Creatures drop the items as treasure when they are killed

In the Inventory section of each creature there is a box labled "Dropable" and a box labeled "Pickpocketable". Normally these are greyed out until you select an Item either equiped or in the inventory box. For each Item you want the NPC to drop, select that Item and check "Dropable". If you also want to make it so PC can Pickpocket the item select "Pickpocketable".

Note that this must be done For each item you wish to drop. Also note that if this is to be done on a Creature that is spawned on a regulare basis, like a Creature respawn system, then make sure you mark these things as Droppable in your Custom Creature Pallet. If you mark the items dropable just on the creature that is on the map, then the ResRef that is respawned won't be marked.

Known Issue Make sure you include a Spawn point for each encounter trigger. For some reason, without a spawn point, the creatures will spawn in with there Items marked as NON-Dropable, even if you have set them to Dropable.

On a side not; Please don't make armor Pickpocketable. Although it may be possible to undo the clasps of a suit of armor un-noticed, I think the NPC would know that he was stripped and the guy running away with a whole suite is the one that did it.