Hmm... Did you play Oblivion?
The challenge with their leveling system was that EVERYTHING leveled with you. You didn't just see bigger monsters. Those bandits at the bridge threatening you with rusty iron swords in level one? They're still threatening you, but now they have glass swords and daedric armor. Huh? If they've got thousands of gold of equipment, why are they hanging out by a bridge?
It also made it hard for you to beat some quests. Say you happen upon a quest that's too hard for you and you run away. Go off and level and now you can handle the quest, right? Nope, the quest may have leveled with you! (Oblivion tried to tack down the levels of the monsters when you first visited the quest, but that didn't work on things like "go collect 10 random things from daedric towers".)
The final big problem was the way leveling worked. You leveled automatically when you slept after your major class skills advanced to a certain level. If you let your major skills advance faster than your minor skills, you'd lose opportunities to train them and you would become less and less capable as you leveled. Eventually, you'd get to the point that you were so far behind the power that you should be at the level that you couldn't actually complete the quest. It turned out it would be better to pick a class with major skills that you never wanted to use, so you could train the hell out of your minor skills.
All of this boiled down to making it somewhat desirable to play the entire main quest WITHOUT EVER LEVELING because it was easier to win that way.