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To be published as HC 1894




Treasury Sub-Committee

National Savings and Investments

Tuesday 13 March 2012

Jane Platt and Steve Owen

Evidence heard in Public Questions 1 - 107



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Oral Evidence

Taken before the Treasury Sub-Committee

on Tuesday 13 March 2012

Members present:

Mr George Mudie (Chair)

Michael Fallon

Mark Garnier

Andrea Leadsom

Mr Andrew Love

Mr Pat McFadden

Teresa Pearce

Mr Andrew Tyrie


Examination of Witnesses

Witnesses: Jane Platt, CEO and Director of Savings, National Savings and Investments, and Steve Owen, Director, Operations and Commercial Management, National Savings and Investments, gave evidence.

Q1 Chair: The bad news is that Mr Tyrie is starting when you sit down, so you have an interesting start. Good morning anyway.

Mr Tyrie: Do you think, given that the Government now guarantees the first £85,000 of savings and can borrow very cheaply on the gilt markets, that we still need the NS&I?

Jane Platt: I think we certainly do need NS&I because NS&I’s main role is to raise cost-effective finance for Government. We have a stock of £100 billion; if NS&I did not exist, the Government would have to finance that £100 billion in another way. We exist to fund part of the national debt. We do that efficiently and effectively, at the same time giving a fair service to customers, the taxpayers and financial stability.

Q2 Mr Tyrie: There is a conflict between those though, isn’t there? You are having to balance one with another. You have talked about the balance. What does this balance mean? I have a quote on the record-"Behaving appropriately at a time when the banks and building societies are rebuilding their balance sheets". What exactly do you mean by "appropriately"?

Jane Platt: When we are looking at wider financial stability, we need to take into account being very transparent and very clear so that the banks and building societies can plan properly for their businesses. At the beginning of each year we have an agreed target, which is set by the Chancellor, for the amount of money that we are going to take out of the retail deposit savings market. Last year, that was zero within a tolerance of minus £2 billion to plus £2 billion, and this year that is £2 billion within a tolerance of zero to £4 billion.

We want at the beginning of the year to be very transparent about that so banks and building societies can plan their activities knowing exactly what we will be taking out of the market. If at any time that plan changes, we need to be transparent and make it known to the public and to the banks as fast as possible.

Q3 Mr Tyrie: What justification do you think there is for you to be the only financial institution able to offer tax-free savings above the usual ISA limits?

Jane Platt: There are four products that we can offer that are above the ISA limit. One is Premium Bonds, where the limit is £30,000. We have our savings certificates and we have children’s bonus bonds. Children’s bonus bonds are very comparable to junior ISAs. We don’t offer a junior ISA, so net-net that is a comparable tax allowance. We offer an ISA product, but again net-net that is the same as any other financial service provider.

That means there are just two products where we are offering a tax-free position and in those two products the amount that can be invested is limited. Apart from Premium Bonds, the other products are only on sale from time to time. Over the period of years, we have moved from offering a range that was rather different than those that could be offered by the market as a whole to a range that is much more compact and much more comparable with the banks and building societies.

Q4 Mr Tyrie: You mentioned a number of products. Have you consulted with the banking industry on releasing new products and setting rates?

Jane Platt: We have regular conversations with the BBA and with the BSA about what we are doing and the amount of money we are raising. We share information about what is going on in the market as a whole, so we do have a regular dialogue with them. Do we explain in advance what products we are launching? No we don’t, but because we say exactly what we are going to be doing in terms of net financing, it is very easy for them to predict what our pricing policy or our product policy is going to be.

Q5 Mr Tyrie: But you are making an assessment of the impact of your activities on the market in order to make this balance that you were talking about earlier?

Jane Platt: That is right. In making any decision, we look at the impact that it is going to have on savers, we look at the impact it is going to have on the taxpayer in terms of what it is going to cost us and the impact on value, and we also then look at financial stability.

Financial stability is looked at in two ways. One is in terms of transparency, as I said before, being very clear about what we are going to do so that the banks and building societies know. I ran a large part of a bank at one period; I know very well that if you are in that situation and you know what the key dynamics and movements are, you are able to manage your business around that.

Then, of course, the second thing is the limit around the net financing that we are asked to raise so that our market share has stayed static or slightly declined over the past few years. Again, in terms of fairness to the banking industry, we have not been aggressive in the marketplace in market share terms at all.

Q6 Mr Tyrie: You are making a reasonably detailed internal assessment of the impact? That is what it sounds as if you are doing, and that is helpful.

Jane Platt: We are, yes.

Q7 Mr Tyrie: In order to give us reassurance on that, would you be prepared to show us, ex post, one of the assessments?

Jane Platt: What we could do is look at, for example, one of the assessments that we would do as part of a pricing recommendation so that if that particular factor has called into play, but in actual fact the last pricing-

Q8 Mr Tyrie: I was referring particularly to new products; it sounds as if you do that for new products as well.

Jane Platt: Yes, we do it for every decision that we make.

Q9 Mr Tyrie: Would you be prepared to show us something for a pricing decision and for a new product, ex post?

Jane Platt: As long as we weren’t breaching any confidentiality. If it was an historical one, I can’t see a problem with that. We can certainly send something to you.

Q10 Mr Tyrie: If necessary, you can send it to us on a confidential basis. Do you think the arguments for privatisation of NS&I have gone away?

Jane Platt: At the time of the spending review, we went through a rigorous examination of whether NS&I should be in the private sector, whether it should remain in the public sector, whether it should be neutralised, whether it should be changed in any way. As part of that review no change was indicated, so as far as I am aware that discussion has gone away.

Q11 Mr Tyrie: Have you put all the relevant material with respect to that discussion into the public domain?

Jane Platt: That was part of our spending review material.

Q12 Michael Fallon: Could we turn to the performance table on page 9 of your annual report and could you explain to me why your performance against the value indicator, the second one, seems to have fallen from 2009-10 to 2010-11?

Jane Platt: We moved away from the value add measure back in 2008 because at that time it was recognised that the market after the financial crisis had changed very markedly. The old relationships between base rate and savings rate and the tensions and impacts on the gilt market and gilt pricing had changed quite dramatically and no one knew quite how far they would change over the future.

So we moved away from value add to the value indicator, and the value indicator is just that. It is the best measure that we have for value, but it is by no means perfect. The reason why it has fallen over the two years that we are looking at is that effectively the pricing of the comparator gilts has fallen. Effectively, in measuring our value we look at the cost of raising the amount of money through NS&I versus the cost of raising money in the fixed interest, the gilt market. Of course, gilt prices have fallen very sharply through the financial crisis so that the comparator has fallen and therefore the value that we are able to offer above that has also fallen.

Q13 Michael Fallon: So it is nothing to do with you?

Jane Platt: The decisions that we take on pricing are now no longer designed to maximise value. Before the financial crisis, part of our remit was to maximise value in all our decisions. That changed when we moved to balancing the interests of the customer, the taxpayer and wider financial stability, and therefore as long as the value indicator is positive we can take the decisions on balancing so we are not managing the business to a specific value number.

Q14 Michael Fallon: But what value does the value indicator have when you have now deteriorated it simply to deliver positive value? How can we know how well you are doing?

Jane Platt: There are a couple of things. First of all, the fact that at the end of the third quarter of this year the value indicator stood at £390 million-odd shows that raising money through NS&I is better value than raising it through the gilt market by that amount, so that is positive value and that is £398 million that otherwise would not be there. The second thing is that NS&I’s cost effectiveness is not just measured by the value indicator. If you look down that table on page 9, there is also-

Q15 Michael Fallon: Yes, but I want to stick to the value indicator. What is the point of it if all you have to do is deliver positive value? How can we measure how well you are doing on that indicator?

Jane Platt: The indicator target is for it to be positive, so the fact that it is positive shows that we are doing what we are asked to do.

Q16 Michael Fallon: But it doesn’t tell us how well you are doing, does it?

Jane Platt: We have been tasked with balancing the interests of customers, the taxpayer and broader financial stability, and I think we are doing a good job there. If you look at the amount of complaints we get from customers, customers are broadly satisfied with our service-in fact, very satisfied if you look at the metrics. The taxpayer should be pleased that we are adding value.

Q17 Michael Fallon: I am coming on to the other indicators. When you are saying you are doing a good job balancing all this stuff, how can we measure whether you are doing a good job if the only measure is simply to deliver a value that is positive?

Jane Platt: But that is not the only measure; it is one measure out of nine, and all those are in line with what we have been asked to do. To look at one in isolation, especially one where we are meeting the target, is skewing the view of the organisation as whole.

Q18 Michael Fallon: Well, let’s look at the third measure then-customer satisfaction, which you have just mentioned, was at 91.5% two years ago. Your new target is only at least 87%. Why have you dropped the target?

Jane Platt: The target was dropped because customer satisfaction measures two things. The first thing that it measures is the service we offer to customers and the second thing it measures is the policy decisions, because customers don’t abstract in their minds policy decisions from customer service delivery. Over this particular period, there were certain policy decisions taken that impacted on that particular measure. I should point out that in the industry as a whole at least 87% would be way above average-way, way above average.

Q19 Michael Fallon: But we are not dealing with the industry as a whole; we are dealing with you. For example, you had exceeded 87% in 2010-11 but then set the same target for 2011-12. Why don’t you set yourself a more stretching target?

Jane Platt: The targets are set depending on a range of things, including what we know is coming up in terms of policy and changes to particular products. For example, in this particular year we did the biggest data transfer, we believe, in Europe. We transferred 2.3 billion records on Premium Bonds from an old system to a new system. We did that over Christmas and none of our customers noticed.

We knew that that was happening and it was such a huge project that we thought that it was realistic to set a slightly lower customer satisfaction level because it is such a big project that we expected that there may have been some issues. In the event, the team did an absolutely brilliant job. They worked all the way through Christmas and they delivered this big project flawlessly. That is why these measures are calibrated to reflect the complexity and the difficulty of the things that NS&I is doing.

Q20 Michael Fallon: Okay, just one more. On the sixth measure, the efficient administration of funds, last year you achieved the 17 basis points but your new target is to do less than 19. That is not very stretching, is it?

Jane Platt: The overall efficiency of NS&I, if you look at that particular ratio you can measure it against other financial services institutions. The figures that we have seen, for example on some businesses that are purely direct businesses, would indicate that in the private sector-for a comparable business with the same mix that we have of telephone, internet, post and the Post Office-the figure would be about 30 to 35 basis points. So 20 basis points is well below the private sector in this particular business.

It becomes a discussion about what happens if you move that metric too far down-what will you do to the quality of the customer service and the new developments that you have to do for this type of financial services business? All the time new regulations are coming along, technological developments are coming along, and all these things have to be paid for and be put into the mix. So we believe that 20 basis points or lower is an exceptionally good deal compared with the private sector.

Q21 Michael Fallon: Is your own performance pay as chief executive measured against these nine indicators or is it calculated in some other way?

Jane Platt: It is measured against these nine in respect of half of it and the other half is down to objectives that are set for me by Sir Nicholas Macpherson.

Q22 Michael Fallon: Yes, but how did you score on the half that is related to this table? Did you get the full bonus?

Jane Platt: Well, I would have got very close to the full bonus, but I chose to waive my contractual bonus down to the maximum agreed for people who are at my level in the senior civil service. I would have achieved very close to it, but I chose to waive it.

Q23 Michael Fallon: Yes, but the measure was that you had met all these?

Jane Platt: Very close to it.

Q24 Mr McFadden: I would like to ask you a bit about your sales channels and how you do this. Can you tell us a little bit about your historic relationship with the Post Office over the years, just to begin with?

Jane Platt: Of course, the historic relationship with the Post Office goes back many, many years. In 1969, we became separated from the Post Office and certainly since the early 2000s we have begun to change our channel mix. At the same time, the Post Office have built up their own suite of savings products, which are sourced from the Bank of Ireland. So we have a good working relationship with the Post Office, we value the service that they give to our customers, but over time we are moving NS&I’s business direct. The Post Office are very well aware of this plan and over the same period have built up their own financial services product range.

Q25 Mr McFadden: So is the Post Office your ally or your rival?

Jane Platt: They are our rival in terms of savings products and they are our ally in that they service our products to their customers-and, of course, Premium Bonds will remain on sale in the post offices long term.

Q26 Mr McFadden: You have said that you want to go more towards direct channels-internet sales and so on-but we have seen an increase in the proportion of sales of your products through the Post Office from, I believe, 34% in 2009-10 to 42% in 2010-11. That seems odd.

The relationship with the Bank of Ireland is not new. The suite of financial products that the Post Office is selling has not come about overnight. As you indicated, it has been happening over a number of years, and 2009-10 to 2010-11 is not ancient history; it is just over the last year. Why are you moving away from a channel that is responsible for an increasing proportion of your sales?

Jane Platt: While the proportion is increasing, if you look at the absolute numbers they remain broadly static but overall sales were down. It looks as though the amount of money coming in through the Post Office has risen, but it is virtually the same amount year on year-but because overall sales were lower, the proportion is higher. That proportion is down to sales mix and the fact that there was a high year in terms of Premium Bond sales in that particular year, because 75% by value of the sales through the Post Office are Premium Bonds. That explains why that figure looks the way it does.

Q27 Mr McFadden: What is the logic for keeping Premium Bonds for sale through the Post Office but moving the rest of the products away and making them direct sales products?

Jane Platt: Premium bonds are a completely unique product and therefore there is nothing like them and there is no conflict at all with any of the Post Office’s own savings range. So in terms of any potential confusion in customers’ eyes between products sourced from the Post Office, which are Bank of Ireland backed, and products from NS&I, there is absolute clarity that there are just Premium Bonds on sale.

Q28 Mr McFadden: How much will you save through this move to direct sales or, put another way, what will be the reduction in revenue to the Post Office from your decision?

Jane Platt: Last year, we paid the Post Office about £21 million, I think, and so over time that amount will decline. Again, the Post Office have known about this for some time but you need to look at £21 million versus some of the other numbers being mentioned in the context of the Post Office at the moment.

Q29 Mr McFadden: Give us a bit more definition on this. Last year, it was £21 million. Where will it be, by your estimate, in, say, three years’ time?

Jane Platt: Well, because we are in middle of commercial negotiations I can’t talk about that, but what I can say is that Premium Bonds are the largest product by far of ours that is sold through the Post Office-some 75% by value.

Q30 Mr McFadden: So the bulk of the £21 million will probably stay?

Jane Platt: I can’t be categoric about that at all because we are in the middle of a negotiation.

Q31 Mr McFadden: Finally, what have you done to assess customer opinion of this shift from selling through the Post Office to selling directly and what has the feedback been?

Jane Platt: In November last year, we announced that we were withdrawing all products, apart from Premium Bonds, from the Post Office. Since then we have had 285 complaints. We obviously take all those complaints seriously, but it has not been a major feature in terms of our overall complaint levels, which are low in any case-but we have not had complaints about that.

You should remember that most of our customers, even for Premium Bonds, would only go into a post office to buy them maybe once a year, sometimes once every three years. These are not transactional products. Our product base is about long-term savings, so they are not the kind of products that provoke a lot of footfall.

Q32 Mr Tyrie: Are the Bank of Ireland Post Office products backed by a Government guarantee, like your Premium Bonds?

Jane Platt: They are sourced from the Bank of Ireland.

Mr Tyrie: So the answer is no?

Jane Platt: No, but they are completely different products to ours.

Q33 Mr Tyrie: Are the public aware that one of the products is gilt-edged and the other product that they buy at a post office is not-that there is a risk?

Jane Platt: We spend a lot of time with the Post Office making sure that the brochures are very clear and that they look very different, and of course the Financial Services Authority has very clearly stated what the guarantee is and who is actually providing these products, but I think it is extremely important for the Post Office.

Q34 Mr Tyrie: I didn’t know this-at least, I wasn’t sure; I had an inkling that it was not covered. Do you think most customers know that when they buy a product from the Post Office, apart from Premium Bonds, there is no UK Government guarantee?

Jane Platt: The Post Office make strenuous efforts to make sure that that is obvious.

Q35 Mr Tyrie: Have you done any customer surveys on it, bearing in mind your products are being sold there too?

Jane Platt: We haven’t done a recent survey on that.

Mr Tyrie: I think this is something you really need to look at.

Q36 Chair: Ms Platt, could you speak up slightly? You have a very gentle voice. Your evidence is very good and I would like all the members to hear it, particularly myself.

Jane Platt: I apologise. Sorry about that.

Q37 Mark Garnier: I should like to follow on from Mr Tyrie’s question. Even if you did tell people that there was not the same level of gilt-edged backing or otherwise on this, do you think they would understand what that actually means?

Jane Platt: I think that the Financial Services Compensation Scheme has done a great job in raising awareness of this, and certainly the latest research that I have seen shows that far more people do understand the FSCS compensation.

Q38 Mark Garnier: Yes, but that is a slightly different thing. You are talking about awareness as a result of scandals-bond selling scandals and that sort of stuff. The Financial Services Compensation Scheme is not about financial education, and I want to talk about financial education. I have been taking a look at the You and Your Money part of your website, which is interesting but relatively simplistic and yet you are duplicating what is being done by the Money Advice Service, which has a much more substantial programme. First of all, why do you feel you need to have this section on your website?

Jane Platt: We need to have it because it is what customers say that they need, in that they would like some information about wider financial services-and, of course, NS&I is a very trusted brand. We make it very clear that the Money Advice Service exists, and indeed provide links into the Money Advice Service. While that institution is building up its brand and its franchise, we have 26 million customers so we are a very good way of raising awareness of the much wider and comprehensive service offered by the Money Advice Service.

Q39 Mark Garnier: You provide links to IFA search engines?

Jane Platt: Yes, we provide links to areas of information.

Q40 Mark Garnier: What is your personal assessment-I am not asking for any sort of numbers or anything-of financial literacy among the wider population?

Jane Platt: My personal assessment is that it is very variable. It has improved, I think.

Q41 Mark Garnier: From where to where?

Jane Platt: From a very low base to slightly better. I think a lot of work has been done on this. There are certain aspects that people do understand far more about, so they do understand more about the Financial Services Compensation Scheme because that has been discussed very widely in the press. But NS&I is all about offering very clear, straightforward products with no bonus rates, no peculiarities about them.

People who have lost trust in institutions know they can come to us with a very small but very clear and straightforward range of products that offer fair value. Then as we educate them, hopefully, using the You and Your Money site, they become more sophisticated, understand more about risk, and then with confidence can move into products that have a slightly higher risk profile.

Q42 Mark Garnier: Take something as simple as Premium Bonds, for example, versus the National Lottery. The National Lottery is something where you have a one-in-14 million chance of winning and you lose your premium once you buy a ticket, whereas with the Premium Bonds you have a one-in-24,000 chance of getting a prize and, lo and behold, you get your premium back when you want to go and do something else with the money.

That is an absolutely simple example of how a Premium Bond is by far and away a better product than the National Lottery and yet people are chucking their money away on the National Lottery week in, week out. That does not necessarily demonstrate that this is a financially literate population when there is something so blindingly obvious as that. Discuss.

Jane Platt: I am not comfortable with the National Lottery and Premium Bonds being mentioned in the same breath, because Premium Bonds are not about gambling. As you said, you get your stake back and there is a clear implied prize fund rate, so with average luck-

Q43 Mark Garnier: Yes, but you are gambling on what your dividend could be.

Jane Platt: But with average luck, you do get that return over time. I think it is also a way of getting people who find savings very boring to go into something that is slightly more appealing to them, so you will find that a number of segments of Premium Bond customers are people who would not necessarily have other types of savings accounts because they see it as in a different category.

Q44 Mark Garnier: How do you measure the success of the You and Your Money section of your website?

Jane Platt: We measure it by number of hits, because it is not designed to drive sales for us. It is designed for education. We are also beginning to look at how we can monitor the number of times that people use the links, because again that would be interesting to know, but I don’t have that data at the moment.

Q45 Mark Garnier: But ultimately the reason you have it is because you see yourself with a unique opportunity of being able to access 24 million individuals?

Jane Platt: That is right. We are a trusted brand. We have delivered excellent service to customers, they trust us and they trust us to balance their interests, the taxpayer and financial stability. So we are in an absolutely unique position to help them with finances.

Q46 Mark Garnier: One last question. You said that financial literacy has come from a very low base to what amounts to just a low base, if you like, or maybe a little bit better than that. Do you think that financial education should be something that ought to be put on the curriculum and become part of the curriculum in the same way that ICT skills are?

Jane Platt: That is a policy decision but when you-

Mark Garnier: Go on, have a personal opinion about it.

Jane Platt: My personal opinion is that when you see today the amount of money that is flooding into structured products-and you can completely understand why savers are doing that; while interest rates are so low, people are looking for a return-you just wonder how many people really understand them.

Q47 Mark Garnier: So you are implying that you think we could do more?

Jane Platt: The more education, the better.

Q48 Mr Love: Can I turn to the spending review? You have been asked to save 10% over the spending review period, yet the average for Government Departments is almost double, at 19%. How come?

Jane Platt: I think it goes back to the fact that when you look at the total cost of running NS&I versus our savings book, which is a measure that is widely used in the industry, we had the ratio that we discussed a few minutes ago of between 17 and 19 basis points, well below anything in the private sector. So, therefore, it becomes a discussion on how far can you drive the cost base down when we have already driven the cost base down tremendously. In fact, Steve, do you want to talk about the cost savings you had already made, which were the context for the decision?

Steve Owen: I think we started our own personal austerity plan just over a decade ago in trying to drive down the cost of the business. In real terms, the cost of NS&I was something like £230 million, £240 million in today’s money, and we have driven that down to the current level, which is £165 million approximately. So we started our austerity plan some time ago. We have managed to drive down the cost of operations very significantly. The core cost of the operation is about 55% of what it was a decade ago. We started a long time ago and there comes a point where if you continue to cut costs beyond what is sensible, beyond the pace that is sensible, we reduce the value that we can add to the taxpayer.

Q49 Mr Love: Am I expected to believe that cost savings already in the bag have been allowed to rank against the cost savings that you need to make over the period of the spending review?

Steve Owen: It would be quite easy to cut the costs of NS&I-we would just do less business-but that would not add benefit to the taxpayer. It would begin to erode benefits as our value figure would fall accordingly. So if we don’t modernise the business, for example, we become less efficient in the future.

Q50 Mr Love: Let me draw the parallel with Her Majesty’s Revenue & Customs. They asked them to make an equivalent saving to other Government Departments, but because of the very need to ensure that the tax take was kept up, they reinstated some additional resource for very specific purposes to achieve that objective. Why haven’t they done that in your case? I can’t believe the Treasury said, "You’re a very, very efficient organisation, we accept that, but because you have instituted your austerity programme prior to the Government spending review we’re going to allow you to save that again". I can’t believe that they would do that.

Jane Platt: As Steve has just explained, I don’t think that that was the logic behind the cuts that we were asked to make, which are certainly being very difficult for us, but you would need to speak to the Treasury and the people who agreed it about what their logic was.

As far as we are concerned, we have very challenging targets. We are part-way through moving our products from one infrastructure to another. We are doing that very successfully but it is an expensive business. We are also having to, quite rightly, institute all the rules and regulations coming out of the FSA-and no doubt some more out of the successor of the FSA when it comes through-and needing to deliver a good service to our customers.

So the spending limit has been set very stretchingly for us to deliver those things and, of course, at the same time recognising that we do need to make sure that we have sufficient money to maintain the core business. We also were authorised to proceed with our business-to-business business, which is effectively providing payment and transaction services for other parts of Government and we use some of that to offset our costs. So the Treasury have recognised the need to keep the core of the business robust.

Q51 Mr Love: Can I ask you about these transaction processing services that you are talking about providing? I see there are some examples of the Court Funds Office and the Equitable Life Payment Scheme that you are doing already. What sort of income is that going to generate for national savings over the period of the spending review?

Jane Platt: Those figures will be shown in our annual report and accounts, so the first time that they will be made public will be in our report and accounts that will be published and laid in July this year. You will see the income in aggregate then.

Q52 Mr Love: But you are confident that you can match whatever target you have set yourself for income generation from a variety of mechanisms-not just including the two that I have mentioned, but others over the period of the spending review?

Jane Platt: In order to meet the terms of the spending review, we will need to expand our customer base, yes.

Q53 Mr Love: It says that you are trying to make yourself more efficient through acceleration and transition to lower-cost direct channels. We have talked about that in relation to the Post Office. Tell me about acceleration. How accelerated will this programme be?

Jane Platt: Before the spending review we already had in place plans to move to a more direct model. Part of it was driven by cost considerations but part of it was also driven by the fact that our customers are increasingly asking to use the call centres, post and online. This is not something that we are pushing our customers into, but something that customers are increasingly using-not only from NS&I, but from other people. So what the spending review has done is effectively accelerate that programme. The result of that was the announcement that you heard in November, which is that by March 2013, apart from Premium Bonds, all NS&I products will be direct, either online, telephone or post.

Q54 Mr Love: I listened carefully when you mentioned that you had had relatively small numbers of complaints in relation to the shift away from the Post Office. Two questions really. To what extent is the shift driven by the view that this is a better way to channel products to your customers and to what extent is it in response to the spending review itself? A lot of your customers would be traditional customers who would want a face at the other side rather than to look on computers or telephones or the more direct channels. I understand the move away from the Post Office, because it is selling other products in competition, but are you convinced that there isn’t a need for a customer face as part of your offer?

Jane Platt: If we offered transactional products where people were interacting very regularly with NS&I, there might be a case for it, but in actual fact the kind of products that we have are long-term products where people deal with us maybe once a year, maybe once every three years. Even with the products in the Post Office at the moment, if you want to withdraw funds you have to write to us and then that is authorised, so already the customers are used to interacting with us by post and on the telephone.

The average length of service of the call centre operatives in our UK-based call centres is 24 years, so the people that our customers are dealing with on our telephones really know the business and the products-far more than anyone behind a high street bank branch counter. So we do offer an extremely good customer service by telephone and online, and larger numbers of silver surfers are definitely using the internet.

We now have close to 800,000 people using our new Premium Bond service. I talked about the migration earlier, but they are now using that to manage their own accounts and they are having their prizes paid straight into their bank accounts. These are things that customers have been asking us for. These are the things that we need the money for to improve and to make sure that all our products have these types of facilities, to make it really convenient for customers.

Q55 Mr Love: Can I ask you one final question? The 10% savings that you are having to make won’t be at the cost of reduction in either the interest rates you pay or the prizes that you give for Premium Bonds? None of the 10% arises from, in a sense, a reduction in the benefits to the customer?

Jane Platt: None of it arises from pricing changes, no.

Q56 Chair: That 10%, in the report and accounts it is framed in a way that leads us to believe certain things that may not be true. It is 10% over four years. Is it 10% each year or is it 2.5% each year of the spending review?

Jane Platt: Our DEL goes down from effectively £175 million to £152 million over the period of the spending review.

Q57 Chair: So it is taking 10% off over four years, not 10% each year?

Jane Platt: No, over four years.

Q58 Andrea Leadsom: Good morning. I would like to ask a few questions about the services that you provide now from Atos, which was Siemens IT Solutions and Services. Specifically, last time you came to this Committee, in 2009, you explained that the quite significant increase in charges from Siemens, now Atos, was due to the flight to quality and yet in the last period there has been a very small, relatively, reduction in the charges. I wonder whether you could explain why.

Steve Owen: Yes. The charges are made up of three components. The first component is what we describe as the unitary fee-that is, the core transaction charge for running the operations business. The second component is a volume-related payment, so as the business grows it costs more to manage and run that operations business. The third is a change budget.

We have talked a little about the change budget in terms of our investment in the business. The issue with the growth payment is when the business grows it stays grown, it remains larger than it was previously and so the running costs also remain larger over time. For a bigger business we need to sell more and deal with more repayments on an annual basis, so the actual charges each year remain at a higher level.

Q59 Andrea Leadsom: I can obviously see the point, and we could argue about economies of scale and whether in fact that represents a significant enough reduction, notwithstanding that they are dealing with a bigger business now. That apart, would you say that Atos’s profit margin has increased over that period or has that remained constant? Is that something you are monitoring yourselves?

Steve Owen: Yes, it is something we monitor very carefully. The contract as a whole, notwithstanding whether it is held by Siemens or Atos, is a loss-making contract. It has been a huge benefit in terms of value for money for the public sector. We have managed to get, for a variety of reasons, very good value for money. That said, Atos are now in operating profit. You might expect that. The heavy investments in the contract came in the early years, but the profits are not excessive. They are manageable and below the market norm.

Q60 Andrea Leadsom: What incentive did they have to take on this business? It was just a prestigious account? If it was a loss-making contract, why were they doing it?

Steve Owen: Atos acquired Siemens BPO. They didn’t really target that particularly at this contract. This was just part of the business they bought.

Q61 Andrea Leadsom: So it was a loss-making contract when it was still under Siemens, but now that Atos has bought it they have turned it around and it is profitable. Is that what you are saying?

Steve Owen: Not quite, no. It would have been naturally profitable at this point in its life cycle. Most deals of this kind tend to go through a traditional J curve. They are loss making initially and then become profit making over time, so it is the natural lifecycle of the contract that has made it profitable.

Q62 Andrea Leadsom: Thank you. I believe you are now tendering for a new PPP partnership. What is the process that you are going through, when is that likely to be finalised and do you expect to deliver some savings through that new contract?

Steve Owen: Yes, we are going through the process. We have shortlisted now down to three potential suppliers. We engage with them next month for a period of time to ensure they can understand the business of NS&I and the possibilities for giving us the best value deal in the future. We should receive final bids at the end of this calendar year and be placing a contract around about April 2013.

Q63 Andrea Leadsom: Do you expect to make savings from that tendering process?

Steve Owen: It would be very nice if we could. As yet we haven’t even engaged with the bidders, so it is quite hard for me to be sure where that is going to go. We are getting a very good value so my first priority is to make sure that we can maintain the current value we get. If there are savings to be had, of course we will take them.

Q64 Andrea Leadsom: Can you just confirm that Atos is one of the shortlisted bidders, so staying with them is a possibility?

Steve Owen: Atos are one of the shortlisted bidders.

Q65 Andrea Leadsom: Thank you. Turning briefly to a different subject, in your annual report and accounts you have a contingent liability, which is a sports ground in Glasgow. Could you tell us a bit about how did you come to own a leasehold on a sports ground in Glasgow and what are you doing with that?

Chair: It is not Ibrox, is it?

Steve Owen: It is not Ibrox. It would be a bigger contingent liability if it were Ibrox.

Chair: It is a liability at the moment, but there you are.

Steve Owen: I believe that in 1974 National Savings signed a 99-year lease for a sports ground that the society that was associated with NS&I ran. As our staff numbers have fallen and our culture has changed, that society has been closed down, so we are left with the lease that still has some 60-odd years to run; my maths is not quite good enough to work out how many years.

We have been in discussion with a local sports society and they are very keen on taking on the lease. They are now currently using the land. We have given them the use of that facility for a three-year period free of charge. The reason is that the landlords of that particular facility were not prepared to grant a sublease to that charitable organisation until they had a balance sheet, effectively, which of course, being a new organisation, they didn’t. So we have given them three years. If they can make themselves financially successful in that three-year period, we can transfer the lease and lose that contingent liability.

Q66 Andrea Leadsom: Does that potentially imply that there will be some kind of liability to NS&I over that subleasing arrangement or not?

Steve Owen: If we can transfer the lease to the sports association, we will lose all our future liability.

Q67 Andrea Leadsom: If you don’t achieve that transfer, how onerous is that lease as a liability? Is it taking up a lot of staff time?

Steve Owen: It takes no staff time at all, but it costs us about £16,500 a year, from memory.

Q68 Chair: On the question of computers, you commissioned an independent review of the security of your IT. It threw up some findings. Are there any findings the Committee should know about? You indicate in your annual report that you are taking steps, so it suggests that there were some problems.

Steve Owen: I don’t believe we have problems in that sense. I think security is a moving feast and the advice and guidance that we have from the security industry changes all the time. It is always a moving feast and what we seek to do is to keep the appropriate level of security around our business. Our fraud levels are very low in NS&I. We can be thankful for that, but we can’t be complacent. We have to continue to move with the times and make sure we are well protected against potential security risks.

Q69 Chair: So it wasn’t retrospective, it was looking forward, taking a look at your system and projecting forward?

Steve Owen: That is correct.

Q70 Teresa Pearce: Just to go back, Jane, to what you said about people who sell your products having 24 years’ experience. Would they be people who had previously worked for you and now work for Siemens or Atos?

Jane Platt: That is right, because when the PPP arrangement was in place, the NS&I staff were TUPE’d across to Siemens and so they-

Q71 Teresa Pearce: So that continuity has been very useful. When you are looking at renegotiating a new contract, other than price, that experience of the contractor is really important?

Steve Owen: I think how the bidders deal with that experience base and those people is very important to us, yes.

Q72 Teresa Pearce: In negotiating that contract, do you have to just look at price or can you look at those other factors?

Steve Owen: No, we can absolutely look at a wide range of evaluation factors beyond price. Those people will naturally transfer to a new provider in any event under the TUPE regulations.

Q73 Teresa Pearce: They might not all want to go so you will lose some, won’t you?

Steve Owen: No, they will all transfer. But what is important is how they are treated, how they are handled, how they are trained, how they are replaced when they retire, all those issues.

Q74 Teresa Pearce: Because your satisfaction survey relies on those people?

Steve Owen: Absolutely right.

Q75 Teresa Pearce: As a sort of connected thing, I was just looking at the accounts and under "Other administration costs" I can see where the PPP provider costs come in, but you have an amount of nearly £4 million under "Internal audit, personnel costs and consultancy". What would that be? Would any of that consultancy be fees to Siemens or anybody like that?

Jane Platt: Are you looking at page-

Teresa Pearce: Sorry, page 72. Rather than taking up the Committee’s time now, if you don’t know off the top of your head you could let me know. I am always interested when it says "consultancy" on anything.

Steve Owen: They certainly aren’t payments to Siemens or Atos. They are something separate.

Q76 Teresa Pearce: I would also be concerned that it may be consultancy fees paid to any board members. That would be the other thing that-

Jane Platt: They are not in that section. There are no consultancy fees to my board members at all and in the remuneration statement the amount of money that they are-

Q77 Teresa Pearce: It is just £4 million is quite a high number. That can’t all be audit, so if at some point somebody could let me know, that would be great. Your staff overall, we have heard that a lot of the work is outsourced. What percentage of staff do you directly employ, roughly how many?

Jane Platt: There are about 150 staff directly employed by NS&I, mostly based in Pimlico and some based out in the UK sites alongside Atos colleagues.

Q78 Teresa Pearce: Looking at what I know about your staff survey, career development is a concern. Do you think because your staff numbers are relatively small it is a problem for senior staff to get the wider experience because most of the work is outsourced? Do you think that is one of the reasons, or is there something else?

Jane Platt: I think that it certainly is the case that because NS&I comprises only 150 people, there are a very large number of singleton jobs; we do not have teams with lots of people in supporting roles. There are a lot of people who are in key posts but there is no one working to them and there is no internal succession planning. But I am delighted that the civil service survey for this year has shown an increase in our overall engagement score up to 71%, which means that out of the 97 organisations that are measured, we came third.

On learning and development, our particular score went up nearly 20 points. That is because we have spent the last year focusing on exactly the areas that we highlighted in the report and accounts to try to improve that. So whereas we won’t always be able to offer people roles in the organisation, because it is a very flat structure with a lot of singleton, very specialist roles, by using learning and development we are showing people that their careers will be enhanced and developed with NS&I even if they work for us for a period of, say, three to five years and then move on.

So we are addressing that, although not structurally because we certainly can’t suddenly increase headcount-we don’t have the money to do that, nor would it be appropriate to do so-but we are approaching it by looking at each individual and spending more time on their learning and development plans.

Q79 Teresa Pearce: With a smallish staff and such a huge contract, management of that contract needs to be really strong, so to have strong staff is very important. Is there any way in which staff can be seconded out to the outsourcer to see how things work out there?

Jane Platt: We have people going up to the sites all the time.

Q80 Teresa Pearce: But a visit is not the same as a secondment, is it?

Jane Platt: No, but we also have people collocated on the sites, so again they are completely embedded in what is going on.

Q81 Teresa Pearce: I raise it because often when local government has outsourced a lot of its core business, the outsourcer becomes, over time, much more powerful than the body and it is easy for them not to meet targets and to present reports that look in a way that can’t be interrogated properly. That is why I raise it, because ongoing you need a very strong staff to make sure that that contract is managed and you can see ahead to see where the pinch-points might be.

Jane Platt: To spare Steve’s blushes, we have, with Steve and his team, an excellent team who have developed these skills over a period of 10 years. We have very rigorous sets of key performance indicators that are monitored on each site. We have regular visits. Where we can do, certainly up until we started the retender, I had the account director from Siemens, and then Atos, as part of my management team, and I treat him exactly as I would my ops director. So there is no "them" and "us"; it is a really cohesive group of NS&I and Atos. I think that is one of the reasons why we have been able to deliver the kind of results that we have.

Q82 Teresa Pearce: What special skills does your new chairman bring?

Jane Platt: The new chairman is Sir John de Trafford and he worked at
Amex for a large number of years, having also had senior jobs at Unilever and Guinness. At Amex, he was in charge of operations in Europe and the Middle East in financial services and cards business, so he understands financial services, but most importantly he also understands the customer. So he brings to us financial services experience but also experience of large brands and also interaction with customers.

We have had two other changes to the board. Martin Gray stepped down after a very great period as our chairman. We also now have James Furse who has joined the board. He was responsible for setting up the Greenbee activities for John Lewis and worked directly for the chairman of John Lewis, so you can imagine he comes in with a very strong consumer finance and retail background from an organisation that has some very powerful brand values. Of course, for NS&I our brand values and the way we do things is very important with building that key trust with our customers, which then allows us to raise cost-effective financing.

Q83 Teresa Pearce: Going back to what you were saying about being pleased about the current staff survey, will you now be publishing your staff surveys online like other Government Departments do?

Jane Platt: I wasn’t aware that other Government Departments put the survey online, but certainly that is something we can look into.

Q84 Teresa Pearce: Just one last thing, will you paying bonuses in 2011-12?

Jane Platt: Where people have done the work and achieved the standard for part of their variable pay, we would intend to pay them, yes. We have a very rigorous method of setting objectives, which are linked to our corporate objectives, and then we measure them and variable pay is awarded where it has been earned.

Q85 Teresa Pearce: Will that be to board members as well as staff?

Jane Platt: To board members as well as staff-not to non-executive members, but to board members where they have earned it.

Q86 Chair: Did the staff not earn their bonuses simply by coming in over Christmas and moving the Premium Bond stuff across? Was that not a good enough reason to pay a staff bonus-working over Christmas?

Jane Platt: In the report and accounts, it shows that the bonuses for staff that were paid for last year averaged about 6.4%, so certainly staff who were engaged in that part of the project did earn that.

Q87 Chair: I might be the only one on the Committee who can’t understand your business model. When you start a year and you have the discussions with the Treasury, they agree your expenditure, your budget, yes?

Jane Platt: The budget is already agreed as part of the spending review, so we know in advance how much we have to spend.

Q88 Chair: Right. So you have your expenditure, which has been agreed with the Treasury. You seemed to be saying to Mr Fallon that what you are judged on is the extra money you raise, the £2 billion. Is that the basis on which you are judged, apart from customers being happy? In financial terms, is that the basis that you raise an extra £2 billion over the year?

Jane Platt: The financial basis on which we are judged is a combination of the various service delivery measures that we looked at earlier. Certainly, net financing is one of them.

Q89 Chair: Which is this £2 billion.

Jane Platt: Which is £2 billion within a range of nought to £4 billion. Then we also look at the value indicator; is that a positive number? So that is the second one.

Q90 Chair: How do we get this value indicator then?

Jane Platt: The value indicator looks at the cost of raising the amount of money that is raised by NS&I compared with the cost of raising the same amount of money in gilts, and also taking into account the cost of running the Debt Management Office and the cost of running NS&I.

Q91 Chair: That is a point. Can you affect that, though? If you are being judged against gilts, you can’t affect the price of gilts. How do you react then?

Jane Platt: At the time when we were tasked with generating a specific value number, pre the financial crisis, we actually had a target for value and there would be a target of £X million that we would need to generate. We would do that by the combination of the type of products we put on sale and the pricing, the interest rates-

Q92 Chair: What happens if gilts go up during the year or fluctuate? How do you build that into your business model?

Jane Platt: That is why we moved away from having a target. There has been such a lot of volatility that it is very difficult to do so and that is exactly why we moved away from value add to value indicator and why we no longer have a specific pounds million forecast. It is simply so difficult to do and there are so many difficult and distorting features to gilt pricing, which makes it a less robust measure than it ever was before because of this volatility and the fact that you can’t influence it to the same extent.

Q93 Chair: You agree an actual budget with the Treasury. You then set about selling your wares. How do you adjust your price if there is volatility in the gilts? How do we know? I certainly don’t know. I was reading it last night; I was reading it early this morning-maybe that was the problem. I could not see how I could sit here and judge whether you had done well.

You raise the brass, it disappears into the National Loans Fund and, provided somebody says you beat gilts, you are in the clear. But how do you know as you go through the year that you are ahead of the game? It is a strange business to run. It is a strange business to judge whether you are operating efficiently and profitably.

Jane Platt: The key measure for us, especially in this difficult time where there are so many distortions and volatility in the marketplace, goes back to the ratio of the cost of running NS&I versus the size of the book, which is the one thing that we can compare with the private sector. So that shows that we are run in a very efficient way.

I know that you dismissed all those nice things about customers; actually, to us those matter a lot because gilt prices will not always be where they are now. We are an important diversifier in terms of source of funds for the Treasury and we need to make sure that we preserve a good relationship with our many millions of customers.

Q94 Chair: Just stay there, before it disappears out of my mind. What you are saying is you link the amount of money you raise to your expenditure and so you will know the ratio. So you will know how you are doing on last year and the year before, and so on. Why do they bring gilts into this? Is that the Treasury making an assessment of whether you are worthwhile or not?

Jane Platt: When you had normal circumstances, before the financial crisis, when markets were stable and there were not the distorting factors affecting gilt prices, it was something that NS&I wanted, as well as the Treasury, to be able to demonstrate how much value NS&I was adding, and that was important.

The problem is that the circumstances at the moment are so far away from normal that, while the value indicator is the best measure we have, it is certainly anything but perfect. If we were tasked with a specific point to forecast on that, we would be making some very strange pricing decisions, which would certainly not be balancing the interests of savers. So we need to be very careful and I think we have a very pragmatic and sensible set of operating frameworks to cope with very extraordinary events.

Q95 Chair: Of your sales, how much is steady? I have some Premium Bonds, I think my wife has some Premium Bonds and they are stuck there. She will never get rid of them, so that is very good for you. How much is in stock and how much each year do you have to raise new?

Jane Platt: Looking at our overall figures, to just stay in the same position every year we have to generate sales of somewhere between £12 billion and £14 billion, because each year products mature. For example, if people hold term products that expire after three years we need to generate sales of between £12 billion and £14 billion every year to stay in a steady state.

Q96 Chair: Which is out of what? What do you expect to hand to the Treasury each year, or the National Loans Fund?

Jane Platt: This year we would expect to be handing over somewhere in the region of the £4 billion, right at the top end of the range that we had. Last year our target was zero and we came in at £83 million, so it shows you how close we were to zero last year. I think sales last year were somewhere in the region of £12 billion just to stay with a zero net financing target.

Q97 Chair: In terms of sales, there is two years now you have put the index-linked one on the market and then pulled it off. Is that used as a balancing or is it pulled off for other reasons?

Jane Platt: It is part of our calculation on how we raise the amount of net financing in any particular year.

Q98 Chair: Is that not an easy one then? I got some this year, and again my wife got some, because they were one of the best on the market, but we knew they were going off because you would take them halfway through the year. Is that not an easy option that you come in, you have three or four months’ good sales, it helps you meet this £2 billion growth, and then you pull them off?

Jane Platt: This last year, when we were given the £2 billion target within a range of nought to four, that was explicitly with the intention of being able to put index-linked saving certificates back on sale. The reason we did that is that our postbag was full of customers wanting us to do that. There was huge customer demand for that product, so the Chancellor agreed that we should have this target that was higher than the previous two years.

For the previous two years, our target had been zero. This was specially to meet customer demand, we had this target and we put the index-linked saving certificates on sale. We obviously had an amount that we had in our minds that we needed to raise in order to meet the net financing target. So you are quite right, it was part of our strategy.

Q99 Chair: It is an easy strategy though, it is an easy way out, because you pitch them that they are so attractive and you mop up the market and then you are happy for the rest of the year and the market just recovers, seeks to get what is left.

Jane Platt: Well, that is not quite the case. Other people offered index-linked saving certificates and they offered them within ISA structures so-

Q100 Chair: Isn’t yours tax-free though?

Jane Platt: Yes, but within an ISA structure so are theirs, so it was not the only game in town at all. However, the fact that we put ours back on sale stimulated a lot of other people to put some on sale as well. So that is no bad thing.

The other important thing is that, of course, this year we were expecting to do most of our net financing at the beginning of the year, with that index-linked saving certificate offer, and then to gently defund during the rest of the year by having no new products on sale. But in actual fact the market was very unusual in the month of December.

So at the time of the autumn statement we said that we would be raising £3 billion for the year as a whole and that was our forecast, based on customer behaviour and how the market was performing. Then in December there was a very extraordinary event. In December every year, people spend money before Christmas; this year, they saved money. They saved £16 billion across the whole of the market and this was something that neither the banks nor the building societies nor NS&I had expected. We didn’t get any more than our market share but the tide came in and all the boats floated. Of course, while the banks and building societies were absolutely delighted, it is not quite such unalloyed good news for NS&I because it means that we are in danger of breaching the top of our net financing.

Q101 Chair: You did though, didn’t you-4.8 or something I thought I saw?

Jane Platt: Yes. That means that we have to defund more than we were expecting by the end of March, so that is why we had to make a 25 basis point cut in our direct saver rate to modify our inflows and to balance the need of financial stability by coming in as close to our target as possible.

Q102 Chair: Just one last question before I hand you over to Mr Fallon. We have been asking this of each organisation that has come in front of us. Are any of your board, executives or staff paid through contract, the student loans arrangement where they are not paying National Insurance or tax but it is paid to a company?

Jane Platt: None of our board and none of our senior management and none of the people in NS&I who are civil servants are paid in that way.

Chair: So, nobody?

Jane Platt: However, we do have some interim and short-term roles that are covered by agency staff, but effectively we pay the agency and they are paid through a payroll through the agency, so it is not the same system as the student loans issue. We have one person who is paid through a contract, but that is for a short-term piece of work and there is just the one person.

Q103 Chair: What is the longest that any of these short-term people have been on this arrangement?

Jane Platt: Well, there is only one of them and they have been there less than a year.

Q104 Chair: They have been? Are they continuing?

Jane Platt: To the end of the specific piece of work.

Q105 Chair: How long is that expected to take?

Jane Platt: That is expected to take about another six months.

Q106 Michael Fallon: I just have one question for Mr Owen about page 72 that we were discussing earlier. There is quite a big increase in the professional services line and the other costs line over the two-year period. There is a couple of million tucked away there without explanation. What is that increase?

Steve Owen: Page 72, professional services? Which figures are you comparing?

Michael Fallon: The professional services line and the other costs line.

Jane Platt: Can we come back to you with a written explanation of that? We are also coming back on the line above that, the consultancy spend.

Q107 Michael Fallon: That seems to be almost £2 million. You would expect either it to be a separate line or there to some kind of note explaining why it is such a big increase, but perhaps you can come back to us on that.

Steve Owen: It is a fair point. We will clarify that for you.

Chair: Thank you very much. Thanks, Mr Owen, and thanks, Ms Platt.

Prepared 20th March 2012