Unfortunately people do fail to meet the grade sometimes. It is not easy to fail people but it is the responsibility which every examiner carries.
In the few occasions when I have had to prounce a fail. I have gone for the direct approach; i.e inform the pilot that he has not met the grade and then proceed to explain to them why I have failed them. There is no polite or best way of telling people that they have failed. Honesty and explanation is the best course of action. If my instincs are right the pilots involved are not happy with it but eventually appreciate an honest analysis of the cause of their failure.
As an examiner/check airman it is important that one is fair to everybody, that way you do not have to worry too much about those you failed. But I can guarantee that you will remember all of them for the rest of your life.