After upgrading my Nexus 5 to vanilla Lollipop a few days ago, I'm no longer able to assign pictures to my contacts. I can tap "Choose photo" and select a picture, but when I confirm I get the error "No pictures are available on the phone". How can this happen? It doesn't make any sense. I already tried wiping cache from recovery because some people say that it can fix some upgrade problems, but that didn't solve anything for me.
You need to have a gallery app installed like the default "Gallery" or "QuickPic" app.
I had the same issue since "Gallery" doesn't come with Android 5.0 Lollipop, only "Photos" (which I disabled since I don't use Google+)