There was a small white nylon ring with the piston-side pad. Should that be installed with the pad?
Yes
I have been driving around with the lever pulled and i can still drive in 1.st gear with the lever pulled all the way to the handle.
Absolutly sure there is no air in the system. Mc still not leaking and no other leaks can be seen on the system.
There are a limited number of causes to the symptom you describe.
It is very hard to believe you don't still have air inside the hydraulic system as that is number two on the list.
Number one would be leaks.
Number three would be non-rigid hydraulic lines.
Number four would be low friction disc pads.
Number five is a compressible liquid in the system. What are you using for brake fluid? Is it purple?
Have you read the front brake caliper rebuild article in the FAQ?
The pads are porous. If they have been contaminated, heating the pad will bring grease, oil, etc. to the surface to reduce friction.
They also take much longer to seat and make full contact with the rotor when lubricated.
The nylon washer serves two functions.
1) It helps keep the caliper side pad wear even.
2) It softens initial engagement so the brake has less initial grab. (this makes them feel more like drum brakes.)
I can't help but think you are overlooking something. Maybe it is time to seek professional help?
Best of luck,