So... just caught up on the thread.
It is in fact possible, if no characters (including NPCs) have any relationships at all outside "We are friends who hunt orcs, those are orcs who need hunting, that is the store where we buy things after we hunt orcs," to have a game where sexuality is entirely irrelevant. It sounds like that is the sort of game GMfPG is running with his niece and nephew; if they enjoy it, that's lovely and he should keep it up, though honestly that wouldn't have held my interest even as a kid, and it basically denies them the "roleplaying" component of "roleplaying game" as much as mechanicless relationship writing denies the "game" component.
It's also not the norm. The innkeeper's wife/husband - and his/her attractive son/daughter - is nearly as much a stock character in RPGs as the innkeeper him/herself. The moment those characters show up - the moment anyone, at all, ever, has a family - you've brought sexuality, if not sex, into your game (and, by the by, I've never once, in my entire career as a player and GM, had graphic sex be described at the table. The most I've ever seen is "They go off to a room/tent/whatever together; fade to black." That's acceptable in a PG movie. Nearly all Disney films also involve sexuality, and the vast bulk of those are G-rated - the moment we know it's Beauty being courted by the Beast, or Lady eating spaghetti with the Tramp, or Robin gives a longing fox-look toward Marian, or Prince Charming kisses Sleeping Beauty... guess what? We're talking about heterosexuality). I'd be astounded if a campaign that featured any amount of roleplaying, at all, has ever run more than two sessions without that.