I can confirm that issue with SHA1 and our Watchguard XTM for a Site-to-Site VPN ???
Crazy to me is that another box running pfSense version 1.2.3 is working perfectly since a long time using SHA1 and same settings (except PSK and WAN stuff of course). It appears as the tunnel is up-n-running but in fact to traffic is going through.
My solution is so far changing to MD5 instead on both, Phase 1and 2. After that every thing is OK immediately. :o
Would like to see this can be fixed some how as I don't know if i'm missing a security option or anything alike.