering profit in-line with expectations for the year. The strategic
logic of acquiring the business was to extend the reach and capability
of our Australian business in the government facilities maintenance
and management market, which we believe will position us well for
numerous bidding opportunities in the coming years.
WBB has experienced the same market headwinds we saw in our
US defence business: repeated and unexpected surges of Covid
led to significant delays in new award decisions and tight labour
markets, particularly in the highly skilled and sensitive areas in which
WBB operates. As the business typically grows rapidly from securing
new work, revenue and profit in the year were ~10-20% lower than
anticipated. However, since the start of 2022 WBB won over $100m
of contracts, and recruitment began to improve. And our belief in
the strategic merit of the acquisition – to extend our Air Force, Army
and the Office of the Secretary of Defense presence – has only been
reinforced by owning the business.
We will continue to search out new opportunities for acquisition which
fit our criteria, and in the meantime focus on delivering value from
those acquisitions already executed.
Operational progress, transformation, innovation
and people
We have an ambition to be the best-managed business in our sector.
Achieving this will require investment in people, processes and
systems. Covid-19 has been hugely disruptive over the last two years
and has tested our systems, processes and people in unforeseen ways.
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Our first trading statement on Covid-19, issued on 2 April 2020, set
out our operational priorities:
“Our priority in this crisis is to support the delivery of essential
public services and, within that context, do all we can to protect our
employees from harm and our shareholders from loss…Our mettle
is being tested as never before, and we are determined to rise to
the level of events.”
It turns out that many of the investments that we have made over
recent years have proven their worth during the crisis. In particular,
I would point to three themes which have served us well.
The first is a management structure based on our “loose-tight”
model. This means that we delegate authority and responsibility for
day-to-day operational management to be as close to the customer
as possible, but we maintain a tight control over risk management,
bidding and cost control, and we have a well-established reporting
regime, where transparency and reporting bad news as soon as it
happens are mandatory. During the crisis, we maintained the regimen
of monthly reporting, and the Investment Committee, which is a
standing committee of the most senior Group executives including
the CEO, CFO, COO and Group General Counsel and which
oversees bids and investments, met 97 times during 2021. Divisional
Performance Reviews, and Business Unit Performance Reviews,
continued their monthly rhythm. Our cash performance was
reported daily.
The second was cultural: over the past seven years we have laid
much emphasis on our values of Trust, Care, Innovation and Pride.
These played a significant part in sustaining the ability of the
business to deliver under extreme and unprecedented pressure.
The levels of Trust built up across the management team allowed
us to work seamlessly together across boundaries; the value of Care
made it easy to connect company and people’s own values with the
astonishing efforts that people had to make to look after prisoners,
patients, travellers, and hundreds of thousands of often frightened
and confused citizens. Innovation and loose-tight management
allowed us to invent new services and business models almost
overnight and to adapt our IT platforms to new ways of working.
Pride meant that people understood that the work we do delivering
public services is incredibly important and that it is a privilege to be
able to make a difference every day to people’s lives. Pride and Trust
also helped us maintain momentum and morale in the face of public
criticism and comment about our work in the early days of NHS Test
& Trace in the UK. Needless to say, much of the criticism was wildly
unfair and bore little relationship to the facts, but it was still unsettling
to our colleagues to see their hard work being called into question.
What evidence do we have of the impact of our culture and
organisational philosophy? On the operational side, clearly we
have the evidence of what has been delivered: on the UK testing
programme, to which we are significant contributors, the number of
tests per week in 2021 ranged from 117,000 to 1.5 million; on tracing,
the number of people we provided to the service rose from 4,000 in
April 2021, to 13,000 in August, and back down to 600 in December.
In Australia we had 275 people on tracing in January 2021 for the
Department of Health in Victoria, which rose to 1,000 in August and
fell back to 300 in December. Managing this variability is one of
Serco’s key skills and it has required major investment in IT systems to
support the recruitment and management of over 100,000 direct and
indirect employees over the last two years.
Our Viewpoint engagement survey generated 29,470 individual
respondents, about the same as last year; having risen every year
from a low of 42 in 2014, our engagement score fell slightly from 73 in
2020 to 70, which is still a good score for a business of our type, and
higher than it was in 2018; we sense that it probably reflects the fact
that in the second year of Covid, and huge volatility, people are just
tired of all the uncertainty and disruption.
Operationally Serco has performed very well during the crisis.
We operated services on Northlink Ferries, MerseyRail, and the
Caledonian Sleeper in the face of numerous challenges. In prisons
we had to manage rapidly changing regimes as lockdowns came and
went; hospital staff had to deliver cleaning, catering and portering
with sickness absence rates of up to 25% in some contracts.
One thing that has suffered during the pandemic is in-person
management training. Several years ago we designed and developed
bespoke week long management training programmes with our
partners at the Saïd Business School, at the University of Oxford.
Travel restrictions meant we had to suspend these programmes as we
believed the week long residential element was critical in being able
to build networks across the Company. We have now reinstated these
programmes, running our Contract Managers programme in February
2022, and we will run our first course specifically designed for women
in management in the next few months. In North America, we have
instituted along with LinkedIn remote training programmes that give
colleagues access to over 1,000 high-quality training courses. And
we have sustained our commitment to recruiting talented young
people at a time when many companies have cut back; in the US
we increased our Internship programme to over 50 people, and
on graduation our recruitment rate is around 90%. In the UK we
expanded our graduate recruitment intake and as a result now have
placed over 50 people into our graduate programme over the last
two years.
The third element that has stood us in good stead has been our
investment in IT systems; over the past few years we have been
migrating our key management and financial systems to the
Cloud, and upgrading them at the same time. We have invested
considerable money and effort in improving our HR systems, and a
new front-end to our core HR applications which went live in January
2022. We also extended the rollout of our Workforce Management
System and created a new infrastructure for our VIVO joint venture.
In January 2021 our European business was the subject of a serious
ransomware attack. Fortunately, the capability we had developed
allowed us to respond robustly to this challenge, and we were
able to trace the criminals’ server; with the assistance of local law
enforcement, it was disabled and our stolen data was safely removed.
Our ability to deliver services to clients was not disrupted and no
ransom was paid, but the time, effort and expense required to
achieve a satisfactory outcome was considerable.
We said at the beginning of the Covid crisis that it would test
our mettle; it has, and I am proud beyond words as to how well
colleagues and the organisation as a whole have performed since
March 2020. The same words I used in last year’s report are worth
repeating: for a very large business, we have shown surprising agility.
For a business which used to look like a collection of individual
contracts, we have demonstrated our ability to act with common
purpose, deliver economies of scale, and to maintain rigorous
standards of reporting and control in confusing and difficult
circumstances. For a business of any size we have shown great
resilience.
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Chief Executive’s Review continued
Market outlook
In 2021 we conducted a detailed market review, which included using
two independent research firms, one British, and one American, to
estimate the size and growth rates of our markets. We now estimate
that total outsourcing spend by governments on services in the
countries in which we operate (which account for an estimated 65% of
the world market, excluding Russia and China) is around £715bn; and
that our market share is between 1% and 3%, depending on whether
we look at segments we operate in or the market as a whole. And we
estimate that once Covid-19 expenditure has normalised the market
will grow at around 2-3% per year in the medium term. Rather than
concentrate on the absolute number, which is likely to have a large
margin for error, some key conclusions from our work are:
– The market for private sector delivery of government services is
very large.
– The supply-side is fragmented; as a leading international
supplier, our market share within our existing footprint, at around
3%, is small, although it is larger in some specific segments
within certain sectors.
– The market is likely to continue to grow and, given our small
market share, there is ample opportunity for us to grow faster
than the market.
In terms of the impact of Covid-19 on our markets, we think it will
take several years for governments’ expenditure patterns to settle
down following the pandemic; the immediate aftermath will probably
focus on continued need for surveillance of the virus, as well as
catching up on the areas of normal expenditure such as healthcare,
court hearings and defence infrastructure which have been disrupted
during the pandemic. The private sector has responded extremely
well to governments’ emergency requirements, and we think it likely
that this will remind governments of the value of flexible, resilient
and robust supply chains which can support them in both ordinary
and extraordinary times. Nor do we anticipate a lot of change arising
from Covid-19 in our basic business model of offering public services
delivered by people supported by good technology. On the contrary,
we know that governments will be massively more indebted than they
were before the crisis and that citizens will be more in need, as well as
more demanding, of public services critical to rebuilding society and
quality of life – be that services to deal with unemployment, training
and skills gaps, social care reform, acute healthcare capacity, building
national resilience, sustainable transport growth and more. And the
level of geopolitical threat that countries perceive themselves to be
facing in 2022 seems if anything higher than in the immediate pre-
Covid years; so defence expenditure is likely to remain robust.
The drivers of growth in our markets can be summarised as ‘Four
Forces’, which have existed for some time and we believe will be
amplified by the crisis:
– Increasing and changing demand for public services.
– Heightened expectations around the quality and resilience of
public services.
– Increased fiscal deficits.
– The unwillingness of voters and corporate taxpayers to tolerate
tax increases.
These will continue to drive governments to want to deliver more
public services, of higher quality, for less money. We believe that this
imperative to provide more, and better, for less will become even
more urgent in the years ahead, and to deliver those objectives
governments will need the skills, resources, innovation and
nimbleness of the private sector.
Following our review of the market, we held a Capital Markets Event
in December 2021. We described how Serco had evolved over
the last seven years from being a collection of largely unrelated
contracts, into a powerful and capable business with a well-proven
Management Framework and Business-to-Government (B2G)
operating platform which enabled us to address our chosen market of
international government services and outperform our competitors.
Our Management Philosophy, and B2G platform are described in
detail in our Annual Report.
Guidance for 2022
In our Capital Markets Day statement on 2 December, we provided
our initial guidance for 2022. Since then we have again seen the
speed at which the impact of Covid-19 can change, as the Omicron
variant spread rapidly in December and January. As a consequence
in the first weeks of 2022 there was high demand for Covid-19 testing
services, while other parts of the Group, such as transport, had lower
volumes because of restrictions, or higher cost due to increased
employee absence rates. As case numbers decline, these effects
are beginning to reverse, leaving our expectations for 2022 largely
unchanged.
We expect a rapid wind-down of Covid-19 related services supplied
to governments during 2022, which will have a significant impact
on both revenue and profits. We anticipate around £60m of net
profit impacts that arose in 2021 will not recur in 2022 , including the
frontline bonus and People Fund contribution. However, a large part
of this reduction will be offset by growth in other parts of the business
as a result of the very strong order intake in 2021. We have also had
a strong start to 2022, with order intake of over £600m and trading
consistent with our full-year guidance. We have been awarded the
contract to manage the new HMP Glen Parva prison on behalf the
UK Ministry of Justice which we expect to generate revenue of over
£300m during the 10-year term; we have also seen strong order intake
in the US, and our new WBB business has won important pieces of
work. In addition, the US Navy has announced the award to Serco
of the Ship Acquisition Programme/Project Management (SHAPM)
contract, which has an expected value of over £200m; this award has
not been included in our order intake as it has been protested by
a competitor. In January the US Government Accountability Office
(GAO) upheld our protest against the award of the SEA21 contract to
a competitor, and we have subsequently been awarded an extension
of the existing contract.
Serco is well-protected from inflationary effects as the great majority
of our contracts have either indexation provisions or are spot-priced
under framework contracts. In our budgeting we assumed low-single
digit indexation impacts, and whilst, since then, inflation expectations
have increased, so would tend to increase revenues, they will tend to
also result in higher costs, leaving the effect on profits broadly neutral.
We have not at this stage increased our revenue guidance to reflect
what may be slightly higher indexation benefits, but we will have a
better idea of the actual levels of indexation achieved at the half year.
Revenue in 2022 is expected to be £4.1bn-£4.2bn, approximately
6% lower than the £4.4bn in 2021. This assumes a 1% contribution
from acquisitions and a neutral currency impact. We expect lower
demand for Covid-19 related services in 2022 to reduce our revenue
by approximately 13%, with organic growth on non-Covid work to be
around 5%, in-line with our new medium-term growth targets.
Underlying Trading Profit (UTP) in 2022 is expected to be around
£195m. As well as the impact of reduced Covid-19 revenues noted
above, UTP will be reduced by the ending of the AWE and Dubai
Metro contracts; we also expect the increase in National Insurance
employers’ contributions in the UK to cost around £5m on an
annualised basis. The impact of these factors is cushioned by the
positive effect of new work secured in 2021, such as the DWP Restart
Programme and the Defence Infrastructure Organisation contracts
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moving into profitability, as well as the ending of our accelerated
investment programme, and the beneficial impact of the efficiencies
we will derive from these investments in 2022. In terms of wider cost
increases, the business has robust mitigation of the impact of inflation
as the great majority of contracts have either indexation provisions or
the ability to re-price work orders at the time they are contracted.
Net finance costs and tax: Net finance costs are expected to be
around £25m, slightly higher than 2021. The underlying effective tax
rate is expected to continue at around 25%, although this is sensitive
to the geographic mix of our profit and any changes to current
corporate tax rates.
Financial position: Free cash flow is expected to remain strong at
around £100m, lower than 2021 reflecting the reduced profitability
and more normal working capital absorption following the reduction
of Covid-19 services which had beneficial payment terms. We expect
Adjusted Net Debt to end the year at around £220m.
Returns to shareholders: Although it is anticipated earnings will
reduce in 2022, it is our intention continue on our path of increasing
dividends to shareholders as part of our policy of progressively
reducing dividend cover towards 3x over the coming years. The
Board will keep future buybacks under review in line with our capital
allocation framework and target leverage of 1-2x net debt to EBITDA.
Summary and concluding thoughts
There is a sense of déjà vu in writing this report, because we start
2022 with the same expectation as we did 2021: that life will return
to normal during the first half as the impact of Covid faded and
became something of the past not the present. These hopes, dashed
by successive waves of infection and Omicron in 2021, seem better
founded at the start of 2022 as the vile virus appears to be behaving
like its predecessors in decades past in that successive variants tend
to be more infectious but less lethal. More like flu; more endemic
than pandemic; something we can live with rather than having to
hide from.
And reporting on the results of a single year – 2021 – also permits
the eye to look further back. A single year of strong performance
might be a blip; two, even, good fortune. But the fact that since 2017,
Serco’s revenues have grown at a compound rate of 11%, and profits
by 35%, and that over that extended period we have taken £20bn of
orders against £17bn of sales, in a market growing at around 3% per
year, suggests that there is something afoot other than blips and luck.
There is a saying that “even turkeys can fly in a hurricane”. And the
revenues we have won providing services to governments related to
Covid have certainly been a strong tailwind. But our Management
Framework, combined with our Business-to-Government Platform,
enabled us to find, and then respond to those winds, to spread our
wings, and fly to the aid of our government customers. And even
if you strip out all the recent Covid impact, the business has grown
much faster than the market over the last five years.
We are pleased with the way our business model is delivering
competitive advantage and differentiation; settled on our strategy of
being a focused provider of services to governments; happy with our
relationships with customers; delighted with the performance that
the business has delivered over the past five years. But there are two
parts of our ecosystem that require careful navigation.
The first is labour markets; worldwide, we employ more than 50,000
people, and handle around 400,000 job applications a year. Our
business is providing people based-services enabled by technology
to governments, and for many years the relationship, the rules of
the road, between people who wanted to work and companies who
needed to employ them was stable and well understood. Since
Covid, that has no longer been the case, and we see far more difficult
labour market conditions than certainly I, in 35 years managing
businesses, have previously seen. It is an international phenomenon,
affecting all our markets, and seems to be driven by the experience
of Covid causing some people to reconsider the way they think about
work. Some have retired early; some have returned to their home
countries; some have found working from home more congenial
than travelling to the office; some are fearful of Covid at work; some
are caring for relatives or suffering from long-Covid; some, having
saved money during lockdowns, have gone walkabout. Whatever the
reason, at the moment it is hard to recruit and retain people. Hard
and frustrating, but not impossible, as the fact that over the last two
years we have recruited and managed around 100,000 direct and
indirect employees, and the millions of pounds we have invested in
the last year in systems to support workforce efficiency and improved
HR systems are helping us to manage through what we believe will be
a largely temporary phenomenon until the demand and supply side
of labour markets find a new equilibrium.
The other part of our ecosystem that is complicated to navigate is
ESG, to which we devote a significant amount of senior management
time. A company that has been writing Corporate Responsibility
Reports since 2003; whose daily work is helping governments to
deliver vital public services, often to the most disadvantaged and
vulnerable in society; and whose stated purpose is to be a “valued
and trusted partner of governments, delivering superb public
services, that transform outcomes and make a positive difference for
our fellow citizens”, is one that clearly “gets” ESG. On Environment
and Governance, by any measure we have a good narrative. What is
required by stakeholders for them to make informed judgements is
reasonably clear, and getting clearer by the year with the introduction
of recommendations such as the Taskforce on Climate-Related
Disclosures, which we are adopting in our 2021 Annual Report, as well
as public company regulatory reporting requirements.
It is on the “Social” side, which is such an integral part of what we
do as a provider of services to government, where we face the
most scrutiny, and where there is least consensus on standards to
which we can adhere and against which stakeholders can judge us.
Perhaps this is because as greater standardisation applies to the
Environmental and Governance dimensions, there is more divergence
on the Social dimension; as a consequence we are faced by a wide
range of strongly-held, but different, opinions and interpretations
of various standards, and a company’s Social Value appears to be
in the eye of the individual analyst or institution who beholds it. In
August 2021 the CFA Institute published some timely research (ESG
Ratings: Navigating Through the Haze) which shows that on financial
measures, such as debt ratings, there was a correlation of around
95% between the main ratings agencies; on ESG matters, the same
agencies on the same companies, the correlation was mostly less than
50% in their scoring, and between some of the largest, less than 30%.
In other words, almost none, and certainly not a basis from which we
can distil a common view or consensus.
To us, the question of whether what we do has social value is quite
straightforward and obvious because of the nature of our customers.
The overwhelming majority of our work is at the instruction of
democratically-elected governments, who are signatories to
international conventions on social issues and who operate alongside
strong legal systems. If they ask us to do work which is lawful and
which they consider is socially useful, we do not think it is for us,
as a mere corporate, to second-guess that judgement, except in
exceptional circumstances. And that applies to work in areas which
some consider contentious such as justice, immigration and defence.
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Chief Executive’s Review continued
We rather scratch our heads at institutions who think it is consistent
to trade in government bonds, but screen out companies on ESG
grounds who do work for the self-same governments and financed
by the self-same bonds; and those who regard democracy and law as
social goods, but prefer their own institution’s interpretation of social
value to those of elected governments.
However, our job is to navigate with the world as it is, not as we
would like it to be. We want to ensure that we are within the universe
of investible companies of as many funds as possible, but the lack
of consistency in how investors judge companies on the social
dimension of ESG can make it feel like we are chasing rainbows. Our
approach, therefore, is to get on with our work serving governments,
helping them to do the hard things citizens (and investors) expect
them to do, and to try and make a positive difference to society
whilst treating our colleagues, suppliers and communities with the
care and respect they deserve. And we recognise a responsibility
to be transparent about the work we do and respond constructively
and helpfully to requests for information so that investors and other
stakeholders can make informed judgements.
For us the most important thing is that our customers and our
colleagues, who best know the work we do, believe we are doing
a good job delivering public services and, by extension, social
value. On the first, order intake in the last five years of over £20bn,
£3bn more than our revenues, and the fact that our revenues from
governments are growing faster than the market, suggests that our
customers think we are doing a good job. On the second, we have an
objective measure to rely on through our annual Viewpoint surveys,
to which around 30,000 Serco people respond each year; the vast
majority of respondents say they are proud to work for Serco and they
feel their work at Serco makes a positive difference.
In conclusion, we think that Serco’s record over the last five years is
proof positive that our strategy of being a focused supplier of services
to governments, organising ourselves around our Management
Framework, and using our B2G platform to win and deliver business,
has worked well. Our unique operating platform differentiates us
from our competitors and gives us agility, reach, breadth, efficiency
and resilience; these things have helped us deliver our objectives of
winning good business, executing brilliantly, making Serco a place
people are proud to work, and delivering profits that are sustainable.
We believe they will continue to do so over the coming years, and will
enable us to deliver a combination of revenues growing faster than
the market, profits growing faster than revenues, and shareholder
returns growing faster than profits, and all the while being a company
that delivers social value through excellent public services which
deliver value for money for taxpayers.
Rupert Soames
Group Chief Executive
Serco – and proud of it.
23 February 2022
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Divisional Reviews
Serco’s operations are reported as four regional divisions: UK & Europe (UK&E);
the Americas; the Asia Pacific region (AsPac); and the Middle East.
Reflecting statutory reporting requirements, Serco’s share of revenue from its joint ventures and
associates is not included in revenue, while Serco’s share of joint ventures and associates’ profit after
interest and tax is included in Underlying Trading Profit (UTP). As previously disclosed and for consistency
with guidance, Serco’s UTP measure excludes Contract & Balance Sheet Review adjustments, which were,
in any case, immaterial in the period.
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£m
Revenue
Change
Change at constant currency
Organic change at constant currency
UTP
Margin
Change
Contract & Balance Sheet Review
adjustments
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on
acquisition
Operating profit/(loss)
before exceptionals
Year ended 31 December 2020
£m
Revenue
UTP
Margin
Contract & Balance Sheet Review
adjustments
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles
arising on acquisition
Operating profit/(loss)
before exceptionals
UK&E
2,131.6
+20%
+20%
+20%
96.0
4.5%
130bps
1.3
2.5
99.8
(0.8)
Americas
1,120.0
+5%
+12%
+2%
117.8
10.5%
105bps
–
–
AsPac
Middle East
Corporate costs
Total
908.4
+26%
+24%
+8%
51.3
5.46%
111bps
–
0.7
264.6
(18%)
(13%)
(13%)
13.7
5.2%
89bps
–
–
–
+14%
(49.9)
(1.1%)
-7bps
–
–
4,424.6
+13.9%
+15.8%
+10.1%
228.9
5.2%
97bps
1.3
3.2
117.8
52.0
13.7
(49.9)
233.4
(11.7)
3.5
–
–
(16.0)
99.0
106.1
48.5
13.7
(49.9)
217.4
UK&E
Americas
AsPac
Middle East
Corporate costs
Total
1,777.4
1,064.3
718.9
324.2
–
3,884.8
57.0
3.2%
5.8
6.8
69.6
(2.0)
67.6
100.8
9.5%
–
–
100.8
(7.0)
93.8
32.6
4.5%
–
–
32.6
–
32.6
13.9
4.3%
–
–
13.9
–
13.9
(41.2)
(1.1%)
–
–
(41.2)
–
163.1
4.2%
5.8
6.8
175.7
(9.0)
(41.2)
166.7
The trading performance and outlook for each Division are described on the following pages. Reconciliations and further detail of financial
performance are included in the Finance Review on pages 77-91. This includes full definitions and explanations of the purpose of each
non-IFRS Alternative Performance Measure (APM) used by the Group. The Condensed Consolidated Financial Statements and accompanying
notes are on pages 179-261. Included in note 2 to the Group’s Consolidated Financial Statements are the Group’s policies on recognising
revenue across the various revenue streams associated with the diverse range of goods and services discussed within the Divisional Reviews.
The various revenue recognition policies are applied to each individual circumstance as relevant, taking into account the nature of the Group’s
obligations under the contract with the customer and the method of delivering value to the customer in line with the terms of the contract.
Annual Report and Accounts 2021
Serco Group plc
27
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Divisional Reviews continued
UK & Europe
Sectors we
operate in:
• Defence
• Justice &
Immigration
• Transport
• Health
• Citizen Services
Revenue
Underlying Trading Profit (UTP)
£2,132m
2020: £1,777m
£96m
2020: £57m
Group revenue
48%
Group UTP (before Corporate costs)
34%
Year ended 31 December
£m
Revenue
Organic change
Acquisitions
Currency
Underlying Trading Profit
Organic change
Acquisitions
Currency
Margin
2021
2020
Growth
2,131.6
20%
0%
0%
96.0
68%
1%
(1)%
4.5%
1,777.4
31%
0%
0%
57.0
20%
68%
3.2%
130bps
Revenue grew by 20% to £2,132m (2020: £1,777m), with the increase
all being almost entirely organic. All our sectors grew with Citizen
Services and Justice & Immigration delivering the strongest growth
but Transport, Health and Defence also expanding. Growth in Citizen
Services was particularly strong due to Covid-19 related work, which
included providing support services for over 200 Covid-19 regional,
local and mobile test centres as well as for the UK Tracing programme.
We delivered around 25% of the UK’s Pillar 2 Testing facilities. Justice
& Immigration also increased revenues, in part because of a full
12 months of the new Prisoner Escorting Contract, and also as a result
of increased numbers of asylum seekers under our care.
Underlying Trading Profit increased to £96m (2020: £57m),
representing a margin of 4.5% (2020: 3.2%). Increased volumes and
efficient scaling of platform costs supported the margin improvement,
as did signs of improvement in those parts of our business that were
badly affected in 2020 by Covid-19 – notably Leisure and Transport
and Health – started to show modest signs of improvement.
Underlying Trading Profit includes the profit contribution of joint
ventures and associates, from which interest and tax have already been
deducted. If the proportional share of revenue from joint ventures and
associates was included and the share of interest and tax cost was
excluded, the overall divisional margin would have been 4.2% (2020:
2.8%). The joint venture and associate profit contribution was lower at
£9m (2020: £13m), as a result of the cessation of our Atomic Weapons
Establishment contract at the end of June 2021 and some mobilisation
expenses related to our new VIVO joint venture.
The UK & Europe division’s order intake was strong at around £3.4bn,
a book-to-bill ratio of 1.6x and around 60% of the total intake for the
Group. Agreements signed included contracts from the Defence
Infrastructure Organisation (DIO) awarded to our VIVO JV with
Engie, which we estimate will have a value in aggregate to Serco of
£1.9bn over their initial seven-year term. The contracts include the
maintenance of some 200 military sites, 19,000 buildings and around
20,000 homes. The order intake also includes our DWP Restart
contract, which has an estimated value of £350m and our Covid-19
Testing Centres contract award, which we value at £190m.
Despite such a strong period for order intake, the pipeline remains
healthy, with significant new opportunities across Defence and Space,
and Justice & Immigration including for new prison operations.
28
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Americas
Sectors we
operate in:
• Defence
• Transport
• Citizen Services
Revenue
Underlying Trading Profit (UTP)
£1,120m
2020: £1,064m
£118m
2020: £101m
Group revenue
25%
Group UTP (before Corporate costs)
42%
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Order intake was £1.3bn, approximately 25% of the total for the Group
and a book-to-bill ratio of approaching 1.2x, despite Covid-19 having
led to a backlog of awards and delays in new tenders. We successfully
rebid our contract to provide support services at the 5 Wing Canadian
Forces Base in Goose Bay, Canada, with an estimated ceiling value
of around C$700m or £400m over the initial 10-year period. We
also successfully rebid our Anti-Terrorism / Force Protection (ATFP)
framework contract for US Naval Facilities, which we estimate will
be worth approximately £110m over eight years. New business wins
totalled in the region of £450m, across a range of contracts, primarily
in the defence sector.
The pipeline of major new bid opportunities due for decision within
the next 24 months in the Americas remains at more than £2bn with
the past year having seen a combination of new opportunities joining
the pipeline and award decisions being delayed due to Covid-19.
Defence makes up the bulk of the Americas pipeline, with a broad
spread of types of work, and Citizen Services opportunities represent
the remainder.
Year ended 31 December
£m
Revenue
Organic change
Acquisitions
Currency
Underlying Trading Profit
Organic change
Acquisitions
Currency
Margin
2021
2020
Growth
1,120.0
2%
10%
(7)%
117.8
14%
11%
(8)%
10.5%
1,064.3
1%
17%
(1)%
100.8
5%
17%
9.5%
105bps
Revenue grew by 5% to £1,120m (2020: £1,064m), with organic growth
of 2% and an acquisition contribution of 10% being partially offset by
a 7% adverse translational effect of currency. The acquisition growth
came from WBB, a leading provider of advisory, engineering and
technical services to the US Department of Defense. This acquisition
completed at the end of April and contributed £106m to revenues in
the year at constant currency. The two main sectors for our Americas
business are Defence and Citizen Services. Excluding WBB, our
Defence business was stable in the year, with growth being held back
by continued delays in the award of new contracts. Citizen Services
saw good growth supported by increased demand for our case
management services.
Underlying Trading Profit growth outpaced revenue growth, increasing
by 17% to £118m (2020: £101m). Excluding the adverse currency
movement of £8m, UTP growth at constant currency was 25%. Margins
increased from 9.5% to 10.5%, due to a strong performance in the
existing business and the acquisition of WBB, which has slightly higher
margins than the overall division. WBB contributed around £12m of
the growth and we saw improved profit contribution in our existing
business from contracts in the Defence and Citizen Services sectors
and £3m of profit on sale from the divestment of our US parking
business.
Annual Report and Accounts 2021
Serco Group plc
29
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Divisional Reviews continued
Asia Pacific
Sectors we
operate in:
• Defence
• Justice &
Immigration
• Transport
• Health
• Citizen Services
Revenue
Underlying Trading Profit (UTP)
£908m
2020: £719m
£51m
2020: £33m
Group revenue
21%
Group UTP (before Corporate costs)
18%
Order intake was £0.6bn, around 10% of the Group total. Having
had significant success in recent years, it was a quiet period for
securing new work. We did however have a very high rate of success
of retaining existing work; our Immigration Services contract was
extended to December 2023 and our contracts to provide contact
centre services to the Australian Tax Office and to Services Australia
were extended to July 2022.
Our pipeline for new business increased significantly in the year, with
new opportunities in the Citizen Services, Health and Defence sectors.
Year ended 31 December
£m
Revenue
Organic change
Acquisitions
Currency
Underlying Trading Profit
Organic change
Acquisitions
Currency
Margin
2021
908.4
8%
15%
3%
51.3
34%
20%
3%
5.6%
2020
718.9
18%
0%
(2)%
32.6
Growth
26%
57%
4.5%
111bps
Revenue increased by 26% to £908m (2020: £719m). Organic growth
was 8% of the increase, with nearly all sectors showing growth.
There was particularly strong growth in the Justice & Immigration,
Citizen Services and Defence sectors. In Justice & Immigration we
experienced increased demand for our immigration services partly as
a result of the Covid-19 response, and saw increased revenues from
Clarence Correctional Centre, where operations commenced in July
2020. Growth in Defence was supported by the successful delivery of
Australia’s new Antarctic research icebreaker vessel, RSV Nuyina. The
acquisition of Facilities First added £110m, or 15%, to revenues, having
completed at the beginning of January. Currency movements added
3% to reported revenue growth.
Underlying Trading Profit increased by 57% to £51m (2020: £33m),
representing a margin of 5.6% (2020: 4.5%). Excluding the favourable
currency movement of £1m, growth at constant currency was 54%.
Facilities First generated profit of £6m, in line with expectations in
the first year of our ownership, while our Citizen Services, Justice &
Immigration and Defence businesses increased both volumes
and margins.
30
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Middle East
Sectors we
operate in:
• Defence
• Transport
• Health
• Citizen Services
Revenue
£265m
2020: £324m
Underlying Trading Profit (UTP)
£14m
2020: £14m
Group revenue
Group UTP (before Corporate costs)
6%
5%
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Year ended 31 December
£m
Revenue
Organic change
Acquisitions
Currency
Underlying Trading Profit
Organic change
Acquisitions
Currency
Margin
2021
264.6
(13)%
0%
(5)%
13.7
1%
0%
(2)%
5.2%
2020
324.2
(7)%
0%
(1)%
13.9
Growth
(18)%
Despite the sharp revenue contraction, Underlying Trading Profit
was stable at £14m (2020: £14m). This favourable profit outcome was
driven by a strong performance in Citizen Services and Defence as
well as good cost control in the areas where we experienced subdued
demand. Margins increased from 4.3% to 5.2% as a result.
(1)%
Order intake was around £0.2bn, or 3% of the total for the Group.
The majority of this was new business and included services at Dubai
Airport, where demand has been increasing following its reopening.
4.3%
89bps
Our pipeline of major new bid opportunities in the Middle East, which
had been limited at the start of 2021, increased significantly over the
year. It includes work in the Transport and Citizen Services sectors.
Revenue fell by 18% to £265m (2020: £324m). Adverse currency moves
contributed 5% of the decline, with the remaining 13% being an
organic decline largely as a result of the end of our contract to operate
the Dubai Metro, which we exited in September, and the ongoing
impact of Covid-19 on the Transport and Health and other Facilities
Management sectors. Covid-19 response work included a short-term
contract to provide tracing services.
Order intake was £0.6bn, around 10% of the Group total. Having had
significant success in recent years, it was a quiet period for securing
new work. We did however have a very rate of success of retaining
existing work; our Immigration Services contract was extended to
December 2023 and our contracts to provide contact centre services
to the Australian Tax Office and to Services Australia were extended to
July 2022.
Our pipeline for new business increased significantly in the year, with
new opportunities in the Citizen Services, Health and Defence sectors.
The high growth seen in the first half will not recur in the second, in
part because of a very strong performance in H2 of 2020, particularly in
our Immigration business, which we do not expect to repeat, although
we will see the inorganic benefit of the Facilities First acquisition.
Corporate Costs
Corporate costs relate to typical central function costs of running the
Group, including executive, governance and support functions such
as HR, finance and IT. Where appropriate, these costs are stated after
allocation of recharges to operating divisions. The costs of Group-
wide programmes and initiatives are also incurred centrally.
Corporate costs increased by £8.7m to £49.9m (2020: £41.2m)
The higher level resulted from increased investment, as we took
the opportunity of the strong financial performance to accelerate
spending on our systems and processes, a one-off commitment to
our recently established Serco People Fund and the normalisation of
LTIP costs and provisions, which were lower than usual in 2020.
Annual Report and Accounts 2021
Serco Group plc
31
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Key Performance Indicators
Key Performance Indicators
We use Key Performance Indicators (KPIs) to monitor our performance, ensuring we have a balance and an
appropriate emphasis to both financial and non-financial aspects. In recent years, we have also evolved
and improved our Management Information, including the contract performance monitoring process
which tracks KPIs specific to each customer operation, our monthly management accounts and our
Divisional Performance Review (DPR) processes.
For each KPI we explain the definition, relevance to our strategy and the performance in 2021. We have added an additional KPI this year,
Lost Time Incident Frequency Rate, which has always been reported in our ESG performance indicators and is widely used throughout the
organisation. There are no changes in 2021 to the existing KPIs presented and therefore there is comparability and consistency with our
focus in the business and the guidance we issue. The Finance Review provides further detailed definitions and reconciliations of our use of
Alternative Performance Measures (APMs). Information on our carbon emissions that was presented in this section in previous years can be
found within our ESG Report on pages 39 to 76. ESG performance and disclosure data can also be found on those pages, as well as in our
complete Serco ESG Databook 2021, which is available on our website.
1. Underlying Trading Profit (UTP)
2. Underlying Earnings Per Share (EPS),
diluted
3. Free Cash Flow (FCF)
2021
228.9
2020
163.1
2019
120.2
2018
93.1
2017
69.3
2021
12.56
12.56
2020
8.43
8.43
2019
6.16
6.16
2018
5.21
5.21
2017
3.36
3.36
189.5
134.9
62.0
16.3
2021
2020
2019
2018
2017
(6.7)
Definition
Underlying EPS reflects the Underlying
Trading Profit measure after deducting
pre-exceptional net finance costs and
related tax effects. It takes into account any
non-controlling interests share of the result
for the period, and divides the remaining
result that is attributable to the equity owners
of the Company by the weighted average
number of ordinary shares outstanding,
including the potential dilutive effect of
share options, in accordance with IFRS.
Relevance to strategy
EPS builds on the relevance of UTP, and
further reflects the achievement of being
‘profitable and sustainable’ by taking
into account not just our ability to grow
revenue and margin but also the strength
and costs of our financial funding and tax
arrangements. EPS is therefore a measure
of financial return for our shareholders.
Performance
The 49% increase on 2020 reflects the
combination of strong UTP growth,
as described, and stable net finance
costs, partially offset by a higher
underlying effective tax rate.
Definition
Trading Profit is defined as IFRS Operating
Profit excluding amortisation of intangibles
arising on acquisition as well as exceptional
items. Consistent with IFRS, it includes Serco’s
share of profit after interest and tax of its joint
ventures and associates. Underlying Trading
Profit additionally excludes Contract & Balance
Sheet Review adjustments (principally Onerous
Contract Provision (OCP) releases or charges),
and other material one-time items as set out
in the Finance Review on pages 77 to 91.
Relevance to strategy
The level of absolute UTP and the relationship
of UTP with revenue – i.e. the margin we
earn on what our customers pay us – is at
the heart of our ‘profitable and sustainable’
business objective, as well as being an
output of ‘winning good business’ and
‘executing brilliantly’. We describe on
pages 9 and 10 that the delivery of strategic
success has potential to deliver annual
revenue growth of 4-6%, in the medium
term, and trading margins of 5-6%.
Performance
The outcome was an improvement over
the £165m we expected at the start of the
year. The 40% increase on 2020 was driven
by additional work related to helping
our government customers respond to
Covid-19, improved performance on some
of our existing non-Covid contracts, some
new work and the contributions from
acquisitions. Generally-speaking, we saw
a strong operating performance across
the Group. The underlying margin rose
by around 97bp from 4.2% to 5.2%.
Definition
Free Cash Flow is the net cash flow from
operating activities before exceptional
items as shown on the face of the Group’s
Consolidated Cash Flow Statement, adding
dividends we receive from joint ventures
and associates, and deducting net interest
paid and net capital expenditure on
tangible and intangible asset purchases.
Relevance to strategy
FCF is a further reflection on how ‘sustainable’
our profits are, as well as the sustainability
of the overall business, by showing a
measure of how much of our effort turns
into cash to reinvest back into the business
or to deploy in other ways. Furthermore,
‘winning good business’ should reflect
that which generates appropriate cash
returns, and ‘executing brilliantly’ should
include appropriate management of
our working capital cash flow cycles.
Performance
The improvement includes that from increased
UTP together with excellent cash collection,
partially offset by the non-repeating benefit
in 2020 from the receipt of some older
receivables. Despite organic revenue growth
of nearly £400m, we saw a working capital
inflow of £25m. The strong working capital
performance was helped by the successful
collection of some older receivables, including
on our Dubai Metro contract following its
conclusion, and efforts by governments
to support their supply chains by ensuring
prompt payments. The Group does not utilise
any factoring or other working capital facilities.
32
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Key Performance Indicators
4. Underlying Return on Invested Capital
(ROIC)
5. Pipeline of larger new bid
opportunities
6. Order book
2021
23.7%
[23.9]%
2020
19.1%
19.1%
2019
15.4%
15.4%
2018
13.6%
13.6%
2017
9.6%
9.6%
2021
£9.9bn
£[XX]bn
2020
£6.4bn
£6.4bn
2019
£4.9bn
£4.9bn
2018
£5.3bn
£5.3bn
2017
£4.4bn
£4.4bn
2021
£13.7bn
£[14.0]bn
2020
£13.5bn
£13.5bn
2019
£14.1bn
£14.1bn
2018
£12.0bn
£12.0bn
2017
£10.7bn
£10.7bn
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Definition
ROIC is calculated as UTP for the period
divided by the invested capital balance.
Invested capital represents the assets and
liabilities considered to be deployed in
delivering the trading performance of the
business. Invested capital assets are: goodwill
and other intangible assets; property, plant
and equipment; interests in joint ventures
and associates; contract assets, trade and
other receivables; and inventories. Invested
capital liabilities are contract liabilities,
trade and other payables. Invested capital
is calculated as a two-point average of the
opening and closing balance sheet positions.
Relevance to strategy
ROIC measures how efficiently the Group
uses its capital to generate returns from
its assets. To be a sufficiently ‘profitable
and sustainable’ business, a return must
be achieved that is appropriately above
a cost of capital hurdle reflective of the
typical returns required by our weighting
of the use of equity and debt capital.
Performance
The improvement in ROIC reflects the £66m
increase in UTP and an invested capital
base that increased by only £112m. The
increase in the invested capital base was
relatively limited due to strong receivable
collections, low working capital requirements
of the Covid-19 related work and because
the goodwill related to the acquisitions of
Facilities First and WBB was in the closing
balance sheet but not the opening position.
Definition
The estimated aggregate value at the end of
the reporting period of new bid opportunities
with Annual Contract Value (ACV) greater
than £10m and which we expect to bid and
awarded within a rolling 24-month timeframe.
It does not include rebids or extensions of
existing business, and the Total Contract
Value (TCV) of individual opportunities
is capped at £1bn; also excluded is the
potential value of framework agreements,
prevalent in the US in particular where there
are numerous arrangements classed as ‘IDIQ’
– Indefinite Delivery/Indefinite Quantity.
Relevance to strategy
The pipeline provides a key area of
potential for ‘winning good business’
and therefore is a major input to being
‘profitable and sustainable’. The size of
the pipeline and our win-rate conversion
of the bids within it will be at the heart
of our strategy to grow the business.
Performance
Our pipeline stood at £9.9bn at the close of
2021, significantly higher than the £6.4bn we
reported at the start of the year and £5.8bn at
the half year. The pipeline increase occurred
despite order intake being very strong in the
year at £5.5bn. The pipeline at the end of
2021 consisted of around 40 bids that have
an ACV averaging approximately £40m and
a contract length averaging more than six
years. As we have noted before, in the services
industry in which Serco operates, pipelines
are often lumpy, as individual opportunities
can be very large, and it is not necessarily
strongly predictive of future revenues.
Definition
The order book reflects the estimated value
of future revenue based on all existing signed
contracts, excluding Serco’s share of joint
ventures and associates. It excludes contracts
at the preferred bidder stage and excludes
the award of new Multiple Award Contracts
(MACs) or IDIQ contract or framework vehicles,
where Serco cannot estimate with sufficient
certainty its expected future value of specific
task orders that may be issued under the IDIQ
or MAC; in these situations the value of any
task order is recognised within the order book
when subsequently won. In 2018, the definition
was aligned with IFRS15 disclosures of the
future revenue expected to be recognised
from the remaining performance obligations
on existing contractual arrangements. This
excludes unsigned extension periods, but
the £13.7bn would be £14.9bn if option
periods in our US business were included.
Relevance to strategy
The order book reflects progress with
‘winning good business’ including retaining
existing work through extensions or rebids,
and as a store of future value it is a key
measure to ensure the Group is ‘profitable
and sustainable’. The value of how much
is added to the order book compared
to how much revenue we are billing our
customers – the book-to-bill ratio – is
key to achieving long term growth.
Performance
The order book increased from £13.5bn to
£13.7bn in 2021. This is lower than might be
expected given order intake of £5.5bn as,
consistent with our usual treatment of joint
ventures, our order intake includes Serco’s
£1.9bn share of our VIVO joint venture with
Engie but our order book does not.
Annual Report and Accounts 2021
Serco Group plc
33
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Key Performance Indicators continued
7. Major incident frequency rate,
per 1 million hours worked
8. Lost Time Incident Frequency Rate
(LTIFR), per 1 million hours worked
9. Employee engagement
2021
0.36
0.36
2020
0.41
0.41
2019
0.39
0.39
2018
0.50
0.50
2017
0.45
0.45
2021
4.1
2020
4.4
2019
2018
2017
5.7
5.3
4.4
2021
70 points
71 points
2020
73 points
73 points
2019
71 points
71 points
2018
67 points
67 points
2017
56%
56%
Definition
Major incidents include but are not limited
to; any injury requiring resuscitation or
admittance to hospital for more than 24
hours; fracture other than to fingers, thumbs
or toes; dislocation of the shoulder, hip, knee
or spine; amputation; loss of sight (temporary
or permanent); chemical or hot metal burn to
the eye or any penetrating injury to the eye.
Relevance to strategy
Our vision of Zero Harm recognises that
delivering excellent service to our customers,
and therefore executing brilliantly, requires
us to operate in the safest way possible at all
times. A positive approach to safety and the
continuous drive to improve our safety culture
also has a direct bearing on the commitment
and engagement of our people, which is central
to achieving a place people are proud to work.
Performance
There were over 124 million hours worked in 2021,
20 million more than in 2020, and 45 major injury
incidents were reported. The resulting frequency
rate of 0.36 incidents per 1 million hours worked
was an improvement compared to the 2020 rate
of 0.42 and positive against the 2021 target of
0.42. These improvements are attributed to a
number of ongoing continuous improvement
initiatives, including contract-based focus on
tackling specific root cause issues, supported
by wider, collaborative Divisional and Group
activities that will continue through 2022.
Only two parts of the business saw a small
increase in the number of incidents, and of those
only one was an increase against target. This
increase related partially to an anticipated rise in
the level of risk from new contracts and changes
in the risk profile of existing contracts. This was
compounded by continuing adverse impacts
associated with Covid-19, including increased
levels of violence and aggression towards our
staff. Reducing violence and aggression and
its impact, as well as on reducing avoidable
incidents (e.g. slips & trips), remain priority areas
of focus across our whole business into 2022.
Further performance data and details of initiatives
implemented to improve performance are
covered in the ESG Report on pages 39 to 76.
Definition
Lost Time Incidents (LTIs) are incidents when
personal injury accidents at work, or when
travelling on company business, cause an
employee to incur one or more working
days (or shifts) absence as a result. LTIs
are recorded from the date the incident
occurred, not from when time was lost.
The Lost Time Incident Frequency Rate
(LTIFR) is calculated using the total number
of Lost Time Incidents over the reporting
period, normalised using the total number
of hours worked in the same period. This
provides a view on the frequency of lost
time incidents, regardless of movements
in staff numbers, which is comparable
across all areas where LTIs are incurred.
Relevance to strategy
The LTIFR bears the same relevance to our
Strategy as MIFR, in that our vision of Zero
Harm recognises that delivering excellent
service to our customers, and therefore
executing brilliantly, requires us to operate in
the safest way possible at all times. A positive
approach to safety and the continuous
drive to improve our safety culture also has
a direct bearing on the commitment and
engagement of our people, which is central to
achieving a place people are proud to work.
The LTIFR is a more relevant indicator of safety
and incident performance as it captures all
lost time issues, not just those related to a
major injury. It gives us greater insight into the
everyday experience of the broader colleague
population compared to those roles where major
injury is a larger risk and it underpins our ESG
approach. It is proposed that future reports will
use the LTIFR as a KPI, instead of the MIFR.
Performance
Considerable focus has been given to
reducing LTIs and the subsequent frequency
rate across the Group with particular attention
to reducing incidents relating to slips & trips
and physical assaults. This has helped to
ensure the Group has remained within target.
We achieved an LTIFR of 4.1 for 2021
against a target of 4.5 and results of 4.4
in 2020 and 5.7 in 2019. We adjusted our
LTIFR threshold for 2022 to 4.6. This figure
takes into consideration two key changes
to the business that increase size and risk.
It is expected that the LTIFR will increase
slightly as a result. Even with these impacts,
the Group is looking at a positive trend of
LTIFR performance of 19% from 2019-2022.
Definition
We use a specialist third party provider
to run Viewpoint, our global employee
engagement survey. The survey covers
employees, excluding our joint ventures,
and measures engagement in two key areas:
how happy employees are working at Serco
and their intention to recommend Serco to
others. Our engagement score incorporates
all respondents’ perceptions and shows
the overall average view of these two areas
when we survey. In 2018, our methodology
for calculating employee engagement
changed, aligned to our new provider.
Pre-2018, engagement results represent the
proportion of engaged employees expressed
as a percentage. Post-2018, engagement
scores represent the average response, with
a maximum potential score of 100. It is not
possible to adjust all our historic data to
restate to the new methodology, although
analysis performed by the new provider in 2018
indicated that the engagement level for that
year was broadly stable on the previous year’s
score which was already the highest since we
started measuring engagement in 2011.
Relevance to strategy
Employee engagement reflects ‘a place
people are proud to work’, which is crucial
to delivering outstanding customer service
and achieving our strategic aims. Under
the new scoring methodology, a score of
70 points or above was our target for 2021,
which aligns with the global cross-sector
benchmark provided by the specialist
third party provider of our survey.
Performance
The 2021 Viewpoint survey was based on some
29,470 employees responding anonymously.
We have sustained high levels of engagement
at all levels measured in the survey and
achieved an overall score of 70. Although
lower than our 2020 result of 73, a return to
the pre-pandemic level, is observed by our
specialist third party provider of the survey
as typical for employers who experienced a
sharp increase in 2020. The 2021 response rate
of 68%, was down on the 71% seen in 2020
but is strong versus the benchmark from the
specialist third party provider of the survey and
a slight reduction is understandable given the
effect of Covid-19 entering a second year as
well as relatively high levels of change to our
organisation in the year, including acquisitions
and Contract exits. The Viewpoint results are
cascaded throughout the organisation and
detailed plans of activity put in place to focus
on areas highlighted by the detailed scoring
analysis and the comments raised. In addition
to completing the survey questions, some
67,700 individual comments were submitted,
with 60% of respondees choosing to do so,
which is positive reflection of the culture
of openness and care of our employees.
Looking forward, our focus is on sustaining
an engagement score of 70 or above.
34
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Our People
Our People
A diverse and resilient public service workforce like no other
It has been two years since the World Health Organization declared Covid-19 a global pandemic. In that
time, the governments, businesses and citizens of the world have learned many important lessons,
including that there is no quick way out of a global pandemic and no way to turn back the clock.
They have all also learned that society cannot function without people who can be relied upon to deliver; who can respond to changing
requirements quickly and with ingenuity; who can work seamlessly with others to deliver better services and lower cost whilst anticipating new
challenges and developing effective solutions; whose values and motivations align with the needs of wider society; and who take satisfaction
in doing jobs that help their fellow citizens live their best lives.
Our priority has always been the protection of people and public services. Our pride has always been our diverse and talented global team,
who have always leant courageously into all that has been asked of them.
Covid-19 has not made us what we are today, it has given us an opportunity to prove, to ourselves as well as our customers and shareholders,
what we had already become. We owe this to our people.
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Employee engagement
transformed, 2014-2021
42 to 70*
* Average score in annual engagement
survey; maximum possible score 100.
Comments from
colleagues
received by the
plc Board in 2021,
through our
annual survey
12,609
Lost Time Incident
Frequency Rate
down
17.6%
from 2016 (5.01 hours per 1m
hours worked) to 2021 (4.13)
Pulse Award winners in
2021, teams and individuals
115
Pulse Award nominations
in 2021
952
Front line colleagues
who received a £100 or
equivalent recognition
payment in 2021
c.50,000
Donated to the Serco People Fund
£4m
Annual Report and Accounts 2021
Serco Group plc
35
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Our People continued
Keeping our people safe, well and celebrated
In the thick of the pandemic – in hospitals and prisons, schools and shipyards, immigration centres and asylum seeker accommodation, trains
and airports, military bases and city streets; working with our customers, partners, suppliers and the public – our colleagues have been doing
the hardest work of all: delivering essential public services in the face of unpredictable infection and societal instability.
From feeding patients and cleaning hospital wards to facilitating family visits for those in prison and helping deliver Covid-19 test and trace
services to the public, and from keeping critical modes of public transport safe and operational to helping people in need gain access to vital
government support, they have been helping to carry society through. Not only that, they have maintained their high level of support for the
local communities they represent and the charitable causes they hold dear, greatly enhancing the local social impact of our operations.
They have done all of this and more, and we have been working hard to keep them safe, well and celebrated:
– seeking to maintain effective
– delivering vaccination
safety standards and high levels
of safety engagement in our
sites and remote working
environments, whilst keeping
pace with rapidly changing
circumstances and restrictions
worldwide;
– supporting our colleagues in
the safe return to workplaces
and the safe reintroduction of
working practices, such as
through our new person-based
risk assessments to identify and
help manage those who may
have been more severely affected
by Covid-19, especially for
vulnerable colleague
communities at greater risk;
– giving our people greater choice
in how and where and when they
work with our new global
principles for hybrid working.
Serco colleagues who can fulfil
their roles remotely are only
required onsite two days a week;
programmes for colleagues in
all regions – endorsing,
educating and facilitating access
to Covid-19 vaccination; striving
to minimise service disruption
and remain fully compliant with
evolving customer and
government requirements whilst
seeking sensitively, fairly and
firmly to respect the individual
right to choose;
– working to ensure that critical
forms of wellbeing support
– such as our mental health apps,
our Employee Assistance
Programmes, our growing global
library of self-help resources and
our regular schedules of virtual
wellbeing events – are in place,
relevant, effective and
accessible – flexing and adapting
them to meet fluctuating regional
needs;
– sharpening our focus on those
at greater risk from Covid-19,
the longer-term risks of the virus,
and mental health – signing up to
the UK Mental Health at Work
Commitment;
– keeping our inclusive culture of
wellbeing alive and thriving
through regular communications,
leadership focus groups,
interactive discussion events,
pulse surveys and more;
– making every effort to
recognise and celebrate
exceptional contributions and
all who live our Values to the
full, such as those who feature in
our annual People Report, and
the 115 teams and individual
winners selected from 952
nominations in our 14th annual
Pulse Awards;
– making an ex-gratia payment to
around 50,000 colleagues in
recognition of their extraordinary
efforts, as we did in 2020, and
making a significant one-off
commitment of £4m to our
recently established Serco
People Fund. The fund provides
support to current and retired
colleagues who would benefit
from a little extra help at this
difficult time.
36
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section A diverse and resilient public service workforce like no other
Growing diversity in the face of adversity
Inclusion has been a cornerstone in our resilience for many years; ensuring our diversity keeps pace with our growth is essential. Not only do
we believe it is the right thing to do, we believe that diverse teams who reflect the communities they serve generate greater value for our
customers and service users.
We have been opening as many doors to diversity as possible, such as through the evolution of our recruitment capability. Most recently,
for example, we have implemented new technology to help us embed gender neutrality and mitigate unconscious bias in recruitment
and selection.
That is only the tip of the iceberg. We have been pouring new energy into diversity and inclusion at Serco for several years, raising up
passionate leaders and strong colleague networks to help us drive real change. They are building momentum at all levels, bringing our
diversity to life through a vibrant calendar of inclusive events, and bringing best practice into Serco through strong specialist partnerships.
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UK Gender Pay Gap reduced,
2017-2021
12.9% - 6.96%
Membership of our
colleague communities:
5,000 (approx.)
% women in senior
leadership up
52.6%
from 2016 (17.1%) to 2021 (26.1%)
Serco makes it easy for
people from diverse
backgrounds to
be accepted
79*
* Average score in annual engagement
survey; maximum possible score 100.
Race and ethnicity
LGBT+
Disability
Gender
We have appointed the
former Chair of Serco
Embrace as our new Group
Head of Diversity and
Inclusion and lead for our
implementation of the UK
Race at Work Charter.
We have joined the
Australian Pinnacle
Foundation as a gold
partner, funding the new
multi-year Serco Scholarship
to support LGBT+ youth in
overcoming challenges and
realising their potential.
We have been recognised
as a Disability Confident
Leader and joined the
Valuable 500, a growing
global movement
revolutionising disability
inclusion through business
leadership.
We have expanded our
partnership with Saïd
Business School, University
of Oxford to launch the
Oxford Women in
Leadership Development
Programme for our
colleagues in Serco.
We have launched the
first Serco Inclusion
Week, focused on
‘Celebrating Diversity,
Building Inclusion’
and featuring our first
global leadership
summit on our diversity
and inclusion risks,
opportunities and
ambitions.
We have won external
recognition for our
intern and graduate
programmes in North
America and the Middle
East. Across all our
regions, our early careers
teams are dedicated to
ensuring every cohort is
rich in diversity.
We have launched an
executive co-mentoring
scheme to provide
two-way mentoring and
career acceleration for
high potential colleagues
from underrepresented
groups.
We have created an
online environment, the
Serco Inclusion Hub, to
support our colleague
communities, enabling
stronger coordination
and collaboration and
enhancing outcomes.
Through the Inclusion
Hub, our communities
are flourishing in their
own right whilst also
helping each other
evolve and establish
a stronger, more
strategic presence in the
organisation.
Our diversity and
inclusion leads, including
the heads of our
colleague communities,
have worked closely with
Dame Sue Owen and our
Colleague ConneXions
(Serco Employee Voice
programme) team
to weave these two
important agendas
together, embedding
open, active Non-
Executive Director
participation in our
annual schedule of
diversity and inclusion
events.
Annual Report and Accounts 2021
Serco Group plc
37
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Our People continued
A place people are proud to work, making a difference every day
In the last two years, for millions of lives profoundly disrupted by Covid-19, direct human interaction and care has made the biggest difference.
For many, help has worn a Serco uniform and lived the Serco Values.
In that time, our workforce has welcomed thousands of new colleagues who, in their search for meaningful, socially responsible employment,
have gravitated towards public service and found in Serco an inclusive, caring culture to come ‘home’ to every day.
That is why we are committed to making Serco a place people are proud to work. Years of investment – in our culture and our systems and in
the resilience and capability of our colleagues – has been helping our global team to become a more cohesive, more manoeuvrable and more
effective public service workforce.
We have not come through unscathed; we have mourned members of our extended Serco family and our thoughts are always with their
loved ones.
Our strength is in our people. Their strength is in our Values. Together, for our fellow citizens and local communities, for whole nations and for
global society, we work hard to make a difference every day.
New hires in 2021*
22,000+
* Includes approx. 4,000
new temporary colleagues
who joined Serco Workforce
Solutions, UK.
Applications in 2021*
c.400k
* Includes approx. 14,000
applications to join Serco
Workforce Solutions, UK.
I feel a sense of belonging
where I work
75*
* Average score in annual engagement survey;
maximum possible score 100.
I feel that my work at Serco
makes a positive difference
74*
* Average score in annual engagement survey;
maximum possible score 100.
38
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section ESG Impact and Integrity
ESG Impact and Integrity
Environmental, social and governance at Serco
“Our purpose is to be a trusted partner of governments, delivering superb
public services that transform outcomes and make a positive difference for
our fellow citizens. We focus our ESG commitments and agenda to sup-
port the delivery of this, ensuring we address the ESG issues that are ma-
terial to us and important to our stakeholders. This is a journey, but one we
have been travelling for many years.”
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Rupert Soames
Serco Group plc Chief Executive
Here we summarise our position, approach and
progress in delivering our ESG commitments.
Further information for all items summarised
here, and our Covid-19 update, ‘Protecting
people and public services from the impacts
of Covid-19’, is available in our full ESG Report
2021 and in our policy and governance
supplement, ‘Inside ESG at Serco’, both of which
are available online, alongside case study
examples, at www.serco.com/esg
As a public company, our job is to create value for shareholders,
delivering competitive returns on their capital. For those profits to
be sustainable and grow over the long term, the Company needs
to operate and behave with the utmost integrity, and in a way that is
responsible and consistent with the broader interests of society.
This is true of all public companies, but it is particularly important to
Serco, as our customers are governments, and governments want
their suppliers to operate and behave in a way that is consistent
with their public policy objectives and that contributes to their
ESG commitments.
Furthermore, much of the work we do for governments is in sensitive
areas such as immigration, justice, defence, health and citizen services.
Often our role is on the front line, working on behalf of governments
to deliver their policies in the most effective and efficient manner and
in the interests of both taxpayers and service users.
In other words, our opportunity to win good business, execute
brilliantly, be a place people are proud to work and, ultimately, be
profitable and sustainable and generate long-term value, depends on
how we:
– live our Values, behave with integrity and respect human rights;
– recruit, develop and retain exceptional leaders and a diverse,
high-performing workforce to deliver our commitments;
– build strong supply chains, partnerships, and relationships with
our local communities;
– provide sufficient transparency and oversight through strong
and robust governance, compliance risk and assurance
management to essential government services;
– commit to net-zero carbon ambitions, including those of our
clients and wider society, and help address climate and wider
environmental emergencies whilst limiting our own
environmental impact; and
– deliver superb public services that transform outcomes, make a
positive difference for our fellow citizens, and build our position
as a valued and trusted partner of governments.
We have been committed to delivering and communicating our
position and performance across ESG criteria for many years.
We recognise the deep strategic relevance of all that we do in
those areas, which is reflected in our ESG scorecards for variable
remuneration (see our Remuneration Report on pages 139 to 170 for
more information). We are always working to expand and deepen
our disclosure whilst strengthening our transparency, not just in our
Annual Report, but through an evolving online suite of dedicated
resources which includes our full ESG Report. Our 2021 ESG Report
is the 19th report on corporate responsibility and ESG that we have
published – the first was in 2003.
Managing these issues and taking them seriously is something
we have been doing for a long time in our efforts to be the best-
managed business in our sector. We believe that managing
ESG should not be seen as something whose only purpose is to
protect from harm. Done well, it builds strength and resilience in a
corporation. We are proud of the strength and depth of our approach
to ESG; we believe that our focus on it, particularly over recent years,
has served the Company and its stakeholders well.
However, we also understand that, to coin a phrase, ‘the price of
liberty is eternal vigilance’. It is when companies think they are doing
well that they can sow the seeds of their own destruction; they can
become complacent, too believing in their own righteousness and
insufficiently humble in the face of the fact that in any company as
large and diverse as ours, someone, somewhere, is doing something
stupid or wrong every day of the year. It is eternal vigilance, an
understanding that the gravitational pull of temptation is constant,
a belief in transparency, a willingness to admit to fault and accept our
own fallibility, and a desire to do the right thing, even when it hurts,
which are the ways to preserve long-term value for our shareholders.
Our work delivering public services on behalf of governments
means that our agenda emphasises the social aspects of ESG, as we
continuously strive to improve our contribution as a public service
provider, employer and participant in industry, infrastructure and
the wider economy. Recognising that environmental sustainability
is a critical factor in the wellbeing of society, we work to manage
our environmental impact and support customer environmental
objectives. All of this is delivered from a mature foundation of
governance which enables ethical and effective direction, risk
management, control and assurance of the business, including where
we operate, who we serve and how we manage our responsibilities.
Annual Report and Accounts 2021
Serco Group plc
39
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
ESG Impact and Integrity continued
Our ESG Framework
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orkforc
and inclu
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Public servi c e
At Serco, ESG factors are embedded in how we deliver our
strategy, defined and driven through our ESG Framework. Our
framework brings all our strategic ESG priorities together in one
model, structured around our key stakeholder groups. This helps us
to maintain focus on achieving an optimal balance of sustainable
value creation for all stakeholders.
The Serco ESG Framework was updated in 2021 to simplify
and clarify certain areas, including the alignment of constituent
elements to ESG. The structure of our reporting aligns to the ESG
weighting in our framework, focusing first on our social priorities,
then looking at governance and environmental issues.
40
Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Robust ESG governance model
Board oversight and scrutiny of environmental, social and certain governance matters (including anti-corruption and anti-bribery, human rights,
environmental approach, health and safety and other employee matters) is embedded in our corporate governance through the Board’s
standing committee, the Corporate Responsibility Committee. Oversight and scrutiny of other governance matters at Serco is distributed
between all standing committees of the Board, with certain matters reserved for the Board itself.
For more information, see our Corporate Governance Report (pages 115 to 178), including our Corporate Responsibility Committee Report
(pages 135 to 136).
Our ESG Framework is considered in strategy development and firmly embedded in how we manage our business – driven through the
Serco Management System (“SMS"), our framework of Policy Statements and supporting Standards and related Operating Procedures, with
appropriate Board and Executive oversight, and dedicated leadership at both Group and Divisional levels.
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R
e
p
o
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t
For example:
ESG Framework
Policy
Strategic alignment and
direction
Group principal risk
linkage
Behaving with
integrity and
respecting human
rights
Business Conduct
and Ethics
Group Ethics and
Compliance Strategy
Failure to act with
integrity
Material legal
and regulatory
compliance failure
Managing our
environmental
impact and
supporting customer
environmental
objectives
Environment and
Climate Change
Group Environment
Strategy
Catastrophic incident
Material legal
and regulatory
compliance failure
Oversight
Leadership
Corporate
Responsibility
Committee
Group General
Counsel and
Company Secretary
Group Executive
Committee
Divisional Executive
Management Team
Corporate
Responsibility
Committee
Group Executive
Committee
Group Director,
Business Compliance
and Ethics
Divisional Ethics and
Compliance Director
Group Chief
Operating Officer
Group Director,
Health, Safety and
Environment (“HSE")
Divisional Executive
Management Team
Divisional HSE
Director
For more information, see our Group Policy Statements, our ESG Report 2021 and Inside ESG at Serco, available at www.serco.com
Annual Report and Accounts 2021
Serco Group plc
41
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
ESG Impact and Integrity continued
Staying focused on what
matters most to our business
and stakeholders
We continually challenge ourselves to
make sure we understand and provide
appropriately for what matters most
regarding our role in society, the impact that
we have, and the value we create.
To help us ensure that our ESG agenda remains
appropriately embedded in Group strategy
and closely aligned to stakeholder interests and
the everyday needs of the business, we use a
materiality assessment aligned to external best
practice and based on:
– material relevance to our business
model, corporate strategy, principal risks
and key performance indicators; and
– material importance for our business and
operations as perceived and
experienced by our key stakeholder
groups.
Our materiality assessment was updated
in 2021 to reflect and align with:
– the enhancements we have made
to our ESG Framework in 2021;
– new input from key stakeholders,
including our shareholders;
– the maturation of strategy and
governance across the Serco ESG
landscape; and
– the evolving relevance and
importance of material ESG factors.
l
s
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k
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25
1b
6
14
78
4
1a
3
13
12
10
11
9
MODERATE
HIGH
Relevance to Serco
VERY HIGH
1a. Behaving with
integrity
1b. Respecting human
rights
Our customers
2. Duty of care
Service
3.
responsibilities
4. Service outcomes
Our people
5. Safe operations
6.
Employee health
and wellbeing
Employee
engagement and
development
Diverse workforce
and inclusive
workplace
7.
8.
Our shareholders
13. Shareholder returns/
Transparency
14. Effective governance
and managed risk
Our world
9.
Contributing to
communities
10. Building sustainable
third-party
relationships
11. Managing our
environmental
impact
12. Supporting
customer
environmental
objectives
Tracking our ESG performance
We seek not only to meet our reporting obligations but to provide
assurance that we are properly addressing our ESG responsibilities
and communicating our position and performance across ESG
criteria. Since our 2020 reports, amongst other developments,
we have:
– consulted with our investors, whose strong, positive response
is informing the current and future evolution of ESG reporting
at Serco;
– grown our ESG transparency through further expansion of our
ESG Performance and Disclosure Data Book, now also published
as a standalone Excel file in addition to its full inclusion in our
ESG Report and the select content reproduced here on pages
69 to 76;
– published on www.serco.com our first:
– human rights supplement, alongside our anti-bribery and
corruption supplement, detailing our approach to human
rights with a specific focus on the management of human
rights impacts within our Justice & Immigration operations;
– full disclosure on our climate-related risks and opportunities,
per the recommendations of the Task Force on Climate-
related Financial Disclosures (“TCFD"), in addition to our
annual Environmental Basis of Reporting supplement;
– Global Reporting Initiative (“GRI") Content Index;
– Sustainable Finance Disclosure Regulation (“SFDR") Content
Index;
– proactively engaged with ESG analysts and commentators;
– commenced the collation of independent and publicly available
performance and regulatory reports on Serco operations on our
website for ease of public reference; and
– continued to monitor the rapidly evolving ESG regulatory
reporting landscape, working to prepare appropriately for new
and emerging requirements, such as elements within the
anticipated EU Sustainable Finance Action Plan and UK Green
Finance Roadmap.
Further information and the publications listed above are available at
www.serco.com/esg
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Non-financial information
The non-financial information required to be disclosed under sections 414CA and 414CB of the Companies Act 2006 is addressed within this
section by means of cross reference and can be found elsewhere in this Annual Report as follows:
Non-financial information
Principal locations in this Annual Report
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Environmental matters
Employees
Social matters
ESG Impact and Integrity
– Delivering ESG at Serco in 2021: Environmental
– ESG performance and disclosure data: Environmental
– TCFD disclosure statement
ESG Impact and Integrity
– Our people – our policy and commitment
– Delivering ESG at Serco in 2021: Social
– ESG performance and disclosure data: Social
Human rights
Anti-corruption and anti-bribery
Policies
Business model
ESG Impact and Integrity
– Business ethics and human rights – our policy and commitment
– Delivering ESG at Serco in 2021: Governance
– ESG performance and disclosure data: Governance
ESG Impact and Integrity: Robust ESG governance model
Our B2G Platform
Non-financial principal risks
Principal Risks and Uncertainties
Non-financial key performance indicators
Key Performance Indicators
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Business ethics and human rights – our policy and commitment
Our commitment to business ethics and human rights is defined
within our Group Business Conduct and Ethics Policy Statement,
supporting standards (including our Group Standards for Business
Conduct and Ethics and Human Rights) and related operating
procedures (including our Human Rights Decision Tree and
Conflicts of Interest Global Standard Operating Procedures).
Our human rights policies are guided by international human
rights principles encompassed in the International Bill of Human
Rights, the International Labour Organization’s Declaration on
Fundamental Principles and Rights at Work, the United Nations
Global Compact and the United Nations Guiding Principles on
Business and Human Rights.
Our anti-bribery and corruption policies comply with the
principles of OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions, United
Nations Convention against Corruption and The United Nations
Declaration Against Corruption and Bribery in International
Commercial Transactions. As a global business, Serco ensures
that its business and staff comply with local laws and regulations
applicable in the countries in which it operates, such as the UK
Bribery Act, US Foreign Corrupt Practices Act and
French Loi Sapin (II).
In summary, we:
– have zero tolerance for corruption and any activities that break
any law relating to human rights anywhere in the world;
– will not engage in or approve any form of bribery; and will take
disciplinary action, and issue criminal proceedings where
appropriate, if an employee participates in or condones any
irregular payment or payment in kind;
– recognising all applicable modern slavery legislation, we will
not engage in any form of human trafficking or use forced,
bonded, illegal or child labour, nor knowingly work with
anyone who does;
– consider international human rights standards as a framework
to assess, monitor, mitigate and remedy any actual or
potential adverse human rights impacts that may affect our
business;
– provide guidance and support to our employees to help them
identify, manage and respond to any risk or issue;
– maintain confidential reporting resources for anyone
concerned about violations of our Values, policies or Code of
Conduct, whilst ensuring there is no need for them to fear the
consequences of doing so; and strive to
– record and report information about our business accurately,
honestly and transparently; and
– compete legally, fairly and ethically, making sure we promote
competition in business, protect our customers’ interests and
avoid situations that may, or may appear to, create a conflict of
interest.
Further information is available in our human rights and anti-bribery
and corruption supplements at www.serco.com
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ESG Impact and Integrity continued
Employee reward
Serco is committed to rewarding employees in line with local
legislation and with appropriate consideration for local custom
and practice. Wherever possible and appropriate, we strive to
offer compelling total reward above and beyond minimum local
legislative requirements, taking into account such factors as market
competitiveness in base salary and benefits, local legislation
regarding fairness and equality, the scope and scale of roles, and
individual performance and potential.
Contractors and temporary workers
To ensure their fair, legal and ethical treatment, all parts of the
organisation are required by the SMS to engage contractor and
temporary worker colleagues through Serco approved agencies
who comply with relevant local laws and regulations, successfully
complete pre-selection due diligence and contractual agreements,
and are subject to the Serco Supplier Code of Conduct, ongoing
monitoring, and other requirements such as worker access to
mechanisms by which to report potential agency misconduct,
such as the Serco Speak Up system.
Through Serco Workforce Solutions (www.serco.com/uk/careers/
temp-workforce) bringing in-house the management of temporary
workers in the UK, we offer enhanced and more secure temporary
employment opportunities, including selected standard employee
benefits such as access to our employee assistance programme.
See also, Our People, pages 35 to 38.
Our people – our policy and commitment
Our commitments to our people are defined within our Group
People and Health & Safety strategies and Policy Statements,
supporting standards (including our Group Standard for Employee
Wellbeing) and related operating procedures (including our Just
Culture Assessment and Procurement of Consultants, Contractors
and Temporary Workers Global Standard Operating Procedures).
In summary, we strive to:
– attract, develop and retain employees from the broadest
possible talent pool;
– proactively manage and regularly analyse the diversity of our
workforce;
– promote equality of opportunity and create an inclusive and
enabling environment in which all our people are treated fairly
and with respect, dignity and zero tolerance for any form of
discrimination;
– regularly review and improve levels of employee engagement
and performance, including the development of employee
experience and capability to enhance their careers and meet
current and future business needs;
– strengthen dialogue and interconnectivity at all levels, amplify
employee voice and cultivate more opportunities to harness
employee insights and expertise;
– support the right of our employees to choose whether they
are a member of a recognised trade union or employee
representative body and deal constructively with such
organisations in line with local legislation;
– actively encourage input from employees, unions, customers
and others to build sustainable solutions, helping us make
decisions based on a deep understanding of work conditions
and constraints;
– identify, assess and actively manage the health, safety and
wellbeing hazards, impacts and risks arising from our
operations, investigating incidents and monitoring
performance and systems;
– maintain a physically and mentally healthy and productive
workforce through effective management of employee
welfare and occupational health;
– promote a ‘just’ culture of health, safety and wellbeing based
on openness, transparency, active and caring leadership and
mutual trust, innovation and pride;
– address any behaviour identified as negatively impacting
employee engagement in line with our policies and
procedures;
– provide relevant training and development where necessary
to enable individuals to perform their duties and develop
within their role; and
– regularly review, learn and identify opportunities for continual
improvement at all levels of governance.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section ESG at a glance throughout the Serco Strategic Report
While in our ESG reporting we draw out the specific action we are taking to further our ESG agenda, our consideration and management
of ESG risks, issues and opportunities is woven inseparably into our operational and commercial landscape, our strategy and governance,
and the means by which we analyse our performance and future prospects. ESG at Serco, therefore, is best understood in the context of our
market and our management framework, and in our approach to stakeholder engagement, managing risk and safeguarding the interests of
our shareholders through effective corporate governance.
Here we provide a simple guide to the relevance of that information and where to find it within this report.
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Our Market
Pages 04 to 08
In our market we set the context for our purpose to be a trusted partner of governments, delivering
superb services that transform outcomes and make a positive difference to our fellow citizens. We
examine the factors that drive and shape government demand for our services and explore how we add
value in the delivery of government policy for the benefit of society.
Our Management
Philosophy
Our management philosophy brings together in one model the key elements and areas of focus in our
approach to delivering long-term value by being the best-managed company in our sector. This applies to
our non-financial performance as much as to our financial performance.
Pages 09 to 10
Our Values
Reflecting our management philosophy, and as illustrated in our ESG Framework, our ESG commitments
start with our Values and end with our delivery of value for key stakeholder groups.
Our organising principles
Every region in which we operate represents a distinct ESG landscape shaped by different customer
needs, policies and commitments and different regulatory principles and priorities, among other factors.
Our organising principles enable us to build and manage regional ESG agendas closely aligned to local
drivers whilst benefiting from Group governance and oversight.
Our method
We strive to make sure that everything we do improves our performance against our strategic priorities,
and this includes our approach to ESG and our management of individual ESG factors. Our opportunity to
win good business, execute brilliantly, be a place people are proud to work and, ultimately, be profitable
and sustainable and generate long-term value, depends on how we:
– live our Values, behave with integrity and respect human rights;
– recruit, develop and retain exceptional leaders and a diverse, high-performing workforce to deliver
our commitments;
– build strong supply chains, partnerships, and relationships with our local communities;
– provide sufficient transparency and oversight through strong and robust governance, compliance
risk and assurance management to essential government services;
– commit to net-zero carbon ambitions, including those of our clients and wider society, and help
address climate and wider environmental emergencies whilst limiting our own environmental
impact;
– help to deliver essential social outcomes for our customers and service users, such as reducing
reoffending and increasing skills; and
– deliver superb public services that transform outcomes, make a positive difference for our fellow
citizens, and build our position as a valued and trusted partner of governments.
Key Performance
Indicators
Pages 32 to 34
Our Group key performance indicators (“KPIs") are those measures that we consider to be the most
material indicators of how well we are delivering our four strategic priorities. Historically we have counted
two measures from our much broader ESG data set among our Group KPIs. This year we have added a
third with the inclusion of a further safety measure, our Lost Time Incident Frequency Rate. These reflect
our belief that safety performance and levels of employee engagement correlate closely to profitability
and sustainability in public services. We recognise that our sustainability, and the extent to which our
business can be considered the best-managed in our sector, can be read in our aggregated
ESG performance.
Annual Report and Accounts 2021
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Section 172 (1)
Statement
Pages 107 to 114
Our approach to ESG is structured around our key stakeholder groups; what matters most to them as
concerns our organisation and public service delivery is a prime factor in identifying our ESG priorities.
Our commitment to engage fairly, frequently and forthrightly with our stakeholders and ensure their
interests are taken seriously is actively owned by the Board. In our Section 172 (1) statement we provide
greater insight into these groups and their concerns, which address or relate to ESG risks and issues, and
how Board decisions and the evolution of our ESG agenda are informed by these inputs.
Risk Management/
Principal Risks and
Uncertainties
Pages 92 to 104
Our ESG agenda focuses as much on the management of risk as on the creation of value, particularly
those risks which we believe can seriously affect the performance, prospects or reputation of our business.
Our enterprise risk management approach plays a key role in how we identify, understand and manage
our most material ESG issues, therefore, monitoring a broad spectrum of present and emerging risks
informed by a wide range of ESG factors.
As a result, there is significant linkage between our ESG priorities and our principal risks at the Business
Unit, Division and Group levels:
Group principal risks
Social
Governance
Environmental
Strategic risks
Financial risks
Operational risks
People risks
Catastrophic incident risks
Legal and compliance risks
Corporate
Governance Report
Pages 115 to 178
Board fulfilment of its role in promoting effective governance across Serco is a key element in our
commitment to effective governance and managed risk. Our Corporate Governance Report details:
– how corporate governance in Serco is structured and operates;
– how it is performing and maturing; and
– through the individual reports of the Board’s standing committees, we provide deeper insight into
how the Board is supporting the Company and safeguarding the interests of shareholders and other
key stakeholder groups in overseeing Serco’s management of its most material governance risks
and issues, including the governance underpinning its management of the Company’s social and
environmental priorities.
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Implications of Serco being a supplier of services to governments
Governments are expected by their citizens, and funded by their
taxpayers, to do hard-edged things: to defend their nations, they keep
weapons which, if ever used, would wreak unimaginable damage to
people and property; to keep communities safe, they hold people in
prison; to secure their borders, they deport people who don’t meet
their entry and immigration criteria; and in managing their budgets,
they make spending trade-offs which impact some people unfairly.
But they are also subject to scrutiny by opposition parties, by the
press and by campaigning organisations. Every newspaper, every day,
has stories of government incompetence and maladministration, and
of the allegedly cruel and inhumane consequences of their decisions.
Some of this criticism will be fair, objective and balanced; an awful
lot will be partial, biased, subjective and unfair. That is a fact of life of
being a government in most free countries.
As a supplier of government services, we are engaged by our
customers to help them do some of these hard-edged things.
Ensuring the right culture, transparency and controls are embedded
at every level of the organisation is key, enabling us to maintain our
relationships with our key government customers and perform well,
as well as targeting market share gains.
We use our governance processes to determine which governments
we will deal with, and which services we offer. For example, we
might be happy providing air traffic control services to a particular
government, but not custodial services if we do not think their
justice system aligns with our Values. However, the vast majority of
our customers are democratically elected governments, pursuing
policies which are legal and publicly acknowledged. For example,
the principle that the state can deprive someone of their liberty is
acknowledged by international law (and indeed the United Nations
publishes a training pack for prison officers).
We therefore must be suitably cautious and humble when imposing
our own corporate values on those of governments. We are reluctant
to second-guess the lawful actions of democratically elected
governments. Reluctant does not mean to say that we don’t, and
there have been occasions when we have refused to do certain types
of work for governments, but that is by exception and, on the whole,
where governments lawfully lead, and we can perform services in
accordance with our Values, we follow, even if this brings challenge
upon us from those who disagree with those policies.
Quite rightly, we too are sometimes subject to scrutiny by opposition
parties, the press and campaigning organisations. In many cases,
this scrutiny is all the fiercer because the idea of private companies
delivering government services is in and of itself anathema to some
people.
In the normal course, therefore, we face a level of scrutiny and public
discussion around our services which is greater than would be the
case for companies doing business with each other. The failure of
a construction company to deliver a multi-million pound new office
building on time to another company is unlikely to be a matter of
public consequence or commentary. If Serco fails to pay the correct
overtime to a teacher employed by a local council, however, it can
be the lead story on local media for a month, and accessible via
online search engines in perpetuity. This year, as part of our ongoing
focus on transparency, we have published even more information
on our website, including third party reports on some of our more
challenging operations.
Almost every service we run is subject to public scrutiny, and quite
rightly so. However, in the same way that much of the scrutiny and
comment aimed at governments is often far from impartial, or fair, or
based on facts, so we must have broad shoulders and accept that we
will often be unfairly criticised in public.
It is therefore important for those who analyse our ESG performance
to understand that public criticism and scrutiny is an important and
inevitable part of our business. Some of it will be fair, objective and
balanced; but some will be partial, biased, subjective and unfair. The
year in which a review of online search engines or social media does
not reveal criticisms of our business will be the year we are not doing
our job, which is to serve governments even when they do hard-
edged and difficult things. Some ESG analysts take a binary view: for
them, any public criticism of a company involved in the delivery of
hard-edged government policy is an automatic black mark. It’s in the
press, it must be right, no? Well, no, actually.
In the pages that follow, we share two examples of work that we do
which has received significant critical attention. In both cases, we are
delivering vital services for government and the public, helping to
manage the impacts of complex health and immigration challenges.
Both are in sensitive areas of government policy and public debate
defined by views which can be very strong.
For Serco, whether we are responding swiftly to the urgent need
of government to manage the impacts of a global pandemic or
supporting government in building up the means by which it
manages rapidly growing and evolving volumes of immigrants and
asylum seekers, our priority is delivering these services effectively,
efficiently, and with the utmost care and respect for service users.
In relation to Test and Trace, we received much commentary from the
press and were able to show much of it was wrong. With immigration,
we receive many queries and views from ESG analysts some of it
imbalanced and incorrect. However, we do not shy from addressing
questions and concerns on our work in these areas, whether we are
responding to challenges levelled at us in the media or requests to
better understand our approach from investors and analysts. It is our
hope that the information shared in the examples that follow will go
some way to making our position and approach clear in both cases.
We also want to make clear that our door is open to balanced, fair
and constructive discussion about what we do – such dialogue is of
great value to us, and always welcome.
Determining where we operate, what we do and who
we serve
We work in many difficult, sensitive areas of government policy
delivery, balancing diverse interests across a complex global
ecosystem of stakeholders. We approach new and repeat business
opportunities with conscience and caution. We will not pursue
an opportunity if we are uncomfortable with what it will require
of us and deem it at odds with our Values, nor if the risks are
unacceptable.
Our decisions are carefully governed through our Business
Lifecycle process – managing risk and taking many factors into
account, including social and environmental impact. Throughout
this lifecycle, we embed robust risk management to monitor
and assess risk and opportunity. The Serco Business Lifecycle
constitutes several stages which follow the maturity of any
business opportunity, controlled through a series of mandatory
governance gates requiring formal assessment and approval by
senior management. Areas of focus include material legal, ethical
and human rights risks; health, safety and environmental risks;
and other salient adverse impact risks from an ESG perspective.
A number of Serco Management System tools are applied in
business lifecycle decision-making, including our Human Rights
Standard and supporting Human Rights Decision Tree procedure.
Further information is available at
www.serco.com/esg/inside-esg
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Standing up such a system – by far the largest of its kind in Europe
– at such a scale and such a speed was a significant achievement
and had never been done before in the UK. Enormous efforts were
made by all involved to deliver against very tight timescales and in
extremely challenging conditions. We are deeply proud of all our
people who have helped to make it happen (assembling, training
and equipping our initial team of 10,500 contact tracers in just four
weeks and setting up the very first testing centres at two days’ notice)
and continued to support NHST&T, in helping to break chains of
transmission and reduce the spread of the virus. As of 2 February
2022, over 250m people have been tested and more than 37.5m
positive cases and their close contacts reached since the start of the
pandemic, with 84.3% of positive cases and 83.2% of contacts traced.
The volume of our Covid-19 related work is reducing, but as it does,
our job is to deliver great service and value to governments on these
contracts while they are needed, and to wind them down in an orderly
manner when they are not. This work will leave an enduring legacy
for Serco: showing our customers that they can trust us to respond at
speed and scale to extremely demanding requirements, and enabling
us to invest in the development of systems, processes and skills which
will further strengthen what is already a powerful proprietary platform
for delivering complex government services.
Our role in the UK Government NHS Test &
Trace programme
We are proud of the part we have played in supporting the UK
Government in the nation’s Covid-19 test and trace infrastructure.
Test and trace programmes are a core public health response in
pandemics, used alongside wider measures to help curb the rate of
infection. NHS (National Health Service) Test & Trace (“NHST&T") was
created at speed by the UK Department of Health and Social Care in
May 2020, to lead on the UK Government’s chosen approach to ‘help
break chains of Covid-19 transmission and enable people to return to
a more normal way of life’.
There has been a good deal of public debate about NHST&T since
its inception, some of which has suffered from significant levels of
misinformation and misunderstanding. Whilst Serco has always
welcomed and recognised the value of public debate, we believe
that it can only generate value if fully informed, factually correct,
and responsibly implemented.
Much has been made of Serco’s involvement in NHST&T, not all of
which has been fully informed and factually correct, such as claims of
our involvement in developing the NHS Covid-19 app or that we run
the entire programme, which are entirely untrue1. We thought that it
would be useful to address and dispel certain myths regarding the
depth and breadth of our involvement.
Serco did not have overall responsibility for the NHST&T system –
our role has been limited and specific. We have been involved in
two important but discrete parts. To help meet changing volumes of
demand, we have managed up to 20% of the sites where people go
to get tested; and we have been one of two providers of non-clinical
call handlers who have provided standard advice to and sought
information from people who have come into contact with positive
cases. It is unlikely that NHST&T could function without such support,
though of course the same could be said of others among the 454
suppliers contributing critical elements in the complex machinery of
the system.
We are not involved in any other aspect of NHST&T; we do not
design or manage the processes or size the capacity; we do not
manage the booking system; we do not supply the test kits or run the
laboratories; we do not develop the IT systems or manage the data;
we do not provide consultants and we are not involved with the app.
A report by the UK National Audit Office (“NAO") in June 20212
confirmed that the UK Government had signed 964 NHST&T
contracts, worth £14.1bn, of which the total value awarded to Serco
was less than 4.5%. It also stated that tracing accounted for only 7%
of NHST&T spend in 2020/21.
1 Who has been involved in creating the app?; https://faq.covid19.nhs.uk/article/
KA-01106
2 Test and trace in England – progress update; www.nao.org.uk/wp-content/
uploads/2021/06/Test-and-trace-in-England-progress-update.pdf
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Our involvement in the delivery of the UK and Australian
Government immigration policy
In our Annual Report 2020, we acknowledged that Yarl’s Wood
Immigration Removal Centre (“IRC") has attracted high volumes of
public attention and commentary during its 20-year lifetime, before
and during our management of the facility. We also shared five
independent reports that paint a picture of life at Yarl’s Wood under
Serco management that is more positive and favourable than the
claims of some campaign groups as reported in the press3.
Here we provide an update covering our UK IRC operations and how
these have evolved in the last year. We also look at our UK Asylum
Accommodation and Support Services Contracts (“AASC"), focusing
on our use of contingency accommodation through the Covid-19
pandemic, and our operation of Immigration Detention Centres on
behalf of the Australian Department of Home Affairs.
Supporting vulnerable people through systems designed
to manage complex social challenges
Government policies regarding the management of immigrants and
asylum seekers can attract challenge and criticism. This can transfer
by association to the operations in place to deliver those policies,
especially in response to any incident or allegation.
Our operation of Immigration Removal Centres on behalf
of the UK Home Office
On behalf of the UK Home Office, we manage three of the seven
main IRCs in the UK: Yarl’s Wood IRC in Bedfordshire and the Brook
House and Tinsley House IRCs, known collectively as Gatwick IRC,
in West Sussex.
IRCs are holding centres for foreign nationals who are awaiting
removal from the UK; or, in the case of Short-Term Holding Facilities
(“STHF"), who are subject to initial screening of a potential asylum
claim. Our management of those at Yarl’s Wood and Gatwick is
subject to regular external scrutiny from Independent Monitoring
Boards (“IMB")4 and Her Majesty’s Inspectorate of Prisons (“HMIP")5.
Publicly available third-party reports on Serco operations can be
accessed at www.serco.com/esg/reference
The changing role and function of Serco-operated IRCs
during the Covid-19 pandemic
In 2020, responding to Covid-19 and rising numbers of migrants
crossing the English Channel, the UK Home Office transferred female
and adult family residents out of Yarl’s Wood to increase STHF
capacity. A smaller number of female residents were returned in late
2020 as STHF arrivals reduced.
Serco has provided immigration services for 15 years, building on our
experience and expertise delivering other sensitive public services
that focus on supporting vulnerable people through government
systems designed to manage complex social challenges.
Our role in this sensitive area is to deliver specific elements of those
government policies in the most effective, efficient and humane
manner; working within established policy frameworks and complex
regulatory requirements; bound by the operational and ethical
standards we set for ourselves; underpinned by an ethos of care,
decency, dignity and respect.
We concentrate on working with our customers and non-
governmental specialist partners to mitigate risks. In this, and per
explicit customer requirements, we provide safe, secure, suitable
accommodation and welfare support for individuals and families
transferred into our care, including engagement and education
programmes, recreational activities, and other services to meet
their needs.
We are not, and have never been, involved in the development
of UK or Australian immigration policy. We have no involvement
in adjudication of immigration and asylum claims, nor any other
involvement in delivering the UK and Australian immigration and
asylum systems. This includes healthcare, which is commissioned
and delivered independently of Serco; our role is to support and
facilitate access.
3
Independent investigation into concerns about Yarl’s Wood Immigration
Removal Centre; www.verita.net
Yarl’s Wood Immigration Removal Centre; www.justiceinspectorates.gov.uk
Review into the Welfare in Detention of Vulnerable Persons – A report to the
Home Office by Stephen Shaw; www.gov.uk/government/publications
Annual Report of the IMB at Yarl’s Wood Immigration Removal Centre, 2019;
www.imb.org.uk
Care Quality Commission – Yarl’s Wood Immigration Detention Centre;
www.cqc.org.uk
Continuing immigration trends and the easing of Covid-19 restrictions
are prompting further change in function – the UK Home Office
determining that Yarl’s Wood should be developed as a majority male
facility. Today at Yarl’s Wood, we manage male IRC detainees; a small,
dedicated female IRC unit; and a separate male STHF. The UK Home
Office has invested significantly in the site’s physical infrastructure
and staffing numbers to enable flexible utilisation for managing
multiple cohorts.
Gatwick IRC had also been operating flexibly in response to
immigration trends and Covid-19 constraints, prior to our assuming
operation of the sites in 2020. This continued through 2021.
We have also worked with the UK Home Office to establish and
operate additional contingency hotel accommodation in 2021,
used for Covid-19 quarantining and initial screening as an alternative
to detention.
Upholding the needs and wellbeing of detained
individuals through evolving operations
We have worked closely with the UK Home Office throughout,
supporting them in optimising these sites to help manage evolving
needs. Simultaneously, we have continued working to meet the needs
of detained individuals as we navigate and adapt service provision
through new, dynamic and challenging circumstances.
As the cohorts we are required to manage change and change again
– each time comprising very different profiles of complex, multi-
dimensional needs and vulnerabilities – we have made significant
investments in expanding and strengthening our operational
workforce and the depth and breadth of their training and capability.
Our focus has been on building versatile, resilient teams who will
always deliver high standards of safe, secure and stable detention,
underpinned by compassionate, socially responsible support for the
people in our care.
IMB Reports; www.imb.org.uk/reports
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5 HMIP Inspections; www.justiceinspectorates.gov.uk/hmiprisons/inspections
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We are also well progressed with a Positive Detention Culture
(“PDC") programme in Gatwick IRC, supported by an external
academic body, The Appreciative Partnership. The purpose of the
programme is to measure and embed a healthy culture among
all who work and reside in the Centre, with regular cultural and
behavioural health checks, over and above ongoing monitoring
by independent statutory bodies. We plan to extend the PDC
programme to Yarl’s Wood IRC in the latter half of 2022.
Our approach to arranging and managing contingency
accommodation
On instruction from the UK Home Office, we work to identify
contingency sites that can meet core criteria for service delivery and
submit these to the UK Home Office for approval. A Serco AASC
team then visits approved sites, carrying out due diligence for all
compliance requirements, including Covid-19 safety.
Both HMIP and the UK Home Office continue to recognise good
practice in our operations at Yarl’s Wood and Gatwick and our
management of the recent changes6. We have discussed improvement
opportunities with the UK Home Affairs Select Committee and are
taking appropriate action where responsibility sits with Serco.
Our use of contingency accommodation in helping to
deliver the UK Home Office asylum dispersal programme
through the Covid-19 pandemic
On behalf of the UK Home Office, we manage two AASC contracts,
covering North West England and the Midlands and East of England.
The UK Home Office has designed AASCs with a focus on providing
asylum seekers with a good standard of community accommodation
and access to the support they need as they progress through the
UK asylum system7. Our delivery of AASCs has been subject to
external scrutiny from the UK Home Affairs Select Committee8,
Public Accounts Committee9 and the Immigration Chief Inspector
of Borders and Immigration10.
Contingency accommodation and its use during the
Covid-19 pandemic
In response to Covid-19, per UK Government and national public
health guidance, the UK Home Office implemented a temporary
amendment to its asylum dispersal programme, effectively halting
movement of asylum seekers through the system. The impact of this
was compounded by the continued flow of new asylum claims. The
UK Home Office asked AASC operators to procure contingency hotel
accommodation for new claimants.
The use of contingency accommodation is not new. Various pressures
limiting the availability of dedicated asylum accommodation can
result in individuals first moving into contingency accommodation
until more suitable accommodation becomes available. The UK
Home Office aims to move people into longer-term accommodation
after 35 days.
Data published by the UK House of Commons, reporting numbers
of asylum seekers in hotels on 24 August 2020, showed that Serco
was responsible for 33% of the total population at that time11. Today,
Serco looks after approximately one quarter of the national hotel
contingency asylum population.
6 www.justiceinspectorates.gov.uk/hmiprisons/inspections
Report on an unannounced inspection of the detention of migrants arriving in
Dover in small boats, 2020
Immigration detention during COVID - reduced populations and effective virus
control, 2020
Residential short-term holding facilities, 2021
www.imb.org.uk/reports
Annual Report of the IMB at Yarl’s Wood IRC, 2020
7 New asylum accommodation contracts awarded;
www.gov.uk/government/news/new-asylum-accommodation-contracts-awarded
8 Home Affairs Committee;
https://committees.parliament.uk/committee/83/home-affairs-committee
9 Public Accounts Committee;
https://committees.parliament.uk/committee/127/public-accounts-committee
10 Independent Chief Inspector of Borders and Immigration;
www.gov.uk/government/organisations/independent-chief-inspector-of-borders-
and-immigration
11 Asylum accommodation: the use of hotels and military barracks; https://
researchbriefings.files.parliament.uk/documents/CBP-8990/CBP-8990.pdf
If the property meets required standards, a team is mobilised to
initiate operation of the site. This includes engaging with UK Home
Office, local authority and statutory service representatives to prepare
for operational delivery as well as standing up required wrap-around
support services. Pace and volume of demand can make this a very
complex and challenging process for all involved.
Contingency accommodation is operated in line with our standard
procedures for initial asylum seeker accommodation. Dedicated
housing officers work onsite to induct new arrivals using translation
services to ensure understanding. These professional officers manage
the resident experience, including welfare checks, ensuring that
they receive three suitable meals each day and that property owners
address any faults, as well as managing any incidents.
Our priorities throughout include:
– Access to primary care: working with local healthcare providers
(rarely structured to support the sudden arrival of large groups)
to remove barriers.
– Public behaviour: working with law enforcement colleagues to
build local intelligence and mobilise around any potential issues
identified.
– Cases of Covid-19: working with Public Health England and other
health colleagues to develop robust plans for minimising
infection risks and containing any cases as effectively as possible.
– Covid-19 flexible catering: ensuring availability of a food
package that can meet quarantine and isolation needs.
– Acutely vulnerable asylum seekers: working with asylum seekers
and local authority colleagues to ensure appropriate support for
those with safeguarding needs.
– Child education: working with local education and voluntary
sector teams to provide meaningful educational activity whilst
ensuring that families with school age children are prioritised for
dispersal.
Our operation of Immigration Detention Centres (“IDC”)
on behalf of the Australian Department of Home Affairs
We have delivered immigration services in Australia since 2009, and
work with the Australian Department of Home Affairs (Home Affairs)
as the national onshore immigration detention service provider.
The Australian Immigration Detention Network (“IDN") is subject to
independent scrutiny by a range of bodies. We regularly interact with
the Australian Human Rights Commission (“AHRC") and the Office
of the Commonwealth Ombudsman. Both organisations conduct
targeted investigations into complaints and/or concerns raised by or
on behalf of detainees, maintain a periodic inspection programme
(including unannounced visits by the Commonwealth Ombudsman)
and have unlimited access to our physical and electronic records,
including CCTV and hand-held/body-worn camera footage. We also
hold community consultations, through which concerns can be raised
directly with Serco and Home Affairs, though these have been limited
in recent years due to Covid-19 restrictions.
Any complaints are promptly and thoroughly investigated by
Serco, Home Affairs, and (where applicable) state or federal law
enforcement. Where any instances of fault or wrongdoing are
identified, swift and decisive action is taken to address the issue.
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The evolving immigration landscape in Australia
The dynamics surrounding complaints in the Australian IDN are best
understood in context of the evolving profile of Australian detainee
cohorts.
In Australia, any non-citizen without a valid visa is considered unlawful
and may be placed in detention – a last resort determined using a
risk-based approach. Per Section 501 of the Australian Migration Act
1958, visas and citizenship may be denied to those who fail to meet
certain character requirements, mainly concerning criminal history.
From 2009-2013, the people in our care were predominantly illegal
maritime arrivals, including asylum seekers. Since 2013, the number
of detainees seeking asylum in Serco care began to fall as asylum
seekers were processed through the system, either through the award
of visas or the relocation to other countries or return to countries of
origin. Today, the majority of detainees are foreign nationals who do
not hold a valid visa to reside in Australia and have served custodial
sentences of not less than 12 months for crimes (often of a serious
nature) committed in Australia, who are considered to pose a risk to
the safety and security of the Australian community if not detained
pending their deportation to their country of origin. These changes
are tracked through the immigration detention data published by
Home Affairs12.
A report in 2020 by the AHRC13, following AHRC inspections of the
Australian IDN:
– acknowledges good practice and improvements made by Home
Affairs;
– expresses concerns regarding the health and wellbeing needs of
individuals held in immigration detention;
– acknowledges operational challenges that can impede meeting
those needs;
– makes recommendations regarding how AHRC concerns might
be addressed; and
– recognises that the current legal and policy framework in
Australia is a key factor.
In a formal response by Home Affairs14, the Department explains
its position on each recommendation, what measures are already
in place and what further action is being taken. This includes
regular review of detainee management and welfare, continuous
consideration of how detainee engagement can be improved, and a
holistic review of mental health services to inform their improvement,
from which such programmes of work as a new welfare and
engagement operating model (see below) have emerged in the last
two years.
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Meeting the complex welfare and engagement needs of
people in detention
Our commitment to the rights and welfare of detainees in our care
has remained unchanged since 2009. In each IDC, our dedicated
welfare teams deliver a wide range of engagement and education
programmes, and welfare services tailored to individual needs and
circumstances.
In this, they work with a large number of volunteer and community
groups and are supported by a nationwide team of integrated care
professionals led by our National Immigration Welfare & Engagement
Manager – qualified social workers with a range of specialisations
including human rights, community services, trauma-informed
response practice and therapeutic crisis intervention as well as
person-centred care.
Our years of experience and insight have been helping us drive
further service improvement for the benefit of all stakeholders. Our
team has worked closely with the Australian Red Cross, supporting
the development of training to identify those at risk of modern
slavery and human trafficking; and is now working with Home Affairs
in designing a new welfare and engagement operating model for
Australian immigration. Acknowledging the importance of dedicated
support for detainee mental health and wellbeing, and heeding
feedback from the AHRC and other external sources, this major
programme recognises the complex, changing needs of the evolving
cohort and builds on the foundations we have already laid across the
IDN.
Our work in this programme includes:
– developing our extensive portfolio of engagement activities into
a comprehensive national programme for detainee education,
training, recreation and other meaningful engagement
opportunities;
– building and enhancing our multi-dimensional capability for
supporting detainees with complex needs, considering all
factors affecting detainee wellbeing with a focus on through-
care commencing upon arrival; and
– improving collaboration with detention healthcare providers and
other key stakeholders to facilitate a holistic care approach.
12 Visa statistics – immigration detention; www.homeaffairs.gov.au/research-and-
statistics/statistics/visa-statistics/live/immigration-detention
13 Inspections of Australia’s immigration detention facilities 2019 report;
https://humanrights.gov.au/our-work/asylum-seekers-and-refugees/publications/
inspections-australias-immigration-detention
14 Response to the AHRC Inspections of Australia’s immigration detention facilities
2019 report; https://humanrights.gov.au/sites/default/files/att_a_-_home_affairs_
response_-_ahrc_2019_idc_inspection_report_-_ohr-20-00262_0.pdf
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Supporting documents
Inside ESG at Serco
An online guide to how we manage and govern our principal areas
of responsibility and sustainability and our overall ESG approach,
available at www.serco.com/esg/inside-esg
ESG action at Serco
Beyond this report, our organisation is alive with ESG engagement,
leadership and action. Interviews and examples of how our people
have brought our commitments to life are available at
www.serco.com/esg/case-studies
The Serco People Report
The Serco People Report features interviews and stories about
employees from every sector and region, exploring different aspects
of the colleague experience and how Serco people make a difference
every day, available at www.serco.com/about/people-report
Serco Global Reporting Initiative (“GRI”) and Sustainable
Finance Disclosure Regulation (“SFDR”) Content Indexes
The GRI standards and SFDR indicators inform our ESG materiality
assessment and the ongoing evolution of our ESG agenda. We
publish GRI and SFDR Content Indexes to enhance our ESG
reporting and transparency and help stakeholders navigate our
disclosures more quickly and easily. Our GRI and SFDR Content
Indexes are available at www.serco.com/esg
Environmental basis of reporting (“EBR”) supplement
Our EBR supplement outlines the scope of the environmental
indicators assured in our ESG Performance and Disclosure Data
Book and sets out the reporting approach and criteria required to
support the environmental elements within the Serco Group plc
Board commitment to non-financial reporting. Our EBR supplement
is available at www.serco.com/esg/environment
Contributing to the United Nations Sustainable
Development Goals
The needs and expectations of our stakeholders, wider society and
the world around us are key factors in our public service solutions and
broader ESG strategies. We work hard to keep them front and centre
in our thinking through direct engagement and consultation and
through careful consideration of prevalent thought leadership across
the global ESG landscape, including the United Nations Sustainable
Development Goals (“UN SDGs").
Many of our government customers are firmly committed to
delivering the UN SDGs and we are proud that many of our
operations and ESG initiatives have linkage to them.
We contribute to the UN SDGs:
– as a public service provider – through the services we provide to
citizens and society, and how we provide them;
– as an employer – through how we attract, select, manage,
develop and look after our employees;
– through our commitment to support the net-zero carbon
ambitions of our clients and wider society and limit the
environmental impact of our operations; and
– as a participant in global industry, infrastructure and the wider
economy – through how we manage, grow and govern the
business.
For more information, see our ESG Report 2021, available at
www.serco.com/esg
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Delivering ESG at Serco in 2021
Here we share select headlines of our impact, progress and performance in the last year, focusing first on our social
priorities and then looking at governance and environmental.
Further information, including future ambitions, is available in our full ESG Report at www.serco.com/esg
Social
Because of our role delivering public services for governments,
the social element of ESG is a particular focus for us. It is at our
core and we are driven to be a valued and trusted partner of
governments, delivering superb public services that transform
outcomes and make a positive difference to our fellow citizens.
As a public service provider, we deliver specific elements of
government policy – providing efficient and economical services
and systems that address complex social challenges and contribute
directly to the wellbeing, resilience and prosperity of whole nations,
local communities and individual citizens. We strive to understand
the challenges that shape our chosen markets and help our
customers address them.
– Defence. Reducing costs and improving outcomes for
modern defence organisations, and thus helping to maintain
national security in a way that is safe and sustainable.
– Justice & Immigration. Safeguarding society and supporting
often vulnerable people in their journeys through justice and
immigration systems. Our prison management approach
helps ex-offenders reintegrate into society and reduce
reoffending. In immigration, we form partnerships with
voluntary organisations to deliver housing and welfare
support and enable successful integration of migrants
into society.
– Transport. Safety, satisfaction and smart, sustainable
solutions – putting customers and communities at the heart of
modern transport and mobility.
– Health and other Facilities Management. Helping to create
a healthier world – improving patient outcomes through safe,
caring and efficient healthcare and healthcare support
services.
– Citizen Services. Building greater wellbeing, resilience and
sustainability into society – serving the everyday needs of
citizens and communities. In the US, we are a key part of
efforts to provide healthcare insurance to low-income
Americans. In our UK Leisure business, we provide sport and
leisure facilities to improve the health of local citizens.
As an employer, we are a team of more than 50,000 people working
in more than 20 countries. Our workforce is multi-skilled and
diverse – drawn from the communities in which we operate and
reflective of the communities we serve and providing opportunities
for full and part-time work and for people to develop their skills
and careers. We strive to create positive, safe and supportive
environments where our colleagues can be proud of who they are,
what they do and who they work with. We work hard to promote
and enable the diversity, development, wellbeing and safety of
our people, and to be the employer of choice for public services
– recruiting, developing and retaining exceptional leaders and
high-performing workforces to deliver our commitments to our
customers and service users.
As a participant in industry, infrastructure and the wider economy,
we seek to be responsible in managing our impact on the
communities and economies in which we operate. Across these we
recognise our responsibilities to a range of stakeholders, including
the third parties with whom we interact as neighbours, customers,
peers and partners. We strive to build strong, reliable and service-
enhancing supply chains, partnerships and relationships with our
local communities – aligned to ethical standards and sustainability
and generating greater value for society.
2021 update highlights
Our customers, partners and communities
– Supporting our customers in the continued delivery of
essential public services throughout the pandemic – helping
them navigate unprecedented complexity, managing acute
operational impacts with care and innovation, and helping to
protect national interests and the public from Covid-19:
– developing and delivering vital services to help
governments manage the primary impacts of Covid-19,
such as through our role in NHS Test and Trace in the UK
and the Covid-19 cleaning services we provide for
education and care facilities in Australia;
– helping to deliver other major programmes and projects
despite Covid-19 challenges and restrictions (or manage
other risks and issues arising from those factors) such as
the Australian RSV Nuyina icebreaker vessel, Centers for
Medicare and Medicaid Services in the US, Driver
Examination Services in Canada and the reopening of
Dubai International Airport;
– responding to the many secondary impacts of Covid-19
and helping to get society back on its feet, such as our
work to deliver the UK Government’s new Restart Scheme,
helping to break down employment barriers for more than
one million people impacted by Covid-19;
– developing new resourcing solutions with which to better flex,
scale and synchronise our workforce with the changing needs of
our customers, such as through Serco Workforce Solutions in the
UK and Serco Care2Connect in Australia;
– working closely with our customers to ensure our operational
teams and customer colleagues stay safe and continue to deliver
whilst complying with changing circumstances and restrictions,
such as through our regional vaccination programmes;
– expanding and enhancing our centres of capability in critically
high-demand service areas, such as through the acquisition of
Facilities First in Australia and our VIVO joint venture partnership
in the UK;
– building a versatile, global cadre of business leaders to grow
and coordinate our capabilities whilst maximising value
generation for all service stakeholders, such as our new Group
Head of International Maritime Programmes;
– building and strengthening the local social and economic
impact of our operations, such as through the publication of our
new global Sustainable Procurement Charter, to extend our
impact through our supply chain, and our recruitment of a Head
of Social Value in the UK, to lead the development of our social
value culture and capability and extend the ESG impact of
government procurement. We are now including social value
commitments in a number of our bids in the UK;
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– deploying the Serco Institute to help governments develop the
next generation of public service solutions, such as through our
People Powered Public Services research and other studies
including an examination of how to support people returning to
work in public services following career breaks
(www.sercoinstitute.com);
– approximately £600,000 of grants made to 300 employee-
nominated not-for-profit organisations worldwide by the Serco
Foundation Coronavirus Community Support Fund during 2020
and early 2021, plus a further £201,519 of donations to dozens of
charities around the world through the remainder of 2021
(www.sercofoundation.org);
– partnering with the UK Supply Chain Sustainability School –
opening access to the latest sustainability knowledge and
training resources to Serco colleagues and supply chain
partners; and
– delivering key objectives in our Group Modern Slavery
Programme. For more information, see our 2021 Modern Slavery
and Human Trafficking Statement at www.serco.com/esg/
modern-slavery
Our people
– Supporting our colleagues in their safe return to workplaces and
the safe reintroduction of working practices; continuing to
prioritise the safe and secure management of people and the
protection of vulnerable communities; seeking to maintain
effective safety standards and high levels of safety engagement
in our sites and remote working environments whilst keeping
pace with rapidly changing circumstances and restrictions
worldwide. For example:
– deploying our new person-based risk assessments to identify
and help manage those who may have been more severely
affected by Covid-19, especially for vulnerable colleague
communities at greater risk;
– developing our capability for the identification and control of
safety risk in new hybrid ways of working;
– maintaining a strong rhythm and momentum in our Employee
Voice approach, Colleague ConneXions, whilst embedding
Non-Executive Director (“NED") participation more deeply in our
global colleague engagement and consultation landscape
through NED involvement in our diversity and inclusion events
and 19 full-day virtual and actual visits with Serco sites in every
region, as well as 12,609 comments to the Board received
through our employee survey;
– refreshing our Contract Manager and Advanced Leadership
Development Programmes with University of Oxford, Saïd
Business School, for relaunch in 2022;
– refining and growing our regional management and leadership
development programmes with focus on underrepresented
groups, with new programmes for frontline leaders, high-
potential talent, and management development;
– officially launching our implementation of the UK Race at Work
Charter and joining the Australian Pinnacle Foundation as a gold
partner, funding the new multi-year Serco Scholarship to
support LGBT+ youth;
– expanding our partnership with Saïd Business School to launch
the Oxford Women in Leadership Development Programme for
our colleagues, and launching a co-mentoring scheme with our
Executive Management Team in Serco UK & Europe, providing
two-way mentoring and career acceleration for high potential
colleagues from underrepresented groups;
– supporting our maturing colleague communities (including
Serco Inspire, Serco Embrace, Serco Unlimited and In@Serco –
addressing gender, race and ethnicity, disability, and LGBT+,
respectively) in growing to membership of nearly 5,000 globally
and working to increase their reach and impact where
appropriate, such as formally launching Serco Embrace in all
regions, with an executive sponsor in each Division;
– delivering our annual schedule of international diversity and
inclusion events, including the first Serco Inclusion Week in June,
and a week-long roadshow during UK National Inclusion Week
in October, visiting Contracts in each sector;
– helping our colleagues in all regions create safer and
– employing 1,811 veterans among our US employees,
representing 22.7% of our workforce in the US, where we have
been recognised by Forbes as one of America’s Best Large
Employers;
– training more than 700 people through apprenticeships across
our UK business; and
– publishing our third annual People Report, featuring interviews
and stories about employees from every sector and region,
exploring different aspects of the colleague experience and
how Serco people make a difference every day, available at
www.serco.com/about/people-report
healthier homeworking environments by improving their
access to the right equipment and resources;
– re-inducting people back into the workplace, with fresh
emphasis on everyday health and safety risks as well as those
relating to Covid-19;
– holding firm to our broader safety commitments, such as working
to drive down our Lost Time Incident Frequency Rate, which has
reduced by 17.6% since 2016;
– sharpening focus on employee health and wellbeing: prioritising
mental health and those at heightened risk, analysing longer-term
Covid-19 risks, and working to ensure that various critical forms of
support are in place, relevant, effective and accessible – flexing and
adapting them to meet fluctuating regional needs;
– giving our people greater choice in how and where and when
they work with our new global principles for hybrid working.
Serco colleagues who can fulfil their roles remotely are now only
required onsite two days a week;
– launching the Serco People Fund, a new independent charity
providing support to current and retired colleagues and close
family members facing extraordinary financial challenges, with a
significant one-off commitment of £4m from Serco, and making
an ex-gratia payment to around 50,000 employees in recognition
of their extraordinary efforts;
– sustaining high levels of engagement as measured in our annual
employee survey with an overall score of 70 (2020: 73). Our scores
2019-2021 are consistent with the return to pre-pandemic levels
experienced by employers who experienced a sharp increase in
2020, followed by a levelling out in 2021;
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Governance
For Serco, governance is not an exercise in compliance, nor is it a
specific form of management. It is an essential part of our public
service ethos and how we manage our impact as a public company
– seeking to protect shareholder interests by managing our
business in a way consistent with the broader interests of society.
Above all, we strive to live and manage our business by our Values
and behave with integrity and treat people with respect – within
the bounds of expected individual and corporate behaviour,
with regard for relevant laws and regulatory requirements, with
sensitivity to local cultures and with respect for human rights.
We focus as much on the preservation and growth of the business
as on the maximisation of shareholder value. We strive to ensure a
balanced performance framework that recognises value must be
delivered to our shareholders as well as customers and employees,
and align remuneration and incentive arrangements to long-term,
sustainable value creation.
We are committed to transparency, recognising that it is integral
to our success. We strive to maintain open, meaningful dialogue
with all stakeholders – using a variety of means to update them
on performance and gain insight into their views – and base our
approach to executive remuneration on a clear rationale in which
the alignment of interests is recognisable and understandable.
Governance, risk and assurance control and a strong corporate
culture are central to the Company. We have a comprehensive
corporate governance framework and approach, with clearly
defined responsibilities and accountabilities to help safeguard
long-term shareholder value. We strive to maintain an effective
system of internal compliance and assurance control and risk
management that promotes business growth whilst ensuring
we operate safely and ethically and deliver quality services, and
that safeguards the best interests of our stakeholders, assets and
reputation. Our Code of Conduct and Supplier Code of Conduct
define how we expect our operations to be delivered and the
behaviours we expect across our organisation and supply chain,
underpinned by our Values and commitment to behave with
integrity and treat people with respect.
2021 highlights
– Key activities of the Board of Directors in promoting effective
governance and compliance with the UK Corporate Governance
Code during 2021 are reported in our Corporate Governance
Report on pages 115 to 178.
– Being recognised by NAVEX Global as the 2021 winner of their
International Customer Excellence Award for Corporate Culture
Impact, for “an impressive demonstration of resiliency, dedication
and excellence – overcoming significant challenges to implement
an effective ethics and compliance program that prioritizes
people, values culture, and inspires organizational trust”;
– delivering a leadership ‘Trust Summit’ at our Divisional
Leadership Conferences, focused on the fraud risk triangle and
the reinforcement of trust among colleagues and customers
while mitigating risks. This was followed by a collaborative
cross-regional exercise in which attendees were invited to
constructively challenge Serco leadership, culture, systems and
controls through the fraud risk triangle lens. Feedback from an
estimated 550+ delegates was discussed by the Group
Executive Committee and Corporate Responsibility Committee
(“CRC") and informed future plans across our Group Functions;
– completing detailed human rights assessments for new business
opportunities where appropriate, improving business guidance
on the assessment of human rights risks, and publishing a new
supplement detailing our approach to human rights with a
specific focus on the management of human rights impacts
within our Justice & Immigration operations, available at
www.serco.com;
– proactively participating in working groups hosted by the Ethics
& Compliance Initiative, and supporting the Institute of Business
Ethics Good Practice Guide on trends and innovations in
effective ethics training;
While SPP is influenced by many factors, we consider earnings
per share (“EPS") and returns on invested capital delivered
(“ROIC") particularly important. Underlying diluted EPS
performance was +18%, +37% and +49% for 2019, 2020 and 2021,
respectively, whilst underlying ROIC has been at 15.4%, 19.1%
and 23.7% for those years. The Group’s order book was £14.1bn,
£13.5bn and £13.7bn at the end of 2019, 2020 and 2021,
respectively. For more information and broader discussion and
analysis on our progress and performance in 2021, as well as
our guidance and outlook, see Key Performance Indicators
(pages 32 to 34), Chief Executive’s Review (pages 16 to 26),
Directors’ Report (pages 171 to 178) and Financial Statements
(pages 179 to 261);
– delivering Year Two of our Deferred Prosecution Agreement Plan
and submitting our Year Two report to the UK Serious Fraud
Office;
– maintaining a comprehensive annual schedule of close executive
engagement and strategic supplier reporting to the UK Cabinet
Office;
– refreshing Board and Committee membership with a focus on
strengthening diversity of skills, knowledge and experience
gained from across business and government;
– launching our new annual Chairman’s Governance and
Remuneration Roadshow, offering top shareholders the
opportunity to engage directly with our new Chairman on these
topics;
– continuing to mature our governance structure around an
increasingly integrated and clearly defined ESG agenda, with
the CRC working to ensure that Serco’s position and approach
on ESG remains appropriate, embedded and conducive to the
delivery of the Group strategy. For more information, see our
CRC Report on pages 135 to 136;
– building on our risk-based Data Protection Programme,
– establishing a global ESG Oversight Group to maintain and
including establishing a global Data Protection Oversight
Group, appointing Data Protection Champions in every Serco
Middle East Contract, and launching new enhanced data
protection training for managers in the UK;
– the year saw shareholders receive their first dividends since 2014,
so Total Shareholder Return (“TSR") includes these as well as
share price performance (“SPP"). TSR has been +69%, -26% and
+14% in the financial years 2019, 2020 and 2021, respectively.
coordinate the Group ESG approach, with representatives from
across the business and core Group functions, including Group
and Divisional Executives;
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– continuing to mature our ESG reporting:
– increasing the depth and breadth of our disclosure to align
more closely with investor needs, analyst focus, and external
recommendations and requirements including those of the
TCFD, Global Reporting Initiative (“GRI") and Sustainable
Finance Disclosure Regulation (“SFDR");
– conducting an internal audit on our ESG reporting, which
confirmed that assurance controls and processes over
non-financial reporting at Serco are adequate and identified
opportunities for enhancement which have been or will be
actioned in 2022;
– maintaining the ESG measures in our annual bonus and long-term
incentive awards, focusing on governance processes, stakeholder
engagement, operational health and safety, colleague diversity
and engagement, and environmental performance and
management of environmental risks. For more information, see
our Remuneration Report on pages 139 to 170;
– conducting comprehensive, global reviews – focused on
improving accessibility, engagement and impact; informing next
phases and future iterations – of Serco Essentials, our all-
employee training programme, the Serco Code of Conduct,
and the SMS, our management framework;
– delivering Group-wide programmes to strengthen internal
control and compliance assurance through our three lines of
defence, including:
– an independent quality assessment of our Internal Audit
function, updating our 2022-2025 internal audit strategy per
the findings;
– implementing a Group-wide enterprise risk management
capability review to drive consistency, process improvement
and best practice sharing across Divisions;
– further increasing the level of our ethics compliance
assurance with an expanded review programme in 2021,
covering anti-money laundering, export controls and trade
sanctions, facilitation payments and competition regulations;
– redesigning our annual SMS Self-Assessment, increasing the
focus on controls managing key risks and implementing new
maturity scales to enhance objectivity; and
– further developing the maturity and formality of Serco financial
reporting processes and controls through a comprehensive
programme of documentation and testing, covering all material
parts of the business globally. This programme is in place to
address and prepare for internal control compliance
requirements anticipated from the UK Department for Business,
Energy & Industrial Strategy (“BEIS") consultation, ‘Restoring
trust in audit and corporate governance’. For more information,
see our Audit Committee Report on pages 128 to 132.
For our Enterprise Risk Management approach and principal risk
mitigation plans, see Principal Risks and Uncertainties (pages
95 to 104) and Group Risk Committee Report (pages 125 to 127).
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Environmental
We are committed to addressing the environmental and climate
emergencies and supporting the net zero carbon ambitions of
our clients and wider society. Alongside our customers and other
stakeholders, we recognise that environmental sustainability is a
critical factor in societal wellbeing and resilience. We also recognise
that the impacts of climate and environmental emergencies will be
felt ever more acutely across the public service landscape, driving
evolution, adaptation and innovation in order to keep pace with
the changing needs of society.
climate emergencies and green recovery from Covid-19; potential
increases in legislation to curb emissions and travel; the need for
greater resource efficiency, a transition to a more circular economy
and consideration of supply chain impacts; and the growing
demand for data and analytics.
Our impact and opportunity to make a positive difference from an
environmental perspective varies in each market, depending on the
nature of services we deliver and the level of operational control we
hold at any given contract.
In 2020, we launched a refreshed Group Environment Strategy to
deliver longer-term Group Environment, Energy and Sustainability
commitments in our operations and supply chain. It has four areas
of focus: carbon and climate; resource efficiency; environmental
protection, including biodiversity; and embedding environmental
behaviours in Group culture.
Since 2017, we have reduced our Scope 1 and (market-based)
Scope 2 carbon emissions by 14.8% and are now working towards
net zero in our own assets, leases and business travel by 2030, for
which our Group targets (2025 and 2030) are based on Science
Based Targets Initiative (“SBTi”) methodology.
Our strategy recognises a number of challenges and opportunities
in the years ahead, including: escalating environmental and
Where we have direct control of environmental impacts,
activities are managed locally. We strive to: build a culture of
environmental stewardship that drives improvement; minimise
adverse environmental impact through effective environmental
management systems and sustainable business practices; actively
manage environmental hazards and risks arising from our activities
and services; monitor our performance; and investigate any
incidents that occur.
Across more than two thirds of our business we work on our
customers’ premises and are not in direct control of environmental
impacts. In such cases, we work collaboratively with our customers,
supporting them in applying their own environmental management
systems and achieving their objectives.
2021 highlights
– Strengthening Board and Group Executive oversight of our
environmental agenda through members joining Chapter Zero,
the UK community of non-executive directors focused on
climate change;
– strengthening Group policy by replacing our combined Group
Health, Safety and Environment (“HSE") Policy Statement with
two new Group Policy Statements, Health and Safety and
Environment & Climate Change;
– expanding our environmental reporting to include waste,
water and activities on or near environmentally protected sites.
See select environmental performance and disclosure data on
pages 72 to 75 and more in our full ESG Report 2021;
– completing our global programme of strategic climate risk
review and consultation, led by our Task Force on Climate-
related Financial Disclosures (“TCFD") working group.
Quantitative and qualitative assessment of relevant climate risks
and opportunities has identified material risks and
opportunities, of which two have been prioritised for analysis:
increased severity and frequency of extreme weather events,
and the impact of carbon taxes and levies across the
geographies in which we operate. Climate scenario analysis and
impact modelling were then applied to understand potential
financial impacts. The metrics and targets in our Group
environmental strategy were also updated per the findings of
our TCFD programme. For more information, see our TCFD
disclosure statement on pages 58 to 68;
– completing a global review of partnership options for
supporting our net-zero carbon and environmental protection
commitments through investment in nature-based solutions,
supporting carbon sequestration, ecosystem restoration and
biodiversity enhancement programmes;
– designing energy efficiency into our Contracts, and delivering
energy efficiency projects in our most energy and carbon
intensive Business Units and Contracts – including our ISO 50001
certified Leisure business, our Environmental Services business
and our Northlink Ferries and Future Provision of Marine
Services Contracts in the UK – and for our customers – including
at Fiona Stanley Hospital in Australia and across our property
and facilities management Contracts in Abu Dhabi;
– delivering and/or operating major public assets and services
with significant environmental purpose – such as the Australian
RSV Nuyina and the European Space Agency Earth observation
programme, both of which are supporting global environmental
and climate change research, and Cycle Hire schemes, helping
to decarbonise the cities and regions where they operate – and
with minimal environmental impact – such as all-electric
passenger ferries in Canada, the first of their kind in North
America, and Clarence Correctional Centre in Australia, arguably
the most environmentally-focused prison on the planet;
– extending our employee-led environmental engagement and
improvement programme, Serco Goes Green, into our Asia
Pacific and Americas regions, connecting a growing global
network of more than 278 Green Ambassadors with 200
improvement projects completed or in progress as of end-2021;
– proactively participating in the Institute of Environmental
Management and Assessment (“IEMA") corporate partnerships
programme, becoming an IEMA-approved training centre and
commencing delivery of our now IEMA-certified courses to key
employee groups; and
– benchmarking our approach to climate change via the annual
Carbon Disclosure Project (“CDP") questionnaire, maintaining
our B score.
– In 2022, we plan to update our Group Environment Strategy,
net zero transition pathway and associated targets (with
consideration of SBTi validation by the CRC) per relevant
outcomes of COP26 and other evolving factors including
customer expectations and anticipated sector-specific net-zero
target setting guidance from the SBTi; and
– publish further details on our net zero transition pathway for
achieving net zero in our own assets, leases and business travel
by 2030.
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Task Force on Climate-related Financial Disclosures (“TCFD”) statement
The purpose of this statement, our full TCFD disclosure statement 2021, consistent with the recommendations of the TCFD, is to provide
investors and wider stakeholders with a better understanding of Serco’s exposure to climate-related risks and our strategic resilience to these
risks, as well as climate-related opportunities material to Serco. The approach we have taken is illustrated below.
Responding to TCFD – Overview of our approach
TCFD Working Group
formed, supported
by external advisers
2. Climate-
related risks and
opportunities
workshops held
across divisions
4. 2021 Disclosure
statement covering
governance, risk, strategy,
and metrics and targets
1. Gap analysis
against 2020
TCFD disclosures
2021/22 roadmap
developed
2022 onwards
Mature integration
of TCFD
recommendations
into processes
3. Scenario analysis
supported by climate
analytics firm
Governance
Alongside our customers and service users, we recognise that
the health of our planet is a critical factor in societal wellbeing
and resilience. We also recognise that the impacts of climate and
environmental emergencies will be felt ever more acutely across
the public service landscape, driving evolution, adaptation, and
innovation to keep pace with the changing needs of society. The
Board of Serco Group plc is focused on ensuring that Serco lives by
its Values; operates by high standards of environmental, social, and
corporate governance, integrity, and ethics; and delivers responsibly
on its commitment to manage its environmental impact whilst
supporting the environmental objectives of its customers. We work
to a clear governance framework to support our assessment and
management of climate-related risks and opportunities, as outlined in
the sections below, see Organisational and reporting structure for
climate governance.
Board oversight of climate-related risks and opportunities
The Board is accountable for the long-term success of Serco and
setting a framework of effective controls which enables risks (including
climate-related risks and opportunities) to be assessed and managed.
Responsibility for ESG matters is embedded in our corporate
governance through the Board’s standing Corporate Responsibility
Committee. The Corporate Responsibility Committee receives
inputs from the Group Risk Committee (supporting assessment
and management of climate risks), the Group Audit Committee
(supporting assessment of financial impacts) and the Group
Remuneration Committee (supporting inclusion of climate-related
targets in remuneration).
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Board of Directors
Approvals and
Allotment
Corporate
Responsibility
Audit
Group Risk
Remuneration
Nomination
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Executive Committee
Investment
Committee
Divisional Executive
Management Team
Business Lifecycle
Review Team
Business Unit
Management Team
Contract
Management
TCFD Steering Group
Environmental
Oversight
Group
TCFD
Working
Group
Key
Internal governance structure
Supporting committee structure
Performance reviews and other
operational Business Lifecycle
reviews
Bids, programmes and other
investment decisions escalated
in accordance with governance
thresholds
The Corporate Responsibility Committee provides oversight of TCFD activities on behalf of the Board. To strengthen Board effectiveness and
competence on climate change, a member of the Board and a member of the Executive Committee joined Chapter Zero in 2021. Chapter
Zero is building a community of non-executive directors and relevant business leaders to equip them to lead boardroom discussions on the
impacts of climate change with a purpose of ensuring companies are fit for the future and that global net zero ambitions are transformed into
robust plans and measurable action. In addition to our official Chapter Zero members, other Non-Executive Directors have accessed Chapter
Zero’s learning opportunities during 2021. We will explore further interaction with Chapter Zero, TCFD website learning resources and wider
climate change learning collateral for Executive and Non-Executive Directors in 2022.
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Responsibilities and roles for the assessment and management of climate-related risks and opportunities, by
committee or group
Climate risk/
opportunities
agenda frequency
Roles and responsibilities
related to climate risk/
opportunities
Chair
Governance
body/
reporting
structure
Serco Group plc
Board
Chairman
Annual, updated
through the Corporate
Responsibility
Committee.
Corporate
Responsibility
Committee –
reporting to the
Board
Independent
Non-Executive
Director
Biannual review of
Group environment
strategy including
climate-related risks
and opportunities.
Executive
Committee –
reporting to the
Board
Group Chief
Executive
Officer
Biannual review of
Group environment
strategy including
climate-related risks
and opportunities.
Areas covered,
review areas and
material climate
risk/opportunities
decisions in 2021
Review and approval
of Annual Report and
Accounts including
TCFD elements.
Focus areas
for 2022
Approval
of updated
environmental
strategy, metrics
and targets.
Oversight of TCFD
disclosure programme
and review and approval
of TCFD disclosure
statement.
Approval of sustainable
procurement charter
which will help to
measure and manage
climate risk in the supply
chain.
Oversight of
the integration
of TCFD
requirements.
Oversight of
environmental
strategy, metrics
and targets
review, including
net zero target
refresh.
Review of TCFD
disclosure programme.
Oversight of climate risks
and opportunities and
input into related Group
strategies. Approval of
Group Environment and
Climate Change Policy
Statement. Approval of Group
environmental strategy and
climate-related targets.
Responsible for assisting
the Board in providing
independent oversight and
guidance of the Company’s
ESG Framework, related
strategies, policies, and
practices on how the
Company conducts its
business, through the lens of
how the organisation lives and
breathes its values of Trust,
Care, Innovation and Pride.
Oversight of environmental
strategy and targets, climate-
related risks, and opportunities.
Review of Group
environmental strategy,
climate risks and
opportunities. Executive
Committee members are
responsible for the delivery of
environmental strategy and
flow of information in their
respective areas supported by
management functions.
Review of
2022 TCFD
disclosures and
environmental
strategy, metrics
and targets.
Review
quantitative
elements of
2022 TCFD
disclosures
and approve
level of support
from external
advisers.
Review climate
elements
in principal,
material cross-
cutting and
emerging risks.
Audit
Committee –
reporting to the
Board
Independent
Non-Executive
Director
Annual review of
climate risk disclosure.
Review of climate risks and
opportunities and financial
elements.
Review of TCFD
disclosure programme.
Engaged external
advisers to support
TCFD disclosures.
Risk Committee
– reporting to
the Board
Independent
Non-Executive
Director
Quarterly review of
Group and Divisional
principal risks; annual
review of emerging
risks.
Responsible for overseeing
the Company's approach
to the risk management,
compliance, and assurance
framework. Review principal
risks, material cross-cutting
risks and emerging risks
(including climate) and report
these to the Board.
Decision to recognise
climate change as
a cross-cutting risk
in relevant principal
risks. Extreme weather
events relating to
climate captured in the
Group principal risk,
‘catastrophic risk’.
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Governance
body/
reporting
structure
Climate risk/
opportunities
agenda frequency
Roles and responsibilities
related to climate risk/
opportunities
Focus areas
for 2022
Areas covered,
review areas and
material climate
risk/opportunities
decisions in 2021
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Remuneration
Committee –
reporting to the
Board
Independent
Non-Executive
Director
Annual agenda
discussion of elements
within our ESG
scorecard.
Embed performance
against climate and wider
environmental issues within
executive level bonus and
long-term incentive plan.
Consideration of
climate-related metrics
for inclusion within our
ESG scorecard.
TCFD steering
group –
reporting to
the Board
committees
Group General
Counsel &
Company
Secretary
Quarterly meetings.
TCFD working
group –
reporting to the
TCFD steering
group
Regular meetings
during 2021 to manage
and undertake TCFD
reporting process
supported by external
advisers.
Group
Head of
Environment,
Energy &
Sustainability/
Group Head
of Financial
Reporting
Multi-functional groups with
the responsibility for preparing
and responding to TCFD
disclosures via collaboration
and input from internal
and external stakeholders.
Organisation of climate risk
and opportunity workshops
and engagement of internal
stakeholders to input to the
climate risk/opportunities
process.
Group
Head of
Environment,
Energy &
Sustainability
Quarterly meeting.
Climate risks and
opportunities
reviewed.
Environmental
Oversight
Group –
reporting to
the Corporate
Responsibility
Committee
and Executive
Committee
Formulating, reviewing,
and progressing Group
environmental strategy
including climate objectives
and targets. Representation
from Divisional Health,
Safety & Environment (“HSE”)
leads and wider functions,
collectively supporting the
flow of information to and
from Divisional Executive,
Business Unit and contract
level management teams.
Review of TCFD
disclosures programme
and disclosure
statement ahead of
submission to the
Corporate Responsibility
Committee.
All aspects of TCFD
reporting. Collaboration
with external advisers
on gap analysis,
global climate risks
and opportunities
workshops; integration
into overall Group risk
framework; scenario
analysis approach; and
disclosure statement.
Roadmap developed to
mature future climate
risk and opportunity
assessment.
Input to climate risks and
opportunities workshops
and engagement of
internal stakeholders
and management
functions.
Review of
climate-
related metric
performance
within our ESG
scorecard.
Review of TCFD
disclosure
programme and
2022 statement.
Support the
integration of
climate risks and
opportunities
into business
strategy,
planning and
processes.
Lead integration
of climate
risks and
opportunities
into business
strategy,
planning and
processes.
Support climate
risks and
opportunities
review and
prepare 2022
TCFD disclosure
statement.
Input into
climate risks and
opportunities
review and
support the
update of
environmental
strategy, metrics
and targets.
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3. Material climate risks and opportunities were shortlisted,
based on workshop outputs. Through heat mapping and
application of our enterprise risk management framework,
we performed a qualitative assessment of the risks and
opportunities to help understand the impacts and assess
the relative materiality of risks and opportunities to Serco.
We will mature the identification, assessment, and management of
climate-related risks in the future as we recognise this is an ongoing
process. Our approach going forward will be informed by our 2021
process and activities, any further guidance published by TCFD and
recognised best corporate practice. In 2022 we will look to undertake
more workshops, engaging key functions and in some cases different
individuals, to continuously refine and mature our understanding
across our operating geographies and business functions.
Through our membership and involvement in the activities of
industry-led organisations, such as the Business Services Association,
Supply Chain Sustainability School and Institute of Environmental
Management and Assessment, combined with regular client
dialogue, we will continue to engage with our supply chain,
clients and wider stakeholders on opportunities to take climate
action, manage climate risks and grasp opportunities, potentially
involving them in future climate risks and opportunities workshops.
Furthermore, through our new Sustainable Procurement Charter
we will engage with our supply chain to incentivise action and
help manage climate risks through Scope 3 carbon emissions
measurement and management.
In considering our climate risks and opportunities we have considered
short-term risks between 0-3 years in line with how we assess our
principal risks and viability statement. Medium-term risks are between
3-6 years, in line with our medium-term contracts. Long-term risks
are between 6-30 years, in line with our longer-term contracts, our
Group Environment Strategy, and the climate plans, visions and
commitments of the governments we serve.
Strategy
We recognise that the climate and wider environmental emergencies
present significant risks to society and the planet. We are committed
to supporting our clients to meet net zero by 2050 and meeting net
zero in our own assets and leases by 2030.
Climate-related risks and opportunities
Climate-related risks have the potential to impact Serco over the
short, medium, and long term. We face potential physical risks
including extreme weather events as well as transition risks resulting
from the transition to a lower carbon economy, including the cost of
transitioning products and services to lower emission options.
As an outsourcing organisation operating across multiple sectors
and geographies, the ways in which climate change may impact our
own and our customers’ assets (where we deliver the majority of our
services) and their requirements is hugely diverse. Following our
Divisional workshops, we identified risks and opportunities which
could be material to Serco at the Group level, see Summary of
material risks opposite.
Wider management functions throughout the organisation also have
climate-related roles and responsibilities. For example, our HSE
network supports delivery of environmental strategy, climate-related
targets and builds competence on climate-related issues, and our
Procurement function launched a Sustainable Procurement Charter in
2021 and during 2022 plan to support a more refined measurement
of Scope 3 carbon emissions in our supply chain. Our HSE network
and Green Ambassador network help deliver strategy, progress
against targets and support action at the local level, delivering
cultural change. We will continue to embed climate-related roles
and responsibilities throughout our functions and operations during
2022. For example, ensuring climate-related risk considerations are
further embedded in financial and commercial planning. Collectively,
this management and leadership focus will help Serco to better
understand its exposure to climate-related risks, build strategic
resilience to these risks and take advantage of opportunities.
Strengthening the link between our climate-related
targets and remuneration
In 2021 we incorporated an ESG scorecard into the annual bonus and
Long-Term Incentive Plan (“LTIP"), weighted at 15%. The environment
element focuses on significant improvement in our understanding,
management, and disclosure of Serco’s environmental risks per our
environmental strategy, informed by environmental performance, risk
mitigation and external agency ratings, which include the assessment
of performance against our climate-related targets and objectives.
As our climate risk and opportunity reporting matures, the
Remuneration Committee will continue to refine our approach and
ensure the climate-related elements of our ESG scorecard remain
adequate and represent best practice for our sector and operations.
The Remuneration Committee is considering how climate-related
elements feature in future ESG scorecards.
Further information is available in our Remuneration Report, on
pages 139 to 170.
Risk management
In our 2020 Corporate Responsibility Report we disclosed some
examples of initial climate-related risks and opportunities identified
and committed to review these in more depth in 2021. We have now
conducted a detailed assessment using our risk management lifecycle
framework. Further information is available in Risk Management and
Principal Risks and Uncertainties, see pages 92 to 94 and 95 to 104
respectively. We do not consider climate risk as a standalone principal
risk, instead we embed it as a cross-cutting scenario under several of
our principal risks.
Identifying, assessing, and managing climate-related risks
and opportunities
A number of climate risks and opportunities workshops were
undertaken using the following process:
1. External advisers reviewed Serco operations and previous
work undertaken before generating an initial list of climate
risks and opportunities that could impact Serco, aligned to
the TCFD risk and opportunity categories.
2. Workshops were facilitated with key stakeholders in each
Serco geographical region, including a range of core sector
and business function representatives. We obtained a wide
range of perspectives on climate-related risks and
opportunities, including impacts from historic events,
opinions on future change, and perceived risk materiality.
The workshops also allowed us the opportunity to build
support across the business for increasing awareness of
climate change and competency, which will help to further
mature our response to TCFD requirements going forward.
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How we are managing this
risk / the action we are
taking
Time horizon
This risk is principally managed
through our catastrophic incident
principal risk.
Short-medium.
Regular insights from external
advisers on climate analytics
and scenario analysis will help
prioritise and inform site-specific
risks and ensure focus in contract/
location specific risk registers,
environmental aspect and impact
registers and business continuity
planning, taking into account
contractual mitigations where
the risk of damage to assets
and infrastructure sits with our
customers or is covered via
contractual protection, such as
force majeure clauses.
We operate across multiple
sectors and geographies and
the type and severity of extreme
weather events varies by region.
These events have the potential
to disrupt our ability to deliver
on our contractual obligations
by disrupting our service
provision or damaging assets and
infrastructure.
This could result in repair costs,
adaptation investments and
potential reductions in revenue
from the inability to provide
services.
Summary of material risks
Risk
Category Description
Acute
Physical risk
Increased severity
of extreme
weather events
such as heatwaves,
hurricanes, and
floods
Transition risk
Introduction of
and increases in
carbon taxes and
levies
Energy
Short-medium
Carbon taxes to date have
remained relatively low but are
expected to increase substantially
in line with global government
commitments to meet the 2015
Paris Agreement. Serco could
be materially impacted by the
implementation of carbon taxes
due to:
– An increase in energy, fuel and
associated operating costs.
– Indirect carbon taxes which
are passed to us through our
supply chain.
Monitoring of policy and tax
changes across our operating
geographies and understanding
where costs will be borne by
Serco or a pass through cost to
customers.
Where we control electricity
contracts, we are looking to
transition across to green energy
tariffs where possible. We also
support clients/landlords with
renewable generation projects
where applicable.
We are seeking to move away from
fossil fuel use in our fleets where
we can, by transitioning to hybrid
and electric vehicles in a number
of areas.
Our sustainable procurement
charter will focus on measuring
and managing carbon within our
supply chain and we are seeking to
influence suppliers to take positive
steps toward measuring carbon
and setting net zero targets.
Scenario analysis
In 2021 we undertook scenario analysis assisted by an external climate analytics advisory firm. This is a vital step in helping us to understand
how climate risks and opportunities may evolve under certain situations, helping us to assess and improve our climate resilience. Climate
scenarios are used to demonstrate a range of pathways and possible emission trajectories over the remainder of the century, and the impact
these could have on global temperature increases compared to pre-industrial levels. These trajectories are based on the different rates of
decarbonisation of the world economy and will impact how physical and transition risks manifest. We selected publicly available climate
scenarios, see Scenarios considered below, sourced from the International Energy Agency (“IEA") and the Intergovernmental Panel on
Climate Change (“IPCC") to help reach plausible outcomes.
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Scenarios considered and high-level assumptions
Warming trajectory
by 2100
1.5˚C
Transition scenarios (“IEA")
Physical scenarios (“IPCC")
IEA Net Zero Emissions (“NZE")
This scenario assumes a rapid transition as
available technologies are deployed quickly and
governments cooperate.
Not considered.
<2˚C
2-3˚C
IEA Sustainable Development Scenario (“SDS")
This scenario assumes a steady, orderly transition
as all current net zero pledges are achieved in
full and there are extensive efforts to realise near-
term emissions reductions.
IPCC Shared Socioeconomic Pathways (“SSP") 1-2.6.
This scenario assumes there are low challenges to
climate mitigation and adaption and there is a
societal shift to sustainable lifestyles and inequality is
lessened globally.
IEA Announce Pledges Scenario (“APS") / IEA
Stated Policies Scenario (“STEPS")
These scenarios consider current government
net zero pledges but are more conservative,
assuming that not all will be met.
IPCC SSP 2-4.5. This scenario assumes medium
challenges to mitigation and adaptation. Institutions
make slow progress in achieving sustainable
development goals and environmental systems
continue to experience degradation and the shift to
sustainable lifestyles is slow.
4˚C
Not considered.
IPCC SSP 5-8.5. This scenario places greater emphasis
on competitive markets, innovation and participatory
societies to produce rapid technological progress
toward sustainable development. Globalisation and the
exploitation of fossil fuels continue.
Impact pathway approach
We have modelled impacts for the following material risks based
on future operations remaining similar to current sectors and
geographies. We have used a range of internal business data and
analytics:
Extreme weather events
Understanding the potential financial impacts of extreme weather
events to Serco’s operations, including the damage to assets, facilities
and sites where we operate and the long-term impact of weather
patterns.
Carbon taxes and levies
The impact of carbon taxes and levies across the geographies in
which Serco operates.
We have used impact pathways in our scenario analysis, see
Impact pathway approach below, as a first step in quantifying
the financial impacts of climate change. This approach displays the
logical steps from event to financial impact, helping to identify
the types of business impacts and develop a narrative, facilitating
the development of calculation logic which underpins our
scenario analysis.
Impact pathway approach
Event
Outcome
Business impact
Financial impact
The physical or transition
climate-related risk or
opportunity events that Serco
may be exposed to.
The possible direct
consequences of the climate-
related risk happening. The
outcome could be to clients,
staff, operations, buildings, or
the business itself.
The business impact is the
consequential impact of the
climate-risk event on business
activities.
The financial consequences to
the business of the climate-
related risk event happening
(eg lost revenue, higher
operating costs).
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and approach:
– We have used IPCC scenarios for physical risks.
– Contracts and sites selected were:
– based on vulnerability to extreme weather, longer-term
contracts and sites with vulnerable people in our care
(ie hospitals and prisons); and
– spread across our Divisions (6 Middle East, 10 Americas,
24 UK & Europe and 12 Asia Pacific) and sectors (8 Citizen
Services, 11 Defence, 5 Health, 13 Justice & Immigration,
6 Transport and 9 Corporate sites).
– Impact on buildings, contents and business downtime was
assessed using Serco insurance data, and it was noted that
customers will often have insurance.
Extreme weather events
We considered financial impacts from reduced revenue, as a result
of disruption to operations caused by extreme weather, and also
asset damage and increased costs as a result of physical destruction
and damage of Serco / client assets leading to difficulties in fulfilling
contractual obligations.
52 sites were selected for modelling using a risk-based approach
consulted on with external stakeholders. These sites represent
approximately 10% of Serco’s operating locations and c. 26% of our
2020 annual revenue. Information from these sites was uploaded
by a climate analytics firm into their ‘ClimateScore global climate
risk model’ which returns the magnitude and frequency of extreme
weather-related hazards, as well as the expected damage and loss
from flood and wind events, for a given value of a property.
Impacts from a business-as-usual emissions scenario resulting in a >4˚
temperature increase include:
– Sites along the East coast and South-East of the United States
(“US”) experiencing a large increase in rainfall and storms.
Implications for Serco would be operational impacts / supply
chain delays and downtime due to disruption.
– Middle East sites will experience more days of extreme heat and
require increased overheads to ensure sites are kept cool
through air conditioning. Reduced productivity from employees
given high temperatures, disrupting operations and increasing
costs. This will be particularly prevalent for sites where
operations take place outdoors. We could face difficulty
recruiting / retaining staff in locations where temperatures are
increasing due to impacts on wellbeing and increased living
costs associated with air conditioning.
– In Australia and UK, increased days of extreme heat will impact
our employees but also people in our care, with hospitals and
Justice & Immigration sites requiring appropriate cooling
infrastructure and business continuity planning required should
equipment fail or not be sufficient to support the comfort
conditions required.
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Carbon tax and levies key
assumptions:
– The IEA’s projected energy carbon
pricing for each scenario to 2050 are
used for all sectors.
– Scope 1 & 2 carbon emissions in
2030, 2040 and 2050 are projected
using Serco’s internal carbon
emissions reduction targets (38%,
69% and 100% respectively), in line
with the Paris agreement of net zero
by 2050.
ESG Impact and Integrity continued
Next steps
To achieve a greater understanding of the risks posed and the vulnerability of Serco/client
sites and operating locations, we plan to undertake future analysis, potentially expanding the
number of sites reviewed via an external climate analytics firm, working in partnership with
clients and drawing upon their insights, intelligence and climate mitigation and adaptation
planning to build collective climate resilience.
Our scenario analysis has identified potential future risks and costs relating to extreme
weather events under various scenarios and we intend to review the force majeure and
business interruption / downtime elements in current and future contracts to understand the
impacts on Serco and clients in order to mature our collective resilience to climate impacts.
Based on this initial modelling and analysis we do not perceive substantial financial impacts
across the Group as a whole given that the hazards will impact at different times across our
geographies / operating locations and clients will often share a proportion of the risks and
liabilities on their sites and assets, such as through insurance and under contractual provisions
such as force majeure type clauses.
Carbon taxes and levies
We considered the financial impact of future carbon pricing. Carbon taxes and levies to
date have remained relatively low but are expected to substantially increase in line with
government commitments to meet the 2015 Paris Agreement. Major commitments to fast
track the transition to a lower carbon economy were agreed by major economies at the
United Nations (“UN”) Conference of Parties (“COP26”).
We consider the following financial impacts to be the most significant:
Reduced revenue as a result of:
– Operational costs which could increase as a result of carbon costs being passed down
the value chain. This could result in Serco’s increasing prices making Serco less
competitive.
– An increase in the complexity of contractual arrangements to understand and agree
with customers on the party that will be liable to bear the costs of a carbon tax.
Increased costs as a result of:
– Cost of carbon tax and levies to the business for energy and fuel use in cases where
these cannot be passed on to customers.
– Indirect carbon taxes which are passed to the Serco through its supply chain.
– Early retirement of assets or investment to reduce asset emissions.
– Retrofitting/replacement costs to transition to lower emission fuels.
Next steps
Our scenario analysis has identified potential future risks and costs relating to carbon pricing
under various scenarios and we intend to understand further where the liability will lie in
current and future contracts and where significant costs could arise in our supply chain. We
will mitigate these risks by continuing to implement our Group environment strategy and net
zero planning in partnership with clients to transition away from fuel and energy sources which
will attract future carbon taxes and levies.
We recognise that scenario analysis and modelling is subject to limitations, for example the
physical climate risks can be unpredictable and carbon price forecasts are subject to many
contributing factors which will change over time. Our modelling uses many fixed assumptions
which are also subject to change (for example, our carbon targets and reporting scope may
change following review in 2022). As we mature our scenario analysis, we will explore ways in
which to move from a more qualitative narrative-based approach in explaining the potential
range of climate change implications, to a more quantitative-based approach, improving and
refining our data and modelling techniques to help illustrate potential pathways. This will
support us in further integrating scenarios in our business, strategy, and financial planning.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Metrics and targets
We have set a range of metrics and targets in our Group environmental strategy against our themes of Carbon and Climate, Resource
Efficiency and Environmental Protection. The climate-related metric categories are outlined below:
Climate-related metric categories
Metric category
Green House Gas (“GHG")
emissions
Absolute Scope 1, 2 & 3
emissions
Unit of
measure
tCO2e
Metric
Group targets set
and reported?
Absolute Scope 1, 2 & 3
emissions (market based)
Yes1
Example linkage to
identified risks and
opportunities
Impact of carbon taxes
and levies
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Emissions intensity
tCO2e per full time
equivalent (“FTE")
and £m revenue
Scope 1 & 2 emissions
per FTE and £m revenue
(market based)
No, reported as an
indicator1 and considering
for future reporting, for
example business travel
tCO2e per FTE
Impact of carbon taxes
and levies
Climate-related risk
Proportion of real assets
exposed to 1:100 and 1:200
climate related hazards*
%
Proportion of sites where
Serco operates with
medium to high risk of
flooding
No, reported as an
indicator2 for sites
selected for modelling
and to be expanded in
the future
Increased severity of
extreme weather events
Climate-related risk
Impact of carbon taxes and
levies
£GBP
Climate-related opportunity
Transition to renewable
electricity
% and Megawatt
hour (“MWh”)
Climate-related opportunity
Transition to greener fleet
Climate-related opportunity
ISO Management System
certification
%
%
Climate-related opportunity
Board level and workforce
competence
Number
Climate-related taxes/
levies included in annual
electricity and gas costs
% and MWh of electricity
consumption sourced
from green tariffs and/
or energy attribute
certificates
% of vehicles by fuel type
No, reported as an
indicator2
Impact of carbon taxes
and levies
No, reported as indicator2,
targets to be considered
in the environment
strategy refresh in 2022
Impact of carbon taxes
and levies
No, reported as indicator2,
targets to be considered
in the environment
strategy refresh in 2022
Impact of carbon taxes
and levies
% of operations covered
by relevant ISO certified
management systems
No, reported as indicator2,
targets to be considered
in the environment
strategy refresh in 2022
Contract risk
No, targets to be
considered in the
environment strategy
refresh in 2022
Upskilling to support
transition to lower
emission products and
services
Executive/Non-Executive
membership of Chapter
Zero. Training provided
to key functions and
groups/professional body
membership/staff with
environment/climate
focused roles
* We cannot yet report fully on this proportion but can report on 52 sites sampled and will seek to refine in future.
1 See ESG performance and disclosure data, pages 69 to 76.
2 See ESG performance and disclosure data in our full ESG Report 2021.
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ESG Impact and Integrity continued
In 2019-20 we formulated and set Scope 1 and 2 carbon emission
reduction targets that aligned with net zero 2050 using the most
appropriate Science Based Targets initiative (“SBTi”) methodology
at the time, based on the guidance of an SBTi-approved consultancy.
Our current targets are based on Scope 2 market-based approach for
electricity emissions and are in line with a scenario between 1.5˚C and
2˚C and net zero by 2050:
– Scope 1 & 2 absolute reduction of 22% vs 2019 baseline by 2025
(market-based Scope 2). 2021 performance = 20.7% reduction
achieved.
– Scope 1 & 2 absolute reduction of 38% vs 2019 baseline by 2030
(market-based Scope 2).
– Scope 3 business travel reduction of 25% vs 2019 baseline by
2021 (set pre-Covid). 2021 performance = 55% reduction (Covid
impacted significantly on the reductions achieved).
As well as the above targets, we have set a 2030 target for net zero
in our own assets, leases and business travel, given we have more
control and influence over these elements and do not rely as much on
our customers’ approach to net zero and the upgrade of their owned/
leased assets which we operate and include in our current carbon
reporting boundary.
We recognise the need to review our climate targets in 2022 based
on:
– Serco/customer carbon reporting boundary review;
– increased ambition and urgency from the governments we
serve;
– the latest climate science, which shows near-term action is a
necessity;
– the need for inclusion of all relevant Scope 3 categories (in
particular supply chain) in our net zero targets; and
– updated guidance and methodologies on net zero target setting
for the sectors in which we operate.
As part of this process, we will acquire external support in reviewing
our targets and will consider the merits of formally signing up
to the new SBTi net-zero standard or other mechanisms to gain
independent validation of our net zero targets. For our performance
against current targets, see ESG performance and disclosure data,
pages 69 to 76 and in our full ESG Report 2021.
Serco has previously commissioned an independent analysis of
our Scope 3 emissions by an SBTi-approved consultant. Based
on our operations, a relevance test was undertaken against all
Scope 3 reporting categories in line with the GHG protocol corporate
reporting standard. See Carbon reporting scopes and reporting
categories material to Serco, below, for the Scope 3 categories
material to our operations and sectors. The total Scope 3 footprint is
reported in our ESG report however, as per all organisations,
we are refining our approach to supply chain carbon measurement
for category 1 (purchased goods and services) and category 2
(capital goods). The relevance of our Scope 3 reporting categories is
scrutinized annually as part of our wider ISO 14064 verification audit
on our carbon reporting processes and data. For a further breakdown
of our Scope 1, 2 and 3 carbon emissions, see ESG performance
and disclosure data on pages 69 to 76 here and in our full
ESG Report 2021.
Carbon reporting scopes and reporting categories material to Serco
CH4
CO2
HFCs
N2O
Scope 3
Indirect
Scope 1
Direct
Scope 3
Indirect
PFCs
Scope 2
Indirect
Leased
assets
Company
facilities
Electricity, steam,
heating & cooling
for own use
Employee
commuting
Business
travel
Transportation
& distribution
Processing of
sold products
Company
vehicles
SF6
Purchased goods
& services
Capital
goods
Fuel & energy
related
Transportation
& distribution
Waste from
operations
Use of sold
products
End-of-life treatment
of sold products
Leased assets
Franchises
Investments
Upstream activities
Reporting company
Downstream activities
Relevant, Scope 1 & 2
reporting mandatory
Reported
Relevant, Scope 3
Reported
Relevant, Scope 3
Not reported/
needs refined
Scope 3, not relevant
for sector/operations
Not reported
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ESG performance and disclosure data 2021
Here we share select datapoints from our ESG performance and
disclosure data. Other indicators relating to governance feature
elsewhere in this Annual Report.
The complete Serco ESG Databook 2021 can be found in our full
ESG Report 2021 and as a standalone Excel file, both of which are
available at www.serco.com/esg
Trend key:
Positive
Steady
Negative
New/non-indicator
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Indicator/disclosure
Our people
Safe operations
Employee engagement:
Safety
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
Avg. score
–
77
79
79
78
-1
-1.3
1, 2
Lost Time Incident (“LTI”)
Frequency Rate
Per 1m hours
worked
LTI Severity Rate
Avg. days
Major Incident
Frequency Rate (“MIFR”)
Per 1m hours
worked
Work-related fatalities
Number
Fatal Incident Frequency
Rate
Per 1m hours
worked
Physical Assault
Frequency Rate
Serious Physical Assault
Frequency Rate
Prosecutions
Fines paid
Improvement/
enforcement notices
Per 1m hours
worked
Per 1m hours
worked
Number
£’000
4.41
23.74
0.45
0
5.30
27.80
0.50
1
5.69
24.05
0.39
0
4.48
25.96
0.41
0
4.13
22.00
-0.35
-3.96
-7.7
-15.2
0.36
-0.05
-11.7
0
0
0
–
–
0.00
0.01
0.00
0.00
0.00
8.96
13.13
8.09
7.61
6.24
-1.37
-18.0
0.87
0
116
1.32
0.63
0.62
0.56
-0.06
-9.7
0
0
2
0
0
1
0
0
2
0
0
2
0
0
0
–
–
–
Number
1
3
4
5
6
7
8
Performance commentary and Group strategic targets
We ended 2021 positively against all targets except LTI Severity Rate. However, lost working days reduced by approx. 1,000 days, with Serco also working nearly
20 million more hours than in 2020. This positive performance is reflected in the LTI Frequency Rate (“LTIFR”) which sits at 4.13 for 2021 against a target of 4.5
and previous year performance of 4.48 in 2020 and 5.69 in 2019. Considerable focus has been given to reducing LTIs across the Group with particular attention to
reducing incidents relating to physical assaults (also reduced compared to 2020), helping the Group to remain within target. Further analysis of our MIFR and LTIFR
performance is included in the Key Performance Indicators section of the Serco Annual Report and Accounts 2021.
Minor revisions have been made to strategic safety thresholds (targets) in light of performance in 2020 and 2021. All targets are for the year 2022, representing
% improvement against a 2019 baseline. Lost Time Incident Frequency Rate: 19%. Major Incident Frequency Rate: 12%. Lost Time Incident Severity Rate: 24%.
Physical Assault Frequency Rate: 25%. Serious Physical Assault Frequency Rate: 9%.
Employee health and wellbeing
Employee engagement:
Wellbeing
Absence due to
sickness
Avg. score
Avg. days per
employee
–
7.4
–
5.6
64
6.3
76
6.7
76
6.6
0
–
1, 2, 9
-0.1
-1.5
Performance commentary and Group strategic targets
In 2019 we set ourselves the target of a year-on-year absence reduction of 5%. Once adjusted for Covid-19 absence, we achieved a reduction of 0.1 days per
employee in 2021. Although this is short of our target, the pandemic has impacted healthcare availability since 2020 and we experienced a c. 29% increase in
colleagues taking time off for operations and recovery in 2021 compared to 2020. We view maintaining absence levels for 2021 as a positive achievement given
the broader spectrum of Covid-19 impacts on our employees. Meanwhile, we have continued to increase and sharpen our focus on the health and wellbeing of all
colleagues.
Absence due to sickness: Annual target: 5% reduction on previous year.
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ESG Impact and Integrity continued
Trend key:
Positive
Steady
Negative
New/non-indicator
Indicator/disclosure
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
Employee engagement and development
Employee engagement
Avg. score
New hires
Staff turnover
Redundancies
Employees covered by
collective bargaining
agreements
%
%
Number
–
28.5
31.1
973
67
30.2
27.3
405
71
34.8
27.3
402
73
34.2
23.3
519
70
36.6
31.5
356
-3
2.4
8.2
-4.1
7.1
35.2
-163
-31.4
1
%
–
–
–
58.8
59.1
0.3
0.5
10
Performance commentary and Group strategic targets
Employee engagement
We have sustained high levels of engagement at all levels measured in our survey, achieving an overall score of 70 with a response rate of 68%. Although
marginally lower than our 2020 results (overall score: 73; response rate: 71%): our scores 2019-2021 are consistent with the return to pre-pandemic levels
experienced by employers who experienced a sharp increase in 2020, followed by a levelling out in 2021; and our 2021 response rate is arguably very strong given
the level of significant change to our organisation in the last year, including acquisitions and Contract exits, and also represents the same number of respondents
to the nearest 1,000 as in 2020.
Employee engagement: Target 2023: >72
Staff turnover
Like many organisations, our turnover dropped sharply during the early months of the Covid-19 pandemic as employees around the world prioritised job security.
The external labour market remains particularly buoyant for candidates, with all our significant workforce locations experiencing sharp increases in vacancies
during 2021, predominately in the second half. The UK market is the most significant example, with over 1.2m vacancies nationally by December 2021 – a
doubling on the same period in 2020, notwithstanding the furloughing impact. This is giving candidates and Serco talent greater opportunities in the job market.
Our overall turnover also includes contract exits, of which the Dubai Metro accounted for more than 1,000 leavers alone. Our voluntary attrition rate has been
declining since October 2021 as we start to see the benefits of our retention plans.
Diverse workforce and inclusive workplace 11
Employee engagement:
Diversity & Inclusion
Serco Group plc Board
% women
Executive Committee
and direct reports
% women
All other employee levels
% women
Global Leadership Team
% women
Age profile –
Serco Group plc Board
16-24
25-40
41-54
55-64
65+
Undisclosed
Avg. score
–
74
79
78.5
79
0.5
0.6
1, 2
%
%
%
%
%
%
%
%
%
%
30.0
33.3
33.3
33.3
44.4
11.1
33.2
21.7
31.8
29.4
27.3
26.1
-1.2
-4.4
12, 13
41.6
42.4
43.1
43.0
44.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
29.1
32.2
–
–
–
–
–
–
0.0
0.0
22.2
44.4
22.2
11.1
1.7
3.1
–
–
–
–
–
–
4.0
10.6
14
–
–
–
–
–
–
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Indicator/disclosure
Ethnicity -
Serco Group plc Board
Asian
Black
Mixed
Other
White
Undisclosed
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
%
%
%
%
%
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11.1
0
0
0
88.9
0
–
–
–
–
–
–
–
–
–
–
–
–
Performance commentary and Group strategic targets
We continue to make steady progress against all of our Diversity and Inclusion metrics with ongoing focus on women in Leadership, UK Gender Pay Gap, ethnicity
data disclosure and disability representation. We have improved our overall women in leadership representation by more than 2% since 2020; our ethnicity data
disclosure gap has reduced to 28% across the UK; and colleagues identifying as having a disability or health condition has increased to 5%. Each of these steps
forward indicate a positive shift that can be sustained over time, making a real difference to the diversity of our workforce for the future.
Global Leadership Team – % women: Target 2023: 35%
Notes
1 Employee engagement data is from our annual employee engagement survey, Viewpoint. Pre-2018 engagement scores calculated as %, not average score. For 2017
data, see our 2020 report.
2. Represents scores per one or more specific questions within our employee engagement survey.
3. Restatement of 2020 from 4.43 to 4.48. Increase of eight LTIs due to late reporting/categorisation of 2020 incidents.
4. Restatement of 2020 from 25.44 to 25.96. Increase of 448 working days lost due to additional incidents combined with late update of ongoing incidents at the time of
reporting.
5. 2018: Asia Pacific – Hong Kong. Male employee (Traffic Officer II) fell while ascending steps of a crew bus, tragically suffering a fatal head injury.
6. Restatement of 2020 from 0.67 to 0.62. Reduction of two incidents due to incorrect categorisation in 2020 following review of Assault categorisation in Serco Asia Pacific
in 2021.
7. 2017 data relates to Dubai Metro: February 2017 (500,000AED) public hazard relating to escalator maintenance by a sub-contractor – fine paid by sub-contractor
and revised work instructions implemented; August 2017 (100,000AED) unsafe lifting operations relating to glass movement in station – revised work instructions
implemented.
8. 2017: Enforcement notice, Asylum Support Services (COMPASS) contract, UK. 2018: Improvement notice, Environmental Services contract, Hammersmith & Fulham,
UK; enforcement notice, HMP Dovegate, UK. 2019: Improvement notice, Environmental Services contract, Breckland, UK. 2020: Notices of contravention, Environmental
Services contracts, Bexley and Sandwell, UK. 2021: Improvement notice, Asylum Accommodation and Support Services Contract, UK; Notice of contravention, Prisoner
Escorting and Custody Services contract, UK.
9. Targeted wellbeing questions not introduced into employee engagement survey until 2019.
10. Includes estimates for parts of our UK business. Also includes employees covered by national pay bargaining arrangements for Local Government in our UK Citizen
Services business, and employees who are members of Workers Councils in Serco Europe. In both the United Arab Emirates and Kingdom of Saudi Arabia there remain
no independent trade unions and while there are trade union organisations in both Qatar and Iraq, there is no direct link to our employees there. For all our employees
in the region, however, we encourage direct employee engagement through: regular briefings from management to colleagues on a wide range of operational
and employment matters; adherence to our global standards, as outlined in the Serco Management System and associated internal policies, such as the Employee
Wellbeing Divisional Standard Operating Procedure – which provides a number of routes for individuals to raise any workplace issues or concerns; and continued use of
our annual employee engagement survey where individuals share their views with us on an entirely confidential basis. Separate to our internal mechanisms, employees
are also able to raise workplace concerns via the relevant labour offices in each country.
11. Diverse workforce data is representative only of employees for whom relevant data is available.
12. Restatement of 2020 from 24.7 to 27.3 due to erroneous omission of the three female members of the Serco Inc. (Serco Americas) Board of Directors.
13. 2021: Based on data submitted to the UK Hampton-Alexander Review in October 2021. Current projection for 2022, based on actual and anticipated numbers, is 28%.
14. Includes Board and Executive Committee members and direct reports to the Executive Committee.
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ESG Impact and Integrity continued
Trend key:
Positive
Steady
Negative
New/non-indicator
Indicator/disclosure
Our world
Contributing to communities
Serco Foundation –
grants made
Serco People Fund –
seed funding
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
£ Number
£ Number
–
–
–
–
–
–
597,520
201,519 -396,001
-66.3
– 4,000,000
–
–
Performance commentary and Group strategic targets
The Serco Foundation continues to make grants to a range of causes in line with its charitable purpose. A specific focus was driven in 2020 due to Covid-19, which
saw an increase in grants made. For more information, see www.sercofoundation.org. The Serco People Fund, a new independent charity providing support to
current and retired colleagues and close family members facing extraordinary financial challenges, launched in 2021 with £4m seed funding from Serco. For more
information, see www.sercopeoplefund.org
Managing our environmental impact and supporting customer environmental objectives
Carbon dioxide
equivalent (Scope 1+2)
market-based Scope 2
– Total Group
Total UK
Total Rest of world
Carbon dioxide
equivalent (Scope 1+2)
location-based Scope 2
– Total Group
Total UK
Total Rest of world
Combustion of fuels and
operation of facilities
(Scope 1) – Total Group
(all fuel types)
UK (all fuel types)
Rest of world (all fuel
types)
Gas (Scope 1) –
Total Group
UK
Rest of world
Petrol (Scope 1) –
Total Group
UK
Rest of world
Diesel (Scope 1) –
Total Group
UK
Rest of world
Burning oil / Kerosene
(Scope 1) – Total Group
UK
Rest of world
LPG / Propane (Scope 1)
– Total Group
UK
Rest of world
72
Serco Group plc
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
1
2
2
2
2
3
4
5
6
244,918
257,086
262,996
225,456
208,639
-16,817
184,388
188,601
189,490
156,814
161,283
4,469
-7.5
2.8
60,530
68,485
73,506
68,642
47,356
-21,286
-31.0
253,655
259,814
266,894
237,759
218,018
-19,741
193,125
191,329
193,387
169,117
170,604
1,487
-8.3
0.9
60,530
68,485
73,507
68,642
47,414
-21,228
-30.9
174,289
176,254
181,413
165,259
165,417
158
169,225
170,022
175,681
156,379
159,562
3,183
0.1
2.0
5,064
6,233
5,732
8,881
5,855
-3,025
-34.1
25,680
26,381
26,658
19,931
22,168
25,256
25,449
25,887
18,787
20,544
424
932
771
1,145
1,624
2,862
4,067
3,546
4,283
612
612
663
487
2,250
3,455
2,883
3,796
3,725
1,645
2,080
2,237
1,757
479
-558
1,158
-1,716
23,965
24,633
27,369
28,665
27,824
-841
23,592
24,237
27,082
27,864
26,793
-1,071
287
801
1,031
230
373
463
462
1
396
384
384
0
1,098
1,098
0
834
834
0
2,198
1,672
2,131
2,063
182
221
339
213
2,016
1,451
1,792
1,850
928
928
0
435
151
284
94
94
0
-1,628
-62
-1,566
11.2
9.4
41.8
-13.0
237.9
-45.2
-2.9
-3.8
28.8
11.3
11.3
–
-78.9
-29.1
-84.7
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Indicator/disclosure
Gas oil (Scope 1) –
Total Group
UK
Rest of world
Specialist marine fuel
(Scope 1) – Total Group
UK
Rest of world
Biomass (Scope 1) –
Total Group
UK
Rest of world
Fugitive emissions
(Scope 1) – Total Group
UK
Rest of world
Scope 2 – Grid electricity
purchased for own use
(market-based) –
Total Group
UK
Rest of world
Scope 2 – Grid electricity
purchased for own use
(location-based) –
Total Group
UK
Rest of world
Scope 2 – Grid electricity
purchased for own use
(location-based)
Energy consumption
used to calculate Scope
1+2 emissions –
Total Group
UK
Rest of world
Headcount intensity
(Scope 1+2) market-
based Scope 2
Headcount intensity
(Scope 1+2) location-
based Scope 2
Financial intensity
(Scope 1+2) market-
based Scope 2
Financial intensity
(Scope 1+2) location-
based Scope 2
Total fuel consumption,
non-renewable sources
Total fuel consumption,
renewable sources
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
3,199
3,199
0
2,973
2,973
0
1,899
1,899
0
1,421
1,421
0
1,228
1,228
0
-193
-193
0
115,652
115,883
118,480
107,011
107,877
866
115,652
115,883
118,480
106,350
107,877
1,527
-13.6
-13.6
–
0.8
1.4
-661
-100.0
0
–
–
–
270
270
–
0
–
–
–
263
263
–
0
–
–
–
661
46
46
0
0
57
57
0
232
232
–
1,005
1,173
377
628
336
837
11
11
0
168
-41
209
70,629
80,832
81,583
60,197
43,222
-16,975
15,163
18,580
13,809
436
1,721
1,285
55,466
62,252
67,774
59,761
41,501
-18,260
79,366
83,560
85,481
72,500
52,601
-19,899
23,900
21,308
17,707
12,739
11,042
-1,697
55,466
62,252
67,774
59,761
41,559
-18,202
23.9
23.9
–
16.7
-10.9
33.3
-28.2
294.7
-30.6
-27.4
-13.3
-30.5
MWh
151,708
167,375
170,493
152,154
130,575
-21,579
-14.2
MWh
873,287
891,931
918,740
827,475
811,377
-16,098
MWh
763,268
772,007
792,086
693,610
709,939
16,329
-1.9
2.4
MWh
110,019
119,924
126,654
133,865
101,438
-32,427
-24.2
tCO2e/FTE
5.36
5.74
5.78
4.53
3.21
-1.32
-29.2
tCO2e/FTE
5.56
5.80
5.87
4.78
3.35
-1.43
-29.8
tCO2e/per £m
revenue
tCO2e/per £m
revenue
82.99
90.62
80.97
58.04
47.15
-10.88
-18.7
85.96
91.58
82.17
61.20
49.27
-11.93
-19.5
MWh
721,579
724,556
748,247
672,314
677,387
5,073
0.8
MWh
0
0
0
3,007
3,754
747
24.8
Annual Report and Accounts 2021
Serco Group plc
73
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
ESG Impact and Integrity continued
ESG Impact and Integrity continued
Trend key:
Positive
Steady
Negative
New/non-indicator
Indicator/disclosure
Total purchased/
acquired electricity
consumption, non-
renewable sources
Total purchased/
acquired electricity
consumption, renewable
sources
Total transport fleet fuel
consumption
Total transport fleet fuel
consumption
Basic screening, Quantis
Scope 3 evaluator
% of overall Scope 1, 2
and 3, Quantis evaluator
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
MWh
151,708
167,375
170,493
108,533
88,593
-19,940
-18.4
MWh
0
0
0
43,621
41,983
-1,639
-3.8
tCO2e
142,479
144,583
149,395
139,959
139,429
-530
-0.4
MWh
–
–
581,616
545,381
545,452
71
0.01
tCO2e 1,208,078 1,258,528
981,237
867,559 1,745,238
877,679
101.2
7, 8
%
82.7
82.9
78.7
78.5
Total water consumption
Megalitres
Non-hazardous waste
generated
Carbon Disclosure
Project
Operations covered by
certified ISO 14001 EMS
Operations covered by
certified ISO 50001
EnMS
Prosecutions
Fines paid
Enforcement notices
Metric
tonnes
Score
%
%
Number
£’000
Number
–
–
B
–
–
0
0
0
–
–
C
–
–
0
0
0
–
–
C
–
–
0
0
0
–
–
B
34
15
0
0
0
88.9
0.86
11,049
B
40
11
0
0
0
10.4
13.2
–
–
–
6
-4
0
0
0
–
–
–
17.6
9, 10
-26.7
11, 12
–
–
–
Performance commentary and Group strategic targets
We remain on course to meet our net-zero targets for Scope 1 and (market-based) Scope 2, achieving a 7.5% reduction against 2020 and a 20.7% reduction against our 2019
baseline year. Our targets are under review in 2022 as we look to further develop our net zero transition pathway and account for updated sector-specific net zero guidance
from the Science Based Target Initiative. Our environmental reporting was expanded in 2021 to provide more granularity at Divisional level and also to include additional
performance metrics, such as waste, water, energy and climate risk.
Carbon dioxide equivalent (Scope 1+2) market-based Scope 2 – Total Group: Target 2025: 22% reduction against 2019 baseline; Target 2030: 38% reduction against
2019 baseline.
Notes
Our reporting year for greenhouse gas (GHG) emissions is one quarter behind our financial year, namely 1 October 2020 to 30 September 2021.
See our Environmental Basis of Reporting Supplement for information on our reporting boundary and methodologies, available at www.serco.com/esg/environment
We quantify and report to ISO 14064-3:2019, using an operational control approach to define our organisational boundary.
We report all material emission sources for which we consider ourselves responsible and have set our materiality threshold at 5%.
For examples of energy efficiency action as required by Streamlined Energy and Carbon Reporting, see our full ESG Report 2021, available at www.serco.com/esg
1. Improved precision in reporting actual electricity consumption data in Serco Asia Pacific (Justice & Immigration Business Unit) has reduced estimation. Covid-19 impacts
and loss of energy intensive Contracts (UK Leisure business) have also contributed significantly to reductions.
2. Restatement of 2017 per notes 3-6.
3. Restatement of 2017 from 164,663 to 169,225; proportion of UK data erroneously included in rest of world. Restatement of 2018 from 169,759 to 170,022; proportion of UK
data erroneously included in rest of world.
4. Restatement of 2017 from 9,626 to 5,064; proportion of UK data erroneously included in rest of world. Restatement of 2018 from 6,496 to 6,233; proportion of UK data
erroneously included in rest of world.
5. Restatement of 2017 from 19,526 to 23,592; proportion of UK data erroneously included in rest of world.
6. Restatement of 2017 from 4,440 to 373; proportion of UK data erroneously included in rest of world.
74
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Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section 7. For many companies, more than 80% of their GHG impacts occur outside of their own operations. Quantifying and reporting these Scope 3 ‘value chain’ emissions can
be time/resource intensive, yet it is a growing stakeholder expectation and globally recognised as good practice. The Quantis Scope 3 evaluator tool was developed by
the World Resource Institute / World Business Council for Sustainable Development’s GHG Protocol. It is designed as a first-step screening process to encourage the
measurement and reporting of value chain GHG emissions.
8. Increase in 2021 attributed to: (a) access to spend data by category now across all Divisions - Serco Americas no longer estimated; significant increased spend in a UK
Government Contract.
9. EMS = Environment Management System.
10. All Contracts are required to comply with our SMS and environmental requirements, which align with ISO 14001. 40% of Contracts where we have management control and
report environment data externally are covered by Serco certified ISO 14001 management systems. At many of our contracts we also operate within customer ISO 14001
certified management systems.
11. EnMS = Energy Management System.
12. A smaller proportion of our contracts have certified ISO 50001 management systems, as only our more energy-intensive operations benefit from this standard.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Indicator/disclosure
Our shareholders
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
Living our Values, behaving with integrity and respecting human rights
Employee engagement:
Our Values
Employee engagement:
Business Integrity
Upheld cases of corrupt
behaviour
Upheld cases of human
rights violations
(incl. indigenous)
Upheld cases of
anti-competitive
behaviour
Substantiated
complaints from data
protection regulators
Total number of
significant data breaches
Speak Up cases
Case rate per 100
employees
Anonymous cases
Investigated
Avg. score
Avg. score
Number
Number
Number
Number
Number
–
–
0
0
0
–
–
81
73
0
0
0
–
–
82
75
0
0
0
–
–
69
75
0
0
0
–
–
67
76
0
0
0
3
2
-2
-2.9
1, 2, 3
1.3
1, 2
1
0
0
0
–
–
–
–
–
–
–
Number
1.22
1.08
0.95
1.29
1.14
-0.15
-11.6
%
%
Average days to close
Number
Cases closed within
three months
Closed case
substantiation rate
Corrective action taken
Disciplinary action
taken against one
or more individuals
involved in a case
Dismissal of one or
more individuals
involved in a case
Agent payments
Total Group
Lobbying payments
Total Group
%
%
%
%
%
£'000
£'000
25
90
59
89
43
42
9
5
–
–
35
94
69
75
40
54
18
11
–
–
52
92
60
89
37
52
62
91
44
84
24
40
59
97
44
86
22
39
-3
6
0
2
-2
-1.0
-4.8
6.6
–
2.4
-8.3
-2.5
24
26
21
-5
-19.2
10
8
–
–
8
9
1
12.5
1,275
2,223
948
74.4
230
274
44
19.1
4
5
6
7
8
9
Annual Report and Accounts 2021
Serco Group plc
75
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
ESG Impact and Integrity continued
Trend key:
Positive
Steady
Negative
New/non-indicator
Performance commentary and Group strategic targets
Values and integrity
Our Values remain strong and are regularly referenced across the Ethics and Compliance (EC) programme. Viewpoint is our main barometer with four questions reflecting EC
matters scoring well. We continue to review the data to identify specific contract and divisional actions.
As custodians that care for personal data held on our Customers, suppliers, business partners, employees and data subjects, Serco have put in place a privacy framework,
integrated into our management system and Customer requirements. Our vision is to meet Serco’s Data Protection/Privacy requirements, a risk-based approach is taken,
supported by policies, standards and processes adapted by our operating culture and to ensure we operate and continuously improve our business in a compliant, ethical and
responsible way.
Speak Up
Whilst case numbers were slightly up in 2021, the case rate per 100 employees came down 12% on 2020 (1.29). Although a decline, it is an improvement over 2018 and 2019,
reflecting better employee awareness of Speak Up and willingness to use it. Covid-19 impacts contributed to the higher rate in 2020. Focus on investigations has seen an
improvement in time to close cases.
The decrease in substantiation rates raises questions on the quality of issues being raised, which is being reviewed. No potential material issues were substantiated.
Agents and Lobbyists
Considerable work has been completed to ensure agents and significant third parties and joint venture partners have been subject to an appropriate level of due diligence.
Whilst the spend on agents and lobbyists saw slight increases, they are in line with activities undertaken and being monitored.
Indicator/disclosure
Units
2017
2018
2019
2020
2021
vs. 2021
Var %
Notes
Trend
2020
Effective governance and managed risk
Annual SMS self-
assessments completed
Annual Compliance
Assurance plan delivered
Annual Audit plan
delivered
Notes
%
%
%
–
–
–
–
–
–
95.7
99.7
98.9
-0.8
-0.8
94.3
85.2
95.0
100.0
94.6
100.0
9.8
5.4
11.5
5.7
1. Employee engagement data is from our annual employee engagement survey, Viewpoint. Pre-2018 engagement scores calculated as %, not average score. For 2017 data,
see our 2020 report.
2. Represents scores per one or more specific questions within our employee engagement survey.
3. Each year we refine our survey questions to examine areas of strength and raise the bar for future improvement. The significant shift in score from 2019-2020 is due to a
new, targeted focus on the recognition of Values-led behaviour.
4. Perth IDC Contract: case upheld no further action or recommendations for Serco. Villawood IDC Contract: case ongoing. Auckland South Corrections Facility Contract –
case upheld and recommendations for Serco complied with.
5. European business, reported to Belgian regulator. HMP Lowdham Grange, reported to UK Information Commissioner’s Office. No action was taken by the Regulators.
6. Restatement of 2020 from 1.30 to 1.29. Reduction due to small increase in 2020 headcount as UK & Europe Corporate omitted.
7. Restatement of 2020 from 47 to 44. Reduction due to late update of 48 cases.
8. Restatement of 2020 from 89 to 84. Reduction due to late update of 48 cases.
9. Restatement of 2020 from 39 to 40. Increase due to late update of 48 cases.
10. Restatement of 2020 from 25 to 26. Increase due to late update of 48 cases.
General notes on Serco ESG performance and disclosure data:
Data is for the total Group unless otherwise stated.
Data excludes joint ventures to enable like-for-like comparison.
‘UK’ includes Serco Business Services and Group functions unless otherwise stated.
Data is as reported internally in January 2022 unless otherwise stated. Additional data may arise after this date. Where this occurs, numbers will
be restated in the following year’s report.
Unless otherwise stated, where like-for-like historic data is not available, we have marked –.
Current performance levels are in line with benchmark targets for the geographies and markets in which we operate. However, we continue to
try to improve them.
All targets identified are Group targets. Other targets are managed at local and regional levels.
76
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Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Finance Review
Finance Review
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Revenue of £4,425m grew by 14% which
included 10% organic growth. Underlying
Trading profit up by 40% to £229m with
margin improving by 100bps to 5.2%. Strong
Free Cash Flow of £190m with Adjusted Net
Debt of £178m and covenant leverage below
the target range at 0.7x; after cash acquisitions
of around £250m made during the year.
Recommend a final dividend of 1.61p and
new share buyback programme of £90m.
Nigel Crossley
Group Chief Financial Officer
Non-underlying
items
£m
–
4.5
4.5
–
–
–
–
4.5
–
4.5
156.2
160.7
For the year ended
31 December 2021
Revenue
Cost of sales
Gross profit
Administrative expenses
Other exceptional
operating items
Other expenses
Share of profits in joint
ventures and associates,
net of interest and tax
Profit before interest
and tax
Margin
Net finance costs
Profit before tax
Tax (charge)/credit
Effective tax rate
Profit for the period
Minority interest
Earnings per share –
basic (pence)
Earnings per share –
diluted (pence)
Underlying
£m
4,424.6
(3,961.1)
463.5
(243.3)
–
–
8.7
228.9
5.2%
(24.0)
204.9
(48.6)
23.7%
156.3
–
12.78
12.56
Trading
£m
4,424.6
(3,956.6)
468.0
(243.3)
–
–
8.7
233.4
5.3%
(24.0)
209.4
107.6
(51.4%)
317.0
–
25.93
25.48
Amortisation
and impairment
of intangibles
arising on
acquisition
£m
Statutory pre-
exceptional
£m
Exceptional
items
£m
–
–
–
–
(1.2)
–
–
(1.2)
–
(1.2)
(0.2)
(1.4)
–
–
–
–
–
(16.0)
4,424.6
(3,956.6)
468.0
(243.3)
–
(16.0)
–
8.7
(16.0)
–
(16.0)
4.3
(11.7)
217.4
4.9%
(24.0)
193.4
111.9
(57.9%)
305.3
–
24.97
24.54
Statutory
£m
4,424.6
(3,956.6)
468.0
(243.3)
(1.2)
(16.0)
8.7
216.2
4.9%
(24.0)
192.2
111.7
(58.1%)
303.9
–
24.86
24.43
Annual Report and Accounts 2021
Serco Group plc
77
Financial StatementsCorporate GovernanceContents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Finance Review continued
Non-underlying
items
£m
–
12.6
12.6
–
–
–
–
–
12.6
–
12.6
10.5
23.1
For the year ended
31 December 2020
Revenue
Cost of sales
Gross profit
Administrative expenses
Exceptional profit on
disposal of subsidiaries
and operations
Other exceptional
operating items
Other expenses
Share of profits in joint
ventures and associates,
net of interest and tax
Profit before interest
and tax
Margin
Net finance costs
Profit before tax
Tax (charge)/credit
Effective tax rate
Profit for the period
Minority interest
Earnings per share – basic
(pence)
Earnings per share –
diluted (pence)
Underlying
£m
3,884.8
(3,514.4)
370.4
(220.0)
–
–
–
12.7
163.1
4.2%
(25.9)
137.2
(31.2)
22.7%
106.0
0.2
8.61
8.43
Trading
£m
3,884.8
(3,501.8)
383.0
(220.0)
–
–
–
12.7
175.7
4.5%
(25.9)
149.8
(20.7)
13.8%
129.1
0.2
10.49
10.28
Amortisation
and impairment
of intangibles
arising on
acquisition
£m
Statutory-pre
exceptional
£m
Exceptional
items
£m
–
–
–
–
–
–
(9.0)
–
(9.0)
–
(9.0)
1.8
(7.2)
3,884.8
(3,501.8)
383.0
(220.0)
–
–
(9.0)
–
–
–
–
11.0
1.5
–
Statutory
£m
3,884.8
(3,501.8)
383.0
(220.0)
11.0
1.5
(9.0)
12.7
–
12.7
166.7
4.3%
(25.9)
140.8
(18.9)
13.4%
121.9
0.2
9.90
9.70
12.5
–
12.5
(0.4)
12.1
179.2
4.6%
(25.9)
153.3
(19.3)
12.6%
134.0
0.2
10.89
10.67
Alternative Performance Measures (APMs) and other related definitions
Overview
APMs used by the Group are reviewed below to provide a definition and reconciliation from each non-IFRS APM to its IFRS equivalent, and to
explain the purpose and usefulness of each APM.
In general, APMs are presented externally to meet investors’ requirements for further clarity and transparency of the Group’s financial
performance. The APMs are also used internally in the management of our business performance, budgeting and forecasting, and for
determining Executive Directors’ remuneration and that of other Management throughout the business.
APMs are non-IFRS measures. Where additional revenue is being included in an APM, this reflects revenues presented elsewhere within the
reported financial information, except where amounts are recalculated to reflect constant currency. Where items of profits or costs are being
excluded in an APM, these are included elsewhere in our reported financial information as they represent actual profits or costs of the Group,
except where amounts are recalculated to reflect constant currency. As a result, APMs allow investors and other readers to review different
kinds of revenue, profits and costs and should not be used in isolation. Other commentary within the Strategic Report, including the other
sections of this Finance Review, as well as the Consolidated Financial Statements and their accompanying notes, should be referred to in order
to fully appreciate all the factors that affect our business. We strongly encourage readers not to rely on any single financial measure, but to
carefully review our reporting in its entirety.
The methodology applied to calculating the APMs has not changed since 31 December 2020.
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Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group’s Consolidated Income Statement on page 191, reflects revenue translated at the average
exchange rates for the period. In order to provide a comparable movement on the previous year’s results, reported revenue is recalculated
by translating non-Sterling values for the year to 31 December 2021 into Sterling at the average exchange rates for the year ended
31 December 2020.
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For the year ended 31 December
Reported revenue at constant currency
Foreign exchange differences
Reported revenue at reported currency
2021
£m
4,497.6
(73.0)
4,424.6
Organic Revenue at constant currency
Reported revenue may include revenue generated by businesses acquired during a particular year from the date of acquisition and/or
generated by businesses sold during a particular year up to the date of disposal. In order to provide a comparable movement which ignores
the effect of both acquisitions and disposals, Organic Revenue at constant currency is recalculated by excluding the impact of any relevant
acquisitions or disposals.
There are three acquisitions excluded for the calculation of Organic Revenue in the year to 31 December 2021 being the acquisitions of
Facilities First Australia Holdings Pty Ltd, Whitney, Bradley & Brown, Inc and Mercurius Finance S.A.. The acquisitions completed on 4 January
2021, 27 April 2021 and 30 June 2021 respectively.
The Group also disposed of its interest in its Viapath joint venture on 31 May 2020, however no adjustment is required to Organic Revenue
since the joint venture results were accounted for on an equity accounting basis and therefore had no impact on Group revenue.
Organic Revenue growth is calculated by comparing the current year Organic Revenue at constant currency exchange rates with the prior year
Organic Revenue at reported currency exchange rates.
For the year ended 31 December
Organic Revenue at constant currency
Foreign exchange differences
Organic Revenue at reported currency
Impact of any relevant acquisitions or disposals
Reported revenue at reported currency
For the year ended 31 December
Organic Revenue at reported currency
Impact of any relevant acquisitions or disposals
Reported revenue at reported currency
2021
£m
4,277.1
(68.3)
4,208.8
215.8
4,424.6
2020
£m
3,884.8
–
3,884.8
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group’s Consolidated Income Statement on page 191, excludes the Group’s share of revenue from joint
ventures and associates, with Serco’s share of profits in joint ventures and associates (net of interest and tax) consolidated within reported
operating profit as a single line in the Consolidated Income Statement. The alternative measure includes the share of joint ventures and
associates for the benefit of reflecting the overall change in scale of the Group’s ongoing operations, which is particularly relevant for
evaluating Serco’s presence in market sectors such as Defence and Transport. The alternative measure allows the performance of the joint
venture and associate operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the
post-tax result.
For the year ended 31 December
Revenue plus share of joint ventures and associates
Exclude share of revenue from joint ventures and associates
Reported revenue
2021
£m
4,663.0
(238.4)
4,424.6
2020
£m
4,249.9
(365.1)
3,884.8
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Finance Review continued
Alternative profit measures
For the year ended 31 December
Underlying Trading Profit
Non-underlying items:
OCP charges and releases
Other Contract & Balance Sheet Review adjustments and one-time items
Total non-underlying items
Trading Profit
Operating exceptional items
Amortisation and impairment of intangibles arising on acquisition
Operating profit
2021
£m
228.9
1.3
3.2
4.5
233.4
(1.2)
(16.0)
216.2
2020
£m
163.1
5.8
6.8
12.6
175.7
12.5
(9.0)
179.2
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur and to remove the impact
of historical issues. UTP therefore provides a measure of the underlying performance of the business in the current year.
Charges and releases on all Onerous Contract Provisions (OCPs) that arose during the 2014 Contract & Balance Sheet Review are excluded
from UTP in the current and prior years. Charges associated with the creation of new OCPs identified are included within UTP to the extent
that they are not considered sufficiently material to require separate disclosure on an individual basis. During the period, net charges on new
and existing OCPs of £1.3m (2020: £5.6m) were taken within UTP. OCPs reflect the future multiple year cost of delivering onerous contracts
and do not reflect only the current cost of operating the contract in the latest individual year. It should be noted that, as for operating profit,
UTP benefits from OCP utilisation of £0.3m in 2021 (2020: £1.8m).
Revisions to accounting estimates and judgements which arose during the 2014 Contract & Balance Sheet Review are reported alongside
other one-time items where the impact of an individual item is material. Items recorded within this category during 2021 are a settlement
received relating to a judgement made as part of the 2014 Contract & Balance Sheet Review and releases of provisions held against possible
contractual requirements that could have required settlement by the Group, but which have now exceeded the period during which such a
claim against the Group can be made.
Both OCP adjustments and other Contract & Balance Sheet Review and one-time items are identified and separated from the APM in order to
give clarity of the underlying performance of the Group and to separately disclose the progress made on these items.
Underlying trading margin is calculated as UTP divided by statutory revenue.
The non-underlying column in the summary income statement on page 77 includes the tax impact of the above items and tax items that,
in themselves, are considered to be non-underlying. Further detail of such items is provided in the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative measure to operating profit, as shown on the Group’s Consolidated Income Statement on
page 191, by making two adjustments.
First, Trading Profit excludes exceptional items, being those considered material and outside of the normal operating practices of the Group
to be suitable for separate presentation and detailed explanation.
Second, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on judgements
about the value and economic life of assets that, in the case of items such as customer relationships, would not be capitalised in normal
operating practice.
UTP at constant currency
UTP disclosed above has been translated at the average foreign exchange rates for the year. In order to provide a comparable movement on
the previous year’s results, UTP is recalculated by translating non-Sterling values for the year to 31 December 2021 into Sterling at the average
exchange rate for the year ended 31 December 2020.
For the year ended 31 December
Underlying Trading Profit at constant currency
Foreign exchange differences
Underlying Trading Profit at reported currency
2021
£m
235.8
(6.9)
228.9
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Alternative Earnings Per Share (EPS) measures
For the year ended 31 December
Underlying EPS, basic
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition
EPS before exceptional items, basic
Impact of exceptional items
Reported EPS, basic
For the year ended 31 December
Underlying EPS, diluted
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition
EPS before exceptional items, diluted
Impact of exceptional items
Reported EPS, diluted
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pence
12.78
12.19
24.97
(0.11)
24.86
2021
pence
12.56
11.98
24.54
(0.11)
24.43
2020
pence
8.61
1.29
9.90
0.99
10.89
2020
pence
8.43
1.27
9.70
0.97
10.67
Underlying EPS
Reflecting the same adjustments made to operating profit to calculate UTP as described above and including the related tax effects of each
adjustment and any other non-underlying tax adjustments as described in the tax charge section below, an alternative measure of EPS is
presented. This aids consistency with historical results and enables performance to be evaluated before the unusual or one-time effects
described above. The full reconciliation between statutory EPS and Underlying EPS is provided in the summary income statements on
page 77.
EPS before exceptional items
EPS, as shown on the Group’s Consolidated Income Statement on page 191, includes exceptional items charged or credited to the income
statement in the year. EPS before exceptional items aids consistency with historical operating performance.
Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect cash flow from operating activities before exceptional items, which is the measure
shown on the Consolidated Cash Flow Statement on page 195. This IFRS measure is adjusted to include dividends we receive from joint
ventures and associates and exclude net interest paid, the capital element of lease payments and net capital expenditure on tangible and
intangible asset purchases.
For the year ended 31 December
Free Cash Flow
Exclude dividends from joint ventures and associates
Exclude net interest paid
Exclude capitalised finance costs paid
Exclude capital element of lease repayments
Exclude proceeds received from exercise of share options
Exclude purchase of own shares to satisfy share awards
Exclude purchase of intangible and tangible assets net of proceeds from disposal
Cash flow from operating activities before exceptional items
Exceptional operating cash flows
Cash flow from operating activities
2021
£m
189.5
(13.5)
24.3
0.6
111.3
(0.2)
20.3
25.1
357.4
(7.5)
349.9
2020
£m
134.9
(19.8)
24.6
0.9
100.8
(0.1)
–
29.2
270.5
(2.0)
268.5
UTP cash conversion
FCF as defined above, includes interest and tax cash flows. In order to calculate an appropriate cash conversion metric equivalent to UTP,
Trading Cash Flow is derived from FCF by excluding tax and interest items. UTP cash conversion therefore provides a measure of the efficiency
of the business in terms of converting profit into cash before taking account of the impact of interest, tax and exceptional items.
Annual Report and Accounts 2021
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For the year ended 31 December
Free Cash Flow
Add back:
Tax paid
Non-cash R&D expenditure
Net interest paid
Capitalised finance costs paid
Trading Cash Flow
Underlying Trading Profit
Underlying Trading Profit cash conversion
2021
£m
189.5
42.1
–
24.3
0.6
256.5
228.9
112%
2020
£m
134.9
35.9
0.1
24.6
0.9
196.4
163.1
120%
Net Debt and Adjusted Net Debt
We present an alternative measure to bring together the various funding sources that are included on the Group’s Consolidated Balance
Sheet on page 194 and in the accompanying notes. Net Debt is a measure to reflect the net indebtedness of the Group and includes all cash
and cash equivalents and any debt or debt-like items, including any derivatives entered into in order to manage risk exposures on these items.
Net Debt includes all lease liabilities, whilst Adjusted Net Debt is derived from Net Debt by excluding liabilities associated with leases.
The Adjusted Net Debt measure was introduced because it more closely aligns to the Consolidated Total Net Borrowings measure used for
the Group’s debt covenants, which is prepared under accounting standards applicable prior to the adoption of IFRS 16 Leases. Principally
as a result of the Asylum Accommodation and Support Services Contract (AASC), the Group has entered into a significant number of leases
which contain a termination option. The use of Adjusted Net Debt removes the volatility that would result from estimations of lease periods
and the recognition of liabilities associated with such leases where the Group has the right to cancel the lease and hence the corresponding
obligation. Though the intention is not to exercise the options to cancel the leases, it is available, unlike other debt obligations.
For the year ended 31 December
Cash and cash equivalents
Loans payable
Lease liabilities
Derivatives relating to Net Debt
Net Debt
Add back: Lease liabilities
Adjusted Net Debt
2021
£m
198.4
(377.0)
(430.3)
0.6
(608.3)
430.3
(178.0)
2020
£m
335.7
(388.8)
(402.6)
(4.7)
(460.4)
402.6
(57.8)
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure to assess the efficiency of the resources used by the Group and is one of the metrics used to determine the performance
and remuneration of the Executive Directors. ROIC is calculated based on UTP and Trading Profit using the Group’s Consolidated Income
Statement for the year and a two-point average of the opening and closing balance sheets. The composition of Invested Capital and
calculation of ROIC are summarised in the table below.
Invested Capital excludes right of use assets recognised under IFRS 16 Leases. This is because the Invested Capital of the Group are those
items within which resources are, or have been, committed, which is not the case for many leases which would previously have been classified
as operating leases under IAS 17 Leases where termination options exist and commitments for expenditure are in future years.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section For the year ended 31 December
ROIC excluding right of use assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interest in joint ventures and associates
Contract assets, trade and other receivables
Current assets
Inventory
Contract assets, trade and other receivables
Total invested capital assets
Current liabilities
Contract liabilities, trade and other payables
Non-current liabilities
Contract liabilities, trade and other payables
Total invested capital liabilities
Invested Capital
Two-point average of opening and closing Invested Capital
Trading Profit
ROIC%
Underlying Trading Profit
Underlying ROIC%
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£m
852.7
144.0
55.5
17.6
16.2
19.6
624.7
2020
£m
669.6
80.6
54.2
19.2
25.3
21.4
609.6
1,730.3
1,479.9
(587.3)
(55.9)
(643.2)
1,087.1
967.0
233.4
24.1%
228.9
23.7%
(576.2)
(56.9)
(633.1)
846.8
855.5
175.7
20.5%
163.1
19.1%
Overview of financial performance
Revenue
Reported revenue increased by 13.9% in the year to £4,424.6m (2020: £3,884.8m), a 15.8% increase at constant currency. Organic revenue
growth at constant currency was 10.1%. This is in line with the trading update issued on 15 November 2021 where revenue was expected to be
£4.4bn for the year ended 31 December 2021.
Commentary on the revenue performance of the Group is provided in the Chief Executive’s Review and the Divisional Reviews sections.
Trading Profit
Trading Profit for the year was £233.4m (2020: £175.7m).
Commentary on the trading performance of the Group is provided in the Chief Executive’s Review and the Divisional Reviews sections.
Underlying Trading Profit
UTP was £228.9m (2020: £163.1m), up 40.3%. At constant currency, UTP was £235.8m, up 44.6%. This is in line with the trading update issued on
15 November 2021 where UTP was expected to be not less than £225m for the year ended 31 December 2021.
Commentary on the underlying performance of the Group is provided in the Chief Executive’s Review and the Divisional Reviews sections.
Excluded from UTP were net releases from OCPs of £1.3m (2020: net releases of £5.8m) following the detailed reassessment undertaken as
part of the budgeting process. Also excluded from UTP were net releases and additional profits of £3.2m (2020: net releases and additional
profits of £6.8m) relating to items identified during the 2014 Contract & Balance Sheet Review and other one-time items.
The tax impact of items in UTP and other non-underlying tax items is discussed in the tax section of this Finance Review.
Joint ventures and associates – share of results
In 2021, the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited (AWEML), prior to
the handing back of the AWEML contract on 30 June 2021, and Merseyrail Services Holding Company Limited (Merseyrail), with dividends
received of £13.5m (2020: £15.5m) and £nil (2020: £1.5m) respectively. Total revenues generated by these businesses were £638.7m (2020:
£1,106.8m) and £161.0m (2020: £150.7m), respectively.
As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services
provided by the Group through AWEML on 30 June 2021.
Annual Report and Accounts 2021
Serco Group plc
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Finance Review continued
As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been
awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD)
Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.
While the revenues and individual line items are not consolidated in the Group’s Consolidated Income Statement, summary financial
performance measures for the Group’s proportion of the aggregate of all joint ventures and associates are set out below for information
purposes.
For the year ended 31 December
Revenue
Operating profit
Net finance cost
Income tax charge
Profit after tax
Dividends received from joint ventures and associates
2021
£m
238.4
11.5
(0.1)
(2.7)
8.7
13.5
2020
£m
365.1
15.4
–
(2.7)
12.7
19.8
The change in revenue and profits on the prior year is primarily due to the exit from the AWEML contract. Merseyrail continued to make losses
during 2021, however these have reduced against prior year due to the lifting of Covid-19 measures resulting in increased passenger volumes.
Dividends received have also reduced due to the exit from the AWEML contract as well as the sale of Viapath which contributed £1.0m in
dividends during 2020. Northern Rail and Hong Kong Parking also contributed £1.0m and £0.8m respectively in 2020. As Merseyrail recorded a
loss in 2021, no dividends were received during the year. Future dividends received from the joint ventures are likely to take into consideration
operating performance as a result of the pandemic and a requirement to maintain an appropriate level of cash resources within the entities
given the impact of Covid-19, though most notably in respect of the Merseyrail joint venture.
Exceptional items
Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either
by virtue of size or nature. These require separate disclosure on the face of the income statement to assist in the understanding of the
performance of the Group. In 2021, the total exceptional charge for the year net of tax was £1.4m (2020: gain of £12.1m).
The Group completed the acquisition of Facilities First Australia Holdings Pty Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB) in 2021.
The combined transaction and implementation costs incurred during the year ended 31 December 2021 of £4.9m have been treated as
exceptional costs in line with the Group’s accounting policy and the treatment of similar costs during the year ended 31 December 2020.
During 2021, the Group sold an investment recording a profit of £4.2m which was treated as exceptional in line with the Group’s accounting
policy.
The Group has recorded an additional £0.6m property provision related to the onerous lease of a building to cover the expected loss
until March 2025. The building was vacated following the strategy review completed in 2014 and therefore the associated cost treated as
exceptional.
Exceptional costs of £1.3m were recorded in 2020 associated with the UK Government review and the programme of Corporate Renewal.
No such costs were incurred in the current financial year.
Exceptional tax
Exceptional tax for the period was a tax charge of £0.2m (2020: charge of £0.4m) which arises on exceptional items within operating profit.
The tax charge on exceptional costs has been increased as an element of the exceptional costs associated with the WBB acquisition were not
allowable for tax. This is partially offset by previously unrecognised capital losses in Australia that were utilised against the gain arising on the
sale of an investment reducing the charge.
Finance costs and investment revenue
Net finance costs were £24.0m (2020: £25.9m) and net interest paid was £24.3m (2020: £24.6m).
Investment revenue of £2.4m (2020: £1.9m) consists primarily of interest accruing on net retirement benefit assets of £1.1m (2020: £1.2m),
dividends received of £0.6m (2020: £0.4m) and interest receivable of £0.6m (2020: £0.2m).
The finance costs of £26.4m (2020: £27.8m) include interest incurred on the US private placement loan notes and the revolving credit facility of
£15.6m (2020: £15.3m) and lease interest payable of £7.8m (2020: £9.5m) as well as other financing related costs including the impact of foreign
exchange on financing activities.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Tax
Tax charge
Underlying tax
In 2021 we recognised a tax charge of £48.6m on underlying trading profits after net finance costs. The effective tax rate (23.7%) is slightly
higher than in 2020 (22.7%). The increase compared with 2020, is primarily due to the recognition of deferred tax assets in the UK as discussed
below. This means that utilisation of losses brought forward to offset current year profits does not reduce the tax rate in 2021 as it did in the
prior year. Further, there has been a reduction in profits made by our joint ventures and associates whose post tax profits are included in
our profit before tax. This is partially offset by a reduction in our expenses not deductible for tax together with the impact of movements in
provisions as part of our regular reassessment of tax exposures across the Group.
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Pre-exceptional tax
A tax credit of £111.9m (2020: £18.9m charge) on pre-exceptional profits has been recognised which includes an underlying tax charge of
£48.6m, the tax impact of amortisation of intangibles arising on acquisition of £4.3m credit and a £156.2m credit on non-underlying items.
Of the £156.2m credit on non-underlying items, £157.2m relates to UK deferred tax. £144.8m of this credit arises from the recognition of
deferred tax assets in relation to the Group’s UK operations which have not previously been recognised as assets. It is now considered that the
UK business has returned to sustainable profitability, and there is sufficient certainty of future taxable profits against which these deductions
can be utilised to enable the recognition of an increased deferred tax asset. £10.8m of the UK deferred tax credit relates to the revaluation
of the deferred tax asset at 1 January 2021, following the announcement in the UK Budget earlier this year that the tax rate in the UK is to
increase in 2023 to 25% and £1.6m of the UK deferred tax credit relates to non-underlying movements in the deferred tax asset where the
value of the asset has been impacted by factors outside of current period trading, such as changes in future forecasts. The remaining £1.0m
non-underlying tax charge relates to tax on non-underlying income that is taxable.
The tax rate on profits before exceptional items at (57.9)% is lower than the UK standard corporation tax rate of 19.0%. This is mainly due to
the impact of non-underlying tax items noted above (reducing rate by 81.3%) together with a reduction in provisions held for uncertain tax
positions (reducing rate by 1.4%). As part of our regular reassessment of tax exposures across the Group, we have concluded that certain
provisions are no longer likely to lead to an outflow of tax. The impact of this is only partially offset by higher statutory rates of tax being
suffered on overseas profits (increasing rate by 5.8%).
Exceptional tax
Analysis of exceptional tax is provided within the exceptional items section above.
Deferred tax assets
At 31 December 2021 there is a net deferred tax asset of £174.0m (2020: £56.3m). This consists of a deferred tax asset of £214.3m
(31 December 2020: £83.2m) and a deferred tax liability of £40.3m (31 December 2020: £26.9m).
A £162.8m UK tax asset is recognised on the Group’s balance sheet at 31 December 2021 (31 December 2020: £30.6m) on the basis that
improved performance in the underlying UK business indicates a sustained return to profitability which would enable accumulated tax losses
within the UK to be utilised. The return to profitability is as a result of onerous contracts ending and new profitable long-term contracts being
entered into, as well as a significant reduction in exceptional restructuring spend following the strategy review in 2015, which also reduced the
level of overhead spend within the UK business.
Taxes paid
Net corporate income tax of £42.1m was paid during the year, relating primarily to our operations in AsPac (£24.4m), North America (£17.6m),
Middle East (£1.2m), UK (£0.8m refund) and Europe (£0.3m net refund). The refund in the UK consists of £1.2m which was paid to HMRC net
of £2.0m which was received in the period from our joint ventures and associates for 2019 losses sold to them. The refund in Europe relates to
various overpayments of tax instalment payments which were refunded during the year.
The amount of tax paid (£42.1m) differs from the tax credit in the period (£111.9m) mainly due to the impact of the additional deferred tax
assets recognised during the period. In addition, taxes paid/received from Tax Authorities can arise in later periods to the associated tax
charge/credit, and there is a time lag on receipts of cash from joint ventures and associates for losses transferred to them resulting in a net
tax inflow.
Total tax contribution
Our tax strategy of paying the appropriate amount of tax as determined by local legislation in the countries in which we operate, means that
we pay a variety of taxes across the globe. We have shown below the cash taxes that we have paid across our regional markets.
In total during 2021, Serco globally contributed £815.2m of tax to government in the jurisdictions in which we operate.
Annual Report and Accounts 2021
Serco Group plc
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Finance Review continued
Taxes by category
For the year ended 31 December 2021
Corporation tax
VAT and similar
People taxes
Other taxes
Total
Taxes by region
For the year ended 31 December 2021
UK & Europe
AsPac
Americas
Middle East
Total
Taxes
borne
£m
44.0
8.5
133.7
6.8
193.0
Taxes
borne
£m
90.0
49.0
51.3
2.7
193.0
Taxes
collected
£m
–
246.6
375.5
0.1
622.2
Taxes
collected
£m
335.4
184.7
98.7
3.4
622.2
Total
£m
44.0
255.1
509.2
6.9
815.2
Total
£m
425.4
233.7
150.0
6.1
815.2
Corporation tax, which is the only cost to be separately disclosed in our Consolidated Financial Statements, is only one element of our tax
contribution. For every £1 of corporate tax paid directly by the Group (tax borne), we bear a further £3.39 in other business taxes. The largest
proportion of these is in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect £3.22 on behalf of national governments (taxes collected). This amount is directly
impacted by the people that we employ and the sales that we make.
Dividends and share buyback
During the year to 31 December 2021, the Group has paid dividends of £26.5m (2020: £nil) in respect of the final dividend for the year ended
31 December 2020 and the interim dividend in respect of the six months ended 30 June 2021. As noted in the Chief Executive’s Review, the
Board has decided to declare a final dividend of 1.61p per share in respect of the year ended 31 December 2021 (2020: 1.4p per share).
Following the successful completion of the share buyback programme during 2021, in which 30.7m shares were repurchased at an average
price of 1.32p, the Group has announced its intention to commence a further share buyback of up to £90m. Consistent with the Group’s
capital allocation policy, the objective of the programme is to provide additional returns to shareholders as well as aid the Group in meeting
its medium-term leverage targets. The buyback programme is expected to complete within 12 months with the shares either cancelled or
held in Treasury.
Share count and EPS
The weighted average number of shares for EPS purposes was 1,222.6m for the year ended 31 December 2021 (2020: 1,229.1m) and diluted
weighted average number of shares was 1,244.0m (2020: 1,254.3m).
The number of ordinary shares in issue has reduced during the year ended 31 December 2021 as a result of the Serco Share Repurchase
Programme (the Programme). At the end of 2020, the Group announced its intention to repurchase ordinary shares with a value of up to
£40m, subject to a maximum of 122,338,063 ordinary shares being purchased, during the period 4 January 2021 to 11 June 2021. Through the
Programme, the Group repurchased 30,721,849 ordinary shares for total consideration of £40.7m including fees.
On 28 June 2021, the Group announced that, of the ordinary shares repurchased and held in Treasury, 15,350,000 were transferred to the
Employee Share Ownership Trust to be used to satisfy awards granted under the Group’s share award schemes. The 15,371,849 ordinary
shares remaining in Treasury were cancelled on 28 June 2021.
Basic EPS before exceptional items was 24.97p per share (2020: 9.90p); including the impact of exceptional items, Basic EPS was 24.86p (2020:
10.89p). Basic Underlying EPS was 12.78p per share (2020: 8.61p).
Diluted EPS before exceptional items was 24.54p per share (2020: 9.70p); including the impact of exceptional items, Diluted EPS was 24.43p
(2020: 10.67p). Diluted Underlying EPS was 12.56p per share (2020: 8.43p).
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UTP of £228.9m (2020: £163.1m) converts into a trading cash inflow of £256.5m (2020: £196.4m). The improvement in 2021 trading cashflows
reflects the increase in profitability from revenue and profit growth offset by £20.3m spent on the repurchase of the Group’s own shares to
satisfy share awards. The Group has delivered a working capital inflow which is better than expected as the working capital position on the
Dubai Metro contract has unwound following its exit during the year. There also continues to be a focus on collections across the Group.
The table below shows the operating profit and Free Cash Flow (FCF) reconciled to movements in Adjusted Net Debt. FCF for the year
was an inflow of £189.5m compared to £134.9 in 2020. The improvement in FCF is largely as a result of improved trading cash inflows,
as discussed above.
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Adjusted Net Debt has increased by of £120.2m in 2021, a reconciliation of which is provided at the bottom of the following table. The
increase is due to £189.5m of free cash flow generated, offset by £234.9m of cash outflow related to acquisitions, £14.3m used to settle historic
intercompany positions at Facilities First Australia Holdings Limited Pty, £26.5m of dividend payments and £20.4m of cash paid out as part of
the Serco Share Repurchase Programme.
For the year ended 31 December
Operating profit
Remove exceptional items
Operating profit before exceptional items
Less: share of profit from joint ventures and associates
Movement in provisions
Depreciation, amortisation and impairment of property, plant and equipment and intangible assets
Depreciation and impairment of right of use assets
Other non-cash movements
Operating cash inflow before movements in working capital, exceptional items and tax
Working capital movements
Tax paid
Non-cash R&D expenditure
Cash flow from operating activities before exceptional items
Dividends from joint ventures and associates
Interest received
Interest paid
Capital element of lease repayments
Capitalised finance costs paid
Purchase of intangible and tangible assets net of proceeds from disposals
Purchase of own shares to satisfy share awards
Proceeds received from exercise of share options
Free Cash Flow
Net cash (outflow)/inflow on acquisition and disposal of subsidiaries, joint ventures and associates
Net increase in debt items on acquisition and disposal of subsidiaries, joint ventures and associates
Dividends paid to shareholders
Purchase of own shares
Movements on other investment balances
Exceptional sale of other investments
Capitalisation and amortisation of loan costs
Exceptional items
Exceptional proceeds from loans receivable
Exceptional distribution from joint venture
Cash movements on hedging instruments
Foreign exchange (loss)/gain on Adjusted Net Debt
Movement in Adjusted Net Debt
Opening Adjusted Net Debt
Closing Adjusted Net Debt
Lease liabilities
Closing Net Debt at 31 December
2021
£m
216.2
1.2
217.4
(8.7)
(7.2)
47.2
109.0
16.6
374.3
25.2
(42.1)
–
357.4
13.5
0.6
(24.9)
(111.3)
(0.6)
(25.1)
(20.3)
0.2
189.5
(234.9)
(14.3)
(26.5)
(20.4)
0.6
13.0
(0.7)
(7.5)
–
–
(16.6)
(2.4)
(120.2)
(57.8)
(178.0)
(430.3)
(608.3)
2020
£m
179.2
(12.5)
166.7
(12.7)
16.2
39.2
93.9
8.5
311.8
(5.3)
(35.9)
(0.1)
270.5
19.8
0.3
(24.9)
(100.8)
(0.9)
(29.2)
–
0.1
134.9
6.1
–
–
–
0.5
–
–
(2.0)
1.2
1.9
2.4
11.7
156.7
(214.5)
(57.8)
(402.6)
(460.4)
Annual Report and Accounts 2021
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Finance Review continued
Net Debt
As at 31 December
Cash and cash equivalents
Loans payable
Lease liabilities
Derivatives relating to Net Debt
Net Debt
Exclude lease liabilities
Adjusted Net Debt
2021
£m
198.4
(377.0)
(430.3)
0.6
(608.3)
430.3
(178.0)
2020
£m
335.7
(388.8)
(402.6)
(4.7)
(460.4)
402.6
(57.8)
Average Adjusted Net Debt as calculated on a daily basis for the year ended 31 December 2021 was £216.1m (2020: £209.2m). Peak Adjusted
Net Debt was £346.3m (2020: £355.7m).
Treasury operations and risk management
The Group’s operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign currency exchange rates,
interest rates and credit risk. The Group has a centralised Treasury function whose principal role is to ensure that adequate liquidity is available
to meet the Group’s funding requirements as they arise and that the financial risk arising from the Group’s underlying operations is effectively
identified and managed.
Treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed annually. Financial
instruments are only executed for hedging purposes and speculation is not permitted. A monthly report is provided to senior Management
outlining performance against the Treasury Policy and the Treasury function is subject to periodic internal audit review.
Liquidity and funding
As at 31 December 2021, the Group had committed funding of £629m (2020: £642m), comprising £259m of US private placement notes, a
£120m term loan facility which was fully drawn and a £250m revolving credit facility (RCF) which was undrawn in its entirety. The Group does
not engage in any external financing arrangements associated with either receivables or payables.
The Group’s RCF provides £250m of committed funding for five years from the arrangement date in December 2018. The US private
placement notes are repayable in bullet payments between 2022 and 2032.
Interest rate risk
Given the nature of the Group’s business, we have a preference for fixed rate debt to reduce the volatility of net finance costs. Our Treasury
Policy requires us to maintain a minimum proportion of fixed rate debt as a proportion of overall Adjusted Net Debt and for this proportion to
increase as the ratio of EBITDA to interest expense falls. As at 31 December 2021, £259.2m of debt was held at fixed rates and Adjusted Net
Debt was £178.0m.
Foreign exchange risk
The Group is subject to currency exposure on the translation to Sterling of its net investments in overseas subsidiaries. The Group manages
this risk where appropriate, by borrowing in the same currency as those investments. Group borrowings are predominantly denominated
in Sterling and US Dollar. The Group manages its currency flows to minimise foreign exchange risk arising on transactions denominated in
foreign currencies and uses forward contracts where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk on the amounts due from counterparties. The Group manages this
risk by adhering to counterparty exposure limits based on external credit ratings of the relevant counterparty.
Debt covenants
The principal financial covenant ratios are consistent across the private placement loan notes and revolving credit facility, with a maximum
Consolidated Total Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and minimum covenant EBITDA to net finance costs of 3.0 times,
tested semi-annually. A reconciliation of the basis of calculation is set out in the table below.
Following the refinancing in December 2018, the debt covenants were amended to include the impact of IFRS 15 Revenue from Contracts with
Customers. The covenants continue to exclude the impact of IFRS 16 Leases on the Group’s results.
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For the year ended 31 December
Operating profit before exceptional items
Remove: Amortisation and impairment of intangibles arising on acquisition
Trading Profit
Exclude: Share of joint venture post-tax profits
Include: Dividends from joint ventures
Add back: Net non-exceptional charges to covenant OCPs
Add back: Net covenant OCP utilisation
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non-acquisition
intangible assets
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non-acquisition
intangible assets held under finance leases – in accordance with IAS 17 Leases
Add back: Foreign exchange credit on investing and financing arrangements
Add back: Share based payment expense
Other covenant adjustments to EBITDA
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£m
217.4
16.0
233.4
(8.7)
13.5
1.3
(0.6)
31.2
5.0
(0.6)
15.8
6.3
2020
£m
166.7
9.0
175.7
(12.7)
19.8
4.9
(0.7)
30.2
4.3
(0.7)
11.2
(7.2)
Covenant EBITDA
296.6
224.8
Net finance costs
Exclude: Net interest receivable on retirement benefit obligations
Exclude: Movement in discount on other debtors
Exclude: Other dividends received
Exclude: Foreign exchange on investing and financing arrangements
Add back: Movement in discount on provisions
Other covenant adjustments to net finance costs resulting from IFRS 16 Leases
Covenant net finance costs
Adjusted Net Debt
Obligations under finance leases – in accordance with IAS 17 Leases
Recourse Net Debt
Exclude: Amortised capitalised finance costs, encumbered cash and other adjustments
Covenant adjustment for average FX rates
CTNB
CTNB / covenant EBITDA (not to exceed 3.5x)
Covenant EBITDA / covenant net finance costs (at least 3.0x)
24.0
1.1
0.1
0.6
(0.6)
–
(7.3)
17.9
178.0
26.5
204.5
2.9
(5.7)
201.7
0.68x
16.6x
25.9
1.2
0.1
0.4
(0.7)
(0.2)
(9.1)
17.6
57.8
24.1
81.9
(1.7)
21.3
101.5
0.45x
12.8x
Annual Report and Accounts 2021
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Net assets summary
As at 31 December
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right of use assets
Contract assets, trade receivables and other non-current assets
Deferred tax assets
Retirement benefit assets
Total non-current assets
Current assets
Inventories
Contract assets, trade receivables and other current assets
Current tax assets
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Contract liabilities, trade payables and other current liabilities
Current tax liabilities
Provisions
Lease obligations
Loans
Total current liabilities
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities
Deferred tax liabilities
Provisions
Lease obligations
Loans
Retirement benefit obligations
Total non-current liabilities
Total liabilities
Net assets
2021
£m
852.7
144.0
55.5
416.7
33.8
214.3
166.2
2020
£m
669.6
80.6
54.2
387.5
44.5
83.2
114.6
1,883.2
1,434.2
19.6
627.3
5.5
198.4
850.8
21.4
614.1
4.9
335.7
976.1
2,734.0
2,410.3
(589.3)
(17.2)
(95.6)
(126.3)
(64.9)
(893.3)
(55.9)
(40.3)
(102.0)
(304.0)
(312.1)
(18.0)
(832.3)
(585.5)
(21.6)
(62.1)
(109.3)
(89.7)
(868.2)
(57.0)
(26.9)
(115.9)
(293.3)
(299.1)
(34.9)
(827.1)
(1,725.6)
1,008.4
(1,695.3)
715.0
At 31 December 2021 the Group had net assets of £1,008.4m, a movement of £293.4m from the closing net asset position of £715.0m as at
31 December 2020. The increase in net assets is mainly due to the following movements:
– An increase in goodwill of £183.1m due to additional goodwill on the acquisitions of Facilities First Australia Holdings Limited Pty (FFA),
Whitney, Bradley & Brown, Inc (WBB) and Mercurius Finance S.A. together with an increase due to foreign exchange movements.
– An increase in other intangible assets of £63.4m due to the combined intangibles recognised on the FFA and WBB acquisitions, offset
by amortisation charged in the period.
– Deferred taxes have increased by £117.7m owing to the Group’s recognition of assets relating to historic losses in the UK. Previously,
only losses likely to be utilised over a five-year period were recognised in the UK, however given the structural change in performance
of the UK entities the majority of losses have now been recognised.
– An increase in the net retirement benefit asset of £68.5m. An increase in risk free rates and a corresponding increase in the discount
rate applied to the defined benefit obligation associated with the Group’s most significant pension scheme resulted in a decrease in
the liabilities of the scheme. The scheme’s assets also saw favourable net returns during the year.
– Cash and cash equivalents have decreased by £137.3m which includes a net exchange loss of £4.8m. In the year the Group has
generated cash inflows of £357.4m from operations before exceptionals. The net spend on tangible and intangible assets was £25.1m
and the capital element of lease repayments in the year was £111.3m. Including associated costs, the spend on shares repurchased
during the year totals £40.7m and dividends totalling £26.5m have been paid. The other significant cash outflow is the spend on
acquisitions which, inclusive of costs but net of cash received, totalled £234.9m.
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On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (FFA), for
consideration of AU Dollars $52.2m (£29.6m) in cash, subject to standard working capital and completion adjustments. The acquired net assets
included AU Dollars $3.6m (£2.1m) of cash resulting in a net cash outflow on acquisition of AU Dollars $48.6m (£27.5m). At the same time,
the Group transferred AU Dollars $25.2m (£14.3m) to allow FFA to settle existing debt and debt-like balances. FFA is a specialist provider
of cleaning, facility maintenance and management services in Australia. The operating results, assets and liabilities have been recognised
effective 4 January 2021.
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On 27 April 2021, the Group acquired 100% of the issued share capital of Whitney, Bradley & Brown, Inc (WBB) for US Dollars $300.5m
(£211.9m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included US Dollars $7.2m (£5.1m)
of cash resulting in a net cash outflow on acquisition of US Dollars $293.3m (£206.8m). The acquisition will increase the scale, breadth and
capability of Serco’s North American Defence business and will give Serco a strong platform from which to address all major segments of the
US Defence services market. The operating results, assets and liabilities have been recognised effective 27 April 2021.
On 30 June 2021, the Group acquired 100% of the issued share capital of Mercurius Finance S.A., the holding company of Clemaco Trading
N.V., Clemaco Contracting N.V. and Targets N.V. (together Clemaco), for €7.8m (£6.7m) in cash, subject to standard working capital and
completion adjustments. The acquired net assets included €7.1m (£6.1m) of cash resulting in a net cash outflow on acquisition of €0.7m
(£0.6m). Clemaco specialises in the support and maintenance of ships for the Belgian Navy, enabling Serco to provide additional value to
existing Serco and Clemaco customers and expanding the Group’s existing activities with the Belgian Navy. The operating results, assets and
liabilities have been recognised effective 30 June 2021.
Pensions
Serco’s pension schemes are in a strong funding position and show an accounting surplus before tax, of £148.2m (2020: £79.7m) on scheme
gross assets of £1.6bn and gross liabilities of £1.5bn. The opening net asset position led to a net credit within net finance costs of £1.1m
(2020: £1.2m). For the Group’s main scheme, the Serco Pension and Life Assurance Scheme (SPLAS), the purchase of a bulk annuity from an
insurer, which covers around half of all scheme members, has the effect of fully removing longevity, investment and accounting risks for those
members; the gross liability remains recognised on our balance sheet, but there is an equal and opposite insurance asset reflecting the perfect
hedge established by the annuity.
Covid-19
In 2021, the Group continued to support governments in their management of the pandemic through its immigration support, testing and
tracing services. Whilst there continues to be some negative impact within the Group’s transport, leisure, health and environmental waste
sectors, the financial performance within these is improving as the impact of the pandemic reduces, and the restrictions implemented by
governments are eased. It remains unknown whether volumes or costs within these sectors will return to pre-pandemic levels, however given
the diverse nature of the Group’s operations the financial impact is mitigated.
As noted in 2020, the Group returned all Covid-19 financial support offered by governments with the exception of the US tax deferrals which
will be repaid in line with regulations given there is no mechanism to repay early; the amount remaining to be repaid is £7.7m.
Claim for losses in respect of the 2013 share price reduction
Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of
any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant
uncertainties. The Group does not currently assess the merits as strong, especially given the legal uncertainties in such actions.
Information on other contingent liabilities can be found in Note 28 to the Consolidated Financial Statements.
Nigel Crossley
Group Chief Financial Officer
23 February 2022
Annual Report and Accounts 2021
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Risk Management
Risk Management
Managing Risk
Serco is exposed to a wide range of risks that, should they materialise,
could have a detrimental impact on our financial performance,
reputation and operational resilience. We therefore take risk
management extremely seriously and invest significant effort into
identifying and managing risks. The Board oversees the Company’s
risk management and internal control processes within an Enterprise
Risk Management (“ERM") framework, discharging its oversight
responsibilities through the Group Risk Committee (“GRC"), supported
by the Corporate Responsibility Committee (“CRC") and the
Audit Committee.
Our ERM approach is not about eliminating risk but seeks to
identify, understand, mitigate and manage risks that might disrupt
our ability to execute our strategy or deliver against our customer
and contractual commitments. Our key risks are agreed through an
annual review with the Executive Committee and through quarterly
challenge and review at either the GRC, CRC, Audit Committee
or Board supported by Divisional level quarterly reviews with the
Executive Management teams. Each risk response reflects the nature
of the activities being undertaken and the level of control considered
necessary to protect our interests and those of our stakeholders.
In addition to the operational focus on risk, consideration and
assessment of risk is an integral part of our annual strategic review
that helps inform our approach to operating across geographies,
jurisdictions and sectors. These discussions include consideration of
several of our principal risks, most notably Failure to Grow. We have
assessed our markets and possible growth over the next five years
as part of our strategy review to ensure it is sustainable and provides
sufficient growth opportunities to meet our ambition without the
need for a material shift in our operating model and existing markets.
Further detail on our market can be found on page 4.
Risk management lifecycle
A key focus throughout 2021 has been on the continued
development of our ERM maturity to ensure consistent application
of our Group policies and procedures. This has included undertaking
a Group-wide capability assessment that has highlighted where
we would like to see development and where best practices can
be shared. Each Division specific improvement plan aligned to this
review will form the basis of a programme of activity through 2022.
In parallel, the risk management process has been subject to an
Internal Audit. The key themes from that audit included potential
improvements in how contracts are managing risk and opportunities
and increased visibility and confidence in assurance levels across the
key risks. As a result of these reports an additional ERM discussion
was undertaken at the GRC noting specific plans for improvement
and that our North America division operates its approach slightly
differently to accommodate customer security requirements. We
have also launched a review of our SMS to ensure it remains the most
effective and efficient vehicle to document and communicate our
processes and controls that remain a core component of our control
environment.
Our plans for 2022 include implementation of the associated
improvement actions referenced above. Additionally, our programme
to prepare for governance improvements resulting from the BEIS
consultation in 2021 is leading us to make further changes including
investment in a new Governance, Risk and Compliance tool.
CORPORATE RISK REPORTING TOOL
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RISK REPORTING
Reporting of the status of material
risks up through the management
chain to the next organisational
level, to provide assurance
that business risks are being
appropriately managed and
controls in place are effective.
RISK PLANNING
Assigning responsibility for risk
management implementation and
planning the approach.
RISK IDENTIFICATION
Identifying risks associated with
achievement of our business
objectives. Includes potential risks
from external factors arising from
the environment within which we
operate, and internal risks arising
from the nature of our business.
Risk Management Life Cycle Process
RISK MONITORING
Monitoring mitigation actions and
their impact (so as to improve the
effectiveness of controls and
improve the residual risk rating).
Monitoring changes to our business
and the external environment,
to ensure we have sight of and
respond appropriately to
emerging risks.
RISK MITIGATION
Identifying controls that will
reduce material risks to a target
risk rating aligned with our risk
appetite and implementing
cost-effective mitigation and
contingency actions that improve
the effectiveness of controls.
RISK ANALYSIS
Assessing the level of inherent
and residual risk exposure, based
on an assessment of the probability
of an identified risk materialising,
and the impact if it does, using a
standard risk scoring system, taking
into account the effectiveness of
current controls.
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Risk Management Process
Our risk policy is set at a Group level with implementation and
execution of that policy owned within each of our Divisions. The
Serco risk management lifecycle process is mandated throughout the
Company to seek a consistent approach to identification, analysis,
monitoring and reporting of risks and to provide further assurance that
the risk mitigation in place is sufficiently effective and appropriate.
We undertake a bottom-up review of risks quarterly, with our Business
Units identifying the main threats to achievement of their objectives,
documenting and analysing their potential impact, and defining clear
actions to reduce the likelihood of those risks materialising and/or the
financial impact if they should still occur. The Business Unit risks are
consolidated and reported to Divisional leadership teams in a check
and challenge capacity to ensure that risks on the Business Unit risk
registers accurately reflect the concerns of local senior leadership.
Once approved, the Divisional risks are reviewed by the Group
ERM team and help inform the principal risk updates. The Board is
updated after each GRC meeting.
Our principal risks, detailed on page 95 are those risks that we
determine to be the most material when considered against our
strategic ambition (as outlined on page 11) and that can materially affect
the performance, prospects, or reputation of our business. These risks
are identified and assessed as part of our strategic review and through
additional discussions at the Executive Committee and the GRC
where internal and external emerging risk trends are considered. Once
identified, each risk’s inherent, residual and target position is assessed
against a standardised set of impact categories that include financial,
reputational, operational and strategic considerations on a worst-case
credible scenario basis. The likelihood of each risk occurring is then
assessed, resulting in a residual risk position that enables us to score the
risk from minor to severe and rank accordingly. Each principal risk has a
Subject Matter Expert (“SME") and a nominated Executive Committee
sponsor allocated to it, supporting its review and management.
Detailed reviews of our principal risks are carried out as part of the
GRC reporting schedule, as well as topical “deep dives” that focus on
pertinent risk themes. These deep dives may be focused on a region,
led by the Divisional CEOs, or on functional or business unit areas
involving specialists from our business operations. This risk focused
approach facilitates flexibility that allows us to be responsive to changes
in our risk profile throughout the year whilst still maintaining appropriate
coverage of our principal risks and divisional risk landscapes. Our
principal risks and uncertainties are detailed on page 95.
Each of our principal risks has an appetite statement to determine
the nature and amount of risk that the Group is willing to accept as
well as informing our decision-making. The statements include one
of four appetite categories, averse, cautious, moderate and flexible,
that reflect the Board’s tolerance to each risk. These statements
are aligned to our Values, Code of Conduct and other ethical
requirements to support and drive the right risk culture within the
Group and are set through discussion with the principal risk Executive
Committee Sponsor and SME and ratified annually by the GRC.
As part of our ERM approach we have dedicated Compliance Assurance
teams which operate as a second line function focusing on validation
and testing of key controls to augment annual control self-assessments
and biannual compliance assurance attestation statements. Key
controls are mapped against our principal risks and our SMS and testing
plans are reviewed annually to identify and respond to any significant
amendments in the control environment. Whilst many controls are
tailored to meet divisional requirements, there are consistent themes
across our control environment to include clear oversight and reporting
by divisional management teams, robust bid governance processes,
a focus on the health, safety and wellbeing of our colleagues and
service users and prioritisation of maintaining integrity and a strong
ethics culture. In addition to our in-house assurance teams work we
are also subject to significant third line assurance activities and audits
delivered through external third parties appropriate to the regulatory
environment, certification standards and customer requirements in our
varied service lines and business units. These reviews include those
that support the range of ISO certifications we manage across the
business as well as independent performance and regulatory reports
on Serco operations.
Emerging Risks
As part of the review of our Corporate risk profile we have a process
to identify and monitor emerging risks to ensure that adequate steps
are being taken to understand and mitigate new risk themes before
they materialise and to assess any impact on our principal risks. This
assessment is completed through individual discussions with our
Executive Committee members, via input from our Divisional risk teams
and through the monitoring of external macro risk trends. A key theme
arising from our emerging risk discussions is the importance of our
ability to demonstrate our commitment to the Environmental, Social and
Governance (“ESG") agenda, including treatment of climate change.
ESG: We are committed to addressing the ESG risks that are material
to us and important to our stakeholders, recognising their deep
strategic relevance. Managing these risks and taking them seriously
is something we have been doing for many years, woven inseparably
into our operational and commercial landscape, our strategy and
governance and how we analyse our performance and prospects. Our
ESG Framework brings all our ESG priorities together in one model,
structured around our key stakeholder groups. The elements within
our framework are considered in strategy development and firmly
embedded in how we manage our business, with appropriate Board
and Executive oversight and dedicated leadership at both Group and
Divisional levels. Our ERM approach plays a key role in how we identify,
understand and manage our ESG risks and priorities, monitoring a
broad spectrum of present and emerging risks informed by a wide
range of ESG factors. Following discussion at both the Executive
Committee and the Group Risk Committee in 2021, we continue to treat
ESG as an embedded consideration across several of our principal risks
rather than a stand-alone item at the Group level. We are mindful that
there are differing views amongst investors about our activities in the
Defence and Immigration sectors. We take those views into account in
considering the types of business we undertake in different countries
whilst noting that defending a nation and having effective controls on
immigration are both topics which all governments have a need to
address. More information on our approach to ESG can be found
on page 39.
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We have also continued to monitor and manage the impact of
the Covid-19 pandemic and associated emerging risks across the
business. Our ongoing and uninterrupted focus is on the continued
delivery of essential public services as well as the wellbeing of our
colleagues and service users as we navigate the challenges of the
pandemic. Covid-19 impacts have been considered against each
principal risk at every quarterly Group Risk Committee led through
the work under our Health, Safety and Wellbeing principal risk.
Further detail on our Covid response can be found on page 39.
Brexit: We have continued to monitor the potential implications of the
UK’s withdrawal from the European Union (“Brexit”) and its impact on
Serco over the last 12 months. Reiterating our position outlined in our
2020 Annual Report, we have not experienced direct negative impact
on Serco to a material extent and we continue to manage this risk in
the ordinary course of business.
Risk Management continued
Climate change: Whilst Governance and Social risks apply to all our
operations, our Environmental footprint varies significantly between
our contracts and business units and is dependent upon the boundary
and scope of our environmental reporting. Across much of our business
we work on our customers’ premises and are not in direct control of
environmental impacts. Regardless of where we operate we recognise
the need to drive consistent environmental behaviours and performance
improvements throughout our operations. For example, by working
to green our supply chain and by ensuring our employees are
engaged, competent and encouraged to contribute to environmental
improvements via our global network of green ambassadors who
continue to create and foster a strong environmental culture at contract
and functional level. Collectively our approach helps Serco to not
only reduce our own environmental footprint but to also support our
customers’ environmental goals, make positive contributions to the
communities in which we work, and address the environmental risks
of our overall value chain. Climate-related risks have the potential to
impact Serco over the short, medium and long term. We face physical
risks including extreme weather events as well as transition risks from
technology, policy and legal, market and reputational perspectives.
Transitional risk examples include the impact of future carbon taxes
and levies on our operations and the cost of transitioning products and
services to lower emission options. The nature of our services requires
us to manage and operate client assets, therefore understanding
climate risk at our operating locations is also beneficial for our clients.
Building employee and leadership literacy on climate risks is vital for
us to deliver the level of support our clients will need in future and we
continue to focus on training and awareness through initiatives such as
Chapter Zero and corporate membership of industry bodies. To build
climate resilience we have developed a specific programme of work
to consider climate change risks and opportunities. In 2021 we ran a
series of cross-functional climate risk and opportunity workshops in each
Division supported by external advisers, helping to develop a more
detailed understanding of the key risks and opportunities faced by the
business in each geography. These risks and opportunities have been
assessed using our risk management framework and detailed climate
risk scenario analysis has been completed on material risks to inform
our understanding and approach whilst also supporting our TCFD
reporting obligations. Similar to the ESG risk approach, we have chosen
not to consider climate risk as a stand-alone principal risk and instead
consider it as a cross-cutting scenario under several of our principal risks,
including Catastrophic Incident, and have embedded this more clearly
in the principal risk narrative. We will continue to monitor the profile
of both the ESG and climate change matters as part of our ongoing
quarterly risk reviews and both remain a focus area for development
throughout 2022. Further detail on our approach to TCFD can be found
on page 58.
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Principal Risks and Uncertainties
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Summary of principal risks and uncertainties
Principal risks, as described below, have been reviewed by the
Executive Committee, GRC and the Board. Each risk is classified
as a strategic, financial, operational, people, hazard, or legal and
compliance risk. The risks are described on the following pages,
together with the relevant strategic business objectives, key risk
drivers, the Group-wide material controls which have been put
in place to mitigate principal risks and the mitigation priorities to
improve the effectiveness of the controls. We have included the
residual risk trend indicator for each risk and a brief commentary to
contextualise these trends. Each of the principal risks is relevant to the
achievement of our KPIs as outlined on page 32 with the strongest
links highlighted as part of the commentary.
Principal risks are considered over the same three-year timeframe as
the Viability Statement set out on page 105, which takes account of
the principal risks in its assessment.
In addition to the principal risks and uncertainties already identified,
there may be other risks, either unknown, or currently believed to
be immaterial, which could turn out to be material, the Covid-19
pandemic being a good example. These risks, whether they
materialise individually or simultaneously, could significantly affect the
Group’s business and financial results.
Changes during the year
Our annual strategic review process (outlined on page 24) considers
the risks and opportunities associated with our existing market and
services and as such we do not see the need for a material shift in
approach. As outlined in the Chief Executive’s Review on page 16
we are reporting strong financial performance and we have not
observed any material manifestation of risk that has caused significant
operational or performance disruption even when considering the
disruption of Covid as described on page 39. As a result, our principal
risks remain valid with their definition and scope remaining largely
unchanged. These risks continue to underpin our business model
described on page 11 and mitigation of the risks link directly to our
four strategic priorities as described in our management philosophy
on page 9. Some changes are noted that reflect updated thinking
and in response to operational influences. We have broadened
the definition and scope of our Supply Chain risk to ensure wider
coverage of this complex risk area and to accommodate potential
disruptions as an ongoing impact of Covid. In a similar vein, we
have also broadened the scope of our People risk ensuring that we
consider capability attraction and retention from a wider perspective.
This should enable us to understand and mitigate the impact of
adverse labour market trends on the execution of our people
strategies across the Group in the medium to long term. We have
also retired Failure to Manage our Reputation as a principal risk,
considering it instead a potential impact outcome in the event of one
of our other principal risks materialising and explicitly considering it as
a causal factor under the Failure to Act with Integrity risk and Failure
to Grow Profitably risk.
Summary of Principal Risks
The table maps our Principal Risks to risk categories.
Strategic risks
Financial risks
Operational risks
People risks
Hazard risks
Legal and
compliance risks
Failure to grow profitably
Financial control failure
Major information security
breach or cyber-attack
Contract non-compliance,
non-performance or misreporting
Significant failure of supply chain
Failure to act with integrity
Failure to attract, engage and
retain key talent
Health, safety and wellbeing
Catastrophic incident
Material legal and
regulatory compliance
failure
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Principal Risks and Uncertainties continued
The method and four priorities we use to deliver our strategy as part of our management philosophy are set out on page 9 namely Winning
good business, Executing brilliantly, A place people are proud to work, and Profitable and sustainable. Each of our principal risks supports
one or more of these priorities with the strongest link shown against each risk using the following icons. Appropriate consideration and
management of the principal risks have a direct link to key Executive remuneration as outlined in the Remuneration Report on page 139.
Winning good business
Executing brilliantly
A place people
are proud to work
Profitable and sustainable
Increasing risk
Decreasing risk
No change
New
The trend indicator depicts the trend of our residual
risk rating internally over the course of 2021.
STRATEGIC RISKS
Failure to grow profitably
Integral to our Strategy Review process, this risk considers the potential impact of failure to win material bids or renew material contracts
profitably, or a lack of opportunities in our chosen markets, restricting revenue growth which may in turn have an adverse impact on Serco’s
profitability. This risk has a broad and direct link to our ability to meet the financial KPIs described on page 32. We have moderate appetite
for this risk recognising that we will take reasonable and considered risks to generate profitable growth. Our business is linked to changes in
the economy, fiscal and monetary policy, political stability and leadership, budget priorities, and the perception and attitude of governments
and the wider public to outsourcing, which could result in decisions not to outsource services or lead to delays in placing work. Our ability to
succeed is also linked to the competitive landscape and our ability to efficiently deploy resources as part of our service offering. We carried out
a comprehensive strategy review that took the divisional five-year strategies and rolled these up for a Group view. This work concluded that
our markets remain robust with significant revenue opportunity in our chosen markets and chosen activities.
In 2021 we have been successful in securing significant new business as well as renewing several critical contracts. Whilst certain key contracts
such as Dubai Metro and AWE did end in 2021 they have been offset by new and existing business. We have also benefited from continuing
demand for Covid-19 related support services such as testing, tracking and tracing across different geographies. On the other hand, tight
employment markets have led to increased employment costs as well as vacancies that have adversely affected some parts of our portfolio.
Overall, our revenues and Underlying Trading Profit increased by £539.8m and £65.8m respectively, however some of these gains are
temporary and expected to level out once pandemic related work recedes. Further detail on our financial performance can be found on
page 77. While the outlook for pandemic related services is unclear, we enter 2022 with a robust, qualified, new business pipeline and good
win rate momentum, suggesting that the near and medium-term risk is stable.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
External factors reducing the
pipeline of opportunities.
Failure to be competitive.
Inability to meet customer and
solution requirements during design,
implementation and delivery.
Ineffective business development.
– Serco Group and Divisional Strategy including
periodic strategy reviews.
– Investment Committees.
– Sector-specific Centres of Excellence and Value
– Review pipeline opportunities to ensure all
market activity is accurately captured and
that budgets are allocated accordingly.
– Review portfolio for new attractive organic
Propositions.
expansion areas.
– Serco Institute developing thought leadership
– Continue to improve leveraging of Serco
and innovation for our markets.
– Business Lifecycle Review team process.
– Pipeline and Business Development spend
best practice and innovation and refinement
of bid development processes.
– Continue to adopt a robust bid qualification
reviews.
process.
– Regular Growth Forum reviews.
– Divisional Performance Reporting process.
– Retain focus on effective management for
major bids.
– Develop efficient common platforms for
service delivery.
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FINANCIAL RISKS
Financial control failure
Serco operates complex financial controls systems and processes and there is an inherent risk that these may fail. Such failures may result in: an
inability to accurately report timely financial results and meet contractual financial reporting obligations; a heightened risk of error and fraud:
poor quality data leading to poor business decisions, or an inability to forecast accurately; the failure to create a suitable capital structure; and
an inability to execute critical financial transactions, leading to financial instability, potential business losses, and negative reputational impact.
This risk links directly to our ability to meet the financial KPIs outlined on page 32. We have an averse appetite for financial control failures and
require a robust framework of financial processes, systems and controls to enable timely and accurate financial reporting.
At the start of the Covid-19 pandemic, it was recognised that the risk of financial control failure was heightened due to the fast-moving nature
of the business, risk of absenteeism in both the in-house and outsourced finance organisation and disruption to core financial processes and
data quality caused by new operating environments resulting from the items noted above and remote working. The Group mobilised quickly
to ensure that key mitigants were put in place such as: additional assurance procedures; adequate remote working capacity, including within
the Group’s outsourced finance teams; monitoring of working capital; and data capture to understand the impact of Covid-19 on the Group’s
financial results. As a result of the actions taken, the risks which were identified at the start of the pandemic have not materialised in 2021 and
our core financial processes and controls have continued to operate without significant disruption.
Over the last 12 months, the Group has worked with external advisers to develop a programme of work with the objective of improving
the financial control environment within the Group. This is in preparation for anticipated changes following the issuance of the consultation
document by the Department of Business, Energy and Industrial Strategy (“BEIS”) entitled Restoring Trust in Audit and Corporate
Governance. In addition to improving documentation and control standards, the programme also aims to review the operating model
required to implement and sustain the improvements and embed an enhanced controls culture across the Group. The work performed to date
is not dependent on the outcome of the BEIS consultation as a no-regrets policy has been adopted to ensure that any work performed would
be considered best practice rather than required to support a formal controls attestation, as suggested within the consultation. As noted
at the Capital Markets Day, the Company’s controls, governance and risk management processes help to assure quality outcomes across
the business. These controls operate at both the strategic and operational levels of the business and are embedded in our ESG framework
described in detail on page 39.
As noted in the 2020 Annual Report and Accounts, the Group’s European business was subject to a cyber-attack in January 2021. The results
of the investigation into this attack, produced by both our internal investigations and by our external advisers, have not identified any
compromise to the financial information used for the 2021 year-end reporting or to the integrity of financial results from the European
Business Unit.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Not setting the right tone from the top.
Poor financial processes.
Inadequate financial controls within the
business.
Loss of critical roles and/or systems.
Poorly skilled and resourced finance
teams to address complex finance
standards.
– Group Governance and Finance strategy.
– Standardised and mandated financial
systems, processes (including forecasting
and reporting) and data structures.
– Governance and review procedures
associated with managing the quality of
services delivered by third party suppliers.
– Skilled and adequately trained finance staff.
– Disaster recovery plans and testing.
– Board oversight via the Audit Committee.
– Monthly Divisional performance reviews.
– Dedicated Financial Assurance team testing.
– Enhance the financial controls and assurance
framework.
– Continue to deliver effective financial
reporting.
– Continuously improve forecasting and
reporting processes and data analysis.
– Deliver global finance process improvement
and efficiency through automation and
robotics.
– Develop a Group-wide training curriculum.
– Effectiveness reviews of disaster recovery
plans.
– Ensure talent is retained within the finance
function.
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Principal Risks and Uncertainties continued
OPERATIONAL RISKS
Major information security breach or cyber-attack
Information security breaches or cyber-attacks represent a key risk for us. Such incidents could result in the loss or compromise of sensitive
information (including personal or customer) or wilful damage resulting in the loss of service, causing significant reputational damage, financial
penalties and loss of customer confidence. We operate an averse risk appetite to major information security breaches and cyber-attacks. We
accept that due to the nature of the services we provide we face threats from both internal and external factors but will mitigate the impact of
any breach and carry out immediate remedial actions.
As described at our Capital Markets Day, we operate on a business-to-government platform that leverages scale and helps simplify our
processes with a well invested portfolio of best-in-class software solutions to support our contracts and shared services. We continue to make
significant investments in our cyber-security both at our endpoints and in our core network. In most of our jurisdictions we test ourselves
against government standards including CES+ in the UK and we also regularly run penetration tests as well as meeting specific security
standards in line with customer requirements as a provider of public services to government. We have a continuing programme of upgrading
old desktops and laptops, and the number of devices outside centralised management and monitoring is decreasing rapidly. We have our
own in-house Security Operations Centre which monitors the networks and manages our response to cyber threats. The strategy review
showed the benefit of investing in shared services to produce standardised and efficient processes.
Serco is committed to delivering secure services which protect our own and our customers’ data and as such holds a variety of externally
audited security-related certifications. This includes the Information Security Management System covering our UK corporate environment
that is certified to ISO 27001. We also maintain certification, where specified, against the principal government security/cyber schemes in the
markets we operate. Our certifications are generally publicly available on the relevant accreditors’ websites or can be requested from the
Company directly.
We continue to invest in staff security training as a key mitigant to this risk. Security training is delivered via our Learning Management
System as part of the broader Serco Essentials framework. Training comprises mandatory modules that cover a range of areas including
responsibilities when dealing with personal data and how to identify and respond to issues. All Serco employees, including contractors, must
complete Serco Essentials and pass a test at the end or alternatively, in the case of subcontract or staff, their employer must demonstrate
that they provide equivalent security training. Training is further supplemented, where appropriate, to cover specific points relevant to any
particular contract, together with regular campaigns and awareness tests such as protecting against phishing threats.
However, the external threat landscape continues to evolve. As evidenced in a cyber-attack in our European business in January 2021 and
recent attacks on our competitors involving ransomware, our industry is a particular target for extortion, and this, along with the increased
public profile we have had because of our involvement with government contracts to respond to the Covid-19 pandemic, leads us to conclude
that this risk is increasing.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Non-compliant or obsolescent systems.
– Enterprise Architecture Boards & Solution
– Perform market reviews of deployed
Non-compliance or misconfiguration
with policies and standards.
Vulnerability of systems and
information.
Unauthorised use of systems.
Inadequate incident monitoring and
response.
Increased regulatory scrutiny.
Review meetings.
– Serco Management System (“SMS”)
including detailed guidance on minimum
security controls.
– IT security infrastructure, processes and
controls including isolated backups.
– Privileged Access Management and
multi-factor authentication for our
centralised managed systems.
– External assessments and scenario based
cyber security testing and incident planning.
– Regular attestation statements on security
controls compliance.
technology when services are reviewed at
renewal to ensure we maintain our defences
as threats change and develop in
sophistication.
– Ongoing continuous improvement
programmes for our Security Operations
Centres to maintain effective risk
identification.
– Continued routine vigilance and proactive
vulnerability identification coordinated
through our Security Operations Centres.
– Continued use of global key security risk
indicators and regular third-party testing
and best practice configuration reviews to
support mitigation priorities.
– Leveraging Cloud adoption to ensure
standardised control mechanisms.
– A focus on the behavioural aspects of our
employees.
– Maintaining government security
attestations.
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There is a risk that we fail to deliver contractual requirements or to meet agreed service performance levels and report against these
accurately. This failure may lead to significant financial penalties, legal notices, onerous contract provisions or, ultimately, early termination
of contracts. We have an averse risk appetite to any possibility of deliberate misreporting of contractual performance and losing material
contracts due to non-performance or non-compliance.
Governance in bid processes, transition and operations provide the primary means of managing this risk. The Serco Management System
prescribes a review of contract risk through each of the stages of the bid lifecycle from prequalification to contract close out, including monthly
performance reviews for all material contracts. As part of our commitment to ongoing improvement our mitigation priorities for the next year
will focus on strengthening some of the key control processes and formalising these in the Serco Management System.
Whilst still in the early stages of development we will also begin to track Environmental, Social and Governance (“ESG”) impact from our
contracts as the maturity of our reporting increases. Though our individual customer contracts vary on ESG-related commitments, our overall
corporate commitment to ESG targets will permeate through to our contract teams and will form part of the overall assessment of contract
performance and compliance.
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Material controls:
Mitigation priorities:
Risk trend:
Not setting the right tone from the top.
Unclear contract requirements/
obligations.
Human error (deliberate or
unintentional).
Operational delivery or reporting
failures.
– Contract Management application.
– Monthly performance reviews at Contract,
Business Unit and Divisional level.
– Business Lifecycle Review team process.
– Communication of Our Values and Code of
Conduct.
– Strengthen processes related to agreeing
clear contracts, change management, bid to
contract handover and KPI reporting,
formalised through Serco Management
System.
– Contract Management training (Global and
– Speak Up process (“Ethicspoint”).
– Extensive internal and external assurance
Divisional).
– Greater visibility of performance through
reviews, including independent third-party
reviews and customer oversight processes.
contract performance dashboard (“Gauge”).
– Continued focus on consistent approach to
risk assessment.
– Operational excellence improvement plans.
– Ongoing ethics, business conduct and
compliance training.
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Principal Risks and Uncertainties continued
Significant failure of the supply chain
If there was a significant failure in Serco’s end-to-end supply chain to perform to the required standard, Serco may be exposed to risks that
mean Serco is unable to meet its customer obligations, perform critical business operations or win new business. This could cause a financial,
operational or reputational impact to Serco. Supply chain risk is broad; examples include operational performance risk, cyber risk, regulatory/
legal compliance risk, ethical risk, environmental, social or governance risk. We use thousands of suppliers globally each year and take a
proportionate approach to management of these third parties and have a moderate risk appetite for using them.
This year we have expanded this risk to encompass the broader risk to Serco from the supply chain rather than just the risk from the failure
of a business-critical supplier. This new scope considers the risk to Serco from non-business critical suppliers and from the suppliers of our
suppliers. This change was prompted by several factors including recognition of external challenges (e.g. mini umbrella companies) and our
growing maturity in this area. The risk was historically focused largely on operational failure; by amending we have extended the coverage
to ensure the risk covers all significant risk exposures and has a view on emerging risks in the supply chain. We have commenced a review of
Serco’s existing Supplier Risk Management processes, current supplier risk initiatives and key supplier risk exposures to identify any gaps and
create alignment across the Group. The output of the review will be used to create a Supplier Risk Management Framework, encompassing
risk exposures from information security/cyber, data protection, business integrity and social responsibility, regulatory and legal compliance,
external and exceptional risks, supply chain performance, supply chain resilience, financial, environmental, and health, safety and wellbeing.
In 2021, we also launched a Sustainable Procurement Charter which aims to improve our review of ESG and responsibility matters in our
supply chain.
As a result of Covid-19 and Brexit our third-party suppliers are reporting supply constraints (e.g. resources/logistics) in line with the general
supply chain instability that is being widely reported in the media. There is a risk of disruption in all divisions, with a higher perceived risk in
the UK where we are experiencing and managing localised challenges. Although our rating for this risk remains constant, the probability is
trending upwards driven by the supply constraints we are seeing in the UK.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Inadequate procurement standards,
operating procedures and controls.
Failures or inadequate due diligence and
onboarding when bringing new
suppliers, partners and sub-contractors
into the business including poor
specification of requirements,
inadequate sourcing and selection and
inadequate contracting.
Inadequate / lack of monitoring – and
management of supplier performance
and risks.
High volume of suppliers / complexity of
supply chain.
– SMS Procurement Policy, Standards and
Procedure including Supplier Code of
Conduct.
– Supplier checks (pre-qualification/
on-boarding).
– Serco standard contracts including
appropriate obligations, Key Performance
Indicators and Service Level Agreements.
– Supplier Management Programme for most
business-critical suppliers including
performance.
– Biannual Procurement review process of all
business-critical suppliers.
– Complete implementation of Supplier Risk
Management Framework and commence
delivery of resulting roadmap, including
supplier triage and assessment.
– Enhance Procurement & Supply Chain
Group Standard improving clarity and
understanding of policy requirements,
processes, controls and responsibilities.
– Risk assessment and mitigation plans
incorporating actions to improve effective
implementation of key risk controls for all
material risk rated business-critical
suppliers.
– Expand scope of supplier management
programme, taking a tiered approach
relative to risk. Review tools and guidance
for contract level supplier management for
lower risk suppliers.
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PEOPLE RISKS
Failure to act with integrity
As a people-based business employing over 50,000 employees there is an inherent risk of rogue employees engaging in significant corrupt
or dishonest acts including bribery, fraud, misreporting, cheating or lying. If this risk occurred it would lead to reputation and brand damage
and customers being reluctant to do business with us. Such behaviour might arise through the actions of rogue employees or as a result
of pressures individuals may feel they are being placed under to deliver financial or operational performance and might lead to: the loss of
existing business; restrictions on our ability to bid or win new business; a reduction in our ability to attract high-quality people or partners; or
may impact shareholder, investor and financial institutions’ confidence in Serco. We have an averse risk appetite to behaviours and actions that
may compromise our integrity. Our values and purpose sit at the top of our Management Framework described on page 9 and integrity sits at
the centre of and underpins our ESG framework. Whilst we are finding a new balance as the pandemic evolves, we continue to recognise that
Covid-19 has brought additional challenges to many parts of the business, and these could lead to an increase in inherent risk. However, we
remain confident in the controls we have in place to manage this, and we rate this risk as stable.
Building on work from 2020 we have rolled out improved ethics training, strengthened our internal capability through professional
qualifications, continued to reinforce our strong tone at the top and further developed our ESG framework as outlined on page 40.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Not setting the right tone from the top.
Weak values and culture.
Increased pressure to deliver.
Ineffective systems and processes.
Weak diligence on where we work and
who we work with.
– Strong, meaningful and understood Values
and required behaviours which are role
modelled by leaders.
– Deliver our commitments under the DPA.
– Drive greater leadership ownership and
accountability for a strong ethical culture.
– Robust governance (Corporate
– Embed Ethics Compliance controls and
Responsibility Committee; Executive
Committee; Investment Committee;
Divisional Executive Management etc.)
exercising oversight of decisions within
delegated authorities.
– Effective policy and procedures including
financial controls and processes defined
within the SMS and supported by our Code
of Conduct.
– Independent Speak Up process supported
by corporate investigations.
procedures as an integral part of business
processes.
– Continue to implement effective due
diligence processes for all third parties.
– Continue to strengthen Ethics Compliance
resource and competency.
– Strengthen assurance provided by Ethics
Compliance controls.
Failure to attract, engage and retain key talent
It is our ambition to be regarded as the best-managed company in the sector and, notwithstanding our framework of people processes, systems
and controls, there is a risk that we are unable to attract, engage and retain an appropriately sized, qualified and competent workforce and
management team. The impact of this risk materialising would restrict Serco’s ability to deliver on its customer obligations, execute its strategy
and achieve its business objectives whilst driving employee pride in the organisation. The ESG framework is an implicit consideration in this
risk and influences the achievement of our Employee Engagement KPI as outlined on page 34. We have a cautious risk appetite and take
a pragmatic approach to the attraction, retention and development of key talent. We ensure that robust contingency plans are in place for
business-critical roles but recognise that an element of churn is healthy for any business meaning that we are not averse to change.
This risk includes consideration of key person reliance in our leadership and executive teams including succession planning for our senior
management team and other business-critical roles. It should be noted that there are difficulties in relation to labour markets, however,
rather than being a problem across our whole business, we are currently addressing challenges in specific sectors, roles, or geographies.
In response to Covid-19, a great deal of work has been done to streamline and simplify our approach to attracting and onboarding new
colleagues. Extensive use of social media to promote recruitment activity and the “speed boarding” global onboarding process has now been
embedded, leading to significant efficiencies in bringing new staff into Serco.
The Group Chief Operating Officer continues to work closely with the Board to develop effective succession planning, both for Executive
Committee and Group roles.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Lack of staff development.
– Talent Management & Succession
– Ensure up-to-date understanding of local
Poor talent management and succession
planning.
Low employee engagement.
Unsatisfactory reward framework.
Recruitment failings.
Inability to attract appropriate new
hires.
processes.
– Leadership capability development.
– Targeted retention arrangements.
– Critical Resource Planning.
– Annual Performance Management process.
– Exit interviews.
– Annual Viewpoint survey.
employment markets.
– Continue to monitor channels to access
external talent in chosen markets.
– Ongoing benchmarking activity to ensure
market competitive reward packages to aid
retention of existing staff and attraction of
new.
– Continue with detailed review of succession
plans and mitigation strategies as part of the
Talent Review process.
– Ensure ongoing use and analysis of exit
interviews.
– Follow up and action on themes identified
as a result of annual people survey.
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Principal Risks and Uncertainties continued
Health, safety and wellbeing
The diversity of services provided by Serco exposes our employees, customers and third parties to a wide range of health, safety and
wellbeing risks inherent to our operations in both work and public environments. These may be caused by a process or control failure or by
the wrong behaviour and/or an inadequate safety culture. As responsible employers we recognise the complexity of wellbeing risk and aim
to ensure that working for Serco does not impose any additional wellbeing challenges on our employees. This is a wide-reaching risk that
directly supports the KPI target for Major Incident Frequency Rate and Lost Time Incident Frequency Rate as described on page 34 and HSE
related metrics outlined in our ESG report on page 69. We have an averse risk appetite for actions/failures that would cause loss of life. We
cannot eradicate H&S risk entirely whilst maintaining operational delivery so we prioritise prevention of major injuries and threats to wellness
whilst accepting that minor injuries will occur on occasion but are minimised by training, risk assessment, safe systems of work, operating
procedures, PPE, site supervision and audit & inspection.
Our vision is zero harm. We aim to ensure that no one comes to harm because of the work we do. Wherever we work, we are committed to
the prevention of injury and promoting a “just” safety culture in which we foster transparency, honesty and trust in order to identify root causes
and prevent recurrence. Wherever we work, we are committed to the promotion of wellbeing and the prevention of ill health. We understand
that healthier, happier employees go hand-in-hand with strong business performance, enhanced productivity, a far more positive culture and
better outcomes for those we serve.
In addition to personal injury concerns, a breach of Health and Safety regulations or failure to meet our contracted expectations could disrupt
our business, have a negative impact on our reputation and lead to contractual, financial and regulatory costs.
Much of 2020 had been dominated by the impact of the Covid-19 pandemic and this has continued into 2021 and will do so into at least 2022.
We have continued our response to the Covid-19 pandemic where we have ensured focus on the protection of our employees, customers and
third parties. Our Health, Safety & Wellbeing teams continue to support our Covid-19 response across the business, facilitating key mitigations
and supporting the continuing recovery phase activities, including design and implementation of Covid-19 site specific risk assessments,
remote working risk assessments, training and the development of mental health resources. We have also continued to develop and mature
our Diversity and Inclusion network. We recognise that Covid-19 continues to present an ongoing challenge and elevates the position of this
risk on our corporate profile.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Failure of the Serco Safety Management
System.
Insufficient communication of key issues,
risks and changes.
Lack of/out-of-date task specific
competence.
Human factors impact on behaviour.
Occupational wellbeing risks including
psychosocial risks.
– Serco Health, Safety, Environmental and
Wellbeing (“HSEW") Strategies and Safety
Management System (policies and
procedures inc. Covid-19 Secure and
specific guidance and policies) underpinned
by our ESG framework.
– Safety and wellbeing training,
– Continue to embed updated Health, Safety,
Environment and Wellbeing strategies and a
positive “just” culture.
– Increase Zero Harm Engagement and Safety
Moment activity across the regions.
– Drive wellbeing agenda and ensure
appropriate focus at a corporate level.
communications, and guidance (inc. Serco
Essentials) and individual development
plans and processes based on role and
operational risk.
– Continuing 1st, 2nd and 3rd line assurance
activities and ensuring understanding of
appropriate levels of ownership,
accountability, and responsibility.
Public Health and wellbeing risks.
Behavioural failures/human error
resulting in injury or incident.
Impact of the Covid-19 pandemic.
– Spontaneous and planned preventative,
maintenance, inspection and repair
programmes.
– Effective incident/near-miss observations
reporting and investigations and effective
use of ASSURE (independent reporting and
compliance system).
– Regular organisation wide and local
Covid-19 specific guidance and
communication.
– Further embed the Serco (Health, Safety,
Environmental and Wellbeing) Strategies
and Safety Management System (policies
and procedures inc. Covid-19 Secure and
specific guidance and policies).
– Further development and maturity of our
ESG agenda and programme of
improvements to meet best practice and
evolving stakeholder expectations.
– Continued review and sharing of lessons
learnt throughout the Covid-19 pandemic
recovery phases.
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HAZARD RISKS
Catastrophic incident
Given the nature of our business we are exposed to the risk of an event (incident or accident) occurring as a result of Serco’s actions or failure
to effectively respond to/prepare for an event that results in multiple fatalities, and/or severe property/asset damage/loss and/or very serious
environmental damage. Management of this risk influences the KPI target for Major Incident Frequency Rate as described on page 34.
We aim to provide safe services and places to work and have an averse risk appetite for this risk.
Each division is continuing to assess risks at a contract level to ensure that all relevant material risks have been identified and to assess and
assure mitigations, including insurance cover, are appropriate. Contracts considered inherently high risk are reviewed regularly. The physical
risks linked to climate change related events are now included more explicitly in our risk management framework as part of the work initiated
for TCFD and outlined in more detail on page 58. Existing business continuity and crisis management plans and processes have been used
and served the business well during the Covid-19 pandemic and, despite a continued hard insurance market, we have secured extensive
insurance protection as a key mitigant for this risk.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Factors resulting in unsafe conditions.
Ineffective or inadequate policies,
standards, and procedures.
Lack of capability and experience.
Lack of safety cultural alignment.
Insufficient safety management
oversight.
Inadequate planning or response to a
catastrophic event, including extreme
weather or a climate change related
event.
– Regular reviews of high-risk contracts.
– Serco Health, Safety, Environmental and
Wellbeing (“HSEW") Strategies and Safety
Management System (policies and
procedures) underpinned by our ESG
framework.
– Safety training (including Serco Essentials)
and individual development plans and
processes based on role and operational risk.
– Effective incident/near-miss investigations
and effective use of ASSURE (independent
reporting and compliance system).
– Business continuity, crisis and incident
emergency response plans and testing.
– Risk transfer via insurance where appropriate.
– Continue to embed updated HSE&W
strategies and a positive “just” culture.
– Ongoing work within divisions to identify
and assess contract specific risks and
liabilities.
– Continued training in insurance and
contractual risk management.
– Review and optimisation of the insurance
programme and captive structure.
– Review levels and adequacy of compliance
assurance.
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Principal Risks and Uncertainties continued
LEGAL AND COMPLIANCE RISKS
Material legal and regulatory compliance failure
Serco operates in complex legal and regulatory environments across multiple industries and geographies and there is a risk that we might not comply
with all relevant laws and regulations. Failure to comply with laws and regulations could cause significant loss and damage to the Group and its people
including exposure to regulatory prosecution and fines, reputational damage and the potential loss of licences and authorisations, all of which may
prejudice the prospects for future bids. Defending legal proceedings may be costly and may also divert management attention away from running
the business for a prolonged period. Uninsured losses or financial penalties resulting from any current or threatened legal actions may also have a
material adverse effect on the Group. We are averse to risks which may result in legal and regulatory non-compliance and require processes that seek
to minimise regulatory fines and legal action, as well as targeted and selected assurance activity.
The Covid-19 pandemic, post-Brexit regulatory landscape in the UK and changes in many governments where our customers operate has
introduced additional and fast-moving complexity to the legal compliance framework and we recognise that this may increase our risk
exposure. In addition, various laws and regulations that apply across the business continue to be subject to increased focus and attention,
including Anti-Bribery and Corruption laws, Market Abuse Regulation, Data and Privacy laws, Modern Slavery, Trade Compliance, Competition
and Antitrust and Human Rights and Modern Slavery.
Our 2019 Annual Report documented our approach to the Deferred Prosecution Agreement (“DPA”) of one of the subsidiaries of Serco Group
plc, Serco Geografix Limited (“SGL”) entered into with the Serious Fraud Office (“SFO”) in July 2019. Throughout 2020 and 2021 we have
continued to implement and monitor delivery of our obligations under the DPA, including reporting to the SFO in June 2020 and June 2021.
We will continue to focus on the implementation of our ongoing obligations via our DPA plan with both the Board and GRC providing review
and oversight of progress.
The management of this risk is a key enabler of Serco’s governance for ESG purposes.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
– Externally appointed legal specialists
monitoring and advising on legal and
regulatory obligations and changes.
– Legal and contract experts aligned to
various specialist areas across the business
supported by mandatory and bespoke
training.
– Compliance with DPA obligations.
– Automating legislation tracking and horizon
scanning on key new laws and regulations.
– Greater use of data and trend analysis.
– Embedding risk based third-party due
diligence including modern slavery risk
assessment.
– Investment Committee and Business
– Continuing development of Serco Essentials
Lifecycle Review Team (“BLRT”) bid process
and governance.
training programmes including Code of
Conduct training.
– Third-party due diligence on all suppliers.
– Speak Up process and systems and
corporate investigation case management
system.
– Continuing to improve key contract and
compliance assurance reviews.
Lack of governance and oversight.
Failure to comply with the SMS and
contractual obligations.
Failure to identify and respond to
material changes in legal and regulatory
requirements, including fast-moving
new laws.
Lack of awareness by employees of the
legal and regulatory requirements
placed upon them and the business.
Inadequate provision of systems and
tools.
Legal or regulatory compliance failure
by a third party.
Class action litigation and increasing
regulatory fines.
Compliance with SFO DPA obligations.
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Contents Generation – Section
Viability Statement
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Viability Statement
In accordance with provision 31 of the UK Corporate Governance Code
published by the Financial Reporting Council in July 2018, the Directors have
assessed the prospects of the Group over the three-year period to
31 December 2024.
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Three-Year Term
Whilst the Group operates many long term contracts, the nature of
the Group’s business relies on continued bidding activity and contract
wins in order to sustain its revenue streams and facilitate growth. The
pipeline of contract opportunities is carefully managed, however
the outcome of bid submissions is binary and the Group uses past
experience and estimated win rates to provide short term budgets
against which performance is measured. As a result of the estimates
used in developing the Group’s forecast, it remains challenging to
develop detailed projections against which the Group’s viability can
be assessed. Therefore, the Directors believe that a three-year period
is appropriate since it reflects the fact that:
– Short term projections can be heavily reliant on successful
bidding opportunities which have a binary outcome.
– The Group has limited visibility of contract bidding
opportunities beyond three years given the lead times which
generally exist before opportunities come to market.
– Approximately 63% (2020: 62%) of the current year revenue
relates to contracts where the contract term potentially comes to
an end within three years.
In addition, during the three-year period approximately 60% of the
Group’s debt funding will mature and the revolving credit facility
will require refinancing. This represents a significant portion of the
Group’s available liquidity and impacts longer term investment and
capital allocation.
In line with the annual budgeting process the Group has prepared an
updated five-year business plan to establish whether it is on target to
achieve its long-term strategic goals. The financials for the last three
years of this period are largely extrapolations of key assumptions
used in the budget process. Given the difficulties of forecasting over
a longer time period it would be inappropriate to draw definitive
conclusions on the future prospects of the Group and challenging to
develop appropriate sensitivities and mitigation strategies. Therefore,
whilst the five-year business plan continues to be developed, its
nature is more akin to a strategic goal rather than a forecast based on
known assumptions; this makes assessing the longer-term viability of
the Group a challenge.
Financial forecasts
In assessing the prospects of the Group over the three-year period,
the Directors have also considered the Group’s current financial
position as well as its financial projections in the context of the
Group’s debt facilities and associated covenants. These financial
projections are based on a bottom-up Budget exercise for 2022 and
2023, and an extrapolation to 2024 using higher level assumptions
based on local market growth rates and identified opportunities
which has been approved by the Board.
The Group’s covenant net debt balance at 31 December 2021 is
£201.7m. The Group’s base projections indicate that debt facilities
and projected headroom are adequate to support the Group over
the next three years. The Group’s financial plan has been stress-tested
against key sensitivities which could materialise as a result of the
crystallisation of one or a number of the principal risks, the objective
being that the future viability of the Group is tested against severe
but plausible scenarios.
Funding facilities
At 31 December 2021, the Group’s principal debt facilities comprised
a £250m revolving credit facility (of which £0m was drawn), acquisition
term loan facilities totalling £120m (of which £120m was drawn)
and £259m of US private placement notes. The principal financial
covenant ratios are consistent across the private placement loan
notes and revolving credit facility and are outlined on page 88.
The Group refinanced its revolving credit facility at the end of 2018
and the associated five-year funding facility provides the financial
platform to continue to invest in the growth of the Group. The
refinanced bank debt expires during the three-year assessment
period and the viability assessment assumes that it will be refinanced
on similar terms. The Directors are of the opinion that refinancing the
debt, to at least a level that would allow the Group to remain viable,
is an achievable outcome.
During the period of assessment, £111m of the Group’s US Private
Placement (USPP) loan notes and facilities of £45m and £75m, mature.
The long-term forecasts supporting this statement assume that if
the acquisition facility is not refinanced and no further debt is raised,
there is still sufficient liquidity headroom for the Group to remain
viable.
The Group’s financial position has also been enhanced by its
improved ability to generate Free Cash Flow from its growing profits
and the reduction in cash outflow associated with historic loss-making
contracts.
Impact of Covid-19
During the year ended 31 December 2021, the Group continued to
assist governments with their response to the Covid-19 pandemic.
The Group has provided a variety of services in respect of the
pandemic and the net impact on the Group’s profit has been positive.
Within the net positive result, the Group has seen certain contracts,
particularly those relying on customer or consumer demand, suffer
an adverse impact on profitability when compared to pre-pandemic
levels. Where this is anticipated to continue into the three years to
31 December 2024, the impact has been included in the forecasts
supporting this statement. Based on the impact seen to date, the
Board consider it unlikely for Covid-19 to have a material effect on the
Group’s viability, which has not already been considered within the
Group’s forecast.
Risks
The Board and the Group Risk Committee continue to monitor the
principal risks facing the Group, including those that would threaten
the execution of its strategy, business model, future performance,
solvency and liquidity. The potential outcome, management and
mitigation of those principal risks have been taken into consideration
when modelling scenarios to assess the future viability of the Group.
The Group’s risk review is set out on pages 95 to 104 and outlines the
Group’s principal risks and mitigating controls that are in place.
The external market is important to the Group’s ability to win new
contracts. Revenue is expected to decrease in 2022 as contracts which
are specifically supporting Governments in managing the pandemic
reduce, however it is expected that contracts which have been delayed
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Conclusions and assumptions
Subject to these risks and on the basis of the analysis undertaken, 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 three-year period of their assessment. In doing so, it is recognised
that such future assessments are subject to a level of uncertainty that
increases further out in time and, therefore, future outcomes cannot
be guaranteed or predicted with certainty. The Directors have made
the following key assumptions in connection with this assessment:
– The potential negative impacts of Covid-19 during the
assessment period are not materially different the Group’s
forecasts;
– The Group is able to refinance the £250m revolving credit facility
which matures during the assessment term;
– There is no significant unexpected contract attrition of existing
work that becomes due for extension or rebid over the next
three years;
– There is no significant reduction in scale of existing contract
operations as a result of customer policy or other changes;
– There is no significant deterioration in new bid and rebid win
rates from those anticipated;
– The Group is able to continue the execution of its strategy of
growing revenue and profits; and
– The Group is not subject to any material penalties, claims or
direct and indirect costs and/or debarment from bidding for
new contracts.
Viability Statement continued
or deferred as a result of the pandemic will begin to recover. Growth
thereafter is more difficult to assess given the nature of the market.
In addition, the Group will rebid two significant contracts in 2023; its
Immigration Services contract in Australia and Center for Medicare
& Medicaid Services (CMS) in the US which were both retained
when previously rebid. However, we will continue to focus on margin
improvement through improved efficiency whilst focusing business
development investment on the most attractive market opportunities.
Severe but plausible scenarios
Having guided the Group through another year of trading during
the Covid-19 pandemic, the Board have an improved ability to
forecast the impacts associated with Covid-19. During the year to
31 December 2021, the net impact of Covid-19 on the Group’s profit
has been positive, and all known or anticipated adverse impacts
on profit have been included in the forecasts supporting this
statement. The Directors believe that any adverse impact resulting
from Covid-19, that is not already included in the forecasts, would be
covered under the various scenarios that have been used to model
reductions in win rates and margins.
Due to the Group’s long-term contracting nature, the sensitivities
tested include a reduction in the win rates for rebids, extensions and
the pipeline of new opportunities, a reduction in delivering margin
improvements and a potential penalty arising from risks such as
contract non-compliance, major information security breach or a
material legal and regulatory compliance failure. A reverse stress test
of the Group’s profit forecast has been completed using different
assumptions of new business and rebid win rates and the Group’s
profit margin. This analysis shows that the Group can afford to be
unsuccessful on 60% of its target new business and rebid wins, or it
can be unsuccessful on 40% of its target new business and rebid wins
combined with a profit margin 40 basis points below the Group’s
forecast before the Group has insufficient liquidity available in
May 2024, on the assumption that the Group’s Revolving Credit
Facility is refinanced on similar terms and all USPPs and other facilities
are repaid during the period. May 2024 is the point with the lowest
amount of liquidity headroom using the sensitivities outlined above
against which the forecast has been stress tested.
As context, rebids have a more significant impact on the Group’s
revenue than new business wins, as contracts accounting for 63% of
total revenues are expected to be rebid in the next three years. The
Group has won more than 85% of its rebids and available contract
extensions over the last two years, therefore a reduction of 60% or
more to the budgeted win rates and rebid rates is not considered
plausible. While these sensitivities will change in line with the Group’s
order book and contract performance going forward, including the
impact of new contract wins and losses, the ability for the Group
to absorb sensitivities of this scale within its existing financing
arrangements drove the assumptions below which the Directors felt
appropriate to disclose in making this viability statement.
Mitigations
It is considered unlikely, but not impossible, that the crystallisation
of a single risk would test the future viability of the Group; however,
unsurprisingly, and as with many companies, it is possible to construct
scenarios where either multiple occurrences of the same risk, or single
occurrences of different significant risks, could put pressure on the
Group’s ability to meet its financial covenants. At this point, the Group
would look to address the issue by exploring a range of options
including, amongst others, a temporary or permanent renegotiation
of the financial covenants, disposals of parts of the Group’s
operations to reduce net debt and/or raising additional capital in
the form of equity, subordinated debt or other such instruments.
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Section 172 (1) Statement
The Directors of the Company are bound by their duties under the Companies Act
2006 and, in particular, must act in the way they consider, in good faith, would most
likely promote the success of the Company for the benefit of its members as a
whole, taking into account the factors listed in section 172(1)(a) to (f) of the
Companies Act 2006.
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The following disclosure describes how the Board has had regard to those matters and forms the
Directors’ statement required under section 414CZA of the Companies Act 2006.
– Attendance at virtual Divisional management conferences,
Colleague ConneXion and Inclusion Hub events, and virtual
and on-site contract visits. In 2021, members of the Board
engaged in over 30 contract visits and events.
– Feedback from employees through responses to the “Tell the
Board” section of the annual employee engagement survey,
Viewpoint. More details are provided on this below.
– Unscheduled Board and Committee meetings if the Board
needs to be informed of matters or when a decision is required
before scheduled Board meetings such as Covid-19
developments, trading updates, bids or M&A opportunities.
– A rolling agenda of matters which are considered by the Board
and Committees throughout the year, including a day long
strategy review which considers the strategy to be followed by
the Group, which is supported by a budget for the following year
and a medium-term financial plan.
– Formal consideration of large bids, acquisitions, refinancing,
share buybacks, dividends and other matters, including any
factors which are relevant to major decisions taken by the Board
through the year in line with the Delegation of Authority and
Terms of Reference for each Board Committee.
– Regular meetings between the Non-Executive Directors and
Divisional Risk Assurance Managers and Divisional Ethics
and Compliance Managers without Executive Directors or
other senior management present.
The Board also engages with stakeholders through news releases and
stock exchange announcements on a wide range of matters including
regular trading updates, in addition to the half and full-year results
reports and accompanying presentations, changes to the Board, key
leadership appointments, material shareholdings, refinancing and
corporate transactions, acquisitions, contract awards and losses, and
operational updates from across the Group. These news releases
and stock exchange announcements drive ad hoc engagement with
stakeholders and are available on the Company’s website.
Details of the Group’s key stakeholders, their key concerns and how
the Board engages with them are set out below.
Board Engagement with Stakeholders
The Board is committed to enhancing engagement and seeks
to build honest, respectful and transparent relationships with all
of the Company’s stakeholders. As with other large and complex
companies, the Directors fulfil their duties partly through a
governance framework which delegates day-to-day decision-making
to the Executive Directors and, within defined levels of costs and
impact, Divisional leadership teams. The Board recognises that such
delegation needs to be much more than simple financial authorities
and it covers areas such as risk, ethics, and new sector or country
approaches.
The governance structure, which covers the values and behaviours
expected of our employees, the standards to which they must adhere,
how we engage with stakeholders and how the Board looks to ensure
that we have a robust system of control and assurance processes,
is designed to drive high standards of business conduct across the
Group.
Our Environmental, Social and Governance (‘ESG’) Framework is
structured around our key stakeholders, and the Board has continued
to focus on our approach to and progress in delivering our ESG
commitments. We summarise our progress and performance in the
ESG Impact and Integrity section of this Annual Report on pages
39 to 76.
The Board considered the continued impact of Covid-19 on our
stakeholders and the Company’s response is set out throughout
the Annual Report, with more detailed information in the
Our People section on pages 35 to 38.
In addition to the methods of engagement described over the
following pages, the interests of our stakeholder groups are
considered by the Board through a combination of:
– Regular reports and presentations at scheduled Board and
Committee meetings, including operational reports, presented
by the Chief Executive Officer, and updates from the Chief
Financial Officer, Chief Operating Officer, Group General
Counsel and Company Secretary and other senior management
on a range of matters including strategy, financial, treasury and
tax matters, the approach to ESG, health and safety, assurance
and controls, risk, ethics and compliance, cyber security, people
matters (including employee engagement, workforce and
management diversity, gender pay gap, workforce remuneration
and related policies), markets, operational performance,
suppliers, community, environment, and customer and investor
feedback.
– Regular briefings from Divisional management, which include
details of engagement with Divisional stakeholders, strategy,
performance, local market and competitor positions, operational
and employee matters, and customer satisfaction and business
development.
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Section 172 (1) Statement continued
Our Shareholders
Engagement with and receiving the support of our shareholders is a key factor in achieving our ambitions. We seek long-term relationships
based on transparency, honesty and clarity – all of which are critical for building trust.
Our shareholders and debt holders are concerned with a broad range of issues, including how the Company has responded to and is
affected by Covid-19, other operational and financial performance, developments in our markets for public services, the execution and
delivery of our strategy, the sustainability of our business, and the impact Serco has on the communities we serve and the environment in
which we operate.
The Chief Executive Officer and Group Chief Financial Officer and other members of the senior management team meet with shareholders
to discuss relevant developments in the business at our post-results road shows and programme of investor meetings. We also consult with
investors and fund managers to seek their views and actively engage with proxy advisers and ESG analysts to provide feedback on specific
topics.
During 2021, we asked for feedback on our ESG reporting from our top 20 investors and those comments have been taken into account in
this year’s Annual Report and Accounts along with feedback received from shareholders and shareholder representative bodies. Following
the announcement of his appointment, our Chairman, John Rishton, undertook a governance roadshow in January 2021 and met with
a number of our top investors. The key themes of discussion were ESG, succession, growth and strategy. We repeated the governance
roadshow in 2022 and the Chairman was joined by the Remuneration Committee Chair and the Group General Counsel and Company
Secretary and further meetings with investors are planned.
In December 2021, we held a Capital Markets Day event. It was attended by the Chief Executive Officer and Group Chief Financial Officer,
the Chairman, a number of the Non-Executive Directors, the Executive Committee and members of the Divisional and Group senior
management teams. This included a series of presentations and Q&A sessions to provide an update and greater insight into the Group’s
strategy, business operations, and financials.
The Chief Executive Officer and Group Chief Financial Officer and other members of the senior management team also meet regularly with
our debt investors, including lending banks and US private placement note holders, and bi-annual update calls or meetings are arranged
with our debt investors after the half year and final results announcements.
The feedback received from the meetings with shareholders and debt investors is provided to the Board as part of the rolling agenda of
matters to be considered by the Board and Committees throughout the year.
The Board also sees and discusses the feedback received from proxy and ESG analysts on the Annual Report, the proposals put to the
Annual General Meeting and a range of ESG matters.
The AGM provides the Board with an opportunity to communicate with private and institutional investors. Due to the restrictions in place in
force in the UK at the time of the 2021 AGM due to Covid-19, the AGM again took place as a closed meeting. Although it was not possible
for the Board to meet with our shareholders in person at the 2021 AGM, all shareholders were invited to submit questions to the Board via
email prior to the meeting.
Further relevant details are referred to elsewhere in this report:
– Key Performance Indicators on pages 32 to 34.
– Further ESG items and details on our ESG performance and data are set out in the ESG Impact and Integrity section on pages
39 to 76.
– Details of notifiable interests in the shares of the Company are provided on page 177 of the Directors’ Report.
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Our People
Our people are at the heart of our business and, as a Company, we are the sum of the efforts, energy and values of our people, who are
critical to achieving our mission of improving the lives of citizens and service users around the world.
Through our annual Group-wide engagement survey, Viewpoint, and more frequent targeted ‘pulse’ surveying in selected parts of the
business, we know that our people are happy working with Serco and would recommend Serco as a great place to work. Each year our
colleagues provide their views on a wide range of topics so we can better understand their perspectives and experiences working with us.
Currently we are focussing on two main areas: creating career opportunities; and providing channels for colleagues to feel heard. There were
12,609 “Tell the Board” comments submitted and, as in previous years, compensation and recognition were key areas to be prioritised.
In addition to this, colleagues indicated that they would like the Board to focus on the journey out of Covid-19 with a key emphasis on the
next phase of the business and personal wellbeing.
During the year, the Board endorsed the launch of the Serco People Fund, which is an independent charity and embraces Serco’s value
of Care, providing support to current and retired colleagues and their families in times of need and when facing extraordinary financial
challenges. Dame Sue Owen, Non-Executive Director and the Employee Voice representative on the Board, updates the Board on
feedback received from our people at virtual engagement activities held throughout the year as part of the Employee Voice and Colleague
ConneXions initiatives. Other members of the Board, the Executive Committee and leadership teams participated in a number of these
virtual engagement activities and Serco Inclusion Hub events arranged by our employee networks: Serco Inspire, Serco Unlimited, Serco
Embrace and In@Serco. Reports on the activities of each network are received by the Board through the regular People reports provided by
the Group Chief Operating Officer and the Board conducts a focused review of the output of the Viewpoint survey every year.
Further relevant details are referred to elsewhere in this report:
– Our People Report, available on the Company’s website www.serco.com
– ESG Impact and Integrity section on pages 39 to 76.
– Employee engagement metrics as part of the Key Performance Indicators on page 34.
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Section 172 (1) Statement continued
Our Customers
As an international B2G business, our customers are many and varied, consisting of local, regional and national governments and agencies,
those receiving our services at a contract level and those who use the services we provide on behalf of our customers.
Our business is built on our ability to retain existing and win new customers. As such, understanding, engaging with and responding to
customer needs is a critical priority. While the demands vary significantly, at the most basic level our customers seek to procure from us
quality public service delivery, at a price they feel represents good value for money. This requires us to have both a deep understanding of
their sector specific needs, and the technical and commercial ‘know how’ to deliver public services more efficiently.
In addition, there are significant regional and sector specific concerns that vary enormously and which also change over time. For example,
nationalisation remains an issue for customers in the Middle East, and social value outcomes are core to most UK bids, and the importance
of supporting indigenous communities has been a feature of many bids in the Middle East, Americas and AsPac Divisions. It is critical that we
maintain a detailed appreciation of these concerns so that we can respond accordingly.
The Chief Executive Officer and Group Chief Financial Officer have continued to meet directly with different customers across all our regions
although this has been more challenging due to Covid-19. The Divisional Performance Reviews, which are made available to the Board, also
contain details on customer issues and engagement.
With the 2015 strategy having been implemented, with significant achievements and progress across the business, a detailed strategy review
was conducted involving all parts of the business and carried out over several months in 2021. As in previous years, this process culminated
in a day-long Board Strategy Day during which the Board debated current and future customer requirements at length. Further information
about the outcome of the 2021 strategy review is provided on pages 18 and 19.
The Serco Institute, often in conjunction with customers, looks at macro societal issues and the research and development of public service
solutions. Updates on the work of the Serco Institute are provided to the Board by the Group Strategy Director and a number of the Board
have attended Serco Institute events. The Serco Institute conducts research, holds events and produces research papers, articles and
thought pieces on a number of areas including:
– Delivering Better Services for the Public: How competition and choice can improve public service delivery in the UK
– People Powered Public Services: Monitoring Australian Opinion
– Competitive Tension: The value of contestable public services in a post-pandemic world (Australia)
– People Powered Public Services: Monitoring UK opinion
– What’s heading down the tracks? The Future of Passenger Rail in Britain
– Transformation, digitisation & happiness: Public opinion on UAE government services
– Transformation, digitisation & happiness: Public opinion on government services in Saudi Arabia
– Vaccine Passports & UK Public Opinion
Further relevant details are referred to elsewhere in this report:
– Pipeline and Order Book metrics as part of Key Performance Indicators on page 33.
– Divisional Reviews on pages 27 to 31.
– Principal Risks on pages 95 to 104 and in particular the risks of contract non-compliance, failure to act with integrity and failure to
grow profitably.
– The Serco Institute website at www.sercoinstitute.com.
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Our Suppliers
Suppliers have an important role to play in Serco being a leading international provider of public services. We aim to build honest,
respectful and transparent relationships with suppliers which have high levels of regulatory compliance and share our ethical standards and
commitment to sustainability throughout the supply chain.
Our suppliers are concerned with the ease of doing business with Serco, responsible business practices, conduct and ethics, driving
innovation, building long-term relationships, fair business terms and receiving prompt payment.
The Chief Executive Officer and Group Chief Financial Officer engage directly with key suppliers and the Board is regularly briefed on
operational matters and on the management and assessment of suppliers by Divisional senior management, the Group Director Enterprise
Risk, the Group Director Business Compliance and Ethics and the Director of Procurement.
The Board received a presentation on cyber security from a key supplier during the year which gave the Board an opportunity to receive
feedback and engage directly with the supplier.
During the year, the Board has overseen the launch of the Serco Sustainable Procurement Charter, which was well received by suppliers,
and were supportive of the assessment of current procurement practices against the ISO20400 framework (the standard for sustainable
procurement). In addition, as part of the annual risk review process, the Group Risk Committee considered the definition of the principal risk ,
Significant Failure of the Supply Chain, and expanded the risk to encompass the broader risk from the supply chain.
Further relevant details are referred to elsewhere in this report:
– ESG Impact and Integrity section on pages 39 to 76.
– Principal Risks on pages 95 to 104, in particular the significant failure of the supply chain.
Our Communities and Environment
Our communities comprise those living and working in close proximity to our operations, those for whom we provide services on behalf of
our government customers and those who represent the needs of the communities we operate in, including charities, independent bodies
and local government.
Operating amongst and on behalf of our communities, we strive to maintain a deep understanding of the complex social challenges that
impact them, whilst recognising our responsibility to contribute to the sustainability and wellbeing of society and the economy wherever we
operate.
We are also committed to building climate resilience and limiting the impact of our operations on the environment through more sustainable
business practices for our customers and stakeholders, including our communities through our strategic themes of carbon and climate
resource efficiency and environmental protection. We are committed to addressing the environmental and climate emergencies and
supporting the net zero carbon ambitions of our clients and wider society. Alongside our customers and other stakeholders, we recognise
that environmental sustainability is a critical factor in the wellbeing of society. In 2020, the Board endorsed a new standalone Group Strategy
for Environment, inclusive of carbon reduction targets, to sharpen focus and direction on delivering longer-term Group Environment,
Energy and Sustainability commitments in our operations and supply chain. To address key challenges and opportunities over the next ten
years, with oversight from the Board through the Corporate Responsibility Committee, we are focusing on enhancing understanding of our
environmental and climate risks and opportunities; evolving our business lifecycle process to capture and cost carbon and environmental
risks; reducing business travel, emissions and carbon; measuring and reducing the impact of our supply chain; and embedding
environmental behaviours in Group culture.
Our communities are primarily concerned with the impact of our operations on society, the economy, and the environment and knowing that
we operate and conduct our business as a respectful and responsible neighbour.
Members of the Board had the opportunity to meet with users of the services we provide on behalf of our customers during contract visits
and the work of the Serco Institute and the Serco Foundation informs reports from management as part of the rolling agenda of matters
considered during the year. The Director, Business Compliance & Ethics, Director, Health, Safety and Environment and the Group Head
of Environment, Energy and Sustainability provide regular updates on ethics and business conduct matters, the Speak Up service and
environmental strategy.
Further relevant details are referred to elsewhere in this report:
– ESG Impact and Integrity section on pages 39 to 76.
– The ESG section of our website at www.serco.com.
– The Serco Foundation website at www.sercofoundation.org
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Section 172 (1) Statement continued
Decision-making in practice
A summary of how the Board applied the factors listed in section 172(1)(a) to (f) of the Companies Act 2006 when making principal decisions
during the year is provided below.
Principal Decision
S172 Considerations
Acquisition of Whitney, Bradley &
Brown Inc (WBB), a leading provider
of advisory, engineering and
technical services to the US Military.
See also:
– Announcements released on
16 February 2021 and
27 April 2021
Covid-19 response and decision to
make further payments to front line
employees.
See also:
– Trading update on
15 November 2021
The Board considered the strategic rationale and how this acquisition would increase existing
capabilities, facilitate growth in the defence sector, enhance the services available to existing and new
Serco customers, the cultural alignment of the workforce, cost synergies, and integration costs.
The Board also considered how the acquisition would be received by shareholders, the impact on
Company margins and earnings per share, and the most appropriate financing method to complete
the purchase, which was completed utilising existing debt facilities whilst staying well within the
Company’s target leverage ratio.
The Board routinely reviewed the Company’s worldwide response to the ongoing Covid-19 pandemic
with updates from and discussions with the Group Chief Operating Officer to help ensure that
sufficient focus was being directed to the wellbeing and welfare of employees and that its customers
were getting the best service possible in challenging circumstances. It also spent time assessing the
outcomes from the annual Viewpoint survey of employees. The Board demonstrated its focus on
employees by recognising the intense pressure and extra work incurred as a result of Covid-19 by
announcing in November 2021 a further ex-gratia payment to around 50,000 employees, as it did in
2020, and in addition agreed to make a significant one-off commitment to the recently established
Serco People Fund. The fund provides cash and other support to current and retired colleagues
and their families who would benefit from a little extra help. Together, these initiatives will cost the
Company around £10m in 2021 and the Board considered the balance of employees and return to
shareholders in its considerations. The Board also assessed the impact on Covid-19 of its supply chain
and the risks inherent to that.
Bid for contract to support the UK
Department for Work and Pensions
Restart Programme.
See also:
– Announcement released
27 April 2021
The Board considered how the Company could utilise existing experience and expertise to support
the UK Government in delivering the Restart programme, which includes assessment of jobseekers’
needs to devise individually tailored programmes, identifying and leveraging skills to help UK citizens
find sustainable employment. The Board also considered the bid in the context of the Company’s
strategy and the Company’s track record in employment services, and in enhancing the supply base
by working with teams of expert partners, including small companies and charities, to achieve positive
outcomes for individual job-seekers, the UK economy and the community more generally. The
Company was awarded two contracts (covering the East Central region and Wales) in April 2021.
Bid for contract to continue
providing support services to
Covid-19 regional, local and
mobile test centres in England
and Northern Ireland for the UK
Department of Health and Social
Care (DHSC).
The Board considered how the services provided under this contract would utilise existing expertise
and capabilities to provide asset administration support, cleaning and security services and allow the
Company to continue to support the UK Government in building and operating the UK’s Covid-19
testing infrastructure and meet the demand for testing. The Board noted the part the Company had
played in building the UK’s Covid-19 testing infrastructure which had benefited the customer, involved
numerous suppliers and many small and medium-sized enterprises, as well as providing employment
to thousands of new colleagues and providing benefit to the Company’s shareholders.
Submission of second report
to the SFO under the Deferred
Prosecution Agreement (DPA)
entered into in 2019
The Board and its committees regularly reviewed progress under the Company’s DPA plan to ensure
it was in accordance with the obligations and undertakings under the DPA. It was noted that this
continued to demonstrate the strong values and robust governance and transparency undertaken by
the Company, helped enhance its relationship with its key UK customers and improved the governance
of its suppliers in helping to ensure an ethical supplier base. It reviewed and approved the delivery of
the second of three reports to the SFO during the year, with the final report being due in June 2022.
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Principal Decision
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ESG
Cyber
Strategy
See also:
– Capital Markets Day
announcement and presentation
released on 2 December 2022
The Board maintain oversight and scrutiny of environmental, social and certain governance matters
(including anti-corruption and anti-bribery, human rights, environmental approach, health and safety
and other employee matters) through the Board’s standing committee, the Corporate Responsibility
Committee. Oversight and scrutiny of other governance matters is distributed between all standing
committees of the Board, with certain matters reserved for the Board itself. In considering ESG
matters it took into account the views of investors that had been gathered over the year as well as
hearing from the Company’s brokers on their views on ESG issues and how this is taken into account
by investors. The Company’s approach to ESG featured in the Capital Markets Day which many of
the Board attended. The views of employees were considered in various ways either through the
attendance of the Board at contract visits or attending events such as the D&I events outlined in
this Report or through the work of the Non-Executive Director responsible as the key interface with
employees. This was also relevant in the Board’s reviews of the Speak Up process, Group Health &
Safety strategy, Group Environmental strategy and the Group People strategy, including Wellbeing,
and the Group Employee Voice. There was discussion on issues such as Social Value and how this was
taken into account by customers and the Board received regular reports on ESG both at the Corporate
Responsibility Committee and at the Board, reviewed ESG Key Performance Indicators (“KPIs”) and
discussed how analysts viewed the Company’s approach to ESG and how it could adapt and improve
its disclosures. In relation to suppliers, ESG considerations were taken into account with the Board’s
review of suppliers performance and in particular the review of the Sustainable Procurement Charter.
The Board reviewed the Company’s approach to cyber-security, data protection and cyber risk in the
year including the Company’s response to the cyber-attack on the Company’s European business in
January 2021. As part of that they discussed the possible impact on employees of possible data loss as
well as the potential impact on customers. As part of wider reviews it discussed security assessments
and accreditations as well as the approach to seek to improve the Company’s cyber resilience and
potential weaknesses in the supply chain or with joint venture partners. It also met with a key IT
supplier to discuss that supplier’s approach to cyber-attack and the resilience and business continuity
plans it had in place. At the Audit Committee it received an update in relation to the Company’s
approach to data protection and covered, amongst other matters, how to improve training and
employee awareness and improve 3rd party and supplier due diligence in this key area.
Shareholders, Customers, People, Suppliers, Community and the Environment are both critical and
central to any meaningful discussion on Strategy. The Board regularly reviewed updates from global
functions, the global sector Centres of Excellence, as well as every operating Division throughout the
course of the year, all of which contained elements of, and updates on, their respective strategies. In
addition, all Board members held individual Strategy discussions with the Group Strategy Director
during the year to discuss their key strategic questions and any new areas of desired strategic
exploration for the Group – many of which related to our people, culture, ESG, social value, how
investors regard us, and how we might better serve our customers. The Board discussed Strategy at
length and in detail at the Annual Board Strategy Day, with presentations led by the Group Strategy
Director, Group Chief Executive and Group Chief Financial Officer, and at further subsequent
discussions following this meeting. These sessions and debates were relevant to all our stakeholders
and reached conclusions on, amongst other things: the updated five-year plan for the Group in
both financial and qualitative terms; the key steps, methods, strengths and weaknesses of this plan
including customers, people, suppliers, community and the environment; a summary of the Divisional
and Sector strategies for the next five years; the Group’s portfolio for the next five years – including
the position and potential of each Division and each Sector and how they fit together; the Company’s
top internal and external strategic challenges and opportunities in reaching its ambitions over the next
five years and plans to address those; and Serco’s B2G operating platform and offer to both customers
and shareholders. The strategy formed the basis of the Capital Markets Day where the Board was able
to ascertain reactions of both investors and customers who attended in person or virtually.
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Section 172 (1) Statement continued
Principal Decision
S172 Considerations
Returning funds to shareholders:
Dividends and Share Buyback
programme.
See also:
– Finance Review (pages 77 to 91)
– Results of AGM announcement
(21 April 2021)
– 2020 full year results
announcement (25 February
2021)
– 2021 half year results
announcement (5 August 2021)
In February 2020, the Board recommended the payment of a final dividend in respect of the year
ended 31 December 2019, the first time it had been able to make such a recommendation since 2014.
It was a milestone in the recovery of the Company. Covid-19 then intervened and, in April 2020, the
Board withdrew the recommendation stating that: “At a time when the UK and other governments
are helping Serco with its liquidity, it seems inappropriate to use that cash for anything other than
its intended purpose of protecting the financial strength and resilience of our business.” The Board
considered carefully the timing of the re-instatement of dividends, which was more than a simple
financial calculation, given the importance of acting responsibly from a reputational perspective at
that time. The Board was mindful of the views of some of the institutions and agencies whose opinion
shareholders may value, as well as taking into account more broadly, to the extent that it could discern
them, views of other stakeholders. It considered whether to defer payments of dividends again, given
that the pandemic was still prevalent. However, it felt that Serco, as a company, had been saved by its
shareholders and supported on its return to growth, with £850m of additional equity injected into the
Company since May 2014 and the Board felt strongly that shareholders should see cash returns on
their investment at the earliest moment it was appropriate and prudent for them to do so. The Board
felt four things had changed since the earlier decision-points of the initial Covid-19 trading updates.
First, any concerns on liquidity had proved groundless: there had been a successful refinancing
of the Company’s long-term debt (and at lower cost) and the Company had been strongly cash-
positive in 2020; leverage, even after the WBB acquisition, was in the middle of the Company’s target
range. Secondly, the Company had refunded all employment and liquidity support paid to Serco by
governments, with the exception of £12m in the USA at that time, for which there is no mechanism for
early repayment. Thirdly, the profits arising from the Company’s work on Covid-19 did not represent
a disproportionate proportion of the Company’s profits in the year at that time. Finally, the Board had
sought to recognise the intense pressure and extra work that Covid-19 had brought to its staff by
making an ex-gratia payment of £6m to 50,000 of our front-line colleagues. In the light of those four
considerations, the Board felt it both appropriate and prudent to recommend the payment of a final
dividend of 1.4p per share in respect of the year ended 31 December 2020. The Board also considered
and agreed to cancel £20m of the £40m of shares, the re-purchase of which was announced at the
pre-close Trading Update in December 2020; the £20m would have been roughly equivalent to the
cash value of the 2019 final and 2020 interim dividends foregone. The payment of a dividend was
unanimously supported by shareholders at the AGM. The Board further reviewed whether to make an
interim dividend payment in the year and decided to declare an interim dividend of 0.8p in respect
of the first half of 2021. The Board also explained its dividend approach at the Capital Markets Day to
give more information to analysts and shareholders on its long term dividend policy.
In addition, the Board has agreed a further share repurchase of up to £90 million shares over the
next 12 months and is recommending a final dividend of 1.61p per share in respect of the year ended
31 December 2021.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
23 February 2022
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Contents
116 Board of Directors
119 Chairman’s Governance Overview
123 Board and Governance
125 Group Risk Committee Report
128 Audit Committee Report
133 Nomination Committee Report
135 Corporate Responsibility Committee Report
137 Compliance with the UK Corporate
Governance Code
139 Remuneration Report
171 Directors’ Report
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Corporate GovernanceContents_GEN_PageContents_GEN_PageL2 Board of Directors
Board of Directors
John Rishton
Chairman
Rupert Soames OBE
Group Chief Executive Officer
Nigel Crossley
Group Chief Financial Officer
A
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GR
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GR
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Appointed to the Board
September 2016 (Chairman since April 2021)
Appointed to the Board
May 2014
Appointed to the Board
April 2021
Skills and experience
John Rishton has over 40 years’ business experience
gained in a variety of companies, industries and roles,
including nearly 14 years as a chief executive or
chief financial officer.
Skills and experience
Rupert Soames is an experienced chief executive
officer having held the role for nearly 20 years in other
companies before joining Serco as Chief Executive
in 2014.
Skills and experience
Nigel Crossley is an experienced chief financial officer
with over 30 years’ experience in finance roles in
international organisations. He has worked for
Serco since 2014.
He has a BA in Economics from Nottingham
University and is a Fellow of the Chartered Institute
of Management Accountants.
He studied Politics, Philosophy and Economics at
Oxford University, where he is now a visiting fellow,
and was President of the Oxford Union.
Previous roles
Chief Executive of Rolls-Royce Group plc, Chief
Executive and President of the Dutch international
retailer, Royal Ahold NV (and prior to that, its Chief
Financial Officer) and Chief Financial Officer of British
Airways plc. Non-Executive Director of Associated
British Ports, Allied Domecq and ICA Gruppen AB.
Previous roles
Chief Executive of Aggreko plc and the Banking and
Securities Division of Misys plc.
Senior Independent Director and a member of the
Remuneration, Nomination and Audit Committees of
Electrocomponents plc.
Current external commitments
Non-Executive Director and Chair of the Audit
Committee of Unilever plc (until the 2022 Annual
General Meeting).
Current external commitments
Non-Executive Director and a member of the Audit,
Nomination and Remuneration Committees of
DS Smith Plc.
Chair of Informa plc.
Non-Executive Director of Majid al Futtaim
Properties LLC.
He has a BSc in mathematics from Hull University.
Previous roles
Director of Finance and transformation EMI, Group
financial controller RHM plc and various finance roles
at Procter & Gamble.
Current external commitments
None.
Key to Committee membership
A
N
R
C
Audit Committee
Nomination Committee
Nomination Committee
Remuneration Committee
Remuneration Committee
Corporate Responsibility Committee
GR Group Risk Committee
Group Risk Committee
Committee Chair
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Senior Independent Non-Executive Director
Kirsty Bashforth
Independent Non-Executive Director
Kru Desai
Independent Non-Executive Director
A
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GR
A
N
R
C
GR
A
N
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GR
Appointed to the Board
July 2017
Designated Director with responsibility for climate
change
Appointed to the Board
October 2021
Skills and experience:
Lynne Peacock has over 30 years’ senior
management experience in a range of roles including
brand development, mergers and acquisitions,
change management and business transformation.
She has a BA (Hons) in Business Studies.
Previous roles
Non-Executive Chair of Standard Life Assurance
Limited and Non-Executive Director and a member
of the Nomination and Governance Committee and
Audit Committee of Standard Life Aberdeen plc.
Non-Executive Director and Chair of the Audit
Committee of Scottish Water.
Senior Independent Director, Chair of the
Remuneration Committee and member of the Audit,
Risk and Nomination Committees of Nationwide
Building Society.
Non-Executive Director and a member of the
Audit and Risk, Nominations and Remuneration
Committees of Jardine Lloyd Thompson Group plc.
Chief Executive of Woolwich plc and National
Australia Bank Limited’s UK businesses.
Current external commitments
Non-Executive Director and Chair of the
Remuneration Committee of Royal Mail plc.
Appointed to the Board
September 2017
Skills and experience
Kirsty Bashforth is an experienced executive and
board member within the construction, services,
consumer goods, health and education industries,
with expertise in change management, safety and risk
management, organisational culture and leadership.
She has an MA in Economics from the University of
Cambridge and is the author of “Culture Shift – a
practical guide to managing organizational culture”.
Previous roles
Non-Executive Director, Chair of the Safety, Health
and Environment Committee and a member of
the Nomination, Remuneration, Risk Management
and Audit Committees of Kier Group plc.
Non-Executive Director and Chair of the
Remuneration Committee of Diaverum AB.
Chief Executive Officer of QuayFiveLimited.
Group Head of Organisational Effectiveness at bp plc
and other global roles.
Non-Executive Director, Chair of the Remuneration
& People Committee and a member of the Audit &
Risk and Reputation & Ethics Committees of
GEMS Education.
Senior Independent Director and Chair of the
Remuneration Committee of TSB Bank plc.
Governor of Leeds Beckett University and Ashville
College.
Chair of the charity, Learning Disability Network
London.
Current external commitments
Chief Business Officer of Diaverum AB.
Skills and experience
Kru Desai has over 30 years’ experience of working
with the public and private sector in leading
transformation of public services in the UK and
internationally. She has held general management
and board leadership roles in sales and operational
delivery.
She has an MSc in Politics and Administration from
Birkbeck College, University of London and an
Executive MBA from the University of Bristol.
Previous roles
Partner, KPMG LLP (UK).
Non-Executive Director and Chair of the
Remuneration Committee of KPMG LLP (UK).
Executive Director and Member of the Group
Management Board of Mouchel Group plc.
Executive Director and Member of Management
Board of Hedra PLC.
Managing Director of Atos (UK).
Current external commitments
Chair of the Zinc Network.
Vice Chair and Chair of the Audit and Risk
Committee at City, University of London.
Independent Non-Executive Director of
Buro Happold limited.
Independent Commissioner of the Geospatial
Commission.
Non-Executive Director, Chair of the Remuneration
Committee and a member of the Nomination and
ESG Committees of PZ Cussons plc.
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Board of Directors continued
Ian El-Mokadem
Independent Non-Executive Director
Tim Lodge
Independent Non-Executive Director
Dame Sue Owen DCB
Independent Non-Executive Director
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Appointed to the Board
July 2017
Appointed to the Board
February 2021
Designated Non-Executive Director for
Employee Voice
Skills and experience
Ian El-Mokadem is an experienced chief executive
officer with international experience in business
transformation and in acquisitions and disposals.
He has a BSc (Hons) in Economics and Statistics
from University College London and an MBA from
INSEAD.
Previous roles
Chief Executive Officer of V. Group and Exova
Group plc, Group Managing Director, UK & Ireland
of Compass Group plc and senior management
positions with Centrica plc and the global
management consultancy, Accenture.
Current external commitments
Chief Executive Officer of RWS Holdings plc.
Director of Roegate Consulting Limited.
Skills and experience
Tim Lodge is a fellow of the Chartered Institute of
Management Accountants and has a strong finance
and accounting background with over 30 years’
experience in financial roles within international
organisations, some eight of which as chief financial
officer. He has considerable experience in leading
significant strategic and operational transformation
and driving commercial performance.
He has an MA in Classics from the University of
Cambridge.
Previous roles
Chief Financial Officer at Tate & Lyle PLC and
COFCO International and a Non-Executive Director
and Chair of the Audit Committee of Aryzta AG.
Current external commitments
Non-Executive Director and Chair of the
Audit Committee of SSP Group plc.
Senior Independent Director of Arco Limited.
Appointed to the Board
August 2020
Skills and experience
Dame Sue has significant experience of government
and economic policy, having held senior roles in
several government departments.
She has a MA in Economics from Cambridge
University and an MSc in Economics from Cardiff
University.
Previous roles
Permanent Secretary for the Department for Digital,
Culture, Media and Sport, Civil Service LGB&T
(straight ally) Champion and overall Diversity and
Inclusion Champion, chair of the Charity for Civil
Servants and senior posts in the Department for
Work and Pensions, Department for International
Development, Foreign Office and HM Treasury.
Current external commitments
Chair of the Royal Ballet Governors.
Director of An African Canvas (UK) Limited.
Specialist partner at Flint-Global.
Chair of the management committee of the
Cordwainers Livery Company.
Non-Executive Director of Pantheon
International plc.
Trustee of Gambia School Support.
Non-Executive Director of Pool Reinsurance
Company Limited and Pool Reinsurance (Nuclear)
Limited.
Non-Executive Director of Methera-Global
Communications.
Trustee of Opera Holland Park.
Trustee of The Windsor Leadership Trust.
Supervisory Board of DAF NV.
Key to Committee membership
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Nomination Committee
Nomination Committee
Remuneration Committee
Remuneration Committee
Corporate Responsibility Committee
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Group Risk Committee
Committee Chair
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Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Chairman’s Governance Overview
Corporate Governance Report
Chairman’s Governance Overview
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This report sets out how Serco is
governed and the key activities of
the Board of Directors in promoting
effective governance during 2021.
Further information on how the
Company complied with the UK
Corporate Governance Code
during 2021 is set out on pages 137
and 138.
John Rishton
Chairman
2021 Highlights
– Continued refreshment of
Board and Committee
membership
– Further improvements to
internal procedures to improve
Board effectiveness following
the internal Board evaluation
undertaken in 2020
– Maintaining momentum in our
approach to “Employee Voice”
throughout the organisation
– Evolution of the remit of the
Group Risk Committee
Dear Shareholders
I am pleased to present the Corporate Governance Report for 2021. The Board believes that good
governance is key to the long-term success of the Group and is committed to achieving high
standards of governance.
I am pleased to confirm that, during 2021, the Company has complied fully with the principles and
provisions of the UK Corporate Governance Code (“the Code”) with the exception of provisions
38 and 41, explanations for which are provided below and, in more detail, on page138. Details of
how the Company has complied with the Code are set out on pages 137 and 138.
The two items of non-compliance relate to the Chief Executive Officer’s pension opportunity
which, following the introduction of the Code, is being reduced over a period of time and which
will align with the level of pension opportunity available to the wider workforce by 1 January 2023,
and to the engagement of the wider workforce in setting executive pay. These are explained in
more detail on page 138 and in the Directors’ Remuneration Report on pages 139, 141, 142
and 156.
The work of the Board’s committees is set out on the following pages. There have been several
changes to the Board and membership of the Committees during the past year, including the
appointments of a new Chairman, a new Chief Financial Officer, two new Non-Executive Directors
and a new Senior Independent Director. Following the retirements of Sir Roy Gardner and Angus
Cockburn at the 2021 Annual General Meeting, I became Chairman and Nigel Crossley became
Chief Financial Officer. My previous roles as Senior Independent Director and Chair of the Audit
Committee were assumed by Lynne Peacock and Tim Lodge respectively, Tim Lodge having been
appointed as a Non-Executive Director earlier in the year. Kru Desai was also appointed as a
Non-Executive Director and Eric Born stood down. The changes to Committee membership are
set out on the following page.
The Board and its Committees have continued to work well together and we now have a
separate discussion after each Board meeting with only the Non-Executive Directors present.
We also have informal dinners – attended by all members of the Board – to which members of
senior management are sometimes invited. These additional opportunities to meet have proved
productive and effective.
Following my appointment as Chairman, accompanied by senior management, I met a number
of shareholders to discuss governance matters and we have held a number of further meetings
with shareholders during 2022. It is important to hear directly from shareholders to help us shape
our approach to governance and to ensure our disclosure meets their specific requirements in
addition to that required by regulation.
We have a strong and diverse Board with over 40% female representation and an increasing level
of female representation within senior management, further details of which are set out below.
Annual Report and Accounts 2021
Serco Group plc
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Corporate Governance Report continued
Chairman’s Governance Overview continued
Our Board effectiveness evaluation was carried out externally in 2021
having last been undertaken externally in 2018. The outcome of the
evaluation was generally positive and details of recommendations
arising from it are set out later in this report.
In addition to the ESG Report, I would encourage you to read the
standalone People Report and the wealth of information available on
our website. For example, our published supplements in relation to
Human Rights and our approach to Anti-Bribery and Corruption.
Our commitment to engaging with the wider workforce continues,
with Dame Sue Owen taking over from Kirsty Bashforth as the Board’s
employee representative as Colleague ConneXions lead and working
closely with the Company, with the support of our Group Colleague
Communications Manager, to ensure the Board fully understands
employees’ perspectives and issues. This is a key area of focus for
the Board and, whilst it is led by Dame Sue Owen, a number of our
Non-Executive Directors have actively participated in the various
Diversity & Inclusion (“D&I”) network events over the year. The D&I
work we do is critical to the Company and, during the year, the Board
has been involved in in@serco, our network for LGBT+ colleagues
and their allies, Embrace, our network for multicultural colleagues,
Unlimited, our network for disabled colleagues and their allies, and
Inspire, an open network for all colleagues to talk gender. In addition,
several of our Non-Executive Directors have participated in Fireside
Sessions which have been particularly powerful. They have also joined
calls with employees in forums addressing health & safety and ESG
issues and they have all attended actual or virtual site visits, meeting
with employees at our contracts in all of the geographies where the
Company operates; such visits are a vital part of connecting with
the wider business and hearing concerns which can be fed back to
management.
Effectiveness
As Chairman, I am responsible for providing leadership to ensure
that the Board operates effectively. I have been supported in this
by all the Directors, in particular Lynne Peacock who was appointed
our Senior Independent Director on 21 April 2021 when I became
Chairman. Despite the challenges created by Covid-19 in meeting
together as a Board during the first few months of the year, we were
able to continue with our scheduled programme of Board meetings
both by video conference and, when permitted, at our offices in Hook
where the design of our offices enabled us to follow government
guidance such that we were able to meet in person. I am pleased to
say that, because we were able to meet the challenges presented,
meetings continued to be held effectively, with presentations from
management and third parties.
The annual reviews of Board effectiveness help the Board to consider
how it operates and how its operations can be improved. This year,
the review was undertaken externally by Gould Consulting Limited
and the findings of this review have provided us with ideas to further
improve the manner in which the Board operates which, together with
progress against recommendations from the internally facilitated
evaluation undertaken in 2020, are set out on page 124.
Members of the Board were also able to participate in the Divisional
Management Conferences which were held virtually last year. The
high attendance levels at the Trust sessions held as part of the
conferences and the feedback generated demonstrated how well
our Values are embedded across the Group.
Non-Executive Directors also attended the Capital Markets Day
in December 2021, providing an opportunity to meet investors,
banks and customers at an event where we were able to demonstrate
how good governance underpins our strategy.
A number of the Board attended Serco Institute events during
the year.
The engagement scores in our annual employee engagement survey
remained high, despite the challenges faced by the Company and
its employees during the pandemic. The survey includes a section
entitled “Tell the Board” and the issues raised are discussed by the
Board and followed up to ensure that common or significant issues
are addressed. Further details of the engagement survey are on
page 34.
Our commitment to ESG, on which there has been considerable
focus during the year, continues to be central to the way we operate.
In particular, ESG targets are now included as a measure within
the incentive schemes by way of an ESG scorecard which is more
fully described in the Directors’ Remuneration Report. We have
endeavoured to further enhance our reporting in this area and have
now aligned our reporting to the GRI index in addition to the SFDR
reporting and made access easier to third party reports published
in relation to a number of our operations. Further details of the
Company’s approach to ESG and activity during the year are included
in the section of this report entitled “ESG Impact and Integrity”
on pages 39 to 76 and in our separate ESG Report.
Changes in the Board
As announced in October 2020, Sir Roy Gardner stood down as
Chairman at the Company’s Annual General Meeting on 21 April
2021. Following Sir Roy’s retirement, I became Chairman, Lynne
Peacock assumed the role of Senior Independent Director and
Tim Lodge, who was appointed as a Non-Executive Director and a
member of the Audit, Group Risk and Remuneration Committees on
21 February 2021, became Chair of the Audit Committee.
As announced in December 2020, Angus Cockburn stood down
as Chief Financial Officer at the Annual General Meeting and was
succeeded by Nigel Crossley, who was previously Group Director of
Finance and who joined the Board after the Annual General Meeting.
During the year, we announced the appointment of Kru Desai
as a Non-Executive Director and a member of the Corporate
Responsibility and Nomination Committees with effect from
21 October 2021; she has subsequently joined the Audit Committee.
We also announced that Eric Born, who joined the Board in 2019,
would be standing down on 31 December 2021.
In addition to the changes in the composition of the Board, several
changes were made to the membership of the Board’s committees.
The Nomination Committee was expanded on 21 April 2021 to
include all Non-Executive Directors through the appointment of
Kirsty Bashforth, Eric Born, Dame Sue Owen and Tim Lodge and
subsequently, on her appointment as a Non-Executive Director,
Kru Desai. Dame Sue Owen, who replaced Kirsty Bashforth as the
lead Non-Executive Director for Employee Voice, was appointed as a
member of the Corporate Responsibility Committee and stood
down from the Audit Committee on 21 April 2021. At the same time
Ian El-Mokadem stood down from the Corporate Responsibility
Committee and was appointed as a member of the Audit Committee.
The Chairs of the Audit and Group Risk Committees now sit
on each other’s committees providing a useful link between the
two committees.
120 Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Contract visits and employee engagement
Non-Executive Directors are encouraged to continually increase
their knowledge of the operations of the Company, its customers, its
employees, end users and the communities it works in. This includes
visits to contract sites which enable them to witness the day-to-day
service provided by our contract teams as well as meeting customers
and other stakeholders, and holding “town hall” sessions to hear
the views of our employees. The visits provide a deeper level of
understanding of the risks and opportunities faced by our contract
teams on a daily basis, together with the Group-wide challenges
regarding the scale and variety of our operations. In response to the
continuing restrictions brought about by Covid-19, the number of
physical visits it was possible to undertake was considerably reduced,
but, in addition to those visits it was possible to make in person, a
number of “virtual site visits” were made by Non-Executive Directors
during 2021 and a programme of such visits for 2022 has been
prepared, of which we hope many will be in person.
During site visits and visits to the Group’s international offices,
both “virtual” and face-to-face, Non-Executive Directors take the
opportunity to discuss issues with the wider workforce and senior
management. In a normal year the Non-Executive Directors would
have attended the Oxford Management Programme for senior
management. Although involvement in this programme was severely
restricted in 2021 due to Covid-19, Non-Executive Directors did
participate in a number of Diversity & Inclusion events and also
attended our International Day of Disabled People.
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Whilst good progress is being made across the Group in many
aspects of diversity and inclusion, sustainable change requires a
long-term perspective and this continues to be a key focus for the
Company which the Board will continue to address when considering
refreshment of the Board. In relation to women in leadership roles
at the Executive Committee and their direct reports, the level
reported for the Hampton-Alexander review was 46.1%. Of our global
leadership team of 984 senior leaders, 117 (representing 32%) were
women. It is well recognised by the Board that the Company needs
to improve female representation at this level of management and
the Company has an active and targeted plan to further improve this
in 2022.
More information is provided in the Nomination Committee Report
on pages 133 and134.
Shareholder engagement
Details on how the Board engaged with shareholders is set out in the
s172 statement on page 108 and, as described earlier in this overview,
members of the Board met or communicated with a number of
shareholders to discuss a range of issues including governance and
remuneration issues.
In addition, Non-Executive Directors were able to virtually attend
Divisional Management Conferences at which they had the
opportunity to reinforce the importance of good governance.
John Rishton
Chairman
23 February 2022
Diversity
The Board is committed to ensuring the development of gender
and ethnic diversity amongst the Company’s senior management
population and annually reviews its recommendations on gender and
ethnic diversity for senior management roles. It recognises that there
is more to do, not just at the Board level, but also in regard to Senior
Leadership level.
Whilst the Board has become more balanced over recent years,
culminating, at the end of 2021, with four of the Board, representing
44%, being women, we recognise we still have more to do, not least
with regard to other areas of diversity at Board level.
Our overall gender balance now comprises of 44% women, some
24,000, across the organisation. While our gender balance differs
based on specific roles, geographies and bands, we are pleased that
female representation in our leadership population has increased to
32% and we are on track to deliver our aspiration of having at least
35% of the leadership group comprising of women by 2023.
On 5 April 2021, Serco employed approximately 23,000 people in the
UK across a number of companies. We choose to voluntarily disclose
our consolidated UK figures, for all UK colleagues at 5 April 2021,
including the Directors of Serco Group plc. For April 2021, our median
hourly pay gap is 6.96%, continuing the downward trend we have
seen across the last four years of reporting and down from 10.9% in
2020. We are pleased to have maintained this reduction, but we still
have a gender pay gap and much work still to do. Further information
is available in our 2021 Gender Pay Gap report.
Annual Report and Accounts 2021
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What the Board has achieved in 2021
During the year the Board receives regular reports and
presentations on subjects including: operational matters
(including the Centres of Excellence), business development
pipeline, operational deep dives from across the Company’s
divisions and its shared services operation as part of the
monitoring of the Group’s operations, financial performance,
budgets, finances, liquidity and tax matters, deep dives into
key risks and oversight of detailed risk reviews undertaken by
the Group Risk Committee, succession planning at board and
senior management level, employee engagement, diversity and
inclusion, people updates (covering matters affecting the health
& safety and wellbeing of the Group’s employees), pensions,
gender pay gap, investor relations (including reporting by the
Company’s brokers), IT resilience and cyber security, ethics &
compliance, ESG, legal & governance and matters discussed
at each of the Board’s Committees.
It also approves the full and half year results, trading updates,
including any unscheduled trading updates, dividend policy and
the recommendation of final and approval of interim dividends,
material bid submissions, Board and Committee appointments,
matters recommended to it by the Committees, Non-Executive
Directors’ fees, the Modern Slavery statement and changes
required by evolving governance.
In addition, during 2021, the Board:
– Considered the impact of Covid-19 on the Company’s
financial position, in particular, liquidity, its culture and
operational requirements (in particular people and supply
chain) and on its existing business and the additional
requirements of governments worldwide in meeting the
challenges presented by the global pandemic.
– Recommended the re-introduction of dividend payments.
– Approved the repurchase of shares at a cost of £40 million,
subsequently cancelling 15,371,849 shares and transferring
15,000,000 shares to the Company’s Employee Benefit Trust
to satisfy awards under the Company’s share schemes.
– Reviewed and challenged the strategy of the Group,
supported management in the Group’s strategic
development and approved the strategic approach
and outcome.
– Held a Capital Markets Day.
– Reviewed and approved the acquisition of Whitney, Bradley
& Brown Inc and considered other merger and acquisition
opportunities.
– Reviewed the transition and integration of newly acquired
businesses, in particular, Facilities First Australia Holdings
Pty. Limited (acquired in 2020) and Whitney, Bradley &
Brown Inc.
– Considered the impact of Brexit.
– Considered the impact of the loss of existing contracts and
reasons for the failure of some bids and re-bids.
– Received training in matters including ESG, TCFD, Modern
Slavery and corporate developments.
– Considered executive succession planning and oversaw the
transition of the Chief Financial Officer.
– Reviewed cyber resilience with a key IT supplier.
– Considered and implemented recommendations arising
from the Board performance evaluation.
– Further considered investor views on and the Company’s
approach to sustainability and ESG factors and the
reporting thereof.
– Engaged with the Company’s stakeholders.
– Attended management meetings and site visits in person
and by video conference.
– Attended Management conferences by video conference in
each of the Divisions.
– Continued the enhancement of risk management.
– Considered alternative arrangements for the Company’s
Annual General Meeting.
– Reviewed progress made under the compliance and
implementation plan agreed with the Serious Fraud Office
under the Deferred Prosecution Agreement and approved
the second of three annual reports to be submitted to
the SFO.
– Launched the Serco People Fund with £4 million to support
current and retired colleagues and their families.
Board priorities for 2022
During 2022, the Board will continue to oversee those matters referred to above with particular focus on:
– Implementation of the outcome of the strategy review,
including the development of the drivers of efficiency within
our core platform
– Succession planning
– Board training
– ESG matters and enhancement of ESG scorecards
– TCFD
– Risk Management, Controls and Assurance
– Cyber and Data Security and Data Protection
– Diversity & Inclusion
– Close out of the Deferred Prosecution Agreement
– Review of key bids for new business and material re-bids for
existing business
– Long-term effects of Covid-19
– Management conferences
– Further stakeholder engagement including on ESG and
Remuneration matters
– Changes in governance, in particular, those arising from the
proposals contained within the consultation document issued
by BEIS
122 Serco Group plc
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Board and Governance
Board and Governance
The Board has a comprehensive corporate governance framework, with clearly
defined responsibilities and accountabilities to safeguard long-term shareholder
value, which provides an effective platform to realise the Group’s strategy.
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Board and Governance structure
Board of Directors
Audit
Committee
Corporate
Responsibility
Committee
Group Risk
Committee
Nomination
Committee
Remuneration
Committee
Approvals and Allotment
Committee
Executive Committee
Investment Committee
Board of Directors
Committee comprised solely of Board members
Committee comprised of Executive Board
members and senior management
The Company’s governance structure is illustrated above. There is a schedule of matters reserved for the Board which is available on the
Company’s website. The Board has delegated certain of its responsibilities to the Audit, Corporate Responsibility, Group Risk, Nomination
and Remuneration Committees, the terms of reference of each of which are also available on the Company’s website. In addition, there is a
Disclosure Group which meets to consider the disclosure of information to meet legal and regulatory obligations under the Market
Abuse Regulation.
The Executive Committee is chaired by the Group Chief Executive Officer and additionally comprises the Group Chief Financial Officer,
Divisional Chief Executives, the Group Chief Operating Officer, the Group Strategy and Communications Director and the Group General
Counsel and Company Secretary. The Committee has delegated responsibility from the Board to ensure the effective direction and control of
the business and to deliver the Group’s long-term strategy and goals.
The Investment Committee comprises the Group Chief Executive Officer, the Group Chief Financial Officer, the Group Chief Operating Officer,
the Group Strategy and Operations Director, the Group General Counsel and Company Secretary and other members of the management team.
It acts on behalf of the Board to review, monitor and approve bids, mergers, acquisitions and disposals and other corporate activity within specific
authority limits delegated by the Board.
The Approvals and Allotment Committee comprises the Group Chief Executive Officer, the Group Chief Financial Officer and the Group
General Counsel and Company Secretary. This Committee acts on behalf of the Board between Board meetings in respect of matters
delegated to it by the Board and to finalise matters already approved in principle, including the approval of documentation for shareholders,
the declaration of interim and the recommendation of final dividend payments and the allotment of shares.
The table below gives details of attendance at Board and Committee meetings during 2021. On occasions when Directors are unable to attend
meetings due to conflicting appointments, their views are sought by the Chair of the Board or the relevant Committee in advance of the meeting
to ensure they are taken into account at the meeting.
Board
Audit
Corporate
Responsibility
Group Risk
Nomination
Remuneration
John Rishton
Sir Roy Gardner (resigned 21 April 2021)
Rupert Soames
Nigel Crossley (appointed 21 April 2021)
Angus Cockburn (resigned 21 April 2021)
Kirsty Bashforth
Eric Born (resigned 31 December 2021)
Kru Desai (appointed 21 October 2021)
Ian El-Mokadem
Tim Lodge1 (appointed 21 February 2021)
Dame Sue Owen
Lynne Peacock
12/12
3/3
12/12
9/9
3/3
12/12
12/12
4/4
12/12
10/11
12/12
12/12
1/1
–
–
–
–
–
5/5
–
4/4
5/5
1/1
5/5
–
1/1
4/4
–
–
4/4
4/4
1/1
1/1
–
3/3
–
1/1
–
–
–
–
5/5
–
–
5/5
5/5
5/5
–
5/5
1/1
–
–
–
4/4
4/4
2/2
5/5
4/4
4/4
5/5
5/5
2/2
–
–
–
5/5
–
–
–
4/4
–
5/5
Notes:
1. Tim Lodge was unable to attend the Board meeting on 22 September 2021, a date on which he had another commitment made prior to joining the Board.
Annual Report and Accounts 2021
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Board and Governance continued
Although, as previously mentioned, site visits and involvement
in management training, meetings and events (all of which are
an important part of training) have been curtailed owing to Covid-19,
all Non-Executive Directors undertook the key elements of the
internal training which is undertaken by management and some
Non-Executive Directors have attended Divisional management
meetings by video conference.
External directorships
The Company has a policy which allows the Executive Directors to
accept directorships of other quoted companies and to retain the
fees paid, provided that they have obtained the prior permission
of the Chairman. In accordance with the Code, and to ensure
sufficient time is devoted to their executive role within the Company,
no Executive Director would be permitted to take on more than
one non-executive directorship in a FTSE 100 company or the
chairmanship of such a company.
Angus Cockburn, who retired as a Director on 21 April 2021, was
Senior Independent Director, Chair of the Audit Committee and
a member of the Nomination and Remuneration Committees of
Ashtead Group plc and a Non-Executive Director of The Edrington
Group Limited throughout the period he was a Director of the
Company during 2021.
Rupert Soames was Senior Independent Director and a member
of the Audit, Nomination and Remuneration Committees of DS
Smith Plc throughout the year. He will be retiring from the board
of DS Smith Plc on 6 September 2022 and will cease to be Senior
Independent Director on 28 February 2022.
Conflicts of interest
Every Director has a duty to avoid a conflict between their personal
interests and those of the Company. The provisions of Section 175 of
the Companies Act 2006 and the Company’s Articles of Association
permit the Board to authorise situations identified by a Director
in which he or she has, or may have, a direct or indirect interest
that conflicts, or may conflict, with the interests of the Company.
The Board undertakes regular reviews of the external positions
and interests held in and arrangements made with third parties by
each Director and, where appropriate, authorises such conflicts.
Notwithstanding the above, each Director is aware of their duty
to notify the Board should there be any material change to their
positions or interests during the year. Directors do not participate in
Board discussions or decisions which relate to any matter in which
they have, or may have, a conflict of interest.
Board evaluation
An internal evaluation was undertaken in 2020 using a questionnaire
based on the UK Corporate Governance Code. This evaluation,
acknowledging progress on areas identified in the previous external
evaluation carried out in 2018 and the internal evaluation carried out
in 2019, concluded that the Board and its Committees continued to
operate effectively. During 2021, in response to the internal Board
evaluation undertaken in 2020 and building on the work already
undertaken in embedding the Corporate Responsibility Framework,
the Board continued to address the promotion of the Company’s
contribution to wider society and ensure that workforce policies
continued to support long term sustainable success. This has
included the evolution of such policies as necessary and increased
assessment and monitoring of culture. The Board continues to
check that policy, practices and behaviour remain aligned with
the Company’s purpose, values and strategy and there has been
further embedding of these processes to ensure that Environmental,
Social and Governance issues are addressed and continue to be an
important focus of the Board. This has included the enhancement of
existing processes to ensure that account is taken of all stakeholders’
interests by the Board.
An external evaluation was undertaken in 2021 by Gould Consulting
Limited, which has no other connection with the Company. It was a
comprehensive review covering the Board and its Committees and as
part of which representatives of Gould Consulting had access to both
current and historic board papers and attended a Board meeting and
meetings of some of the Committees. This evaluation, acknowledging
progress on areas of improvement identified in previous internal
evaluations, including those from the 2020 evaluation described
above, concluded that the Board continued to operate effectively.
It was, however, recommended that the Board would benefit from
holding a board meeting in the USA with the US board and members
of the senior management team, more regular review of strategic
issues and increased reporting of non-financial KPIs during the year,
continued focus on succession planning and diversity throughout the
organisation, holding of annual governance meetings for investors
and the further refinement of ESG targets. These recommendations
are being addressed through changes to the annual agenda plan.
Appointment, induction and training
The Chairman is responsible for ensuring that an appropriate
induction is provided to new Board members. The induction
programme is specifically tailored to the needs of the incoming
Director and includes circulation of the Board’s policies and
procedures, meetings with senior management and contract
site visits. Since March 2020, on the outbreak of the pandemic,
although the majority of such meetings and visits have been
undertaken virtually, it has, however, been possible for some to
be undertaken in person.
Training is provided to the Board on a range of governance and
other issues both at Board and Committee meetings and in other
forums. Further training is also made available on a range of subjects,
including those undertaken by executive management.
Individual training needs are identified as part of the annual appraisal
process and Directors are encouraged to take advantage of both
internally and externally provided training opportunities.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Group Risk Committee Report
Corporate Governance Report
Group Risk Committee Report
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Group Risk Committee members
Ian El-Mokadem (Chair)
Kirsty Bashforth
Tim Lodge
Dame Sue Owen
Dear Shareholders,
Membership of our Committee evolved during the year in line
with wider changes to the Group’s Board. We welcomed Tim
Lodge to the Committee on 21 February 2021 and following his
appointment as Chairman on 21 April 2021, John Rishton stood
down as a member of the Committee although he continues to be
a regular attendee at the Committee’s meetings.
Throughout 2021 the Committee has continued to oversee the
Group’s efforts to enhance its risk management capability and the
way that the Risk Management Framework has been embedded
at Divisional level. We have continued to review the risk profile on
a quarterly basis and, during these sessions, have held focused
discussions around our principal risks and their mitigations. These
sessions have included ongoing monitoring of the impact of the
Covid-19 pandemic against our principal risks, their key controls,
mitigations and oversight of lessons learned.
Our approach to maintaining oversight of our principal risks has
remained broadly consistent with previous years and we have
continued to:
– conduct “deep dives” with Divisions, considering and
challenging their approach to their material risks to gain a
deeper understanding of the management approach to risk
management generally, as well as reviewing risk themes
delivered by business leads;
– examine and debate detailed updates from principal risk
subject matter experts to gain a deeper understanding of the
current status of risks;
– review divisional risk registers to understand their alignment
with the Group’s principal risks;
– ensure that Divisions have adequate capability to implement
the Group’s Risk Management Framework;
– review the output from the Group Executive Committee’s
annual review of principal and emerging risks;
– maintain oversight of insurance trends and internal insurance
programme updates;
– monitor business continuity progress; and
– oversee the Compliance Assurance activities.
There has been significant focus on supporting the Group
ERM function to drive process improvements and endorse
developments towards a more integrated Enterprise Risk
Management (“ERM") methodology, particularly in reference
to how we define best practice for Serco and in how Divisions
are applying the ERM approach. A Group-wide ERM capability
assessment highlighted areas where we would like to see further
process development and where best practices could be shared
across Divisions. We are supportive of ongoing work to refine our
Serco Management System and the continued drive to deliver
both improved consistency of approach and resource models
across the Group.
Improvement activity has also been a feature in our compliance
assurance approach, evolving the way we self-assess controls to a
more risk-based maturity model to drive a richer controls dialogue
across the contracts and to increase value from the exercise.
Following a review by the Executive Committee, including a
review of external and emerging risk trends, it was agreed that
whilst there were no additions to the principal risks we would
broaden the definition and scope of our Supply Chain risk to
ensure wider coverage of this complex risk area. In a similar vein,
we also broadened the scope of our People risk to ensure that
we were considering capability attraction and retention from a
wider perspective to capture the challenges from macro labour
market trends impacting execution of our people strategies across
the Group in the medium to long term. It was also agreed that
we would retire Failure to Manage our Reputation as a principal
risk, considering it instead a potential impact outcome in the
event of one of our principal risks materialising and explicitly as a
causal factor under the Failure to Act with Integrity risk. Some of
the principal risks were also discussed at the Board including the
Failure to Grow Profitably risk which was further underpinned by
the extensive market reviews done as part of the strategy review
and Audit Committee reviews around Financial Controls.
The discussions of emerging risk also considered the treatment
of ESG and the risk of extreme weather/climate change incident
and we determined to continue to treat ESG as an embedded
consideration across a number of our principal risks rather than
a stand-alone item at the Group level. Similarly, we have chosen
not to consider climate risk as a standalone principal risk and
instead consider it as a cross-cutting scenario under several of
our principal risks, most notably under the Catastrophic Incident
and Health, Safety and Wellbeing risk. Monitoring of our ESG and
environmental strategy, including climate change, is led by the
CRC which supports our approach to the new TCFD reporting
requirements this year. More detail on this area can be found
on page 58.
Our governance of principal risks has remained unchanged
in 2021.
The Committee recognises the ongoing commitments under
the DPA and notes that elements of the planned improvements
associated with the DPA remain included in several of the
mitigations captured against our principal risks. We will continue
to oversee execution of these mitigations via our risk management
process and through regular review and continuous improvement
of the DPA plan.
Ian El-Mokadem
Chair of the Group Risk Committee
23 February 2022
Annual Report and Accounts 2021
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Group Risk Committee Report continued
Committee’s responsibilities
The Committee advises the Board on the Group’s overall risk
appetite, tolerance and strategy, taking account of the current and
prospective macroeconomic and financial environments. The key
responsibilities of the Committee are:
– overseeing the effectiveness of the Group’s risk management
framework, including the assessment of all the principal risks
facing the Group, and the action being taken by management to
mitigate risks that are outside of the Group’s risk appetite;
– challenging and advising the Board on the current risk exposures
facing the Group, future risk strategy and reviewing regular risk
management reports which enable the Committee to consider
the process for risk identification and management;
– assessing how key Group risks are controlled and monitored by
management;
– in conjunction with the Audit Committee, reviewing the Group’s
risk assessment processes, and ensuring both qualitative
and quantitative metrics are used to inform the Board’s
decision-making; and
– reviewing the Group’s capability to identify and manage
emerging risks, in conjunction with the other Board Committees
as appropriate.
Membership and attendees
The Committee is comprised solely of independent Non-Executive
Directors. The Board considers that each member of the Committee
is independent within the definition set out in the UK Corporate
Governance Code. Biographical details for each member of the
Committee are provided on pages 116 to 118. The Committee
met five times during the year, including an additional meeting
where the Risk Committee met with all other members of the Board
present. Details of attendance at meetings are set out on page 123.
Committee meetings are held in advance of Board meetings, with
the Committee Chair updating the Board directly on the outcomes
of each meeting. Meetings of the Committee are attended by the
Group Chief Executive Officer, the Group Chief Operating Officer,
the Group General Counsel and Company Secretary, the Deputy
Company Secretary, the Chairman, the Group Director Enterprise
Risk and the Head of Group Internal Audit.
Activities of the Committee during 2021
During the year the Committee’s key activities included:
– receiving updates regarding the Group’s principal risks, detailing
key changes, trends and ongoing Covid-19 impacts. These
included discussion on the potential impacts of challenges in the
supply of short-term resourcing, treatment of terrorism risk and
updates on governance, risk, and compliance tooling options;
– considering internal and emerging risks and themes. These
discussions included treatment of ESG, climate change,
terrorism, IT infrastructure failure and geopolitical uncertainty;
– undertaking in-depth reviews (“deep dives”) of the following
risks: Major information security breach; Catastrophic incident,
including a session focused on Maritime related risk; Material
legal and regulatory compliance failure; and Significant failure of
supply chain. The principal risk of Failure to act with integrity and
risks around Health, safety and wellbeing, including focused
sessions on fleet risk and regular updates on ESG, were
reviewed by our Corporate Responsibility Committee; the
principal risk of Financial control failure was reviewed by our
Audit Committee; and Failure to grow profitably and additional
sessions on Major information security breach were reviewed by
the Board;
– receiving updates on all Divisional risk management processes
including alignment of their risks to the Group principal risks and
progress with implementing improvement opportunities
identified in the Group-wide ERM capability assessment;
– overseeing the compliance assurance programme including
monitoring of key findings and process improvements to the
self-assessment process and proposed review of our Serco
Management System; and
– ongoing challenge and support of the Group Director Enterprise
Risk to improve, enhance and embed the risk management
framework.
2022 priorities and focus
During 2022, the Committee will maintain its focus on undertaking
detailed deep dive reviews into the Group’s principal risks in line with
our forward agenda. In addition, we will continue to maintain a more
flexible approach to include deep dives into specific risk themes and
emerging risks delivered by functional leads and/or business unit
subject matter experts from across the Group operations. Meetings
with the Divisional teams will also continue. Committee attention
will remain on the progression of mitigation actions and their
effectiveness, the development of our Enterprise Risk Management
approach and the review and refresh of supporting policies,
standards, and reporting. In addition, we will focus on implementing
changes identified under the ERM process improvement initiative
launched in 2021, as well as working closely with the Audit Committee
on any changes required under the BEIS consultation and any
potential associated regulatory changes. We will also continue our
monitoring of governance of our Group-wide compliance assurance
activity, including greater oversight of the three lines of defence
and how they interrelate and work effectively. The Committee will
continue to retain time at the end of each meeting to meet separately
without management present and invite one of the Divisional
Heads of Compliance Assurance to attend for part of this session.
The Committee will also continue to meet privately with the Group
Director Enterprise Risk.
126 Serco Group plc
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Serco’s approach to managing business risks and
internal control
Serco’s internal control framework includes financial, operational,
compliance and risk management controls. These are designed to
manage and minimise risks that would adversely affect services to our
customers and to safeguard shareholders’ investments, our assets,
our people, and our reputation (collectively “business risks”).
Second line of defence – The Group Enterprise Risk Function is
responsible for the development and implementation of policies
and standards associated with Risk Management and Compliance
Assurance. It is the custodian of the Group Compliance Assurance
Programme (“CAP”) and the Principal Risk Register, providing
management oversight, assurance, and challenge. Divisional Risk and
Assurance teams also form part of the second line.
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The CAP aims to ensure we have a consistent approach to
compliance assurance across all Divisions, with direction provided by
Group around minimum requirements based upon our principal risks.
Third line of defence – The Group Head of Internal Audit reports
functionally to the Audit Committee Chair and is responsible for the
delivery of the Internal Audit programme.
Internal Audit provides an independent assessment of the design and
operating effectiveness of the Group’s governance, risk management
and control frameworks in place to manage risk.
The Internal Audit team carries out an annual programme of
risk-based audits reporting findings to the Audit Committee.
The audit programme is approved by the Audit Committee. The
in-house Internal Audit function uses the services of two co-sourced
providers to supplement and enhance in-house skills and resources
where required.
In addition to our in-house assurance teams, we are also subject to
significant third line assurance activities and audits delivered through
external third parties appropriate to the regulatory environment,
certification standards and customer requirements in our varied
service lines and business units. These reviews include those that
support the range of ISO certifications we support across the
business as well as independent performance and regulatory reports
on Serco operations.
Internal controls and key processes are defined within the Serco
Management System (“SMS”). To provide management assurance
that these controls are effective, we use a “three lines of defence”
compliance assurance model to test business compliance.
The Executive Committee is responsible for providing oversight,
challenge, and direction across the first and second lines of defence,
including the review of the Group Risk Register and individual risks
as required.
The Board has overall responsibility for risk management and internal
control and formally reviews the findings of the overall Internal
Audit programme. It is supported in these duties by the Group Risk,
Corporate Responsibility and Audit Committees.
The Board confirms that there has been a focus on the three lines of
defence for the year under review and up to the date of approval of
the 2021 Annual Report and Accounts.
First line of defence – Contract Managers, Business and Function
leaders within the Group are responsible for identifying and
managing risks and for implementing associated processes and
controls.
We endeavour to ensure that appropriate processes and controls are
in place through the implementation of our SMS and that suitably
trained staff seek to ensure that customer, legal and regulatory
requirements are adhered to. We have launched a review of our SMS
to ensure it remains an effective and efficient vehicle to document
and communicate our processes and controls. This review and
associated improvement changes are expected to be completed in
2022. As part of our commitment to process improvement we have
refreshed our approach to our annual SMS self-assessment. The
assessment remains in place but has been refocused on the principal
and top divisional risks and the associated key controls. In addition,
we now ask our Contract Managers to complete the assessment
using a maturity scale. This process enables a deeper understanding
of SMS compliance levels by identifying specific actions for
improvement. Progress against actions identified through this
self-assessment is monitored by senior management. We recognise
that whilst the SMS controls can provide reasonable assurance against
misstatement or loss, this cannot be absolute.
Annual Report and Accounts 2021
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Corporate Governance Report continued
Audit Committee Report
Committee’s responsibilities
The Committee supports the Board in fulfilling its responsibilities
in respect of: overseeing the Group’s financial reporting processes;
reviewing, challenging and approving significant accounting
judgements proposed by management; assessing the way in which
management ensures and monitors the adequacy of financial and
compliance controls; the appointment, remuneration, independence
and performance of the Group’s External Auditor; and the
independence and performance of the Group’s Internal Audit function.
The Terms of Reference for the Committee are available on the
Group’s website.
Membership and attendees
The Committee is comprised solely of Independent Non-Executive
Directors. The Board considers that each member of the Committee
is independent within the definition set out in the UK Corporate
Governance Code (“the Code”) and that, between them, the
members of the Committee bring strong international, service and
public sector expertise and experience which is highly relevant to the
Company. Having joined the Audit Committee on 21 February 2021,
Tim Lodge became Chair of the Committee on 21 April 2021. Having
previously been CFO at Tate & Lyle plc and COFCO International, as
well as holding other non-executive positions, Tim provides assurance
to the Board that recent and relevant financial experience, as required
by the Code, is held within the Committee. Biographical details for
each member of the Committee are provided on pages 116 and 118.
The Committee met five times during the year, which at times was
virtually as a result of the local and national restrictions imposed
as a result of Covid-19, and details of attendance at meetings are
set out on page 123. Committee meetings are held in advance of
Board meetings with the Committee Chair updating the Board
directly on the outcomes of each meeting. In addition to the
members of the Committee, the Chief Financial Officer, the Group
Financial Controller, the Head of Internal Audit, the Group General
Counsel and Company Secretary, the Deputy Company Secretary
and representatives of the Company’s External Auditor, KPMG LLP,
attended and received papers for each meeting. The Committee
retain time at the end of each meeting to meet separately without
management present and invite either the Head of Internal Audit
or KPMG LLP to attend for part of this session. The Committee also
meets privately with the Chief Financial Officer.
Audit Committee members
Tim Lodge (Chair)
Kru Desai
Ian El-Mokadem
Lynne Peacock
Following the appointment of John Rishton as Chairman of
Serco Group plc on 21 April 2021, his position as Chair of the
Audit Committee was filled by Tim Lodge, who joined the
Committee on 21 February 2021. Dame Sue Owen, who became
the lead non-executive director for Employee Voice, stood down
from the Audit Committee and was appointed as a member of
the Corporate Responsibility Committee on 21 April 2021 and, at
the same time, Ian El-Mokadem stood down from the Corporate
Responsibility Committee and was appointed as a member of
the Audit Committee. Eric Born resigned as a Non-Executive
Director on 31 December 2021 and ceased to be a member of
the Committee on that date and Kru Desai, who was appointed
as a Non-Executive Director on 21 October 2021, became a
member of the Committee on 1 January 2022.
Dear Shareholders
I am pleased to present the Committee’s report for the
year ended 31 December 2021, and my first as Chair of the
Committee. This review gives an insight into how the Committee
addressed significant issues during 2021, which were reported to
the Board as a matter of course, and how other responsibilities
of the Committee were discharged. The Audit Committee
continues to have a fundamental role to play in reviewing,
monitoring and challenging the effectiveness of the Group’s
financial reporting and internal control processes. During the
year the Committee undertook a range of finance, accounting
and control related reviews particularly in relation to specific
risks identified within the Group’s operations, new operating
platforms which the Group is implementing and reviews of the
Group’s control effectiveness in relation to cyber security threats.
Throughout 2022, the Committee will continue to focus on
the critical accounting judgements made, the effectiveness
of the Group’s financial controls and assurance programme,
the operating performance of the finance operating structure,
specifically the outsourced operating model as the contract with
the Group’s third party service provider comes to an end in 2024,
compliance with the Deferred Prosecution Agreement for items
under its terms of reference, and the delivery and effectiveness
of the Group’s Internal Audit function.
Additionally, during 2022, the Committee will continue to
monitor developments from the review led by the Department
for Business, Energy and Industrial Strategy (BEIS) into restoring
trust in audit and corporate governance, and the impact the
recommendations have on the Group’s current internal control
framework and the audit profession. The Committee will
challenge and review how the Group adapts to address any
legislative changes which arise from these recommendations.
Tim Lodge
Chair of the Audit Committee
23 February 2021
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Performance review
The Audit Committee’s effectiveness was reviewed as part of the
Board’s annual performance evaluation which was undertaken
externally by Gould Consulting Limited. The findings from the review
were largely positive with it being noted that the Audit Committee
is effective in its role with valuable input being received from all
members and that the change in Committee Chair during the year
was managed effectively. The level of information received at the
Audit Committee is considered to be sufficient with appropriate
challenge given to management and time allocated for the External
Auditors to present the basis of their conclusions. It was agreed
that the Committee would benefit from a combined Risk and Audit
committee meeting in 2022 to assist in developing an integrated
view of risk and assurance, more formal reporting to the Committee
of whistleblowing (which is overseen by the Corporate Responsibility
Committee), a review of the audit process to ensure contingency is
built into its latter stages, and presentations to the Committee in
respect of specific areas of risk within the Group.
Activities of the Committee during the year
During the year, the Audit Committee carried out core duties
alongside the work required on significant judgements and issues.
The core activities undertaken during the year included:
– Reviewing the integrity of the half-year and annual financial
statements and the associated significant financial reporting
judgements and disclosures including;
– that the information presented in the Annual Report and
Accounts, when taken as a whole, is fair, balanced and
understandable and contains the information necessary for
shareholders to assess the Group’s position and
performance, business model and strategy;
– the effectiveness of the disclosure controls and procedures
designed to ensure that the Annual Report and Accounts
complies with all relevant legal and regulatory requirements;
– the process designed to ensure the External Auditor is aware
of all ‘relevant audit information’, as required by Sections 418
and 419 of the Companies Act 2006.
– the management representation letter to the External
Auditor; and
– the findings and opinions of the External Auditor;
– Considering the liquidity risk and the basis for preparing the
half-year and annual financial statements on a going concern
basis, and reviewing the related disclosures in the Annual Report
and Accounts;
– Reviewing the 2021 Viability Statement to ensure that it is
appropriate and balanced in respect of highlighting the risks the
Group is exposed to, including the ongoing impact of Covid-19,
and the assumptions being made in assessing its viability;
– Considering the provisions of the Code regarding going
concern and viability statements and reviewing emerging
practice and investor comment;
– Reviewing updates on accounting matters and those related to
financial reporting including the recommendations and
requirements of the Task Force on Climate-Related Financial
Disclosures (TCFD);
– Reviewing the effectiveness of the Group’s financial controls and
financial assurance programme, including a deep dive into the
management of the Financial Control Failure principal risk;
– Receiving updates from the Risk Committee Chair in respect of
key items discussed within that Committee and assessing
whether they resulted in any additional financial risks which
should be considered within the Audit Committee;
– Providing oversight to the Group’s Tax strategy, including how
provisions for uncertain tax positions are derived, the status of
tax audits being undertaken, the Group’s position in relation to
historic tax losses and associated recognition of a deferred tax
asset, and the intention to comply with both the letter and spirit
of tax legislation in all jurisdictions within which the Group
operates;
– Reviewing the effectiveness and independence of the Group’s
Internal Audit function; and
– Maintaining the Group’s relationship with the external auditor,
including assessing the audit plan and monitoring both
independence and effectiveness.
As well as carrying out the core duties above, the Audit Committee
received the following updates which assisted the Committee in
understanding the framework in place to improve financial controls
and mitigate the specific risks associated with these aspects of the
business:
– Ongoing updates on the Group’s progress in reviewing and
improving its documentation of internal controls whilst
considering the proposals contained with the consultation
document issued by BEIS;
– A review of the post-acquisition integration and performance of
the Naval Systems Business Unit; and
– Reviewing progress against the Group’s Deferred Prosecution
Agreement obligations.
Internal control environment
The Committee is responsible for monitoring the Group’s internal
control environment and assessing its effectiveness. As part of this
assessment the Committee receives regular updates on internal
controls and in forming an opinion on effectiveness it also considers
the requirement to make relevant recommendations to the Board.
The Group has both a financial assurance function and an Internal
Audit function, with both making regular contributions to meetings
of the Audit Committee. The findings of financial assurance are
assessed, and guidance is given to direct their work. Similarly, Internal
Audit reports are received by the Committee on a regular basis and if
it is deemed relevant, the management teams from central functions,
divisions or individual business units are invited to the meeting to
discuss the findings arising from Internal Audit reviews. The Audit
Committee also has responsibility for reviewing the annual Internal
Audit programme of work and assessing both the adequacy of
resources of the Internal Audit function and the scope of the Internal
Audit programme.
Internal Audit
Internal Audit acts as a ‘third line of defence’ providing independent
assurance to the Board, the Serco Group plc and Serco Inc Audit
Committees and management, and in particular:
– Provides objective, independent assurance and advice to
management and the Audit Committee on the design and
operating effectiveness of the governance and internal control
processes in place to identify and manage business risks;
– Delivers an annual programme of risk-based Internal Audits,
reporting findings and recommendations for management
actions to improve governance, risk management and controls
to each Audit Committee meeting; and
– Reviews the annual Internal Audit programme regularly
throughout the year to ensure it remains focused on key risks,
recommending changes to the Audit Committee for their
approval.
Annual Report and Accounts 2021
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Internal Audit gives particular regard to the ongoing evaluation of
the effectiveness of the Group’s financial controls and reporting
processes. Internal Audit (outside of the Americas) is headed by the
Group Head of Internal Audit who reports functionally to the Chair
of the Serco Group plc Audit Committee. Within the Americas, to
ensure compliance with the Special Security Agreement, there is a
local Internal Audit team that reports functionally to the Americas
CFO, but also has oversight by the Serco Inc Audit Committee (which
is chaired by the CFO of Serco Group plc). These arrangements are
designed to ensure that Internal Audit’s independence is maintained.
Internal Audits may focus on individual contracts, processes, functions
or risk themes and in conjunction with the Group Risk Committee,
the Group Audit Committee considers whether the Internal Audit
programme is aligned to the Group’s key risks. The Internal Audit
function use the services of two co-sourced providers to supplement
and enhance in-house skills and resources where required, particularly
in specialist areas such as IT and cyber-security.
Compared to 2020 (when the Internal Audit plan was significantly
adapted to focus on Covid-19 specific risks at the height of the
pandemic) the 2021 audit plan was a more typical balance of work
across the Group’s inherent risks, whilst giving due attention to
specific risks and issues associated with the enduring nature of the
pandemic (such as the mobilisation of contracts whilst pandemic
related restrictions remained in place). Internal Audit has delivered
a full programme of audits during 2021 making recommendations
to management for improvements to risk, governance and controls.
This work has continued to focus on cyber security controls across
various parts of the Group (building on Internal Audits in this space
undertaken across the last 2 years), major projects and significant
contract mobilisations. Reports are discussed with the parts of
business they relate to and management actions agreed are then
tracked for progress. Key themes and progress on management
actions have been included in regular written updates to the Audit
Committee.
An External Quality Assessment (EQA) of the effectiveness of Internal
Audit was completed during the year, as required by the Institute
of Internal Auditors’ standards. Overall, the EQA noted that the
function was performing well. Key strengths identified included
leadership, business engagement and independence; with the EQA
also commenting that good progress had been made in a number
of other areas (such as audit techniques, data analytics and quality
assurance) following the implementation of a plan of work across
the last two years. Most of the findings from the EQA related to
suggestions for continuous improvement, building on Internal Audit’s
established strategy and associated action plan.
The 2022 Internal Audit programme will continue to focus on the key
risks across the business.
Financial controls
The Group aims to have a strong and well-monitored control
environment that minimises financial risk and, as part of the
Committee’s responsibilities, it reviews the effectiveness of systems
for internal financial control and financial reporting. Where relevant,
the Committee also works with the Group Risk Committee to
consider financial risk management.
Financial control risk is monitored through one of the Group’s
Principal Risks, ‘financial control failure’. The Committee has reviewed
this risk during 2021 and has focused in particular on:
– Management’s review of the output and adequacy of the
Group’s financial assurance programme, with a focus to deliver
better assurance through system controls and data analytics;
and
– Management’s plan to improve internal controls whilst
considering the proposals contained within the consultation
document issued by BEIS;
– Review of Management’s Key Risk Indicators associated with the
risk and the strength of mitigating controls and actions to
improve their effectiveness.
Following review and challenge, the Committee believes that, to the
best of its knowledge and belief, the financial control framework and
the monitoring of this framework has worked effectively during the
year, and that in cases of non-compliance, the Group has not been
exposed to critical, severe or significant risk. The Committee was also
encouraged to note that where weaknesses in the financial control
framework were identified, they were being addressed.
During the year, the Financial Reporting Council (‘FRC’) wrote to the
Company in relation to a review of the Group’s annual report and
accounts to 31 December 2020. As part of the review the Group made
the decision to reclassify £4.9m disclosed within Other Payables on
the balance sheet from non-current to current as, although settlement
within one year was not considered likely, there was no legal basis to
delay it, and an amount of £19.8m within Other Payables to Other
Provisions since, although the liability is materially accurate, there is
sufficient uncertainty associated with the timing of settlement. In the
context of £1.7bn of liabilities, £0.9bn of which were current as at
31 December 2020, the adjustment was made in the current year and
no prior year adjustment was necessary since it was concluded that
the balance sheet reclassification would not have a material impact
on users of the financial statements and therefore did not constitute
a material prior period error that required restatement.
In addition it was agreed that the wording contained within the
accounting policies for revenue recognition would be updated to
provide clarity over the treatment for contract modifications, which
does not result in a change to the results as presented. Additional
disclosure would also be made in respect of the uncertainties
associated with other provisions.
The FRC’s review provides no assurance that the report and accounts
are correct in all material respects; the FRC’s role is not to verify the
information provided but to consider compliance with reporting
requirements.
Significant financial judgements
Contract performance, including Onerous Contract
Provisions (OCPs)
The measurement of OCPs requires significant judgement that the
Audit Committee has kept under review, providing challenge to
the assumptions used by management and key judgements
used in assessing the performance of the Group’s contracts. As at
31 December 2021, the level of OCPs remaining in respect of the
2014 review stands at an immaterial level.
Despite historic OCPs having been transformed or the underlying
contracts having ended, the Audit Committee continues to focus
on the potential for existing contracts to become onerous as well
as assessing the risk of an onerous position materialising across a
portfolio of contracts across the Group. The Committee agreed,
consistent with the External Auditor, that the view formed by
management regarding each individually material potential OCP, as
well as the aggregate view which includes management’s assessment
of portfolio risk, was reasonable. The Committee was satisfied that
the work undertaken by management to monitor existing contracts
and identify contracts where a new OCP may be required, and
associated allocation of central costs, was sufficiently robust.
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After review of the disclosure of APMs in the Half Year 2021 results
and the 2021 Annual Report, the Committee concluded that the
descriptions for each individual APM used were clear and meaningful,
and that the relationship between them and the nearest relevant
statutory IFRS measure was clearly explained and supported. The
Committee was also satisfied with the controls management has
put in place to identify Exceptional Items and to ensure that costs
which should be recorded within Underlying Trading Profit are not
inappropriately classified as Exceptional Items. As a result, the use
of APMs and Exceptional Items in the Half Year 2021 results and the
2021 Annual Report was recommended to the Board for approval.
Consistent with the approach adopted during 2020, management’s
assessment is that the APMs should not be adjusted to exclude the
impact of Covid-19 and that clear narrative should continue to be
used to describe the impact of Covid-19 on the Group’s results. The
Committee concurred with this approach and management’s view
that no APMs should be adjusted to exclude the impact of Covid-19
on the Group’s measures.
Goodwill Impairment
The goodwill impairment test as at 31 December 2021 used
anticipated future cash flows, discount rates and terminal values which
are key areas of judgement, and the Audit Committee has received
key information associated with these. The Committee challenged
management on the discount rates and terminal values used in the
review, noting that they had been sourced by a third-party expert,
and ensured that the underlying cash flows were consistent with those
included in Board approved forecasts.
The Committee reviewed the resulting disclosures proposed by
management and found them to be transparent, appropriate and in
compliance with applicable financial reporting requirements.
Defined Benefit Pension Schemes
The Group’s defined benefit pensions schemes include a number of
significant estimates and judgements, principal amongst which are
the identification of obligations arising from contracts with customers
and calculation of the financial impact of defined benefit obligations.
The Committee has considered the process undertaken by
management to finalise key assumptions underlying the valuation
of defined benefit obligations, and processes associated with
identifying the obligations arising. The Committee is satisfied that the
assumptions used remain appropriate. In forming their opinion on the
judgements applied to valuing liabilities, the Committee considered
how those judgements compared to observable benchmarks in the
market, and advice has been taken from independent actuaries on
the ongoing appropriateness of assumptions used. The Committee
is satisfied that the processes followed are appropriate and that the
conclusions reached, and calculations performed are appropriately
balanced.
Viability and Going Concern
The Group has assessed its ongoing viability and the appropriateness
of using of the going concern assumption in preparing its financial
results. In making these statements, management use the Group’s
anticipated future cash flows and undertake a range of sensitivities
to identify any plausible situations which could put pressure on the
Group’s viability or ability to continue as a going concern. The going
concern assessment is prepared twice annually.
In challenging management’s assessment in respect of the viability
and going concern statements, which were based on anticipated
future cash flows agreed by the Board as part of the Group’s
budgeting process, the Committee focused on the Group’s
headroom within its financial covenants and the liquidity available in
the Group. The Committee considered the likely severity of key risks
crystallising over the period of assessment including; the potential
ongoing impact of Covid-19; the commitments made under the
Deferred Prosecution Agreement (DPA) entered into with the Serious
Fraud Office (SFO); and management’s assessment of the claim
seeking damages for alleged losses following the reduction of Serco’s
share price in 2013.
The Committee concurred that, whilst in severe scenarios the ability
of the Group to stay within its agreed headroom may be put under
pressure, the Group remains viable and key assumptions supporting
this assessment are disclosed within the viability statement on
page 105. The Committee also agreed that the going concern basis
of accounting is appropriate and this assessment is disclosed within
the going concern statement on page 196.
Both the proposed viability and going concern statements were
approved by the Committee for recommendation to the Board.
In respect of the shareholder claim, noted above, the Committee
concurred with management’s assessment that, due to the stage
of the matter and the uncertainties regarding the outcomes, no
provision was required, and disclosure as contingent liabilities at the
year-end was appropriate. See note 28 to the financial statements.
Use of Alternative Profit Measures (APMs) and
Exceptional Items
The Group’s performance measures continue to include some metrics
which are not defined or specified under IFRS. In particular, following
its introduction in 2015, management continued to use Underlying
Trading Profit, as a key measure to review current performance
against the prior year by removing the impact of adjustments to
OCPs, material charges and releases of other items identified
during the 2014 Contract & Balance Sheet Review, together with
other significant non-trading items. The Group also uses the term
Exceptional Items to meet the requirements of IAS1 para 97 which
requires the nature and amount of material items of income and
expense to be disclosed separately.
The Audit Committee continues to consider the disclosure of
performance measures used by management and whether they
continue to provide meaningful insights into the results of the Group.
The Committee also considers the treatment of Exceptional Items
and whether they are appropriate to be classified as such.
The Committee has agreed with management that Underlying
Trading Profit continues to be a reasonable basis on which to
compare the relative performance of the business year on year. The
Committee, following challenge of each individual item, agreed with
management’s classification of items as Exceptional and requiring
separate disclosure.
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Audit Committee Report continued
The Committee reviewed the External Auditor’s engagement
letter and determined the remuneration of the External Auditor
in accordance with the authority given to it by shareholders. The
Committee considered the External Auditor’s remuneration to be
appropriate.
It is proposed that KPMG LLP be re-appointed as External Auditor of
the Company at the next AGM in April 2022 and, if so appointed, that
they will hold office until the conclusion of the next general meeting
of the Company at which accounts are laid. Further details are set out
in the Notice of Annual General Meeting which is available on the
Company’s website.
The Independent Auditor’s Report to shareholders is set out on pages
180 to 190.
Non-audit fees
The Committee limits the non-audit work undertaken by the External
Auditor and monitors the non-audit fees paid during the year. For the
financial year ended 31 December 2021, the non-audit fees paid to
KPMG LLP were £63k (2020: £12k) excluding the half-year review.
An analysis of fees paid in respect of audit and non-audit services
provided by the external auditor for the past two years is disclosed on
page 218. The Committee regularly reviews the nature of non-audit
work performed by the External Auditor and the volume of that work.
Focus is given to ensuring that engagement for non-audit services
does not: (i) create a conflict of interest; (ii) place the auditor in a
position to audit their own work; (iii) result in the auditor acting as a
manager or employee; or (iv) put the auditor in the role of advocate
for the Company.
Having undertaken a review of the non-audit services provided
during the year, the Committee is satisfied that these services were
provided efficiently by the External Auditor as a result of their existing
knowledge of the business and did not prejudice their independence
or objectivity.
External Auditor
The Audit Committee manages the relationship with the Company’s
External Auditor on behalf of the Board. Following a tender process
undertaken in 2016, KPMG LLP were appointed by the Board in 2017
as the Company’s external auditor for the 2016 audit and have served
as the Company’s auditor for four years. John Luke was appointed as
audit partner in 2018. In accordance with the Revised Ethical Standard
2016, the Company will continue the practice of the rotation of the
audit engagement partner at least every five years. Should KPMG
be re-appointed as External Auditor at the AGM in April 2022, John
Luke will rotate from the audit in 2023 in line with these standards.
The Group will prepare for a change in audit partner in 2022 to ensure
adequate handover as a result of this.
The Committee evaluates the effectiveness of the external audit
annually, using feedback obtained from the Committee and
management associated with audits undertaken in Group Finance
and in the Divisions, and by assessing the performance of the External
Auditor against a range of criteria including calibre of the audit team,
knowledge of the Group, and the quality of planning, review, testing,
feedback and reporting. The feedback received was reviewed by
management and reported to the Committee. After taking these
reports into consideration, the Committee concluded that the
auditor demonstrated appropriate qualifications and expertise and
remained independent of the Company, had appropriate focus on
the key issues within the Group, that the audit process demonstrated
professional integrity and objectivity, that the audit was effective, and
that there was adequate challenge on the key judgements adopted
by management. Foremost amongst the areas which could be
enhanced within the External Audit process was to review the balance
of work before and after 31 December and where possible allow
some contingency to be established in the period after 31 December.
In addition to the evaluation of the effectiveness of the external audit,
the Audit Committee has responsibility for certain core decisions
relating to the external audit process that include:
– Considering and approving the audit approach and scope of the
audit undertaken by KPMG LLP as External Auditor and their
fees;
– Agreeing reporting materiality thresholds;
– Reviewing reports on audit findings and assessing their impact
on the Group’s internal control environment;
– Considering and approving letters of representation issued to
KPMG LLP;
– Considering the independence of KPMG LLP and their
effectiveness, considering:
– non-audit work undertaken by the External Auditor;
– feedback from a survey targeted at various stakeholders; and
– the Committee’s own assessment.
– Making a recommendation to the Board on the appointment of
the External Auditor.
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Nomination Committee Report
Nomination Committee members
John Rishton (Chair)
Kirsty Bashforth
Kru Desai
Ian El-Mokadem
Tim Lodge
Dame Sue Owen
Lynne Peacock
Dear Shareholders
As reported in the 2020 Annual Report, I succeeded
Sir Roy Gardner as Chair of the Company following the Annual
General Meeting on 21 April 2021. At the same time Lynne Peacock
became Senior Independent Director and Tim Lodge, who was
appointed as a Non-Executive Director and a member of the Audit,
Remuneration and Group Risk Committees on 21 February 2021,
succeeded me as Chair of the Audit Committee.
Nigel Crossley’s appointment as Chief Financial Officer in place
of the retiring Angus Cockburn also took effect on 21 April 2021.
During the year, several changes were made to the membership
of the Board’s committees. The Nomination Committee was
expanded to include all Non-Executive Directors. Sue Owen, who
became the lead Non-Executive Director for Employee Voice, was
appointed as a member of the Corporate Responsibility Committee
and stood down from the Audit Committee on 21 April 2021. At
the same time, Ian El-Mokadem stood down from the Corporate
Responsibility Committee and was appointed as a member of the
Audit Committee.
Following review of Board composition and taking account of
the changes referred to above, it was concluded that the Board
and its Committees continue to have the appropriate breadth of
experience. However, in anticipation of potential future changes
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it was decided to seek an additional Non-Executive Director
and a search process, led by myself with assistance from
Egon Zehnder, also took place to identify an appropriate
candidate. This search resulted in the appointment of Kru
Desai as a Non-Executive Director on 21 October 2021. On her
appointment as a Director, she was also appointed a member of
the Corporate Responsibility and Nomination Committees and
she has subsequently been appointed as a member of the
Audit Committee.
In September 2021, Eric Born indicated his wish to stand down
as a Non-Executive Director with effect from 31 December 2021,
ceasing to be a member of the Audit, Corporate Responsibility
and Nomination Committees at the same time.
During the year, the Committee regularly reviewed the balance
of skills on the Board to identify where additional skills would be
beneficial, reviewed the annual plan of agenda items to ensure all
those matters required to be addressed by the Committee were fully
discussed and confirmed the renewal of appointments for further
terms of three years for those Non-Executive Directors whose three-
year terms of appointment were due for renewal. The Committee
also oversaw the appraisal by myself of the Non-Executive Directors
and the Chief Executive Officer and my own appraisal by the
Senior Independent Director.
John Rishton
Chair of the Nomination Committee
23 February 2022
Committee’s responsibilities
The key responsibilities of the Committee are:
– reviewing the size, structure and composition of the Board and
identifying candidates for appointment to the Board;
– recommending membership of Board Committees;
– undertaking succession planning for Executive Directors and
other senior executives and seeking to ensure that the
leadership needs of the organisation continue to be met;
– seeking to ensure that Board composition is appropriately
diverse; and
– reviewing induction and training needs of Directors.
The Committee’s Terms of Reference are available on the Company’s
website.
Membership and attendees
The Committee is chaired by the Company’s Chairman and is
comprised solely of independent Non-Executive Directors.
The Board considers that each member of the Committee is
independent within the definition set out in the UK Corporate
Governance Code. The Committee met five times during the year
and details of attendance at meetings is set out on page 123. Meetings
of the Committee are normally attended by the Group Chief Executive
Officer, the Group Chief Operating Officer, the Group General
Counsel & Company Secretary and the Deputy Company Secretary.
Biographical details for each member of the Committee are provided
on pages 116 to 118.
Diversity
The Board values diversity and, when recruiting new Board members,
the issue of diversity is addressed by the Committee. The percentage
of women on the Board is currently 44%, exceeding the target of 33%
set by the Hampton-Alexander review; the Company also meets the
target set by the Parker Review of having at least one director from
an ethnic minority background. However, the Board is aware that it
would be beneficial to broaden its diversity in other respects and this
will continue to be a key focus as the Company looks to broaden and
refresh the Board.
Performance review
The Committee’s performance was assessed as part of the Board’s
annual effectiveness review, further details of which are set out on
page 124. Although it was felt that the Committee worked effectively,
it was agreed that the roles of the Board and Committees should
continue to be reviewed and closely monitored to ensure that risks of
duplication of effort, excessive time spent and the burden placed on
meetings management are met and that greater diversity in a wider
range of attributes than those where there is already considerable focus
should be reviewed.
Board balance
The regular reviews of the skills, knowledge, experience and diversity
and the refreshment of the Board and its Committees ensure that the
Board is collectively well placed to meet the strategic objectives of the
Company and the challenges and opportunities that are likely to arise in
meeting these objectives.
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– Review of external commitments
A review of the Non-Executive Directors’ external commitments,
taking account of the views of institutional investor bodies,
was undertaken from which it was concluded that each of the
Company’s Non-Executive Directors was able to dedicate sufficient
time to undertake their duties on behalf of the Company.
– Non-Executive Director training
The Company strongly believes that visits by Non-Executive
Directors to the Company’s contracts, leadership conferences
and management meetings are important in increasing Non-
Executive Directors’ awareness of the Company’s operations and
their accessibility to the Group’s employees. Although the number
of such contract visits increased during 2019, as detailed in the
Governance overview, in response to the impact of Covid-19,
the number of physical visits it was possible to undertake was
considerably reduced in both 2020 and 2021. However, a number
of ‘virtual site visits’ were made by Non-Executive Directors
and a programme of such visits has been prepared for 2022,
taking account of the increased pressures placed on some of
our contracts as a consequence of Covid-19. Training is made
available to and undertaken by Directors throughout the year
and a record is maintained of the training undertaken by each
Director. Although training has been made available throughout
2021, the possibilities for face-to-face training have continued to
be restricted by the impact of Covid-19. However, alternatives,
including access to online seminars and director training have
been made available. This will be a continued focus in 2022.
2022 priorities and focus
During 2022, the Committee will continue to focus on developing its
approach to succession planning for the Board, its Committees and
the wider management team, as well as a greater focus on diversity,
training and consideration of ESG matters.
Activities of the Committee during 2021
During the year the Committee’s key activities included:
– Appointment of Additional Non-Executive Director
Following a search process led by the Chairman assisted by
Egon Zehnder, the Committee recommended the appointment
of Kru Desai as a Non-Executive Director and a member of the
Corporate Responsibility and Nomination Committees; she was
subsequently appointed as a member of the Audit Committee
on 1 January 2022.
– Changes to membership of Board Committees
As part of the ongoing process of ensuring the continuing
refreshment of the Board and its Committees, the Committee
recommended that:
– the Nomination Committee should be expanded to include
all Non-Executive Directors;
– Dame Sue Owen, who became the lead Non-Executive
Director for Employee Voice, should be appointed as a
member of the Corporate Responsibility Committee and
stand down from the Audit Committee; and
– Ian El-Mokadem should be appointed as a member of the
Audit Committee, and stand down from the Corporate
Responsibility Committee..
– Executive Succession Planning
The Committee reviews succession for key executive roles annually
to ensure plans are in place for both planned and unintended
vacancies, including the identification of suitable internal
candidates and their development requirements, including their
exposure to the Board at Board meetings.
– Developing the Board Diversity Policy
Serco strongly supports the principle of boardroom diversity
and values the benefits that diversity of thought can bring to its
Board and throughout Serco. We believe that a mix of expertise,
experience, skills and backgrounds (including age, ethnicity,
disability, gender, sexual orientation, religion, belief, culture,
education and professional backgrounds) allows Serco to deliver a
great service that is valued by our customers and meets the needs
of those who use the services we provide. Serco will always seek to
appoint Board members and senior management on merit against
objective criteria, including diversity. In developing the Board
Diversity Policy, the Committee considered the recommendations
in the Hampton-Alexander Review and the Parker Review and
recommended that the Board commit to improving gender and
ethnic diversity on the Board and in the senior management roles
within Serco. The Nomination Committee reviews and assesses the
Board Diversity Policy annually and recommends any revisions to the
Board for approval.
Further details on Diversity are provided in the Chairman’s
Governance Overview on pages 119 to 121, the Our People
section of the Annual Report on page 37 and in the standalone
ESG and People Reports.
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Corporate Governance Report continued
Corporate Responsibility Committee Report
Corporate Responsibility Committee members
Kirsty Bashforth (Chair)
Kru Desai
Dame Sue Owen
Rupert Soames
Dear Shareholders
The culture, processes and systems in which Serco’s Values and
its management of ESG commitments come alive continue to
mature at a healthy pace. So too, therefore, does the agenda of
the Corporate Responsibility Committee. Against the ongoing
disruptive backdrop of Covid-19 and the rapidly matured
ESG agenda for all organisations, the Committee’s work sits
centre stage.
The focus of the Committee in 2021
1. Testing the resilience of Serco’s maturing internal system of
responsibility, drilling down into specific areas of risk and
opportunity such as overseeing the refresh of the Code of
Conduct, and understanding the emerging impact of
Covid-19 on Company culture.
2. Oversight of the deeper development of that system with
external stakeholders – customers, partners, service users
and communities – including a deepened focus on
published environmental goals and a new Sustainable
Procurement Charter.
3. Helping to drive Company progress on ESG as both a
conscience and catalyst, and ensuring that Serco’s position
and approach is coherent, consistent and impactful. For
example, requiring deeper examination of certain ESG
risks in potential business opportunities, and engaging
closely in how the Group continues to develop and deliver
its environment strategy, and in particular its approach to
managing and reporting climate-related risks and
opportunities, per Task Force on Climate-related Financial
Disclosures (“TCFD") guidance.
Changes to Committee membership
A cornerstone of the Corporate Responsibility Committee for
three years, with his natural acuity for health and safety risk and
employee engagement, Ian El-Mokadem left in April 2021 to join
the Audit Committee.
With Ian’s departure, we welcomed Dame Sue Owen to the
Committee, and Kru Desai joined us in October. Together, they
Committee responsibilities
The Corporate Responsibility Committee is responsible for assisting
the Board in providing independent oversight and guidance of the
Company’s ESG Framework and, based on this agreed framework,
considering related strategies, policies and practices on how
the Company conducts its business, through the lens of how the
organisation lives and breathes its Values of Trust, Care, Innovation
and Pride.
The Committee’s Terms of Reference are available on the Company’s
website.
bring a tremendous depth and breadth of experience and
expertise across the public and private sectors. This, combined
with their prior and continued work on key social issues, stands us
in excellent stead for our future agenda.
I would like to thank Eric Born for his work in the Committee in the
last three years, where his customer focus and European business
insight has been invaluable. We will miss him as he departs.
The Committee’s role in 2022 and beyond
Two key themes continue to underpin the mindset of the
Committee.
The first is its assurance of the Company’s delivery against its
Values with its stakeholders, both inside and outside of Serco,
no matter how government demand for services may fluctuate,
such as during the Covid-19 pandemic.
The second is its role in supporting Serco in its ambition to be the
best managed company in its sector through clarity and coherence
of its strong ESG credentials. Serco’s role in helping to deliver
government policies for the safe, secure functioning of society
means that it sometimes works in hard-edged but vital services.
As a result, it may never convince the hardiest critics to hold its
ESG credentials at the highest levels. The Committee works hard
to guide and challenge the Company in ensuring that its ESG
credentials are coherently expressed and fairly understood.
The CR Committee observes the spirit of public service held
deeply across Serco at every level, with a maturing ESG landscape
as pertains to its purpose and strategy. The work to ensure
consistency is never done, however, and the Committee is here to
help guard against complacency, always testing for vulnerability,
always elevating improvement and better practice.
It remains a privilege to chair the Committee and I look forward to
the continued agenda in 2022.
Kirsty Bashforth
Chair of the Corporate Responsibility Committee
23 February 2022
Membership and attendees
The Committee comprises both Executive and Non-Executive
Directors. Biographical details for each member of the Committee are
provided on pages 116 to 118. The Committee met four times during
the year. Details of attendance at meetings are set out on page 123.
Sue Owen, who became the lead Non-Executive Director for
Employee Voice in January 2021, was appointed as a member of the
Corporate Responsibility Committee and stood down from the Audit
Committee on 21 April 2021. At the same time, Ian El-Mokadem
stood down from the Corporate Responsibility Committee and was
appointed as a member of the Audit Committee. Sir Roy Gardner and
Eric Born resigned as Non-Executive Directors on 21 April 2021 and
31 December 2021 respectively, and ceased to be members of the
Committee on the dates of their resignation. Kru Desai, who was
appointed as a Non-Executive Director on 21 October 2021, became
a member of the Corporate Responsibility Committee on that date.
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Committee meetings are held in advance of Board meetings, with
the Committee Chair updating the Board directly on the outcomes
of each meeting. Meetings of the Committee are normally attended
by the Group General Counsel and Company Secretary, the Assistant
Company Secretary, the Group Chief Operating Officer and the
Group Director, Business Compliance and Ethics.
Standard annual activities of the Committee
Each year the Committee:
– reviews the Committee Terms of Reference to ensure they
remain appropriately aligned to the purpose of the Committee;
– reviews the Committee’s position, focus and approach regarding
ESG to ensure it remains appropriate, embedded in the business
and conducive to the ongoing delivery of the Group strategy;
– supports embedding the Serco ESG Framework whilst ensuring
it remains integral to the Group’s purpose, strategy and material
responsibilities;
– reviews the Group approach to ESG reporting, reviews ESG Key
Performance Indicators (“KPIs") to track ESG maturity across
Serco, and oversees preparation of the Group’s annual ESG
Report and Modern Slavery and Human Trafficking (“MSHT")
Statement;
– undertakes deep dives into key areas within its remit to ensure
appropriate focus, control and rigour throughout the Group;
– engages on new business opportunities to ensure consistency in
addressing ESG factors; and
– oversees effective delivery – including monitoring and reviewing
progress and performance across the Group – of the:
– Group Ethics & Compliance strategy and Speak Up
process, including in-depth review of specific Speak Up
cases; in-depth review of the Group principal risk, ‘Failure to
act with integrity’, Human Rights and Modern Slavery; and
meeting privately with a Divisional Head of Ethics &
Compliance at each Committee meeting;
risks for new and existing operations in each sector; Committee
members completed training, as delivered in every Division
during 2021, on MSHT risk and our new MSHT response and
remediation process;
– Group Health & Safety strategy: review of the aggregated
HSE risk profile for all Company operations involving road
transport, leading to the establishment of a new global Road
Transport Oversight Group and the adoption of ‘road risk’ as
a Group imperative in the Group Health and Safety Strategy;
ongoing review of Coronavirus risks and monitoring the
management of Coronavirus across the Group; review of
progress in embedding a mature safety culture; ratification of
revisions to the Company’s three-year safety targets;
– Group Environmental strategy: overseeing delivery of the
Company approach to fulfilling the recommendations of
the TCFD; Chair and Group General Counsel and Company
Secretary joining Chapter Zero, the UK community of
non-executive directors focused on climate change;
– Group People strategy, including Wellbeing: approval of
the transfer of Covid-19 risks into the Group principal risk,
‘Health, Safety and Wellbeing’; and in-depth review of D&I and
Wellbeing progress and performance across the Group, to the
point of applying for ISO certification regarding the latter;
– Employee Voice approach: working directly with the Group
Colleague ConneXions Lead to support delivery and direct the
evolution of the Colleague ConneXions programme in 2021,
including direct engagement between all Non-Executive
Directors and the worldwide Company workforce through
active involvement in diversity and inclusion events and learning
programmes as well as 19 virtual/actual visits to Serco sites,
covering every region;
– Sustainable procurement: review of the Company sustainable
procurement approach and endorsement of the new Serco
Sustainable Procurement Charter; and
– Group Health & Safety strategy, including in-depth review
– Community impact: review of the Company’s emerging
of specific incidents; and in-depth review of the Group
principal risk, ‘Health, Safety and Wellbeing’;
– Group Environmental strategy, including delivery of the
Company approach to fulfilling TCFD recommendations;
– Group People strategy, including Wellbeing, including
input into the annual employee engagement survey and
in-depth analysis of survey results, with specific focus on
Company culture; and in-depth review of Employee
Wellbeing and Diversity and Inclusion (“D&I");
– Employee Voice approach, including ongoing
implementation of the Colleague ConneXions programme;
– Sustainable procurement – sustainability strategies within
the supply chain; and
– Community impact through employee activity and contract
footprint.
Additional activity undertaken in 2021
– Values and culture: monitoring the ongoing impact of Covid-19
on Company culture.
– Group Ethics & Compliance strategy and Speak Up process:
monitoring ongoing fulfilment of the Company’s DPA
obligations; in-depth review of the Company approach and
progress in conducting due diligence for agents and strategic
partners globally; review of the Company Ethics & Compliance
maturity; consideration of the outputs of a ‘Trust Summit’
delivered at the Serco Annual Leadership Conferences and
concluded through a global exercise generating rich and
wide-ranging feedback from an estimated 550+ conference
delegates; overseeing a major refresh of the Serco Code of
Conduct, following a review with the organisation to heighten
everyday relevance for frontline colleagues; review and approval
of new business guidance on the assessment of human rights
strategy through both employee activity and Contract footprint.
Additional activity planned for 2022
– ESG oversight: strengthening ESG performance monitoring
across the Group, including cross-Committee indicator
connectivity where appropriate and development of further
ESG metrics and scorecard;
– Values and culture: monitoring the ongoing impact of Covid-19
on Company culture;
– Group Ethics & Compliance strategy and Speak Up process:
review of ongoing fulfilment of the Company’s DPA obligations;
review of the Company progress in conducting due diligence for
agents and strategic partners globally; review of Ethics &
Compliance maturity; review of the new Code of Conduct
implementation; further assessment of MSHT and human rights
impact;
– Group Health & Safety strategy: review of progress in
embedding a mature safety culture; further maturity of
Company-wide road risk strategies and tracking;
– Group Environmental strategy: specific review of carbon
offsetting strategy and progress; review of progress in
embedding and maturing the management and reporting of
climate-related risks and opportunities, per TCFD guidance;
– Group People strategy, including Wellbeing: review of
Wellbeing and D&I progress and performance across the Group;
– Employee Voice approach: working directly with the Group
Colleague ConneXions Lead to support delivery and direct the
evolution of the Colleague ConneXions programme in 2022;
– Procurement and supply chain: ongoing review of progress in
delivering the Serco Sustainable Procurement Charter; and
– Community impact: approval of community impact strategy.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Compliance with the UK Corporate Governance Code
This section of the Corporate Governance Report describes how the Company
has complied with the principles and provisions of the UK Corporate Governance
Code (“the Code”) published by the Financial Reporting Council in July 2018 and
which is available at www.frc.org.uk. It should be read in conjunction with the
Corporate Governance Report as a whole, set out on pages 119 to 138 in which
further details of how the Provisions of the Code have been applied can be found.
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The Company has applied all the principles and complied with all the
Provisions of the Code during 2021, except for Provisions 38 and 41,
explanations for which are provided below and on pages 119, 138 to
142 and 156.
1. Board leadership and Company purpose
The Board is collectively responsible to the Company’s shareholders
for promoting the long-term sustainable success of the Company,
generating value for shareholders as a valued and trusted partner of
governments, and delivering public services that transform outcomes
and make a positive difference for our fellow citizens. It oversees and
agrees the Group’s purpose, values and strategy at its annual strategy
review and at each Board meeting, and ensures that necessary
resources are available, and that the appropriate risk management
controls and processes are in place by regular review of such matters
at Board and Committee meetings.
The Board is mindful of the need to create value whilst taking account
of the wider interests of other stakeholders and, when taking decisions,
balances the impact on suppliers, communities, the environment,
employees and customers with the objective of securing long-term
sustainable growth for shareholders. New business and the renewal of
existing contracts above an agreed level are considered at divisional
level and then by the Investment Committee, prior to review by the
Board which is undertaken having regard to the Company’s four
principal values of Trust, Care, Innovation and Pride, and the impact
on its workforce. The ways in which the interests of the Company’s
stakeholders and the matters set out in section 172 of the Companies
Act 2006 have been considered are set out on pages 107 to 114,
including details of the manner in which engagement with the
workforce is achieved. The Board is conscious of the benefits of aligning
its culture with its strategy and is further embedding this through its
ESG Framework.
Regular engagement is sought with major shareholders, primarily
through executive management, following the announcement of the full
and half year results, and also through the Chairman, who is available
to major shareholders, and the Chair of the Remuneration Committee
who consults with shareholders when appropriate to do so regarding
remuneration matters. The Chairman meets shareholders during the
annual governance roadshow and Non-Executive Directors have the
opportunity to meet investors and other stakeholders at the Capital
Markets Day. The outcome of such engagement is shared to ensure the
Board as a whole has a clear understanding of the views of shareholders.
The Company has established “Employee Voice” to ensure employee
engagement and employees can raise concerns through the Company’s
ethics hot line, Speak Up.
Potential and actual conflicts of interest are considered at Board
meetings and, where appropriate, at Committee meetings.
2. Division of responsibilities
The roles and responsibilities of the Chairman, Chief Executive,
Senior Independent Director, the Board and its Committees are
clearly defined, documented, approved by the Board and are
available on the Company’s website.
The Chairman, who was independent on his appointment, leads and
is responsible for the operation of the Board. The Chief Executive
is responsible for the leadership and management of the business
within the authorities delegated by the Board. Their respective
responsibilities are documented and regularly reviewed.
There are five separate committees of the Board, each of which is
chaired by a different Non-Executive Director as follows:
– Audit Committee: Tim Lodge
– Corporate Responsibility Committee: Kirsty Bashforth
– Group Risk Committee: Ian El-Mokadem
– Nomination Committee: John Rishton
– Remuneration Committee: Lynne Peacock
Details of the activities of each of these committees are set out in
their reports elsewhere within this Annual Report.
The Board regularly reviews the overall balance of skills, experience,
diversity, independence and knowledge of Board and Committee
members and undertakes an annual review of the independence of its
Non-Executive Directors.
As at the date of this report, with six Non-Executive Directors, in
addition to the Chairman, and two Executive Directors on the Board,
over half of the Board, excluding the Chairman, are independent
Non-Executive Directors.
The Non-Executive Directors approve the objectives of the Executive
Directors annually and assess their performance against these objectives.
The Chairman meets formally with the Non-Executive Directors
without the Executive Directors present and maintains regular formal
and informal contact with Non-Executive Directors. In addition,
there are opportunities for the Non-Executive Directors to meet in
the absence of the Executive Directors at Committee meetings.
The Non-Executive Directors, led by the Senior Independent Director,
meet, without the Chairman present, to appraise his performance.
The time commitment of Non-Executive Directors is defined on
appointment and regularly evaluated. All Non-Executive Directors are
able to devote the time required to undertake their roles, including
the Chairman who chairs two listed companies. No director holds
more than four directorships of public companies.
Annual Report and Accounts 2021
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Compliance with the UK Corporate Governance Code continued
The Audit Committee annually reviews the external auditor’s
independence, the effectiveness of the external audit, including
consideration of the level of challenge made by the external auditor,
and the provision of non-audit services. It also reviews and monitors
the effectiveness of the Company’s internal audit arrangements.
5. Remuneration
The Remuneration Committee has delegated responsibility for
determining the policy on Executive Director remuneration, which it
does taking account of workforce remuneration and the alignment of
incentives and rewards with culture.
The Company’s share incentive schemes are designed to promote
long term shareholdings for Executive Directors to provide alignment
with shareholders’ interests.
Although currently not fully compliant with Provision 38 of the Code in
respect of the alignment of Executive Directors’ pension contributions
with those of the wider workforce in respect of the Chief Executive
Officer, following reductions made during the period from 2020 to
2023, his pension will be fully aligned with the wider workforce by
1 January 2023 in accordance with the requirements of the Code.
Decisions made regarding executive pay are appropriate in
the context of the wider workforce. Whilst there is no specific
engagement with employees when determining the executive
remuneration policy, as required under Provision 41 of the Code,
there are a number of colleague ‘Touchpoints’ to both give
information and gain feedback on a wider range of subjects,
including pay.
Full details of how the Company has complied with the principles and
provisions of the Code as they relate to remuneration are contained
in the Directors’ Remuneration Report on pages 139 to170.
The Directors have access to independent professional advice at the
Company’s expense as well as to the advice and services of the Company
Secretary who advises the Board on corporate governance matters.
3. Composition, succession and evaluation
The Nomination Committee is chaired by the Company’s Chairman
and comprises solely Non-Executive Directors. It reviews succession
plans for both Board and senior management positions to ensure
appropriate refreshment and, with the assistance of an external
search company, leads the process for Board appointments and
makes recommendations to the Board. All appointments are made
on merit against objective criteria including the skills, experience and
knowledge required for the Board as a whole and the promotion of
diversity of gender and ethnic and social background.
When seeking to appoint Non-Executive Directors, the services of
a search consultant with appropriate experience within the sector
in which the Company operates are utilised to ensure a strong and
diverse selection of potential candidates meeting the candidate
specification drawn up by the Committee.
All Directors submit themselves for re-election at each Annual
General Meeting.
Following the annual evaluation of the Board and its Committees,
which is externally facilitated every three years, the recommendations
are considered by the Board and implemented by the Chairman
with the assistance of the Company Secretary. Annual appraisals
of Non-Executive Directors, including the identification of training
needs, are undertaken by the Chairman to ensure continued effective
contributions.
4. Audit, risk and internal control
The Annual Report and Accounts includes a statement of the
Directors’ responsibilities regarding the financial statements,
including the status of the Company as a going concern, with an
explanation of the Group’s strategy and business model together
with the relevant risks and performance metrics.
A further statement confirms that the Board considers that the
Annual Report and Accounts, 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.
The Audit Committee report sets out the details of the Committee’s
responsibility for ensuring the integrity of the financial reporting
process and the key matters considered during the year in respect of
its oversight of financial and business reporting.
The Board, through the Group Risk and Audit Committees, has
carried out a robust assessment of the emerging and principal
risks facing the Company, including those which would threaten its
business model, future performance, solvency or liquidity. Further
details about these risks and how they are managed and mitigated
are included in this Annual Report and Accounts together with the
Viability Statement which explains how the Directors have assessed
the prospects of the Company and concluded that 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.
The Board determines the Company’s risk appetite and has
established risk management and internal control systems. At least
annually, the Board undertakes a review of their effectiveness.
138 Serco Group plc
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Remuneration Report
Remuneration Report
Report on Directors’ remuneration
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Remuneration Committee members
Lynne Peacock (Chair)
Kirsty Bashforth
Tim Lodge
John Rishton
Dear Shareholders
On behalf of the Board, I am pleased to present the Directors’
Remuneration Report (the “Report”) for Serco Group plc for
the year ended 31 December 2021. A summary of our revised
Remuneration Policy (the “Policy”) is included at the end
of the Report for reference. The Policy became binding on
21 April 2021 with some 95% of shareholders voting their
approval at the Annual General Meeting (“AGM”). In this Report,
we set out how the Policy has been implemented for 2021 and
how the Policy will be implemented for 2022.
Leading up to the Policy review, the Remuneration Committee (the
‘Committee’) considered Serco’s strategic priorities, the need to
attract and retain executives of the right calibre to successfully deliver
long-term stakeholder value as well as evolving investor expectations.
During the review we also recognised the need to ensure fairness and
equity in our pay practices throughout our organisation. For annual
bonus, financial performance measures were simplified to focus on
profitable growth and cash flow and an ESG scorecard added at
15% weighting to support our ambition of being the ‘best managed
company in our sector’ alongside individual objectives for our
executives and senior leadership. An ESG scorecard (15% weighting)
was also introduced into the Long-Term Incentive Plan (‘LTIP’) with
components aligned to our long-term sustainability strategy.
Angus Cockburn stepped down from the Board at the AGM on
21 April 2021 and Nigel Crossley was appointed to the Board from
that date. In line with established good practice, on his appointment,
Nigel Crossley’s pension opportunity was set at the wider workforce
rate of 8% of salary. The CEO’s pension provision was further reduced
in 2021 and will be aligned with the wider workforce by 1 January
2023. The in-employment shareholding guideline for the CFO was
increased to 200% of salary, aligned to the CEO’s guideline. Post-
employment shareholding requirements were implemented for the
Executive Directors equal to 100% of the in-employment guideline (or
actual holding if lower) for the first year post-employment, followed
by 50% of the in-employment guideline (or actual holding if lower) for
the second year. Malus and clawback provisions within the Policy were
also strengthened.
There are no changes proposed to the Policy in 2022, as set out on
page 143 of this Report.
Another challenging year but one of strong business
performance
The Covid-19 pandemic and its challenges have continued to shape
our business and how we deliver our services through our people.
Our focus has remained firmly on the delivery of essential public
services as well as the wellbeing of our colleagues and the support
and guidance they need to deliver to our service users whilst looking
after themselves and each other. As the Chairman’s statement on
page 14 and the Chief Executive’s Review on page 16 set out, 2021
saw another strong year of growth in revenue and profits with revenue
growth at 14% and Underlying Trading Profit (“UTP”) up by 40%
on 2020. 10% of this revenue growth was organic. Free Cash Flow
(“FCF”) also increased by £55m on 2020, an uplift of 40%. An increase
in margin was achieved from 4.2% to 5.2%. Underlying Earnings Per
Share (“EPS”) increased by 49% year on year. This represents another
successive year of strong growth after 2020 which allowed a full year
dividend to be approved and paid in 2021 with a further dividend
planned to be paid in 2022.
Covid considerations – protecting and rewarding
our colleagues
We have continued to provide stability to all our colleagues by
safeguarding jobs (we have made no one redundant because of
Covid-19) and did not make use of the UK government’s furlough
scheme in 2021. Serco created, directly and with our sub-contractors,
over 12,000 new jobs worldwide, including supporting governments’
responses to Covid-19 in the territories in which we operate.
We protected our front-line colleagues financially, implementing pay
reviews below the leadership level as normal during the year, with
average increases across the Group of around 2%. The executives and
global leadership did not receive a pay increase at the normal review
date in April, except for a very small number of colleagues who would
otherwise fall substantially behind a competitive market rate or were
the subject of retention concerns. Reflecting a strong performance,
all 2020 bonus payments were made in March 2021 and the 2018
Performance Share Plan (“PSP”) vested close to maximum (99.4%) on
25 June 2021.
We have also continued to strengthen our global benefits offerings.
At the 2021 AGM, shareholders approved the Rules for the new,
all employee, global share plan (International Save As You Earn
Plan (“I-SAYE”) 2021) which will further support the Company’s
commitment to colleagues’ financial wellbeing and enable all
colleagues to benefit from Serco’s success. This new I-SAYE plan will
be launched in 2022. Its initial launch will be in the UK, US, Canada,
Australia and the UAE which covers 94% of our headcount with
the intention to expand to other smaller headcount jurisdictions,
including our European business, in subsequent years. It is proposed
to offer our employees an annual opportunity to contribute to the
I-SAYE plan over a three-year term and begin to build affordable
savings out of which they can acquire shares at the expiry of each
savings contract.
In recognition of the extraordinary efforts of our people throughout
another pandemic year, for a second year in a row, we distributed an
ex-gratia recognition award of £100 (or equivalent in local currency)
in February 2022 totalling nearly £6m to around 50,000 employees.
In addition, we have made a significant one-off commitment to our
recently established Serco People Fund. The fund provides support
to current and retired colleagues or their families who need additional
help. Together, these initiatives involve Company funding of some
£10m. Further details of our actions to support our people, and
wider society, during 2021 can be found on pages 35 to 38, in our full
Corporate Responsibility report (www.serco.com/about/corporate-
responsibility) and in our 2021 People Report (www.serco.com/about/
people-report).
Corporate changes
The Company continued to make acquisitions throughout 2021
including the acquisition of Facilities First which completed in January
2021. Announced in February 2021, the Group also completed the
acquisition of Whitney, Bradley & Brown Inc. (‘WBB’) from an affiliate
of H.I.G Capital for $295m (£212m) on 27 April 2021. This was a
material acquisition for the Group and was funded through available
cash and £75m of new debt. The acquisition has increased the scale,
breadth and capability of our North American defence business
and gives Serco a strong platform from which to address all major
segments of the US defence services market. For the eight months
of ownership in 2021, WBB contributed approximately $15m (£11m)
of UTP.
Annual Report and Accounts 2021
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Report on Directors’ remuneration continued
Adjusting in-flight LTIP awards targets for WBB acquisition
Our in-flight 2019, 2020 and 2021 LTIP awards are, in part, assessed on EPS and ROIC performance. The targets for the 2021 LTIP award were
agreed in March 2021 after the WBB acquisition had been announced and been included in the forecast and analyst consensus used to
calculate EPS and ROIC targets. The targets were set out in the RNS accompanying the 2021 LTIP award grant made on 6 April 2021. In
June 2021, the Committee agreed a similar adjustment should be made to the 2019 and 2020 LTIP EPS and ROIC measures. Analysis of the
WBB acquisition showed this would result in a small increase in EPS (making the targets slightly easier to achieve) and a dilutive effect on ROIC
(making these targets slightly harder). To accurately reflect the performance of the Group and maintain the performance stretch required for
vesting as originally intended, the Committee approved the following adjustments in line with the discretion available under the Policy.
Award
2019 LTIP
Performance measures
and weightings
Original EPS and ROIC
target range
Adjusted EPS and ROIC
target range
28.33% EPS
EPS 19.69p – 23.89p
EPS 20.19p – 24.39p
28.33% ROIC
ROIC 15.2% – 18.6%
ROIC 15.0% – 18.4%
28.33% TSR
7.5% Order Book
7.5% Employee
Engagement
2020 LTIP
28.33% EPS
EPS 20.62p – 25.2p
EPS 21.87p – 26.45p
28.33% ROIC
ROIC 16.4% – 20%
ROIC 15.6% – 19.3%
Variance
EPS +0.5p
ROIC -0.2%
EPS +1.25p
ROIC -0.75%
2021 LTIP
28.33% TSR
7.5% Order Book
7.5% Employee
Engagement
25% EPS
25% ROIC
25% TSR
10% Order Book
15% ESG
EPS 25.17p – 30.76p
ROIC 16.5% – 20.2%
No changes were made to the TSR, Employee Engagement, Order Book or ESG targets.
2021 variable pay outcomes linked to the delivery of the strategic plan
In determining the variable pay outcomes for 2020, the Committee looked at the Company’s performance as a whole when deciding on
levels of payout for the annual bonus and LTIP. The Committee also considered the impact of Covid-19 and whether management should be
rewarded for the impact of what was an unexpected and unbudgeted event. The performance outcomes for the 2020 annual incentive were,
therefore, adjusted to remove the impact of Covid-19.
The situation in 2021 was very different: Covid-19 work around the world was budgeted and the benefits to profit included in targets. Contracts
have been re-competed and won against stiff competition. The fact that some of the contracts have gone on for longer than anticipated
at the time that budgets and performance targets were set should not, in the Committee’s view, be used as a reason to discount the very
considerable skill and effort management deployed to ensure that they continue to be engaged and re-engaged by governments around the
world in supporting them.
The revenue budget for 2021, including WBB, was set at £4,216m (up from the reported result of £3,885m in 2020); Trading Profit maximum
target was set at £205.2m (up against reported results of £175.7m in 2020) and the FCF maximum target was set at £134.7m (level with the
£134.9m reported in 2020).
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2021 Annual Bonus
In line with the Policy, the 2021 target and maximum bonus potential
for Rupert Soames (CEO) is 87.5% and 175% of salary respectively.
For Nigel Crossley (CFO), the respective target and maximum bonus
potential is 70% and 140% of salary. Angus Cockburn (who stepped
down as CFO and from the Board on 21 April 2021 at the AGM)
was not eligible to participate in the 2021 annual bonus plan. Bonus
amounts in excess of 100% of salary for Executive Directors will be
deferred into shares with a holding period of three years in line with
the Policy.
The Executive Directors’ annual bonus awards are based on a
combination of 70% financial measures, 15% ESG measures and 15%
individual objectives. In 2021, the financial targets were rebalanced
to remove Revenue as a measure to allow for greater weighting
for profitable growth (from 28% to 40%) with the FCF weighting
increasing from 28% to 30%. For the first time in 2021, the Committee
also implemented an ESG scorecard of measures into the annual
bonus framework (15%) intended to support the Company’s ambition
of being the ‘best managed company in our sector’. The focus of the
ESG scorecard is on robust governance processes, health and safety
within operations as measured by the Lost Time Injury Frequency
Rate (“LTIFR”) and high levels of employee engagement measured
through the annual Group Viewpoint survey carried out in
September 2021.
As noted above, the Committee also determined that adjustments be
made to the 2021 Group financial targets to reflect the contribution
from the WBB acquisition completed on 27 April 2021. This is in
line with the Policy if there is a ‘significant event’ such as a major
transaction and ensures that the conditions achieve their original
purpose and are not materially less easy or difficult to satisfy. The UTP
target figure was increased from £176.5m to £193m and the maximum
increased from £187.7m to £205.2m. FCF figures were similarly
uplifted from £105.2m to £113.7m at target and from £125.7m to
£134.7m at maximum. A 2021 bonus award of 163.2% of salary (93.3%
of maximum) has been made for Rupert Soames and 129.5% of salary
(92.5% of maximum) for Nigel Crossley. The bonus amount for Nigel
Crossley shown in the single figure table on page 145 is a pro-rated
figure to reflect the period he was an Executive Director (21 April
2021 to 31 December 2021 inclusive). The Committee believes that
these levels of award are a true and fair reflection of the underlying
performance of the Company and the Executive Directors throughout
another challenging year. Full details of how these awards were
determined are included on pages 146 to 151 of this Report.
LTIP Vesting
Targets for the 2019 LTIP were set when the Company began to move
into its growth phase and, despite the challenges over the last two
years of the performance period ending 31 December 2021 due
to Covid-19, performance has continued to be strong resulting in
a payout of 89% of maximum opportunity. The award was granted
on 6 June 2019 and will vest on 6 June 2022. As set out above, the
Committee agreed adjustments to the 2019 and 2020 EPS and ROIC
performance targets to include the impact of the WBB acquisition.
Careful consideration was given to the overall performance period
and the extent to which Covid-19 may have affected the performance
assessed. The Committee is satisfied that the overall vesting outcome
is an appropriate reflection of the overall performance of the Group
over the performance period, during which management continued
to successfully drive the growth phase of our corporate strategy. Full
details of actual performance against the framework of performance
conditions are included in the Report on page 151.
2021 LTIP Awards
In 2021, the LTIP award level for Rupert Soames was 200% of salary
and 150% of salary for Nigel Crossley. Angus Cockburn was not
eligible to participate in the 2021 LTIP. The main award grant date
was 6 April 2021 and awards will vest on 6 April 2024. Following his
appointment as CFO at the AGM, on 28 April 2021, Nigel received
a ‘top up’ grant to the award made to him on 6 April 2021 to bring
his award up to 150% of salary with the same vesting date of 6 April
2024. Given the importance of ESG matters to both the operational
performance and long-term sustainability of Serco, an ESG scorecard
of measures was also implemented for the first time into the LTIP
framework at a 15% weighting. The 2021 LTIP ESG scorecard contains
measures based on employee engagement, colleague diversity and
improvements in environmental performance and management of
environmental risks. The performance framework attached to the
2021 LTIP award grant is set out on page 158 of this Report.
The Committee also undertook a review of the percentage range of the
LTIP financial performance conditions, particularly in respect of the EPS
and ROIC targets, to satisfy itself that they were appropriately challenging
and were aligned with market practice. Following detailed consideration,
the Committee was satisfied that maintaining the current +/-10% spread
around target represents a more challenging target to achieve compared
to previous years as absolute profit levels have more than doubled since
2016. The Committee determined that the 2021 LTIP framework of
performance conditions and weightings be retained for 2022.
Executive Director shareholding and post-employment
shareholding requirements
Executive Directors are now expected to build up and hold
a shareholding of 200% of salary. Rupert Soames more than
comfortably meets this requirement. Nigel Crossley has only recently
been appointed as CFO and will build up to this level over time.
The Policy also implemented a post-employment shareholding
guideline for the first time for Executive Directors equal to 100%
of the in-employment guideline (or actual holding if lower) for the
first year post employment, followed by 50% of the in-employment
guideline (or actual holding if lower) for the second year.
Implementation of the Policy in 2022
Base Salaries
The current base salary for the CEO of £850,000 was set on his
appointment to the Company on 8 May 2014. Benchmarking of both
Executive Director roles and all Executive Committee roles was carried
out by Willis Towers Watson towards the end of 2021 and considered
by the Committee at its December 2021 meeting. With effect from
1 April 2022, the Committee awarded a base salary increase of 2%
to Nigel Crossley in line with the average increase of 2% proposed
for the wider UK workforce in 2022. The Committee agreed with
Rupert Soames that his base salary would not be increased for the
eighth successive year. This, together with him withdrawing from the
Deferred Bonus Scheme and agreeing to a reduction in his pension
contributions, have resulted in a significant reduction in both fixed and
variable pay opportunity since he joined the company in 2014.
2022 Annual Bonus
The annual bonus opportunity for the CEO and CFO will be 175%
and 140% of salary respectively, in line with the Policy. The Committee
determined that the same framework of performance targets and
weightings be retained for the 2022 annual bonus award. The financial
measures will, therefore, remain as Trading Profit (40% weighting) and
FCF (30% weighting). The non-financial measures will continue to be split
between the ESG scorecard (15% weighting) and individual objectives
(15% weighting). Any bonus earned over 100% of salary will continue
to be subject to compulsory deferral into shares for three years. Careful
consideration was given to the setting of the 2022 bonus targets and the
Committee has agreed full year targets against all these measures.
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2022 LTIP
Following consultation with major shareholders as part of the Policy
review, it was agreed that aggregate EPS, average Return on Invested
Capital (“ROIC”) and relative Total Shareholder Return (“TSR”)
remained the most appropriate financial measures of the long-term
successful delivery of our strategy. These together with the Order
Book and the ESG measures introduced in 2021 will remain in 2022.
For 2022, the Committee was also keen to disclose the financial
performance targets prospectively in the Report, in keeping with
market practice, rather than separately before the AGM as in previous
years. The framework of performance measures and targets for the
2022 LTIP award are, therefore, set out in detail on page 160.
The LTIP awards will be granted at 200% and 150% of salary to the
CEO and CFO respectively during 2022. The Committee retains
the ability to apply discretion when determining remuneration
outcomes to ensure that the value at vesting is fully reflective of
the performance delivered and that the Executive Directors do not
receive unjustified gains.
Changes to the Board
There have been a number of changes to the Board to report this
year. As mentioned above, Angus Cockburn retired from the Board
and stepped down from his role as CFO at the 2021 AGM with Nigel
Crossley appointed as his replacement. Details of Angus Cockburn’s
remuneration at cessation are provided on page 154 and are in
line with established good practice and our Policy. Nigel Crossley’s
remuneration arrangements are as described in our report last year.
As Nigel was an internal successor, there were no buy out awards
made. His base salary on appointment of £430,000 was positioned
significantly below that of his predecessor (£522,750) and below
the lower quartile of our peer group. The Committee intends to
review Nigel’s salary over time with a view to moving him to a more
competitive position versus market pay levels as he establishes
himself in role.
In other changes to the Board, Sir Roy Gardner retired from the Board
and his role as Chairman and Non-Executive Director at the AGM
on 21 April 2021. John Rishton took up the role of Chairman at the
AGM on the same date. I was also appointed as Senior Independent
Director (“SID”) from 21 April 2021. Tim Lodge was appointed as a
Non-Executive Director of the Company on 21 February 2021 and
joined the Committee on his appointment. Kru Desai took up her
Non-Executive Director’s appointment on 21 October 2021 and
joined the Corporate Responsibility Committee on that date. Eric
Born resigned as a Non-Executive Director on 31 December 2021.
Our people and culture
We are committed to ensuring any decisions made on executive
pay are appropriate in the context of the approach for the wider
workforce. Whilst we do not engage specifically with employees when
determining the executive remuneration policy, there are a number of
colleague ‘Touchpoints’ to both give information and gain feedback
on a wide range of subjects, including pay. Those employees who are
shareholders have the opportunity to vote on our Policy and Report.
Information on workforce demographics and on pay policies and
practices is presented to the Committee for review at each meeting
in a detailed dashboard summary. Unlike many other companies,
Serco has a specifically dedicated front line colleague to represent
the Colleague Voice at Board level. This position is on a two-year
rotation and meets with the Corporate Responsibility Committee
(“CRC”) on a quarterly basis as well as with the Director with specific
responsibility for workforce engagement, Dame Sue Owen. There
is also a dedicated ‘colleague connexions’ email account that is
monitored for feedback.
The Chairman and all Directors undertake a schedule of contract visits
either virtually (because of Covid restrictions), or in person throughout
the year. In the Viewpoint engagement survey held in September of
each year, there is a specific question dedicated to ‘Tell the Board’
anything colleagues wish to let them know. These results are played
back to the Board with deeper dive reviews by the Committee as well
as the CRC.
Diversity and Inclusion (“D&I”) events and surveys are also run
throughout the year in which Non-Executive Directors actively
participate. These events are conducted virtually with the option
to post comments and questions at any time. Our D&I networks
also have a number of different channels for colleagues to interact
and provide their thoughts such as via Yammer groups, Safe Space
Session and Lived Experience Surveys which are summarised and
presented to the CRC. There is also an ‘Inclusion Hub’ which can
be used to express views. As well as all the information provided in
our Annual Report, Directors’ Remuneration Report, Annual People
Report, CRC Report etc., pulse and lifecycle surveys are carried out
throughout the year where colleagues (when joining and leaving in
particular) are given the opportunity through a variety of platforms to
provide feedback to the Company.
As reported in our 2021 Gender Pay Gap Report (www.serco.com/
about/corporate-responsibility/gender-pay-gap-report), our 2021
consolidated UK median gender pay gap continued its downward
trend from 10.9% in 2020 to 6.96% in 2021 (10.2% in 2019, 11.9% in
2018 and 12.9% in 2017). Our gender pay gap is a reflection of our
wider talent gap with fewer women than men in senior leadership
roles and fewer women in specialist and traditionally male dominated
roles such as prison custody officers and engineers. We continue to
make good progress in our priority areas with a focus on improving
diversity in its broadest sense across our whole organisation, of which
gender diversity is just one part.
Stakeholder engagement
We have continued our programme of shareholder dialogue
particularly in connection with the design of the Policy and its
implementation and we thank all those who took the time to consider
and respond with their feedback. We also wish to thank shareholders
for their overall support with a nearly 95% vote of approval for the
Policy. We wish this to continue as we welcome your input and are
always prepared to listen and take on board suggestions that help the
Company continue to grow and develop its services. In addition to
direct engagement with shareholders, our Investor Relations team are
in regular contact with our shareholders and share any feedback or
queries on remuneration throughout the year so that we can maintain
an ongoing dialogue.
Concluding comments
On behalf of my colleagues on the Committee, I wish to thank all our
shareholders for their ongoing support. The Committee believes that
the Policy decisions implemented in 2021 and our proposals for 2022
will continue to ensure the executive management are fairly rewarded
to deliver against the strategic goals of the Company and that all
our colleagues continue to deliver the critical services needed to
governments and citizens around the world. I hope you will all support
the resolution to vote for this Report at the forthcoming AGM.
Lynne Peacock
Chair of the Remuneration Committee
23 February 2022
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This Report has been prepared in accordance with the requirements of the Companies Act 2006 and the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 (as amended) (the “Regulations”). The Report also meets the relevant requirements of
the Listing Rules of the Financial Conduct Authority and describes how the Board has complied with the principles and provisions of the UK
Corporate Governance Code relating to remuneration matters.
The Policy was approved for three years at the 2021 AGM held on 21 April 2021 with a ‘for’ vote of 94.55%. A summary of the approved
Policy is available at the end of this Report on pages 163 to 170 for ease of reference. The full Policy can be found in our 2020 Directors’
Remuneration Report which is available on the Company’s website.
There may be circumstances from time to time when the Committee will consider it appropriate to apply some judgement and exercise
discretion within the approved Policy. This ability to apply discretion is highlighted where relevant in the Policy and the use of discretion will
always be in the spirit of the Policy.
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Implementation of the Policy for 2022 – Executive Directors
The pay structure which will apply in 2022 is summarised as follows:
Long-term
incentive
Compulsory
bonus deferral
Annual bonus
Base salary
Vests subject to financial and non-financial
performance over a three-year period.
Two-year post-vest holding period.
Over 100% of salary mandatorily deferred in
shares for three years.
Up to 100% of salary paid
in cash immediately.
Year
1
2
3
4
5
Note: Chart is illustrative and is not to scale. Details of Executive Director remuneration for 2022 may be found on page 159. A summary of the Policy for Executive Directors is
set out for reference on pages 163 to 165.
This pay structure will be applied to the Executive Directors in 2022 as follows.
Element
CEO
Rupert Soames
CFO
Nigel Crossley
Base salary from 1 April 2022
£850,000
£438,600
(2% increase in line with the wider workforce )
Pension1
Annual bonus
20% of salary
(alignment with wider workforce average from
1 January 2023 )
8% of salary
Max 175% of salary
On-target 87.5% of salary
Max 140% of salary
On-target 70% of salary
Compulsory three-year deferral into Serco shares of bonus over 100% of salary.
Annual bonus measures2,3
40% Trading Profit
30% Free Cash Flow
15% Personal
objectives
15% ESG scorecard
Long-term incentive (granted under
the LTIP)
Maximum 200% of salary
Maximum 150% of salary
LTI measures3,4 assessed over the
three-year performance period
For 2022, 75% of the award will be based on financial measures (EPS, Relative TSR and ROIC)
and 25% of the award will be based on non-financial measures:
25% EPS
25% ROIC
25% Relative TSR
10% Order
Book
15% ESG
scorecard
Holding requirement
Vested LTI shares must be held post-vest until the fifth anniversary of grant (after payment
of tax).
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Element
Shareholding guideline5
In-employment
Post-employment
Malus and clawback
CEO
Rupert Soames
CFO
Nigel Crossley
200% of salary
200% of salary
100% of the in-employment shareholding guideline (or actual shareholding if lower) for the
first year post employment, and 50% of the in-employment shareholding guideline (or actual
shareholding if lower) for the second year post employment.
– Malus provisions and clawback provisions apply to LTIP and deferred bonus share awards
during the three-year period prior to vesting and within five years of grant respectively.
– Clawback provisions apply to the annual bonus plan.
Notes:
1.
In line with the previously disclosed phased approach being applied to reduce the pension opportunity for the incumbent Executive Directors to align with that of the
wider workforce by 1 January 2023. Nigel Crossley’s pension opportunity was aligned to that of the workforce from his appointment as CFO on 21 April 2021. Rupert
Soames’ pension will be aligned by 1 January 2023.
2. 70% of the bonus will be measured by financial targets. The Committee deems the specific details of the performance targets to be commercially sensitive as they are
3.
intrinsically linked to the forward-looking strategic plans of the business. Full disclosure will be provided in the Annual Report on Remuneration for the year in which final
performance is assessed, provided these details are no longer considered sensitive.
In light of the absolute importance of ESG measures to the short and long-term sustainable success of Serco, the Committee has continued to incorporate an ESG
scorecard into both the 2022 annual bonus plan and LTIP. The use of scorecards recognises that ESG is not about a single action being taken, albeit specific measurable
targets will be set for each measure. The measures used in the annual bonus plan are intended to support our ambition of being the “best managed company in the
sector”, whilst for the LTIP, the ESG scorecard contains measures important to the long-term sustainability of Serco. Further details of the composition of the 2022 ESG
scorecards are set out on pages 159 and160.
4. The performance targets to apply to the 2022 LTIP awards are set out on page 160.
5. Shareholding guidelines applied from the Policy approved at the AGM held on 21 April 2021.
Annual Report on Remuneration
The Remuneration Committee
All members of the Committee are independent, Non-Executive Directors of the Company, initially appointed for a three-year term.
That appointment may be terminated on three months’ written notice.
Chair: Lynne Peacock
Committee Members: Kirsty Bashforth, Tim Lodge, John Rishton
Sir Roy Gardner resigned as a Non-Executive Director on 21 April 2021 and ceased to be a member of the Committee on that date.
Tim Lodge joined the Committee on 21 February 2021 on being appointed as a Non-Executive Director of the Company.
The role of the Committee is to determine and recommend to the Board a fair and responsible remuneration framework that aligns the
executive management team to shareholders’ interests and is designed to reward and incentivise them appropriately for their contribution to
Group performance. The Committee’s primary focus is to ensure a clear link between reward and performance. This means ensuring that the
policy, structure and levels of remuneration for the Executive Directors and other senior executives reinforce the strategic aims of the business
and are appropriate given the market context in which Serco operates and the reward strategy throughout the rest of the business.
The Committee’s composition, responsibilities and operation comply with the principles of good governance as set out in the UK Corporate
Governance Code, the Listing Rules and the Companies Act 2006. The Terms of Reference for the Committee are available on the Company’s
website.
The Committee met five times during the year. Details of attendance at meetings are set out on page 123. Meetings of the Committee are
normally attended by the Group Chief Executive Officer, the Group Chief Operating Officer, the Group Reward Director, the Group General
Counsel & Company Secretary, the Deputy Company Secretary and representatives of Willis Towers Watson (WTW), the Committee’s
independent external advisers. No person is present during any discussion relating to their own remuneration arrangements.
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Summary of the Committee’s activities during 2021
The Remuneration Committee met five times during the year. The principal agenda items were as follows:
Meeting
Agenda item
January
2020 bonus calculation adjustments for net Covid-19 impact; Review of Directors’ Remuneration Report (‘DRR’) commentary and
disclosure.
February
June
September
December
Shareholder consultation update; Employee Dashboard review on policy and workforce demographics; 2020 Remuneration Policy and
2020 DRR; 2020 annual bonus achievement and 2021 bonus performance framework; 2018 Performance Share Plan and 2018 Deferred
Bonus Plan vesting; Executive Director and Executive Committee 2021 annual incentive awards; ESG scorecards for 2021 annual bonus and
2021 LTIP framework; share award policy and update; I-SAYE for shareholder vote at the April AGM.
AGM voting results for the Policy and DRR; corporate governance and market practice update; financial performance conditions for 2021
LTIP awards and update to Executive Committee on financial performance targets for 2021 annual bonus; Employee Dashboard and
workforce remuneration update; Employee Voice update; share awards update; adjustments to 2019 and 2020 LTIP financial targets for
Whitney Bradley Brown (WBB) acquisition.
Corporate governance and market practice update; Employee Dashboard and workforce remuneration update; Employee Voice update;
adjustment of 2021 Group and Americas financial performance targets for annual bonus for WBB acquisition; 2021 Gender Pay Gap
analysis report; draft outline of the 2021 DRR; shares award update; executive shareholding status; LTIP performance conditions review and
range of financial targets; review of progress against 2021 bonus targets and delivery against individual objectives for Executive Directors;
executive annual remuneration review and approach to benchmarking for 2022.
Base pay proposals for Executive Directors and Executive Committee members for 2022; update on 2021 bonus projections for Executive
Directors and Executive Committee members; 2022 annual bonus performance framework; shares award update; share grant policy and
LTIP framework for 2022; I-SAYE update for launch of new plan in September 2022; Employee Dashboard and Employee Voice update
including feedback on executive remuneration in relation to provision 41 of the Corporate Governance Code; 2021 Gender Pay Gap report;
2021 DRR; car allowance benchmarking for executives; annual Committee programme of work for 2022.
External Advisers
Willis Towers Watson (“WTW”) provided advice to the Committee throughout the year. WTW is a member of the Remuneration Consultants’
Group and, as such, voluntarily operates under the Remuneration Consultants’ Group Code of Conduct. The Committee is satisfied that WTW
are providing robust and professional advice.
The fees in respect of 2021 paid to WTW (excluding VAT) are set out in the table:
Adviser
WTW
Appointed by
Remuneration Committee
in 2020
1. Fees are determined on a time spent basis.
Services provided
to the Committee
Fees for services provided
to the Committee1
Other services provided
to the Company
Advice on market
practice; governance;
reward consultancy
£78,359
Reward and benefits
consultancy; provision
of benchmark data; DRR
review
The implementation of the Policy for year ended 31 December 2021
The Policy applied for the year ended 31 December 2021 was consistent with the 2021 Policy approved by shareholders at the AGM on
21 April 2021. The Committee has not deviated from the approved Policy in respect of any payments made during 2021.
Single Figure – Directors’ remuneration (audited information)
Executive Directors’ single figure
The following table shows a single total figure of remuneration in respect of qualifying services in 2021 for each Executive Director, together
with comparative figures for 2020. Details of NEDs’ fees are set out in the next section.
All figures in £
Salary
Taxable benefits3
Pension4
Rupert Soames
Angus Cockburn1
Nigel Crossley2
2021
850,000
49,195
170,000
2020
850,000
53,255
191,250
2021
161,182
15,960
32,236
2020
519,563
67,712
116,663
2021
296,144
17,022
23,803
Total Fixed Remuneration
1,069,195
1,094,505
209,378
703,937
336,969
Bonus5
Long-Term Incentives6, 7
1,387,094
1,555,004
1,190,000
2,934,730
–
627,000
642,133
1,166,455
Total Variable Remuneration
2,942,098
4,124,730
627,000
1,808,588
Total
4,011,292
5,219,235
836,377
2,512,524
387,507
31,936
419,442
756,411
2020
–
–
–
–
–
–
–
–
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Notes:
1. Angus Cockburn stepped down from the Board as Chief Financial Officer at the AGM held on 21 April 2021. His salary and benefits for 2021 are pro-rated to reflect his
qualifying service as an Executive Director from 1 January 2021 to 21 April 2021. He did not participate in the 2021 annual bonus plan and was not eligible to receive any
bonus for the year ended 31 December 2021. His 2019 LTIP is for the months of qualifying service in the three-year performance period ending 31 December 2021.
2. Nigel Crossley was appointed to the Board as Chief Financial Officer following the AGM held on 21 April 2021 and hence his single total figure of remuneration for 2020 is
nil. His salary, bonus and benefits for 2021 are pro-rated to reflect his qualifying service as an Executive Director from 21 April 2021 to 31 December 2021 inclusive. His 2019
LTIP is for the months of qualifying service in the three-year performance period ending 31 December 2021.
3. The taxable benefits relate to the provision of independent financial advice, a car or car allowance (fully inclusive of all scheme costs including insurance and maintenance),
healthcare and private medical assessments, as well as taxable business expenses. Where Serco settles the PAYE and NIC liability in respect of benefits provided, the value
of the benefit has been grossed up at the individual’s marginal tax rate. The taxable benefits for 2021 include an individual benefit value of £25,744 in respect of Rupert
Soames’ company car in the year. In connection with their roles, Rupert and Angus were on the Board of our US company, which requires them to make tax declarations in
the US. They do not receive any additional compensation for these directorships, but the Company provides US tax support. The benefit for Rupert for the year was £7,855.
Angus stepped down from the US Board on 21 April 2021. His benefit for the period was £8,000. Nigel joined the US Board on his appointment to CFO on
21 April 2021 and his total benefit for the period ending 31 December 2021 was £2,086. These figures are all on a grossed-up basis.
4. The pension amount includes payments made in lieu of pension, calculated as a percentage of base salary, from which the Executive Directors make their own pension
arrangements. The pension opportunity for the incumbent Executive Directors was significantly reduced from 30% to 20% of salary from 1 April 2020 and was applied to
Rupert and Angus for 2021. On his appointment to CFO, the pension opportunity applied to Nigel was 8% of salary, in line with the level available to most of the wider
workforce.
5. Performance bonuses earned in the period under review and paid in the following financial year. For 2021, this figure includes £537,094 (39%) of Rupert Soames’ and
£126,850 (23%) of Nigel Crossley’s 2021 bonuses which will be subject to mandatory deferral into Serco shares for a three-year period at the point the bonuses are paid in
2022. Angus Cockburn was not eligible to participate in the 2021 annual bonus plan.
6. This is the estimated or actual value of Long-Term Incentives for which the performance period ended in the year including dividend equivalents. For 2020, this includes
sums in connection with the legacy Deferred Bonus Plan (’DBP’) in which the Executive Directors could no longer participate in 2021. The 2020 DBP amount in the 2020 LTI
value total is £668,476. The quantum of the 2021 LTI values for Rupert and Nigel attributable to share price appreciation is £18,392 and £378 respectively. Further details are
provided on page 152.
7. The Long-Term Incentive values reported for 2020 have been restated to reflect the actual share price at the relevant vest dates for the awards (in respect of the 2018 PSP
Awards which vested on 25 June 2021: £1.3073, and in respect of the legacy 2018 DBP Awards which vested on 23 August 2021: £1.3547).
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2021, the Executive Director bonus was based on achieving a mix of financial and non-financial objectives which were weighted
70:30 respectively. The financial measures were Trading Profit (40%) and Free Cash Flow (30%). For the first time in 2021, the Committee
implemented an ESG scorecard (weighted at 15%) to support the Company’s ambition of being the ‘best managed company in our sector’.
The remaining 15% weighting was attached to individual objectives aligned to the delivery of the Group’s corporate strategy.
As set out in the Chair’s letter and the business context for 2021, in determining the appropriate awards under the annual 2021 bonus plan,
the Committee took into account the wider impact of what has been another extraordinary year for both the Company and its employees.
Adjustments were made to Group financial targets (and for the Americas) to reflect the contribution from the WBB acquisition completed on
27 April 2021.
The Committee has also been concerned to ensure fair outcomes for all other employees in the annual bonus plan, with bonus payments
taking into account overall Group and Divisional performance to ensure payments are reflective of the overall contribution and that no
colleague is penalised for factors beyond their control.
Trading Profit of £233.4m was adjusted by the Committee to arrive at a figure for Trading Profit for bonus purposes. Shareholders were
consulted on the principles behind these adjustments in early 2015, and the bonus outcome for 2015 to 2020 reflected these principles. The
purpose of the principles is to ensure that management are measured against their in-year performance and are not given credit for gains
which they have not materially influenced. The Committee has applied these established principles to 2021 in a consistent manner.
The first adjustment made was to put Trading Profit into constant currency so that it was consistent with the targets set at the beginning of the
year. This resulted in a +£6.9m increase. The Committee then considered items to properly reflect management effort and in-year operational
performance. The Committee has concluded that a total of +£1.9m should be added to Trading Profit in constant currency to arrive at a
calculation of Trading Profit for bonus purposes in 2021. This compares with -£3.3m which was deducted from Trading Profit in 2020.
All awards under the 2021 annual bonus plan were subject to a UTP affordability test (after adjustment for in-year Onerous Contract Provisions
(“OCP”) items) of £186.5m at constant currency rates.
After full consideration, the Committee determined that the annual bonus achievement for Executive Directors should not be adjusted for
2021. The tables below show the achievement determined by the Committee against the financial and non-financial measures, together with
the overall bonus outcome for 2021.
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Performance measure
Trading Profit
Free Cash Flow
Note:
1. At constant currency.
£m
Trading Profit
Constant currency adjustment
Trading Profit at constant currency
Adjustment for bonus purposes
Trading Profit for bonus purposes
Underlying Trading Profit at constant
currency
Weighting
for 2021
(% maximum
bonus
opportunity)
40%
30%
2021
233.4
6.9
240.3
1.9
242.2
Threshold
target
(£m)
£186.5
£92.6
2020
175.7
1.4
177.0
(3.3)
173.7
Target
(£m)
£193.0
£113.7
2019
133.4
(4.1)
129.3
(12.6)
116.7
Maximum
target
(£m)
£205.2
£134.7
Actual
performance1
(£m)
£242.2
£189.5
2018
116.7
4.4
121.1
(15.2)
105.9
Achievement
against measure
(% maximum
opportunity for
this measure)
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100%
2016
100.3
(5.7)
94.6
(20.9)
73.7
73.4
2017
54.0
(6.8)
47.2
23.6
70.8
63.4
235.8
164.5
116.5
97.1
Non-financial performance
ESG Scorecard
An ESG scorecard was introduced for the first time in the 2021 annual bonus plan (weighting 15%). For 2021, the scorecard focused on three
key areas:
– maintain and continue to improve robust governance processes including ensuring active and ongoing engagement with stakeholders
(to include shareholders, governments and customers, and colleagues) setting out the progress in achieving strategic objectives
including ESG strategy and approach, as well as operating/financial performance;
– ensure a focus on health and safety within our operations through improvements in the Lost Time Injury Frequency Rate (“LTIFR”); and
– maintain a high level of colleague engagement as measured through our annual Group employee engagement score.
In its consideration of the governance component, the Committee looked at a number of factors including:
– active management of stakeholder concerns from shareholder meetings, Cabinet Office reports and other government reports;
– Board and Executive Committee updates including reactions to regional specific issues such as Social Value in line with UK government
expectations;
– continued transparency to the market and customers measured through feedback to the Company; and
– continued enhancement in assurance, internal controls and compliance (including regulatory compliance).
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As part of its assessment of governance, the Committee also included specific actions agreed for Rupert and Nigel relating to the effective
governance in operation and stakeholder relationships. Achievement against the ESG scorecard for the Executive Directors is shown in the
table below:
Weighting
for 2021
(% maximum
bonus
opportunity)
Performance measure
Lost Time Injury Frequency Rate
Colleague Engagement Score1
Governance Processes2
Achievement
against measure
(% maximum
opportunity for
this measure)
Threshold
target
–
68
Target
4.5
70
Maximum
target
Actual
performance
72
4.1
70
Continued to improve robust governance processes including ensuring
an active and ongoing engagement with stakeholders (to include
shareholders, governments, customers and colleagues) setting out the
progress in achieving strategic objectives including ESG strategy and
approach, as well as regular updates on operational/financial
performance. Hosting a Capital Markets Day, as an example, and other
events such as meetings for analysts and investors to engage with the
wider operational management team of the business, or to hear broader
perspectives on our sectors and markets, such as through the work of the
Serco Institute.
15%
Specific governance actions have been delivered to an exceptional
standard and underpinned the smooth and highly effective transition in
critical Board roles and the Board’s successful operation during another
challenging year for the Company.
11.25%
Specific governance actions2
For Rupert Soames:
Support the effective and smooth
running of the Board, ensuring an
efficient transition of Chairman,
whilst managing a successful
handover from Angus to Nigel in
respect of the CFO role.
For Nigel Crossley:
Deliver the Company’s
obligations under the Deferred
Prosecution Agreement (“DPA”).
Support the effective and smooth
transition of the Chair of the Audit
Committee.
Notes:
1. Group employee engagement score from Employee Voice survey run from 7 – 24 September 2021.
2. Committee decision reached on overview of activity for the year.
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Weighting for 2021 (% maximum opportunity)
15%
Achievement against measure (% maximum opportunity for this measure)
Rupert Soames – consideration of personal performance in the year
Target
Achievements in year
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75%
Winning good business
1. Improve Business Development performance to
a. Total reported pipeline for 2021 was £11,907m well above the
maximum target of £7,817m.
deliver:
a) A reported total pipeline of a minimum of £5,528m,
target of £7,215m and a maximum achievement of
£7,817m or more.
b) New business wins of a minimum of £1,021m, target
of £1,361m and maximum achievement of £1,429m or
more.
c) Total wins, including recompetes and extensions of a
minimum of £2,937m target of £3,916m and maximum
achievement of £4,112m or more.
2. Maintain and improve the relationship with major
Government customers.
b. New business wins amounted to £2,941m so exceeded maximum
target of £1,429m.
c. Total wins delivery was also exceptional amounting to £5,398m
against a maximum target of achievement of £4,112m.
– Strength of relationships built up and maintained as demonstrated
by the trust and confidence displayed in Serco during another
challenging year due to Covid-19. Contracts have been re-competed
and won against stiff competition. Company continued to be
engaged and re-engaged by governments around the world to
support them.
Executing brilliantly
3. Continue to build and where necessary invest in
Serco’s cyber resilience and security.
– Successful programme of continuing to build Serco’s cyber resilience
and security which allowed >10,000 employees to work from home
without compromising data and operational security.
A place people are proud to work
4. Work with the Board to support the development of
succession plans, and in particular the identification
and development of successors for the role of Chief
Executive and other Executive Committee positions.
Profitable and sustainable
5. Where appropriate develop plans for new market
entry or adjacencies to ensure sustainable growth
opportunities (including M&A).
6. Support the effective integration of the FFA and WBB
acquisitions.
7. Deliver against Financial Targets and City
expectations whilst maintaining the reputation of
Serco in the investment community.
– Successful internal appointment of Nigel Crossley as CFO in
April 2021 to replace Angus Cockburn.
– Regular talent and succession planning review of senior leadership to
build pipeline for critical Executive Committee roles to reduce
reliance on external appointments to these roles.
– Calibration and review sessions held on senior leaders to ensure fair
and proper recognition is given to performance to develop and
retain their contribution to the Company.
– Engagement with more than 100 different investment funds –
holding meetings with institutional investors and attending investor
conferences as part of a programme of post-results roadshows and
corporate access activity.
– FFA and WBB integration actively supported and monitored to gain
the benefit anticipated from the acquisitions. Different challenges
encountered. WBB acquisition, in particular, has significantly
increased the scale, breadth and capability of the North American
defence business and given Serco a strong platform from which to
address major segments of the US defence services market.
– Financial targets’ delivery was exceptional in 2021. Substantial
investment in maintaining and developing relationships in the
investor community with issuing of regular trading updates in
addition to the requirement to report half and full year results.
– Issuing 116 announcements throughout the year regarding contract
awards, contract losses, changes to the Board, material
shareholdings, refinancing and corporate transactions and share
buy-back programme.
– Regular engagement with analysts actively covering Serco and
hosting other events. Inclusion of analyst consensus on the Serco
website with the website regularly updated.
The Committee considered Rupert’s performance against his stated objectives and deemed his overall performance in 2021 to be very strong,
awarding him a personal performance outcome of 80%. Rupert has continued to show highly effective and visible leadership throughout 2021,
and over the course of the year has delivered another strong year of performance in the face of the substantial challenges brought on by the
tailwinds of Covid-19. This was achieved whilst maintaining the trust built up with our customers, based on the strong foundations of good
governance, and whilst ensuring the engagement and wellbeing of all colleagues at Serco, all of which are critical to our longer-term success.
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Remuneration Report continued
Nigel Crossley – consideration of personal performance in the year
Target
Achievements in year
Winning good business
1. Improve Business Development performance to deliver:
a) A reported total pipeline of a minimum of £5,528m, target of
£7,215m and a maximum achievement of £7,817m or more.
b) New business wins of a minimum of £1,021m, target of
£1,361m and maximum achievement of £1,429m or more.
c) Total wins, including recompetes and extensions of a
minimum of £2,937m target of £3,916m and maximum
achievement of £4,112m or more.
Executing brilliantly
2. Continue to improve the Finance function by focusing on data
integrity, controls (preparing for Brydon implementation) and
working with Accenture to improve services delivered to
contracts.
a. Total reported pipeline for 2021 was £11,907m well above
the maximum target of £7,817m.
b. New business wins amounted to £2,941m so exceeded
maximum target of £1,429m.
c. Total wins delivery was also exceptional amounting to
£5,398m against a maximum target of achievement of
£4,112m.
– Continued enhancement in assurance, internal controls and
compliance (including regulatory compliance).
– Improvements in governance and compliance with DPA
internal updates to the Board and reporting to Serious Fraud
Office.
– Effective compliance assurance with reviews completed to
plan with timely recommendations and action.
– Sound risk management process in place with evidence of
review and change.
– No material regulatory failures resulting in formal reporting
to regulators, fines or legal action.
A place people are proud to work
3. Lead the Finance function through the transition of CFOs and
ensure succession planning for Divisional CFOs and Senior
Finance teams are robust and regularly reviewed to improve
and enhance capability.
– Highly effective transition with Nigel’s appointment as CFO.
– Strong leadership provided to Finance function at time of
change with excellent continuity of functional performance
throughout 2021.
– Regular talent and succession planning review of senior
leadership in Finance to build pipeline for critical Divisional
CFO and other senior roles and to provide the best means to
retain and develop an excellent level of capability in the
function.
Profitable and sustainable
4. Continue to work with financial institutions to ensure we have
sufficient headroom for future potential acquisitions and
working towards the re-financing of the Revolving Credit
Facility (“RCF”) (due in 2022).
– Financial targets’ delivery was exceptional in 2021.
Substantial investment in maintaining and developing
relationships in the investor community with issuing of regular
trading updates in addition to the requirement to report half
and full year results.
5. Support the effective integration of FFA and WBB
– Clear strategy on potential future acquisitions and how these
acquisitions.
might best be accomplished.
6. Deliver against Financial Targets and City expectations whilst
– Full support to annual Chairman’s Governance investor
maintaining the reputation of yourself and Serco in the
investment community.
roadshow and to full year and half year results presentations
and investor events.
– Attendance at investor conferences.
– FFA and WBB integration actively supported and monitored
to gain the benefit anticipated from the acquisitions. In 2021,
WBB contributed approximately $15m (£11m) of UTP.
The Committee considered Nigel’s performance against his stated objectives and deemed his overall performance in 2021 since his
appointment to the Board to be very strong, awarding him a personal performance outcome of 75%. Nigel has shown highly effective and
visible leadership since he took on the CFO role. Since April 2021, Nigel has delivered a strong period of performance, maintained good
levels of liquidity and maintained a strong balance sheet despite the substantial ongoing challenges due to Covid-19. This was achieved
whilst maintaining the trust built up with our customers and the investment community and ensuring the engagement and wellbeing of all
colleagues at Serco, all of which are critical to our longer-term success.
150 Serco Group plc
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Overall 2021 bonus outcome
Total bonus payable as % of maximum
Bonus opportunity as % of salary
Bonus amount achieved as % of salary
Bonus amount earned2
Rupert Soames
Nigel Crossley1
93.25%
175%
163.2%
£1,387,094
92.5%
140%
129.5%
£556,850
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Note:
1. Bonus amount disclosed is for the full 2021 performance year. Disclosure in the single total figure of remuneration table is pro-rated for the qualifying service as Executive
Director for the period 21 April 2021 to 31 December 2021.
2. Bonuses earned over 100% of salary are subject to mandatory deferral into Serco shares for three years.
Long-term incentives
LTIP
The 2021 single figure is comprised of the 2019 LTIP awards granted on 6 June 2019, which are due to vest on 6 June 2022 subject to TSR,
EPS, ROIC, Order Book (measured as the book-to-bill ratio) and Employee Engagement performance in the period to 31 December 2021. In
determining the overall vesting for the 2019 LTIP, the Committee was mindful that the last two years of the performance period were subject
to the impact of Covid-19. Careful consideration was given to the overall performance of the Group over the whole performance period.
The Committee is satisfied that the overall vesting outcome is an appropriate reflection of the overall performance of the Group over the
performance period, during which management successfully continued the journey of growth in Serco’s corporate strategy.
The 2019 EPS and ROIC target ranges were retrospectively adjusted in 2021 for the WBB acquisition completed on 27 April 2021. The
acquisition resulted in a small increase in EPS with a 0.50p adjustment for 2021 and a very small dilution in the Group’s ROIC. This is because
the acquisition price of c.£210m largely consisted of goodwill and working capital which are treated as invested capital. The net impact of the
acquisition was to reduce the Group’s average ROIC over the three-year period to 2021 by -0.2%. The adjustment made to the EPS and ROIC
target range for the 2019 LTIP is shown in the table below:
Target
EPS
ROIC
Previous target range
Adjusted target range
Adjustment variance
19.69p – 23.89p
20.19p – 24.39p
15.2% – 18.6%
15.0% – 18.4%
+ 0.50p
- 0.2%
Vesting
The performance and formulaic vesting outcome for each tranche of the 2019 LTIP is as follows:
Performance condition
and relative weighting
Threshold3 –
25% vesting
Relative TSR1 (28.33%)
Median ranking
Aggregate EPS2,3 (28.33%) 20.19p
Average pre-tax ROIC2,3
(28.33%)
15.0%
Order Book3 (7.5%)
Employee Engagement
in 20213,4 (7.5%)
Overall vesting outcome
N/A
N/A
Maximum – 100%
Upper quartile
ranking
24.39p
18.4%
105%
70
Performance measured
(% of maximum)
Rank 62/161 Between median and upper quartile
27.5p
19.4%
124%
70
61%
100%
100%
100%
100%
88.94%
Notes
1. For the 2019 LTIP, the Company’s TSR performance was assessed relative to the constituents of the FTSE 250, excluding investment trusts, over the three-year period
ending 31 December 2021. The Company’s TSR 45.6% ranked between median (at which TSR was 22%) and upper quartile (at which TSR was 68.6%) giving a vesting
outcome of 61%.
2. The 2019 EPS and ROIC performance targets are the adjusted targets following the WBB acquisition (as set out in this Report) to ensure that the targets accurately reflect
the true performance of the Group, and that they maintain the performance ‘difficulty’ required for vesting as originally intended. The original 2019 target ranges for EPS
were 19.69p (threshold) to 23.89p (max); and for ROIC, 15.2% (threshold) to 18.6% (max) as shown under the separate table on the EPS and ROIC adjustment above.
3. Only the financial performance targets vest at 25% for threshold performance, rising on a straight-line basis to 100% vesting at maximum performance. The Committee
views the Order Book and Employee Engagement targets to be strategically critical to the longer-term success of the Company, and that there should be no vesting below
target performance. The vesting level for on-target performance (being a book-to-bill ratio of 100%, or an Employee Engagement score of 67) is 50% of this element, rising
on a straight-line basis to 100% for maximum performance.
4. The Company changed provider for its annual Viewpoint survey via which employee engagement is assessed each year (from Aon to Glint). On transition, an assessment
was undertaken to convert the targets set (determined as a % engaged under the Aon tool) to an engagement score per the Glint tool. The Committee is satisfied that the
2021 engagement score of 70 meets the maximum engagement score required for full vesting of this element.
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Remuneration Report continued
Executive Director
2019 LTIP Tranche
Rupert Soames
Relative TSR
EPS
ROIC
Order Book
Employee
Engagement
Angus Cockburn1 Relative TSR
EPS
ROIC
Order Book
Employee
Engagement
Nigel Crossley2
Relative TSR
EPS
ROIC
Order Book
Employee
Engagement
No. of shares
awarded
371,943
371,943
371,943
98,456
98,456
149,975
149,974
149,974
39,699
39,699
7,641
7,641
7,641
2,022
2,022
No. of shares
vesting
226,885
371,943
371,943
98,456
98,456
91,484
149,974
149,974
39,699
39,699
4,660
7,640
7,640
2,022
2,022
Dividend equivalent
shares
3,670
6,018
6,018
1,592
1,592
1,479
2,426
2,426
641
641
75
123
123
32
32
Value of
Vesting3
302,142
495,318
495,318
131,113
131,113
121,828
199,720
199,720
52,866
52,866
6,205
10,173
10,173
2,692
2,692
Value attributable
to share price
appreciation4
3,574
5,858
5,858
1,551
1,551
1,441
2,362
2,362
625
625
73
120
120
32
32
Notes:
1. Angus Cockburn stepped down from the Board at the AGM on 21 April 2021. His 2019 LTIP is for the months of qualifying service in the three-year performance period
ending 31 December 2021.
2. Nigel Crossley was not a Director at the date of the 2019 LTIP award on 6 June 2019 but was appointed to the Board as CFO on 21 April 2021. The award grant level of
60% of salary reflects his terms before he became a Director. His 2019 LTIP award is for the months of qualifying service in the three-year performance period ending
31 December 2021.
3. As these awards are still to vest at the time of reporting, the share price used to determine the value of vesting for the 2021 single figure is the Q4 average closing share
price to 31 December 2021 (£1.3105).
4. The value included in the single figure reflects an increase in the share price from that at grant (£1.295) to the estimate of the share price at vest (based on the 2021 Q4
average share price). The Committee believes that the share price movement appropriately reflects the broader performance of the Company and, therefore, did not make
any discretionary adjustments to the vesting of these awards on this basis.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – SectionContents_GEN_PageContents_GEN_PageL2Contents Generation – Section Single figure – Non-Executive Directors’ remuneration (audited information)
Non-Executive Directors’ remuneration consists of cash fees paid monthly with increments for positions of additional responsibility. In addition,
reasonable travel and related business expenses are paid. No bonuses are paid to Non-Executive Directors. Non-Executive Directors’ fees are
not performance related.
Non-Executive Directors are encouraged to hold shares in the Company but are not subject to a shareholding requirement.
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Committee roles held
in the year
John Rishton1 (Chairman)
R
Sir Roy Gardner2
Kirsty Bashforth
Eric Born3
Kru Desai4
Tim Lodge5
Ian El-Mokadem6
Dame Sue Owen7
Lynne Peacock8(SID)
Total
C R GR
A C
A C
A
A
A
R GR
GR
C
GR
R
Board fee
(including Chairmanship fees)
(£)
Taxable benefits9
(£)
Total10
(£)
2021
222,576
76,705
75,500
63,000
11,278
62,525
70,500
63,000
80,955
2020
90,500
250,000
75,500
63,000
–
–
65,530
26,250
70,500
726,037
641,280
2021
1,994
284
1,363
–
–
–
–
–
446
4,086
2020
874
7,066
637
4,383
–
–
–
–
–
2021
2020
224,569
76,988
76,863
63,000
11,278
62,525
70,500
63,000
81,400
91,374
257,066
76,137
67,383
–
–
65,530
26,250
70,500
12,960
730,123
654,240
Notes:
A = Audit Committee, C = Corporate Responsibility Committee, R = Remuneration Committee, GR = Group Risk Committee. Red denotes Chair. No additional fees were
payable for other Board Committee roles in the year.
1. John Rishton was appointed as Chairman of the Board on 21 April 2021. He receives no additional fees for Committee membership.
2. Sir Roy Gardner stepped down from the role of Chairman on his retirement from the Board on 21 April 2021.
3. Eric Born stepped down from the Board on 31 December 2021.
4. Kru Desai joined the Board on 21 October 2021 and became a member of the Corporate Responsibility Committee. She became a member of the Audit Committee from
1 January 2022.
5. Tim Lodge joined the Board on 21 February 2021. He chairs the Group Audit Committee (from 21 April 2021) and is a member of the Group Risk and Remuneration
Committees.
Ian El-Mokadem moved from the Corporate Responsibility Committee to sit on the Audit Committee on 21 April 2021.
6.
7. Dame Sue Owen joined the Board on 3 August 2020. She moved from the Audit Committee to the Corporate Responsibility Committee on 21 April 2021.
8. Lynne Peacock was appointed Senior Independent Director (SID) on 21 April 2021.
9. Taxable benefits in 2020 and 2021 relate to reimbursed taxable travel and subsistence business expenses.
10. Non-Executive Directors do not receive any variable pay so “Total” is total fixed remuneration.
Pensions (audited information)
As at 31 December 2021, there were no Executive Directors actively participating, or accruing additional entitlement, in the Serco Pension and
Life Assurance Scheme which is a defined benefits scheme.
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Remuneration Report continued
Payments for loss of office and to past Directors (audited information)
Angus Cockburn stepped down as Group Chief Financial Officer and as an Executive Director of Serco Group plc at the AGM held on
21 April 2021. He also stepped down from the role he held on the Board of Serco Inc. From the AGM date, Angus moved into the role of
Advisor to the Investment Committee, also ensuring a smooth transitional period for Nigel Crossley as the incoming Group Chief Financial
Officer. He continued in this role until the expiry of his notice period on 31 December 2021.
Description
Salary and benefits
Details of payment
– Base salary of £522,750 until 31 December 2021.
– Contractual benefits e.g. company car, life assurance, independent financial advice etc.
(£28,977) until 31 December 2021.
– Pension cash alternative payment of 20% of salary (£104,550) until 31 December 2021.
Discretionary 2021 annual bonus award
No participation in the 2021 annual bonus plan. No eligibility to receive any bonus for year
ending 31 December 2021.
Equity Settled Bonus Plan (“ESBP”) for
bonus earned above 100% of salary
deferred into shares and vesting after
three years. These awards are not
subject to further performance
conditions or pro-rated.
Treated as ‘good leaver’ in respect of outstanding unvested ESBP awards. These will all vest
in full on the normal vesting dates for these awards:
– 2019 ESBP award – 69,162 shares vesting on 26 April 2022
– 2020 ESBP award – 175,724 shares vesting on 28 April 2023
– 2021 ESBP award – 85,566 shares vesting on 26 March 2024
– To the extent that a dividend is paid prior to the vest of these awards, the total number
of shares linked to the award may increase for dividend equivalents.
– Awards subject to malus and clawback provisions.
Holiday entitlement
All outstanding holiday entitlement was taken by the end of 31 December 2021.
Share awards
– No award made under the Company’s LTIP in 2021.
– Treatment as ‘good leaver’ for outstanding awards made under 2019 LTIP and 2020 LTIP.
Outstanding unvested LTIP share awards will vest on the normal vesting dates subject
to the satisfaction of the relevant performance conditions and on a time pro-rated
basis. A post vesting holding period of two years applies post vesting date.
– 2019 LTIP – 574,323 shares retained – vesting date 6 June 2022 – holding period expires
6 June 2024.
– 2020 LTIP – 333,159 shares retained – vesting date 6 April 2023 – holding period expires
6 October 2025.
Medical insurance
Private medical insurance continued on existing terms until 31 December 2021.
There were no other payments made to past Directors in 2021.
154 Serco Group plc
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – SectionContents_GEN_PageContents_GEN_PageL2Contents Generation – Section Performance graph and table
This graph shows the value as at 31 December 2021, of a £100 investment in Serco on 31 December 2011 compared with £100 invested in the
FTSE 250 index on the same date. It has been assumed that all dividends paid have been reinvested. The TSR performance for the long-term
incentives applies over a different period and details of the Company’s performance versus the FTSE 250 relevant to the 2021 single figure can
be found on page 151.
The TSR level shown at 31 December each year is the average of the closing daily TSR levels for the 30-day period up to and including that
date. The Company chose the FTSE 250 index as the comparator for this graph as Serco has been a constituent of that index throughout
the period.
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350
300
250
200
150
100
50
0
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Dec 2020
Dec 2021
Serco
FTSE 250 Index
CEO’s pay in last ten financial years
Year ended 31 December
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Christopher
Hyman
Ed
Casey
Group CEO
Christopher
Hyman
Ed
Casey
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
CEO single figure
remuneration (£000)
Annual bonus
outcome (as % of
maximum opportunity)
LTI vesting outcome
(as % of maximum
opportunity)
2,581
72%
893
295
N/A
74%
1,605
748
71%
0%
2,255
2,217
3,681
5,176
5,201
4,943
4,011
87%
82%
75%
77%
94%
80%
93%
64%
0%
0%
100%
24%
91%
73%
71%
99%
89%
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Remuneration Report continued
Percentage change in Directors’ remuneration
The table below shows the percentage change in remuneration for all Directors who served during 2021 compared to that for the average UK
employee. The UK employee sub-set of the Company’s global workforce has been chosen as the group which provides the most appropriate
comparator. There are no employees in the Group’s parent company. The UK employee population comprises some 23,000 of the approximately
50,000 individuals Serco employs worldwide. Inflation and local pay practices form a key driver in the salary and benefits provided in each location,
and as the Directors’ pay is set against the UK market (with the Executive Directors based in the UK), we have chosen employees within the same
country. Information will need to be shown for each Director in the relevant year on a rolling five-year basis. 2021 is the second year of disclosure.
Executive Directors4
Non-Executive Directors
UK
employees
Rupert
Soames
Angus
Cockburn
Nigel
Crossley
Sir Roy
Gardner
John
Rishton
Kirsty
Bashforth
Eric
Born
Kru
Tim
Desai
Lodge
Ian El-
Mokadem
Dame
Sue
Owen
Lynne
Peacock
2021
Salary/fees1
1.12%
Benefits2
Bonus3
2%
21%
0%
-8%
-69%
-76%
17% -100%
-43%
-75%
-67%
-69%
-96%
N/A
146%
128%
N/A
0%
0%
114% -100%
N/A
N/A
2020
Salary/fees1
1.9%
Benefits2
Bonus3
-3%
20%
0%
20%
2%
36%
-15%
-10%
N/A
N/A
N/A
0%
-50%
N/A
0%
-51%
N/A
2%
-81%
N/A
0%
53%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8%
0%
N/A
4%
0%
N/A
140%
0%
N/A
N/A
N/A
N/A
15%
0%
N/A
0%
0%
N/A
1. The average salary change for UK employees represents the average pay increase applied in the 2021 annual pay review. Changes in NED fees reflect changes in each
individual’s role on the Board and its Committees. There was a change in the Chairman’s fee from £250,000 to £280,000 in 2021 but no other changes to underlying fees.
2. The nature of taxable benefits provided to all Directors and employees in 2021 compared to 2020 remains the same.
3. The bonus element is shown for those employees eligible for such payments. The figures shown here relate to a calculation of the bonus earned, but not yet paid, related
to performance in 2021 compared to the 2020 bonuses paid in March 2021. The Executive Directors’ 2021 bonuses over 100% of salary are subject to compulsory deferral
for three years into shares. NEDs do not receive bonus pay.
4. Disclosure in the above table is pro-rated for the qualifying service as Executive and Non-Executive Director in the relevant year.
CEO Pay Ratio
The table below shows how pay for the CEO compares to our UK colleagues at the 25th, median and 75th percentiles.
Year
2021 (Option B)
2020 (Option B)
2019 (Option B)
Percentile
25th
Median
75th
25th
Median
75th
25th
Median
75th
Salary1
Total pay and benefits2
Pay Ratio
£22,351
£26,785
£28,675
£24,964
£30,597
£32,486
£24,859
£27,026
£32,429
£23,816
£28,801
£32,992
£26,611
£33,127
£34,709
£26,066
£30,072
£34,420
1:168
1:139
1:122
1:186
1:149
1:142
1:219
1:190
1:166
Notes:
1.
2.
Includes salary enhancements such as shift allowances, unsociable hours payments and overtime.
Includes the value of employer pension contributions made to a defined contribution pension arrangement. Each of these representative colleagues participated in a
salary sacrifice pension arrangement.
The Committee believes that the median ratio is consistent with the Company’s pay, reward and progression policies for our UK colleagues.
As a business, Serco employs a very wide range of people with different skills, experiences and capabilities, and our reward aims to reflect
these differences and be responsive to the needs of our employees. We apply the same reward principles for all our colleagues, in that reward
should be competitive and aligned to the sectors and markets from which we draw our talent. Our remuneration philosophy throughout the
organisation is to compensate employees fairly for their contribution to the business while ensuring that we are appropriately managing the cost
of our workforce which, as a people business, is our biggest operating cost.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – SectionContents_GEN_PageContents_GEN_PageL2Contents Generation – Section The remuneration of Serco’s CEO has a significant weighting towards variable pay to align his remuneration with Company performance. In
contrast, due to our workforce profile, all three of our pay ratio reference points represent front-line operational or administrative staff who are
critical to the delivery of the commitments we make under our contracts every day. In line with market practice for such roles, these colleagues
are in receipt of fixed pay only (including pension contributions). The reduction in the Pay Ratio from 2020 to 2021 is, therefore, primarily a result
of the reduction in the CEO’s single figure in 2021 compared to 2020, driven by a reduction in his variable pay as the legacy DBP awards have
fallen out of the 2021 reporting. The final award was granted in 2018 with performance assessed to 31 December 2020 and included in the 2020
assessment. However, the remuneration for the reference points has been maintained reflecting the commitment made by the Company to
ensure front-line colleagues continue to receive fair pay for their contributions to the success of Serco, particularly in the context of the ongoing
impact of Covid-19 in 2021 and beyond.
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Consistent with our approach in 2020, we have used our 2021 Gender Pay Gap data to identify employee representatives at each pay quartile
of our UK employee population. Employees were ranked by hourly pay and, where possible, full-time colleagues at the quartile points fulfilling
common roles within the UK employee population were selected as the representatives for comparison. Given our diverse workforce and large
number of UK employees across many contracts and payrolls, this is considered to be the most appropriate method of identifying employees
who are representative of our workforce. The single figures for each representative employee (all of whom were full-time) were calculated
in respect of the financial year to 31 December 2021. The single figures have been calculated taking into consideration regular salary and
allowances (e.g. shift allowances), employer pension contributions, taxable benefits and bonuses (which for 2021 included the ex gratia awards
made to around 50,000 of our global colleagues to recognise their extraordinary efforts during the pandemic) following the same approach
taken in determining the CEO’s single figure. Significant salary enhancements, such as acting up allowances, which were not received at the
date the pay was calculated for Gender Pay Gap purposes are disregarded from the single figure calculation for the representative employees
to avoid over-inflating the representative pay at the quartile levels. The pay and benefits figures for the employee representatives do not include
any amounts in respect of long-term incentives as these are only available to the most senior members of the Group.
The 2021 Gender Pay Gap pay quartiles reflect an increased size of workforce compared to prior years, impacting the roles captured as
representative at lower quartile, median and upper quartile for our UK workforce.
Relative importance of spend on pay
The table below details the percentage change in dividends and overall expenditure on pay compared with the previous financial year.
Dividend per share
Overall expenditure on wages and salaries
2021 vs 2020
100%
14%
2021
2.4
2020
Nil
£1,984.7m
£1,742.7m
Dividend per share and overall expenditure on wages and salaries have the same meaning as in the notes to the Company Financial
Statements.
Awards made in 2021
Equity settled bonus plan (ESBP) (audited information)
In line with the approved Policy, in connection with the compulsory deferral of the 2020 bonus in excess of 100% of salary, Rupert Soames and
Angus Cockburn were granted the following ESBP awards on 26 March 2021 in the form of conditional share awards. ESBP awards granted in
2021 vest on the third anniversary of grant on 26 March 2024. Nigel Crossley did not take up his Board appointment as Group CFO until after
the 2020 bonus pay-out so no deferral of any bonus into shares was made.
Directors
Rupert Soames
Angus Cockburn
Face value
(£)1
340,000
119,383
Market price at award
Grant date
(£)2
Number of shares3
26 March 2021
26 March 2021
1.3952
1.3952
243,692
85,566
Notes:
1. Calculated as the value of the Executive Directors’ 2020 bonus in excess of 100% of salary.
2. Average closing share price on the five trading days immediately prior to the date of grant.
3. Calculated using the average share price used to determine the number of shares awarded.
Pre-vesting malus and post-vesting clawback are applicable to these awards, but no further performance conditions apply.
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Long term incentive plan (LTIP) (audited information)
In line with the approved Policy, in 2021, the CEO received LTIP awards equivalent to 200% of salary, and the CFO received awards equivalent
to 150% of salary. All awards were in the form of conditional share awards.
For the first time in 2021, the Committee implemented an ESG scorecard of measures as one of its performance conditions for the LTIP awards.
The LTIP awards will normally vest on 6 April 2024, following the end of the performance period, if the Executive Directors are still in employment
with Serco and to the extent that the performance conditions have been met, as measured over the three-year performance period ending
31 December 2023.
Performance
measure
Weighting
of measure
Performance target
Aggregate
EPS
25%
Relative TSR 25%
Average
ROIC
25%
Order Book
10%
Statutory Earnings Per Share (EPS) before exceptional items (adjusted to reflect tax paid on a cash basis) of
25.17p (threshold, 25% vesting) to 30.76p (maximum, 100% vesting), measured as an aggregate over the
three-year performance period.
Total Shareholder Return (TSR) of median (threshold, 25% vesting) to upper quartile (maximum, 100%
vesting) when ranked relative to companies in the FTSE 250 (excluding investment trusts), measured over the
three-year performance period.
Pre-tax Return on Invested Capital (ROIC) of 16.5% (threshold, 25% vesting) to 20.2% (maximum, 100%
vesting), measured as an average over the three-year performance period.
Book-to-bill ratio of 100% (target, 50% vesting) to 105% (maximum, 100% vesting), measured as an average
over the three-year performance period.
ESG
scorecard
15%
Scorecard made up of three components:
– Employee engagement score of 69 for target and 71+ for maximum performance measured via the Serco
Employee Engagement Survey as an average across the three-year performance period;
– Colleague diversity improvement with women in senior global leadership in 2023 at 33% target and 35% or
above for maximum. Progress in ethnic diversity to be noted; and
– Improvement in environmental risks assessment measured by externally issued environment /climate rate
changes.
The structure for vesting of the EPS, TSR and ROIC conditions is straight-line vesting between threshold and target, and target and maximum,
and no shares vest where performance is below threshold. The Committee views the Order Book and ESG targets to be strategically critical
to the longer-term success of the Company and that there should be no vesting below target performance. Threshold performance of these
elements, therefore, delivers a 0% vesting outcome. The vesting level for on-target performance is 50%, with straight-line vesting between
target and maximum. This is a more stringent approach than required under the approved Policy.
In determining the extent to which these LTIP awards will vest, the Committee will consider the Group’s underlying performance (with input
from the Group Audit and Risk Committees, as appropriate) and external market reference points to ensure that outcomes are fair and reflect
the underlying performance of the Group.
Each element of the LTIP award is subject to a post-vesting holding requirement that takes the total term of the LTIP award (i.e. performance
period plus holding period) to a minimum of five years. Pre-vesting malus and post-vesting clawback are also applicable to these LTIP awards.
Following his appointment as CFO on 28 April 2021, Nigel received a ‘top up’ grant to the LTIP award made to him on 6 April 2021 to bring
the total aggregate value of his LTIP awards for 2021 up to 150% of salary (£645,000) with the same vesting date of 6 April 2024.
Directors
Rupert Soames
Nigel Crossley
Basis of
award
(% salary)
Face
value
(£)
Market price
at award
(£)1
Number
of shares2
Grant date
Percentage
vesting at
threshold
performance3
Performance
period
end date
200% 1,700,000
6 April 2021
1.3822
1,229,923
18.75% 31 December 2023
150%
210,000
435,000
6 April 2021
28 April 2021
1.3822
1.4174
151,931
306,899
18.75%
18.75%
31 December 2023
31 December 2023
Notes:
1. Average closing share price on the five trading days immediately prior to the date of grant.
2. Calculated using the average share price used to determine the number of shares awarded.
3. 75% of the awards that are subject to financial performance conditions vest at 25% for threshold performance. 25% of the awards that relate to Order Book and ESG
performance conditions vest at 0% for threshold performance and only begin to vest when at least target performance is achieved.
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Executive Directors
Salary increases for the year ending 31 December 2022
The Committee reviewed base salaries for the current Executive Directors and determined that no increase will apply to the CEO’s salary but
that a 2% increase will be made to the CFO’s salary rate from £430,000 to £438,600 from 1 April 2022 in line with the average increase to our
wider workforce of 2%. His £430,000 base salary on appointment was positioned significantly below that of his predecessor (£522,750) and
below the lower quartile of our peer group. The Committee intends to review Nigel’s salary over time with a view to moving him to a more
competitive position versus market pay levels as he establishes himself in role. This approach may require moderate increases over and above
the average of the wider workforce over time.
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Pension
As summarised on page 143, and in line with our commitment to align the Executive Directors’ pension opportunity with that of the wider
workforce, Nigel Crossley’s pension opportunity was aligned to the wider workforce (8% of salary) from the date of his CFO appointment on
21 April 2021. Rupert Soames will continue to have a pension opportunity in 2022 of 20% of salary. This will be reduced to align to the wider
workforce by 1 January 2023.
Annual bonus and LTIP
Details of structure and opportunity under the 2022 annual bonus and LTIP for each Executive Director are set out on page 143. Further details
of the performance framework to apply in 2022 are provided below.
Details of the performance measures to apply to the 2022 annual bonus and long-term incentive awards
Our aspiration is to be the best managed company in our sector. To achieve this, we concentrate on doing four things really well – winning
good business, executing brilliantly, being a place people are proud to work, and being profitable and sustainable. Our variable pay for
2022 aligns to this through the targets set against a number of our core KPIs, each of which has an important role in realising this aspiration.
Total Shareholder Return aligns variable pay with value created for shareholders. The Committee takes a robust approach to target setting,
informed by internal budget and long-term plans, analyst forecasts and strategic objectives.
Recognising the importance of our ESG commitments to both the short and long-term success of Serco, an ESG scorecard for both our
annual bonus and LTIP will continue to be incorporated into each incentive. The ESG scorecard components have been chosen taking into
consideration our current maturity across this space, our ability to set and measure performance that is relevant and meaningful to Serco, and
the current strategic priorities as articulated in our Corporate Responsibility and People Reports. As our ESG strategy continues to evolve over
time, and the priorities for Serco change, we would expect the scorecard components to also change. For 2022, the Committee decided to
retain the same framework of ESG scorecard measures as they continue to be the most appropriate for our strategic direction for 2022.
Determination of the amount payable under the 2022 annual bonus plan will also take into consideration the wider performance of the Group
as well as the affordability of the bonuses so determined. In determining the vesting of the 2022 LTIP awards, the Committee will also take into
consideration the wider performance of the Group. The final vesting will be adjusted where appropriate to ensure the outcomes are a fair and
reasonable reflection of the performance of the Group.
2022 bonus performance measures
The performance measures to apply to the 2022 annual bonus plan continue the focus on profit growth and cash, as well as to incorporate
a strategically aligned ESG scorecard to support our ambition of being the best managed company in our sector. The 2022 performance
measures will be aligned to core KPIs as follows:
Financial (70%)
Non-financial (30%)
Core KPIs
40%
30%
Trading Profit
Free Cash Flow
15%
15%
Personal objectives aligned to the delivery of the Group’s
corporate strategy
ESG scorecard aligned to being the “best managed company in
our sector”
Components of the 2022 annual bonus ESG scorecard (15% weighting)
The 2022 annual bonus ESG scorecard will continue to focus on three key areas:
– Maintain and continue to improve robust governance processes including ensuring active and ongoing engagement with stakeholders
(to include shareholders, governments and customers, and colleagues) setting out the progress in achieving strategic objectives
(including ESG strategy and approach), as well as operating/financial performance;
– Ensure a focus on health and safety within our operations through improvements in LTIFR; and
– Maintain a high level of colleague engagement as measured through our annual Group employee engagement score.
The specific targets for the 2022 annual bonus plan are deemed to be commercially sensitive. Full disclosure of the targets set will be made in
the 2022 Report following the end of the current financial year to the extent these are no longer considered commercially sensitive.
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2022 LTIP performance measures
The table below provides details of the performance measures and targets to apply to the 2022 LTIP awards. Targets have been set taking into
account our longer-term business forecasts and strategy as outlined at the Capital Markets Day held in December 2021 as well as
analyst consensus.
Performance measure
Financial
performance
Non-financial
strategic
performance
Relative TSR
25%
Average ROIC
25%
Aggregate EPS 25%
Order Book1
10%
ESG scorecard
15%
Weighting
of measure
Performance target
Total Shareholder Return (TSR) when ranked relative to
companies in the FTSE 250 (excluding investment trusts),
measured over the three-year performance period.
Pre-tax Return on Invested Capital (ROIC) measured as an
average over the three-year performance period.
Statutory Earnings Per Share (EPS) before exceptional items
(adjusted to reflect tax paid on a cash basis) measured as an
aggregate over the three-year performance period.
Threshold
25% vesting1
Maximum
100% vesting
Median
ranking
Upper
quartile
ranking
17.3%
21.2%
28.41p
34.72p
Book-to-bill ratio of 100% (target, 50% vesting) to 105%
(maximum, 100% vesting), measured as the cumulative average
over the three-year performance period.
The components of the 2022 LTIP ESG scorecard (set out below)
have been selected as being important to the long-term
sustainability of Serco.
N/A
105% or
above
N/A
See ESG
table below
Note:
1. Only the financial performance targets vest at 25% for threshold performance, rising on a straight-line basis to 100% vesting at maximum performance. The Committee
views the Order Book and ESG targets to be strategically critical to the longer-term success of the Company and that there should be no vesting below target
performance. The vesting level for on-target performance (being a book-to-bill ratio of between 100% to 105% or an average Employee Engagement score of 70) is 50% of
this element, rising on a straight-line basis to 100% for maximum performance.
Components of the 2022 LTIP ESG scorecard (15% weighting)
Performance measure
Performance target
Employee engagement
Improvement in colleague diversity
Improvement in our understanding,
management and disclosure of Serco’s
environmental risks
Average annual Group employee engagement score over the three-year performance
period at or above 70 for on-target performance, and at or above 72 for maximum
performance.
Performance will be assessed against a scorecard of factors relating to the improvement in
colleague diversity. This will include reviewing progress on activities which support diversity,
such as:
– commitment to diversity charters, where appropriate, such as the UK Race at Work charter,
and progress shown against the commitments made;
– the continued implementation of policies to promote diversity in recruitment and
candidate pools;
– wider and better targeted participation in learning and career development, and
– active management of a talent pipeline and progression within the organisation which will,
in time, result in a more diverse leadership cadre.
To track progress, the Committee will also review quantitative metrics such as the
percentage of women and colleagues of diverse ethnic backgrounds, holding senior global
leadership roles.
Demonstrate improvements in environmental performance and management of
environmental risks, through actions taken in line with our environmental strategy and
improvements in externally issued environment/climate change ratings such as CPD Climate
Change Scores.
In each case, the performance will be assessed over the three-year period ending 31 December 2024. The structure for vesting of the EPS,
TSR, ROIC and ESG conditions will be straight-line vesting between threshold and target, and between target and maximum, and no shares
will vest where performance is below threshold. The Committee views the Order Book and ESG targets to be strategically critical to the longer-
term success of the Company and that there should be no vesting below target performance. Threshold performance will, therefore, deliver a
0% vesting outcome. The vesting level for on-target performance will be 50%, with straight-line vesting between target and maximum. This is
a more stringent approach than that required under the Policy. In determining the final vesting of these awards, the Committee will also give
consideration to the Group’s underlying performance (with input from the Group Audit and Risk Committees as appropriate) and external
market reference points to ensure that outcomes are fair and reflect the underlying performance of the Group. The Company announced
its intention to implement a share buyback programme during 2022. The 2022 LTIP EPS targets exclude the impact of this share buyback,
however, the Committee will exercise its discretion and make target adjustments at the end of the performance period to account for the
impact of any share buyback on the average number of shares over the performance period ending 31 December 2024. Any adjustment
made will be fully disclosed in the 2024 DRR.
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Following a review by the Board of Non-Executive Director’s fees, it was agreed that the basic Board fee would be increased by 2.5% from
1 April 2022 in line with the average percentage increase awarded to the wider UK workforce. Fees in respect of Committee membership will
remain unchanged for 2022. A benchmarking review will be undertaken in late 2022 and any further fees’ adjustment implemented in 2023. In
2021, it was agreed that the Chairman’s fee would increase to £280,000 to incorporate a separate expense allowance that was made available
to the previous Chairman. John Rishton is not eligible for a separate expense allowance although he may still claim reimbursement for certain
expenses incurred in line with the Policy. In line with the approved Policy, the fees to apply in 2022 will be as follows:
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Chairman1
Senior Independent Director
Board fees2
Chairmanship of a Board Committee (Audit, Corporate Responsibility, Group Risk or
Remuneration)
Membership of a Board Committee (Audit, Corporate Responsibility, Group Risk or
Remuneration)
Base fee to
apply from
1 April 20222
£
Base fee
1 January 2021
£
Change
£
280,000
250,000
30,000
15,000
54,325
12,500
15,000
53,000
12,500
No change
1,325
No change
5,000
5,000
No change
Notes:
1. Chairman’s fee increased from £250,000 to £280,000 on John Rishton’s appointment to the role at the AGM on 21 April 2021. There is no further increase to the Chairman’s
fee in 2022.
2. Basic Board fee to increase from £53,000 to £54,325 with effect from 1 April 2022.
No additional fee is payable for the Chair or Membership of the Nomination Committee, or for responsibilities in connection with our
Employee Voice initiatives. The Chairman does not receive any additional fees for his committee memberships nor do the Executive Directors
where they sit on Board committees.
Voting outcomes
At the previous AGMs, votes on remuneration matters were cast as follows:
2020 Annual Report on Remuneration
2020 Remuneration Policy
Year of AGM
2021
2021
For
%
97.33%
94.55%
Against
%
2.67%
5.45%
Number
withheld1
29,472
1,633,113
Note:
1. A “Vote Withheld” is not a vote in law and is not counted in the calculation of the proportion of votes “For” or “Against” a Resolution.
External appointments
The Board believes that the Group can benefit from its Executive Directors holding appropriate non-executive directorships of companies or
independent bodies. Such appointments are subject to the approval of the Board. Fees are retained by the Executive Director concerned.
Rupert Soames served as Senior Independent Director and a Member of the Audit, Nomination and Remuneration Committees of DS Smith
Plc throughout the year in respect of which he received a fee of £71,125 per annum (comprising a Director’s fee of £60,500 per annum from
1 January 2021 increasing to £62,000 from 1 August 2021 and an additional fee of £10,000 per annum for acting as Senior Independent
Director). As announced on 20 January 2022, Rupert will cease to be Senior Independent Director as from 28 February 2022 and will retire
from the board of DS Smith Plc at its AGM on 6 September 2022. Angus Cockburn retired as a Director at the AGM on 21 April 2021. During
the period from 1 January 2021 to 21 April 2021, he was Senior Independent Director, Chair of the Audit Committee and a Member of the
Nomination and Remuneration Committees of Ashtead Group plc in respect of which he received a fee of £27,370 (comprising a Director’s
fee of £18,247 for the period and additional fees of £9,123 for acting as Senior Independent Director and for chairing the Audit Committee).
He was also a Non-Executive Director of The Edrington Group Limited in respect of which he received a fee of £19,767 for the period to
21 April 2021 which he donated to the Robertson Trust, the charity which is a majority shareholder of The Edrington Group Limited. Nigel
Crossley did not hold any non-executive directorships during 2021.
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Directors’ shareholding and share interests (audited information)
Current shareholdings are summarised in the table below. Shares are valued for shareholding guideline purposes at the year-end price, which
was £1.3460 per share at 31 December 2021 (being the last trading day of the financial year).
Executive Directors
Name
Rupert Soames
Angus Cockburn8
Nigel Crossley
Share Awards
Share options6
Number of
shares owned
outright at
31 December
20212
Share ownership
requirements
(% of salary)1
Value
invested3
(£)
Subject to
performance
conditions4
Not subject to
performance
conditions5
Subject to
performance
conditions
Exercised
during the
year7
200% 5,777,821
200% 1,901,118
222,941
200%
7,623,543
675,412
302,531
3,931,932
N/A
841,306
921,528
N/A
0
0
N/A
0
2,253,913
N/A
428,314
Total share
interests at
31 December
20212
10,631,281
N/A
1,064,247
Notes:
1. Nigel Crossley was appointed to the Board as Group CFO on 21 April 2021. It is anticipated that it will take him up to five years from appointment to meet his shareholding
commitment.
2.
Includes shares owned by connected persons. There were no changes in Executive Directors’ interests in the period between 1 January 2022 and the date of this report.
3. Based on the share price at the point of acquisition of each tranche of shares held outright at 31 December 2021 by the Executive Director and/or their connected persons.
4.
Includes awards made to Rupert Soames and Nigel Crossley under the Long-Term Incentive Plan, and previously made under the Deferred Bonus Plan which have not yet
vested. All awards are in the form of conditional share awards.
5. These are awards made under the Equity-Settled Bonus Plan in connection with the compulsory deferral of bonus into shares. Awards are in the form of conditional share
awards and have not yet vested.
6. All options are in the form of nominal cost options subject to a 2 pence per share exercise price. There are no interests in the form of share options that are not subject to
performance conditions, nor are there any share options that are vested but unexercised.
7. Rupert Soames and Nigel Crossley exercised vested options in respect of their 2018 PSP awards that were subject to EPS, TSR, ROIC, Order Book and employee
engagement performance conditions.
8. Figures show Angus Cockburn’s shares owned outright as at 21 April 2021 when he stepped down from the Board at the AGM. He left the Company on 31 December 2021.
Non-Executive Directors
Non-Executive Directors do not participate in any share-based incentives and do not hold any interests in shares other than shares owned
outright.
Name
Sir Roy Gardner1
Kirsty Bashforth
Eric Born2
Kru Desai3
Tim Lodge4
Ian El-Mokadem
Dame Sue Owen
Lynne Peacock
John Rishton
Number of shares owned outright
(including connected persons) at
31 December 20215,6
225,000
10,000
30,000
–
40,000
50,000
10,000
15,000
43,086
Notes:
1. Showing Sir Roy Gardner’s share interests at 21 April 2021 when he retired as Chairman and stepped down from the Board.
2. Eric Born stepped down from the Board on 31 December 2021.
3. Kru Desai joined the Board on 21 October 2021.
4. Tim Lodge joined the Board on 21 February 2021.
5.
6. Non-Executive Directors do not have shareholding guidelines and there are no interests in shares held by Non-Executive Directors where the individual does not own those
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period between 1 January 2022 and the date of this report.
shares outright.
Other shareholding information
Shareholder dilution
Awards granted under the Company share plans are met either by the issue of new shares or by shares held in trust when awards vest. The
Committee monitors the number of shares issued under its various share plans and their impact on dilution limits. The relevant dilution limits
established by the Investment Association (formerly the ABI) in respect of all share plans is 10% in any rolling ten-year period and in respect of
discretionary share plans is 5% in any rolling ten-year period.
Dilution against these 5% and 10% limits is regularly reviewed. Based on the Company’s issued share capital as at 31 December 2021,
the Company had headroom of 1.7% and 6.63% respectively so our dilution level was within these limits.
The Group has an employee share ownership trust which is administered by an independent trustee and which holds ordinary shares in the
Company to meet various obligations under the share plans.
The Trust held 7,036,349 and 11,605,185 ordinary shares at 1 January 2021 and 31 December 2021 respectively.
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Summary of the approved Remuneration Policy
The 2021 Directors’ Remuneration Policy (the “Policy”) took effect following shareholder approval at the 2021 Annual General Meeting (held
on 21 April 2021). A summary of the Policy is provided below. This summary does not replace or override the full approved Policy which is
available on our website within the 2020 Annual Report and Accounts.
Remuneration principles
Serco’s Policy supports the achievement of the Group’s long-term strategic objectives. Serco’s approach to executive remuneration is
designed to:
– support Serco’s long-term future growth, strategy and values;
– align the financial interests of executives and shareholders;
– provide market-competitive reward opportunities for performance in line with expectations and deliver significant financial rewards for
sustained out-performance;
– enable Serco to recruit and retain the best executives with the required skills and experience in all our chosen markets;
– be based on a clear rationale which participants, shareholders and other stakeholders are able to understand and support.
In considering the structure and framework for the Policy, the Committee carefully considered the linkage of remuneration to the Company’s
strategy to ensure that the arrangements support the strategy and promote the long-term sustainable success of Serco. We approach
Executive Directors’ remuneration on a total reward basis to provide the Remuneration Committee with a holistic view of total remuneration
rather than just the competitiveness of the individual elements. Analysis is conducted by looking at each of the different elements of
remuneration (including salary, annual bonus, long term incentive plan and pension) in this context. This ensures that in applying the Policy,
executive pay is sufficient to achieve the goals of the Policy without paying more than is necessary. The balance of fixed to variable pay also
ensures that significant reward is only delivered for exceptional performance.
This remuneration framework is echoed throughout the organisation with the approach to pay for the wider workforce reflecting these core
principles.
The Policy table for Executive Directors below sets out how each element of the 2021 Policy aligns with, and supports, our strategic objectives.
Base salary
Purpose
To recognise an individual’s experience, responsibility and performance of the role, and by providing the basis for a competitive
remuneration package; to help recruit and retain executives of the necessary calibre to execute Serco’s strategic objectives.
Operation
Salaries are normally reviewed annually, and any changes are usually effective from 1 April. Salary reviews take account of the individual’s
performance and contribution to the Company during the year.
role, performance and experience of the individual;
Salary levels are set by reference to the:
–
– wider economic environment;
–
–
compensation of similar roles at companies in an appropriate peer group; and
salary increases across the Group.
In some circumstances an Executive Director may start on a lower salary than would be competitive in the market, with a phased increase
applying depending on performance in role and individual ability.
Opportunity Whilst there is no prescribed, formulaic maximum, over the Policy period base salaries for Executive Directors will be set at an appropriate
level within the peer group and will normally increase at no more than salary increases made to the general workforce in the jurisdiction in
which the Executive Director is based.
Higher increases may be made in exceptional circumstances. Such cases would include where there has been a significant change in role
size or complexity, which has resulted in the salary falling below a market competitive level given the enhanced responsibilities of the role.
Full disclosure of the rationale would be included in the relevant Report.
Performance
framework
Review takes account of individual performance and contribution to the Company during the year.
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Benefits
Purpose
To provide a competitive level of benefits.
Operation
A range of benefits may be provided to Executive Directors. These typically include company car or car allowance, private medical
insurance, permanent healthcare insurance, life cover, annual allowance for independent financial advice, and voluntary health checks.
Where appropriate other benefits may be offered including, but not limited to, relocation benefits.
Directors may also be eligible to participate in any all-employee share plan, such as an SAYE, which may be launched subject to
shareholder approval. Participation will be on the same basis as other employees, up to HMRC approved limits where relevant.
Benefits are reviewed annually against market practice and are designed to be competitive.
Opportunity
The maximum opportunity for benefits is defined by the nature of the benefits and the cost of providing them. As the cost of providing
such benefits varies based on market rates and other factors, there is no formal maximum monetary value.
Performance
framework
None
Pension
Purpose
To provide pension-related benefits to encourage Executive Directors to build savings for retirement.
Operation
Executive Directors may participate in the Group defined contribution pension plan (or overseas Serco pension plan as appropriate).
Executive Directors may choose to receive some or all their employer pension contribution as a cash allowance to invest as they see fit.
Opportunity
The maximum contribution or cash allowance (or mix of both) for current Executive Directors will be aligned with the contribution
available to the wider workforce over a two-step approach as follows:
–
–
From 1 April 2020, 20% of salary; and
From 1 January 2023, aligned to the workforce rate.
The maximum Company contribution (or cash payment in lieu) for a newly appointed UK based Executive Director will be aligned with the
maximum employer contribution available to the wider UK workforce (currently 8% of salary). For a newly appointed Executive Director
based outside the UK, their maximum pension opportunity will align with that available to the wider workforce for the jurisdiction in which
they are based.
Performance
framework
None
Annual bonus
Purpose
To incentivise executives to achieve specific, strategically aligned annual targets and objectives, and to reward ongoing stewardship and
contribution to core values.
Bonus deferral provides alignment with shareholder interests.
Operation
Bonus awards are based on the achievement of specific targets over the year. The Committee sets objectives against key financial
measures and strategic objectives aligned to the Group’s overall strategy, annual business plan and priorities for the year, and the
weighting for each measure, at the start of each performance year.
Annual bonuses are paid after the end of the financial year to which they relate. There is compulsory deferral into shares, typically vesting
after three years, of any bonus earned over 100% of salary.
The Committee may decide to pay the entire bonus in cash where the amount to be deferred into shares would, in the opinion of the
Committee, be so small that it is administratively burdensome to apply deferral. Dividend equivalents may accrue during the vesting
period on the shares under the bonus deferral award. These may be delivered in the form of additional shares or cash to the extent that
the award vests.
Malus and clawback provisions apply.
Opportunity Maximum bonus opportunity is 175% of salary for CEO and 155% of salary for other Executive Directors. This represents the maximum
bonus payable for exceptional/’stretch’ performance.
Performance
framework
Performance is measured over each financial year relative to financial, strategic and individual objectives in the year aligned with the
Company’s strategic plan.
Performance measures and weightings are reviewed each year to ensure that they remain appropriate and reinforce the business strategy.
At least 70% of the total bonus will be based on the achievement against financial measures. Up to 30% of the total bonus will be based on
strategic and personal objectives which will include ESG objectives.
Bonus awards are at the Committee’s discretion and the Committee will consider the Company’s performance and the affordability of the
bonuses in the round. The Committee may override the formulaic bonus outcome within the limits of the plan where it believes that the
outcome is not reflective of wider performance, or affordability of the bonus, to ensure fairness to both shareholders and participants.
Awards are on a straight-line basis from 0% for threshold performance to 50% at target, and to 100% at maximum performance.
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Purpose
To recognise delivery of the Group’s longer-term strategy and value creation and align the long-term interests of the Executive Directors
with the Group’s shareholders.
Operation
LTIP awards consist of share awards subject to performance conditions which are normally granted annually.
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Awards normally vest three years from their grant date although in exceptional circumstances, such as but not limited to where a delay to
the grant date is required, the Committee may set a vesting period of less than three years, although awards will continue to be subject to
a performance period of at least three years.
At the discretion of the Committee, awards may be converted to a cash equivalent based on the value of the shares at the vesting date (in
cases where due to local law it is not possible to deliver shares), or subject to net settlement.
The Committee has discretion to permit a dividend equivalent to accrue during the vesting period. Dividend equivalents are delivered to
participants in the form of additional shares or cash to the extent that the award vests.
Post-tax shares are subject to a post vesting holding period usually ending on the fifth anniversary of grant. During this time, the shares
must be retained but are not subject to forfeiture provisions. Shares may be sold in order to satisfy tax or other liabilities as a result of the
vesting of the award.
Awards made to Executive Directors are subject to malus and clawback provisions.
Opportunity Maximum annual award of up to 200% of base salary for the CEO and 175% for other Executive Directors.
Performance
framework
At least 75% of the vesting of LTIP awards will be dependent on financial performance, with up to 25% of the vesting based on the
achievement of strategic measures aligned with the Company’s strategic plan, which will include ESG objectives. The Committee has
discretion to restrict the vesting against the non-financial measures if, on assessment of the Company’s performance as a whole
(including the financial performance), the formulaic outcome of the non-financial measures is not reflective of this.
The maximum vesting for threshold performance is 25% of the total award, and 100% vesting for maximum performance.
The Committee (with input from the Audit and Group Risk Committees as appropriate) considers Serco’s underlying performance and
external market reference points, as well as performance against the specific targets set in determining the overall outcome of the LTIP
awards.
Shareholding guidelines
Purpose
To support long-term commitment to the Company and the alignment of Executive interests with those of shareholders.
Operation
The Committee reviews the shareholding guidelines with the Policy review to ensure the guidelines remain in line with market and best
practice.
Unvested awards that are subject to performance conditions are not considered in determining an Executive Director’s shareholding for
these purposes. Share price is measured as at end of the relevant financial year, or at the date of cessation as applicable.
Executive Directors are required to retain, in shares, 50% of the net value of any performance shares vesting or options exercised until
they satisfy the shareholding guideline.
Opportunity
In-employment guideline
The in-employment shareholding guideline is 200% of salary.
Post-employment guideline
The post-employment guideline is equal to 100% of the in-employment guideline (or actual shareholding on cessation if lower) for the
first 12 months, and 50% of the in-employment guideline (or actual shareholding on cessation if lower) for the second 12 months.
This guideline applies to shares vesting from the date of the approval of this Policy, to Executive Directors not under notice at this date.
The Committee has the discretion to increase the shareholding guidelines of the Executive Directors.
Performance
framework
None
Remuneration Policy for the Chairman and non-Executive Directors
Base fees
Purpose
To attract Non-Executive Directors with the necessary experience and ability to make a substantial contribution to the Group's affairs.
Operation
The fees of the Chairman are determined and approved by the Remuneration Committee (excluding the Chair of the Company) and fees
of the Non-Executive Directors are determined and approved by the Board as a whole.
The Chairman and other Non-Executive Directors receive a base fee. Other Non-Executive Directors may also receive additional fees in
respect of additional responsibilities such as membership of or chair a Board Committee.
Fees are typically reviewed on an annual basis against a relevant peer group and taking into consideration market practice.
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Opportunity Over the Policy period, base fees for current Non-Executive Directors will be set at an appropriate level within the peer group and
increases will typically be broadly in line with market.
The base fees or fees for specific Non-Executive Directors’ roles may be reviewed at any time based on anticipated responsibility and time
commitment involved.
Current fee levels are shown on page 161.
Performance
framework
Non-Executive Directors fees are not performance related.
Benefits and expenses
Purpose
To cover the cost of reasonable expenses in connection with carrying out the duties of the role.
Operation
An allowance may be paid to Non-Executive Directors for attendance at meetings outside their country of residence where such meetings
involve inter-continental travel.
In addition, all reasonable travel and business-related expenses incurred in connection with carrying out their duties are reimbursed.
Opportunity
The maximum travel allowance is £5,000 per occasion requiring inter-continental travel.
Performance
framework
None
Non-Executive Directors are not entitled to receive incentives and pension. Non-Executive Directors are encouraged to hold shares in the
Group but are not subject to a shareholding guideline.
Malus and clawback
Malus and clawback provisions apply to awards under the annual bonus and long-term incentive. Under the Policy, the Committee, at its
discretion, may reduce, cancel or recover some or all of the awards granted to Executive Directors in certain circumstances. Under the malus
and clawback provisions, the Company may reduce or prevent vesting of unvested share awards, or clawback against vested or paid awards,
in circumstances including but not limited to material misstatement of the Group’s audited financial results; material or misleading results
announcement prior to vesting; a clear and material contravention of Serco’s Codes of Practice or Values; a serious failure of risk management;
or an event that leads to serious reputational damage or corporate failure. Clawback may be invoked in the most serious of these
circumstances and must be implemented within five years of the grant of the relevant long-term incentive or deferred bonus share award,
and within two years in respect of the bonus awards paid in cash.
Use of discretion
The Committee will operate the annual bonus plan and LTIP according to their respective rules, as approved by shareholders, and in
accordance with the Listing Rules, where applicable. The Committee retains discretion, consistent with market practice, in a number of areas
with regard to the operation and administration of these plans. These include, but are not limited to:
– the participants;
– the timing of grant of an award;
– the vehicle of an award;
– the size of an award;
– the determination of vesting or bonus payment;
– discretion required when dealing with a change of control or restructuring of the Group;
– determination of the treatment of leavers based on the rules of the plan and the appropriate treatment chosen;
– adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends); and
– the annual review of performance measures and weighting, and determining the performance measures for the awards granted from
year to year.
In relation to the long-term incentive and bonus, the Committee retains the ability, in exceptional circumstances, to change performance
measures, targets and/or the relative weighting of performance measures part-way through a performance period if there is a significant
event (such as a major transaction or, in the case of the bonus only, a transition in role) which causes the Committee to believe the original
performance conditions are no longer appropriate. In exercising this discretion, the Committee will determine that the original conditions
are no longer appropriate, and the amendment is required so that the conditions achieve their original purpose and are not materially less
difficult to satisfy. In exceptional circumstances, the Committee also has discretion to vary the proportion of awards that vest, to ensure that
the outcomes are fair and appropriate and reflect the underlying financial performance of the Group. Any use of the above discretions would,
where relevant, be explained in the Remuneration Report.
Consideration of employment conditions elsewhere in the Group
When setting remuneration for Executive Directors, the Committee considers contextual information about pay and conditions within the
Group, including salary increases and bonus awards for the wider workforce. The Committee sign off all reward decisions applicable to the
Executive Committee Members. More broadly, the Committee receives regular updates from Management in relation to employee feedback,
and on pay and employment conditions elsewhere in the Group. Further details of how this and the colleague voice is considered are
provided in the Chair’s letter. The Committee believes that the structure of management reward at Serco should be linked to Serco’s strategy
and performance, and that reward throughout the whole organisation should follow the same philosophy and underlying principles. The table
below provides an overview of how the Policy cascades throughout the organisation.
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Element
Base salary
Benefits
Pension
Annual bonus
Long-term incentive
Cascade of the Executive Director Remuneration Policy
Salary levels throughout the Group, as far as possible, are set using the same principles applicable to the
Executive Directors. Salary increases for Executive Directors will not normally exceed the average increase of
the wider workforce .
Market-aligned benefits are provided for all employees.
The Group operates a large number of different pension/retirement benefit arrangements globally, in line
with local market practice. Cash allowance alternatives are offered where applicable, e.g. where pension tax
allowances would otherwise be exceeded.
Approximately 1,300 colleagues, including members of the Global Leadership Team, are annually invited to
participate in the Serco Bonus Plan.
Annual long-term incentive awards are granted to approximately 250 colleagues in the Global Leadership
Team.
All employee share plan
The Group are preparing to launch an all employee share plan enabling all colleagues to share in Serco’s
longer-term success.
Consideration of shareholder views
The Committee believe it is important to continue to maintain effective channels of communication with our shareholders. The Committee
takes the views of shareholders very seriously and these views have been influential in shaping our policy and practice.
Illustration of remuneration opportunity for 2022
The following charts illustrate the value that may be delivered to Executive Directors in 2022 under the Policy.
Rupert Soames (£000s)
Nigel Crossley (£000s)
£6000
£5000
£4000
£3000
£2000
£1000
£0
2,663
32%
28%
40%
1,069
100%
4,257
40%
35%
25%
5,107
17%
33%
29%
21%
Minimum
Target
Maximum
Maximum
(including share
price appreciation)
£2500
£2000
£1500
£1000
£500
£0
1,771
37%
2,100
16%
31%
35%
29%
28%
24%
1,135
29%
27%
44%
499
100%
Minimum
Target
Maximum
Maximum
(including share
price appreciation)
Fixed elements of remuneration
Annual variable
Multiple period variable
Value attributable to share price appreciation
The scenarios in the above graphs are defined as follows:
– Fixed elements of remuneration:
– Base salary as applicable from 1 April 2022.
– Estimated value of benefits to be provided in 2022 in line with the Policy.
– Pension contribution/cash supplement equal to 20% for Rupert Soames and 8% for Nigel Crossley in line with the Policy.
– Annual bonus and LTIP participation as set out in the Policy table. In all cases, target performance results in delivery of 50% of
maximum opportunity. The LTIP values reflect the ‘face value’ at grant of shares that could be received for target and maximum
performance. The LTIP value under the maximum scenario is also shown assuming 50% share price appreciation over the performance
period.
Approach to recruitment remuneration
Our approach to recruitment remuneration follows our overarching remuneration principles – that is that we seek to offer a package that
is sufficient to attract, retain and motivate while aiming to pay no more than is necessary. We take into account that, as a complex global
business, Serco operates in diverse markets and geographies and many of its competitors for talent are outside the UK.
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The remuneration package for a new Executive Director is aligned to the elements set out in the summary Policy table on pages 163 to 165.
Base salary is set by the Committee taking into account all factors it considers relevant, including the Executive Director’s experience and
calibre, current total remuneration, levels of remuneration for companies in the Committee’s chosen peer group, and the remuneration
required to attract the best candidate for Serco. The Committee will seek to ensure that the arrangement is in the best interests of the
Company and its shareholders without paying more than is necessary. New promotees or recruits to the Board may on occasion have their
salaries set below the targeted policy level while they become established in their role. In such cases, salary increases may be higher than
inflation or the wider workforce increase until the targeted market positioning is achieved.
The recruitment policy also includes the additional provision of benefits in kind, pensions and other allowances such as relocation, education
and tax equalisation in line with Serco policies as may be required in order to achieve a successful recruitment. The policy for recruitment also
includes benefits that are either not significant in value or are required by legislation. Any new UK based Executive Director would be offered
either a pension contribution and/or a pension allowance aligned to the maximum opportunity available to the wider UK workforce (currently
8% of salary). For a newly appointed Executive Director based outside the UK, their maximum pension opportunity will align with that available
to the wider workforce for the jurisdiction in which they are based.
As summarised below, the Policy provides for a maximum combined total incentive under the bonus and long-term incentive of 375% of salary
in any one year.
Element of remuneration
Maximum variable pay:
Normally comprising:
– Annual bonus
– Long-term incentive
Maximum percentage of salary
375%
175%
200%
This is the maximum level of incentives excluding any to compensate for entitlements forfeited that will apply to new recruits. Different
performance conditions may apply for new recruits from those set out in the Policy, depending on the particular circumstances at the time
(which could, for example, include the appointment of an interim Executive Director).
Where it is necessary to compensate a candidate for entitlements and/or unvested incentive awards from an existing employer that
are forfeited, the Committee will seek to match the quantum, structure and timeframe of the award with that of the awards forfeited.
In determining the form and quantum of replacement awards, the Committee will consider whether existing awards are still subject to
performance requirements, and the extent to which those are likely to be met, with the aim of providing an opportunity of broadly equivalent
value. The principle will be to seek to replace awards that remain significantly at risk for performance at the candidate’s current employer
with awards subject to performance at Serco, and to seek to make any other replacement awards in the form of Serco shares, subject to
appropriate vesting or holding requirements. Any compensation for awards forfeited is not taken into account in determining the maximum
incentive award level.
Where a new Executive Director is an internal promotion, the Committee has discretion to allow the new Executive Director to continue
to benefit from existing awards granted, or benefit entitlements that were in place prior to appointment to the Board. The policy on the
recruitment of new Non-Executive Directors is to apply the same remuneration elements as for the existing Non-Executive Directors.
The Committee will include in future Remuneration Reports details of the implementation of the recruitment policy in respect of any such
recruitment to the Board.
Service contracts and loss of office payments
The policy for service contracts for new Directors is shown in the table below. Under this policy, the Committee may at any time, with the
agreement of a Director, alter aspects of their existing contracts so that they are in line with the policy for new Directors. Copies of the
Executive Directors’ service contracts and Chairman and Non-Executive Directors’ letters of appointment are available for inspection at the
Company’s registered office. Service contracts outline the components of remuneration paid to the individual but do not prescribe how
remuneration levels may be adjusted from year to year.
The date of appointment for each Director is shown in the table on page 170.
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Detailed terms
Notice period
– 12 months’ notice from the Company
– 12 months’ notice from the Director
Termination payment
– Payment in lieu of notice comprising:
– Base salary
– Pension allowance
– Selected benefits
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– All of the above would be paid in instalments in accordance with the Executive Director’s
contractual payment schedule, subject to an obligation on the part of the Director to
mitigate their loss. Payments will either reduce or cease completely, in the event that the
Executive Director gains new employment/remuneration.
– In the event of a compromise or severance agreement, the Committee may make payments
it considers reasonable in settlement of potential legal claims. It may include in such
payments, reasonable reimbursement of professional fees incurred by the Executive
Director in connection with such agreements and reasonable payments in respect of
restrictive undertakings.
– The Committee may agree that if an Executive Director steps down from the Board, then
for a transitional period, notice (including payment in lieu of notice) would continue to be
based on the equivalent of up to 12 months based on their rate of salary and benefits while
a Director, payable in instalments and subject to mitigation.
– The reimbursement of repatriation costs or fees for professional or outplacement advice
may also be included in the termination package, as deemed reasonable by the Committee.
– No payment unless employed on date of payment of bonus except for ‘good leavers’.
– ‘Good leavers’ are entitled to a bonus pro-rated to the period of service during the year,
subject to the outcome of the performance metrics and paid at the usual time unless in
exceptional circumstances (e.g. in the case of death of the executive) when the Committee
may determine to make the payment early.
– The Committee has discretion to reduce the entitlement of a ‘good leaver’ in line with
performance and the circumstances of the termination.
– For new Executive Directors, unvested deferred bonus share awards will lapse on cessation of
employment except for ‘good leavers’. For good leavers, the shares will usually be released on
the normal vesting date, however the Committee has discretion to determine early vesting of
the deferred share awards in exceptional circumstances (e.g. in the case of death of the
Executive Director). ‘Bad leaver’ provisions will not apply to the existing Executive Directors in
respect of unvested deferred bonus share awards on cessation of employment except in the
event of termination relating to misstatement of results, misconduct or poor performance.
– Malus and clawback provisions continue to apply.
– All awards lapse except for ‘good leavers’ for whom vesting is pro-rated on a time basis,
unless the Committee determines otherwise, and is dependent on the achieved performance
over the performance period. Awards typically vest on the normal vesting date although the
Committee retains discretion to accelerate the vesting in exceptional circumstances.
– The Committee has the discretion to vary the level of vesting to reflect the individual
performance, and may, depending on the circumstances of the departure, allow some awards
to vest while lapsing others.
– On cessation, the holding period (from vest to the fifth anniversary of grant) will typically apply
unless the Committee determines otherwise.
– Malus and clawback provisions continue to apply.
Treatment of annual bonus on termination1
Treatment of unvested awards granted under
the LTIP1
Post-employment shareholding requirement
– As set out in the Policy table on page 165, post-employment shareholding requirements
apply for two years following the cessation of employment of an Executive Director.
Change of control
Exercise of discretion
– Where the Executive Director leaves the Company following a change of control, whether or
not he is dismissed or he elects to leave on notice, he will be entitled to receive a payment
equivalent to up to one year’s remuneration.
– Bonuses will typically be paid on a pro-rata basis measured on performance up to the date of
change of control.
– Unvested LTIP awards and unvested share awards in respect of deferred annual bonus are to
vest pro-rata for time and performance up to the date of change of control with Committee
discretion to treat otherwise. For existing Executive Directors, the unvested share awards in
respect of deferred annual bonus will vest without time pro-rating.
– Intended only to be used to prevent an outcome that is not consistent with performance.
The Committee’s determination will take into account the particular circumstances of the
Executive Director’s departure and the recent performance of the Company.
Note:
1. Good leavers are defined as leavers due to ill-health, injury or disability, death, redundancy, retirement, change of control (as defined in the relevant plan rules) and other
circumstances at the Committee’s discretion (to the extent that they allow ‘good leaver’ treatment for particular awards).
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Provision for NEDs
Letters of appointment
Detailed terms
– Appointed for initial three-year term.
– Appointment may be terminated on three months’ written notice.
– All Non-Executive Directors are subject to annual re-election.
Loss of office policy
– No compensation or other benefits are payable on early termination.
Dates of Directors’ service contracts/letters of appointment
Directors who served on the Board during the financial year ended 31 December 2021:
Director
Sir Roy Gardner1
John Rishton2
Rupert Soames
Angus Cockburn3
Nigel Crossley4
Kirsty Bashforth
Eric Born5
Kru Desai6
Tim Lodge7
Ian El-Mokadem
Dame Sue Owen
Lynne Peacock
Date of appointment to the Board
1 June 2015
13 September 2016
8 May 2014
27 October 2014
21 April 2021
15 September 2017
1 January 2019
21 October 2021
21 February 2021
1 July 2017
3 August 2020
1 July 2017
1. Sir Roy Gardner retired from the Board as Chairman on 21 April 2021.
2. John Rishton was appointed as Chairman of the Board on 21 April 2021.
3. Angus Cockburn stepped down from the Board as Chief Financial Officer on 21 April 2021.
4. Nigel Crossley was appointed to the Board as Chief Financial Officer on 21 April 2021.
5. Eric Born stepped down from the Board on 31 December 2021.
6. Kru Desai was appointed to the Board on 21 October 2021
7. Tim Lodge was appointed to the Board on 21 February 2021.
Each Director is subject to election at the first AGM following their appointment and re-election at each subsequent AGM.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
23 February 2022
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Directors’ Report
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Annual Report and Accounts
The Directors present the Annual Report and Accounts of
the Group for the year ended 31 December 2021. Comparative
figures used in this report are for the year ended 31 December 2020
unless otherwise stated. The Corporate Governance Report, set out
on pages 118 to 138, forms part of the Directors’ Report.
The Chairman’s Statement on pages 14 and 15 and the Chief
Executive’s Review and Divisional Reviews on pages 16 to 31 report
on the activities during the year and likely future developments.
The information in these reports, which is required to fulfil the
requirements of the Business Review, is incorporated in this Directors’
Report by reference.
2021 Trading update
On 15 November 2021, the Company released a trading update,
the content of which is set out in full below:
“Serco today provides an update to 2021 guidance, following
stronger than expected recent trading.
Recent trading
Trading has been stronger than we expected in recent months,
and we now expect revenue to be around £4.4bn, and Underlying
Trading Profit to be not less than £225m. Several factors have
driven this improved performance, most of which are unlikely to
repeat. First, in the UK and Australia, volumes of work related to
Covid-19 support to governments have been higher, and have
continued for longer, than we anticipated. Second, a number
of contracts across the business have performed better than we
expected, notably immigration-related contracts in the UK and
Australia, and our healthcare insurance eligibility services contract
(CMS) in the United States, where the decision of the Biden
administration to extend the open enrolment period has resulted
in additional volumes. Finally, a number of commercial discussions
that we had expected to complete in 2022 are now anticipated to
be finalised in the current financial year. Cash generation has also
remained strong.
Recognising the extraordinary efforts of our colleagues around the
world and the difficulties experienced by many as a consequence
of the pandemic, we will be making an ex-gratia payment to
around 52,000 employees, as we did in 2020, and in addition we
will be making a significant one-off commitment to our recently
established Serco People Fund. The fund provides cash and other
support to colleagues who would benefit from a little extra help at
this difficult time. Together, these initiatives will cost the company
around £10m in the current year.
Our revised guidance for 2021 is set out below:
2020
2021
Prior
Actual
guidance
2021
Latest
guidance
Revenue
£3.9bn
~£4.3bn
~£4.4bn
Organic sales growth
16%
~6%
~10%
Underlying Trading Profit
£163m ~£200m ≥£225m
Net Finance Costs
£26m
~£28m
~£26m
Underlying effective tax rate
23%
~25%
~25%
Free Cash Flow
£135m ~£120m ~£150m
Adjusted Net Debt
£58m ~£250m ~£220m
Notes: The guidance uses an average GBP:USD exchange rate of 1.38 in
2021 and GBP:AUD of 1.83.
Outlook for 2022
We are yet to complete our budget process for 2022, and we will
be working over the coming weeks to finalise individual budgets
and gain Board approval. We expect to be ready to give our
usual detailed guidance for the year ahead in conjunction with
our Capital Markets Day on 2 December. At this point, we do not
expect the guidance for revenue and trading profit for 2022 to be
materially different to current analysts’ consensus (Serco-compiled
consensus is £4.2bn of revenue and £196m of Underlying Trading
Profit. Bloomberg consensus is £4.2bn of revenue and £192m of
Underlying Trading Profit as at 12 November 2021). We expect
2022 to see much lower demand for Covid-19 related services,
partially offset by the impact of new work secured in 2021 and
growth in our core non-Covid-19 related business.”
Articles of Association
The rules relating to the appointment and replacement of Directors
are contained in the Company’s Articles of Association. Changes to
the Articles of Association must be approved by the shareholders in
accordance with the legislation in force from time to time.
Share capital
The issued share capital of the Company, together with the details of
shares issued during the year, is shown in note 31 to the Consolidated
Financial Statements.
The powers of the Directors to issue or buy back shares are restricted
to those approved at the Company’s Annual General Meeting.
At the Annual General Meeting in April 2021, pursuant to Section
570 of the Companies Act 2006, shareholders approved the issue of
shares for cash up to 5% of the existing issued share capital and an
additional 5% (only to be used in connection with an acquisition or
specified capital investment) in each case without the application of
pre-emption rights. The authority will expire at the conclusion of the
2022 Annual General Meeting, at which a resolution will be proposed
for its renewal, or, if earlier, 30 June 2022.
Rights attaching to shares
Each ordinary share of the Company carries one vote at general
meetings of the Company. There are no restrictions on the transfer
of ordinary shares in the capital of the Company other than certain
restrictions which may from time to time be imposed by law.
The Company is not aware of any agreement between shareholders
that may result in restrictions on the transfer of securities and/or
voting rights.
Authority for the purchase of shares
At the Annual General Meeting in April 2021, the Company was
granted authority by shareholders to purchase up to 121,662,712
ordinary shares (10% of the Company’s issued ordinary share capital
as at 10 March 2021). This authority will expire at the conclusion of the
2022 Annual General Meeting, at which a resolution will be proposed
for its renewal, or, if earlier, 30 June 2022.
As announced on 17 December 2020, the Company undertook
a programme to purchase its own shares with a value of up to
£40 million. During the year the Company purchased a total of
30,721,849 shares with a nominal value of £614,437 (representing
2.49% of the Company’s issued share capital (including those
repurchased and held in treasury) on 11 June 2021, the date the
repurchase programme was completed) at a total cost of £40 million.
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The shares purchased were held in treasury and, on 25 June 2021,
following completion of the repurchase programme, 15,371,849
shares, valued at approximately £20 million, roughly equivalent to
the sum of the final dividend for 2019 (which was withdrawn) and
the interim dividend for 2020 (which it had been intended would be
declared), were cancelled. The remainder, 15,350,000 shares, valued
at approximately £20 million, were transferred on the same date to
the Company’s Employee Share Ownership Trust to be used to satisfy
awards under existing employee share schemes.
The Board has agreed a further share repurchase of up to £90 million
shares which it is intended will be completed within 12 months.
Dividends
The Directors recommend that a final dividend of 1.61p be paid in
respect of the year ended 31 December 2021 (2020: 1.4p). An interim
dividend 0.8p per share was paid during the year (2020: nil).
Subject to approval by shareholders at the Annual General Meeting
to be held on 28 April 2022, the final dividend will be paid on
7 June 2022 to shareholders on the register at the close of business
on 13 May 2022.
Directors
Details of the current members of the Board, all of whom served
throughout the year with the exception of Tim Lodge, who was
appointed on 21 February 2021, Nigel Crossley, who was appointed
on 21 April 2021, and Kru Desai, who was appointed on 21 October
2021, are set out on pages 116 to118.
Sir Roy Gardner and Angus Cockburn resigned as Directors
on 21 April 2021 and Eric Born resigned as a Director on
31 December 2021.
Nigel Crossley and Kru Desai, having been appointed as Directors
since the previous Annual General Meeting, will resign and offer
themselves for election at the Annual General Meeting on
28 April 2022 in accordance with the Articles of Association.
In accordance with the UK Corporate Governance Code, all Directors
will stand for re-election at the Annual General Meeting.
Directors’ interests
With the exception of the Executive Directors’ service contracts and
the Non-Executive Directors’ letters of appointment, there are no
contracts in which any Director has an interest.
Details of the Directors’ interests in the ordinary shares and options
over the ordinary shares of the Company as at 31 December 2021 are
set out in the Directors’ Remuneration Report on page 162.
Between 1 January 2022 and the date of this report there were no
changes in the Directors’ interests in ordinary shares and options over
ordinary shares.
Directors’ indemnities
The Company maintains Directors‘ and Officers’ liability insurance.
As permitted under the Articles of Association and in accordance with
best practice, deeds of indemnity have been executed indemnifying
each of the Directors and the Company Secretary of the Company in
respect of their positions as officers of the Company as a supplement
to this insurance cover. The indemnities, which constitute a qualifying
third party indemnity provision as defined by Section 234 of the
Companies Act 2006, remain in force for all current Directors and the
Company Secretary of the Company.
Branch offices
The Group operates through branches of subsidiary companies in
the following jurisdictions: Abu Dhabi, Afghanistan, Bahrain, Belgium,
Dubai, France, Iraq, Italy, Luxembourg, Netherlands, Qatar, Ras Al
Khaimah, Saudi Arabia, Sharjah and Singapore.
Significant agreements that take effect, alter or terminate
upon a change of control
Given the business-to-government nature of many of the services
provided by the Company and its subsidiaries, many agreements
contain provisions entitling the other parties to terminate them in the
event of a change of control, including a takeover of the Company.
The following agreements are those individual agreements which the
Company considers to be significant to the Group as a whole that
contain provisions giving the other party a specific right to terminate
if the Company is subject to a change of control:
Material contracts
– Clarence Correctional Centre: On 14 June 2017,
NorthernPathways Project Trust (of which Serco Australia Pty
Limited was a member at the time) entered into a project deed
with the Australian State of New South Wales to design,
construct and operate a new build prison named the New
Grafton Correctional Centre, the name of which has
subsequently been changed to Clarence Correctional Centre.
Also, on 14 June 2017, Serco Australia Pty Limited entered into
an operator sub-contract with NorthernPathways, pursuant to
which Serco was awarded the rights to operate the prison. The
prison entered operations on 1 July 2020, following acceptance
of the completed Clarence Correctional Centre by the State
(“Commencement Date”). The operator sub-contract will run for
20 years from the Commencement Date. Both the project deed
and the operator subcontract contain change of control
provisions that provide that any change of control to an
unrelated third-party that has not been approved by the State of
New South Wales would be a major default. A major default
under either the project deed or operator sub-contract, if not
cured, could result in a termination of that contract.
– Australian Immigration Services: On 11 December 2014,
Serco Australia Pty Limited entered into a contract with the
Commonwealth of Australia (acting through the Department
of Immigration and Border Protection) for the provision of
detention services at all onshore immigration facilities in
Australia. The contract has an initial five-year term, with two
two-year extension options. The first option was exercised by
the client in late 2019 and the second option was exercised in
2021, so the current term will run until December 2023. In the
event of a change in control or ownership of Serco Australia Pty
Limited, which in the reasonable opinion of the Commonwealth
adversely affects the Company’s ability to perform the services,
the contract may be terminated by the Commonwealth.
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– Subcontract relating to the provision of ADF Health Services
by Bupa Health Services Pty (Bupa) to the Commonwealth of
Australia, Department of Defence (NGHS Contract):
On 4 February 2019 Serco Australia Pty Limited entered into a
Subcontract with Bupa for the provision of national garrison
health services to the Commonwealth of Australia, Department
of Defence. The contract had a services commencement date of
1 July 2019, with an initial six-year term. The NGHS Contract
includes a change of control provision that provides that a
change of control of the ultimate holding company, Serco Group
plc, requires Bupa’s prior written consent. If the change is as a
result of market transactions, then Bupa is to be notified as soon
as possible and consent sought after the event. On request,
details of the change and its impact on Serco Australia Pty
Limited’s obligations under the NGHS Contract are to be
provided to Bupa. Bupa may provide consent to the change
subject to conditions. If Bupa does not consent to the change of
control, Bupa may terminate the NGHS Contract for default.
– Special Security Agreement: In order to bid and perform on
certain classified contracts involving US national security, Serco
Inc. was required to mitigate its foreign ownership through a
Special Security Agreement (SSA) between the US Government,
Serco Inc. and Serco Group plc. The effective date of the SSA is
7 October 2019. The U.S. Department of Defense may terminate
Serco’s SSA in the event of the sale of the Corporation to a
company or person not under Foreign Ownership, Control or
Influence (FOCI).
– CMS Eligibility Support Services: In June 2018, Serco Inc. was
awarded a follow-on contract with the United States of America
(acting through the Centers for Medicare and Medicaid Services
(CMS)) for the provision of support for the Exchanges
implemented to provide affordable health insurance and
insurance affordability programmes. The contract had an initial
base term of one year, with four options of one year each. In the
event of a change in control or ownership of Serco Inc., which in
the reasonable opinion of the U.S. Government adversely affects
the Company’s ability to perform the services, the contract may
be terminated by the U.S. Government.
– Anti-Terrorism/Force Protection (AT/FP) Ashore Program
Global Sustainment Contract: In February 2021, Serco Inc. was
awarded a contract with the United States of America (acting
through the Naval Facilities Engineering Systems Command) to
provide sustainment services for electronic anti-terrorism and
force protection systems at U.S. Navy installations around the
world. The contract has an initial base term of one year, with four
options of one year each. In the event of a change in control or
ownership of Serco Inc., which in the reasonable opinion of the
U.S. Government adversely affects the Company’s ability to
perform the services, the contract may be terminated by the
U.S. Government.
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– Federal Emergency Management Agency (FEMA) Recovery
Directorate, Public Assistance Division Technical Assistance
Contracts IV (“PA TAC IV”): In December 2017, Serco Inc. was
awarded an indefinite-delivery/indefinite-quantity (IDIQ)
contract with the United States of America (acting through the
Federal Emergency Management Agency) to provide
professional and non-professional services, in an advisory and
assistance capacity, in support of FEMA responses to major
disasters and emergencies. The contract had an initial base term
of one year, with four options of one year each. In the event of a
change in control or ownership of Serco Inc., which in the
reasonable opinion of the U.S. Government adversely affects the
Company’s ability to perform the services, the contract may be
terminated by the U.S. Government.
– Asylum Accommodation and Support Services Contract
(“AASC”): On 8 January 2019 Serco Limited entered into contracts
with the Secretary of State for the Home Department (acting
through its UK Home Office Visas and Immigration department)
for two AASC regions, being the North West of England and the
Midlands & East of England. Under AASC, Serco is responsible
for the provision of properties for initial and dispersed
accommodation requirements, for transportation to and from
properties, and for a range of other services to support the welfare
of asylum seekers. Across the two regions for which Serco was
selected, there are currently approximately 29,000 asylum seekers
living in more than 6,000 properties. The AASC contracts became
operational on 1 September 2019. The contracts are for a ten year
term. In the event of a change of control or ownership of Serco
Limited or Serco Group plc, which in the reasonable opinion of the
Authority adversely affects Serco’s ability to perform the services,
the contracts may be terminated by the Authority.
– Agreement relating to the provision of Prisoner Escort and
Custodial Services (Generation 4) (“PECS IV”): On 30 October
2019 Serco Limited entered into a ten year contract with the
Secretary of State for Justice to provide prisoner escort services
to the South of England. Under the PECS IV contract Serco is
responsible for provision of prisoner escort and custody
services, including the escort and custody of young people in
the criminal justice system. The PECS IV contract became
operational on 28 August 2020. In the event of a change of
control or ownership of Serco Limited or Serco Group plc, which
the Authority reasonably believes will negatively affect either
Serco’s ability to perform the services or the Authority’s
reputation, the contract may be terminated by the Authority.
– Skynet 5 Agreement relating to the Provision of Military
Satellite Communications: On 24 October 2003, Serco Limited
entered into a contract with Paradigm Secure Communications
Limited which was subsequently novated to Airbus Defence and
Space (ADS) for the provision of services in support of the PFI
contract between the Secretary of State for Defence and ADS
for the Skynet 5 programme which delivers secure global military
satellite infrastructure. Serco is responsible for provision of a
range of services in support of the Skynet 5 programme. The
current contract term will expire on 31 August 2022. In the event
of a change of control or ownership of Serco Limited without
the prior written consent of ADS and the Secretary of State
for Defence, the contract may be terminated by ADS. Our
expectation is that any successor contact awarded to Serco will
have the same or similar terms in respect of change of ownership
of Serco Limited.
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Material contracts continued
– Covid-19 Track & Trace Contract: On 18 May 2020, Serco
Financing facilities
– Revolving credit facility: the Company has a £250,000,000
Limited entered into a contract with the Secretary of State for
Health & Social Care (“the Authority”) for the provision of Track
& Trace Contact Centre Services as part of the UK Government’s
pandemic response. A number of extensions to the original
contract term have been made and the current contract term will
expire on 31 March 2022. In the event of a change of control of
Serco Limited which does not have the prior approval of the
Authority, the contract may be terminated by the Authority. The
current contract will be succeeded by a new contract with the UK
Health Security Agency (an executive agency of the Department
of Health & Social Care) (the “UKHSA”) which has been awarded
to Serco and will commence on 1 April 2022 for a minimum term
of 2 years (with the possibility of extension for a further period of
up to 2 years)(the “Single Service Centre Contract”). Under the
terms of the Single Service Centre Contract, it may also be
terminated in the event of a change of control of Serco Limited
which does not have the prior approval of the UKHSA.
– Future Defence Infrastructure Services (FDIS) programme:
Serco Holdings Limited is a 50% shareholder in VIVO Defence
Services Limited (“the VIVO JV”). Serco Holdings Limited’s joint
venture partner and the other shareholder in the VIVO JV is a
UK subsidiary company of Engie (Engie Services Holdings UK
Limited). The VIVO JV performs facilities management services
pursuant to call-off contracts procured by the UK Defence
Infrastructure Organisation (“DIO”) part of the UK Ministry of
Defence (“MoD”) under a Crown Commercial Services
Framework Agreement for the provision of Workplace Services
(RM6089) (the “CCS Framework”) as part of the Future Defence
Infrastructure Services (FDIS) programme. On 14 June 2021 VIVO
entered into two call-off contracts (one for the Central Region
and one for the South West Region) for Lot 3 contracts under
the CCS Framework for a 7 year term (with the possibility of
extension for further periods of up to 3 years) (the “Lot 3
Contracts”). The Lot 3 Contracts became operational on
1 February 2022. On 24 June 2021, VIVO entered into two further
call-off contracts (one for the South East and one for the South
West Region) for Regional Accommodation Maintenance
Services (‘RAMS’) under Lot 2b for an initial 7 year term (with the
possibility of extension for further periods of up to 3 years) (the
“Lot 2b Contacts”). The Lot 2b Contracts become operational
on 1st March 2022. Under the terms of the CCS Framework, in
the event of a change of control of VIVO without the prior
approval of the MoD, the Lot 2b Contracts and Lot 3 Contracts
may be terminated by the MoD. In the event that there is a
change of control of Serco Holdings Limited, it is required to
transfer its entire shareholding in the VIVO JV to Serco Group
plc or another wholly owned subsidiary of Serco Group plc prior
to such change of control. In the event that there is a change of
control of Serco Holdings Limited without its entire shareholding
in the VIVO JV first being transferred to another member of the
Serco Group or if there is a change of control of Serco Group plc
then, unless the prior approval of the other shareholder in the
VIVO JV is given, the other shareholder in the VIVO JV is entitled
to purchase the VIVO JV shares and loans held by Serco
Holdings Limited and any other member of Serco Group plc at
fair market value determined by an expert.
revolving credit facility dated 3 December 2018 with a syndicate
of banks. The facility provides funds for general corporate and
working capital purposes and bonds to support the Group’s
business needs. The facility agreement provides that, in the
event of a change of control of the Company, each lender may,
within a certain period, call for the prepayment of the amounts
owed to it and cancel its commitments under the facility.
– US notes: the Company has notes outstanding under three
US Private Placement Note Purchase Agreements (the ‘USPP
Agreements’) dated 20 October 2011, 13 May 2013 and
8 October 2020 respectively. The total amount of the notes
outstanding under the three USPP Agreements was $349,165,785
at 31 December 2021, and their maturity is between May 2022
and October 2032. Under the terms of the USPP Agreements,
if a change of control of the Company occurs, it is required to
offer to prepay the entire principal amount of the notes together
with interest to the prepayment date but without payment of any
make-whole amount.
– Term loan facilities: the Company has a £45,000,000 term
loan dated 23 May 2019 and a £75,000,000 term loan dated
24 February 2021. The facility agreements provide that, in the
event of a change of control of the Company, each lender may,
within a certain period, call for the prepayment of the amounts
owed to it.
Share plans
– The Company’s plans contain provisions in relation to a change
of control. Outstanding options and awards may vest and
become exercisable on a change of control of the Company,
in accordance with the rules of the plans.
Annual General Meeting 2021
In compliance with the restrictions in place at the time, the 2021
Annual General Meeting took place as a closed meeting, attended
by the Company Secretary and employee shareholders to meet the
quorum requirements, and was held at Discovery House, 18 Bartley
Way, Bartley Wood Business Park, Hook, Hampshire RG27 9XA.
Annual General Meeting 2022
The 2022 Annual General Meeting of the Company will be held at the
Company’s offices at Enterprise House, 11 Bartley Way, Bartley Wood
Business Park, Hook, Hampshire RG27 9XB on Thursday 28 April 2022
at 11.00 am.
Financial risk policies
A summary of the Group’s treasury policies and objectives relating to
financial risk management, including exposure to associated risks, is
set out in note 29 on pages 233 to 238.
Employment policies
The Board is committed to maintaining a working environment where
staff are individually valued and recognised. Group companies and
Divisions operate within a framework of human resources policies,
practices and regulations appropriate to their own market sector and
country of operation, whilst subject to Group-wide policies
and principles.
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Diversity
The Group is committed to ensuring equal opportunity, honouring
the rights of the individual, and fostering partnership and trust in
every working relationship. Policies and procedures for recruitment,
training and career development promote diversity, respect for
human rights and equality of opportunity regardless of gender, sexual
orientation, age, marital status, disability, race, religion or other beliefs
and ethnic or national origin.
The Group promotes diversity and inclusion so that every employee
is able to be successful. The Group gives full consideration to
applications for employment, career development and promotion
from persons of disability, and offers employment when suitable
opportunities arise. Wherever practicable adjustments will be made
for persons of disability to continue with employment and training.
Human rights
We strive to live and manage our business by our Values, behave
with integrity and treat people with respect – within the bounds of
expected individual and corporate behaviour, with regard for relevant
laws and regulatory requirements, with sensitivity to local cultures and
with respect for human rights.
We have zero tolerance for any activities that break any law relating
to human rights, either directly or indirectly, anywhere in the world.
Recognising all applicable modern slavery legislation, we will not
engage in any form of human trafficking or use forced, bonded,
illegal or child labour, nor knowingly work with anyone who does.
We consider international human rights standards as a framework to
assess, monitor, mitigate and remedy any actual or potential adverse
human rights impacts that may affect our business. We provide
guidance and support to our employees to help them identify,
manage and respond to any risk or issue, and maintain confidential
reporting resources for anyone concerned about violations of our
Values, policies or Code of Conduct, whilst ensuring there is no need
for them to fear the consequences of doing so.
Our commitment to human rights is defined within our Business
Conduct and Ethics Policy Statement, supporting standards
(including our Group Standard for Human Rights) and related
operating procedures (including our Human Rights Decision Tree).
Our human rights policies are guided by international human rights
principles encompassed in the International Bill of Human Rights,
the International Labour Organization’s Declaration on Fundamental
Principles and Rights at Work, the United Nations Global Compact
and the United Nations Guiding Principles on Business and Human
Rights.
Further information is available in our human rights supplement on
our website.
Employee engagement
The Group is proud of its record of managing employee relations and
believes that the structure of individual and collective consultation
and negotiation is best developed at a local level. Over the years, the
Group has demonstrated that working with trade unions and creating
effective partnerships allows improvements to be delivered in
business performance as well as in employment terms and conditions.
Where employees choose not to belong to a trade union, employee
communication forums such as works councils exist to ensure
involvement of staff within the business.
The Group has been proactive in providing employees with
information on matters of concern to them as employees and in taking
their views on board. Effective leadership and line management are
our principal means of engagement and employee feedback is invited
through Viewpoint, our employee engagement survey; Speak Up, our
global ethics helpline and investigation process; Yammer, our internal
social media platform; and Colleague ConneXions, our approach to
amplifying employee voice and strengthening dialogue between the
Board and employees.
These mechanisms ensure employees’ views are considered in
decision-making and that they have a common awareness of Group
strategy, matters of concern to them and the financial and economic
factors affecting the performance of the Company.
Participation by staff in the success of the Group is encouraged
by the availability of long-term incentive arrangements for senior
management, which effectively aligns their interests with those of
shareholders by requiring that Company-level financial performance
criteria are achieved as a condition of vesting.
We have also continued to strengthen our global benefits offerings
and plan to create further opportunities for colleagues to share in
the success of the Company. Shareholders have approved the Rules
for the new, all employee, global share plan which will be launched
in 2022. It is proposed to offer our employees an annual opportunity
to contribute to the plan over a three-year term to build affordable
savings out of which they can acquire shares in the Company at the
expiry of each savings contract.
Further information is contained in the People Report which is
available on the Company’s website
Corporate responsibility
We have been committed to delivering and communicating
our position and performance across environmental, social and
governance (ESG) criteria for many years. We recognise the deep
strategic relevance of all that we do in those areas and ESG factors
are embedded in how we deliver our strategy, defined and driven
through our ESG Framework. Our framework brings all our strategic
ESG priorities together in one model, structured around our key
stakeholder groups. It is considered in strategy development and firmly
embedded in how we manage our business, driven through the Serco
Management System with appropriate Board and Executive oversight
and dedicated leadership at both Group and Divisional levels.
Board oversight and scrutiny of environmental, social and certain
governance matters (including anti-corruption and anti-bribery, human
rights, environmental approach, health and safety and other employee
matters) is embedded in our corporate governance through the
Board’s standing committee, the Corporate Responsibility Committee.
Oversight and scrutiny of other governance matters is distributed
between all standing committees of the Board, with certain matters
reserved for the Board itself.
Further information can be found in the Strategic Report on pages
39 to 76.
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Political donations
During the year neither the Company nor the Group made political donations and they intend to continue with this policy. However, it is
possible that certain routine activities may unintentionally fall within the broad scope of the Companies Act 2006 provisions relating to political
donations and expenditure. As in previous years, a resolution will therefore be proposed that the authority granted at the Annual General
Meeting in April 2021 regarding political donations be renewed in order to avoid inadvertent contravention of UK legislation. Details will be
included in the Notice of Annual General Meeting.
Within the US business there exists a Political Action Committee (PAC), which is funded entirely by employees. The Serco PAC and its
contributions are administered in strict accordance with regulatory requirements. Employee contributions are entirely voluntary and no
pressure is placed on employees to participate. Under US law, an employee-funded PAC must bear the name of the employing company.
Financial statements
At the date of this report, as far as each Director is aware, there is no relevant audit information of which the Group’s Auditor is unaware. Each
Director has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit
information and to establish that the Group’s Auditor is aware of that information.
Auditor
Following a tender process undertaken in 2016, KPMG LLP were appointed by the Board in 2017 as the Company’s external auditor for the
2016 audit and have served as the Company’s auditor for four years.
The Audit Committee has considered the reappointment of KPMG LLP as auditor and recommended it to the Board. The Board recommends
the reappointment of KPMG LLP to shareholders at the Annual General Meeting to be held on Thursday 28 April 2022.
Going concern and Viability Statement
The Company’s Going Concern and Viability Statement can be found on pages 105 and 106.
Interests in voting rights
At 31 December 2021, the Company had been notified under Rule 5 of the Disclosure Guidance and Transparency Rules of the Financial
Conduct Authority (‘Rule 5’) of the following interests in voting rights over the issued share capital of the Company:
Notifying person
BlackRock Inc
FIL Limited
Marathon Asset Management LLP
Majedie Asset Management Limited
Magallanes Value Investors SA SGIIC
Number of voting rights
attached to shares or
held through financial
instruments
% held at date
of notification
100,070,594
14,625,142
114,695,736
73,169,712
156,204
73,325,916
58,353,594
55,965,452
37,294,171
8.21
1.20
9.41
6.66
0.01
6.67
5.31
5.09
3.04
Nature of holding
Indirect
Contract for difference
Total
Indirect
Stock Loan
Total
Indirect
Direct
Indirect
Notes:
1. The above interests may have changed since the date of notification to an interest not requiring further notification under Rule 5.
2. On 25 January 2022, BlackRock Inc notified the Company that its interest in voting rights had increased to 9.91% (120,873,916 shares).
3. On 9 February 2022, Slater Investments Limited notified the Company that its interest in voting rights had increased to 5.0% (60,908,863 shares).
4. On 11 February 2022, Magallanes Value Investors SA SGIIC notified the Company that it no longer had a notifiable interest in voting rights.
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The information required to be disclosed in the Directors’ Report can be found in this Annual Report on the pages listed below. Pursuant to
Listing Rule 9.8.4C, the information required to be disclosed in the Annual Report under Listing Rule 9.8.4R is marked with an asterisk (*).
Amendment of the Articles
Appointment and replacement of Directors
Board of Directors
Change of control
Community
Corporate responsibility
Directors’ insurance and indemnities
Directors’ inductions and training
Directors’ responsibilities statement
Disclosure of information to Auditor
Diversity
Dividends
Employee involvement
Employees with disabilities
Financial risk management
Future developments of the business
Going concern
Page 171
Page 172
Pages 116 to 118
Pages 172 to 174
Pages 107 to 114
Pages 39 to 76
Page 172
Page 124
Page 178
Page 189
Pages 121 and 133 to 134
Pages 14, 21, 86 and 172
Pages 53, 54, 120, 174 and 195
Page 175
Pages 233 to 238
Pages 4 to 13
Pages 105 to 106 and 176
Pages 58 to 76
Greenhouse gas emissions
Pages 180 to 190
Independent Auditor’s Report
Pages 139 to 170
Long-term incentive plans*
Page 176
Political donations
Page 171
Powers for the Company to issue or buy back its shares
Page 137
Powers of the Directors
Page 171
Restrictions on transfer of securities
Rights attaching to shares
Page 171
Risk management and internal control Pages 92 to 104 and 125 to 127
Share capital
Page 171
Pages 172 to 174
Significant agreements
Pages 250 and 251
Significant related party agreements*
Significant shareholders
Page 176
Pages 137 and 138
Statement of corporate governance
Pages 1 to 114
Strategic Report
Pages 105 and 106
Viability Statement
Page 171
Voting rights
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Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
23 February 2022
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Directors’ Responsibility Statement
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 UK-adopted international accounting standards and
applicable law and have elected to prepare the parent Company
financial statements in accordance with UK accounting standards and
applicable law, including FRS 101 Reduced Disclosure Framework.
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 the Group’s 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
Responsibility statement of the directors in respect of the
Annual Report and Accounts
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 accounts, 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.
consistently;
By order of the board
Rupert Soames
Group Chief Executive
23 February 2022
Nigel Crossley
Group Chief Financial Officer
23 February 2022
– make judgements and estimates that are reasonable, relevant,
reliable and prudent;
– for the Group financial statements, state whether they have been
prepared in accordance with UK-adopted international
accounting standards;
– for the parent Company financial statements, state whether
applicable UK accounting standards have been followed, subject
to any material departures disclosed and explained in the parent
Company financial statements;
– 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.
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section
Contents
Independent Auditor’s Report
180
191 Consolidated Income Statement
192
Statement of Comprehensive Income
193 Consolidated Statement of Changes in Equity
194 Consolidated Balance Sheet
195 Consolidated Cash Flow Statement
196 Notes to the Consolidated Financial Statements
253 Company Balance Sheet
254 Company Statement of Changes in Equity
255 Notes to the Company Financial Statements
259 Appendix: List of subsidiaries and
related undertakings
262 Shareholder information
263 Useful Contacts
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Financial StatementsContents_GEN_PageContents_GEN_PageL2Financial Statements Independent Auditor’s Report
Independent Auditor’s Report
to the members of Serco Group plc
1. Our opinion is unmodified
Basis for opinion
2. Key audit matters: our assessment of risks of material
misstatement
We have audited the financial statements of Serco Group plc (“the
Company”) for the year ended 31 December 2021 which comprise
the Consolidated Income Statement, the Consolidated Statement
of Comprehensive Income, the Consolidated and parent company
Statement of Changes in Equity, the Consolidated and parent
Company Balance Sheet, the Consolidated Cash Flow Statement,
and the related notes, including the accounting policies in note 2.
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 December 2021 and of the Group’s profit for the year
then ended;
– the Group financial statements have been properly prepared
in accordance with UK-adopted international accounting
standards;
– 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.
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 directors on 27 May
2016. The period of total uninterrupted engagement is for the six
financial years ended 31 December 2021. 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.
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 decreasing order of audit significance, 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 findings 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.
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Contents_GEN_PageL2Contents Generation – Section Revenue and margin recognition
Revenue £4,424.6m (2020: £3,884.8m), Onerous Contract Provisions of £14.2m (2020: £14.5m) and Contract Assets £319.0m (2020: £296.1m)
Assessment of risk vs. prior year: Unchanged
Refer to page 130 (Audit Committee Report), pages 198 to 200 and 205 (accounting policy), pages 206 to 207 (key judgements), pages 227 to
228 (contract assets, trade and other receivables note in the financial statements) and page 232 (provisions note in the financial statements)
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The risk
Our response
We performed the tests below rather than seeking to rely on group’s controls because the
contractual arrangements that underpin the measurement and recognition of revenue by the
group can be complex, with significant judgement involved in the assessment of current and future
financial performance. This meant that detailed testing is inherently the most effective means of
obtaining audit evidence.
Our audit procedures included:
Contracts were selected for substantive audit procedures based on qualitative factors, such as
commercial complexity, and quantitative factors, such as financial significance and profitability that
we considered to be indicative of risk. Our audit testing for the contracts selected included the
following:
Assessing policy application
We inspected customer contracts to assess the method of revenue recognition to determine
that it was in accordance with the Group’s accounting policy and relevant accounting standards,
including the appropriate recognition of revenue as the performance obligation is satisfied on
service contracts.
Accounting analysis
We inspected and challenged accounting papers prepared by the Group to explain the positions
taken in respect of key contract judgements including contract modifications (such as those arising
due to COVID-19). We also challenged whether it is highly probable that the variable revenue
recognised will not be reversed in future periods as required by the application of the revenue
constraint in accordance with the Group’s accounting policy and relevant accounting standards.
Tests of details
To assess whether the revenue constraint was appropriately applied in accordance with the
Group’s accounting policy and relevant accounting standards;
– we vouched a sample of revenue to documents such as invoices or purchase orders, or
customer agreements for the work performed;
– we inspected a sample of customer contracts to identify any KPI obligations and assessed
the contract’s operational performance against those obligations; and
– we inspected a sample of customer contracts to identify contractual variations and claims
and where these arose, obtained evidence of correspondence with customers and third
parties.
Site visits
For contracts selected for testing;
– we attended a selection of monthly Divisional and Business Unit Performance Reviews used
to assess business performance in order to inform our assessment of operational and
financial performance of the contracts; and
– we performed a selection of physical and virtual site visits and enquired with contract and
Business Unit management teams as to matters related to operational and financial
performance in order to assess whether indicators of an onerous contract exist.
For selected contract related assets, representing capitalised bid and phase in costs, our
procedures included:
– Assessing application: We assessed whether contract related assets have been recognised
in accordance with the Group’s accounting policy and relevant accounting standards.
– Historical comparisons: We compared forecast contract cash flows and profits with historical
actuals and assessed whether the forecasts supported the carrying value of the assets.
– Independent reperformance: We compared the amortisation period with the duration of the
contract and checked that the amortisation had been calculated correctly.
Accounting application
The many and sometimes unique
contractual arrangements that
underpin the measurement and
recognition of revenue by the group
can be complex, particularly in relation
to variable revenue, with significant
judgement involved in the assessment
of current and future financial
performance. The key judgements
impacting the recognition of revenue
and resulting operating profit include:
– Interpretations of terms and
conditions in relation to the
required service obligations in
accordance with contractual
arrangements;
– The allocation of revenue and
costs to performance obligations
where multiple deliverables exist;
– Assessment of stage of
completion and cost to complete,
where percentage completion
accounting is used;
– Consideration of the Group’s
performance against contractual
obligations and the impact on
revenue and costs of delivery;
– The recognition and recoverability
assessments of contract related
assets, including those recognised
as direct incremental costs prior to
service commencement.
Subjective estimate
Judgement is required to determine
whether a contract is onerous,
based upon the estimated future
performance of the contract. Where
a contract is determined to be loss-
making, an onerous contract provision
is required, which requires further
judgement in assessing the level of
provision, based on estimated variable
income and cost to complete, taking
into account contractual obligations
to the end of the contract, extension
periods and customer negotiations.
The effect of these matters is that,
as part of our risk assessment, we
determined that the onerous contract
provision 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.
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Independent Auditor’s Report continued
to the members of Serco Group plc
The risk
Our response
Accounting application
continued
For onerous and potentially onerous contracts identified through application of quantitative
selection criteria, our procedures to address the subjective estimate risk included:
Benchmarking assumptions
We compared contract level forecast revenues and costs to the Group’s annual budgets and
longer-term forecasts approved by the directors. We challenged key assumptions made by
the Group in preparing these forecasts, including those in relation to revenue growth and cost
reductions, by comparing them to external evidence (for example customer correspondence)
where possible, and assessing against business plans.
Our sector experience
We assessed the contractual terms and conditions to identify the key obligations of the contract
and compared these with common industry risk factors to inform our challenge of completeness of
forecast costs.
Historical comparisons
We compared the contract forecasts to historic and in year performance to assess the historical
accuracy of the forecasts.
Tests of details
We compared the allocation of central functional costs to the group’s policy and challenged the
underlying assumptions using our understanding of the contract operations.
Assessing transparency
We also assessed whether the Group’s disclosures about the estimates and judgements applied
reflected the risks related to the estimation of onerous contracts.
Our findings
We found no material errors in the group’s application of its revenue accounting policy (2020: no
material errors). We found the resulting estimate of onerous contract provision to be balanced
(2020: balanced).
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Recoverability of group goodwill and of parent’s investment in subsidiary
Group: £852.7m (2020: £669.6m); parent Company: £2,041.7m (2020: £2,032.7m)
Assessment of risk vs. prior year: Unchanged
Refer to page 131 (Audit Committee Report), page 201 (accounting policy), page 207 (key judgements) and pages 223 to 224 (Goodwill note in
the financial statements)
The risk
Our response
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Goodwill in the group and the carrying
amount of the parent Company’s
investment in subsidiary are significant
and at risk of irrecoverability due to
estimation uncertainty in valuing the
recoverable amounts of the Group’s
cash generating units. The estimated
recoverable amount of these balances
through value in use calculations
is subjective due to the inherent
uncertainty involved in forecasting and
discounting future cash flows.
The CGUs which were most sensitive
to a deterioration in the division’s
cash flow projections or an increase
in discount rate were the AsPac CGU
and Middle East CGU. As at year end
31 December 2021, the AsPac CGU
was estimated to have headroom
of £380.6m and Middle East has
headroom of £103.6m.
The effect of these matters is that,
as part of our risk assessment, we
determined that the value in use of
CGUs and value in use of investment
in subsidiary have 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 17) disclose the
sensitivity for goodwill estimated by
the Group.
We performed the tests below rather than seeking to rely on any of the group’s controls because
the contractual arrangements that underpin the measurement and recognition of revenue by the
group can be complex, with significant judgement involved in the assessment of current and future
financial performance. This meant that detailed testing is inherently the most effective means of
obtaining audit evidence.
Our audit procedures included:
Benchmarking assumptions: With the assistance of our valuation specialists, we challenged
the growth rate and discount rate used in the value in use calculation by comparing the Group’s
assumptions to external data. We challenged the implied cumulative annual growth rate within the
five year forecasts and assessed this against past performance and the terminal growth rate. We
challenged forecast assumptions around new contract wins or extensions, contract attrition, cost
reductions as well as cost reductions on existing contracts.
Historical comparisons
We compared current year actual cash flows to historic forecasts to assess the historical accuracy of
the forecasts used in the impairment model.
Sensitivity analysis
We tested the sensitivity of impairment calculations to changes in key underlying assumptions,
which were the short term cash-flow projections, the discount rate and terminal growth rates.
We assessed the impact on headroom with the inclusion of an alpha factor in the discount rate
in order to reflect any country specific and forecasting risks we considered might be present in
each division. We challenged the projected win probabilities (including contract extensions) on
key contracts and sensitised the five year cash flow forecasts by reducing new wins and extensions
within the pipeline. We specifically considered the impact of COVID-19 on trading and compared
the forecasts against the company’s experience to date during the pandemic.
Comparing valuations
We considered whether the forecast cash flow assumptions used in the value in use calculation
were consistent with the assumptions used to calculate the expected loss on onerous contract
provisions, the recognition of deferred tax assets and the Directors’ assessment of going concern
and viability. We compared the results of discounted cash flows against the Group’s market
capitalisation, after adjusting for its net debt to assess the reasonableness of the value in
use calculations.
Assessing transparency
We also assessed whether the Group’s disclosure about the sensitivity of outcomes reflects the
risks inherent in the valuation of goodwill.
Substantive audit procedures over testing of recoverability of the investment in subsidiary
included:
– Comparing the carrying amount of investment with the subsidiary’s financial statements or
draft balance sheet to identify whether its net assets, being an approximation of their
minimum recoverable amount, are in excess of their carrying amount and assessing whether
the subsidiary has historically been profit-making.
– We compared the carrying amount of the investment to the market capitalisation for the
Group (after adjusting for net debt).
Our findings:
We found the Group’s assessment that there is no impairment of the carrying amount of Group’s
goodwill and of parent’s investment in subsidiary to be balanced (2020: balanced) and the related
sensitivity disclosures to be proportionate (2020: proportionate).
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Independent Auditor’s Report continued
to the members of Serco Group plc
Recognition of Deferred Tax Assets
£214.3m (2020: £83.2m)
Assessment of risk vs. prior year: Unchanged
Refer to page 129 (Audit Committee Report), page 204 (accounting policy), page 208 (key judgements) and pages 221 to 222 (Deferred Tax
note in the financial statements)
The risk
Our response
Forecast based assessment
The Group has significant deferred
tax assets in respect of tax losses.
There is inherent uncertainty involved
in forecasting future taxable profits,
which determines the extent to which
deferred tax assets are or are not
recognised.
The effect of these matters is that,
as part of our risk assessment, we
determined that the recoverable
amount of deferred tax assets 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.
We performed the tests below rather than seeking to rely on any of the group’s controls because
the nature of the balance is such that detailed testing is inherently the most effective means of
obtaining audit evidence.
Our audit procedures included:
Assessing forecasts
The work on the Group’s forecasts as described in the goodwill impairment risk above.
Our tax expertise
Use of our own tax specialists to assist us in assessing the recoverability of the tax losses against
the forecast future taxable profits, taking into account the Group’s tax position, the timing of
forecast taxable profits, and our knowledge and experience of the application of relevant tax
legislation.
Assessing transparency
Assessing the adequacy of the Group’s disclosures about the sensitivity of the recognition of
deferred tax assets to changes in key assumptions reflected in the inherent risk.
Our results
As a result of our work we found the level of deferred tax assets recognised to be acceptable
(2020 result: acceptable).
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section
3. Our application
of materiality
and an overview
of the scope of
our audit
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Materiality for the Group financial statements as a whole was set at £7m (2020: £6.2m), determined with
reference to a benchmark of group profit before tax, of which it represents 3.6% (2020: 4.0%).
Materiality for the parent company financial statements as a whole was set at £6.3m (2020: £5.4m), determined
with reference to a benchmark of company total assets, of which it represents 0.2% (2020: 0.2%).
In line with our audit methodology, our procedures on individual account balances and disclosures were
performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that
individually immaterial misstatements in individual account balances add up to a material amount across the
financial statements as a whole.
Performance materiality was set at 75% (2020: 65% group, 75% parent company) of materiality for the financial
statements as a whole, which equates to £5.3m (2020: £4.0m) for the group and £4.7m (2020: £4.0m) for the
parent company. We applied this percentage in our determination of performance materiality because we did
not identify any factors indicating an elevated level of risk for the current year.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements
exceeding £0.35m (2020: £0.31m), in addition to other identified misstatements that warranted reporting on
qualitative grounds.
Scope of our audit
Of the Group’s 6 (2020: 6) reporting components, we subjected all to full scope audits for Group purposes.
These components represent approximately 100% (2020: 100%) of the Group’s Revenue, 100% (2020: 100%) of
Group profit before tax and 100% (2020: 100%) of Group total assets.
The Group audit 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 approved component
materiality levels, which ranged from £2.4m to £5.5m (2020: £2.1m to £3.7m) having regard to the mix of size
and risk profile of the Group across the components. The work on 4 of the 6 components (2020: 4 of the 6
components) was performed by component auditors and the rest, including the audit of the parent company,
was performed by the Group team. Due to the travel restrictions in place during the performance of the audit,
the Group team has not visited any component auditors outside of the UK and instead held virtual conference
meetings with all component auditors (2020: virtual meetings held with all component auditors).
At these meetings, the findings reported to the Group team were discussed in more detail, and any further
work required by the Group team was then performed by the component auditor.
The Group operates a shared service centre in India, the outputs of which are included in the financial
information of the reporting components it services and therefore it is not a separate reporting component.
The shared service centre is subject to specified risk-focused audit procedures by us, principally the testing
of transaction processing controls. Additional procedures are performed at certain reporting components to
address specific audit risks not addressed by the work performed centrally over the shared service centre.
We were able to rely upon the Group’s internal control over financial reporting in several areas of our audit,
where our controls testing supported this approach, which enabled us to reduce the scope of our substantive
audit work; in the other areas the scope of the audit work performed was fully substantive.
4. The impact of
climate change
on the audit
In planning our audit, we considered the impacts of climate change on the Group’s business and its financial
statements.
The Group has made a commitment to be net zero in own assets and leases by 2030 and to support its clients
to meet this target by 2050. Further information has been provided in the Group’s Strategic Report on page
39. The Group’s climate related disclosures as recommended by the Task Force on Climate Related Financial
Disclosure (“TCFD”) are included on page 58 of the Annual Report.
As part of our audit, we have made enquiries of the directors to understand the extent of the potential
impact of climate change risk on the Group’s financial statements. We have performed a risk assessment of
how climate risks facing the Group and the Group’s strategy to mitigate these risks may affect the financial
statements and our audit. In addition, we held discussions with our own climate change professionals to
challenge our risk assessment.
The potential impacts of these matters relate to forward looking estimates, which includes cost projections
for long-term contracts and impairment assessments for goodwill. Taking into account our risk assessment
procedures, the headroom on goodwill and the nature and duration of the group’s contracts, we have assessed
that there is not a significant risk to balances in the 2021 financial statements as a result of climate change.
There was therefore no impact from climate change on our key audit matters.
We read the disclosure of climate related information in the front half of the Annual Report, which included the
Group’s adoption of climate related disclosures as recommended by the TCFD and considered consistency
with the financial statements and our audit knowledge.
Annual Report and Accounts 2021
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Contents_GEN_PageContents_GEN_PageL2Contents Generation – SectionFinancial StatementsCorporate Governance
Independent Auditor’s Report continued
to the members of Serco Group plc
5. Going concern
The directors have prepared the financial statements on the going concern basis as they do not intend to
liquidate the Group or the Company or to cease their operations, and as they have concluded that the Group’s
and the Company’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”).
We used our knowledge of the Group, its industry, and the general economic environment to identify the
inherent risks to its business model and analysed how those risks might affect the Group’s and Company’s
financial resources or ability to continue operations over the going concern period. The risks that we
considered most likely to adversely affect the Group’s and Company’s available financial resources and metrics
relevant to debt covenants over this period were:
– Significant deterioration of contractual performance impacting on profit margins across the Group;
– Significant deterioration in the Group’s ability to win new contracts, and successfully retain existing
contracts which are being re-bid;
– Significant deterioration of cash collection, leading to a build-up of working capital.
We also considered less predictable but realistic second order impacts, such as the impact of the Covid-19
pandemic, and the possible impact of major contractual or other claims which could result in a rapid reduction
of available financial resources.
We considered whether these risks could plausibly affect the liquidity or covenant compliance in the going
concern period by assessing the Directors’ sensitivities over the level of available financial resources and
covenant thresholds indicated by the Group’s financial forecasts taking account of severe, but plausible adverse
effects that could arise from these risks individually and collectively.
Our procedures also included:
– Critically assessing assumptions in base case and downside scenarios relevant to liquidity and covenant
metrics, in particular in relation to profitability of existing contracts, and win rates assumed for future
pipeline, by comparing to the group’s approved budgets, growth and economic forecasts and our
knowledge of the entity and the sector in which it operates.
– Challenging whether the break-points in the Group’s reverse-stress test analysis were not plausible
to occur by comparing these scenarios with the Group’s previous experience, including the experience
to date during the Covid-19 pandemic, assessing the working capital assumptions by comparing the
forecasts to actual recent experience and existing supplier/customer arrangements.
– Assessing the conversion of past budgets to actual results to assess the directors’ track record of
budgeting accurately.
– We inspected the confirmation from the lender of the level of committed financing, and the associated
covenant requirements.
– We made inquiries to understand the group’s insurance arrangements in respect of certain items and
obtained copies of key insurance policies to corroborate the assertions made.
We considered whether the going concern disclosure in note 2 to the financial statements gives a full
and accurate description of the Directors’ assessment of going concern , including the identified risks,
dependencies, and related sensitivities.
Our conclusions based on this work:
– we consider that the directors’ use of the going concern basis of accounting in the preparation of the
financial statements is appropriate;
– we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty
related to events or conditions that, individually or collectively, may cast significant doubt on the Group’s
or Company’s ability to continue as a going concern for the going concern period;
– we have nothing material to add or draw attention to in relation to the directors’ statement in note 2 to
the 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 the
going concern period, and we found the going concern disclosure in note 2 to be acceptable; and
– the related statement under the Listing Rules set out on pages 196 to 197 is materially consistent with the
financial statements and our audit knowledge.
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 above conclusions
are not a guarantee that the Group or the Company will continue in operation.
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6. Fraud and
breaches of laws
and regulations –
ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that
could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk
assessment procedures included:
– Enquiring of directors, the audit committee, internal audit, internal legal counsel and the Group’s Ethics
& Compliance function and inspection of policy documentation as to the Group’s high-level policies and
procedures to prevent and detect fraud, including the internal audit function, and the Group’s channel
for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud.
– Reading Board minutes including minutes of board committees such as the audit committee and risk
committee.
– Considering remuneration incentive schemes and performance targets for directors and management
including the Revenue, Trading Profit and Free Cash Flow / Days Sales Outstanding targets for
management remuneration.
– Using analytical procedures to identify any unusual or unexpected relationships.
– Using our own forensic subject matter experts to assist us in identifying fraud risks based on discussions
of the circumstances of the Group.
We communicated identified fraud risks throughout the audit team and remained alert to any indications
of fraud throughout the audit. This included communication from the group to component audit teams of
relevant fraud risks identified at the Group level and request to component audit teams to report to the Group
audit team any instances of fraud that could give rise to a material misstatement at group.
As required by auditing standards, and taking into account possible pressures to meet profit targets and our
overall knowledge of the control environment, we perform procedures to address the risk of management
override of controls and the risk of fraudulent revenue recognition, in particular:
– the risk that variable revenue is inappropriately recognised, and
– the risk that Group and component management may be in a position to make inappropriate accounting
entries, and
– the risk of bias in accounting estimates and judgements such as assessing whether long-term contracts
are onerous, determining whether provisions for disputes and litigation are adequate and the
assumptions and data used when testing for impairment of goodwill.
We did not identify any additional fraud risks.
In determining the audit procedures we took into account the results of our evaluation and testing of the
operating effectiveness of some of the Group-wide fraud risk management controls.
We performed procedures including:
– Identifying journal entries and other adjustments to test for all components and at the Group
consolidation level based on risk criteria and comparing the identified entries to supporting
documentation. These included those posted by senior finance management, those posted and
approved by the same user and those posted to unexpected account combinations.
– Assessing significant accounting estimates for bias.
We read the disclosures in the front end related to the Company’s obligations under the Deferred Prosecution
Agreement with the UK Serious Fraud Office and considered consistency with the financial statements and our
audit knowledge.
Annual Report and Accounts 2021
Serco Group plc
187
Contents_GEN_PageContents_GEN_PageL2Contents Generation – SectionFinancial StatementsCorporate Governance
Independent Auditor’s Report continued
to the members of Serco Group plc
6. Fraud and
breaches of laws
and regulations –
ability to detect
continued
Identifying and responding to risks of material misstatement due to non-compliance with
laws and regulations
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 and through discussion with the
directors and other management (as required by auditing standards), and from inspection of certain 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.
As the Company is regulated, our assessment of risks involved gaining an understanding of the control
environment including the entity’s procedures for complying with regulatory requirements.
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 the Group level, and a request for component auditors to
report to the group team any instances of non-compliance with laws and regulations that could give rise to a
material misstatement at group.
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,
pensions legislation and taxation 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 or the loss of the Group’s license to operate. We identified the following areas
as those most likely to have such an effect:
– health and safety, given the front-line nature of many of the Group’s operations,
– anti-bribery and corruption, recognising the Governmental nature of many of the Group’s customers,
– employment law, due to the significant number of employees the Group employs,
– Data protection laws, such as the General Data Protection Regulations in Europe due to the number of
employees and the services performed for customers in Europe, and
– Single source procurement regulations in the UK, due to the contracting environment.
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. Therefore, if a breach of operational regulations is not disclosed to us or evident from
relevant correspondence, an audit will not detect that breach.
We read the disclosures in the front end related to the Company’s obligations under the Deferred Prosecution
Agreement with the UK Serious Fraud Office and considered consistency with the financial statements and our
audit knowledge.
Context of the ability of the audit to detect fraud or breaches of law or regulation
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 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 fraud, as these may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit
procedures are designed to detect material misstatement. We are not responsible for preventing non-
compliance or fraud and cannot be expected to detect non-compliance with all laws and regulations.
188 Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section 7. We have nothing
to report on the
other information
in the Annual
Report
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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 emerging and principal risks and longer-term viability
We are required to perform procedures to identify whether there is a material inconsistency between the
directors’ disclosures in respect of emerging and principal risks and the viability statement, and the financial
statements and our audit knowledge.
Based on those procedures, we have nothing material to add or draw attention to in relation to:
– the directors’ confirmation within Viability Statement on pages 105 to 106 that they have carried out
a robust assessment of the emerging and 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 how emerging risks are identified, 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.
We are also required to review the Viability Statement, set out on pages 105 to 106 under the Listing Rules.
Based on the above procedures, we have concluded that the above disclosures are materially consistent with
the financial statements and our audit knowledge.
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 perform procedures to identify whether there is a material inconsistency between the
directors’ corporate governance disclosures and the financial statements and our audit knowledge.
Based on those procedures, we have concluded that each of the following is materially consistent with the
financial statements and our audit knowledge:
– 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;
– the section of the annual report describing the work of the Audit Committee, including the significant
issues that the audit committee considered in relation to the financial statements, and how these issues
were addressed; and
– the section of the annual report that describes the review of the effectiveness of the Group’s risk
management and internal control systems.
We are required to review the part of the Corporate Governance Statement relating to the Group’s compliance
with the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in this respect.
Annual Report and Accounts 2021
Serco Group plc
189
Contents_GEN_PageContents_GEN_PageL2Contents Generation – SectionFinancial StatementsCorporate Governance
Independent Auditor’s Report continued
to the members of Serco Group plc
8. 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.
9. Respective
responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 178, 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 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 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.
10. 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.
John Luke (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
23 February 2021
190 Serco Group plc
Annual Report and Accounts 2021
Contents_GEN_PageContents_GEN_PageL2Contents Generation – Section Consolidated Income Statement
Consolidated Income Statement
For the year ended 31 December
Revenue
Cost of sales
Gross profit
Administrative expenses
Exceptional profit on disposal of subsidiaries and operations
Other exceptional operating items
Other expenses – amortisation and impairment of intangibles arising on acquisition
Share of profits in joint ventures and associates, net of interest and tax
Operating profit
Operating profit before exceptional items
Investment revenue
Finance costs
Total net finance costs
Profit before tax
Profit before tax and exceptional items
Tax on profit before exceptional items
Exceptional tax
Tax credit/(charge)
Profit for the year
Attributable to:
Equity owners of the Company
Non-controlling interest
Earnings per share (EPS)
Basic EPS
Diluted EPS
The accompanying notes form an integral part of the financial statements.
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Note
8
2021
£m
4,424.6
(3,956.6)
9
18
6
12
13
14
14
468.0
(243.3)
–
(1.2)
(16.0)
8.7
216.2
217.4
2.4
(26.4)
(24.0)
192.2
193.4
111.9
(0.2)
111.7
303.9
303.9
–
2020
£m
3,884.8
(3,501.8)
383.0
(220.0)
11.0
1.5
(9.0)
12.7
179.2
166.7
1.9
(27.8)
(25.9)
153.3
140.8
(18.9)
(0.4)
(19.3)
134.0
133.8
0.2
16
16
24.86p
24.43p
10.89p
10.67p
Annual Report and Accounts 2021
Serco Group plc
191
Financial StatementsCorporate Governance
Consolidated Statement of Comprehensive
Income
Consolidated Statement of Comprehensive Income
For the year ended 31 December
Profit for the year
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Remeasurements of post-employment benefit obligations*
Actuarial (loss)/gain on reimbursable rights*
Income tax relating to these items*
Share of other comprehensive income in joint ventures and associates
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss)/gain on translation of foreign operations**
Fair value gain/(loss) on cash flow hedges during the year**
Income statement items reclassified
Tax relating to items that may be reclassified**
Total other comprehensive income for the year
Total comprehensive income for the year
Attributable to:
Equity owners of the Company
Non-controlling interest
* Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.
The accompanying notes form an integral part of the financial statements.
Note
30
30
14
6
2021
£m
303.9
66.8
(0.5)
(21.7)
3.3
(11.6)
0.2
0.1
4.0
40.6
344.5
344.5
–
2020
£m
134.0
18.2
3.9
(5.9)
2.7
7.9
(0.2)
–
–
26.6
160.6
160.4
0.2
192 Serco Group plc
Annual Report and Accounts 2021
Consolidated Statement of Changes in Equity
Consolidated Statement of Changes in Equity
Share capital
£m
Share premium
account
£m
Retained earnings
£m
Other reserves*
£m
Total shareholders’
equity
£m
Non-controlling
interest
£m
At 1 January 2020
24.5
462.9
165.9
(111.9)
541.4
Total comprehensive income for
the year
Issue of share capital
Shares transferred to award holders
on exercise of share awards
Expense in relation to share based
payments
–
0.2
–
–
–
0.2
–
–
136.5
–
–
–
23.9
(0.2)
0.1
160.4
0.2
0.1
11.2
11.2
1.5
0.2
–
–
–
At 1 January 2021
24.7
463.1
302.4
(76.9)
713.3
1.7
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Total comprehensive income for
the year
Income statement items reclassified
Dividends paid
Shares purchased and held in
Treasury
–
–
–
–
Cancellation of shares held in
Treasury
(0.3)
Shares transferred from Treasury to
own shares reserves
Shares transferred to award holders
on exercise of share awards
Expense in relation to share based
payments
–
–
–
–
–
–
–
–
–
–
–
307.3
37.2
344.5
–
(26.5)
0.1
–
0.1
(26.5)
(40.7)
(40.7)
(20.4)
20.7
(20.0)
20.0
–
–
–
–
0.2
0.2
15.8
15.8
–
–
–
–
–
–
–
–
At 31 December 2021
24.4
463.1
542.8
(23.6)
1,006.7
1.7
* An analysis of other reserves is presented as part of note 33 Reserves.
The accompanying notes form an integral part of the financial statements.
Annual Report and Accounts 2021
Serco Group plc
193
Financial StatementsCorporate Governance
Consolidated Balance Sheet
Consolidated Balance Sheet
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right of use assets
Interests in joint ventures and associates
Contract assets
Trade and other receivables
Deferred tax assets
Retirement benefit assets
Current assets
Inventories
Contract assets
Trade and other receivables
Current tax assets
Cash and cash equivalents
Derivative financial instruments
Total assets
Current liabilities
Contract liabilities
Trade and other payables
Derivative financial instruments
Current tax liabilities
Provisions
Lease obligations
Loans
Non-current liabilities
Contract liabilities
Trade and other payables
Derivative financial instruments
Deferred tax liabilities
Provisions
Lease obligations
Loans
Retirement benefit obligations
Total liabilities
Net assets
Equity
Share capital
Share premium account
Retained earnings
Other reserves
Equity attributable to owners of the Company
Non-controlling interest
Total equity
The accompanying notes form an integral part of the financial statements.
At 31 December
2021
£m
At 31 December
2020
£m
Note
17
18
19
19
6
21
21
15
30
20
21
21
22
29
23
23
29
26
24
25
23
23
29
15
26
24
25
30
31
32
33
852.7
144.0
55.5
416.7
17.6
2.6
13.6
214.3
166.2
669.6
80.6
54.2
387.5
19.2
–
25.3
83.2
114.6
1,883.2
1,434.2
19.6
319.0
305.7
5.5
198.4
2.6
850.8
21.4
296.1
313.5
4.9
335.7
4.5
976.1
2,734.0
2,410.3
(61.3)
(526.0)
(2.0)
(17.2)
(79.6)
(126.3)
(64.9)
(877.3)
(48.6)
(7.3)
–
(40.3)
(118.0)
(304.0)
(312.1)
(18.0)
(848.3)
(42.3)
(533.9)
(9.3)
(21.6)
(62.1)
(109.3)
(89.7)
(868.2)
(47.5)
(9.4)
(0.1)
(26.9)
(115.9)
(293.3)
(299.1)
(34.9)
(827.1)
(1,725.6)
(1,695.3)
1,008.4
715.0
24.4
463.1
542.8
(23.6)
1,006.7
1.7
1,008.4
24.7
463.1
302.4
(76.9)
713.3
1.7
715.0
The financial statements were approved by the Board of Directors on 23 February 2022 and signed on its behalf by:
Rupert Soames
Group Chief Executive Officer
Nigel Crossley
Group Chief Financial Officer
194 Serco Group plc
Annual Report and Accounts 2021
Consolidated Cash Flow Statement
Consolidated Cash Flow Statement
For the year ended 31 December
Net cash inflow from operating activities before exceptional items
Exceptional items
Net cash inflow from operating activities
Investing activities
Interest received
Decrease in other investments
Exceptional sale of other investments
Dividends received from joint ventures and associates
Exceptional distribution from joint ventures
Other dividends received
Proceeds from disposal of property, plant and equipment
Net cash inflow on disposal of subsidiaries and operations
Acquisition of subsidiaries, net of cash acquired
Proceeds from loans receivable
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash (outflow)/inflow from investing activities
Financing activities
Interest paid
Capitalised finance costs paid
Advances of loans
Repayments of loans
Capital element of lease repayments
Cash movements on hedging instruments
Dividends paid to shareholders
Own shares repurchased
Proceeds received from exercise of share options
Net cash outflow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Net exchange (loss)/gain
Cash and cash equivalents at end of year
The accompanying notes form an integral part of the financial statements.
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7
22
2021
£m
357.4
(7.5)
349.9
0.6
–
13.0
13.5
–
0.6
7.0
–
(234.9)
–
(8.2)
(23.9)
(232.3)
(24.9)
(0.6)
110.0
(139.7)
(111.3)
(16.6)
(26.5)
(40.7)
0.2
(250.1)
(132.5)
335.7
(4.8)
198.4
2020
£m
270.5
(2.0)
268.5
0.3
0.1
–
19.8
1.9
0.4
20.9
11.0
(4.9)
1.2
(8.3)
(41.8)
0.6
(24.9)
(0.9)
447.9
(348.5)
(100.8)
2.4
–
–
0.1
(24.7)
244.4
89.5
1.8
335.7
Annual Report and Accounts 2021
Serco Group plc
195
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
1. General information
Serco Group plc (the Company) is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the
registered office is Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UY.
These Consolidated Financial Statements comprise the Company and its subsidiaries (together referred to as the Group) and are presented in
pounds Sterling because this is the currency of the primary economic environment in which Serco operates. All amounts have been rounded
to the nearest one hundred thousand pounds and foreign operations are included in accordance with the policies set out in note 2.
2. Significant accounting policies
Basis of accounting
On 31 December 2020, international accounting standards as adopted by the European Union at that date were brought into UK law and
became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board.
The Company transitioned to UK-adopted International Accounting Standards in its Consolidated Financial Statements on 1 January 2021.
This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the
period reported as a result of the change in framework.
These Consolidated Financial Statements on pages 191 to 252 have been prepared in accordance with UK-adopted International Accounting
Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards.
The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. Historical cost is
generally based on the fair value of the consideration given in exchange for goods and services. The following principal accounting policies
adopted have been applied consistently in the current and preceding financial year except as stated below.
Basis of consolidation
The Consolidated Financial Statements incorporate the financial statements of the Company and entities controlled by the Company up to
31 December each year. Control is achieved when the Company:
(i) has power over the investee;
(ii) is exposed, or has rights to variable returns from its involvement with the investee; and
(iii) has the ability to use its power to affect the returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of
the three elements of control listed above.
The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the effective date
of acquisition or up to the effective date of disposal as appropriate. Where necessary, adjustments are made to the financial statements of
subsidiaries to bring accounting policies into line with those used by the Group. All intra-Group transactions, balances, income and expenses
are eliminated on consolidation.
Non-controlling interests represent the portion of profits or losses and net assets in subsidiaries that is not held by the Group and is presented
within equity in the Consolidated Balance Sheet, separate from equity of shareholders of Serco Group plc.
Going concern
In assessing the basis of preparation of the financial statements for the year ended 31 December 2021, the Directors have considered the
principles of the Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting,
2014’ particularly in assessing the applicability of the going concern basis, the review period and disclosures. The period of assessment is
considered to be at least 12 months from the date of approval of these financial statements.
At 31 December 2021, the Group’s principal debt facilities comprised a £250m revolving credit facility (of which £nil was drawn), acquisition
term loan facilities totalling £120m (of which £120m was drawn) and £259m of US private placement notes, giving £629m of committed credit
facilities and committed headroom of £444m. The principal financial covenant ratios are consistent across the private placement loan notes
and revolving credit facility and are outlined on page 88. As at 31 December 2021, the Group’s primary restricting covenant, its leverage ratio,
is below the covenant of 3.5x and is below the Group’s target range of 1x-2x at 0.68.
The Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts, as well as the
potential impact of key uncertainties and sensitivities on the Group’s future performance. In making this assessment the Directors have
considered the Group’s existing debt levels, the committed funding and liquidity positions under its debt covenants, its ability to generate
cash from trading activities and its working capital requirements. The Directors have also identified a series of mitigating actions that could be
used to preserve cash in the business should the need arise.
The basis of the assessment continues to be the Board-approved budget. The budget is prepared annually for the next two-year period and
is based on a bottom-up approach to all of the Group’s existing contracts, potential new contracts and administrative functions. As part of the
budgeting process covering 2022 and 2023, consideration was given to the known impacts of Covid-19, though most of the Group’s contracts
deliver critical services to governments and the delivery requirements of these have not been materially impacted. Where situations have
evolved, these have been reflected in the Group’s most recent forecasts and thus are included within the assessment process outlined below.
196 Serco Group plc
Annual Report and Accounts 2021
The Directors have considered the ongoing impact of Covid-19 on the Group’s operations. The key impacts which the Group has felt are
lower passenger volumes on the Group’s train operating contracts, lower volumes within its air traffic control business in the Middle East,
higher costs within the Health portfolio and lower usage of the Group’s UK leisure centres. The Group has continued to trade profitably during
the pandemic, and even at the various peaks globally, the potentially adverse impact of the pandemic was mitigated through the Group’s
involvement in Covid-related responses. As a result, the Directors no longer consider going concern to be a critical accounting judgement as
was previously disclosed in the financial statements for the year ended 31 December 2020.
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Due to the limited adverse impacts of Covid-19 on the Group’s profitability, the Directors believe that appropriate sensitivities in assessing the
Group’s ability to continue as a going concern are to model reductions in the Group’s win rates for new business and rebids, and reductions in
profit margins. Due to the diversity in the Group’s operations, the Directors believe that a reverse stress test of these sensitivities to assess the
headroom available under the Group’s debt covenants and available liquidity provides meaningful analysis of the Group’s ability to continue
as a going concern. Based on the headroom available, the Directors are then able to assess whether the reductions required to breach the
Group’s financial covenants, or exhaust available liquidity, are plausible.
This reverse stress test shows that, even after assuming that the US private placement loans of $28.4m due to mature before 30 June 2023
and the £45m acquisition term loan facility used to fund the acquisition of NSBU are repaid, and that no additional refinancing occurs, the
Group can afford to be unsuccessful on 60% of its target new business and rebid wins, combined with a profit margin 60 basis points below
the Group’s forecast, and still retain sufficient liquidity to meet all liabilities as they fall due and remain compliant with the Group’s financial
covenants.
In respect of win rates, rebids have a more significant impact on the Group’s revenue than new business wins during the assessment period.
The Group has won more than 85% of its rebids and available contract extensions over the last two years, therefore a reduction of 60% or more
to the budgeted win rates and rebid rates is not considered plausible. The Group does not generally bid for contracts at margins below its
target range.
In respect to margin reduction, due to the diversified nature of the Group’s portfolio of long-term contracts and the fact that the Group has
met or exceeded its full-year guidance for the last five years, a reduction in margin of 60bps versus the Group’s budget is not considered
plausible within the assessment period combined with a 60% reduction in win rates for new business and rebids.
Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall
due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements on a
going concern basis.
Adoption of new and revised standards
There have been no new accounting standards implemented by the Group during the year and no revisions to accounting standards have had
a material impact on the Group’s Financial Statements.
Amendments to IFRS16 Covid-19 Related Rent Concessions
On 28 May 2020, the IASB issued Covid-19 Related Rent Concessions – amendment to IFRS16 Leases. The amendments provide relief to
lessees from applying IFRS16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19
pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease
modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession
the same way it would account for the change under IFRS16, if the change were not a lease modification.
The relief was originally limited to reductions in lease payments that were due on or before 30 June 2021. However, the IASB subsequently
extended this date to 30 June 2022. The impact of applying the amendment and subsequent extension to the Group’s Financial Statements
was immaterial.
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16: Interest Rate Benchmark Reform – Phase 2
In August 2020, the IASB made amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 to address the issues that arise during the reform of
an interest rate benchmark rate, including the replacement of one benchmark with an alternative one.
The Phase 2 amendments provided reliefs that were not applicable to the Group. The impact of replacing benchmarks is not expected to have
a material impact on the Group, see note 29 for details of the Group’s interest rate risk management strategy.
Annual Report and Accounts 2021
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Notes to the Consolidated Financial Statements
continued
2. Significant accounting policies continued
New standards, amendments and interpretations not yet adopted
The following published new accounting standards, amendments to accounting standards and interpretations that are not mandatory for
31 December 2021 reporting periods, have not been early adopted by the Group. These are effective for annual reporting periods beginning
on or after the date indicated:
Annual Improvements to IFRS Standards 2018-2020
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16)
Reference to the Conceptual Framework (Amendments to IFRS 3)
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37)
IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance Contracts
Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)
Definition of Accounting Estimates (Amendments to IAS 8)
Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendment to IAS 12)
Initial Application of IFRS 17 and IFRS 9 – Comparative Information
Effective Date
01 January 2022
01 January 2022
01 January 2022
01 January 2022
01 January 2023
01 January 2023
01 January 2023
01 January 2023
01 January 2023
01 January 2023
These standards, amendments or interpretations are not expected to have a material impact on the Group in the current or future
reporting periods.
Changes in accounting policies
The Group, following a review of its accounting policies, has updated its accounting policy for modifications to contracts with customers
which do not result in the provision of distinct goods or services. Previously, it was stated that if the pricing in the new contract was not
commensurate with the stand-alone selling prices for the goods or services and the new goods and services were not distinct from those
in the original contract, that any historic adjustments would be recognised through opening retained earnings. This is not the case, and the
Group would recognise any adjustments as an adjustment to revenue in the period of the modification. No such modifications have occurred
either during the year ended 31 December 2021 or 31 December 2020.
Fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market
participants at the measurement date, regardless of whether that price is directly observable or is estimated using another valuation
technique. There are certain transactions in these financial statements which are similar to fair value but are determined by the treatment set
out in their respective standards. These are share based payment transactions that are within the scope of IFRS2 Share Based Payment,
leasing transactions that are within the scope of IFRS16 Leases, the calculation of net realisable value under IAS2 Inventories and value in use
under IAS36 Impairment of Assets.
Revenue
The Group recognises revenue based on the principles set out in IFRS 15 Revenue from Contracts with Customers and is recognised in any
period based on the delivery of performance obligations and an assessment of when control is transferred to the customer.
For all contracts, the Group determines whether each arrangement meets the definition of a contract under IFRS 15 and creates enforceable
rights and obligations.
Contracts are combined if they are entered into at or near the same time and one or more of the following criteria are met:
– They are negotiated as a package with a single commercial objective.
– Consideration receivable in one contract depends on the other contract.
– Goods or services are a single performance obligation.
For contracts with multiple components, Management applies judgement to consider whether those promised goods and services are:
– a deliverable (i.e. a good or a service) that is distinct; or
– a series of distinct deliverables that are substantially the same and that have the same pattern of transfer to the customer (transferred
over time using the same measure of progress).
At contract inception, the transaction price is the total amount of consideration to which the Group expects to be entitled to in exchange for
transferring goods or services to a customer.
Once the total transaction price is determined, the Group allocates this to the identified performance obligations in proportion to their
relative stand-alone selling prices and recognises revenue when (or as) those performance obligations are satisfied. Where there is only one
performance obligation, no allocation is necessary as the full transaction price is allocated to the single performance obligation.
Where there is more than one performance obligation, the Group looks at each performance obligation separately to see if there is an
observable price available, however due to the bespoke nature of the services provided by the Group there is normally no observable
stand-alone selling price and the expected cost plus margin approach is used. All bid models for new contracts are built up and negotiated
with the customers on a cost-plus margin basis and therefore this approach most accurately reflects the commercial reality and the value of the
benefits transferred to the customer.
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The Group enters into contracts which contain extension periods where either the customer or both parties can choose to extend the contract
or there is an automatic annual renewal and/or termination clauses that could impact the actual duration of the contract. Judgement is
applied to assess the impact that these clauses have when determining the appropriate contract term. The term of the contract impacts both
the period over which revenue from performance obligations may be recognised and the period over which contract fulfilment assets and
capitalised bid and phase in costs are expensed.
Further details on revenue recognition for specific contract types are shown below.
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Revenue recognition: Repeat service-based contracts
The majority of the Group’s contracts are repeat service-based contracts where value is transferred to the customer over time as the core
services are delivered. Therefore, in most cases revenue will be recognised on the output basis, based on direct measurements of the value to
the customer of the services transferred to date relative to the remaining services under the contract. This is a faithful depiction of the transfer
of services since the service delivered to the customer is unchanged. Where the output method is used, the Group often uses a method of
time elapsed which requires minimal estimation. Certain repeat service-based contracts use output methods based upon: user numbers;
service activity levels; or fees collected. Where any price reductions within output-based contracts are contractual, but the level of service is
not decreasing, revenue will be deferred from initial years to subsequent years in order for revenue to be recognised on a consistent basis.
There are certain contracts where a separate performance obligation has been identified for services where the pattern of delivery differs
to the core services and which are capable of being distinct, such as asset construction or asset maintenance. In these instances, where the
transfer of control is most closely aligned to our efforts in delivering the service, the input method is used to measure progress and revenue
is recognised in direct proportion to costs incurred. In limited circumstances, other methods are used to measure progress under the input
method, including resources consumed, time elapsed or labour hours expended. This is a faithful depiction of the transfer of services because
costs (or other inputs) most accurately reflect the incremental benefits received by the customer from efforts to date.
Where deemed appropriate, the Group will utilise the practical expedient within IFRS15, allowing revenue to be recognised at the amount
which the Group has the right to invoice, where that amount corresponds directly with the value to the customer of the Group’s performance
completed to date.
Under IFRS15, unless upfront fees received from customers including transition payments can be clearly attributable to a distinct service the
customer is obtaining, then such payments do not constitute a separate performance obligation and instead are deferred and spread over the
life of the core services.
In general, the timing of satisfaction of performance obligations is consistent with when payment becomes due, other than in instances where
up front win fees or transition payments are received, where in most instances these are deferred.
Any changes to the enforceable rights and obligations with customers and/or an update to the transaction price will not be recognised as
revenue until there is evidence of customer agreement in line with the Group’s policies.
Revenue recognition: Variable revenue
The Group has a number of contracts where at least an element of the revenue generated is variable in nature. Variability in revenue
recognised can arise from a number of factors, including usage related volumes, graduated performance against contractual performance
indicators, indexation linked pricing, profit sharing elements and customer decisions related to the provision of goods or services. Any variable
amounts will only be recognised where it is highly probable that a significant reversal will not occur.
Revenue recognition: Long-term project-based contracts
The Group has a limited number of project based long-term contracts. Revenue associated with these contracts is recognised at the point in
time when control over the deliverable is passed to the customer.
Revenue recognition: Contract modifications
When a modification to an existing contract is approved, the Group first assesses whether it adds distinct goods or services to the existing
contract that are priced commensurate with the stand-alone selling prices for those goods or services. If this is the case, then the modification
is accounted for prospectively as a separate contract. If the pricing is not commensurate with the stand-alone selling prices for the goods or
services and the new goods or services are not distinct from those in the original contract, then this is considered to form part of the original
contract. Pricing is updated for the entirety of the revised contract and any historic adjustments recorded as a result are recognised as a
cumulative adjustment to revenue in the period of the modification. If the pricing is not commensurate with the stand-alone selling prices for
the goods or services and the new goods or services are distinct from those in the original contract, then this is considered to represent the
termination of the original contract and the creation of a new contract which is accounted for prospectively from the date of modification.
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
2. Significant accounting policies continued
Revenue recognition: Other
Sales of goods are recognised when goods are delivered and title has passed.
The Group has a limited number of pass through arrangements in respect of goods or services procured by the Group on behalf of customers
where it assesses whether it is acting as a principal or as an agent. The Group is acting as principal if it is in control of a good or a service
prior to transferring to the customer and gross revenue and costs are recognised. More commonly, the Group is acting as agent where it is
arranging for those goods or services to be provided to the customer without obtaining control, for example, where the Group is engaged
to manage operations for a customer but procures goods or services on behalf and at the instructions of the customer in order to deliver the
operation. When acting as an agent, only the fee or commission is recognised as revenue and the costs represent only the direct costs of
facilitating the transaction.
Interest income is accrued for on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the
rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.
The Group has no material exposure to returns or refunds.
Government grants
The majority of the Group’s customers are governments. Any income that arises from a contractual agreement for the delivery of goods or
services, or a specific modification to such a contract, is treated as revenue. Income from governments is only considered to be a government
grant if it is not related to the supply of goods or services under a contractual arrangement.
Government grants are recognised where there is reasonable assurance that the grant will be received. Grants that compensate the Group for
expenses incurred are recognised in the income statement as a reduction to the corresponding expenses on a systematic basis in the periods
in which the expenses are recognised. There were no material government grants received during the year or prior year.
Contract costs
Bid costs are capitalised only when they relate directly to a contract and are incremental to securing the contract. Bid costs are amortised over
the duration of the contract to which they relate in equal annual instalments. Any costs which would have been incurred whether or not the
contract is actually won are not considered to be capitalised bid costs.
Contract costs are charged to the income statement as incurred, including the necessary accrual for costs which have not yet been invoiced,
unless the expense relates to a specific time frame covering future periods.
Contract costs can only be capitalised when the expenditure meets all of the following three criteria and are not within the scope of another
accounting standard, such as inventories, intangible assets, or property, plant and equipment:
– The costs relate directly to a contract. These include direct labour, being the salaries and wages of employees providing the promised
services to the customer; direct materials such as supplies used in providing the promised services to a customer; and other costs that
are incurred only because an entity entered into the contract, such as payments to subcontractors.
– The costs generate or enhance the resources used in satisfying performance obligations in the future. For initial contract costs
capitalised, such costs only fall into one of the following two categories: the mobilisation of contract staff, being the costs of moving
existing contract staff to other Group locations; or directly incremental costs incurred in meeting contractual obligations incurred prior
to contract delivery, which are required to ensure a proper handover from the previous contractor. Redundancy costs are never
capitalised.
– The costs are expected to be recovered, i.e. the contract is expected to be profitable after amortising the capitalised costs.
Operating profit
Operating profit is not a measure defined by IFRS and the Group considers this to include the profits and losses from operations prior to
corporation tax, interest revenue and finance costs.
Foreign currencies
Transactions in currencies other than Sterling are recorded at the rates of exchange on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet
date. Gains and losses arising on retranslation are included in the net profit or loss for the period, except for exchange differences arising on
non-monetary assets and liabilities where the changes in fair value are recognised directly in equity through the Consolidated Statement of
Comprehensive Income (SOCI).
On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance
sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are
recognised directly within equity in the Group’s hedging and translation reserve. On disposal of an operation, such translation differences
are recognised as income or expenses in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the
acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
The Group uses a monthly approximation for transactions during the period. If exchange rates fluctuate significantly during a period, the use
of approximate rates are reviewed to ensure they are still appropriate.
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Dividends
Dividend distributions are recognised as a liability in the year in which the dividends are approved by the Company’s shareholders. Interim
dividends are recognised when they are paid; final dividends when authorised in general meetings by shareholders. Dividend income is
recognised on receipt.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is
measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments
issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in profit or loss as incurred. Where
acquisition and transition costs for successful acquisitions are material, they are disclosed as exceptional costs within note 9.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement,
measured at its acquisition date fair value. Subsequent changes in fair values are adjusted against the cost of acquisition where they qualify as
measurement period adjustments (which is subject to a maximum of one year). All other subsequent changes in the fair value of contingent
consideration classified as an asset or liability are accounted for in accordance with the relevant accounting standards.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS3 (2008) Business
Combinations are recognised at their fair value at the acquisition date, except where a different treatment is mandated by another standard.
Investments in joint ventures and associates
A joint venture is an arrangement whereby the owning parties have joint control and rights over the net assets of the arrangement. The
Group’s investments in joint ventures are incorporated using the equity method of accounting.
Under the equity method, an investment in an associate or a joint venture is initially recognised in the Consolidated Balance Sheet at cost
and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture.
Any excess of the cost of acquisition over the Group’s share of net fair value of the identifiable assets, liabilities and contingent liabilities of
the joint venture recognised at the date of acquisition is recognised as goodwill. Goodwill is included within the carrying value amount of the
investment and is assessed for impairment as part of that investment. Any excess of the Group’s share of the net fair value of the identifiable
assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.
Determining whether joint control exists requires a level of judgement, based upon specific facts and circumstances which exist at the year
end. Details of the unconsolidated joint ventures are provided in notes 5 and 6.
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control.
The results and assets and liabilities of associates are also incorporated in these financial statements using the equity method of accounting.
Goodwill
Goodwill is measured as the excess of the fair value of purchase consideration over the fair value of the net assets acquired and is
recognised as an intangible asset when control is achieved. Negative goodwill is recognised immediately in the income statement. Fair
value measurements are based on provisional estimates and may be subject to amendment within one year of the acquisition, resulting in an
adjustment to goodwill.
Goodwill itself does not generate independent cash flows and therefore, in order to perform required tests for impairment, it is allocated at
inception to the specific cash generating unit (CGU) or groups of CGUs which are expected to benefit from the acquisition.
On the disposal of a business which includes all or part of a CGU, any attributable goodwill is included in the determination of the profit or
loss on disposal. Where part of a CGU with goodwill is sold, the attributable amount is calculated based on the future discounted cash flows
leaving the Group as a proportion of the total CGU future discounted cash flows.
The fair values associated with material business combinations are valued by external advisers and any amount of consideration which is
contingent in nature is evaluated at the end of each reporting period, based on internal forecasts.
Other intangible assets
Material intangible assets are grouped into classes of similar nature and use and separately disclosed. Other intangible assets are amortised
from the date of completion.
Customer relationships can arise on the acquisition of subsidiaries and represent the incremental value expected to be gained as a result
of existing contracts in the purchased business and identifiable technology-based propositions in the purchased business. These assets are
amortised over the average length of the related contracts.
Software and IT represent computer systems and processes used by the Group in order to generate future economic value through normal
business operations. The underlying assets are amortised over the period from which the Group expects to benefit, which is typically between
three to eight years.
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
2. Significant accounting policies continued
Development expenditure is capitalised as an intangible asset only if the conditions below are met, with all research costs and other
development expenditure being expensed when incurred. The period of expected benefit, and therefore period of amortisation, is typically
between three and eight years. The capitalisation criteria are as follows:
– an asset is created that can be separately identified and which the Group intends to use or sell;
– the finalisation of the asset is technically feasible and the Group has adequate resources to complete its development for use or sale;
– it is probable that the asset created will generate future economic benefits; and
– the development cost of the asset can be measured reliably.
Property, plant and equipment
Assets held for use in the rendering of services, or for administrative purposes, are stated in the balance sheet at cost, net of accumulated
depreciation and any provision for impairment. Assets are grouped into classes of similar nature and use and separately disclosed except
where this is not material.
Depreciation is provided on a straight-line basis at rates designed to reduce the assets to their residual value over their estimated useful lives.
The principal annual rates used are:
2.5%
Freehold buildings
Leasehold improvements The higher of 10% or the rate produced by the lease term
Machinery
Vehicles
Furniture
Office equipment
Right of use assets
15% – 20%
10% – 50%
10%
20% – 33%
Equally over the lease term from inception or equally over the remainder of the lease term from the date of a
reassessment of the lease end date
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying
amount of the asset and is recognised in the income statement. Given that there is limited history of material gains or losses on disposal of
fixed assets, the level of judgement involved in determining the depreciation rates is not considered to be significant.
Asset impairment
The Group reviews the carrying amounts of its tangible and intangible assets (including goodwill) at each reporting period, together with any
other assets under the scope of IAS 36 Impairment of Assets, in order to assess whether there is any indication that those assets have suffered
an impairment loss. As the impairment of assets has been identified as both a key source of estimation uncertainty and a critical accounting
judgement, further details around the specific judgements and estimates can be seen in note 3.
If any indication of impairment exists, the recoverable amount of the asset is estimated in order to determine if there is any impairment
loss. Goodwill is assessed for impairment annually, irrespective of whether there are any indicators of impairment. Where the asset does not
generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit (CGU)
to which the asset belongs.
Recoverable amount is defined as the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value with reference to pre-tax discount rates that reflect the risks specific to the asset for which the
estimates of future cash flows have not been adjusted.
If the recoverable amount is estimated to be less than the carrying amount of the asset, the carrying amount is impaired to its recoverable
amount. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the
CGU and then to reduce the carrying amount of the other assets in the CGU on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are
assessed at each reporting date for indications that the loss which led to the impairment has decreased or no longer exists. Where an
impairment loss is subsequently reversed, the carrying amount is increased to the revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation,
had no impairment loss been recognised in prior years.
Impairment losses and reversals are recognised immediately within expenses in the income statement unless it is considered to be an
exceptional item.
Retirement benefit costs
Payments to defined contribution pension schemes are charged as an expense as they fall due.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit actuarial cost method,
with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which
they occur. They are recognised outside the income statement and are presented in the statement of comprehensive income.
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Both current and past service costs are the amounts recognised in the income statement, reflecting the expense associated with the
individuals. Current service cost represents the increase in the present value of the scheme liabilities expected to arise from employee service
in the current period. Past service cost is recognised immediately. Gains and losses on curtailments or settlements are recognised in the
income statement in the period in which the curtailment or settlement occurs.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as reduced
by the fair value of scheme assets. Any asset resulting from this calculation is limited to the present value of available refunds (which is only
recognised to the extent that the Group has an unconditional right to receive it) and reductions in future contributions to the scheme. To the
extent that an economic benefit is available as a reduction in future contributions and there is a minimum funding requirement required of the
Group, the economic benefit available as a reduction in contributions is calculated as the present value of the estimated future service cost in
each year, less the estimated minimum funding contributions required in respect of the future accrual and benefits in that year.
Calculation of the amounts recognised in the Consolidated Financial Statements in respect of defined benefit pension schemes requires a
high level of judgement, as further explained in note 3.
Defined benefit obligations arising from contractual obligations
Where the Group takes on a contract and assumes the obligation to contribute variable amounts to the defined benefit pension scheme
throughout the period of the contract, the Group’s share of the scheme assets and liabilities is calculated by reducing the scheme assets and
liabilities with a franchise adjustment. The franchise adjustment represents the estimated amount of scheme deficit that will be funded outside
the contract period. Subsequent actuarial gains and losses in relation to the Group’s share of pension obligations are recognised in the
Statement of Comprehensive Income (SOCI).
End of contract provisions
Where the Group has a legal or constructive obligation to compensate employees at the end of a contract term and these employees cannot
be relocated within the Group, a provision is recognised to reflect the expected outflow of economic benefits at the end of the contract. The
obligation is reassessed at each reporting date. The amount calculated assumes the tenure of the employee base, expected turnover and
salary.
Derivative financial instruments and hedging activities
The Group may enter into a variety of derivative financial instruments to manage the exposure to interest rate, foreign exchange risk and price
risk, including currency swaps, foreign exchange forward contracts, interest rate swaps and commodity future contracts. Further details of
derivative financial instruments are given in note 29.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their
fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated
and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge
relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities (fair value hedges),
hedges of highly probable forecast transactions or hedges of firm commitments (cash flow hedges).
At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item,
along with its risk management objectives and its strategy for undertaking various hedge transactions. Both at the inception of the hedge and
on a periodic basis, the Group assesses whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting
changes in fair values or cash flows of the hedged item.
A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months
and it is not expected to be realised or settled within 12 months. Derivatives, which mature within 12 months, are presented as current assets
or current liabilities.
Details of the fair values of the derivative instruments used for hedging purposes and movements in the hedging and translation reserve in
equity are detailed in the Statement of Comprehensive Income and described in note 29.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together
with any changes in the fair value of the hedged item that is attributable to the hedged risk. The change in the fair value of the hedging
instrument and the change in the hedged item attributable to the hedged risk are recognised in the line of the income statement relating to
the hedged item.
Hedge accounting is discontinued when a hedge is no longer effective as a result of a change in risk management strategy, the hedging
instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the
hedged item arising from the hedged risk is realised in the profit or loss account.
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Notes to the Consolidated Financial Statements
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2. Significant accounting policies continued
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The
gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to
profit or loss in the periods when the hedged item affects profit or loss, in the same line of the income statement as the recognised hedged
item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires or is sold,
terminated, exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in
equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss.
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because
it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or
deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for accounting purposes.
Deferred tax assets are generally recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax
losses, to the extent that it is probable that taxable profits will be available against which these items can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of an
asset and liability in a transaction other than a business combination and, at the time of the transaction, it affects neither the tax profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able
to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be utilised.
Deferred tax is measured at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based
upon tax rates and legislation that have been enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited
in the income statement, except where it relates to items charged or credited directly to equity, in which case the deferred tax is recognised in
equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same tax authority where the Group intends to settle its current tax assets and liabilities on
a net basis.
Share based payment
Where the fair value of share options or shares under award requires the use of a valuation model, fair value is measured by use of Binomial
Lattice, Black-Scholes or Monte Carlo Simulation models depending on the type of scheme, as set out in note 34. The expected life used
in the models has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations. Where relevant, the value of the option or award has also been adjusted to take account of market conditions
applicable to the option or award.
Inventories
Inventories are stated at the lower of cost and net realisable value and comprise service spares, supplies and consumables used in the
rendering of services to our customers. Cost comprises direct materials and, where applicable, direct labour costs that have been incurred in
bringing the inventories to their present location and condition.
Trade receivables
Trade receivables are recognised initially at cost (being the same as fair value) and subsequently at amortised cost less any credit notes,
provision for impairment and expected credit losses, to ensure that amounts recognised represent the recoverable amount.
Determining whether a trade receivable is impaired requires judgement to be applied based on the information available at each reporting
date. A provision for impairment arises where there is evidence that the Group will not be able to collect amounts due for reasons other than
customer default, which is achieved by creating an allowance for doubtful debts recognised in the income statement within expenses.
When a trade receivable is expected to be uncollectible for reasons other than credit-related losses, it is provided for within the allowance.
Subsequent recoveries of amounts previously provided for or written off are credited against expenses.
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The majority of contracts entered into by the Group are with government organisations and therefore historic levels of default are relatively
low and as a result, the risks associated with this judgement are not considered to be significant. An expected credit loss is recorded where
there is evidence that a counterparty is at risk of default due to their credit worthiness. If the loss was material, the amount would be presented
separately in the Consolidated Income Statement, however the Group’s customer base is predominantly government or government-backed
and as a result, the Group’s expected credit loss at a given point in time across the entirety of the customer base is typically immaterial.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and balances with banks and similar institutions, which are readily convertible to known
amounts of cash, which are subject to insignificant changes in value and have a maturity of three months or less from the date of acquisition.
This definition is also used for the Consolidated Cash Flow Statement.
Leases
The Group uses leases in the delivery of a number of contracts and in other centralised functions. Most notably, the Group uses
accommodation leases in the delivery of the Asylum Accommodation and Support Services contract, vehicle leases in the Prisoner Escorting
and Custodial Services contract and to deliver its UK vehicle fleet and support offices, amongst others. Where leases are utilised in the delivery
of contracts, the Group aims to limit the duration of any non-cancellable periods of leases to be no longer than the duration of the underlying
contract. For non-contract related leases, the Group has set policies on lease duration and purpose to ensure their appropriate use.
On entering into a lease, a lease liability is recorded equal to the value of future lease payments discounted at the appropriate incremental
borrowing rate and, simultaneously, a right of use asset is created representing the right conferred to control the manner of use of the leased
asset. The Group typically uses an appropriate incremental borrowing rate, based on the lease location and duration, as it typically does not
have access to the interest rate implicit in the lease.
Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on
the remaining balance of the liability. Finance charges are charged directly to the income statement and corresponding assets are depreciated
on a straight-line basis over the lease term.
The lease term is measured as the non-cancellable period of a lease, together with periods covered by an option to extend the lease if it is
reasonably certain that the option will be exercised and periods covered by an option to terminate the lease if it is reasonably certain that the
option will not be exercised. The lease term is reassessed if an event occurs which causes either the non-cancellable period to change,
or another event occurs which changes the assessment of the likelihood of exercising an option included in the lease.
All changes to leases are accounted for on a prospective basis from the point at which the change is triggered.
Where, on inception, the term of a lease is less than twelve months or the value of the leased asset is less than £5,000, or both, rentals payable
under the lease are charged to the income statement on a straight-line basis over the term of the relevant lease.
Loans
Loans are stated at amortised cost using the effective interest-rate method. Accrued interest is recorded separately from the associated
borrowings within current liabilities.
Loans are described as non-recourse loans and classified as such only if no Group company other than the relevant borrower has an
obligation, under a guarantee or other arrangement, to repay the debt.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take
a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are
substantially ready for their intended use or sale.
All other borrowing costs are recognised as an expense in the period in which they are incurred.
Provisions
Provisions are recognised when the Group has an obligation to make a cash outflow as a result of a past event. Provisions are measured at the
best estimate of the expenditure required to settle the obligation at the balance sheet date when settlement is considered to be likely.
Onerous contract provisions (OCPs) arise when the unavoidable costs of meeting contractual obligations exceed the remuneration expected
to be received. Unavoidable costs include total contract costs together with a rational allocation of shared costs that can be directly linked
to fulfilling contractual obligations which have been systematically allocated to OCPs on the basis of key cost drivers except when this is
impracticable, where contract revenue is used as a proxy to activity. The provision is calculated as the lower of the termination costs payable
for an early exit and the best estimate of net cost to fulfil the Group’s unavoidable contract obligations. Where a customer has an option to
extend a contract and it is likely that such an extension will be made, the expected net cost arising during the extension period is included
within the calculation. However, where a profit can be reasonably expected in the extension period, no credit is taken on the basis that such
profits are uncertain given the potential for the customer to either not extend or offer an extension under lower pricing terms. Further details
of the judgements can be seen in note 3.
Annual Report and Accounts 2021
Serco Group plc
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
2. Significant accounting policies continued
Net investments in foreign operations
Exchange differences arising on monetary items that form part of the Group’s net investment in foreign operations are initially recognised in
equity and accumulated in the hedging and translation reserve and reclassified from equity to profit or loss on disposal of the net investment.
When monetary items no longer form part of a hedging relationship, the exchange differences that arose during the time that the hedge was
in place remain in the hedging translation reserve until such time as the net investment is disposed of.
Dividends payable
Dividends are recorded in the Group’s Consolidated Financial Statements in the period in which they are declared, appropriately authorised
and no longer at the discretion of the Company.
Segmental information
Segmental information is based on internal reports about components of the Group that are regularly reviewed by the Group’s Chief
Operating Decision Maker (CODM) in order to allocate resources to the segments and to assess their performance. The CODM is considered
to be the Board of Directors as a body.
Segmental revenue is analysed on an external basis. Inter-segment revenue is not presented as it is not significant in the context of revenue as
a whole. Net finance costs are not presented for each operating segment as they are reviewed on a consolidated basis by the CODM.
Specific corporate expenses are allocated to the corresponding segments. Segment assets comprise goodwill, other intangible assets,
property, plant and equipment including right of use assets, inventories, trade and other receivables (excluding corporation tax recoverable)
and any retirement benefit assets. Segment liabilities comprise trade and other payables, lease liabilities, provisions and retirement benefit
obligations.
3. Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group’s accounting policies, which are described in note 2 above, Management has made the following
judgements that have the most significant effect on the amounts recognised in the Consolidated Financial Statements. As described below,
many of these areas of judgement also involve a high level of estimation uncertainty.
Key sources of estimation uncertainty
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions requires assumptions and complex judgements to be made about the future
performance of the Group’s contracts. The level of uncertainty in the estimates made, either in determining whether a provision is required, or
in the calculation of a provision booked, is linked to the complexity of the underlying contract and the form of service delivery. Due to the level
of uncertainty and combination of variables associated with those estimates, there is a significant risk that there could be material adjustment
to the carrying amounts of onerous contract provisions within the next financial reporting period. This includes the potential recognition of
onerous contract provisions for contracts which the Directors have assessed do not require a provision as at 31 December 2021.
Major sources of uncertainty which could result in a material adjustment within the next financial year, are:
– The ability of the Company to maintain or improve operational performance to ensure costs or performance related penalties are in
line with expected levels;
– Volume driven revenue and costs being within the expected ranges;
– The outcome of open claims made by or against a customer regarding contractual performance or contractual negotiations taking
place where there is expected to be a positive outcome from the Group’s perspective;
– The ability of suppliers to deliver their contractual obligations on time and on budget; and
– The potential impact of any longer term impacts of Covid-19 on contract performance such as the performance and usage of leisure
centres or passenger volumes in the UK and the risk that this may be impacted by any future wave of the virus which requires a
subsequent lock down period, or as-yet unknown shifts in customer behaviours, in the absence of any customer support.
In the current year, an amount of £1.3m was released from historic provisions. The net charge on new and existing OCPs within Underlying
Trading Profit was £1.3m. All of these revisions have resulted from triggering events in the current year, either through changes in contractual
positions or changes in circumstances which could not have been reasonably foreseen at the previous balance sheet date. To mitigate the
level of uncertainty in making these estimates, Management regularly compares actual performance of the contracts against previous forecasts
and considers whether there have been any changes to significant judgements.
The future range of possible outcomes in respect of those assumptions and significant judgements made to determine the carrying value of
onerous contracts could result in either a material increase or decrease in the value of onerous contract provisions in the next financial year.
The extent to which actual results differ from estimates made at the reporting date depends on the combined outcome and timing of a large
number of variables associated with performance across multiple contracts.
The individual provisions are discounted where the impact is assessed to be significant. When used, discount rates are calculated based on
the estimated risk-free rate of interest for the region in which the provision is located and matched against the ageing profile of the provision.
206 Serco Group plc
Annual Report and Accounts 2021
The Group undertakes a robust assessment at each reporting date to determine whether any individual customer contracts, which the
Group has entered into, are onerous and require a provision to be recognised in accordance with IAS37 Provisions, Contingent Liabilities
& Contingent Assets. The Group operates a large number of long-term contracts at different phases of their contract life cycle. Within the
Group’s portfolio, there are a small number of contracts where the balance of risks and opportunities indicates that they might be onerous
if transformation initiatives or contract changes are not successful. The Group has concluded that these contracts do not require an onerous
contract provision on an individual basis. Following the individual contract reviews, the Group has also undertaken a top-down assessment
which assumes that, whilst the contracts may not be onerous on an individual basis, as a portfolio there is a risk that at least some of the
transformation programmes or customer negotiations required to avoid a contract loss, will not be fully successful, and it is more likely
than not that one or more of these contracts will be onerous. Therefore, in considering the Group’s overall onerous contract provision, the
Group has made a best estimate of the provision required to take into consideration this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a critical estimate for the Group. As at 31 December 2021, the provision recognised in
respect of this portfolio of contracts is £9.7m (2020: £8.5m).
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Onerous contract provisions totalling £4.5m are estimated for individual contracts, based on the specific characteristics of the contract
including possible contract variations, estimates of transaction price such as variable revenues and forecast costs to fulfil those contracts.
As noted above, the Group also holds a balance of £9.7m in respect of the portfolio risk associated with operating a large number of long-
term contracts, giving a total onerous contract provision of £14.2m (see note 26). Management has considered the nature of the estimate for
onerous contract provisions and concluded that it is reasonably possible that outcomes within the next financial year may be different from
Management’s assumptions and could, in aggregate, require a material adjustment to the onerous contract provision. However, due to the
estimation uncertainty across numerous contracts each with different characteristics, it is not practical to provide a quantitative analysis of the
aggregated judgements that are applied, and Management do not believe that disclosing a potential range of outcomes on a consolidated
basis would provide meaningful information to a reader of the financial statements.
Whilst the focus of the judgement is to determine whether the Group is required to record an onerous contract provision, management also
inherently assess whether any assets dedicated to the contract are required to be impaired where contracts are forecast to make sustainable
losses in the future. In accordance with IAS 37, the Group will impair assets dedicated to the contract before the recognition of an onerous
contract provision.
Impairment of goodwill
A key area of focus in recent years has been in the impairment testing of goodwill, though no impairment indicators were noted in the year
ended 31 December 2021. At each reporting period an assessment is performed in order to determine whether there are any such indicators,
which involves considering the performance of our business and any significant changes to the markets in which we operate.
Determining whether goodwill requires an actual impairment involves an estimation of the expected value in use of the asset (or cash
generating unit (CGU) to which the asset relates). The value in use calculation involves an estimation of future cash flows and also the selection
of appropriate discount rates, both of which involve considerable judgement. The future cash flows are derived from latest approved forecasts,
with the key assumptions being revenue growth, margins and cash conversion rates. As was the case at the end of 2020, the budgeting
process is required to estimate the ongoing impact of Covid-19, and whilst this remains a source of uncertainty, the Group’s understanding
of the potential impacts continues to improve. As a result of known and anticipated impacts of Covid-19 being included in Management’s
forecasts, no additional specific adjustments have been made to the cash flows used in assessing the value in use of assets.
Discount rates are calculated with reference to the specific risks associated with the assets and are based on advice provided by external
experts. Our calculation of discount rates is performed based on a risk free rate of interest appropriate to the geographic location of the
cash flows related to the CGU being tested, which is subsequently adjusted to factor in local market risks and risks specific to Serco. For the
purpose of impairment testing in accordance with IAS36 Impairment of Assets, Management estimates pre-tax discount rates based on the
post-tax weighted average cost of capital which is used for internal purposes.
There continues to be significant headroom across all CGUs and as detailed in note 17, sufficient headroom remains even when reasonably
possible changes to discount rates occur. However, a high degree of judgement remains in estimating future cash flows, particularly those
relating to the terminal year of the value in use calculation.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit obligation as a result of contractual arrangements entered into requires a level of
judgement, largely driven by the legal position held between the Group, the customer and the relevant pension scheme. The Group’s
retirement benefit obligations are covered in note 30.
The calculation of retirement benefit obligations is dependent on material key assumptions including discount rates, mortality rates, inflation
rates and future contribution rates.
Annual Report and Accounts 2021
Serco Group plc
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
In accounting for the defined benefit schemes, the Group has applied the principle that the asset recognised for the Serco Pension and Life
Assurance Scheme is equal to the full surplus that will ultimately be available to the Group as a future refund.
No pension assets are invested in the Group’s own financial instruments or property.
Pension annuity assets are remeasured to fair value at each reporting date based on the share of the defined benefit obligation covered by the
insurance contract.
Critical accounting judgements
Deferred tax
Deferred tax assets are recognised on tax deductible temporary differences to the extent that it is probable that taxable profit will be available
against which they can be utilised. Significant Management judgement is required to determine the amount of deferred tax assets that should
be recognised, based upon the likely timing, geography and the level of future taxable profits. Since a significant portion of the deductible
temporary differences relate to historic tax losses, there has been historic evidence that future taxable profits may not be available.
A £162.8m UK tax asset is recognised on the Group’s balance sheet at 31 December 2021 (31 December 2020: £30.6m) on the basis that
structural changes in the underlying UK business indicate a sustained return to profitability which would enable future tax deductions within
the UK to be utilised. The return to profitability is as a result of onerous contracts ending and new profitable long-term contracts being
entered into as well as a significant reduction in exceptional restructuring spend following the strategy review in 2015, which also reduced
the level of overhead spend within the UK business. A UK deferred tax asset of £186.2m was initially recognised during the year with this
balance subsequently being revalued by £1.6m and £25.0m being used to offset profits and reserves movements arising in the year to
31 December 2021.
Further details on deferred taxes are disclosed in note 15.
Use of Alternative Performance Measures: Operating profit before exceptional items
IAS1 Presentation of Financial Statements requires material items to be disclosed separately in a way that enables users to assess the quality
of a company’s profitability. In practice, these are commonly referred to as ‘exceptional’ items, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in arriving at an Alternative Performance Measure which excludes such exceptional items.
We consider items which are material and outside of the normal operating practice of the Company to be suitable for separate presentation.
There is a level of judgement required in determining which items are exceptional on a consistent basis and require separate disclosure.
Further details can be seen in note 9.
The segmental analysis in note 4 includes the additional performance measure of Trading Profit on operations which is reconciled to reported
operating profit in that note. The Group uses Trading Profit as an alternative measure to reported operating profit by making several
adjustments. Firstly, Trading Profit excludes exceptional items, being those we consider material and outside of the normal operating practice
of the Company to be suitable for separate presentation and detailed explanation. Secondly, amortisation and impairment of intangibles
arising on acquisitions are excluded, because these charges are based on judgements about the value and economic life of assets that, in the
case of items such as customer relationships, would not be capitalised in normal operating practice. The Group’s Chief Operating Decision
Maker (CODM) reviews the segmental analysis for operations.
Claim for losses in respect of the 2013 share price reduction
Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of
any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant
uncertainties. The Group does not currently assess the merits as strong, especially given the legal uncertainties in such actions.
208 Serco Group plc
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4. Segmental information
The Group’s operating segments reflecting the information reported to the Board in 2021 under IFRS8 Operating Segments are as set out below.
Reportable operating segments
Sectors
UK & Europe
Americas
AsPac
Middle East
Services for sectors including Citizen Services, Defence, Health & Other Facilities Management, Justice &
Immigration and Transport delivered to UK Government, UK devolved authorities and other public sector
customers in the UK and Europe
Services for sectors including Citizen Services, Defence and Transport delivered to US federal and civilian
agencies, selected state and municipal governments and the Canadian Government
Services for sectors including Citizen Services, Defence, Health & Other Facilities Management, Justice &
Immigration and Transport in the Asia Pacific region including Australia, New Zealand and Hong Kong
Services for sectors including Citizen Services, Defence, Health & Other Facilities Management and
Transport in the Middle East region
Corporate
Central and head office costs
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Each reportable operating segment is focused on a narrow group of customers in a specific geographic region and is run by a local
Management team which reports directly to the Group’s Chief Operating Decision Maker (CODM) on a regular basis. As a result of this focus,
the sectors in each region have similar economic characteristics and are aggregated at the reportable operating segment level in these
financial statements.
The accounting policies of the reportable operating segments are the same as the Group’s accounting policies described in note 2.
Information about major customers
The Group has three major governmental customers which each represent more than 5% of Group revenues in the current year.
The customers’ revenues were £1,814.4m (2020: £1,517.0m) for the UK Government within the UK & Europe segment, £993.0m (2020: £913.1m)
for the US Government within the Americas segment and £836.4m (2020: £703.8m) for the Australian Government within the AsPac segment.
These customers do not act in a unified way in making purchase decisions, and in general, the Group engages directly with the various
departments of these customers in respect of the services it provides.
Segmental information
Segmental revenue is analysed on an external basis. Inter-segment revenue is not presented as it is not significant in the context of revenue
as a whole. Net finance costs are not presented for each reportable operating segment as they are reviewed on a consolidated basis by
the CODM.
Specific corporate expenses are allocated to the corresponding segments. Segment assets comprise goodwill, other intangible assets, property,
plant and equipment including right of use assets, inventories, trade and other receivables (excluding corporation tax recoverable) and any
retirement benefit asset. Segment liabilities comprise trade and other payables, lease liabilities, provisions and retirement benefit obligations.
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable operating segment:
Year ended 31 December 2021
Revenue
Result
UK&E
£m
Americas
£m
2,131.6
1,120.0
Trading Profit/(Loss) from operations*
Amortisation and impairment of intangibles arising
99.8
117.8
on acquisition
Operating profit/(loss) before exceptional items
Other exceptional operating items**
Operating profit/(loss)
Investment revenue
Finance costs
Profit before tax
Tax credit
Tax on exceptional items
Profit for the year
(0.8)
99.0
0.4
99.4
(11.7)
106.1
(4.1)
102.0
AsPac
£m
908.4
52.0
(3.5)
48.5
3.4
51.9
Middle East
£m
Corporate
£m
Total
£m
264.6
–
4,424.6
13.7
–
13.7
–
13.7
(49.9)
233.4
–
(49.9)
(0.9)
(50.8)
(16.0)
217.4
(1.2)
216.2
2.4
(26.4)
192.2
111.9
(0.2)
303.9
* Trading Profit/(Loss) is defined as operating profit/(loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.
** Exceptional restructuring costs incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider
business. Included within Other exceptional operating items are total acquisition related costs of £4.9m.
Annual Report and Accounts 2021
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
4. Segmental information continued
Year ended 31 December 2021
Supplementary information
Share of profits in joint ventures and associates, net
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Corporate
£m
Total
£m
of interest and tax
8.7
–
–
–
–
8.7
Depreciation of plant, property and equipment and
right of use assets
(77.6)
(23.4)
(12.5)
(5.2)
(9.9)
(128.6)
Impairment of plant, property and equipment and
right of use assets
(0.3)
–
–
Total depreciation and impairment of plant, property
and equipment and right of use assets
(77.9)
(23.4)
(12.5)
(0.8)
(1.2)
(11.7)
(0.5)
(2.0)
(12.2)
17.1
782.5
799.6
–
911.6
911.6
(3.5)
(2.9)
(6.4)
0.1
313.2
313.3
Amortisation of intangible assets arising on
acquisition
Amortisation of other intangible assets
Total amortisation and impairment of intangible
assets
Segment assets
Interests in joint ventures and associates
Other segment assets***
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities***
Unallocated liabilities
Consolidated total liabilities
(641.2)
(187.7)
(224.7)
(53.2)
(182.3)
–
(5.2)
–
(0.1)
(0.1)
0.4
60.8
61.2
–
(0.3)
(9.9)
(128.9)
–
(6.6)
(16.0)
(11.3)
(6.6)
(27.3)
–
227.5
227.5
17.6
2,295.6
2,313.2
420.8
2,734.0
(1,289.1)
(436.5)
(1,725.6)
*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and
corporate intangible assets.
The depreciation charge in the UK&E segment has increased to £77.6m (2020: £61.6m) due to additional property leases together with the
timing of renewals on existing leases on the Asylum Accommodation and Support Services Contract (AASC).
Year ended 31 December 2020
Revenue
Result
Trading Profit/(Loss) from operations*
Amortisation and impairment of intangibles arising
on acquisition
Operating profit/(loss) before exceptional items
Exceptional profit on disposal of subsidiaries and
operations
Other exceptional operating items**
Operating profit/(loss)
Investment revenue
Finance costs
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year
UK&E
£m
1,777.4
Americas
£m
1,064.3
69.6
(2.0)
67.6
11.0
1.0
79.6
100.8
(7.0)
93.8
–
1.4
95.2
AsPac
£m
718.9
32.6
–
32.6
–
(0.8)
31.8
Middle East
£m
Corporate
£m
Total
£m
324.2
–
3,884.8
13.9
–
13.9
–
–
13.9
(41.2)
–
(41.2)
–
(0.1)
(41.3)
175.7
(9.0)
166.7
11.0
1.5
179.2
1.9
(27.8)
153.3
(18.9)
(0.4)
134.0
* Trading Profit/(Loss) is defined as operating profit/(loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.
** Exceptional restructuring costs incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider
business. Included within Other exceptional operating items are total acquisition related costs of £2.4m.
210 Serco Group plc
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and equipment and right of use assets
(62.3)
(22.5)
Year ended 31 December 2020
Supplementary information
Share of profits in joint ventures and associates, net
of interest and tax
Depreciation of plant, property and equipment and
right of use assets
Impairment of plant, property and equipment and
right of use assets
Total depreciation and impairment of plant, property
Amortisation of intangible assets arising on
acquisition
Amortisation of other intangible assets
Total amortisation and impairment of intangible
assets
Segment assets
Interests in joint ventures and associates
Other segment assets***
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities***
Unallocated liabilities
Consolidated total liabilities
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Corporate
£m
Total
£m
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
12.7
(61.6)
(0.7)
–
(22.5)
–
(2.0)
(0.7)
(2.7)
18.7
750.9
769.6
(7.0)
(0.6)
(7.6)
–
675.3
675.3
–
(9.6)
–
(9.6)
–
(3.0)
(3.0)
0.1
274.4
274.5
–
(7.6)
–
(7.6)
–
(0.4)
(0.4)
0.4
87.9
88.3
(626.6)
(185.0)
(200.0)
(66.7)
(170.3)
–
12.7
(8.1)
(109.4)
–
(8.1)
–
(9.3)
(9.3)
–
174.3
174.3
(0.7)
(110.1)
(9.0)
(14.0)
(23.0)
19.2
1,962.8
1,982.0
428.3
2,410.3
(1,248.6)
(446.7)
(1,695.3)
*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and
corporate intangible assets.
5. List of principal undertakings
The following are considered to be the principal undertakings of the Group as at the year end:
Principal subsidiaries
United Kingdom
Australia
USA
Serco Limited
Serco Australia Pty Limited
Serco Inc.
Principal joint ventures and associates*
United Kingdom
Merseyrail Services Holding Company Limited
2021
100%
100%
100%
2021
50%
2020
100%
100%
100%
2020
50%
* Following the termination of services provided by the Group through AWE Management Limited, it is no longer considered a principal associate (see note 6).
A full list of subsidiaries and related undertakings is included in the Appendix on pages 259 to 261 which form part of the financial statements.
Annual Report and Accounts 2021
Serco Group plc
211
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
6. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding Company Limited (MSHCL) were the only equity accounted entities
which were material to the Group during the year or prior year. Dividends of £13.5m (2020: £15.5m) and £nil (2020: £1.5m), respectively, were
received from these companies in the year. The low level of dividends received in respect of MSHCL were due to lower passenger volumes
which were negatively impacted by Covid-19.
As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services
provided by the Group through AWEML on 30 June 2021.
As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been
awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD)
Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.
Summarised financial information of AWEML and MSHCL, and an aggregation of the other equity accounted entities in which the Group has
an interest in is as follows:
31 December 2021
Summarised financial information
Revenue
Operating profit/(loss)
Net finance cost
Income tax (charge)/credit
Profit/(loss) from operations
Other comprehensive income
Total comprehensive income/(expense)
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Proportion of Group ownership
Carrying amount of investment
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
Group portion
of material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
638.7
49.6
–
(12.0)
37.6
–
37.6
–
8.5
(1.7)
–
6.8
24.5%
1.7
161.0
237.0
(0.8)
(0.1)
0.3
(0.6)
6.6
6.0
13.9
43.4
(23.6)
(4.0)
29.7
50.0%
14.9
11.8
(0.1)
(2.8)
8.9
3.3
12.2
7.0
23.8
(12.2)
(2.0)
16.6
–
16.6
1.4
(0.3)
–
0.1
(0.2)
–
(0.2)
0.2
7.7
(3.9)
(3.0)
1.0
–
1.0
* Total results of the entity multiplied by the respective proportion of Group ownership.
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
Group portion
of material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
Cash and cash equivalents
Current financial liabilities excluding trade and other
payables and provisions
Non-current financial liabilities excluding trade and other
payables and provisions
Depreciation and amortisation
Interest income
Interest expense
8.5
(0.3)
–
–
–
–
28.9
16.5
4.7
(5.3)
(2.9)
(5.8)
–
(0.2)
(2.7)
(1.5)
(2.9)
–
(0.1)
–
–
–
–
–
* Total results of the entity multiplied by the respective proportion of Group ownership.
Total
£m
238.4
11.5
(0.1)
(2.7)
8.7
3.3
12.0
7.2
31.5
(16.1)
(5.0)
17.6
–
17.6
Total
£m
21.2
(2.7)
(1.5)
(2.9)
–
(0.1)
212 Serco Group plc
Annual Report and Accounts 2021
The Group’s share of liabilities within joint ventures and associates is £21.1m (2020: £224.5m). In 2020, £163.1m relates to a defined benefit
pension obligation against which Serco is fully indemnified. As a result of the Ministry of Defence’s termination of the Management &
Operations contract with AWEML, the gross obligation no longer exists. The remaining liabilities include £3.9m of lease obligations (2020:
£6.2m) and the balance is trade and other payables which arise as part of the day-to-day operations carried out by those entities. Other than
liabilities associated with leases, the Group has no material exposure to third party debt or other financing arrangements within any of its joint
ventures and associates.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Certain employees of the group headed by MSHCL are members of a sponsored defined benefit pension scheme. Given the significance of
the scheme to understanding the position of the entities, the following key disclosures are made:
Main assumptions: 2021
Rate of salary increases (%)
Inflation assumption (CPI %) – pre-retirement
Inflation assumption (CPI %) – post-retirement
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustment*
Net retirement benefit obligation
MSHCL
3.25%
2.35%
2.85%
1.80%
Nil
N/A
N/A
£m
(468.4)
280.9
(187.5)
75.0
112.5
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The deficit reflected in the financial statements of MSHCL covers only that portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In addition, the defined benefit position reflects an adjustment in respect of funding
required to be provided by employees.
31 December 2020
Summarised financial information
Revenue
Operating profit/(loss)
Net investment revenue/(finance cost)
Income tax (charge)/credit
Profit/(loss) from operations
Other comprehensive income
Total comprehensive income/(expense)
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Proportion of Group ownership
Carrying amount of investment
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
Group portion
of material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
1,106.8
150.7
346.5
18.6
75.0
0.3
(14.0)
61.3
–
61.3
668.1
191.4
(169.2)
(665.9)
24.4
24.5%
6.0
(5.7)
(0.1)
1.5
(4.3)
5.3
1.0
19.1
43.2
(29.6)
(8.5)
24.2
50.0%
12.1
15.5
–
(2.7)
12.8
2.7
15.5
173.3
68.5
(56.3)
(167.4)
18.1
–
18.1
(0.1)
–
–
(0.1)
–
(0.1)
0.1
1.8
(0.8)
–
1.1
–
1.1
Total
£m
365.1
15.4
–
(2.7)
12.7
2.7
15.4
173.4
70.3
(57.1)
(167.4)
19.2
–
19.2
* Total results of the entity multiplied by the respective proportion of Group ownership.
Annual Report and Accounts 2021
Serco Group plc
213
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
6. Joint ventures and associates continued
Cash and cash equivalents
Current financial liabilities excluding trade and other
payables and provisions
Non-current financial liabilities excluding trade and other
payables and provisions
Depreciation and amortisation
Interest income
Interest expense
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
Group portion
of material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
119.8
(0.6)
–
–
0.3
–
22.5
40.6
(5.5)
(7.7)
(6.1)
0.1
(0.2)
(2.9)
(3.8)
(3.1)
0.1
(0.1)
0.8
0.1
–
(0.4)
–
–
Total
£m
41.4
(2.8)
(3.8)
(3.5)
0.1
(0.1)
* Total results of the entity multiplied by the respective proportion of Group ownership.
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
Main assumptions: 2020
Rate of salary increases (%)
Inflation assumption (CPI %)
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustment*
Related asset, right to reimbursement
Net retirement benefit obligation
AWEML
MSHCL
1.9%
1.9%
1.5%
23.0
25.1
£m
(2,597.7)
1,931.8
(665.9)
–
–
665.9
–
2.8%
1.9%
2.4%
N/A
N/A
£m
(450.5)
233.8
(216.7)
86.7
130.0
–
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
7. Acquisitions
On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (FFA), for
consideration of AU Dollars $52.2m (£29.6m) in cash, subject to standard working capital and completion adjustments. The acquired net
assets included AU Dollars $3.6m (£2.1m) of cash resulting in a net cash outflow on acquisition of AU Dollars $48.6m (£27.5m). At the same
time, the Group transferred AU Dollars $25.2m (£14.3m) to allow FFA to settle existing debt and debt-like balances. FFA is a specialist provider
of cleaning, facility maintenance and management services in Australia. The operating results, assets and liabilities have been recognised
effective 4 January 2021.
FFA contributed post acquisition the following amounts have been recognised, AU Dollars $206.8m (£112.8m) of revenue and AU Dollars
$5.7m (£3.1m) of operating profit before exceptional items, including an appropriate allocation of charges for shared support services and fully
allocated overheads, to the Group’s results during the year to 31 December 2021.
On 27 April 2021, the Group acquired 100% of the issued share capital of Whitney, Bradley & Brown, Inc (WBB) for US Dollars $300.5m
(£211.9m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included US Dollars $7.2m (£5.1m)
of cash resulting in a net cash outflow on acquisition of US Dollars $293.3m (£206.8m). The acquisition will increase the scale, breadth and
capability of Serco’s North American Defence business and will give Serco a strong platform from which to address all major segments of the
US Defence services market. The operating results, assets and liabilities have been recognised effective 27 April 2021.
WBB contributed US Dollars $135.8m (£98.5m) of revenue and US Dollars $7.5m (£5.5m) of operating profit before exceptional items, including
an appropriate allocation of charges for shared support services and fully allocated overheads, to the Group’s results during the year to
31 December 2021.
214 Serco Group plc
Annual Report and Accounts 2021
On 30 June 2021, the Group acquired 100% of the issued share capital of Mercurius Finance S.A., the holding company of Clemaco Trading
N.V., Clemaco Contracting N.V. and Targets N.V. (together Clemaco), for €7.8m (£6.7m) in cash, subject to standard working capital and
completion adjustments. The acquired net assets included €7.1m (£6.1m) of cash resulting in a net cash outflow on acquisition of €0.7m
(£0.6m). Clemaco specialises in the support and maintenance of ships for the Belgian Navy, enabling Serco to provide additional value to
existing Serco and Clemaco customers and expanding the Group’s existing activities with the Belgian Navy. The operating results, assets and
liabilities have been recognised effective 30 June 2021.
i
S
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a
t
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g
c
R
e
p
o
r
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Clemaco contributed €5.4m (£4.6m) of revenue and €0.2m (£0.2m) of operating profit before exceptional items, including an appropriate
allocation of charges for shared support services and fully allocated overheads, to the Group’s results during the year to 31 December 2021.
Based on estimates made of the full year impact of the acquisition of WBB and Clemaco, had the acquisitions taken place on 1 January 2021,
Group revenue and operating profit before exceptional items for the period would have increased by approximately £58.9m and £4.6m
respectively, taking total Group revenue to £4,483.5m and total Group operating profit before exceptional items to £222.0m. Due to the
date of acquisition of FFA, the annualised impact is not considered to be materially different to the results already included in the
financial statements.
Provisional fair values
Goodwill
Other intangible assets
Property, plant and equipment
Right of use assets
Retirement benefit assets
Inventories
Trade and other receivables
Cash and cash equivalents
Corporation tax assets
Trade and other payables
Provisions
Retirement benefit obligations
Loans
Corporation tax liabilities
Deferred tax liabilities
Lease obligations
Acquisition date fair value of consideration transferred
Satisfied by:
Cash
Total consideration
FFA
£m
29.7
19.8
1.6
2.3
1.3
0.1
14.9
2.1
–
(19.2)
(1.7)
(2.7)
(14.3)
(0.7)
(1.3)
(2.3)
29.6
29.6
29.6
WBB
£m
148.6
62.4
2.0
7.6
–
–
22.5
5.1
0.1
(15.3)
(1.0)
–
–
–
(8.6)
(11.5)
211.9
211.9
211.9
Clemaco
£m
0.5
–
0.1
–
–
–
1.3
6.1
0.1
(1.4)
–
–
–
–
–
–
6.7
6.7
6.7
Total
£m
178.8
82.2
3.7
9.9
1.3
0.1
38.7
13.3
0.2
(35.9)
(2.7)
(2.7)
(14.3)
(0.7)
(9.9)
(13.8)
248.2
248.2
248.2
Goodwill on the acquisitions of FFA and WBB represents the premium associated with expanding the Group’s capabilities in the relevant
sectors and geographical locations in which the acquired companies operate. For FFA, this represents scale within facilities management in
Australia, whilst for WBB it relates to the increased presence in the US defence market as well as considerable expertise in complementary
areas. No tax deductions related to the goodwill arising on either transaction are available. The acquisition related intangibles represent
customer relationships which have been valued using our best estimate of forecast cash flows discounted to present value and, in the case of
WBB, certain software related assets and the brand names associated with them.
The total impact of acquisitions to the Group’s cash flow position in the period was as follows:
Cash consideration in respect of current period acquisitions:
FFA
WBB
Clemaco
Net cash outflow in relation to acquisitions
Exceptional acquisition related costs
Net cash impact in the year on acquisitions
£m
27.5
206.8
0.6
234.9
(4.9)
230.0
Costs associated with the acquisitions of both FFA and WBB are shown as exceptional costs in the Consolidated Income Statement. The total
acquisition related costs recognised in exceptional items for the year ended 31 December 2021 was £4.9m. There were no material costs
associated with the acquisition of Clemaco during the year.
Annual Report and Accounts 2021
Serco Group plc
215
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
8. Revenue from contracts with customers
Revenue
Information regarding the Group’s major customers and a segmental analysis of revenue is provided in note 4.
An analysis of the Group’s revenue from its key market sectors, together with the timing of revenue recognition across the Group’s revenue
from contracts with customers, is as follows:
Year ended 31 December 2021
Key sectors
Defence
Justice & Immigration
Transport
Health & Other Facilities Management
Citizen Services
Timing of revenue recognition
Revenue recognised from performance obligations
satisfied in previous periods
Revenue recognised at a point in time
Products and services transferred over time
Year ended 31 December 2020 (restated*)
Key sectors
Defence
Justice & Immigration
Transport
Health & Facilities Management
Citizen Services
Timing of revenue recognition
Revenue recognised from performance obligations
satisfied in previous periods
Revenue recognised at a point in time
Products and services transferred over time
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Total
£m
262.2
468.9
149.3
260.9
990.3
764.6
–
79.9
–
275.5
2,131.6
1,120.0
2.5
17.3
2,111.8
2,131.6
UK&E
£m
243.7
393.7
143.3
247.8
748.9
–
–
1,120.0
1,120.0
Americas
£m
725.2
–
84.7
–
254.4
1,777.4
1,064.3
1.1
14.2
1,762.1
1,777.4
–
–
1,064.3
1,064.3
145.6
374.2
7.3
220.3
161.0
908.4
6.6
8.4
893.4
908.4
AsPac
£m
133.3
328.1
7.7
110.0
139.8
718.9
(0.8)
0.8
718.9
718.9
31.4
–
135.6
94.4
3.2
264.6
–
–
264.6
264.6
Middle East
£m
27.0
–
194.2
102.8
0.2
324.2
–
–
324.2
324.2
1,203.8
843.1
372.1
575.6
1,430.0
4,424.6
9.1
25.7
4,389.8
4,424.6
Total
£m
1,129.2
721.8
429.9
460.6
1,143.3
3,884.8
0.3
15.0
3,869.5
3,884.8
* The prior period balances have been restated to ensure consistent application of the sector definitions used for the current period. This follows a review in 2021 of the
Group’s sector definitions to align with the strategic objectives of the Group. The change has no impact to the income statement or the balance sheet of the Group.
Transaction price allocated to remaining performance obligations
The following table shows the transaction price allocated to remaining performance obligations. This represents revenue expected to be
recognised in subsequent periods arising on existing contractual arrangements.
In assessing the future transaction price, the judgements of most relevance are the future term over which the transaction price is calculated
and the estimation of variable revenue to be included.
Where a contract with a customer includes, within the term of the committed contract, provisions for price-rebasing or a provision for market
testing, revenue beyond these is included to the extent that there are no indicators which suggest that the contract will not continue past
this point and it is highly probable that a significant reduction will not occur. Where there is a requirement for the Group, or a customer, to
enter into a new contract, rather than continuing an existing contract, such an extension is not included for the purposes of calculating future
transaction price.
Additionally, the Group has a small subset of contracts that contain a termination for convenience clause, for example due to national security
considerations which are assumed by the Group not to be without cause. These contracts are considered to run for the full intended term
for the purpose of calculating the transaction price allocated to remaining performance obligations, other than instances where the Group
believes that termination will occur before the original contract end date.
216 Serco Group plc
Annual Report and Accounts 2021
Under the terms of certain contracts which the Group has with its customers, the Group’s compensation for providing those services is
based on volumes or other drivers of variable activity, such as additional activities awarded under existing contracts. These volumes are
not guaranteed, however based on historic volumes and the nature of the contracts in operation, such as the provision of asylum seeker
accommodation or passenger transport, Management are able to prepare a sufficiently reliable estimate of the minimum level of variable
revenue that is likely to be earned. As a result, variable revenue is included only to the level at which Management remain confident that a
significant reduction will not occur.
i
S
t
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a
t
e
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c
R
e
p
o
r
t
As part of the considerations around variable revenue, Management consider the impact that factors such as contractual performance,
anticipated demand and pricing (including indexation) may have on future revenue recognised. Management also consider whether there are
possible impacts from climate change and other environmental related risks, with certain sectors considered to be more at risk than others,
however no adjustment was identified in relation to existing contracts’ future revenue forecasts.
Within 1 year (2022)
Between 2 – 5 years (2023 – 2026)
5 years and beyond (2027+)
UK&E
£m
1,580.1
3,666.7
3,340.1
8,586.9
Americas
£m
597.3
195.4
118.4
911.1
AsPac
£m
803.1
1,524.5
1,456.6
3,784.2
Middle East
£m
135.4
193.9
118.4
447.7
Total
£m
3,115.9
5,580.5
5,033.5
13,729.9
9. Exceptional items
Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either
by virtue of size or nature. As such, the items set out below require separate disclosure on the face of the income statement to assist in the
understanding of the performance of the Group.
For the year ended 31 December
Exceptional items arising
Exceptional profit on disposal of subsidiaries and operations
Other exceptional operating items
Restructuring costs
Costs associated with UK Government review
Increase in onerous lease provision
Movement in other provisions and other items
Reversal of impairment in interest in joint venture and related loan balances
Costs associated with successful acquisition
Profit on sale of investments
Other exceptional operating items
Exceptional operating items
Exceptional tax
Total exceptional operating items net of tax
2021
£m
–
0.1
–
(0.6)
–
–
(4.9)
4.2
(1.2)
(1.2)
(0.2)
(1.4)
2020
£m
11.0
0.1
(1.3)
–
2.6
2.5
(2.4)
–
1.5
12.5
(0.4)
12.1
Other exceptional operating items
The Group completed the acquisition of Facilities First Australia Holdings Pty Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB) in 2021.
The combined transaction and implementation costs incurred during the year ended 31 December 2021 of £4.9m have been treated as
exceptional costs in line with the Group’s accounting policy and the treatment of similar costs during the year ended 31 December 2020.
During 2021, the Group sold an investment recording a profit of £4.2m which was treated as exceptional in line with the Group’s accounting
policy.
The Group has recorded an additional £0.6m property provision related to the onerous lease of a building to cover the expected loss until
March 2025. The building was vacated following the strategy review completed in 2014 and therefore the associated cost is treated as
exceptional.
Exceptional costs of £1.3m were recorded in 2020 associated with the UK Government review and the programme of Corporate Renewal.
No such costs were incurred in the current financial year.
Annual Report and Accounts 2021
Serco Group plc
217
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
9. Exceptional items continued
Exceptional tax
Exceptional tax for the year was a charge of £0.2m (2020: £0.4m charge) which arises on exceptional items within operating profit.
The tax charge on exceptional costs has been increased as an element of the exceptional costs associated with the WBB acquisition were not
allowable for tax. This is partially offset by previously unrecognised capital losses in Australia that were utilised against the gain arising from the
sale of an investment reducing the charge.
10. Operating profit
Operating profit is stated after charging/(crediting):
Year ended 31 December
Research and development costs
Profit on disposal of property, plant and equipment
Profit on early termination of leases
Loss on disposal of intangible assets
Depreciation and impairment of property, plant and equipment
Depreciation and impairment of right of use assets
Amortisation and impairment of intangible assets – arising on acquisition
Amortisation, write down and impairment of intangible assets – other
Exceptional profit on disposal of subsidiaries and operations
Staff costs (note 11)
Allowance for doubtful debts charged to income statement
Net foreign exchange charge
Movement on non-designated hedges and reclassified cash flow hedges
Lease payments recognised through operating profit *
Operating lease income from sub-leases
2021
£m
1.2
(0.2)
(0.6)
1.6
19.9
109.0
16.0
11.3
–
2,000.5
0.4
0.5
–
2.8
(1.5)
2020
£m
1.8
(0.4)
(2.9)
0.6
16.2
93.9
9.0
14.0
11.0
1,753.9
1.9
0.3
(0.3)
5.6
(1.6)
* The lease payments recognised in operating profit are those which have not been recorded in accordance with IFRS16 Leases due to their status as either short-term or
low value.
Amounts payable by the Company and its subsidiary undertakings in respect of audit and non-audit services to the Company’s Auditor are
shown below.
Year ended 31 December
Fees payable to the Company’s Auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s Auditor and their associates for other services to the Group:
– audit of the Company’s subsidiaries pursuant to legislation
Total audit fees
– Audit-related assurance services
– Other non-audit services
Total non-audit fees
2021
£m
1.7
0.6
2.3
0.1
0.1
0.2
2020
£m
1.7
0.6
2.3
0.2
–
0.2
Fees payable to the Company’s Auditor for non-audit services to the Company are not required to be disclosed separately because the
Consolidated Financial Statements are required to disclose such fees on a consolidated basis.
Details of the Company’s policy on the use of auditors for non-audit services and how the auditor’s independence and objectivity was
safeguarded, are set out in the Audit Committee Report on page 128. No services were provided pursuant to contingent fee arrangements.
218 Serco Group plc
Annual Report and Accounts 2021
11. Staff costs
The average number of persons employed by the Group (including Executive Directors) was:
Year ended 31 December
UK & Europe
Americas
AsPac
Middle East
Unallocated
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2021
number
22,377
8,693
15,438
3,518
858
50,884
2020
number
20,649
8,014
11,740
4,198
729
45,330
The average number of persons employed includes all permanent employees and those with fixed term contracts. It excludes self-employed
contractors and other casual workers.
Aggregate remuneration of all employees based on the average number of employees reported above was:
Year ended 31 December
Wages and salaries
Social security costs
Other pension costs (note 30)
Share based payment expense (note 34)
12. Investment revenue
Year ended 31 December
Interest receivable on other loans and deposits
Net interest receivable on retirement benefit obligations (note 30)
Other dividends received
Movement in discount on other debtors
13. Finance costs
Year ended 31 December
Interest payable on lease liabilities
Interest payable on other loans
Facility fees and other charges
Movement in discount on provisions
Foreign exchange on financing activities
2021
£m
1,759.7
127.4
97.6
1,984.7
15.8
2,000.5
2020
£m
1,547.3
111.0
84.4
1,742.7
11.2
1,753.9
2021
£m
0.6
1.1
0.6
0.1
2.4
2021
£m
7.8
15.6
2.4
–
25.8
0.6
26.4
2020
£m
0.2
1.2
0.4
0.1
1.9
2020
£m
9.5
15.3
2.1
0.2
27.1
0.7
27.8
Annual Report and Accounts 2021
Serco Group plc
219
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
14. Tax
14 (a) Income tax recognised in the income statement
Year ended 31 December
Current income tax
Current income tax charge
Adjustments in respect of prior years
Deferred tax
Current year credit
Adjustments in respect of prior years
Before
exceptional
items
2021
£m
Exceptional
items
2021
£m
34.6
1.3
(146.5)
(1.3)
(111.9)
0.8
–
(0.6)
–
0.2
Before
exceptional
items
2020
£m
Exceptional
items
2020
£m
41.8
(1.3)
(23.5)
1.9
18.9
0.4
–
–
–
0.4
Total
2021
£m
35.4
1.3
(147.1)
(1.3)
(111.7)
The tax expense for the year can be reconciled to the profit in the Consolidated Income Statement as follows:
Year ended 31 December
Profit before tax
Tax calculated at a rate of 19.00% (2020: 19.00%)
Expenses not deductible for tax purposes*
UK unprovided deferred tax**
Other unprovided deferred tax
Effect of the use of unrecognised tax losses
Additional recognition of UK deferred
tax asset***
Overseas rate differences
Other non taxable income
Adjustments in respect of prior years****
Adjustments in respect of deferred tax on pensions
Impact of revaluing brought forward UK provided
deferred tax from 19% to 25%
Adjustments in respect of equity accounted
investments
Tax (credit)/charge
Before
exceptional
items
2021
£m
193.4
36.7
1.8
–
2.2
(0.4)
(146.4)
11.2
(4.6)
–
–
(10.8)
(1.6)
(111.9)
Exceptional
items
2021
£m
Before
exceptional
items
2020
£m
Exceptional
items
2020
£m
Total
2021
£m
192.2
140.8
(1.2)
(0.2)
0.6
–
–
(0.3)
–
0.1
–
–
–
–
–
36.5
2.4
–
2.2
(0.7)
(146.4)
11.3
(4.6)
–
–
(10.8)
(1.6)
0.2
(111.7)
26.7
6.5
(4.2)
2.5
(1.1)
(9.5)
7.2
(1.4)
0.6
(5.9)
–
(2.5)
18.9
12.5
2.4
(0.2)
(1.9)
–
–
–
0.1
–
–
–
–
–
0.4
Total
2020
£m
42.2
(1.3)
(23.5)
1.9
19.3
Total
2020
£m
153.3
29.1
6.3
(6.1)
2.5
(1.1)
(9.5)
7.3
(1.4)
0.6
(5.9)
–
(2.5)
19.3
* Relates to costs that are not allowable for tax deduction under local tax law.
** Arises due to timing differences between when an amount is recognised in the income statement and when the amount is subject to UK tax. This is nil in the current year
due to the recognition of previously unrecognised UK deferred tax assets as referred to below.
*** In the current year, the Group brought onto the balance sheet a previously unrecognised UK deferred tax asset of £144.8m at 1 January 2021. This asset was revalued
during the year giving a net adjustment of £146.4m.
**** Included within adjustments in respect of prior years for the year ended 31 December 2020, is a charge of £4.9m being an immaterial adjustment related to the deferred
tax impact of the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS16 Leases in 2019.
The income tax charge for the year is based on the UK statutory rate of corporation tax for the period of 19.00% (2020: 19.00%). Taxation for
other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Management are closely monitoring the Organisation for Economic Co-operation and Development’s Pillar II solution with regards to global
minimum corporate tax for multinational enterprises, which is expected to be enacted in 2022 with application from 1 January 2023. The
accounting implications under IAS12 will be determined when the relevant legislation is available.
220 Serco Group plc
Annual Report and Accounts 2021
14 (b) Income tax recognised in the SOCI
Year ended 31 December
Current tax
Taken to retirement benefit obligations reserves
Deferred tax
Relating to net investment hedge
Taken to retirement benefit obligations reserve
14 (c) Tax on items taken directly to equity
Year ended 31 December
Current tax
Recorded in share based payment reserve
Deferred tax
Recorded in share based payment reserve
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2021
£m
0.8
4.0
(22.5)
(17.7)
2021
£m
(0.7)
0.7
–
2020
£m
–
–
(5.9)
(5.9)
2020
£m
–
–
–
15. Deferred tax
Deferred income taxes are calculated in full on temporary differences under the liability method using local substantively enacted tax rates.
The movement in net deferred tax assets during the year was as follows:
At 1 January – asset
Income statement credit*
Items recognised in equity and in other comprehensive income
Arising on acquisition
Exchange differences
At 31 December – asset
2021
£m
(56.3)
(148.4)
17.8
9.9
3.0
(174.0)
2020
£m
(37.2)
(21.6)
5.9
–
(3.4)
(56.3)
*
Included within the income statement credit for the year ended 31 December 2020, is a charge of £4.9m being an immaterial adjustment related to the deferred tax impact
of the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS 16 Leases in 2019.
The movement in deferred tax assets and liabilities during the year was as follows:
Temporary
differences
on assets/
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Onerous
contract
provisions
£m
Other
temporary
differences
£m
Tax losses
£m
Total
£m
At 1 January 2021
(Credited)/charged to income
statement (note 14a)
Arising on acquisition of a subsidiary
Items recognised in equity and in
other comprehensive income (note
14b and 14c)
Exchange differences
At 31 December 2021
25.5
(24.7)
14.8
(11.7)
5.6
–
0.5
19.9
(7.6)
(2.4)
(0.7)
0.9
(34.5)
(0.8)
(0.4)
22.5
0.1
36.2
(0.5)
(0.3)
–
–
–
(31.1)
(40.3)
(56.3)
(127.3)
(3.3)
(0.7)
10.4
(148.4)
9.9
(4.0)
(0.3)
–
1.8
17.8
3.0
(0.8)
(166.0)
(28.8)
(174.0)
Annual Report and Accounts 2021
Serco Group plc
221
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
15. Deferred tax continued
Other temporary differences include amounts such as provisions and accruals which, under certain tax laws, are only allowable when
expended.
Of the amount credited to the income statement, £nil has been taken to costs of sales in respect of the R&D Expenditure Credit.
As it is now considered that the UK business has returned to sustainable profitability, tax losses of £662m have been valued on the balance
sheet at 31 December 2021.
The movement in deferred tax assets and liabilities during the previous year was as follows:
Temporary
differences
on assets/
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Onerous
contract
provisions
£m
Other
temporary
differences
£m
Tax losses
£m
At 1 January 2020
Charged/(credited) to income
statement (note 14a)*
Items recognised in equity and in
other comprehensive income (note
14b and 14c)
Reclassification
Exchange differences
At 31 December 2020
24.4
2.8
–
–
(1.7)
25.5
(15.6)
(6.2)
–
(2.0)
(0.9)
(24.7)
6.8
–
5.9
2.0
0.1
14.8
(1.9)
1.3
–
–
0.1
(0.5)
(21.0)
(10.1)
–
–
–
(31.1)
(29.9)
(9.4)
–
–
(1.0)
(40.3)
Total
£m
(37.2)
(21.6)
5.9
–
(3.4)
(56.3)
*
Included within other temporary differences is a charge of £4.9m being an immaterial adjustment in the year ended 31 December 2020 related to the deferred tax impact
of the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS 16 Leases in 2019.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal authority. The following analysis shows the deferred tax balances (after
offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2021
£m
40.3
(214.3)
(174.0)
2020
£m
26.9
(83.2)
(56.3)
As at the balance sheet date, the UK has a potential deferred tax asset of £234.3m (2020: £189.9m) available for offset against future profits.
A deferred tax asset has currently been recognised of £162.8m (2020: £30.6m). Recognition has been based on there being sufficient certainty
of future taxable profits against which these deductions can be utilised. No deferred tax asset has been recognised in respect of the remaining
asset (net £71.5m) as they are more restricted in their use either due to their nature, such as capital losses, or the period and entity in which
they arose, as revenue losses made before April 2017 are more restricted in their use. On 24 May 2021 legislation which increases the UK tax
rate from 19% to 25% from April 2023 was substantively enacted. These measures increase the Group’s future current tax charge accordingly.
The deferred tax balance at 31 December 2021 has been calculated reflecting the increased rate of 25% where the balance is expected to be
realised after April 2023.
Losses of £1.3m (2020: £0.1m) expire within 5 years, losses of £0.1m (2020: £0.5m) expire within 6-10 years, losses of £nil (2020: £0.7m) expire
within 20 years and losses of £1,077.4m (2020: £1,052.3m) may be carried forward indefinitely.
222 Serco Group plc
Annual Report and Accounts 2021
16. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS 33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares
Weighted average number of ordinary shares for the purpose of basic EPS
Effect of dilutive potential ordinary shares: Shares under award
Weighted average number of ordinary shares for the purpose of diluted EPS
2021
millions
1,222.6
21.4
1,244.0
2020
millions
1,229.1
25.2
1,254.3
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Earnings per share
Basic EPS
Earnings for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Diluted EPS
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS
Add back exceptional items
Add back tax on exceptional items
Earnings excluding exceptional items for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Excluding exceptional items, diluted
Earnings
2021
£m
Per share amount
2021
pence
Earnings
2020
£m
Per share amount
2020
pence
303.9
–
303.9
303.9
1.2
0.2
305.3
–
305.3
24.86
(0.43)
24.43
24.86
0.10
0.01
24.97
(0.43)
24.54
133.8
–
133.8
133.8
(12.5)
0.4
121.7
–
121.7
10.89
(0.22)
10.67
10.89
(1.02)
0.03
9.90
(0.20)
9.70
17. Goodwill
At 1 January 2020
Exchange differences
At 31 December 2020
Acquisitions
Exchange differences
At 31 December 2021
Accumulated
impairment
losses
£m
Carrying amount
£m
(331.8)
7.0
(324.8)
–
(2.7)
(327.5)
674.2
(4.6)
669.6
178.8
4.3
852.7
Cost
£m
1,006.0
(11.6)
994.4
178.8
7.0
1,180.2
Movements in the balance since the prior year end can be seen as follows:
UK & Europe
Americas
AsPac
Middle East
Goodwill
balance
1 January
2021
£m
184.4
366.7
108.6
9.9
669.6
Acquisitions
£m
0.5
148.6
29.7
–
178.8
Exchange
differences
2021
£m
Goodwill
balance
31 December
2021
£m
Headroom on
impairment
analysis
2021
£m
Headroom on
impairment
analysis
2020
£m
(1.3)
12.5
(7.0)
0.1
4.3
183.6
527.8
131.3
10.0
852.7
728.0
415.8
380.6
103.6
688.5
658.3
328.0
103.2
1,628.0
1,778.0
Included above is the detail of the headroom on the cash generating units (CGUs) existing at the year end, which reflects where future
discounted cash flows are greater than the underlying assets and includes all relevant cash flows, including where provisions have been made
for future costs and losses. Headroom overall has decreased compared to 2020 driven primarily by the movement in cash flows in the Americas
CGU compounded by an increase in discount and terminal growth rates. The UK & Europe and AsPac CGUs have both seen increases in
headroom as improvements to future cash flows have outweighed the impact of discount rates.
Annual Report and Accounts 2021
Serco Group plc
223
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
17. Goodwill continued
The key quantifiable assumptions applied in the impairment review are set out below:
UK & Europe
Americas
AsPac
Middle East
Discount rate
2021
%
Discount rate
2020
%
Terminal growth
rates
2021
%
Terminal growth
rates
2020
%
9.3
10.9
11.0
12.1
8.6
10.7
10.1
12.1
2.0
2.4
2.2
1.3
1.9
2.5
2.2
1.6
* The financial statements for the year ended December 2020 disclosed different discount rates to those used in the underlying impairment analysis. These have therefore
been restated, but this has no impact on the conclusions regarding impairment.
Discount rate
Pre-tax discount rates derived from the Group’s post-tax weighted average cost of capital have been used in discounting the projected cash
flows. These rates are reviewed annually with external advisers and are adjusted for risks specific to the market in which the CGU operates.
Discount rates used in 2021 have increased compared with 2020 with the exception of the Middle East where the rate has remained flat.
The change can be attributed to an increase in the equity risk premium (ERP) applied by management following a return to the same margin
of ERP over the base model as was used until the end of 2019. In 2020, this margin was removed owing to the range of discount rates amongst
the Group’s peers narrowing, however a return to a wider spread of discount rates, as the pandemic eases, has allowed a return to the
previous approach.
Terminal growth rates
The calculations include a terminal value based on the projections for the fifth year of the short-term plan, with a growth rate assumption
applied which extrapolates the business into perpetuity. The terminal growth rates are based on long-term inflation rates of the geographic
market in which the CGUs operate and therefore do not exceed the average long-term growth rates forecast for the individual markets.
These are provided by external sources and have not materially changed as compared with 2020.
Short-term growth rates
The annual impairment test is performed immediately prior to the year end, based initially on five-year cash flow forecasts approved by
Management. Short-term revenue growth rates used in each CGU five-year plan are based on internal data regarding our current contracted
position, the pipeline of opportunities and forecast growth for the relevant market.
Short-term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to expected changes in
both. Where businesses have been poor performers in recent history, turnaround has only been assumed where a detailed and achievable
plan is in place and all forecasts include cash flows relating to contracts where onerous contract provisions have been made.
As explained in note 8, Management considers certain sectors in which the Group operates to be more exposed to environmental risks than
others. For example, changes in consumer attitudes to aviation or the use of private vehicles, may have an impact on the Group’s Transport
contracts. Currently, no adjustment to existing contracts is required, although Management will continue to monitor the potential impact of
environmental risks and will include these in future analysis as required.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption; a 1% movement in discount rates and a 1% movement in terminal growth
rates are considered to be reasonably possible, as has a degree of estimation uncertainty in the cash flows associated with each CGU of up
to 10% in the final year of the plan. Performing a sensitivity analysis on short-term growth rates is not a numerical exercise, as growth rates are
based on known opportunities and the likelihood of those opportunities being won and turned into resulting cash flows. However, in order
to model a sensitivity scenario that reflects the judgement associated with short-term growth rates, Management have applied a no growth
model to cash flows outside of the 2-year budget period. No impairment results from these changes, even when combined with the additional
1% increase in discount rates and 1% reduction in terminal growth rates.
Management has also considered the sensitivity of cash flows in the terminal year for the CGUs with the lowest headroom. Terminal year cash
flows would need to reduce by 56% (£12.9m) and 41% (£27.5m) in the Middle East and AsPac, respectively, before an impairment would need
to be recognised.
224 Serco Group plc
Annual Report and Accounts 2021
18. Other intangible assets
Cost
At 1 January 2021
Arising on acquisition
Additions – internal development
Additions – external
Disposals
Reclassification to property, plant and equipment
Exchange differences
At 31 December 2021
Accumulated amortisation and impairment
At 1 January 2021
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification to property, plant and equipment
Exchange differences
At 31 December 2021
Net book value
At 31 December 2021
Cost
At 1 January 2020
Additions – internal development
Additions – external
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2020
Accumulated amortisation and impairment
At 1 January 2020
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2020
Net book value
At 31 December 2020
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Acquisition
related
Other
Customer
relationships
£m
Software and IT
£m
Internally
generated
development
expenditure
£m
95.2
79.3
–
–
(1.2)
–
3.1
176.4
44.8
–
16.0
(1.2)
–
0.7
60.3
131.9
2.9
0.2
8.0
(12.1)
(0.9)
(1.2)
128.8
102.2
5.0
5.9
(10.6)
(0.5)
(1.1)
100.9
56.9
–
–
–
(1.0)
–
(0.1)
55.8
56.4
0.4
–
(0.9)
–
(0.1)
55.8
Total
£m
284.0
82.2
0.2
8.0
(14.3)
(0.9)
1.8
361.0
203.4
5.4
21.9
(12.7)
(0.5)
(0.5)
217.0
116.1
27.9
–
144.0
Acquisition
related
Other
Customer
relationships
£m
Software and IT
£m
Internally
generated
development
expenditure
£m
99.1
–
–
(1.5)
–
(2.4)
95.2
38.4
–
9.0
(1.2)
–
(1.4)
44.8
50.4
123.6
0.9
7.4
(1.8)
0.4
1.4
131.9
90.4
2.2
9.9
(1.5)
0.2
1.0
102.2
29.7
56.9
–
–
–
–
–
56.9
54.3
1.9
–
–
–
0.2
56.4
0.5
Total
£m
279.6
0.9
7.4
(3.3)
0.4
(1.0)
284.0
183.1
4.1
18.9
(2.7)
0.2
(0.2)
203.4
80.6
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £116.1m (2020: £50.4m) in relation
to customer relationships. Amortisation of intangibles arising on acquisition consists of amortisation in relation to customer relationships and
totals £16.0m (2020: £9.0m).
The net book value of internally generated intangible assets as at 31 December 2021 was £nil (2020: £0.5m) in development expenditure and
£7.8m (2020: £19.6m) in software and IT.
Annual Report and Accounts 2021
Serco Group plc
225
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
19. Property, plant and equipment and right of use assets
Land and
buildings
owned
£m
Land and
buildings
leased
£m
Leasehold
improvements
owned
£m
Cost
At 1 January 2021
Arising on acquisition
Additions
Reclassification between property, plant
and equipment categories
Reclassifications from other intangible assets
Disposals
Exchange differences
At 31 December 2021
Accumulated depreciation and
impairment
At 1 January 2021
Charge for the year – impairment
Charge for the year – depreciation
Reclassification between property, plant
and equipment categories
Reclassifications from other intangible
assets
Disposals
Exchange differences
At 31 December 2021
Net book value**
At 31 December 2021
4.3
–
0.3
–
–
(0.5)
–
4.1
2.8
–
0.2
–
–
(0.1)
(0.1)
2.8
479.5
9.0
178.9
–
–
(112.1)
0.3
555.6
141.6
–
88.7
–
–
(40.0)
0.1
190.4
1.3
365.2
31.9
1.5
2.2
–
0.6
(2.4)
(0.1)
33.7
17.5
–
3.5
–
0.5
(2.4)
(0.1)
19.0
14.7
Other
assets
owned*
£m
133.4
2.2
21.4
8.2
0.3
(29.7)
(0.9)
134.9
95.1
0.3
15.9
8.0
–
(23.3)
(0.6)
95.4
Other
assets
leased*
£m
136.4
0.9
22.1
(8.2)
–
(18.7)
(0.2)
132.3
86.8
–
20.3
(8.0)
–
(18.2)
(0.1)
80.8
Total
£m
785.5
13.6
224.9
–
0.9
(163.4)
(0.9)
860.6
343.8
0.3
128.6
–
0.5
(84.0)
(0.8)
388.4
39.5
51.5
472.2
* Other assets include machinery, vehicles, furniture and equipment.
** The net book value is shown on the balance sheet as £55.5m of owned assets in property, plant and equipment and £416.7m of leased assets in right of use assets.
The impairment charge for the year includes £nil (2020: £0.2m) charged against right of use assets arising in the year on newly entered into
leases on onerous contracts.
The additions for leased land and buildings include £3.1m (2020: £1.3m) for dilapidation provisions and £nil (2020: £0.3m credit) for non-cash
lease incentives.
Cost
At 1 January 2020
Additions
Reclassification between property, plant
and equipment categories
Reclassifications to other intangible assets
Disposals
Exchange differences
At 31 December 2020
Accumulated depreciation and
impairment
At 1 January 2020
Charge for the year – impairment
Charge for the year – depreciation
Reclassification between property, plant
and equipment categories
Reclassifications to other intangible assets
Disposals
Exchange differences
At 31 December 2020
Net book value**
At 31 December 2020
Land and
buildings
owned
£m
Land and
buildings
leased
£m
Leasehold
improvements
owned
£m
Other
assets
owned*
£m
4.6
0.2
(0.2)
–
(0.3)
–
4.3
3.0
–
0.2
(0.2)
–
(0.2)
–
2.8
1.5
424.2
134.2
0.2
–
(78.2)
(0.9)
479.5
128.3
0.2
73.7
0.2
–
(60.2)
(0.6)
141.6
337.9
33.6
4.7
–
–
(6.3)
(0.1)
31.9
20.7
–
3.1
–
–
(6.3)
–
17.5
14.4
128.3
36.9
2.5
(0.4)
(34.4)
0.5
133.4
95.5
0.3
12.6
0.5
(0.2)
(14.0)
0.4
95.1
38.3
Other
assets
leased*
£m
126.6
24.9
(2.5)
–
(12.2)
(0.4)
136.4
77.2
0.2
19.8
(0.5)
–
(9.5)
(0.4)
86.8
49.6
Total
£m
717.3
200.9
–
(0.4)
(131.4)
(0.9)
785.5
324.7
0.7
109.4
–
(0.2)
(90.2)
(0.6)
343.8
441.7
* Other assets include machinery, vehicles, furniture and equipment.
** The net book value is shown on the balance sheet as £54.2m of owned assets in property, plant and equipment and £387.5m of leased assets in right of use assets.
226 Serco Group plc
Annual Report and Accounts 2021
20. Inventories
Service spares, supplies and consumables
21. Contract assets, trade and other receivables
Contract asset: Non-current
Accrued income
Contract assets: Current
Accrued income and other unbilled receivables
Capitalised bid costs
Capitalised mobilisation and phase in costs
Other contract assets
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2021
£m
19.6
2021
£m
2.6
2021
£m
306.5
2.4
9.8
0.3
319.0
2020
£m
21.4
2020
£m
–
2020
£m
278.0
2.8
15.3
–
296.1
An Expected Credit Loss (ECL) is recognised against contract assets only when it is considered to be material and there is evidence that the
credit worthiness of a counterparty may render balances irrecoverable.
The Group’s Consolidated Balance Sheet includes capitalised bid and phase in costs that are realised as a part of the normal operating cycle
of the Group. These assets represent up-front investment in contracts which are recoverable and expected to provide benefits over the life of
those contracts. Bid costs are capitalised only when they relate directly to a contract and are incremental to securing the contract. Any costs
which would have been incurred whether or not the contract is actually won are not considered to be capitalised bid costs.
Contract costs can only be capitalised when the expenditure meets all three criteria identified in note 2.
Movements in the period were as follows:
Capitalised other contract assets, bid and phase in costs
At 1 January
Additions
Amortisation
Written off
Exchange differences
At 31 December
Total trade and other receivables held by the Group at 31 December 2021 amount to £321.9m (2020: £338.8m).
Trade and other receivables: Non-current
Trade receivables
Other investments
Prepayments
Other receivables
2021
£m
18.1
0.3
(4.0)
(1.5)
(0.4)
12.5
2021
£m
–
–
0.4
13.2
13.6
2020
£m
23.0
1.3
(6.8)
–
0.6
18.1
2020
£m
3.1
9.4
1.7
11.1
25.3
Annual Report and Accounts 2021
Serco Group plc
227
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
21. Contract assets, trade and other receivables continued
Other non-current receivables include long term employee compensation plans, advances and other non-trade receivables.
Trade and other receivables: Current
Trade receivables
Prepayments
Amounts owed by joint ventures and associates
Other receivables
2021
£m
234.4
42.9
1.7
26.7
305.7
2020
£m
244.3
45.5
0.2
23.5
313.5
Other receivables include amounts due from third parties, advances paid to suppliers and other non-trade receivables.
The management of trade receivables is the responsibility of the reportable operating segments, although they report to the Group on a
monthly basis on debtor days, debtor ageing and significant outstanding debts. The average credit period taken by customers is 19 days
(2020: 23 days) and no interest was charged on overdue amounts in the current or prior reporting period.
Each customer has an external credit score which determines the level of credit provided. However, the majority of our customers have
a sovereign credit rating as a result of being government organisations. Of the trade receivables balance at the end of the year, £68.0m
is due from agencies of the UK Government, the Group’s largest customer, £54.7m from the Australian Government, £37.9m from the US
Government and £23.8m from the Government of the United Arab Emirates. There are no other customers who represent more than 5% of the
total balance of trade receivables. Of the trade receivables balance at the end of 2020, £63.5m was due from agencies of the UK Government,
£57.1m from the Australian Government, £27.8m from the US Government and £42.7m from the Government of the United Arab Emirates.
The maximum potential exposure to credit risk in relation to trade receivables at the reporting date is equal to their carrying value. The Group
does not hold any collateral as security.
The Group does not have any material impairments associated with expected credit losses due to the sovereign credit rating of most
customers. Further specific impairments to trade receivables are based on estimated irrecoverable amounts and provisions on outstanding
balances greater than a year old unless there is firm evidence that the balance is recoverable. The total amount of these impairments for the
Group was £4.4m as of 31 December 2021 (2020: £7.0m).
Ageing of trade receivables
Not due
Overdue by less than 30 days
Overdue by between 30 and 60 days
Overdue by more than 60 days
Allowance for doubtful debts
2021
£m
191.3
25.1
8.2
14.2
(4.4)
234.4
Of the total overdue trade receivable balance, 92% (2020: 73%) relates to the Group’s four major governmental customers (being the
governments of the UK, US, Australia and the United Arab Emirates).
Movements on the Group allowance for doubtful debts
At 1 January
Arising on acquisition
Net charges and releases to income statement
Utilised
Exchange differences
At 31 December
2021
£m
7.0
1.6
0.4
(4.7)
0.1
4.4
Included in the current other receivables balance is a further £0.8m (2020: £0.2m) due from agencies of the UK Government.
2020
£m
175.5
49.1
5.5
21.2
(7.0)
244.3
2020
£m
5.5
–
1.9
(0.2)
(0.2)
7.0
228 Serco Group plc
Annual Report and Accounts 2021
22. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2021
£m
–
172.9
172.9
Other
currencies
2021
£m
0.1
25.4
25.5
Total
2021
£m
0.1
198.3
198.4
Sterling
2020
£m
–
243.6
243.6
Other
currencies
2020
£m
0.1
92.0
92.1
Total
2020
£m
0.1
335.6
335.7
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
* Customer advance payments totalling £0.1m (2020: £0.1m) are encumbered cash balances.
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other
short-term highly liquid investments with a maturity of three months or less.
23. Contract liabilities, trade and other payables
Contract liabilities: Current
Deferred income
Contract liabilities: Non-current
Deferred income
2021
£m
61.3
2021
£m
48.6
2020
£m
42.3
2020
£m
47.5
The allocation of deferred income between current and non-current is presented on the basis that the current portion will unwind in the
following twelve months through revenue. There were no material items in the current portion of deferred income in 2020 which did not
unwind during the year.
Total trade and other payables held by the Group at 31 December 2021 amount to £533.3m (2020: £543.3m).
Trade and other payables: Current
Trade payables
Other payables
Accruals
Other payables include sales and other direct taxes, payroll taxes, salaries and other non-trade payables.
The average credit period taken for trade purchases is 23 days (2020: 25 days).
Trade and other payables: Non-current
Other payables
2021
£m
89.2
123.7
313.1
526.0
2021
£m
7.3
2020
£m
99.6
134.5
299.8
533.9
2020
£m
9.4
Annual Report and Accounts 2021
Serco Group plc
229
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
24. Leases
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount. The Group uses leases in the
delivery of its contractual obligations and the services required to support the delivery of those contracts, including administrative functions.
There are no material future cash outflows relating to leases in place as at 31 December 2021 that are not reflected in the minimum lease
payments disclosed below and the Group does not have any leases to which it is contracted but which are not yet reflected in the minimum
lease payments. Additionally, the Group does not have any leases where payments are variable. The Group has a significant number of leases
which include either termination or extension options, or both. Included in amounts payable under leases below are only those amounts which
reflect Management’s view of the reasonably certain lease term in line with current operational requirements.
No lease liability is recognised in respect of leases which have a lease term of less than twelve months in duration at the point of entering into
the lease, or where the purchase price of the underlying right of use asset is less than £5,000.
The total cash outflow for leases, excluding short-term leases and low-value leases, in the year was £119.1m (2020: £110.3m). This is presented
in the Consolidated Cash Flow Statement as £111.3m (2020: £100.8m) relating to the principal element of the lease liability payments, with the
remaining balance of £7.8m (2020: £9.5m) presented within interest paid.
Amounts payable under leases
Within one year
Between one and five years
After five years
Less: future finance charges
Present value of lease obligations
Less: amount due for settlement within one year (shown within current liabilities)
Amount due for settlement after one year
The following amounts are included in the Group’s Consolidated Financial Statements in respect of its leases:
Additions to right of use assets (including transitional adjustments)
Depreciation charge on right of use assets (including transitional adjustments)
Impairment of right of use assets
Net disposals of right of use assets
Net reclassifications from right of use assets
Net exchange differences on right of use assets
Carrying amount of right of use assets
Current lease liabilities
Non-current lease liabilities
Capital element of lease repayments
Interest expense on lease liabilities
Profit on early termination of leases
Expenses relating to short-term or low-value leases
Note
19
19
19
19
19
19
19
24
24
13
10
10
Minimum lease
payments
2021
£m
Minimum lease
payments
2020
£m
131.0
263.9
53.6
448.5
(18.2)
430.3
(126.3)
304.0
2021
£m
201.0
(109.0)
–
(72.6)
(0.2)
0.1
416.7
126.3
304.0
(111.3)
(7.8)
0.6
(2.8)
115.3
228.9
90.5
434.7
(32.1)
402.6
(109.3)
293.3
2020
£m
159.1
(93.5)
(0.4)
(20.7)
(2.0)
(0.3)
387.5
109.3
293.3
(100.8)
(9.5)
2.9
(5.6)
230 Serco Group plc
Annual Report and Accounts 2021
25. Loans
Loans are repayable as follows:
On demand or within one year
Between one and two years
Between two and five years
After five years
Less: amount due for settlement within one year (shown within current liabilities)
Amount due for settlement after one year
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Total
2021
£m
64.9
40.2
160.8
111.1
377.0
(64.9)
312.1
Total
2020
£m
89.7
64.9
124.6
109.6
388.8
(89.7)
299.1
Included within amounts repayable within one year is £nil (2020: £nil) related to the draw down on the revolving credit facility. See note 22 for
cash balances available.
Loans
Carrying amount
2021
£m
Fair value
2021
£m
Carrying amount
2020
£m
377.0
389.4
388.8
Fair value
2020
£m
397.8
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised cost.
Analysis of Net Debt
The analysis below provides a reconciliation between the opening and closing positions in the balance sheet for liabilities arising from
financing activities together with movements in derivatives relating to the items included in Net Debt. There were no changes in fair value
noted in either the current or prior year.
Loans payable
Lease obligations
Liabilities arising from financing
activities
Cash and cash equivalents
Derivatives relating to Net Debt
Net Debt
At 1 January
2021
£m
(388.8)
(402.6)
(791.4)
335.7
(4.7)
(460.4)
Cash flow
£m
29.7
111.3
141.0
(145.8)
–
(4.8)
Acquisitions*
Exchange
differences
£m
Non-cash
movements**
£m
At 31 December
2021
£m
(14.3)
(13.8)
(28.1)
13.3
–
(14.8)
(2.9)
(0.5)
(3.4)
(4.8)
5.3
(2.9)
(0.7)
(124.7)
(125.4)
–
–
(125.4)
(377.0)
(430.3)
(807.3)
198.4
0.6
(608.3)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
** Non-cash movements relate to the net impact of entering into new leases and exiting certain leases before the end of the lease term without payment of a cash
termination cost.
Loans payable
Lease obligations
Liabilities arising from financing activities
Cash and cash equivalents
Derivatives relating to Net Debt
Net Debt
At 1 January
2020
£m
Cash flow
£m
Exchange
differences
£m
Non-cash
movements*
£m
At 31 December
2020
£m
(305.0)
(369.9)
(674.9)
89.5
1.0
(584.4)
(99.4)
100.8
1.4
244.4
–
245.8
15.6
0.9
16.5
1.8
(5.7)
12.6
–
(134.4)
(134.4)
–
–
(134.4)
(388.8)
(402.6)
(791.4)
335.7
(4.7)
(460.4)
* Non-cash movements relate to the net impact of entering into new leases and exiting certain leases before the end of the lease term without payment of a cash
termination cost.
Annual Report and Accounts 2021
Serco Group plc
231
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
26. Provisions
At 1 January 2021
Arising on acquisition
Transferred from working capital
Charged to income statement – exceptional
Charged to income statement – other
Released to income statement – exceptional
Released to income statement – other
Included in the valuation of right of use asset
Utilised during the year
Exchange differences
At 31 December 2021
Analysed as:
Current
Non-current
Employee
related
£m
83.2
1.7
2.1
–
18.3
(0.1)
(6.2)
–
(22.6)
(2.6)
73.8
29.2
44.6
73.8
Property
£m
Contract
£m
Other
£m
15.7
0.9
–
0.6
4.4
–
(4.2)
3.1
(1.0)
(0.2)
19.3
5.7
13.6
19.3
14.5
–
–
–
2.1
–
(2.1)
–
(0.3)
–
14.2
14.0
0.2
14.2
64.6
0.1
23.2
–
14.8
(0.3)
(8.5)
–
(3.6)
–
90.3
30.7
59.6
90.3
Total
£m
178.0
2.7
25.3
0.6
39.6
(0.4)
(21.0)
3.1
(27.5)
(2.8)
197.6
79.6
118.0
197.6
Employee related provisions include amounts for long-term service awards and terminal gratuity liabilities which have been accrued and are
based on contractual entitlement, together with an estimate of the probabilities that employees will stay until rewards fall due and receive all
relevant amounts. There are also amounts included in relation to restructuring. The provisions will be utilised over various periods driven by
local legal or regulatory requirements, the timing of which is not certain.
The majority of property provisions relate to leased properties and are associated with the requirement to return properties to either their
original condition, or to enact specific improvement activities in advance of exiting the lease. Dilapidations associated with leased properties
are held as a provision until such time as they fall due, with the longest running lease ending in January 2037.
A contract provision is recorded when a contract is deemed not be profitable and therefore is considered onerous. The present value of
the estimated future cash outflow required to settle the contract obligations as they fall due over the respective contracts has been used in
determining the provision. Individual provisions are only discounted where the impact is assessed to be significant. Currently, no contract
provisions are discounted. Discount rates are calculated based on the estimate risk-free rate of interest for the region in which the provision is
located and matched against the ageing profit of the provision.
Included within other provisions is:
– £43.0m related to indemnities provided in respect of a historic business transaction. Within this amount, £36.0m is reserved for
potential tax liabilities arising within the disposed company when local tax submissions are reviewed by the relevant authorities which
represents Management’s best estimate of the likely outcome based on past experiences and other known factors. Under the
indemnity, £36.0m is the Group’s maximum potential exposure to these tax matters. The timing of utilisation is dependent on future
events which could occur within the next twelve months, or over a longer period, with the majority expected to be settled by
31 December 2023.
– £20.1m related to claims made against the Group. These claims are varied in nature, although they typically come from either the
Group’s service users, claimants for vehicle related incidents or the Group’s employees. Whilst there is some level of judgement on the
amount to be recorded, in almost all instances the variance to the actual claim paid out will not individually be material, however the
timing of when the claims are reported and settled is less certain as a process needs to be followed prior to the amounts being paid.
The Group has decided to reclassify these claim liabilities from other payables to other provisions during 2021 as, although the liability
is materially accurate, there is sufficient uncertainty associated with the timing of settlement. The claim liabilities reported in other
payables in 2020 was £19.8m. The adjustment was made in the current year and no prior year adjustment was considered necessary
since it was concluded that the balance sheet reclassification did not constitute a material prior period error that required restatement.
– £27.2m related to legal and other costs that the Group expects to incur over an extended period, in respect of past events for which a
provision has been recorded, none of which are individually material.
232 Serco Group plc
Annual Report and Accounts 2021
27. Capital and other commitments
Capital expenditure contracted but not provided
Property, plant and equipment
Intangible assets
2021
£m
1.2
0.8
2020
£m
6.6
3.4
i
S
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a
t
e
g
c
R
e
p
o
r
t
28. Contingent liabilities
The Group has guaranteed overdrafts, leases, and bonding facilities of its joint ventures and associates up to a maximum value of £5.7m
(2020: £3.8m). The actual commitment outstanding at 31 December 2021 was £5.7m (2020: £3.8m).
The Group has provided certain guarantees and indemnities in respect of performance and other bonds, issued by its banks on its behalf in
the ordinary course of business. The total commitment outstanding as at 31 December 2021 was £263.8m (2020: £247.9m).
Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of
any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant
uncertainties. The Group does not currently assess the merits as strong, especially given the legal uncertainties in such actions.
The Group is also aware of other claims and potential claims which involve or may involve legal proceedings against the Group although
the timing of settlement of these claims remains uncertain. The Directors are of the opinion, having regard to legal advice received and the
Group’s insurance arrangements, that it is unlikely that these matters will, in aggregate, have a material effect on the Group’s financial position.
29. Financial risk management
29 (a) Fair value of financial instruments
i) Hierarchy of fair value
The vast majority of financial instruments are held at amortised cost. The classification of the fair value measurement falls into three levels,
based on the degree to which the fair value is observable. The levels are as follows:
Level 1: Inputs derived from unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable inputs for the asset or liability.
Based on the above, the derivative financial instruments held by the Group at 31 December 2021 and the comparison fair values for loans
and leases, are all considered to fall into Level 2. Market prices are sourced from Bloomberg and third party valuations. The valuation models
incorporate various inputs including foreign exchange spot and forward rates and interest rate curves.
There have been no transfers between levels in the year.
Annual Report and Accounts 2021
Serco Group plc
233
Financial StatementsCorporate Governance
Notes to the Consolidated Financial Statements
continued
29. Financial risk management continued
The Group held the following financial instruments which fall within the scope of IFRS 9 Financial Instruments at 31 December:
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Amortised cost
2021
£m
Fair value –
Level 2
2021
£m
2021
£m
Amortised cost
2020
£m
Fair value –
Level 2
2020
£m
Financial assets
Financial assets – current
Cash and bank balances
Derivatives designated as FVTPL
Forward foreign exchange contracts
Receivables
Trade receivables (note 21)
Amounts owed by joint ventures and
associates (note 21)
Financial assets – non-current
Receivables
Trade receivables (note 21)
Other investments (note 21)
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated
hedge accounting relationships
Forward foreign exchange contracts
Financial liabilities at amortised cost
Trade payables (note 23)
Loans (note 25)
Lease obligations (note 24)
Financial liabilities – non-current
Derivative instruments in designated
hedge accounting relationships
Forward foreign exchange contracts
Financial liabilities at amortised cost
Loans (note 25)
Lease obligations (note 24)
198.4
–
234.4
1.7
–
–
–
–
(89.2)
(64.9)
(126.3)
–
(312.1)
(304.0)
–
2.6
–
–
–
–
198.4
335.7
2.6
–
234.4
244.3
1.7
–
–
(2.0)
(2.0)
–
–
–
–
–
–
–
–
(89.2)
(65.2)
(126.3)
–
(324.2)
(304.0)
0.2
3.1
9.4
–
–
(99.6)
(89.7)
(109.3)
–
(299.1)
(293.3)
–
4.5
–
–
–
–
(9.2)
(0.1)
–
–
–
(0.1)
–
–
2020
£m
335.7
4.5
244.3
0.2
3.1
9.4
(9.2)
(0.1)
(99.6)
(91.2)
(109.3)
(0.1)
(306.6)
(293.3)
The Directors estimate that the carrying amounts of cash, trade receivables and trade payables approximate to their fair value due to the
short-term maturity of these instruments.
The fair values of loans and lease obligations are based on cash flows discounted using a rate based on the borrowing rate associated with the
liability.
The fair value of derivatives is calculated using a discounted cash flow approach applying discount factors derived from observable market
data to actual and estimated future cash flows. Credit risk is considered in the calculation of these fair values.
ii) Fair value of derivative financial instruments
The fair value of derivative financial instruments results in a net asset of £0.6m (2020: net liability of £4.9m) comprising current assets of £2.6m
(2020: £4.5m), current liabilities of £2.0m (2020: £9.3m) and non-current liabilities of £nil (2020: £0.1m).
Movement in fair value
of derivatives designated
in hedge accounting
relationships
£m
Movement in fair value of
derivatives not designated
in hedge accounting
relationships
£m
1 January 2021
£m
31 December 2021
£m
Forward foreign exchange contracts
(4.9)
0.2
5.3
0.6
Forward foreign exchange contracts
234 Serco Group plc
Movement in fair value
of derivatives designated
in hedge accounting
relationships
£m
Movement in fair value of
derivatives not designated
in hedge accounting
relationships
£m
31 December 2020
£m
(0.2)
(5.8)
(4.9)
1 January 2020
£m
1.1
Annual Report and Accounts 2021
The fair value of financial liabilities recognised at fair value through profit and loss is £2.0m (2020: £9.2m) and relates to derivatives that are
not designated in hedge accounting relationships. The fair value of the derivatives and their credit risk adjusted fair value are not materially
different and are approximately equal to the amount contractually payable at maturity due to the short tenure of the instruments.
29 (b) Financial risk
The Board is ultimately responsible for ensuring that financial and non-financial risks are monitored and managed within acceptable and
known parameters. The Board delegates authority to the Executive team to manage financial risks. The Group’s Treasury function acts as a
service centre and operates within clearly defined guidelines and policies that are approved by the Board. The guidelines and policies define
the financial risks to be managed, specify the objectives in managing these risks, delegate responsibilities to those managing the risks and
establish a control framework to regulate treasury activities to minimise operational risk.
29 (c) Liquidity risk
i) Credit facilities
The Group maintains committed credit facilities to ensure that it has sufficient liquidity to maintain its ongoing operations. As at 31 December,
the Group’s committed bank credit facilities and corresponding borrowings were as follows:
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Syndicated revolving credit facility
Term loan facility
Syndicated revolving credit facility
Term loan facility
Currency
Sterling
Sterling
Currency
Sterling
Sterling
Amount
2021
£m
250.0
120.0
Amount
2020
£m
250.0
45.0
Drawn
2021
£m
–
120.0
Drawn
2020
£m
–
45.0
Utilised for
bonding facility
2021
£m
–
–
Utilised for
bonding facility
2020
£m
–
–
Total facility
available
2021
£m
250.0
–
Total facility
available
2020
£m
250.0
–
In April 2021, the Group drew down on a new £75m, 3-year term loan facility in order to fund the purchase of Whitney, Bradley & Brown, Inc.
The Group has £259.2m (2020: £346.7m) of US private placement loan notes which will be repaid as bullet repayments between 2022 and 2032.
ii) Maturity of financial liabilities
The Group’s financial liabilities will be settled on both a net and a gross basis over the remaining period between the balance sheet date and
the contractual maturity date. The amounts disclosed below are the contractual undiscounted cash flows based on the earliest date on which
the Group can be required to pay.
At 31 December 2021
Trade payables (note 23)
Obligations under leases* (note 24)
Loans** (note 25)
Future loan interest
Derivatives settled on gross basis:
Outflow
Inflow
On demand or
within one year
£m
Between one and
two years
£m
Between two and
five years
£m
After five years
£m
89.2
131.0
66.1
12.2
1,427.9
(1,428.4)
298.0
–
107.1
40.5
11.3
–
–
–
156.8
161.2
16.3
–
–
–
53.6
111.4
12.2
–
–
158.9
334.3
177.2
Total
£m
89.2
448.5
379.2
52.0
1,427.9
(1,428.4)
968.4
* The present value of lease obligations is £430.3m after deducting £18.2m of future finance costs.
** Loans are stated gross of capitalised finance costs.
Annual Report and Accounts 2021
Serco Group plc
235
Financial StatementsCorporate Governance
29. Financial risk management continued
At 31 December 2020
Trade payables (note 23)
Obligations under leases (note 24) – restated*
Loans** (note 25)
Future loan interest
Derivatives settled on gross basis:
Outflow
Inflow
On demand or
within one year
£m
Between one and
two years
£m
Between two and
five years
£m
After five years
£m
99.6
115.3
90.9
15.2
1,007.8
(1,003.2)
325.6
–
86.2
65.8
10.8
–
–
–
142.7
125.1
21.8
–
–
–
90.5
109.9
16.1
–
–
162.8
289.6
216.5
Total
£m
99.6
434.7
391.7
63.9
1,007.8
(1,003.2)
994.5
* The present value of lease obligations is £402.6m after deducting £32.1m of future finance costs. The amount has been restated to show the undiscounted obligations
under leases.
** Loans are stated gross of capitalised finance costs.
Gross cash flows in the table above relating to forward foreign exchange contracts total £1,428.4m (inflow) and £1,427.9m (outflow) on demand
or within one year (2020: £1,003.2m (inflow) and £1,007.8m (outflow) on demand or within one year).
29 (d) Foreign exchange risk
i) Transactional
It is the Group’s policy to hedge material transactional exposures using forward foreign exchange contracts to fix the functional currency value
of non-functional currency cash flows. At 31 December 2021, there were no material unhedged non-functional currency monetary assets or
liabilities, firm commitments or highly probable forecast transactions.
ii) Translational
Where possible the Group will raise external funding to match the currency profile of its foreign operations, in order to mitigate translation
exposure. If matched funding is not possible, currency derivatives may be used to protect against movements in foreign exchange.
iii) Hedge accounting
For the purposes of hedge accounting, hedges are classified as either fair value hedges, cash flow hedges or hedges of net investments in
foreign operations. Details of the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IFRS 9 Financial
Instruments can be seen in note 2.
The Group holds a number of forward foreign exchange contracts designated as cash flow hedges. These derivatives are hedging highly
probable forecast foreign currency trade payments in the UK business. The net notional amounts are summarised by currency below:
Sterling
Indian Rupee
2021
£m
(2.1)
2.2
2020
£m
(6.0)
6.0
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2021, £nil (2020: £0.2m net fair value loss) has been
deferred in the hedging reserve. During the year to 31 December 2021, £0.1m (2020: £0.1m loss) of net fair value gains were transferred to the
hedging reserve and £0.1m fair value gains (2020: £0.1m loss) were reclassified to the Consolidated Income Statement.
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2021 that result in net currency gains and losses in the income
statement and equity, arise principally from movement in US Dollar and Indian Rupee exchange rates. The impact of a 10% movement is
summarised below:
US Dollar
Indian Rupee
Pre-tax profits
gain/(loss)
2021
£m
Equity gain/(loss)
2021
£m
Pre-tax profits
gain/(loss)
2020
£m
Equity gain/(loss)
2020
£m
–
–
–
0.1
(0.2)
(0.1)
(0.1)
–
(0.1)
–
(0.6)
(0.6)
236 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued
29 (e) Interest rate risk
The Group’s policy is to minimise the impact of interest rate volatility on earnings to provide an appropriate level of certainty to cost of funds.
Exposure to interest rate risk arises principally on changes to US Dollar and Sterling interest rates.
i) Interest rate management
An analysis of financial assets and liabilities exposed to interest rate risk is set out below:
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Financial assets
Cash and cash equivalents
Financial liabilities
US Dollar loans
Other loans
Floating rate
2021
£m
198.4
Fixed rate
2021
£m
–
Weighted
average interest
rate
2021
%
Floating rate
2020
£m
–
335.7
Floating rate
2021
£m
–
120.0
120.0
Weighted
average interest
rate
2021
%
4.3
1.6
3.2
Fixed rate
2021
£m
259.2
–
259.2
Floating rate
2020
£m
–
45.0
45.0
Weighted
average interest
rate
2020
%
–
Weighted
average interest
rate
2020
%
4.6
1.5
4.3
Fixed rate
2020
£m
–
Fixed rate
2020
£m
346.7
–
346.7
Exposure to interest rate fluctuations is mitigated through the issuance of fixed rate debt. The rates on the US Dollar loans are fixed for the
term each loan. The loans will be repaid as bullet repayments between 2022 and 2032. Excluded from the above analysis is £430.3m (2020:
£402.6m) of amounts payable under leases, which are subject to fixed rates of interest.
ii) Interest rate sensitivity
The effect of a 100 basis point increase in LIBOR rates on the net financial liability position (excluding leases) at the balance sheet date, with
all other variables held constant, would have resulted in a £0.8m increase in pre-tax profit for the year to 31 December 2021 (2020: increase of
£2.9m).
From 1 January 2022, SONIA (Sterling Overnight Index Average) replaces GBP LIBOR and with all other variables held constant is not
expected to have a material impact on the Group. The floating rate loans mentioned above have been restructured effective 1 January 2022
so that the actual interest rates used are consistent when using SONIA as a benchmark compared with GBP LIBOR and this results in no
change to the risk strategy going forward.
29 (f) Credit risk
The Group’s principal financial assets are cash and cash equivalents, contract assets and trade and other receivables.
Credit risk is the risk that a counterparty could default on its contractual obligations. In this regard, the Group’s principal exposure is to cash
and cash equivalents, derivative transactions and trade receivables.
The Group’s contract asset and trade receivables credit risk is relatively low given that a high proportion of our customer base are government
bodies with strong sovereign, or sovereign like, credit ratings. However, where the assessed credit worthiness of a customer, government or
non-government, falls below that considered acceptable, appropriate measures are taken to mitigate against the risk of contractual default
using instruments such as credit guarantees.
The Group has not recorded any impairments related to contract assets or trade and other receivables relating to credit risk during the year
ended 31 December 2021 (2020: none).
The Group’s Treasury function primarily transacts with counterparties that comply with Board policy. Where exceptions are approved due to
local requirements, the Group’s exposures are monitored and kept to an immaterial level. The credit risk is measured by way of a counterparty
credit rating from any two recognised rating agencies. Pre-approved limits are set based on a rating matrix and exposures monitored
accordingly. The Group also employs the use of set-off rights in some agreements.
The Group’s policy is to provide guarantees for joint ventures and associates only to the relevant proportion of support provided by the
partners. At 31 December 2021, the Company has issued guarantees in respect of certain joint ventures and associates as per note 28.
Annual Report and Accounts 2021
Serco Group plc
237
Financial StatementsCorporate Governance
29. Financial risk management continued
29 (g) Capital risk
The Board’s objective is to maintain a capital structure that supports the Group’s strategic objectives, including but not limited to reshaping
the portfolio through mergers, acquisitions and disposals. In doing so the Board seeks to manage funding and liquidity risk, optimise
shareholder return and maintain an implied investment grade credit position. This strategy is unchanged from the prior year.
The Board reviews and approves at least annually a treasury policy document which covers, inter alia, funding and liquidity risk, capital
structure and risk management. This policy details targets for committed funding headroom, diversification of committed funding and debt
maturity profile.
The Group plans to maintain sufficient funds and distributable reserves to allow payments of projected dividends to shareholders.
The following table summarises the capital of the Group:
Cash and cash equivalents
Loans
Obligations under leases
Equity
Capital
2021
£m
(198.4)
377.0
430.3
1,008.4
1,617.3
2020
£m
(335.7)
388.8
402.6
715.0
1,170.7
30. Retirement benefit schemes
30 (a) Defined benefit schemes
i) Characteristics and risks
The Group contributes to defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. The normal contributions
expected to be paid during the financial year ending 31 December 2022 are £6.8m (2021: £8.0m).
Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full actuarial
valuation of this scheme was undertaken as at 5 April 2018 and completed in June 2019. The actuarially assessed deficit for funding purposes
was £26.0m. The exercise to value the scheme as at 5 April 2021 is underway with completion anticipated during the first half of 2022 with an
expected increase to the actuarially assessed deficit for funding purposes as a result of the RPI reform. As a scheme well hedged for inflation
risk, the expected impact of RPI reform is a £65m increase to liabilities. This will be partially offset by changes to mortality assumptions and the
scheme will work with the Trustees during the 2021 valuation process to address the impact on the funding level.
Pension obligations are valued separately for accounting and funding purposes and there is often a material difference between these
valuations. As at 31 December 2021, the estimated actuarial surplus of SPLAS was £23m (2020: £20m deficit) based on the actuarial assessment
on the funding basis valuation before the impact of RPI reform, whereas the accounting valuation resulted in an asset of £166.2m (2020:
£114.6m). The primary reason a difference arises is that pension scheme accounting requires the valuation to be performed on the basis of a
best estimate whereas the funding valuation used by the trustees makes more prudent assumptions.
The schedule of contributions for SPLAS was agreed during 2019, with 30.8% of pensionable salaries due to be paid from 1 November
2019, changing to 30.3% from 1 November 2020. The schedule of contributions also determined that additional shortfall contributions were
required. A total of £13.2m of these have already been made, with further amounts of £1.7m for the years 2022 to 2028. A change to the
schedule of contributions is being finalised with the pension trustees as part of the expected increase to the deficit for funding purposes as
noted above.
The assets of funded schemes are held independently of the Group’s assets in separate trustee administered schemes. The trustees of each
pension scheme are required by law to act in the interest of the scheme and of all relevant stakeholders in the scheme. The trustees of the
pension schemes are responsible for the investment policy with regard to the assets of the scheme. The Group’s major schemes are valued by
independent actuaries annually using the projected unit credit actuarial cost method for accounting purposes. This reflects service rendered
by employees to the dates of valuation and incorporates actuarial assumptions including discount rates to determine the present value of
benefits, inflation assumptions, projected rates of salary growth and life expectancy of pension plan members. Discount rates are based on the
market yields of high-quality corporate bonds in the country concerned. Pension assets and liabilities in the different defined benefit schemes
are not offset.
238 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
The schemes typically expose the Group to risks that impact the financial performance and position of the Group and may affect the amount
and timing of future cash flows. The key risks are set out below:
– Investment risk. The schemes hold assets with which to discharge the future liabilities of these schemes. Any decline in the value of
these investments directly impacts on the ability of the scheme to meet its commitments and could require the Group to fund this
shortfall in future years. As a result of the SPLAS’s investment strategy, which aims to reduce volatility risk by better matching assets to
liabilities, 42% of the scheme’s assets are annuity policies, 25% are Liability Driven Investments (LDIs) and the remainder is split between
equities, bonds, pooled investment funds and cash or cash equivalents. The annuity policies result in an insurer funding the future
benefit payments to the relevant members and therefore eliminate the risk of changes in the future value of the benefits to the scheme.
The main asset classes that make up the LDI investments are gilts and corporate bonds with inflation and interest swap overlays and are
therefore linked to the key drivers of the scheme’s liabilities. SPLAS previously identified an investment strategy consisting of Multi-
Asset Absolute Return (MAAR), Buy and Maintain credit (B&M) and LDI. SPLAS previously transferred assets to a passive LDI portfolio
managed by BlackRock, over the course of late 2016 and early 2017. This ensures that the scheme remains protected against changes to
interest rates and long-term inflation expectations, with the funding level therefore being relatively stable. The Buy and Maintain credit
implementation comprised of four tranches, the last of which completed during 2020.
– Interest risk. The present values of the defined benefit schemes’ liabilities are calculated using a discount rate determined by reference
to high quality corporate bond yields and therefore a decrease in the bond interest rate will increase the schemes’ liabilities. This will be
partially offset by an increase in the return of the schemes’ debt investments.
– Longevity risk. The present values of the defined benefit schemes’ liabilities are calculated by reference to the best estimate of the
mortality of the schemes’ participants, both during and after their employment. An increase in the life expectancy of the schemes’
participants will increase the schemes’ liabilities.
– Inflation risk. The present values of the defined benefit schemes’ liabilities are calculated to include the effect of inflation on future
purchasing power based on estimations around inflation rates. An increase in expected future inflation rates will increase the schemes’
liabilities.
– Salary risk. The present values of the defined benefit schemes’ liabilities are calculated by reference to the future salaries of the
schemes’ participants, as such, an increase in the salary of the schemes’ participants will increase the schemes’ liabilities.
The defined benefit schemes are grouped together as follows:
– Contract specific. These are pre-funded defined benefit schemes. Under contractual arrangements the Group sponsors a section of
an industry wide defined benefit scheme, the Railways Pension Scheme (RPS), paying contributions in accordance with a Schedule
of Contributions. There is no residual liability to fund a deficit at the end of the franchise period and any costs are shared 60% by the
employer and 40% by the members. The Group also makes contributions under Admitted Body status to a number of sections of the
Local Government Pension Scheme for the period to the end of the relevant customer contracts. The Group will only participate in the
Local Government Pension Schemes for a finite period up to the end of the contracts. The Group is required to pay regular
contributions as decided by the respective Scheme Actuary and as detailed in each scheme’s Schedule of Contributions. In addition,
the Group may be required to pay some or all of any deficit (as determined by the respective Scheme Actuary) that is remaining at the
end of the contract. The Group also makes contributions to the Public Sector Superannuation Scheme in Australia and is the only
non-UK contract specific scheme in which the Group participates. In respect of Local Government Pension Schemes and the Public
Sector Superannuation Scheme, the Group recognises a sufficient level of provision in these financial statements based on the IAS 19
Employee Benefits valuation at the reporting date and contractual obligations.
– Non-contract specific. These do not relate to any specific contract and consist of two pre-funded defined benefit schemes and an
unfunded defined benefit scheme. Any liabilities arising are recognised in full and the liabilities in relation to the unfunded scheme
amount to £0.3m (2020: £0.3m). The unfunded scheme is the only non-UK non-contract specific scheme in which the Group
participates. The funding policy for the pre-funded schemes is to contribute such variable amounts, on the advice of the actuary, as will
achieve 100% funding on a projected salary basis. One of these schemes is SPLAS and the other is a non-contract specific section of
the RPS.
ii) Events in the year
On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (FFA). Included in the
acquisition was a net pension obligation of £1.4m.
On 30 June 2021, the 31 December 2019 formal actuarial valuation report was issued for the RPS. This resulted in a reduction of the pension
obligation on the non-contract specific section of the RPS as a result of a change in demographic assumptions.
Annual Report and Accounts 2021
Serco Group plc
239
Financial StatementsCorporate Governance
30. Retirement benefit schemes continued
iii) Values recognised in total comprehensive income in the year
The amounts recognised in the Consolidated Financial Statements for the year are analysed as follows:
Recognised in the income statement
Current service cost – employer
Administrative expenses and taxes
Recognised in arriving at operating profit after exceptionals
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements
Change in franchise adjustment
Change in members’ share
Actuarial profit on reimbursable rights
Total pension gain recognised in the SOCI
Recognised in the income statement
Current service cost – employer
Administrative expenses and taxes
Recognised in arriving at operating profit after exceptionals
Interest income on scheme assets – employer
Interest cost on scheme liabilities – employer
Interest on franchise adjustment
Finance cost/(income)
Contract specific
2021
£m
Non-contract
specific
2021
£m
1.4
0.1
1.5
(0.2)
(0.1)
0.3
–
3.7
1.4
5.1
(21.8)
–
20.7
(1.1)
Contract specific
2021
£m
Non-contract
specific
2021
£m
2.6
(0.2)
2.4
(0.1)
(0.1)
–
2.2
0.1
(0.6)
(0.5)
1.7
39.7
(21.8)
17.9
3.4
19.9
23.4
64.6
–
–
–
64.6
Contract specific
2020
£m
Non-contract
specific
2020
£m
1.2
0.1
1.3
(0.2)
0.4
(0.1)
0.1
3.5
1.5
5.0
(29.1)
27.8
–
(1.3)
Total
2021
£m
5.1
1.5
6.6
(22.0)
(0.1)
21.0
(1.1)
Total
2021
£m
42.3
(22.0)
20.3
3.3
19.8
23.4
66.8
0.1
(0.6)
(0.5)
66.3
Total
2020
£m
4.7
1.6
6.3
(29.3)
28.2
(0.1)
(1.2)
240 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements
Change in franchise adjustment
Change in members’ share
Actuarial profit on reimbursable rights
Total pension (loss)/gain recognised in the SOCI
iv) Balance sheet values
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value
Equities
Bonds except LDIs
Pooled investment funds
LDIs
Property
Cash and other
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Franchise adjustment*
Members’ share of deficit
Net retirement benefit asset
Net pension liability
Net pension asset
Net retirement benefit asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
Contract specific
2020
£m
Non-contract
specific
2020
£m
0.1
(0.3)
(0.2)
0.4
(3.6)
(0.6)
(4.0)
2.5
1.3
3.8
(0.2)
216.7
(29.1)
187.6
–
(170.0)
4.6
22.2
–
0.1
0.1
22.3
Contract specific
2021
£m
Non-contract
specific
2021
£m
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Total
2020
£m
216.8
(29.4)
187.4
0.4
(173.6)
4.0
18.2
2.5
1.4
3.9
22.1
Total
2021
£m
55.7
368.2
107.6
390.0
2.2
6.9
662.3
14.9
3.2
–
–
2.0
4.9
–
25.0
(41.7)
(16.7)
8.6
5.8
(2.3)
(2.3)
–
(2.3)
–
(2.3)
40.8
365.0
107.6
390.0
0.2
2.0
662.3
1,567.9
(1,417.4)
1,592.9
(1,459.1)
150.5
–
–
150.5
(15.7)
166.2
150.5
(36.9)
113.6
133.8
8.6
5.8
148.2
(18.0)
166.2
148.2
(36.9)
111.3
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Annual Report and Accounts 2021
Serco Group plc
241
Financial StatementsCorporate Governance
30. Retirement benefit schemes continued
Scheme assets at fair value
Equities
Bonds except LDIs
Pooled investment funds
LDIs
Property
Cash and other
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Franchise adjustment*
Members’ share of deficit
Net retirement benefit asset
Net pension liability
Net pension asset
Net retirement benefit asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
Contract specific
2020
£m
Non-contract
specific
2020
£m
Total
2020
£m
55.6
367.3
62.8
408.3
1.6
14.7
690.2
44.3
363.2
62.8
408.3
–
10.6
690.2
1,579.4
(1,497.8)
1,600.5
(1,534.8)
81.6
–
–
81.6
(33.0)
114.6
81.6
(15.2)
66.4
65.7
8.4
5.6
79.7
(34.9)
114.6
79.7
(15.2)
64.5
11.3
4.1
–
–
1.6
4.1
–
21.1
(37.0)
(15.9)
8.4
5.6
(1.9)
(1.9)
–
(1.9)
–
(1.9)
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The SPLAS Trust Deed gives the Group an unconditional right to a refund of surplus assets, assuming the full settlement of plan liabilities
in the event of a plan wind-up. Pension assets are deemed to be recoverable and there are no adjustments in respect of minimum funding
requirements as economic benefits are available to the Group either in the form of future refunds or, for plans still open to benefit accrual,
in the form of possible reductions in future contributions.
As required by IAS 19 Employee Benefits, the Group has considered the extent to which the pension plan assets should be classified in
accordance with the fair value hierarchy of IFRS 13 Fair Value Measurement.
– Equity and Bonds all virtually have quoted prices in active markets and are classified as level 1.
– Pooled investment funds are valued at fair value which is typically the Net Asset Value provided by the fund administrator and are
classified as level 3.
– LDIs are valued at fair value which is typically the Net Asset Value provided by the fund administrator and are classified as level 2.
– Property assets are valued at fair value and are classified as level 3.
– Annuity policies are valued at fair value based on the share of the defined benefit obligation covered by the insurance contract and can
be classified as level 3.
242 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued Changes in the fair value of scheme liabilities
At 1 January 2020
Current service cost – employer
Current service cost – employee
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
At 1 January 2021
Current service cost – employer
Current service cost – employee
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Arising on acquisition
Foreign exchange
At 31 December 2021
Changes in the fair value of scheme assets
At 1 January 2020
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
At 1 January 2021
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
Arising on acquisitions
Foreign exchange
At 31 December 2021
Changes in the franchise adjustment
At 1 January 2020
Interest on franchise adjustment
Recognised in the SOCI
At 1 January 2021
Interest on franchise adjustment
Recognised in the SOCI
At 31 December 2021
Contract specific
£m
Non-contract
specific
£m
31.1
1.2
0.7
–
0.4
0.2
(0.4)
(0.4)
3.6
0.6
37.0
1.4
0.9
–
0.3
0.1
(0.8)
0.1
0.1
–
2.7
(0.1)
41.7
1,353.4
3.5
–
0.1
27.8
–
(52.4)
–
170.0
(4.6)
1,497.8
3.7
–
0.4
20.7
–
(58.5)
(3.4)
(19.9)
(23.4)
–
–
1,417.4
Contract specific
£m
Non-contract
specific
£m
20.7
0.2
0.1
(0.1)
0.5
0.3
(0.4)
(0.2)
21.1
0.2
0.1
(0.1)
0.6
0.3
(0.8)
2.4
1.3
(0.1)
25.0
1,408.5
29.1
–
(1.5)
7.9
0.2
(52.4)
187.6
1,579.4
21.8
–
(1.4)
8.4
0.3
(58.5)
17.9
–
–
1,567.9
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Total
£m
1,384.5
4.7
0.7
0.1
28.2
0.2
(52.8)
(0.4)
173.6
(4.0)
1,534.8
5.1
0.9
0.4
21.0
0.1
(59.3)
(3.3)
(19.8)
(23.4)
2.7
(0.1)
1,459.1
Total
£m
1,429.2
29.3
0.1
(1.6)
8.4
0.5
(52.8)
187.4
1,600.5
22.0
0.1
(1.5)
9.0
0.6
(59.3)
20.3
1.3
(0.1)
1,592.9
Total
£m
5.8
0.1
2.5
8.4
0.1
0.1
8.6
Annual Report and Accounts 2021
Serco Group plc
243
Financial StatementsCorporate Governance
30. Retirement benefit schemes continued
v) Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 91% of total liabilities and 93% of total assets of the defined benefit pension
scheme in which the Group participates. The significant actuarial assumptions with regards to the determination of the defined benefit
obligation are set out below.
The Group continued to set RPI inflation in line with the market break-even expectations less an inflation risk premium. The inflation risk
premium has remained at 0.3% at 31 December 2020 and at 31 December 2021.
The average duration of the benefit obligation at the end of the reporting period is 16.3 years (2020: 17.4 years).
Main assumptions
Discount rate
Rate of salary increases
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Inflation assumption – pre-retirement
Inflation assumption – post-retirement
Post retirement mortality*
Current pensioners at 65 – male
Current pensioners at 65 – female
Future pensioners at 65 – male
Future pensioners at 65 – female
2021
%
2020
%
1.80
2.95
2.75 (CPI) and 3.05 (RPI)
2.00 (CPI) and 2.90 (RPI)
2.45 (CPI) and 3.35 (RPI)
2.75 (CPI) and 3.05 (RPI)
1.40
2.50
2.40 (CPI) and 2.75 (RPI)
2.20 (CPI) and 2.80 (RPI)
2.00 (CPI) and 2.90 (RPI)
2.40 (CPI) and 2.75 (RPI)
2021
years
21.7
24.3
23.9
26.4
2020
years
21.6
24.2
23.9
26.3
* The mortality assumptions have not been updated to reflect the potential effects of Covid-19 given there remains uncertainty of the Covid-19 impact on long-term
mortality rates for pension scheme members.
Sensitivity analysis is provided below, based on reasonably possible changes of the assumptions occurring at the end of the reporting period,
assuming all other assumptions are held constant. The sensitivities have been derived in the same manner as the defined benefit obligation
as at 31 December 2021 where the defined benefit obligation is estimated using the Projected Unit Credit method. Under this method each
participant’s benefits are attributed to years of service, taking into consideration future salary increases and the scheme’s benefit allocation
formula. Thus, the estimated total pension to which each participant is expected to become entitled at retirement is broken down into units,
each associated with a year of past or future credited service. The defined benefit obligation as at 31 December 2021 is calculated on the
actuarial assumptions agreed as at that date. The sensitivities are calculated by changing each assumption in turn following the methodology
above with all other things held constant. The change in the defined benefit obligation from updating the single assumption represents the
impact of that assumption on the calculation of the defined benefit obligation.
Increase/(decrease) in defined benefit obligation
Discount rate – 0.5% increase
Discount rate – 0.5% decrease
Inflation – 0.5% increase
Inflation – 0.5% decrease
Rate of salary increase – 0.5% increase
Rate of salary increase – 0.5% decrease
Mortality – one-year age rating
2021
£m
(119.1)
127.6
84.0
(92.6)
3.5
(3.3)
54.0
2020
£m
(125.3)
142.4
103.7
(96.6)
3.7
(3.5)
59.8
Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent limitation given
that it is more likely for a combination of changes but highlights the value of each individual risk and is therefore a suitable basis for providing
this analysis.
Assumptions in respect of the expected return on scheme assets are required when calculating the franchise adjustment for the contract-
specific plans. These assumptions are based on market expectations of returns over the life of the related obligation. Due consideration has
been given to current market conditions as at 31 December 2021 in respect to inflation, interest, bond yields and equity performance when
selecting the expected return on assets assumptions.
244 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued The expected yield on bond investments with fixed interest rates is derived from their market value. The yield on equity investments
contains an additional premium (an ‘equity risk premium’) to compensate investors for the additional anticipated risks of holding this type of
investment, when compared to bond yields. The Group applies an equity risk premium of 4.6% (2020: 4.6%).
The overall expected return on assets is calculated as the weighted average of the expected returns for the principal asset categories held by
the scheme.
30 (b) Defined contribution schemes
The Group paid employer contributions of £92.1m (2020: £79.3m) into UK defined contribution schemes, foreign defined contribution schemes
and foreign state pension schemes.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Serco accounts for certain pre-funded defined benefit schemes relating to contracts as defined contribution schemes because the
contributions are fixed until the end of the current concession and at rebid any surplus or deficit would transfer to the next contractor.
Cash contributions are recognised as pension costs and no asset or liability is shown on the balance sheet.
31. Share capital
Issued and fully paid
1,233,380,637 (2020: 1,223,380,637) ordinary shares of 2p each at 31 December
Issued: Nil (2020: 10,000,000) ordinary shares of 2p
Cancelled: 15,371,849 (2020: Nil) ordinary shares of 2p
1,218,008,788 (2020: 1,233,380,637) ordinary shares of 2p each
at 31 December
2021
£m
24.7
–
(0.3)
Number
2021
millions
1,233.4
–
(15.4)
24.4
1,218.0
2020
£m
24.5
0.2
–
24.7
Number
2020
millions
1,223.4
10.0
–
1,233.4
During the year 15,371,849 shares were cancelled as part of the Serco Share Repurchase Programme (the Programme). At the end of 2020,
the Group announced its intention to repurchase ordinary shares with a value of up to £40m, subject to a maximum of 122,338,063 ordinary
shares being purchased, during the period 4 January 2021 to 11 June 2021. Through the Programme, the Group repurchased 30,721,849
ordinary shares for total consideration of £40.7m including fees.
On 28 June 2021, the Group announced that, of the ordinary shares repurchased and held in Treasury, 15,350,000 were transferred to the
Employee Share Ownership Trust (ESOT) to be used to satisfy awards granted under the Group’s share award schemes. The 15,371,849
ordinary shares remaining in Treasury were cancelled on 28 June 2021.
During 2020, 10,000,000 shares were issued to the ESOT to satisfy awards under the Group’s share plan schemes.
The Company has one class of ordinary shares which carry no right to fixed income.
32. Share premium account
At 1 January
Arising on shares issued
At 31 December
2021
£m
463.1
–
463.1
2020
£m
462.9
0.2
463.1
The movement on the account in the prior year was the release of an accrual for costs associated with the 2019 share issue which was no
longer required.
Annual Report and Accounts 2021
Serco Group plc
245
Financial StatementsCorporate Governance
Own shares
reserve
£m
Treasury
shares
£m
Hedging
reserve
£m
Translation
reserve
£m
33. Reserves
33 (a) Movements in other reserves
At 1 January 2020
Retirement
benefit
obligations
reserve
£m
Share based
payment
reserve
£m
(151.8)
72.2
Total comprehensive income for the year
16.2
Issue of share capital
Shares transferred to award holders on
exercise of share awards
Expense in relation to share based
payments
–
–
–
At 1 January 2021
(135.6)
Total comprehensive income for the year
44.6
Income statement items reclassified
Shares purchased and held in Treasury
Cancellation of shares held in Treasury
Shares transferred from Treasury to own
shares reserves
Shares transferred to award holders on
exercise of share awards
Expense in relation to share based
payments
–
–
–
–
–
–
At 31 December 2021
(91.0)
(4.4)
–
(0.2)
2.5
–
(2.1)
–
–
–
–
–
–
–
–
–
–
–
–
(40.7)
20.4
(0.3)
20.3
–
–
(2.4)
11.2
81.0
–
–
–
–
–
(1.0)
1.2
15.8
95.8
–
(1.2)
–
–
–
Capital
redemption
reserve
£m
Total other
reserves
£m
0.1
(111.9)
–
–
–
–
23.9
0.2
0.1
11.2
(0.2)
(0.2)
(27.8)
7.9
–
–
–
–
–
–
(0.4)
(19.9)
0.1
(76.9)
0.2
0.1
–
–
–
–
–
(7.6)
–
–
–
–
–
–
–
–
–
0.3
–
–
–
37.2
0.1
(40.7)
20.7
20.0
0.2
15.8
(0.1)
(27.5)
0.4
(23.6)
33 (b) Retirement benefit obligations reserve
The retirement benefit obligations reserve represents the actuarial gains and losses recognised in respect of annual actuarial valuations for
defined benefit retirement schemes, the fair value adjustments on reimbursable rights and the related movements in deferred tax balances.
33 (c) Share based payment reserve
The share based payment reserve represents credits relating to equity-settled share based payment transactions and any gain or loss on the
exercise of share award schemes satisfied by own shares.
33 (d) Own shares reserve
The own shares reserve represents the cost of shares in Serco Group plc held by the Serco Group plc Employee Share Ownership Trust (ESOT)
to satisfy awards under the Group’s share plan schemes. At 31 December 2021, the ESOT held 11,605,185 (2020: 7,036,349) shares equal to
1.0% of the current allotted share capital (2020: 0.6%). The market value of shares held by the ESOT as at 31 December 2021 was £15.6m
(2020: £8.4m).
33 (e) Hedging and translation reserve
The hedging and translation reserve represents foreign exchange differences arising on translation of the Group’s overseas operations and
movements relating to cash flow hedges.
246 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued 34. Share based payment expense
The Group recognised the following expenses related to equity-settled share based payment transactions:
Long-Term Incentive Plan
Performance Share Plan
Deferred Bonus Plan
Equity Settled Bonus Plan
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2021
£m
12.3
2.0
1.0
0.5
15.8
2020
£m
4.9
4.6
0.9
0.8
11.2
Long-Term Incentive Plan (LTIP)
Under the LTIP, eligible employees have been granted conditional share awards. Awards vest after the performance period of two to three
years and are subject to the achievement of certain performance measures, with the exception of non-performance awards. These
non-performance awards are subject only to continued employment on vesting dates which vary from two to three years after the grant dates.
On the performance related awards, the performance measures are Earnings per Share (EPS), Total Shareholder Return (TSR), Return on
Invested Capital (ROIC) and measures linked to Strategic Objectives.
Outstanding at 1 January
Granted during the year
Dividend equivalent granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number
of shares
under award
2021
thousands
Weighted
average
exercise price
2021
£
Number
of shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
22,149
10,584
512
(29)
(2,202)
31,014
Nil
Nil
Nil
Nil
Nil
Nil
11,468
11,582
–
(11)
(890)
22,149
Nil
Nil
Nil
Nil
Nil
Nil
The awards over shares outstanding at 31 December 2021 were all unvested and had a weighted average contractual life of 1.3 years
(2020: 1.9 years).
In the year, thirteen grants were made, of which seven were non-performance. The remaining six awards were performance-based awards,
of which five awards were made with 75% of the award split equally between Earnings per Share (EPS), Total Shareholder Return (TSR) and
Return on Invested Capital (ROIC) performance conditions, 15% linked to ESG Scorecard Objectives and 10% linked to improvements in order
book. The other award was made with 85% of the award split equally between EPS, TSR and ROIC performance conditions and 15% linked to
Strategic Objectives based on improvements in order book and employee engagement. The rewards subject to market-based performance
conditions (such as the TSR condition for these awards) were valued using the Monte Carlo Simulation model. For awards subject only to
non-market-based performance conditions (such as the EPS and ROIC conditions) the Black-Scholes model was used. The Black-Scholes
model was also used for the awards made with no performance conditions attached to them.
The Monte Carlo Simulation model is considered to be the most appropriate for valuing awards granted under schemes where there are
changes in performance conditions by which the awards are measured, such as for the TSR based awards.
The Monte Carlo and Black-Scholes models used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2021
£1.41
Nil
36.5%
3 years
0.14%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected
life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
The weighted average fair value of awards granted under this scheme in the year is £1.30 (2020: £1.15).
Annual Report and Accounts 2021
Serco Group plc
247
Financial StatementsCorporate Governance
34. Share based payment expense continued
Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options or conditional share awards with an exercise price of two or zero pence.
Awards vest after the performance period of two to three years and are subject to the achievement of certain performance measures, with the
exception of non-performance awards. These non-performance awards are only subject to continued employment on vesting dates which vary
from two to three years after the grant dates.
On the performance related awards, the performance measures are Earnings per Share (EPS), Total Shareholder Return (TSR) and Return on
Invested Capital (ROIC).
If options remain unexercised after a period of ten years from the date of grant, then the options expire.
Outstanding at 1 January
Dividend equivalent granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options or shares
under award
2021
thousands
Weighted
average
exercise price
2021
£
Number of
options or shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
19,091
129
(9,787)
(96)
9,337
0.02
0.02
0.02
0.02
0.02
28,485
–
(5,834)
(3,560)
19,091
0.02
Nil
0.02
0.02
0.02
Of these awards, 9,335,825 (2020: 6,459,304) were exercisable at the end of the year. The awards outstanding at 31 December 2021 had a
weighted average contractual life of 5.5 years (2020: 6.2 years).
The awards subject to market-based performance conditions (such as the TSR condition for these awards), were valued using the Monte Carlo
Simulation model. For awards subject only to non-market based performance conditions (such as the EPS and ROIC conditions) the
Black-Scholes model was used. The Black-Scholes model was also used for the awards made with no performance conditions attached
to them.
The Monte Carlo Simulation model is considered to be the most appropriate for valuing awards granted under schemes where there are
changes in performance conditions by which the awards are measured, such as for the Absolute Share Price or TSR based awards.
There were no new awards granted under the Performance Share Plan in the year.
Deferred Bonus Plan (DBP)
Under the DBP, eligible employees are entitled to participate in a voluntary bonus deferral, using up to 50% of their earned annual bonus to
purchase shares in the Group at market price. In connection with this, the Group will make a matching share award, up to a maximum of two
times the gross bonus deferred, which will vest provided they remain in employment for that period, the shares are retained for that period
and the performance measures have been met.
Outstanding at 1 January
Granted during the year
Dividend equivalent granted during the year
Exercised during the year
Outstanding at 31 December
Number
of shares
under award
2021
thousands
Weighted
average
exercise price
2021
£
Number
of shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
2,046
687
39
(966)
1,806
Nil
Nil
Nil
Nil
Nil
3,380
594
–
(1,928)
2,046
Nil
Nil
Nil
Nil
Nil
The awards over shares outstanding at 31 December 2021 and 2020 were all unvested and had a weighted average contractual life of 1.5 years
(2020: 1.3 years).
There were 686,472 awards granted under the Deferred Bonus Plan in the year, subject to the same EPS performance conditions as the LTIP.
The awards were valued using the Black-Scholes model.
248 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued The Black-Scholes model used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2021
£1.41
Nil
36.5%
3.0 years
0.13%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected
life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
The weighted average fair value of awards granted under this scheme in the year is £1.41 (2020: £1.29).
Equity Settled Bonus Plan (ESBP)
Under the ESBP, eligible employees who are subject to a compulsory bonus deferral, are granted share awards equivalent in value to the gross
bonus deferred. The awards vest at the end of the deferral period and the awards are not subject to any performance or service conditions.
Outstanding at 1 January
Granted during the year
Dividend equivalent granted during the year
Outstanding at 31 December
Number
of shares
under award
2021
thousands
Weighted
average
exercise price
2021
£
Number
of shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
908
329
20
1,257
Nil
Nil
Nil
Nil
308
600
–
908
Nil
Nil
Nil
Nil
The awards over shares outstanding at 31 December 2021 were all unvested and had a weighted average contractual life of 1.3 years
(2020: 2.0 years).
There were 329,258 awards granted under the Equity Settled Bonus Plan in the year. The awards were valued using the Black-Scholes model.
The Black-Scholes model used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2021
£1.40
Nil
36.6%
3 years
0.10%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected
life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
The weighted average fair value of awards granted under this scheme in the year is £1.40 (2020: £1.31).
Annual Report and Accounts 2021
Serco Group plc
249
Financial StatementsCorporate Governance
35. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation and
are not disclosed in this note. Transactions between the Group and its joint venture undertakings and associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with joint ventures and associates:
Sale of goods and services
Joint ventures
Associates
Other
Dividends received – joint ventures
Dividends received – associates
Receivable from consortium for tax – joint ventures
Total
Current
outstanding
at 31 December
2021
£m
Non-current
outstanding
at 31 December
2021
£m
Transactions
2021
£m
1.6
0.8
–
13.5
0.9
16.8
1.7
–
–
–
0.2
1.9
–
–
–
–
0.8
0.8
Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of trading,
are unsecured, and will be settled in cash. No guarantees have been given or received.
Sale of goods and services
Joint ventures
Associates
Other
Dividends received – joint ventures
Dividends received – associates
Receivable from consortium for tax – joint ventures
Total
Current
outstanding
at 31 December
2020
£m
Non-current
outstanding
at 31 December
2020
£m
Transactions
2020
£m
0.1
2.3
4.3
15.5
(0.1)
22.1
–
0.2
–
–
2.0
2.2
–
–
–
–
0.1
0.1
As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services
provided by the Group through AWE Management Limited (AWEML) on 30 June 2021.
As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been
awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD)
Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.
Remuneration of key Management personnel
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and Directors’
liability insurance.
The remuneration of the key Management personnel of the Group is set out below in aggregate for each of the categories specified in IAS24
Related Party Disclosures:
Short-term employee benefits
Share based payment expense
2021
£m
8.5
5.0
13.5
2020
£m
9.3
5.4
14.7
The key Management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee
(2021: 18 individuals, 2020: 18 individuals).
250 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued Aggregate Directors’ remuneration
The total amounts for Directors’ remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:
Salaries, fees, bonuses and benefits in kind
Amounts receivable under long-term incentive schemes
Gains on exercise of share awards
2021
£m
3.5
2.8
3.6
9.9
2020
£m
3.6
3.4
3.6
10.6
None of the Directors are members of the Company’s defined benefit or money purchase pension schemes.
Further information about the remuneration of individual Directors is provided in the audited part of the Directors’ Remuneration Report on
pages 139 to 170.
36. Notes to the Consolidated Cash Flow statement
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e
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o
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t
2020
Before
exceptional
items
£m
2020
Exceptional
items
£m
Year ended 31 December
Profit before tax
Net finance costs
Operating profit for the year
Adjustments for:
Share of profits in joint ventures and associates
Exceptional distribution from joint venture
Share based payment expense
Impairment of property, plant and equipment
Impairment of right of use assets
Depreciation of property, plant and equipment
Depreciation of right of use assets
Amortisation of intangible assets
Exceptional profit on disposal of subsidiaries and
operations
Reversal of impairment on loans to JVs
Profit on early termination of leases
Profit on disposal of property, plant and equipment
Loss on disposal of intangible assets
(Decrease)/increase in provisions
Total non-cash items
Operating cash inflow/(outflow) before
movements in working capital
Decrease/(increase) in inventories
Decrease/(increase) in receivables
(Decrease)/increase in payables
Movements in working capital
Cash generated by operations
Tax paid
Non-cash R&D expenditure
2021
Before
exceptional
items
£m
193.4
24.0
217.4
(8.7)
–
15.8
0.3
–
19.6
109.0
27.3
–
–
(0.6)
(0.2)
1.6
(7.2)
156.9
374.3
1.7
25.4
(1.9)
25.2
399.5
(42.1)
–
2021
Exceptional
items
£m
(1.2)
–
(1.2)
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.5)
(1.5)
(2.7)
–
–
(4.8)
(4.8)
(7.5)
–
–
2021
Total
£m
192.2
24.0
216.2
(8.7)
–
15.8
0.3
–
19.6
109.0
27.3
–
–
(0.6)
(0.2)
1.6
(8.7)
140.8
25.9
166.7
(12.7)
–
11.2
0.3
0.4
15.9
93.5
23.0
–
–
(2.9)
(0.4)
0.6
16.2
155.4
145.1
371.6
1.7
25.4
(6.7)
20.4
392.0
(42.1)
–
311.8
(2.9)
(0.1)
(2.3)
(5.3)
306.5
(35.9)
(0.1)
Net cash inflow/(outflow) from operating
activities
357.4
(7.5)
349.9
270.5
2020
Total
£m
153.3
25.9
179.2
(12.7)
(1.9)
11.2
0.3
0.4
15.9
93.5
23.0
(11.0)
(1.2)
(2.9)
(0.4)
0.6
12.2
127.0
306.2
(2.9)
(0.1)
1.3
(1.7)
304.5
(35.9)
(0.1)
268.5
12.5
–
12.5
–
(1.9)
–
–
–
–
–
–
(11.0)
(1.2)
–
–
–
(4.0)
(18.1)
(5.6)
–
–
3.6
3.6
(2.0)
–
–
(2.0)
Annual Report and Accounts 2021
Serco Group plc
251
Financial StatementsCorporate Governance
37. Post balance sheet events
Serco share repurchase programme
Following the successful completion of the share buyback programme during 2021, in which 30.7m shares were repurchased at an average
price including fees of 1.32p, the Group has announced its intention to commence a further share buyback of up to £90m. Consistent with
the Group’s capital allocation policy, the objective of the programme is to provide additional returns to shareholders as well as aid the Group
in meeting its medium-term leverage targets. The buyback programme is expected to complete within 12 months with the shares either
cancelled or held in Treasury.
Dividends
Subsequent to the year end, the Board has recommended the payment of a final dividend in respect of the year ended 31 December 2021 of
1.61p. The dividend remains subject to shareholder approval at the Annual General Meeting and therefore no amounts have been recognised
in respect of a dividend in these Consolidated Financial Statements.
252 Serco Group plc
Annual Report and Accounts 2021
Notes to the Consolidated Financial Statements continued Company Balance Sheet
Company Balance Sheet
At 31 December
Fixed assets
Right of use assets
Investments in subsidiaries
Current assets
Debtors: amounts due within one year
Debtors: amounts due after more than one year
Derivative financial instruments due within one year
Corporation tax asset
Cash at bank and in hand
Total assets
Creditors: amounts falling due within one year
Trade and other payables
Loans
Provisions
Derivative financial instruments
Net current assets
Creditors: amounts falling due after more than one year
Loans
Amounts owed to subsidiary companies
Provisions
Total liabilities
Net assets
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account
Share based payment reserve
Own shares reserve
Total shareholders’ funds
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Note
39
40
41
41
45
42
43
44
45
43
44
47
48
49
50
2021
£m
0.1
2,041.7
2,041.8
3.9
534.2
2.6
0.5
138.2
679.4
2020
£m
0.1
2,032.7
2,032.8
5.0
366.1
4.5
1.0
206.2
582.8
2,721.2
2,615.6
(80.0)
(64.9)
(12.6)
(2.0)
(159.5)
519.9
(312.1)
(1,203.6)
(41.1)
(1,556.8)
(1,716.3)
1,004.9
24.4
463.1
0.4
437.1
81.1
(1.2)
(73.2)
(89.7)
(11.3)
(9.2)
(183.4)
399.4
(299.1)
(1,046.5)
(41.1)
(1,386.7)
(1,570.1)
1,045.5
24.7
463.1
0.1
493.0
66.7
(2.1)
1,004.9
1,045.5
The accompanying notes form an integral part of the financial statements.
The Company has not presented its own profit and loss account as permitted by Section 408 of the Companies Act 2006. The total profit for
the year was £11.0m (2020: loss £22.5m) and the total comprehensive income for the year was £11.0m (2020: loss of £22.5m).
The financial statements (registered number 02048608) were approved by the Board of Directors on 23 February 2022 and signed on its
behalf by:
Rupert Soames
Group Chief Executive Officer
Nigel Crossley
Group Chief Financial Officer
Annual Report and Accounts 2021
Serco Group plc
253
Financial StatementsCorporate Governance
Company Statement of Changes in Equity
Company Statement of Changes in Equity
Share capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Profit and
loss account
£m
Treasury
shares
£m
At 1 January 2020
24.5
462.9
0.1
515.5
Total comprehensive income for
the year
Issue of share capital
Shares transferred to award holders
on exercise of share awards
Awards over parent’s shares made
to employees of subsidiaries
Expense in relation to share based
payments
–
0.2
–
–
–
–
0.2
–
–
–
–
–
–
–
–
(22.5)
–
–
–
–
At 1 January 2021
24.7
463.1
0.1
493.0
Total comprehensive income for
the year
Dividends paid by the Group
Shares purchased and held in
Treasury
Cancellation of shares held in
Treasury
Shares transferred from Treasury to
own shares reserve
Shares transferred to award holders
on exercise of share awards
Awards over parent’s shares made
to employees of subsidiaries
Expense in relation to share based
payments
Tax charge on items taken directly
to equity
–
–
–
(0.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(40.7)
0.3
(20.4)
20.4
(20.0)
20.3
–
–
–
–
–
–
–
–
11.0
(26.5)
–
–
–
–
At 31 December 2021
24.4
463.1
0.4
437.1
The accompanying notes form an integral part of the financial statements.
Share based
payment
reserve
£m
Own shares
reserve
£m
Total
shareholders’
equity
£m
57.9
(4.4)
1,056.5
–
–
–
(0.2)
(2.4)
2.5
3.2
8.0
–
–
(22.5)
0.2
0.1
3.2
8.0
66.7
(2.1)
1,045.5
–
–
–
–
–
–
–
–
–
(0.3)
(1.0)
1.2
9.0
6.8
(0.4)
–
–
–
11.0
(26.5)
(40.7)
–
–
0.2
9.0
6.8
(0.4)
81.1
(1.2)
1,004.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
254 Serco Group plc
Annual Report and Accounts 2021
Notes to the Company Financial Statements
Notes to the Company Financial Statements
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38. Accounting policies
The principal accounting policies adopted are set out below and have been applied consistently throughout the current and preceding year.
Basis of accounting
The Company meets the definition of a qualifying entity under FRS 100 (Financial Reporting Standard 100) issued by the Financial Reporting
Council. These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework
(FRS 101). In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of
international accounting standards in conformity with the requirements of the Companies Act 2006 (Adopted IFRSs) but makes amendments
where necessary in order to comply with the Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure
exemptions has been taken.
The Company has not presented its own profit and loss account as permitted by Section 408 of the Companies Act 2006. As permitted by
FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share based payments,
financial instruments, capital management, presentation of comparative information in respect of certain assets, presentation of a cash flow
statement, standards not yet effective, impairment of assets and related party transactions.
The financial statements have been prepared on the historical cost basis and on the going concern basis, except for the revaluation of certain
financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the goods and services.
The principal accounting policies adopted are the same as those set out in note 2 to the Consolidated Financial Statements, except as noted
below.
Fixed asset investments
Investments held as fixed assets are stated at cost less provision for any impairment in value.
39. Right of use assets
Leased vehicles of £0.1m (2020: £0.1m) have been included on the balance sheet following the adoption of IFRS 16 Leases.
40. Investments held as fixed assets
Shares in subsidiary companies at cost
At 1 January 2020
Awards over parent’s shares made to employees of subsidiaries
At 1 January 2021
Awards over parent’s shares made to employees of subsidiaries
At 31 December 2021
The Company directly owns 100% of the ordinary share capital of the following subsidiaries:
Name
Serco Holdings Limited
41. Debtors
Amounts due within one year
Other debtors
£m
2,029.5
3.2
2,032.7
9.0
2,041.7
% ownership
100%
2021
£m
3.9
2020
£m
5.0
Included within other debtors is prepaid intercompany interest of £3.0m (2020: £4.2m), amounts owed by other subsidiary companies £0.7m
(2020: £0.7m) and other prepayments of £0.2m (2020: £0.1m).
Amounts due after more than one year
Amounts owed by subsidiary companies
2021
£m
534.2
2020
£m
366.1
The expected credit loss provision against amounts owed by subsidiary companies is immaterial.
Annual Report and Accounts 2021
Serco Group plc
255
Financial StatementsCorporate Governance
Notes to the Company Financial Statements
continued
42. Trade and other payables
Amounts due within one year
Amounts owed to subsidiary companies
Trade creditors
Accruals and deferred income
Other creditors including taxation and social security
43. Loans
Loans are repayable as follows:
On demand or within one year
Between one and two years
Between two and five years
After five years
Less: amount due for settlement within one year (shown within current liabilities)
Amount due for settlement after one year
44. Provisions
At 1 January 2021
Charged to income statement
At 31 December 2021
Analysed as:
Current
Non-current
2021
£m
64.5
0.5
13.4
1.6
80.0
2021
£m
64.9
40.2
160.8
111.1
377.0
(64.9)
312.1
Other
£m
43.9
–
43.9
2.8
41.1
43.9
2020
£m
55.6
0.4
15.9
1.3
73.2
2020
£m
89.7
64.9
124.6
109.6
388.8
(89.7)
299.1
Total
£m
52.4
1.3
53.7
12.6
41.1
53.7
Contract
£m
8.5
1.3
9.8
9.8
–
9.8
Other provisions are held for indemnities given on disposed businesses and legal and other costs that the Company expects to incur over an
extended period, in respect of past events, for which a provision has been recorded. These costs are based on past experience of similar items
and other known factors and represent Management’s best estimate of the likely outcome and will be utilised with reference to the specific
facts and circumstances. The timing of utilisation is dependent on future events which could occur within the next twelve months or over a
longer period.
45. Derivative financial instruments
Forward foreign exchange contracts
Analysed as:
Current
Assets
2021
£m
2.6
2.6
Liabilities
2021
£m
(2.0)
(2.0)
Assets
2020
£m
4.5
4.5
Liabilities
2020
£m
(9.2)
(9.2)
The Company holds derivative financial instruments in accordance with the Group’s policy in relation to its financial risk management. Details
of the disclosures are set out in note 29 of the Group’s Consolidated Financial Statements.
256 Serco Group plc
Annual Report and Accounts 2021
46. Deferred tax
The deferred tax asset not recognised is as follows:
At 31 December
Depreciation in excess of capital allowances
Share based payments and employee benefits
Short-term timing differences
Losses
47. Called up share capital
Issued and fully paid
1,233,380,637 (2020: 1,223,380,637) ordinary shares of 2p each at 31 December
Issued: Nil (2020: 10,000,000) ordinary shares of 2p
Cancelled: 15,371,849 (2020: Nil) ordinary shares of 2p
1,218,008,788 (2020: 1,233,380,637) ordinary shares of 2p each at 31 December
2021
£m
24.7
–
(0.3)
24.4
Number
2021
millions
1,233.4
–
(15.4)
1,218.0
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a
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c
R
e
p
o
r
t
2021
£m
0.3
2.4
1.8
51.5
56.0
2020
£m
24.5
0.2
–
24.7
2020
£m
0.2
–
1.3
40.0
41.5
Number
2020
millions
1,223.4
10.0
–
1,233.4
During the year 15,371,849 shares were cancelled as part of the Serco Share Repurchase Programme (the Programme). At the end of 2020, the
Group announced its intention to repurchase ordinary shares with a value of up to £40m, subject to a maximum of 122,338,063 ordinary shares
being purchased, during the period 4 January 2021 to 11 June 2021. Through the Programme, the Group repurchased 30,721,849 ordinary
shares for total consideration of £40.7m including fees.
On 28 June 2021, the Group announced that, of the ordinary shares repurchased and held in Treasury, 15,350,000 were transferred to the
Employee Share Ownership Trust (ESOT) to be used to satisfy awards granted under the Group’s share award schemes. The 15,371,849
ordinary shares remaining in Treasury were cancelled on 28 June 2021.
During 2020, 10,000,000 shares were issued to the ESOT to satisfy awards under the Group’s share plan schemes.
The Company has one class of ordinary shares which carry no right to fixed income.
48. Share premium account
At 1 January
Arising on shares issued
At 31 December
2021
£m
463.1
–
463.1
2020
£m
462.9
0.2
463.1
The movement on the account in the prior year is the release of an accrual for costs associated with the 2019 share issue that will no longer
be incurred.
Annual Report and Accounts 2021
Serco Group plc
257
Financial StatementsCorporate Governance
Notes to the Company Financial Statements
continued
49. Profit and loss account
At 1 January
Profit/(loss) for the year
Equity dividends
Shares transferred from Treasury to own shares reserve
Cancellation of shares held in Treasury
At 31 December
2021
£m
493.0
11.0
(26.5)
(20.0)
(20.4)
437.1
2020
£m
515.5
(22.5)
–
–
–
493.0
As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented as part of these
accounts. The total profit for the year was £11.0m (2020: loss of £22.5m) and the total comprehensive income for the year was £11.0m
(2020: loss of £22.5m).
The Company plans to maintain sufficient funds and distributable reserves to allow payments of projected dividends to shareholders. During
2015, Serco Group plc as a statutory entity created £519m of reserves from the Rights Issue which was structured to ensure that these reserves
were distributable. As a result of this transaction, the Group has sufficient distributable reserves to facilitate the payment of distributions by
Serco Group plc.
50. Share based payment reserve
At 1 January
Awards over parent’s shares made to employees of subsidiaries
Share based payment charge
Shares transferred to award holders on exercise of share awards
Tax charge on items taken directly to equity
At 31 December
2021
£m
66.7
9.0
6.8
(1.0)
(0.4)
81.1
2020
£m
57.9
3.2
8.0
(2.4)
–
66.7
Details of the share based payment disclosures are set out in note 34 of the Group’s Consolidated Financial Statements.
51. Own shares
The own shares reserve represents the cost of shares in Serco Group plc held by the Serco Group plc Employee Share Ownership Trust (ESOT)
to satisfy awards under the Group’s share plan schemes. At 31 December 2021, the ESOT held 11,605,185 (2020: 7,036,349) shares equal to
1.0% of the current allotted share capital (2020: 0.6%). The market value of shares held by the ESOT as at 31 December 2021 was £15.6m
(2020: £8.4m).
52. Contingent liabilities
The Company has guaranteed overdrafts, leases, and bonding facilities of its joint ventures and associates up to a maximum value of
£5.7m (2020: £3.8m). The actual commitment outstanding at 31 December 2021 was £5.7m (2020: £3.8m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other bonds, issued
by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31 December 2021 was £243.5m
(2020: £228.6m).
Following the announcement during 2020 that the Company has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Company has continued to assess the merit, likely outcome and potential impact on the Company
of any such litigation that either has been or might potentially be brought against the Company. Any outcome is subject to a number of
significant uncertainties. The Company does not currently assess the merits as strong, especially given the legal uncertainties in such actions.
The Company is also aware of other claims and potential claims which involve or may involve legal proceedings against the Company
although the timing of settlement of these claims remains uncertain. The Directors are of the opinion, having regard to legal advice received
and the Company’s insurance arrangements, that it is unlikely that these matters will, in aggregate, have a material effect on the Company’s
financial position.
53. Related parties
The Directors of Serco Group plc had no material transactions with the Company or its subsidiaries during the year other than service contracts
and Directors’ liability insurance. Details of the Directors’ remuneration are disclosed in the Remuneration Report for the Group.
The Company is exempt under the terms of FRS 101 from disclosing related party transactions with entities that are 100% owned by Serco
Group plc.
258 Serco Group plc
Annual Report and Accounts 2021
Appendix: List of subsidiaries
and related undertakings
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Appendix: List of subsidiaries
and related undertakings
Company name
ACN 611 392 744 Pty Ltd
Aeradio Technical Services L.L.C.2
Aeradio Technical Services WLL2/4
AWE Management Limited
BRTRC Federal Solutions, Inc.
Cardinal Insurance Company Limited
Chimera WBB JV L.L.C.
Clemaco Contracting NV
Clemaco Trading NV
COMPASS SNI Limited
Conflucent Innovations, L.L.C.
Decisive Analytics Corporation
Djurgardens Farjetrafik AB
DMS Maritime Pty Limited
Facilities First Australia Holdings Pty Ltd
Facilities First Australia Pty Ltd
Serco Group
interest
Registered office address
49%
49%
49%
24.5%
100%
100%
49%
100%
100%
100%
49%
100%
50%
100%
100%
100%
Level 6, 123 Epping Road, Macquarie Park NSW 2113, Australia
Headquarters Building, PO Box 126, Doha, Qatar
Headquarters Building, Building # 1605, Road # 5141, Askar # 951, PO Box
26803 Manama, Kingdom of Bahrain
Hill House, 1 Little New Street, London, EC4A 3TR
12930 Worldgate Drive, Suite 600, Herndon, VA 20170, United States
Dorey Court, Admiral Park, St Peter Port, GY1 4AT Guernsey
12930 Worldgate Drive, Suite 600, Herndon, VA 20170, United States
Sint-Sebastiaanstraat 5, 8400 Oostende, Belgium
Sint-Sebastiaanstraat 5, 8400 Oostende, Belgium
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
5880 Innovation Drive, Dublin, OH 43016, United States
12930 Worldgate Drive, Suite 600, Herndon, VA 20170, United States
Svensksundsvagen 17, 111 49 Stockholm, Sweden
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Facilities First Australia Sub-Holdings Pty Ltd
100%
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Hong Kong Parking Limited
Innu Serco Inc
Innu Serco Limited Partnership
International Aeradio (Emirates) L.L.C. – Abu
Dhabi
40%
49%
49%
49%
International Aeradio (Emirates) L.L.C. – Dubai 49%
JBI Properties Services Company L.L.C.
49%
Joint Integrated Range Solutions L.L.C.
Khadamat Facilities Management L.L.C.
LOGTEC Inc.
Mahani Technical Services, L.L.C.
Mercurius Finance SA
Merseyrail Electrics 2002 Limited
Merseyrail Infraco Limited
49%
49%
100%
49%
100%
50%
50%
Room 2601, World Trade Centre, 280 Gloucester Road, Causeway Bay, Hong
Kong
P.O. Box 1012, Station C, Happy Valley – Goose Bay, NL, A0P 1C0, Canada
P.O. Box 1012, Station C, Happy Valley – Goose Bay, NL, A0P 1C0, Canada
Office No. 503, 5th Floor, Al Muhairy Building, Zayed The First Street, PO Box
3164 Abu Dhabi, United Arab Emirates
19th Floor, Rolex Tower, Sheikh Zayed Road, PO Box 9197 Dubai, United Arab
Emirates
7th Floor, Al Sila Tower Abu Dhabi Global Market Square, Al Maryah Island,
Abu Dhabi, United Arab Emirates
8337 W. Sunset Road, Suite 250, Las Vegas, NV 89113, United States
The United Arab Emirates University, Al Jamea Street, Al Maqam District, PO
Box 66718 Al Ain, United Arab Emirates
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
511 Duckwater Fall Road, Duckwater, Nevada 89314, United States
42 rue de la Vallée, L-2661 Luxembourg
Rail House, Lord Nelson Street, Liverpool, Merseyside, L1 1JF
Rail House, Lord Nelson Street, Liverpool, Merseyside, L1 1JF
Merseyrail Services Holding Company Limited3 50%
2 New Bailey, 6 Stanley Street, Salford, Greater Manchester, M3 5GS
Northern Rail Holdings Limited
Northern Rail Limited
50%
50%
Priority Properties North West Limited
100%
Eversheds House, 70 Great Bridgewater Street, Manchester, Lancashire, M1
5ES United Kingdom
Serco House 16 Bartley Wood, Business Park Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, ,
RG27 9UY, United Kingdom
Serco (Jersey) Limited
Serco Australia Pty Limited3
Serco Belgium S.A.
100%
100%
100%
26 New Street, St. Helier, JE2 3RA, Jersey
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
1945 Chaussée de Wavre, 1160 Auderghem, Brussels, Belgium
Annual Report and Accounts 2021
Serco Group plc
259
Financial StatementsCorporate Governance
Appendix: List of subsidiaries
and related undertakings continued
Serco Group
interest
Registered office address
Company name
Serco Caledonian Sleepers Limited
Serco Canada Inc.
Serco Canada Marine Corporation
Serco Citizen Services Pty Ltd
Serco Corporate Services Limited
Serco Czech Republic s.r.o.
Serco Defence Clothing Pty Ltd
Serco Defence S.A.
Serco Defence Services Pty Ltd
Serco Environmental Services Limited
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Serco Ferries (Guernsey) Crewing Limited
100%
Serco Ferries (HR) Limited
Serco Geografix Limited
Serco Gestion de Negocios S.L.U.
Serco Group (HK) Limited
Serco Group Pty Limited
Serco Holdings Limited1
Serco Inc.3
Serco Integrated Transport Private Limited2
Serco International Limited
Serco International S.à r.l
Serco Italia S.p.A.
Serco Leasing Limited
Serco Leisure Operating Limited
Serco Limited3
Serco Listening Company Limited
Serco Luxembourg S.A.
Serco Nederland B.V.
Serco New Zealand (Asset Management
Services) Limited
Serco New Zealand Limited
Serco New Zealand Training Limited
Serco North America (Holdings), Inc.
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Basement and Ground Floor Premises, 1-5 Union Street, Inverness, IV1 1PP,
Scotland, United Kingdom
330 Bay Street, Suite 400, Toronto, Canada M5H 2S8
330 Bay Street, Suite 400, Toronto, Canada M5H 2S8
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Praha City Centre, Klimentska 46, Prague, 110 02, Czech Republic
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
1945 Chaussée de Wavre, 1160 Auderghem, Brussels, Belgium
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
4th Floor, West Wing, Trafalgar Court, Admiral Park, St Peter Port, GY1 2JA,
Guernsey
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Calle Ayala no 13, 1° derecha, CP-28001, Madrid, Spain
Unit 3103, 31/F, Millennium City 6, 392 Kwun Tong Road, Kwun Tong, Kowloon,
Hong Kong
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
Office# 431, Level 4, Augusta Point, Sector 53 Golf Course Road, Gurgaon
122002, India
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
7, rue Robert Stümper, L-2557, Luxembourg
Viale della Tecnica 161, 00144, Rome, Italy
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Rue Sainte Zithe, 33, L-2763 Luxembourg
Kapteynstraat 1, 2201 BB Noordwijk ZH, Netherlands
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland Central,
Auckland, 1010, New Zealand
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland Central,
Auckland, 1010, New Zealand
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland Central,
Auckland, 1010, New Zealand
1209 Orange Street, Wilmington, DE 19801, United States
260 Serco Group plc
Annual Report and Accounts 2021
Company name
Serco North America Limited
Serco Nunavut Ltd.
Serco Paisa Limited
Serco PIK Limited
Serco Pension Trustee Limited
Serco Projects L.L.C.
Serco Regional Services Limited
Serco Safety Services L.L.C.
Serco Sarl
Serco SAS
Serco Saudi Arabia L.L.C.
Serco Saudi Fire Services L.L.C.
Serco Saudi Services L.L.C.
Serco Security Services SASU
Serco Services GmbH
Serco Singapore Pte Limited
Serco Switzerland S.A.
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Serco Group
interest
Registered office address
100%
49%
50%
100%
100%
49%
100%
49%
100%
100%
100%
95%
60%
100%
100%
100%
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Field Law, House 2436, PO Box 1734, Iqaluit, NU X0A 0H0, Canada
Ci Tower, St. George’s Square, New Malden, Surrey, KT3 4TE United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Global Business Centre 2, Second Floor, Al Hitmi Village Building, C-Ring
Road, PO Box 25422 Doha, State of Qatar
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
Hala Business Center, Al Khor Building, Office 201, 202, Baniyas Street, Al
Buteen Area Deira, Dubai
15, rue Lumière 01630 Saint Genis Pouilly, France
15, rue Lumière 01630 Saint Genis Pouilly, France
6987 King Abdul Aziz Road, Al Maseef District, Unit No. 31, Riyadh, 12467-
2444, Kingdom of Saudi Arabia
6987 King Abdul Aziz Road, Al Maseef District, Unit No. 31, Riyadh, 12467-
2444, Kingdom of Saudi Arabia
6987 King Abdul Aziz Road, Al Maseef District, Unit No. 31, Riyadh, 12467-
2444, Kingdom of Saudi Arabia
15 Rue Lumière, Technoparc Pays de Gex, 01630 Saint Genis Pouilly, France
Lise-Meitner-Strasse 10, 64293 Darmstadt, Germany
38 Beach Road, #29-11 South Beach Tower, Singapore, 189767
62 Route de Frontenex Bis 86, 1208 Geneva, Switzerland
Serco Traffic Camera Services (VIC) Pty Limited 100%
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco-IAL Limited
Serco-IPS Corporation
STJ Administration Pty Limited
Targets NV
TJS Corporate Security WA Pty Limited
TJS Hospitality & Entertainment Pty Ltd
TJS Services (FNQ) Pty Ltd
TJS Services (Newcastle) Pty Ltd
TJS Services (SA) Pty Ltd
TJS Services (Vic) Pty Ltd
TJS Services (WA) Pty Ltd
Vivo Defence Services Limited
WBB Intermediate Holding Corp.
Whitney, Bradley & Brown, Inc.
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
RG27 9UY, United Kingdom
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Sint-Sebastiaanstraat 5, 8400 Oostende, Belgium
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Shared Services Centre Q3 Office, Quorum Business Park, Benton Lane,
Newcastle-Upon-Tyne, NE12 8EX, United Kingdom
12930 Worldgate Drive, Suite 600, Herndon, VA 20170, United States
12930 Worldgate Drive, Suite 600, Herndon, VA 20170, United States
1 Serco Holdings Limited is directly owned by Serco Group plc. All other subsidiaries and associated undertakings are held indirectly via Group companies.
2 Companies in liquidation as at 31 December 2021.
3 Companies key to the consolidated numbers, all of which are engaged in the provision of support services.
4 Companies with a non-controlling interest due to being consolidated in full as a result of considerations over control.
Annual Report and Accounts 2021
Serco Group plc
261
Financial StatementsCorporate Governance
Shareholder Information
Shareholder Information
Our website
The Company’s website, www.serco.com, provides access to share
price information as well as sections on managing your shareholding
online, corporate governance and other investor relations
information.
Dividend
Proposed final dividend
The Directors have recommended payment of a final dividend of
1.61p in respect of the year ended 31 December 2021, subject to
approval by shareholders at the Annual General Meeting.
Shareholder queries
Our share register is maintained by our Registrar, Equiniti.
Shareholders with queries relating to their shareholding
should contact Equiniti directly using one of the methods
listed opposite.
Key dates
Annual General Meeting 28 April 2022
Ex-dividend date 12 May 2022
Record date 13 May 2022
Payment date 7 June 2022
Dividend payment
Shareholders are encouraged to receive dividends directly to their
bank or building society which saves paper, helping to minimise our
environmental impact and reducing the cost of printing and delivery.
Mandate forms are available at www.shareview.co.uk
American Depositary Receipts (ADRs)
Serco has established a sponsored Level I ADR programme.
Serco ADRs are traded on the US over-the-counter market (SCGPY).
For queries relating to your ADR holding, please contact our
ADR depositary bank, Deutsche Bank Trust Company Americas.
Managing your shares online
Shareholders can manage their holding online by registering to use
our shareholder portal at www.shareview.co.uk. This free service
is provided by our Registrar, giving quick and easy access to your
shareholding.
Electronic communications
We encourage shareholders to consider receiving their
communications electronically which means you receive information
quickly and securely and allows us to communicate in a more
environmentally friendly and cost-effective way. You can register for
this service online using our share portal at www.shareview.co.uk
Duplicate documents
Some shareholders find that they receive duplicate documentation
due to having more than one account on the share register. If you
think you fall into this group and would like to combine your
accounts, please contact our Registrar, Equiniti.
Changes of address
To avoid missing important correspondence relating to your
shareholding, it is important that you inform our Registrar of your
new address as soon as possible.
Sharegift
If you have a very small shareholding that is uneconomical to sell,
you may want to consider donating it to Sharegift (Registered Charity
no.10526886), a charity that specialises in the donation of small,
unwanted shareholdings to good causes. You can find out more by
visiting www.sharegift.org or by calling +44 (0) 207 930 3737.
262 Serco Group plc
Annual Report and Accounts 2021
Useful Contacts
Useful Contacts
Serco’s registered office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
United Kingdom
Telephone: +44 (0)1256 745 900
Email:
investorcentre@serco.com
Registered in England and Wales No. 2048608
Group General Counsel and Company Secretary
David Eveleigh
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
United Kingdom
Telephone: 0371 384 2932 (from within UK)
+44 (0)121 415 7047 (from outside UK)
Lines are open 8.30am to 5.30pm
Monday to Friday. (excluding public holidays
in England and Wales)
www.shareview.co.uk
Website:
Shareholders can securely send queries via the website using the
‘Help’ section.
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ADR depositary bank
Deutsche Bank Trust Company Americas
c/o American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn NY 11219
USA
Telephone: +1 866 249 2593 (toll-free within USA)
Website:
Email:
+1 718 921 8124 (from outside USA)
www.adr.db.com
db@astfinancial.com
Brokers
JP Morgan Cazenove
Barclays
Auditor
KPMG LLP
Unsolicited mail and shareholder fraud
Shareholders are advised to be wary of unsolicited mail or telephone
calls offering free advice, to buy shares at a discount or offering free
company reports. For further information on how shareholders can
be protected from investment scams visit www.fca.org.uk/consumers/
scams/investment-scams/ share-fraud-and-boiler-room-scams
Notification of major interests in shares (TR1 Forms)
Email:
cosec@serco.com
Legal Disclaimer
This Annual Report and Accounts contains certain statements
which are, or may be deemed to be, ‘forward-looking statements’.
All statements other than statements of historical fact are forward-
looking statements. Generally, words such as “expect”, “anticipate”,
“may”, “could”, “should”, “will”, “aspire”, “aim”, “plan”, “target”,
“goal”, “ambition”, “intend” and similar expressions identify
forward- looking statements. By their nature, these forward-looking
statements are subject to a number of known and unknown risks,
uncertainties and contingencies, and actual results and events could
differ materially from those currently being anticipated as reflected
in such statements. Factors which may cause future outcomes to
differ from those foreseen or implied in forward-looking statements
include, but are not limited to: general economic conditions and
business conditions in Serco’s markets; contracts awarded to Serco;
customers’ acceptance of Serco’s products and services; operational
problems; the actions of competitors, trading partners, creditors,
rating agencies and others; the success or otherwise of partnering;
changes in laws and governmental regulations; regulatory or legal
actions, including the types of enforcement action pursued and
the nature of remedies sought or imposed; the receipt of relevant
third party and/or regulatory approvals; exchange rate fluctuations;
the development and use of new technology; changes in public
expectations and other changes to business conditions; wars and
acts of terrorism; cyber-attacks; and pandemics, epidemics or
natural disasters. Many of these factors are beyond Serco’s control
or influence. For a description of the principal risks and uncertainties
that may affect Serco’s business, financial performance or results
of operations, please refer to the Principal Risks and Uncertainties
set out in this Annual Report and Accounts. These forward-looking
statements speak only as of the date of this publication. Past
performance should not be taken as an indication or guarantee
of future results and no representation or warranty, express or
implied, is made regarding future performance. Except as required
by any applicable law or regulation, Serco expressly disclaims
any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained in this
publication to reflect any change in Serco’s expectations or any
change in events, conditions or circumstances on which any such
statement is based. Accordingly, undue reliance should not be
placed on any such forward-looking statements. Any references
in this publication to other reports or materials, including website
addresses, are for the reader’s interest only. Neither the content of
Serco’s website nor any website accessible from hyperlinks from
Serco’s website, including any materials contained or accessible
thereon, are incorporated in or form part of this publication.
Serco is subject to the regulatory requirements of the Financial
Conduct Authority of the United Kingdom
Annual Report and Accounts 2021
Serco Group plc
263
Financial StatementsCorporate Governance
Notes
264 Serco Group plc
Annual Report and Accounts 2021
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www.serco.com
Serco Group plc
Serco House
16 Bartley Wood Business Park
Bartley Way, Hook
Hampshire, RG27 9UY
For general enquiries contact
T: +44 (0)1256 745900
E: investorcentre@serco.com