I really don't know if it is that simple but: they can replace the backpack UI when it's on the ground after you die by the chest UI (which have more slot than you inventory), but it will be pick-up only. It will give room for the armor which is not counted in your inventory slot in this scenario.
First of all you seems to put word in my mouth, I don't want Obsidian to "loose" a feature, on contrary I think it's a waste of ressource, if I would need to suggest something is quite the contrary and add a feature to let the player decide if they want a more "survival" experience or not, li