Having a DC underpin means that the benefits or should I say liability, will never be less than the Accumulated contributions. we can write the liability as max(A,B) where A is the Accumulated contributions and B is the defined Benefit. (Take the time to consider both situations of A>B and A<B to convince yourself that this is true). Ironically, the same representation applies for a DC scheme with a DB underpin.
Now, the underpin will 'bite' if you have to pay out more than what you had to pay if there was no underpin. In this case, this happens when A>B because if we did not have an under pin we would have been paying out the pure defined Benefit B but now have to pay out A which is larger.
I can understand why this is confusing because it may happen for example when investment returns are high, which ideally should not be a bad thing. we would usually ascribe situations leading to guarrantees biting to have been caused by 'bad things' such as low investment returns.
I must say that this is somehow a weird scheme isn't it? but one motivation of having such a scheme may be so as to give beneficiaries the surplus from the DB if such a surplus existed. If we view the surplus as being owned by the sponsor, then it does make sense to say that the guarrantee bites since the sponsor has to give this surplus to the members.
worth hearing what others have to say, after all, I'm going to be taking this exam for the third time next year.
cheers
