Non-Npc's not leveling up?

It's probably disabled. They have level indicators and exp bars, and they gain exp, so there's a very good chance they will be able to level at some point.

Would be cool if you could level a peasant so much they become as powerful as a champion, and maybe even become one.

Generally the design principle has been that an army units' experience level is chosen during recruitment, that only Champions and Sovereigns gain experience, because they're exceptional individuals.

Seems odd, that army units don't receive any benefits from experience! That seems to make them, little more than lemmings. I had through that maybe, a high experinced army unit would have the chance someday to turn into a champion.