Well, if they think they might get to make a sequel (or even just an expansion) there's obviously an incentive not to let characters reach top levels, so there's enough new gameplay left for expansions/sequels. I think for Pillars the obvious model was the Baldur's Gate games.

I never liked level caps in games where at least half the fun is watching your character level and acquire new skills.

There are a few different cases when it comes to level caps:
* Level cap hit early. The one example I can think of, Ys 1, is not a game I consider an RPG, but it does expect you to cap your level midway through the game. When combined with the fact that the final dungeon (which is an example of what I call a mega-dungeon, as that dungeon is nearly half the game) traps you in it and has no place to spend money, you get a situation where there's no reason to kill enemies unless they're in the way.
* Level cap hit around endgame. This is where the game is trying to prevent you from leveling to the point where the final boss becomes too easy. I'd say that this is a decent approach, as long as you always end up with the same stats at this point (or at least don't have missable stats), and if the game uses skill points, that there be some other way to earn them (for example, by respecing or by some money-sink item you can buy).
* Level cap reachable, but not by endgame. This is an interesting case; it has the same issues of the previous option, but differs in that the player can continue to level up if they feel like it, perhaps reaching the cap eventually. This is the most common approach that I've seen.
* Level cap not feasibly reachable is like not having a level cap, unless it's due to XP gains becoming practically zero, in which case it functions as a level cap. (Castlevania: Symphony of the Night, Castlevania: Harmony of Dissonance, and some Ys games are like this, where enemies only give 1 XP after a while, and levels still take at least thousands of XP.)

(Random fact: In Ys 6 XSEED version, the superboss is easier on Catastrophe mode; while you can't take healing items in with you, you can buy stat-boosting seeds, which will compensate for the fact that it's not feasible to reach the level the game is expecting. On Ys 6 PS2, the boss is manageable if you use a cheat to start at max level, but that makes the rest of the game trivial, and also turns your save file's text to a hard to read color.) Or, alternatively, the sequel could just start the player back at level 1.

Also, when it comes to player character progression, I've found that I prefer the way SaGa games typically do it, where instead of gaining levels through experience points, you (typically) gain stats based off what actions you take during battle, and there are no levels.

(A few SaGa games have different races which follow different rules, and SaGa 1 doesn't have stats grow based off combat actions for any of the three races.)

Unless you've got new protagonists, you have to come up with some sort of explanation for that though (e.g. "hero was buried under a pile of rocks and suffers from amnesia" in Gothic 1/2), and that might reduce immersion. And some people might also want to export their characters from the previous game.

or just ate a pie without washing hands and got stomach infection , vomit+diarrhea for weeks weakening down the champ who barely survived ,back to lvl1 :P

I think level caps are ok, but if they are there the game should be carefully designed so that the level cap won't be hit until close to the end of the game. Imo, the Baldur's Gate games are well-paced in that regard. If the level cap is hit too early, it is bound to feel artificial and immersion-breaking, plus it puts a hard stop on one of the more enjoyable aspects of a CRPG. I have played D:OS 1 (but not 2) and I think the game is pretty well-balanced in terms of leveling. I'm not sure if it has a level cap, but I don't think so. The character system is not class-based, so there is no reason for there to be a cap. Any character can take levels in any of the different skill categories. By the time I finished the game, my characters were more-or-less fully leveled in their primary skill areas, but had a lot of headroom to branch out and diversify, if the game had lasted longer. I think the problem with having continuity of characters in a sequel is that it makes the sequel less accessible to newcomers to the series. I would argue Baldur's Gate 2 is less accessible than the first game, for players that aren't familiar with 2nd ed D&D. Does Pillars 2 start at a higher level than Pillars 1?

I haven't played either Pillars game, but Pillars 2 has you play the same character as in the 1st game iirc, and also has some party members return, so it must have a higher starting level.
Baldur's Gate 2 was actually my first Infinity Engine game, played the first game only later, but I didn't have that many problems.

No, you don't need to explain that. Ys 2 doesn't, and it doesn't allow importing from the previous game. Same with all later Ys games, as they all share the same protagonist (except Ys Origin, which is explained by the fact that it takes place something like 1,000 years before the first game).

Immersion really isn't that important.

Another approach, of course, is to make even transferred characters lose level; see Ultima 4-6. I note that Ultima 7 drops the ability to import characters, and Ultima 8 gets rid of appearance customization while also forcing the avatar to be male (even though they can be female in previous Ultimas).

By the way, Ultima 4-6 have a level cap of 8, and the XP requirements double with every level. Reaching level 8 is likely not going to happen in U5-U6 for many players, even though there are spells that require that level. (I don't like what they did to Gate Travel; in Ultima 4 it's a very nice quality-of-life spell, but in Ultima 5 it requires level 8 to cast, which is obnoxious.) Ultima 4, incidentally, gives sizeable quest XP to the main character (only), and it's actually not possible to beat the game without being level 8.

Another possibility is that level 1 in the sequel might be the equivalent of endgame level in the original, at least in in-world terms. Your stats might be lower, but only because the scale is different.

(Thought for later: Perhaps it's worth mentioning how the Disgaea series handles character growth and the level cap.)

Maybe for you, because you play games mainly for systems and mechanics, but other people care about story and immersion.

When I'm playing a game with character leveling in it, I actually use cheat engine to figure out where the XP variable is and prevent my character from leveling until I feel under-powered. Leveling is one of those inherently broken systems that can never be fixed, well unless you have level caps... but the problem is over-leveling is far too easy in a game where you can spend hours or days just playing the first act.

"Player Level based loot / enemies" are terrible systems, but if you have uncontrolled leveling you can easily out level everything in the game and just keep whinging about how it's too easy now. I honestly don't understand why character leveling games don't have a simple checkbox to let you cap your own level.

I guess what I'm saying is I'd rather there be level caps to keep the character at the level expected for the main story than to allow the character to get absurdly powerful and break the game altogether.

Magic of Scheherezade does this. There are 5 chapters, and your level can't exceed 5 times the chapter you're in, so in Chapter 1 you're limited to level 5. If you beat the chapter boss before you cap your level, your level is raised to the current chapter's cap, and you then start the next chapter.

It's interesting to note that the first level up of the new chapter takes less XP than the last level of the previous chapter.

I'm bothered by them, seeing as I mainly play for escapism, which isn't that directly linked to actual gameplay and even less so to the systems used, and the power trip associated with increasing in power faster than the difficulty of the challenges faced and ending up basically an invincible godlike creature by the end, which is linked to gameplay and systems, and which level caps or any other restrictions on character development tends to prevent from happening.
Basically level caps are for those who want the endgame to mainly be a challenge, before anything else.

That said, a sufficiently high level cap, as in what dtgreene's 3rd scenario depicts, something not reachable if you normally complete the game but achievable with a moderate amount of grinding done specifically for that purpose (and not because for example there are infinite respawns or random battles in areas you actually would, as part of normal gameplay, wander back and forth through multiple times), may provide a goal, and I'll have a choice whether I feel it's good enough to finish the game at the level I approached the end at or would rather take some more time to reach the cap and be the best I can be before the end.

But would still just rather do without one.

I assume by 'over-leveling is far too easy in a game where you can spend hours or days just playing the first act', you are referring to grinding?

If so, then I don't agree. It is not always possible (or at least easy) to grind levels in single-player RPGs. Not every game has respawning enemies. D:OS 1 for example doesn't have respawning enemies or random encounters. Grinding levels in SP RPGs tends to be very boring as well. I guess you could grind levels in BG2 with random encounters, but it would be extremely dull and pointless.

Tbh, if you are grinding levels in a SP RPG, there is something wrong. If you are doing it unnecessarily, you are playing it wrong. If significant grinding seems like it is necessary, the game is badly designed. Imo, there should be enough quality main and side-content that you can level your character adequately to play the game.

No, I mean ROLE PLAYING, hence the distinction between a character leveling game. The only thing I can come up with is that you rush through the game and don't care at all about exploration just pew-pew... really, it's terribly easy to level in games if you're just doing your own thing and not caring about the main quest, other quests, or what not.