I am back from vacation and I am not in my 100% Moodle mode.
You asked "Activity completion" , what does it do? I think I understand what this does. First, this screen has 4 parts, it has 2 "Lock" settings (conditions to enter the activity) and 1 "Activity completion" setting (when is the current activity complete) and a Settings section that is about visibility if the "lock" setting conditions are not met.
First you will notice the "Activity Completion" section setting is only for the activity you are in. This is independent of the locking sections
on this screen. In short, there is a field in the database
that is switched on when this criterion is reached. In your screen shot, when the student scores 10 (with a maximum possible of 10), the field will be marked that they completed test 2. Each kind of activity may have it's own measure for "completion".
In Moodle 2.0 they put this section on its own page because it is not a condition to enter the activity (does not lock students out of this activity). It is a condition that says when this activity is complete. A forum might not be complete unless the student made 3 posts. Unless someone got a 100% (10 of a maximum of 10) on your quiz, it will not be marked complete.
The hyperlink to test2 should not have anything to do with the "Activity Completion" setting you show. The hyper link to test2 should not even be seen by a student who has not taken or scored less than 5 (of a maximum of 10) on test 1. Please note, I do not have this version of Activity Locking so my hyperlink comment is the way it should work. It sounds as if it is seen but that the student can not enter it, which says to me that they have not met the test 1 conditions for entering test 2.
You did not mention if the student sees the message to tell them that they must score 5 of 10 on test1. My guess is that they do not, because test 2 "visible when locked" setting is set to No. Thus a student has nothing to click on and trigger the message.
In summary: The Activity completion is used by other activity locks, not by the current activity. The hyper link for an activity is really determined by the other settings and has nothing to do with its Activity completion setting.
Hope this helps. I am still foggy from vacation and do not use this version of activity locking. In theory, I think I have answered your questions