So these people have a choice whether to leave or not? Does it mean that company gives them a chance to start finding a new job?

The affected staff are perm staff or contract staff?

No. More like cause this is not an "official" retrenchment exercise but a "volunteery" exercise. If they can't hit the quota, the official one will come.

No one is spared.

Band 3 is grade C?

There's no longer grade A B C D. Its only Band 1, 2 and 3

You can take it this way, as how each of us interpret the situation might be different.

There were only two options in the offer:
1. Accept their compensation package now and leave.
OR
2. To reject their offer and stay in company and hope that the ask to manpower reduction quota has been met and there won't be a round of retrenchment exercise.
(The compensation package will be worse if being called upon again on the 2nd time)

Were they offered 1month severance package to every 1year of service?

A month for a year + additional 2.5 months

if it is you, which will you choose? Take compensation package then go find another job or stay then find another job?