I have a policy pushed to my phone from my employer which also forces a passcode onto the Watch.
I also have Apple Pay enabled, which also requires that the passcode is active.
As noted, it's a sensible idea to have a passcode all the same.
I am guessing that you cannot turn off the passcode because you still have something turned on that requires it like maybe apple pay, unlocking mac via watch, or some other feature that requires a passcode to set-up
I had a look on my watch on the latest software and the option to do it was there but it said it was going to wipe my ApplePay cards etc off the phone so i didnt bother going any further.