Retention Policies
1) This option refers to the timestamp you see in Windows Explorer for your files.
2) Always keep the last version means that if for some reason you have only 1 version of any file left on storage side it will never be purged.
3) "Keep number of versions..." option won't override the second setting, but can override the first one. Basically, if you reach the first threshold of 2 years the software will purge the data before 10 versions were generated on storage side. It will also start deleting the files if they are not yet 2 years old but more than 10 versions were created.
In addition, the option to delete files that have been deleted locally can override any settings above.