I think Robroy said it rightly... the Derivatives and the value of the Gilts moved at the same direction to interest rate fluctuation, then the whole argument that this is 'strictly' hedging kind of leaked water.
Nobody will be here to declare what exactly happens, but piecing together the info and whatever written by the semi-professionals at FT.. this is what I would guess:
Assuming Pension asset collected GBP 100b.
Investment allocation, say, 60b GBP in long dated 10/20/30y Gilts/IG bonds. the rest 10b in RE+PE, and 20b in Equity.
Then, the so called 'hedge' that blew up. I reckon they overlaid a GBP 100b receive fixed IRS 'hedge' on the portfolio.
or maybe even overhedged.. say 200b or 300b.
This IRS receiving fixed will allow the funds to receive a fixed annual payment of say, 2.5% on the amount, and the liabilities are floating rate GBP on conventional basis (i think its quarterly).
Technically this hedge means the pension fund will receive that 2.5% that it needs to pay out annually.. so that locks up the required payment cash flow for the next 10/20/30 years. But the IRS actually comes with a floating rate liability that the investment portfolio would have needed to fund. During times of low interest rate, the payment flow is fine. But as the short term rate goes up, the payment flow becomes high. Which leads to the whole MTM of the IRS collapsing.
In general, the 60b of Gilt/IG in the portfolio would have been used as collateral of the IRS. Most c/p of IRS allow that.. even equities are commonly used as collateral with some haircut.
But when rates shot up? The Gilts/IG were falling in value at the same time as the IRS... so that created a situation where liquidation of the IRS/Gilts/risky assets were necessary.
So the question. Is this a 'leveraged' position or some so-called hedging.
To a laymen its can be just hedging.. (i.e. converting floating rate liabilities into fixed rate cash flow).
but if you are in the rates space you know actually the way the IRS were used syntactically creates a long-bond position. i.e. those IRS replicated investment in long dated bonds. Hence, when rates went up the IRS become negative in value (i.e. bond price fell, triggering a margin call) at the same time the Gilts/IG value fell.
If this is what actually happened, then yes, there had been leverages. Not high, depending on how much yield they were trying to generated on the long term.. if that IRS notional position was just 100b, then its just a 2x leveraged bond portfolio.
Is that going to destroy ? Well, probably not. But let's see what happens later when gilt rates move back up again.. how the short term liquidity will lead to the funding status of the funds.