Managed to enable the option with no problems, and it did initially work fine.
Today upon opening my Macbook nothing happened, just presented with the logon screen and no indication that it was attempting to auto-unlock.
Restarted the machine. Got to the logon screen with the 'Unlocking with Apple Watch' message... but nothing. Activity spinner showed briefly but then left at the logon screen. Next attempt (closed laptop, reopened) again worked.
Seems something is *very* inconsistent about this feature!