This message is related to Auto Unlock, but doesn’t prevent it from working. It is the reason why, after applying the “Keychain fix”, enabling Auto Unlock for the first time will fail. Before applying the fix outlined by @Stoska992, please ensure that your Watch is on 7.1 (or any version of WatchOS prior to 7.0) and your iPhone is on 14.2 (or any version of iOS prior to 14.0). Also, make sure your Watch is on your wrist and unlocked, and also unlock your iPhone. If you have met all these conditions and still cannot activate Auto Unlock, then please read my post on page 34 of this thread, which outlines an extended procedure. This involves applying the Keychain Fix and then resetting the computer’s NVRAM, after which Auto Unlock may be enabled again.
I don’t know exactly what Apple have done, but they most certainly effed something up big time with the release of WatchOS 7. Auto Unlock has always been a finicky feature to get to work, and WatchOS 7 made it ever so much trickier…