Yes they can level up with you. To quote UESP wiki:
The Armor Stand in the room under the Priory of the Nine is actually much more than simply a display stand. Placing the Relics on it will recharge them, repair the items to 100% durability (even if they had been repaired to 125%, so you can use this as a free way of increasing your Armorer skill once you reach 75) and most importantly they convert the items into their level-appropriate variants, i.e. if you got the items at level 5, but are now level 25, placing them on the stand then removing them will mean you now have the level 21+ equivalents of the same items.
Here is the source link if you have more questions: http://www.uesp.net/wiki/Oblivion:Knights_of_the_Nine_New_Items