Here are some past nodes on solving this problem of expecting ISO-8859-1 but getting UTF-8 back from XML parsers.
in reply to Template Toolkit and non-english characters
XML Parser encoding problem (was: XML::Parser)
XML encoding problems...
XML encoding ISO-8859-1
Regexp to convert high-bit (?) characters to character entites
Update: I posted those links because I recognize that your problem is converting from UTF8, but I don't know much about Template Toolkit. I thought they might help you solve the problem (rather than understand it). Hopefully one of the TT gurus will chime in.