Sorry for posting so much, but I’m just a bit too curious about this thing (^_^)"
Observation: In character pawns, there is a property under the Character Movement component that is: Character Movement: Physics Interaction, and it has a lot of stuff pertaining to the behavior which is seen in the First Person and Third Person templates.
Also, if any part of the character’s mesh is outside the Capsule Collision, the physics of the collisions go haywire.
Thus, any part which needs to have proper physics based collisions have to be inside the Capsule.
From what I have seen until now, that’s the only way by which I can justify how those Characters have proper collisions. But then, again, those are Characters, and not basic Pawns.
I hope this can help you guys to help me out!