Oh wait.  I see, the Pencil tool itself is the 'Unplugged' version of the Paint tool. 
It is not actually a Pencil per say, but just an almost Demo-skeletal version of the 'Paint', which has all the FX active.

So, what you do is select 'Paint' select from the 'Group' which has all of the brushes, pencils and all.

LOL - that is very confusing and counter-intuitive.
It should be called "FX-off" and "FX-on", or something. 
Just calling it Pencil and Paint makes you think it will be those type of art tools, not a nomenclature for brush mode.

So - Really you would always use Paint, because it is the Full-Brush mode...and it has everything...including Pencils!