I've never had much luck with commonly-available spar varnish. Despite being rated as an outdoor product, it never seemed to last more than a year. I've used McCloskey, Minwax and some other brand I can't recall with the same results for every one.

You can sand and apply new varnish. I'd be more inclined to switch to a different product. Le Tonkinois is one that looks really good but I've only had the opportunity to do limited testing. My company doesn't do much outdoor work.

Le Tonkinois Website

I did do the varnished-wood-sample-in-the-car-for-three-summer-months test and Le Tonkinois held up fine to that.

I take it this is outdoors in full exposure? When I see peeling down to bare wood like that, I suspect the wood is getting wet, or it was not dry when the varnish went on.
In full exposure this will always require yearly maintenance. Clear finishes have no pigment to ameliorate UV, and they take all the damage directly.
Casey

Yes, full exposure. Doesn't really get much water, so that's probably not it.

Is there a benefit of a high gloss versus a satin? ie. does one not last as long?

I'm also looking at epiphanes - that a good varnish?

http://www.amazon.com/gp/product/B005ADWQ9U/ref=as_li_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=B005ADWQ9U&linkCode=as2&tag=thewoodwhispe-20&linkId=PKEFEOMOKFZYIR6T

Also - to fix it should I completely sand it down/restain, and re-varnish?

I don't have great advice as to what to use for a finish, but yes you need to get back to bare wood whatever you do. I'd be tempted to use a penetrating oil finish (something like this exterior-finishes/outdoor-oil -- though I have no experience with this specific product) instead of a film-forming varnish. You probably need to reapply it every year or two, but it's just a wipe-on product and will not make the kind of mess you have now. Clear finishes outside are really difficult.

You need to sand back to fresh wood if you want the finish to last. Scraping and sanding creates high/low spots and gaps which causes the new finish to crack and peel away. The surface must be smooth (all edges must be feathered or removed).