Got an update from Octaaf on this.
Hi,
I've reported this issue to the programmer in charge.
The problem is probably related to the story event that causes you to lose 10% of your army. It is probably calculated incorrectly.
We will try to correct the issue in an upcoming patch.
Kind regards,
Octaaf
Larian studios/
Yep, instead of 10% it obliterates your armies with a preference for high value units too... Also after that and allowing for female officers consecutively (glutton for punishment) the game crashed consistently when trying to access the strategic map...
One way to work around these issues that I found is not to take the decision until the end of chapter 2. i.e first win the final capital then take the decision (before the extra round). The unit reductions don't seem to translate to chapter 3 starting armies.