Good question. Hope the following helps:
it doesn't
all it says is it uses the VPN on your phone, which doesn't apply when using cellular on the watch.
I'd say "good job googling" but it really wasn't, but at least you skipped the ad results
I'm not sure what the advantage of having VPN on the watch would be, the watch doesn't generate a lot of "sensitive" traffic or a lot of traffic at all, and the stuff it does should be secured with SSL.
They'll be able to see you connect to Apple, but that's no surprise, and maybe some third party servers for stuff like weather or mail. But it's only that you're talking to a certain IP, not what's being said.
It would also impact battery life to some extent, with it having to double process all the data. Not sure if it would be noticeable or not.
The other reason for VPN (accessing devices on remote networks) also really doesn't have much use as apps don't do a lot of accessing the local network.