Comment 6 for bug 1551858

Because what pairing method is selected is chosen further down the stack so settings only reacts on what bluez tells it should do. I suspect the keyboard uses pairing capability KeyboardOnly which then should lead to passkey entry where the initiator displays and the responder inputs the PIN (we use KeyboardDisplay) [see Core spec 4.0 page 1968].

However the described dialog on your side is incorrect as it just asks the user to confirm or cancel which could still be an settings app issue just displaying the dialog but also an issue down the stack.