AIG'sTaiwan unit Nan Shan Life must settle a pay dispute with employees before a new owner can be allowed in, the island's financial regulator said on Wednesday, potentially disrupting its ongoing sale.

Insurance agents at the Taiwan unit, which is being put on sale to help shore up its AIG's finances, are in talks with the company to ask for their T$14 billion ($420 million) pension fund be returned to them.

Our take on this matter is that AIG has to deal with the issue with its employees, said Huang Tien-mu, director general of the insurance bureau at Taiwan's Financial Supervisory Commission.

We can only begin talking about other issues when Nan Shan has dealt with the pension problem in a manner that is acceptable to all parties involved.

Nan Shan's union has been placing front-page advertisements in local newspapers, calling on AIG to settle its pension obligations before finalizing any sale.

The company's now agreed to allow us to jointly manage the fund, but we want the money to be returned to us. It's our money after all, said Grace Feng, a spokeswoman for the agents' union.

Feng said some 38,000 insurance agents at Nan Shan supported the move to ask for their money to be returned.

Nan Shan Life said in a statement released late on Thursday that it had agreed to allow the union and the firm to jointly manage the pension fund, but it would need approval from AIG to return the money to its agents.

On its part, AIG said it has hired consultants to look into the issue.

AIG has hung a $2 billion price tag on Nan Shan Life, its most expensive asset for sale in Asia, but many industry watchers now expect the deal to fail due to the rich asking price and union disputes.

(Reporting by Rachel Lee; Writing by Lee Chyen Yee; Editing by Rupert Winchester)

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