A pension scheme carries its promised future benefits as liabilities. When long-term interest rates fall, the present value of those liabilities rises, and when rates rise, it falls. LDI holds long-term government bonds or interest rate swaps so that the assets move with the liabilities in response to interest rates1.
In the UK, some LDI funds used leverage through repo borrowing or interest rate swaps. When interest rates rise, such a fund must post additional collateral or margin to cover the fall in the value of its bonds and the loss on its swaps1.