I think it's fairly clear they don't know they have to give your colleague preferential treatment and 'first dibs' on the one suitable post. Either that or they've offered it to her and she's elected to take VR instead, but that seems doubtful from what you've said.
You have 3 choices as I see it. You could go along with what they are doing, make your choice, either take the VR or go forward for selection and see what happens. You could point out the legislation to them, tell them that they should offer the job to your colleague first, effectively making yourself redundant. Or you could point out the legislation to your colleague and leave it up to her to do the leg work.
If you take voluntary redundancy or put yourself forward for selection, you're not really losing anything, you'll either be redundant anyway, or you may get the job. If they later discover after the event due to your colleague challenging the decision that in fact they should have offered her the job, they may well pay her compensation rather than reinstate her so the effect on you may be minimal anyway.
On the other hand, if you don't point this out to anyone, your colleague may lose out on a job that should be allocated to her.
I think it partly depends what you actually want from this. If you don't mind being made redundant and fancy the VR package, you could take that, and then once that's signed sealed and delivered, point out the rule to your colleague and leave the decision up to her.
What do you want for yourself?