Report of the Isle of Man Post Office Board Strategic Recommendations

GD 2018/0085

REPORT OF THE ISLE OF MAN POST OFFICE BOARD

STRATEGIC RECOMMENDATIONS REQUIRING TYNWALD APPROVAL

REPORT OF THE ISLE OF MAN POST OFFICE BOARD

STRATEGIC RECOMMENDATIONS

REQUIRING TYNWALD APPROVAL

On Tuesday 17th July 2018 it was resolved that Tynwald –

“recognises the unique attributes, capabilities and social value of the Isle of Man Post Office; acknowledges the challenges it faces in its core business sectors; views with concern its future prospects; believes that the Isle of Man Post Office has a significant role to play in the future delivery of enhanced public services in the Isle of Man; supports Isle of Man Post Office Board to ensure the long-term future of Isle of Man Post Office for the benefit of the people of the Isle of Man; requires Isle of Man Post Office to report back to Tynwald with its plans for Isle of Man Post Office by December 2018; and recognises the importance of putting aside any determination to pursue corporatization.”

Isle of Man Post Office Board Membership Julie Edge MHK (Chairman) Tanya August-Hanson MLC (Vice Chairman) John Hollis (Member) Christopher Mitchell (Member) Jane O’Rourke (Member)

Copies of this report may be obtained from the Isle of Man Post Office, Douglas, Isle of Man, IM2 1AA Tel. +44 1624 698400. All correspondence with regards to this report should be addressed to the Chief Executive Office.

TABLE OF CONTENTS

1 FOREWORD – CHAIRMAN ...... 5 2 EXECUTIVE SUMMARY ...... 7 3 INTRODUCTION ...... 9

3.1 BACKGROUND ...... 9

3.2 TYNWALD MOTION ...... 10

3.3 DOCUMENT SCOPE ...... 10

3.4 PUBLIC CONSULTATION ...... 11

3.5 INTRA-GOVERNMENT CONSULTATION ...... 11

3.6 EMPLOYEE AND UNION ENGAGEMENT ...... 12 4 OVERVIEW AND RECOMMENDATIONS ...... 13

4.1 REVENUE AND PROFIT GENERATION OVERVIEW ...... 13

4.2 PENSIONS OVERVIEW ...... 14

4.3 LETTER MAIL OVERVIEW ...... 15

4.4 PARCELS DELIVERY AND THE GIG ECONOMY OVERVIEW ...... 16

4.5 RETAIL NETWORK OVERVIEW ...... 16 5 APPENDIX A: REVENUE AND PROFIT GENERATION SUPPORTING INFORMATION ...... 17 6 APPENDIX B: PENSION SUPPORTING INFORMATION ...... 21 7 APPENDIX C: LETTER MAIL SUPPORTING INFORMATION...... 24 8 APPENDIX D: PARCEL MAIL AND THE GIG ECONOMY SUPPORTING INFORMATION ...... 28 9 APPENDIX E: RETAIL NETWORK SUPPORTING INFORMATION ...... 31 10 APPENDIX F: IOMPO STRATEGY ...... 36 11 APPENDIX G: PUBLIC CONSULTATION FULL RESULTS ...... 37 12 APPENDIX H: EXTRACT FROM DEFINED BENEFIT FRS 102 PENSION SCHEME VALUATION ...... 56 13 APPENDIX I: IMPACT OF POSSIBLE BENEFIT CHANGES TO DEFINED BENEFIT PENSION SCHEME ...... 1 14 APPENDIX J: PENSION SAVINGS FORECAST 2018 TO 2032 ...... 1

1 Foreword – Chairman “This report outlines recommendations for which the Isle of Man Post Office (IOMPO) is seeking Tynwald approval and support in order to protect the long-term future of the Island’s post office, in the best interests of the Manx community, its staff, customers and key stakeholders. The recommendations stem from the IOMPO Board and its staff initiating a high-level strategy to modernise the IOMPO. This was presented to the Department for Enterprise, (the IOMPO’s sponsoring department), the Council of Ministers and Tynwald Members earlier this year, setting out the key challenges facing the Post Office and detailing the reasons for necessary change so as to minimise the risk of a future subsidy from Government. This strategy is being formally laid as a separate document concurrently with this report. As Chairman of the IOMPO, I made a statement in the July sitting of Tynwald to provide Members with an update on the IOMPO’s strategic aims, and how it would be seeking approval for any fundamental changes we wish to make to the post office network, letter deliveries and our pension scheme. It is the belief of the IOMPO Board that Tynwald approval for the recommendations presented within this report are fundamental to the future success of the business, enabling it to create efficiencies and savings whilst not compromising the high quality standard of service the IOMPO provides to customers Island-wide. The absence of these changes will have a detrimental impact on the organisation, and in consequence the community, which should not be underestimated. The board are committed to acting in a financially responsible way, whilst providing services that meet the needs of the Island’s community. Our governing legislation requires the IOMPO to have regard to efficiency and economy; to the social, industrial and commercial needs of the Island, to the desirability of improving and developing our operating systems and to the developments occurring in the fields of communications and banking. I believe that our strategic business plan addresses those obligations squarely. Appreciating the heritage and unique attributes, capabilities and social value of the postal service, the board ran a public consultation during the summer to gather the valued opinions of Island residents, businesses, organisations and the IOMPO clients. This was to gain a better understanding of customers’ needs and how our services might be improved, offering value for money, while ensuring the Isle of Man Post Office remains self-funding and sustainable into the future. The IOMPO strongly believes customers are best placed to contribute as to the type, frequency and location of required Post Office services. So with their support, the IOMPO is proposing changes to make the business more fit for purpose and to reflect the supply and demand nature of the postal industry. It is grateful to the 2,700 plus people who took the time to have their say in what they expect from the IOMPO as a modern postal business. The results continue to inform our discussions with key stakeholders including staff, unions, sub postmasters, local commissioners and other parts of Government on the key issues and the future service options. With regard to the future of the post office network, more exploratory work needs to be undertaken in this area and when ready, the IOMPO will seek Tynwald approval for any proposed material changes. In the meantime, the consultation results with regard to changing the frequency of letter delivery support the recommendation laid out in this report. We are addressing our pension scheme which despite being substantially funded, is no longer affordable or sustainable in its current form. The recommendations within this report are for the mutual benefit and protection of the business and the scheme members.

The urgency for modernising the IOMPO is reflected in the £1.2m loss reported in the 2017/18 annual report and accounts which were laid before Tynwald in October. This was the first loss in the history of the IOMPO, emphasising the need for the business to adapt its current operations and practices to ensure it is financially responsible in delivering services that meet the changing needs and reasonable expectations of its customers. The IOMPO’s commercial success, which has historically helped to sustain an overall profit, is no longer sufficient to offset the increasing costs of providing the service obligations required under the Post Office Act. Therefore the board are focused on improving the efficiency and effectiveness of those services, while actively seeking new business and enhanced delivery opportunities. Addressing the issues the IOMPO faces, does call for some hard decisions and changes. Throughout this change process thus far, the IOMPO has sought to be inclusive, informing staff of the reasons to change through business-wide briefings and inviting questions, involvement and ideas every step of the way. Employees, including union members, have been asked to participate in a number of projects being undertaken so they can evaluate trends, identify efficiencies and seek opportunities to grow our services and customer base. Seconding staff to focus on the work of the strategy, using their skills, knowledge and experience in their respective fields is critical to the success of the business’ strategy. To conclude, the IOMPO remains committed to bringing all its key stakeholders along its modernisation journey while continuing to operate in a rapidly changing and challenging industry. I call on Tynwald to support the recommendations contained in this report to protect the Island’s much trusted and valued postal service.” Julie Edge MHK Chairman of Isle of Man Post Office

2 Executive Summary

1. As outlined in the Foreword by the Chairman, this report details the strategic recommendations for which the Isle of Man Post Office ‘IOMPO’ is seeking Tynwald approval and support in order to protect the long-term future of the IOMPO, in the best interests of its staff, customers and key stakeholders.

2. The first recommendation asks for recognition that IOMPO is not only managing decline but over the years has actively and successfully built up its commercial activities to offset the increasing losses in our public service obligations under the Post Office Act 1993.

3. Recommendation 1: that Tynwald notes that the IOMPO’s commercial activities have made significant contribution to offset the increasing losses from our public service obligations under the Post Office Act 1993, and have provided profit for reinvestment and significant contributions to Isle of Man Government Treasury.

4. The IOMPO will put aside its determination to pursue corporatization but will continue to pursue the development of both commercial diversification opportunities and enhanced public services. IOMPO is formally consulting with every Government department to examine how the organisation can, on a pan-government basis, provide added value to direct and indirect public services.

5. Recommendation 2: that Tynwald approve the IOMPO’s aim to continue to be self-funding as defined within the financial duties in the Post Office Act 1993 Section 5(1), by protecting the core business, by being efficient and effective, by growing profitably and by diversifying selectively.

6. To ensure the long term, sustainable future of the IOMPO and protect the benefits of the organisation to the Manx community, its staff and other stakeholders the third recommendation addresses the challenge of reforming a pension arrangement which is unaffordable and unsustainable. Costs and risks associated with the current pension scheme provision are significant contributory factors to our actual and forecasted unfavourable financial position. The IOMPO also recognises though that current and future staff are indispensable to the organisation’s ability to meet the challenges of an evolving postal environment. It wishes to remain an attractive and responsible employer. To this end it is committed to providing affordable retirement benefits to all staff.

7. Recommendation 3: that Tynwald approves in principle the intention of the IOMPO to bring forward proposals concerning the required legislative changes concerning the closure to new members of its existing Superannuation Scheme coupled with its intention to seek to offer a replacement contract defined contribution group personal pension scheme to new members.

8. IOMPO’s statutory core service is the delivery of letters; the outstanding challenge to the sustainability of this service is the year on year, global and irreversible decline in letter volumes. To maintain an efficient cost base for this service and in recognition of changing customer preferences within our community, the fourth recommendation recognises that the delivery of letters on Saturdays is not of key importance to the public.

9. Recommendation 4: that Tynwald approves the reduction of letters delivery from six days a week to five days a week removing the Saturday.

10. Industry parcel volumes have increased but the extra revenue has not offset the decline in letters. This is partly due to the low cost models of off Island competitors. The IOMPO welcomes the decision of the Chief Minister to setup a committee to review ‘zero hour’ contracts and welcomes the opportunity to put forward its concerns in this area, with a view to ensuring fair employment practices and in doing so facilitating fair competition between providers. 7

11. The maintenance of an efficient retail network delivering social value in the face of challenge to core revenues, requires a marrying of complex economic, demographic and financial elements. The recently concluded public consultation failed to produce immediately conclusive data. As stated by the fifth recommendation, further analysis is required, working with focus groups and key stakeholders, including Government, sub-postmasters and local commissioners to evaluate the responses and to understand how the how the IOMPO can work with Government to support the digitally excluded in a financially responsible way.

12. Recommendation 5: that Tynwald supports that following the public consultation the IOMPO will undertake further work on the format of the delivery of retail services and come back to Tynwald with its results and recommendations no later than October 2019.

3 Introduction

3.1 Background

13. After 45 years of profitable trading, and having contributed to Isle of Man Government revenues consistently over that period, including £25m in dividends in the last 20 years, the IOMPO has reported a loss of 1.2m for the year ended 31st March 2018.

14. The Tynwald approved IOMPO Statutory Board recognised that the business was in need of material change.

15. The five year strategy, entitled ‘Strategic Business Case 2017-2022’1 addresses the challenges of declining traditional markets by seeking to find new markets, capitalise on growth markets, transform the way the business operates, and to identify efficiencies that will allow costs to be reduced whilst continuing to deliver on the statutory obligations conferred by the Post Office Act 1993.

16. It was presented to the Department for Enterprise on the 31st January 2018, the Council of Ministers on the 15th February 2018 and informally to Tynwald members on the 24th April 2018 in the Baroole Suite, with a follow-up letter from the Chairman on the 16th May 2018. On Tuesday 17th July 2018 the Chair of the IOMPO also made a statement on the strategy to Tynwald.

17. The strategy is key to the delivery of the IOMPO’s Programme for Government action;

• “We are financially responsible while providing services that meet the needs of our community”

18. The strategy aligns with the following key themes from the ‘Programme for Government’;

• “Demonstrate sustainable public finances with clear recognition of financial targets that support Government priorities” • “Make access to our services more focussed around the needs of our customers” • “Maintain our reputation at the forefront of innovation and emerging technologies and respond quickly to new business models” • “We will work together with local authorities and other partners to deliver the right services in the right place at the right time, making sure national priorities are funded accordingly”

19. And it supports the IOMPO strategic vision;

• “Working together to protect the core business, growing profitably and diversifying selectively to the benefit of the Manx economy”

20. When implemented, this strategy will see the business’s finances turnaround from a loss to a small profit over the five year period, retaining our position as a net contributor to the public purse.

1 The ‘Strategic Business Case 2017-2022’ is included in Appendix F. 9

3.2 Tynwald Motion

21. At the sitting of Tynwald on Wednesday 18th July 2018 the following motion was passed:

22. That Tynwald: a. recognises the unique attributes, capabilities and social value of the IOMPO; b. acknowledges the challenges it faces in its core business sectors; c. views with concern its future prospects; d. believes that the IOMPO has a significant role to play in the future delivery of enhanced public services in the Isle of Man; e. supports IOMPO Board to ensure the long-term future of IOMPO for the benefit of the people of the Isle of Man; f. requires IOMPO to report back to Tynwald with its plans for IOMPO by December 2018; and g. recognises the importance of putting aside any determination to pursue corporatization.

23. We thank Tynwald for its recognition of the IOMPO, its acknowledgement of the challenges we face and also its support for the board in ensuring the long term future.

3.3 Document Scope

24. The IOMPO ‘Strategic Business Case 2017-2022’ is underway and the business is already seeing positive benefits internally with new business and efficiency savings. The half year financial position is now ahead of forecast and prior year.

25. The IOMPO Board, with advice from the Attorney General’s Chambers, sought clarity as to the strategic changes that require Tynwald approval.

26. The table below lists the key sections from the strategy and whether they are in or out of scope for this report.

27. The ‘In Scope’ elements require significant changes to public services or legislation and therefore require Tynwald to approve the recommendations contained in this report.

28. The decisions and directions of the ‘Out of Scope’ elements are the responsibility of the Tynwald approved IOMPO Statutory board. In Scope Out of Scope  Changes to our pension scheme to  Review and modernise collection and ensure it is affordable and delivery service operations. sustainable for the future.  Introducing a pricing strategy for letter  Review our 6-day letter delivery mail to protect the first class service. service in line with reducing customer demand.  Increase contracted parcel last mile deliveries.  A review of the Post Office Network to ensure it provides a viable and  UK sales presence to increase our off- affordable service in the future Island

 Increase the pace of introduction of our new services. E.g. MiCard, (Hybrid) Smart Delivery, scanning, more/new direct mail customers

 A review of pay, terms and conditions, employment practices and job evaluation

29. The recommendations will help ensure that the IOMPO is positioned not only to meet its future challenges but also to remain financially responsible and minimise the risk of the necessity of a subsidy from the Government.

3.4 Public Consultation

30. A vital step of the IOMPO strategy was to consult with Isle of Man residents, businesses, organisations and its clients on our core services.

31. This was to provide an enhanced understanding of customers’ reasonable needs and how services might be improved, offering value for money, while ensuring the IOMPO remains sustainable in the future.

32. On the 22nd August 2018 the IOMPO sought public opinion by consultation, on how best to adapt letter and parcel deliveries and post office services in the community.

33. On the 16th October 2018 the consultation closed with over 2700 respondents.

34. We would like to thank everyone who responded and appreciate their help in shaping our decisions on the future delivery of letter services and the sub post office network in the community.

35. The results of the full consultation2 are included in this document. They have been used to create and support the conclusions contained in this report.

3.5 Intra-Government Consultation

36. The IOMPO was given a mandate to investigate potential ‘enhanced public service’ opportunities within Government utilising our strong trusted brand, all island delivery capability, retail network counter services assistance to the digitally excluded and our unique skills and capabilities in corporate services.

37. Following a presentation to the Chief Officer Group in August 2018, IOMPO agreed to meet with each of the key departments. This was further extended to the statutory boards and offices at the extended Chief Officer Group meeting.

38. Initial meetings have been held with nominated officers from each department, statutory board, and office during September and October 2018. We are thankful for the support provided to date and look forward to working with the relevant officers to explore the opportunities put forward, noting that pan government opportunities to generate cost, risk and social benefits will require cross government collaboration.

2 Full consultation results can be found in Appendix F 11

3.6 Employee and Union Engagement

39. The IOMPO understands that as it delivers its strategic plan’s proposed changes it can be unsettling for its employees. Therefore it is vital that the IOMPOs engages its workforce as it goes through this necessary period of change.

40. As the five year strategy develops and new projects are initiated and analysed, the IOMPO is being inclusive of employees and local committee members from our recognised Trade Unions.

41. Two thirds of employees belong to a staff or management union, with whom the IOMPO enter into collective bargaining. This includes discussions on pensions which have been underway for over twelve months, and more recently introducing a new job evaluation framework to evaluate roles fairly and consistently, to comply with the impending Equality Act obligations, this in turn will inform a new pay structure and where appropriate, changes to terms and conditions.

42. On an individual level, the board and executive directors have also been talking directly to frontline staff and managers in quarterly briefing sessions to ensure that formal messages are being clearly communicated, questions answered on-site and feedback taken directly.

43. There have been more frequent functional and unit manager briefings in between the Executive-led sessions to update our staff on progress.

44. The IOMPO continues to use the internal “Weekly News” bulletin to pass on key messages when appropriate, as well as notices around our buildings. Managers are briefed about project progress regularly via various functional and cross-functional forums and meetings.

45. At a functional programme/project level, the union committee has been involved in manager-led workshops and training sessions including benchmarking visits to Royal Mail in the UK to see some of our planned efficiency initiatives already working.

46. Lower level changes are discussed at weekly meetings between Mails functional heads and representatives of the union committee and where possible, frontline colleagues are encouraged to join the working groups developing the various efficiency projects.

47. The National Federation of Sub Postmasters represent the network of sub postmasters. The local National Federation of Sub Postmasters Secretary is in regular communication with the IOMPO Retail General Manager and attends the quarterly meeting with sub postmasters which the executives attend. The five year strategy was presented to the local National Federation of Sub Postmasters Secretary and subsequently at a quarterly sub postmasters meeting.

4 Overview and Recommendations

48. This section contains overviews of the elements of the five year strategy that require noting or approval and their related recommendations.

49. Where appropriate, background analysis, public feedback and supporting information around the recommendations has been provided in the Appendices.

4.1 Revenue and Profit Generation Overview3

50. The challenges facing the IOMPO are not new or unforeseen, but are reflective of changing socio- economic trends, and particularly the inevitable drive toward electronic substitution.

51. A Tynwald debate in 2006 recognised this, and resolved that the IOMPO “pursue the diversification and development of new commercial opportunities in order to remain economically and commercially viable and thus enable it to continue to support its public service obligation.”

52. In the subsequent years, revenues from the IOMPO commercial activities have made a significant contribution to offset increasing losses from our public service obligations under the Post Office Act 1993, and have provided profit for reinvestment and significant contributions in the last 20 years of over £25m dividends to the Isle of Man Government Treasury.

53. The motion agreed by Tynwald at its sitting in July 2018 stated that “the IOMPO has a significant role to play in the future delivery of enhanced public services in the Isle of Man”. Further to this resolution, the IOMPO during September 2018 and October 2018 met with key Departments, Boards and Offices to investigate further the opportunities for “enhanced public services”.

54. It is often misreported that the IOMPO is only managing decline and not actively seeking new business or commercial opportunities. In fact, the IOMPO will continue to seek new business and opportunities.

55. Recommendation 1: that Tynwald notes that the IOMPO’s commercial activities have made significant contribution to offset the increasing losses from our public service obligations under the Post Office Act 1993, and have provided profit for reinvestment to Isle of Man Government Treasury.

56. Recommendation 2: that Tynwald approve IOMPO’s aim to continue to be self-funding as defined within the financial duties in the Post Office Act 1993 Section 5(1), by protecting the core business, by being efficient and effective, by growing profitably and by diversifying selectively.

3 Refer to Appendix A for full revenue and profit generation summary supporting information. 13

4.2 Pensions Overview4

57. A key theme from the Programme for Government is to be a responsible Island demonstrating sustainable public finances.

58. The results from the 2017 actuarial valuation5 of the IOMPO Superannuation Scheme indicated that the costs of funding the scheme in its current form would be unaffordable and unsustainable for the IOMPO in the future. The total charge in respect of the IOMPO Superannuation Scheme to the Profit & Loss Account of the IOMPO for the year ended 31st March 2018 was £2.7m, an increase of £1m on the prior year.

59. The IOMPO reported a loss of £1.2m for the year ended 31st March 2018, and is forecasting further losses for the years ended 2019, 2020 and 2021, with a forecast return to profit in 2022 based on the planned programme of change.

60. The cost of maintaining current pension arrangements is a significant contributory factor to its actual and forecast financial position.

61. In the interest of reducing risk to both IOMPO and their current employees in the IOMPO Superannuation Scheme, the board considers that, subject to legislative approval, the scheme should be closed to new members, and their employees given the option of making enhanced contributions to protect the current level of benefits, or to accept a reduced level of benefits with no change to contributions.

62. In view of the above, the IOMPO proposes a plan that their new employees, and those eligible but not currently in the IOMPO Superannuation Scheme, will be eligible to join a newly established contract based defined contribution group personal pension scheme.

63. The net annual saving to the IOMPO from the changes proposed will grow exponentially over time. Based on reasonable assumptions, the calculations provided by our actuary forecast net savings at present value of £0.5m per annum in ten years’ time.

64. Accordingly these measures will underpin its objective of maintaining the affordability and sustainability of the IOMPO Superannuation Scheme, thus protecting existing employee benefits, and put in place alternative arrangements for new employees which are socially responsible and competitive.

65. Recommendation 3: that Tynwald approves in principle the intention of the IOMPO to bring forward proposals concerning the required legislative changes concerning the closure to new members of its existing Superannuation Scheme coupled with its intention to seek to offer a replacement contract based defined contribution group personal pension scheme to new members.

4 Refer to Appendix B for pension supporting information. 5 Isle of Man Post Office Superannuation Scheme Actuarial Valuation as at 31 March 2017 by Buck Consultants Limited (registered number 1615055). Buck Consultants Limited are a private limited liability company registered in England and Wales. Their registered office is at 160 Queen Victoria Street, London EC4V 4AN. Buck Consultants Limited are authorised and regulated by the Financial Conduct Authority. 14

4.3 Letter Mail Overview6

67. Letter mail7 volumes are in an irreversible decline due to personal mail by texts and social media, of transactional mail by e-banking and e-billing, of publishing by on-line content and of marketing by all forms of electronic communication.

68. The increase in e-commerce and parcel fulfilment has not offset this decline.

69. The IOMPO has a fixed operating model and it is difficult to flex costs against the fluctuation of letter mail volumes. Letter mail volumes have reduced on average by almost 7% per annum over the last 3 years. Total letter mail delivery ten years ago was 44m items and last year it was just 23m.

70. As mail volumes fluctuate, it is standard to revise the delivery routes that the postal workers use to deliver mail. Historically this has been done manually and is resource heavy. One of the elements of the IOMPO strategy has been to automate the revision process so this can be done using computerised tools.

71. A full Island revision is presently being planned that embraces technology and different ways of working to allow the IOMPO to effectively and efficiently revise delivery routes as mail volumes continue to fluctuate in the future.

72. A significant cost is the delivering of letter mail six days per week. Whilst the IOMPO recognises the importance of five day Monday to Friday business letter mail deliveries, this is less important for a Saturday.

73. Changing six-day letter mail deliveries per week to five-day letter mail deliveries per week, can save around 15% (over £500k saving per annum in total) of the hours spent on letter delivery whilst still maintaining Monday to Friday deliveries for business and residences.

74. The public consultation shows this to be acceptable to 68% of both business and personal respondents, so long as we maintain a priority mail and parcels delivery service on the sixth day, which we will continue.

75. IOMPO expects no compulsory redundancies with this change.

76. The reduction of letter mail delivery from six days a week to five days a week will assist the forecasted return to profit in 2022 in tandem with the continued optimisation of delivery routes.

77. Recommendation 4: that Tynwald approves the reduction of letters delivery from six days a week to five days a week removing the Saturday.

6 Refer to Appendix C for mail services supporting information. 7 Letter mail includes letters, large letters, flats (magazines and advertising) and small packages. 15

4.4 Parcels delivery and the Gig Economy Overview8

78. The current Post Office Act became legislation in 1993 and was amended in 2012.

79. Section 10 of the Post Office Act 1993 confers on the IOMPO the exclusive privilege of conveying letters from one place to another and of performing all the incidental services of receiving, collecting, despatching and delivering letters.

80. Exclusive privilege is granted to a national postal administration in return for their undertaking to supply a postal service for all residents that meets the requirements of the Government. This can for instance include daily collections and deliveries to all parts of the country, maintaining a range of affordable services to worldwide destinations, single tier pricing, provision of post offices etc.

81. The mails market is constantly evolving due in the main to the rise of telecommunications, the internet and e-commerce. Letters, cards and large letters (magazines, reports, catalogues etc.) are being increasingly replaced by texts, emails, social media, on-line payments and web-sites whilst the packets and parcels market is growing through on-line shopping.

82. Parcels income growth however does not offset letters’ income decline. The cost of providing the basic services has risen whilst overall revenue has fallen. However, the requirement on the IOMPO to continue to supply the same level of service to all Island residents under the Post Office Act remains.

83. To take advantage of the unregulated parcels delivery and collections market in the UK, courier companies have developed cheaper ways of delivering parcels including ‘zero hours’ contracted staff at the same time as new disruptive operators have emerged utilising ‘self-employed’ lifestyle couriers, working within what has become known as the Gig Economy. These companies are now operating on our Island.

84. By paying their staff less and only when there is work to do, paying for piece rate only, having minimal or no employment rights, expecting them to contribute their own transport, insurances and pay their own taxes, these budget operators are able to undercut the IOMPO prices, in effect unfairly competing for a limited volume of work against us. To win this work we would have to operate at a loss, which we obviously cannot do.

85. The privilege under the Post Office Act 1993 therefore is increasingly falling out of line with the costs it is incurring in maintaining the Island postal service.

86. The IOMPO believes that companies operating within the gig economy, whether mails-related or not are gradually eroding the ability of responsible employers to maintain reasonable levels of pay and conditions to Island workers/residents (affecting their spending capability for the wider economy) and still be able to win profitable work to allow for reinvestment and growth.

87. Many of these companies are not Island-based and contribute little to the Manx economy, yet the consequential loss of revenue to the IOMPO is significant.

88. The IOMPO understands that a committee has been setup to review zero hours contracts and looks forward to being involved in the discussion with a view to ensuring fair employment practices and in doing so fair competition.

4.5 Retail Network Overview9

8 Refer to Appendix D for parcels delivery and gig economy supporting information 9 Refer to Appendix E for retail network summary supporting information 16

89. Transactions are falling at the independent Isle of Man regional post offices by an average of 7% per annum due to falling letter volumes, as has been discussed previously, and face to face monetary transactions, increased competition and changing customer habits.

90. Only three post offices generated a profit, albeit small, for the IOMPO in this current 2017/18 financial year.

91. The viability of each post office varies greatly depending on local factors such as location, catchment area, business model, surrounding shops etc. Certain parts of the network are more dependent on support from the IOMPO and Isle of Man Government than others.

92. Though the IOMPO is supportive of the Isle of Man Government’s digital strategy, it is inevitable that the IOMPO and the independent network will be adversely impacted by its development. As an illustration, the percentage of Government revenue over total sales stands at 66%. The Department of Infrastructure and Social Security Division of Treasury agency arrangements over total sales percentages are 32% and 30% respectively.

93. The Department of Infrastructure is currently reviewing its contracts for agency arrangements with IOMPO, with a view to digitising as many of the services as possible. Ceasing the paper service would reduce the IOMPO’s annual revenue by over £550k per annum based on current revenue levels, and the independent network’s sub postmasters’ income would be reduced by between 11% to 54% per annum depending on location.

94. The public consultation showed support for maintaining the independent network of sub post offices but did not provide solutions for falling transactions.

95. Whilst IOMPO fully appreciates and embraces the digital era in which that it operates, an understanding and appreciation needs to be achieved by all stakeholders that the number of independently run post offices across the Island is highly likely to fall in the future, to ensure a viable independent post office network on the Isle of Man can be maintained.

96. The IOMPO is actively seeking new enhanced public services for the network. At this stage the initial opportunities explored within the intra-governmental consultation suggest limited potential new counter services, which will not materially reduce the decline in transactions. Our initial discussions with political members and the Lord Bishop indicate a desire to develop a small number of regional community hubs from which Government could offer first line, pan-Government services. We are keen to engage in discussions to explore this medium-long term opportunity and the way the IOMPO could support it.

97. Therefore, further analysis of the public consultation work with stakeholders, focus groups and discussions with Government Departments need to be undertaken to ensure that full consideration is given to any future decisions in relation to the post office network.

98. Recommendation 5: that Tynwald supports that following the public consultation the IOMPO will undertake further work on the format of the delivery of retail services and come back to Tynwald with its results and recommendations no later than October 2019.

5 Appendix A: Revenue and Profit Generation Supporting Information

99. Vital to our self-funding position is our ability to continue to optimise revenue from our trading divisions, principally Integrated Mailing Solutions, Stamps & Coins, Mails and Retail. 17

100. This section details the areas in which the IOMPO is trying to drive growth and profit.

5.1 Integrated Mailing Solutions Division

101. Our commercial activities in our Integrated Mailing Solutions Division protect and enhance volume going into the mail-stream, as well as generating revenues from ancillary services such as fulfilment, enveloping and franking etc. The division makes an important contribution to mail revenues, accounting for approximately 16% of total mails volume in 2016/17 (contributing 3.5m gross postage revenue).

102. Integrated Mailing Solutions Division revenues are largely derived from the local finance sector. Unfortunately this sector is changing and various banks have closed their offshore operations or moved to group contracts, which has significantly impacted the IOMPO revenue. Clients are increasingly digitising their communications in an effort to make cost savings and there are limited new business opportunities.

103. In recognition of the challenging market conditions, our commercial team are working toward our strategic objectives to ensure that the IOMPO retains existing business, and wins new business from existing and new clients, as well as expanding into new markets off Island. As part of the intra- government consultation we are exploring opportunities to utilise the products and services of this division more broadly.

104. In early 2018 the board approved the recruitment of a United Kingdom based salesperson. Our competitively priced first class postal offering, and the suite of Integrated Mailing Solutions Division fulfilment services offers a unique selling point into the UK market which could offer real savings for UK businesses.

105. Identified targets include charities, financial services, pension providers, and public sector.

106. The IOMPO continues to innovate, with a number of hybrid mail and digital solutions in development including:

• Smart Delivery – a secure ‘digital locker’ suitable for confidential/sensitive transactional mail, with the option of a physical alternative according to user defined preferences. • Click & Post – a convenient solution for ad hoc physical mailing through an electronic portal. • Click & Dispatch – online mail dispatch solution aimed at business customers to manage shipping, print labels, store and manage addresses, and track shipments in real-time. • Accounts Payable – a service to business customers to receive, process and scan purchase invoices and to upload directly into their accounting software, minimising labour requirements, storage and administration.

5.2 Stamps & Coins Division

107. Whilst these philatelic activities continue to make a positive contribution, the demographic of the customer base is such that a declining revenue trend is expected to continue. We have identified an increasing issue with the bulk importation of ‘old’ stamps, previously held in collections but still valid, that are being bought and then sold at a discount to individuals and businesses to use for postage. We intend to adopt the approach taken in other jurisdictions, seeking support from Tynwald to update the Post Office Act to prohibit the bulk import of stamps for this purpose.

108. Whilst the division continues to innovate its product range to sustain revenues, and the business as a whole is looking at ways to cut costs by integrating production with IMS, it is acknowledged by the board that the division’s growth opportunities are limited.

5.3 Mails Division

109. Falling mail volumes create opportunities to utilise the surplus capacity that cannot be readily flexed to reflect the falling volume tends. The IOMPO is looking at ways to utilise this capacity, other than from the growth of the parcels market.

110. Our principal strength and unique selling point is that we can visit every address on the Island several times a week, both business and residential. We have the infrastructure (staff, vehicles, buildings and supporting processes) so if we are visiting an address to deliver one item, we can deliver or collect other items at the same time reasonably economically, despite operating with relatively high fixed costs.

111. We have sought and continue to seek through the intra-government consultation, opportunities to utilise the delivery network to support alternative uses. ‘Call and Check’ is one such example, it is a process operated by Jersey Post, whereby postal workers call on individuals living independently to check they answer door and are able to answer a couple of short simple questions. The responses are then digitally shared with the recipient’s designated contacts (family, carers, GP, Community volunteers etc.). Royal Mail has recently initiated a trial as part of the British Government’s new loneliness strategy. The concept was presented to the IOM Department of Health and Social Care with a view to trialling on-island. While the department is supportive of the IOMPO developing a service for private individuals, they are keen to see evidence of success in other jurisdictions before they support a trial with IOMPO.

112. In addition, we are starting to work more with on-Island couriers and hauliers where possible and appropriate. In this way, we hope that we can each play to our various strengths and encourage increased new business for the Island. This has already resulted in one haulier asking us to deliver items sent to them by a UK parcels’ operator.

113. We have been advised that several on-Island retailers may consider sub-contracting to IOMPO their business collection / customer delivery service, and / or operate a local “click and collect” service in parts of the Island where they have no physical presence of their own.

114. One of the retailers identified home delivery as a critical factor and a perceived difference between what people expect from the internet and what they experience from on-Island retailers who cannot necessarily afford to run a website, internet ordering and a home delivery service as a small business or single person operation.

115. An Island customer being able to order goods on day one by phone, email, social mail, responding to a leaflet or other advertising material and receive the goods on day two compares favourably to internet service standards, is desired by on-Island retailers and fully supports ‘buy local’ and “freedom to flourish”.

116. Following an introduction made by our colleagues in the Department for Enterprise, we have been working with a company establishing an airfreight network between Isle of Man and Liverpool, Belfast and Dublin. We have been asked to become their collection and delivery service agent and anticipate that this work will commence in November 2018 with a full launch in early 2019.

117. As with any commitment to seek new business not everything we have attempted has worked, despite everyone’s best intentions. Earlier in 2018, we tried to assist a local company wanting to enter into the Meals on Wheels market vacancy created when Age Concern discontinued their service.

118. Whilst the overall concept was good, we found that customers of Meals on Wheels appreciated the contact and social element of the service almost as much as the food. That cannot match our current delivery model which comprises only brief visits to each address, because of the very low profit ratio of each item delivered. Temperature control was also a factor in this model. However, we are now working with a health food retailer who wants us to deliver groceries, which can be delivered to the customer’s doorstep without a need for temperature control or extended social interaction.

5.4 Retail Division

119. In addition to offering traditional postal counter services, the largely independently managed retail network bolsters its revenues with commercial agency arrangements with both public and private sector organisations.

120. The division is actively reviewing these contracts to optimise, the commercial terms and volumes of transactional business, however, it is acknowledged that society in general is reducing the volume of face to face transactions with the switch to digital alternatives.

121. IOMPO has identified an opportunity to utilise its trusted brand on the island to benefit residents, Isle of Man Government and the private sector, by extending its MiCard service for residents to verify and assert their identity to access multiple services. Initial opportunities have been explored with more than one department. Further work is required, building on the intra-government consultation, to understand the potential of a pan -government solution.

122. As noted above, parcel services are seen as a growth area, and the division is in discussions with the network and private sector operators to provide enhanced parcel services to further develop retail revenues. However, key to success will be achieving a lower cost base to improve success rates when bidding in this cost sensitive sector.

6 Appendix B: Pension Supporting Information

6.1 Background

123. The IOMPO currently employs 324 staff who are eligible for the IOMPO Superannuation Scheme, a statutory defined benefit scheme.

124. There are currently 283 active members in the superannuation scheme, 13 staff who are working but have paid their final contribution and are in receipt of pension benefits, and 28 staff who have elected not to join the scheme to date.

6.2 Current Situation

125. The 2014 triennial valuation reported a scheme surplus of £1.6m and an employer funding requirement of 12.3% (approx. cash flow of £1.0m) after allowing for amortisation of 50% of the scheme surplus. Employees currently make contributions at 6% of salary.

126. The draft results of the most recent triennial actuarial valuation of the superannuation scheme as at 31st March 2017, reports a net liability of £0.5m with an employer future service funding requirement of 21% of superannuable salaries (approx. cash flow of £1.7m). The 8.7% difference from the 2014 valuation funding requirement is currently being underwritten by IOMPO. This is unaffordable.

127. The following sets out the estimated or actual charge to the ‘Profit & Loss Account’ (current service cost and net interest) in respect of the Superannuation Scheme for the year ended10:

• 31st March 2019: £2.0m (estimated) • 31st March 2018: £2.7m (as a component of the £1.2m loss for the year) • 31st March 2017: £1.6m (as a component of the £1.3m profit for the year)

128. At 31st March 2018 the IOMPO net liability for accounting purposes (calculated using different assumption to the actuarial valuation in line with the accounting requirements) with respect to the Superannuation Scheme was £3m (assets of £87m and liabilities of £90m. At the prior year end the net liability was £13.2m for accounting purposes. Due to the funded nature of the scheme it is not reliant on an inflow of new members to fund current and future pension payment obligations.

129. Following the cessation of ‘Contracting Out’ from 1 April 2019, the IOMPO is required to increase Employers National Insurance contributions in respect of employees who are members of the scheme, from the rate of 9.1% to 12.8% (additional cost of approximately £250k per annum) which will add further strain to budgets.

6.3 The Case for Change

130. The IOMPO reported a loss of £1.2m for the year ended 31st March 2018, and is forecasting further losses for the years ended 2019, 2020 and 2021, with our strategy forecasting a return to profit in 2022.

131. The cost of maintaining current pension arrangements is a significant contributory factor to our actual and forecast financial position and is unaffordable and unsustainable going forward.

132. Our planned objective of making the IOMPO Superannuation Scheme affordable and sustainable for the future is underpinned by the proposal to close the scheme to new employees. This is expected to

10 see Appendix H for an extract of the ‘FRS102’ report prepared by the scheme actuary 21

realise material savings over the medium to long term, and reduce the risk to existing members of the scheme becoming financially unviable.

133. The extent to which the scheme is required to be funded by the employer is highly variable, and typically historically increases, as evidenced by the 21% conferred by the 2017 draft valuation. The 8.7% increased funding requirement, in addition to the increased employer National Insurance contribution of 3.7%, is unaffordable for the business.

6.4 Pension Conclusion

134. To protect existing members and the business, the IOMPO has proposed closing the IOMPO Superannuation Scheme to new employees and will increase its contribution to 15% (approx. cash flow of £1.2m), subject to employees agreeing to make increased contributions or to accept a reduction in benefits (reduced accrual rate), and/or extending normal retirement age, and to agree to annual CPI linked pension increases, capped at 2.5%11. From implementation, these measures are expected to realise savings for IOMPO of approximately £0.45m per annum. IOMPO understands that the 15% target is in line with the latest GUS scheme target employer contribution rate and the Public Sector Pension Authority plan to share future costs with members (within a target ‘cost envelope’).

135. The proposals remain under negotiation with the Unions. Several potential options to bridge the employee funding gap, through changes to the member contribution rate, the accrual rate and normal retirement age have been shortlisted in conjunction with the respective unions. At the time of writing the local CMA/Unite union are supportive of the closure to new entrants, the Communication Workers Union (CWU) are not.

136. Following agreement with the Unions, or any executive action necessary in the absence of agreement, there will be a period of consultation with members and other stakeholders. Any current employees eligible to join the scheme who have not yet done so, will be given a window of opportunity to join before it is closed to new members.

137. The financial benefit to the IOMPO of closing the scheme to new members (and changes to arrangements for existing members) will accumulate over time. Based on reasonable assumptions, Conduent (the scheme actuary) estimates savings at present value of £0.7m per annum in ten years’ time. This estimate incorporates assumptions regarding the likely risk appetite of the trustees given the consequential increasing proportion of the membership in retirement, although in any case figures from the scheme actuary have indicated that, under reasonable assumptions, the proportion of scheme liabilities relating to pensioners will only be around 2% lower in 10 years’ time if the scheme were to close to new entrants.

138. Subject to support for closing the scheme to new employees, the IOMPO will seek Tynwald approval for the Trustees of the scheme to make the necessary changes to relevant secondary legislation.

139. Notwithstanding the board’s proposal to close the scheme to new members, the IOMPO wish to remain an attractive and responsible employer, and therefore remain committed to providing benefits for staff in their retirement. To that end, the board seek Tynwald support for the establishment of a contract based defined contribution group personal pension scheme.

140. The CWU has highlighted its concern that such schemes do not adequately provide for an income in retirement. To inform the discussions on this matter the IOMPO have undertaken a ‘request for

11 see Appendix I for future service cost of example future service benefits for existing members 22

quotes’ exercise with local pension providers and independent financial advisors. This exercise has confirmed that such schemes are now commonplace with the substantial majority of Isle of Man employers who offer pension arrangements. Furthermore, enquiries indicate that the design of the proposed scheme contributions, set out below, will ensure that the scheme is attractive to employees and competitive in the marketplace.

141. From the date of establishment, the defined contribution scheme will be open to all new employees of the IOMPO, and to any existing employees who have chosen not to join the IOMPO Superannuation Scheme.

142. IOMPO are intending that the defined contribution scheme will be a ‘matching’ scheme, whereby the employer will make minimum contributions of 5%, but will match any contributions made by the employee up to 7.5%.

143. Taking into account experience of staff turnover, and potential future attrition rates, the actuary has estimated that the cost of the defined contribution scheme at present value will be approximately £0.2m per annum in ten years’ time. Therefore, the net saving of the two recommendations relating to pension arrangements is expected to be approximately £0.5m per annum in ten years’ time, and increasing thereafter12.

12 The financial impact of these changes, in aggregate with the expected savings from changing the terms of the scheme for current employees as set out above, are presented in graphical form in Appendix J 23

7 Appendix C: Letter Mail Supporting Information

7.1 Background

144. There has been a sustained decline in letter mail due to electronic diversion and changing customer needs, with the IOMPO having seen an average volume reduction approaching 50% over the last 10 years, and 7% per annum over the last three years.

145. In addition to lower letter mail volumes the IOMPO are also delivering to approximately 3000 or 7% more delivery points over the same period.

146. Historically the Integrated Mailing Services division has generated mail volume to help offset some of the decline due to electronic diversion but recently the division has been losing commercial letter related contracts.

147. The IMS division delivers corporate mail services and associated postage revenue, a reduction in this area of the business has occurred due to long standing local banks and financial companies leaving the island, closing down, or merging to create a smaller market.

148. Other corporate customers were able to source these services more cheaply in-house or in group locations in other jurisdictions, as their own digital strategies came on-stream.

149. Letter mail decline has been further compounded by GDPR (General Data Protection Regulations), which came into effect in late May 2018 and has had a negative effect on volumes of around 8% on top of the annual decline.

150. Whilst use of mail for direct marketing to existing customers should be permissible under GDPR, acquisition marketing (using ‘cold lists’ or prospects rather than existing customers) will be supressed.

151. Letter mail volumes are also affected by the Isle of Man Government’s Digital Strategy, for example the move to electronic payslips.

7.2 Current Situation

152. This trend presents a challenge for the business as revenues from letter mail are increasingly insufficient to cover the largely fixed costs associated with delivery of our obligations under the Post Office Act 1993.

153. The graph below shows the decline in total mail volume versus fixed cost for the Mails Division over the last 10 years.

154. The way is which well-established industry players, including ourselves, utilise their resources (employees, technology, vehicles and premises) has not developed as quickly with technology and customer preferences as new companies starting up with flexible operating models.

155. The IOMPO Mails Division has high fixed operation costs which are not easily flexed against increase or decline in mail volumes as shown in the ’10 Year Volume v Cost Analysis’ graph above.

156. The chart below shows the breakdown of the Mails Division total operational costs.

157. Fixed costs stand at 77% of total costs with the highest being staff costs 62%.

158. Another high cost is our agreement with the Royal Mail Group. Isle of Man outward bound mail is delivered in the UK and beyond by the Royal Mail Group. Isle of Man mail originating off-island is delivered by the IOMPO on behalf of the Royal Mail Group. This makes the Royal Mail Group our most significant trading partner.

159. It is a challenge for the IOMPO to flex costs against the highly volatile mail volumes.

160. Historically this has been done by manually revising the delivery duties but this process is resource heavy and has only been undertaken on average once every four years.

7.3 Case for Change

161. Whilst delivery income relates directly to the number of items we handle (postage paid), delivery costs relate to ‘under the roof’ sorting time, vehicle costs and the time and distance the postal worker

has to travel to deliver those items. Some of our delivery routes are 14 miles or more per day on foot, whether they are delivering ten items or one item to an address on their route.

162. It is key that as mail volumes fluctuate due to volume decline or the winning of new business the IOMPO is able to more effectively manage its fixed costs.

163. One of the elements of the IOMPO strategy is the ability to automate the indoor and outdoor delivery revision process.

164. This process includes using electronic duties lists, automated delivery sorting, improving work measurement collections, using new industry specific computerised tools and improving working methods.

165. It is important to enable the revisions to be done efficiently and more regularly against fluctuating mails volumes. This will mean that the delivery routes are optimised to the volumes of letter mail helping control our fixed costs going forward.

166. It is also important that delivery routes, services and schedules are optimised to the type of mail being delivered.

167. The urgency for the IOMPO to find answers to manage its fixed costs more effectively was also exacerbated this year as the Royal Mail Group forced a significant change in trading terms on us.

168. Resulting negotiations meant that the IOMPO were ultimately successful in limiting the impact, however, the change represents a material reduction in revenue, and highlights our vulnerability as the junior partner in this business critical relationship.

7.4 Public Consultation

169. The public consultation included questions around the services that the IOMPO provides for letters and parcels.

170. Feedback from the public showed that although letters are declining it was important to continue with daily collections, notwithstanding the fact that many boxes are often empty.

171. Next day UK delivery was neutral, important or very important to 81% of replies.

172. Feedback from the public around delivery of letter mail was positive with 68% comfortable with moving to 5 day deliveries.

7.5 Letter Mail Conclusion

173. Fixed costs have not declined in line with letter mail revenue.

174. This underscores the need for a combination of regular and efficient delivery route optimisation and a focus on finding cost savings where possible to ensure we can continue to meet our responsibilities under the Post Office Act 1993.

175. The IOMPO needs to continue to improve the process around delivery route revisions and optimisation to allow for greater automation and therefore fixed cost management against fluctuating mail volumes.

176. Feedback from the public was negative with regards to reducing collections but very positive with UK next day delivery and reducing standard letter delivery on a Saturday.

177. To allow for a six day working week, each postal worker is given every sixth week off. The IOMPO then needs to ensure that these weeks are resourced. This is a significant fixed cost.

178. By moving from six-day letter deliveries to five days per week, we can save around 15% (£500k per year) of the time spent on letter and flat delivery whilst still maintaining Monday to Friday deliveries for businesses and residents.

179. The Chamber of Commerce has reacted positively to this change.

180. The public consultation also shows this to be acceptable to 68% of both our business and personal customers, so long as we maintain a priority mail and parcels delivery service on the sixth day, which we need to do to meet the requirements of our partners in the UK.

8 Appendix D: Parcel Mail and the Gig Economy Supporting Information

8.1 Background

181. The current Post Office Act became legislation in 1993 and was amended in 2012.

182. Enshrined in the Post Office Act at Part 2, Postal Services section 10 is the reference to the Postal monopoly. Section 10 (1) states:

183. “Subject to the following provisions of this Part, the Post Office shall have throughout the Island the exclusive privilege of conveying letters from one place to another and of performing all the incidental services of receiving, collecting, despatching and delivering letters.“

184. Postal privilege is granted to a national Postal Administration in return for their undertaking to supply a postal service for all residents that meets the requirements of the Government.

185. This can for instance include daily collections and deliveries to all parts of the country, maintaining a range of affordable services to worldwide destinations, single tier pricing and provision of post offices.

8.2 Current Situation

186. Over the succeeding 25 years it is clear that the mails market has been and still is constantly evolving due in the main to the rise of the telecommunications, the internet and e-commerce.

187. Letters, cards and large letters (magazines, reports, catalogues etc.) are being increasingly replaced by texts, emails, social media, on-line payments and web-sites whilst the packets and parcels market is growing through on-line shopping.

188. The cost of providing the basic services has risen whilst overall revenue has fallen. However, the requirement on the IOMPO to continue to supply the same level of service to all Island residents under the Post Office Act remains.

189. In the UK the Parcels market has seen an increase of over 40% in the last 10 years.

190. Our main partner Royal Mail Group retains the largest share of this market with approximately 40%, but the strong growth of Amazon now stands it at 7% of the market, just behind Hermes with about 9% and just ahead of DPD, Yodel and TNT each with about 6%.

191. Due to this competition the Royal Mail Group has not been able to take full advantage of the increasing parcels market which has a direct effect on ourselves as parcels delivered by the IOMPO through the Royal Mail Group have only increased approximately 6% over the same time.

192. Therefore parcels’ income growth does not offset letters income decline as shown in the graph below.

193. More recently, to take advantage of the unregulated parcels delivery and collections market in the UK, courier companies have developed cheaper ways of delivering parcels including “zero hours” contracted staff or “self-employed” lifestyle couriers, working within what has become known as the ‘Gig Economy’.

194. These companies are now operating on our Island in an unregulated manner.

8.3 Case for Change

195. By paying their staff less and only when there is work to do, paying for piece rate only, having minimal or no employee rights, expecting them to contribute their own transport, insurances and pay their own taxes for instance, these budget operators are able to undercut IOMPO prices, in effect unfairly competing for a limited volume of work against us.

196. To win this work we would have to operate at a loss, which we obviously cannot do.

197. The table below with sample sizes taken over Christmas periods shows that the IOMPO is losing market share to off-island companies’ year on year: Sample Size THE IOMPO HERMES OTHER 2015 260 72% 16% 12% 2016 697 65% 21% 13% 2017 429 63% 23% 15%

198. These carriers are reinventing the ‘last mile’ delivery and the competitive landscape.

199. Evidence suggests that their share of the Isle of Man parcels market is increasing, from 16% in 2015 to 23% in 2017, a trend which is expected to continue due to their low-cost model.

200. There has been much controversy and media attention in the UK over this employment trend, with a number of organisations facing and losing legal action surrounding the employment rights of gig

economy workers given organisations are avoiding paying minimum wage, denying pensions and rejecting holiday rights.

8.4 Parcel Mail and the Gig Economy Conclusion

201. The privileges under the Post Office Act increasingly do not compensate for the costs we are incurring maintaining the whole-Island postal service, hence requesting Tynwald’s agreement to cease delivering letters on a Saturday and concentrate on Priority parcels and other premium products.

202. The IOMPO and other Isle of Man licensed delivery companies should be able to compete fairly against other companies in the parcels market but this is difficult whilst the ‘Gig Economy’ is allowed to operate unfettered within the Island economy.

203. Many of the companies operating within the ‘Gig Economy’, are either non-Island based or unregulated and, whether mails-related or not are gradually eroding the ability of companies such as ours to maintain reasonable levels of pay and conditions to Island workers/residents (affecting their spending capability for the wider economy) and still be able to win profitable work to allow for reinvestment and growth.

204. We welcome the Chief Ministers decision to set up a committee to review ‘Zero hour’ contracts, which we understand will include ‘lifestyle couriers’ operating on a price per item.

205. Subject to understanding the outcomes of the committee, it may be necessary for IOMPO to seek Tynwald support to update the Post Office Act to ensure the exclusive privilege is appropriate to meet the service obligation.

9 Appendix E: Retail Network Supporting Information

9.1 Background

206. IOMPO has twenty-three independent sub post offices along with our three delivery offices which offer a limited number of services alongside our letters and parcels delivery operation.

207. All twenty-three sub post offices operate on an agency basis with a commercial and service level agreement in place. The IOMPO does not own or lease any of the properties that house sub post offices nor do they directly employ any of the staff.

208. The Isle of Man has more post offices per head of population than the UK, Jersey and Guernsey.

209. The decision to resign or retire as a sub postmaster is a decision made entirely by the individual or business entity operating each sub post office. Since 2002, seven independent post offices across the network have closed. Payments are made to each sub post office on a transactional basis but in addition a community payment to sub post offices outside Douglas and Ramsey is made to “top up” their income. The total, the community payment paid by the IOMPO in 2017/2018 was £383k. The IOMPO pay this community payment with no contribution from the Isle of Man Government.

210. The two largest contracts generating income and footfall for post offices are provided by the Isle of Man Government – from the Department of Infrastructure for the processing of vehicle and driving licences and from the Social Security Division of Treasury for the payment of pensions, benefits and allowances. These two contracts make up approximately 62% of total transactions.

211. The majority of the remaining transactions at post offices come from third party commercial contracts such as the withdrawal and deposit of cash for selected bank accounts, utility bill payments and other licences.

9.2 Current Situation

212. Transactions are falling at the sub post offices by an average of 7% per annum due to falling letter volumes and face to face monetary transactions, increased competition and changing customer habits. Only three sub post offices generated a profit for the IOMPO in the 2017/2018 financial year.

213. As sub post office’s transactions fall so does their income with sub-postmasters’ transactional income decreasing on average by 19% across the network in the last 8 years with the highest decrease at 72%.

214. We have had feedback from one rural sub postmaster stating that continuing to operate a sub post office jeopardises their whole retail operation, rather than the widely held public view that it is the sub post office that sustains shops in local communities.

9.3 Case for Change

215. The community payment or subsidy (which better reflects the nature of the payment) has historically been paid to ensure sub post offices in local communities across the Island remain viable. However, as transaction revenues decline, this payment, which does not increase each year, is heavily relied upon and it is unlikely some sub post offices would continue to operate without it.

216. This is a problem for the IOMPO due to the decline in letters and commercial income, the revenue from which used to support the network; in consequence it will be challenging to continue making these payments.

217. In effect, the IOMPO is subsidising private enterprises through the community payment system.

218. The IOMPO Network has nearly twice as many Post Offices per head of population than the UK. In the UK a restructuring plan is underway with up to a third of 9,000 urban post offices closing. Sub postmasters were compensated for the closure with up to two years of income although it should be noted that this payment is made by the UK Government rather than the Post Office.

219. The Isle of Man also has more Post Offices per head of population for similar jurisdictions as shown in the table below. Isle of Man Jersey Guernsey Total Number of Post Offices 24 21 12 Total Population 85,015 104,200 66,502 Population per Post Office 3542 4961 5541

220. As evidenced by the recent closure of Crosby Terrace Sub Post Office, the closure of one post office provides increased transactions to other post offices in the area making them more viable.

221. The IOMPO fully supports the Isle of Man Government’s digital strategy but also understands that this will likely have a further negative effect on face to face, counter, public services. The Isle of Man Government’s Digital Strategy vision is;

222. “to improve the access to and quality of public services in a way that provides better value to everyone in the Isle of Man. Our future Digital Services are those which are fully automated and controlled by the customer. They will be so simple, convenient and compelling, that those who can will choose to use them.”

223. This includes the following strategic aim;

224. “Online uptake of transactional services at 80% within five years and an interim goal of 50% by the end of the current administration.”

225. The Department of Infrastructure is currently reviewing its contract for agency arrangements with IOMPO, with a view to digitising as many of the services as possible. Ceasing the service would reduce the IOMPO’s annual revenue by over £550k per annum based on current revenue levels, and the independent network’s sub postmasters’ income would be reduced by between 11% to 54% per annum depending on location. It is highly likely that the withdrawal of this contract would result in the resignation of a number of sub post masters.

9.4 Public Consultation

226. The public consultation results indicated that for the majority of respondents, their sub-post office use has not declined.

227. The majority of respondents also confirmed that they attended at least once a month.

228. Further analysis of the results indicated that this was weighed towards the older demographic as shown in the graph below, with the same question, split out by demographic.

229. These results do not generally correlate with the falling transactions and revenue but are understandable as 41% of respondents were over 60 years old, and only 16% of respondents were under 40 years old.

230. Further analysis has shown that as expected, the majority of respondents visited post offices in higher population areas and most wanted a post office near their home or place of work.

231. There were major differences with regards to use around opening hours, the graph below shows the difference between demographics around the opening hours for the evening as an example.

9.5 Conclusion

232. The following trends are expected to become more pronounced and will continue to significantly impact our current retail business model:

• Personal preferences will further result in declining post office transactions. • Businesses will continue to conduct more transactions electronically with customers, putting downward pressure on mail volumes. • Strong mobile e-commerce will continue to disrupt brick and mortar retail operations to drive growth in Package volume.

233. It is clear that transactions will continue to decline in the present model, especially around the demographic structure of users. The initial analysis shows that younger people use the existing post office service in their current structure less than the older demographic.

234. It will become untenable for independent sub postmasters to maintain the network in its current form.

235. The cessation of all or part of the Department of Infrastructure agency arrangement would have a catastrophic impact on the viability. Whilst appreciating the Government’s drive for efficiency through digitalization the material impact that changes would have on network financial viability need to be considered in more depth.

236. We have only just completed the public consultation and the valuable information gained needs to be further analysed and more work undertaken with the stakeholders and Government. It is inconclusive and results are weighted around demographics.

237. Early analysis does not show huge public support for reducing size, changing network or services although views differ between demographics. 34

238. Further analysis of the public consultation and existing situation, work with stakeholders, focus groups and discussions with Government need to be undertaken to ensure that full consideration has been given to all factors before any future conclusions and recommendations are made by the IOMPO. Any material changes would subsequently be brought before Tynwald as required by statute and convention.

239. The IOMPO will undertake the following activities:

• Further analysis of the public consultation results. • Setting up of focus groups to ensure a balanced range of demographics are considered. • Work with the Department for Infrastructure and the Social Security Division of Treasury to understand their future need for counter services, aligned to their respective service delivery strategies. • Continue the intra-Government Consultation to understand the potential future demand for new face to face services through the retail network, including support for the digitally excluded. • One-to-one meetings with sub post masters to discuss individual office, financial income forecasts and the impact that transactions under threat will have on their income. • Two day workshop with the Nation Federation of Sub Postmasters. • Analysis of community payment across network and investigation of alternative funding arrangements. • Engage with central Government, local authorities and other third sector entities to understand the Community Hub vision and how IOMPO can contribute. • Bring evidence based conclusions and recommendations back to Tynwald.

10 Appendix F: IOMPO Strategy Formally laid as a separate document.

11 Appendix G: Public Consultation Full Results

12 Appendix H: Extract from defined benefit FRS 102 pension scheme valuation

13 Appendix I: Impact of possible benefit changes to defined benefit pension scheme

Option Accrual Rate Pension NRA Retain Member Contribution Rate Post Office Contribution Rate increases Protection (% of Basic Pay) (% of Superannuable Pay)

1 1/95ths CPI (max 2.5%) 65 Y 9.0 15.3

2 1/95ths CPI (max 2.5%) 67 Y 6.0 15.5

3 a) 1/90ths CPI (max 2.5%) 65 Y 10.0 15.6

3 b) 1/100ths CPI (max 2.5%) 65 Y 8.0 15.5

3 c) 1/110ths CPI (max 2.5%) 65 Y 6.0 15.0

4a 1/90ths CPI (max 2.5%) 66 N 7.5 14.5

4b 1/90ths CPI (max 2.5%) 67 N 6.0 14.7

4c 1/96ths CPI (max 2.5%) 65 N 7.5 14.5

4d 1/96ths CPI (max 2.5%) 66 N 6.0 14.7

All costings are approximate, based on benefit changes taking place as at 1 April 2017, and the latest proposed funding assumptions as set out in David Marsden’s email to Lisa Duckworth of 14 June 2017 (and subsequently agreed between the Post Office and the Trustees).

Other than option 4, they assume that all accrual rate changes (and ER terms) proportionately affect protected/transitional members (e.g. option 3 a) assumes no change to their accrual rates or ER terms). The Post Office Contribution Rates shown make no allowance for any adjustment for any past service surplus / deficit 14 Appendix J: Pension savings forecast 2018 to 2032

‘DB’: This is the existing Isle of Man Post Office Superannuation Scheme, a defined benefit scheme. Subject to legislative approval, it is proposed that this scheme is closed to new entrants, but will stay open to existing members. For existing members, to meeting the future service funding requirement, it is proposed that IOMPO will cap it’s contributions at 15%, and that members will increase their contributions to 10% (or accept a reduction in benefits, and/or an extension to normal retirement age), together with changing to annual CPI linked pension increases, capped at 2.5%. ‘DC’: Proposed new contract based defined contribution group personal pension scheme. This scheme will be made available to all new employees, and any existing members of staff who do not wish to join the DB scheme. The blue line illustrates the expected cost of implementing Recommendation 3, in aggregate with the savings anticipated from implementing changes to the DB scheme for existing members as set out above. The red line illustrates the cost of maintaining current pension arrangements for existing and new employees.