I think I have now resolved this after a lot more digging. I highlighted documents folder and clicked on view and options.
Changed the settings to show all hidden folders etc. unchecked the boxes to hide extensions of known file types and Hide protected operating systems files.
Pressed apply / ok etc. then restarted file explorer.
This then shows that a folder already exists called My Pictures under the documents folder that has its permissions set with a deny rule to avoid access (found this out through properties, security, advanced). This explains why the merge folders option appears when trying to create a new My Pictures folder.
I changed the rule to allow instead of deny and allowed full control and then all the files that appear under the separate default Pictures folder appeared.
If you delete or add something to the Documents\My Pictures folder the same change happens to the separate Pictures folder. I proved this by deleted a picture then restoring it. Windows is therefore making the same changes in both folders at the same time when an action takes place in only one.
I can only assume this is part of Microsoft working to tidy up everyone's files into a standard structure (a good thing) but bad if you need a folder accessible for an old game that has a hard coded path to it.
I did this on my computer, I am hopeful if I remove this deny rule on my sons computer it will mean the folder will be accessible to his game - it will work and will not mess anything else up as the actions act on both folders they will stay in step if this is important for some reason.
Well that was fun - will try it on Tuesday and see if it works - can't see why it wouldn't now.
If anyone thinks this is wrong or I am doing something that will have other consequences can you please let me know.
Thanks Guys.