The encoding of the Tamino result document (which is presumably the input to the Saboltron transformation) won’t affect the encoding of the Sablotron output. To control the Sablotron output, you need to specify something like
<xsl:output method=“html” encoding=“iso-8859-1”>
On the other hand, it’s possible (and perhaps more likely) that the encoding is being lost between Tamino and Sablotron. It’s not clear to me from your post how you are getting the Tamino output into Sablotron - if you can, check that the actual encoding of the data stream at this interface matches the XML declaration at the head of the stream, and also the encoding specified in the HTTP header.