Why doesn't the option 'No auto-restart for scheduled Automatic Update installation' work?

Solution 1:

Why doesn't this option work?

The reason the policy isn’t being applied is due to the fact Configure Automatic Updates isn’t enabled.

No auto-restart with logged on users for scheduled automatic updates installations

Use this policy to prevent automatic restart when a user is logged on. This policy applies only when the Configure Automatic Updates policy is configured to perform scheduled installations of updates.

Source: Here

What is the right way to prevent the restart after update?

You have to enable both policies to be prompted to install updates. However, the better way to install updates, is to defer updates for a period of time, and routinely update your machine once a week.