2. That would only be in relation to public prayers, so as to avoid scandal.

See, the problem with #2 is that there IS papal teachings that admonished a Catholic bishop from praying for and encouraging his flock to pray privately for those who clearly died outside the Church (in this case a late noble woman).

I assume the reason the Church forbids public prayer for those who died outside Her Bosom is partly because it gives the impression that non-Catholics can be saved without converting, indifferentism - which is deadly error for both Catholics and non-Catholics alike, that undermines (or implicitly denies) the dogma of EENS.

So, in Padre Pio's case, I am going out on a limb and assuming his grandfather was Catholic.

No problem there. One could pray for their grandpa's conversion 20 years after his death, that they would meet grandma and get married, or that they would get a Red Ryder BB gun for their 9th Christmas.

It is with those who we can clearly see DID NOT convert that there is a problem.

How does it make sense for the Church to advocate for Catholics to practice in private (private prayer for those who died already outside the Church)...

while at the same time,

Forbidding public prayer for the very same persons due to scandal?

The idea that praying for those who died outside the Church and after their death (retroactively) for their conversion in private is good, but that if we all come together at the chapel under Fr. so-and-so to offer some prayers for the same persons is bad! 

Whatever a certain bishop may have said in relation to a certain noble lady does not necessarily constitute Catholic doctrine, I am sure you would agree.

Sure, but it wasn't a "certain bishop"

It was a Pope writing to a bishop.





There is more at play here than just scandal. 

I believe it has to do with how we are to understand the communion of saints as the Church Herself sees it.